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Transcript of T. Rowe Price, Invest With Confidence and the Bighorn Sheep logo is a registered trademark of T....
T. Rowe Price, Invest With Confidence and the Bighorn Sheep logo is a registered trademark of T. Rowe Price Group, Inc.
Financial Markets Review: First Quarter 2009May 19, 2009
Presented by: Tim Noel, Ph.D., CFA
2
Brief, incomplete history of how we got here
Credit standards are weakened
More leverage, risk taking, and housing bubble
Fed lowers interest rates
Technology bubble bursts
Increased asset securitization
Mortgage security prices fall
Housing bubble bursts
Liquidity dries up
Consumers are forced to de-lever
Companies (particularly financials) are forced to de-lever
Widespread asset write-downs increase fear and uncertainty
2000 2001 2002 2004 20092003 2005 2006 2007 2008
3
What happened this quarter
Sources: Credit Suisse; Barclays Capital; Standard & Poor’s; MSCI; Russell
Investors are exhibiting some risk appetite
5.8
1.0
-1.3-4.1
-19.6
-46.9
3.1
7.5
-34.3-38.1
-46.2
-37.5
-42.4
0.1
-16.8-15.0-13.9
-11.0
-60
-50
-40
-30
-20
-10
0
10
20
HY Bond EM Stock U.S. AggBond
U.S.Treasuries
Grow th S&P 500 EAFE Small Value
Ret
urn
(%)
First Quarter 2009
One Year
Capital Market Returns by Asset Class Ended March 31, 2009
Growth
4
What happened this quarter
2 JanuaryISM Manufacturing index plungesto a 28-year low of 32.4%
S&P 500 Index
Clo
sing
Pric
e (Y
TD
)
10 FebruaryUncertainty over stimulus bill passing the House of Representatives
23 FebruaryReport thatAIG may post massive losses. Citigroup talks with governmentabout increasing stake.
9 JanuaryUnemployment tops 7%, highest in 16 years.
20 JanuaryObama inauguration
10 MarchCitigroupindicates it was profitable in January and February.Barney Frank makes hopeful comments on reinstating the uptick rule
18 MarchFed announces expanded asset purchaseprograms
26 FebruaryHealth care stocks fall after House calls for cuts on payments to private insurance plans
23 MarchTreasury unveils toxic asset plan details
30 MarchU.S. government officially rejects viability plans from GM and Chrysler
Jan: -8.43% Feb: -10.65% Mar: +8.76% 1Q09: -11.01%
Source: Factset
5
Investor Fear
Fears of economic and earnings weakness
Severe Sell Off
Severe high velocity sell off
in risky assets
Forced Liquidations
Indiscriminate selling and forced liquidations
Fundamental Disconnect
Prices become disconnected from fundamentals
Investment Opportunities
Fundamental analysis identifies opportunities
Chain Reaction
What happened this quarter
CBOE Market Volatility Index (VIX)
0
10
20
30
40
50
60
70
80
90
Jul-0
8
Aug-0
8
Sep-0
8
Oct-
08
Nov-0
8
Dec-0
8
Jan-
09
Feb-0
9
Mar
-09Jul-08 Aug-08 Sep-08 Nov-08Oct-08 Dec-08 Jan-09 Feb-09 Mar-09
Panic eases:Fundamentals are important again.Quality rewarded.
Fear and panic:Investors shoot first, ask questions later.Opportunities arise.
Source: Factset
6
• Restructuring in the financial sector will slow down the recovery in late 2009 and into 2010
− Accumulated imbalances need to be corrected before growth returns
− Housing supply overhang will have a long tail
− Correction of business inventories are starting to take hold
• Expecting declining Real GDP until Q309
− Government spending to provide the only positive contribution until 4Q09 when the consumer and business begin slight growth in spending
• Unemployment and savings rate
− Expecting unemployment rate to hit 9.2% by the end of 2009
− Secular rebound in the personal savings rate after 25-year decline (peaked in 1981 at 12.5%) – expecting it to hit 6.3% by 2010
Economics summary
Base case: visibility to gradual recovery by year-end (55%)
7
Signs of stabilization?
Sources: Bureau of Labor Statistics; Haver Analytics
First signs of stabilization bring visibility to gradual recovery by year-end
Real Gross Domestic Product (SAAR, Bil.Chn.2000$) Q1 1989 – Q1 2009
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
Q1-89 Q1-91 Q1-93 Q1-95 Q1-97 Q1-99 Q1-01 Q1-03 Q1-05 Q1-07 Q1-09
Per
cent
cha
nge,
ann
ual r
ate
Real GDP (SAAR, Bil.Chn.2000$)
TRP Estimates
8
Signs of stabilization?
Sources: Bureau of Labor Statistics; Haver Analytics
All Employees: Total Nonfarm (SA) Difference – Period to Period January 31, 1985 – March 31, 2009
-1000
-800
-600
-400
-200
0
200
400
600
Jan-85 Jan-87 Jan-89 Jan-91 Jan-93 Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09
Cha
nge,
thou
sand
s
Pressures on labor markets appear to be stabilizing after intensifying in December and January
9
Signs of stabilization?
Sources: Bureau of Labor Statistics; Haver Analytics
Real Personal Consumption Expenditures January 31, 1990 – February 28, 2009
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
7%
Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08
Per
cent
cha
nge
Consumers felt the pressure of the labor market decline; economic fears led to less consumption and more saving
10
Signs of stabilization?
Source: Bloomberg
30-year Mortgage RatesMarch 31, 2000 – March 31, 2009
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
8.0
8.5
Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09
Mortgage rates hit historic lows with the Fed buying Agency MBS
11
The IMF now forecasts total global write-downs to reach $4.1 trillion
The new normal – continued deleveraging and loss recognition
Source: Bloomberg; IMF Global Financial Stability Report - April 2009
Global Financial ServicesQuarterly Write-downs and Recapitalization
Through March 31, 2009
279223
170
258
358
2
1,289
86 88
193
103
432
201
1,104
0
200
400
600
800
1,000
1,200
1,400
1,600
Prior to 1Q08 1Q08 2Q08 3Q08 4Q08 1Q09 Total
Billi
ons
($)
Total w rite-dow ns & credit losses
Total capital injections
12Source: Federal Reserve Board, Haver Analytics
The new normal – massive government intervention to provide liquidity
U.S. government intervention will remain elevated with new programs
The Federal ReserveBalance Sheet Composition
December 31, 2007 – March 31, 2009
13
What’s next?
• Credit conditions must continue to improve. Companies must be able to finance their activity. Watch credit spread trends.
• The pace of deleveraging must slow. Indiscriminate, forced selling of equity and fixed-income securities must continue to diminish.
• Fiscal and monetary stimulus measures must bite. This will give businesses and investors confidence to spend and invest.
• A deflationary mindset must be averted. The velocity of spending will grind to a halt if consumers and businesses believe prices will get continually cheaper.
14
What’s next?
Old Norm
New Norm
Global Real GDP > 5% 0% to negative 2 to 3%
Inflation Modest 3%, but rising Spike then collapse Deflation/Inflation?
Price power Strong Disappeared Return slowly
Profit margins Continuously improving Free fall Improving
Real interest rates @ 0% Rising Resetting higher
ROES All-time highs Collapsing Normalizing
Consumer Excess consumption Deleveraging Moderate consumption
Fixed-asset investment Excessive Falling sharply Recovering slowly
Source of global GDP growth < 50% Emerging mkt > 100% Emerging mkt ~ 66% Emerging mkt
Valuations Modest expansion Rock bottom Normalizing
Risk premiums Historic lows Historic highs Declining
Transition Period