Macroeconomic and Industry Analysis

Slides:



Advertisements
Similar presentations
ECONOMIC AND INDUSTRY ANALYSIS
Advertisements

Measuring GDP and Economic Growth Chapter 1 Instructor: MELTEM INCE
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 1-1 Six Key Economic Variables Real Gross Domestic Product (GDP) –is corrected.
INVESTMENTS | BODIE, KANE, MARCUS Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin CHAPTER 17 Macroeconomic and.
ECONOMIC AND INDUSTRY ANALYSIS
1 Pertemuan 01 Makro Ekonomi dan Industri Matakuliah: F0392/Simulasi Perdagangan di Bursa Efek Tahun: 2005 Versi: 1/3.
1 FIN 2802, Spring 10 - Tang Chapter 17: Macroeconomic and Industry Analysis Fin2802: Investments Spring, 2010 Dragon Tang Lecture 16 Macroeconomic and.
Chapter 12 Managing the Macroeconomy. Stagflation: it occurs when recession and inflation takes place simultaneously in the economy.
1 1 Ch17, 18, 19 – MBA 566 Security Valuation and Analysis Macroeconomic and Industry Analysis/Fundamental Analysis Equity Valuation Ratio analysis.
McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. Macroeconomic and Industry Analysis 12 Bodie, Kane, and Marcus.
22 Aggregate Supply and Aggregate Demand
 The McGraw-Hill Companies, Inc., 1999 INVESTMENTS Fourth Edition Bodie Kane Marcus Irwin/McGraw-Hill 17-1 Macroeconomic and Industry Analysis Chapter.
Economy / Market Analysis
Macroeconomics and Industry Analysis, BKM Ch 17
Chapter 10 ECONOMIC AND INDUSTRY ANALYSIS. 1.2 Investments Chapter 10 Chapter 10 Questions What are the generic approaches to security analysis? What.
Chapter 8 The Impact of Economic Forces.
McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Macroeconomic and Industry Analysis CHAPTER 12.
ECONOMIC AND INDUSTRY ANALYSIS
Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin Macroeconomic and Industry Analysis Chapter 12.
Macroeconomic and Industry Analysis
Business Cycles, Unemployment, and Inflation
Understanding Basic Economies
Version 1.2 Copyright © 2000 by Harcourt, Inc. All rights reserved. Requests for permission to make copies of any part of the work should be mailed to:
8 Investment Analysis and Portfolio Management First Canadian Edition
Macroeconomic and Industry Analysis Chapter 12 Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin.
MACROECONOMIC AND INDUSTRY ANALYSIS
Investments, 8 th edition Bodie, Kane and Marcus Slides by Susan Hine McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights.
Macroeconomic and Industry Analysis From the various sources.
CH 17 Macroeconomic and Industry Analysis
Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Chapter 14.
McGraw-Hill/Irwin Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter Macroeconomic and Industry Analysis.
 Circular Flow of Income is a simplified model of the economy that shows the flow of money through the economy.
Macroeconomic Goals and Instruments
Spending, Income, and Interest Rates Chapter 3 Instructor: MELTEM INCE
Fundamental Analysis Approach to Fundamental Analysis: –Domestic and global economic analysis –Industry analysis –Company analysis Why use the top-down.
CHAPTER 17 Investments Macroeconomic and Industry Analysis Slides by Richard D. Johnson Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights.
Unit 2: The Government, Banking and the Economy. Who in government has the responsibility to respond when the economy is in trouble? The President? Congress?
Essential Standard 1.00 Understand the role of business in the global economy. 1.
Macroeconomic and Industry Analysis Chapter The Global Economy 12-2.
GHSGT Review Economics. Unit 1 – Fundamental Concepts of Economics.
Essentials of Investments © 2001 The McGraw-Hill Companies, Inc. All rights reserved. Fourth Edition Irwin / McGraw-Hill Bodie Kane Marcus 1 Chapter 12.
Chapter 6 Macroeconomics the Big Picture 12-1 Copyright  2008 by The McGraw-Hill Companies, Inc. All rights reserved.
Part II: Business Environment Introduction to Business 3e 4 Copyright © 2004 South-Western. All rights reserved. Assessing Economic Conditions.
Chapter 11 Macroeconomic and Industry Analysis. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Fundamental Analysis Approach.
Chapter 10 Business Cycles, Unemployment, and Inflation McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
1 Security Valuation and Analysis Macroeconomic/Industry Analysis Security valuation Ratio analysis MBA566: chapter
Macroeconomic and Industry Analysis
MACROECONOMICS.  Analyzes interrelationships among sectors of the economy.
McGraw-Hill/Irwin © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved. Macroeconomic and Industry Analysis CHAPTER 11.
124 Aggregate Supply and Aggregate Demand. 125  What is the purpose of the aggregate supply-aggregate demand model?  What determines aggregate supply.
Objectives After studying this chapter, you will able to  Explain what determines aggregate supply  Explain what determines aggregate demand  Explain.
The Impacts of Government Borrowing 1. Government Borrowing Affects Investment and the Trade Balance.
IGCSE®/O Level Economics
Advanced Macroeconomics Lecture 1. Macroeconomic Goals and Instruments.
Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 14-1 Chapter 14.
The President Congress BUDGET Taxes Spending Fiscal Policy.
Chapter 14 Industry Analysis. Why Do Industry Analysis? Help find profitable investment opportunities Part of the three-step, top-down plan for valuing.
Class Business Upcoming Debate. Valuation Assignment Free-Cash Flow Valuation of Target (TGT) Graded portions – Pro forma projections (Wednesday, 5/25)
Industry Analysis Shahadat Hosan Faculty, MBA Program Stamford University Bangladesh 15 June 2011.
Chapter 11 Macroeconomic and Industry Analysis. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Fundamental Analysis Approach.
Essential Standard 1.00 Understand the role of business in the global economy. 1.
Objective 1.02 Understand economic conditions 1 Understand the role of business in the global economy.
  GDP (Gross Domestic Product) – Basic measure of a nation’s economic output and income. Total market value of all goods and services produced in the.
7 AGGREGATE DEMAND AND AGGREGATE SUPPLY CHAPTER.
Essential Standard 1.00 Understand the role of business in the global economy. 1.
Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Investments, by Bodie, Ariff, da Silva Rosa, Kane & Marcus Slides prepared by Harminder Singh Chapter.
INVESTMENTS | BODIE, KANE, MARCUS Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written.
ECONOMIC AND INDUSTRY ANALYSIS
Macroeconomic and Industry Analysis
Presentation transcript:

Macroeconomic and Industry Analysis Chapter 12 Macroeconomic and Industry Analysis

12.1 The Global Economy 12-2

Framework of Analysis Fundamental Analysis Analysis of the determinants of firm value, specifically attempting to forecast the earnings and dividends of a firm. Top down approach:  The Global Economy  Analyze economy  Analyze industry Analyze firm 12-3

Framework of Analysis Approach to Fundamental Analysis Domestic and global economic analysis Performance in countries and regions is highly variable Politics affects the economy Foreign exchange rates affect U.S. firms and their competitors Political effects are manifold; the most recent of which is the financial crisis, which perhaps had its origins in monetary policy and government involvement in the mortgage markets and certainly the politics of handling the crisis have affected the stock markets. Ski resort in Aspen: Competition includes ski resorts in Europe. As euro strengthens, it becomes cheaper to fly to Aspen and ski in Colorado. At times this has been cheaper for a European than gong to a ski resort in the French alps such as Chamonix. Rocky Mountain Logs is exports many homes to Japan. If the dollar strengthens against the yen, it is more costly for a Japanese buyer to buy the U.S. product. Yen profit on Toyota cars. Toyota is a Japanese firm and they have extensive U.S. operations, in part to limit the exchange rate risk. If the yen strengthens the yen value of the dollar revenue from the sale of a car in the U.S. is reduced, putting pressure on Toyota to lose profit margin, or increase the dollar price and risk losing market share. Their choices will affect the competition and vice versa. 12-4

Framework of Analysis Approach to Fundamental Analysis Industry analysis Critical to understand the competitiveness of the industry Company analysis Detailed strategic and financial analysis of the firm Why use the top-down approach? Why use the top down approach? Economy has a major effect on stock returns as does the industry, particularly for growth stocks. It is hard to find a well performing stock in a poor industry when the economy is not doing well! 12-5

Economic Performance, 2008 The real value of the dollar has dropped against the euro and the Canadian dollar. over this time period. This indicates that firms that sell product in these markets may face reduced $ profit margins. 12-6

Change in Real Exchange Rate: Dollar Versus Major Currencies. 1999-2008 12-7

12.2 The Domestic Macroeconomy 12-8

Key Economic Variables Gross domestic product The market value of gods and services produced domestically in a given time period Unemployment rate The ratio of number of people classified as unemployed to the total labor force Inflation The rate of change in the general price level as measured by some price index: Consumer Price Index, Producer Price Index, GDP Deflator The CPI is the most commonly reported measure of inflation. It attempts to measure price changes for the typical urban consumer. So called core inflation as measured by the CPI excludes more volatile items such as energy prices. There are various PPIs that measure price changes of raw materials, intermediate and finished goods. These indices typically lead changes in the CPI. The GDP deflator is the broadest measure of inflation , it measures the changes in prices for all goods and services in the economy. 12-9

Key Economic Variables Interest rates Major impact on security prices (stocks and bonds) and the level of economic growth Budget Deficits Budget deficits can crowd out private investment, private investment generates more growth than public sector investment. Alternative to crowding out is overreliance on foreign borrowing. 12-10

Key Economic Variables Consumer sentiment Consumers’ optimism or pessimism concerning the economy and job prospects. See the St. Louis Fed website, National Economic Trends, for the latest graph of consumer confidence over recent periods. Consumer confidence hit all time lows during the Financial Crisis of 2008. 12-11

S&P 500 Versus EPS Estimate Stock prices tend to rise & fall with earnings. The normal price earnings ratio (P/E) is in the range 12 to 25. 12-12

12.3 Interest Rates 12-13

Factors Determining the Level of Interest Rates Supply of funds from savers Demand for funds from businesses Government’s net supply and demand for funds Fiscal policy Monetary policy Expected rate of inflation Interest rates contain a premium for expected inflation The Federal Reserve typically raises interest rates proactively when inflation is expected to increase Fiscal policy is government spending that is designed to stimulate the economy, Monetary policy is manipulating the money supply to stimulate the economy or reduce inflationary pressures. In the Financial Crisis of 2008, the Fed brought interest rates down to essentially zero, but the economy continued to slide. The Fed then pursued a policy of quantitative easing. Namely, directly buying debt from private entities. 12-14

Determination of the Equilibrium Real Rate of Interest Note the Fed can affect nominal interest rates but it may be tougher to bring about long run changes in real rates 12-15

12.4 Demand and Supply Shocks 12-16

Demand Shocks Demand Shock An event that affects the demand for goods and services, some examples include: Change in tax rates Change in the money supply Change in government spending Change in foreign export demand The economic growth rate in the 1990s was very high because of technological growth, low commodity prices, low interest rates and low taxes. 12-17

Supply Shocks An event that influences production capacity and input costs, including labor costs; examples: Changes in the price or availability of imported oil Freezes, Floods, Droughts Changes in wage rates Negative supply shocks result in reduced output, slower economic growth. demand > supply, which is inflationary. Note: Monetary policy is note very effective at correcting supply shocks, except perhaps in the very short run. If a negative supply shock is serious enough, stagflation (a stagnant economy with inflation) can occur. 12-18

Implications for investments Choose industries that will be helped by your expected economic scenario and avoid those that will be hurt. Choose consumer cyclicals if the economy is projected to do well, but not if the economy will weaken, May choose consumer staples and necessities such as utilities if the economy is not expected to do well. To earn abnormal returns you must have better information (unlikely) or better analysis than the competition. Consumer cyclicals would include consumer durables such as appliances, autos, etc., and luxury items. Notice how many motorcycles have been for sale during the recession. Also, dividends of phone companies and other utilities look good during a recession. 12-19

12.5 Federal Government Policy 12-20

Fiscal Policy Government spending and taxing actions to stabilize or spur growth in the economy Most direct policy method in terms of its effect on the economy (Keynesian policy) Often implemented too slowly due to political process Poor means to fine tune an economy, can be inflationary May be necessary when monetary policy is ineffective such as in the Financial Crisis of 2008 Leaky budget analogy: Government spending is very inefficient and it can be likened to carrying a leaky bucket to fill up the trough. The process is highly politicized and government does not have a profit motive; hence, it is rarely an efficient operation and much money is poorly spent, resulting in little growth. If growth does not occur, then future taxpayers will face higher taxes to repay the debt used to finance the spending. This is the problem with Keynesian policy mentioned in the related text box. Be aware that the evidence indicates that fiscal stimulus probably was called for during the crisis of 2008. Evidence shows that severe recessions result in governments having to borrow more than a temporary fiscal stimulus, even one of the size the U.S. instituted. Whether the actual stimulus bill Congress passed was a good bill or not is another question. Many students will not understand this issue. 12-21

Monetary Policy Manipulation of the money supply to influence economic activity by influencing the demand for goods and services to be produced and consumed Initial & long run effects Potentially long lags Changes incentives to purchase and invest, but may not lead to desired effect on demand The Fed can increase the money supply and lower interest rates in the short term (albeit with lags up to 18 months to full policy effect), but many believe money supply creation is inflationary in the long run and the inflation would push interest rates back up. This is the expectations problem of monetary policy and it can be self-fulfilling. In the inflationary periods in the 1970s when the Fed increased the money supply interest rates fell, but quickly began to rise again due to inflationary expectations in the economy. For this reason the Fed tries to keep inflation out of the system. Tools: Note that changes in the discount rate is used as a signal of what direction the Fed wants interest rate to move rather than as a direct policy tool. Changing reserve requirements changes the money multiplier and is not generally used to change the money supply. The most direct tool is open market operations. In open market operations the Fed buys government securities from government securities dealers. To pay for the purchase the Fed ‘hits a computer button’ and creates more deposits on reserve at the Fed for the seller. This is the main way that the money supply is expanded, rather than ‘printing money’ as people often euphemistically say. 12-22

Supply-Side Policies Supply-siders focus on incentives and marginal tax rates Lowering tax rates tends to encourage more investment Improve incentives to work Income inequality may also rise Can we rely solely on supply side policies in a severe recession such as the Financial Crisis of 2008? No because these are incentives to stimulate production and consumption (aggregate demand) for goods and services. With the debt overhang (high levels of indebtedness) these policies are unlikely to be sufficiently effective on their own. 12-23

Supply-Side Policies Income inequality may also rise Those with better ideas, education, opportunities, work ethic, providence, etc. will do better, others may not. If the majority are better off, but some much more so than others does this indicate that we should not use supply side policies? Income inequality: If I give you the following choice which would you prefer? Alternative 1: I give you $20 and your friend $100 or Alternative 2: I give both of you $10 each. Studies show that many people will prefer Alternative 2, even though both parties are better off in Alternative 1. Supply side policies, capitalism and global trade all can lead to higher wealth, but greater inequalities. For your information, this answer employs a utilitarian ethic. 12-24

Supply-Side Policies Income inequality may also rise Those with better ideas, education, opportunities, work ethic, providence, etc. will do better, others may not. If the majority are better off, but some much more so than others does this indicate that we should not use supply side policies? Income inequality: If I give you the following choice which would you prefer? Alternative 1: I give you $20 and your friend $100 or Alternative 2: I give both of you $10 each. Studies show that many people will prefer Alternative 2, even though both parties are better off in Alternative 1. Supply side policies, capitalism and global trade all can lead to higher wealth, but greater inequalities. For your information, this answer employs a utilitarian ethic. 12-25

12.6 Business Cycles 12-26

The Business Cycle Recurring patterns of recession and recovery Peak Trough Industry relationship to business cycles Cyclical industries Industries with above average sensitivity to the state of the economy Defensive Industries with below average sensitivity to the state of the economy Cyclicals: durable goods, anything whose purchase is likely to be delayed during a recession, this will include items that are less likely to be purchased when income is not growing or falling. These might include discretionary goods like jewelry, expensive vacations, RVs, machine tools, steel, autos, and transportation Defensive: food producers and food processors, pharmaceutical firms, medical services and public utilities, tobacco, movies, cheap beers 12-27

Economic Indicators Leading Indicators - tend to rise and fall in advance of the economy 12-28

Economic Indicators (cont) Coincident Indicators - indicators that tend to change at the same time as the economy Table 12.2 12-29

Economic Indicators (cont) Lagging Indicators - indicators that tend to follow or lag economic performance Source: The Conference Board, Business Cycle Indicators 12-30

Cyclical Indicators 12-31

Other Indicators 12-32

Economic Calendar at Yahoo! 12-33

12.7 Industry Analysis 12-34

Industry Analysis Performance can vary widely across industries It is difficult to find a good stock in a poor industry Note you may be able to find a good value stock in a poorly performing industry. In fact this is Warren Buffet’s and Peter Lynch’ s preferred strategy. 12-35

Industry Stock Price Performance, 2008 12-36

ROE of Application Software Firms, 2008 12-37

Sensitivity to Business Cycle Factors affecting sensitivity of earnings to business cycles Sensitivity of sales of the firm’s product to the business cycles Fixed costs and leverage Fixed costs are costs that do not vary with the level of production. Fixed costs contribute to higher profitability when sales are high, but will result in lower profitability when sales are lower. Sales: Cyclicals: durable goods, anything whose purchase is likely to be delayed during a recession, this will include items that are less likely to be purchased when income is not growing or falling. These might include discretionary goods like jewelry, expensive vacations, RVs, machine tools, steel, autos, and transportation Defensive: food producers and food processors, pharmaceutical firms, medical services and public utilities, tobacco, movies, cheap beers 12-38

Sensitivity to Business Cycle Operating leverage Proportion of fixed operating costs as a percent of total costs Greater operating leverage results in greater swings in profits over the business cycle Airlines, automobiles Financial leverage Proportion of fixed financing costs as a percent of total costs Greater financial leverage results in greater swings in profits over the business cycle Airlines, banks, investment banks Sales: Cyclicals: durable goods, anything whose purchase is likely to be delayed during a recession, this will include items that are less likely to be purchased when income is not growing or falling. These might include discretionary goods like jewelry, expensive vacations, RVs, machine tools, steel, autos, and transportation Defensive: food producers and food processors, pharmaceutical firms, medical services and public utilities, tobacco, movies, cheap beers 12-39

Industry Cyclicality Grocery business is a necessity and has much smaller swings in sales growth than the luxury good jewelry 12-40

A Stylized Depiction of the Business Cycle “Economic Activity” is often measured as change in GDP, Unofficially, a recession is often thought to be defined as two successive quarters of falling GDP. Officially, the National Bureau of Economic Research officially declares whether the economy is in a recession (and the start date). 12-41

Sector Rotation Selecting Industries in line with the stage of the business cycle: Peak Contraction Trough Expanding natural resource firms defensive firms equipment, transportation and construction firms cyclical industries It is difficult to achieve above average returns this way, often we don’t know which phase of the cycle we are in until later and the duration of each phase is also unknown. 12-42

Sector Rotation Illustrated 12-43

Industry Life Cycles Stage Sales Growth Start-up Consolidation Maturity Relative Decline Rapid & Increasing Stable Slowing Minimal or Negative Stages: Start-up: Cell phones in the 1990s. Sales and earnings grow rapidly, no or small dividends. Note that it is difficult to pick the eventual winners in this stage. Some firms won’t make it and investing in these type firms can be risky. Consolidation: Emergence of industry leaders (Verizon), survivors of the start-up phase become more stable, industry still growing faster than the economy overall Maturity stage: Product has reached saturation level (think McDonald’s), generally more competition and less diversification, so price competition emerges which further limits profitability. Relative Decline: Growth is lower than the overall economy, may be facing product obsolescence (VCRs) Biotech is closer to the start up phase and is enjoying high rates of investment, high rates of return on investment and low dividends. High growth rates beget competition however and eventually growth must slow. Utilities are in the mature phase and have lower rates of investment and lower rates of return on investment and higher dividends. 12-44

The Industry Life Cycle 12-45

Industry Structure and Performance (Porter Model)

Determinants of Industry Competition and Profitability Threat of Entry New entrants reduce profitability Barriers to entry preserve profitability Large scale required to be profitable (autos) Secure distribution channels Brand loyalty, unique differentiated product Proprietary production technology Intellectual property protections Learning curve effects 12-47

Determinants of Industry Competition and Profitability Rivalry between existing competitors Equal competitors reduce profitability Slow industry growth, High fixed costs, Scale economies, Pressure to cut prices 12-48

Determinants of Industry Competition and Profitability Pressure from substitute products Substitutes limit profitability (propane, natural gas) Bargaining power of buyers A buyer that purchases a large percent of an industry’s output can limit the selling industry’s profitability (auto parts suppliers) Bargaining power of suppliers A supplier that controls a key input can limit the buying industry’s profitability (labor unions) 12-49