Chapter 12 investments macroeconomic and industry analysis

Chapter 12 Macroeconomic and Industry Analysis 12.1 The Global Economy 12-2 The Global Economy • Fundamental Analysis - Analysis of the determinants of firm value, specifically attempting to forecast the earnings and dividends of a firm. - Top down approach: Analyze economy Analyze industry Analyze firm 12-3 • Performance in countries and regions is highly variable 12-4  • Politics affects the economy EX) The biggest international economic story in late 1997 and 1998 was the turmoil in several Asian economies. - Highlighted the close interplay between politics and economics. - Affect trade policy, the free flow of capital, and the status of a nation’s workforce. 12-5  • Foreign exchange rates affect the international competitiveness of a country’s industries. -How are the following affected by a change in the value of the dollar? EX) Yen profit on sale of Toyota cars in U.S. 12-6  12-7    !!!"##$ %&&' '&'()'&* (+,-& &' '&'()' && ,' 12.2 The Domestic Macroeconomy 12-8 • Gross domestic product - The market value of gods and services produced domestically in a given time period - Growing GDP indicates an expanding economy, providing a firm with an opportunity to increa se sales. • Unemployment rate - The ratio of number of people classified as unemployed to the total labor force. - Measures the extent to which the economy is operating at full capacity. • Inflation - The rate of change in the general price level as measured by some price index such as Con sumer Price Index or Producer Price Index. - High rate of inflation are associated with overheated economies where the demand for good s and services is outstripping productive capacity. Key Economic Variables 12-9 '"./ 0,& Key Economic Variables • Interest Rates - High interest rates reduce the present value of future cash flow, thereby reducing the attractiveness of investment opportunities. - Major impact on security prices (stocks and bonds) and the level of economic growth • Budget Deficits - The budget deficit is the amount by which government spending exceeds government revenues. - Budget deficits must be offset by government borrowing. - Large amounts of government borrowing can force up interest rates by increasing the total demand for credit in the economy.  Excessive government borrowing will crowd out private borrowing and investin g. • Alternative to crowding out is overreliance on foreign borrowing. 12-10 [...]... 12- 29 Other Indicators 12- 30 12. 7 Industry Analysis 12- 31 Industry Analysis • Performance can vary widely across industries - It is difficult to find a good stock in a poor industry 12- 32 Figure 12. 8 Industry Stock Price Performance, 2011 12- 33 Defining an Industry • It can be difficult to define an industry - North American Industry Classification System (NAICS) attempts to define industry groups with... 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 12- 18 12. 5 Federal Government Policy 12- 19 Demand-Side policies Fiscal Policy • Government spending and taxing actions to stabilize or spur growth in the economy (demand-side m anagement) - Most... environment in which workers and owners of capital have the maximum incentive and ability to produce and develop goods • Supply-siders focus on incentives and marginal tax rates • Lowering tax rates tends to - Encourage more investment - Improve incentives to work - Generate faster economic growth 12- 23 12. 6 Business Cycles 12- 24 The Business Cycle • Recurring patterns of recession and recovery - Peak: the... Demand and Supply Shocks 12- 15 Demand Shocks - - 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 Positive demand shocks  Increase interest rate  Increase inflation rate 12- 16 Supply Shocks - An event that influences production capacity and input costs, including... define industry groups with a four or five digit code:   The first two digits broadly define the industry group: NAIC code 23 = construction The last two or three digits define the industry more narrowly 12- 34 Example of NAICS Industry Codes 12- 35 Figure 12. 9 ROE of Application Software Firms, 2 012 12-36 ... Figure 12. 3 Determination of the Equilibrium Real Rate of Interest The higher the real interest rate, the greater the supply of household savings Click to edit Master text styles Second level Third level Fourth level Fifth level Households Saving Budget Deficit Increase in Money Supply E’’ · Firm’s Demand The lower the real interest rate, the greater the loanable fund demand of firm 12- 14 12. 4 Demand and. .. Consumers’ and Producers’ optimism or pessimism concerning the economy and job prospects - If consumers have confidence in their future income levels, they will be more willing to spend on big-ticket items - If firms predict higher demand for their products, businesses will increase production and inventory levels 12- 11 12. 3 Interest Rates • The level of interest rates affect both credit and stock market... determined by formula rather than policy and cannot be changed in response to economic conditions - May be necessary when monetary policy is ineffective such as in the Financial Crisis of 2008 12- 20 Demand-Side policies Monetary Policy • Manipulation of the money supply to influence economic activity by influencing the demand for goods and s ervices to be produced and consumed - Works largely through its... declines 12- 12 Factors Determining the Level of Interest Rates 1 2 3 4 Supply of funds from savers Demand for funds from businesses Government’s net supply and/ or 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 expect ed to increase 12- 13... interest rates : Increase in the money supply  lower short-term interest rates  encourage invest and consumption de mand : However, over longer periods, a higher money supply  a higher price level - Stimulation/inflation trade-off - Easily formulated and implemented but has a less immediate impact 12- 21 Demand-Side policies Monetary Policy • Tools of monetary policy  Open market operations - Buy or . Chapter 12 Macroeconomic and Industry Analysis 12. 1 The Global Economy 12- 2 The Global Economy • Fundamental Analysis - Analysis of the determinants of firm. rate, the greater the loanable fund demand of &rm. 12. 4 Demand and Supply Shocks 12- 15 Demand Shocks - An event that affects the demand for goods and services, some examples include: • Change. better analysis than the competition. 12- 18 12. 5 Federal Government Policy 12- 19 Fiscal Policy • Government spending and taxing actions to stabilize or spur growth in the economy (demand-side