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 I.Effect of Elections on Markets II.Fiscal Cliffs Notes III.Election Roadmap IV.Scenarios

4. EFFECT OF ELECTIONS ON MARKETS HiddenLevers

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

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. FISCAL CLIFFS NOTES HiddenLevers TAXMAGEDDON

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) 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.

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. ELECTION ROADMAP HiddenLevers

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

14. 2012 Election Roadmap – Obama best case Status Quo Obama Dem 53/47 GOP 242/193 exec senate house 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?

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

16. Gridlock – Back to the Future Remember Summer of 2011 ? 1.Debt Ceiling hit 2.Congress – gridlock on raising it 3.Obama – hands in pockets 4.S+P downgrades US Treasuries 5.Market collapses 16% (22/Jul – 03/Oct 2011)

17. 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

18. 2012 ELECTION RUNDOWN - SCENARIOS HiddenLevers

19. 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 significant 2. Treasuries – counter intuitive rally

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