Name: Matthew Lloyd

Web Site: http://aam.us.com/FISBonds/PublicSite/AAMHome.aspx

Bio: Matthew Lloyd is Vice President and Chief Investment Strategist of Advisors Asset Management (AAM). He has worked in the industry for 16 years in various aspects from retail to institutional. Mr. Lloyd focuses on matching the dynamic and evolving asset classes to the large economic trends that are currently affecting the investment marketplace and clients’ portfolios. He has a keen interest and understanding of how macro events affect the individual investor and offers this insight in the monthly publication Strategic Times. The Strategic Times covers topics including demographics, economics and globalization, as well as other timely investment themes. Mr. Lloyd has made guest appearances on many CNBC and Fox Business News programs, and his commentary regularly appears in CNN Money, Forbes, InvestmentNews, and other prominent periodicals. Mr. Lloyd holds a degree in Economics with emphasis on Business, Math and Psychology from the University of Kansas.

Posts by Matthew Lloyd:

Weekly Economic Note- September 28th, 2009

Written by Matthew Lloyd
September 30th, 2009 at 9:18 am

Quick notes on the economy and markets.
 The housing market continues to show resiliency. The S&P CaseShiller home price index increased
1.6% for the month of July. Year over year comparisons are down 13.30%, which is well off of the 19%
drop at the end of January 2009. When one views the long term chart, it is very difficult to point to another
downturn being possible. Since April, the price index is on a near 15% annual increased pace.
 While the market and economy was experiencing cascading failure after failure during 2008, we made
mention of the overwhelming negative headlines versus positive ones. This pointed, according to a
study from Credit Suisse, to the most pessimistic news story metric on record. Well the news heard
index just made a significant jump. It is now at levels that have not been seen since 2007. As pointed
out by CS, it usually marks a significant jump in overall consumer confidence numbers.
 For as much as has been written about the overheating Chinese economy, their year over year consumer
inflation is still negative on a year over year basis at –1.2%. This may start to increase as we
see some of the new orders on the manufacturing front begin to stimulate some domestic spending.
However, with such a large population, domestic consumption only makes up 37% of their GDP.
Though increasing domestic consumption is a primary focus for the Chinese government, it will not
happen overnight. The dependence upon the US consumer will still be a heavily weighted variable.
 Inflation across emerging markets are still falling , however but at a decreasing pace. Perhaps the
most appealing inflation metric is the significant drop in food inflation. In the 3q of 2008, food inflation
was running at a 6.50% annual pace in the emerging markets. The last print came in at 2.50%. For
countries that often have volatile political environments, rising food prices can often multiply the rising
tensions of a slowing overall economy.
 We continue to push for an overweight in the Emerging Markets. As the economy recovers, industrial
production across the EM universe is picking up dramatically. New orders have been increasing for
Korea, China, Brazil Russia and Turkey to name a few. India’s new orders have rolled over and look to
be taking a little rest. Another issue to monitor which may greatly influence the equities of these
emerging markets is the already increasing corporate earnings estimates.
There are still many opportunities in the marketplace and we would consider any significant drop in prices
in equities (domestic and international), debt (specifically corporate and municipal) and commodities as a
point for allocating more capital for risk assets.
Ps. Happy 60th Birthday to the Peoples Republic of China. On October 1st, 1949, the People’s Republic
of China was founded. At 60 and from an economic perspective, China seems to be a youthful and spry.

This report is provided for information purposes only and does not pertain to any fixed income security product or service and is not an offer or solicitation of an
offer to buy or sell any product or service. Unless otherwise stated, all information and opinion contained in this publication were produced by Advisors Asset Management,
Inc (AAM) and other sources believed by AAM to be accurate and reliable. Due to rapidly changing market conditions and the complexity of investment
decisions, supplemental information and other sources may be required to make informed investment decisions based on your individual investment objectives and
suitability specifications. All expressions of opinions are subject to change without notice.
All AAM employees, including research associates, receive compensation that is based in part upon the overall performance of the firm. AAM may make a market
in or have other financial interests in any given security with which this analysis suggests may be benefited from its conclusions. Investors should seek financial
advice regarding the appropriateness of investing in any security or investment strategy discussed or recommended in this report and should understand that statements
regarding future prospects may not be realized. Past performance does not guarantee future performance.
Advisors Asset Management, Inc. (AAM). All rights reserved. AAM is a FINRA/SIPC member and SEC Registered Investment Advisor. Copyright © 2009.

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Weekly Economic Notes- Week of August 31, 2009

Written by Matthew Lloyd
September 1st, 2009 at 2:29 pm

It appears that the Fed’s backstop programs are already turning a profit. According to Federal Reserve officials, they have made a net $14 billion profit over what they would have made if they were invested in Treasury Bills. Though the amounts of money discussed today far outweigh the RTC’s creation in bailing out the S&Ls, the timing of a turnaround in the profit is quite extraordinary. As the debate about government-run health care continues, one wouldn’t be branded foolish to forecast a “non-profit, government-run” money management option. Social Security 2.0?

The changing of the guard in Japan cannot be overstated! Japanese citizens overwhelmingly voted out the party that has nearly ruled the country of the last 54 years. The Democratic Party of Japan pushed out the Liberal Democratic Party though they share some of the same platforms. The distinction is a major push into expanding the dormant economy that has permeated Japan over the last 20 years.

The new party looks to increase social spending dramatically and review its relationship with the United States. Sure sounds like a bit of protectionism from our point of view. Recall that we felt that protectionist policies would become viral and spread to countries both large and small. Unless exporting dominant countries advocate more domestic consumption and in a very rapid fashion, the dependence upon the US consumer will still be in place. If the protectionist proposals become reality, the global recovery will require more time and more deft negotiations.

With such an overwhelming overhaul with regard to Japan’s political environment, one can’t help but be reminded of the similarities with the US. The gap between the outgoing administration’s approval rating with that of the new administration, was one of the widest on record. However, since the onset of the reality of the economic situation set in, President Obama’s ratings have dropped dramatically. Perhaps the unreasonable amount of expectations (whether stated explicitly or not) has caused a significant drop in this too closely watched political measure.

Japan may be excited and a bit shocked by the significant change, but the reality of the economic, demographic and cultural situation will still require patience. Two decades of anemic economic growth and an aging population cannot be cured by a simple, but dramatic shift in ruling parties.

All AAM employees, including research associates, receive compensation that is based in part upon the overall performance of the firm. AAM may make a market in or have other financial interests in any given security with which this analysis suggests may be benefited from its conclusions. Investors should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. Past performance does not guarantee future performance.

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Weekly Economic Notes- Week of July 20th, 2009

Written by Matthew Lloyd
July 22nd, 2009 at 4:38 pm

The debate about whether the economy is receding or recovering is in full force. For every data point one way, another comes in as a surprise. We believe the recovery is in the beginning stages and gaining momentum piece by piece.

The Ted spread has been dropping to not only more normal levels, but much tighter levels. This is crucial to a normal credit market. Recall it stood at 463 bps last October, the widest point since being measured from 1991. The average is stands at 49 bps during that time frame. Currently we are at 32 bps, which is in the range of 0—50bps over 68% of the time.

We also have the demand for emergency Fed support dropping to very low levels. According to the Wall Street Journal, demand for the funding is a third of its peak level and overseas borrowing is at a fifth of it’s high point. The financial based companies appear to be weathering the storm. It appears to us that there are a few early and distinct gainers in the industry and appear to be poised to grab a dramatic amount of market share when the market as a whole recovers.

Economically speaking, the LEI rose for a third straight month. Combined with a more stable housing market, confidence appears to have been bolstered by the rise in the equity markets. The Nasdaq is up 20% year to date while the S&P is up almost 5%. The S&P jumped 7% last week as a broad based group of companies reported better than expected earnings. The Dow Jones is flat for the year.

Volume on the S&P 500 has been trading at about 80% of its average for the year since the beginning of July. A continuation of the upward move will ultimately have to have some weight behind it. With households maintaining $7 trillion in cash and liquid holdings, this may not be as big of an issue as once thought.

We also saw a continuation of positive surprises in some of the housing data. The NAHB Housing market index rose to 17 from the previous’ 15 level. Housing starts jumped dramatically over the last month and saw last months number revised substantially upward.

This week offers little in the way of economic data, but is heavy on the earnings front.

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Weekly Economic Notes – July 6, 2009

Written by Matthew Lloyd
July 7th, 2009 at 9:44 am

As the fireworks remind us of the explosiveness and unpredictability of the markets, it’s timely to look at some of the underlying economic developments of the first half of the year.

GDP contracted as expected measuring in at a –6.3% annualized rate at the end of last year and a slightly less dramatic –5.5% annualized rate for the first quarter. We expect this will pick up over the last half of the year as inventory builds offer a slight improvement to the underlying numbers and a slight increase in spending resulting from a wealth impact of a rising stock market and stabilizing of housing.

Unemployment has continued to climb from 7.2% at the end of last year to a current reading of 9.50%. This as with many other indicators showed a “declining worsening” at the mid year point. We would expect this to continue to maintain its current path, though with slightly less drama. This is a lagging indicator and will be exacerbated by a birth death component which will exaggerate the job creation numbers on both the positive and negative side.

Inflation is in check, though the rhetoric of rising inflation is clearly getting louder. We clearly see this as putting the cart before the sleeping horse. Inflation needs to have some form of pass through to the consumer to take hold and begin a spiraling impact. We don’t see that happening for mainly 3 reasons:

Wages will not be under any pressure for some time just as we witnessed from the last expansion.
The pool of labor will remain high as many would be retirees must work later than previously expected due to wealth implosion.
The nature of global producing economies will continue to ramp up supply and compete on a potentially unbalanced competitive labor model to maintain economic and political stability.

There is far too much supply and too little demand which results in excess capacity….inflation does not take hold during times like that.

Consumer sentiment has improved as the markets improved. We made note of this a couple of months ago when we pointed to the interesting correlation between rising equity markets and rising consumer confidence. It also appeared we saw a bounce in the metrics just due to the Armageddon prognostication didn’t come to fruition.

Globally speaking, outside the BIC countries and a few other isolated environments, the global economy fared as bad or worse than the US. We note that the banking system in Europe is one area we are not as bullish about currently, though in general we favor financial institutions.

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Weekly Economic Notes – June 22, 2009

Written by Matthew Lloyd
June 25th, 2009 at 11:04 am

As the summer tug of war commences, there are many events to take note of.

Existing home sales were up again, though slightly less than expected. The fact that expectations are rising should be seen as a positive development, though the glass half empty is the path of least resistance for most investors. As the prices have come down, the overhang of inventory of homes for sale seems to be waning. The price drop was the third largest on record.

The PMI indexes of Europe, Japan, China and the United States are all showing signs of a relative recovery in the psychology of manufacturers. In fact, if you look at what is going on in the Emerging Markets, there appears to be at least a consistent theme of building inventories across the globe. We believe this is driven by two components:

1. Inventory draw down has had a significant impact on the excess capacity that has resulted from declining consumption of predominantly US consumers. Led by the Chinese infrastructure plan and global government stimulus programs, demand has slightly picked up.

2. Consumer confidence has picked up in the US, the largest consumption based economy. We have said for some time, with the US consumer being nearly 20% of the global economy at their peak, how they spend will dictate much of the health of the developing world.

We are already seeing a rush to predict the increase in the Fed Funds rate by the FOMC next year. A “spiraling” inflationary issue is the number one cause for this. Quite frankly, the FOMC raising rates may occur, however the curve shape is the one thing people should be considering. With a normal curve at 200 bps and currently we stand at 420 bps, something has to give. This marks only the second time in the last 18 years that we have breached the 400 bps level. Three years following the earlier two times, we experienced a curve of less than 75 bps.

As such, the long end of the curve may become range bound as the short term catches up to where the long end resides. The long end is really responding to the large net new issuance that will be required over the next few years, however we don’t think it wise to underestimate the pension buying of long dated treasuries as it nears the 5% level.

Short term rates may rise, but inflation will likely take years before it can truly take hold as consumer inflation will be dictated by wages rising high enough to absorb higher costs. Without higher wages to absorb costs, inflation cannot truly spiral and will therefore become an inhibitor to growth.

Disclosures:
This report is provided for information purposes only and does not pertain to any fixed income security product or service and is not an offer or solicitation of an offer to buy or sell any product or service. Unless otherwise stated, all information and opinion contained in this publication were produced by Advisors Asset Management, Inc (AAM) and other sources believed by AAM to be accurate and reliable. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and other sources may be required to make informed investment decisions based on your individual investment objectives and suitability specifications. All expressions of opinions are subject to change without notice.

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The Irresistible Force and the Immovable Object

Written by Matthew Lloyd
June 24th, 2009 at 10:12 am

The Irresistible Force and the Immovable Object

Moody’s ponders US downgrade

Diane Coyle, Economics Correspondent, The Independent, January, 26 1996

“American financial markets were unnerved yesterday by the news that Moody’s credit rating agency might downgrade a chunk of the US government’s Treasury bonds.”

Moody’s losing faith in Japan

Jonathon Watts, Tokyo, The Guardian, September 7, 2001

“Japan is threatened with relegation to a division of credit worthiness shared by Slovenia and Taiwan amid growing dismay about the world’s second biggest economy.”

“Moody’s Investors Service, the US credit ratings agency, said the rising risks posed by recession and deflation had prompted it to review Japanese government bonds for a possible downgrade.”

Pound Slides as S&P Signals Britain May Lose Top Debt Rating

By Ye Xie and Anna Rascouet, May 21, 2009 (Bloomberg)

“The pound dropped from a six-month high versus the dollar after Standard & Poor’s signaled Britain may lose its top credit rating for the first time as the government’s finances deteriorate during the economic slump.”

In light of the many anxious moments revolving around the world, it seems we are in the next phase with regard to speculation about credit downgrades of sovereign debt. While we like to consider this a new phenomenon, it really is just another repeating cycle. In November of 1998, Japan’s credit rating was downgraded to Aa from AAA citing the battle with deflation and rising debt to GDP. It then lowered them all the way to A status as the fight continued.

The headlines continue to show the schizophrenic amount of information attempting to be digested by investors, rating agencies and the media. Attempting to trade on this information is as trying as it gets; much like bull riding. Cowboy Up!

We think it is time to take a serious snapshot of what is transpiring in the Treasury market as it is the axis which all other credit markets derive some sort of value from.

The Shape Shifter

The shift in the curve is profound enough over the last year, but more pronounced when we take a look at year to date. This time period also nearly coincides with lows set in yields. This is no coincidence as the panic buying at year-end led a widely held belief that the global economy neared collapse. Additionally, any institution with some ties to finance (a wide number considering the percentage of profits arising from finance backed activities at the peak was profoundly higher than the next high historically) were not able to get enough liquidity to satisfy their regulators as their balance sheet deteriorated daily.

What transpired was a rewardless risk in owning Treasuries, in our opinion. As the economy begins to stabilize, saner minds realized the pricing of risk versus reward. The immense amount of stimulus and support will have to be funded and the future of the Treasury market is ripe with more supply than demand can meet…at least that is what most prognosticators will have you believe.

The short end is anchored as the 10 year and beyond saw the shift. It’s easy to think that the 10 and 30 year had similar yield shifts, but do not discount that the principal side saw a near 18% drop in principal in the 10 year and a 30% drop in the 30 year.

A shift of this magnitude happens on many fronts, but looking at the holders of Treasuries gives you a good insight into the back drop catalysts.

According to the Federal Reserve, there still has been considerable year-over-year purchases from those who seem to get the most venom for protectionist policies. Though, the venom has dropped a bit since the elections are well in the rear view mirror…..coincidence, we think not. Also, the new Treasury Secretary is seen as pushing back to the countless challenges that China has thrown the new administration (currency-wise, militarily, economically, etc).

With the 30 year selling off substantially, we would not be surprised to see a bit of an uptick in foreign net purchases, specifically with the Asian private pensions. Though it is clearly hard to be fully blown bullish on any paper currency, recall the relativity of currency trading. You don’t necessarily have to be favoring one currency and disliking another; rather, which one are you less bearish on and initiate a bullish position versus the ones you favor even less.

A quick look at the trading year over year in debt is profound for those who follow it. This may appear unsophisticated, yet the details point to a very profound displacement for those looking to take advantage of the flightiness of capital.

We are large proponents of the debt market over the next few years, minus cash and treasuries. With the large amount of risk capital leaving the market-making in debt, as dealer’s hoarded cash and minimized bid side sizes, an opportunity arrived for the patient willing to allocate money towards the seemingly large number of desperate sellers.

With the health of the credit markets improving, the large amount of new issuance has reached a bit of equilibrium in the short run. This looks to be setting up a bit of a tug of war over the summer as even the most conditioned investor is welcoming a break from the EKG test they have been thrust upon over the last 2 years.

The large amount of liquidity in the system that is sitting behind the dam of paralysis is going to flow eventually. The herd mentality may not translate exactly as it had done in the past because of recent history; however, where it might flow may be of extreme significance.

According to the Fed Flow of Funds and Merrill Lynch, households have the following:

$20.5 trillion in real estate

$8.8 trillion in equities

$7.7 trillion in cash and deposits

$4.1 trillion in consumer durable goods

$1.6 trillion in corporate bonds

$960 billion in municipals

$920 billion in agency debt

$273 billion in Treasury

We wouldn’t think that this would materially supplant the foreign public and private ownership of treasuries, but it could make a large dent in the estimated new issuance of $3 trillion of treasuries.

A Rarity in Treasuries

Recent trading activity has created an interesting pattern for those looking at where potential convex trading positions may arise in the near term.

The spread between the 30 year and 10 year Treasury has been in a fairly pronounced band over the last 20 years. The average has been 36 bps (green line). Using two standard deviations as an absolute channel, one notices an interesting pattern when we touch the top specifically. The previous two periods showed a long draw down in the spread over the next 4 years.

As we mentioned above, the yield difference currently in the 30 year and 10 year are profound. Below are two charts just showing the YTD difference.

Conclusion

The year to date movement in treasuries has gone reasonably unnoticed by most as headlines over the next shoe to drop dominated our attention. The move however, is very profound and will have far reaching ramifications with regard to capital markets around the world.

The measurable metrics such as spread to treasuries and risk-free rates of returns are an easy leap. What is more dynamic and elusive is the impact it may have on the currency and political landscape.

Though the sell-off in the longer dated maturities has created a tremendous backdrop for financials and lending based institutions, the curve being anchored in the short end will only last so long. The Fed will likely maintain a near zero interest rate policy for some time; well after the economic recovery has taken hold. Many may recall the move in the 3 month Tbill jumping a year in advance of the FOMC hiking short term rates on the last go around.

There is a tremendous amount of liquidity in the market moving at glacial speeds. There is an immense amount of financing that will be required over the short run as well. It seems the paradox of the irresistible force is meeting the immovable object.

Disclosure

*Chart/Graph Disclosure: This chart/graph does not reflect past or current recommendations made by AAM, should be considered an academic treatment of empirical data and should not be used to predict security prices or market levels. Any suggestion of cause and effect or of the predictability of economic cycles or investment cycles is unintentional. Strategic Times was created using empirical research and analysis by highly experienced market observers and is designed for educational purposes only. This presentation should only be considered as a tool in any broker’s, dealer’s or advisor’s investment decision matrix. Investors should consult their financial advisor when applying the assumptions of this chart/graph.

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Posts by Matthew Lloyd:

Weekly Economic Note- September 28th, 2009

Weekly Economic Notes- Week of August 31, 2009

Weekly Economic Notes- Week of July 20th, 2009

Weekly Economic Notes – July 6, 2009

Weekly Economic Notes – June 22, 2009

The Irresistible Force and the Immovable Object

Moody’s ponders US downgrade

Moody’s losing faith in Japan

Pound Slides as S&P Signals Britain May Lose Top Debt Rating