Presentation is loading. Please wait.

Presentation is loading. Please wait.

The Crash of 2008 and Its Aftermath Jack Marco Chairman/ Sr Consultant Marco Consulting GroupAugust 2010.

Similar presentations


Presentation on theme: "The Crash of 2008 and Its Aftermath Jack Marco Chairman/ Sr Consultant Marco Consulting GroupAugust 2010."— Presentation transcript:

1 The Crash of 2008 and Its Aftermath Jack Marco Chairman/ Sr Consultant Marco Consulting GroupAugust 2010

2 Marco Consulting Group Outline Part 1: 2008 Year in Review Part 2: 2009 Year in Review Part 3: 2010 First Half Year in Review Part 4: 2010 What Lies Ahead Part 5: How Pension Funds Suffered After 2008

3 2008 Year in Review

4 Marco Consulting Group 3 S&P/Case-Shiller United States Home Price Index 0 50 100 150 200 250 300 350 Mar-87Mar-88Mar-89Mar-90Mar-91Mar-92Mar-93 Mar-94Mar-95Mar-96Mar-97Mar-98Mar-99Mar-00Mar-01Mar-02 Mar-03Mar-04 Mar-05 Mar-06Mar-07Mar-08 Jump on the Housing Bandwagon Source: Bloomberg, 1987 index level set to 100 +206% (3-87 to 9-06) -21% (9-06 to 9-08)

5 Marco Consulting Group 4 Household Debt - 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 1980 Q11983 Q31987 Q11990 Q31994 Q11997 Q32001 Q12004 Q32008 Q1 Total Debt Outstanding ($B) 15 16 17 18 19 20 Debt Payments as % of Income Debt $Debt % Homeowners… …took on too much debt Source: Federal Reserve

6 Marco Consulting Group 5 Mortgage Lenders… …issued risky mortgages and quickly sold them Source: PIMCO, UBS (2000-2007), JPMorgan (2008)

7 Marco Consulting Group 6 Credit Freeze First Half of 2008 – Overall lending slows – Lending frozen in risky areas (e.g., subprime, leveraged loans) – Belief that government will step in (Bear Stearns) Second Half of 2008 – Lehman bankruptcy – Paralyzed by headlines – Lending frozen across the board (prime mortgages, corporate bonds, commercial paper, interbank lending)

8 Marco Consulting Group 7 Headlines #1: Bankruptcy Bankruptcy or similar failure – Lehman Brothers – FDIC seized 25 failed banks (IndyMac, Washington Mutual) – Retailers (Linens n Things, Sharper Image) – Others (ATA Airlines, Icelandic banks) Reaction: Stocks. Bonds.

9 Marco Consulting Group 8 Headlines #2: Government Assistance Temporary government protection – Bear Stearns: JPM purchase with Fed $30 billion guarantee – Fannie Mae, Freddie Mac: conservatorship – AIG: $152 billion rescue package (loans and investments) – Dozens of major banks: accept $250 billion in government capital in exchange for preferred shares Reaction: Stocks. Bonds stabilize or.

10 Marco Consulting Group 9 Headlines #3: Private Assistance Acquired or re-capitalized – Countrywide: acquired by Bank of America – Merrill Lynch: acquired by Bank of America – Morgan Stanley: $9 billion investment from Mitsubishi UFJ – Goldman Sachs: $5 billion investment from Buffet/Berkshire – GE: $3 billion investment from Buffet, $12 billion from others – Wachovia: acquired by Wells Fargo – National City: acquired by PNC Financial Reaction: Stocks. Bonds.

11 Marco Consulting Group 10 Headlines #4: Bank Holding Companies Applied for federal bank charter – Morgan Stanley – Goldman Sachs – American Express – GMAC Benefits: collect retail deposits, FDIC guarantee on bank debt, access to Feds discount window Trade-Offs: bank regulators, higher capital requirements

12 Marco Consulting Group 11 Massive Sell-Offs Source: Bloomberg Cumulative Returns in 2008 -37.0% -33.8% -43.4% -53.3% 5.2% -26.2% -35.6% -80% -60% -40% -20% 0% 20% 40% Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Cumulative Return US Large CapUS Small CapIntl EquityEmrg Mkt Equity Aggregate BondHigh Yield BondCommodities

13 Marco Consulting Group 12 VIX Volatility Index 0 10 20 30 40 50 60 70 80 90 Jan-90Jan-91Jan-92Jan-93Jan-94Jan-95 Jan-96Jan-97Jan-98Jan-99Jan-00Jan-01Jan-02Jan-03 Jan-04Jan-05 Jan-06Jan-07Jan-08 Expected 30-day volatility - S&P 500 Credit Crunch Record Highs for Volatility Russia/LTCM Sept 11, 2001 Enron/Worldcom Tech Bubble Source: CBOE

14 Marco Consulting Group 13 Flight to Quality Safety in U.S. Government assets U.S. dollar U.S. Treasuries Risk assets Sell anything with any level of risk Higher correlations across the board Technical reaction, not fundamental

15 Marco Consulting Group 14 Nominal Dollar Broad Index 70 80 90 100 110 120 130 140 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Index Level Strength of U.S. Dollar Source: Federal Reserves trade-weighted US dollar index

16 Marco Consulting Group 15 1.43% 0.25% 0.08% 0% 1% 2% 3% 4% 5% 6% Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08Sep-08 Oct-08 Nov-08 Dec-08 3M LIBORFed Funds Target3M TBILL Treasury Yields Pushed to Zero Source: Bloomberg

17 Marco Consulting Group 16 0 500 1000 1500 2000 2500 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Demand Higher Yields from Risky Bonds Source: Option-adjusted spreads on Merrill Lynch indexes through 12-31-08 12/31/200810y Avg High Yield1812598 CMBS990141 ABS967136 Corporate604156 MBS16570 Agency2011 Excess yield over Treasuries (basis points)

18 Marco Consulting Group 17 Imagine a World Where… People cant get mortgages People cant get car or student loans Companies cant raise funds for new factories or new products Companies have to stash more cash to cover payroll or operating costs Banks dont want to lend to each other

19 Marco Consulting Group 18 Government Intervention Buyer of last resort Lender of last resort U.S. Treasury U.S. Federal Reserve Foreign governments Foreign central banks

20 Marco Consulting Group 19 U.S. Bail-Out: TARP $700 billion Troubled Asset Relief Program (TARP) Run by the U.S. Treasury Waiting for Congress to release second installment of $350 billion Project Amount ($ billions) Purchase shares of healthy banks$250 Buy AIG preferred shares$40 Fed program to guarantee ABS$20 Citigroup investment$25 Auto industry (GM, Chrysler, GMAC) $23 Total$358

21 Marco Consulting Group 20 U.S. Bail-Out: Other Actions WhoAction Month Announced Purpose FedLowered federal funds rate seven timesAll YearTo encourage banks to lend Fed Opened discount window to lend to investment banks MarchTo provide source for emergency funds FedCurrency swaps with 14 other central banksSept To provide US dollars where supply is tight TreasuryMoney market insurance programSept To guarantee safety of money market deposits SECBanned short selling of select stocksSept To temporarily ease downward price pressure FDICGuaranteed newly issued senior bank debtOctTo promote liquidity Fed Buying 3-month commercial paper (highly rated, unsecured and asset-backed) Oct To provide funds to companies to continue operations Fed Buying $600 billion in agency debt and agency MBS (Ginnie, Fannie, Freddie) NovTo lower mortgage rates Fed Lending up to $200 billion, taking ABS (auto, credit card, student, and small biz loans) as collateral Nov To encourage banks to continue creating these loans

22 Marco Consulting Group 21 U.S. Bail-Out: Other Actions WhoAction Month Announced Purpose FedLowered federal funds rate seven timesAll YearTo encourage banks to lend Fed Opened discount window to lend to investment banks MarchTo provide source for emergency funds FedCurrency swaps with 14 other central banksSept To provide US dollars where supply is tight TreasuryMoney market insurance programSept To guarantee safety of money market deposits SECBanned short selling of select stocksSept To temporarily ease downward price pressure FDICGuaranteed newly issued senior bank debtOctTo promote liquidity Fed Buying 3-month commercial paper (highly rated, unsecured and asset-backed) Oct To provide funds to companies to continue operations Fed Buying $600 billion in agency debt and agency MBS (Ginnie, Fannie, Freddie) NovTo lower mortgage rates Fed Lending up to $200 billion, taking ABS (auto, credit card, student, and small biz loans) as collateral Nov To encourage banks to continue creating these loans

23 Marco Consulting Group 22 U.S. Bail-Out: Other Actions WhoAction Month Announced Purpose FedLowered federal funds rate seven timesAll YearTo encourage banks to lend Fed Opened discount window to lend to investment banks MarchTo provide source for emergency funds FedCurrency swaps with 14 other central banksSept To provide US dollars where supply is tight TreasuryMoney market insurance programSept To guarantee safety of money market deposits SECBanned short selling of select stocksSept To temporarily ease downward price pressure FDICGuaranteed newly issued senior bank debtOctTo promote liquidity Fed Buying 3-month commercial paper (highly rated, unsecured and asset-backed) Oct To provide funds to companies to continue operations Fed Buying $600 billion in agency debt and agency MBS (Ginnie, Fannie, Freddie) NovTo lower mortgage rates Fed Lending up to $200 billion, taking ABS (auto, credit card, student, and small biz loans) as collateral Nov To encourage banks to continue creating these loans

24 Marco Consulting Group 23 Central Banks Drop Rates Source: Bloomberg Central Bank Interbank Lending Rates 0 1 2 3 4 5 6 7 8 Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08Sep-08 Oct-08 Nov-08 Dec-08 USEnglandCanadaAustraliaEuropeJapan

25 Marco Consulting Group 24 Concern 1: Housing Source: National Association of Realtors Home Sales

26 Marco Consulting Group 25 Concern 2: Economy and Unemployment Source: Bureau of Economic Analysis

27 Marco Consulting Group 26 Hopeful Sign 1: Historical Recessions PeakTroughMonths Sept. 1902Aug. 190423 May 1907June 190813 Jan. 1910Jan. 191224 Jan. 1913Dec. 191423 Aug. 1918March 19197 Jan. 1920July 192118 May 1923July 192414 Oct. 1926Nov. 192713 Aug. 1929March 193343 May 1937June 193813 Feb. 1945Oct. 19458 PeakTroughMonths Nov. 1948Oct. 194911 July 1953May 195410 Aug. 1957April 19588 April 1960Feb. 196110 Dec. 1969Nov. 197011 Nov. 1973March 197516 Jan. 1980July 19806 July 1981Nov. 198216 July 1990March 19918 March 2001Nov. 20018 December 2007 Average14 Source: NBER

28 Marco Consulting Group 27 Hopeful Sign 2: Average Drawdowns PeakBottomDurationDecline 11/29/1968 5/26/197018 months-36.1% 1/11/197310/3/197421 months-48.2% 11/28/19808/12/1982 20 months-27.1% 8/25/1987 12/4/19873 months-33.5% 7/16/199010/11/19903 months-19.9% 3/24/2000 10/9/2002 31 months-49.1% Average decline for prior 7 events-35.7% PeakBottomDurationDecline 10/9/200711/20/0813 months-50.7% Average return for the 3 months following the bottom of a cycle: +13.9% Average return for the 12 months following the bottom of cycle: +34.9% Return from 11/20/08 to 12/31/08: +20.5% S&P 500 Index Returns Source: Attalus Capital, Morningstar

29 Marco Consulting Group 28 Hopeful Sign 3: Forecast MSNBC Year-End Economic Roundtable Forecast for GDP Growth Q4 2008Q1 2009Q2 2009Q3 2009Q4 2009 Scott Anderson, Senior Economist, Wells Fargo -5.6%-3.8%-0.5%1.7%2.2% Nariman Behravesh, Chief Economist, IHS Global Insight -6.5%-4.0%-0.7%0.7%1.4% Michael Englund, Chief Economist, Action Economics -6.5%-3.0%1.0%2.0%2.5% Ethan Harris, Co-head, U.S. economics research, Barclays Capital -4.5% -1.0%2.0%3.0% Jan Hatzius, Chief U.S. Economist, Goldman Sachs -5.0%-3.0%-1.0%1.0% Ed Leamer, Forecast Director, UCLA Anderson Business School -4.1%-3.4%-0.8%0.2%1.0% Mickey Levy, Chief Economist, Bank of America -5.7%-3.6%-0.8%2.1%2.9% Joel Naroff, President, Naroff Economic Advisors -5.1%-0.6%1.1%2.0%4.8% David Rosenberg, Chief North American Economist, Merrill Lynch -4.5%-4.2%-3.3%-0.8%0.0% John Silvia, Chief Economist, Wachovia Corp. -5.9%-3.4%-1.8%1.0%1.9% Diane Swonk, Chief Economist, Mesirow Financial -6.3%-3.0%-0.8%1.4%1.9% Lawrence Yun, Chief Economist, National Association of Realtors -5.5%-2.0%-0.2%1.4%2.6% Consensus -5.4%-3.2%-0.7%1.2%2.1% Source: MSNBC.com

30 Marco Consulting Group 29 Hopeful Sign 4: Government Actions Hooray! More jobs More infrastructure More stimulus checks More tax breaks Easier mortgages Challenges Higher taxes later or spending cuts elsewhere Infrastructure projects take time to get running Mortgage modifications can hurt bond investors Government spending can lead to: – weaker dollar – higher inflation – being more indebted to other nations

31 2009 Year in Review

32 Marco Consulting Group 31 Q2 to Q4 2009: a Tale of Two Markets In early 2009, investors were still shell-shocked from 2008 Credit markets still frozen Fear prevailed as investors kept money on the sidelines Green shoots of economic recovery Investors begin risk-seeking typical of recoveries and market normalization Bargain-hunting activity increase as investors see oversold areas of market Q1

33 Marco Consulting Group 32 Early 2009 Headlines...

34 Marco Consulting Group 33 In January, Things Were Still Unraveling... Characterized by: Market uncertainty: indicated by high volatility; search for market bottom Declining consumer spending and business investment Home prices in free fall Rising unemployment Source: PIMCO The Downward Economic Spiral Asset Prices Consumption Spending Employment Savings Investments Dire negative expectations and lack of credit availability prevent a reset of the system despite much lower asset prices Profits

35 Marco Consulting Group 34 Equity Markets Continued Heading South… Cumulative Returns 10/9/2007 - 12/31/2009 -60% -50% -40% -30% -20% -10% 0% 10/0712/0702/0804/0806/0808/0810/0812/0802/0904/0906/0908/0910/0912/09 2008 decline = -37.0% 1/1/09-3/9/09 decline = -24.6% 10/9/07-3/9/09 total decline from the market peak to the market trough: -54.9%

36 Marco Consulting Group 35 Consumer Confidence Went With the Markets Consumer confidence bottomed in February Source: The Conference Board (via Bloomberg). Consumer Confident Index through 2/28/2009. 2/28/09 level = 25.3 Consumer Confidence Index 0 20 40 60 80 100 120 140 160 Jul-00Sep-01Nov-02Jan-04Mar-05May-06Jul-07Sep-08Dec-09 Monthly Average 7/31/2000 – 2/28/09 = 94.7

37 Marco Consulting Group 36 Government Intervention in 2009 February 17: $787 billion government stimulus package enacted February 18: Obama announces plan to aid homeowners with mortgage payments March 18: Federal Reserve announces it will increase its balance sheet to purchase additional securities for the purpose of increasing liquidity in credit markets March 23: Treasury details Public Private Investment Program June 24: Bill with Cash for Clunkers provision signed into law

38 Marco Consulting Group 37 Green Shoots Appeared in Late Q1 BusinessWeek cover, April 13, 2009. Bernanke photo from www.federalreserve.gov Green shoots is a term used colloquially to indicate signs of economic recovery during an economic downturn. Federal Reserve Chairman, Ben Bernanke, made the first public use of the phrase by a Fed official in a March 15, 2009 interview with 60 Minutes

39 Marco Consulting Group 38 March 9th Market Turnaround Cumulative Returns 10/9/2007 - 12/31/2009 -60% -50% -40% -30% -20% -10% 0% 10/0712/0702/0804/0806/0808/0810/0812/0802/0904/0906/0908/0910/0912/09 Source: Bloomberg, through 12/09

40 Marco Consulting Group 39 S&P 500 Rebounded 66% Since March Bottom Cumulative Returns 10/9/2007 - 12/31/2009 -60% -50% -40% -30% -20% -10% 0% 10/0712/0702/0804/0806/0808/0810/0812/0802/0904/0906/0908/0910/0912/09 66.1% rally since March 9 Source: Bloomberg, through 12/09

41 Marco Consulting Group 40 Consumer Confidence Turned Up in March Consumer confidence rebounded March through May; flat in the third quarter Still well-below average Source: The Conference Board (via Bloomberg). Consumer Confident Index through 9/30/2009. Consumer Confidence Index Current level = 52.9 Monthly Average 7/31/2000 – 12/31/2009 = 90.5 0 20 40 60 80 100 120 140 160 Jul-00Feb-02Sep-03Apr-05Nov-06Jun-08Dec-09

42 Marco Consulting Group 41 End of the Recession Economists indicate recession officially over in mid-year 2009 – Bernanke: From a technical perspective the recession is likely over – Former Fed staffer: June was mostly likely the trough – 41 of 51 economists surveyed by WSJ believe recession is over But things are still tentative… – Unemployment – Consumer spending – Credit creation – Housing prices – Government programs Where are we today and where are we going?

43 Marco Consulting Group 42 Yield Curve Steepening Process Began Beginning of Year and End of Year Difference Treasury Yield Curve 1.55 2.68 0.34 2.21 2.68 4.64 0.44 3.84 3 mos 1 yr 5 yrs 10 yrs30 yrs Time to Maturity 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5 6.0 Yield to Maturity (%) 12/31/200812/31/2009

44 Marco Consulting Group 43 In the U.S., GDP Growth Was Positive in Second Half but Negative for Full Year Source: Morgan Stanley Full year 2009 GDP declined by 2.4%

45 Marco Consulting Group 44 Potential Shapes of the Economic Recovery Economic Alphabet Soup – V Shaped Recovery – U Shaped Recovery – W Shaped Recovery – L Shaped Recovery

46 Marco Consulting Group 45 GDP Growth 1952-1955 -10% -5% 0% 5% 10% 15% 1952195319541955 V-Shaped Recovery Example U.S. Recession of 1953 – GDP growth for this recession forms a classic v-shape

47 Marco Consulting Group 46 U-Shaped Recovery Example U.S. Recession of 1973-1975 – Recession is longer than a V-shaped recession with a less clearly-defined trough – GDP may shrink for several quarters and only slowly return to trend growth GDP Growth 1973-1975 1973197419751976 -6% -4% -2% 0% 2% 4% 6% 8% 10% 12% S&P 500 Index 1973-1976 0 20 40 60 80 100 120 140 1973 197419751976

48 Marco Consulting Group 47 -4 -2 0 2 4 6 8 1978197919801981198219831984 W-Shaped Recovery Example Early 1980s Recession in the U.S. – Also called a Double Dip recession GDP Growth 1978-1983

49 Marco Consulting Group 48 L-Shaped Recovery Example Asset Price Bubble in Japan 1980s-1990s Source: finance.yahoo.com. Penn World Tables NIKKEI 225 (1984-2009) 0 5000 10000 15000 20000 25000 30000 35000 40000 45000 85878991939597990103050709

50 Marco Consulting Group 49 Key Themes in 2009 Unemployment Credit Creation Consumer SpendingHousing Government Actions

51 Marco Consulting Group 50 10% Unemployment Source: Bureau of Labor Statistics Unemployment Rate 2000-2009 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 2000200120022003200420052006200720082009 50-year average: 5.9%

52 Marco Consulting Group 51 Unemployment Change in Nonfarm Payrolls 7.2 million total jobs lost since Jan 2008 -900 -700 -500 -300 -100 100 300 500 700 2000200120022003200420052006200720082009 Monthly Change in Nonfarm Payrolls (000s)

53 Marco Consulting Group 52 Unemployment Second highest rate over last 60 years Source: Bureau of Labor Statistics Historical Peaks in Unemployment 10.0% 7.0% 6.3% 7.7% 10.8% 9.0% 7.5% 7.9% 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 194819521956196019641968197219761980198419881992 1996200020042009 Unemployment Rate 50-year Average: 5.9%

54 Marco Consulting Group 53 Consumer Confidence Index 0 20 40 60 80 100 120 140 160 Jul-00Feb-02Sep-03Apr-05Nov-06Jun-08Dec-09 Consumer Spending Consumer confidence bottomed in March A reading above 90 means the economy is on solid footing. Above 100 signals strong growth Source: The Conference Board (via Bloomberg). Consumer Confident Index through10/31/2009. 25.3 52.9

55 Marco Consulting Group 54 Consumer Spending Source: Commerce Department Source: BEA and JP Morgan Asset Management LT Average 3.5% Personal Consumption Expenditures Growth from 2000-2009 Components of GDP Billions, USD -2.8% Net Exports 71.1% Consumption 20.8% Govt Spending 8.4% Investment Ex-Housing 2.5% Housing/Construction

56 Marco Consulting Group 55 Consumer Savings Consumer Spending Data Source: U.S. Department of Commerce Data as of 8/31/2009 Personal Savings Rate Data Source: St. Louis Federal Reserve Bank as of 11/30.2009) U.S. Personal Savings Rate (1959-2009) -4% -2% 0% 2% 4% 6% 8% 10% 12% 14% 19591963196819721977 19811986 19911995200020042009 Long Term Average = 6.4%

57 Marco Consulting Group 56 Credit Card Loans Other Loans U.S. Consumer Credit Conditions -20% -10% 0% 10% 20% 30% 40% 50% 60% 70% 80% 2000200120022003200420052006200720082009 % of Banks Tightening Credit Standards Credit Creation Credit officers are still tightening their standards Source: Federal Reserve - Senior Loan Officer Survey

58 Marco Consulting Group 57 NAR Median Home Price $178,300 $228,600 $164,800 $- $50,000 $100,000 $150,000 $200,000 $250,000 $300,000 2006Aug-07Mar-08Oct-08May-09Dec-09 Median Price Housing Market Source: National Association of Realtors, data through December 2009. Standard & Poors Case Schiller Composite 10 Index, data October 2009 Case-Schiller Home Price Index 0 50 100 150 200 250 20062007 2008 2009 Index Level May: Case Schiller index bottomed Up 8% Home prices may be stabilizing…

59 Marco Consulting Group 58 Government Actions …but is the stabilization permanent? ProgramsPrimary SponsorImpact Home Buyer Tax CreditCongress$11 billion in Tax Credits due to the extension Increase in Conforming Balance LimitsCongress Expands pool of borrowers eligible for GSE mortgages and reduces strain on jumbo non-conforming mortgage market TARP funded HAMP modificationsTreasury Monthly payment reductions and incentive payments will provide aprox $70 billion to borrowers over the next 5 years. Agency Conduit InitiativeFHFA Facilitate greater mortgage creation by smaller banks and non-bank loan originators Easing of tax consequences relating to CMBS loan models IRS Makes it easier for operators of troubled properties to lower debt service payments Easing of capital treatment related to bank CRE loan models Regulators Allows banks to refinance high LTV borrowers who can stay current on payments without a capital charge CMBS TALF new issueFederal Reserve Lowers spreads on existing qualifying CMBS, helps channel money for new securitized Commercial Real Estate deals. Support of State Housing AuthoritiesTreasury/ FHFAProvides $35 billion of financing to State Housing Authorities Expansion of FHA mortgage book (via GNMA) HUD GNMA now provides 45% of new net issuance and over 50% of mortgages for new home purchasers Expanded Tax Loss Carry ForwardCongress$33 billion in cash tax refunds Bridgewater Daily Observations 11/24/2009

60 2010 First Half Year in Review

61 Marco Consulting Group 60 GDP Increased 2.7% in the 1st Quarter of 2010 Source: BEA, annualized seasonally-adjusted quarter-to-quarter growth rates. Data through 3/31/2010. Real GDP Growth

62 Marco Consulting Group 61 Consumer Price Index Core inflation is well below the Feds comfort zone of 1.5-2.0%. Some economists are concerned about the threat of disinflation or deflation, a result of declining prices and spending. Source: Bureau of Labor Statistics. Data through 6/30/2010. Headline CPICore CPI -2.5 -2 -1.5 -0.5 0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 5.5 6 Jan-00 Nov-00 Sep-01Jul-02May-03 Mar-04 Jan-05 Nov-05 Sep-06Jul-07 May-08 Mar-09Jan-10 Jun-10 Inflation Rate Fed comfort zone (core) 1.5 to 2.0% Consumer Price Index (y/y change)

63 Marco Consulting Group 62 Consumer Confidence Despite the index reaching 63.3 in May, it quickly relapsed to 52.9 in June. A reading over 90 indicates that the economy is on solid footing. Above 100 signals strong growth. Source: The Conference Board. Consumer Confidence Index through 6/30/2010. 52.9

64 Marco Consulting Group 63 Unemployment Source: Bureau of Labor Statistics. Data through 6/30/2010.

65 Marco Consulting Group 64 Direction of Home Prices Remains Uncertain Although there has been a slight uptick in home prices we have yet to see a strong, consistent price rebound Source: National Association of Realtors, data through May 2010. Standard & Poors Case Shiller Composite 10 Index, data through May 2010.

66 Marco Consulting Group 65 Direction of Home Sales Remains Uncertain Mortgage Bankers Association Purchase Index, which measures the volume of mortgage loan applications, rose 34.5% during Q2 Index rose despite the tax credit program expiring in April for the second time (the first deadline was in October 2009) Source: Bloomberg. Data through 6/30/2010. 0 200 400 600 800 1000 1200 1400 1600 1800 2000 Jan-00Jan-01Jan-02Jan-03Jan-04Jan-05Jan-06Jan-07Jan-08Jan-09Jan-10 MBA Purchase Index

67 Marco Consulting Group 66 Equity Market Volatility Peaks In May, the VIX, which shows the markets expectation of 30-day volatility, rose to heights not seen since the financial crisis. VIX spiked to 45.8 on May 20 th Source: VIX Index, Data through 6/30/2010.

68 Marco Consulting Group 67 S&P Posts Worst Performance Since 4Q08 After showing signs of recovery in 1Q10, stocks retreated in the 2nd quarter with the S&P 500 falling 12% May performance was the worst drawdown since the depths of the financial crisis Source: Bloomberg, through 6/30/2010. -10.7% -8.0% S&P 500 Monthly Returns, January 2009 - June 2010 -15% -10% -5% 0% 5% 10% 15% Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10

69 Marco Consulting Group 68 Returns Since the Peak, 10/9/07 – 6/30/10 Equity market lost some of its gains from 1Q10 during the second quarter Source: Bloomberg, through 6/30/2010. Cumulative Returns 10/9/07- 6/30/10 -60% -50% -40% -30% -20% -10% 0% Oct-07Jan-08Apr-08Jul-08Oct-08Jan-09Apr-09Jul-09Oct-09Jan-10Apr-10 Returns Since 10/9/07

70 Marco Consulting Group 69 Bond Spreads in 2Q10 Spreads widened in the second quarter, particularly in high yield, reflecting investors aversion to risky assets Source: Bloomberg (Monthly data). Data through 6/30/2010.

71 Marco Consulting Group 70 Source: NCREIF Open-End Diversified Core (ODCE). Data through 6/30/2010*. *Q2 preliminary data Real Estate in Q2

72 2010 What Lies Ahead

73 Marco Consulting Group 72 What is the New Normal? The world is being transformed by DDR – D: Old model for encouraging home ownership is dead – D: Global leadership has changed with China growing faster than others – R: The invisible hand of free enterprise is being replaced by government Source: PIMCO – William Gross Investment Outlook September 2009 Re-RegulationDe-GlobalizationDe-Leveraging

74 Marco Consulting Group 73 What is the New Normal? De-Leveraging: Global interest rates will remain low for extended periods of time De-Globalization: Asia and Asian-connected economies (Australia, Brazil) will dominate future global growth Re-Regulation: Investors should continue to anticipate government policies Source: PIMCO – William Gross Investment Outlook September 2009

75 Marco Consulting Group 74 Summary of U.S. GDP Forecasts For 2010 Economist / InstitutionForecast Goldman Sachs2.7% Blackstone3% JP Morgan3.5% IMF1.5% Mesirow Financial2-4% Schroedersrecovery of an L or W shape Fed Governors Survey2.5-3.5% Average GDP growth following a recession: 6 - 8% Average Estimate 2.7% Average Estimate 2.7%

76 Marco Consulting Group 75 Key Themes to Watch in 2010 Inflation Unemployment Credit Creation Consumer SpendingHousing Government Actions

77 Marco Consulting Group 76 Unemployment: Some Improvement Expected Unemployment forecasts – Federal Reserve 2010: 9.3%-9.7% 2011: 8.2%-8.6% 2012: 6.8%-7.5% For a significant decline in unemployment rate, the U.S. needs real GDP growth of over 5% in 2010 While official unemployment is 10%, if you add the underemployed (part time workers who would like to have full time jobs), the number is closer to 17.5% Sources: Okuns Law; Blackstone

78 Marco Consulting Group 77 Consumer: Still Needs to De-Lever Percentage of U.S. households that are underwater on their mortgages – High debt levels and debt service payments, coupled with rising unemployment and the legacy of the housing collapse, mean that a very large number of households are in no condition to buy homes or to increase spending through borrowing 25% Source: American CoreLogic

79 Marco Consulting Group 78 Housing: Recovery Needs to Take Place 5.3 million Number of US households tied to mortgages that are at least 20% higher than their homes value Source: American CoreLogic 2011 Year that JP Morgan expects US home prices to hit rock bottom

80 Marco Consulting Group 79 Government Actions Fed to maintain low interest rates Source: Federal Reserve Board / Mesirow Financial Estimates

81 Marco Consulting Group 80 Credit Creation Access to credit is primary risk to growth – Lending by banks remains constrained – Retailers are feeling the squeeze, as regulators are curtailing their issuance of pre-approved lines of credit at the cash register – Small business owners have had difficulty in securing credit to run their businesses

82 Marco Consulting Group 81 Inflation Core Inflation Is Expected To Remain Muted In 2010 – High unemployment will likely hold nominal wages in check – Overhang of vacant homes will keep rents from rising, which will hold the housing component of the Consumer Price Index in check – Inflation remains more of a medium-term (3-5 year) than near-term threat Source: Federal Reserve

83 Marco Consulting Group 82 Summary Recovery has started Economy is on a path to growth: path is still uncertain Key factors to watch include: Re-RegulationDe-GlobalizationDe-Leveraging

84 How Pension Funds Suffered After 2008

85 Marco Consulting Group 84 Results of the NCCMP 2009 Survey of the Funded Status of Multiemployer Defined Benefit Plans

86 Marco Consulting Group 85 Results of the NCCMP 2009 Survey of the Funded Status of Multiemployer Defined Benefit Plans Green: Healthy plans Yellow: Endangered plans Red: Critical plans 2008 Over 75% of the plans that responded to the survey reported their 2008 PPA zone status as green reflecting the relative health of these plans and the seriousness with which the bargaining parties addressed the funding disruption caused by the first historic market contraction which occurred from 2000 – 2002. 2008 Over 75% of the plans that responded to the survey reported their 2008 PPA zone status as green reflecting the relative health of these plans and the seriousness with which the bargaining parties addressed the funding disruption caused by the first historic market contraction which occurred from 2000 – 2002. 2009 A striking decline in green zone plans from 2008 to 2009, with only 20% of plans reporting their 2009 zone status as green, and more than 40% of the plans reporting their zone status as red. 2009 A striking decline in green zone plans from 2008 to 2009, with only 20% of plans reporting their 2009 zone status as green, and more than 40% of the plans reporting their zone status as red.


Download ppt "The Crash of 2008 and Its Aftermath Jack Marco Chairman/ Sr Consultant Marco Consulting GroupAugust 2010."

Similar presentations


Ads by Google