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Chapter 12. Macroeconomic and Industry Analysis. Outline. Valuation approach Global economy The domestic economy Demand and supply shock Federal government policy Business cycles: the Macro Cycle Industry analysis and industry life-cycle; the Micro Cycle Competitive positioning.

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Presentation Transcript
Chapter 12
Chapter 12

Macroeconomic and Industry Analysis


  • Valuation approach

  • Global economy

  • The domestic economy

  • Demand and supply shock

  • Federal government policy

  • Business cycles: the Macro Cycle

  • Industry analysis and industry life-cycle; the Micro Cycle

  • Competitive positioning

Framework of analysis
Framework of Analysis

  • Fundamental Analysis

  • Approach to Fundamental Analysis

    • Domestic and global economic analysis

    • Industry analysis

    • Company analysis

  • Top-down approach

An alternative approach
An alternative approach

  • Stock price is the present value of all future cash flows it generates to its holder

  • Factors influencing dividends: top down

  • Factors influencing discount rates

    • Risk free rate

    • Inflation

    • Risk aversion degree

Global economic considerations
Global Economic Considerations

  • Foreign Demand

    • Foreign demand critical for US recovery from 2008 financial crisis

  • Exchange rate risk

    • Cheap $ helps US exports, while appreciation of $ hurts

    • Sales and Earnings

    • Stock returns

Key domestic economic variables
Key Domestic Economic Variables

  • Gross domestic product

  • Unemployment rates

  • Interest rates & inflation

    • Impact on fix-income assets

    • Impact on stocks

  • Budget deficit

    • Government spending-Revenue

  • Sentiment

    • Consumer confidence

    • Business

Demand shocks
Demand Shocks

  • Demand shock - an event that affects demand for goods and services in the economy

    • Who demand goods?

      • Tax rate cut

      • Increases in government spending

      • Money supply

      • Foreign exports demand

Supply shocks
Supply Shocks

  • Supply shock - an event that influences production capacity or production costs

    • Basic commodity price changes (oil price)

    • Whether to agriculture

Federal government policy
Federal Government Policy

  • Fiscal Policy –

    • government spending and taxing actions

    • Direct policy

    • Slowly implemented

Federal government policy cont
Federal Government Policy (cont.)

  • Monetary Policy - manipulation of the money supply to influence economic activity

  • Tools of monetary policy

    • Open market operations

    • Discount rate

    • Reserve requirements

Business cycles macro cycle
Business Cycles-Macro Cycle

  • Business Cycle

    • Business cycle is the recurring pattern or recession and recovery

Cyclical indicators leading
Cyclical Indicators: Leading

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


  • Stock Prices: reflect anticipation of future

  • Money supply, New orders for goods: impact future

Cyclical indicators coincident
Cyclical Indicators: Coincident

Coincident Indicators - indicators that tend to change directly with the economy


  • Industrial production

  • Manufacturing and trade sales

Cyclical indicators lagging
Cyclical Indicators: Lagging

Lagging Indicators - indicators that tend to follow the lag economic performance


  • Average duration of unemployment

Industry analysis sensitivity to business cycle
Industry Analysis-sensitivity to business cycle

  • Sensitivity to business cycles

  • Factors affecting sensitivity of earnings to business cycles

  • Sensitivity of sales of the firm’s product to the business cycles

    • Defensive: Necessities (Grocery, Drugs, Medical), small/cheap items (Movies, DVD, tobacco)

    • Sensitive/Cyclical : big items and luxury ( house, car, jewels, premium brands)

  • Operating leverage (Fixed costs are fixed)

  • Financial leverage (interest payments are fixed)

Industry analysis industry life cycles micro cycle
Industry Analysis: Industry Life Cycles(micro cycle)

StageSales Growth

Start-up Rapid & Increasing

Consolidation Stable

Maturity Slowing

Relative Decline Minimal or Negative

Industry analysis competitive environment
Industry analysis: Competitive environment

  • Porter’s five forces

    • Threat of entry

    • Rivalry between existing competitors

    • Pressure from substitute products

    • Bargaining power of buyers

    • Bargaining power of suppliers