Broad Municipal Market Review: Are Munis Rich or Cheap?

©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

[email protected]

mailto:[email protected]


®. Further distribution prohibited without prior permission. 2

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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



Difference Between U6 and U3

Source: BLS and Cumberland Advisors

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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



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

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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

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Less than one year One to 10 Yr Over ten yr

QE-1

QE-2

QE-3



Federal Deficit

Source: Haver Analytics and Congressional Budget Office



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

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Municipal Bond Fund Flows (All Municipal) 2 per. Mov. Avg. (Municipal Bond Fund Flows (All Municipal))

Source: Lipper



Munis vs. Crises

Source: Bond Buyer and Cumberland Advisors

3

3.5

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4.5

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5.5

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6.5

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2007 2008 2009 2010 2011 2012 2013 2014

Yie

ld (

%)

2008

Meredith Whitney

Moment

Tapering &

Fund Outflows

Fed Hike??



Moody’s Rating Changes: Revenue

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1Q02 1Q03 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15

Upgrades Revenue Downgrades RevenueSource: Moody’s Investors Service



Moody’s Rating Changes: Tax-Backed

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1Q02 1Q03 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15

Upgrades Tax Downgrades TaxSource: Moody’s Investors Service



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



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



50 Years of 10-year US Tsy Yields

Source: Bloomberg



Trailing 12-mo. REAL GDP Growth

Source: Bloomberg



Headline vs. Core CPI

Source: Bloomberg



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.

18

Documents

Broad Municipal Market Review: Are Munis Rich or Cheap?