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Economic, Business & Financial
Markets Update –
Association for Financial Technology
John Augustine, CFA
Chief Market Strategist
Fifth Third Bank
September, 2012
Fifth Third Overview (6/30/12)

$118 billion assets

1,322 banking centers; 2,409
ATMs

Locations in 12 states

Commercial Banking, Branch
Banking, Consumer Lending
and Investment Advisor
divisions


Fifth Third Bank has been
dedicated to serving the needs
of 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
Traverse
City
Grand Rapids
Detroit
Chicago
Toledo
Cleveland
Pittsburgh
Columbus
Indianapolis
Cincinnati
St. Louis
Florence
Evansville Louisville
Lexington
Huntington
Raleigh
Nashville
Charlotte
Raleigh
Atlanta
Augusta
Jacksonville
Orlando
Tampa
Naples
Naples
2
Investment Advisors Division Asset Mix (6/30/12)
Total Assets Under Care = $291.2 billion
Assets Under Management = $25.4 billion
FTAM
11%
Fifth Third
Securities*
5%
Private Bank
55%
Institutional
Services
29%
*Reflects only Fifth Third Securities managed assets associated with Fifth Third Private Bank, and does not reflect all assets managed through
Fifth Third Securities, a wholly owned subsidiary of Fifth Third Bank.
3
Presentation Summary
1.
2.
3.
Global economy & markets dealing with macro economic and policy issues.
•
US tension – “fiscal cliff”, financial repression, election outcome, regulatory
frustration, healthcare and financial-reregulation implementation
•
European recession – policymakers need to focus on growth and bond/bank calm
•
China transition – Can domestic demand growth offset weakness in exports?
US Economy expected to “muddle-thru”.
•
Private sector continues to rebuild – housing, vehicle sales & export growth vs.
employment, investment & confidence weakness.
•
Government sector remains under fiscal stress.
Stocks, for the time being, are moving ahead of fundamentals.
•
4.
Commodities remain a risk to businesses and consumers.
•
5.
Drought, storms and geopolitics all affecting commodities in 2H.
Investors are having a successful year.
•
4
S&P 500 has a total return of 12% YTD, with GDP only growing in 1% range and
profit-growth slowing to single-digits.
Average balanced fund is 8%+ higher YTD.
1) Macro Policy Environment
5
Global Central Bank Policy Focus –
Yields now moving lower in EM; holding in DM
G-20 Central Bank Benchmark Rates
16
16
14
14
12
12
Argentina
10
10
Russia
Brazil
India
China
Turkey
Indonesia
S. Africa
Mex ico
Australia
S. Korea
S. Arabia
Canada
Euro Zone
UK
USA
Japan
8
6
4
2
0
'08
6
'09
'10
'11
'12
8
6
4
2
0
European Policy Focus –
Closing the gap among government bond yields
EuroZone 10-year Government Bond Yields
35
35
30
30
25
25
20
Greece
20
15
15
Portugal
Ireland
Spain
Italy
France
Netherlands
Finland
Germany
10
5
10
2
5
3
0
0
10/09
1/10
4/10
7/10
Greece Benchmark Bond - 10 Year - Yield
Portugal Benchmark Bond - 10 Year - Yield
Spain Benchmark Bond - 10 Year - Yield
10/10
1/11
4/11
7/11
10/11
Italy Benchmark Bond - 10 Year - Yield
Spot Yield - Ireland Benchmark Bond - 10Yr - Yield
France Benchmark Bond - 10 Year - Yield
1/12
4/12
7/12
Germany Benchmark Bond - 10 Year - Yield
Netherlands Benchmark Bond - 10 Year - Yield
Finland Benchmark Bond - 10 Year - Yield
Source = FactSet
7
1
US Policy Focus #1 – Size of Federal Government
GDP growth slows as government grows
Federal Government vs. GDP Growth
30
30
Federal
Govt % of
GDP
25
25
20
20
15
15
10
10
5
Nominal
5
GDP - YoY
% change
0
0
-5
-5
'47 '49 '51 '53 '55 '57 '59 '61 '63 '65 '67 '69 '71 '73 '75 '77 '79 '81 '83 '85 '87 '89 '91 '93 '95 '97 '99 '01 '03 '05 '07 '09 '11
(% 1YR) Gross Domestic Product, Bil. $, Saar - United States
(Federal Govt Current Receipts & Expenditures, Current Expenditures, Bil. $, SAAR - United States / Gross Domestic Product, Bil. $, SAAR - United States) * 100
Recession Periods - United States
Trendline: Linear
Trendline: Linear
8
Source = FactSet
US Policy Focus #2 – Fiscal Cliff
Challenge to economy, business & markets
US Fiscal Balances and Interest Cost - $billions
18,000
16,000
4,500
Total Debt
(L)
Ex penditures
(R)
4,000
14,000
3,500
12,000
3,000
Receipts (R)
10,000
2,500
8,000
2,000
6,000
1,500
4,000
1,000
2,000
Annual
Interest
Cost (R)
0
500
0
'88 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12
Federal Debt, Total Public Debt Outstanding - United States / 1000 (Left)
Federal Govt Current Receipts & Expenditures, Current Expenditures, Bil. $, Saar - United States (Right)
Federal Govt Current Receipts & Expenditures, Current Receipts, Bil. $, Saar - United States (Right)
Federal Budget, Monthly Treasury Statement, Fiscal Year Estimate, Outlays, Dep. of the Treasury, Interest on the Public Debt, M
Recession Periods - United States
9
Source = FactSet
US Policy Focus #3 – Financial Repression
Six components we monitor
Financial Repression
5
12,000
Publicly-Held
Treasury
Debt
4.5
10,000
4
Bank
Deposits
3.5
8,000
3
Bank Loans
2.5
6,000
2
4,000
1.5
Fed
Treasury
Holdings
Bank
Reserves at
the Fed
3-month
Yields (L)
1
0.5
0
'08
'09
'10
'11
2,000
0
'12
H.8, Liabilities Of Commercial Banks, Deposits, Bil. Usd, Sa - United States (Left)
H.8, Assets Of Commercial Banks, Loans & Leases In Bank Credit, Bil. Usd, Sa - United States (Left)
US Benchmark Bond - 3 Month - Yield (Right)
Federal Debt, Marketable Treasury Securities, Debt Held by the Public - United States / 1000 (Left)
H.4.1- Assets of All Federal Reserve Banks, U.S. Treasury (Mil $) - United States / 1000 (Left)
H.4.1- Liabilities of All Federal Reserve Banks, Deposits, Depository Institutions (Mil $) - United States / 1000 (Left)
Recession Periods - United States
10
Source = FactSet
US Business Focus –
Regulation, taxes, poor sales now about equal
NFIB Survey - Single Most Important Problem %
40
40
35
35
30
30
25
25
Tax es
Regulations
Poor Sales
20
Labor
Quality
Big
Business
Inflation
Insurance
Cost
Other
Cost of
Labor
Finance
Costs
15
10
5
15
10
5
0
0
4/09
11
20
7/09 10/09 1/10
4/10
7/10 10/10 1/11
4/11
7/11 10/11 1/12
4/12
7/12
Source = FactSet
US Confidence Trends –
All three are stuck
Consumer vs. Business vs. Investor Sentiment
120
120
100
100
Business
Optimism
Index
80
80
Consumer
Confidence
Index
60
AAII
Investor
Bullish %
40
20
60
40
20
0
0
'03
'04
'05
'06
'07
'08
'09
'10
'11
'12
Nfib Small Business Economic Trends, Optimism Index, 1986=100, Sa - United States
Composite Series: Index Numbers, 1985=100, Consumer Confidence Index - United States
(MOV 4W) American Association Of Individual Investors, Sentiment Survey, Bullish, Percent - United States
Recession Periods - United States
12
Source = FactSet
US Economic Focus –
Piles of cash remain on the sidelines
Cash piles continue to build on the sidelines...
10,000
10,000
Deposits in billions ($)
Total Bank
Deposits
9,000
9,000
8,000
8,000
7,000
7,000
6,000
6,000
5,000
5,000
4,000
4,000
3,000
3,000
Corporate
Cash
Bank
Deposits
w ith Fed
2,000
1,000
0
2,000
1,000
0
'98
'99
'00
'01
'02
'03
'04
'05
'06
'07
'08
'09
'10
'11
'12
H.8, Liabilities Of Commercial Banks, Deposits, Bil. Usd, Sa - United States
H.4.1- Liabilities of All Federal Reserve Banks, Deposits, Depository Institutions (Mil $) - United States / 1000
Nonfarm Nonfinancial Corporate Business - Total Liquid Assets, L.102 - Levels - United States
Recession Periods - United States
Trendline: Linear
Source = FactSet
13
US Economic Focus –
Velocity of money remains at 40-year low
US Money Growth Rates and Velocity
50
2.2
2.1
40
2
30
1.9
20
M1
1.8
MZM
M2
1.7
10
Velocity of
Money (R)
0
-10
1.6
1.5
'63 '65 '67 '69 '71 '73 '75 '77 '79 '81 '83 '85 '87 '89 '91 '93 '95 '97 '99 '01 '03 '05 '07 '09 '11
(% 1YR) Money supply M1, USD, SA - United States (Left)
(% 1YR) Money supply M2, USD, SA - United States (Left)
(% 1YR) Money Zero Maturity (Mzm) Money Stock, Sa - United States (Left)
Velocity Of Money - United States (Right)
Recession Periods - United States
Source = FactSet
14
US Private Sector vs. Federal Government –
Perceived and/or actual battle lines
1.
2.
3.
4.
5.
15
Central Bank
•
Government stance – need for financial repression to minimize interest costs
•
Private stance – need of populace for some interest income on savings
Taxes
•
Government stance – tax wealth (new); income creation; transactions
•
Private stance – broaden tax base; simplify code; implement “non-expiring” policy
Spending
•
Government stance – waiting for the other political party to act first
•
Private sector – desire for someone (…anyone) to act in a balanced fashion
Business Regulation
•
Government stance – manage outcomes and send resources its way
•
Private Stance – allow for capitalism to return and flourish
Banking Control
•
Government stance – perceived need to punish, control and regulate
•
Private stance – need for normalized credit markets
2) Macro Economic Environment
16
US Economic Focus –
The basics of GDP – watching ‘G’
C+E+I+G
30
30
20
20
Investment
10
10
Ex ports
Consumption
0
Government
0
-10
-10
-20
-20
-30
-30
'63 '65 '67 '69 '71 '73 '75 '77 '79 '81 '83 '85 '87 '89 '91 '93 '95 '97 '99 '01 '03 '05 '07 '09 '11
(% 1YR) Govt Current Receipts & Expenditures, Total Expenditures, Bil. $, Saar - United States
(% 1YR) Gross Private Domestic Investment, Bil. Chained 2005 $, Saar - United States
(% 1YR) Net Exports Of Goods & Services, Exports, Bil. Chained 2005 $, Saar - United States
(% 1YR) Personal Consumption Expenditures, Bil. $, Saar - United States
Recession Periods - United States
Source = FactSet
17
US Economic Focus –
Private sector still have positive YoY growth
Five Economic Building Blocks - YoY% Changes
50
50
40
40
30
30
Housing
Starts
Vehicle
Sales
20
10
Construction
Exports
Employment
0
20
10
0
-10
-10
-20
-20
-30
-30
-40
-40
-50
-50
'98
'99
'00
'01
'02
'03
'04
'05
'06
'07
'08
(% 1YR) Motor Vehicles Total vehicle sales, Number of, Annual Rate, SA - United States
(% 1YR) Housing Starts 1 unit, Number of, Annual Rate, SA - United States
(% 1YR) Net Exports Of Goods & Services, Exports, Bil. Chained 2005 $, Saar - United States
(% 1YR) Employment - Persons, Sa - United States
(% 1YR) Total Construction Put In Place, Mil. Usd, Sa - United States
'09
'10
'11
'12
Recession Periods - United States
Source = FactSet
18
US Economic Focus –
Households still generally challenged
Homeowners Debt vs. Equity
16,000
16,000
14,000
14,000
12,000
12,000
10,000
Mortgage
Debt
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
Source = FactSet
19
US Economic Focus –
Consumers still working down debt
US Household Debt and Debt-to-Income
1.2
16,000
Personal
Income
Household
Debt (L)
1.1
1
Debt to
Income
Ratio (R)
0.9
14,000
12,000
10,000
8,000
0.8
6,000
0.7
4,000
0.6
2,000
0.5
0
0.4
-2,000
0.3
-4,000
'59 '61 '63 '65 '67 '69 '71 '73 '75 '77 '79 '81 '83 '85 '87 '89 '91 '93 '95 '97 '99 '01 '03 '05 '07 '09 '11
Debt outstanding - Total households - Home mortgage, D.3 - United States + Debt outstanding - Total households - Consumer credit, D.3 - United States (Left)
(Debt outstanding - Total households - Home mortgage, D.3 - United States + Debt outstanding - Total households - Consumer credit, D.3 - United States) / Personal Income, Bil. $ Personal Income, Bil. $ - United States (Left)
Trendline: Linear
Trendline: Linear
Recession Periods - United States
Source = FactSet
20
3) Market Environment
21
Global Stocks –
US outperforming by a wide margin
MSCI US vs. MSCI World ex US
600
2,200
MSCI US
(R)
550
500
2,000
1,800
450
MSCI World
ex -US (L)
400
1,600
1,400
6/4/2012
bottom
350
300
10/3/11
bottom
250
7/5/10
bottom
1,200
1,000
800
200
600
150
400
100
200
'93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12
MSCI AC World ex USA - Total Return Index (Left)
MSCI US Investable Market (2500) - Total Return Index (Right)
Recession Periods - United States
Source = FactSet
22
US Bond Market –
When will yields start to rise and by how much?
10-year and 3-month Treasury Yields
18
18
16
16
14
14
12
12
10
10
8
8
6
6
4
4
10yr
Treasury
3-month
T-Bill
2
0
'53
'56 '59 '62 '65 '68 '71 '74
'77 '80 '83 '86 '89 '92 '95
Government Benchmarks 10 year, Yield, Percent, Close - United States
US Benchmark Bond - 3 Month - Yield
2
0
'98 '01 '04 '07 '10
Recession Periods - United States
Source = FactSet
23
Commodities –
Getting very volatile, but back in long-term range
CRB Index (ThomsonReuters/Jeffries)
500
500
3
450
450
400
400
4
2
1
350
350
309.26
300
300
250
250
200
200
150
150
'74
'76
'78
'80
'82
'84
'86
'88
'90
'92
'94
'96
'98
'00
'02
'04
'06
'08
'10
'12
AVAIL(ECON_CLIENT[CRB_HISTORY],SPEC_ID[LPL1K:FG_TOTAL_RET_IDX])
Recession Periods - United States
Trendline: Linear with 1st standard deviation, trend based
Source = FactSet
24
US Dollar Index* vs. Price of Gold–
Gold is the new reserve currency
Gold vs. Dollar Index*
180
2,000
1,800
Gold
160
1,600
1,400
140
1,200
1,000
120
Gold Trend
800
100
600
Dollar
Trend
DXY
80
400
200
0
60
'72 '74 '76 '78 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12
AVAIL(ECON_CLIENT[DXY.Z_HISTORIC],SPEC_ID[DXY.Z:FG_PRICE]) (Right)
Gold (NYM $/ozt) Continuous Contract - Futures Price Close (Left)
Recession Periods - United States
25
Trendline: Linear
Trendline: Linear
* Dollar Index = Euro = 57%; Yen = 14%; Pound = 12%; Canadian Dollar = 9%; Swedish Krona = 4%; Swiss Franc = 4%
Source = FactSet
4) Business Recommendations
26
Business Focus 2013
Narrow the scope of purpose
1.
Resources - Focus resources on what is currently growing; challenge or jettison those
areas that are not.
2.
Growth - Brainstorm to identify one new revenue growth area to focus on for the year –
and follow thru on it.
3.
Productivity - Brainstorm to identify one area that needs productivity gains for the year –
and follow thru on it.
4.
Cash balance income - Increase the yield from excess balance-sheet cash.
5.
Commodity costs - Lock-in commodity costs when they hit your strategic planning level.
6.
Insurance review - Review key man insurance policies and if all other policies are still
current and relevant.
7.
Acquiring employees - Actively seek partnerships (local community colleges or
equivalents) for a steady employment pool.
8.
Future growth - Pre-fund growth by purchasing a property and/or facilities to grow into.
9.
Transition planning - Have a written transition plan (private company) or succession
planning (public company), with the appropriate professional partner input.
10. Hire a healthcare cost consultant!!!
27
Five US Business Themes for the Decade –
1) Rise of the Gen Y’ers
2) Recovery of US Manufacturing
3) Privatization/Consolidation of Government
4) Transition of the Baby Boomers
5) Rearrangement of Energy – Sources, Supply & Usage
Resulting potential domestic growth sectors of economy:
28
1.
Healthcare
2.
Education
3.
Facility retrofitting – reuse and/or energy efficiency
4.
Energy
5.
Transportation – as a result of energy transformation
Disclosures and Disclaimers
The opinions expressed herein are those of Fifth Third Bank, Investment Advisors Division, 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
29
May Lose Value
Not A Deposit