Investments, 8

th
edition
Bodie, Kane and Marcus
Slides by Susan Hine
McGraw-Hill/Irwin
Copyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
CHAPTER 17
Macroeconomic
and Industry
Analysis
17-2
Fundamental Analysis
Approach to Fundamental Analysis:
Domestic and global economic analysis
Industry analysis
Company analysis
Why use the top-down approach?
Framework of Analysis
17-3
Performance in countries and regions is
highly variable
Political risk
Exchange rate risk
Sales
Profits
Stock returns
Global Economic Considerations
17-4
Table 17.1 Economic Performance in
Selected Emerging Markets
17-5
Figure 17.1 Change in Real Exchange Rate:
U.S. Dollar versus Major Currencies,
19992006
17-6
Gross domestic product
Unemployment rates
Interest rates & inflation
Budget deficit
Consumer sentiment
Key Economic Variables
17-7
Figure 17.2 S&P 500 Index versus
Earnings Per Share
17-8
Demand shock - an event that affects
demand for goods and services in the
economy
Demand Shocks
17-9
Supply shock - an event that influences
production capacity or production costs
Supply Shocks
17-10
Federal Government Policy
Fiscal Policy: Demand-side management
Tax rate cut
Increases in government spending

17-11
Federal Government Policy Continued
Monetary Policy - Demand-side management
Manipulation of the money supply to
influence economic activity
Initial & feedback effects
Tools of monetary policy
Open market operations
Discount rate
Reserve requirements

17-12
Federal Government Policy Continued
Fiscal Policy: Supply-side management
Incentive or marginal taxes
National policies on education, infrastructure,
and research are important elements

17-13
Business Cycles
The transition points across cycles are called
peaks and troughs
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
17-14
Figure 17.3 Cyclical Indicators
17-15
Leading indicators tend to rise and fall in
advance of the economy
Examples:
Avg. weekly hours of production workers
Stock Prices
Leading Indicators
17-16
Table 17.2 Indexes of Economic
Indicators
17-17
Coincident Indicators - indicators that tend to
change directly with the economy
Examples:
Industrial production
Manufacturing and trade sales
Coincident Indicators
17-18
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
Lagging Indicators
17-19
Figure 17.4 Indexes of Leading,
Coincident, and Lagging Indicators
17-20
Table 17.3 Economic Calendar
17-21
Industry Analysis
Sensitivity to business cycles
Factors affecting sensitivity of earnings to
business cycles:
Sensitivity of sales of the firms product to the
business cycles
Operating leverage
Financial leverage
Industry life cycles

17-22
Figure 17.5 Economic Calendar at
Yahoo!
17-23
Table 17.4 Useful Economic
Indicators
17-24
Figure 17.6 Return on Equity, 2007
17-25
Defining an Industry
North American Industry Classification
System, or NAICS codes
Codes assigned to group firms for statistical
analysis
17-26
Figure 17.7 Industry Stock Price Performance as
Measured by Rate of Return on Dow Jones
Sector iShares, January-October 2007
17-27
Figure 17.8 ROE of Major Banks
17-28
Table 17.5 Examples of NAICS Industry Codes
17-29
Figure 17.9 Industry Cyclicality
17-30
Table 17.6 Operating Leverage of Firms A and B
Throughout the Business Cycle
17-31
Figure 17.10 A Stylized Depiction of the
Business Cycle
17-32
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

17-33
Figure 17.11 Sector Rotation
17-34
Stage Sales Growth
Start-up Rapid & Increasing
Consolidation Stable
Maturity Slowing
Relative Decline Minimal or Negative
Industry Life Cycles
17-35
Figure 17.12 The Industry Life
Cycle
17-36
Industry Structure and Performance
Threat of entry
Rivalry between existing competitors
Pressure from substitute products
Bargaining power of buyers
Bargaining power of suppliers