renmac 2013 outlook call · 2013-01-10 · renmac 2013 outlook call . tom gallagher monetary policy...

Jeff deGraaf | Technical@renmac.com | 212.537.8822

Neil Dutta | Econ@renmac.com | 212.537.8826

Tom Gallagher | Policy@renmac.com | 202.470.1518

Kim Wallace | Policy@renmac.com | 202.470.1518

RenMac 2013 Outlook Call

Tom Gallagher

Monetary Policy

3

Macro Policy Framework

Developed Markets:

– Post-crisis dynamics still dominate the policy and economic outlook

– US and Eurozone, to markedly different degrees, have pursued a tight-fiscal/easy-money policy mix

– Japan, much deeper into its post-crisis period, is moving to an easy fiscal and monetary stance

Emerging Markets:

– Cyclical dynamics dominate, but they must cope with limits of export/investment-driven growth model

2013 Outlook Call

Main Points

4

1) US is ramping up fiscal drag

2) A framework for thinking about the new fiscal deadlines

3) The Fed is not signaling a change in policy

4) Europe has done a good job in lowering financial crisis risk but a poor job in dealing with the recession

5) Important to read the right lessons of the summer of 2011

2013 Outlook Call

US will experience Europe-like fiscal drag in 2013

5

Fiscal Drag (change in structural deficit as % of GDP)

Country 2012 2013

US 0.9 1.9

Eurozone 1.3 0.9

France 0.7 1.2

Germany 0.6 0.2

Greece 3.8 3.4

Ireland 1.6 0.7

Portugal 0.3 0.8

Spain 2.7 1.4

2013 Outlook Call

U.S. Fiscal Policy

6

New triple deadline of sequester, debt limit, and CR in Feb-Mar time period

Analyzing new policies:

1) Change in near-term fiscal drag

2) Change in long-term budget outlook (deficit and debt to GDP ratios 5, 10, and 20 years out)

3) Fiscal disruptions (new sources of policy uncertainty or sharp moves to fiscal restraint - downgrades, “prioritization of payments,” shutdowns, new cliffs)

2013 Outlook Call

Fed Outlook

7

Is the Fed preparing to end easing/to begin tightening earlier than expected?

1) Do the new macro thresholds suggest tightening earlier than mid-2015? No, the Fed told us so.

2) Do the December minutes suggest the Fed will taper or end QE this year? Yes, if the economy is on track to grow by 2.6%. That’s the Fed’s projection. The Blue Chip consensus is 2.2%.

2013 Outlook Call

8

2013 Outlook Call

9

Europe

Eurozone policymakers have done a good job reducing the risk of a financial crisis, but they haven’t done a good job at generating growth

That is, they’ve reduced tail risk, but they haven’t elevated the growth path under the baseline scenario

2013 Outlook Call

10

To the extent valuation increases in 2012 were due to perceptions of lower EZ risk, they won’t be repeated in 2013

2013 Outlook Call

11

Lessons of Summer 2011 – Some turmoil from the downgrade and debt limit fight, but it was mainly Europe

2013 Outlook Call

Kim Wallace

Fiscal Policy

13

Overview

Macroeconomic policy to define known risk parameters early and late this year.

Ability of divided government to function likely to create headline risk. We remain of the view that worst-case outcomes will be avoided.

Bipartisan action on a few sectors will test Washington’s dysfunctional posture.

International risks are manageable; especially in near-term. Trade policy needs more post-crisis attention.

2013 Outlook Call

14

Fiscal: The Republic’s Debt/GDP History

0

20

40

60

80

100

120

179

0

179

5

180

0

180

5

181

0

181

5

182

0

182

5

183

0

183

5

184

0

184

5

185

0

185

5

186

0

186

5

187

0

187

5

188

0

188

5

189

0

189

5

190

0

190

5

191

0

191

5

192

0

192

5

193

0

193

5

194

0

194

5

195

0

195

5

196

0

196

5

197

0

197

5

198

0

198

5

199

0

199

5

200

0

200

5

201

0

Federal Debt Held by the Public % of GDP, 1790 - 2011

Source: CBO, Treasury, Fed, Census Bureau

2013 Outlook Call

15

Fiscal: Mandatory Lessons

0

1

2

3

4

5

6

1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012E 2017E

Major Mandatory Outlays, 1962 - 2017E (% GDP)

Social Security

Medicare

Medicaid

Source: CBO

2013 Outlook Call

16

Fiscal: The Cost of Living

Source: The Joint Committee on Taxation, Congress of the United States

Current Average Annual Cost of Largest Tax Expenditures, Individual and Corporate ($B)

Individual Tax Expenditures

Exclusion of employer contributions for health care, health insurance premiums, and long-term care insurance premiums 131.9 Deduction for mortgage interest on owner-occupied residences 96.8 Reduced rates of tax on dividends and long-term capital gains 80.6 Net exclusion of pension contributions and earnings: Defined benefit plans 60.1 Earned income tax credit 53.8 Deduction of nonbusiness State and local government income, sales and property taxes 47.5 Net exclusion of pension contributions and earnings: Defined contribution plans 42.4 Exclusion of capital gains at death 38.8 Deductions for charitable contributions, other than for education and health 36.5 Exclusion of untaxed social security and railroad retirement benefits 34.6

Subtotal 623.0

Corporate Tax Expenditures

Deferral of active income of controlled foreign corporations 14.1 Exclusion of interest on public purpose State local government debts 9.1 Deduction for income attributable to domestic production activities 8.6 Inventory property sales source rule exception 7.6 Depreciation of equipment in excess of alternative depreciation system 7.4 Inclusion of income arising from business indebtedness discharged by the reacquisition of a debt instrument 5.8 Tax credit for low-income housing 5.4 Expensing of research and experimental expenditures 5.1 Inventory methods and valuation: LIFO 4.0 Reduced rates for the first $10 million of corporate taxable income 3.2

Subtotal 70.3 TOTAL 693.3

2013 Outlook Call

17

Fiscal: War Spending on the Decline

Source: Center for Strategic and Budgetary Assessments, BEA, Wall St. Journal Average GDP Forecasts

0%

5%

10%

15%

20%

25%

National Defense Budget Authority (Percent of GDP) FY1946 - FY2015

Funding for wars in Iraq and Afghanistan

2013 Outlook Call

18

Housing: A Meaningful Renovation

Source: National Association of Home Builders

0

10

20

30

40

50

60

70

80

90

100

1985 1988 1991 1994 1997 2000 2003 2006 2009 2012

NAHB National Housing Market Index January 1985 - December 2012

2013 Outlook Call

19

Housing: Sales

Source: U.S. Department of Commerce: Census Bureau/FRED

0

200

400

600

800

1,000

1,200

1,400

1,600

Jan-63 Nov-66 Sep-70 Jul-74 May-78 Mar-82 Jan-86 Nov-89 Sep-93 Jul-97 May-01 Mar-05 Jan-09 Nov-12

Tho

usa

nd

s

New One Family Houses Sold: United States January 1963 – November 2012 (Monthly)

2013 Outlook Call

20

Healthcare: States of Stress

Source: Government Accountability Office

0%

2%

4%

6%

8%

10%

12%

2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060

Pe

rcen

t o

f G

DP

Projected health & non-health expenditures of state & local governments

Nonhealth care

Health care

Forecast

2013 Outlook Call

21

Energy: Global Supply & Demand

Source: US Energy Information Administration

-80

-60

-40

-20

0

20

40

60

80

-4

-3

-2

-1

0

1

2

3

4

do

llars

/bar

rel

mil

lion

bar

rels

/day

World Oil Consumption and Non-OPEC Production Growth (q-o-q change)

World oil consumption (LHS)

Non-OPEC production (LHS)

WTI price (RHS)

Forecast

2013 Outlook Call

22

Geopolitics: Pardon the Interruption…

Source: International Energy Agency (IEA)

2.0

2.0

4.3

5.6

4.1

4.3

2.1

2.6

2.3

1.5

0.0 1.0 2.0 3.0 4.0 5.0 6.0

Nov. 1956 - Mar. 1957

Jun. - Aug. 1967

Oct. 1973 - Mar. 1974

Nov. 1978 - Apr. 1979

Oct. 1980 - Jan. 1981

Aug. 1990 - Jan. 1991

Jun. - Jul. 2001

Dec. 2002 - Mar. 2003

Mar. - Dec. 2003

Sep. 2005

Gross peak supply loss (mb/d)

Major World Oil Supply Disruptions

Hurricanes Katrina/Rita

War in Iraq

Venezuelan strike

Iraqi oil export suspension

Iraqi invasion of Kuwait

Outbreak of Iran-Iraq war

Iranian revolution

Arab-Israeli war and Arab oil embargo

Six-Day War

Suez crisis

2013 Outlook Call

Neil Dutta

Economics

Source: Congressional Budget Office

“Fiscalamity” by the Numbers

(billions, $)

AMT 120 Debt ceiling #1 40 Payroll tax cut 120

Tax extenders 20 Business expensing 10 Jobless benefits 40

Doc fix 20 Expiring spending 40 Debt ceiling #2 110

Bush tax cuts 180

Obamacare taxes 20

Total 160 Total 90 Total 470

1.0% 0.6% 3.0%

Easy extension Under the radar Year-end debate

24

2013 Outlook Call

Source: Bureau of Economic Analysis

Profit Margins Have Peaked

After tax corporate profits as % of GDP

3

4

5

6

7

8

9

10

11

47 50 53 56 59 62 65 68 71 74 77 80 83 86 89 92 95 98 01 04 07 10 13

25

2013 Outlook Call

26

Plenty of Cyclical Upside

17%

19%

21%

23%

25%

27%

29%

31%

33%

47 50 53 56 59 62 65 68 71 74 77 80 83 86 89 92 95 98 01 04 07 10

Source: Bureau of Economic Analysis, Renaissance Macro Research

Durable goods consumption + private domestic investment (as a % of GDP)

2013 Outlook Call

27

Consumer Durables Getting Old

Source: Bureau of Economic Analysis, Renaissance Macro Research

Average age of consumer durable goods (years)

4.0

4.1

4.2

4.3

4.4

4.5

4.6

4.7

60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

2013 Outlook Call

28

US a Lower Cost Production Base

Source: Renaissance Macro Research

60

70

80

90

100

110

120

99 00 01 02 03 04 05 06 07 08 09 10 11 12

0

2

4

6

8

10

12

14

16

2006 2007 2008 2009 2010 2011

Trade-weighted US Dollar Index FDI in US Manufacturing (%)

2013 Outlook Call

29

US Economic Outlook

Shaded area represents forecast Source: Renaissance Macro Research

Real Economic Activity (SAAR %) Q1 12 Q2 12 Q3 12 Q4 12 Q1 13 Q2 13 Q3 13 Q4 13 2011 2012 2013

Real GDP 2.0 1.3 3.1 1.0 1.0 1.5 3.0 3.5 1.8 2.2 1.8

% Change, Year Ago 2.4 2.1 2.6 1.8 1.6 1.6 1.6 2.2

Consumption 2.4 1.5 1.6 1.6 1.0 1.5 2.0 2.5 2.5 1.8 1.5

Structures 12.8 0.6 0.0 1.0 0.0 5.0 8.0 10.0 2.8 9.7 2.8

Equipment and Software 5.4 4.8 -2.6 3.5 2.5 3.0 7.0 9.0 11.0 6.4 3.2

Residential Investment 20.6 8.4 13.6 18.0 15.0 15.0 20.0 20.0 -1.4 12.1 15.9

Inventory Accumulation ($) 56.9 41.4 60.3 40.3 42.3 47.3 57.3 64.3 31.0 49.7 52.8

Net Exports ($) -415.5 -407.4 -395.2 -385.4 -390.5 -398.8 -394.8 -390.6 -408.0 -400.9 -393.7

Exports 4.4 5.2 1.9 -4.0 2.5 3.0 7.0 7.0 6.7 3.3 2.3

Imports 3.1 2.8 -0.6 -5.0 3.0 4.0 5.0 5.0 4.8 2.4 1.5

Government -3.0 -0.7 3.9 -2.5 -1.0 -1.0 -0.5 -0.5 -3.1 -1.4 -0.6

Key Indicators

Nonfarm Payrolls (MoM, 000s) 226 67 168 125 85 125 185 225 153 146 155

Private Payrolls (MoM, 000s) 226 88 140 145 90 130 185 220 175 150 156

Unemployment Rate 8.3 8.2 8.1 7.8 7.9 7.8 7.7 7.5 9.0 8.1 7.7

Housing Starts (000s) 715 736 774 873 891 922 958 1002 612 774 943

Light Vehicle Sales (SAAR) 14.2 14.1 14.5 14.9 14.5 14.6 15.0 15.5 12.8 14.4 14.9

Industrial Production (% SAAR) 6.2 2.4 0.1 -0.4 4.4 2.8 3.5 4.5 4.1 3.6 2.4

Capacity Utilization 78.7 78.9 78.6 78.2 78.7 79.0 79.3 79.9 76.8 78.6 79.2

Inflation

Consumer Price Index 2.5 0.8 2.3 2.2 0.7 1.8 2.0 2.2 3.1 2.1 1.7

% Change, Year Ago 2.8 1.9 1.7 1.9 1.5 1.8 1.7 1.7

Core CPI 2.1 2.6 1.5 1.7 1.7 1.8 2.1 2.2 1.7 2.1 1.8

% Change, Year Ago 2.2 2.3 2.0 2.0 1.9 1.7 1.8 2.0

Core PCE Chain Price Index 2.2 1.7 1.1 1.2 1.4 1.7 2.0 2.1 1.4 1.7 1.5

% Change, Year Ago 1.9 1.8 1.6 1.6 1.4 1.4 1.6 1.8

Interest Rate Forecasts

Fed Funds 0.125 0.125 0.125 0.125 0.125 0.125 0.125 0.125 0.125 0.125 0.125

2-Year Treasury Note 0.33 0.30 0.23 0.20 0.20 0.20 0.25 0.30 0.24 0.20 0.30

10-Year Treasury Note 2.21 1.64 1.63 1.65 1.65 1.70 1.85 2.05 1.88 1.65 2.05

30-Year Treasury Bond 3.33 2.75 2.85 2.85 2.85 2.90 3.05 3.35 2.90 2.85 3.35

10s/2s Treasury Curve (bps) 188 134 140 145 145 150 160 175 164 145 175

2013 Outlook Call

Jeff deGraaf

Technical

31

Financial Conditions Supportive 2013 Outlook Call

32

NYSE New Breadth High 2013 Outlook Call

33

Cyclicals Have Turned vs. Defensives 2013 Outlook Call

0.60

0.62

0.64

0.66

0.68

0.70

0.72

Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13

Cyclical / Defensive

34

10 Year Yield Trend Change 2013 Outlook Call

2009 A M J J A S O N D 2010 A M J J A S O N D 2011 M A M J J A S O N D 2012 M A M J J A S O N D 2013 M

1.2

1.3

1.4

1.5

1.6

1.7

1.8

1.9

2.0

2.1

2.2

2.3

2.4

2.5

2.6

2.7

2.8

2.9

3.0

3.1

3.2

3.3

3.4

3.5

3.6

3.7

3.8

3.9

4.0

4.1

4.2U.S. Treasury 10 Year Yield

Important that 10-yr yields are attempting to turn through 1.90%. A bear steepener is bullish, not bearish at this point.

35

Global PMI & Stock Returns (1M Lead) 2013 Outlook Call

y = 20.935x - 6.0537R² = 0.4769

-60

-40

-20

0

20

40

60

-100% 0% 100%

S&

P 5

00 Y

oY

% C

hg

Net % of Global PMIs Expanding (1mo Adv)

Global PMIs going in right direction

36

Earnings are likely to come down to $107 (SPX) but unlikely to harm market

2013 Outlook Call

-8%

-6%

-4%

-2%

0%

2%

4%

6%

2013 EPS Estimate Revison Pct 4Q Relative Return 4Q

Most cyclical sectors did well in 4Qin the face of negative CY13 earnings revision

Earnings

37

Multiples are low…unless inflation accelerates

2013 Outlook Call

Multiples

5

7

9

11

13

15

17

19

21

23

25

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

Assuming our fundamental multiple modeled fair value multiple of 14.5x is correct, the S&P is currently

pricing in $100 in EPS for 2013. ..

S&P 500 NTM PE

S&P NTM PE Macro ModelLower Bound

S&P NTM PE Macro ModelUpper Bound

38

Global PMIs not improving enough to stoke inflation

2013 Outlook Call

Inflation

y = 0.638x - 0.0234R² = 0.4133

-3

-2

-1

0

1

2

3

4

-5 -4 -3 -2 -1 0 1 2

Bre

nt

Cru

de

(Y

oY

% C

hg,

ZSc

ore

)

Global PMI (ZScore, Adv 3Mos)

Global PMIs seem to have turned a corner, but remain too low to push oil prices much higher.

Today

39

Velocity not gaining traction yet CPI unlikely to follow

2013 Outlook Call

Inflation

-4

-3

-2

-1

0

1

2

3

-4

-3

-2

-1

0

1

2

3

1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

CPI YoY Velocity YoY

Relationship has weakened in last few years

40

February deadline not peaking Google trends… room For disappointment?

2013 Outlook Call

Debt Ceiling

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RenMac 2013 Outlook Call