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Markets Gone Wild : Surviving Sub Prime, Black Swans and Market Turmoil John Cassady, CFA Senior Portfolio Manager Fifth

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

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

  2. Homes Now Equal to 2000 Stock Levels Source: Bianco Research

  3. Sub Prime Contagion Crisis I 2/27/07 BBB Current Loss Outlook (62.5%) BBB Historical Worst Case 1999 = (5.25%) Source: Bianco Research

  4. Contagion – Part 1 Source: Bianco Research Updated 8/31/07

  5. $ $ $ $ $ $ $ $ $ $ $ $ $ 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

  6. Money Market Meltdown - Liquidity Seizure Source: Bianco Research

  7. 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

  8. Will Housing Prices Collapse? Source: ISI Group

  9. Consumer Spending – How Much of a Decline? ?

  10. 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

  11. Above Average Global Growth Source: World Bank/IMF

  12. Unemployment Rate & Real GDP 3.1% Source: FTAM (Q2, Advance)

  13. Fed Focus – Core Inflation Measures Source: Bianco Research

  14. Percent Change in Real GDP by State 2005-2006 Source: U.S. Bureau of Economic Analysis

  15. 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

  16. Detroit Drops; Asia Gains U.S. Market Share of Major Automakers: GM FORD TOYOTA CHRYSLER HONDA NISSAN Source: Autodata, Updated 7/31//07

  17. MEW Declines – Bad News for Detroit (000) millions U.S. Mtg. Equity Withdrawal House Price Index Source: ISI Group

  18. Post-Employment Healthcare Costs $ billion $ billion Book Value/Share -9.62 Book Value/Share -2.58 Source: Bank of America, Bloomberg, 10-Ks

  19. 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…

  20. Common Stock Total Returns Source: FTAM

  21. Global ETF Returns US$ Source: Bloomberg Updated 8/31/07

  22. What stock traders are watching: Earnings Source: FirstCall

  23. Stock market valuation is still about average… Internet euphoria… High inflation... Source = FactSet

  24. More Profitable being Naughty not Nice Source: Bianco Research

  25. Fixed Income Total Returns Source: FTAM

  26. Fundamentally - Stocks Still Attractive Versus Bonds… 10-year Treasury Yield vs. SPX Earnings Yield Bonds Attractive Stocks Attractive Source = FactSet

  27. 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

  28. Investment Management Tactical Outcomes Value add: +4.16% +0.14% +1.76% +1.17% +0.61% Source = FactSet

  29. 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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