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

com Leveling the Playing Field October 1, 2012 _______________________________________________________________________

Am I the only one that things Romneys campaign logo read omney without the R? Is that why hes losing to the guy that has overseen double digit real unemployment? Because I cant read his logo? Treasury yields finished down for the second week in a row following an incredibly weak Durable Goods Order (weakest in almost 4 years) and consumer confidence was down as well. 70% of small business owners say Obamas policies hurt them and worsen the economy according to last weeks NFIB survey. The other 30% are probably tax collectors or regulation enforcers. GDP also came in weaker than expected and suggests the second half of 2012 will be worse than expected. GDP in the first half of the year was 1.8% and economists we trust are now forecasting a 1.5% GDP for the second half. Ive spent the last few weeks asking a lot of clients for their view on the economy. No one has the same concerns about a complete freeze like we experienced a few years ago, but there does seem to be a general wait and see approach. Assuming Congress resolves the fiscal cliff issue (which it likely will, but only at the 11th hour), I wouldnt be surprised to see a general pickup in the beginning of 2013 domestically. Across the pond, Spain announced a series of severe austerity measures such as cutting spending by 9% and holding the budget deficit to 6.3%. They also forecasted GDP will only fall to -0.5%, which is highly optimistic. This is starting to sound like Greece from 3 years ago. The ECB has committed to buying Spanish bonds at any levels to help keep borrowing costs down, but only under strict conditionality. We doubt that as well. What happens when Spain fails to meet one of those conditions the ECB allows a sovereign collapse? If they were going to do that, why not do it now before bloating the balance sheet with worthless Spanish bonds? Complicating matters is the fact that the IMF (part of the Troika) has proposed a slower adjustment for Spain to mitigate the GDP shock from austerity measures. Spains unemployment rate is 25.1%. Just imagine how much Obama would win by if he had that sort of UR instead of just 8.2%. Nearly 1.5 million Spaniards from the Catalonia region turned out for a march last week supporting a succession from Spain. Is that going

to happen? Not in the literal sense, but does it suggest a growing momentum to abandon the euro? One of the biggest issues of the ECB bailout is that a third party is imposing monetary and fiscal authority on a sovereign country. When I was young, I didnt like taking orders from my own parents, let alone someone elses parents. Throw in the fact that they cant manipulate exchange rates to inflate their way out of this and the euro survival doesnt feel like a certainty regardless of what Draghi says. Below is a table with some 10 year benchmark sovereign yields. Germany is the benchmark for the region and is trading at 1.46%, but Germany is sliding into a recession and has been asked to bear the brunt of the bailout. Remember that 6.00% is the Mendoza Line and historically nations have needed assistance when the 10yr remained above this level.

Nation Greece Portugal Spain Italy Ireland US Germany

10 Year Sovereign Bond 19.51% 8.77% 6.02% 5.20% 5.04% 1.62% 1.46%

LIBOR Outlook With LIBOR down to 0.21% and low for the foreseeable future, our clients have been buying a lot of very cheap caps just as disaster protection. Weve sold caps on loans in excess of $50mm for 3 years at $15k in the last few weeks. Does anyone think the caps will ever come into play? No, but for a few grand it feels like an inexpensive insurance policy against a black swan event.

Fixed Rate Outlook Last week I wrote that I was torn about the path of fixed rates and nothing has changed. Generally speaking, it feels like the 10yr Treasury might have a lid over the near term (particularly with the elections and fiscal cliff looming). Beyond that, QE generally leads to a steeper yield curve. I wouldnt be surprised to see a higher 10yr in 2013, but inflation isnt a concern yet and I dont know that it gets up to 3.00%.

At your next cocktail party, use the term tail risk to sound educated. Traders and economists use this term to generally signify an outcome three standard deviations from the mean on a normal distribution curve. As it applies to Europe, it suggests a meltdown scenario is off the table. Heres how it might sound: You: Listen, I get it, Draghi has removed the Eurozone-related tail risk, but have they really addressed any of the underlying issues? Thats why the US is still the reserve currency of the world. Your Buddys 26 Year Old Second Wife Oh, Im sorry, I dont like football. This Week Headline for the week will be Fridays labor reports, which we expect to be disappointing. The consensus forecast is for a gain of 111k, but in our office pool Ill be wagering on a gain of 76k. Unemployment will likely hold steady at 8.1% or increase to 8.2%. We expect another week of weak economic data and probably another round of manufacturing data that suggests contraction. Bernanke speaks on monetary policy Monday at 12:30pm. We dont expect anything earth shattering, but it is an opportunity for him to clarify the Feds position and reiterate the general message. We also wouldnt be surprised to hear some comments aimed at Congress addressing the fiscal cliff. The FOMC minutes come out Thursday, but Fedspeak has been on overdrive since the last meeting, so we shouldnt have any surprises.

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ECONOMIC CALENDAR
Economic Data Day Monday Time 10:00AM 10:00AM Tuesday 9:45AM 5:00PM 5:00PM Wednesday 7:00AM 10:00AM Thursday 8:30AM 8:30AM 10:00AM 2:00PM Friday 8:30AM 8:30AM 8:30AM 8:30AM 8:30AM 3:00PM Report ISM Manufacturing Construction Spending (MoM) ISM New York Total Vehicle Sales Domestic Vehicle Sales MBA Mortgage Applications ISM Non-manufacturing Composite Initial Jobless Claims Continuing Claims Factory Orders Minutes of FOMC Meeting Change in Nonfarm Payrolls Change in Private Payrolls Unemployment Rate Underemployment Rate (U6) Avg Weekly Hours All Employees Consumer Credit 111k 125k 8.2% 14.7% 34.4 $7.500B 96k 103k 8.1% 14.7% 34.4 -$3.276B 53.2 370k 3275k -2.5% 14.40mm 11.40mm Forecast 50.0 0.5% Previous 49.6 -0.9% 51.4 14.46mm 11.54mm 2.8% 53.7 359k 3271k 2.8%

Speeches and Events Day Monday Time 12:00PM 12:30PM Thursday 2:00PM 8:00PM Fed's Williams speaks Fed's Bernanke speaks on Monetary Policy Fed releases Minutes from September 13 FOMC Meeting Fed's Bullard speaks on US Economy Memphis, TN Report Place San Francisco, CA Indianapolis, IN

Treasury Auctions Day Time Report Size