Broad Municipal Market Review: Are Munis Rich or Cheap?

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 john.mousseau@cumber.com

©Copyright 2015 Cumberland Advisors®. Further distribution prohibited without prior permission.

Lower Unemployment 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.

18 16 14

Percent

12 10 8 6 4 2

2000-Jan May Sep 2001-Jan May Sep 2002-Jan May Sep 2003-Jan May Sep 2004-Jan May Sep 2005-Jan May Sep 2006-Jan May Sep 2007-Jan May Sep 2008-Jan May Sep 2009-Jan May Sep 2010-Jan May Sep 2011-Jan May Sep 2012-Jan May Sep 2013-Jan May Sep 2014-Jan May Sep 2015-Jan May

0

U-6

U-5

U-4

U-3

Source: BLS and Cumberland Advisors. Data through August 2015 ŠCopyright 2015 Cumberland AdvisorsŽ. Further distribution prohibited without prior permission.

2

Difference Between U6 and U3 Sources of Difference Between U-6 and Standard Unemployment Statistic (U3) 8

7

6

Percent

5

Estimate 200 bp above normal

4

3

2

1

2000-Jan Apr Jul Oct 2001-Jan Apr Jul Oct 2002-Jan Apr Jul Oct 2003-Jan Apr Jul Oct 2004-Jan Apr Jul Oct 2005-Jan Apr Jul Oct 2006-Jan Apr Jul Oct 2007-Jan Apr Jul Oct 2008-Jan Apr Jul Oct 2009-Jan Apr Jul Oct 2010-Jan Apr Jul Oct 2011-Jan Apr Jul Oct 2012-Jan Apr Jul Oct 2013-Jan Apr Jul Oct 2014-Jan Apr Jul Oct 2015-Jan Apr Jul

0

% Discouraged Workers

%Marginally Attached Workers

%Part-Time Workers Who Want Full Time Work

Source: BLS and Cumberland Advisors ©Copyright 2015 Cumberland Advisors®. Further distribution prohibited without prior permission.

3

Jan-1948 Jul-1949 Jan-1951 Jul-1952 Jan-1954 Jul-1955 Jan-1957 Jul-1958 Jan-1960 Jul-1961 Jan-1963 Jul-1964 Jan-1966 Jul-1967 Jan-1969 Jul-1970 Jan-1972 Jul-1973 Jan-1975 Jul-1976 Jan-1978 Jul-1979 Jan-1981 Jul-1982 Jan-1984 Jul-1985 Jan-1987 Jul-1988 Jan-1990 Jul-1991 Jan-1993 Jul-1994 Jan-1996 Jul-1997 Jan-1999 Jul-2000 Jan-2002 Jul-2003 Jan-2005 Jul-2006 Jan-2008 Jul-2009 Jan-2011 Jul-2012 Jan-2014 Jul-2015

Total US Labor Force Part. Rate 68

67 Apr-2000, 67.3%

66

65

64 May-1979, 63.3%

63

62

Aug-2015, 62.6%

61

60

59

58

57

©Copyright 2015 Cumberland Advisors®. Further distribution prohibited without prior permission.

Source: Bureau of Labor Statistics

4

Jan-1948 Jul-1949 Jan-1951 Jul-1952 Jan-1954 Jul-1955 Jan-1957 Jul-1958 Jan-1960 Jul-1961 Jan-1963 Jul-1964 Jan-1966 Jul-1967 Jan-1969 Jul-1970 Jan-1972 Jul-1973 Jan-1975 Jul-1976 Jan-1978 Jul-1979 Jan-1981 Jul-1982 Jan-1984 Jul-1985 Jan-1987 Jul-1988 Jan-1990 Jul-1991 Jan-1993 Jul-1994 Jan-1996 Jul-1997 Jan-1999 Jul-2000 Jan-2002 Jul-2003 Jan-2005 Jul-2006 Jan-2008 Jul-2009 Jan-2011 Jul-2012 Jan-2014 Jul-2015

Avg. Number Weeks Unemployed 45 Dec-2011, 40.7

40

35

30

25

Aug-2015, 28.4

Jul-1983, 21.2

20 Aug-1961, 17.0

15

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Jun-1976, 16.9 May-1994, 19.5

Jun-2004, 20.5

10

5

Source: Bureau of Labor Statistics

5

Fed Maturity Structure: Assets Less than one year

One to 10 Yr

Over ten yr

$5.0

QE-3 $4.5

$4.0

QE-2

$3.5

$ Trillions

$3.0

QE-1

$2.5

$2.0

$1.5

$1.0

$0.5

$0.0 2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

Source: Haver Analytics ŠCopyright 2015 Cumberland AdvisorsŽ. Further distribution prohibited without prior permission.

6

Federal Deficit

Source: Haver Analytics and Congressional Budget Office ŠCopyright 2015 Cumberland AdvisorsŽ. Further distribution prohibited without prior permission.

7

Muni Bond Fund Flows Municipal Bond Fund Flows (All Municipal)

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

$13,000

$8,000

$ Millions

$3,000

-$2,000

-$7,000

-$12,000

-$17,000 2009

2010

2011

2012

2013

2014

2015

Source: Lipper ŠCopyright 2015 Cumberland AdvisorsŽ. Further distribution prohibited without prior permission.

8

Munis vs. Crises 7

2008 6.5

Meredith Whitney Moment 6

Tapering & Fund Outflows

Yield (%)

5.5

5

Fed Hike??

4.5

4

3.5

3 2007

2008

2009

2010

2011

2012

2013

2014

Source: Bond Buyer and Cumberland Advisors ŠCopyright 2015 Cumberland AdvisorsŽ. Further distribution prohibited without prior permission.

9

Moody’s Rating Changes: Revenue 200

180

160

140

120

100

80

60

40

20

0 1Q02

1Q03

1Q04

1Q05

1Q06

1Q07

1Q08

Upgrades Revenue

1Q09

1Q10

1Q11

1Q12

1Q13

1Q14

1Q15

Downgrades Revenue

Source: Moody’s Investors Service ©Copyright 2015 Cumberland Advisors®. Further distribution prohibited without prior permission.

10

Moody’s Rating Changes: Tax-Backed 200

180

160

140

120

100

80

60

40

20

0 1Q02

1Q03

1Q04

1Q05

1Q06

1Q07

1Q08

Upgrades Tax

1Q09

1Q10

1Q11

1Q12

1Q13

1Q14

1Q15

Downgrades Tax

Source: Moody’s Investors Service ©Copyright 2015 Cumberland Advisors®. Further distribution prohibited without prior permission.

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Fed Funds vs. Treasury 6

30-Year Treasury 5

4

10-Year Treasury Fed Funds Target 3

2

1

0

Fed Funds Target

30-yr. Treasury

10-yr. Treasury

Source: Bloomberg and Cumberland Advisors ©Copyright 2015 Cumberland Advisors®. Further distribution prohibited without prior permission.

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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 ©Copyright 2015 Cumberland Advisors®. Further distribution prohibited without prior permission.

13

MMA Muni/Treasury Ratios

ŠCopyright 2015 Cumberland AdvisorsŽ. Further distribution prohibited without prior permission.

14

50 Years of 10-year US Tsy Yields

Source: Bloomberg ŠCopyright 2015 Cumberland AdvisorsŽ. Further distribution prohibited without prior permission.

15

Trailing 12-mo. REAL GDP Growth

Source: Bloomberg ŠCopyright 2015 Cumberland AdvisorsŽ. Further distribution prohibited without prior permission.

16

Headline vs. Core CPI

Source: Bloomberg ŠCopyright 2015 Cumberland AdvisorsŽ. Further distribution prohibited without prior permission.

17

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.

ŠCopyright 2015 Cumberland AdvisorsŽ. Further distribution prohibited without prior permission.

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