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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?. Debt Cliff – Where are We? Wall Street 2013 Baseline Estimates III. 2013 Fed Stress Tests

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

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  1. War Room 24 Jan 2013 Happy 2013, Are We There Yet?

  2. War Room • Monthly macro discussion • Using tools in context • Update on HiddenLevers Features • Your feedback welcome

  3. Happy 2013, Are We There Yet? • Debt Cliff – Where are We? • Wall Street 2013 Baseline Estimates • III. 2013 Fed Stress Tests • IV. Product Update

  4. HiddenLevers Debt Cliff – Where are We?

  5. Fiscal Cliff - Review slide from Oct 2012 War Room – Eve of Election Update Tax Increases $60 billion actual increase for 2013 Spending Cuts $120 billion on table for 2013 Fahgettaboudit.

  6. 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 Began playing out in December We overestimated. This played out. Now 100% priced in Real effects would have been post-Jan 01

  7. Election Review: Pre-Election Possibilities (pipe dream) Romney + GOP Congress Pre 2012 Election Romney + Split Congress Romney + Dem Congress Obama + GOP Congress Obama + Split Congress (pipe dream) Obama + Dem Congress exec senate house Obama Dem 53/47 GOP 242/193

  8. Election Review: Nothing changes in 2013 Same as it ever was Post 2012 Election Obama + Split Congress If anything, election strengthens Obama’s hand (slight + temporary) exec senate house Obama Dem 55/45 GOP 235/200

  9. Election Review: GOP giving ground post-election Changing tunes in 2013 slide from Oct 2012 War Room – Eve of Election Update Apple -- 35% tanking Manti Te’o – fake girlfriend Beyoncé -- inauguration lip-sync surprise but not out of thin air GOP – debt ceiling surrender

  10. 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

  11. 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) 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) Mental note: Never use the word “debtpocolypse”

  12. Debt Cliff – How will it play out? • Good • Bipartisan Reform • Bad • Government Shutdown • Ugly • US Default

  13. HiddenLevers Wall Street 2013 baseline estimates

  14. Equity Market Rally: What Risks? VIX = 12, crashed to 5 year lows I’m done juicing I’m still going strong • S&P steady rally since mid-November, up 8% • Rally accelerated after 01 Jan tax cut deal • QE ramped up in Q4

  15. Wall Street Analysts - Bulls Make Their Case The 70’s 12 year bear market might mirror current bear market S&P 1980 1968 2000 1980 S&P source: HiddenLevers Super-bulls: next great rally coming Kinda-bulls: steady growth likely 2013 Bullish consensus = 1575 on S&P 500

  16. Wall Street Analysts – Bulls Make Their Case Jobless Claims Housing Starts • Unemployment claims lowest in over 5 years • Claims now very close to pre-recession levels • Housing starts doubled since June 2009

  17. 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

  18. 2013 Wall Street Consensus: Snapshot Guidance Bearish Firms: Wells Fargo, UBS, Morgan Stanley Consensus S&P earnings estimate of $103 in 2013 versus $100 in 2012. Average bearish call only 5% below current levels, and forecast still calls for EPS growth = not that bearish Guidance Bullish Firms: Goldman , JP Morgan, BofA Merrill, Citi, Deutsche Bank, Credit Suisse, Barclays, HSBC Consensus S&P earnings estimate of $108 in 2013 versus $100 in 2012 Average bullish call still only 5% above current levels 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

  19. HiddenLevers 2013 fed stress tests

  20. 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

  21. Federal Reserve Stress Tests: Assumptions Fed echoes HiddenLevers creed ADVERSE STAGFLATION Typical market correction and soft recession 25% drop in equities SEVERELY ADVERSE FINANCIAL CRISIS pt 2 Deflationary 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.” Source: Federal Reserve

  22. Fed Stress Tests: Snapshot Guidance Deflationary scenario in which yields, CPI, and markets fall together S&P experiences a financial crisis-like drawdown Economy remains in recession for multiple years Guidance Inflation and interest rates both rise rapidly in this scenario, in contrast with recent market downturns S&P experiences a correction slightly bigger than Q2-Q3 2011 Growth and markets rebound quickly • BOTH SCENARIOS: • Economy falls into recession in both scenarios • Correlation model used to project some levers, based on Fed’s forecast

  23. HiddenLevers – Product Update • Search Function for Portfolios • Custom Assets - improved • Coming soon: • Interactive Lead Generation App – Feb Launch • Product Development SurveyResults

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