Inventory Build-Up Overstates Economic Strength

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1 Exhibit A Investment Portfolio Review Quarter Ending December 3, 203 OVERVIEW October December 3, 203 During the October to December quarter, Treasury yields continued to rise. Yield increases were more significant in the 5+ year range, while rate increases in shorter term issues remained quite modest. The majority of the increase in yield was caused by positive economic data that generally signaled continued improvement in the U.S. economy. The preliminary U.S. GDP report in November on the June September quarter showed a greater than expected 2.8% increase in GDP, but much of it was attributed to an increase in inventory, rather than increases in sales. In the period under review, yield spreads between Treasury, Agency and Corporate issues remained narrow. Although rates could continue to move higher, the rate for short-term investments remains near zero, which will continue the trend of very low returns in overnight funds and shorter term securities. Inventory Build-Up Overstates Economic Strength The third quarter growth rate may have overstated the underlying strength of the economy as nearly half of the growth was attributable to a.7% growth in inventories. If consumers purchases don t accelerate enough to justify the third quarter s.7% inventory growth, then companies may slow production in the coming quarters to decrease inventories. This could result in inventories being a negative contributor to GDP growth. 5.00% Contribution of Inventories to GDP 4.00% 3.00% 2.00%.00% 0.00% -.00% 0.36% 3.35% 0.60% 2.% 2.8% 2.4% -0.9% -2.00% 0.93% 0.22% 0.4% 2.07%.67% 2.47% -2.00% -3.00% Mar-2 Jun-2 Sep-2 Dec-2 Mar-3 Jun-3 Sep-3 Non-Inventories Inventories Source: Bureau of Economic Analysis, Bloomberg PFM Asset Management LLC The County Treasury continued to outperform all of the portfolio benchmarks due to a consistent investment strategy that ladders short term debt to provide liquidity and takes advantage of available higher rates by buying small amounts of longer term corporate and non callable securities, while maintaining positions in currently held callable debt structures. The following indicators reflect key aspects of the County s investment portfolio in light of the above noted conditions: 2

2 . Market Access The U.S. Treasury continues to issue substantial amounts of debt instruments. The continued large issuance is due to efforts to stimulate the economy by providing funding for financial institutions, social programs, and ongoing military funding requirements. Access to U.S. Treasuries and Agency debt has been plentiful, but yields have continued to remain low as investors seek safe havens from an uncertain world market. These issues have continued to keep yields low on Treasury bonds from September through December. During the quarter, the majority of County investment purchases continue to be in U.S. Treasury and Agency markets with a continued small position in shorter term, highly rated (AA or better) Corporate bonds, Certificates of Deposits and highly rated (A, P), short term Commercial Paper. In addition, the Treasurer continues to keep a high level of overnight liquid assets, reflecting the need to maintain increased levels of available cash to ensure the ability to meet all cash flow needs. 2. Diversification - The Treasurer s portfolio consists of fixed income investments, all of which are authorized by the State of California Government Code The portfolio asset spread is detailed in the table below: Portfolio Asset Composition Corporate Assets Overnight Liquid Assets US Treasuries Federal Agencies 5.72% 33.23% 0.95% 60.0% 3. Credit Risk Approximately 94.28% of the investment portfolio is comprised of U.S. Treasuries, Federal Agency securities and other liquid funds. All assets have an investment grade rating. U.S. Treasuries are not specifically rated, but are considered the safest of all investments. The corporate debt (5.72%) is rated in the higher levels of investment grade. All federal agency securities have AA ratings, or are guaranteed by the U.S. Treasury. The portfolio credit composition is detailed in the table below: Portfolio Credit Composition AA+ AA- A-+ (Short Term) Not Rated (LAIF/Blackrock) AAAm Amf/S (Cal Trust) 64.00% 2.00%.00% 4.00% 0.00% 9.00% 4. Liquidity Risk Liquidity risk, as measured by the ability of the county s Treasury to meet withdrawal demands on invested assets, was adequately managed during the September to December quarter. The portfolio s average weighted maturity was 496 days, and large percentages (33.23%) of assets are held in immediately available funds. 2

3 PORTFOLIO CHARACTERISTICS September 30, 203 December 3, 203 Total Assets $925,323,720 $,049,985,939 Market Value $922,5,473 $,046,087,332 Days to Maturity Yield 0.49% 0.50% Estimated Earnings $,202,998 $,220,76 FUTURE STRATEGY The U.S. Treasury has continued a policy of heavy borrowing for stimulus programs, military funding and other additional needs. The continued improvement in our economy has given the Federal Reserve an opportunity to taper their Quantitative Easing program by $0 billion a month, which may make securities easier to obtain, but will have little effect on short term rates in the near term. The consistent improvement has also ensured that investors will continue to prefer the safety of U.S. debt to other investment options. By the end of the quarter, the U.S. Government passed a budget that will extend until 205 which should help alleviate some of the uncertainty in Treasury and Agency markets. It is important to note; given all the market concern about tapering of the Federal Reserve s QE program, they are nowhere near their previously stated comfort level to consider increasing short term rates. Although the tapering of the QE program is a good signal of increased confidence in our economic recovery, it is the belief of the Treasurer that the current round of tapering (or buying less than the current $85 Billion per month), will not have a dramatic effect on short term rates. As long as the Federal Treasury remains actively engaged in the fixed income markets, and continues to target short term rates at 0%-0.25%, the returns on the investments in the County s pool will remain historically low. If the rate environment continues its trend, the portfolio is adequately positioned to take advantage of the changing market conditions. 3

4 Fed Rate Guidance Indicates Continued Low Rates Through at Least 205 At its December meeting, the Federal Reserve announced the first taper of its $85 billion bond purchase program. Beginning in January, the Fed will purchase $5 billion fewer long-term Treasuries and $5 billion fewer mortgage-backed securities each month. Despite this taper, the Federal Reserve is not expected to raise its target range for the federal funds rate until at least 205. FOMC Participant Votes on Appropriate Timing of Policy Firming as of December 8, % 4% Targeted Federal Funds Rate at Year-End FOMC Participant Forecasts as of December 8, 203 3% 2% 2 3 % % Individual FOMC participant s judgment of the appropriate level of the target federal funds rate at the end of the specified calendar year. Source: Federal Reserve Open Market Committee. PFM Asset Management LLC 5 In the near term the Treasurer continues to believe rates will not begin to rise until there is a longer history of consistent improvement in the unemployment rate, or the Federal Reserve starts to see significant inflation in the core Consumer Price Index. The Treasurer s rolling investment ladder will access short term Treasury and Agency markets with expected yields of less than one-quarter percent. In our efforts to continue to provide the safest vehicles for Treasury investments, the Treasurer will maintain a portfolio weighted with U.S. Treasuries, Federal Agency securities, and other highly liquid assets. 4

5 CUSIP Investment # Money Market Accts-GC 5360(k)(2) Issuer Average Balance Portfolio Management Portfolio Details - Investments December 3, 203 Purchase Exhibit B Par Value Market Value Book Value Stated Rate Moody's Days to S&P Maturity SYS BlackRock 99,770, ,770, ,770, SYS80 80 CalTrust 00,000, ,000, ,000, Aaa AAA SYS Federated 07/0/ Aaa AAA SYS Fidelity Investments 5,832, ,832, ,832, Aaa AAA Page Maturity Subtotal and Average 94,67, ,602, ,602, ,602,59.70 State Pool-GC 5360(p) SYS36 36 LAIF 50,000, ,000, ,000, Subtotal and Average 50,000, ,000, ,000, ,000, CAMP-GC 5630(p) SYS Calif. Asset Mgmt 93,300, ,300, ,300, AAA SYS Calif. Asset Mgmt AAA Subtotal and Average 68,89, ,300, ,300, ,300, Negotiable CDs - GC 5360 (i) 78009NGU4 863 RBC Capital Markets 06/25/202 0,000, ,99, ,000, Aa AA /25/205 Subtotal and Average 0,000, ,000, ,99, ,000, Medium Term Notes - GC 5360(k) 36962G4N 70 General Electric 08//200 0,000, ,076, ,000, A AA // G4X9 738 General Electric 0/07/20 5,000, ,000, ,000, A AA 6 0/07/ G4X9 749 General Electric 03/09/20 5,000, ,000, ,000, A AA 6 0/07/ G5W0 855 General Electric 04/27/202 5,000, ,39, ,995, A AA,22 04/27/ G5W0 856 General Electric 04/27/202 5,000, ,39, ,004, A AA,22 04/27/ P5S 839 Toyota Motor Corporation 02/29/202 5,000, ,09, ,068, Aa AA,07 0/2/ P5Z5 840 Toyota Motor Corporation 02/29/202 5,000, ,033, ,006, Aa AA 42 02/7/205 Subtotal and Average 40,080, ,000, ,500, ,075, Commercial Paper Disc.- GC 5360(h) 89233HE8 938 Toyota Motor Corporation 08/05/203 0,000, ,993, ,990, P- A /0/204 Subtotal and Average 9,987, ,000, ,993, ,990, Portfolio INVT AP Run : 0/07/204-09:47 PM (PRF_PM2) Report Ver

6 Exhibit B Portfolio Management Portfolio Details - Investments December 3, 203 Page 2 CUSIP Investment # Fed Agcy Coupon Sec - GC 5360(f) Issuer Average Balance Purchase Par Value Market Value Book Value Stated Rate Moody's Days to S&P Maturity 333EAF Federal Farm Credit Bank 08/07/202 0,000, ,95, ,000, Aaa AA,34 08/07/ ECD Federal Farm Credit Bank 0/7/203 0,000, ,000, ,999, Aaa AA 6 0/7/ KAH3 909 Federal Farm Credit Bank 03/9/203 0,000, ,05, ,04, Aaa AA 57 02/27/ ECHV9 92 Federal Farm Credit Bank 04/02/203 0,000, ,998, ,00, Aaa AA /30/ ECFJ8 94 Federal Farm Credit Bank 04/02/203 0,000, ,003, ,000, Aaa AA 394 0/30/ ECTM6 93 Federal Farm Credit Bank 07/02/203 0,000, ,073, ,042, Aaa AA,643 07/02/ EC7 878 Federal Home Loan Bank 09/7/202 0,000, ,809, ,963, Aaa AA,346 09/08/ XB8 88 Federal Home Loan Bank 0/7/202 0,000, ,96, ,997, Aaa AA,020 0/7/ TW8 888 Federal Home Loan Bank 2/05/202 0,000, ,336, ,393, Aaa AA /09/ WC5 900 Federal Home Loan Bank 0/5/203 0,000, ,000, ,999, Aaa AA 4 0/5/ UF0 90 Federal Home Loan Bank 0/6/203 0,000, ,00, ,00, Aaa AA 28 0/29/ T0 904 Federal Home Loan Bank 0/23/203 0,000, ,000, ,000, Aaa AA 22 0/23/ DF7 908 Federal Home Loan Bank 03/06/203 0,000, ,999, ,999, Aaa AA 55 02/25/ EE3 90 Federal Home Loan Bank 03/9/203 0,000, ,00, ,00, Aaa AA 44 02/4/ SZ6 93 Federal Home Loan Bank 04/02/203 0,000, ,363, ,402, Aaa AA 89 06/0/ LD3 95 Federal Home Loan Bank 04/09/203 0,000, ,000, ,000, Aaa AA 79 03/2/ JY0 99 Federal Home Loan Bank 04/2/203 0,000, ,00, ,000, Aaa AA 76 03/8/ FM0 92 Federal Home Loan Bank 04/6/203 0,000, ,000, ,000, Aaa AA 69 03// EG4 922 Federal Home Loan Bank 04/6/203 0,000, ,000, ,000, Aaa AA 63 03/05/ A Federal Home Loan Bank 05/02/203 0,000, ,94, ,253, Aaa AA,528 03/09/ A Federal Home Loan Bank 06/3/203 0,000, ,724, ,000, Aaa AA,624 06/3/ Q Federal Home Loan Bank 06/28/203 0,000, ,00, ,000, Aaa AA 90 04/0/ QM8 934 Federal Home Loan Bank 06/28/203 0,000, ,00, ,000, Aaa AA 92 04/03/ JR4 937 Federal Home Loan Bank 07/24/203 0,000, ,050, ,050, Aaa AA 47 05/28/ BN0 939 Federal Home Loan Bank 08/02/203 0,000, ,000, ,999, Aaa AA 4 05/22/ A05Y2 94 Federal Home Loan Bank 09/30/203 0,000, ,997, ,999, Aaa AA 80 06/30/ A04L 942 Federal Home Loan Bank 09/27/203 0,000, ,998, ,000, Aaa AA 73 06/23/ WP2 943 Federal Home Loan Bank 0//203 9,700, ,699, ,698, Aaa AA 40 05/2/ TL3 944 Federal Home Loan Bank 0/3/203 0,000, ,00, ,0, Aaa AA 62 06/2/ A05Y2 947 Federal Home Loan Bank 2/04/203 0,000, ,997, ,998, Aaa AA 80 06/30/ SV4 950 Federal Home Loan Bank 2/06/203 0,000, ,00, ,002, Aaa AA /28/ QF 95 Federal Home Loan Bank 2/06/203 0,000, ,002, ,003, Aaa AA /25/ EADC0 852 Federal Home Loan Mtg Corp 04/8/202 0,000, ,06, ,978, Aaa AA,62 03/08/ G3H52 87 Federal Home Loan Mtg Corp 09/2/202 0,000, ,870, ,000, Aaa AA,350 09/2/ G3K Federal Home Loan Mtg Corp 09/27/202 0,000, ,966, ,997, Aaa AA,000 09/27/ G3S Federal Home Loan Mtg Corp /30/202 0,000, ,960, ,08, Aaa AA,035 /0/206 Maturity Portfolio INVT AP Run : 0/07/204-09:47 PM (PRF_PM2) 7.3.0

7 Exhibit B Portfolio Management Portfolio Details - Investments December 3, 203 Page 3 CUSIP Investment # Fed Agcy Coupon Sec - GC 5360(f) Issuer Average Balance Purchase Par Value Market Value Book Value Stated Rate Moody's Days to S&P Maturity 334G42M9 96 Federal Home Loan Mtg Corp 04/25/203 0,000, ,874, ,000, Aaa AA,20 04/25/ G42G2 97 Federal Home Loan Mtg Corp 04/30/203 0,000, ,703, ,000, Aaa AA,580 04/30/ EACR8 98 Federal Home Loan Mtg Corp 04/2/203 0,000, ,08, ,08, Aaa AA 55 02/25/ G43F3 920 Federal Home Loan Mtg Corp 04/30/203 0,000, ,695, ,000, Aaa AA,580 04/30/ G43V8 923 Federal Home Loan Mtg Corp 05/5/203 0,000, ,743, ,999, Aaa AA,595 05/5/ G47M4 930 Federal Home Loan Mtg Corp 06/26/203 0,000, ,97, ,000, Aaa AA,637 06/26/ G3SB7 932 Federal Home Loan Mtg Corp 06/27/203 0,000, ,007, ,006, Aaa AA 7 04/28/ EACB3 935 Federal Home Loan Mtg Corp 06/28/203 0,000, ,074, ,072, Aaa AA 2 04/23/ G2UA8 949 Federal Home Loan Mtg Corp 2/05/203 0,000, ,052, ,055, Aaa AA 23 08/20/ G0HV8 837 Federal National Mtg Assn 03/06/202 0,000, ,00, ,980, Aaa AA,60 03/06/ G0B Federal National Mtg Assn 09/27/202 0,000, ,875, ,000, Aaa AA,365 09/27/ G0NH2 876 Federal National Mtg Assn 09/3/202 0,000, ,885, ,995, Aaa AA,330 08/23/ G04Q 884 Federal National Mtg Assn /20/202 0,000, ,006, ,54, Aaa AA,49 /20/ G06Z9 885 Federal National Mtg Assn 2/3/202 0,000, ,939, ,000, Aaa AA,077 2/3/ G4N6 890 Federal National Mtg Assn 0/02/203 0,000, ,850, ,994, Aaa AA,274 06/28/ G0PP2 903 Federal National Mtg Assn 0/8/203 0,000, ,875, ,026, Aaa AA,358 09/20/ G0UH4 906 Federal National Mtg Assn 02/22/203 0,000, ,783, ,000, Aaa AA,53 02/22/ G0AP8 9 Federal National Mtg Assn 03/28/203 0,000, ,07, ,06, Aaa AA 57 02/27/ G0XA6 924 Federal National Mtg Assn 05/2/203 0,000, ,692, ,000, Aaa AA,60 05/2/ AVZ2 926 Federal National Mtg Assn 05/06/203 0,000, ,05, ,052, Aaa AA 7 03/3/ G0XK4 927 Federal National Mtg Assn 05/30/203 0,000, ,674, ,000, Aaa AA,605 05/25/ G0WJ8 929 Federal National Mtg Assn 05/28/203 0,000, ,673, ,927, Aaa AA,60 05/2/ G0PQ0 948 Federal National Mtg Assn 2/04/203 0,000, ,829, ,930, Aaa AA,394 0/26/207 Federal Agency Disc.-GC 5360(f) Subtotal and Average 565,622, ,700, ,948, ,065, XH9 945 Freddie Mac Discount Security /26/203 0,000, ,997, ,995,33.33 Aaa AA 46 05/27/204 US Treasury Note-GC 5360(b) Subtotal and Average 3,90, ,000, ,997, ,995, VR8 940 U.S. Treasury 08/29/203 0,000, ,002, ,959, Aaa AA /5/206 Federal Agency Step Up-GC 5360(f) Subtotal and Average 9,958, ,000, ,002, ,959, G4NB0 946 Federal Home Loan Mtg Corp 2/9/203 0,000, ,903, ,000, Aaa AA,448 2/9/ G07K 886 Federal National Mtg Assn 2/06/202 0,000, ,840, ,996, Aaa AA,435 2/06/ GQP7 936 Federal National Mtg Assn 07/30/203 0,000, ,008, ,000, Aaa AA,67 07/30/208 Subtotal and Average 2,408, ,000, ,752, ,996,069.44,58 Maturity Total and Average 973,324,573.69,048,602,59.70,046,087,33.70,049,985, Run : 0/07/204-09:47

8 Exhibit C Historical Yields vs. Benchmarks Yr Treasury and Agency 0.30 LAIF 0.20 Yr T-Bill 0.0 S&P Rated Govt. Pool Index 0.00 Q Q2 Q3 Q4 Q Q2 Q3 Q4 FY 2/3 FY 3/4 FY 2/3 FY 3/4 Quarterly Yield Q Q2 Q3 Q4 Q Q2 Q3 Q Yr Treasury and Agency LAIF Yr T-Bill S&P Rated Govt. Pool Index The S&P Index yields are obtained from Bloomberg The -3 Yr Treas and Agy benchmark has replaced the Yr T-Bill, as it more accurately reflects the current composition and weighted average maturity of the County's portfolio. The -3 Yr Treas and Agy yields are obtained from the B of A Merrill Lynch Global Bond Indices/Bloomberg

9 Exhibit D Aging Report By Maturity As of January, 204 Maturity Par Value Percent of Portfolio Current Book Value Current Market Value Aging Interval: 0 days ( 0/0/204-0/0/204 ) 7 Maturities 348,902, % 348,902, ,902,59.70 Aging Interval: - 90 days ( 0/02/204-04/0/204 ) 7 Maturities 60,000, % 60,06, ,2, Aging Interval: days ( 04/02/204-0/0/205 ) 5 Maturities 49,700, % 49,885, ,882,32.00 Aging Interval: days ( 0/02/205-0/0/206 ) 5 Maturities 45,000, % 45,009, ,03,50.00 Aging Interval: days ( 0/02/206-2/3/206) 7 Maturities 70,000, % 70,769, ,530, Aging Interval: 096 days and after ( 0/0/207 - ) 29 Maturities 275,000, % 275,32, ,556, Total for 80 Investments 00.00%,049,985,939.38,046,087,33.70 Investments within the Aging Period $400,000,000 $350,000, ,902,59.70 $300,000, ,000, $250,000,000 $200,000,000 60,000, ,700, $50,000,000 $00,000,000 70,000, $50,000,000 45,000, $0 0 days - 90 days days days days 096 days and after

10 Exhibit E Overnight (Liquid) Asset Distribution LAIF BlackRock MMF CD's 3.93% 7.92% 4.92% 54.64% Treasuries Mortgages Agencies CDs/BNs Time Deposits Commercial Paper 2.00% 5.50% 0.70% 0.80%.20% 0.60% 33.00% Financial Co.Commercial Paper Govt Agy Repo Asset Backed Commercial Paper Treasury Debt Other Repo Time Deposit 0.57% 7.76% 0.26% Loans 3.80% 8.80% 2.00% 2.60% Other Notes Variable Rate DN Treasury Repo Other CP 30.40% 4.90% CAMP.90% 24.20% 25.40% Agencies Commercial Paper Neg CDs Repurchase agreements Banker' Acceptances Fidelity 0.5% 0.78% 0.80%.54% 20.20% 22.82% 9.38% 8.27%.08%.39% 33.23% Treasury Debt Govt. Agy Debt Financial Company CP Other CP CD's Other Notes Repurchase Agreements Varr. Rate Demand Notes Other Muni Debt Other Instruments CalTRUST Short Term 5.70% 4.80% 2.90% 29.0% 5.40% 32.0% Commercial Paper Corporate Bonds US Agency Bonds Money Market Municipal Bonds MBS/ABS Net Other Assets * Percent total may not equal 00 due to rounding * Net Other Assets may include cash and receiveables and payables related to open security or capital stock trades LAIF CAMP Fidelity MMF BlackRock CalTRUST Short-Term Credit Rating NR AAAm AAAm NR Amf/S Fund Assets $56.5 Billion $2.06 Billion $39.0 Billion $8.28 Billion $639Million WAM 209 days 58 days 44 days 44 days 5 days Percent of Portfolio Invested in Fund 4.77% 8.90% 0.56% 9.5% 9.54% Fund Quarterly Return 0.26% 0.08% 0.05% 0.08% 0.38%