munis: chicago, detroit, puerto rico and more · moody’s rating changes: tax-backed 0 20 40 60 80...
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©Copyright 2015 Cumberland Advisors
®. Further distribution prohibited without prior permission.
Munis: Chicago, Detroit,
Puerto Rico and More
Broad Municipal Market Review – Are Munis Rich or Cheap?
September 2015
John Mousseau, CFA Executive Vice President &
Director of Fixed Income
©Copyright 2015 Cumberland Advisors
®. Further distribution prohibited without prior permission. 2
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Per
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U-6 U-5 U-4 U-3
U3 = Published Unemployment Rate
U4 = U3 + "discouraged workers" (those who have stopped looking for work because current economic conditions make them believe no work is available for them)
U5 = U4 + other "marginally attached workers", or "loosely attached workers", or those who "would like" and are able to work, but have not looked for work recently
U6 = U5 + Part time workers who want to work full time, but cannot due to economic reasons.
Lower Unemployment
Source: BLS and Cumberland Advisors. Data through August 2015
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Difference Between U6 and U3
Source: BLS and Cumberland Advisors
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Per
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Sources of Difference Between U-6 and Standard Unemployment Statistic (U3)
% Discouraged Workers %Marginally Attached Workers %Part-Time Workers Who Want Full Time Work
Estimate 200 bp above normal
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Total US Labor Force Part. Rate
Source: Bureau of Labor Statistics
May-1979,
63.3%
Apr-2000,
67.3%
Aug-2015,
62.6%
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Avg. Number Weeks Unemployed
Source: Bureau of Labor Statistics
Aug-1961,
17.0 Jun-1976,
16.9
Jul-1983,
21.2 May-1994,
19.5
Jun-2004,
20.5
Dec-2011,
40.7
Aug-2015,
28.4
5
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15
20
25
30
35
40
45
Jan
-194
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Fed Maturity Structure: Assets
Source: Haver Analytics
$0.0
$0.5
$1.0
$1.5
$2.0
$2.5
$3.0
$3.5
$4.0
$4.5
$5.0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
$ T
rill
ion
s
Less than one year One to 10 Yr Over ten yr
QE-1
QE-2
QE-3
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Federal Deficit
Source: Haver Analytics and Congressional Budget Office
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Muni Bond Fund Flows
-$17,000
-$12,000
-$7,000
-$2,000
$3,000
$8,000
$13,000
2009 2010 2011 2012 2013 2014 2015
$ M
illio
ns
Municipal Bond Fund Flows (All Municipal) 2 per. Mov. Avg. (Municipal Bond Fund Flows (All Municipal))
Source: Lipper
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Munis vs. Crises
Source: Bond Buyer and Cumberland Advisors
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3.5
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4.5
5
5.5
6
6.5
7
2007 2008 2009 2010 2011 2012 2013 2014
Yie
ld (
%)
2008
Meredith Whitney
Moment
Tapering &
Fund Outflows
Fed Hike??
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Moody’s Rating Changes: Revenue
0
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160
180
200
1Q02 1Q03 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15
Upgrades Revenue Downgrades RevenueSource: Moody’s Investors Service
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Moody’s Rating Changes: Tax-Backed
0
20
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100
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140
160
180
200
1Q02 1Q03 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15
Upgrades Tax Downgrades TaxSource: Moody’s Investors Service
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Fed Funds vs. Treasury
Fed Funds Target
30-Year Treasury
10-Year Treasury
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Fed Funds Target 30-yr. Treasury 10-yr. Treasury
Source: Bloomberg and Cumberland Advisors
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Job Formation
• Job formation is moderate and inconsistent with past experience
– Since start of ZIRP, there has been little measurable effect on inflation;
however, it has negated negative trends: Overindebtedness, Government
shutdown, and European uncertainty
– Tepid growth and high excess capacity in the economy have kept interest
rates low
• Real GDP prior to ZIRP averaged 3.1% y-o-y growth; but has averaged 2.7%
since then
– Rates have moved lower since the Fed’s initial taper decision. End of ZIRP
does not equate to higher interest rates
• The 30-yr. Treasury has moved from a high of 3.9% to a low of 2.2% since
initial taper announcement and return to policy normalization
– QE does not create inflation
• Headline CPI change has dropped from 3% y-o-y, now is lower than Core CPI
(remember the Fed threshold is 2.5%) at 0.2%
– Eurodollar futures not pricing in rate hike until early 2016
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MMA Muni/Treasury Ratios
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50 Years of 10-year US Tsy Yields
Source: Bloomberg
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Trailing 12-mo. REAL GDP Growth
Source: Bloomberg
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Headline vs. Core CPI
Source: Bloomberg
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Disclosure
All material presented is compiled from sources believed to be reliable. However, accuracy
cannot be guaranteed. Past performance is no guarantee of future results. All investments
involve risk including loss of principal. Fixed income investments are subject to interest rate
and credit risk.
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