War Room 24 Jan 2013

Happy 2013, Are We There Yet?

War Room•Monthly macro discussion

•Using tools in context

•Update on HiddenLevers Features

•Your feedback welcome

Happy 2013, Are We There Yet?

I. Debt Cliff – Where are We?

II. Wall Street 2013 Baseline Estimates

III. 2013 Fed Stress Tests

IV. Product Update

HiddenLevers

DEBT CLIFF – WHERE ARE WE?

Fiscal Cliff - Review

Tax Increases$60 billion

actual increase for 2013

Spending Cuts$120 billion

on table for 2013

slide from Oct 2012 War Room – Eve of Election Update

Fahgettaboudit.

Fiscal Cliff – How Did We Do? Ugly:

Thelma + Louise

No deal for President + Congress. Tax hikes +spending

cuts on 01 Jan

Bad: Brinksmanship

President + Congress destructive bickering, with

gridlock into early Jan

Good: Proactive Resolution

President + Congress agree to tax + spending measures,

avoiding fiscal cliff

This played out.

Now100% priced in

Began playing out in December

We overestimated.

Real effects would have been post-Jan 01

Election Review: Pre-Election Possibilities

Romney + GOP Congress

Romney + Dem Congress

Obama + GOP Congress

Obama + Split Congress

Obama + Dem Congress

Romney + Split CongressPre 2012 Election

ObamaDem 53/47GOP 242/193

execsenatehouse

(pipe dream)

(pipe dream)

Election Review: Nothing changes in 2013

Obama + Split Congress

Post 2012 Election

ObamaDem 55/45GOP 235/200

execsenatehouse

If anything, election strengthens Obama’s hand (slight + temporary)

Same as it ever was

Election Review: GOP giving ground post-election

slide from Oct 2012 War Room – Eve of Election Update

surprise but not out of thin air

Changing tunes in 2013

Apple -- 35% tanking

Manti Te’o – fake girlfriend

Beyoncé -- inauguration lip-sync

GOP – debt ceiling surrender

Debt Ceiling – Era of Ultimatums (not) Over

Dems: No Economic Showdown

- US borrowing limit eliminated until May - No tit-for-tat spending cuts - Postponed until May

GOP: Got Commitment on Budget

- Real plans to address deficits + debt - First budget plan from Dems since 2009 - #NoBudgetNoPay provision (15 April)

Both sides claim victory

Lawmaker salaries withheld until budget passed

Debt Cliff – What’s left?SEQUESTRATION BEGINS

01 March

$10 billion already in place

$60 billion defense

$50 billion discretionary

$120 billion total spending cuts

Healthcare largely protected

2% haircut to Medicare(doctors + hospitals only)

Mental note:

Never use the word

“debtpocolypse”

STOPGAP MEASURES EXPIRE

27 March

US Budget expires = shutdown

Non-emergency govt workers off

Republicans: let shut down happen to force deep spending cuts (Social Security + Medicare)

GoodBipartisan

Reform

BadGovernment

Shutdown

UglyUS Default

Debt Cliff – How will it play out?

WALL STREET 2013 BASELINE ESTIMATESHiddenLevers

Equity Market Rally: What Risks?

• S&P steady rally since mid-November, up 8%• Rally accelerated after 01 Jan tax cut deal• QE ramped up in Q4

I’m still goingstrong

I’m done juicing

VIX = 12, crashed to 5 year lows

Wall Street Analysts - Bulls Make Their Case

2013 Bullish consensus = 1575 on S&P 500

The 70’s 12 year bear market might mirror current bear market

Super-bulls: next great rally coming

Kinda-bulls: steady growth likely

1968 1980S&P

S&P1980 2000

source: HiddenLevers

Wall Street Analysts – Bulls Make Their Case

• Unemployment claims lowest in over 5 years• Claims now very close to pre-recession levels• Housing starts doubled since June 2009

Jobless Claims

Housing Starts

Wall Street Analysts - Bears Make Their Case

Bearish consensus

• S&P = 1415 in 2013

• Bears see poor S&P earnings growth

• Rally (started 3/09) is already older than average mkt rally

• Debt-deleveraging from housing boom – it ain’t over till its over

• Fiscal imbalances (debt cliff) will hold back growth

Nikkei

Nearing highs

2013 Wall Street Consensus: Snapshot

Guidance

1. Bullish Firms: Goldman , JP Morgan, BofA Merrill, Citi, Deutsche Bank, Credit Suisse, Barclays, HSBC

2. Consensus S&P earnings estimate of $108 in 2013 versus $100 in 2012

3. Average bullish call still only 5% above current levels

Guidance

1. Bearish Firms: Wells Fargo, UBS, Morgan Stanley

2. Consensus S&P earnings estimate of $103 in 2013 versus $100 in 2012.

3. Average bearish call only 5% below current levels, and forecast still calls for EPS growth = not that bearish

Notes: - Both Bullish and Bearish estimates are range-bound – no one sticking neck out. - HL correlation engine used to model other economic levers, based on S&P forecast

2013 FED STRESS TESTSHiddenLevers

Federal Reserve Stress Tests: Be Prepared

Fed stress tests

• Released Q4 2012

• Originally developed to stress test bank balance sheets

• Fed's concern about inflation forces banks evaluate impact of stagflation environment that features an interest-rate squeeze.

• Brought to our attention by a subscriber

(keep the suggestions coming)

10y chart

12m chart

Federal Reserve Stress Tests: Assumptions

Source: Federal Reserve

ADVERSE

STAGFLATIONTypical market correction and soft recession

25% drop in equities

SEVERELY ADVERSE

FINANCIAL CRISIS pt 2Deflationary as heck

50% drop in equities

Housing crash – 20% down in home prices and commercial too

Unemployment 12%

“These scenarios are not forecasts, but rather hypotheticals designed to assess the strength and resilience of financial institutions and their ability to continue to meet the credit needs of households and businesses in stressful economic and financial environments.”

Fed echoesHiddenLevers creed

Fed Stress Tests: Snapshot

Guidance

1. Inflation and interest rates both rise rapidly in this scenario, in contrast with recent market downturns

2. S&P experiences a correction slightly bigger than Q2-Q3 2011

3. Growth and markets rebound quickly

Guidance

1. Deflationary scenario in which yields, CPI, and markets fall together

2. S&P experiences a financial crisis-like drawdown

3. Economy remains in recession for multiple years

BOTH SCENARIOS: • Economy falls into recession in both scenarios• Correlation model used to project some levers, based on Fed’s forecast

HiddenLevers – Product Update

• Search Function for Portfolios

• Custom Assets - improved

Coming soon:1. Interactive Lead Generation App – Feb Launch

2. Product Development Survey Results