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The Pensford Letter - 4.30.12 v3

The Pensford Letter - 4.30.12 v3

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Published by: Pensford Financial on Apr 30, 2012
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JP Conklin704-887-9880 office jp.conklin@pensfordfinancial.comwww.pensfordfinancial.com 
 Leveling the Playing Field 
April 30, 2012 ______________________________________________________________________If this week’s newsletter is more cynical than usual, it might be because I am typing thiswhile sitting on a plane bound for LA with two screaming kids directly behind me. I coulduse 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 weredown across the curve. The 10yr Treasury closed at 1.93%, down 0.03% on the week. TheFOMC meeting failed to suggest additional QE, which disappointed markets. Friday’sGDP came in at 2.2%, below the consensus 2.6% and quite a bit weaker than last quarter’s3.0% growth.The FOMC meeting did reveal a divergence of opinions on the first rate hike. Thorn-in-the-side Lacker said the central bank will have to raise rates in mid-2013. Six out of 17members 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 isn’t going to happen, but it does tell us thatBernanke 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, andshould the economic data show improvement, the FOMC would be willing to adjust itsforecast. When asked about the discrepancy of the views within the FOMC on the subjectof the Fed Funds rate, Bernanke responded that the “committee’s decision is the criticalelement”. 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 theend of the year, an improvement over January’s forecast of 8.2%-8.5%. This should beeasily 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? Ohyeah, right next to them.
Quantitative Easing
I’m beginning to think Bernanke is up to some trickeration regarding additional QE. TheFed has become more transparent than ever and yet I wonder if he’s intentionallymisdirecting 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 turnswildly optimistic again. The Fed gets some love and regains some of the ambiguity it lovesso 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 thinksthe 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 ourforecast of another round of monetary easing at the June 19-20 FOMC meeting
. It isstill our forecast, but it depends on our expectation of a meaningful amount of weakness inthe economic indicators over the next 6-8 weeks. In other words, our sense of the Fed’sreaction function to economic growth has become more hawkish than it looked after theJanuary 25 FOMC press conference, when Chairman Bernanke saw a ‘very strong case’ for additional accommodation under the FOMC’s forecasts. This shift is a headwind from the perspective of the risk asset markets....So the case for a successor program to OperationTwist still looks solid to us,
and the FOMC’s apparent reluctance to deliver it is aconcern
” (emphasis is mine).
According to one author from ZeroHedge, “back of the envelope math based on theFed/ECB balance sheets and EURUSD implies the market expects around $700bn of QE3”.We still believe Helicopter Ben won’t disappoint, he’s just trying to time it perfectly tomake 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 atPrinceton is in the cards for these kids who seem completely baffled by the rules of theQuiet Game.
Job Reports – Friday at 8:30am
Goldman slashed its forecast for NFP to a gain of 125k. By now, we all know that whenGoldman “forecasts” payrolls, it’s 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
by the market. Why? Because the markets may interpret weakness as a catalystfor further Fed intervention.Isn’t it amazing how long a child’s 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 amiracle right here on flight 1439! I just don’t know if it’s the bottomless sippy cup or thefact one of these kids can sip uninterrupted for 19 minutes. He’s not even stopping to catchhis breath!It has become increasingly clear that the recent strength in job data was due in part to anunseasonably warm winter and that job growth was paid-forward. Now it is time for  payback and that is why
most economists are revising Friday’s projections downward toa gain of 165k, while the economists we trust the most are actually closer to 125k 

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