Economic and Market Outlook - PowerPoint PPT Presentation

1 / 27
About This Presentation

Economic and Market Outlook


... is the investment management division of Bank of America Corporation. ... by other Columbia Management associates or other divisions of Bank of America. ... – PowerPoint PPT presentation

Number of Views:129
Avg rating:3.0/5.0
Slides: 28
Provided by: bank152


Transcript and Presenter's Notes

Title: Economic and Market Outlook

Economic and Market Outlook
March 2009
Marie M. Schofield, CFA Managing Director and Sen
ior Portfolio Manager
Columbia Management
CMG-32/9508-0309 09/AR75908
Important Disclosure
  • Columbia Management Group, LLC (Columbia
    Management) is the investment management
    division of Bank of America Corporation. Columbia
    Management entities furnish investment management
    services and products for institutional and
    individual investors.
  • Since economic and market conditions change
    frequently, there can be no assurance that the
    trends described here will continue or that the
    forecasts will come to pass. The views and
    opinions expressed are those of the portfolio
    managers and analysts of the affiliated advisors
    of Columbia Management Group, are subject to
    change without notice at any time, may not come
    to pass and may differ from views expressed by
    other Columbia Management associates or other
    divisions of Bank of America. These materials are
    provided for informational purposes only and
    should not be used or construed as a
    recommendation of any security or sector.
  • This information does not constitute investment
    advice and is issued without regard to specific
    investment objectives or the financial situation
    of any particular recipient.
  • Past performance is no guarantee of future

Important Disclosure
  • The Troubled Asset Relief Program (TARP) is a
    U.S. government program to purchase assets and
    equity from financial institutions in order to
    strengthen the financial sector.
  • The Term Asset-Backed Securities Loan Facility
    (TALF) is a program created by the U.S. Federal
    Reserve to support the issuance of asset-backed
    securities (ABS) collateralized by student
    loans, auto loans, credit card loans and loans
    guaranteed by the Small Business
  • High-yield bonds are represented by the Merrill
    Lynch High Yield Master II Index, a broad based
    index consisting of all U.S. dollar-denominated
    high-yield bonds with a minimum outstanding
    amount of 100 million and maturing over one
  • Unlike mutual funds, indices are not managed and
    do not incur fees or expenses. It is not possible
    to invest directly in an index.
  • Price to earnings ratio (P/E) is the value of a
    company's stock price relative to company
    earnings. The P/E is determined by dividing the
    price of the stock by a company's earnings per
  • The Standard Poors (SP) 500 Index tracks the
    performance of 500 widely held,
    large-capitalization U.S. stocks.
  • Treasury-Eurodollar (TED) spread The difference
    between the yield on the 3-month U.S. Treasury
    bill and 3-month LIBOR.
  • Swap spreads The premium charged over U.S.
    Treasury yields to exchange floating for
    fixed-rate payments and are a measure of
    counterparty risk.

The U.S. Economy
Job losses multiply and jobless rate moves higher
Source U.S. Bureau of Labor Statistics
Data through January 2009
We are seeing some of the fastest declines in
labor market conditions in decades as companies
cut jobs and economic activity collapses. Only
the health care and government sectors are adding
jobs now, with broadening weakness in all other
sectors. The unemployment rate will head much hi
gher in 2009 and into 2010, peaking well above 9
and perhaps 10, considering the pace of cuts and
typical lags. This will be the highest
unemployment rate since the 1982 recession.
Economic growth weakest since 1982 recession
Real percent change over prior quarter, annual
Sources U.S. Bureau of Economic Analysis
Red bar forecast from Bloomberg, as of March
The trajectory of economic growth remains to the
downside and fundamentals continue to weaken.
Q109 growth is likely to be just as weak, with
further contraction or little growth into 2010.
This would take the year on year growth to -2 or
lower by years endnear or exceeding levels seen
in the 1980 recession and would make this one
of the longest recessions in the post-WW2
period. Nominal GDP, growth not adjusted for infl
ation, fell for the first time since 1958. This
is evidence of a reversal in inflation trends and
some mild deflation.
Economic Performance Measure 19301944
Source University of Michigan/Reuters, Surveys
of Consumers
Declines Related to Past Real Estate/Credit Busts
Source BCA Research Inc.
Wages and spending plummet while savings rate
Monthly, percent change over prior year
Source U.S. Bureau of Labor Statistics, NBER, as
of 01/31/2009
Source Ned Davis Research, as of 09/30/2009
As wages and incomes fall due to job loss and the
recession, spending typically falls in concert.
But this recession has been caused by a major
structural problemnot a cyclical one.
Consumers income as a share of GDP fell 5 but
consumers share of expenditure as a share of GDP
rose 11 leading to a 16 imbalance and covered
by lending. These high levels of consumer debt ar
e increasingly unserviceable. This has led to
rising delinquencies and defaults in credit cards
and mortgages. These are some of the factors
that argue against any broad pick up in consumer
spending near term. It will also likely prove a
major drag for growth with consumption accounting
for about 70 of total economic growth.
Historic declines in household net worth
Real percent change over prior quarter and year
Source Federal Reserve Data through September 30
, 2008
Consumption has buckled as consumer net worth has
plummeted and labor conditions have deteriorated.
About 7 trillion in wealth has disappeared in
the four quarters up to September. It is
estimated another 3-5 trillion has disappeared
since then, making this one of the worst
reversals in household worth since the Great
Depression. We believe a secular shift in consum
er behavior is likely with less spending,
increased savings and efforts to reduce debt.
This will be a significant drag to growth with
consumption about 70 of GDP.
Inflation falling rapidly and inflation
expectations, too
Consumer Price Index, annual percent change
U.S. Treasury Inflation Protected Securities
(TIPs) Breakevens
Danger zone
Sources U.S. Bureau of Labor Statistics
Data through December 2008
Headline and core inflation measures have fallen
dramatically, with periodic measures the lowest
in 50 years. Credit crunches and unexpected
shortfalls in activity are both highly
deflationary. Mild deflation is manageable but
the Fed is worried about the more pernicious kind
of deflation. Market measures began to warn of s
ome deflation late last summer. The Fed is
leaning into this with a zero interest rate
policy, quantitative easing and unconventional
policy measures to counter these building
deflationary forces. Money supply is expanding
rapidly but velocity is falling. Risk is for mild
to moderate deflation despite ultra-easy policy.
A recovery in housing and home prices is the key
Percent change versus year ago
Sources National Assoc of Realtors, U.S. Census
Data available as of January 31, 2009
Home prices are still falling and credit is still
tightening for consumers. The interplay between
weak housing markets, weak financial markets and
tighter credit conditions has created a negative
feedback loop leading to ever weaker economic
growth. Monetary policy at full throttle, govern
ment initiatives such as the TARP, TALF and the
Homeowner Stability Plan, and fiscal stimulus in
the form of large spending proposals are targeted
at reversing this dynamic. Still, home prices hav
e yet to bottom and are now down 15 to 18
overall and falling about 3 a month. While the
epicenter is in the West, home prices in other
areas are declining near 10 annually. The
uptick in existing home sales is primarily due to
distressed sales, which is good news and bad
news. High inventory levels remain a challenge to
any bottom.
Homeowner data and U.S. mortgage rates
Weekly data, percent
Monthly index data
Source Bloomberg Data available as of 02/27/09
Sources Mortgage Bankers Association, Haver
Data through 12/31/2008
Affordability measures are near the highest in
decades and represent an attractive purchase
opportunity for first time homebuyers, together
with government sponsored incentives. Falling
home prices are a major driver.
However, homeownership rates have turned lower in
the last couple of years and have yet to turn up.
The rise seen through 2005 was the strongest in
decades and may represent a long term peak.
Mortgage rates for conventional 30 year mortgages
have fallen since the fall but appear to have
stalled. Mortgage rates for jumbo mortgages have
fallen very little.
U.S. mortgage applications pick up
Weekly, Mortgage Bankers Association Index
Refinancings Purchase
Sources Mortgage Bankers Association,
Data through 2/27/09
Mortgage applications surged at first as interest
rates fell to record lows, but most of the
activity was for refinancings. While the rise
here is encouraging, it may also be optimistic
considering tight lending standards and falling
appraisals may reduce overall approvals and
lessen the beneficial effect of lower mortgage
rates. What is disappointing is the trend lower i
n purchase applications, although some of this
may fail to measure direct government housing
Record budget deficit
Congressional Budget Office deficit projections
Source Congressional Budget Office, as of

Deficit at 1.2 trillion or 8 of GDP without
the stimulus package. And this is before the new
administrations budget spending proposals.
Global Markets
World GDP forecast to weaken this year, then
slowly recover
Real GDP forecasts, percent change over prior year
Source Bloomberg
Decoupling theoriesthe thinking that our global
trading partners would be more immune from the
effects of the a US recession and financial
crisishave been severely tested and have
apparently failed the test. The IMF recently redu
ced its forecasts for global growth and it now
expects that the global downturn will be
considerably deeper and the worst period since
1946. It is a small world after all.
Market environment U.S. dollar trends since 1973
5 Years
10 Years
6 Years
7 Years
7 Years
Source Bloomberg
Coordinated central bank easing now
Policy interest rates, end of period, percent
Source Bloomberg Data thru Dec 2008
Global policy rates are now at multiyear lows, as
central bank easing gains steam.
The U.S. dollar has found some support recently,
being the least bad choice as global interest
rates converge toward rock bottom levels and the
U.S. remains a safe haven.
Financial Markets
Treasury yields fall to historic lows
Treasury bill and Treasury note yields, weekly,
end of period, percent
3-month Bill
Yield Spread (difference)
Source U. S. Federal Reserve Board Bloomberg
Data through 2/27/09
Interest rates in U.S. Treasuries are at their
lowest levels in decades, a result of the flight
to quality and a deepening recession.
Yield curve, as measured by the spread between
3-month Treasury bills and 10-year Treasury
notes, is very steep based on history and over
200 basis points. This indicates monetary policy
is in high gear and on target toward a recovery
in the economy.
LIBOR spreads improving but still elevated
Money market rates and spreads
Sources Bloomberg Data through February 2009
The London Interbank Offered Rate (LIBOR) is a
daily reference rate based on the interest rates
at which banks offer to lend to other banks in
the London wholesale money market (or interbank
Short-term interest rates have fallen, an
indication the liquidity facilities provided by
monetary authorities are working.
Obviously, this is due to government subsidies,
as the authorities have provided the stamp of a
government guarantee to many markets in an effort
to support demand.
High-yield bond spreads explode
Merrill Lynch High Yield Corporate Master II -
Option Adjusted Spread
Source BloombergData through February 2009
Past performance is no guarantee of future results
Risk premiums in credit markets have spiked
higher, especially those in debt of companies
with quality ratings below investment grade.
However, even high-grade debt has reached levels
not seen in decades. This is driven by deteriorat
ing fundamentals associated with the recession
and accelerating bankruptcies and rising default
rates by companies.
Recession and profit downturn depresses PE ratios
Price to Earnings Ratio (P/E) of the SP 500
SP 500 Scenario Analysis
Key to chart Assuming a P/E of 12 and expected
earnings per share of 45, the target level for
the SP 500 Index is 540.
Current P/E 11X Feb 2009
Source Bloomberg Data through February 2009 Bas
ed on trailing 12-month operating earnings
Past performance is no guarantee of future results
Current P/E levels are well below long-term
averages. Rapidly falling consensus views of forw
ard earning expectations and market multiples are
creating new bear market lows and are proving a
challenge for those expecting a stimulus driven
second-half rebound. As a result, valuation has
vastly improved but the short term outlook
remains uncertain.

  • Continued deceleration in world growth and in
    U.S. economic activity in 2009, with the current
    recession to be one of the longest in decades
  • Unemployment is expected to rise into 2010 and
    peak north of 9
  • Some mild deflation forecasted, but not the
    pernicious kind
  • Credit market adjustment forecast to take
    considerable time to complete, however valuation
    is attractive in selected fixed income sectors
  • Equity outlook uncertain in the short term, but
    opportunities for positive excess returns through
    active management should be emphasized
  • Conditions for recovery include financial system
    repair, reduced deleveraging activity and
    stabilizing home prices
  • Policy stimulus and government programs are
    expected to support a recovery in growth in 2010

Corporate Biography
Marie M. Schofield, CFA Managing Director and Sen
ior Portfolio Manager Marie Schofield is a mana
ging director and senior portfolio manager for
global asset allocation at Columbia Management.
Ms. Schofield is a member of the firms
investment strategy committee, focusing on the
development of macro strategy. She is a manager
of the Columbia LifeGoal portfolios, the Columbia
Asset Allocation funds and the Columbia
Retirement Target Date funds. Prior to her
current role, she served as head of the core
fixed-income team in Boston from 2001 through
2006 and as senior strategist for the
fixed-income strategy group from 2006 through
2008. Ms. Schofield joined a Columbia Management
predecessor firm in 1990 and has been a member of
the investment community since 1975. Prior to
joining Columbia Management, Ms. Schofield was a
portfolio manager at Trustco Bancorp NY,
Chittenden Bank and BayBanks Investment
Management. Ms. Schofield earned a B.S. from the
College of Saint Rose and is a member of the CFA
Institute, the Boston Security Analysts Society,
the Fixed Income Management Society of Boston and
the Boston Economic Club. In addition, she holds
the Chartered Financial Analyst designation.
(No Transcript)
Write a Comment
User Comments (0)