War Room 28 June 2012

2012 Election Rundown

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2012 Election Rundown

I. Effect of Elections on Markets

II. Fiscal Cliffs Notes

III. Election Roadmap

IV. Scenarios

EFFECT OF ELECTIONS ON MARKETSHiddenLevers

2012 Election Rundown – Markets like Certainty

Returns usually higher in months in Nov/Dec than Sep/Oct in election years

Certainty is greeaaat!

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.

FISCAL CLIFFS NOTESHiddenLevers

TAXMAGEDDON

Fiscal Cliff - Taxmageddon01 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

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

Candidate Opening Bids (fantasies)

Obama

Romney

1. Make Bush tax cuts permanent for all

2. Eliminate estate tax

3. Repeal Obamacare and associated funding

1. Make Bush tax cuts permanent for < 250k earners

2. Buffet Rule = 30% minimum tax rate for $1M+ earners

3. Pursue jobs plan = incremental stimulus

No way Jose.

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

ELECTION ROADMAPHiddenLevers

Presidency?

Congress?

Portfolios?

2012 Election Roadmap – Romney Best Case

Status Quo

ObamaDem 53/47GOP 242/193

execsenatehouse

Romney + GOP Congress

Romney + Dem Congress

Obama + GOP Congress

Obama + Split Congress

Obama + Dem Congress

Romney + Split Congress

Extend the Bush Tax Cuts

why?

2012 Election Roadmap – Obama best case

Status Quo

ObamaDem 53/47GOP 242/193

execsenatehouse

Romney + GOP Congress

Romney + Dem Congress

Obama + GOP Congress

Obama + Split Congress

Obama + Dem Congress

Romney + Split Congress

Let Bush Tax Cuts expire for high earners

why?

2012 Election Roadmap – Gridlock Likely

Romney + GOP Congress

Romney + Dem Congress

Obama + GOP Congress

Obama + Split Congress

Obama + Dem Congress

Romney + Split CongressStatus Quo

ObamaDem 53/47GOP 242/193

execsenatehouse

(pipe dream)

(pipe dream)

Gridlock – Back to the FutureRemember Summer of 2011 ?

1. Debt Ceiling hit2. Congress – gridlock on raising it3. Obama – hands in pockets4. S+P downgrades US Treasuries5. Market collapses 16%

(22/Jul – 03/Oct 2011)

2012 Election Roadmap – Take Aways

1. Most likely outcome of election remains a divided government

2. Neither side will get filibuster-proof majority that Obama had in 2008-09

3. Gridlock likely pushes US toward debt ceiling style showdown over Fiscal Cliff

2012 ELECTION RUNDOWN - SCENARIOSHiddenLevers

Market Reaction: (1) History + (2) Leadership

Guidance

1. 2011 Debt Ceiling Showdown Aftermath analogy

2. Gridlock makes this the likely outcome

3. US decoupling story – decent chance for survival

Guidance

1. Recession inevitable due to huge impact (-5% of GDP)

2. Poorly handled, with no plan of action = bloodbath

3. US decoupling scenario = das is kaput

Both Scenarios:1. Defense spending – cuts are significant2. Treasuries – counter intuitive rally

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