Framework of Analysis
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Transcript of Framework of Analysis
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• Fundamental Analysis• Approach to Fundamental Analysis:
– Domestic and global economic analysis– Industry analysis– Company analysis
• Why use the top-down approach?
Framework of Analysis
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• Performance in countries and regions is highly variable.
• Political risk
• Exchange rate risk– Sales– Profits– Stock returns
Global Economic Considerations
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Table 17.1 Economic Performance in Selected Emerging Markets
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Figure 17.1 Change in Real Exchange Rate: Dollar versus Major Currencies, 1999 – 2005
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• Gross domestic product
• Unemployment rates
• Interest rates & inflation
• Budget deficit
• Consumer sentiment
Key Economic Variables
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Figure 17.2 S&P 500 Index versus Earnings Per Share Estimate
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• Demand shock - an event that affects demand for goods and services in the economy.– Tax rate cut– Increases in government spending
Demand Shocks
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• Supply shock - an event that influences production capacity or production costs.– Commodity price changes– Educational level of economic participants
Supply Shocks
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• Fiscal Policy - government spending and taxing actions.– Direct policy– Slowly implemented
Federal Government Policy
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• Monetary Policy - manipulation of the money supply to influence economic activity.– Initial & feedback effects– Tools of monetary policy
• Open market operations
• Discount rate
• Reserve requirements
• Supply Side Policies
Federal Government Policy (cont’d)
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Leading Indicators - tend to rise and fall in advance of the economy.
Examples:– Avg. weekly hours of production workers– Stock Prices
NBER Cyclical Indicators: Leading
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Coincident Indicators - indicators that tend to change directly with the economy.
Examples:– Industrial production– Manufacturing and trade sales
NBER Cyclical Indicators: Coincident
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Lagging Indicators - indicators that tend to follow the lag economic performance.
Examples:– Ratio of trade inventories to sales– Ratio of consumer installment credit
outstanding to personal income
NBER Cyclical Indicators: Lagging
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Figure 17.3 Cyclical Indicators
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Table 17.2 Indexes of Economic Indicators
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Figure 17.4 Indexes of Leading, Coincident, and Lagging Indicators
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Table 17.3 Economic Calendar
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Figure 17.5 Economic Calendar at Yahoo!
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Table 17.4 Useful Economic Indicators
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• Sensitivity to business cycles• Factors affecting sensitivity of earnings to
business cycles:– Sensitivity of sales of the firm’s product to
the business cycles– Operating leverage– Financial leverage
• Industry life cycles
Industry Analysis
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Figure 17.6 Returns on Equity, 2005
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Figure 17.7 Rate of Return, 2005
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Figure 17.8 ROE of Money Center Banks
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Table 17.5 Examples of NAICS Industry Codes
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Figure 17.9 Industry Cyclicality
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Table 17.6 Operating Leverage of Firms A and B Throughout the
Business Cycle
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Figure 17.10 A stylized Depiction of the Business Cycle
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Stage Sales GrowthStart-up Rapid & Increasing
Consolidation Stable
Maturity Slowing
Relative Decline Minimal or Negative
Industry Life Cycles
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Figure 17.11 The Industry Life Cycle
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Sector Rotation
• Portfolio is adjusted by selecting companies that should perform well for the stage of the business cycle– Peaks – natural resource extraction firms– Contraction – defensive industries such as
pharmaceuticals and food– Trough – capital goods industries– Expansion – cyclical industries such as
consumer durables