John Hallacy +1 646 743 1446 Municipal Research Strategist MLPF&S john.hallacy@baml

1

6 October 2011

John Hallacy +1 646 743 1446

Municipal Research Strategist

MLPF&S

[email protected]

Municipal Research

Meaningful Municipal Metrics

Product ID

6 October 2011

2

6 October 2011

Current Outlook

State and local governments are expected to be under financial pressure for some time, most likely continuing throughout Fiscal Year 2012 and beyond

NCSL budget gap estimate is lower than last year at $32bn with only 20 state responses

Is the incidence of municipal default and bankruptcy on the rise? 2010: $4.25bn defaults, 0.15% annual default rate, YTD 22 September

2011: $1.13bn defaults, 0.04% default rate

Light supply ($187bn to-date, down 36% YoY) and weak economic recovery in 2011 driving performance: Muni YTD total return, 7.934%, as of October 6

Estimated supply 2011: $245bn

Yield curve remains steep: BofAML Economics Team expects the Fed to remain on hold until 1Q2014

Current outlook for the muni market

3

6 October 2011

AAA Muni yield curves, 5 October 2011 vs. 6 October 2008

Source: Thomson Reuters MMD


0.00

1.00

2.00

3.00

4.00

5.00

6.00

1yr 2yr 3yr 4yr 5yr 7yr 10yr 12yr 15yr 20yr 30yr

10/6/2008 10/5/2011

4

6 October 2011

Current Outlook

US downgrade to AA+ with a Negative Outlook by S&P and its implications for munis

Fitch affirmed the US rating at AAA with a Stable Outlook, Moody’s maintains AAA with Negative Outlook

Next review post 11/23

Eurozone – Portugal, Italy, Ireland, Greece, Spain?

FED Twist: sell $400bn near term maturities and purchase $450bn long term maturities

Tax Policy Outlook

Future of Bush tax cuts for incomes $250k and over

Preserve tax exemption up to 28% bracket

Additional reductions of tax exemption if debt targets not hit

Elimination of tax exemption for municipals – viewed as an expenditure ~$40bn per year


5

6 October 2011

Annual Deficits as a Percent of GDP

Source: Executive Office of the President, Office of Management and Budget (OMB)*BCA: Budget Control Act of 2011


6

6 October 2011

Debt Held by the Public as a Percent of GDP


Source: Executive Office of the President, Office of Management and Budget (OMB)*BCA: Budget Control Act of 2011

7

6 October 2011

21 of the Top 50 world economies are U.S. municipalities*

*GDP Current Price ($bn) as of 2010; 2010 figures are estimates except for state data and figure for USSource: IMF; U.S. Bureau of Labor Statistics

Rank Area GDP Rank Area GDP

1 United States 14,552 26 Pennsylvania 570

2 China 5,364 27 Chicago-Naperville-Joliet, IL-IN-WI 532

3 Japan 5,273 28 Switzerland 512

4 Germany 3,333 29 New Jersey 487

5 France 2,669 30 Poland 479

6 United Kingdom 2,223 31 Ohio 478

7 Italy 2,121 32 Belgium 472

8 Brazil 1,910 33 Sweden 444

9 California 1,901 34 Saudi Arabia 438

10 Canada 1,556 35 Norway 433

11 Russia 1,508 36 North Carolina 425

12 Spain 1,425 37 Washington-Arlington, DC-VA-MD-WV 425

13 India 1,367 38 Virginia 424

14 New York-Northern New Jersey-Long Island, NY-NJ-PA 1,281 39 Taiwan, Province of China 418

15 Texas 1,207 40 Georgia 403

16 Australia 1,193 41 Austria 392

17 New York 1,160 42 Houston-Sugar Land-Baytown, TX 385

18 Mexico 996 43 Michigan 384

19 Korea 991 44 Massachusetts 379

20 Netherlands 797 45 Dallas-Fort Worth-Arlington 374

21 Florida 748 46 Iran 360

22 Los Angeles-Long Beach-Santa Ana, CA 736 47 Philadelphia-Camden-Wilmington, PA-NJ-DE-MD 347

23 Turkey 711 48 Argentina 344

24 Indonesia 670 49 Washington 340

25 Illinois 652 50 Greece 325

51 Denmark 314

52 South Carolina 164


8

6 October 2011

It’s all Greek to me

Outlook for the economy and municipals

9

6 October 2011

Sovereign ratings and how the rating agencies’ ratings of the US compare

Sovereign ratings

Sovereign Moody’s S&P Fitch

United States Aaa/Negative AA+/Negative AAA/Stable

Japan Aa3/Stable AA-/Negative AA-/Negative

France Aaa/Stable AAA/Stable AAA/Stable

Germany Aaa/Stable AAA/Stable AAA/Stable

Italy Aa2/RUR-* A+/Negative AA-/Stable

United Kingdom Aaa/Stable AAA/Stable AAA/Stable

Spain Aa2/Negative AA/Negative AA+/Negative

Greece Caa1/Negative CC/Negative CCC

*RUR – “Ratings Under Review” for possible downgradeSource: Moody’s; Standard & Poor’s; and Fitch

10

6 October 2011

Agreement to increase the debt ceiling

Prior $14.3tn debt limit was raised through the end of 2012. House passed measure on August 1st (269-161), Senate passed measure

on August 2nd (74-26)

Details behind the agreement: increase in debt ceiling AND deficit reduction plan Additional increase of $400bn; limit will be raised further in 2 additional

steps for a cumulative increase of between $2.1tn and $2.4tn over the ten years through 2021

Cuts of $917bn in cuts agreed to initially. (First round of cuts has spared entitlement spending).

Followed by an additional $1.5tn in cuts which will be identified by a bicameral Congressional “super” committee by November 2011 (to be enacted by year-end) If Congress does not enact the committee’s recommendations, cuts of $1.2tn will

be implemented over the same time period and would mainly affect outlays for civilian discretionary spending, defense, and Medicare

Debt Ceiling

11

6 October 2011

Agreement to increase the debt ceiling

Moody’s maintained ratings at Aaa and has a negative outlook; has kept 21 Public Housing Authority bonds on negative pending further review

Fitch maintained ratings at AAA with a stable outlook

S&P downgraded its rating to AA+ with a negative outlook based upon “political risks and rising debt burden”. Related actions include: Ratings on Fannie Mae and Freddie Mac and issuer credit ratings and related issue

ratings on the Farm Credit System and 10 of 12 FHLBs lowered to AA+ from AAA. Lowered ratings on issues that have guarantees by Ginnie Mae in the form of MBS to AA+ from AAA

Ratings on municipal housing issues guaranteed by Fannie Mae and Freddie Mac lowered to AA+

Lowered ratings on certain public finance housing authority issuer credit ratings and municipal housing issues backed by the government to AA+

Several Defeased industrial bonds’ ratings were lowered to AA+ on sovereign ceiling consideration

Ratings on Energy Northwest, WA & Bonneville Power Administration, OR lowered to AA/Stable; ratings on TVA lowered to AA+/Negative

States & Locals to be reviewed later this year

No strict sovereign ceiling consideration but subject to one notch rule by S&P

Debt Ceiling

12

6 October 2011

BofA Merrill Lynch Global Research US Treasury rates forecast

Source: BofA Merrill Lynch Global Research


0.00

1.00

2.00

3.00

4.00

5.00

6.00

3Q2011 4Q2011 1Q2012 2Q2012 3Q2012 4Q2012

Yiel

d (%

)

2-year 5-year 10-year 30-year

13

6 October 2011

Size of U.S. Credit Markets

Source: Federal Reserve


12/31/2006 (Municipal Market $2.40tn)

Agencies17%

Corporates27%

Mortgages37%

Municipals6%

Treasurys13%

12/31/2010 (Municipal Market $2.93tn)

Agencies17%

Corporates25%

Mortgages31%

Municipals6%

Treasurys21%

14

6 October 2011

Quarterly issuance since 2000 ($mn)



$0

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

$140,000

$160,000

1Q20

00

3Q20

00

1Q20

013Q

2001

1Q20

02

3Q20

021Q

2003

3Q20

03

1Q20

043Q

2004

1Q20

05

3Q20

051Q

2006

3Q20

06

1Q20

073Q

2007

1Q20

08

3Q20

081Q

2009

3Q20

09

1Q20

103Q

2010

1Q20

11

3Q20

11

15

6 October 2011

Issuance summary ($mn)

Source: Thomson Financial


MTD 09/29/11 MTD 09/29/10 YTD 09/29/11 YTD 09/29/10

Total 27,334.7 31,786.6 187,477.3 294,264.9

New Money 10,337.8 18,145.9 95,183.9 180,096.5

Refunding 16,996.9 13,640.7 92,293.3 114,168.6

Insured 1,993.3 2,106.5 10,488.1 20,849.0

Fixed rate 25,452.9 28,752.0 167,992.9 271,864.1

Variable rate long 238.5 169.3 2,239.2 1,602.0

Linked rate 617.0 1,333.7 7,778.9 5,800.0

Variable rate short 913.6 1,393.0 7,673.4 12,307.9

Zero coupon 108.9 66.2 1,265.7 1,766.9

Convertible 3.9 72.5 527.5 924.0

Tax exempt 25,010.9 21,197.4 160,770.1 197,488.7

Taxable 1,265.1 10,202.7 20,959.1 93,436.2

AMT 1,058.7 386.5 5,747.9 3,340.1

16

6 October 2011

Quarterly change in State tax revenue vs. change in U.S. GDP

Source: Census Bureau; Bureau of Economic Analysis


-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

1989Q1 1990Q4 1992Q3 1994Q2 1996Q1 1997Q4 1999Q3 2001Q2 2003Q1 2004Q4 2006Q3 2008Q2 2010Q1

YoY Change in State Tax Revenue YoY Change in U.S. GDP

17

6 October 2011

Budget cuts made after the state budget passed, FY1990 – FY2011 ($mn)


Source: National Association of State Budget Officers

18

6 October 2011

Total State Expenditures by Function

Source: National Association of State Budget Officers


19

6 October 2011

State debt and pensions burden as a percentage of state GDP


Source: Moody’s Investor Service (Debt as of FY2010); Pew Center for the States (UAAL as of FY2009); Bureau of Economic Analysis (State GDP for 2010)

State Debt/GDP Ratio(Debt + Pension)/

GDP Ratio State Debt/GDP Ratio(Debt + Pension)/

GDP Ratio

Alabama 2.6% 9.6% Montana 1.1% 9.5%

Alaska 2.0% 15.3% Nebraska 0.0% 1.4%

Arizona 2.7% 6.9% Nevada 2.1% 10.4%

Arkansas 1.1% 6.6% New Hampshire 2.0% 8.5%

California 5.5% 10.9% New Jersey 7.8% 18.3%

Colorado 1.1% 8.3% New Mexico 5.1% 14.7%

Connecticut 8.7% 16.2% New York 6.0% 5.8%

Delaware 4.2% 5.1% North Carolina 1.9% 2.6%

Florida 3.2% 6.6% North Dakota 0.7% 3.4%

Georgia 3.0% 5.9% Ohio 2.7% 16.4%

Hawaii 9.3% 17.9% Oklahoma 1.8% 13.0%

Idaho 1.6% 7.8% Oregon 4.6% 9.4%

Illinois 5.3% 16.0% Pennsylvania 2.7% 6.9%

Indiana 1.2% 6.2% Rhode Island 5.3% 16.0%

Iowa 0.6% 4.6% South Carolina 2.8% 11.8%

Kansas 3.1% 9.8% South Dakota 0.7% 2.4%

Kentucky 5.9% 16.2% Tennessee 1.0% 2.5%

Louisiana 3.0% 11.2% Texas 1.4% 3.6%

Maine 2.5% 10.9% Utah 3.4% 6.7%

Maryland 3.6% 10.7% Vermont 2.0% 6.7%

Massachusetts 9.1% 14.9% Virginia 2.2% 5.8%

Michigan 2.2% 6.6% Washington 5.8% 6.0%

Minnesota 2.5% 8.3% West Virginia 4.0% 15.2%

Mississippi 5.2% 17.1% Wisconsin 4.6% 4.6%

Missouri 2.1% 7.5% Wyoming 0.1% 2.5%

20

6 October 2011

Idaho74%

Washington99%

Montana74% North Dakota

81%

Wisconsin100%

South Dakota92%

Kentucky58%

Iowa81%

Kansas64%

Oklahoma57% Arkansas

78%

Louisiana60%

Mississippi67%

Alabama74%

Wyoming89%

Oregon86%

Utah86%

New Mexico76%

Minnesota77%

Missouri79%

Georgia87%

North Carolina97%

SouthCarolina

69%

Tennessee90%

Indiana67%

Illinois51%

Ohio66%

Michigan79%

Pennsylvania81%

New York101%

New Jersey (66%)

Maryland (65%)

Delaware (94%)

Massachusetts(68%)

Maine73%

Vermont73%

New Hampshire(58%)

Virginia80%

WestVirginia

56%

Florida84%

Hawaii69%

Nebraska88%

Texas84%

Arizona78%

Colorado69%

California81%

Nevada72%

Alaska61%

Connecticut (62%)Rhode Island (59%)

Legend

Greater than 90% funded

80-90% funded

70-80% funded

Less than 70% funded

State pension funding levels

Source: The Pew Center for the StatesBased on 2009 valuations


21

6 October 2011

Pension Policies

Types of reforms include: 1) reducing benefits, 2) sharing risk with employees, 3)requiring greater employee contributions, 4)improving Investment Management and Governance.

The ARC and the Investment Return assumptions are driven by budgetary as well as actuarial considerations.

Can past benefits be modified? Yes, if the consideration is COLA’s, according to the Courts

Cases in Minnesota, South Dakota and Colorado


22

6 October 2011

Local government employment (000s), seasonally adjusted

Source: Bureau of Labor Statistics


13,600

13,700

13,800

13,900

14,000

14,100

14,200

14,300

14,400

14,500

14,600

14,700

Jan-

05

Jul-0

5

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

Jan-

10

Jul-1

0

Jan-

11

Jul-1

1

23

6 October 2011 Current outlook for the muni market

Legend

Specific Authorization

Conditional Authorization

Limited Authorization

Prohibit Filing

Unclear or no specific authorization

Kansas

Colorado

Oregon

Illinois

Washington

Montana

Idaho

California

Arizona

Texas

Louisiana

ArkansasOklahoma

Nebraska Iowa

Minnesota

Alabama Georgia

Kentucky

Indiana Ohio

SouthCarolina

Florida

North Carolina

Pennsylvania

New York

Missouri

South Dakota

North Dakota

Wyoming

Utah

Nevada

New Mexico

Alaska

Wisconsin

Michigan VermontMaine

New HampshireMassachusetts

Rhode IslandConnecticut

New Jersey

Delaware

MarylandVirginia

WestVirginia

Tennessee

Mississippi

Hawaii

States that authorize Chapter 9 filings

Source: James Spiotto, Chapman and Cutler LLP

24

6 October 2011

0369

12

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

YTD

In 2011 YTD there have been five bankruptcy filings. Most recently, Central Falls, RI filed. There were six filings in 2010. California and Texas have had highest number of filings, and most filings involve non conventional issuers.

Source: Chapman and Cutler LLC, PACER


0

5

10

15

20

AL AR CA ID IL MO MS NC NE NM NY OK PA RI SC TX VA WA

05

1015202530

City , Village or

County

Hospital/Health Care Municipal Utilities Special Municpal

District

Chapter 9 filings by year

Chapter 9 filings by type since 2000Chapter 9 filings by state since 2000

25

6 October 2011

Annual municipal bond defaults since 2000 (par value in default)

Source: BofA Merrill Lynch Global Research; *YTD 2011 as of 22 September; *Default rate for 2011 represents annualized rate

$0$500

$1,000$1,500$2,000$2,500$3,000$3,500$4,000$4,500$5,000

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

YTD 2011*

0.00%0.02%0.04%0.06%0.08%0.10%0.12%0.14%0.16%0.18%0.20%

Defaults ($mn) (lhs) Default Rate (rhs)


26

6 October 2011

Defaults by sector in 2010 ($4.25bn total)



Housing4% Healthcare

11%

Special Assessment

46%

Transportation15%

Other9%

Tribal Gaming15%

27

6 October 2011

Comparing long-term rates

Source: BofA Merrill Lynch Global Research; Thomson Reuters MMD


2.50%

3.00%

3.50%

4.00%

4.50%

5.00%

5.50%

6.00%

12/31/09 2/28/10 4/30/10 6/30/10 8/31/10 10/31/10 12/31/10 2/28/11 4/30/11 6/30/11 8/31/11

30 Year AAA Muni 30 Year Trsy AAA-rated BABs 15+ Yrs AA-AAA U.S. Industrial Corporates

28

6 October 2011

Cumulative flows into open-end mutual funds since 2009, as of 17 August 2011 ($bn)

Source: Lipper FMI


-60

-40

-20

0

20

40

60

80

100

120

140

Muni Funds IG Corporate Funds Equity Funds

29

6 October 2011

Municipal bonds outstanding by holders


Source: Federal Reserve

3Q2100 4Q2100 1Q2011 2Q2011 % of 2Q11

Munis Outstanding ($bn) 2,859.3 2,928.0 2,907.6 2,886.0 100.00%

Household sector 1,043.8 1,090.3 1,088.6 1,066.2 36.94%

Nonfinancial corporate business 21.5 21.0 20.4 19.8 0.69%

Nonfarm noncorporate business 4.3 4.3 4.3 4.3 0.15%

State and local governments 6.1 6.3 6.2 6.2 0.21%

Rest of the world 69.0 73.0 75.2 77.2 2.67%

U.S.-chartered Commercial banking 226.4 243.5 249.0 256.3 8.88%

Banks in U.S.-Affiliated areas 2.7 2.5 2.8 2.5 0.09%

Savings institutions 10.2 11.1 10.9 11.1 0.38%

Property-casualty insurance companies 353.5 348.4 349.7 348.2 12.07%

Life insurance companies 100.8 112.3 115.1 116.1 4.02%

State and local govt retirement funds 1.6 1.6 1.6 1.5 0.05%

Money market mutual funds 331.6 334.4 320.7 305.8 10.60%

Mutual funds 532.8 526.6 515.1 520.0 18.02%

Closed-end funds 81.7 80.3 79.6 79.6 2.76%

Exchange-traded funds 7.8 7.6 7.5 7.7 0.27%

Government-sponsored enterprises 26.2 24.9 23.8 22.9 0.79%

Brokers and dealers 39.2 40.0 37.0 40.6 1.41%

30

6 October 2011

Bond redemptions and coupon payments by month in 2011



0

5

10

15

20

25

30

35

40

45Ja

nuar

y

Febr

uary

Mar

ch

April

May

June July

Augu

st

Sept

embe

r

Oct

ober

Nov

embe

r

Dec

embe

r

$Bill

ions

Bond Redemptions Coupon Payments

31

6 October 2011

July through October rollover for top 15 states ($mn)



Bond Redemptions Coupon Payments

Oct-11 Nov-11 Dec-11 Oct-11 Nov-11 Dec-11

NY 800.1 2,638.1 1,423.8 856.8 1,395.9 1,441.4

CA 1,291.5 1,305.5 982.8 1,489.6 1,827.2 1,604.6

FL 2,793.5 525.5 176.6 1,151.6 440.4 535.6

IL 187.4 766.7 1,880.0 183.2 342.4 1,006.2

OH 297.1 364.0 2,090.4 122.4 165.4 963.6

TX 653.3 415.1 854.0 590.1 717.0 457.8

PA 757.2 611.3 870.1 299.3 397.0 563.2

NJ 226.9 288.1 1,382.3 149.0 206.3 879.1

MI 659.3 965.3 165.3 249.5 630.0 206.0

CO 43.0 468.7 1,440.3 54.0 267.1 561.8

MA 180.9 726.6 866.6 143.5 258.7 262.7

WA 213.6 83.6 1,776.2 13.6 22.0 21.3

CT 387.7 795.4 403.9 104.2 192.3 170.3

GA 246.2 361.8 303.2 209.5 196.0 181.6

32

6 October 2011

Muni ratios to Treasurys

Source: BofA Merrill Lynch Global Research; Thomson Reuters MMD


50%

60%

70%

80%

90%

100%

110%

120%

12/31/09 2/28/10 4/30/10 6/30/10 8/31/10 10/31/10 12/31/10 2/28/11 4/30/11 6/30/11

5 Year 10 Year 30 Year

33

6 October 2011

BBB-rated Muni Credit Spreads (bp)



100

120

140

160

180

200

220

240

7/5/11 7/19/11 8/2/11 8/16/11 8/30/11 9/13/11 9/27/11

Municipals Revenue BBB Muni General Obligation BBB

34

6 October 2011

Breakdown of munis by sector

Source: BofA Merrill Lynch Global Research, as of 30 June 2011


0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

GO

Sta

te

GO

Loc

al

Tax

Rev

enue

s

Hea

lth a

nd H

ospi

tals

Tran

spor

tatio

n

Util

ities

Leas

e-ba

cked

Hig

her E

duca

tion

Pow

er

Wat

er &

Sew

er

Prer

efun

ded

Toll

& Tu

rnpi

ke

Airp

orts

Toba

cco

Sing

le-F

amily

Hou

sing

PCR

s

IDR

s

Mul

ti-Fa

mily

Hou

sing

35

6 October 2011

Ratings distribution of all municipals by average rating

Source: BofA Merrill Lynch Global Research; 28 February 2011


0

200

400

600

800

1,000

1,200

1,400

1,600

AAA AA A BBB BB B CCC CC C N/R

$Bil

lio

ns

36

6 October 2011

93

95

97

99

101

103

105

107

109

111

113

-8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10 11 12

Growth: Big drop; slow recovery

Real GDP(index level)

2001

1991

Current

Indexed to 100 at the recession trough. Average includes all recessions after 1950 excluding the 1980 and current recessions. Dotted line represents BofA Merrill Lynch forecast.Source: Bureau of Economic Analysis, BofA Merrill Lynch Global Research

Average

Quarters

37

6 October 2011 Rehab: Shaky handoff

Note: Open bar represents BofA Merrill Lynch forecast for April private wages and salary growth.Source: Bureau of Labor Statistics, Bureau of Economic Analysis, BofA Merrill Lynch Global Research

(month-over-month % change)

-0.6%

-0.4%

-0.2%

0.0%

0.2%

0.4%

0.6%

Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11

Private Wages and Salaries

Private Employees

38

6 October 2011 Jobs: Slow healing

Indexed to 100 at the previous business cycle peak. Average includes all recessions after 1950 excluding the 1980 and current recessions.Source: Bureau of Labor Statistics, Bureau of Economic Analysis, BofA Merrill Lynch Global Research

Private payrolls(index level)

91

92

93

94

95

96

97

98

99

100

101

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

20011991Average

Current

(Quarters since business cycle peak)

39

6 October 2011

Capital spending: More machines

Source: Consumer Expenditure Survey, BofA Merrill Lynch Global Research

-15

-10

-5

0

5

10

15

1999 2001 2003 2005 2007 2009 2011

Capital Spending

Employ ment

Duke/CFO Business Outlook SurveyExpected growth in next 12 months

40

6 October 2011

400

450

500

550

600

650

1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007

0

20

40

60

80

100

120

140

160

Consumer: Restoring your net worth

*Income is disposable incomeSource: Federal Reserve Board, BofA Merrill Lynch Global Research

(percent of income)

Net worth (LHS)

Debt (RHS)

(percent of income)

41

6 October 2011 Rehab: Saving households

Note: Dashed line is BofA Merrill Lynch forecastSource: Bureau of Economic Analysis, BofA Merrill Lynch Global Research

Savings rate(percent)

0

2

4

6

8

10

12

14

16

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Forecast

Historic Range

42

6 October 2011

0

1

2

3

4

5

6

7

8

9

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Will take 17 months to clear at the

current sales pace

Rehab: Surplus shadow supply

Source: National Association of Realtors, Mortgage Bankers Association, BofA Merrill Lynch Global Research

(current and future inventory, millions of homes)

90+ days delinquent

Foreclosure ex-REO

Current stock of homes on the market for sale

43

6 October 2011

Rehab: Dented housing demand

0

200

400

600

800

1000

1200

1400

1600

1800

1990 1994 1998 2002 2006 2010 2014 2018

Source: Census Bureau, BofA Merrill Lynch Global Research. Haughwout, Andrew, Richard Peach, Joseph Tracy. “The Homeownership Gap”, Federal Reserve Bank of New York Current Issues in Economics and Finance, Volume 16, Number 5, May 2010.

Household formation(thousands of households)

Homeownership rate(% of occupied homes)

Baseline forecast

60

62

64

66

68

70

65 70 75 80 85 90 95 00 05 10

Lower bound assuming all negative equity homeowners become renters

44

6 October 2011 Rehab: More state pain

Source: Center on Budget and Policy Priorities, BofA Merrill Lynch Global Research

State budget shortfall(FY, Billions $)

• Gimmicks exhausted

• Federal aid declining

• Some revenue rebound

-250

-200

-150

-100

-50

0

2009 2010 2011 2012

Budget gaps offset by RecoveryAct & extension

Remaining budget gaps afterRecovery Act & extension

45

6 October 2011

0

500

1000

1500

2000

2500

1/1/2010 4/1/2010 7/1/2010 10/1/2010 1/1/2011 4/1/2011 7/1/2011

Greece II: Back for help

Source: Bloomberg, BofA Merrill Lynch Global Research

Credit default swaps(basis points)

Germany

Greece

Ireland

46

6 October 2011 Fiscal: Deficit divergence

Source: Congressional Budget Office, BofA Merrill Lynch Global Research

Revenue and outlay shares of GDP(percent)

14

16

18

20

22

24

26

1960 1970 1980 1990 2000 2010

Outlays

Revenues

47

6 October 2011 Debt deal: Discretionary cuts

Source: CBO, BofA Merrill Lynch Global Research

Spending cuts(% of GDP)

-1.2%

-1.0%

-0.8%

-0.6%

-0.4%

-0.2%

0.0%

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

48

6 October 2011

5

7

9

11

13

15

17

19

2000 2005 2011 2016 2021 2026 2031 2036 2041 2046

Debt deal: Unbalanced budget cuts


Government spending(% of GDP)

Mandatory

Discretionary

Forecast

Discretionary with cuts

49

6 October 2011

200

400

600

800

1000

1200

1400

1600

1800

2000

2200

2400

2600

2800

Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11

Inflation: Fed fillup

Source: Federal Reserve Board, BofA Merrill Lynch Global Research

Federal Reserve Assets Federal Reserve Liabilities

Unencumbered Treasuries

Repo

TAF

Other*

Bank notes in circulation

Reverse repo Bank reserves

Treasury deposits

All other

(billions $)

200

400

600

800

1000

1200

1400

1600

1800

2000

2200

2400

2600

2800

3000

Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11

Other assets

Treasury securities

Agency & MBSsecurities

Liquidity facilities

Emergency lending

50

6 October 2011

-60%

-40%

-20%

0%

20%

40%

60%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Inflation: Low commodity pass through

Source: Bureau of Labor Statistics, BofA Merrill Lynch Global Research

PPI: Crude materials for further processing

CPI: Commodities less food & energy

(YoY % change)

51

6 October 2011

0%

2%

4%

6%

8%

10%

12%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Inflation: Slacking off

Shaded regions represent periods of US recessionSource: Bureau of Labor Statistics, BofA Merrill Lynch Global Research

Unemployment rate

Average Hourly Earnings (YoY % change)

(percent)

52

6 October 2011

0

1

2

3

4

5

6

May -08 Nov -08 May -09 Nov -09 May -10 Nov -10 May -11

Inflation: It takes two to tango

Source: University of Michigan, Federal Reserve Bank of NY, BofA Merrill Lynch Global Research

Median expected price inflation

Median expected wage inflation

(YoY % change)

53

6 October 2011 Fed: A long way to the exit

*NAIRU is the CBO estimate of the inflation-neutral unemployment rate; Shaded regions represent periods of US recession Source: Bureau of Labor Statistics, Federal Reserve Board, Haver Analytics, BofA Merrill Lynch Global Research

Unemployment rate (percent)

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

9.0

9.5

10.0

10.5

1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

First rate hike(Feb 1994) First rate

hike(June 2004)

Unemployment rate

NAIRU*

Final rate cut(Sept 1992)

Final rate cut(June 2003)

QE2 ends (June 2010)

First hike (Q3 2014)

54

6 October 2011 US outlook table

Source: Bureau of Economic Analysis, BofA Merrill Lynch Global Research

Real Economic Activity, % SAAR 3Q 11 4Q 11 1Q 12 2Q 12 3Q 12 4Q 12 2011 2012 2013

Real GDP 1.8 2.0 2.0 2.0 1.5 1.0 1.7 1.8 1.4 % Change, Year Ago 1.5 1.4 1.8 2.0 1.9 1.6 Consumer Spending 2.2 2.0 2.0 2.0 1.5 1.3 2.2 1.8 1.6 Residential Investment -5.0 -5.0 -2.0 0.0 0.0 0.0 -3.1 -1.8 2.5 Nonresidential Investment 3.8 4.9 5.6 5.7 4.9 5.0 7.3 5.4 5.4 Structures -2.0 -2.0 0.5 2.0 2.0 3.5 2.4 1.6 3.8 Equipment and Software 6.0 7.5 7.5 7.0 6.0 5.5 9.1 6.8 6.0 Government -2.0 -1.5 -1.5 -1.3 -0.9 -0.8 -2.2 -1.4 -0.8 Exports 7.0 10.5 9.0 8.0 7.5 5.5 7.5 8.1 6.3 Imports 5.0 5.0 5.0 5.0 5.5 5.5 5.5 4.9 5.5 Net Exports (Bil 05$) -413 -395 -382 -373 -369 -374 -412 -375 -379 Inventory Accumulation (Bil 05$) 49 48 49 50 51 51 46 50 53

Key Indicators

Industrial Production (% SAAR) 4.8 2.0 1.5 1.5 1.0 0.5 3.9 1.8 1.0Private Payrolls (Avg MoM change, 000s) 87.7 85.0 100.0 90.0 75.0 65.0 125.6 82.5 95.0Civilian Unemployment Rate (%) 9.1 9.1 9.1 9.1 9.1 9.2 9.0 9.1 9.2Personal Savings Rate (%) 4.8 4.6 4.5 4.4 4.3 4.3 4.9 4.4 4.4

Inflation

CPI, Consumer Prices (% SAAR) 2.9 1.4 1.3 1.6 1.4 1.4 3.2 1.8 1.6 % Change, Year Ago! 3.7 3.4 2.4 1.8 1.4 1.4CPI ex Food & Energy ( % SAAR) 2.6 1.6 1.5 1.6 1.6 1.7 1.6 1.8 1.6 % Change, Year Ago@ 1.9 2.1 2.1 1.8 1.6 1.6

Rates

Fed Funds 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 0-0.253-Month LIBOR 0.37 0.45 0.45 0.45 0.50 0.50 0.45 0.50 n.a.2-Year T-Note 0.20 0.20 0.25 0.40 0.60 0.80 0.20 0.80 n.a.10-Year T-Note 2.15 2.30 2.50 2.75 3.00 3.25 2.30 3.25 n.a.

55

6 October 2011 Global growth slows downGlobal GDP growth - %qoq, saar

-8

-6

-4

-2

0

2

4

6

8

Jun-00 Jun-02 Jun-04 Jun-06 Jun-08 Jun-10

DM and EM GDP growth - %qoq, saar

-15

-10

-5

0

5

10

15

Jun-00 Jun-02 Jun-04 Jun-06 Jun-08 Jun-10

EM

DM


56

6 October 2011 Global Assumptions

2009 2010 2011F 2012F 2009 2010 2011F 2012F Current 2010 2011F 2012FGlobal and Regional AggregatesGlobal -0.9 5.0 3.9 4.6 1.6 3.2 4.3 3.6 3.34 3.01 3.64 4.16Global ex US -0.2 5.6 4.5 5.2 2.2 3.7 4.6 4.1 4.23 3.80 4.58 5.30Developed Markets -3.9 2.8 1.6 2.3 0.0 1.4 2.7 1.9 0.80 0.58 0.85 1.11G5 -4.1 2.6 1.4 2.2 -0.1 1.4 2.7 1.8 0.69 0.46 0.73 0.96Emerging Markets 2.6 7.5 6.5 6.4 3.6 5.2 6.0 5.0 6.46 5.71 6.60 6.80Europe, Middle East and Africa (EMEA) -4.2 2.6 2.5 2.4 3.1 3.3 4.1 3.3 2.99 2.61 3.17 3.59 European Union -4.1 1.8 1.8 1.9 0.9 2.0 3.0 2.1 1.64 1.20 1.83 2.28 Emerging EMEA -3.5 4.4 4.3 4.0 7.9 6.1 6.6 5.7 6.69 6.30 6.66 6.75PacRim 3.8 8.1 6.2 6.9 0.5 3.5 4.6 3.6 4.55 4.11 4.92 5.22 PacRim ex Japan 6.1 8.9 7.5 7.6 0.9 4.4 5.5 4.3 5.66 4.97 5.89 6.19 Emerging Asia 6.6 9.2 7.8 7.8 0.9 4.6 5.6 4.4 5.89 5.14 6.11 6.40Americas -3.1 3.9 2.6 2.9 1.4 2.9 4.1 3.2 2.60 2.29 2.76 2.89 Latin America -2.0 6.3 4.6 4.3 6.4 6.3 6.6 6.5 9.23 8.13 9.63 9.79

GDP growth, % CPI inflation*, % Short term interest rates**, %


57

6 October 2011 A slow fragile recovery

Source: Consensus from Bloomberg, BofA Merrill Lynch Global Research

•If all goes well: 3% GDP growth

•Four shocks: oil, Japan, Europe and Washington

•The uncertainty shock of 2012

•Inflation fading; QE3 coming

2010 2011 2012 2013

Real GDP (SAAR)

BofAML 3.0 1.6 1.8 1.4

Consensus 3.0 1.6 2.2 2.5

Core PCE

BofAML 1.3 1.5 1.6 1.4

Consensus 1.3 1.4 1.7 1.3

Fed Funds Rate (eop)

BofAML 0.125 0-0.25 0-0.25 0-0.25

Consensus 0.125 0.25 0.25 n.a.

58

6 October 2011

93

98

103

108

113

-8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

Rehab: Big fall; slow recovery

Real GDP(index level)

2000

1991Current

Indexed to 100 at the recession trough. Average includes all recessions after 1950 excluding the 1980 and current recessions. Dotted line represents BofA Merrill Lynch forecast.Source: Bureau of Economic Analysis, BofA Merrill Lynch Global Research

Average

59

6 October 2011 Rehab: Progress report

• Good:

• Corporations fully healed

• Trading partners fully recovered

•Bad:

• Banks still healing

• Households still rebuilding wealth

•Ugly:

• Housing recession continues

• Two more years of state and local austerity


60

6 October 2011 Exports: Strong partners

Note: Export share is a percentage of total US exports.Source: Census Bureau, Haver Analytics, BofA Merrill Lynch Global Research

real GDP(YoY % change)

Export share (%) 2009 2010 2011 2012

1 Canada 18.8 -2.8 3.2 2.6 2.72 Mexico 13.5 -6.1 5.4 3.7 3.63 China 7.3 9.2 10.3 9.3 9.04 Japan 4.5 -6.3 4.0 -0.4 3.25 United Kingdom 3.8 -4.9 1.4 1.2 2.1

US - -3.5 3.0 1.6 2.3Global ex US - -0.2 5.6 4.5 5.1

GDP growth

Top 5 export markets

61

6 October 2011 Banks: Rebalancing


2007 2008 2009 2010 2011E 2012E

3,900 4,800 4,400 4,620 4,650 4,900Loan growth (%) 14.9% 23.1% -8.3% -3.8% 0.6% 5.4%

52.3 133.9 190.2 118.5 55.0 48.0LLP/Loan (% , avg) 1.43% 3.08% 4.13% 2.52% 1.19% 1.01%

34.9 64.6 146.9 148.0 91.5 65.0Charge-off rate/Loan (% , avg) 1.0% 1.5% 3.2% 3.1% 2.0% 1.4%

61.5 130.7 173.9 185 148 131Loss Reserves/Loans (%) 1.6% 2.7% 4.0% 4.0% 3.2% 2.7%

Loss Reserves (EOP, $bn)

Loans outstanding (EOP, $bn)

Loan Loss provisiong ($bn)

Net charge-offs ($bn)

62

6 October 2011 Consumer: Income squeeze

0

1

2

3

4

5

6





Wage and inflation expectations(YoY % change)

-0.20%

-0.10%

0.00%

0.10%

0.20%

0.30%

0.40%

0.50%

0.60%

Jan-11 Feb-11 Mar-11 Apr-11 May -11 Jun-11 Jul-11

Nominal disposable income Consumption deflator

Disposable income and inflation(MoM% change)

63

6 October 2011

400

450

500

550

600

650

1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007

0

20

40

60

80

100

120

140

160

Consumer: Restoring your net worth

*Income is disposable incomeSource: Federal Reserve Board, BofA Merrill Lynch Global Research

(percent of income)

Net worth (LHS)

Debt (RHS)

(percent of income)

64

6 October 2011

0

2

4

6

8

10

12

14

16

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Consumer: Saving households

Note: Green line is BofA Merrill Lynch forecastSource: Bureau of Economic Analysis, BofA Merrill Lynch Global Research

Savings rate(percent)

Forecast

Historic Range

65

6 October 2011

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

02 03 04 05 06 07 08 09 10 11

Housing: Shadow inventory

Source: National Association of Realtors, Mortgage Bankers Association, BofA Merrill Lynch Global Research

(current and future inventory, millions of homes)

90+ days delinquent

Foreclosure ex-REO

Current stock of homes on the market for sale

Will take 18 months to clear at the

current sales pace

66

6 October 2011

200

400

600

800

1000

1200

1400

1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011

100

120

140

160

180

200

220

240

Housing: Slow bleed

Source: WSJ, BLS, BofA Merrill Lynch Global Research

Current level

FHFA housing price index (index level, RHS)

New home sales (thous., LHS)

67

6 October 2011

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3/1/2011 9/1/2011 3/1/2012 9/1/2012 3/1/2013 9/1/2013

Rebound: Triple dip

Note: Consensus are from Blue Chip Economic Indicators survey released on September 10, 2011Source: BEA, BofA Merrill Lynch Global Research

Real GDP(QoQ SAAR)

Consensus

BofAML

Forecast

68

6 October 2011 Rebound: Fading energy tax

60

70

80

90

100

110

120

130

Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11

Note: WTI refers to West Texas IntermediateSource: WSJ, BofA Merrill Lynch Global Research

Crude oil ($/bbl)

WTI

Brent

Headline inflation minus core inflation (percent)

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

1997 1999 2001 2003 2005 2007 2009 2011

Forecast

69

6 October 2011 Rebound: Motoring ahead

Note: Japan IP forecasts are from the Survey of Production Forecast. Source: Haver Analytics, Federal Reserve Board, Autodata, BofA Merrill Lynch Global Research

40

50

60

70

80

90

100

110

120

130

2008 2009 2010 2011

Japan comes backs(index level)

Japanese industrial production

Japanese auto production

40

50

60

70

80

90

100

110

2007 2008 2009 2010 2011

8

9

10

11

12

13

14

15

16

17

18

Auto rebound

IP: Motor vehicles and parts (LHS, index lvl)

Vehicle Sales (RHS, mil units, SAAR)

70

6 October 2011 Recession risk: Never enough

Source: Bloomberg, BofA Merrill Lynch Global Research

Credit default swaps(basis points)

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

12/31/09 2/28/10 4/30/10 6/30/10 8/31/10 10/31/10 12/31/10 2/28/11 4/30/11 6/30/11 8/31/11

Greece Ireland Germany

71

6 October 2011 Debt debacle: The plan

• Two tranches: $0.9 + $1.2 trillion

• Almost all discretionary

• Carries through election


72

6 October 2011

Debt debacle: Discretionary cuts

1,000

1,050

1,100

1,150

1,200

1,250

1,300

1,350

1,400

1,450

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021


Spending cuts(% of GDP)

Discretionary spending($ billion)

Baseline

Tranche 1

Tranche 2-1.2%

-1.0%

-0.8%

-0.6%

-0.4%

-0.2%

0.0%

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

73

6 October 2011

-6

-4

-2

0

2

4

6

8

10

1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Recession risks: Stall speed?

Source: BEA, BofA Merrill Lynch Global Research

GDP growth(YoY % change)

74

6 October 2011 Recession risk: Lean and mean

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

1926 1936 1946 1956 1966 1976 1986 1996 2006

Source: BLS, BEA, BofA Merrill Lynch Global Research

90

92

94

96

98

100

102

104

106

108

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14

average of '61, '70, '75 19821991 2000Current

A feeble jobs recoveryPrivate payrolls (indexed to 100 at peak)

Capital stock(YoY % change)

75

6 October 2011 Inflation: Starting to turn


Core CPI(year-over-year percent change)

0

2

4

6

8

10

12

14

59 63 67 71 75 79 83 87 91 95 99 03 07 11

Forecast

76

6 October 2011

0%

2%

4%

6%

8%

10%

12%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Inflation: Slacking off


Unemployment rate

Average Hourly Earnings (YoY % change)

(percent)

77

6 October 2011

0

1

2

3

4

5

6


Inflation: It takes two to tango




(YoY % change)

78

6 October 2011 Fed: Us and them

FOMC BofAML FOMC BofAMLReal GDP 2.7 to 2.9 1.3 3.3 to 3.7 1.6Unemployment (eop) 8.6 to 8.9 9.1 7.8 to 8.2 9.2PCE Inflation 2.3 to 2.5 3.6 1.5 to 2.0 1.5Core PCE Inflation 1.5 to 1.8 1.9 1.4 to 2.0 1.4

20122011(Q4/Q4 %)

FOMC forecasts from their June meetingSource: FOMC, BofA Merrill Lynch Global Research

79

6 October 2011

Growth: The answer is blowing in the wind

• Crippled real estate

• Weak banks

• State & local govt.

• Very weak banks

• Peripheral problems

• Fiscal tightening

• Deflation

• Loss of animal spirits

• Declining population

United States Euro Area Japan


Regional headwinds

80

6 October 2011 Global: Imbalances

Source: IMF, BofA Merrill Lynch Global Research

0

2

4

6

8

10

12

US Japan Eurozone China India Brazil-4

-3

-2

-1

0

1

2

3

4

5

6

US Japan Eurozone China India Brazil

General government net borrowing (% of GDP, 2010)

Current account balance(% of GDP, 2010)

81

6 October 2011 Growth: Official gaps

OECD IMF

United States -3.2 -4.9

Eurozone -4.7 -2.9

Japan -3.1 -5.0

Source: OECD, IMF, BofA Merrill Lynch Global Research

2010 Output gap(percent)

Date post:	15-Jan-2016
Category:	Documents
Upload:	zamir
View:	27 times
Download:	0 times

John Hallacy +1 646 743 1446 Municipal Research Strategist MLPF&S john.hallacy@baml

Documents