Adios QE, Hello Rate Hike29 April 2015

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Past Fed Moves + Impact

Scenario: Hello Rate Hike

Adios QE, Hello Rate Hike

HiddenLevers

MARKET UPDATE

US/Iran détente = oxymoron

Market UpdateChina GDP/Markets divergence hard to crack

Resource Currencies up with Oilsources: HiddenLevers, FT, Economist,

1

3

2

Market Update: Greek default nearsuncertainty in Greece increasing, not decreasing

sources: HiddenLevers, NYTimes, American Thinker, Guardian, Forbes, Telegraph UK

4

bear flag

Greek finance

minister out

Greek PM talking

referendum

09May IMF loans

due

Greece refusing

austerity

HiddenLevers

PAST FED MOVES + IMPACT

Past Fed Moves: S+P Impact

source: Business Insider, HiddenLevers

Period Months Fed Funds Change (bps)

S&P Change(%)

Russell 2K Change

12/65 – 12/66 12 +165 -12.2% --

8/67 – 9/69 25 +540 -0.5% --

4/71 – 9/71 5 +185 -9.35% --

3/72 – 9/73 18 +749 -2.75% --

3/74 – 9/74 6 +304 -32.39% --

2/77 – 5/80 39 +1300 +11.44% --

8/80 – 7/81 11 +1007 +0.34% --

1/82 – 3/82 2 +241 -7.01% --

3/83 – 9/84 18 +294 +8.97% --

2/87 – 11/87 9 +133 -18.97% --

4/88 – 4/89 12 +323 +18.49% +14.28%

2/94 – 3/95 13 +300 +7.19% -.01%

4/97 – 5/97 1 +19 +10.46% +12.24%

7/99 – 7/00 12 +174 +8.23% +9.97%

6/04 – 8/06 26 + 425 +14.66% +27.09%

Past Fed Moves: Sector Impact

*Individual companies used when no index data exists. Sources: HiddenLevers

Period Months

Fed Funds Change (bps)

S&P(%)

S&P Tech Index

S&P Financial Index

S&P Energy Index

2/87 – 11/87 9 +133 -18.97% *IBM: -18.8% *JPM: -47.42% *XOM: -11.04%

4/88 – 4/89 12 +323 +18.49% *IBM: +6% *JPM: +68.11% *XOM: +1.59%

2/94 – 3/95 13 +300 +7.19% +23.7% +5.46% +8.93%

7/99 – 7/00 12 +174 +8.23% +37.34% +4.21% -.52%

6/04 – 8/06 26 + 425 +14.66% +14.24% -25.67% +121.36%

source: HiddenLevers

Rates Rising – Sector Performance

Financials underperforms (4/5)

Techs overperform (4/5)

Energy is non-correlated (5/5)

Past Fed Moves: Fixed Income Impact

source: Allianz

25 bps rise more significant when starting at ZERO

Money Markets – yeah right!

Inflation Protected Bonds outperform

Market Update – Ebola Pandemic

sources: HiddenLevers, Forbes

Past Fed Moves: 2014 Taper

QE 1QE 2

QE 2.5 (Twist) +

QE3

bull flag

strength quickened post-taper

Not once did Fed alter course of taper

Taper Tantrums: -4-5%

Yields down, not up

source: HiddenLevers, Fed Minutes, Wikipedia

+130 bps

-19%

Past Fed Moves: 1987 Crash

1986-87S+P +60% in 1986-87Oil -50% in 6 monthsBoomers coming into workforce

2014-15S+P +49% in 2013-14Oil -50% in 6 monthsMillennials coming into workforce

HiddenLevers

SCENARIO: HELLO RATE HIKE

Scenario Update

Need for Scenario Update

- Fed Rate Hike imminent

- USD rise from end of QE topping out

- Fed minding asset bubbles, not just macro

Adios QE

Hello Rate Hike

steady as she goes rate hike postponed Fed pops bubble

(now priced in) (S+P, not macro) (still on the table)

GOOD: Fed Delays

source: HiddenLevers, Fed Minutes

so-so econ data = Fed delays hike = equity boost

easy money from Fed inaction

commodities comeback continues

Fed unhappy with job growth

CPI at ZERO below Fed

target

BAD: Super Tantrum

commodities mild

downside

the correction you’ve been expecting

source: HiddenLevers, Financial Times

EM shocksUSD-based

debt

technical supports missing

yield curve behaves normally

UGLY: Fed Pops Bubble

rate hike now deals

with Nasdaq

source: HiddenLevers

economic picture intact

safety play10y Yields

down

October 1987 redux

SPX lows2007 M top

Scenario: Hello Rate Hike

S&P1560 -26%

S&P1860 -12%

S&P2250 +7%

key lever

Yellen channels Bernanke, keeping easy money flowing and letting equities float up.

Market reacts negatively to loss off access to interest-free money. Hard to pin down MDD due to lack of technical support levels.

Fed would attempt to pierce equity bubble, while not affecting GDP at large, similar to 1987 rate hikes.

GoodFed Delays

BadSuper

Tantrum

UglyFed pops

bubble

Hello Rate Hike: Take-Aways

Fed has used monetary policy to pop asset bubbles before

No inflation = Fed’s hands not forced

Yellen Fed has not altered courseall rate hike cycles began with improving macro environment

Do you hear the words that are comin’ out of my mouth?

1987 1994

2015

Product Update

integrationRedTail

coming soonhistorical scenario lookup