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

com

Leveling the Playing Field

April 30, 2012

_______________________________________________________________________ If this weeks newsletter is more cynical than usual, it might be because I am typing this while sitting on a plane bound for LA with two screaming kids directly behind me. I could use a big hug from Roger Goodell right now. At least the flight is only five hours

A relatively benign week in rate movements last week, but generally speaking rates were down across the curve. The 10yr Treasury closed at 1.93%, down 0.03% on the week. The FOMC meeting failed to suggest additional QE, which disappointed markets. Fridays GDP came in at 2.2%, below the consensus 2.6% and quite a bit weaker than last quarters 3.0% growth.

The FOMC meeting did reveal a divergence of opinions on the first rate hike. Thorn-inthe-side Lacker said the central bank will have to raise rates in mid-2013. Six out of 17 members agreed that the first hike would occur by the end of 2013, and three of them believe the first hike will be this year. That isnt going to happen, but it does tell us that Bernanke has his hands full keeping everyone committed to extremely low rates.

The Chairman then announced that the guidance of the Fed Funds rate is conditional, and should the economic data show improvement, the FOMC would be willing to adjust its forecast. When asked about the discrepancy of the views within the FOMC on the subject of the Fed Funds rate, Bernanke responded that the committees decision is the critical element. Later, the Chairman decided not to comment on a specific rate threshold that

would warrant the definition exceptionally low. To us, this means rates could be raised and still qualify for the exceptionally low moniker. The FOMC also released its forecast for unemployment, projected a 7.8%-8.0% UR by the end of the year, an improvement over Januarys forecast of 8.2%-8.5%. This should be easily attainable since the White House is massaging these numbers as they see fit anyway. I wish these kids would stop pounding the back of my seat. Where are the parents? Oh yeah, right next to them.

Quantitative Easing

Im beginning to think Bernanke is up to some trickeration regarding additional QE. The Fed has become more transparent than ever and yet I wonder if hes intentionally misdirecting us by suggesting there is really no pressing need for additional QE. Then, without much warning, we get blindsided in June with QE3 and WHAM! the market turns wildly optimistic again. The Fed gets some love and regains some of the ambiguity it loves so much while the President gets his accommodative policy heading into the summer before elections.

Goldman Chief Economist/Secret Liason with the US Government Hatzius actually thinks the likelihood of further easing has gone down despite softening data. "Despite the weaker numbers, we have on net become more, not less, worried about the risks to our forecast of another round of monetary easing at the June 19-20 FOMC meeting. It is still our forecast, but it depends on our expectation of a meaningful amount of weakness in the economic indicators over the next 6-8 weeks. In other words, our sense of the Feds reaction function to economic growth has become more hawkish than it looked after the January 25 FOMC press conference, when Chairman Bernanke saw a very strong case for additional accommodation under the FOMCs forecasts. This shift is a headwind from the perspective of the risk asset markets....So the case for a successor program to Operation Twist still looks solid to us, and the FOMCs apparent reluctance to deliver it is a concern (emphasis is mine).

According to one author from ZeroHedge, back of the envelope math based on the Fed/ECB balance sheets and EURUSD implies the market expects around $700bn of QE3.

We still believe Helicopter Ben wont disappoint, hes just trying to time it perfectly to make sure the president remembers him in another 18 months. When you think about it, who would want to go back to teaching at Princeton? I seriously doubt teaching at Princeton is in the cards for these kids who seem completely baffled by the rules of the Quiet Game.

Job Reports Friday at 8:30am

Goldman slashed its forecast for NFP to a gain of 125k. By now, we all know that when Goldman forecasts payrolls, its really telling clients Our old bosses that now work for run the government have told us this is where NFP will be on Friday. Trade accordingly. This is one of those odd situations where a weaker release may actually be received positively by the market. Why? Because the markets may interpret weakness as a catalyst for further Fed intervention. Isnt it amazing how long a childs attention can be held by the sound of sucking the very bottom of a juicy cup through a straw? Someone call the Catholic Church, we have a miracle right here on flight 1439! I just dont know if its the bottomless sippy cup or the fact one of these kids can sip uninterrupted for 19 minutes. Hes not even stopping to catch his breath!

It has become increasingly clear that the recent strength in job data was due in part to an unseasonably warm winter and that job growth was paid-forward. Now it is time for payback and that is why most economists are revising Fridays projections downward to a gain of 165k, while the economists we trust the most are actually closer to 125k.

LIBOR Outlook

Someone give these kids a f#$88# % binkie!

Fixed Rate Outlook

Generally speaking, interest rates hit their calendar year highs between the end of February and mid-March. Then reality sets in as you pack up the family for that 8 hour drive for the summer vacation. We may see temporary jumps in rates in the coming months, but the underlying domestic fundamentals havent really improved and Europe very much remains a concern.

What if the Fed really allows Operation Twist to expire and doesnt replace it with any additional quantitative easing? We could be in store for a 0.25% - 0.50% jump in Treasury yields this summer.

This Week Fridays job reports (see section above) will be the big headline news for the week, but there are also a tremendous amount of Fed speeches planned. Markets will be watching these closely for hints about additional quantitative easing. What are you up to Senor Bernanke? No Treasury auctions this week. Sh*t, I might not make it to Fridays NFP. We have a monthly pool at the office for $1 and a wheelbarrow full of pride on the NFP print. Im going to win because Goldman already told us it will be 125k and I am claiming that number right here for the wager. And for the record, I HAVE flown my three children from CLT LAX. So there!

enerally, 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

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