Chapter 12 - Macroeconomic & Industry Analysis Flashcards
What are the 2 broad-based aspects of fundamental analysis?
- Macroeconomics
2. Industry Analysis
What is the analysis of determinants of firm value, such as prospects for earnings and dividends?
Fundamental Analysis
3 approaches to fundamental analysis (from notes)
- Global (and domestic) economic analysis
- Industry Analysis
- Company Analysis
True or False:
Top-down approach DOESN’T call for analysis of the economy with the goal of identifying industries and companies that will perform well in that economic environment.
FALSE!!!!
What international economic factors might affect a firm’s success?
- export prospects
- price competition from foreign competitors
- profits from investments abroad
the concept ‘it is harder for businesses to succeed in a contracting economy than in an expanding one is called _____?
country/region performance variability
3 GLOBAL economic considerations
- highly country/region performance variability (comparing against)
- Political risk
- Exchange rate risk (sales, profits, stock returns)
examples of political risk
- currency crisis (euro crisis - interplay btw politics and economics)
- government bailouts
- government budget deficit issues
- Protectionism
- Trade Policy
- Free Flow of capital
- Status of nation’s workforce
_____ is the rate at which domestic $$ can be converted into foreign $$$
Exchange Rate (p.374)
appreciation vs depreciations (dollar for example)
less dollars needed vs. more dollars are needed
What are the 6 Key macroeconomic indicators (p.376)
- Gross Domestic Product
- Unemployment Rates
- Interest Rates
- Inflation
- Budget Deficit
- Consumer (public market) Sentiment
what is the measure of the economy’s TOTAL production of goods & services?
Gross Domestic Product (GDP)
what another popular measure of economic activity more narrowly focuses on manufacturing side of the economy?
Industrial production
% of total labor force yet to find work. measures extent to which economy is at full capacity operation
unemployment rate
ratio of actual output from factories to potential output
capacity utilization rate (p.376)
______is the rate at which general level of prices is rising.
Inflation
‘overheated’ economies refer to what?
high rates of inflation
_____ reduces PV of cash flows & reduces attractive investment opportunities. also affects housing and auto financings.
high Interest Rates
____ is when government spends more than they earn (and must borrow for shortfalls). forces interest rates rise due to raising demand & ‘crowd out’ funds available to the private sector.
budget deficit
perhaps most important macroeconomic factor to consider in investment analysis
interest rates
4 fundamental factors of interest rate determinents
- Supply of funds (household savers)
- Demand for funds (businesses)
- Government net supply/demand for funds (Federal Reserves)
- Expected rate of inflation
True or false.
At higher real interest rates, households will choose to save more than spend; opting to use later future disposal [supply curve rises]
True
True or False.
Lower real interest rates does NOT spur more business investments on physical capital. [demand curves up?]
False & FALSE!!!
the point of intersection of the supply and demand curves, point ‘E’
Equilibrium interest rate
“shifting” the actual supply and/or demand curves is done by?
thru fiscal & monetary policies
the government (Federal Reserves)
if government is net borrower, it shift _____ curve and interest rates ____
demand; increases
if government is net supplier, increases _____ curve and interest rates _______?
supply; decreases
_____ = real interest rate + inflation
nominal interest rate (p. 378)
______ is an even that affects demand for goods and services in the economy. i.e. - reduced tax rate, increased $$ supply, increase government spending, increase foreign export demand
Demand Shock
_____ is an event that influences production capacity and costs.
i.e. - imported oil prices, natural disasters, workforce educational level, labor wage rates changes
Supply Shock
T or F.
Demand shock moves same direction as interest rates & inflation
true
T or F.
Supply shock moves in opposite direction of interest rates & inflation.
True
demand-side policy include….
spending
tax levels
monetary policy (supply and interest rates)
Supply-side policy include: 7
capacity improvements work incentives innovation education infrastructure R&D Marginal Tax rates? (p. 382)
Fiscal policy refers to _____ and ____. Most DIRECT and immediate impact on economy; but slow formation and implementation; rigid system.
gov spending; taxation actions
Monetary policy targets ______ and ______. Largely focused on interest rates. more supply lowers SHORT-TERM interest rates, but may cause inflation. Easy to formulate and implement but LESS immediate impact. (Feds - Treasury securities, discount rates to banks, reserve requirements)
money supply; interest rates
3 tools of monetary policy actions
- Treasury Securities
- Discount rate (to banks)
- Reserve requirements
______ recurring cycles of recession and recovery? Also refers to periods of expansion and contractions.
business cycles
what is the transition from the end of an expansion to start of contraction in the economy?
peak
what is at the bottom of a recession to the beginning of recovery in the economy?
Trough
_____ is the period from peak to trough.
Contraction
______ is the period from trough to peak.
Expansion
what’s it called when a business has above-average sensitivity to the state of the economy. (capital goods, autos, washing machines….) Stocks rise the most in good times but also falls most in bad, and tend to have HIGH BETA stocks.
cyclical industries
firms having little sensitivity to the business cycles. (food producers, pharmacy, utilities, healthcare)
Defensive industries
define ‘leading economic indicators’
economic series of events that rise and fall IN ADVANCE of the economy results.
coincident indicators?
move in tandem with the economy
lagging indicators
generally occurs after the broad economy
*Average weekly hours of production workers
*Stock Market Price Index
Unemployment Claims
Yield curve (spread from 10yr Tbond and fed fund rate)
Money Supply growth rate
Consumer expectations
Company slow delivery reports…etc
Leading Indicators
Average duration of unemployment
Ratio of trade inventories to sales
Average prime rate charged
Commercial & Industrial loans outstanding
*Ratio of consumer credit outstanding to personal income, etc
Lagging Indicators
Just as it varies in macroeconomic factors, a firm’s performance may vary also in its given industry. This is the reason we must conduct ______ also?
Industry Analysis
NAICS codes. What does it stand for and its meaning?
- North American Industry Classification System
2. it is a classification of firms into industry groups using numerical codes to identify industry.
3 factors that determine sensitivity of firm’s earnings o business cycle
- Sensitivity of Sales (necessities vs. luxury)
- Operating Leverage (division btw fixed & variable costs)
- Financial Leverage (debt interest payments - form of fixed costs)
firms with high fixed costs are said to have ______ operating leverage
high
______ is an investment strategy that entails shifting the portfolio into industry sectors that are expected to outperform other based on macroeconomic forecasts (re-adjust investment portfolio holdings)
Sector Rotation
Near peak or overheated economy, good to invest in _____
natural resource extraction and processing
in contraction/recession conditions, one should invest in _______ industries such as pharmaceuticals, food, necessities. near end, lowered inflation & interest rates favor financial firms
defensive
at trough point of cycle, poised for recovery & expansion. invest in ______ industries such as equipment, transportation, construction
Capital Goods
In expansion point of cycle, rapid economic growth. investments in consumer _____ and ______ items such as designer companies, auto industries, high-tech firms…etc
durables; luxury
what’s it called when firms experience stages through which they mature
industry life cycle
4 stages of life cycle
- start-up (extreme rapid growth)
- consolidation (stability)
- maturity (slowing down, ‘cash cows’ w/stable dividends, low risk)
- Relative Decline (minimal or negative growth, obsolescence?)
Lynch’s 6 life-cycle groups
- Slow Gro
