vining sparks economic outlook 2012
DESCRIPTION
Economic Outlook provided by Vining Sparks during their session in the Executive Track during the 9th Annual Police Officers' Credit Union Conference.TRANSCRIPT
Q2 2012 Economic Outlook The Sputtering Economy Why the U.S. Economy Has Not Achieved Escape Velocity Coming out of the Great Recession
Presented by: Craig Dismuke Chief Economic Strategist [email protected]
Recap Weak Growth Consumption Investment Risks to Stability Monetary Policy
0
1
2
3
4
5
6
FF 3M 1 2 3 5 7 10 30
Treasury Yield Curve Source: Bloomberg, Vining Sparks
1%
2%
One Year Later, Even Lower Yields
June 2012
June 2011
Average Since 1990
-130 bps
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6/19/2012 Page 2
Weak U.S. Economy, Fed Action, Greece,
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
M J J A S O N D J F M A
Treasury Yields Sources: Bloomberg, Vining Sparks
GDP Revision
“Mid 2013”
U.S. Downgrade
Operation Twist
Dovish FOMC
“Late 2014”
Strong Payroll Report Greece Defaults
FOMC More Neutral
Payrolls Disappoint Spain Comes into Focus
Greek Plan Involves No New Money
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6/19/2012 Page 3
0.0
0.5
1.0
1.5
2.0
2.5
A M J J A S O N D J F M A M J J A S O N D J F M A M J J A
Fed Funds Futures Contracts Source: Bloomberg, Vining Sparks
Expectations Drop Further
June 2012
June 2011
2014 2013 2012
0.5%
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6/19/2012 Page 4
Growth Continues to Be Moderate
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6/19/2012 Page 5
1.9
3.0
1.8 1.3
0.4
2.3 2.5
3.8 3.9 3.8
1.7
-0.7
-6.7
Mar-12Dec-11Sep-11Jun-11Mar-11Dec-10Sep-10Jun-10Mar-10Dec-09Sep-09Jun-09Mar-09
GDP Growth QoQ Annualized Source: Bureau of Economic Analysis, Vining Sparks
-10%
-5%
0%
5%
10%
15%
20%
-8 -6 -4 -2 0 2 4 6 8 10 12 14 16
Pe
rce
nta
ge o
f P
eak
GD
P
Quarters from Beginning of Recession
Change In GDP from Beginning of Recessions Source: Bureau of Economic Analysis, Vining Sparks
July 1981 Recession
July 1990 Recession
March 2001 Recession
December 2007 Recession
Recovery Not As Robust As Others
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6/19/2012 Page 6
50%
60%
70%
80%
90%
100%
110%
120%
130%
140%
1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012
Household Debt as a Percentage of Disposable Income Sources: Federal Reserve, Vining Sparks
Average 1985-2000: 83%
Average 1962-1984: 63%
Current: 112%
Peak: 129%
Deleveraging Continues, More to Come
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6/19/2012 Page 7
0
20
40
60
80
100
120
140
160
40
50
60
70
80
90
100
110
120
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Co
nfe
ren
ce B
oar
d
Un
iver
sity
of
Mic
hig
an
Consumer Confidence Sources: Conference Board, University of Michigan, Vining Sparks
University of Michigan
Conference Board
Confidence Rebounded, Still Low
Long-Term Average
Debt Ceiling Debate Great Recession
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6/19/2012 Page 8
40
42
44
46
48
50
52
54
56
58
6,000
7,000
8,000
9,000
10,000
11,000
12,000
13,000
14,000
15,000
Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12
Ho
use
ho
ld N
et W
ort
h (
Trill
ion
s)
Do
w J
on
es
Ind
ust
rial
Ave
rage
Household Net Worth - Financial Assets Sources: Federal Reserve, Bloomberg, Vining Sparks
Household Net Worth – Financial Assets
Dow Jones Industrial Average
Rising Equity Prices Lifting Spirits
Quarter-End
-7.7%
+99.7%
Peak: $55.4 T
Nadir: $44.2 T
Current: $52.3 T
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6/19/2012 Page 9
-500
-300
-100
100
300
500
700
2010 2011 2012
Tho
usa
nd
s
Monthly Change in Nonfarm Payrolls Sources: BLS, Vining Sparks
Monthly Change in Nonfarm Payrolls
3-Month Average
Payroll Growth Has Been Inconsistent
Current Total Nonfarm Payrolls 133.0 MM
Pre-Recession Total Nonfarm Payrolls 138.0 MM
3-Month Average Growth 96k
12-Month Average Growth 149k
Net Difference -5.0 MM
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6/19/2012 Page 10
0%
2%
4%
6%
8%
10%
12%
1982 1987 1992 1997 2002 2007 2012
Headline Unemployment Rate Source: Bureau of Labor Statistics, Vining Sparks
Current: 8.2%
Peak: 10.0%
Unemployment Rate Dropping
Not in the Labor Force Employed
10% Peak
May 2011
May 2012
82.7 MM
85.7 MM
87.9 MM
138.4 MM
139.6 MM
142.0 MM
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6/19/2012 Page 11
56%
57%
58%
59%
60%
61%
62%
63%
64%
65%
1982 1987 1992 1997 2002 2007 2012
Jobs/Population Ratio Source: Bureau of Labor Statistics, Vining Sparks
57.48%
Fundamental Shift in Labor Market
= [(Full Time x 1) + (Self Emp. x 1) + (Part Time x .5)] / Total Civilian Pop.
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6/19/2012 Page 12
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
1985 1990 1995 2000 2005 2010
Ave
rage
Ho
url
y Ea
rnin
gs (
YoY)
Average Hourly Earnings YoY Source: Bureau of Labor Statistics, Vining Sparks
Earnings Growth Has Been Weak
1.7%
3.0%
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6/19/2012 Page 13
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
2009 2010 2011 2012
Disposable Personal Income Growth Sources: Bureau of Economic Analysis, Vining Sparks
Disposable Personal Income, Adjusted for Inflation (3M/3M Ann.)
Disposable Personal Income (3M/3M Ann.)
Real Disposable Income Growth Weak
0.9%
3.5%
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6/19/2012 Page 14
Cannot Use Home Equity This Time
3
5
7
9
11
13
15
17
50
70
90
110
130
150
170
190
210
230
250
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Ho
use
ho
ld N
et
Wo
rth
- T
rilli
on
s
S&P
Cas
eSh
iller
Ho
me
Pri
ces
Household Net Worth - Real Estate Sources: Federal Reserve, Bloomberg, Vining Sparks
Household Net Worth – Real Estate
S&P CaseShiller Home Price Index
2003 – 2007 Home Prices Up 54%
$2.2 Trillion Extracted
$13.5 T
$6.3 T
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6/19/2012 Page 15
$200
$400
$600
$800
$1,000
$1,200
$1,400
1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Bill
ion
s
Gross Private Investment (Chained SAAR) Sources: Bureau of Economic Analysis, Vining Sparks
Non-Residential Investment in Structures
Non-Residential Investment in Equipment
Residential Investment
6.3% of GDP
2.3%
Housing Suppressing Investment
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6/19/2012 Page 16
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
0
200
400
600
800
1,000
1,200
1,400
2003 2005 2007 2009 2011
Exis
tin
g H
om
e Sa
les
in T
ho
usa
nd
s (S
AA
R)
Ne
w H
om
e S
ale
s in
Th
ou
san
ds
(SA
AR
)
New And Existing Homes Sales Sources: National Assoc. of Realtors, Vining Sparks
Existing Home Sales
New Home Sales
Home Sales Up, Still Low
4.62 MM
343k
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6/19/2012 Page 17
0
500
1,000
1,500
2,000
2,500
2000 2002 2004 2006 2008 2010 2012
Tho
usa
nd
s
Total Building Permits by Type Sources: U.S. Commerce Department, Vining Sparks
Permits Up, Still Very Low
Multi-Family Permits
Single Family Permits
723k Total
2,263k Total
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6/19/2012 Page 18
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
2002 2004 2006 2008 2010 2012
CoreLogic Home Price Indices Sources: CoreLogic, Vining Sparks
National Home Price Index
National Home Price Index, Excluding Distressed
Non-Distressed Prices Finding Support
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6/19/2012 Page 19
0
1
2
3
4
5
6
7
8
9
10
2000 2002 2004 2006 2008 2010 2012 2014 2016
Mill
ion
s
Home Inventory by Type Sources: National Association of Realtors, Mortgage Bankers Association, Vining Sparks
Applying 12-Month Rate of Change
Pre-Bubble Level
Existing Home Inventory
Shadow Inventory (MBA)
New Home Inventory
Pre-Bubble Level
Must Work through Excess Supply
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6/19/2012 Page 20
Europe: A Debt Crisis and a Recession
Year-End Fiscal Cliff
Unwinding Monetary Accommodation
Oil Prices
Possibility of Inflation
Significant Risks to Economic Stability
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6/19/2012 Page 21
-12
-10
-8
-6
-4
-2
0
2
Def
icit
2011 Estimated Budget Deficit as a Percentage of GDP Sources: European Commission Est., Vining Sparks
Maastricht Treaty Requirement
Debt Continues to Grow
-3.0%
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6/19/2012 Page 22
0
20
40
60
80
100
120
140
2002 2003 2004 2005 2006 2007 2008 2009 2010
Debt as a Percentage of GDP Sources: Eurostats, Vining Sparks, Q3 2011 Est.
Italy (120%)
Greece (159%)
Spain (66%)
Portugal (110%)
Ireland (105%)
Euro Area (87%)
Maastricht Treaty Requirement
Debt Continues to Grow
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6/19/2012 Page 23
-10
-8
-6
-4
-2
0
2
4
6
8
10
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
GDP (YoY) Sources: Eurostats, Vining Sparks, Q3 2011 Est.
Italy
Greece
Spain
Portugal Ireland
Euro Area
A Double Dip Makes Matters Worse
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6/19/2012 Page 24
0
2
4
6
8
10
12
14
16
18
1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012
Trill
ion
s
U.S. Debt and Total GDP Sources: Treasury, Bureau of Economic Analysis, Vining Sparks
U.S. Fiscal Policymakers Face Tough Choices
Debt Ceiling Total U.S. Debt Outstanding Total GDP
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6/19/2012 Page 25
Expiration of Bush Tax Cuts
Expiration of Payroll Tax Cut
Extension of Unemployment Insurance
$1.2 Trillion in Automatic Fiscal Cuts
Total: E3.5% GDP
$16.4 Trillion Debt Ceiling Will Be Hit
Moody’s, S&P, and Fitch Warnings
Year-End Fiscal Cliff
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6/19/2012 Page 26
Fed Funds Target Rate – 0.00% to 0.25%
Fed Funds Rate Projections – “Late 2014”
Grown Balance Sheet: $2.88 Trillion
Operation Twist Ongoing, Ends June 2012
Longer Average Maturity
Talking Frequently about Housing
New Quantitative Easing Tabled for Now
Slightly More Hawkish Tone in April
Monetary Policy: Accommodative
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6/19/2012 Page 27
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
2012 2013 2014 Longer Run
Federal Funds Target Projections by FOMC Members Sources: Federal Reserve Appropriate Pace of Policy Firming Chart, Vining Sparks
Projections Reveal Minor Shifts in Fed Sentiment
January FOMC Projection (Average)
April FOMC Projection (Average)
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6/19/2012 Page 28
1.0
1.2
1.4
1.6
1.8
2.0
2.2
2.4
2.6
2.8
F M A M J J A S O N D J F M A M
Implied Future Inflation Rates Source: Bloomberg, Vining Sparks
5-Year TIPs Breakeven Rate
10-Year TIPs Breakeven Rate
Inflation Expectations Anchored
2.13%
1.69%
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6/19/2012 Page 29
-4
-3
-2
-1
0
1
2
3
4
5
6
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Federal Reserve GDP Projections and Actual GDP Sources: Federal Reserve (Green Books and SEP), Vining Sparks
2 Years before Period 1 Year before Period
Actual
Average Variance from Actual 1 Year before Period: 1.3 2 Years before Period: 1.8
Projections Are Historically Unreliable
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6/19/2012 Page 30
No Evidence of Rapid Economic Growth
Risks Creating Significant Market Volatility
Fed has been biggest buyer of Treasuries
$1.9 trillion in excess holdings to sell or let pay down
Longer yields are very low, in part because of Fed’s stance
*Drives Mortgage Rates Higher
Increases Government’s Borrowing Cost
Unwinds Spread Tightening in Other Sectors
A Tough Exit for the FOMC
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6/19/2012 Page 31
Consumption Is Modest, but Household Finances Still Face Long-Term Headwinds
Watch Earnings and Disposable Income Growth
Housing Is Poised to Be Accretive to Growth, Still Need to Work through Foreclosure and Shadow Inventories
Watch Shadow Inventory and Building Permits
Overall Growth Will Continue to Be Modest
Risks to Economic Stability Are Significant
Exiting Accommodative Policies Will Be Very Tenuous for Fed – Unlikely to Do So Soon
Summary
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6/19/2012 Page 32
INTENDED FOR INSTITUTIONAL INVESTORS ONLY. The information included herein has been obtained from sources deemed reliable, but it is not in any way guaranteed, and it, together with any opinions expressed, is subject to change at any time. Any and all details offered in this publication are preliminary and are therefore subject to change at any time. This has been prepared for general information purposes only and does not consider the specific investment objectives, financial situation and particular needs of any individual or institution. This information is, by its very nature, incomplete and specifically lacks information critical to making final investment decisions. Investors should seek financial advice as to the appropriateness of investing in any securities or investment strategies mentioned or recommended. The accuracy of the financial projections is dependent on the occurrence of future events which cannot be assured; therefore, the actual results achieved during the projection period may vary from the projections. The firm may have positions, long or short, in any or all securities mentioned. Member FINRA/SIPC.
6/19/2012 Page 33
Portfolio Strategies – Q2 2012 Presented by: Craig Dismuke Chief Economic Strategist [email protected]
Portfolio Strategies – Rate Environment
6/19/2012 Page 35
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
0.90
1.00
Fed Funds Futures Contracts Source: Bloomberg, Vining Sparks
5/31/2012
4/30/2012
3/30/2012
2/29/2012
Portfolio Strategies – Rate Environment
6/19/2012 Page 36
0.28
0.71
1.65
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y
Treasury Yield Curve Source: Bloomberg, Vining Sparks
6/7/2012
4/30/2012
5/31/2011
Portfolio Strategies – Rate Environment
6/19/2012 Page 37
0
50
100
150
200
250
300
350
Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12
2s10s Spread Source: Bloomberg, Vining Sparks
2s10s Spread (137)
Average
+/- 1 SD
Portfolio Strategies – Rate Environment
-20
0
20
40
60
80
100
120
140
160
180
Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12
2s5s Spread Source: Bloomberg, Vining Sparks
2s5s Spread (43)
Average
+/- 1 SD0
20
40
60
80
100
120
140
160
Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12
5s10s Spread Source: Bloomberg, Vining Sparks
5s10s Spread (94)
Average
+/- 1 SD
6/19/2012 Page 38
Portfolio Strategies – Rate Environment
-10
0
10
20
30
40
50
60
70
Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12
2s3s Spread Source: Bloomberg, Vining Sparks
2s3s Spread (11)
Average
+/- 1 SD
0
10
20
30
40
50
60
70
80
90
Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12
5s7s Spread Source: Bloomberg, Vining Sparks
5s7s Spread (38)
Average
+/- 1 SD
0
20
40
60
80
100
120
Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12
3s5s Spread Source: Bloomberg, Vining Sparks
3s5s Spread (32)
Average
+/- 1 SD
0
10
20
30
40
50
60
70
80
90
Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12
7s10s Spread Source: Bloomberg, Vining Sparks
7s10s Spread (56)
Average
+/- 1 SD
6/19/2012 Page 39
0
20
40
60
80
100
120
140
160
180
Aug-07 Feb-08 Aug-08 Feb-09 Aug-09 Feb-10 Aug-10 Feb-11 Aug-11 Feb-12
5Y Bullet Spread / 5Y Treasury Source: Vining Sparks
Spread (31)
Average
+/- 1 SD
Portfolio Strategies – Relative Value
Agency
Treasury
6/19/2012 Page 40
0
20
40
60
80
100
120
Aug-07 Feb-08 Aug-08 Feb-09 Aug-09 Feb-10 Aug-10 Feb-11 Aug-11 Feb-12
5Y NC 1Y Spread / 5Y Bullet Source: Vining Sparks
Spread (11)
Average
+/- 1 SD
Callable
Bullet
Portfolio Strategies – Relative Value
6/19/2012 Page 41
0
50
100
150
200
250
300
350
Aug-07 Feb-08 Aug-08 Feb-09 Aug-09 Feb-10 Aug-10 Feb-11 Aug-11 Feb-12
15Y CC MBS Spread / 5Y Treasury Source: Bloomberg, Vining Sparks
Spread (96)
Median
+/- 1 SD
MBS
Treasury
Portfolio Strategies – Relative Value
6/19/2012 Page 42
-20
0
20
40
60
80
100
120
Aug-07 Feb-08 Aug-08 Feb-09 Aug-09 Feb-10 Aug-10 Feb-11 Aug-11 Feb-12
15Y CC MBS Spread / 5Y NC 1Y Source: Bloomberg, Vining Sparks
Spread (54)
Median
+/- 1 SD
MBS
Callable Agency
Portfolio Strategies – Relative Value
6/19/2012 Page 43
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12
15Y 4.00 Minus 30Y 4.00 MBS Price Source: Bloomberg, Vining Sparks
Price Diff. (-0.31)
Median
+/- 1 SD
30 Year
15 Year
Portfolio Strategies – Relative Value
6/19/2012 Page 44
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
Aug-10 Feb-11 Aug-11 Feb-12
15Y 5.00 Minus 15Y 3.50 MBS Price Source: Bloomberg, Vining Sparks
Price Diff. (2.06)
Median
+/- 1 SD
3.50% MBS
5.00% MBS
Portfolio Strategies – Relative Value
6/19/2012 Page 45
Portfolio Strategies – Relative Value
6/19/2012 Page 46
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
1.60
1.80
2.00
3M 1 2 3
Sector Yield Curves - Short End Source: Vining Sparks
Treasuries
Agency Bullets
Agency 1Y Callables
PAC CMOs
Sequential CMOs
Corporates ('A' Rated)
Municipals (Taxables)
SBA (Premium Pool)
Portfolio Strategies – Relative Value
6/19/2012 Page 47
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
3 4 5 6 7 8 9 10
Sector Yield Curves - Belly Source: Vining Sparks
Treasuries
Agency Bullets
Agency 1Y Callables
PAC CMOs
Sequential CMOs
Corporates ('A' Rated)
Municipals (Taxables)
MBS (15 Year)
MBS (30 Year)
Portfolio Strategies – Relative Value
6/19/2012 Page 48
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
5.00
5.50
6.00
10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30
Sector Yield Curves - Long End Source: Vining Sparks
Treasuries
Agency Bullets
Agency 1Y Callables
PAC CMOs
Sequential CMOs
Corporates ('A' Rated)
Municipals (Taxables)
Portfolio Strategies A. Rate Environment
1. Low interest rates
2. Fed on hold – Staying in cash or overnights will be painful
3. Asymmetric interest rate risk
4. Yield curve has flattened, with the steepest part beyond 7 years
B. Sector Relative Value 1. Agency spreads are tight
2. MBS spreads are fairly tight, but prepay and extension risks are concerns
3. Corporate and municipal spreads remain relatively attractive
4. With long yields as low as they are, short-amortizing products with lockout make most sense
C. Concentration Risks 1. Longer maturity agencies
2. Mortgages with significant prepayment risk
1. Higher coupons
2. Fast prepays causing lower book yields
3. Longer maturity mortgages with too much extension risk or price volatility
4. Excessive short-term cashflow
6/19/2012 Page 49
Portfolio Strategies D. Portfolio Strategies
1. Optimize*
2. Invest cash
3. Push short cashflows out to 2013 and beyond when economics make sense
4. Consider sector swaps to take advantage of cross-sector relative value
5. Swap out of extension and/or prepayment risks in MBS
6. Reduce line items through odd-lot cleanups
6/19/2012 Page 50
Optimize: Finding the Best Sector Allocation
9.4% 14.1% 30.1% 65.0%
83.2% 80.3% 66.8% 33.7%
6/19/2012 Page 51
6/19/2012 Page 52
Invest Cash: The Cost of Waiting Is too High
Example Strategy
6/19/2012 Page 53
Example Strategy: Buy/Sell Details
6/19/2012 Page 54
Example Strategy: Cashflows
6/19/2012 Page 55
Example Strategy: Results A. Give Up 32 BPS Income
B. Take $10K Loss on $54 Million Transaction
C. Go into Sectors with Better Spreads
D. Dramatically Reduce Price Volatility (-7.63% +300)
E. Shortens Interest Rate Sensitivity
F. Push $5 Million of Cashflow from 2012 to 2017
6/19/2012 Page 56
INTENDED FOR INSTITUTIONAL INVESTORS ONLY. The information included herein has been obtained from sources deemed reliable, but it is not in any way guaranteed, and it, together with any opinions expressed, is subject to change at any time. Any and all details offered in this publication are preliminary and are therefore subject to change at any time. This has been prepared for general information purposes only and does not consider the specific investment objectives, financial situation and particular needs of any individual or institution. This information is, by its very nature, incomplete and specifically lacks information critical to making final investment decisions. Investors should seek financial advice as to the appropriateness of investing in any securities or investment strategies mentioned or recommended. The accuracy of the financial projections is dependent on the occurrence of future events which cannot be assured; therefore, the actual results achieved during the projection period may vary from the projections. The firm may have positions, long or short, in any or all securities mentioned. Member FINRA/SIPC.