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

com Leveling the Playing Field July 30, 2012 _______________________________________________________________________ Just to confirm - the Eurozone is headed for a recession and is in the midst of financial collapse, US GDP is contracting, and we got disappointing earnings from Apple and Starbucks and stocks rallied Friday? The big, positive news from late in the week were comments by ECB President Draghi that the ECB would do whatever it takes to preserve the euro (has he checked with Germany?) coupled with hints dropped by anonymous government officials that the Fed is on the verge of additional quantitative easing. Well, be careful what you wish for because both the ECB and the Fed are on the calendar for formal policy decisions this week. The ECB will be expected to deliver a bold initiative or markets may go into a nosedive. But Germany is awaiting a September 2nd Constitutional Court ruling that will decide how they can contribute to the EFSF, so can the ECB really afford to go all in ahead of that decision? And can the markets wait 4+ weeks? They may have to as most of Europe is on vacation in August. A strong Troika move would also buy the Fed some time while markets digest the European situation, meaning that Wednesdays FOMC statement will likely set the stage for additional QE in September. This will also give the Fed two more employment reports (starting with Fridays) before announcing another round of easing. France is expected to be downgraded within the next few months, which could then threaten its ability to contribute to the EFSF, further shifting responsibility back to Germany. Spain has lost access to the bond markets, which is critical given its need to sell 50B of bonds before year end. From a Reuters article: The euro zone does not seem to have enough cash in the current setup to deal with a scenario of Spain and Italy needing a rescue, and a sense of doom is growing among some policymakers. Fighting the crisis, said the euro zone diplomat, is like trying to keep a life raft above water. "For two years we've been pumping up the life raft, taking decisions that fill it with just enough air to keep it afloat even though it has a leak," the diplomat said. "But now the leak has got so big that we can't pump air into the raft quickly enough to keep it afloat."

Compounding the problems, Greece is far behind with reforms to improve its finances and economy so it may need more time, more money and a debt reduction from euro zone governments. If Greek debt cannot be made sustainable, the country may have to leave the euro zone, sending a shockwave across financial markets and the European economy. Athens wants two more years than originally planned to cut its budget deficit to below 3 percent of GDP, so as not to impose yet more spending cuts on a country which is already in a depression. This would mean Greece's 130 billion euro second bailout package may need to be increased by 20-50 billion euros, according to estimates by some euro zone officials and economists, and there is no appetite in the euro zone to give Greece yet more extra money. More importantly Greece needs to bring its debt, which is equal to 160 percent of its annual economic output, under control. This means euro zone governments, which own roughly two thirds of it, may need to write part of it off. And markets are rallying? LIBOR Outlook Remember all those times when banks were honest and transparent over the years? Me neither. Perhaps the only real surprise is that we somehow allowed $350T worth of financial instruments to be tied to a self-reported banking index.

Fixed Rate Outlook The absurd equitiy rally late in the week following Draghis comments flies in the face of the strength of US Treasurys. On Tuesday, the 2 year Treasury note sold at a record low 0.22%. The 10yr Treasury broke into the 1.30%s before spiking Thursday and Friday to 1.54%. We still believe the Eurozone crisis is far from being resolved (far = years), but rumors are swirling of a coordinated Troika bailout, so we have to caution our readers that rates could move higher from here, particularly in the near-term. These types of rate movements frequently end up being temporary, but dont be surprised if 10yr rates jump 0.25% following a coordinated central bank intervention.

This Week Monday could open with a large movement depending on what progress Draghi makes over the weekend. The ECB and the FOMC make formal policy decisions. Friday brings

NFP and Unemployment Rate dont forget that disappointing numbers could force the Fed into additional easing and therefore a paradoxical market rally.

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ECONOMIC CALENDAR
Economic Data Day Monday Tuesday Time 10:30AM 8:30AM 8:30AM 8:30AM 8:30AM 9:00AM 9:45AM 10:00AM Wednesday 7:00AM 8:15AM 10:00AM 10:00AM 10:00AM 2:15PM 5:00PM 5:00PM Thursday 8:30AM 8:30AM 9:45AM 10:00AM Report Dallas Fed Manufacturing Activity Employment Cost Index Personal Income Personal Spending PCE Core (MoM) Case-Shiller 20-city Index Chicago Purchasing Manager Consumer Confidence MBA Mortgage Applications ADP Employment Change ISM Manufacturing ISM Prices Paid Construction Spending (MoM) FOMC Rate Decision Total Vehicle Sales Domestic Vehicle Sales Initial Jobless Claims Continuing Claims ISM New York Factory Orders ICSC Chain Store Sales Friday 8:30AM 8:30AM 8:30AM 8:30AM 8:30AM 10:00AM Change in Nonfarm Payrolls Change in Private Payrolls Unemployment Rate Underemployment Rate (U6) Avg Weekly Hours All Employees ISM Non-Manufacturing Composite 34.5 52.3 100k 110k 8.2% 0.5% 120k 50.2 41.0 0.3% 0.25% 14.00mm 11.00mm 370k 3278k Forecast 2.0 0.5% 0.4% 0.1% 0.2% -1.45% 52.5 61.4 Previous 5.8 0.4% 0.2% 0.0% 0.1% -1.90% 52.9 62.0 0.9% 176k 49.7 37.0 0.9% 0.25% 14.05mm 11.05mm 353k 3287k 49.7 0.7% 0.2% 80k 84k 8.2% 14.9% 34.5 52.1

Speeches and Events Day Wednesday Thursday Time 2:15PM 9:00AM FOMC Rate Decision Fed Deputy Director Eichner testifies on Tri Party Repo Market Report Place

Treasury Auctions Day Time Report Size