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Markets Gone Wild : Surviving Sub Prime, Black Swans and Market Turmoil John Cassady, CFA Senior Portfolio Manager Fifth Third Asset Management, Inc. (FTAM) PowerPoint PPT Presentation


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Markets Gone Wild : Surviving Sub Prime, Black Swans and Market Turmoil John Cassady, CFA Senior Portfolio Manager Fifth Third Asset Management, Inc. (FTAM). Homes Now Equal to 2000 Stock Levels. Source: Bianco Research. Sub Prime Contagion. Crisis I 2/27/07. BBB Current Loss Outlook

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Markets Gone Wild : Surviving Sub Prime, Black Swans and Market Turmoil John Cassady, CFA Senior Portfolio Manager Fifth Third Asset Management, Inc. (FTAM)

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Markets Gone Wild :

Surviving Sub Prime, Black Swans and Market Turmoil

John Cassady, CFA

Senior Portfolio Manager

Fifth Third Asset Management, Inc. (FTAM)


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Homes Now Equal to 2000 Stock Levels

Source: Bianco Research


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Sub Prime Contagion

Crisis I

2/27/07

BBB

Current Loss Outlook

(62.5%)

BBB

Historical Worst Case

1999 = (5.25%)

Source: Bianco Research


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Contagion – Part 1

Source: Bianco Research Updated 8/31/07


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$

$

$

$

$

$

$

$

$

$

$

$

$

Honey, I NUKED the Hedge Fund

There are 10,000 Hedge Funds today.

1)

2)

c

c

Hedgie raises $1,000,000.

Wall Street Bankers lend Hedgie $5,000,000 more, @ 6% interest.

3)

4)

Hedgie invests $6,000,000 @ 8% interest.

Uh oh, here comes the black swan…

$6,000,000

x 8%

$480,000

(300,000)

$180,000

$1,000,000

$6,000,000

x (.20)

($1,200,000)

$1,000,000

Return

Bond prices decline 20% 100 80.

Gross Return

Busted, margin call’s incinerate principal.

Interest Expense (Wall Street loves Hedgie)

18% return, Collect big fees

X X X X X X


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Money Market Meltdown - Liquidity Seizure

Source: Bianco Research


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Real Estate Story – Looking for a Bottom…

Home Sales Price

Housing Affordability

-0.6%

Monthly Supply

Existing Home Sales

Source: FTAM Updated 7/31/07 Year-Over-Year


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Will Housing Prices Collapse?

Source: ISI Group


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Consumer Spending – How Much of a Decline?

?


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What will the Fed do?

Rate cuts normally Good for stocks.

1) S&P 500 up 31.6% in 1985.

2) S&P 500 up 31.3% in 1989.

3) S&P 500 up 37.4% in 1995.

4) S&P 500 down 11.8% in 2001.

Source = FactSet/Ned Davis Research


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Above Average Global Growth

Source: World Bank/IMF


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Unemployment Rate & Real GDP

3.1%

Source: FTAM (Q2, Advance)


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Fed Focus – Core Inflation Measures

Source: Bianco Research


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Percent Change in Real GDP by State 2005-2006

Source: U.S. Bureau of Economic Analysis


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Motor Vehicle & Parts Manufacturing Employment1999 – 2007 April

1,128,400

U.S.: -281,500 or –25%

846,900

Michigan: -127,300 or –40%

316,300

189,000

April

Source: BLS


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Detroit Drops; Asia Gains

U.S. Market Share of Major Automakers:

GM

FORD

TOYOTA

CHRYSLER

HONDA

NISSAN

Source: Autodata, Updated 7/31//07


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MEW Declines – Bad News for Detroit

(000)

millions

U.S. Mtg. Equity Withdrawal

House Price Index

Source: ISI Group


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Post-Employment Healthcare Costs

$ billion

$ billion

Book Value/Share

-9.62

Book Value/Share

-2.58

Source: Bank of America, Bloomberg, 10-Ks


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2007 – A Turning Point for the Big 3

  • Master Contract Negotiations – September 2007

    • Wage Rates – Need to come down

    • Productivity Enhancement – More flexible work rules

    • Healthcare Costs

      • Legacy and existing workers

      • Need to erase a $1,500 per vehicle cost disadvantage

      • Can a VEBA cure the healthcare crisis for the Big 3?

  • Chrysler – What can Cerberus do that Daimler couldn’t?

  • A seminal moment for the UAW and the domestic auto industry…


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Common Stock Total Returns

Source: FTAM


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Global ETF Returns

US$

Source: Bloomberg Updated 8/31/07


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What stock traders are watching: Earnings

Source: FirstCall


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Stock market valuation is still about average…

Internet euphoria…

High inflation...

Source = FactSet


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More Profitable being Naughty not Nice

Source: Bianco Research


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Fixed Income Total Returns

Source: FTAM


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Fundamentally - Stocks Still Attractive Versus Bonds…

10-year Treasury Yield vs. SPX Earnings Yield

Bonds Attractive

Stocks Attractive

Source = FactSet


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Treasury Yields vs. After Tax Muni Yields

Long Munis are Cheap

AAA Muni

35% Tax Bracket

AAA Muni

25% Tax Bracket

U.S. Treasury

Source: Bloomberg, Municipal Market Data Updated August 31, 2007


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Investment Management Tactical Outcomes

Value add: +4.16% +0.14% +1.76% +1.17% +0.61%

Source = FactSet


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Items of Consideration for Investors

  • The national economy will weather the sub-prime storm, but it will be a drag on growthfor the next year. There is no reason to expect a quick turn around, so growth will be sub –3.0% into 2008.

  • The struggles of Ford and GM will overshadow the Midwest economy for at least the next 2 years. Economic fundamentals are much stronger today than they were in the past which will mitigate the economic impact on the Midwest economy, though we will still lag the national economy.

  • Remember the importance of diversification and re-balancingin your portfolios for long-term performance.

  • Volatility is to be expected in financial markets, what matters is earnings growth still supports stock valuations, keeping P/E multiples reasonable.

    • At current levels S&P 500 is selling for 15.7x the 2007 estimates and 14.8x the 2008 earnings estimates. 25 year average is 20.4x, 50 year average is 17.5x, and 81 year average is 15.9x.

    • This is not an expensive market.

  • International stocks represent near and long-term opportunity.

  • Current 2007 domestic biases include . . .

    • Stocks over bonds.

    • Large Cap stocks over Small Cap.

    • Higher quality over Lower quality (stocks & bonds).


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