Reading the Tea Leaves: Investing for 2010 and Beyond Wednesday, April 28, 2010; 8:00 AM - 9:15 AM Moderator: Maria Bartiromo, Anchor, CNBC's Closing Bell With Maria Bartiromo Speakers: Nick Calamos, President of Investments and Co-Chief Investment Officer, Calamos Investments Patrik Edsparr, Global CEO, Citadel Securities Thomas Joyce, Chairman and CEO, Knight Capital Group Inc. Meredith Whitney, CEO, Meredith Whitney Advisory Group LLC 1
Nick P. Calamos s Slides 2
Tracking a normal recovery FIGURE 1: S&P 500 FALL/RISE OF 1970s, 1980s, 2001 & FIGURE 2: ISM MANUFACTURING FALL/RISE OF 1970s, 2007 RECESSIONS 1980s, 2001 & 2007 RECESSIONS 3
Tracking a normal recovery, continued FIGURE 3: CREDIT SPREADS FOR HIGH GRADE AND FIGURE 4: G7 EXPORTS FALL/RISE OF 1970s, 1980s, HIGH YIELD CORPORATE BONDS 2001 & 2007 RECESSIONS 4
Not tracking a normal recovery FIGURE 5: TOTAL NONFARM PAYROLL FALL/RISE OF FIGURE 6: REAL DOMESTIC INVESTMENT FALL/RISE OF 1970s, 1980s, 2001 & 2007 RECESSIONS 1970s, 1980s, 2001 & 2007 RECESSIONS 5
The New Misery Index FIGURE 7: MISERY INDEX NEW VS. OLD 6
High debt levels indicate this is not a normal recession FIGURE 8: GENERAL GOVERNMENT DEBT, ADVANCED ECONOMIES AS A % OF GDP FIGURE 9: U.S. HOUSEHOLD DEBT AS A % OF NOMINAL GDP 7
Historical collapse in velocity of money further indication this recession is different FIGURE 10: RATIO OF GDP TO MONETARY BASE (VELOCITY OF MONEY) 8
A high debt level increases vulnerability to rate changes and event risk Sources: Non-Financial Debt from Federal Reserve, Flow of Funds Report.. GDP data from BEA, Govt Bond Yields from FactSet. 9
Expanding government results in lower wealth creation FIGURE 12: FEDERAL GOVERNMENT EXPENDITURES AS A % OF GDP AND S&P 500 INDEX ADJUSTED FOR INFLATION 10
Short-term Bullish; Long-term Scared FIGURE 13: U.S. CORPORATE PROFITS AND U.S. LABOR PRODUCTIVITY FIGURE 14: EUROZONE LABOR PRODUCTIVITY 11
Calamos focusing on companies with global revenue sources FIGURE 15: MARKET BOTTOM TO NOW RUSSELL 3000 INDEX AND INTERNATIONAL REVENUE SEGMENT RETURNS 12
Additional Slides 13
U.S. Consumer Confidence Index Confidence improves slowly Index (1985 =100) 160 140 120 100 80 60 40 Conference Board's Consumer Confidence Index 20 0 Jan 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Mar 2010 Source: Bloomberg. 14
U.S. small business optimism index (1986=100) 110 Small business optimism Index 105 100 95 90 85 80 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Source: the National Federation of Independent Business. 15
Forecasts of positive U.S. real GDP growth rates 8 6 4 2 0-2 -4-6 -8-10 2.1-0.7 Real GDP growth (%) (Quarterly ypercentage change, seasonally adjusted at an annual rate) 1.5-2.7-5.4-6.4-0.7 2.2 Note: Composite forecasts are average forecasts of 27 private organizations. Sources: U.S. Bureau of Economic Analysis; Bloomberg. 5.9 3.0 3.0 2.8 2.9 2.9 3.0 3.2 Composite forecasts Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2007 2008 2009 2010 2011 3.9 16
Retail sales climbed in March A sign showing American consumers were beginning to spend more US$ billions 400 Monthly total retail sales, seasonally adjusted +1.6% in March 350 300 Shade area indicates recession 250 2000 2002 2004 2006 2008 2010 Source: U.S. Department of Commerce. 17
Households are deleveraging U.S. households need to reduce their debt to more manageable level U.S. household debt (% of disposable personal income) 150 100 Economists see 100% as a sustainable level Total household debt stood at 123% as of the end of 2009 50 0 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2009 Source: Federal Reserve. 18
Growing personal bankruptcy filings The total number of bankruptcy filings = 1.47 million in 2009 Thousands 800 The number of quarterly bankruptcy filings in the federal courts 600 400 Business bankruptcy filings Personal bankruptcy filings Total 200 0 Q1 1995 Q1 1997 Q1 1999 Q1 2001 Q1 2003 Q1 2005 Q1 2007 Q1 2009 Source: Administrative Office of the U.S. Courts. 19
The nation posted its large job gain in March The largest job gains since the start of the recession Monthlynet employment change (thousands of workers) 400 200 162,000 jobs added in March 0-200 -400-600 -800-1000 Jan-2007 Jan-2008 Jan-2009 Jan-2010 Source: U.S. Bureau of Labor Statistics. 20
Decline in initial claims for unemployment insurance Thousands 700 600 500 6.6 million people receiving jobless benefits as of June, 2009 4.56 million (as of March 31, 2010) 400 300 200 1980 1985 1990 1995 2000 2005 2010 Source: U.S. Bureau of Labor Statistics. 21
A rise in private hiring Job losses continued in financial activities and in information Government Education and health Trade, transportation, utilities Leisure and hospitality Manufacturing Construction Professional and business Mining and logging Other services Information Financial activities Monthlynet employment change, March 2010 (thousands of workers) -30-20 -10 0 10 20 30 40 50 Source: U.S. Bureau of Labor Statistics. 22
Underemployment is still a concern Thousands 7000 7,000 6,000 5,000 4,000 Part-time employment for economic reasons Part-time due to slack work or business conditions 3,000 2000 2,000 1,000 0 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 Source: U.S. Bureau of Labor Statistics. Could only find part-time work 2010 23
Turnaround stock markets 15,000 12,500 Nasdaq (right scale) 3000 2500 1,800 1,600 Russell 2000 (right scale) 1,400 900 800 700 10,000 7,500 Dow Jones (left scale) 2000 1500 1000 1,200 1,000 800 600 S&P 500 (left scale) 600 500 400 300 5,000 500 2002 2004 2006 2008 2010 400 200 2002 2004 2006 2008 2010 Source: DataStream. 24
Narrowing risk spread Indicative of the reduced stress in the debt markets Percentage points 5 Oct10, 2008 4 TED Spread 3 2 BAA-AAA spread 1 0 Note: The TED spread is the difference between 3 month-libor rates and the yield on 3 month U.S. Treasury bill. The BAA-AAA spread is the difference between the interest rates on high-grade and medium-grade corporate bonds. Sources: Bloomberg, Federal Reserve. 25
Decline in market volatility 80 70 60 50 40 30 20 10 Volatility index (VIX) VIX long-term average,1990-2010 Long-Term Capital Management bailout (September 1998) Dot-com bubble burst (March 2000) Lehman Brothers collapsed (September 2008) 0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Note: VIX is the Chicago Board Options Exchange's volatility index. Source: DataStream. 26
Frozen secondary markets US$ billions U.S. issues of non-agency 1,000 mortgage-backed g securities (MBS) 800 600 400 200 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Source: Securities Industry and Financial Market Association, SIFMA. 27
Frozen secondary markets US$ billions 800 600 400 200 U.S. issues of asset-backed securities (ABS) by asset type Student Loans CBOs & CLOs Manufactured Housing Home Equity Equipment Credit Cards 0 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 Auto Note: CBOs = Collateralized bond obligations; CLOs = Collateralized loan obligations. Source: Securities Industry and Financial Market Association, SIFMA. 28
U.S. bond issuance Started to increase since 2009 Total issuance (US$ billions) 180 160 140 120 100 80 60 40 20 0 Jan 2008 Investment grade High yield Mar May Jul Sep Nov Jan 2009 Mar May Jul Sep Nov Jan 2010 Mar Source: Securities Industry and Financial Markets Association. 29
U.S. fiscal position is in a free fall US$ billions Federal surplus [+] or deficit [-], fiscal year 400 200 0-200 -400-600 -800-1,000-1,200 Shade area indicates recession -1,400-1,600 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 Source: The Office of Management and Budget, White House. 30
President Obama's budget will generate nearly $10 trillion in budget deficits over the next 10 years Federal Budget (US$ billions) 0-200 -400-600 -800-1,000-1,200-1,400-1,600 US$9.761 trillion total deficit from 2011 to 2020 Actual CBO's estimate of federal budget for fiscal year 2011 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Source: Congressional Budget Office (CBO). 31
U.S. national debt will reach 90% of GDP in the next decade % of GDP Federal debt held by public 100 90 80 70 60 50 40 30 20 2010 63% of GDP, or $9.2 trillion 2020 90% of GDP, or $20.3 trillion 10 CBO's estimate 0 1980 1985 1990 1995 2000 2005 2010 2015 2020 Source: Congressional Budget Office (CBO). 32
World economic recovery Real GDP growth rates, 1980-2014 Real GDP (% change, year-to-year) Projected 10 Emerging and 8 developing economies World 6 4 2 0-2 -4 Advanced economies -6 1980 1985 1990 1995 2000 2005 2010 2014 33
2009 and 2010 Global equity markets Emerging markets were the clear winners in 2009 YTD (as of April 20, 2010) MSCI Japan 7.4% MSCI Pacific 5.8% MSCI EAFE 1.4% S&P 500 Index 5.6% MSCI World 3.7% MSCI Europe -0.4% MSCI EM index 3.8% -2 0 2 4 6 8 10 Index return (%) in US$ Source: DataStream. 34
2010 global equity markets Japan and U.S. lead; Europe lags in 2010 December2009 = 100 110 105 100 95 Japan and U.S. have been the leaderin 2010. MSCI Japan S&P 500 Index MSCI EM MSCI EAFE 90 Spain,Portugaland and Greece continue to weigh on European performance 85 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 MSCI EUROPE Source: DataStream. 35
Unemployment rate in Eurozone on the rise Unemploymentrate, percent (seasonally adjusted) 10.5 10.0 9.5 9.0 8.5 80 8.0 7.5 7.0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Sources: Eurostat, Bloomberg. 36
Global economic forecasts Emerging market economies will lead the world growth % Real GDP growth forecasts by key countries/regions 9 (average 2010-2014) 2014) 8.5 80 8.0 8 7 6 4.6 4.8 4.9 5 3.9 4 3 2.1 2 14 1.4 1.1 1 0 Western Japan United Latin MENA Brazil Asia India China Europe States America Source: Economist Intelligence Unit. 37
Change in the world economic power China and India become larger in the world economy Real GDP (PPP dollars), share of world total 1991 United States 22% 2009 United States 20% Rest of the world 48% U.K. 4% France 4% China 4% Japan 9% India 3% Germany 6% Rest of the world 47% China 12% Japan U.K. 6% 3% India France 5% Germany 3% 4% Sources: International Monetary Fund, The Milken Institute. 38
Global stock market capitalization (% world total) China almost surpassed Japan in stock market capitalization Canada 2% France 3% United Kingdom 9% China 0% Source: Bloomberg. 1991 Rest of the world 19% Japan 33% United States 34% Rest of the world; 39% Canada; 4% France; 4% April, 2010 United Kingdom 7% United States; 31% China; 7% Japan; 8% 39