Macroeconomic and Industry Analysis Bodie Kane and Marcus
Macroeconomic and Industry Analysis Bodie, Kane, and Marcus Essentials of Investments, 9 th Edition Mc. Graw-Hill/Irwin 12 Copyright © 2013 by The Mc. Graw-Hill Companies, Inc. All rights reserved.
12. 1 Global Economy • National Economic Environment • Crucial determinant of industry performance • Exchange Rate • Rate at which domestic currency can be converted into foreign currency 12 -2
Table 12. 1 Economic Performance 2011 Stock Market Return (%) In Local Currency In U. S. Dollars Forecasted Growth in GDP, 2012 (%) Brazil -22. 9 -28. 9 3. 5 Britain -3. 9 -4. 2 0. 2 Canada -9. 1 -10. 9 2. 0 China -22. 7 -19. 1 8. 2 France -16. 1 -19. 2 -0. 3 Germany -11. 6 -14. 9 0. 1 Greece -53. 2 -54. 9 -7. 5 India -22. 6 -34. 6 7. 8 Italy -24. 0 -26. 9 -1. 1 Japan -16. 3 -11. 6 1. 7 Mexico -3. 0 -12. 9 3. 1 Russia -15. 4 -19. 0 3. 7 Singapore -15. 0 -15. 5 4. 0 -9. 0 -10. 1 3. 8 Thailand 0. 3 -3. 9 3. 1 U. S. 1. 6 2. 0 South Korea Source: The Economist, January 7, 2012 12 -3
Figure 12. 1 Change in Real Exchange Rate U. S. dollar versus major currencies, 1999 -2010 U. K. 4, 3% Euro -13, 4% Japan Canada -35% 2, 7% -28, 9% -30% -25% -20% -15% -10% -5% 0% 5% 10% 12 -4
12. 2 The Domestic Macroeconomy • Gross Domestic Product (GDP) • Market value of goods and services produced over period of time • Unemployment Rate • Ratio of number of unemployed to total labor force • Inflation • Rate at which general level of prices for goods and services is rising 12 -5
12. 2 The Domestic Macroeconomy • Interest Rates • High interest rates reduce present value of future cash flows • Budget Deficit • Government spending in excess of government revenues • Sentiment • Consumer optimism/pessimism are determinants of economic performance 12 -6
Figure 12. 2 S&P 500 Index versus Earnings per Share 2500 2000 S&P 500 EPS x 12 EPS x 18 EPS x 25 1500 1000 500 2011 2007 2003 1999 1995 1991 1987 1983 1979 1975 1971 1967 1963 1959 1955 0 12 -7
12. 3 Interest Rates • Fundamental Factors of Interest Rates • Supply of funds from savers • Demand for funds from borrowers • Government’s net supply/demand for funds, modified by Federal Reserve • Expected rate of inflation 12 -8
Figure 12. 3 Determination of Equilibrium Real Rate of Interest 12 -9
12. 4 Demand Supply Shocks • Demand Shock • Event that affects demand for goods and services in economy • Supply Shock • Event that influences production capacity and costs in economy 12 -10
12. 5 Federal Government Policy • Fiscal Policy • Use of government spending and taxing for stabilizing economy • Monetary Policy • Actions taken by Board of Governors of Federal Reserve System to influence money supply or interest rates • Supply-Side Policies • Address productive capacity of economy, goal is to induce workers/owners to produce goods 12 -11
12. 6 Business Cycles • Recurring cycles of recession and recovery • Peak • Transition from end of expansion to start of contraction • Trough • Transition point between recession and recovery 12 -12
12. 6 Business Cycles • Cyclical Industries • Industries with above-average sensitivity to state of economy • Defensive Industries • Industries with below-average sensitivity to state of economy 12 -13
Figure 12. 4 Cyclical Indicators 12 -14
Figure 12. 4 Cyclical Indicators 12 -15
12. 6 Business Cycles • Leading Economic Indicators • Economic series that tend to rise or fall in advance of rest of economy • Stock-market-price index • Money supply • Manufacturers’ orders 12 -16
Table 12. 2 Indexes of Economic Indicators 12 -17
Figure 12. 5 Indexes of Leading, Coincident, and Lagging Factors 12 -18
Table 12. 3 Economic Calendar 12 -19
Figure 12. 6 Economic Calendar at Yahoo! For Actual Briefing Forecast 3 -Jan 10: 00 AM Construction Spending Nov 1. 20% 0. 50% -0. 20% 0. 80% 4 -Jan 31 -Dec -3. 70% NA NA -2. 60% — 4 -Jan 10: 00 AM Factory Orders Nov 1. 80% 2. 60% 2. 10% -0. 20% -0. 40% 5 -Jan 8: 15 AM ADP Employment Change Dec 325 K 200 K 180 K 204 K 206 K 5 -Jan 8: 30 AM Intial Claims 31 -Dec 372 K 375 K 387 K 381 K 5 -Jan 10: 00 AM ISM Services Dec 52. 6 53 53 52 — 6 -Jan 8: 30 AM Nonfarm Private Payrolls Dec 212 K 200 K 170 K 120 K 140 K% 6 -Jan 8: 30 AM Unemployment Rate Dec 8. 50% 8. 70% 8. 60% 6 -Jan 8: 30 AM Hourly Earnings Dec 0. 20% 0. 10% 0. 20% 0. 00% -0. 10% Date Time (ET) Statistic 7: 00 AM MBA Mortgage Index Market Expects Prior Revised From 12 -20
12. 7 Industry Analysis • Defining an Industry • NAICS codes • Classification of firms into industry groups using numerical codes to identify industries • Sensitivity to the Business Cycle • Sensitivity of sales • Operating leverage • Financial leverage 12 -21
Figure 12. 7 Return on Equity, 2011 Computer systems Restaurants Application software Industrial metals Chemical products Integrated oil & gas Health care plans Aerospace/defense Pharmaceuticals Home improvement Telecom services Business software Asset management Food products Biotech Trucking Auto manufacturers Electric utilities Heavy construction Money center banks 36, 4 29, 6 24, 9 24, 6 19, 6 18, 1 17, 2 17, 1 15, 8 15, 6 14, 1 11, 4 10, 3 9, 0 8, 7 8, 5 7, 9 7, 1 7, 0 6, 7 0, 0 5, 0 10, 0 15, 0 20, 0 25, 0 30, 0 35, 0 40, 0 ROE (%) 12 -22
Figure 12. 8 Industry Stock Price Performance, 2011 Computer systems Restaurants Application software Industrial metals Chemical products Integrated oil & gas Health care plans Aerospace/defense Pharmaceuticals Home improvement Telecom services Business software Asset management Food products Biotech Trucking Auto manufacturers Electric utilities Heavy construction Money center banks -40, 0 16, 3 27, 8 -8, 6 -21, 2 -4, 6 13, 4 10, 5 5, 5 14, 7 12, 9 -9, 1 -8, 6 -20, 1 11, 3 5, 5 -7, 7 -33, 2 13, 1 -17, 1 -25, 3 -30, 0 -20, 0 -10, 0 20, 0 30, 0 Rate of return (%) 12 -23
Figure 12. 9 ROE of Application Software Firms Adobe 15, 2 CA (Computer Assoc) 15, 5 Oracle 24, 3 Intuit 25, 7 SAP 26, 0 Microsoft 44, 2 0 5 10 15 20 25 30 35 40 45 50 ROE (%) 12 -24
Table 12. 5 Examples of NAICS Industry Codes 12 -25
Figure 12. 10 Industry Cyclicality 15% Grocery Jewelry 5% 0% -5% -10% 2011 2009 2007 2005 2003 2001 1999 1997 1995 -15% 1993 Annual sales growth (%) 10% 12 -26
Figure 12. 11 Stylized Depiction of Business Cycle 12 -27
12. 7 Industry Analysis • Sector Rotation • Shifting portfolio into industry sectors expected to outperform others based on macroeconomic forecasts • After peak, defensive industries often better performers • In trough, capital goods industries often better performers • In expansion, cyclical industries often better 12 -28
Figure 12. 12 Sector Rotation 12 -29
12. 7 Industry Analysis • Industry Life Cycles: Stages Firms Pass Through to Maturity • Start-up stage: Often characterized by new technology/product • Consolidation stage: Industry leaders begin to emerge • Maturity stage: Product has reached potential for use by consumers • Relative decline: May grow less than rest of economy or shrink 12 -30
Figure 12. 13 Industry Life Cycle 12 -31
12. 7 Industry Analysis • Industry Structure and Performance • Threat of entry: New entrants to industry pressure price/profits • Rivalry between existing competitors: Market share competition pressures price/profits • Pressure from substitute products: Firms in related industries can threaten market share 12 -32
12. 7 Industry Analysis • Industry Structure and Performance • Bargaining power of buyers • Large-scale buyers have considerable bargaining power • Bargaining power of suppliers • Large-scale suppliers have considerable bargaining power 12 -33
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