renmac 2013 outlook call · 2013-01-10 · renmac 2013 outlook call . tom gallagher monetary policy...
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Jeff deGraaf | [email protected] | 212.537.8822
Neil Dutta | [email protected] | 212.537.8826
Tom Gallagher | [email protected] | 202.470.1518
Kim Wallace | [email protected] | 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