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Investment Strategies in Today's Market

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Investment Strategies in Today's Market Powered By Docstoc
					   Investment Strategies in
       Today’s Market

Presented by:
Susan Anderson, Anderson Financial Management
        Richard Long, Valley View Consulting
              Tony Sekaly, Coastal Securities
Presentation Overview:
• Market Update
• Investment Considerations
   –   Local Government Investment Pools
   –   Financial Institution Deposits
   –   Interest Bearing Accounts
   –   Money Market Mutual Funds
   –   Callable/Step Up Agencies
   –   Build America Bonds (BABs)
• Strategy Development
   – Horizon Analysis
   – Allow Your Portfolio to Evolve
• PFIA Changes
• Useful Websites
                                           2
Market Update
2006 Review - Short-Term Rates Implied Rate Peak

                      Yield on 180-Day Federal Agencies vs. Fed Funds Rate
                              January 1, 2006 – November 27, 2006




  Source: Bloomberg




                                                                             4
2007 – Still looking for lower rates
           Yield on 180-Day Federal Agencies vs. Fed Funds Target Rate
                          January 2008 – December 2007
   5.4%


   5.2%


   5.0%


   4.8%


   4.6%


   4.4%


                    180-Day Federal Agency
   4.2%
                    Fed Funds Target Rate

   4.0%
          Jan    Feb     Mar      Apr       May   Jun   Jul   Aug   Sep   Oct   Nov   Dec

          07      07      07      07         07   07    07    07    07    07    07    07


    Source: Bloomberg

                                                                                        5
2008 – Short Term Continue Falling




                                     6
2009 – Short Term Rates have hit bottom?




                                           7
1960 TV Trivia

 • Early Morning Weekday Children Show –and his
   side kick name – ( lead role wore a uniform)


 • Clint Eastwood was an actor on what Western TV
   Show – name of TV program and his character
   name


 • Steve McQueen was an actor on what Western TV
   Show – name of TV program and his character
   name.

                                                    8
Yield Curve Update
2006 - Yield Curve Has Inverted
  • Short-term rates are responsive to Fed
                          U.S. Treasury Yield Curve
                      March 31, 2006 vs. November 27, 2006




  Source: Bloomberg



                                                             10
2007 - Yield Curve Is Still Inverted on the Short End

                                         U.S. Treasury Yield Curve
                                              3/30/07 December 3, 2007
                                    March 31, 2007 vs. 12/3/07
           5.5%

           5.0%

           4.5%

           4.0%
                                                            `



           3.5%
                                                                          3/30/07
           3.0%
                                                                          12/3/07

           2.5%
                         3m 6m 2y   5y          10y                                 30y
                                                       Time to Maturity

                     0
   Spread (bps)




                   -50
                  -100
                  -150                    Chart 6     Chart 7
                  -200
                  -250

              Source: Bloomberg

                                                                                     11
2008 - Yield Curve is More Positive – But Yields
Are Dismally Low
                U.S. Treasury Yield Curve
           December 31, 2007 vs. December 3, 2008
 5.00%
 4.50%
 4.00%
 3.50%
 3.00%
 2.50%                                          12/31/07
 2.00%                                          12/3/08
 1.50%
 1.00%
 0.50%
 0.00%




                                                           12
2009 - Yield Curve is More Positive – But Short-
     Term Yields Remain Low
               U.S. Treasury Yield Curve
          December 31, 2007 vs. December 3, 2009
 4.500

 4.000

 3.500

 3.000

 2.500

 2.000

  1.500

  1.000

 0.500

 0.000




                12/31/07      12/31/08     12/3/09


                                                     13
So What Happened in 2009?
What is going on with the economy?
Headlines :
• FOMC lowers Fed Funds rate to “a range from 0% to 0.25%
  (12/16/08)
• Bernie Madoff put under house arrest for massive fraud (12/17/08)
• GM, Chrysler get $13.4 billion in U.S. Loans to survive through
  March (12/19/08)
• Bankruptcies, Store Closings Loom at U.S. Retailers Amid Holdiay
  Debacle (12/29/08)
• Economy Shrinks at 3.8% Pace – Most in 27 Years as Spending
  Crumbles (1/30/09)
• Stanford Financial Closed by SEC on investigation of Fraud in CD
  Program (2/18/09)
                                                                    15
What is going on with the economy?
Headlines:
• Nationalization of Banks Becomes Focus of Growing Market
  Speculation (2/23/09)
• U.S. Economy Shrank 6.2% in 4Q08 – Weakest Performance Since
  1982 (2/24/09)

• DOW Index Falls Below 7,000 for the First Time Since 1997 in
  Global Stock Rout (3/2/09)

• Fed Announces Massive Purchase of Treasuries/Agencies/Mortgages
  to Stimulate Credit Thaw (3/18/09)

• Auto Industry Presented with Specific Demands before More Fed
  Money is Given (3/29/09)
                                                                 16
What is going on with the economy?
Headlines:
• Home Prices in 20 U.S. Cities Decline by Record 19% (3/31/09)
• Goldman Sachs Raises $5 Billion in Share Sale to Repay TARP
  (4/14/09)
• JPMorgan Net Beats Estimate on Record $8 Billion Investment
  Bank Revenue (4/16/09)
• Chrysler to File for Bankruptcy After Some Creditors Balk
  (4/30/09)
• General Motors Files for Bankruptcy (6/1/09)
• “Cash for Clunkers” Program Provides Safety Net for Automakers
  (8/3/09)
                                                                17
What is going on with the economy?
Headlines:
• Consumer Bankruptcies in U.S. May Reach 1.4 Million on Job
  Losses, Credit (8/10/09)

• Economy Shrank 1% in 1Q09, Less than Economists Forecast
  (8/25/09)

• Home Prices Climb the Most in 4 Years as Slump Abates (9/29/09)

• U.S. Stocks Extend Rally as DOW tops 10,000 for the first time in a
  year (10/14/09)

• Founder of Galleon (Major Hedge Fund) Arrested for Insider-
  Trading Fraud (10/16/09)
                                                                 18
What is going on with the economy?
Headlines:
• GDP Expands 3.5% for the First Time in More than a Year Amid
  Stimulus (10/27/09)
• CIT Group Files for Bankruptcy (11/2/09)
• FOMC Says Interest Rates Will Remain “Exceptionally Low” for an
  “Extended Period” (11/4/09)
• U.S. Unemployment Rate Jumps to 10.2% - Highest Level Since
  1983 (11/6/09)
• Bank of America to Repay $45 Billion in Government Bailout Loan
  (12/2/09)
• There are still some ominous signs, but economy may be headed for a
  slow healing in 2010
                                                                 19
How Bad Are Loan Problems?

               100 Largest Banks

  8.00
  7.00
  6.00
  5.00
  4.00
  3.00
  2.00
  1.00
  0.00




               Charge-Offs Rates   Delinquency Rates

                                                       20
Relationships Worked Back to “Normal”
                         Common Bank Base Rates

    7.00


    6.00


    5.00


    4.00


    3.00


    2.00


    1.00


    0.00




              One Month LIBOR       Three Month T-Bill   Fed Funds



                                                                     21
Is it a Mountain or a Mole Hill? (Dec. 2007)
 The Sub-prime Mortgage Mess

 • Original Estimates:
     – $10, 400 Billion in Mortgages (i.e. $10.4 Trillion)
     – 13 % or $1,352 Billion as Sub-Prime
     – 14% or $189 Billion as Delinquent
     – 5% or $9 Billion Foreclosed
 • Big Players Taking Hits!

 • Should They Have Known Better?


                                                             22
Mortgage Problems Continue (Dec. 2009)
The Mortgage Mess Now Includes Prime Loans

• MBA Delinquency Reports for Quarter 3
    – Hit all time high
    – 9.64% of all outstanding loans are delinquent
    – 4.47% of all outstanding loans are in foreclosure
    – Total of 14.41% of all outstanding loans at risk
• Prime loans in foreclosure are higher than sub-prime for the
  first time in history

• FHA Foreclosure rate increasing even as number of loans
  outstanding is on the rise
                                                             23
1960 TV Trivia

  • “Leave it to Beaver” – Ward, Jane, Wally and the Beaver –
    What was their last name? – and Beaver real name?



  • “Andy Griffith Show” – Andy Taylor, Opie, Aunt Bee,
    Barney, Thelma Lou, Gomer, Gubber – who was the
    Barber?



  • What famous movie star was a blacksmith on “Gunsmoke”
    1962 to 1965?

                                                            24
Local Government Investment Pools
Local Government Investment Pools

• Many Options Available:
      • Overnight Liquidity
         – Government Pools
         – Commercial Paper Pools
      • Longer-Term Pools
      • Targeted Maturity Pools




                                    26
Investment Pool Yields Have Plummeted

               6.00

               5.00
  Percentage




               4.00

               3.00

               2.00

               1.00

               0.00




                      Government Pool   Commercial Paper Pool


                                                                27
                                                 0.0000
                                                                   2.0000
                                                                            3.0000
                                                                                     4.0000
                                                                                              5.0000
                                                                                                       6.0000




                                                          1.0000
                                        Jan-02
                                        May-02
                                        Sep-02
                                        Jan-03
                                        May-03




     Average:
                                        Sep-03
                                        Jan-04
                                        May-04
                                                                                                                Is It Worth the Risk?




                                        Sep-04




                Government Pool
                                        Jan-05




     2.61%
                                        May-05
                                        Sep-05
                                        Jan-06
                                        May-06
                                        Sep-06
                                        Jan-07
                                        May-07
                                        Sep-07
     2.67%

                                        Jan-08
                                        May-08
                Commercial Paper Pool




                                        Sep-08
                                        Jan-09
                                        May-09
28




                                        Sep-09
Watch List – Legislative Change made in 2007
TexPool Legislation Passed in 2007, but not yet initiated
HB 860 Section 5 (Amends 404.024 Government Code)

(n) Notwithstanding any other law to the contrary, any
  government investment pool created to function as a money
  market mutual fund and managed by the comptroller or the
  Texas Treasury Safekeeping Trust Company may invest the
  funds it receives in investments that are “eligible securities,” as
  defined by the Securities and Exchange commission in Rule 2a-
  7 (17 C.F. R. Section 270.2a-7), if it maintains a dollar-weighted
  average of 90 days or less, with the maturity of each portfolio
  security calculated in accordance with Rule 2a-7 (17 C.F. R.
  Section 270.2a-7), and meets the diversification requirements of
  Rule 2a-7.
                                                                 29
Economic Landscape Has Changed

      Where is the Value?
Where is the Value?

 • Certificates of Deposit?

 • Money Market Mutual Funds?

 • Interest-Bearing Accounts?

 • Callables/Step-Ups?

 • Build America Bonds?




                                31
Financial Institution Deposits
Certificates of Deposit & Other Accounts
Certificates of Deposit Options


• Direct Bank CDs


• CDARS (Certificate of Deposit Account Registry
  Service)


• Brokered CDs



                                                   33
FDIC Insurance Levels
 • $250,000 per account
    – Extended through 12/31/2013

• Unlimited for “Non-Interest Bearing” Accounts
    – Rates Up To 0.50% considered “non-interest bearing”
    – Expires 6/30/2010

• FDIC Insurance for MMMF expired 10/30/09

• New FDIC mandate to pre-fund Insurance Payments
    – How will this impact Public Funds?

                                                            34
CDs versus Agencies
 3.50


 3.00


 2.50


 2.00


 1.50


 1.00


 0.50


 0.00




            Six Month CD      Six Month Agency
            Twelve Month CD   Twelve Month Agency


                                                    35
Certificate of Deposit Account Registry Service
 • $250,000 FDIC Insurance until 12/31/2013

 • Main or Branch Office in Texas

 • Reciprocal Deposit

 • Originating Bank Sets Rate

 • Fixed Maturities

 • Substantial Early Withdrawal Penalties

 • CDARS.com

                                                  36
Letters of Credit as Collateral

 • Issued by an Agency or Instrumentality (FHLB)

 • Monitor Amount vs. Deposit

 • Maintain Extra Business Days on Expiration

 • Open-ended LOC

 • LOC “Pool”




                                                   37
New Collateral Option for Texas Governments:

• Statewide Collateral Pool (SB 638, HB 77)
   –Centralized Collateral Pool
   –Overseen by Comptroller
   –Optional Participation: Institution & Public Funds
   –Single, Independent Custodian per Institution
   –102% Market Value
   –Regular Reporting to Comptroller
   –Counties Not Eligible
                                                    38
Brokered CDs

 • Main or Branch Office in Texas AND

 • FDIC Insurance

 • Is it a “Security” or a “Deposit”

 • Does DVP Apply

 • CD In Your Name

 • Check Direct Custodial Account


                                        39
FIRREA Remains Important
    CDs and Cash Deposits

“Agreements Against Interests of Corporation”
• Written Agreement

• Contemporaneous with Acquisition

• Approved by Bank Board or Committee

• Continuous Part of Record

Codified to 12 U.S.C. 1823(e)



                                                40
Third Party Custodian Is A Must

       Public                                           Depository
       Entity           Security Agreement                Bank



             Monthly                                          Securities
            Statement                 Custodial Trust         Transfer
                                       Agreement



      Custodial                                         Federal
       Bank              Securities Transfer            Reserve




                                                                           41
Interest Bearing Accounts
Interest Bearing Accounts

 • Depository May Have Available Accounts

 • NOW Accounts

 • FDIC Insurance Unlimited for Non-Interest Earnings
   Accounts (Temporary)
    – Rates Up To 0.50% considered “non-interest bearing”
    – Expires 6/30/2010

 • Must Have Appropriate Account Documents In Place


                                                            43
Money Market Mutual Funds
Money Market Mutual Funds

 • FDIC Insurance for MMMFs has expired

 • Know and Understand the Fund You Intend to Use
    – Collect and Read Prospectus
    – Understand Allowable Securities in Mix

 • Compare Rates to Comparable Products
    – Rate Appears Too Good to be True?




                                                45
Name these 1960 TV Programs

 • After finding “liquid gold” they owned a “cement
   pond”.


 • Major Nelsen found her on the beach



 • Marilyn was considered the ugly member of the
   family


                                                      46
Callables/Step-Ups
Callables and Step-Ups:

• What are they and how do they work?
    – Callables:     Call option inserted into structure
    – Step Ups:      Feature that allows for a rising coupon

• How do you analyze?
    – Assumptions – must consider Yield To Call (YTC) and
      Yield to Maturity (YTM) to understand yield range
      possibilities and then utilize Yield to Worst (YTW) to
      compare to “bullets” (non-callables)



                                                               48
Appropriate Risk/Return Analysis
                                                                    Bullet vs. Callable Performance
            10.00

             9.00

             8.00

             7.00
  Yield %




             6.00

             5.00

             4.00

             3.00

             2.00

             1.00
                    Jan-90

                             Jan-91

                                      Jan-92

                                                  Jan-93

                                                           Jan-94

                                                                    Jan-95

                                                                             Jan-96

                                                                                       Jan-97

                                                                                                Jan-98

                                                                                                         Jan-99

                                                                                                                  Jan-00

                                                                                                                           Jan-01

                                                                                                                                     Jan-02

                                                                                                                                              Jan-03

                                                                                                                                                       Jan-04

                                                                                                                                                                Jan-05

                                                                                                                                                                         Jan-06

                                                                                                                                                                                  Jan-07

                                                                                                                                                                                           Jan-08

                                                                                                                                                                                                    Jan-09
                                                                                      Rolling Bullet                       Rolling Callable


                                                                     Rolling 2Yr Note             Rolling 2Yr Bullet                Rolling 2Yr/3MoCallable
                                               Ave 1/90 - 10/09            4.86                          5.16                                 4.72

                                      Note: Since 1990, TexPool average yield = 3.14%

                                                                                                                                                                                                    49
Investment – Step Up, Three Year
• Maturity: 3 years to 11/27/10

• Callable:   6 months 5/27/10, then every 90 days.

• Starting coupon fixed for first year, then has 4 steps
    – Coupons:
       • 1.25% for 1 year

       • Then steps to 1.50% for 6 months,
       • Then steps to 1.75% for 6 months,
       • Then steps to 2.00% for 6 months,
       • Then steps to 3.00% for the final 6 months.
                                                           50
Investment – Step up, Three Year (cont’d)

• Yield to Call (YTC) Analysis:
   – YTC = 1.25% through 5/27/10
   – YTC = 1.25% through 11/27/10
   – YTC = 1.33% through 5/27/11
   – YTC = 1.436% through 11/27/11
   – YTC = 1.547% through 5/27/11
   – YTM = 1.783% through 11/27/11



                                            51
Investment – 3 year Step Up “Canary”

  • Maturity: 12/21/12

  • Callable:    6/21/10

  • Coupon:
      – 1.05% for first year
      – Then steps to 2.50% for 2 years

  • YTC = 1.05%

  • YTM = 2.007%

                                          52
Investment – Step up “Canary” (Continued)
• 3 year final – 12/21/12 (settles 12/21/09)

• Callable in 6 months, then every 90 days
      • Call Dates: 6/21/09 - 9/21/10 - 12/21/10

• First Coupon – 1.05% for first year, then if not called it
  steps to 2.50% until maturity (if it steps will become a
  “bullet”)

• YTM – 2.007%

• YTC – 1.05%
                                                        53
Investment – 5 year Step Up
• Maturity:   12/23/14

• Callable:    6/23/10 (first in 6 months, and then every 90 days)

• Coupon:
    – 1.75% for 2 years
    – Then Steps to 4.00% for last 3 years (becomes a “bullet”)
• YTC – 1.75% for 2 years
    – 2 year bullet yield = .82%
• YTM – 3.059% for 5 years
    – 5 year bullet yield = 2.33%
                                                              54
Investment – 5 year Step Up

  • Maturity – 12/18/14

  • Callable 3/18/09 then every 90 days

  • Steps every year

  • 1%, 3%,4%,6%,7%

  • YTM – 4.079% !
     –YTM 5 year bullet = 2.33%


                                          55
Build America Bonds (BABs)
New Investments – BABs

• Build America Bonds (BABs) – Federally Subsidized
  Taxable Municipal Bonds
   – Part of the 2009 Federal Stimulus Program
      • American Recovery and Reinvestment Act
   – Provides Opportunities for State & Local governments




                                                            57
BABs (continued):
   – Permits state & local governments to sell taxable bonds
     instead of tax–exempt bonds and receive either :
      • An annual tax credit of 35% of the annual interest on
        the bonds or,
      • For bonds in which 100% of the purpose proceeds
        (excluding up to 2% costs of issuance, capital interest
        and reserve funds) are used for new money capital
        projects, have the issuer receive payments directly from
        the Fed equal to 35% of the interest at approximately
        the same time as the interest payments by the issuer to
        bondholders.
      • Debt must be sold by 12/31/10.
                                                               58
What Qualifies for BAB’s?

• New Money

• General Obligation Bonds

• Dedicated Tax Bonds – Sales, Personal Income Tax &
  Highways Taxes

• Water & Sewer Bonds

• Toll Roads

• Government-owned Power Authorities

• Public Universities & Hospitals

                                                       59
What Will not Qualify for BABs?

 • Refinancing
 • Private Colleges and Hospitals
 • Housing Bonds
 • Airports
 • Ports
 • Corporate Industrial Development Bonds

     – The relationships between tax-exempt and
       taxable yields are volatile, continuously changing
       the savings available to issuers.


                                                            60
Who has issued BAB’s in Texas?
       Issuer                 Deal Size   Maturity
 • Harris County MTA          $ 82MM      2038
    – 5/28/09(first deal in TX)
 • San Antonio ELEC           $375MM      2039
 • UT Rev                     $330MM      2041
 • Dallas Rapid Auth          $828MM      2034 & 2038
 • Carroll ISD                $ 58MM      2014 – 2034
 • Cypress-Fairbanks ISD $180MM           2031 & 2038
 • North TX HWY               $825MM      2039
 • Bexar Hosp                 $254MM      2018 - 2039
                                                        61
Who has issued BAB’s in Texas
       Issuer             Deal Size   Maturities
 • Texas State            $170MM      2020 - 2029
 • Bexar Co Hosp          $100MM      2018 to 2039
 • Midland Co. Hosp       $ 92MM      2018 to 2039
 • Dallas Conv CTR        $388MM      2042
 • Texas Transportation   $ 1.2MM     2029 & 2039
 • Houston Ref            $ 76MM      2029 & 2039
 • Collin County          $ 16MM      2019 & 2029
 • Laredo                 $ 50MM      2029 & 2039
                                                     62
Who has issued BAB’s in Texas

    Issuer              Deal Size   Maturities
• Austin                $ 82MM      2024 & 2029
• Galveston             $230MM      2011 to 2029
• University of Texas   $250MM      2039
• Victoria              $ 20MM      2018 to 2030
• EL Paso               $ 38MM      2020 to 2034
• Hidalgo               $ 8MM       2018 to 2029
• Spring Branch ISD     $ 62MM      2039

                                                   63
Who has issued BAB’s in Texas

    Issuer                     Deal Size   Maturities
• Houston ISD                  $148MM      2029 & 2034

• Plano ISD                    $ 87MM      2016 to 2035

• North TX Water               $107MM      2015 to 2039

• Houston ISD                  $181MM      2019 to 2028

• Northside ISD                $ 25MM      2039

• San Antonio                  $100MM      2015 to 2039
    – 11/17/09 Last deal so far !!

                                                          64
Yield on BAB Bonds (Example):
 • Carroll TX ISD priced 7/22/09, Aa3/AA
    –Maturity     Yield       Spread
    2/15/14       3.715%      +140         5 yr Trsy
    2/15/15       3.915%      +160         5 yr Trsy
    2/15/16       4.46%       +135         7 yr Trsy
    2/15/17       4.709%      +125         10 yr Trsy



                                                  65
Yield on BAB Bonds (Example)
• Galveston Co. TX priced 9/7/09 Aa2/nr/AA
   – Maturity   Yield       Spread
   2/1/11       1.248%      + 30       2 year Trsy
   2/1/12       1.865%      + 40       3 year Trsy
   2/1/13       2.365%      + 90       3 year Trsy
   2/1/14       3.007%      + 60       5 year Trsy
   2/1/15       3.407%      +100       5 year Trsy
   2/1/16       3.90%       + 80       7 year Trsy
   2/1/17       4.20%       +110       7 year Trsy

                                                66
Yield on BAB Bonds (Example)
• Wicomico Co., MD priced 12/1/09 A2/AA-/A-
   – Maturity   Yield      Spread
   12/1/10      1.00%      + 34       2 year Trsy
   12/1/11      1.46%      + 80       2 year Trsy
   12/1/12      1.71%      + 60       3 year Trsy
   12/1/13      2.01%      + 90       3 year Trsy
   12/1/14      2.72%      + 70       5 year Trsy
   12/1/15      3.02%      +100       5 year Trsy
   12/1/16      3.62%      + 90       7 year Trsy
   12/1/17      3.82%      +110       7 year Trsy
                                               67
Strategy Development
Investment Portfolio Strategy

   • Adopt a disciplined approach for your investment
     program!
   • Discipline = Ladder & Diversify
   • But what if you have not laddered or diversified?
      – Is it too late?
      – How long will I be in this fix?
      – Is there anything out there to boost my returns?


                                                           69
 Recent Laddering Success - 2008

Operating Funds

Settlement 10/30/2008                                      Pool Yield   Pool Yield
   Days     Maturity    Amount       Rate      Earnings      2.25         1.75
      106   2/13/2009   3,500,000     3.75        38,116      22,870        17,788
      134   3/13/2009   3,500,000     3.75        48,185      28,911        22,486
      165   4/13/2009   3,500,000     3.75        59,332      35,599        27,688
      195   5/13/2009   3,500,000     3.75        70,120      42,072        32,723
      225   6/12/2009   3,500,000     3.75        80,908      48,545        37,757
      256   7/13/2009   3,500,000     3.75        92,055      55,233        42,959

                        21,000,000              388,716      233,229       181,401
                                             Added Value    155,486       207,315




                                                                               70
Laddering Success - 2009
         Settlement 10/12/2009
Term                  Target      Actual
(days)   Maturity     Amount      Amount     Bank A      Bank B   Earnings   Pool @
                                                                             0.25%    0.50%    0.75%

123      2/12/2010   3,500,000                0.88%

151      3/12/2010   3,500,000                0.88%

184      4/14/2010   3,500,000                0.95%

214      5/14/2010   3,500,000   5,000,000    1.10%      1.15%      33,712    7,329   14,658   21,986

245      6/14/2010   3,500,000   5,000,000    1.15%      1.15%      38,596    8,390   16,781   25,171

275      7/14/2010   3,500,000   5,000,000    1.20%      1.15%      43,322    9,418   18,836   28,253

305      8/13/2010   3,500,000   7,000,000    1.25%      1.15%      73,116 14,623     29,247   43,870


              Total 24,500,000 22,000,000                          188,747 39,760      79,521 119,281

                                             7,000,000
                                                                  Added
                                              Limit               Value      148,986 109,226 69,466
                                                                                                 71
Strategy for Operating Funds:
   • Evaluate your Cash Flows
      – What are your most consistent expenditures?
         • Payrolls
         • Debt Service Transfers


   • Target some of those cash flow dates and lock in
     at currently available rates


   • Try to build and maintain a ladder over time

                                                      72
Cash Flow Analysis - 2007

                                                                     Portfolio Structure Analysis
                            35,000
                            30,000
     Value in $ Thousands




                            25,000
                            20,000
                            15,000
                            10,000
                             5,000
                                0




                                                                                                     Mar-05
                                                                Mar-04




                                                                                                                                         Mar-06




                                                                                                                                                                             Mar-07
                                                       Dec-03




                                                                                            Dec-04




                                                                                                                                Dec-05




                                                                                                                                                                    Dec-06
                                              Sep-03




                                                                                                                       Sep-05




                                                                                                                                                           Sep-06
                                     Jun-03




                                                                          Jun-04

                                                                                   Sep-04




                                                                                                              Jun-05




                                                                                                                                                  Jun-06




                                                                                                                                                                                      Jun-07
                            Core Balance                                 Intermediate Balances                                           Liquidity Base @ 15%

      Cornerstone for Effective Portfolio Development
      Allows Investment Officer to Plan Structure
      Identifies Core positions to target maturity extensions
                                                                                                                                                                                               73
But Is Now the Best Time to Ladder?

 • Simple Answer: It Depends……


 • More Appropriate Answer: Find Opportunities to
   Safely Allocate Investments to Maturities Beyond
   Overnight


 • Adjust the Length of the Ladder to Estimated
   Length of Economic Downturn


                                                  74
How to Add Value:
 • Laddering the portfolio and then maintaining the structure
   with a disciplined approach is a proven performer over time
 • What options are available for laddering?
     – Direct Securities (includes BABs, etc.)
     – Repurchase Agreements
     – Certificates of Deposit
     – Bankers Acceptances
     – Commercial Paper
     – Investment Pool with targeted maturities

                                                            75
Event Risk Planning

 • More than One Liquid Option
    – LGIP and Solid Bank with Capacity
    – LGIP and MMMF
    – Two LGIP

 • LGIP Requires Specific Governing Body Approval

 • Back-up Bank
    – Minimum Balance DDA or MMA
    – Blank Check Stock and/or Wire Capabilities

                                                    76
Horizon Analysis/Assumptions
Horizon Analysis:

 • The maturity decision is the most daunting.




    How do you decide between two maturity
     dates?




                                                 78
Horizon Analysis:

 • An investor has funds that can be invested
   for two years. Should he purchase a two-
   year security or should he purchase a one-
   year security and then purchase another
   one-year position when the original security
   matures?



                                                  79
Horizon Analysis:

 Slide from a Past Training Session:
 • Investing $1,000,000 on 7/1/04 that can be placed
   out to 7/1/06
    – 2-Year US Treasury yields 2.50%
    – 1-year US Treasury yields 1.50%
    – Pool yields 1.26%
    – Fed Funds Rate at 1.25%




                                                       80
Simple Horizon Analysis




 Where would the 1-Year Treasury have to be to break even?
 In July 2004, the yield curve was relatively steep and
 expectations of rate increases were widespread and evidenced
 by the Fed Funds Futures contracts. FOMC in fact raised
 interest rates eight times between July 2004 and July 2005. At
 end of first year, 1-year Treasury yielded 3.51%.
                                                            81
Simple Horizon Analysis




 Where would the 1-Year Treasury have to be to break even?
 In December 2009, the Fed Funds Futures market indicates a
 high probability that the Fed Funds rate will remain in the
 0.25% to 0.50% range through 2010. The probability of the 1-
 year Treasury increasing by 100 basis-points in one year would
 seem remote.
                                                            82
Simple Horizon Analysis
                                              As of 11/16/09




 Fed Funds Futures Contract is one indicator that may be
 utilized to understand where the market anticipates the level
 of the Fed Funds Rate to be into the future.
                                                               83
1970’s TV Trivia

 • What did Archie Bunker call his son-in-law?

 • Whose big break was playing Vinnie Barbarino on
   Welcome Back Kotter

 • On Bonanza, who was the Cartright's longtime cook

 • Who played Mork on 'Mork & Mindy'




                                                     84
Allow Your Portfolio to Evolve
Evolution 2006
September 30, 2006
Security       Maturity                     Life
Description     Date        Par Value       (mo)     Yield   Overnight   48%   5.24%
TexPool       10/1/2006     10,505,987.18     0.03   5.26%
TexSTAR       10/1/2006      7,388,263.54     0.03   5.27%   Gov't Sec   51%   4.71%
Bank MMMF     10/1/2006      1,718,709.60     0.03   4.96%
                                                             CDs         0%    0.00%
FNDN          10/27/2006     2,000,000.00     0.89 5.38%
FHLB          11/15/2006     2,000,000.00     1.51 3.28%
FHLB          2/15/2007      2,000,000.00     4.52   3.90%
FMCDN          3/7/2007      3,000,000.00     5.18   5.40%
FMCDN         4/13/2007      2,000,000.00     6.39   5.36%
FAMCA         5/25/2007      2,000,000.00     7.77   3.94%
FNMA           7/6/2007      2,000,000.00     9.15   4.61%
FNMA          12/18/2007     2,000,000.00    14.56   4.79%
FNMA          2/13/2008      2,000,000.00    16.43   4.92%
FHLB          4/11/2008      2,000,000.00    18.33   5.26%
                           $40,612,960.32     4.30   4.97%




                                                                               86
Evolution 2007
September 30, 2007
Security       Maturity                     Life
Description     Date        Par Value       (mo)     Yield   Overnight   47%   5.12%
TexPool       10/1/2007     10,547,987.45     0.03   5.13%
TexSTAR       10/1/2007     11,304,027.91     0.03   5.12%   Gov't Sec   52%   5.16%
Bank MMMF     10/1/2007       289,630.13      0.03   4.83%
                                                             CDs         0%    0.00%
FNDN          10/5/2007      2,000,000.00     0.16   5.23%
FMCDN         11/6/2007      2,000,000.00     1.21   5.28%
FNMA          12/18/2007     2,000,000.00     2.59   4.79%
FNMA          2/13/2008      2,000,000.00     4.46   4.92%
FMCDN          3/3/2008      2,000,000.00     5.08   5.19%
FHLB          4/11/2008      2,000,000.00     6.36   5.26%
FRMDN         5/23/2008      2,000,000.00     7.74   5.29%
FNDN          6/13/2008      3,000,000.00     8.43   5.26%
FAMCA         7/29/2008      2,000,000.00     9.93   5.23%
FHLMC         11/3/2008      2,000,000.00    13.11   5.05%
FNMA          2/24/2009      2,000,000.00    16.82   5.15%
FHLB           6/4/2009      2,000,000.00    20.10   5.21%
                           $47,141,645.49     4.23   5.14%
                                                                               87
Evolution 2008
September 30, 2008
Security       Maturity                     Life
Description     Date        Par Value       (mo)    Yield   Overnight   45%   2.34%
TexPool       10/1/2008     10,505,987.18    0.03   2.41%
TexSTAR       10/1/2008      7,388,263.54    0.03   2.30%   Gov't Sec   32%   3.85%
Bank MMMF     10/1/2008      1,718,709.60    0.03   2.11%
                                                            CDs         23%   3.39%
FHLMC          11/3/2008     2,000,000.00    1.11   5.05%
CDARS CD      12/11/2008     1,000,000.00    2.36   3.20%
FNMA          2/24/2009      2,000,000.00    4.82   5.15%
CDARS CD      2/27/2009      1,000,000.00    4.92   3.45%
CDARS CD      3/12/2009      2,000,000.00    5.34   3.39%
FHLB           6/4/2009      2,000,000.00    8.10   5.21%
CDARS CD      6/25/2009      1,000,000.00    8.79   3.32%
CDARS CD      7/23/2009      1,000,000.00    9.70   3.15%
FHLB          8/14/2009      2,000,000.00 10.43     2.76%
CDARS CD      8/27/2009      2,000,000.00 10.85     3.63%
FHLB          12/22/2009     2,000,000.00 14.69     2.83%
FHLB          3/12/2010      2,000,000.00 17.31     2.36%
FHLB          6/11/2010      2,000,000.00 20.30     3.39%
CDARS CD      9/23/2010      2,000,000.00 23.70     3.68%
                           $43,612,960.32    5.99   3.07%

                                                                              88
Portfolios Evolve 2009
September 30, 2009
Security       Maturity                     Life

Description     Date        Par Value       (mo)     Yield   Overnight   14%   0.21%
TexPool       10/1/2009      2,232,555.96     0.03   0.28%

TexSTAR       10/1/2009      1,986,847.53     0.03   0.26%   Gov't Sec   15%   2.89%
Bank MMMF     10/1/2009      1,331,535.61     0.03   0.01%

                                                             CDs         71%   2.13%
CD             11/4/2009     2,000,000.00     1.15   1.29%
CDARS CD      11/19/2009     1,000,000.00     1.64   3.45%
FHLB          12/22/2009     2,000,000.00     2.72   2.83%
CD            12/29/2009     3,000,000.00     2.95   1.76%
CD             1/22/2010     1,000,000.00     3.74   1.10%
CD             2/1/2010      1,000,000.00     4.07   1.45%
FHLB           3/12/2010     2,000,000.00     5.34   2.36%
CD             4/5/2010      3,000,000.00     6.13   1.93%
CD             5/6/2010      1,000,000.00     7.15   1.61%
FHLB          6/11/2010      2,000,000.00     8.33   3.39%
CDARS CD      6/24/2010      1,000,000.00     8.75   1.75%
CD             8/6/2010      1,000,000.00    10.16   1.75%
CDARS CD      9/23/2010      2,000,000.00    11.74   3.68%
CD            9/30/2010      1,000,000.00    11.97   1.30%
CDARS CD      12/9/2010      2,000,000.00    14.26   3.50%
CD            3/31/2011      1,000,000.00    17.93   1.43%
CD             4/4/2011      2,000,000.00    18.07   2.35%
CDARS CD      5/26/2011      2,000,000.00    19.77   2.00%
CD            8/29/2011      2,000,000.00    22.89   2.16%
CD            9/30/2011      2,000,000.00    23.93   1.91%
                           $39,550,939.10     8.82   1.95%
                                                                               89
Public Funds Investment Act
Mineral Rights Investment
 SB 894 - Sec. 2256.0202. AUTHORIZED INVESTMENTS:
  MUNICIPAL FUNDS FROM MANAGEMENT AND
  DEVELOPMENT OF MINERAL RIGHTS. (a) Authorizes a
  municipality, in addition to other investments authorized under this
  subchapter, to invest funds received by the municipality from a lease or
  contract for the management and development of land owned by the
  municipality and leased for oil, gas, or other mineral development in any
  investment authorized to be made by a trustee under Subtitle B (Texas
  Trust Code: Creation, Operation, and Termination of Trusts), Title 9
  (Trusts), Property Code. (b) Requires that funds invested by a
  municipality under this section are to be segregated and accounted for
  separately from other funds of the municipality.


                                                                       91
Useful Websites
• GTOT – www.gtot.net

• Center for Public Management – www.unt.edu/cpm

• Federal Reserve System – www.federalreserve.gov

• FDIC – www.fdic.gov

• Bloomberg Financial News – www.bloomberg.com

• Interest Rates – moneycafe.com

• FNMA – www.fanniemae.com

• FHLMC – www.freddiemac.com

• FHLB – www.fhlbanks.com

• GNMA – www.ginniemae.gov

• Texas Legislation – www.capitol.state.tx.us


                                                    92
Questions?




             93
Contact Information:
       Susan Anderson
       Anderson Financial Management LLC
       3627 Stoneridge Road, #1
       Austin, TX 78746
       512-327-4447
       sanderson25@austin.rr.com
       Richard Long
       Valley View Consulting L.L.C.
       2428 Carters Mill Rd.
       Huddleston, VA 24104
       540-297-3419
       rglong@yahoo.com
       Tony Sekaly
       Coastal Securities
       5555 San Felipe, Suite 2200
       Houston, TX 77055
       800-681-4121
       tds@coastalsecurities.com
                                           94

				
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