2016 ECONOMIC LUNCHEON SEMINAR The Keys to SurThrival: Learn to - - PowerPoint PPT Presentation

2016 ECONOMIC LUNCHEON SEMINAR

The Keys to SurThrival:

Learn to not only survive, but thrive in Alaska’s dynamic economy

ALASKA ECONOMIC UPDATE Mark Edwards

Senior Vice President Senior Credit Underwriter Bank Economist

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• Sharp drop in oil prices has created uncertainty
• State and Federal budget issues create drag on

government jobs and related construction.

• Department of Labor predicts -2,500 jobs, -0.7%
• Private sector growth in tourism, retail, native

corporations and health care help offset.

• Summer tourism +7% last year, 2 million total

ALASKA’S MAJOR ECONOMIC ISSUES

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• Per capita income +3.8% 2015, $55,940, 6th in US
• Inflation 2015, -0.1% Anchorage, +0.7% US
• Flat population 737,625. 0% growth for 2 years.
• 339,300 payroll jobs +0.5% in 2015, +1,700 jobs
• Real estate stable, aided by low interest rates.

Anchorage average home price +2.3% last year

ALASKA’S 2015 MACRO INDICATORS

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0% 2% 4% 6% 8% 10% 12% 14% 16% 18%

16.6% In 1981 3.69% March 2016

30 YEAR CONVENTIONAL MORTGAGE

ALASKA BUILDING PERMITS

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Number of new, privately owned housing, 1-5 units authorized

2000 4000 6000 8000 10000 12000

1291 11,248

FORECLOSURE AND DELINQUENCY RATES

1-4 UNIT RESIDENTIAL PROPERTIES

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National Rank Alaska U.S. Delinquencies, total 4Q 2015 2nd best 2.7% 5% Foreclosures, total in progress 4th best 0.7% 1.8% Subprime delinquencies Best in Nation 6.3% 16.2% Subprime foreclosures Best in Nation 1.7% 7.8%

DON’T PANIC!

PREPARE

• Cash is King. Slow dividends to conserve cash.
• Take advantage of historically low interest rates.

Consolidate or refinance debt, and reset amortization.

• Consider selling underutilized or non-performing assets
• If sales slow you may need cash to service debt and rent
• Be careful of more fraud and slow A/R turn in a recession

A FEW TIPS TO SURTHRIVE

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• Track economic variables that most affect your industry
• Are any of your key customers or suppliers impacted?
• Any business segment that could benefit from outsourcing?
• Shift employee focus from past problems to future
• pportunities to help morale and productivity.
• The future is not determined by external events, but rather

how we respond to them.

A FEW TIPS TO SURTHRIVE

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ALASKA CRUDE PRICES 2004 - 2016

$0 $20 $40 $60 $80 $100 $120 $140 $160

Dollars per Barrel

High $134 June 2008 $37 December 2008

Prices over $100

April 2011 to July 2014 $38 March 2016

Traditional Correct Answer:

• Too much spending, oil prices are volatile and oil

production continues to decline. Real Deeper Reason:

• Many of the main revenue sources are off limits to spend.

ALASKA IS RICH WITH ASSETS. WHY DO WE HAVE A CASH FLOW PROBLEM?

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Principle assets of the State of Alaska

Energy wealth – heavily taxed and paying a lions share of State services 104 million acres of State land – only ½% is privately owned, no tax base for municipal services to reduce burden of State Investment Accounts - $53 billion Permanent Fund mostly off limits, other accounts not invested aggressively because liquidity needed for current deficits. State taxing authority – lowest use of taxes in all 50 states

ALASKA IS RICH WITH ASSETS. WHY DO WE HAVE A CASH FLOW PROBLEM?

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• Everything must be on the table for negotiations, it will take

“all of the above” to close this large of a gap.

• State government must diversify its revenue stream
• We will likely have to accept less government services and

spending and pay more personally for it.

• Ensure a stable business climate for future investment
• Support leaders faced with these though decisions.

DRIVING PRINCIPLES FOR A SOLUTION

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THANK YOU

Mark Edwards

Senior Vice President Senior Credit Underwriter Bank Economist

Pacific Portfolio Consulting, LLC

Economic & Capital Market Outlook

Northrim Bank Economic Luncheon Seminar April, 2016

601 Union Street, Suite 4343 Seattle, WA 98101 206-623-6641

Not for reproduction and/or distribution. All data obtained from sources believed to be reliable.

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Key Points of Today’s Presentation

Global Economy:

• Slow & steady, no recession this year
• Developed economies: U.S. > Europe > Japan
• EMs stabilizing, China poised for near-term up-tick
• All major central banks increasingly biased towards easier policy

Capital Markets:

• Risk assets have run far & fast, be prepared for consolidation or even pullback
• Tone of market swinging in favor of “risk-on” factors
• Prior leaders out-of-favor, beaten down areas moving to forefront (small-caps, EM)
• Still looking for modestly positive 2016 stock market overall as:
• Oil recovery, weak US Dollar set stage for earnings beat vs. lowered target
• P/E’s get a boost from lower volatility
• Credit spreads have eased (a good thing), but still offer reasonably attractive risk-reward

Primary Risks:

• China hard landing or major Yuan devaluation (neither is part of our base case)
• Policy mistake by the Fed (looks unlikely to us; if anything, we think Fed will err on the dovish side)

Not for reproduction and/or distribution. All data obtained from sources believed to be reliable.

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Market-based Recession Flags Receding

Source: Bloomberg

• 60
• 40
• 20

20 40 60 80 100

MSCI ACWI YoY % Chg

500 1000 1500 2000 2500

Barclays HY Spread to 10Y Tsy LT Avg Spread = 527bps

?

Not for reproduction and/or distribution. All data obtained from sources believed to be reliable.

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Economic Data Continue To Reject Recession Claims

Source: Bloomberg

The yield curve has typically inverted prior to recession Albeit at a slow pace, leading indicators continue to advance U.S. has never gone into recession with this much slack

Not for reproduction and/or distribution. All data obtained from sources believed to be reliable.

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Global Economy Poised For Improvement

Source: Bloomberg

Not for reproduction and/or distribution. All data obtained from sources believed to be reliable.

45 47.5 50 52.5 55 57.5 60 62.5

ISM US Manufacturing Index

7/09 1/10 7/10 1/11 7/11 1/12 7/12 1/13 7/13 1/14 7/14 1/15 7/15 1/16

• 12.5
• 7.5
• 2.5

2.5 7.5 12.5 17.5

Avg MoM Change Regional Fed Mfg Surveys

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Signs Of A Turn In Manufacturing?

Source: Bloomberg

Not for reproduction and/or distribution. All data obtained from sources believed to be reliable.

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Consumer Remains The Key For Now

Source: Bloomberg

Even with a 20% rise since mid-Feb, lower gas prices still driving consumer savings of $100b-$200b per year Wage growth is finally perking up and expected to continue

Still down 45%

• ver 2 years

Still down 25% since mid-2015

Gas Price $/Gallon

Not for reproduction and/or distribution. All data obtained from sources believed to be reliable.

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Employment Remains A Highlight

Source: Bloomberg

• Payrolls remain solid, while participation rate is

showing clear improvement

• Offers potential to add significant new jobs without

spiking wage gains (which could force the Fed’s hand)

FOMC long-term est.: 4.8% PPC 2016 Outlook: 4.84%

US Unemployment Rate Non-farm Payrolls MoM Chg Labor Participation Rate

Not for reproduction and/or distribution. All data obtained from sources believed to be reliable.

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Global Feedback Loops Drive Major Fed Policy Shift

Source: Bloomberg

Futures market prices show investor expectations Narrowing expectations gap Fed guidance moved sharply lower in Q1

Year-end 2015 Current

• Fed consensus down from 4 ¼-point hikes in 2016 to 2, expects to play catch-up in later years
• Market pricing in roughly 1 hike/year; could be more of an issue next year.
• Policy risk reduced as Fed poised to err on side of more inflation/fewer rate hikes near-term

Market

Not for reproduction and/or distribution. All data obtained from sources believed to be reliable.

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Europe: All The Right Moves, None Of The Results

Source: Bloomberg ECB QE Begins ECB QE Announced

?

Euro Stoxx 600 EPS Estimates US$/Euro Long-term Inflation Expectations

Not for reproduction and/or distribution. All data obtained from sources believed to be reliable.

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Japan: Is Abenomics Missing The Target?

Source: Bloomberg

Not for reproduction and/or distribution. All data obtained from sources believed to be reliable.

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China Outcomes Will Be Critical

Source: Bloomberg

 Hard-landing risk reduced as China

backtracks to make growth top priority

 Better growth benefits oil , commodities,

reduces temptation for a big Yuan deval, to benefit of EMs & risk assets in general

 Near-term cyclical upturn potentially

coming at cost of greater long-term risk

Not for reproduction and/or distribution. All data obtained from sources believed to be reliable.

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Pause In Dollar’s Advance A Key Driver

Source: Bloomberg

Average of ‘80s & ‘90s bull markets: +8.5%/year appreciation, 5.75 year duration

• After strong multi-year run, US$ currently flat year-over-year
• Beneficiaries:

 EM economies  Commodities  Corporate earnings  Risk Assets in general

+31% 4.6 years

US Trade-Weighted Dollar

+19% 1.76 years

Not for reproduction and/or distribution. All data obtained from sources believed to be reliable.

30

Oil Appears To Be Forming A Bottom

Source: Bloomberg

• Supply glut has resisted massive

declines in price and the rig count

• Bottoming process appears to be

unfolding; this won’t be a V-shaped recovery

OPEC U.S.

Not for reproduction and/or distribution. All data obtained from sources believed to be reliable.

+12.3% +16.4% +7.8% +13.4% +0.6% +7.6% +5.5% +1.4%

• 4.4%
• 0.4%
• 14.6%

+1.1%

• 4.6%
• 24.7%
• 9.2%
• 15.1%
• 11.8%
• 7.9%

+1.7%

• 4.1%
• 5.9%
• 30.0%
• 25.0%
• 20.0%
• 15.0%
• 10.0%
• 5.0%

0.0% 5.0% 10.0% 15.0% 20.0%

Lrg-Cap US Sm-Cap US Fgn Dev EM Bond High Yield Cmdty

2015 2016 thru 2/10 Since 2/11/16*

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Just In Case You Blinked…

Source: Bloomberg

*Thru market close 4/4/2016

Not for reproduction and/or distribution. All data obtained from sources believed to be reliable.

Index (as of 3/31/2016)

1Q16 1Yr

(Annualized)

PPC Long-term Risk Premia Assumptions Last 3 Yrs Last 5 Yrs Last 10 Yrs

Citi 3-month T-Bills

0.05% 0.08% 0.05% 0.06% 1.07%

• Barclays Int. Govt/Credit

2.45% 2.06% 1.83% 3.01% 4.34% +1.70%

Opportunistic Bonds*

5.04% 2.88% 1.54% 3.26% 5.70% +3.70%

S&P 500

1.35% 1.78% 11.82% 11.58% 7.01% +6.50%

Russell Mid Cap

2.24%

• 4.04%

10.45% 10.30% 7.45% +7.50%

Russell 2000

• 1.52%
• 9.76%

6.84% 7.20% 5.26% +8.50%

MSCI EAFE

• 2.88%
• 7.87%

2.68% 2.76% 2.27% +6.50%

MSCI EAFE Small Cap

• 0.52%

3.53% 7.63% 5.93% 3.79% +8.50%

MSCI Emerging Markets

5.75%

• 11.70%
• 4.15%
• 3.80%

3.34% +9.50%

Wilshire REIT

5.20% 4.76% 11.07% 12.11% 6.29% +5.00%

Bloomberg Commodity

0.42%

• 19.56%
• 16.87%
• 14.15%
• 6.16%

+2.00%

Credit Suisse Liquid Alts

• 0.12%
• 3.43%

2.56% 1.98% 4.33% +3.50%

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1Q’16 Capital Market Performance

Source: Morningstar Direct *60% Merrill Lynch Global Broad/ 40% Merrill Lynch Global HY & Emerging

Not for reproduction and/or distribution. All data obtained from sources believed to be reliable.

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Should We Be Bracing For A Bear Market?

Source: JP Morgan Asset Management; * Bear Return and Duration defined based on peak-to-trough periods

Bear markets don’t usually just “happen” but instead are typically driven by one or more of the “usual suspects”

Not for reproduction and/or distribution. All data obtained from sources believed to be reliable.

34

Don’t Be Surprised By A Pullback

Source: Bloomberg

+13% 2/11 thru mkt close 4/4/16

• Bounce off Feb 11 low retracing most of

YTD loss

• Sentiment a key driver as recession fears

have receded

• Unsustainable pace; consolidation or

pullback likely within ongoing correction

Not for reproduction and/or distribution. All data obtained from sources believed to be reliable.

35

Tone Of The Market Has Started To Turn

Source: Bloomberg

• Narrow 2015/early-2016 market favored defensive and

momentum factors

• Post-2/11, sentiment has flipped to favor risk-on factors
• If sustained, this would add credence to the recent rally

Not for reproduction and/or distribution. All data obtained from sources believed to be reliable.

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Few Signs of Exuberance

Source: Bloomberg (Top), ICI, Morningstar Direct (Bottom)

Sentiment has rebounded after sinking below ‘08-’09 levels

• $114B
• $23B

+ $200B

$(150) $(100) $(50) $- $50 $100 $150 $200 $250

Equity Bond Money Market

Cumulative Flows ($Millions)

Cumulative Fund Flows Since Mid-2014

% Investors Bullish % Investors Bearish

Not for reproduction and/or distribution. All data obtained from sources believed to be reliable.

37

Outlook For Corporate Profits Remains Mixed

Source: Bloomberg

• Profit cycle has peaked, given rising wages and lack of top-line growth
• Near-term, bar is low; firmer oil prices & US $ pullback could make for

upside surprises

U.S. Corporate Profits as % GDP Employee Comp as % GDP

Not for reproduction and/or distribution. All data obtained from sources believed to be reliable.

38

Be Prepared For More Volatility

Source: Bloomberg

• Volatility is back near its lows on receding recession

fears, oil price stability, and US $ weakness, helping to drive markets higher

• Further declines unlikely; need to see fundamentals

improve or probably facing move back to higher levels

Not for reproduction and/or distribution. All data obtained from sources believed to be reliable.

39

Even Modest Rate Increase Expectations Challenging

Source: Morningstar Direct

• 12.5%
• 7.5%
• 2.5%

2.5% 7.5% 12.5% 17.5% 22.5% 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Price Return Coupon Component Total Return (Barclays Agg)

Boxed years = periods

• f Fed tightening

Not for reproduction and/or distribution. All data obtained from sources believed to be reliable.

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Stressed Credit Markets Rebound

• 4.1%
• 1.0%
• 0.7%

1.7% 3.4% 2.1% 7.6% 2.6% 6.0% 2.8%

• 0.2%

1.0%

• 5.0%
• 2.5%

0.0% 2.5% 5.0% 7.5% 10.0%

HY Lvgd Ln EM Debt TIPS Treas Agg Total Return %

Bond Market Returns – 1st Half vs. 2nd Half Q1

1/1 thru 2/10/16 2/11 thru 3/31/16

Source: Morningstar Direct

More Credit Risk More Interest Rate Risk

Since 2/11 inflection, easing credit spreads and a weaker U.S. Dollar have driven a sharp recovery in the more credit-sensitive and non-US segments of the market

Not for reproduction and/or distribution. All data obtained from sources believed to be reliable.

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 YTD'16 66.4% 31.8% 12.4% 25.9% 56.3% 33.2% 34.5% 36.0% 39.8% 5.1% 79.0% 28.6% 9.2% 18.6% 38.8% 31.8% 4.2% 5.8% 27.3% 31.0% 9.0% 9.8% 47.3% 26.0% 21.4% 32.6% 16.2% 1.8% 32.5% 26.9% 5.8% 17.9% 32.4% 13.7% 1.4% 5.2% 24.4% 10.1% 6.9% 3.6% 39.2% 20.7% 14.0% 26.9% 12.4%

• 12.1%

30.3% 19.2% 2.1% 17.6% 23.3% 4.9% 1.1% 2.5% 21.3% 6.3% 4.4% 2.7% 36.2% 18.3% 13.8% 18.4% 11.6%

• 31.1%

28.6% 16.8% 0.1% 16.4% 16.9% 3.6% 0.0% 1.4% 21.0% 6.2% 2.5% 1.8% 28.7% 12.6% 8.5% 16.0% 7.4%

• 33.8%

27.2% 15.3%

• 3.3%

16.0% 7.4% 3.1%

• 0.4%

0.4% 19.8% 1.3%

• 2.4%
• 6.0%

27.2% 10.9% 6.8% 15.8% 7.4%

• 35.7%

26.5% 15.1%

• 0.1%

14.9% 1.9% 2.7%

• 0.8%

0.4% 13.0%

• 3.0%
• 4.6%
• 9.4%

23.9% 9.3% 4.9% 13.2% 5.5%

• 37.0%

18.9% 8.2%

• 4.2%

3.9% 0.1% 0.0%

• 2.0%

0.1% 4.9%

• 9.1%
• 11.9%
• 15.7%

12.8% 9.2% 4.6% 4.8% 4.7%

• 39.2%

13.3% 5.9%

• 11.7%

3.2%

• 0.9%
• 1.8%
• 4.4%
• 0.1%

0.4%

• 14.0%
• 19.5%
• 20.5%

4.3% 3.0% 3.1% 4.1%

• 1.6%
• 43.1%

5.2% 5.5%

• 13.3%

0.1%

• 2.3%
• 4.5%
• 14.6%
• 1.5%
• 2.6%
• 30.6%
• 21.2%
• 22.1%

1.2% 1.3% 1.6% 2.1%

• 17.6%
• 53.2%

0.2% 0.1%

• 18.2%
• 1.1%
• 9.5%
• 17.0%
• 24.7%
• 2.9%

Cash Foreign Developed Alternatives Bonds Emerging Markets 60/40 Mix (PPC Balanced Growth) Large Cap Stocks Real Estate Small Cap Stocks Commodities

As of 3/31/2016

Worst Best

41

Be Prepared Not To Come In First (Or Last)

Source: Morningstar Direct

Not for reproduction and/or distribution. All data obtained from sources believed to be reliable.

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Be Prepared To Keep A Long-term Perspective

Source: Morningstar Direct 50 100 150 200 250

PPC Balanced Growth Strategy (60/40) S&P 500 TR USD

Thru 3/31/2016 12/31/1998 = 100

249.5 231.9

A diversified long-term strategy may not be the top performer in any one period, but proves its merit over time

Not for reproduction and/or distribution. All data obtained from sources believed to be reliable.

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• Disciplined, long-term Asset Allocation process forms foundation for

portfolio strategies

• Diversification through inclusion of assets with materially different

characteristics will reduce overall portfolio risk in most environments

• Modest Shifts in Allocation made around longer-term strategic

allocations can add value by taking advantage of market opportunities when appropriate

• Employ Active, Passive, & Absolute Return management styles within

the overall portfolio strategy

• Careful Selection, Monitoring, & Management of investment

managers will add value

• Remember that Investment Discipline always trumps emotion

Be Prepared To Stick To Your Long-term Plan

Not for reproduction and/or distribution. All data obtained from sources believed to be reliable.

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Views expressed are as of the date indicated; they are based on the information available at the time and are subject to changed based on economic, capital market, and other conditions. Any investment decision should be based on an individual’s own goals, time horizon, and tolerance for risk. Past performance is no guarantee of future results. Investing involves risk, including the risk of loss of principal invested. Diversification does not ensure a profit or guarantee against a loss. As with any type of portfolio structuring, attempting to reduce risk and increase return could, at certain times, unintentionally reduce returns. Stock markets are volatile and can decline significantly in response to adverse issuer, political, regulatory, or economic developments. Investments in the securities of smaller, less well-known companies typically carries more risk than investing in larger, better-established companies since smaller companies generally have a higher risk of failure and, historically, have exhibited a greater degree of volatility. Investing in non-U.S. markets entails a different set of risks than that typically associated with U.S. markets, including the possibility of currency fluctuations, political and economic instability, accounting changes, and foreign taxation, all of which can potentially have a material favorable or unfavorable impact on performance. Securities may be less liquid and more volatile. Investments in emerging or developing markets involve exposure to economic structures that are generally less diverse and mature, and to political systems which can be expected to have less stability than those of more developed countries. Securities may be less liquid and more volatile than U.S. and longer-established non-U.S. markets. Although stocks have historically outperformed bonds, they also have historically been more volatile. Investors should carefully consider their ability to invest during volatile periods in the market. Although bonds generally present less short-term risk and volatility than stocks, bonds are subject to interest rate risk (the risk that bond prices fall in response to an increase in interest rates) and default risk (the risk that an issuer will be unable to make timely payments of principal and interest due on the bond). In addition, bonds and many short-term investments entail great inflation risk (the risk that an investment’s returns will fail to keep pace with increases in the prices of goods and services) than stocks. Lower-quality fixed income securities generally offer higher yields but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss. The value of an investment in commodities and/or commodity-linked derivatives can be significantly affected by commodity prices, world events, import controls, worldwide competition, government regulations, and economic conditions. Investments in real estate and related securities can be significantly affected by changes in real estate market and economic conditions, property taxes, tax laws, and interest rates. Such investments can be volatility on their own and should generally form only a small portion of an investor’s diversified portfolio to enhance diversification and act as a potential hedge against inflation. Real Assets may not be suitable for all investors. Indexes are unmanaged and cannot be invested in directly. Returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment.

Important Information

THANK YOU!