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

com Leveling the Playing Field December 5, 2011 _______________________________________________________________________ Last weeks Top 10 Things Your Bank is Grateful You Dont Know About Derivatives was our number 1 read newsletter of all time. Since I blatantly mailed it in last week, Im not sure if I should celebrate or take it as an indictment on the usual bs we write about. Rates have been incredibly sedate over the last few weeks despite the turmoil in Europe. Across, the curve, rates are up about 4-6bps since last Monday and no day had more than a +/- 5bps movement. This is very surprising given the Central Bank coordination announcement and US labor data on Friday. Maybe traders are sitting on their hands until January. Bernanke & Co. joined hands with Europe, Japan, Switzerland, Canada and China to announce a global coordination to inject liquidity into financial markets. Central banks around the globe did the same in October 2008 and prevented a full scale meltdown, but it doesnt erase the underlying issues. This will allow the ECB to get its hands on more dollars and loan them to the Central Banks of each member country, who then pass them along to the struggling banks. If the Central Bankers have taken too long or if the politicians prevent decisive action (or if Germany takes its ball and goes home), then the Eurozone will suffer mightily and will probably thrust the US back into another recession. If they use this temporary reprieve and lessons from 2008 to put together a painful but effective plan out of this mess, we might avoid a full blown redux. Last week ended on a bang with a strong job report, particularly the Unemployment Rate dropping to 8.6% from 9.0%. Rates immediately spiked and stock futures indicated a much higher opening, but then everyone dug into the numbers and realized that the labor force participation rate had dropped from 64.2% to 64.0%. Had this held steady, the UR would have come in at 8.9%. Said another way, people stopped looking for jobs so they dont get counted in the UR survey. But they still dont have jobs. The graph below from the St. Louis Fed shows that about 10mm more people are not in the labor force than in 2007. Approximately 5mm of that is attributable to population growth, but the other 5mm is those that have given up looking for work. This means that the UR would be more like 11% or 12% if we used the labor force participation rate was the same as a few years ago. And the average duration of unemployment is up to a record high of 40.9 weeks.

NFP showed an increase of 120k jobs last month, right on the forecast screws. Last month was revised up from a gain of 80k to 100k. This is a pretty mixed bag. As weve discussed before, the US economy really needs to be adding more than 300k jobs per month to show an appreciable impact on the UR. But 100k jobs gained is nothing to sneeze at either. Weve heard a lot of commentators refer to the US economy as improving moderately. We might instead use the word resilient. In the face of a Eurozone meltdown, US corporates have remained very profitable. But before you ask us to turn in our Pessimist Card, we do wonder about the lag effect of Europe and China will have on our economy in 2012. Heres a brief overview at S&P 500 trends (excluding financials) this year.

Revenues are still growing, but at a slower rate than earlier in the year. But why? Interest rates arent any higher and commodity prices are actually down. Keep an eye on corporate profits at year-end and forecasts for 2012 - that lag effect from Europe and China may be finally passing through to domestic earnings. And dont take our word for it, Goldman Sachs just released a 2012 Portfolio Outlook titled Strategies for Stagnation and calls for low interest rates, low inflation, and 1250 on S&P in 2012. Heres a graph from Markit Economics demonstrating the global contraction that seems to be effecting every developed country except the US and Canada. The Mendoza Line for PMI data is 50. Above 50 represents growth, below 50 represents contraction. If you move from right to left (August thru November), youll see the disturbing trend of contraction. Well let the data speak for itself.

LIBOR Outlook LIBOR continues to inch higher as we approach year end and this will likely reverse in mid-January. The global coordination should remove the short term risk of a spike in LIBOR, but as markets realize that many European banks are still insolvent, this risk remains.

Fixed Rate Outlook The risk is to higher rates right now, particularly following the Central Bank coordination which implies a government backstop. It also creates a risk on approach in an attempt to grab additional yield. How is it that the Congressional Supercommittee fails to deliver the necessary cuts and US rates are lower than Germanys? Thats like the Eagles failing to meet expectations all year long and then being favored against the Patriots. Or even the Seahawks. The European situation festers, lets keep an eye on this. This Week Very light week for economic data and no Treasury auctions, but we do have quite a few Fed speeches. We think the Fed may start to hint at the next round of quantitative easing, although like Operation Twist it will be given a different name to avoid political fallout. This raises another interesting question does the complete ineptitude of the Supercommittee and the various presidential candidates (and ex candidates Mr Cain) actually take some of the political pressure off of Bernanke? The minute anyone starts to question him theyll have quite a few questions to answer themselves. Herman Cain - Chairman Bernanke, wont QE4 create massive inflationary pressures? Why do you hate retirees? Bernanke Please stop sending my wife friend requests on Facebook. Rick Perry Benny Boy, can you please explain ummmmlets see here, how abouthang on. Bernanke See why I use prepared remarks? Sarah Palin Mr Chairman Bernanke Let me just stop you right there. No. President Obama Why hasnt the trillions in dollars youve printed brought down the unemployment rate to 6%? Bernanke Can I wait until November of next year to answer this? I dont like repeating myself. Tim Tebow I will fix this economy if you ask me, my child. Bernanke (genuflecting) Yes, please.

No newsletter next week as I take a short vacation. Enjoy yourselves!

ECONOMIC CALENDAR
Economic Data Day Monday Time 10:00AM 10:00AM Tuesday Wednesday 10:00AM 7:00AM 3:00PM Thursday 8:30AM 8:30AM 10:00AM Friday 8:30AM 9:55AM Report ISM Non-Manufacturing Composite Factory Orders IBD/TIPP Economic Optimism MBA Mortgage Applications Consumer Credit Initial Jobless Claims Continuing Claims Wholesale Inventories Trade Balance U. of Michigan Confidence $7.000B 395k 3700k 0.3% -$44.0B 65.8 Forecast 53.8 -0.3% 42.0 Previous 52.9 0.3% 40.6 -11.7% $7.386B 402k 3740k -0.1% -$43.1B 64.1

Speeches and Events Day Monday Tuesday Wednesday Time 12:10PM 10:00AM 3:15AM 5:00AM 8:30AM Fed's Evans speaks Fed's Tarullo testifies at Senate Banking Committee ECB calls for Bids in 3-Month Dollar Tender ECB announces Allotment in 3-Month Dollar Tender Fed's Raskin speaks on Data Use Baltimore, MD Report Place Muncie, IN

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