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HomeMy WebLinkAbout2009 02 09 Awards and Presentations 301 Provided by Steven AlexanderDate: February 9, 2009 The attached document was provided to the City Commission during Awards and Presentations "3 O 1 " by Mr. Steven Alexander at the February 9, 2009 City Commission Regular Meeting. Current Market Update and Summary of Investment Policy February 9, 2009 PFM Asset Management LLC ,,, 300 South Orange Avenue, Suite 1170 Orlando, FL 32801 '°"`° (P) 800-695-4PFM ~~ www. pfm. com ~ 2008 PFM Asset Management LLC I. Current Market Conditions II. Current Market Investment Rates III. Summary of Changes to Investment Policy i © 2008 PFM Asset Management LLC The yield on 2-year Treasury notes is trading near record lows. Continued investor flight-to-quality and fears of a prolonged recession have contributed to falling yields. 2-YearU.S. TreasuryYields Janury 1, 1999 -February 2, 2009 7.5% 6.0% • The yield on 2-year Treasury notes has fallen more than 2 percentage points over the past year due to increasing investor demand for safe, liquid investments. 2-Year U.S. Treasury Yields Janury 1, 2008 -February 2, 2009 4% 0.91 % on 2/2/2009 3% 2% 1% 0% ~ Jan 08 Apr 08 Jul 08 Oct 08 Jan 09 Source: Bloomberg O ~~: ..- • Yields have fallen for all maturities, with yields on shorter maturities now at or near zero. U.S. Treasury Yield Curve June 30, 2008 vs. February 2, 2009 4.50% 3.00% a~ 1.50% -June 30, 2008 tFebruary2, 2009 0.00% -~-L 3 6 m m 1 2 5 10 30 yr yr yr yr yr Maturity Source: Bloomberg 3 month 6/30/2008 1.74% 2/2/2009 0.25% 6 month 2.16% 0.36% 1 year 2.33% 0.49% 2 year 2.62% 0.91 5 year 3.33% 1.81 10 year 3.97% 2.78% 30 year 4.52% 3.52% • Under the Temporary Liquidity Guarantee Program (TLGP), announced on October 14, the Federal Deposit Insurance Corporation (FDIC) will guarantee new senior unsecured bank debt issued through June 30, 2009 for maturities up to three years to help banks refinance maturing debt. • According to the prospectuses of the guaranteed debt issues: - "This debt is guaranteed under the Federal Deposit Insurance Corporation's Temporary Liquidity Guarantee Program (TLGP) and is backed by the full faith and credit of the United States." - "The expiration date of the FDIC's guarantee is the earlier of the maturity date of the debt or June 30, 2012." • As of December 18, more than $107 billion of FDIC-guaranteed debt had been issued. • Deals are pending for debt to be issued by many of the larger regional banks. • Moody's, Fitch and S&P will rate debt issued under the FDIC's TLGP "AAA." • TLGP debt that has already come to market has carried significant yields advantage over Treasuries and Agencies at issue, and has performed strongly in the secondary market. O i~• ..- a • The TED Spread, the difference in yield between 3-month LIBOR and the 3-month Treasury bill yield, is an indicator of banks' willingness to lend to one another. • Since early October, the TED spread has declined significantly, indicating that actions taken by the Federal Government, including the Federal Reserve's Commercial Paper Funding Facility, are helping to increase liquidity in the market. Ted Spread June 1, 2008 -February 2, 2009 6.0% 4.5% 0.97% on 2/2/2009 3.0% 1.5% i !• ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ • The spread between 2-year U.S. Treasury and Federal Agency notes has narrowed dramatically since reaching an all-time wide of 2.06% in November 2008. Spread between 2-year U.S. Treasury and 2-year Federal Agency Securities January 1, 2004 to February2, 2009 2.50% 2.00% 1.50% 1.00% 0.50% 0.72% as of 2/2/2009 0.00% Jan 04 Jul 04 Feb 05 Sep 05 Mar 06 Oct 06 May 07 Nov 07 Jun 08 Jan 09 a a R Source: Bloomberg o ~~: • The S&P 500 finished 2008 down 38% (565 points) for the year, driven by weak corporate earnings and poor growth prospects for the coming year. • Price volatility, as measured by the VIX Index, remains elevated, reflecting investor fears. 1, 600 1, 400 1, 200 1, 000 800 S&P 500 Index VIX Index January 1, 2008 to February2, 2009 January 1, 2008 to February2, 2009 x 827 on 2/2/09 600 0 r Jan 08 Apr08 Jul 08 Oct 08 Jan 09 Jan 08 Apr08 Jul 08 Oct 08 Source: Bloomberg • The VlX Index measures implied volatility of S&P 500 index options. • A high value corresponds to a more volatile market and, therefore, to more costly options, which can be used to defray risk from volatility. 100 80 60 40 20 46.02 on 2/2/09 Jan 09 • Revised estimates of GDP show that the U.S. economy contracted by 0.5% in the third quarter. • Some economists project that GDP will decline by as much as 5% in the fourth quarter and that the recession could last through the second quarter of 2009. Gross Domestic Product January2003 to December2008 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% -6.0% 0o mberg Survey Forecast 1 Q 03 4Q 03 3Q 04 2Q 05 1 Q 06 4Q 06 3Q 07 2Q 08 1 Q 09 4Q 09 Source U S Department of Commerce - Bureau of Economic Analysis and Median Estimate of Bloomberg Economic Survey _. ~.:. _ _ .. .~.~. O ~i: ..- ~~°:: • In December the unemployment rate jumped to 7.2%, the highest level in 16 years. This compares with just 5% unemployment at the beginning of 2008. Employers cut a combined 2.6 million jobs in 2008 - 524,000 of those losses occurring in December alone. Change in Non-Farm Payrolls vs. Unemployment Rate December 2003 -December 2008 400 ° 300 N 200 ;, 100 a E~ 0 ~ ~ c ; -100 z° z c ~- -200 _ _ a~ as a -300 s U -400 -500 -600 Nov 03 Nov 04 Nov 05 Source: Bureau of Labor Statistics, U. S. Department of Labor Nov 06 Nov 07 8 /° 7% c 3 6% c 5% --1 4% Nov 08 • The price of a barrel of oil has declined sharply amid concerns about waning demand in an recession. The per-barrel price of oil has fallen more than two-thirds since hitting a high of $146 on July 3, 2008. Price of Crude Oil per Barrel ~ January 1, 2008 -January 8, 2009 ~ $150 + $140 _ ___ _-_ _ _;_ _ _ __: ~ $130 ----------- - _ -------------------=----------------------- ___ ___ $120 ---------------------- $110 --------------------- $100 - ----------- $90 ------------------------------------------------ .-------------------- $80 $70 _ _------------------y-------------------------~------------------------ ;--------------------------•----------- $60 ' $50 -------------------------r--------------------------,---------------------.. $40 - - _ _ _ _ . _ _~_ _ _ ___ ___.._ ' $42 per barrel as of 1 /8/09 $30 -~ _- Jan 08 Mar 08 May 08 Jul 08 Sep 08 Nov 08 Jan 09 Source: Bloomberg o ~~: - ..- :.{ • Consumer confidence rebounded modestly in the latest survey, after trending downward since July 2007, hitting a 41-year low in October 2008. Waning consumer confidence is often a precursor to reduced consumer spending, which composes approximately two-thirds of GDP. ConsumerConfidence December 1998 to December2008 160 140 120 100 80 60 40 20 O T-r-T- r -,--~----- T--~ i --i~------,~ Dec 98 Dec 99 Dec 00 Dec 01 Dec 02 Dec 03 Dec 04 Dec 05 Dec 06 Dec 07 Dec 08 Source: Consumer Confidence Board O ~~: ..- .- I ----------------~---------------t---------------,---------------y---------------f i , • ISM readings have historically been good indicators of GDP growth. Readings below fifty indicate that the economy is contracting. __ __ ~ ,, 65 60 55 50 45 40 35 30 rv 65 60 55 50 45 40 35 30 ISM Manufacturing Index ISM Non-Manufacturing Index December 2003 - December 2008 December 2003 - December 2008 ~„ ~~ Dec 03 Dec 04 Dec 05 Dec 06 Dec 07 Dec 08 Dec 03 Dec 04 Dec 05 Dec 06 Dec 07 Dec 08 Source: Institute for Supply Management Source.• Institute for Supply Management • Despite recent elevated CPI numbers, the economy is actually in a period of significant deflation, with the value of housing, commodities, and equities lower across the board. The Fed's focus has shifted from combating inflation to ensuring financial stability and promoting economic growth. Year-Over-Year Consumer Price Index December 2002 -December 2008 6.00% 5.00% -~- 4.00% -Core CPI - -CPI 3.00% -~------------- r 2.00% ~:_. ~_. _ ...___ ~.. 1.00% ~=~ ~~_ 0 00% w / --------------- ~ ~/ 1 1 t 1 1 1 1 1 t / 1 1 1 1 1 , ` 1 1 1 1 1 ----------------1 1 1 _ r------------------~------------------~--------- ----- 1 1 1 ' 1 1 1 1 1 1 ---------- ~ -~-' ------~-~---------------------- ~ - - ~ -----1. ~ ~ ~~~/ ~ ~ ~' ~ 1 I , 1 .--t-~------------------- --- ---------------------------------1 1 1 , ~ ~ ~ ' i ~ .,-,, ~._ Fed Comfort Zone For Core CPI __________________i________-_________i________________. _. _' ~ i 1 t i 1 1 1 1 1 1 i i ~ 1 1 i . ~ r ~r Dec 02 Dec 03 Dec 04 Dec 05 Dec 06 Dec 07 Dec 08 k$ Source: Bloomberg • Core values exclude food and energy, while non-care values include food and energy. • Consumer Price Index (CPI) is a measure of the average price level of a fixed basket of goods and services purchased by consumers. Monthly changes in the CPI represent the rate of inflation. ..,._ ,_ . ~ ~ ... _y . , .,. f ,».u :. o ~ ~ . _.. _.. ti ;~ • The Federal Upen Market Committee (FUMC) took unprecedented action at its December 16 meeting. The FOMC cut its target interest rate to lowest level in history, actually setting a "range" for the rate, between 0.00% and 0.25%. 6.00% 5.00% Federal Funds Target Rate December 2003 -December 2008 4.00% 3.00% 2.00% 1.00% 0.00% ~ ~I 0.00% - 0.25% as of 12/16/08 Dec 03 Dec 04 Dec 05 Dec 06 Dec 07 Dec 08 Source: Federal Open Market Committee • After the FOMC dramatically cut its target interest rate, investors are betting the Fed Funds target rate will remain below 0.50% for at least the next nine months. Federal Funds Futures Contracts June 30, 2008 vs. January 8, 2009 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% ~ ~ Jan 09 Mar 09 May 09 Jul 09 Sep 09 Nov 09 Source: Bloomberg June 30, 2008 tJanuary 8, 2009 Oy~II~Ia»~4I_~iJFTifTf i • Both new and existing home sales came in significantly below forecasts in November. • Home sales are down 42% from the height of the housing boom in August 2005. Existing Home Sales New Homes Sales December 2003 -December 2008 December 2003 -December 2008 1,500 1,300 ~ 1,100 y 900 O ~ 700 500 ~ i I -------- -r - -r-----------~-----------~----------- ______---_ L.___---____L___________ _ _______1___--______ 1 I 1 1 1 I t i 1 i 1 i 1 1 1 i 1 1 1 ____-_-___J 1 1 ~ r-----------r----------r------ -r----------- i i 1 1 i 0 0 0 0 0 0 U ~ ~ ~ U i a a i a i a i i a ~ ~ D o ~ ~ D 300 7.50 , 7.00 ,. ' 6.50 i 6.00 i i i ~ ~ •- 5.50 5 00 -_ ~ '----_e- _.. . ~ i __ -;--__ - _ I .....__r. .__._ ~ i -.._ ~_ _. _ ~ i ~ i . 4.50 i _ ~ _ _ _~ _ _ 1 s 4 00 ~ ~ ~ ~ ~' . r~ 0 ~ 0 ~n 0 co 0 ~ oo 0 0 ~ aUi ~ m aUi a~i ~ ~ ~ ~ ~ ~ Source: National Association of Realtors Source: National Association of Realtors • The rising rate of mortgage delinquencies is an early indicator of future foreclosures and signals continued weakening of the housing sector. U.S. Mortgage Delinquencies December 1997 -September 2008 7.50% 7.00% . _ _ _ __ ---- ----- - 6.50% -------------f----------------~----------- 6.00% ' 5.50% ----- 5.00 4.50% 4.00% -~ - 3.50% _ __ _ _ - 3.00% ~~~ T , - Dec 97 Jan 00 Jan 02 Jan 04 Jan 06 Jan 08 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% Quarterly Foreclosure Percentages December 1997 -September 2008 Dec 97 Jan 00 Jan 02 Jan 04 Jan 06 Jan 08 ` Source: Mortgage Bankers Association Source: Mortgage Bankers Association o ~~: ..- !.:.,~~ ,a • Florida's number of foreclosures starts was 90,322 as of 9/30/08 compared to the United States number of foreclosure starts of 575,204. Florida makes up 15.7% of the United States foreclosure starts. Florida's Serious Mortgage Delinquencies 1 Q2008 - 3Q2008 11.00% 10.00% 9.00% 8.00% 7.00% 6.00% 5.00% 4.00% 3.00% 2.30% 2.20% 2.10% 2.00% 1.90% 1.80% 1.70% 1.60% Florida's Foreclosure Starts 1 Q2008 - 3Q2008 Source: Mortgage Bankers Association Source: Mortgage Bankers Association o ~~ Mar 08 Apr 08 May 08 Jun 08 Jul 08 Aug 08 Sep 08 Mar 08 Apr08 May 08 Jun 08 Jul 08 Aug 08 Sep 08 © 2008 PFM Asset Management LLC • Money market yields are currently trading at historically low levels - Short-term U.S. Treasury bills are trading at 0.00% (gross); A- 1 + Commercial Paper adds value in the 60-90 day range Current Market Yields (as of February 6, 2009) . - ~ -.- ~.- - ..- Overnight* 0.21 % 0.82% 0.03% - - 7-day 0.10% - 15-day 0.17% - _ 30-day 0.22% 0.29% 0.00% 45-day 0.25% 0.30% - 2-month 0.27% 0.36% 0.30% 3-month 0.28% 0.38% 0.30% 4-month 0.35% 0.41 % 0.45% 5-month 0.37% 0.48% 0.55% 6-month 0.43% 0.52% 0.55% 7-month 0.46% 0.56% - Source data: Bloomberg "The overnight rate for the PFM Funds is the 7-day SEC yield as of January 27 2009 • Longer-term Treasury yields are compressed, as seen in the following table - FDIC insured corporate notes add value over U.S. Treasury securities Current Market Yields (as of February 6, 2009) 8-month 9-month 10-month 11-month 1.5 years 0.47% 0.48% 0.49% 0.50% 0.61 % - - - 0.65% - - - 0.78% - - - 0.90% - 0 9 - - . 5% - 1.20% - - - - - 1.54% 1.36% 1.39% 1.44% 2.12% 1.97% 1.99% 2.13% 0.67% 3 years 1.38% 3.5 years 1.50% Source data: Bloomberg O 20118 PFDZ asset Management LLC t .M Section XII -Authorized Investments Add Subsection L -Corporate obligations issued under the Temporary Liquidity Pages 12-13 Guarantee Program ("TLG Program") -carry the full faith and credit of the United States (see: www.fdic.gov/tlgp) Change subsection J (Money Market Mutual Funds) ratings to AAAm and; this increases the safety selection of money market funds ~ XII -Portfolio Composition Remove the use of the State of Florida's Local Government Investment Pool 7-12 due to the financial problems experienced by local governments. Add Section for TLG Program -establish sector limit of 50% ,maximum maturity limit of 3.40 years, and issuer limitation of 25%. Change subsection D -Federal Instrumentalities Individual Issuer from 40% to 25%. Change subsection K -Intergovernmental Investment Pool -add due diligence for the selection of local government funds. Change subsection K -Intergovernmental Investment Pool -add AAA rating rani ~iramantc ©2008 PFM Asset Management LLC `'`~ •PFM pioneered The following work plan details the steps that will be taken to ensure that the City's investment objectives and constraints will be fully developed and implemented pursuant to Florida State Statutes: Step 1: Preliminary review Step 2: Interview officials and key staff Step 3: Evaluate and provide recommendations Step 4: Prepare the cash flow analysis Step 5: Review/Update investment policy 10-15 days 10-30 days regarding the current investment program 10-30 days 30-60 days 30-60 days Step 6: Update investment strategies 30-60 days Step 7: Verify adherence to GASB 31 and 40. 30-60 days Step 8: Review/Update performance benchmarks 30-60 days Step 9: Review/Update internal controls manual 30-90 days Step 10: Monitor Investments with Quarterly Performance Reports 90-120 days ©2008 PFM Asset Management LLC .~~ ;,;;~ j: s;~ iii ~ %s ~; ;:~ ;i,i. i.~.~ is/. ~;;:;:::;:; : /.~ •/: ~ ~. / ~ ~ i/' 60-}a0 a ': ~%~~ ~ i / iv. i; o f f%i'' ~; '%'%'~~ ~; /'/,:,~'///:; is ;i;~;~ ~: O C 0 80-}a0 ~ O_ a~i O `~ N ~ 80-un~ o ~ O ~ = 4. o ~ ~ LL i - ~ 80-qa~ QU N U H ~ `o t4 ~ C Q ^ LO-un ~ 0 LO-ga~ 0 o_ E 90-}ap ~ r 0 L (d gp-un~ ~? 0 ~_ O 90-qa~ 50-}a0 ~~~ a s g o s~ 0 s p s s S s s o s s V O ~ O N N r O ~