FHCF Investment Update Financial Market Recap Historical Yield Curves Benchmark Standings Investment Summaries by Maturity & Sector Monthly Return Comparisons Summary & Forecast Richard Smith, Portfolio Manager Florida State Board of Administration
FINANCIAL MARKET RECAP March 2001 September 2001
March 2001 The Dow Jones Industrial Average was unable to sustain its high of 10,983.63 in February and closed the month at 9,878.78. The NAPM manufacturing index unexpectedly rose to 43.1 from 41.9 suggesting factory weakness is a diminishing threat to the economy s record-long expansion. Unemployment ended the month at 4.30% and was the highest total since July 1999. Non-farm payrolls lost 86,000 jobs in March well below the expected addition of 60,000 jobs. The Fed cut the funds rate 50 basis points to 5.00% and continued their weakness bias. The 1 st Quarter totaled 150 basis points in rate reductions. The majority of money market investors favored short-term maturities even though the Fed expected to continue cutting rates.
April 2001 Labor market weakness continued to signal a slowdown in consumer spending as retail sales dropped 0.2%. The Fed continued to see economic weakness and cut the funds rate 50 basis points to 4.50%. Money market investors began to extend into August and September. At month-end the spread between 3-month Treasury bills @ 3.88% and 30-year Treasury bonds @ 5.79% was 191 basis points. New home sales dropped 11% from March s 10-year high. Personal income edged up slightly from the 1 st Quarter. Consumer confidence dropped to its lowest level since February 1996.
May 2001 Retail sales increased 0.8% vs. -0.4 decline last month, however, sales of big ticket items were weak. The auto market contributed only 0.1% to the retail increase. Labor markets continued to decline as the loss of 233,000 jobs increased the unemployment rate to 4.50%. The consumer price index was up slightly to 177.5 from 176.8 in April which was its highest level this year. The U.S. Treasury s spread between the 2-year @ 4.24% and 30-year @ 5.76% grew to its widest margin in seven years. Chairman Greenspan notes the weakness risks are still prevalent, therefore, the Fed cut rates 50 basis points to 4.00%.
June 2001 The U.S. Labor Department announces worker productivity declined in the 1 st Quarter for the first time in six years. The producer price index rose 0.2%, less than expected, signaling room for further interest rates reductions. June s unemployment rate remained steady at 4.50% Mortgage rates continue to resist the economic slowdown. January s average opening 30-year fixed was at 7.03% and ended June at 7.13%. Economists were split 50-50 on a 25 or 50 basis point rate cut, however, the Fed moved 25 basis points to 3.75%.
July 2001 The economic slowdown continued to extend as service-based businesses added the fewest jobs since August 2000. May consumer credit rose $6.5 billion to $1.591 trillion, the smallest gain in 5 months, suggesting a pessimistic long-term economic outlook. 2 nd Quarter GDP grew 0.7%, the lowest rate in eight years, as businesses curtailed spending. The street expected a 25 basis point rate cut in August and many money managers felt this could be the final cut.
August 2001 Corporate America continued to announce layoffs. The unemployment rate jumped to 4.90%, a four-year high, threatening to erode any remaining consumer optimism. Tax rebate checks began to be received, however, their impact will not be seen immediately. The release of the Beige Book confirmed the economy is still downbeat. Money market securities priced in 25 basis point cut based on Beige Book statistics. The money market curve remained flat during the month as rates ranged from 3.55% - 3.62%. Three to six-month commercial paper averaged 3.50% suggesting investors would not gain from executing extension trades. As expected the Fed cut the funds rate 25 basis points to 3.50%.
September 2001 The August NAPM index rose to its highest level in nine months signaling the worst may be over. The big three auto makers received a major hit as North America based vehicle sales fell 24% at Chrysler (from 8/00), 7.6% at GM, and 8.4% at Ford. The unemployment rate was unchanged at 4.90%. On September 11, terrorists destroyed the World Trade Center towers and a small portion of the Pentagon. The stock markets were closed from September 11-14 and on Monday, September 17 the Dow Jones Industrial Average plunged 685 points, or 7.3%. The Federal Reserve reduced the overnight rate to 3.00% to shore up consumer confidence. Initial adjusted jobless claims reached a nine-year high leading to further expected economic contraction in the 4 th Quarter.
HISTORICAL YIELD CURVES March 2001 September 2001
Historical Yield Curves U.S. Treasuries 6.00 5.50 5.00 4.50 4.00 3.50 3.00 2.50 2.00 3M 6M 2Y 5Y 10Y 30Y 12/29/2000 03/30/2001 06/29/2001 09/10/2001 09/28/2001
BENCHMARK STANDINGS March 2001 September 2001
BENCHMARK STANDINGS December-00 March-01 June-01 September-01 CATFUN 6.71% 5.45% 4.49% 3.76% Fed Funds Target 6.50% 5.00% 3.75% 3.00% Discount Rate 6.00% 4.50% 3.25% 2.50% 1-Month Libor 6.56% 5.08% 3.86% 2.63% 3-Month Libor 6.40% 4.88% 3.84% 2.59% 2-Year Treasury 5.09% 4.18% 4.24% 2.85% 30-Year Treasury 5.46% 5.44% 5.76% 5.42%
INVESTMENT SUMMARIES BY MATURITY & SECTOR March 2001 September 2001
FLORIDA HURRICANE CATASTROPHE FUND MATURITY SPECTRUM (in US Dollars) Time to Maturity March-01 June-01 September-01 1-90 Days 2,491,249,000 2,608,800,000 2,764,147,000 91-180 Days 278,000,000 211,575,000 230,000,000 181-270 Days 54,000,000 110,000,000 100,000,000 271-365 Days 160,000,000 150,000,000 42,800,000 1-1.5 Years 192,800,000 278,300,000 445,500,000 1.5-2.5 Years 465,500,000 300,000,000 332,000,000 2.5-3 Years 110,000,000 135,000,000 69,080,000 TOTAL 3,751,549,000 3,793,675,000 3,983,527,000
FLORIDA HURRICANE CATASTROPHE FUND INVESTMENT SUMMARY March - 2001 Investment Sectors Par Invested % of Total Average Days to Maturity Basic Industries $5,000,000 0.13% 326 Banks $10,500,000 0.28% 611 Corporates - Finance $164,800,000 4.39% 689 Other Finance Issues $35,000,000 0.93% 1,036 U. S. Agency Discount Notes $225,000,000 6.00% 89 Commercial Paper $2,381,349,000 63.47% 43 CD - Interest Bearing $105,000,000 2.80% 41 Variable Rate Notes $825,000,000 21.99% 65 TOTAL $3,751,649,000 100.00% 90
FLORIDA HURRICANE CATASTROPHE FUND INVESTMENT SUMMARY June - 2001 Investment Sectors Par Invested % of Total Average Days to Maturity Basic Industries $5,000,000 0.13% 235 Banks $10,500,000 0.28% 520 Corporates - Finance $204,800,000 5.40% 619 Other Finance Issues $35,000,000 0.92% 945 U. S. Agency Discount Notes $489,505,000 12.90% 35 Commercial Paper $1,820,370,000 47.98% 55 Bankers Acceptances $18,500,000 0.49% 6 CD - Interest Bearing $360,000,000 9.49% 52 Variable Rate Notes $850,000,000 22.41% 37 TOTAL $3,793,675,000 100.00% 88
FLORIDA HURRICANE CATASTROPHE FUND INVESTMENT SUMMARY September - 2001 Investment Sectors Par Invested % of Total Average Days to Maturity Capital Goods & Technology $25,000,000 0.63% 1,007 Basic Industries $55,000,000 1.39% 643 Banks $10,500,000 0.27% 429 Corporates - Finance $217,880,000 5.50% 629 Other Finance Issues $25,000,000 0.63% 844 U. S. Agency Discount Notes $615,849,000 15.56% 55 Commercial Paper $1,934,298,000 48.86% 32 CD - Interest Bearing $230,000,000 5.81% 26 Variable Rate Notes $870,000,000 21.98% 38 TOTAL $3,958,527,000 100.00% 90
MONTHLY RETURN COMPARISONS March 2001 September 2001
FL HURRICANE CATASTROPHE FUND AND LOCAL GOV'T INVESTMENT POOL MONTHLY YIELD COMPARISON DECEMBER 2000 - SEPTEMBER 2001 7.00% 6.50% 30-Day Average Yield 6.00% 5.50% 5.00% 4.50% 4.00% 3.50% 3.00% Dec-00 Jan-01 Feb-01 Mar-01 Apr-01 May-01 Jun-01 Jul-01 Aug-01 Sep-01 FHCF POOL Mar-01 Apr-01 May-01 Jun-01 Jul-01 Aug-01 Sep-01 FHCF 5.45% 5.15% 4.77% 4.49% 4.17% 4.02% 3.76% POOL 5.05% 4.69% 4.22% 3.82% 3.58% 3.39% 3.48%
FL HURRICANE CATASTROPHE FUND AND FIRST TIER INSTITUTIONAL MMF MONTHLY YIELD COMPARISON DECEMBER 2000 - SEPTEMBER 2001 7.00% 6.50% 30-Day Average Yield 6.00% 5.50% 5.00% 4.50% 4.00% 3.50% 3.00% Dec-00 Jan-01 Feb-01 Mar-01 Apr-01 May-01 Jun-01 Jul-01 Aug-01 Sep-01 FHCF BENCHMARK Mar-01 Apr-01 May-01 Jun-01 Jul-01 Aug-01 Sep-01 FHCF 5.45% 5.15% 4.77% 4.49% 4.17% 4.02% 3.76% BENCHMARK* 5.05% 4.69% 4.22% 3.82% 3.58% 3.39% 3.10% * Performance is expected to be competitive with the 30-day average yield on First Tier Institutional Money Market Funds published in the weekly Money Fund Report.
SUMMARY & FORECAST The Federal Open Market Committee has cut the funds rate 400 basis points this year. They have two remaining scheduled meetings on November 6 and December 11. Unemployment is at its highest levels in nine years. The Dow Jones Industrial Average has decreased almost 22% through the end of the quarter. Treasury spreads between the 3-month bill @ 2.37% and the 2-year note @ 2.85% vs. the 30-year bond @ 5.42% ended the quarter at 257 and 305 basis points, respectively. Prior to the September 11 attack the Fed had indicated their rate cuts were beginning to take effect (due to the 6-9 month lag). Since the attack they have been forced to re-consider their future moves. Homeland defense is the wild card in our economic recovery. The majority of economists are certain of an additional rate cut of 25 basis points. Additionally, most money managers expect the funds rate to be 2.00% by the end of the 1 st Quarter 2002.
Fed Funds 30-Day Futures Contract 4.50% 4.25% 4.00% 3.75% 3.50% 3.25% 3.00% 2.75% 2.50% 2.25% 2.00% Sept Oct Nov Dec Jan Feb Mar Apr 06/29/2001 09/28/2001 Sep-01 Oct-01 Nov-01 Dec-01 Jan-02 Feb-02 Mar-02 Apr-02 June 29 3.67% 3.65% 3.65% 3.79% 3.84% 4.03% 4.13% 4.24% Sept 28 3.07% 2.57% 2.42% 2.33% 2.29% 2.26% 2.29% 2.31% * - The Fed Funds futures contract is cash settled to the simple average overnight Fed Funds Rate (the effective rate) for the delivery month.