JP Conklin 980-475-0268 phone 480-247-5675 fax jp.conklin@pensfordfinancial.com www.pensfordfinancial.

com _______________________________________________________________________ January 18, 2010 Dear Tar Heel Nation That was fun, can we do it again next year? Hugs and Kisses, College of Charleston PS Clemson and GT are here with us right now and they are wondering the same thing. And the Eagles got embarrassed in back to back weeks by their most hated rival. Unlike with Nate Kaeding, however, I feel confident David Akers didnt have any wagers on the game Obama upset a lot of Atlas Shrugged fans when he announced that he would tax the banks that paid obscene bonuses based on record profits generated by the bail out and ensuing accommodative Fed policy. We are a little split on this topic. On the one hand, the government should not be dictating pay. If the banks paid back the TARP plus interest as required by the government, then theoretically they should pay as they see fit. But many of these banks would have ceased to exist and are around today only because of the tax payers bailout. Just because a bank pays back the TARP and interest, it shouldnt signal the final checkmark before the government gets out of its hair. These banks not only survived, but thrived because of the bailout. If a bank borrowed $25B to survive, shouldnt it have to pay back the $25B, plus interest, PLUS some portion of the profits it generated through the governments year long assistance? For example, part of the reasons banks wouldnt lend this year was because they had a risk free carry trade as an alternative to lending. Lets assume you are a bank and can borrow at essentially 0%. Would you rather lend to a real estate project right now OR buy Treasurys at a historically steep yield curve and earn say 2.50% - 3.50% risk free? But a banks behavior in that sort of rate environment is fairly predictable and we dont fault them one bit. That is just smart investing. What is bothersome is the banks and bankers acting as if record profits are solely a result of their acumen. Even a state-schooler like me could make money all day long by

borrowing at 0% and investing at 3%. Well, to be fair I would probably find a way to screw that up, but you get the picture. So what should the banks have done with this money instead? What if they set the bonus money aside as reserves against future losses? Commercial real estate still hasnt bottomed. Banks are still carrying structured notes on the balance sheet at ridiculously inflated levels via FAS 157 MTM. Save the money for a rainy day so that next time (and there is always a next time), they dont need government assistance So while we probably agree that the banks are acting improperly by paying out this cash when they should be holding onto cash just like every consumer is currently doing (as evidenced by the dropping credit balance, decreased consumer spending, and increasing savings rate), we dont like the Administrations handling of the situation. Banks are clearly for profit entities, so if we take money away from them, they will react. And the easiest way to compensate for this sudden shock to the bottom line is by passing it along to their customers. Higher interest rates on loans. Lower interest rates on deposits. Higher fees. The end result is banks still generate profit and justify obscene bonuses while the average taxpayer gets penalized twice. Atlas Shrugged was a good book, we just dont like using it to support every act of excess incentive. When one of these investment bankers removes themselves from the workforce, moves to a third world country, and does nothing, we promise to interview them for this Letter and let them explain their position. Changing gears: conspiracy theory of the week the government is secretly buying equities to prop up the DJIA and S&P. We thought it sounded ridiculous at first. And then when we thought about the wealth effect, the Administrations need for some positive economic news, etc, it sounded a little less weird Last week various governmental entities released an advisory regarding interest rate risk management. While not earth shattering, it is an interesting read as it highlights a few interesting points, notably the importance of financial institutions to maintain an appropriate risk management strategy. http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20100107.pdf Lots of talk last week about possible failures in the massive Treasury auctions, but in the end the standard metrics came in stronger than average over the last 6 auctions. On Thursday, Fed President Plosser said that the rate rise cannot wait for acceptable levels of unemployment. And Fed President Evans said that the extended period language means no change in Fed policy for 3 or 4 meetings or more. This would imply a summer hike at the earliest, but just as importantly a willingness by the Fed to signal a hike several months ahead of time.

This week Light economic data, no Treasury auctions, but very heavy corporate earnings. LIBOR outlook Markets have LIBOR at 2.75% by the end of 2011, but much of that increase is loaded into next year. Fixed rates outlook Weve have a few people respond to our emails asking why we are the only people in the world not expecting rates to rise dramatically next year. Lets take a brief second to clarify our position. Firstly, there are two types of rates. Short term rates, like LIBOR, which we do not expect to move materially in 2010, if at all. The market is pricing in a hike beginning in the summer, but we just dont see it. The other type of rate is long term fixed rates like Treasurys and swaps. We do believe these will increase in 2010 and beyond. We just dont think they will increase by as much as many observers are forecasting. We remember 2003 when fixed rates moved before the Fed did and then waited for LIBOR to catch up. The T10 has already jumped by more than 1.50% and may again wait for LIBOR to catch up. But we also know that typically the best time to lock is right before the Fed begins to hike rates because you have benefitted from low LIBOR and the rate that you lock is not much higher than it was back when fixed rates initially jumped. On December 30, 2008, the T10 bottomed out at 2.11%. Just a little over 3 months later, on 4/27/09, it registered a sub 3% yield for the last time. In other words, it jumped 1% in just three months and has been bouncing around between 3% - 4% for nearly a year. So if youve been holding off on locking, keep in mind that youve already benefitted from floating for the last year. The headline on the WSJ will read rate hike likely long after the markets have figured it out, and by that time it will be too late to lock in current levels. We only say this to make sure that we advocate a risk management position, not a speculative position.

Anyway, no Pensford Letter next week as we take a completely undeserved vacation and close the office for Friday and Monday.

QUICK MARKET SUMMARY

Benchmark Fed Funds Target 1 Month LIBOR 3 Month LIBOR 6 Month LIBOR 12 Month LIBOR 2 Year Treasury 5 Year Treasury 10 Year Treasury 30 Year Treasury 2 Year Swap Spread 5 Year Swap Spread 10 Year Swap Spread 30 Year Swap Spread 1 Year Swap 2 Year Swap 3 Year Swap 4 Year Swap 5 Year Swap 7 Year Swap 10 Year Swap 30 Year Swap Today 0.25% 0.23% 0.25% 0.39% 0.89% 0.86% 1.43% 3.67% 4.58% 0.28% 1.29% 0.12% -0.10% 0.49% 1.14% 1.76% 2.29% 2.72% 3.31% 3.79% 4.48% One Week Ago 0.25% 0.23% 0.25% 0.42% 0.96% 0.98% 1.54% 3.83% 4.72% 0.28% 1.35% 0.11% -0.15% 0.53% 1.26% 1.91% 2.46% 2.89% 3.47% 3.94% 4.57% Change 0.00% 0.00% 0.00% -0.03% -0.07% -0.12% -0.11% -0.16% -0.14% 0.00% -0.06% 0.01% 0.05% -0.04% -0.12% -0.15% -0.17% -0.17% -0.16% -0.15% -0.09% One Month Ago 0.25% 0.23% 0.25% 0.43% 0.97% 0.79% 2.27% 3.03% 3.54% 0.34% 0.37% 0.64% 0.76% 0.52% 1.13% 1.74% 2.24% 2.64% 3.19% 3.67% 4.30% Change 0.00% 0.00% 0.00% -0.04% -0.08% 0.07% -0.84% 0.64% 1.04% -0.06% 0.92% -0.52% -0.86% -0.03% 0.01% 0.02% 0.05% 0.08% 0.12% 0.12% 0.18% One Year Ago 0.25% 0.35% 1.12% 1.55% 1.83% 0.73% 1.48% 2.40% 2.97% 0.60% 0.57% 0.13% -0.16% 1.04% 1.33% 1.64% 1.88% 2.05% 2.29% 2.53% 2.81% Change 0.00% -0.12% -0.87% -1.16% -0.94% 0.13% -0.05% 1.27% 1.61% -0.32% 0.72% -0.01% 0.06% -0.55% -0.19% 0.12% 0.41% 0.67% 1.02% 1.26% 1.67%

* Note - Swap Rates from above are based on certain assumptions and likely do not represent where an actual swap could be executed. These are meant to help demonstrate relative levels and trends, not as a basis upon which to execute a hedge. If you lock in a swap using these rates, you may pay an above market rate. Since these quotes are based off of 3 month LIBOR, be particularly careful if your hedge is on 1 month LIBOR.

Generally, this material is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. Your receipt of this material does not create a client relationship with us and we are not acting as fiduciary or advisory capacity to you by providing the information herein. All market prices, data and other information are not warranted as to completeness or accuracy and are subject to change without notice. This material may contain information that is privileged, confidential, legally privileged, and/or exempt from disclosure under applicable law. Though the information herein may discuss certain legal and tax aspects of financial instruments, Pensford Financial Group, LLC does not provide legal or tax advice. The contents herein are the copyright material of Pensford Financial Group, LLC and shall not be copied, reproduced, or redistributed without the express written permission of Pensford Financial Group, LLC.

ECONOMIC CALENDAR
Economic Data Day Monday Tuesday Wednesday 1:00PM 8:30AM 8:30AM 8:30AM 8:30AM 8:30AM Thursday 8:30AM 8:30AM 8:30AM Events and Speeches Day Time Report Place Time Markets Closed NAHB Housing Market Index PPI m/m PPI y/y PPI Core m/m PPI Core y/y Housing Starts Initial Claims Philly Fed Survey Leading Indicators 17 0.0% 4.4% 1.0% 1.0% 575k 445k 18.0 0.7% 16 1.8% 2.4% 0.5% 1.2% 574k 444k 20.4 0.9% Report Forecast Previous

Issuance and Buyback Day Closing Issues Size