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War Room 28 June 2012 2012 Election Rundown

War Room 28 June 2012 2012 Election Rundown. War Room. Monthly macro discussion Using tools in context Update on HiddenLevers Features Your feedback welcome. 2012 Election Rundown. Effect of Elections on Markets Fiscal Cliffs Notes Election Roadmap Scenarios. HiddenLevers.

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War Room 28 June 2012 2012 Election Rundown

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  1. War Room 28 June 2012 2012 Election Rundown

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

  3. 2012 Election Rundown • Effect of Elections on Markets • Fiscal Cliffs Notes • Election Roadmap • Scenarios

  4. HiddenLevers Effect of Elections on Markets

  5. 2012 Election Rundown – Markets like Certainty Certainty is greeaaat! Returns usually higher in months in Nov/Dec than Sep/Oct in election years

  6. Election + Markets – No pattern + not enough data • Election Year Returns: • Mean performance = 11% • No pattern regarding party winning • Only 16 elections in Modern American era (post wwII) • Not enough data to determine party significance Note: HiddenLevers is NOT in the business of speculation about who wins elections.

  7. TAXMAGEDDON HiddenLevers Fiscal Cliffs notes

  8. Fiscal Cliff - Taxmageddon • 01 Jan 2013 - the witching hour • Bush Tax Cuts – Average family gets $3000 tax hike • Cost of Bush tax cuts expiring over next decade - $4 trillion • Payroll Tax Cuts expire • Medicare tax on high earners (Obamacare) • Estate Tax goes from 35%  55% • Capital Gains + Dividends Tax : 15%  normal income tax rates • Total tax increase: almost $500b

  9. Fiscal Cliff – Govt spending winding down • 2013 Spending cuts • First spending decline since 1999 • Obama – Stimulus spending = over • Unemployment extensions = over • Teacher + Police earmarks = expired • Fed - Operation twist – over • Debt Ceiling hit end of 2012 • Defense spending cuts – $500b • Discretionary spending cuts– $700b Impact of Taxmageddon + Spending cuts Total = 5% of GDP

  10. Candidate Opening Bids (fantasies) Make Bush tax cuts permanent for < 250k earners Buffet Rule = 30% minimum tax rate for $1M+ earners Pursue jobs plan = incremental stimulus Obama Make Bush tax cuts permanent for all Eliminate estate tax Repeal Obamacare and associated funding Romney No way Jose.

  11. Candidates Opening Bids – Lame Duck Issues • Who is in charge between November + January after the election? • Obama re-elected: • No better bargaining position in 2013 than now • Gridlock = no partial extension of cuts • Romney wins: • No authority to act until late Jan = too late • Temporary extension of Bush Tax Cuts almost certain

  12. Portfolios? HiddenLevers Congress? Presidency? Election Roadmap

  13. 2012 Election Roadmap – Romney Best Case Romney + GOP Congress Status Quo Romney + Split Congress Extend the Bush Tax Cuts Romney + Dem Congress why? Obama + GOP Congress Obama + Split Congress Obama + Dem Congress exec senate house Obama Dem 53/47 GOP 242/193

  14. 2012 Election Roadmap – Obama best case Romney + GOP Congress Status Quo Romney + Split Congress Romney + Dem Congress why? Let Bush Tax Cuts expire for high earners Obama + GOP Congress Obama + Split Congress Obama + Dem Congress exec senate house Obama Dem 53/47 GOP 242/193

  15. 2012 Election Roadmap – Gridlock Likely Romney + GOP Congress Status Quo (pipe dream) Romney + Split Congress Romney + Dem Congress Obama + GOP Congress Obama + Split Congress Obama + Dem Congress (pipe dream) exec senate house Obama Dem 53/47 GOP 242/193

  16. Gridlock – Back to the Future Remember Summer of 2011 ? • Debt Ceiling hit • Congress – gridlock on raising it • Obama – hands in pockets • S+P downgrades US Treasuries • Market collapses 16% • (22/Jul – 03/Oct 2011)

  17. 2012 Election Roadmap – Take Aways • Most likely outcome of election remains a divided government • Neither side will get filibuster-proof majority that Obama had in 2008-09 • Gridlock likely pushes US toward debt ceiling style showdown over Fiscal Cliff

  18. HiddenLevers 2012 Election Rundown - Scenarios

  19. Market Reaction: (1) History + (2) Leadership Guidance 2011 Debt Ceiling Showdown Aftermath analogy Gridlock makes this the likely outcome US decoupling story – decent chance for survival • Guidance • Recession inevitable due to huge impact (-5% of GDP) • Poorly handled, with no plan of action = bloodbath • US decoupling scenario = das is kaput Both Scenarios: 1. Defense spending – cuts are significant 2. Treasuries – counter intuitive rally

  20. HiddenLevers – Product Update • Custom Asset Upload • Fidelity Integration • Coming soon: • iPad App (beta) • Big Screen Presentation (beta)

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