Investments: Analysis and Behavior
Chapter 9 - Business Environment
Learning Objectives
Know the major forces driving economic growth Define the economic environment Identify industries /sectors Learn the impact of regulation Analyze the level of corporate governance in a firm
Current Events Article
Title: Consumer Sentiment Dips to Lowest Since November
Author: Caroline ValetkevitchSource: ReutersLink:
http://www.reuters.com/article/idUSTRE69S2LA20101029?loomia_ow=t0:s0:a49:g43:r3:c0.200000:b38946892:z0
3
Fundamental Analysis
Top-down approach– Economy aspects
• Industry aspects Firm specific
» Accounting - Recording, reporting and analysis of financial transactions of a business
» Valuation: value (bargains) vs. growth (without regard for money) firms
Dimensions of the Economy As the economy goes, so goes the businesses and
their stock(s)… Macroeconomic Environment
– Aggregate Economic Activity • Gross Domestic Product ($14,730.2 Billion)
The total value of all goods and services produced by all people within the boundaries of a country during a one-year period
• Interest rates (0.25 percent)• Consumer spending and consumer income
• Employment (9.2% unemployment rate)
Microeconomic Environment – Industry, Firm, Plant, or Product Level
• Industry specific regulation• Material prices
Forces Driving the Economy
1) Demographics– Baby boom
generation• Born 1946
through 1964
Figure 9.1 U.S. 2007 Population Distribution
0
5,000
10,000
15,000
20,000
25,000
< 5 5 to 9 10 to 14 15 to 19 20 to 24 25 to 29 30 to 34 35 to 39 40 to 44 45 to 49 50 to 54 55 to 59 60 to 64 65 to 69 70 to 74 75 to 79 80 to 84 > 84
Age (in years)
Po
pu
lati
on
in
Ag
e G
rou
p (
in t
ho
us
an
ds
)
Baby Boom Generation
Significant impact on society:
• spending
• saving
• working/retirement
• housing
Figure 9.2 A Changing Age Distribution
0%
2%
4%
6%
8%
10%
12%
< 5 5 to 9 10 to 14 15 to 19 20 to 24 25 to 29 30 to 34 35 to 39 40 to 44 45 to 49 50 to 54 55 to 59 60 to 64 65 to 69 70 to 74 >75
Age Group (in years)
Pe
rce
nt
of
Po
pu
lati
on
1950
2030
2) Productivity– The ability to produce more products and services with the
same number of people.
– When productivity growth is robust, the standard of living increases.
– Gains are often made from advances in technology• Computers, Internet, etc. Figure 9.3 Actual and Trend in Labor Productivity
50
70
90
110
130
150
19
60
19
65
19
70
19
75
19
80
19
85
19
90
19
95
20
00
20
05
Source: US Bureau of Labor Statistics
Trend = 2.51% per year
Actual
Trend = 1.28% per year
Trend = 2.23% per yearIndex, 1992 = 100
3) International Trade– Imports
– Exports
Balance of trade• The total value of a nation’s exports minus the total value of its imports over some period of time
Trade deficit• A negative (unfavorable) balance of trade—imports exceed exports in value
Balance of payments• The total flow of money into a country minus the total flow of money out of that country over a period of time
U.S. International Trade in Goods
Source: U.S. Department of Commerce, International Trade Administration, U.S. Bureau of Economic Analysis, http://bea.gov/international/bp_web/simple.cfm?anon=78260&table_id=1&area_id=3, accessed September 18, 2008.
Value of U.S. Merchandise Exports and Imports
Source: U.S. Department of Commerce, International Trade Administration, http://www.census.gov/foreign-trade/statistics/highlights/top/top0712.html, accessed September 22, 2008.
Business Cycles Pattern of economic recession and expansion
– Periods of economic expansion are followed by periods of contractions
Recession is a sustained period of generally declining economic activity (GDP)– Higher unemployment
– Restricted credit
– Reduced output
Depression– Devastating recession
Economic Indicators
Inflation rate– An economic statistic that tracks the increase in prices of goods and
services over a period of time; usually calculated on a monthly or annual basis
National income– The total income earned by various segments of the population, including
employees, self-employed individuals, corporations, and other type of income
New housing starts– The total number of new homes started during a specific time period.
Unemployment rate– The percentage of a nation’s labor force unemployed at any time
Competitive Environment Industry’s market structure
– Number and size of competitors
– Conditions of entry and exit
– Monopoly
– Oligopoly
Competitive advantage– Better
– Cheaper
– Faster
http://www.forbes.com/lists/2009/18/global-09_The-Global-2000_Sales.html
Michael Porter’s Five Forces
Rivalry among existing competitors Threat of new entrants Pressure from substitute products Bargaining power of customers Bargaining power of suppliers
Legal EnvironmentRegulation
– All sectors of the US economy are regulated to some degree.
• OSHA, EPA, etc.
– Some industries have high regulation
• Banks, utilities, etc.
– Costs of regulation are very high
Antitrust Policy
Monopoly– A market (or industry) with only one seller
Government promotes competition– Reviews mergers for impact on competition
Corporate Governance
Principal-agent problem– Separation of ownership and control
• Stockholders own the firm with little control
• Managers control the firm with little ownership
Why should the managers (agents) care about stockholders? Corporate governance is the monitoring devices and incentives
in place to protect stockholders.
Executive Compensation
Aligning managerial incentives– Salary
• Fixed amount
– Bonus• Additional pay for meeting various accounting targets
– Incentive pay• Options, stock, restricted stock
– Benefits and Perks
http://money.cnn.com/2009/08/14/news/companies/highest_paid_ceos
Monitoring Executives
Board of Directors Active shareholders
– Institutional investors
Auditors Analysts Investment banks Credit rating agencies SEC
Ownership Structure
Corporate ownership– Stock
• The shares of ownership of a corporation
– Stockholder• A person who owns a corporation’s stock
– Closed corporation• A corporation whose stock is owned by relatively few people and is not sold to the
general public
– Open corporation• A corporation whose stock is bought and sold on security exchanges and can be
purchased by any individual
Inside equity– Shares held by top management.
Does high inside equity mean managers:– Are aligned with shareholders?– Are entrenched?
4 | 21
Hierarchy of Corporate Structure
Stockholders exercise a great deal of influence through their right to elect the board of directors
Top Related