1. War Room 25 Oct 2012 Eve of Election Update

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

3. Eve of Election Update I.Fiscal Cliff – Brinksmanship Assumed II.Housing – Rebound Emerging III.Europe – Debt Crisis = no. Recession = yes IV.Scenarios

4. HiddenLevers FISCAL CLIFF – BRINKSMANSHIP ASSUMED

5. Fiscal Cliff - Basics TAX INCREASES 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 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 Total Impact of Tax Increases + Spending cuts Total = 5% of GDP TAXMAGEDDON

6. Fiscal Cliff – Basics 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)

7. Fiscal Cliff – Post-Election Behavior Change? congress since 2010 congress post-election Seriously? “Administration officials have been expressing that confidence for weeks, even as they say no real negotiations are happening.” – NY TimesNY Times Two thirds of economists assume resolution without damage to economy – USA TodayUSA Today Potential Trump Card: 1.Obama win = clock ticking + some new clout 2.Defense spending + Bush tax cuts = GOP agenda Conclusion Romney wins – lame duck, can kicked into 2013 Obama wins – worst case more likely, but GOP may buckle

8. Fiscal Cliff Update – Worst Case Scenario Advantages of Worst Case Scenario No sudden economic collapse Falling market forces government to focus Deficit Balanced – automatic austerity Disadvantages Long term effects of belligerent parties Recession very likely – 5% hit to GDP 1840s – worse than Thelma + Louise Disagreement between north + south on tariffs on Euro goods 1830 agreement that in 10 years tariffs would be eliminated (Think Bush Tax Cuts) 1838 major financial crisis after boom 1840 US sliding into deep depression 1842 1/3 of states defaulted on foreign loans President Tyler cabinet resigned The Deal: John Tyler vetoed bills to keep high tariffs Original bargain struck 10 years before abandoned Tariff preserved but way lower Southern states seething led to secession/war

9. Fiscal Cliff Update – Effect on USD + Treasuries Dollar Rally in Fiscal Cliff MACRO : Flight to dollar as safety FUNDAMENTALS : Lower Deficit = Stronger USA Rally in US Treasuries 2011 Counter-intuitive – 10y integrity 2012 : Intuitive – stronger USA

10. HOUSING – REBOUND EMERGING HiddenLevers

11. Housing - Competing Trends: Long Term Home Prices - Downward

12. Housing - Competing Trends: Affordability Affordability is highest in decades Historically low mtg rates + price declines 75% of homes sold now affordable to median income buyers In many markets buying < renting Sources: National Associations of Realtors, Home Builders, and Wells Fargo NAR Affordability Index NAHB Housing Opportunity Index

13. Home builders' confidence and stock prices soaring over last 2 years US home sales + new housing construction starts both rising since bottom in early 2011 Housing - Competing Trends: Home Sales + Construction Upward Source: HiddenLevers

14. Housing - Competing Trends: Home Price + Foreclosure Issues Remain Low mortgage rates + low home prices = affordability But home prices continue to drag on household wealth Residential foreclosures remain high + existing home sales trend much weaker than new home sales Source: HiddenLevers

15. Consequences: 1.Home prices may suffer up to 30% more downside 2.Good chance of US economy going into recession 3.Pendulum’s don’t stop in the middle 4.Home ownership dies as an American tradition Housing Update – Rebound Emerging Consequences: 1.S+P to new highs, but muted impact from here 2. Industrial commodities will benefit most 3.Employment picture change will be cause 4.Rebound will in turn affect employment in sector

16. EUROPE – DEBT CRISIS = NO. RECESSION = YES. HiddenLevers

17. Europe – Basics S&P + Euro continue to move in lockstep, up + down over 3 months Source: HiddenLevers

18. Europe Update – Draghi commitment Spanish Bonds – 10Y Benchmark Yields Source: Bloomberg 1.ECB pledged unlimited bond purchases to Spain 2.Spain bond yields have fallen considerably since early Sept 3.ECB interventions key to this decrease 4.Spain default = Euro Zone 5.Pulse of banking crisis rests on this lever, no matter what drama is in news

19. Europe Update – Now in Recession ECB intervention = buying time ECB so far unwilling to engage in QE a la Fed European austerity policies failed to deliver growth Even German economy sliding now US big caps pulling out of Europe  no more diapersno more diapers  plant shut downsplant shut downs  $15b out of EU banks$15b out of EU banks

20. Europe Update – Why no action? Significance Greek economy shrunk almost 20% since peak Unemployment in Greece at 25% = Depression levels Unemployment in Germany at 5% = Germans not feeling pinch Source: Economist

21. Guidance 1.Spain default or other PIIGS follow Greece out 2.Poorly handled, with no plan of action = bloodbath 3.At risk – anything priced in US Dollars 4.Defending Euro/Swiss Peg will be difficult 5.Think Lehman Europe Update – Greece Defaulted, did not Exit Guidance 1.Greek default + Euro exit almost fully priced in 3.Well handled, with guidance and action = rally 4.Proof - Gold is a commodity, not a reserve currency 5.Think GM, Bear Stearns

22. SCENARIOS HiddenLevers

23. HiddenLevers – Product Update iPad app now in App Store – very beta House-holding of portfolios Advanced Analytics – multiple time frames Coming soon – Integrations: 1. Schwab Portfolio Center 2. Money Guide Pro 3. Fortigent