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

com Leveling the Playing Field September 4, 2012 _______________________________________________________________________ With Europe coming off a month long vacation, America goes on its own vacation with the return of football and its related fantasy spinoff. Some of you may be wondering, JP, how was that Penn State game? Im glad you asked. I knew we were in trouble when Mark Emmert was announced the honorary captain for Ohio before the coin toss, but most of the pain was self-inflicted. The first half was largely positive and the crowd was energized (even if 10k below capacity), but the air got sucked out of the stadium at halftime and everything just felt flat after that. The teams play mirrored the energy and a sure fire interception through a PSU defenders hands was caught and taken for a fluke TD and it felt like the team just quit after that. I have a sneaky suspicion attendance will be down significantly next week and high school commits will start rethinking their position now that Coach OBrien is no longer undefeated. Thank goodness I still have the 1-0 Tarheels! Last week was not as volatile as we expected, with a general flight to quality as 10yr rates came in about 0.11% to 1.54%, most of the move coming on Friday following a slightly disappointing Bernanke statement at Jackson Hole. Last week we said with tongue in cheek confidence that the following would occur, lets review how we did: 1. Commitment to open ended stimulus rather than a formal QE3 announcement, stressing the Fed will remain flexible and do whatever necessary to achieve its objectives. He made it abundantly clear that the Fed stands ready to intervene as necessary, but he didnt commit to an open-ended program. 2. Suggestion that stimulus will focus on mortgage purchases. He touched on this topic, but didnt specifically address buying mortgages instead of just Treasurys. As with #1, we believe this will be addressed at the September 12 FOMC meeting. 3. Suggestion that alternatives like cutting IEOR or the BOEs program providing incentives to increase lending will be considered/utilized. Bernanke touched on alternatives to traditional balance sheet measures but conceded nontraditional policies are relatively more difficult to apply. However, he spent so much time defending alternative methods and the FOMCs pragmatic approach that he is clearly considering them as a tool.

4. Commitment to keeping Fed Funds low through 2015 instead of 2014. Bernanke defended Fed guidance as a mechanism for easing, but really stayed away from committing to extending the duration of the FOMCs holding pattern. So howd we do? Not very well. Bernanke spent far more time defending the Feds strategies to date than we expected, although we now believe this was to set the table for the September 12th meeting. Perhaps the lesson here is that Bernanke didnt want to formally front run the FOMC meeting, particularly if the Fed really is evaluating incoming data like this weeks job reports. We think our absurdly bold predictions will hold true at next weeks meeting, but for the first time we believe there is a slight chance the Fed doesnt unveil another round of QE. But Bernanke noted that inflation has remained near 2% despite repeated warnings that excessive policy accommodation would ignite inflation. Heres an excerpt from Jackson Hole 2010 foreshadowing QE2, and then a comparison of the quote from Fridays speech: JH 2010: In particular, the Committee is prepared to provide additional monetary accommodation through unconventional measures if it proves necessary, especially if the outlook were to deteriorate significantly. JH 2012: Taking due account of the uncertainties and limits of its policy tools, the Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability." Other warm and fuzzies from Helicopter Ben include: the economic situation is far from satisfactory stagnation of the labor market is a grave concern economic growth is tepid I cant believe Republicans are going to lose this election barring substantial improvement, the unemployment rate is likely to remain far above levels consistent with maximum employment for some time

So, yeah, Bernankes finger is on the QE trigger. And maybe I made one of those up. On the Feds LSAP (large-sized asset purchases) program, it is probably not a coincidence that the sustained recovery in US equity prices began in March 2009, shortly after the FOMC's decision to greatly expand securities purchases. This effect is potentially important, because stock values affect both consumption and investment

decisions." Wait, I know the Fed had a dual mandate of inflation and employment, but Bernanke is focused on stocks, too? Cue feign surprise. And just in time for elections Speaking of which, job data is likely to be one of the single biggest data points referenced by politicians leading up to the election. If the unemployment rate stays around 8.3%, Romneys odds probably go up as long as Clint Eastwood isnt in charge of the press conference. Consumer confidence came in at a 9 month low last week and US home prices are at 2003 levels, 31% below their 2006 peaks according to the WSJ.

LIBOR Outlook Dear Mr. Eastwood Thank you for making us relevant again. Sincerely, Screenwriters Guild of America Fixed Rate Outlook Were in a weird spot because negative news may paradoxically lead to higher rates as markets price in greater odds of additional easing. Reasons for lower rates include: Lack of supportive rhetoric by Draghi Weak US labor data on Friday Fiscal cliff Greece exiting the euro France downgrade Weak Spanish bond auction Thursday Mixed messages from Germany via Merkel German constitutional court ruling vetoing ESM Israel/Iran and Syria

Reasons for higher rates include: - Draghi saber rattling - 150k+ job growth and decline in employment rate - Merkel putting Samaras in Ric Flair Figure Four WOOOOOOO! - Additional QE (although several months from now the actual process of Fed buying Treasurys will bring rates down)

It appears that there are far more reasons for rates to go lower, but keep in mind that much of this is already priced into markets. When every cabbie in NY can explain why Greece should exit the euro, its already baked into rates. Long term fixed rates are near the bottom of the current range, so barring total collapse in Europe it will be challenging for rates to break significantly lower. Alternatively, strong coordinated central bank action could send rates sharply higher in short order. Since the Eurozone issue wont be resolved until the 11th hour as these issues are wont to do, we are likely range bound for the foreseeable future.

This Week Charlotte basically shuts down while the DNC takes over uptown this week. San Antonio Mayor Julian Castro opens Tuesday, and President Obama speaks Thursday, but Wednesday is still Ladies Night. Meanwhile, the Republican party has set up its counterconvention HQ in the NASCAR Hall of Fame. NASCAR, a right leaning sport, rejoiced not only at hosting the GOP but for tripling YTD attendance all at once. The next two weeks have quite a few important moments. On Thursday, the ECB has a policy meeting and Draghi is expected to make remarks. This will be his first public appearance since suddenly canceling his Jackson Hole speech and markets are hoping for another commitment to a unified Eurozone, particularly using phrases along the lines of at any cost. On the same day, Spains bond auction should be a good barometer for Eurozone credit appetite. President Obama speaks Thursday night and then we start Friday morning with the monthly labor reports. Will a weak number offset the usual boost candidates gain? Will a strong number send Obama on the path to reelection? Or could a strong number keep the Fed on hold and lead to an equities selloff and an Obama loss? Although were still a week out, next week will be just as, if not more, significant. The FOMC will announce its rate decision on Wednesday September 12th along with the QE/NOQE plan. The same day, the German constitutional court will rule on the countrys ability to participate in the ESM. The odds of a veto are very low, but not impossible. The most likely outcome is that the court approves the ESM involvement but reiterates that German involvement is on a case by case basis and not a blanket approval. Rates may decline heading into the ruling as traders try to protect themselves against a surprise ruling. The two days after that (Thursday and Friday) have a G20 Finance ministers and central bank governors meeting in Mexico.

The point being: the next two weeks could be very volatile. Please dont hesitate to contact us frequently to check rates or prices or ask for fantasy football advice. I have a remarkable knack for finishing last and if you do the opposite of what I suggest, you should be just fine.

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ECONOMIC CALENDAR
Economic Data Day Monday Tuesday 10:00AM 10:00AM 10:00AM 5:00PM 5:00PM Wednesday 7:00AM 8:30AM 8:30AM 9:45AM Thursday 8:15AM 8:30AM 8:30AM 10:00AM Time Labor Day ISM Manufacturing ISM Prices Paid Construction Spending (MoM) Total Vehicle Sales Domestic Vehicle Sales MBA Mortgage Applications Nonfarm Productivity Unit Labor Costs ISM New York ADP Employment Change Initial Jobless Claims Continuing Claims ISM Non-manufacturing Composite ICSC Chain Store Sales (YoY) Friday 8:30AM 8:30AM 8:30AM 8:30AM 8:30AM Change in Nonfarm Payrolls Change in Private Payrolls Unemployment Rate Underemployment Rate (U6) Avg Weekly Hours All Employees 34.5 127k 142k 8.3% 140k 370k 3315k 52.5 1.8% 1.5% 50.0 46.5 0.4% 14.17mm 11.05mm 49.8 39.5 0.4% 14.05mm 11.00mm -4.3% 1.6% 1.7% 55.2 163k 374k 3316k 52.6 1.9% 163k 172k 8.3% 15.0% 34.5 Report Forecast Previous

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