Sec Ana Chapter 12

Front 1

__________ has two components: (1) the macroanalysis of the relationship betweenthe aggregate securities markets and the aggregate economy, and (2) the specific microvaluationof the stock market employing the valuation approaches

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market analysis

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is in response to the belief that security markets reflect what is expectedto go on in the economy, because the value of an investment is determined by its expected cash flows and its expected required rate of return (i.e., its discount rate)

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macroanalysis

Front 3

______________provides importantinsights for our subsequent industry and company analysis.

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macroeconomy and market analysis

Front 4

__________ builds on these macro insights by deriving a specific valuation for themarket using the approaches discussed.

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microanalysis

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_________, includes economic series that usually reach peaks ortroughs before corresponding peaks or troughs in aggregate economic activity

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leading indicators

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_____________, includes four economic time series that havepeaks and troughs that roughly coincide with the peaks and troughs in the business cycle.

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coincident indicators

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___________, includes seven series that experience their peaks andtroughs after those of the aggregate economy

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, lagging indicators

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________________ is widely reported in the presseach month as an indicator of the current and future state of the economy

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composite leading indicator serieS

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___________, includes economic series that are expected to influence aggregateeconomic activity but do not fall neatly into one of the three main groups.

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selected series

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______________ indicate how pervasive a given movementis in a series. ______----values are measured by computing the percentage of reportingunits in a series that indicate a given result.

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diffusion indexes, Diffusion index

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This is when a series that is moving in one direction suddenly reverses and nullifiesa prior signal or hesitates, which is difficult to interpret. High variability in a series causesthis problem.

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False Signals

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Some data series take time to be reported, but a biggerproblem are revisions in data especially if the revision changes the direction implied by theoriginal data.

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Currency of the Data and Revisions

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Examples include the service sector, import-export data,and many international series.

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Economic Sectors Not Represented

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It is intended to provide earlier signals of major turning points in theeconomy.

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Long-Leading Index

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It is meant to forecast changes in U.S. employment.

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Leading Employment Index

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It is intended to forecast U.S. inflation.

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Leading Inflation Index

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s This is a set of composite leading indicators for eightother major industrial countries: Canada, Germany, France, the United Kingdom, Italy, Japan,Australia, and Taiwan (Republic of China). The series are comparable in data and analysis tothe leading series for the United States.

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International Leading Indicator Series

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___________ are considered relevant asthe economy approaches cyclical turning points

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Consumer expectations

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Many academic and professional observers hypothesize a close relationship between stockprices and various monetary variables that are influenced by _____________

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monetary policy

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The best-knownmonetary variable is the ___________

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money supply.

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You will recall from your economics course that thereare numerous measures of the money supply and the __________ controls the money supplythrough various tools, the most useful of which is ___________________.

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Federal Reserve, pen market operations.

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e aggregate economy. He hypothesizes that, to implementplanned changes in monetary policy, the Federal Reserve engages in open market operations, __________________ to adjust bank reserves and, eventually, the money supply.

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, buying or selling Treasury bond

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when the Fed________bonds affects the government bond market, creating excess liquidity for those who sold bondsto the Fed.

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buys

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result of the bond _________ is an increase in bond prices and lower interestrates. R

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purchases

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Thereis the opposite effect if the Fed ___ bonds to reduce bank reserves and the money supply

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sells

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JJM contend that ______ is best identified by changesin the discount rate by the Federal Reserve (i.e., declining discount rates imply an easy monetarypolicy, while rising discount rates imply a restrictive policy)

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monetary policy

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(_________, a measure of inflation).

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consumer price index (CPI

Front 28

_____ in the rate of inflation, we would expect them to _______ their required rates ofreturn by a similar amount to derive constant real rates of return

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increase, Increase

Front 29

__________ are available for virtually all the developed countries, and the empiricalrelationships to the economy are quite similar to those of the United States.

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Leading economic series

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Real_______ growth is typically consistent with what is implied by the leading series.

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GDP

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________ of a country will clearly differ from that of the United Statesbecause the monetary authority in each country will be responsive to the economic outlookfor its country, which is typically different from that of the United States.

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monetary environment

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_________ will depend on the monetary environment—that is, the ease or tightnessof monetary policy

It also will be impacted by the economic environment and the pointon the business cycle (recession or expansion).

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inflation outlooK

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n has four subsectionsin which the four sets of valuation techniques are employed: (1) the dividend discount model(DDM), (2) the free cash flow to equity model (FCFE), (3) the earnings multiplier technique,and (4) the other relative valuation ratios. Note that the first two subsections consider two ofthe present value of cash flow approaches

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(1) the dividend discount model (DDM), (2) the free cash flow to equity model (FCFE), (3) the earnings multiplier technique, and (4) the other relative valuation ratios. Note that the first two subsections consider two of the present value of cash flow approaches

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, we do not demonstratethe ______________because of space constraints and the difficulty ofestimating debt for the S&P industrials

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operating free cash flow model

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________ is a measure of aggregate economic output or activity.

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GDP

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Once sales per share for the market series have been estimated, the difficult estimate is the __________

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profit margin

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first is a direct estimate of the ___________ based on recent trends

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net profit margin

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______ series is quite volatile because of changes in operatingearnings, interest, and the tax rate over time

it is the most difficult series to estimate.

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net profit margin

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second procedure would estimate the __________

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net before tax (NBT) profit margin

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The third method estimates an_________, defined as earnings before interest andtaxes (EBIT), as a percentage of sales. Because this measure as a percentageof sales is not influenced by changes in interest expense or tax rates, it should be a more stableseries compared to either the net profit margin or the net before tax margin series.

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operating profit margin

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Finkel and Tuttle (1971) hypothesized that the following four variables affected the aggregateprofit margin:

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1. Capacity utilization rate 2. Unit labor costs 3. Rate of inflation 4. Foreign competition

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if production increases as a proportion of totalcapacity, there is a decrease in per-unit fixed production costs and fixed financial costs

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true

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t The change in unit labor cost is a compound effect of two individual factors:

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(1) changes in wages per hour, and (2) changes in worker productivity

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n The precise effect of inflation on the aggregate profit margin is unresolved.Finkel and Tuttle hypothesized a positive relationship between inflation and the profit margin.They contended that a higher level of inflation increases the ability of firms to pass highercosts on to the consumer and thereby raise their profit margin. Second, assuming the classicdemand-pull inflation, the increase in prices would indicate

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true

Front 45

If a firmincreases prices at the same rate as cost increases, it will experience a constant profit margin,not an increase. Only if a firm can raise prices by more than cost increases can it increase itsprofit margin. Many firms are not able to raise prices in line with increased costs because ofthe elasticity of demand for their products,10 which will cause the profit margin to decline.

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true

Front 46

Finkel and Tuttle (1971) contend that export markets are more competitivethan domestic markets, so export sales are made at a lower margin. This implies thatlower exports by U.S. firms would increase profit margins

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Foreign Competition

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. In addition, the expected relationship between the unit laborcost and the operating profit margin was likewise confirmed—it was always negative and significant.Alternatively, the rate of inflation and foreign trade variables were never significant inthe multiple regression. Finally, the univariate correlation between the profit margin and inflationwas consistently negative.Therefore, given these empirical

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true

Front 48

Coming out of a recession, capacity utilization will be increasing while unit labor costs willrise very slowly, due to increased labor productivity. Given this positive economic scenario,you should expect an increase in the operating profit margin.

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true