Economic Groundhog Day

Transcription

1 Economic Groundhog Day Early Signs of Spring or Six More Months/Years of Economic Winter? May 2009 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. Columbia Management Advisors, LLC ( CMA ) is an SEC-registered investment advisor and indirect, wholly owned subsidiary of Bank of America Corporation and is part of Columbia Management. INT-32/ /AR78830

2 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 i i 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. Most current available data is included. Past performance is no guarantee of future results.

3 The Great Recession Is Passing Its Point of Maximum Strength The recession is continuing Risk of a Great Depression has eased Massive monetary stimulus averted a depression Banks are still lending Will banks fail the stress test? Equities are reasonable value Corporate bond spreads will fall The cost may be modest growth for a long time We are not Japan

4 The Recession Is Continuing Most Indicators Are Still Significantly Negative Feb-71 Feb-73 Feb-75 Feb-77 Feb-79 CFNAI Index - 3 month Moving Average Red line denotes recession signal Feb-81 Feb-83 Feb-85 Feb-87 Feb-89 Recession Feb-91 Feb-93 Feb-95 Feb-97 Feb-99 Feb-01 3mo MA Feb-03 Feb-05 Feb-07 Feb-09 Leading Indicators - 6mo Change 10% 2.0% 8% 1.5% 6% 4% 10% 1.0% 2% 0.5% 0% 0.0% -2% -0.5% -4% -6% -1.0% -8% -1.5% Aug-00 Feb-01 Aug-01 Feb-02 Aug-02 Feb-03 Aug-03 Feb-04 Aug-04 Feb-05 Aug-05 Feb-06 Aug-06 Feb-07 Aug-07 Feb-08 Aug-08 Feb-09 Recession Mo Chg (RS) 6mo Ann (LS) 6mo Signal (LS) Perc cent Change 12.0% 10.0% 8.0% 6.0% 40% 4.0% 2.0% 0.0% Mar-73 Mar-77 Mar-81 Mar-85 Labor Markets Industrial lproduction, CapU, and Recessions 20.0% Mar-89 Mar-93 Mar-97 Mar-01 Mar-05 Mar (100) (300) (500) (700) (900) Level 15.0% 10.0% 5.0% 0.0% -5.0% 50% -10.0% -15.0% -20.0% Feb-69 Feb-73 Feb-77 Feb-81 Feb-85 Feb-89 Feb-93 Feb-97 Feb-01 Feb-05 Feb Payrolls 3mo avg gain (RS) Unemployment Rate (LS) Recession Capacity Utilization (RS) Ind Prod Vs Yr ago(ls) Sources: Bureau of Labor Statistics as of March 2009 and Bloomberg as of February 2009

5 The Recession Is Continuing Deflation Remains the Bigger Concern Headline Inflation and Recessions TIPs Breakevens (weekly) ate R Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar yr TIPs BE Spread 5yr TIPs BE Spread 1yr TIP BE 2yr TIP BE M ar- 53 M ar- 57 M ar- 61 M ar- 65 M ar- 69 M ar- 73 M ar- 77 M ar- 81 M ar- 85 M ar- 89 M ar- 93 M ar- 97 M ar- 01 M ar- 05 #N /A Recession Headline CPI Sources: Bureau of Labor Statistics and Bloomberg as of March 2009

6 Morgan Stanley Business Conditions Index An Example of Poor But Improving Numbers Morgan Stanley Business Conditions Index (seasonally adjusted) Oct 08 Nov 08 Dec 08 Jan 09 Feb 09 Mar 09 Apr Price Index Credit Conditions Index Advance Bookings Index Business Conditions Expectations Index MSBCI (3-month moving average) Hiring Plans (% of respondents reporting increase over next 3 months) Capex Plans (% of respondents reporting increase over next 3 months) Source: Morgan Stanley Research as of April 2009

7 3/16 6/20 09 Massive Monetary Stimulus Averted a Depression Monetary Aggregates (Various) - 13 week Annualized Rate of Change 80% Money Multiplier (Velocity) 60% 40% 20% 0% -20% -40% /20 0/ /18 8/ /19 9/ /17 7/ /17 7/ /15 5/20 08 Recession Ratio of M2 to M1 1/7/2008 2/7/2008 3/7/2008 4/7/2008 5/7/2008 6/7/2008 7/7/2008 8/7/2008 9/7/ /7/ /7/ /7/2008 1/7/2009 2/7/2009 3/7/2009 Monetary Base M1 Index M2 Index MZM Index Source: Columbia Management Advisors as of March 2009

8 Massive Monetary Stimulus Averted a Depression Consumer Showing Signs of Bottom Mar-04 Mar-05 Total Vehicle Sales Auto Sales Vehicle Sales Mar-06 Mar-07 Mar-08 Domestic Vehicle Sales 400 Mar Retail Sales 22 ICSC/UBS Retail Chain Store Sales 6.0% % % 0.0% -2.0% -4.0% Home Sales 7/11/06 10/10/06 06 MBA Mortage Applications Indexes 1/9/07 4/10/ /10/ /9/07 07 Rolling 4 wk Change (RS) /8/08 4/8/08 7/8/08 10/7/ /6/09 4/7/09 YOY Change (LS) 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% -3.0% -4.0% /27/08 7/25/08 8/22/08 9/19/08 10/17/08 11/14/08 12/12/08 1/9/09 2/6/09 3/6/09 4/3/09 MBA Refi App Index (RS) MBA Purch App Index (LS) Sources: Bloomberg as of March 2009, ICSC Goldman Sachs and Mortgage Bankers Association as of April 2009

9 Massive Monetary Stimulus Averted a Depression Consumer Confidence Is Improving Is It Sustainable? Sources: University of Michigan, Reuters and Bloomberg as of March 2009

10 Is Housing Bottoming? Volume vs. Price Housing Consumer Propensity to Buy or Sell a Home Source: MKM Partners, LLC as of January 2009

11 Banks Are Still Lending Indeed, while growth rates have slowed, they are still near 5% (annualized). In past recessions, bank credit slowed more than current rates and loans growth was negative. 30.0% Bank Lending - Growth Rates (YOY) 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Bank Credit Comm'l/Ind Loans Consumer Loans -5.0% -10.0% De c-7 0 De c-7 2 De c-7 4 De c-7 6 De c-7 8 De c-8 0 De c-8 2 De c-8 4 De c-8 6 De c-8 8 De c-9 0 De c-9 2 De c-9 4 De c-9 6 De c-9 8 De c-0 0 De c-0 2 De c-0 4 De c-0 6 De c-0 8 Source: Federal Reserve as of March 2009

12 Will Banks Fail the Stress Test? What If Some Don t? Bank A Bank B Bank C Bank D Bank E Bank F Risk Adjusted Assets / Tangible Assets 54% 59% 90% 83% 91% 88% Market Cap / Tangible Common Equity 42% 177% 273% 49% 367% 481% Projected 2009 Net Income Available to Common (NIAC) Street Median NIAC 377,000 7,277,000 1,331, ,600 2,114,850 6,767,000 Street Low NIAC -7,391,000 5,776, ,000-1,712,000 1,464,000 1,879,000 CMA Stress NIAC 2 Year Future Loss Periods -32,331,922-8,479,055-3,669,067-2,025,515-1,191,224-6,964,633 CMA Stress NIAC 3 Year Future Loss Periods -17,129,273 2,416,404-2,674,170-1,078, ,015-1,179,375 Net Total Loans / Tangible Assets 36% 34% 63% 69% 73% 69% Risky Trading, AFS and HTM Securities % Tangible Assets 28% 23% 10% 3% 2% 11% Days Delinquent % Loans 2.50% 2.22% 1.94% 1.93% 1.93% 2.57% Noncurrent % Loans 3.96% 3.04% 2.32% 2.06% 2.01% 2.52% Delinquent and Noncurrent % Loans 6.46% 5.25% 4.25% 3.99% 3.94% 5.09% Delinquent and Noncurrent % Tangible Assets 2.34% 1.80% 2.70% 2.76% 2.86% 3.52% Cumulative Losses % Loans 66% 6.6% 43% 4.3% 26% 2.6% 36% 3.6% 31% 3.1% 35% 3.5% Future Losses % Loans 15.3% 13.5% 10.5% 8.5% 10.4% 11.9% Total Estimated Cumulative Losses % Loans 21.9% 17.8% 13.1% 12.1% 13.5% 15.4% Tangible Common Equity / Tangible Assets 2.5% 3.4% 2.3% 5.0% 3.4% 1.4% Tangible Total Equity / Tangible Assets 3.5% 4.9% 5.2% 7.4% 6.5% 3.8% Tangible Total Equity and TRUPS / Tangible Assets 48% 4.8% 58% 5.8% 62% 6.2% 81% 8.1% 81% 8.1% 54% 5.4% Tier 1 RBC % 11.8% 10.9% 9.7% 10.4% 10.6% 7.8% Total RBC % 15.6% 14.9% 13.2% 14.6% 14.3% 11.8% Tier 1 Leverage % 6.0% 6.9% 17.5% 8.5% 9.8% 14.5% Tangible Common Equity / Tangible Assets -0.7% 2.7% 0.6% 2.2% 3.0% 0.6% Tangible Total Equity / Tangible Assets 0.4% 4.3% 3.5% 4.7% 6.4% 3.2% Tangible Total Equity and TRUPS / Tangible Assets 1.7% 5.2% 4.6% 5.5% 8.0% 4.9% Source: Columbia Management Advisors based on balance sheet data as of December 31, 2008

13 But Bank Loan Growth Had Been Too High Chart 7: Major deleveraging cycle ahead Bank loans as a % of GDP: 10% below time trend in 2013 Time trend Source: BCA Research

14 Equities Are Reasonable Value Equity Market Historically Leads GDP and ISM Equities predict more recessions and expansions than actually occur. Source: BCA Research, graphs provided by BCA and current as of December 2008

15 Sustainable Recovery? Beware of Market-Based Predictions Strategas Bellwether Index Relative to S&P 500 Strategas Bellwether Index is a construction of the 15 S&P 500 Index stocks with the highest h correlation to nominal GDP growth over the last 10 years. 65 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Source: Strategas: Investment Strategy Report as of Monday, April 2009

16 Equities Are Reasonable Value Equity Valuation Matrix EPS/ PER Long and Deep Recession Long and Shallow Recession 12x x x x x Short and Deep Recession Short and Shallow Recession EPS: Estimated Aggregate Earnings per Share for S&P 500 Index Constituents PER: Potential Multiples of Earnings per Share Used to Predict the Value of the S&P 500 Index Source: Columbia Management Advisor Research

17 Corporate Bond Spreads Expected To Fall Credit Spreads (weekly data) /15/05 /14/05 /14/06 /13/06 /13/07 /12/07 /11/08 /10/08 /10/09 4/ 10/ 4/ 10/ 4/ 10/ 4/ 10/ 4/ LB Credit Index OAS (RS) JPM HY Index OAS (LS) Source: Columbia Management Advisor Research as of April 2009

18 Corporate Compensation Versus Profits Will Government Policy Force a Reversal of This Trend? Source: BCA Research, graphs provided by BCA

19 Cyclicals Have Adjusted Costs Faster Than Staples Source: BCA Research, graphs provided by BCA

20 Small Caps Typically Lead Large Source: BCA Research, graphs provided by BCA

21 The Cost May Be Modest Growth for a Long Time Savings Rate and Output Gap 4.00 Output Gap vs Savings Rate / /30/60 12/ /31/63 12/ /30/66 12/ /31/69 12/ /29/72 12/ /31/75 12/ /29/78 12/ /31/81 12/ /31/84 12/ /31/87 12/ /31/90 12/ /31/93 12/ /31/96 12/ /31/99 12/ /31/02 12/ /30/05 12/ /31/08 Savings Rate (RS) Output Gap - US (OECD) (LS) Source: Federal Reserve

22 The Cost May Be Modest Growth for a Long Time 20.00% 15.00% 10.00% 5.00% 0.00% -5.00% % % % Household Net Worth and Financial Obligations Ratio /80 1/82 1/84 1/86 1/88 1/90 1/92 1/94 1/96 1/98 1/00 1/02 1/04 1/06 1/08 12/31 12/31 12/31 12/31 12/31 12/31 12/31 12/31 12/31 12/31 12/31 12/31 12/31 12/31 12/31 Recession HH Fincl Obligation Ratio (RS) Change in Net Worth Vs Yr Ago (LS) Source: Bank Credit Analyst as of December 2008

23 The Cost May Be Modest Growth for a Long Time Burden of Debt and Lower Leverage Federal Debt Source: Congressional Budget Office as of December 2008

24 We Are Not Japan Source: BCA Research, graphs provided by BCA as of December 2007

25 We Are Not Japan Gen X and Y to Replace Boomers Source: Bloomberg as of March 2009

26 Stress Correlations Crisis Period Correlations (period ) are significantly different from Normal Period Correlations. Weekly Correlation to S&P 500 Treasury Index Corporate Investment Grade Index ML US HIGH YIELD MASTER II. US TIPS Index US Securitized Index S&P 600 MSCI EAFE U$ MSCI EM U$ S&P GSCI Commodity Non-Crisis (0) (0.03) (0.03) (0.09) 1987 Stock Market Crash (0.21) n/a n/a 0.93 (0.02) 0.17 (0.05) Tech Bubble (0.32) (0.04) 0.37 (0.33) Current Credit Crisis / Housing Bubble (0.29) (0.21) Ci Crisis i (123) (1,2,3) (0.32) (0.26) Only Treasuries and TIPS remain negatively correlated to S&P 500 during crisis periods. Correlation with all other asset classes increases considerably. Source: Columbia Management Advisor Research. Analysis based on weekly returns data on various indices through December 2008.

27 Easy Terrain: A New (Old?) Asset Allocation Approach for a New Reality

28 Easy Terrain Has Been Much Less Painful Drawdowns 0% Maximum Drawdown From Peak NAV Since % -10% -15% -20% -25% -30% Easy Terrain Portfolio -35% Classic 60/40 Portfolio Jan-70 Jan-75 Jan-80 Jan-85 Jan-90 Jan-95 Jan-00 Jan-05 Source: Columbia Management Advisors as of January 2009

29 More Reliably Positive Returns vs. Conventional Funds 125% Rolling 3 Year Returns Since % Easy Terrain Portfolio 105% Classic 60/40 Portfolio 95% 85% 75% 65% 55% 45% 35% 25% 15% 5% -5% -15% -25% Jan-70 Jan-75 Jan-80 Jan-85 Jan-90 Jan-95 Jan-00 Jan-05 Source: Columbia Management Advisors as of January 2009

30 How This Portfolio Is Built: Strategic Asset Allocation At its core is a simple strategic asset allocation (SAA) with a fixed risk budget. 30% is invested in stocks, bonds and commodities, respectively, and 10% in alternatives. Portfolio Statistics Since 1970 Easy Terrain Classic Classic SAA Only 60/40 30/70 Average Annual % Return 11.9% 11.4% 10.7% Annual % Volatility 5.7% 10.2% 7.3% Information Ratio Max Drawdown from Peak NAV -20.4% -27.8% -15.6% Source: Columbia Management Advisors as of January 2009

31 Portfolio Composition Strategic Expected Asset Alloc Portfolio Category Asset (Risk Alloc) Weight Stocks 30% 9% to 20% MSCI EM MSCI EAFE S&P 500 Fixed Income 30% 46% to 62% Global Govts US Govt US Corporates US High Yld US Converts Inflation Hedge 30% 8% to 20% US TIPS Gold GSCI Alternatives 10% 10% to 18% GTAA PE/HF Index Source: Columbia Management Advisors as of January 2009

32 Performance of Bonds vs. Equities Source: Ned Davis Research as of March 2009

33 Portfolios Compared Portfolio Statistics Since 1970 Easy Classic Classic Terrain 60/40 30/70 Average Annual % Return 12.1% 10.4% 10.7% Annual % Volatility 5.5% 10.5% 7.3% Information Ratio Max Drawdown from Peak NAV -18.2% -29.5% -15.6% Source: Columbia Management Advisors as of January 2009

34 Corporate Biography Colin Moore, AIIMR Colin Moore is the chief investment officer for Columbia Management. His responsibilities include ensuring that a disciplined investment process is in place across all asset classes, including equity, fixed income and cash. He is also responsible for spearheading the development and implementation of Columbia Management s proprietary alternative investment product offering, a key component of the company s long-term growth strategy. Mr. Moore joined Columbia Management in 2002 as head of equity and has been a member of the investment community since Prior to joining Columbia Management, Mr. Moore was chief investment officer of global and international value equities and associate director of research at Putnam Investments. While serving in this role, he personally managed $3 billion in addition to overseeing a team of 29 analysts and five portfolio managers. Previously, Mr. Moore was director of research and chief investment officer for Rockefeller & Co. in New York and London. Throughout his career in the investment industry, he has held portfolio management positions with three London-based asset management firms, as well as a role in product development. Mr. Moore attended the London Business School where he completed its Investment Management Program, and he is an associate by examination of the Institute of Investment Management and Research. 1 1 AIIMR merged with the London Society of Investment Professionals, and was renamed the CFA Society of the U.K. in November 2007.