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Ebook Investments (10E): Part 2

(BQ) Part 2 book "Investments" has contents: Empirical evidence on security returns, behavioral finance and technical analysis, the efficient market hypothesis, managing bond portfolios, the term structure of interest rates, option valuation, futures markets, equity valuation models,.and other contents. | CHAPTER SEVENTEEN 17 7 Macroeconomic and Industry Analysis THE INTRINSIC VALUE OF A stock depends on the dividend and earnings that can be expected from the firm. This is the heart of fundamental analysis—that is, the analysis of the determinants of value such as earnings prospects. Ultimately, the business success of the firm determines the dividends it can pay to shareholders and the price it will command in the stock market. Because the prospects of the firm are tied to those of the broader economy, however, fundamental analysis must consider the business environment in which the firm operates. For some firms, macroeconomic and industry circumstances might have a greater influence on profits than the firm’s relative performance within its industry. In other words, investors need to keep the big economic picture in mind. Therefore, in analyzing a firm’s prospects it often makes sense to start with the broad economic environment, examining the state of the aggregate economy and even the international economy. From there, one considers the implications of the outside environment on the industry in which the firm operates. Finally, the firm’s position within the industry is examined. This chapter treats the broad-based aspects of fundamental analysis—macroeconomic and industry analysis. The two chapters following cover firm-specific analysis. We begin with a discussion of international factors relevant to firm performance, and move on to an overview of the significance of the key variables usually used to summarize the state of the macroeconomy. We then discuss government macroeconomic policy. We conclude the analysis of the macroenvironment with a discussion of business cycles. Finally, we move to industry analysis, treating issues concerning the sensitivity of the firm to the business cycle, the typical life cycle of an industry, and strategic issues that affect industry performance. PART V 558 PART V Security Analysis 17.1 The Global Economy A top-down