Top Down Approach to Investing

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Top Down Approach to Investing

• Analysis of the Economy

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SECURITY ANALYSIS

• Economic analysis
• assessing the general state of the economy and
  its potential effects on security returns
• Sector analysis
• Determining which SP sectors will over and under
  perform based upon forecasted future economic
  performance
• Industry analysis
• deals with the general outlook for an industry,
  given the economic environment, and then the
  specific industry within which particular
  companies operate
• Fundamental company analysis
• helps investors formulate expectations about the
  future performance of the company and its stock

3
Economic analysis

• Economic analysis is a study of current and
  expected future economic conditions
• This is essential to portfolio analysis because
  the performance of the economy has a significant
  bearing on the performance and profitability of
  the companies that issue common stock

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SEVEN ENGINES THAT DRIVE THE ECONOMY

• Demographics
• The largest age group in the U.S. today are
  those who are 40 to 44 years old, followed by 35
  to 39. These groups account for about 17 of the
  U.S. population. They are major contributors to
  the increase in U.S. labor productivity, a trend
  expected to continue for 5 to 10 more years.
• Deregulation
• Strategic tax rate cuts
• Trade liberalization
• Technology revolution
• Annual U.S. productivity growth, which averaged
  about 1.8 from 1991 to 1995, jumped to 2.6
  between 1996 and 1999. It is continuing to
  climb.
• Welfare reform
• 2.4 of U.S. population is now on welfare half
  of the amount in 1989. Technology and
  welfare-to-work programs have helped in the
  decline.
• Monetary policy

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KEEPING TRACK OF THE ECONOMY

• GDP (June 25)
• Industrial Production (June 16)
• Leading Indicators (June 17)
• Personal Income (June 28)
• Retail Sales (June 14)
• Consumer Prices (June 15)
• Producer Prices (June 11)
• Unemployment (July 2)
• Housing Starts (June 16)

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ECONOMIC ACTIVITY

• The behavior of the economy is captured in the
  business cycle
• an indication of the change in total economic
  activity over time
• One commonly used measure of eco. activity
• Growth in gross domestic product (GDP)- the value
  of all goods and services produced in the country
  during one year

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ECONOMIC ACTIVITY

• Another measure is the index of industrial
  production
• measures industrial services in the economy
• also used to measure the business cycle
• Decisions by the Federal Reserve Board are also
  powerful forces affecting the level of economic
  activity

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Economic Activity

• Several economic factors influence overall
  economic activity and security returns
• Government fiscal policy
• Monetary policy actions of the Federal Reserve
  Board
• Other important factors

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GOVERNMENTAL FISCAL POLICY

• Government fiscal policy affects the economy
  through the use of
• Tax policy
• Government spending
• Debt management

10
MONETARY POLICY

• Monetary policy actions of the Federal Reserve
  Board also affect the economy through
• Growth in money supply
• Level of interest rates
• Three tools
• Reserve requirement
• Discount rate
• Open market operations

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OTHER IMPORTANT FACTORS

• Other important factors include
• Inflation or deflation
• Consumer spending
• Business investments
• Foreign trade and foreign exchange rates

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DEVELOPING AN ECONOMIC OUTLOOK

• can be aided through the use of published sources
  
• one must keep in mind the relationship between
  the economy and the industry and company under
  evaluation