Bodie−Kane−Marcus: Essentials of Investments, Fifth Edition IV. Security Analysis 11. Macroeconomic and Industry Analysis © The McGraw−Hill Companies, 2003 Fiscal policy is cumbersome to implement but has a fairly direct impact on the economy, while monetary policy is easily formulated and implemented but has a less immediate impact. Monetary policy is determined by the Board of Governors of the Federal Reserve System. Board members are appointed by the president for 14-year terms and are reasonably insulated from political pressure. The board is small enough and often sufficiently dominated by its chairperson that policy can be formulated and modulated relatively easily. Implementation of monetary policy also is quite direct. The most widely used tool is the open market operation, in which the Fed buys or sells Treasury bonds for its own account. When the Fed buys securities, it simply writes a check, thereby increasing the money supply. (Unlike us, the Fed can pay for the securities without drawing down funds at a bank account.) Conversely, when the Fed sells a security, the money paid for it leaves the money supply. Open market operations occur daily, allowing the Fed to fine-tune its monetary policy. Other tools at the Fed’s disposal are the discount rate, which is the interest rate it charges banks on short-term loans, and the reserve requirement, which is the fraction of deposits that banks must hold as cash on hand or as deposits with the Fed. Reductions in the discount rate signal a more expansionary monetary policy. Lowering reserve requirements allows banks to make more loans with each dollar of deposits and stimulates the economy by increasing the effective money supply. Monetary policy affects the economy in a more roundabout way than fiscal policy. While fiscal policy directly stimulates or dampens the economy, monetary policy works largely through its impact on interest rates. Increases in the money supply lower interest rates, which stimulate investment demand. As the quantity of money in the economy increases, investors will find that their portfolios of assets include too much money. They will rebalance their port- folios by buying securities such as bonds, forcing bond prices up and interest rates down. In the longer run, individuals may increase their holdings of stocks as well and ultimately buy real assets, which stimulates consumption demand directly. The ultimate effect of monetary policy on investment and consumption demand, however, is less immediate than that of fiscal policy. 2. Suppose the government wants to stimulate the economy without increasing interest rates. What combination of fiscal and monetary policy might accomplish this goal? Supply-Side Policies Fiscal and monetary policy are demand-oriented tools that affect the economy by stimulating the total demand for goods and services. The implicit belief is that the economy will not by it- self arrive at a full employment equilibrium and that macroeconomic policy can push the economy toward this goal. In contrast, supply-side policies treat the issue of the productive capacity of the economy. The goal is to create an environment in which workers and owners of capital have the maximum incentive and ability to produce and develop goods. Supply-side economists also pay considerable attention to tax policy. While demand-siders look at the effect of taxes on consumption demand, supply-siders focus on incentives and mar- ginal tax rates. They argue that lowering tax rates will elicit more investment and improve in- centives to work, thereby enhancing economic growth. Some go so far as to claim that reductions in tax rates can lead to increases in tax revenues because the lower tax rates will cause the economy and the revenue tax base to grow by more than the tax rate is reduced. 3. Large tax cuts in the 1980s were followed by rapid growth in GDP. How would demand-side and supply-side economists differ in their interpretations of this phenomenon? 390 Part FOUR Security Analysis Concept CHECK > Concept CHECK > Bodie−Kane−Marcus: Essentials of Investments, Fifth Edition IV. Security Analysis 11. Macroeconomic and Industry Analysis © The McGraw−Hill Companies, 2003 11.6 BUSINESS CYCLES We’ve looked at the tools the government uses to fine-tune the economy, attempting to main- tain low unemployment and low inflation. Despite these efforts, economies repeatedly seem to pass through good and bad times. One determinant of the broad asset allocation decision of many analysts is a forecast of whether the macroeconomy is improving or deteriorating. A fore- cast that differs from the market consensus can have a major impact on investment strategy. The Business Cycle The economy recurrently experiences periods of expansion and contraction, although the length and depth of these cycles can be irregular. These recurring patterns of recession and re- covery are called business cycles. Figure 11.4 presents graphs of several measures of pro- duction and output for the years 1967–2001. The production series all show clear variation around a generally rising trend. The bottom graph of capacity utilization also evidences a clear cyclical (although irregular) pattern. The transition points across cycles are called peaks and troughs, labeled P and T at the top of the graph. A peak is the transition from the end of an expansion to the start of a contraction. A trough occurs at the bottom of a recession just as the economy enters a recovery. The shaded areas in Figure 11.4 all represent periods of recession. As the economy passes through different stages of the business cycle, the relative profitabil- ity of different industry groups might be expected to vary. For example, at a trough, just before the economy begins to recover from a recession, one would expect that cyclical industries, those with above-average sensitivity to the state of the economy, would tend to outperform other industries. Examples of cyclical industries are producers of durable goods, such as automobiles or washing machines. Because purchases of these goods can be deferred during a recession, sales are particularly sensitive to macroeconomic conditions. Other cyclical industries are producers of capital goods, that is, goods used by other firms to produce their own products. When demand is slack, few companies will be expanding and purchasing capital goods. Therefore, the capital goods industry bears the brunt of a slowdown but does well in an expansion. In contrast to cyclical firms, defensive industries have little sensitivity to the business cy- cle. These are industries that produce goods for which sales and profits are least sensitive to the state of the economy. Defensive industries include food producers and processors, phar- maceutical firms, and public utilities. These industries will outperform others when the econ- omy enters a recession. The cyclical/defensive classification corresponds well to the notion of systematic or mar- ket risk introduced in our discussion of portfolio theory. When perceptions about the health of the economy become more optimistic, for example, the prices of most stocks will increase as forecasts of profitability rise. Because the cyclical firms are most sensitive to such develop- ments, their stock prices will rise the most. Thus, firms in cyclical industries will tend to have high-beta stocks. In general then, stocks of cyclical firms will show the best results when eco- nomic news is positive, but they will also show the worst results when that news is bad. Con- versely, defensive firms will have low betas and performance that is relatively unaffected by overall market conditions. If your assessments of the state of the business cycle were reliably more accurate than those of other investors, choosing between cyclical and defensive industries would be easy. You would choose cyclical industries when you were relatively more optimistic about the econ- omy, and you would choose defensive firms when you were relatively more pessimistic. As we know from our discussion of efficient markets, however, attractive investment choices will 11 Macroeconomic and Industry Analysis 391 business cycles Repetitive cycles of recession and recovery. peak The transition from the end of an expansion to the start of a contraction. trough The transition point between recession and recovery. cyclical industries Industries with above- average sensitivity to the state of the economy. defensive industries Industries with below- average sensitivity to the state of the economy. Bodie−Kane−Marcus: Essentials of Investments, Fifth Edition IV. Security Analysis 11. Macroeconomic and Industry Analysis © The McGraw−Hill Companies, 2003 392 Part FOUR Security Analysis FIGURE 11.4 Cyclical indicators, 1967–2001 Source: Business Cycle Indicators, The Conference Board, February 2002. 68 8,500 Dec. P Nov. P Nov. T Mar. T Jan. P July T July P July P Nov. T Mar. T Mar. P 7,500 6,500 5,500 4,500 3,500 190 170 150 130 110 90 70 50 120 110 100 90 80 70 60 90 85 80 75 70 8,500 7,500 6,500 5,500 4,500 3,500 190 170 150 130 110 90 70 50 120 110 100 90 80 70 60 90 85 80 75 70 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 55. Gross domestic product, 1996$, Q (ann. rate, bill dol.)[C,C,C] 73. Industrial production index, durable manufactures [C,C,C] (dark line) 74. Industrial production index, nondurable manufactures [C,L,L] (light line) 75. Industrial production index, consumer goods [C,L,C] 82. Capacity utilization rate, manufacturing (percent) [L,C,L] December 2001 December 2001 December 2001 4th Quarter 2001 Bodie−Kane−Marcus: Essentials of Investments, Fifth Edition IV. Security Analysis 11. Macroeconomic and Industry Analysis © The McGraw−Hill Companies, 2003 rarely be obvious. It usually is not apparent that a recession or expansion has started or ended until several months after the fact. With hindsight, the transitions from expansion to recession and back might be apparent, but it is often quite difficult to say whether the economy is heat- ing up or slowing down at any moment. Economic Indicators Given the cyclical nature of the business cycle, it is not surprising that to some extent the cy- cle can be predicted. The Conference Board publishes a set of cyclical indicators to help fore- cast, measure, and interpret short-term fluctuations in economic activity. Leading economic indicators are those economic series that tend to rise or fall in advance of the rest of the econ- omy. Coincident and lagging indicators, as their names suggest, move in tandem with or somewhat after the broad economy. Ten series are grouped into a widely followed composite index of leading economic indi- cators. Similarly, four coincident and seven lagging indicators form separate indexes. The composition of these indexes appears in Table 11.2. Figure 11.5 graphs these three series over the period 1958–2001. The numbers on the charts near the turning points of each series indicate the length of the lead time or lag time (in months) from the turning point to the designated peak or trough of the corresponding business cycle. While the index of leading indicators consistently turns before the rest of the economy, the lead time is somewhat erratic. Moreover, the lead time for peaks is consistently longer than that for troughs. 11 Macroeconomic and Industry Analysis 393 leading economic indicators Economic series that tend to rise or fall in advance of the rest of the economy. TABLE 11.2 Indexes of economic indicators A. Leading indicators 1. Average weekly hours of production workers (manufacturing). 2. Initial claims for unemployment insurance. 3. Manufacturers’ new orders (consumer goods and materials industries). 4. Vendor performance—slower deliveries diffusion index. 5. New orders for nondefense capital goods. 6. New private housing units authorized by local building permits. 7. Yield curve: spread between 10-year T-bond yield and federal funds rate. 8. Stock prices, 500 common stocks. 9. Money supply (M2). 10. Index of consumer expectations. B. Coincident indicators 1. Employees on nonagricultural payrolls. 2. Personal income less transfer payments. 3. Industrial production. 4. Manufacturing and trade sales. C. Lagging indicators 1. Average duration of unemployment. 2. Ratio of trade inventories to sales. 3. Change in index of labor cost per unit of output. 4. Average prime rate charged by banks. 5. Commercial and industrial loans outstanding. 6. Ratio of consumer installment credit outstanding to personal income. 7. Change in consumer price index for services. Source: Business Cycle Indicators, The Conference Board, February 2002. Bodie−Kane−Marcus: Essentials of Investments, Fifth Edition IV. Security Analysis 11. Macroeconomic and Industry Analysis © The McGraw−Hill Companies, 2003 394 Part FOUR Security Analysis FIGURE 11.5 Indexes of leading, coincident, and lagging indicators Source: Business Cycle Indicators, The Conference Board, February 2002. 58 110 Apr. T Ϫ11 Apr. P Dec. P Feb. T Nov. T Nov. P Mar. T Jan. P July T July P July P Nov. T Mar. T Mar. P 100 90 80 70 60 110 100 90 80 70 60 130 110 90 70 50 30 110 100 90 80 110 100 90 80 70 60 50 130 110 90 70 50 30 110 100 90 80 110 100 90 80 70 60 50 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 910. Composite index of 10 leading indicators (series 1, 5, 8, 19, 27 ,29, 32, 83, 106, 129) 920. Composite index of 4 coincident indicators (series 41, 47, 51, 57) 930. Composite index of 7 lagging indicators (series 62, 77, 91, 95, 101, 109, 120) 940. Ratio, coincident index to lagging index December 2001 December 2001 December 2001 Ϫ8 ϩ9 ϩ15 ϩ22 ϩ21 ϩ13 Ϫ8 Ϫ12 Ϫ10 Ϫ10 Ϫ11 Ϫ10 Ϫ10 Ϫ10 Ϫ2 Ϫ8 Ϫ2 Ϫ4 Ϫ9 Ϫ15 Ϫ3 ϩ3 ϩ3 ϩ3 ϩ3 ϩ6 ϩ2 Ϫ2 Ϫ1 Ϫ3 ϩ1 0 0 0 0 0 0 0 0 0 0 0 0 Ϫ7 Ϫ2 Ϫ3 Ϫ3 Ϫ2 Ϫ14 Ϫ6 December 2001 Bodie−Kane−Marcus: Essentials of Investments, Fifth Edition IV. Security Analysis 11. Macroeconomic and Industry Analysis © The McGraw−Hill Companies, 2003 The stock market price index is a leading indicator. This is as it should be, as stock prices are forward-looking predictors of future profitability. Unfortunately, this makes the series of leading indicators much less useful for investment policy—by the time the series predicts an upturn, the market has already made its move. While the business cycle may be somewhat predictable, the stock market may not be. This is just one more manifestation of the efficient market hypothesis. The money supply is another leading indicator. This makes sense in light of our earlier dis- cussion concerning the lags surrounding the effects of monetary policy on the economy. An expansionary monetary policy can be observed fairly quickly, but it might not affect the econ- omy for several months. Therefore, today’s monetary policy might well predict future eco- nomic activity. Other leading indicators focus directly on decisions made today that will affect production in the near future. For example, manufacturers’ new orders for goods, contracts and orders for plant and equipment, and housing starts all signal a coming expansion in the economy. A wide range of economic indicators are released to the public on a regular “economic cal- endar.” Table 11.3 lists the public announcement dates and sources for about 20 statistics of 11 Macroeconomic and Industry Analysis 395 TABLE 11.3 Economic calendar Statistic Release Date* Source *Many of these release dates are approximate. Source: Charter Media, Inc. Auto and truck sales Business inventories Construction spending Consumer confidence Consumer credit Consumer price index (CPI) Durable goods orders Employment cost index Employment record (unemployment, average workweek, nonfarm payrolls) Existing home sales Factory orders Gross domestic product Housing starts Industrial production Initial claims for jobless benefits International trade balance Index of leading economic indicators Money supply New home sales Producer price index Productivity and costs Retail sales Survey of purchasing managers 2nd of month 15th of month 1st business day of month Last Tuesday of month 5th business day of month 13th of month 26th of month End of first month of quarter 1st Friday of month 25th of month 1st business day of month 3rd–4th week of month 16th of month 15th of month Thursdays 20th of month Beginning of month Thursdays Last business day of month 11th of month 2nd month in quarter (approx. 7th day of month) 13th of month 1st business day of month Commerce Department Commerce Department Commerce Department Conference Board Federal Reserve Board Bureau of Labor Statistics Commerce Department Bureau of Labor Statistics Bureau of Labor Statistics National Association of Realtors Commerce Department Commerce Department Commerce Department Federal Reserve Board Department of Labor Commerce Department Conference Board Federal Reserve Board Commerce Department Bureau of Labor Statistics Bureau of Labor Statistics Commerce Department National Association of Purchasing Managers Bodie−Kane−Marcus: Essentials of Investments, Fifth Edition IV. Security Analysis 11. Macroeconomic and Industry Analysis © The McGraw−Hill Companies, 2003 interest. These announcements are reported in the financial press, for example, The Wall Street Journal, as they are released. They also are available at many sites on the World Wide Web, for example, at Yahoo’s website. Figure 11.6 is an excerpt from a recent Economic Calendar page at Yahoo!. The page gives a list of the announcements released during the week of Janu- ary 22. Notice that recent forecasts of each variable are provided along with the actual value of each statistic. This is useful, because in an efficient market, security prices will already re- flect market expectations. The new information in the announcement will determine the mar- ket response. 11.7 INDUSTRY ANALYSIS Industry analysis is important for the same reason that macroeconomic analysis is: Just as it is difficult for an industry to perform well when the macroeconomy is ailing, it is unusual for a firm in a troubled industry to perform well. Similarly, just as we have seen that economic per- formance can vary widely across countries, performance also can vary widely across indus- tries. Figure 11.7 illustrates the dispersion of industry earnings growth. It shows projected growth in earnings per share in 2001 and 2002 for several major industry groups. The fore- casts for 2002, which come from a survey of industry analysts, range from Ϫ10.5% for natu- ral resources to 69.6% for information technology. Not surprisingly, industry groups exhibit considerable dispersion in their stock market per- formance. Figure 11.8 illustrates the stock price performance of 27 industries in 2001. The market as a whole was down dramatically in 2001, but the spread in annual returns was re- markable, ranging from a Ϫ50.3% return for the networking industry to a 25% return in the gold industry. Even small investors can easily take positions in industry performance using mutual funds with an industry focus. For example, Fidelity offers over 30 Select funds, each of which is in- vested in a particular industry. Defining an Industry While we know what we mean by an industry, it can be difficult in practice to decide where to draw the line between one industry and another. Consider, for example, the finance industry. Figure 11.7 shows that the forecast for 2002 growth in industry earnings per share was 16.7%. 396 Part FOUR Security Analysis FIGURE 11.6 Economic calendar at Yahoo! Jan 10:00 AM Leading Indicators Dec 1.2% 1.1% 0.8% 0.8% 0.5% 22 2:00 AM Treasury Budget Dec $26.6B $24.0B $24.0B $32.7B $32.7B Jan 8:30 AM Initial Jobless Claims 01/19 376K 380K 395K 391K 384K 24 Jan 10:00 AM Existing Home Sales Dec 5.19M 5.25M 5.18M 5.23M 5.21M 25 . Time Briefing Market . Revised (ET) Forecast Expects From Date . Statistic For Actual Prior Economic Calendar Jan. 22 - Jan. 25 Last Week Next Week Bodie−Kane−Marcus: Essentials of Investments, Fifth Edition IV. Security Analysis 11. Macroeconomic and Industry Analysis © The McGraw−Hill Companies, 2003 But this “industry” contains firms with widely differing products and prospects. Figure 11.9 breaks down the industry into six subgroups. The forecast earnings growth of these more nar- rowly defined groups differs widely, from Ϫ0.9% to 60.5%, suggesting that they are not mem- bers of a homogeneous industry. Similarly, most of these subgroups in Figure 11.9 could be divided into even smaller and more homogeneous groups. A useful way to define industry groups in practice is given by Standard Industry Classifi- cation, or SIC, codes or, more recently, North American Industry Classification System, or NAICS codes. These are codes assigned for the purpose of grouping firms for statistical analysis. The first two digits of the SIC codes denote very broad industry classifications. For example, the SIC codes assigned to any type of building contractor all start with 15. The third and fourth digits define the industry grouping more narrowly. For example, codes starting with 152 denote residential building contractors, and group 1521 contains single family building contractors. Firms with the same four-digit SIC code therefore are commonly taken to be in the same industry. Many statistics are computed for even more narrowly defined five-digit SIC groups. NAICS codes similarly group firms operating inside the NAFTA (North Ameri- can Free Trade Agreement) region, which includes the U.S., Mexico, and Canada. Neither NAICS nor SIC industry classifications are perfect. For example, both J.C. Penney and Neiman Marcus might be classified as department stores. Yet the former is a high-volume “value” store, while the latter is a high-margin elite retailer. Are they really in the same indus- try? Still, SIC classifications are a tremendous aid in conducting industry analysis since they provide a means of focusing on very broadly or fairly narrowly defined groups of firms. Several other industry classifications are provided by other analysts, for example, Standard & Poor’s reports on the performance of about 100 industry groups. S&P computes stock price indexes for each group, which is useful in assessing past investment performance. The Value Line Investment Survey reports on the conditions and prospects of about 1,700 firms, grouped into about 90 industries. Value Line’s analysts prepare forecasts of the performance of indus- try groups as well as of each firm. 11 Macroeconomic and Industry Analysis 397 FIGURE 11.7 Estimates of earnings growth rates in several industries–2001 and 2002 2001 2002 80 60 40 20 0 –20 –40 –60 –80 –29.3 –22.4 –10.1 –27.4 –0.8 –11.5 –67.0 –10.5 38.7 23.6 10.9 13.2 24.1 21.1 18.7 16.7 69.6 3.3 7.8 10.5 Public utilities Information technology IndustrialsFinancialsNoncyclical services Cyclical services Noncyclical consumer goods Cyclical consumer goods Basic industries Percent change from previous year Resources SIC and NAICS codes Classification of firms into industry groups using numerical codes to identify industries. Bodie−Kane−Marcus: Essentials of Investments, Fifth Edition IV. Security Analysis 11. Macroeconomic and Industry Analysis © The McGraw−Hill Companies, 2003 Sensitivity to the Business Cycle Once the analyst forecasts the state of the macroeconomy, it is necessary to determine the im- plication of that forecast for specific industries. Not all industries are equally sensitive to the business cycle. For example, consider Figure 11.10, which is a graph of automobile produc- tion and shipments of tobacco products, both scaled so that 1963 has a value of 100. Clearly, the tobacco industry is virtually independent of the business cycle. Demand for to- bacco products does not seem to be affected by the state of the macroeconomy in any mean- ingful way: This is not surprising. Tobacco consumption is determined largely by habit and is a small enough part of most budgets that it will not be given up in hard times. 398 Part FOUR Security Analysis FIGURE 11.8 Industry stock price performance, 2001 Source: Thomson Financial. 3020100–20 –10–50 –40 –30 –34.7 –21.9 –28 –31.7 –7 –2.4 –50.3 –22.7 –2.3 –4.9 –3.1 –15 –0.5 –9.1 –21 –12 –14.7 –36.1 –27.3 –25 –9 0.3 3.3 25 1.2 0.4 –1 –60 percent return Wireless Utilities Telecommunications Technology Software & comp services Retailing Networking infrastructure Natural gas Multimedia Medical delivery Medical equipment Leisure Insurance Home finance Health care Gold Food & agriculture Financial services Energy service Energy Electronics Developing communications Defense Aerospace Computers Brokerage Biotechnology Banking Bodie−Kane−Marcus: Essentials of Investments, Fifth Edition IV. Security Analysis 11. Macroeconomic and Industry Analysis © The McGraw−Hill Companies, 2003 Auto production by contrast is highly volatile. In recessions, consumers can try to prolong the lives of their cars until their income is higher. For example, the worst year for auto pro- duction, according to Figure 11.10, was 1982. This was also a year of deep recession, with the unemployment rate at 9.5%. Three factors will determine the sensitivity of a firm’s earnings to the business cycle. First is the sensitivity of sales. Necessities will show little sensitivity to business conditions. Ex- amples of industries in this group are food, drugs, and medical services. Other industries with low sensitivity are those for which income is not a crucial determinant of demand. As we noted, tobacco products are examples of this type of industry. Another industry in this group is movies, because consumers tend to substitute movies for more expensive sources of enter- tainment when income levels are low. In contrast, firms in industries such as machine tools, steel, autos, and transportation are highly sensitive to the state of the economy. The second factor determining business cycle sensitivity is operating leverage, which refers to the division between fixed and variable costs. (Fixed costs are those the firm incurs regardless 11 Macroeconomic and Industry Analysis 399 FIGURE 11.9 Estimates of earnings growth in 2002 for finance firms 70 60 50 40 30 20 10 0 Ϫ10 Savings and Loans LeasingInvestmentsInsuranceFinancial services Percent charge from 2001 Banking 19.0 20.3 Ϫ0.9 14.5 60.5 19.0 FIGURE 11.10 Industry cyclicality. Industry sales, scaled so that sales in 1963 equal 100. Sources: Passenger car sales: Ward’s Automobile Yearbook, 1994 and www .nada.org. Cigarette sales: Department of Alcohol, Tobacco, and Firearms Statistical Releases and Statistical Abstract of the U.S. 140 120 100 80 60 40 20 0 1963 Passenger cars Cigarettes 1967 1971 1975 1979 1983 1987 1991 1995 1999 [...]... influencing business cycle sensitivity is financial leverage, which is the use of borrowing Interest payments on debt must be paid regardless of sales They are fixed costs that also increase the sensitivity of profits to business conditions We will have more to say about financial leverage in Chapter 13 Investors should not always prefer industries with lower sensitivity to the business cycle Firms in sensitive... candidate, states: “Based on our assumption that Universal will be able to increase prices significantly on U .S passenger cars in 1998, we project a multibillion dollar profit improvement ” a Discuss the concept of an industrial life cycle by describing each of its four phases b Identify where each of Universal s two primary businesses—passenger cars and information processing—is in such a cycle c Discuss... reduce prices since fixed costs put greater pressure on firms to operate near full capacity Industries producing relatively homogeneous goods also are subject to considerable price pressure since firms cannot compete on the basis of product differentiation Pressure from substitute products Substitute products means that the industry faces competition from firms in related industries For example, sugar producers... United States passenger car production, but it also includes small truck manufacturing operations in the United States and passenger car production in other countries This segment of Universal has had weak operating results for the past several years, including a large loss in 1997 Although the company does not reveal the operating results of its domestic passenger car segments, that part of Universal s. ..Bodie−Kane−Marcus: Essentials of Investments, Fifth Edition 400 IV Security Analysis © The McGraw−Hill Companies, 2003 11 Macroeconomic and Industry Analysis Part FOUR Security Analysis of its production levels Variable costs are those that rise or fall as the firm produces more or less product.) Firms with greater amounts of variable as opposed to fixed costs will be less sensitive to business conditions This is... because, in economic downturns, these firms can reduce costs as output falls in response to falling sales Profits for firms with high fixed costs will swing more widely with sales because costs do not move to offset revenue variability Firms with high fixed costs are said to have high operating leverage, as small swings in business conditions can have large impacts on profitability The third factor influencing... Edition IV Security Analysis 11 Macroeconomic and Industry Analysis 11 © The McGraw−Hill Companies, 2003 Macroeconomic and Industry Analysis 405 ample, auto producers can put pressure on suppliers of auto parts This reduces the profitability of the auto parts industry Bargaining power of suppliers If a supplier of a key input has monopolistic control over the product, it can demand higher prices for the... Analysis © The McGraw−Hill Companies, 2003 Part FOUR Security Analysis 14 Universal Auto is a large multinational corporation headquartered in the United States For segment reporting purposes, the company is engaged in two businesses: production of motor vehicles and information processing services The motor vehicle business is by far the larger of Universal s two segments It consists mainly of domestic... http://www.hoovers.com/search/forms/ stockscreener http://screen.yahoo.com/stocks.html http://moneycentral.msn.com/investor/finder/ predefstocks.asp http://prosearch.businessweek.com/businessweek/ general_free_search.html? The above sites contain significant information on company analysis and news http://www.ceoexpress.com/default.asp Related Websites The sites listed above have stock screeners that allow you to find stocks meeting... per share of the assets the company already has in place When Growth Prospects decided to reduce current dividends and reinvest some of its earnings in new investments, its stock price increased The increase in the stock price reflects the fact that planned investments provide an expected rate of return greater than the required rate In other words, the investment opportunities have positive net present . producers can put pressure on suppliers of auto parts. This reduces the profitabil- ity of the auto parts industry. Bargaining power of suppliers If a supplier of a key input has monopolistic control over. amounts of variable as opposed to fixed costs will be less sensitive to business conditions. This is because, in economic downturns, these firms can reduce costs as output falls in response to. S& amp ;P computes stock price indexes for each group, which is useful in assessing past investment performance. The Value Line Investment Survey reports on the conditions and prospects of about