JP Conklin 704-887-9880 office jp.conklin@pensfordfinancial.com www.pensfordfinancial.

com Leveling the Playing Field July 16, 2012 _______________________________________________________________________ Say it aint so Joe The statue needs to come down. Perhaps the library needs to be renamed. A lifetime of good deeds should not (and in my mind, will not) be erased by one horrible decision, but there shouldnt be any visible reminders of this mistake, either. I give credit to Penn State for its handling and complete transparency thus far and hope it continues. I would have bet the house that JoePas involvement would not have been motivated by a desire to protect The Program. And I would have been wrong. Another attempt by President Obama to really really really upset business owners: If you were successful, somebody along the line gave you some help. There was a great teacher somewhere in your life. Somebody helped to create this unbelievable American system that we have that allowed you to thrive. Somebody invested in roads and bridges. If youve got a business -- you didnt build that. Somebody else made that happen. Perhaps a reminder is due for Mr. President if you got elected president, you didnt do that. Somebody else made that happen. Markets continue to react mildly to mixed economic data, but it appears the middling economy is taking its toll on US consumers. Fridays consumer sentiment was weaker than expected, driven by deteriorating expectations for the future. The FOMC minutes on Wednesday revealed growing momentum for another round of QE (que feign surprise). Four members mentioned more QE in forecasts, with two saying they are in support of it and two more saying they are considering it. Can we just skip to the part where the Fed engages in another round of QE just in time to create a rally in stocks ahead of the November elections? Italy Downgrade On Friday, Moodys downgraded Italys longterm sovereign debt rating by two notches to Baa2 with a negative outlook (meaning further downgrades are likely). S&P has Italy at BBB+ and Fitch has it at A-.

Moodys cited the following: 1. Increasingly fragile market confidence 2. Contagion risk from Greece and Spain 3. Signs of eroding non-domestic investor base 4. Higher likelihood of Greek exit from the euro 5. Higher Spanish banking system credit losses and Spains own funding challenges 6. Deteriorating economic outlook Considering that this was a downgrade to Italy, Moodys spent a lot of time on Spain, who was downgraded three notches last month. The two most likely reasons for this is 1. The Eurozone is highly intertwined, and 2. Moodys is signaling markets that Spain might be downgraded into junk status. Thats right, two prominent Eurozone countries are at risk of being downgraded into junk status. Should Italy's access to public debt markets become more constrained and the country were to require external assistance, then Italy's sovereign rating could transition to substantially lower rating levels Moodys. A lot of institutional investors/banks/central banks have an investment grade threshold that would require selling of bonds if they are downgraded to junk status, usually by at least two of the rating agencies. But if you think portfolio managers are going to sit around and wait for that to happen, we have a great opportunity for you to pay fixed at 12% for 4 yearsdeal of the century kind of stuff. LieBOR Things are going to get much worse here. Expect US banks to face charges in the coming weeks, with JPM likely the first target. So far the BBA has been a bit reluctant to assist the US investigation, but the information is slowly making its way across the pond and this could be the largest banking scandal ever. Some sources are reporting a possible $22B in combined penalties. Many clients have been calling to ask if we expect LIBOR will be done away with. Our short answer is no, because the market is $350T and therefore likely too big to fail. But I bet there are contact attorneys out there asking whether a swap contract is valid if the underlying index is phony. Also, as you work on new loans it may make sense to examine the section that describes what would happen if LIBOR was no longer available. Common language for this is Prime or Fed Funds + x.xx%. Make sure the bank is including comprable indices and spreads.

LIBOR and Fed Funds typically trade on top of each other, so the spread over FF should basically be the same as the LIBOR spread. Prime historically trades about 2.85% over LIBOR (today it is 3.00%). That means a LIBOR + 2.85% should reference Prime + 0.00% as an alternative index.

Fixed Rate Outlook Last weeks 10yr Treasury auction was one of the strongest ever, suggesting there is still incredibly high demand for a 1.50% Treasury yield. Absent a coordinated global central bank intervention, we just dont see any reason for a dramatic spike in fixed rates right now. In fact, rates feel incredibly range-bound for the foreseeable. We have an office wager of where the 10T will be on Labor Day. I have anything below 1.46% and above 1.54% - and Im not sure Ill win.

This Week Bernanke speaks Tuesday and Wednesday at his semi-annual Humphrey Hawkins testimony. Given the political pressure to avoid additional QE, wed be surprised if he makes and strong references to additional QE - there are plenty of other forums for these sorts of statements.

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ECONOMIC CALENDAR
Economic Data Day Monday Time 8:30AM 8:30AM 8:30AM 10:00AM Tuesday 8:30AM 8:30AM 8:30AM 8:30AM 9:15AM 9:15AM 10:00AM Wednesday 7:00AM 8:30AM 8:30AM 2:00PM Thursday 8:30AM 8:30AM 10:00AM 10:00AM 10:00AM Report Empire Manufacturing Advance Retail Sales Retail Sales less Autos Business Inventories Consumer Price Index (MoM) Consumer Price Index (YoY) CPI Core (MoM) CPI Core (YoY) Industrial Production Capacity Utilization NAHB Housing Market Index MBA Mortgage Applications Housing Starts (MoM) Building Permits (MoM) Fed's Beige Book Initial Jobless Claims Continuing Claims Philadelphia Fed Existing Home Sales (MoM) Leading Indicators 363k 3288k -8.0 1.5% -0.1% 350k 3304k -16.6 -1.5% 0.3% 5.2% -2.8% Forecast 4.00 0.2% 0.0% 0.3% 0.0% 1.6% 0.2% 2.2% 0.3% 79.2% 30 Previous 2.29 -0.2% -0.4% 0.4% -0.3% 1.7% 0.2% 2.3% -0.1% 79.0% 29 -2.1% -4.8% 7.9%

Speeches and Events Day Monday Tuesday Time 7:30PM 10:00AM 1:15PM Wednesday 10:00AM 2:00PM Report Fed's George speaks on Monetary Policy and Farmland Values Fed's Bernanke delivers Monetary Policy Report to Senate Fed's Pianalto speaks on Economy Fed's Bernanke gives Semiannual Report to US House Fed releases Beige Book Economic Survey Erie, PA Place

Treasury Auctions Day Time Report Size