Moderator: Jon Najarian, Co-Founder, optionmonster.com New Risk Management Strategies Wednesday, May 4, 2011; 2:30 PM - 3:45 PM Speakers: Jim Lenz, Chief Credit and Risk Officer, Wells Fargo Advisors John Moninger, Executive Vice President, Advisory and Brokerage Consulting Services, LPL Financial David Morton, Chief Research Officer and Co-Chief Investment Officer, Foxhall Capital Management Colbert Narcisse, Chief Operating Officer, Global Investment Strategies and Solutions Group, Morgan Stanley Smith Barney Lisa Shalett, Chief Investment Officer, Merrill Lynch Global Wealth Management
The Ramifications of the Great Recession Consolidations Cause a Shift in the Industry Landscape Intermediary Breakdown Insurance 8% RIA 16% Independent Advisors 19% Wirehouses 46% Wirehouse FA headcount Assets ($ bn) Morgan Stanley Smith Barney 18,087 1,500 Bank of America Merrill Lynch 15,142 1,410 Wells Fargo Advisors 15,102 1,100 UBS Wealth Management 6,760 707 Total 55,091 4,717 % of Total 18% 46% Regional B/D 11% Source: Goldman Sachs Research. 2
1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 U.S. 10 Year Treasury Rate Age Group Revisiting Risk Market Dynamics Force Risk Trades U.S. 10 Year Treasury Rate Investable Assets by Age Group 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 75+ 65-74 55-64 45-54 <45 14% 18% 13% 18% 14% 24% 30% 33% 33% 24% 22% 17% 15% z 13% 12% 2004 2010 2020 Retirement Segment Source: Bloomberg. Data as of April 15, 2011. McKinsey Analysis. 3
Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Net Flows ($ millions) Tomorrow s Investment Solutions Asset Allocation and Portfolio Construction to Play Crucial Role U.S. Mutual Fund Net Flows and Net Assets Alpha Beta Separation * $4,500 $180,000 $4,000 $160,000 $3,500 $3,000 $2,500 $2,000 $1,500 $1,000 $500 $- $140,000 $120,000 $100,000 $80,000 $60,000 $40,000 $20,000 $- Total Net Assets ($ millions) 45% 14% 41% Commodities Alternative Total Net Assets (Alt & Commodities) Source: Morningstar. Net flows and net assets as of March 31, 2011. McKinsey Analysis. *Survey examining the investment practices of 120 of the largest 350 defined benefit pension plans in the U.S. Plans making the distinction Plans considering making the distinction Plans not making the distinction 4
Unprecedented rise in market volatility during the 2008 market crash 80 70 60 50 40 Volatility index (VIX) VIX long-term average,1990-april 2011 Long-Term Capital Management bailout (September 1998) Dot-com bubble burst (March 2000) Lehman Brothers collapsed (September 2008) 30 20 10 0 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 Note: VIX is the Chicago Board Options Exchange's volatility index. Source: DataStream. 5
Positive & highly correlated Global stock markets are highly correlated 1 0.5 FTSE 100 250-day rolling correlation with S&P 500 DAX 30 0 MSCI Emerging Markets -0.5 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 Source: DataStream. 6
Stock prices around the world gained strongly, but most remained below their pre-crisis peaks January 2006 = 100 200 160 Emerging markets 120 Europe 80 S&P 500 40 2006 2007 2008 2009 2010 2011 Note: Data are as of April 20, 2011. Source: Bloomberg. 7
The U.S. small- and mid-cap stocks outperform large cap stocks January 1998 = 100 350 300 S&P 400 Mid Cap 250 200 S&P 600 Small Cap 150 100 S&P 100 Large Cap 50 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Note: Data are as of April 19, 2011. Source: Bloomberg. 8
2011: U.S. stock market is off to a good start 2011 YTD gains for key U.S. stock indexes (%) (as of 04/20/2011) S&P mid-cap Dow Jones industrial avg Russell 2000 S&P small-cap NYSE composite S&P 500 Nasdaq composite Dow Jones utility Dow Jones transports 3.1 3.0 5.8 5.6 6.2 6.9 7.1 7.6 9.0 0 2 4 6 8 10 Note: Data are as of April 19, 2011. Source: Bloomberg. 9
Five largest banks control almost half of the U.S. national banking assets (2010) All FDIC insured commercial banks Total assets = US$12 trillion; Total number = 6,529 banks Other commercial banks 53.0% JPMorgan Chase, 13.5% Bank of America, 12.3% Citibank, 9.6% Wells Fargo, 9.1% US Bank, 2.5% Sources: Federal Reserve and FDIC. 10
Derivatives activity is dominated by few large banks The top five banks hold 96% of all derivatives The notional amount of derivative contracts held by large U.S. commercial banks, fourth quarter 2010 (% total) Goldman Sachs Bank USA 18.4% Wells Fargo Bank 1.6% Other banks 3.6% JPMorgan Chase Bank 33.7% Bank of America 21.0% Citibank National 21.7% Source: Comptroller of the Currency. 11
Derivative contracts are concentrated in top five largest banks Credit derivatives Q4 2010 Futures & forwards Options Top five banks Other banks Swaps Total 0 25 50 75 100 125 150 175 200 225 250 US$ trillions Note: Other banks include only U.S. commercial banks with derivatives activity. Source: OCC s quarterly report on bank trading and derivative activities, Comptroller of the Currency, fourth quarter, 2010. 12
Despite significant decline after the crisis, the CDS market is still valued at $26 trillion US$ trillions 70 60 50 40 30 20 10 0 0.6 0.9 1.6 2.2 2.7 3.8 Credit default swaps, notional amounts outstanding 5.4 8.4 12.4 17.1 26.0 34.4 45.5 62.2 54.6 38.6 31.2 30.4 26.3 Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec Jun 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: International Swaps and Derivatives Association. 13
Bank CDS spreads: Still elevated Median 10-year bank CDS spreads, basis points 400 United States 350 300 250 Eurozone 200 150 100 50 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: International Monetary Fund. 14
U.S. bank bailout returns 9.4% Return on TARP investment TARP bailouts ($B) Return on TARP ($B) Return on TARP (%) Citigroup 45 12.4 27.5 Bank of America Corp 45 4.3 9.5 Wells Fargo & Company 25 2.3 9.2 GMAC Financial Services 16.3 2.2 13.4 JPMorgan Chase & Co 25 1.7 7.0 Goldman Sachs Group Inc 10 1.4 14.2 Morgan Stanley 10 1.3 12.7 Hartford Financial Services group 3.4 0.8 24.8 PNC Financial Services group 7.6 0.7 9.8 Others 144.0 3.9 2.7 Total 331.3 31.2 9.4% Note: Data are as of April 20, 2011. Source: Bloomberg. 15
Financial institutions received largest government bailouts (all countries) Bailout funds received from governments (US$ billions) Fannie Mae (U.S.) Royal Bank of Scotland Group (U.K.) AIG (U.S.) Citigroup (U.S.) Freddie Mac (U.S.) Bank of America Corp. (U.S.) Commerzbank AG (Germany) JPMorgan Chase & Co. (U.S.) Wells Fargo & Company (U.S.) $26 $25 $25 $45 $51 $55 $70 $75 $84 0 20 40 60 80 100 Note: Data are as of April 20, 2011. Source: Bloomberg. 16
Government capital investments in financial firms Most recently available data, as of April 6, 2011 (US$ billions) Total outstanding = $491 billion Belgium, $18 Netherlands, $23 Rest of the world, $20 Ireland, $31 Germany, $68 United States, $232 United Kingdom, $99 Source: Bloomberg. 17
Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Continued accommodative monetary policy in the United States U.S. federal funds rate (%) 6 5 4 3 Federal funds effective rate Target rate 2 1 0 Source: Federal Reserve. 18
U.S. Treasury yields remained low by historical standards Percent Interest rates on Treasury securities Percent 6 6 5 4 3 2 1 10-year 2-year 5 4 3 2 1 0 2005 2006 2007 2008 2009 2010 2011 0 Source: Federal Reserve. 19
Investment returns for selected asset classes As of March 2011, a $100 investment made in December 2000 gives you: 500 $446 400 300 200 $237 $191 $169 $133 $122 100 0 Emerging markets Sources: Bloomberg, Milken Institute. U.S. high-yield bonds U.S. AAA corporates U.S. Treasuries Commodities S&P 500 20
Gold prices hit record highs and silver rallied to its strongest since 1980 Gold price (US$/oz) 1,600 Silver price (US$/oz) 60 1,200 800 400 Silver price (right axis) Gold price (left axis) 50 40 30 20 10 0 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 0 2011 Source: Bloomberg. 21
Silver ETF (SLV) down 15% in past 3 days 22
Silver has been down 15% in 3 days 11 times source: Bespoke Investment Group 23