Transcript Fifth Third Securities, Inc.

Fifth Third Securities
Investment Outlook
Bill Kielczewksi, V.P.
5/3 Securities, Inc.
Institutional Investment Group
October, 2011
Fifth Third Securities, Inc. Background and Qualifications


Fifth Third
Securities
What is the 5/3 Securities Institutional Investment Group
—
Broker / Dealer created in 1998 when Fifth Third Bank purchased the Ohio
Company – Established 1925
—
Make primary and secondary markets in over $10 Billion monthly
—
Series 7 / 63 registered investment representatives working for the 5/3 Capital
Markets Division and housed in our various affiliates
—
Specialize in fixed-income investments (MMKTs, Bonds, & Structured Notes)
—
Build customized fixed-income portfolios for commercial clients; investing from
overnight out to 30 years
—
Distribute 5/3’s proprietary investment products (5/3 VRDNs, 5/3 underwritten
MBS, 5/3 Corporate Bond participations)
Who are your local contacts
—
Bill Kielczewski, V.P. Team Lead of MI, IN, Northern OH, PA, 13 years
Institutional Investment experience, $1.50 billion in assets under management,
The University of Toledo, Ohio
616-653-5008
2
2
5/3 Footprint Overview

$111 billion assets*

1,316 banking centers

2,456 ATMs
Fifth Third
Securities
Traverse
City
Grand Rapids
Detroit



Chicago
15 affiliates in 12 states
Fifth Third Bank has been
dedicated to serving the needs
families and businesses for
more than 150 years
7th strongest bank in the world,
#1 in the US – according to
capital ratios as defined by
Bloomberg, June 2011
Toledo
Cleveland
Pittsburgh
Columbus
Indianapolis
Cincinnati
St. Louis
Florence
Evansville Louisville
Lexington
Huntington
Raleigh
Nashville
Charlotte
Raleigh
Atlanta
Augusta
Jacksonville
Orlando
Tampa
* As of 6/30/2011
Naples
Naples
3
Fifth Third
Securities
1) Global View –
Focusing on growth & stabilizing
the Euro Zone
4
Global Economy Focus –
US and Chinese GDP growth
Fifth Third
Securities
Global GDP = $63.0 trillion
16000
$14,582
Of interest:
1. Direction of US economy – which is still the
dominant economic force on the planet and
70% consumer driven.
14000
12000
2. China sustaining its GDP growth.
10000
3. Emerging economies growing 3-9%; developed
economies growing 0-2%.
8000
6000
$5,878 $5,497
$3,309
4000
$2,560 $2,246
$2,087 $2,051 $1,729
$1,574 $1,479 $1,407
$1,039 $1,014
2.8% 1.7% 0.6% 3.1% 0.8% 7.7% 2.3% 3.5% 0.7% 3.3% 3.4%
2000
1.5%
9.5%
0
-1.1%
-2000
Source = GDP data are 2010 numbers from Bloomberg (8/11); emerging market definitions from MSCI
5
Global Economy Focus –
EuroZone bond yields
Fifth Third
Securities
European Government Bond Yields
100
100
90
90
Greece
80
80
70
70
60
60
50
50
40
40
30
30
20
20
Portugal
Ireland
Italy
Spain
Germany
10
0
1/10
4/10
7/10
Germany Benchmark Bond - 2 Year - Yield
Italy Benchmark Bond - 2 Year - Yield
Spain Benchmark Bond - 2 Year - Yield
6
10/10
1/11
4/11
7/11
10/11
Greece Benchmark Bond - 2 Year - Yield
Portugal Benchmark Bond - 2 Year - Yield
Ireland Benchmark Bond - 2 Year - Yield
Source = FactSet
10
0
Macro, Policy-Driven Markets
Fifth Third
Securities
Q3
1.
Washington inability to agree on a debt & deficit framework leads to US debt downgrade by S&P.
2.
European Union inability to agree on financing Greece leads to concerns widening (…Italy is in focus).
3.
Markets focus solely on Europe/Washington, ratcheting volatility up and economic confidence down.
Q4
1.
European Union (17 nations) continue to struggle for a solution to finance peripheral countries.
2.
Washington debt & deficit framework turned-over to a committee of 12. Plans to be delivered in
November and voted on in December.
3.
US economy continuing slowly forward; China exports slowing.
2012
7
1.
US economy will hinge on two issues: i) the extent fiscal restraint from Washington may restrict
consumer spending, ii) the potential spillover from Europe via lower exports and tighter financial
conditions.
2.
US markets will hinge on:
•
#1 above
•
Tone of US elections
•
Foreigners continuing to finance 40-50% of our Treasury debt issuance.
Macro Summary
Fifth Third
Securities
1)
2)
3)
8
Global economy is moving forward, but at an uneven pace and behind inflation rates.
•
5-9% in emerging markets, but with inflation concerns around commodity prices
•
1-2% in developed markets, but very nervous about potential fiscal policy/debt management.
•
Event risks remain high - price of crude oil and social tensions around government fiscal policy.
US economic growth is frustratingly slow, but self-sustaining on its own. However…
•
Washington and the Private Sector are at sharp odds over future economic leadership.
•
Cash will not commit to be recycled back into the economy as capital.
Continuation of slow economic rebuild = continuation of incremental investment rebuilding.
•
Watching US consumer spending trends; prices of copper, gold and crude oil.
•
Risk of recession in next 12-month now likely approaching 50/50. Consumer dependent, and
would likely be shallow – unless Europe spins out of control.
Fifth Third
Securities
USA Inc. –
Challenges where progress
needs to be made in 2012…
9
The U.S. Consumer - Spending OK; Sentiment Low
Fifth Third
Securities
10
120
110
8
Consumer
Spending
YoY %
(right)
Savings
Rate
6
4
100
90
80
2
70
60
0
Consumer
Confidence
Index (left)
-2
-4
50
40
30
-6
20
'02
'03
'04
'05
'06
'07
'08
'09
'10
'11
Composite Series: Index Numbers, 1985=100, Consumer Confidence Index - United States (Left)
(% 1YR) Personal Consumption Expenditures, Bil. $, Saar - United States (Right)
Personal Income, Personal Saving As A Percentage Of Disposable Personal Income, Bil. $, Saar - United States (Right)
Recession Periods - United States
10
Source = FactSet
Lowering the Misery Index
Fifth Third
Securities
The Misery Index
CPI Y/Y plus the Unemployment Index
25
25
20
20
15
15
13.00
10
10
5
5
0
0
'47 '50 '53 '56 '59 '62 '65 '68 '71 '74 '77 '80 '83 '86 '89 '92 '95 '98 '01 '04 '07 '10
11
Source = FactSet
Normalizing the housing market
Fifth Third
Securities
Housing Market Net Worth
16,000
16,000
14,000
14,000
12,000
12,000
Mortgage
Debt
10,000
8,000
10,000
8,000
Ow ners
Equity
6,000
6,000
4,000
4,000
2,000
2,000
0
0
'46 '49 '52 '55 '58 '61 '64 '67 '70 '73 '76 '79 '82 '85 '88 '91 '94 '97 '00 '03 '06 '09
Household & Nonprofit Organizations - Owners' Equity In Household Real Estate, B.100 - United States
Debt Outstanding - Total Households - Home Mortgage, D.3 - United States
Recession Periods - United States
12
Source = FactSet
Framework for federal government finances
Fifth Third
Securities
Federal Government Finance Summary
16,000
14,000
Total Debt
Outstanding
(L)
Ex penditures
(R)
4,000
12,000
3,500
10,000
3,000
8,000
Receipts (R)
2,500
6,000
2,000
4,000
1,500
2,000
1,000
0
500
'87 '88 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11
Federal Debt, Total Amount Outstanding - United States / 1000 (Right)
Federal Govt Current Receipts & Expenditures, Total Expenditures, Bil. $, Saar - United States (Left)
Federal Govt Current Receipts & Expenditures, Total Receipts, Bil. $, Saar - United States (Left)
Recession Periods - United States
13
4,500
Source = FactSet
Getting the piles of cash off the sidelines
Fifth Third
Securities
Cash piles continue to build on the sidelines...
9,000
Amounts in billions ($)
2,500
8,500
8,000
Bank
Deposits (L)
Corporate
Cash (R)
2,000
Bank
Deposits
w ith Fed
(R)
1,500
7,500
7,000
1,000
6,500
500
6,000
5,500
0
'07
'08
'09
'10
'11
H.8, Liabilities Of Commercial Banks, Deposits, Bil. Usd, Sa - United States (Right)
H.4.1- Liabilities of All Federal Reserve Banks, Deposits, Depository Institutions (Mil $) - United States / 1000 (Left)
Nonfarm Nonfinancial Corporate Business - Total Liquid Assets, L.102 - Levels - United States (Left)
Recession Periods - United States
14
Source = FactSet
USA Inc. Trend Watch in Q4 –
The importance of the number 3…
Fifth Third
Securities
1. Getting monthly job additions that start with a 3, followed by 5 zeroes.
Currently 150k….
2. Getting weekly unemployment claims to start with a 3, followed by 5
zeroes. Currently 400k….
3. Getting real GDP growth to start with a 3. Currently 2.5%....
4. Keeping YoY consumer inflation at or below 3%. Currently 2.9%....
5. Keeping gasoline signs to start with a 3. Currently $3.20….
6. Getting a 10-year Treasury yield to start with a 3. Currently 1.99%....
7. Reaching a credible, bi-partisan framework that would bring the
federal budget deficit down to 3% of GDP. Currently 8.5%....
15
8. Over next 12-18 months, getting the Fed Funds Rate back toward 3%.
Currently 0 – 0.25%....
Fifth Third
Securities
3) Bond Market Trends –
Investment Ideas & Analysis
16
US Bond Market – How did we get here?
Fifth Third
Securities
17
Source = FactSet
US Bond Market – Where are we going?
Fifth Third
Securities
18
Source = FactSet
US Bond Market – already assuming the worst?
Fifth Third
Securities
10-year and 3-month Treasury Yields
6
6
5
5
4
4
3
3
10yr
Treasury
2
1
1
0
'07
'08
'09
'10
'11
3-month
T-Bill
-1
0
-1
Government Benchmarks 10 year, Yield, Percent, Close - United States
US Benchmark Bond - 3 Month - Yield
19
2
Recession Periods - United States
Source = FactSet
Fifth Third
Securities
4) Focusing on the Financial Basics –
What can we do to increase yield?
20
Trade the “Spread” – 2 Yr. Treasury vs. 2 Yr. Agency Bond
Fifth Third
Securities
21
Source = FactSet
Trade the “Spread” – 5 Yr. Treasury vs. Fannie Mae MBS
Fifth Third
Securities
22
Source = FactSet
Trade the “Spread” – 10 Yr. Treasury vs. 10 Yr. Muni Bonds
Fifth Third
Securities
23
Source = FactSet
Financial Insights to Remember
Fifth Third
Securities
24
1.
When it comes to investing, be unemotional and pragmatic. If this isn't you, hire someone who is.
2.
If you don’t understand an investment holding, sell it and buy something you do understand.
3.
Investing is about allocating capital today to work through business cycles to produce average returns
that exceed the inflation rate and build future purchasing power. Sitting in cash is currently producing a
negative real yield.
4.
When it comes to investing, everything works some of the time. Be diversified…money market,
Government Bonds, Government MBS, Michigan Municipal Bonds.
5.
Constantly look to rebalance your portfolio. Be dynamic…Sell asset classes when their prices are
high, buy others when prices are low.
6.
When the asset side of your balance sheet is stuck, work on reducing the liability side. In the end, the
two are connected. Look to refinance existing bond deals at all time low rates.
7.
According to the Fed, saving and money market rates are staying below 1% until at least 2013 – so be
frustrated or do something about it.
Appendix I – Allowable investments
Fifth Third
Securities
www.michigan.gov
Release Date: January 08, 2002
(To Print: use your browser's print function)
Last Update: December 20, 2006
Investments of Surplus Funds of Political Subdivisions
Public Act 20 of 1943 as amended by Public Act 196 of 1997
Public Act 20 of 1943
Public Act 20 of 1943
as amended through June 30, 1997
as amended through December 31, 1997
129.91
Sec. 1. (1) The legislative or governing body of a county, city,
Sec. 1. (1) Except as provided in section 5, the governing body by
village, township, or special assessment district, or an agency,
resolution may authorize its investment officer to invest the funds of
board, or commission of a county, city, village or township, by
the public corporation in 1 or more of the following:
resolution may authorize its treasurer or other chief fiscal officer to
invest surplus funds belonging to and under the control of the
political subdivision, special assessment district, or agency, board,
or commission of a county as follows:
(a) In bonds, securities, and other obligations of the United States, (a) Bonds, securities, and other obligations of the United States or
or an agency or instrumentality of the United States in which the
an agency or instrumentality of the United States.
principal and interest is fully guaranteed by the United States. This
subdivision shall include securities issued or guaranteed by the
government national mortgage association.
(b) In certificates of deposit, savings accounts, deposit accounts, or (b) Certificates of deposit, savings accounts, deposit accounts, or
depository receipts of a financial institution, but only if the financial depository receipts of a financial institution, buy only if the financial
institution complies with subsection (2).
institution complies with subsection (2).
(c) In commercial paper rated at the time of purchase within the 3 (c) Commercial paper rated at the time of purchase within the 2
highest classifications established by not less than 2 standard
highest classifications established by not less than 2 standard
rating services and which matures not more than 270 days after the rating services and that matures not more than 270 days after the
date of purchase. Not more than 50% of any fund may be invested date of purchase.
in commercial paper at any time.
(d) In United States government or federal agency obligation
(d) Repurchase agreements consisting of instruments listed in
repurchase agreements.
subdivision (a).
(e) In bankers' acceptances of United States banks.
(e) Bankers' acceptances of United States banks.
(f) Obligations of this state or any of its political subdivisions that at
the time of purchase are rated as investment grade by not less than
1 standard rating service.
(f) In mutual funds composed of investment vehicles which are
legal for direct investment by local units of government in this state.
25
Appendix I – Allowable investments, cont’d.
Fifth Third
Securities
(g) Mutual funds registered under the investment company act of
1940, title I of chapter 686, 54 Stat. 789, 15 U.S.C. 80a-1 to 80a-3
and 80a-4 to 80a-64, with the authority to purchase only investment
vehicles that are legal for direct investment by a public corporation.
However, a mutual fund is not disqualified as a permissible
investment solely by reason of either of the following: (i) The
purchase of securities on a when-issued or delayed delivery basis.
(ii) The ability to lend portfolio securities as long as the mutual fund
receives collateral all times equal to at least 100% of the securities
loaned.
(iii) The limited ability to borrow and pledge a like portion of the
portfolio's assets for temporary or emergency purposes.
(h) Obligations described in subdivisions (a) through (g) if
purchased through an interlocal agreement under the Urban
Cooperations Act, PA 7 of 1967 (Ex Sess), MCL 124.501 to
124.512.
(i) Investment pools organized under the surplus funds investment
pool act, PA 367 of 1982, 129.111 to 129.118.
(j) The investment pools organized under the local government
investment pool act, PA 121 of 1985, MCL 129.141 to 129.150.
(2) A county, city, village, township, or special assessment district (2) A public corporation that invests its funds under subsection (1)
investing funds under subsection (1) shall not deposit or invest the shall not deposit or invest the funds in a financial institution that is
funds in a financial institution which is not eligible to be a depository not eligible to be a depository of funds belonging to the state under
of surplus funds belonging to the state under section 6 of PA 105 of a law or rule of this state or the United States.
1855, MCL 21.146.
(3) Assets acceptable for pledging to secure deposits of public
(3) Assets acceptable for pledging to secure deposits of public
funds are limited to any of the following: (a)
funds are limited to assets authorized for direct investment under
(b)
section (1).
(i)
(ii)
(iii)
(c)
(4) As used in this section, "financial institution" means a state or
(4) As used in this section, "financial institution" means a state or
nationally chartered bank or a state or federally chartered savings
nationally chartered bank or a state or federally chartered savings
and loan association, savings bank, or credit union whose deposits and loan association, savings bank, or credit union whose deposits
are insured by an agency of the United States government and
are insured by an agency of the United States government and
which maintains a principal office or branch office in this state under
which maintains a principal office or branch office in this state
the laws of this state or the United States.
under the laws of this state or the United States.
26
Appendix II – U.S. Treasury conservatorship of
Fannie Mae and Freddie Mac
Fifth Third
Securities
September 11, 2008
HP-1131
Frequently Asked Questions:
Treasury Senior Preferred Stock Purchase Agreement
Can the U.S. Congress or the Executive Branch change the terms of the preferred stock purchase agreement?
This preferred stock purchase agreement is a binding legal obligation between two parties. The agreement is designed
to prohibit any amendment that would decrease the amount of Treasury's funding commitment or add funding conditions
that would adversely affect debt or mortgage-backed securities holders.
Some may speculate that a future Congress could pass a law that would abrogate the agreement. But any such law
would be inconsistent with the U.S. government's longstanding history of honoring its obligations. Such action would
also give rise to government liability to parties suing to enforce their rights under the agreement.
The U.S. Government stands behind the preferred stock purchase agreements and will honor its commitments.
Contracts are respected in this country as a fundamental part of rule of law.
Can the U.S. Congress or the Executive Branch change the covenants in the agreement, such as the covenant
requiring the reduction of the companies' portfolios?
As with any contract, the parties to the agreement may modify the covenants by mutual agreement only.
Does the senior preferred stock purchase agreement protect debt and mortgage backed securities issued or
maturing after 2009?
Yes. The holders of senior debt, subordinated debt, and mortgage backed securities issued or guaranteed by these
GSEs are protected by the agreement without regard to when those securities were issued or guaranteed. Debt and
mortgage backed securities issued or guaranteed both before and after December 31, 2009 are protected by the
agreement.
27
Appendix II – U.S. Treasury conservatorship of
Fannie Mae and Freddie Mac, cont’d.
Fifth Third
Securities
If the preferred stock purchase agreement protects senior and subordinated debt securities issued at any time in
the future, how can the agreement ever be terminated?
Treasury's funding commitment in the agreement would terminate under three events:
The funding commitment terminates if the commitment is fully funded by Treasury.
If a GSE liquidates its assets, its net worth deficiency is computed at that time and the GSE can call upon the Treasury to
fund under its preferred stock purchase agreement. After that final funding, the funding commitment in the agreement would
terminate.
When a GSE satisfies all of its liabilities, whether at maturity or by making some other provision for payment in full of its
obligations, the funding commitment will also terminate.
Why is the preferred stock purchase agreement limited to $100 billion? Is that enough to protect against even the
worst downside scenario? What happens if losses exceed $100 billion?
Treasury deliberately chose a large number to give confidence to the markets.
If Treasury has already received $1 billion in senior preferred stock, how can you say that no investment has been
made yet?
The companies each issued $1 billion in senior preferred stock to Treasury in connection with Treasury's commitment to
maintain a positive net worth in the GSE. No taxpayer money was spent to receive this stock.
How is it legal for this preferred stock purchase agreement to be valid beyond the December 31, 2009 expiration of
Treasury's authority?
Treasury received the preferred stock and received warrants for common stock as of Sunday September 7, 2008 and will
not need to purchase any additional shares relative to this agreement. No payments by the Treasury will be made under
this agreement until and unless necessary to prevent a negative net worth position for either GSE.
If the Treasury makes payments under its funding commitment, the liquidation preference of the Treasury shares will
increase accordingly
.
28
Appendix II – U.S. Treasury conservatorship of
Fannie Mae and Freddie Mac, cont’d.
Fifth Third
Securities
What happens to the declared dividends for investors of existing GSE preferred stock?
Dividends actually declared by a GSE before the date of the senior preferred stock purchase agreement will be paid on
schedule.
Can the government exercise its warrants whenever it wants, even if it is disadvantageous to the companies?
Yes. Treasury can exercise its warrant for up to 79.9% of the common stock of each GSE on a fully diluted basis at any
time during the 20-year life of the warrant.
What do the rating agencies think of this agreement?
All of the rating agencies have reaffirmed the United States' current rating status
.
29
Fifth Third
Securities
Disclosures and Disclaimers
The opinions expressed herein are those of Fifth Third Bank, Investment Advisors Division, Fifth Third Securities, Inc., and may
not actually come to pass. This information is current as of the date of the presentation and is subject to change at any time, based
on market and other conditions. Prior to making any financial or investment decision, you should assess, or seek advice from a
professional regarding, whether any particular transaction is relevant or appropriate to your individual circumstances.
Index performance is used throughout this presentation to illustrate historical market trends and performance. Indexes are
unmanaged and do not incur investment management fees. An investor is unable to invest in an index. Past performance is no
guarantee of future results.
Fifth Third Asset Management, Inc (FTAM) is an indirect, wholly owned subsidiary of Fifth Third Bancorp and an affiliated
company with Fifth Third Bank Investment Advisors division.
Fifth Third Bancorp provides access to investments and investment services through various
subsidiaries. Investments and Investment Services are:
Not FDIC Insured
Offer No Bank Guarantee
Not Insured By Any Federal Government Agency
30
May Lose Value
Not A Deposit