slide1
Download
Skip this Video
Download Presentation
John Hallacy +1 646 743 1446 Municipal Research Strategist MLPF&S [email protected]

Loading in 2 Seconds...

play fullscreen
1 / 81

John Hallacy +1 646 743 1446 Municipal Research Strategist MLPF&S [email protected] - PowerPoint PPT Presentation


  • 68 Views
  • Uploaded on

6 October 2011. Municipal Research. John Hallacy +1 646 743 1446 Municipal Research Strategist MLPF&S [email protected] Meaningful Municipal Metrics. Product ID. Current Outlook. Current outlook for the muni market.

loader
I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
capcha
Download Presentation

PowerPoint Slideshow about 'John Hallacy +1 646 743 1446 Municipal Research Strategist MLPF&S [email protected]' - zamir


An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript
slide1
6 October 2011

Municipal Research

John Hallacy +1 646 743 1446

Municipal Research Strategist

MLPF&S

[email protected]

Meaningful Municipal Metrics

Product ID

current outlook for the muni market
Current OutlookCurrent outlook for the muni market
  • State and local governments are expected to be under financial pressure for some time, most likely continuing throughout Fiscal Year 2012 and beyond
  • NCSL budget gap estimate is lower than last year at $32bn with only 20 state responses
  • Is the incidence of municipal default and bankruptcy on the rise?
    • 2010: $4.25bn defaults, 0.15% annual default rate, YTD 22 September 2011: $1.13bn defaults, 0.04% default rate
  • Light supply ($187bn to-date, down 36% YoY) and weak economic recovery in 2011 driving performance: Muni YTD total return, 7.934%, as of October 6
  • Estimated supply 2011: $245bn
  • Yield curve remains steep: BofAML Economics Team expects the Fed to remain on hold until 1Q2014
current outlook for the muni market2
Current OutlookCurrent outlook for the muni market
  • US downgrade to AA+ with a Negative Outlook by S&P and its implications for munis
    • Fitch affirmed the US rating at AAA with a Stable Outlook, Moody’s maintains AAA with Negative Outlook
    • Next review post 11/23
  • Eurozone – Portugal, Italy, Ireland, Greece, Spain?
  • FED Twist: sell $400bn near term maturities and purchase $450bn long term maturities
  • Tax Policy Outlook
    • Future of Bush tax cuts for incomes $250k and over
    • Preserve tax exemption up to 28% bracket
    • Additional reductions of tax exemption if debt targets not hit
  • Elimination of tax exemption for municipals – viewed as an expenditure ~$40bn per year
current outlook for the muni market3
Annual Deficits as a Percent of GDPCurrent outlook for the muni market

Source: Executive Office of the President, Office of Management and Budget (OMB)

*BCA: Budget Control Act of 2011

current outlook for the muni market4
Debt Held by the Public as a Percent of GDPCurrent outlook for the muni market

Source: Executive Office of the President, Office of Management and Budget (OMB)

*BCA: Budget Control Act of 2011

slide7
21 of the Top 50 world economies are U.S. municipalities*

Current outlook for the muni market

*GDP Current Price ($bn) as of 2010; 2010 figures are estimates except for state data and figure for US

Source: IMF; U.S. Bureau of Labor Statistics

sovereign ratings
Sovereign ratings and how the rating agencies’ ratings of the US compareSovereign ratings

*RUR – “Ratings Under Review” for possible downgrade

Source: Moody’s; Standard & Poor’s; and Fitch

debt ceiling
Agreement to increase the debt ceiling Debt Ceiling
  • Prior $14.3tn debt limit was raised through the end of 2012.
    • House passed measure on August 1st (269-161), Senate passed measure on August 2nd (74-26)
  • Details behind the agreement: increase in debt ceiling AND deficit reduction plan
    • Additional increase of $400bn; limit will be raised further in 2 additional steps for a cumulative increase of between $2.1tn and $2.4tn over the ten years through 2021
    • Cuts of $917bn in cuts agreed to initially. (First round of cuts has spared entitlement spending).
    • Followed by an additional $1.5tn in cuts which will be identified by a bicameral Congressional “super” committee by November 2011 (to be enacted by year-end)
      • If Congress does not enact the committee’s recommendations, cuts of $1.2tn will be implemented over the same time period and would mainly affect outlays for civilian discretionary spending, defense, and Medicare
debt ceiling1
Agreement to increase the debt ceiling Debt Ceiling
  • Moody’s maintained ratings at Aaa and has a negative outlook; has kept 21 Public Housing Authority bonds on negative pending further review
  • Fitch maintained ratings at AAA with a stable outlook
  • S&P downgraded its rating to AA+ with a negative outlook based upon “political risks and rising debt burden”. Related actions include:
    • Ratings on Fannie Mae and Freddie Mac and issuer credit ratings and related issue ratings on the Farm Credit System and 10 of 12 FHLBs lowered to AA+ from AAA. Lowered ratings on issues that have guarantees by Ginnie Mae in the form of MBS to AA+ from AAA
    • Ratings on municipal housing issues guaranteed by Fannie Mae and Freddie Mac lowered to AA+
    • Lowered ratings on certain public finance housing authority issuer credit ratings and municipal housing issues backed by the government to AA+
    • Several Defeased industrial bonds’ ratings were lowered to AA+ on sovereign ceiling consideration
    • Ratings on Energy Northwest, WA & Bonneville Power Administration, OR lowered to AA/Stable; ratings on TVA lowered to AA+/Negative
    • States & Locals to be reviewed later this year
    • No strict sovereign ceiling consideration but subject to one notch rule by S&P
current outlook for the muni market10
Budget cuts made after the state budget passed, FY1990 – FY2011 ($mn)Current outlook for the muni market

Source: National Association of State Budget Officers

current outlook for the muni market11
Total State Expenditures by FunctionCurrent outlook for the muni market

Source: National Association of State Budget Officers

current outlook for the muni market12
State debt and pensions burden as a percentage of state GDPCurrent outlook for the muni market

Source: Moody’s Investor Service (Debt as of FY2010); Pew Center for the States (UAAL as of FY2009); Bureau of Economic Analysis (State GDP for 2010)

current outlook for the muni market13
State pension funding levels

Washington

99%

Montana

Vermont

Michigan

74%

Oregon

North Dakota

73%

79%

Maine

86%

81%

Minnesota

73%

Idaho

77%

74%

New Hampshire

South Dakota

(58%)

Wisconsin

Wyoming

92%

Massachusetts

New York

100%

89%

(68%)

101%

Nevada

Rhode Island (59%)

72%

Nebraska

Iowa

Pennsylvania

Connecticut (62%)

88%

81%

Utah

81%

Ohio

New Jersey (66%)

California

Illinois

Colorado

86%

Indiana

66%

81%

51%

69%

67%

West

Delaware (94%)

Kansas

Virginia

Virginia

Missouri

64%

Maryland (65%)

56%

Kentucky

80%

79%

58%

Arizona

North Carolina

Tennessee

Oklahoma

78%

97%

New Mexico

90%

57%

Arkansas

76%

South

78%

Carolina

Legend

Mississippi

69%

67%

Alabama

Georgia

Texas

Greater than 90% funded

74%

87%

84%

Louisiana

80-90% funded

60%

70-80% funded

Florida

84%

Alaska

Less than 70% funded

61%

Hawaii

69%

Current outlook for the muni market

Source: The Pew Center for the States

Based on 2009 valuations

current outlook for the muni market14
Pension PoliciesCurrent outlook for the muni market
  • Types of reforms include: 1) reducing benefits, 2) sharing risk with employees, 3)requiring greater employee contributions, 4)improving Investment Management and Governance.
  • The ARC and the Investment Return assumptions are driven by budgetary as well as actuarial considerations.
  • Can past benefits be modified? Yes, if the consideration is COLA’s, according to the Courts
    • Cases in Minnesota, South Dakota and Colorado
current outlook for the muni market16
Washington

Montana

Oregon

Michigan

Vermont

North Dakota

Minnesota

Maine

States that authorize Chapter 9 filings

Idaho

New Hampshire

Wisconsin

Wyoming

South Dakota

Massachusetts

New York

Nevada

Rhode Island

Nebraska

Iowa

Connecticut

Utah

Pennsylvania

New Jersey

Ohio

Indiana

Colorado

Illinois

Delaware

California

WestVirginia

Kansas

Missouri

Maryland

Virginia

Kentucky

Arizona

North Carolina

Oklahoma

Tennessee

New Mexico

Arkansas

SouthCarolina

L

e

g

e

n

d

Alabama

Georgia

Texas

Mississippi

Specific Authorization

Louisiana

Conditional Authorization

Florida

Limited Authorization

Alaska

Prohibit Filing

Unclear or no specific authorization

Hawaii

Current outlook for the muni market

Source: James Spiotto, Chapman and Cutler LLP

current outlook for the muni market17
In 2011 YTD there have been five bankruptcy filings. Most recently, Central Falls, RI filed. There were six filings in 2010. California and Texas have had highest number of filings, and most filings involve non conventional issuers. Current outlook for the muni market

Chapter 9 filings by year

Chapter 9 filings by state since 2000

Chapter 9 filings by type since 2000

Source: Chapman and Cutler LLC, PACER

current outlook for the muni market18
Annual municipal bond defaults since 2000 (par value in default)Current outlook for the muni market

Source: BofA Merrill Lynch Global Research; *YTD 2011 as of 22 September; *Default rate for 2011 represents annualized rate

current outlook for the muni market20
Comparing long-term ratesCurrent outlook for the muni market

Source: BofA Merrill Lynch Global Research; Thomson Reuters MMD

current outlook for the muni market25
Muni ratios to TreasurysCurrent outlook for the muni market

Source: BofA Merrill Lynch Global Research; Thomson Reuters MMD

current outlook for the muni market27
Breakdown of munis by sectorCurrent outlook for the muni market

Source: BofA Merrill Lynch Global Research, as of 30 June 2011

growth big drop slow recovery
Growth: Big drop; slow recovery

Real GDP

(index level)

Average

1991

Current

2001

Quarters

Indexed to 100 at the recession trough. Average includes all recessions after 1950 excluding the 1980 and current recessions.

Dotted line represents BofA Merrill Lynch forecast.

Source: Bureau of Economic Analysis, BofA Merrill Lynch Global Research

rehab shaky handoff
Rehab: Shaky handoff

(month-over-month % change)

Private Wages and Salaries

Private Employees

Note: Open bar represents BofA Merrill Lynch forecast for April private wages and salary growth.

Source: Bureau of Labor Statistics, Bureau of Economic Analysis, BofA Merrill Lynch Global Research

jobs slow healing
Jobs: Slow healing

Private payrolls(index level)

Average

1991

2001

Current

(Quarters since business cycle peak)

Indexed to 100 at the previous business cycle peak. Average includes all recessions after 1950 excluding the 1980 and current recessions.Source: Bureau of Labor Statistics, Bureau of Economic Analysis, BofA Merrill Lynch Global Research

capital spending more machines
Capital spending: More machines

Duke/CFO Business Outlook SurveyExpected growth in next 12 months

Source: Consumer Expenditure Survey, BofA Merrill Lynch Global Research

consumer restoring your net worth
Consumer: Restoring your net worth

(percent of income)

(percent of income)

Net worth (LHS)

Debt (RHS)

*Income is disposable income

Source: Federal Reserve Board, BofA Merrill Lynch Global Research

rehab saving households
Rehab: Saving households

Savings rate

(percent)

Forecast

Historic Range

Note: Dashed line is BofA Merrill Lynch forecast

Source: Bureau of Economic Analysis, BofA Merrill Lynch Global Research

rehab surplus shadow supply
Rehab: Surplus shadow supply

(current and future inventory, millions of homes)

Will take 17 months to clear at the current sales pace

Current stock of homes on the market for sale

Foreclosure ex-REO

90+ days delinquent

Source: National Association of Realtors, Mortgage Bankers Association, BofA Merrill Lynch Global Research

rehab dented housing demand
Rehab: Dented housing demand

Household formation

(thousands of households)

Homeownership rate

(% of occupied homes)

Baseline forecast

Lower bound assuming all negative equity homeowners become renters

Source: Census Bureau, BofA Merrill Lynch Global Research. Haughwout, Andrew, Richard Peach, Joseph Tracy. “The Homeownership Gap”, Federal Reserve Bank of New York Current Issues in Economics and Finance, Volume 16, Number 5, May 2010.

rehab more state pain
Rehab: More state pain

State budget shortfall

(FY, Billions $)

  • Gimmicks exhausted
  • Federal aid declining
  • Some revenue rebound

Source: Center on Budget and Policy Priorities, BofA Merrill Lynch Global Research

greece ii back for help
Greece II: Back for help

Credit default swaps

(basis points)

Greece

Ireland

Germany

Source: Bloomberg, BofA Merrill Lynch Global Research

fiscal deficit divergence
Fiscal: Deficit divergence

Revenue and outlay shares of GDP

(percent)

Outlays

Revenues

Source: Congressional Budget Office, BofA Merrill Lynch Global Research

debt deal discretionary cuts
Debt deal: Discretionary cuts

Spending cuts

(% of GDP)

Source: CBO, BofA Merrill Lynch Global Research

debt deal unbalanced budget cuts
Debt deal: Unbalanced budget cuts

Government spending

(% of GDP)

Forecast

Mandatory

Discretionary

Discretionary with cuts

Source: CBO, BofA Merrill Lynch Global Research

inflation fed fillup
Inflation: Fed fillup

(billions $)

Federal Reserve Assets

Federal Reserve Liabilities

Other assets

All other

Emergency lending

Treasury deposits

Other*

Liquidity facilities

Agency & MBSsecurities

Reverse repo

Bank reserves

TAF

Repo

Bank notes in circulation

Unencumbered Treasuries

Treasury securities

Source: Federal Reserve Board, BofA Merrill Lynch Global Research

inflation low commodity pass through
Inflation: Low commodity pass through

(YoY % change)

PPI: Crude materials for further processing

CPI: Commodities less food & energy

Source: Bureau of Labor Statistics, BofA Merrill Lynch Global Research

inflation slacking off
Inflation: Slacking off

(percent)

Unemployment rate

Average Hourly Earnings (YoY % change)

Shaded regions represent periods of US recessionSource: Bureau of Labor Statistics, BofA Merrill Lynch Global Research

inflation it takes two to tango
Inflation: It takes two to tango

(YoY % change)

Median expected price inflation

Median expected wage inflation

Source: University of Michigan, Federal Reserve Bank of NY, BofA Merrill Lynch Global Research

fed a long way to the exit
Fed: A long way to the exit

Unemployment rate (percent)

First hike (Q3 2014)

QE2 ends (June 2010)

Final rate cut(Sept 1992)

Final rate cut(June 2003)

First rate hike(Feb 1994)

First rate hike(June 2004)

Unemployment rate

NAIRU*

*NAIRU is the CBO estimate of the inflation-neutral unemployment rate; Shaded regions represent periods of US recession Source: Bureau of Labor Statistics, Federal Reserve Board, Haver Analytics, BofA Merrill Lynch Global Research

us outlook table
US outlook table

Source: Bureau of Economic Analysis, BofA Merrill Lynch Global Research

global growth slows down
Global growth slows down

Source: BofA Merrill Lynch Global Research

global assumptions
Global Assumptions

Source: BofA Merrill Lynch Global Research

a slow fragile recovery
A slow fragile recovery
  • If all goes well: 3% GDP growth
  • Four shocks: oil, Japan, Europe and Washington
  • The uncertainty shock of 2012
  • Inflation fading; QE3 coming

Source: Consensus from Bloomberg, BofA Merrill Lynch Global Research

rehab big fall slow recovery
Rehab: Big fall; slow recovery

Real GDP

(index level)

Average

Current

1991

2000

Indexed to 100 at the recession trough. Average includes all recessions after 1950 excluding the 1980 and current recessions.

Dotted line represents BofA Merrill Lynch forecast.

Source: Bureau of Economic Analysis, BofA Merrill Lynch Global Research

rehab progress report
Rehab: Progress report
  • Good:
    • Corporations fully healed
    • Trading partners fully recovered
  • Bad:
    • Banks still healing
    • Households still rebuilding wealth
  • Ugly:
    • Housing recession continues
    • Two more years of state and local austerity

Source: BofA Merrill Lynch Global Research

exports strong partners
Exports: Strong partners

real GDP

(YoY % change)

Note: Export share is a percentage of total US exports.

Source: Census Bureau, Haver Analytics, BofA Merrill Lynch Global Research

banks rebalancing
Banks: Rebalancing

Source: BofA Merrill Lynch Global Research

consumer income squeeze
Consumer: Income squeeze

Disposable income and inflation

(MoM% change)

Wage and inflation expectations

(YoY % change)

Nominal disposable income

Consumption deflator

Median expected price inflation

Median expected wage inflation

Source: University of Michigan, Federal Reserve Bank of NY, BofA Merrill Lynch Global Research

consumer restoring your net worth1
Consumer: Restoring your net worth

(percent of income)

(percent of income)

Net worth (LHS)

Debt (RHS)

*Income is disposable income

Source: Federal Reserve Board, BofA Merrill Lynch Global Research

consumer saving households
Consumer: Saving households

Savings rate

(percent)

Forecast

Historic Range

Note: Green line is BofA Merrill Lynch forecast

Source: Bureau of Economic Analysis, BofA Merrill Lynch Global Research

housing shadow inventory
Housing: Shadow inventory

(current and future inventory, millions of homes)

Will take 18 months to clear at the current sales pace

Current stock of homes on the market for sale

Foreclosure ex-REO

90+ days delinquent

Source: National Association of Realtors, Mortgage Bankers Association, BofA Merrill Lynch Global Research

housing slow bleed
Housing: Slow bleed

New home sales

(thous., LHS)

Current level

FHFA housing price index

(index level, RHS)

Source: WSJ, BLS, BofA Merrill Lynch Global Research

rebound triple dip
Rebound: Triple dip

Real GDP

(QoQ SAAR)

Forecast

Consensus

BofAML

Note: Consensus are from Blue Chip Economic Indicators survey released on September 10, 2011

Source: BEA, BofA Merrill Lynch Global Research

rebound fading energy tax
Rebound: Fading energy tax

Crude oil ($/bbl)

Headline inflation minus core inflation (percent)

Forecast

Brent

WTI

Note: WTI refers to West Texas Intermediate

Source: WSJ, BofA Merrill Lynch Global Research

rebound motoring ahead
Rebound: Motoring ahead

Japan comes backs

(index level)

Auto rebound

Japanese industrial production

IP: Motor vehicles and parts (LHS, index lvl)

Japanese auto production

Vehicle Sales (RHS, mil units, SAAR)

Note: Japan IP forecasts are from the Survey of Production Forecast.

Source: Haver Analytics, Federal Reserve Board, Autodata, BofA Merrill Lynch Global Research

recession risk never enough
Recession risk: Never enough

Credit default swaps

(basis points)

Source: Bloomberg, BofA Merrill Lynch Global Research

debt debacle the plan
Debt debacle: The plan
  • Two tranches: $0.9 + $1.2 trillion
  • Almost all discretionary
  • Carries through election

Source: BofA Merrill Lynch Global Research

debt debacle discretionary cuts
Debt debacle: Discretionary cuts

Discretionary spending

($ billion)

Spending cuts

(% of GDP)

Baseline

Tranche 1

Tranche 2

Source: CBO, BofA Merrill Lynch Global Research

recession risks stall speed
Recession risks: Stall speed?

GDP growth

(YoY % change)

Source: BEA, BofA Merrill Lynch Global Research

recession risk lean and mean
Recession risk: Lean and mean

A feeble jobs recovery

Private payrolls (indexed to 100 at peak)

Capital stock

(YoY % change)

Source: BLS, BEA, BofA Merrill Lynch Global Research

inflation starting to turn
Inflation: Starting to turn

Core CPI(year-over-year percent change)

Forecast

Shaded regions represent periods of US recessionSource: Bureau of Labor Statistics, BofA Merrill Lynch Global Research

inflation slacking off1
Inflation: Slacking off

(percent)

Unemployment rate

Average Hourly Earnings (YoY % change)

Shaded regions represent periods of US recessionSource: Bureau of Labor Statistics, BofA Merrill Lynch Global Research

inflation it takes two to tango1
Inflation: It takes two to tango

(YoY % change)

Median expected price inflation

Median expected wage inflation

Source: University of Michigan, Federal Reserve Bank of NY, BofA Merrill Lynch Global Research

fed us and them
Fed: Us and them

(Q4/Q4 %)

FOMC forecasts from their June meeting

Source: FOMC, BofA Merrill Lynch Global Research

growth the answer is blowing in the wind
Growth: The answer is blowing in the wind

Regional headwinds

Euro Area

Japan

United States

  • Deflation
  • Loss of animal spirits
  • Declining population
  • Very weak banks
  • Peripheral problems
  • Fiscal tightening
  • Crippled real estate
  • Weak banks
  • State & local govt.

Source: BofA Merrill Lynch Global Research

global imbalances
Global: Imbalances

Current account balance

(% of GDP, 2010)

General government net borrowing (% of GDP, 2010)

Source: IMF, BofA Merrill Lynch Global Research

growth official gaps
Growth: Official gaps

2010 Output gap

(percent)

Source: OECD, IMF, BofA Merrill Lynch Global Research

ad