SVB Asset Management Economic ReportFourth Quarter 2012
Table of ContentsThoughts from our CIO	Thoughts from our CIO      pg 3 3                            pgOverview	Overview   ...
Thoughts from our CIOApproaching the OasisAfter four years wandering the desert, it seems the economy has found an oasis. ...
Overview• GDP growth picked up considerably in the third quarter, printing at 3.1 percent, however the effects of hurrican...
GDP Modestly RecoveringGDP1 10.0%                                                                                         ...
GDP Modestly Recovering                                                Contributions to the Cyclical Variation in Real GDP...
Employment Continuing to HealEmployment Landscape1                                                                        ...
Employment Continuing to HealComposition of U.S. Labor Force (Goods vs. Services)                                     Wage...
The Housing Market Key Economic DriverHome Sales & Supply                          9.0                                    ...
The Housing Market Key Economic DriverHomeownership Rate                                                            Housin...
Consumption Too Many UncertaintiesConsumer Sentiment - University of Michigan 120.0                                       ...
Consumption Too Many UncertaintiesPersonal Savings as a % of Disposable Income                                            ...
Inflation In the Comfort ZoneComponent Distribution 2012                                                                  ...
Inflation In the Comfort ZoneWage Growth: Average Hourly Earnings                                                         ...
Monetary Policy How Far Can You Go?Total Assets of Federal Reserve                  U.S. Generic Government Yields        ...
Fiscal Cliff On the Edge                                                         Debt Ceiling vs. Debt OutstandingThe Agre...
Deficit Bill Coming Due                                            Changes in Deficit Projections Since January 20011     ...
Social Security How to Sustain it?                                                The 2012 Long-Term Projections for Socia...
TARP Breaking Even…                                                TARP Tracker                                           ...
U.S. Debt Demand Remains Broad Despite Debt Ceiling                                                 Major Foreign Holders ...
World Debt Guide Rising Debt Levels Prompting Action                                                 Debt as a % of GDPA c...
Yield Compression Financials Tighten             Government                                                              C...
Investment Performance Reward for RiskBenchmark Performance                                              Ticker   2012    ...
U.S. Corporate Bonds Insatiable DemandU.S. Corporate-Bond Yields, %                                Corporate-Bond Issuance...
Banking Sector Climbing Out of Abyss                                              Effect of Federal Funds Rate on Commerci...
Banking Sector Climbing Out of AbyssFDIC Quarterly Bank Net Income/(Loss)                $40,000.0                $30,000....
Banking Sector Climbing Out of AbyssLending Standards                                                                   De...
Banking Sector Climbing Out of AbyssRating Agencies’ U.S. Financials Upgrades and Downgrades  3,000  2,500  2,000  1,500  ...
Industrial Sector Cautiously OptimisticRating Agencies’ U.S. Industrials Upgrades and Downgrades  400  350  300  250  200 ...
Global Trade Fundamental Growth IntactExports as % of GDP, 2011                                    Exports vs. World GDP  ...
FX Central Bank Policies DebasingThe U.S. Dollar Index Measures the General Value of the USD     Volatility in the Euro Pe...
Regulatory Environment Rocky Road AheadPotential MMF Reform Proposals as of 4Q2012Amendments to SEC 2a-7 rule havebeen in ...
Our Team  Our Team  Managing Director              Portfolio Managers        Credit and Risk  Jeff Schnitz                ...
SVB Asset Management555 Mission Street, Suite 900San Francisco, CA 94105This material, including without limitation the st...
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SVB Asset Management Economic Book Q4 2012

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SVB Asset Management is pleased to announce the release of the Q4 2012 Economic Booklet as a research piece summarizing the macro-economic and sector trends in the global market. The Economic Booklet is our reference tool for clients. Displaying graph and chart views of the global economy, this piece guides clients through factors that impact their business.

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SVB Asset Management Economic Book Q4 2012

  1. 1. SVB Asset Management Economic ReportFourth Quarter 2012
  2. 2. Table of ContentsThoughts from our CIO Thoughts from our CIO pg 3 3 pgOverview Overview pg 4 4 pgGDP GDP pg 5 5 pgEmployment Employment pg 7 7 pgThe Housing MarketThe Housing Market pg 9 9 pgConsumption Consumption pg 11 pg 11Inflation Inflation pg 13 pg 13Monetary Policy Monetary Policy pg 15 pg 15FiscalCliffFiscal Cliff pg 16 pg 16Deficit Deficit pg 17 pg 17SocialSecuritySocial Security pg 18 pg 18TARP TARP pg 19 pg 19U.S.DebtU.S. Debt pg 20 pg 20WorldDebt GuideWorld Debt Guide pg 21 pg 21YieldCompressionYield Compression pg 22 pg 22Investment Performance Investment Performance pg 23 pg 23U.S.Corporate BondsU.S. Corporate Bonds pg 24 pg 24Banking Sector Banking Sector pg 25 pg 25Industrial Sector Industrial Sector pg 29 pg 29Global Trade pg 30Global Trade pg 30FX pg 31 pg 31FXRegulatory Environment pg 32 pg 32Regulatory Environment 2
  3. 3. Thoughts from our CIOApproaching the OasisAfter four years wandering the desert, it seems the economy has found an oasis. Whether from reduced uncertainty in today’s post-election world or from shear frustration associatedwith multiple years of disappointing activity, economic actors are moving forward once again.Viewed over a decade’s worth of data, many of the upturns are hazy and difficult to see. In fact, some would argue we are only seeing a mirage and that real activity will be restatedaway in future quarters. But given such broad based confirmation of positive action, this is extremely unlikely.No, the oasis we are seeing is real, as outlined in the remainder of this booklet. The question is how long will the cool, refreshing drink of consumer purchases, homebuyer activity, andmanufacturing upturns last?The Fed would have you believe four years of zero interest rates and $2 trillion of balance sheet growth (with open-ended growth to come) is the cause of the current respite.Legislators would argue the tens of thousands of pages of stimulus, support, and reform packages that have been passed are the cause.More rational observers would argue for a combination of the two.In any case, it is difficult for me to believe this watering hole will last very long because the fundamental changes we’ve seen in the economy are not likely to support long-term growth.A Fed that continues to scrape the bottom of its bag of tricks and a legislature that is unable to have even civil exchanges over fiscal policy will only lead to greater uncertainty later inthe quarter.The “victory” over 2012’s fiscal cliff will be short-lived, and another kick of the can likely coming in March will only create more cause for concern.Economists are predicting 2013 growth anywhere from slightly negative to positive 3 percent. Such confusion about the size of the oasis is, in itself, a great uncertainty that worksagainst solid, consistent growth.Joe Morgan, Chief Investment Officer 3
  4. 4. Overview• GDP growth picked up considerably in the third quarter, printing at 3.1 percent, however the effects of hurricane Sandy on the final quarter’s activity remains to be seen.• Job growth has been about the most consistent indicator over the last two years, even though it continues to run slightly sub-par. Interestingly, wage growth picked up in the second half of 2012, perhaps an early indicator of employment strength in 2013.• The housing market emerged from the shadows in the fourth quarter as indications of both home building and home sales activity increased. Unfortunately, there remains the overhang of millions of foreclosed (or forecloseable) home loans in the shadows as well as a difficult home financing market.• Consumption growth has been steady, along with job growth, and an elevated stock market is helping support consumer sentiment even after considering recent setbacks over the fiscal cliff.• Inflation remains a non-event for most as Core PCE has been restrained below the Fed’s 2 percent target. Oil and food prices are much more volatile, primarily affecting developing nations who effectively import America’s monetary policy by tying their currencies to the dollar.• The U.S. deficit has moved front and center recently, though spending cut conversations in Washington haven’t really even begun. Long and arduous discussions are a commodity in the capital, however the coming debate – if it includes health care entitlements – will likely stand out. If it doesn’t, such discussions will be viewed as another kick of the can.• TARP is finally winding down and will end with little cost to the government overall. Of course the goal of this program was never profitability, but confidence in the markets – which it surely achieved.• Yields in the marketplace remain depressed. Many talk of rising yields as investors shift back into risky assets such as stocks, however it is unlikely we’ll see yield spikes in the near future – certainly so long as the Fed continues to expand its balance sheet by $85 billion per month.• Recent year’s corporate bond issuance is could continue at near-record pace, assuming bond investors remain skeptical about higher yields in the near future. 4
  5. 5. GDP Modestly RecoveringGDP1 10.0% • The latest round of Treasury purchases is intended to replace Operation Twist which expired at the end of the year 5.0% • The additional quantitative easing aims to keep rates low in the long end and support economic growth 0.0% • Growth in 3Q 2012 was more than twice the 1.3% growth rate in 2Q 2012 -5.0% • Superstorm Sandy and "fiscal cliff" uncertainty weighed heavily on consumer and business minds could likely hold back growth-10.0% • The biggest boost to 3Q expansion came from factors that may be short-lived, including upturns in private inventory investment and federal government spendingComponents of GDP1 Gross Domestic Investment2 150.0% $3.0 100.0% $2.0 Trillions 50.0% $1.0 0.0% $0.0 -50.0% Consumption Government spending Investment ex-housing Domestic business Households and institutions Federal State and local Residential Net exportsSource: 1 Bureau of Economic Analysis (BEA) 2Congressional Budget Office (CBO), SVB Asset Management.Note: 1 GDP values shown in legend are % change vs. prior quarter annualized. 5
  6. 6. GDP Modestly Recovering Contributions to the Cyclical Variation in Real GDP, 12 Quarters Following RecessionMajor factors contributing to the difference (% difference from trough for components of real GDP as a ratio of potential GDP)include:• Slow growth in U.S. and strong growth in emerging markets• Rebound from unusually weak investment during the recession• Loss of wealth, weak confidence, a bigger decline in the share of national income going to labor• Overbuilding during the housing boom, weak household formation• A decline in defense purchases, slow growth in tax revenues and federal grants Source: Congressional Budget Office (CBO), Department of Commerce, Bureau of Economic Analysis. 6
  7. 7. Employment Continuing to HealEmployment Landscape1 Full-Time Employment2 1,000.0 125,000.0 10,000.0 15.0% 500.0 120,000.0 Thousands Thousands Thousands 5.0% 115,000.0 0.0 5,000.0 110,000.0 -500.0 -5.0% 105,000.0 -1,000.0 -15.0% 100,000.0 0.0 Non-Farm Payroll (LHS) Unemployment Rate (RHS) U-6 (RHS) Full Time Employment (LHS) Part Time for Economic Reasons (RHS)Long Term Unemployment3 50.0% • The unemployment rate dropped to 7.7% in November and then climbed 40.0% back to 7.8% in December 30.0% • The U.S. added 155,000 jobs in December, as the economy seemingly shrugged off storm Sandy 20.0% • The number of long-term unemployed was little changed at 4.8 million in 10.0% November. These individuals accounted for 40.1% of the unemployed 0.0% • The number of people employed part time, for economic reasons, were 8.2 million in November, was little changed over the month. These individuals were working part time either due to their hours been cut or Recession Period Unemployed 27 Weeks and Over because they were unable to find a full-time jobSource: 1, 2, 3 U.S. Bureau of Labor and Statistics (BLS), SVB AssetManagement, 3 National Bureau of Economic Research (NBER).Note: The underemployment rate U6 defined as persons marginally attached to the labor force are those who currently are neither working nor looking for work but indicate that they want and are available for a job andhave looked for work sometime in the past 12 months. 7
  8. 8. Employment Continuing to HealComposition of U.S. Labor Force (Goods vs. Services) Wage Pressure100.0% 11.0% 5.0% 80.0% 9.0% 4.0% 3.0% 60.0% 7.0% 2.0% 40.0% 5.0% 1.0% 20.0% 3.0% 0.0% 0.0% U.S. Unemployment Rate U.S. Avg Hourly Earnings Pvt Nonfarm payrolls Goods Producing Service ProvidingState and Local Government Employment U.S. Labor Force Participation Rate 15,000 5,400 68.0% 14,500 5,200 67.0%Thousands Thousands 14,000 5,000 13,500 66.0% 4,800 13,000 4,600 65.0% 12,500 12,000 4,400 64.0% 63.0% Local government (LH) State government (RH)Source: U.S. Bureau of Labor Statistics (BLS). 8
  9. 9. The Housing Market Key Economic DriverHome Sales & Supply 9.0 15.0 • The U.S. housing market continues to show expansion with rising home Home Supply (months) values, lower inventory overhang, and increased home sales nationwide Home Sales (Millions) 7.0 10.0 • As shown by the S&P/Case-Shiller national home price index, home values rose 4.3% in October, partially due to the home-buyer tax credit. 5.0 5.0 This was the largest YoY increase in over two years • Existing home supply fell in November to 4.8 months, the lowest level in 3.0 0.0 more than seven years • The improvement in housing has been additive to economic growth and growth is expected to continue in 2013 Total Sales (new & existing) Existing Home SupplyHousing Starts Home Prices - Indexed to 100 2.5 240 2.0 190 1.5Millions 1.0 140 0.5 90 0.0 Case Schiller 20-City FHFA Purchase Median Home PriceSource: National Association of Home Builders (NAHB), Census.gov, S&P, SVB Asset Management. 9
  10. 10. The Housing Market Key Economic DriverHomeownership Rate Housing Affordability Composite Index 250.0 15.0% 70.0% Affordability Index 200.0 68.0% 10.0% 150.0 66.0% 100.0 5.0% 50.0 64.0% 0.0 0.0% 62.0% Housing Affordability 30 Year Fixed Mortgage RatesHome Foreclosures - % of Total Loans 7.0% • Homeownership resumed its decline after remaining at 65.6% for two quarters of 2012. The homeownership rate fell to 65.3% in 3Q 2012 6.0% 5.0% • U.S. home foreclosures fell to 4.07%, the lowest level since before the 4.0% 2008-2009 mortgage meltdown 3.0% • Historically low mortgage rates have been driving record-high housing 2.0% affordability numbers. Housing affordability is now coming off its high as 1.0% asking prices have begun to rise faster than rents 0.0%Source: Census.gov, National Association of Realtors, SVB Asset Management. 10
  11. 11. Consumption Too Many UncertaintiesConsumer Sentiment - University of Michigan 120.0 • The University of Michigan indicator closed the year at 72.9, a five- month low. The index had risen to as high as 82.7 in November, but this 100.0 was still below the 30-year average • The drop in confidence heading into year-end was likely attributed to 80.0 Average concerns over the fiscal cliff • Auto sales rose 9% in December, capping off the best year for the 60.0 industry since before the recession 40.0 • Personal consumption slowed to 1.5% and 1.6% in 2Q and 3Q 2012, respectively. This compares to growth of 2.4% in the first quarterRetail & Food Services Sales Personal Consumption - % Change $450.0 $25.0 8.0% Vehicle Sales (Millions) Retail & Food Services 6.0% $400.0 $20.0 Sales (Billions) 4.0% $350.0 $15.0 2.0% 0.0% $300.0 $10.0 -2.0% $250.0 $5.0 -4.0% -6.0% Ex Autos Vehicle SalesSource: U.S. Bureau of Economic Analysis (BEA), Census.gov, University of Michigan / Thomson Reuters - Survey of Consumers, SVB Asset Management. 11
  12. 12. Consumption Too Many UncertaintiesPersonal Savings as a % of Disposable Income Personal Income 10.0% 2.5% 2.0% Monthly Percentage 8.0% 1.5% 6.0% 1.0% Change 0.5% 4.0% 0.0% -0.5% 2.0% -1.0% 0.0% -1.5%Household Debt Payments vs. Debt Outstanding • Savings rates as a percentage of disposable income fluctuated between 15.0% 3.3%-4.1% during the year. Consumers are being more responsible with Debt Outstanding (% change disposable personal income) 14.0% their finances post-recession, however we are off of the highs seen in 10.0% Debt Payments (% of 2008 12.0% 5.0% • We are still not seeing any meaningful improvement in personal 10.0% incomes. The largest gain in the second half of the year was a 0.6% YoY) 0.0% MoM increase in November 8.0% -5.0% • Overall U.S. consumer credit outstanding grew to an all-time record in October, primarily on the strength of student loans, auto loans and credit cards Debt Payments Debt OutstandingSource: U.S. Bureau of Economic Analysis (BEA), Federal Reserve, SVB Asset Management. 12
  13. 13. Inflation In the Comfort ZoneComponent Distribution 2012 Core PCECPI Components 12-month Change 12.0% 3.0% 4.0% % change from prior yearFood & Bev. 1.8% 40.7% Housing 10.0% 6.0%Housing 1.7% Transportation 8.0%Apparel 1.2% 6.7%Transportation 1.5% Food & Bev. 6.0%Medical Care 3.4% Medical Care 7.1%Recreation 1.4% Educ. & Comm. 4.0%Educ. & Comm. 1.5% 2.0% RecreationOther 1.5%Headline CPI 1.8% Apparel less footwear 0.0% 15.1%Less: Other Energy -4.1% 17.4% Food 0.2%Core CPI 1.9% Core PCE Fed TargetConsumer Price Index Producer Price Index 15.0% 15.0% % change from prior year % change from prior year 10.0% 10.0% 5.0% 5.0% 0.0% -5.0% 0.0% -10.0% -5.0% PPI Ex Food & Energy PPI CPI Ex Food & Energy CPISource: U.S. Bureau of Economic Analysis (BEA), U.S. Bureau of Labor Statistics (BLS), SVB Asset Management. 13
  14. 14. Inflation In the Comfort ZoneWage Growth: Average Hourly Earnings Crude Oil - Spot & Futures 4.0% $150.0 Annual Percentage Price per Barrel 3.5% $100.0 Change 3.0% 2.5% $50.0 2.0% $0.0 1.5% Crude Oil Crude Oil FuturesUniv. of Michigan Survey of Inflation Expectations 5.5% • Inflation continues to take a back seat as measures point to a stable inflationary environment. Furthermore, both short-term and longer-term 4.5% inflation expectations remain fairly steady 3.5% • Falling energy prices along with a stagnant labor market have been the main drivers of low inflation. The consumer price index saw its first 2.5% decline in six months in November as energy prices dropped 1.5% • Facing little threat of inflation, the Fed continues its easy monetary policy through low interest rates and additional quantitative easing measures 1 Year Ahead 5-10 Year AheadSource: U.S. Bureau of Labor Statistics (BLS), U.S. Energy Information Administration (EIA), University of Michigan / Thomson Reuters - Survey of Consumers, SVB Asset Management. 14
  15. 15. Monetary Policy How Far Can You Go?Total Assets of Federal Reserve U.S. Generic Government Yields $3,500 Pre-QE1 QE1 Pre-QE2 QE2 Pre-OT OT $3,000 $2,500 Billions $2,000 $1,500 $1,000 $500 $-Source: Federal Reserve, SVB Asset Management. 15
  16. 16. Fiscal Cliff On the Edge Debt Ceiling vs. Debt OutstandingThe Agreement $18.0 • Permanent extension of Bush-era tax rates for individuals with income up to $400k and $450k for couples $16.0 o Permanent maximum 15% tax rate for dividend income and LT capital gains for same income levels $14.0 o Higher incomes will be taxed at 20% Trillions • Estate tax rates for estates worth up to $5mil • Permanent fix to AMT $12.0 • Two-month delay of sequester • One-year extension of unemployment benefits $10.0Outlook $8.0 • Further debate on debt ceiling, entitlement reform, scheduled spending cuts, tax code reforms, etc. • The Fiscal Cliff agreement temporary removed $6.0 economic growth headwinds but does not completely remove them. • Financial markets will remain volatile Debt Ceiling Debt Outstanding Source: Bloomberg and SVB Asset Management 16
  17. 17. Deficit Bill Coming Due Changes in Deficit Projections Since January 20011 Factors Responsible for Fiscal Deterioration2Since 1969, the U.S. government hasrecorded a surplus in only five years Events between 2007 and 2009with four of those from 1998-2001. 48.0% 35.0% Nondefense spending since 2009 $8.0 Defense spending since 2009Up until the global financial crisis, the Revenue loss since 2009annual deficits were much smaller in $6.0 9.0% Cumulative Surpluscomparison to GDP. That ratio, 8.0% onom ic h echowever, has climbed significantly $4.0 roug lus thsince 2009 when the deficit reached In January 2001, CBO projected surp s ct on ge cumulative surpluses through 2011 l impa al chan$1.4 trillion. Tota chnic $2.0 te and TrillionsThe combination of two wars $0.0(Afghanistan and Iraq) and substantial Total impact on surplus through totalrevenue loss have considerably altered legislative changesCBO projections. The CBO in 2001 had -$2.0predicted a steady yearly surplus for Cumulative Deficitthe next decade, but that never -$4.0materialized. -$6.0Together, events that occurred before However in 2011, the U.S. had aJanuary 2009 and the precipitous cumulative deficit of $6 trillion -$8.0decline in tax revenues account forabout 83% of the difference betweenwhat the 2012 deficit actually is andwhat it was expected to be five years 2001 Baseline Projections 2011 Statusago. Source: Congressional Budget Office (CBO), Center for American Progress. 1 Congressional Budget Office (CBO), 2 This material was created and published by the Center for American Progress (www.americanprogress.org). 17
  18. 18. Social Security How to Sustain it? The 2012 Long-Term Projections for Social Security As a % of GDPTotal Social Security outlays in 2012 were$773 billion - one-fifth of federal spending. 7.0% Actual ProjectedOver the next decade, spending will 6.5%exceed dedicated tax revenues, onaverage, by about 10 percent. 6.0%Spending relative to income will continueto increase to the point that outlays willshift from scheduled to payable benefits 5.5%around 2040. 5.0%The drop in benefits paid at that time willbe a little more than 1 percent of GDP. 4.5%These estimates change from time to time,but the underlying problem remains:today’s entitlements are unsupportable in 4.0%the medium term future. Outlays (with Scheduled Benefits) Tax Revenues Outlays (with Payable Benefits) Source: Congressional Budget Office (CBO). 1,2 Of the 56 million people who currently receive Social Security benefits, about 70% are retired workers or their spouses and children, and another 11% are survivors of deceased workers - all of those beneficiaries receive payments through Old-Age and Survivors Insurance (OASI). The other 19% of beneficiaries are disabled workers or their spouses and children and they receive Disability Insurance (DI) benefits. 18
  19. 19. TARP Breaking Even… TARP Tracker Total Authorized Funds ($ billions)TARP (Troubled Asset Relief Program) In the surplus zonehelped to stabilize the financial system from $300 AIG Investmentscollapse and restart the markets that $268 Auto Inductry Investmentsprovided mortgage, auto, student, and $68 $245 $80 Bank Investment Programsbusiness loans. $250 $235 Credit Market Programs Housing ProgramsThe government program that began in $46 $27 $2452009 has been winding down, with many of $200 Cancelledthe beneficiaries paying back much of theoriginal loan. As of November 30, 2012, Billions $150 91% of funds disbursed have been recovered asAmerican taxpayers have recovered nearly of December 201291% of the TARP funds disbursed. Bank Investment Programs have added surplus to the result $100 $80 To strengthen the Housing markets, TARPOverall, the government is now expected to $68 introduced the two central programs, Making Homeat least break even on its financial aid from $50 Affordable (MHA) and the Hardest Hit Fund (HHF). $41principal and interest payments. A $50 MHA permanently reduces mortgage payments tosubstantial part of the program came with a $19 $16 affordable levels for qualifying borrowers, whilecompetitive rate of return. HHF helps those states hardest hit by home price $0 declines and high unemployment to develop locally- AIG Auto Industry Bank Credit Market tailored foreclosure prevention solutions Investments Investments Investment Programs The deadline for MHA has been extended by a Programs year through December 2013, also conforming the extended deadline for the Home Affordable Funds Disbursed Funds Recovered Refinance Program (HARP) Source: U.S.Treasury, as of January 4, 2013. 19
  20. 20. U.S. Debt Demand Remains Broad Despite Debt Ceiling Major Foreign Holders of Treasury SecuritiesU.S. Treasuries continue to be a deep China $1,162source of liquidity and has retained its safe- Japan $1,135haven status despite the political theatrics Oil Exporters 1 $266surrounding the debt limit that lead a Caribbean Banking Centers 2 $259downgrade by S&P of U.S. Treasuries to AA Brazil $255+ from AAA in 2011. Taiwan $202 Switzerland $194 Russia $165About 45 percent of Treasuries are held by Luxembourg $139public entities. While China remains the Hong Kong $137largest investor of U.S. Treasuries, its Belgium $133holdings have declined since peaking in U.K. $117July 2011. The widening of the U.S.-China Singapore $94trade deficit through 2012 indicates China Ireland $93may have diversified its foreign reserves Norway $76away Treasuries. Meanwhile, Japan and France $75 Canada $65OPEC countries steadily increased their Germany $64Treasury investments. Mexico $59 India $59The difficult political process in reaching a Thailand $58tax policy comprise at the end of 2012 Turkey $52 Others $622indicates upcoming debt limit discussionswill be just as tenuous, and may compel 0 200 400 600 800 1,000 1,200 1,400other rating agencies to downgrade U.S. Billionscredit ratings. Any downgrade will have de Note: 1 Includes Ecuador, Venezuela, Indonesia, Bahrain, Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, UAE, Algeria, Gabon, Libya and Nigeriaminimal impact on Treasury demand. 2 Includes Bahamas, Bermuda, Cayman Islands, Netherlands Antilles, British Virgin Islands and Panama. Source: Treasury.gov. Data as of 31st October 2012. 20
  21. 21. World Debt Guide Rising Debt Levels Prompting Action Debt as a % of GDPA combination of contracting economic OVERALL DEBToutput, increasing demand for government % of GDP, latest • Over 100support, and escalating sovereign • 75 – 99 • 50 – 74borrowing have contributed to rising debt • 0 - 49levels as a percentage of GDP in manydeveloped countries.The impact of rising debt levels have beeninconsistent. In Japan, evolvingdemographic trends have lead to structuraldeflation, while rising commodity priceshave supported a strengthening Canadiandollar despite higher debt levels. 0% 50% 100% 150% 200% 250% Japan 206%Investors have tagged some countries with Italy 121% Canada 87%higher interest rates to express worries France 86%over future debt servicing capabilities. This Britain 85%has pushed many developed countries to Germany 81% Spain 69%confront their own balance sheets and may U.S. 68%lead to additional contractions in spending Brazil 54%to reduce leverage. India 51% China 44% South Korea 34% Russia 8% Source: Bloomberg, SVB Asset Management. 21
  22. 22. Yield Compression Financials Tighten Government Credit 0.8% 2.5% 0.6% 2.0% 0.4% 1.5% 0.2% 1.0% 0.0% 0.5% -0.2% 0.0% A-1/P-1 CP (Q3) Ind Bonds - A Rated (Q3) U.S. Treasury Bill /Notes (Q3) U.S. Agency DN/Bonds (Q3) Fin Bonds - A Rated (Q3) A-1/P-1 CP (Q4) U.S. Treasury Bill /Notes (Q4) U.S. Agency DN/Bonds (Q4) Ind Bonds - A Rated (Q4) Fin Bonds - A Rated (Q4)Source: SVB Asset Management, Bloomberg 22
  23. 23. Investment Performance Reward for RiskBenchmark Performance Ticker 2012 2011 2010 2009 2008 2007 Short Benchmarks 3-Month Treasury Bill G0O1 0.111 0.103 0.126 0.207 2.057 5.004 3-Month Citi/Salomon CD SBMMCD3 0.307 0.289 0.310 0.822 3.442 5.448 6-Month Treasury Bill G0O2 0.171 0.268 0.365 0.579 3.582 5.607 6-Month Cit/Salomon CD SBMMCD6 0.488 0.389 0.437 1.611 3.756 5.459 1-yr Treasury Bill G0O3 0.204 0.496 0.792 0.813 4.746 5.948 Treasury 1-3 yr Treasury G1O2 0.434 1.554 2.348 0.785 6.609 7.317 3-5 yr Treasury G2O2 1.577 6.229 5.695 -0.672 12.153 9.836 Corporate/Govt (A Rated and Above) 1-3 yr Corp/Govt B110 1.188 1.527 2.641 2.766 5.184 6.981 3-5 yr Corp/Govt B210 3.077 5.479 5.925 2.958 6.174 8.324 Agencies 1-3 yr Agencies G1P0 0.847 1.536 2.338 2.189 7.034 6.735 3-5 yr Agencies G2P0 2.588 5.290 4.900 3.223 8.971 8.261 Municipals - Tax Exempt 1-3 yr Prere U1AF 0.520 1.800 0.923 3.189 5.875 4.710 3-7 yr Prere U2AF 1.539 4.951 2.087 5.345 7.992 5.390 Auto Asset Backed Securities ABS, Autos, Fixed Rate, (1.45yrs) R0U0 2.291 1.689 3.077 14.845 -0.682 5.723 Dow Jones Industrial Average INDU 7.257 5.544 11.023 3.116 -33.762 6.432 S&P 500 SPX 13.405 2.110 12.783 23.454 -38.486 3.530 NASD CCMP 15.906 -1.799 16.910 43.888 -40.541 9.812 MSCI World Index MXWO 13.184 -7.615 9.262 27.283 -42.081 7.093 CRB Index (Commodities) CRY -3.372 -8.264 15.430 23.563 -39.450 16.679 Source: Bloomberg, BoAML, Morgan Stanley 23
  24. 24. U.S. Corporate Bonds Insatiable DemandU.S. Corporate-Bond Yields, % Corporate-Bond Issuance $210.0 25.0% $183 $179 $175 $180.0 $166 $162 $166 $151 20.0% $142 $150.0 $133 $112 $111 $119 15.0% $120.0 Billions $98 $101 $94 $88 $80 $90.0 $77 $72 $74 10.0% $64 $59 $60.0 5.0% $30.0 $0.0 0.0% Investment grade High Yield 2011 2012 Corporate borrowing costs continue to trend lower due to Corporate bond sales surpassed 2009’s all-time high of $3.89 factors such as easy monetary policy and strong investor trillion to reach $3.9 trillion in 2012. Corporate Treasurers are demand. rushing to lock-in historically low interest rates.Source: Bloomberg, SVB Asset Management. 24
  25. 25. Banking Sector Climbing Out of Abyss Effect of Federal Funds Rate on Commercial Banks’ Return on Average EquityBenign markets and strong economies 25.0% 10.0%resulted in commercial banks’ ROAEexceeding 15 percent prior to the crisis. 9.0% 20.0%Crisis took a toll on the returns, leaving 8.0% 15.0%commercial banks with negative ROAE. 7.0% 10.0%With easy money and relatively calmer 6.0%markets, commercial banks are 5.0%reporting healthier ROAE. The U.S. 5.0%Banks ROAE reached to over 7.5 0.0%percent in first three quarters of 2012. 4.0% -5.0% 3.0%Uncertain times ahead and continued -10.0%low interest rate environment may 2.0%result in stagnated ROAE growth. -15.0% 1.0%It is unlikely that the U.S. commercial -20.0% 0.0%banks will return to ROAE exceeding 15percent any time soon. U.S. Banks ROAE (%) Federal Funds Rate (%) Source: Federal Reserve and SNL Financial. 25
  26. 26. Banking Sector Climbing Out of AbyssFDIC Quarterly Bank Net Income/(Loss) $40,000.0 $30,000.0 $20,000.0 $10,000.0 Millions $0.0 -$10,000.0 -$20,000.0 -$30,000.0 -$40,000.0U.S. banks’ performance continues to stabilize and is supported by a decline in loss provisions, albeit in a persistently low interest rateenvironment.Source: Federal Deposit Insurance Corporation (FDIC). 26
  27. 27. Banking Sector Climbing Out of AbyssLending Standards Delinquency Rates Net percent of banks reporting tighter lending standards 14.0% 120.0% 12.0% 100.0% Conservative All banks, seasonally adjusted 80.0% 10.0% 60.0% 8.0% 40.0% 20.0% 6.0% 0.0% Relaxed 4.0% -20.0% -40.0% 2.0% 0.0% Commercial & Industrial loans Commercial Real Estate Loans Residential Mortgage Loans Prime Residential Consumer Loans Sub-Prime Non Traditional Commercial and Industrial Loans CommercialSource: Federal Reserve, SVB Asset Management. Source: Federal Reserve. 27
  28. 28. Banking Sector Climbing Out of AbyssRating Agencies’ U.S. Financials Upgrades and Downgrades 3,000 2,500 2,000 1,500 1,000 500 0 Upgrades Downgrades2012 Financial sector downgrades have outpaced upgrades, but number of rating actions from S&P, Moody’s and Fitch is moderatecompared to 2009. Hazy outlook in 2013 with economic and regulatory uncertain.Source: S&P, Moody’s, Fitch & Bloomberg, January 4, 2013. 28
  29. 29. Industrial Sector Cautiously OptimisticRating Agencies’ U.S. Industrials Upgrades and Downgrades 400 350 300 250 200 150 100 50 0 Upgrades Downgrades2013 should see minimal rating actions in the industrial sector subject to shareholder and financial policies as well as therecovering U.S. economy.Source: S&P, Moody’s, Fitch & Bloomberg, January 4, 2013. 29
  30. 30. Global Trade Fundamental Growth IntactExports as % of GDP, 2011 Exports vs. World GDP 20.0% 6.0% 15.0% 4.0% 10.0% 2.0% 5.0% 0.0% 0.0% -5.0% -2.0% -10.0% -4.0% -15.0% -20.0% -6.0% Exports of Goods & Services (YoY %) World GDP (YoY %) While exports grew in 2011, long-run imbalances in export Export levels are normalizing towards its long-term trend. levels remain, perpetuating trade imbalances. Global trade remains a fundamental growth story.Source: The World Bank, SVB Asset Management. 30
  31. 31. FX Central Bank Policies DebasingThe U.S. Dollar Index Measures the General Value of the USD Volatility in the Euro Persists130 €1.75 €1.65120 €1.55110 €1.45100 €1.35 90 €1.25 €1.15 80 €1.05 70 €0.95 60 €0.85 50 €0.75 The dollar retains safe-haven status despite debasement from European financial policies have proved insufficient to easing monetary policy. Economic outperformance may prove generate growth and squelch debt worries. Euro supportive for dollar firming. underperformance to reflect unresolved economic weakness.Source: Bloomberg, SVB Asset Management. 31
  32. 32. Regulatory Environment Rocky Road AheadPotential MMF Reform Proposals as of 4Q2012Amendments to SEC 2a-7 rule havebeen in place for more than two years Floating NAV by • Real-time mark to market level valuation SEC • Most of the money fund industry is not in favornow. Key changes included morerestrictive maturity limits, highercredit quality standards andestablishment of new daily and ORweekly liquidity requirements. Capital Buffer and • Cushion against liquidity and credit risk Redemption • Goal: to minimize the risk or disorderly runThe SEC failed to push through a Restriction by • Uncertain about the form or amount of buffersecond round of reforms in August SEC • Could drive further consolidation and work against the investor2012. objective of liquidity ORIn November 2012, FSOC submittedrequest for public comments on SIFI’s Designation • Inclusion of certain money funds as SIFI*additional money funds reform. FSOC by FSOC • Could be subject to heightened regulation by Federal Reservehighlighted that if SEC doesn’t takeactions for further reform, FSOC maystep in by designating certain fundsas SIFI. Potential Reforms can be a combination of above measures. *SIFI: Systemically Important Financial InstitutionsSource: SVB Asset Management FSOC: Financial Stability Oversight Council 32
  33. 33. Our Team Our Team Managing Director Portfolio Managers Credit and Risk Jeff Schnitz Minh Trang, CFA Sook Kuan Loh, CFA jschnitz@svb.com mtrang@svb.com sloh@svb.com Chief Investment Officer Paula Solanes Tim Lee, CFA Joe Morgan, CFA psolanes@svb.com tlee@svb.com jmorgan@svb.com Renuka Kumar Kyle Balough Head of Portfolio Management rkumar@svb.com kbalough@svb.com Ninh Chung nchung@svb.com Jose Sevilla Silicon Valley Bank Partners jsevilla@svb.com Priyanka Raju Kelly Caviglia Head of Credit Research Girish Mallya Melina Hadiwono, CFA mhadiwono@svb.com 33
  34. 34. SVB Asset Management555 Mission Street, Suite 900San Francisco, CA 94105This material, including without limitation the statistical information herein, is provided for informational purposes only. The material is based in partupon information from third-party sources that we believe to be reliable, but which has not been independently verified by us and, as such, we do notrepresent that the information is accurate or complete. The information should not be viewed as tax, investment, legal or other advice nor is it to berelied on in making an investment or other decision. You should obtain relevant and specific professional advice before making any investmentdecision. Nothing relating to the material should be construed as a solicitation or offer, or recommendation, to acquire or dispose of any investment orto engage in any other transaction.All material presented, unless specifically indicated otherwise, is under copyright to SVB Asset Management and its affiliates and is for informationalpurposes only. None of the material, nor its content, nor any copy of it, may be altered in any way, transmitted to, copied or distributed to any otherparty, without the prior express written permission of SVB Asset Management. All trademarks, service marks and logos used in this material aretrademarks or service marks or registered trademarks of SVB Financial Group or one of its affiliates or other entities.©2013 SVB Financial Group. All rights reserved. Silicon Valley Bank is a member of FDIC and Federal Reserve System. SVB>, SVB>Find a way,SVB Financial Group, and Silicon Valley Bank are registered trademarks. SVB Asset Management, a registered investment advisor, is a non-bankaffiliate of Silicon Valley Bank and member of SVB Financial Group. Products offered by SVB Asset Management are not FDIC insured, are notdeposits or other obligations of Silicon Valley Bank, and may lose value. B_SAM-12-12609 Rev. 01-18-2013 1012-0177

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