War Room 24 Jan 2013 Happy 2013, Are We There Yet?
description
Transcript of War Room 24 Jan 2013 Happy 2013, Are We There Yet?
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