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

com Leveling the Playing Field March 18, 2013 _______________________________________________________________________ Have you ever had one of those weeks? You know, when a tree jumps out into your driveway while youre backing up and scrapes up the side of the car? And where your credit card information is stolen and used to purchase fun things online like a Southwest ticket? And then in a completely separate incident five days later, your house is broken into and all of your electronics are stolen while you were at your sons baseball practice? Apparently the tax increases are being carried out in a more direct manner than I realized. It takes a lot of hutzpah to rip off someone in broad daylight, and yet that is exactly what happened. Not just in my home, but in Cyprus as well where a tax is set to be levied on savers. Anyone with more than 100,000 in a bank will pay 9.9% and those with less will pay 6.75%. The move was announced Saturday morning and of course everyone was fine with it. Oh wait, never mind - it created a run on banks! Shockingly. One depositer even parked his bulldozer in front of his local branch. And then the government shut down electronic transfers to really help soothe everyones fears. The fallout has forced lawmakers to postpone the vote until Monday when Dennis Rodman is set to arrive in an attempt to broker a deal. Euro finance ministers are demanding the tax as a part of a 10B bailout package to Cyprus, however, and markets will be jittery until this is resolved. As uncomfortable and as socialist as this tax feels, a default by Cyprus would really create havoc in the markets. This is particularly true in the face of Draghis commitment to bail out euro members at all costs. The flip side is this if a tax can be levied in Cyprus, what about other countries? Particularly those with socialist tendencies to begin with (cough cough France)? Would you leave your money in a European nation right now? Why not pull it out and stick it in the US for a while? Or gold? And while we criticize the Fed for bailing out their banking cronies at the expense of main street tax payers, their strategy has been incredibly successful in restoring the balance sheet strength of US banks. Last week the Fed revealed data that showed US banks have $2T more deposits than loans. Unfortunately, the opposite is true in Europe. Some large banks have ratios at 2:1 loans to deposits. This results in a very fragile banking system, one very susceptible to a liquidity crisis.

At home, rates are finally experiencing some volatility after more than a year of benign movements. Two weeks ago, the 10yr Treasury dropped to 1.85% and then last week it reversed course and topped out at 2.06%. Despite the recent rollercoaster ride, rates are still clearly stuck in a tightly traded range. Stocks continue to rally as data surprises mildly to the upside. Some economists are even revising forecasts for GDP slightly higher, say from 1.5% to 1.8%. This feels a tad premature since we dont have a firm grasp on the full impact of the sequestration, but it is a good sign that consumer spending hasnt plummeted following the tax increases and higher gas prices. Perhaps the fact that Exxon recorded $45B in profits last year helped. Its costing me $4/gallon, but 100% of proceeds go to XOM so its ok! LIBOR Outlook Anchored near zero. Fixed Rate Outlook As discussed a few weeks ago, we are experiencing more volatility since the Fed formally tied itself to data points. But thus far it has remained within a pretty tight band. Front end rates are likely to stay anchored, so dont expect much volatility there (3 years and in), while the long end is more likely to experience the ups and downs. Weve tested support and resistance levels over the last two weeks, yet have been unable to break through. 1.85% - 2.10% is the current range. In general, there is more consistent pressure to higher rates at this point. Lack of bad news is enough to push rates higher, while it takes actual negative news to push yields lower. Optimism, fueled by respectable data and unending Fed support, has replaced outright fear from the last few years. This Week Most important news of the week will be Wednesdays FOMC meeting. While the Fed may acknowledge the recent strength in US data, it will likely counter this with expected headwinds from the sequestration and concerns in Europe, using this as an opportunity to reaffirm its commitment to ZIRP and QE4EVA. The only people worse at forecasting than me all work at the Fed, and they have consistently overestimated growth over the last several years. We cant imagine they will risk withdrawing QE support anytime soon. At a minimum, we would expect the Fed to maintain its current course through 2013, using sequestration, debt ceiling, and Europe as

cover fire. If the US economy maintains its trajectory despite these factors, the Fed can begin letting off the gas pedal in early 2014.

The ACC tournament bracket looked like this on Saturday: Not Duke versus Not Duke at 1pm Not Duke versus Tar Heels 3pm In todays finals, Not Duke played an incredible game against the Heels and walked away with a well-deserved title. Im proud of the Heels and disappointed they somehow ended up as an 8 seed in the big dance. I can only assume that the committee was busy discussing the debt ceiling instead of merits.

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Economic Calendar
Day Monday Tuesday Time 10:00AM 8:30AM 8:30AM Wednesday 7:00AM 2:00PM Thursday 8:30AM 8:30AM 8:30AM 10:00AM 10:00AM 10:00AM Friday Report NAHB Housing Market Index Housing Starts (MoM) Building Permits (MoM) MBA Mortgage Applications FOMC Rate Decision Initial Jobless Claims Continuing Claims House Price Index (MoM) Philadelphia Fed Existing Home Sales (MoM) Leading Indicators 0.25% 342k 3075k 0.7% -2.0 1.6% 0.3% Forecast 47 2.8% 2.1% Previous 46 -8.5% 1.8% -4.7% 0.25% 332k 3024k 0.6% -12.5 0.4% 0.2%

Speeches and Events Day Wednesday Time 2:00PM 2:30PM FOMC Rate Decision Fed's Bernanke holds Press Conference Report Place

Treasury Auctions Day Time Report Size