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

com Leveling the Playing Field April 2, 2012 _______________________________________________________________________ A lot of clients ask about when I write these newsletters, and the answer is that it usually ends up being on a Sunday night. The upside is that any breaking news over the weekend can be included. The downside is that Ive usually had a weekend of bad sports experiences that can jade my commentary. Last week was the perfect example. I watched the Tar Heels lose to eventual runner-up Kansas Jayhawks and I was in a funk. I blamed Harrison Barnes for never reaching 50% of his potential. I blamed Zeller for putting up stats that tricked everyone into thinking he was good. I blamed Creighton for playing dirty and knocking Marshall out. I blamed Calipari for his eventual scandal that will vacate tonights title. I blamed Henson for not cutting those toenails. So I mailed it in. I wrote the newsletter, but my heart wasnt in it. And I only wrote because I had missed the week prior. And it showed. I apologize. I know I mailed it in, you know I mailed it in, and I know that you know that I mailed it in. And I spent the weekend in PA with my kids for their grandmothers 60th birthday bash, another perfect reason to mail it in or skip it altogether. But as my drill sergeants used to say, Do the hard right over the easy wrong. I hated those guys. Picking Pennies Up In Front of a Steamroller The Best Trader I Have Ever Known (TBTIHEK) said this to me in January about owning long term (7 year +) and then he said it again last week. He actually called 30 Year Treasurys the scariest asset in the entire investable universe here. If only he was more clear about his thoughts So what does he mean? Long-term Treasurys are running basically even to headline inflation and unless you believe we'll be able to hammer out a meaningful entitlement reform compromise I think the day of reckoning will come sooner/faster than you'll have time to prepare for. So collecting a coupon of 2.00%, which is essentially eroded by inflation, is like picking up pennies up in front of a steamroller because you could get flattened if rates spike. What does that mean for clients with floating rate debt?

You're never going to time the cycle perfectly, just know that - a 2.20% 10 year rate is ridiculously cheap - they would've killed for this low of a fixed rate 5 years ago - the Fed is a notoriously bad forecaster and their forecasts have been poor predictors of eventual policy

Dodd-Frank Implications We have heard from 3 different clients spread out across the country that US Bank has been trying to include language in the Note that allows them to change their base rate if Dodd-Frank materially changes their cost of funds. We havent seen the actual Notes, but heres our understanding that the two clauses look like: Regulatory Change Conversion of Interest Rate Basis of Taxation of Lender (this clause allowed US Bank to charge a 1.65% fee) At least one of these clients walked away from the loan entirely. Calls to US Bank were not immediately returnedprobably because we havent actually called them yet...because we arent real reporters. But we wanted to put it on your radar. Portugal and Spain More Overexposed Than Anthony Daviss Unibrow A few weeks ago we discussed how Greece is now in the rear-view mirror because the panic was really never about Greece, but the other (larger) economies like Portugal, Spain, and Italy. We dug into Portugals dilemma, so lets spend some time on Spain today. Spains unemployment is at 23%, while the unemployment rate for those 25 and under is 51%. 2011 housing starts were down by 94% and new mortgages by 81%. A recent WSJ article cited 1.5mm unfinished, unsold or unwanted residential units stand scattered across the country. If the US currently has about 2.5mm homes for sale and about 6x the population of Spain, that means we would need to have about 15mm homes for sale to match Spains current predicament. Portugal is still likely the next shoe to drop. The Greek CAC changed the rules on the bonds after the fact. As any rational investor would do, this is now being priced into credit spreads for Portugal and Spain. Deposits are shifting away from these countries into German banks, because deposits are guaranteed by the national government, NOT the ECB. Where would you park your money?

On Sunday, two documents from the days meeting of European finance ministers were leaked to the press. The first said that 1 trillion bailout is not enough. "Contagion may ... re-emerge at very short notice, as demonstrated only a few days ago, and re-launch the potentially perverse triangle between sovereign, bank funding risk and growth," one of the analyses, prepared by the EU's economic and finance committee and seen by the Financial Times, said. More from the Financial Times on the second document: "The second document, which was prepared by the Commission, warned bluntly: 'The euro crisis is not over. Many of the underlying imbalances and weaknesses of the economies, banking sectors or sovereign borrowers remain to be addressed.' "The paper argued the elements of the recent restoration of confidence finalising a second Greek bailout, increasing the eurozone's rescue fund, EU-wide bank recapitalisation, new eurozone fiscal discipline rules, and efforts to pass policies to encourage growth must be fully implemented or leaders risk losing their last chance to act. If this window of opportunity is not most effectively used ... we might have missed the last chance for a considerable amount of time,' the analysis said."

LIBOR Outlook More likely to change than Kansas is to win tonight.

Fixed Rate Outlook You saw the thoughts above from TBTIHEK and he and I disagree, but mostly about timing. He believes that Treasurys could spike substantially in the very near future, while I believe that the Eurozone issues should keep a lid on rates for much of 2012. The problem is that if I put $5 down, I would put it on him.

This Week Bond markets are closed on Friday at noon, so if you are locking in a swap or buying a cap this week, it might be best to do it before Thursdays close. Liquidity could be poor on Friday morning. We will still get the important monthly labor data on Friday, Non-Farm Payrolls and the Unemployment Rate. I am rapidly losing faith in these numbers now that Obama will manipulate these to win the election.

On Wednesday, we get the minutes from the last FOMC meeting. Theres hope that perhaps some new insight into QE3 will be revealed, but we doubt it. Bernanke is managing that information flow very tightly. We still believe QE3 to be on the horizon (as does Bill Gross), but that that moderately optimistic data and lack of a European implosion has allowed the Fed to delay this action. We think growing concerns over Portugal and Spain will eventually give the Fed an excuse to initiate QE3 without weak US data. Its not our fault, its Europe! But look at that stock market, would ya? And how about that Obama guy, right?

OK, hopefully were back on track with our normal C+ effort. As for tonights game, Kentucky wins by double digits and then Roger Goodell suspends the NCAA indefinitely for lack of institutional control, then preemptively vacates Caliparis season for the third time. Fool me once, shame on you. Fool me twice, shame on me. Fool me thrice, shame on the NCAA for allowing that guy to coach again. I just hope Anthony Daviss unibrow didnt take his SATs for him.

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ECONOMIC CALENDAR
Economic Data Day Monday Time 10:00AM 10:00AM 10:00AM Tuesday 9:45AM 10:00AM 2:00PM 5:00PM 5:00PM Wednesday 7:00AM 8:15AM 10:00AM Thursday 7:30AM 8:00AM 8:30AM 8:30AM Report Construction Spending (MoM) ISM Manufacturing ISM Prices Paid ISM New York Factory Orders Minutes of FOMC Meeting Total Vehicle Sales Domestic Vehicle Sales MBA Mortgage Applications ADP Employment Change ISM Non-Manufacturing Composite Challenger Job Cuts (YoY) RBC Consumer Outlook Index Initial Jobless Claims Continuing Claims ICSC Chain Store Sales (YoY) Friday 8:30AM 8:30AM 8:30AM 8:30AM 8:30AM 8:30AM 8:30AM 8:30AM 3:00PM Change in Nonfarm Payrolls Change in Private Payrolls Change in Manufacturing Payrolls Avg. Hourly Earning (MoM) Avg. Hourly Earning (YoY) Avg. Weekly Hours Unemployment Rate Underemployment Rate (U6) Consumer Credit $12.000B 205k 221k 21k 0.2% 1.9% 34.5 8.3% 358k 3330k 200k 56.9 14.55mm 11.30mm 15.03mm 11.70mm -2.7% 216k 57.3 2.0% 47.5 359k 3340k 6.7% 227k 233k 31k 0.1% 1.9% 34.5 8.3% 14.9% $17.776B 1.5% Forecast 0.7% 53.0 63.0 Previous -0.1% 52.4 61.5 63.1 -1.0%

Speeches and Events Day Monday Time 10:00AM 12:35PM Tuesday 2:00PM 4:05PM Wednesday Thursday 11:00AM 9:10AM Report Fed's Bullard speaks at Tsinghua University Fed's Pianalto speaks on Monetary Policy Fed Releases Minutes from March 13 FOMC Meeting Fed's Williams speaks on Economy Fed's Williams speaks Fed's Bullard speaks on Economy, Monetary Policy San Diego, CA San Francisco, CA St. Louis, MO Marietta, OH Place

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