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Macroeconomic and Industry Analysis12Bodie, Kane, and MarcusEssentials of Investments, 9th EditionMcGraw-Hill/Irwin Copyright 2013 by The McGraw-Hill Companies, Inc. All rights reserved.112.1 Global EconomyNational Economic Environment Crucial determinant of industry performanceExchange RateRate at which domestic currency can be converted into foreign currency12-#2Table 12.1 Economic Performance2011 Stock Market Return (%) In Local CurrencyIn U.S. DollarsForecasted Growth in GDP, 2012 (%)Brazil-22.9-28.93.5Britain-3.9-4.20.2Canada-9.1-10.92.0China-22.7-19.18.2France-16.1-19.2-0.3Germany-11.6-14.90.1Greece-53.2-54.9-7.5India-22.6-34.67.8Italy-24.0-26.9-1.1Japan-16.3-11.61.7Mexico-3.0-12.93.1Russia-15.4-19.03.7Singapore-15.0-15.54.0South Korea-9.0-10.13.8Thailand0.3-3.93.1U.S.1.61.62.0Source: The Economist, January 7, 201212-#Figure 12.1 Change in Real Exchange Rate12-#12.2 The Domestic MacroeconomyGross Domestic Product (GDP)Market value of goods and services produced over period of timeUnemployment RateRatio of number of unemployed to total labor forceInflationRate at which general level of prices for goods and services is rising12-#12.2 The Domestic MacroeconomyInterest RatesHigh interest rates reduce present value of future cash flowsBudget DeficitGovernment spending in excess of government revenuesSentimentConsumer optimism/pessimism are determinants of economic performance12-#Figure 12.2 S&P 500 Index versus Earnings per Share12-#12.3 Interest RatesFundamental Factors of Interest RatesSupply of funds from saversDemand for funds from borrowersGovernments net supply/demand for funds, modified by Federal ReserveExpected rate of inflation12-#Figure 12.3 Determination of Equilibrium Real Rate of Interest

12-#12.4 Demand and Supply ShocksDemand ShockEvent that affects demand for goods and services in economySupply ShockEvent that influences production capacity and costs in economy12-#12.5 Federal Government PolicyFiscal PolicyUse of government spending and taxing for stabilizing economyMonetary PolicyActions taken by Board of Governors of Federal Reserve System to influence money supply or interest ratesSupply-Side PoliciesAddress productive capacity of economy, goal is to induce workers/owners to produce goods12-#12.6 Business CyclesBusiness CyclesRecurring cycles of recession and recoveryPeakTransition from end of expansion to start of contractionTroughTransition point between recession and recovery

12-#12.6 Business CyclesCyclical IndustriesIndustries with above-average sensitivity to state of economyDefensive IndustriesIndustries with below-average sensitivity to state of economy12-#Figure 12.4 Cyclical Indicators

12-#Figure 12.4 Cyclical Indicators

12-#12.6 Business CyclesLeading Economic IndicatorsEconomic series that tend to rise or fall in advance of rest of economyStock-market-price indexMoney supplyManufacturers orders12-#Table 12.2 Indexes of Economic Indicators

12-#Figure 12.5 Indexes of Leading, Coincident, and Lagging Factors

12-#Table 12.3 Economic Calendar

12-#Figure 12.6 Economic Calendar at Yahoo!DateTime (ET)StatisticForActualBriefing ForecastMarket ExpectsPriorRevised From3-Jan10:00 AMConstruction SpendingNov1.20%0.20%0.50%-0.20%0.80%4-Jan7:00 AMMBA Mortgage Index31-Dec-3.70%NANA-2.60%4-Jan10:00 AMFactory OrdersNov1.80%2.60%2.10%-0.20%-0.40%5-Jan8:15 AMADP Employment ChangeDec325K200K180K204K206K5-Jan8:30 AMIntial Claims31-Dec372K375K375K387K381K5-Jan10:00 AMISM ServicesDec52.65353526-Jan8:30 AMNonfarm Private PayrollsDec212K200K170K120K140K%6-Jan8:30 AMUnemployment RateDec8.50%8.70%8.70%8.70%8.60%6-Jan8:30 AMHourly EarningsDec0.20%0.10%0.20%0.00%-0.10%12-#12.7 Industry AnalysisDefining an IndustryNAICS codesClassification of firms into industry groups using numerical codes to identify industriesSensitivity to the Business CycleSensitivity of salesOperating leverageFinancial leverage12-#Figure 12.7 Return on Equity, 201112-#Figure 12.8 Industry Stock Price Performance, 201112-#Figure 12.9 ROE of Application Software Firms12-#Table 12.5 Examples of NAICS Industry Codes

12-#Figure 12.10 Industry Cyclicality12-#Figure 12.11 Stylized Depiction of Business Cycle

12-#12.7 Industry AnalysisSector RotationShifting portfolio into industry sectors expected to outperform others based on macroeconomic forecastsAfter peak, defensive industries often better performersIn trough, capital goods industries often better performersIn expansion, cyclical industries often better12-#Figure 12.12 Sector Rotation

12-#12.7 Industry AnalysisIndustry Life Cycles: Stages Firms Pass Through to MaturityStart-up stage: Often characterized by new technology/product Consolidation stage: Industry leaders begin to emergeMaturity stage: Product has reached potential for use by consumersRelative decline: May grow less than rest of economy or shrink12-#Figure 12.13 Industry Life Cycle

12-#12.7 Industry AnalysisIndustry Structure and PerformanceThreat of entry: New entrants to industry pressure price/profitsRivalry between existing competitors: Market share competition pressures price/profitsPressure from substitute products: Firms in related industries can threaten market share12-#12.7 Industry AnalysisIndustry Structure and PerformanceBargaining power of buyersLarge-scale buyers have considerable bargaining powerBargaining power of suppliersLarge-scale suppliers have considerable bargaining power12-#