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

com Leveling the Playing Field January 14, 2013 _______________________________________________________________________ Did you miss me? Dont answer that, but please know that I missed you. It feels like forever since our last newsletter. I was out with the flu and then the holidays struck and then two weekends in a row out of town. You might be saying, thank goodness youre back, we need to know your thoughts on interest rates, the Fed, Dodd-Frank, and most notably, AJ McCarrons girlfriend. Lets tackle these in descending order of importance. The Future Ex-Mrs. Conklin If you were like me (which is about 9 notches below Brent Musburger on the creepiness scale), your first thought was Way to go McCarron! If I had a girlfriend that looked like Katherine Webb, I would be showing her off, too. Heck, if I had a girlfriend at all I would be showing her off (subject to certain minimum standards obviously). But then I thought about it some more and think hes really going to regret bringing her to the game. In Alabama, being QB of a back to back national championship winning team effectively makes you a deity. But, with all apologies to Alabama, thats still being a big fish in a little pond. Now that the entire world has seen Ms. Webb, AJs competition is about to get a lot stiffer. NFL players, actors, politicians, derivative consultants, and Mark Cuban will all come calling. I dont know if it was intentional on her part or not, but her career is about to take off. The cover of Maxim Magazine and a reality TV show should be in the works by now. And well be hearing about their break up while she focuses on her career while AJ practices his clipboard holding skills.

Meanwhile, interest rates are generally higher since the resolution (cue feigned surprise) of the fiscal cliff. Now we turn our attention to the more pressing matter of the debt ceiling where an actual default on US obligations is in play. Zhang Monan, researcher at the China Macroeconomic Research Platform: "The US government is now trying to repay old debt by borrowing more; in 2010, average annual debt creation (including debt refinance) moved above $4 trillion, or almost one-quarter of GDP, compared to the pre-crisis average of 8.7% of GDP."

Federal Reserve Last week we heard some cage rattling from the incoming FOMC voters that QE may need to be ended sooner than currently expected. There was some market reaction to this, but dont be fooled Bernankes super majority will remain well intact. In fact, I wouldnt be surprised if Bernanke encouraged the more hawkish members to speak up. Every time the Fed unveils another round of QE, long term rates spike. This is counterintuitive, but heres a great graph from a recent article by Matthew OBrien.

So how does Bernanke continue QE without the associated jump in yields? Perhaps by creating a little uncertainty around the voting process, particularly since the voting composition is changing and it appears on the surface to move the FOMC slightly towards the hawkish side of the equation. Heres a great graph from SocGen on the FOMC voting tendencies.

SocGen: One man, one vote, but some votes are worth more than others. As represented in the picture above (see left column), the annual rotation of voting members will see a replacement of 1 hawk and 3 doves with 2 hawks and 2 doves. It is tempting to conclude that this will change the bias, but we dont think it will have much impact on FOMC decisions. Aside from the fact that moderate doves will be replaced with extreme doves (Evans and Rosengren); the hawkish side of the spectrum will see some softening as well. We may in fact see fewer dissents in 2013. Of the two incoming hawks, we dont expect George to dissent and we are 50/50 on Bullard. And, even if both dissented, this would not alter the outcome. Recall that in 2011 we had three dissents, and it did not stop the Fed from launching operation twist and introducing calendar guidance. Ultimately, it is the votes of the Fed Governors that matter and the Governors tend to always vote with the Chairman and Vice Chair.

Dodd-Frank So far DF has had two immediate impacts: 1. Requiring a Legal Entity Identifier (LEI) from here on out, borrowers will need to pay $200 to register online so the CFTC can track counterparty exposure. The banks will require you to do this before you can lock in a swap. 2. Daily MTM all banks are required to provide daily MTMs. Some will be sending emailsdailyno matter what..without the ability to opt outuntil the swap maturesthank you Barneywhile most will establish an online portal that allows you to access the MTM when you want to. a. Here is the best part they dont have to quote at par! Actual language we have seen: i. The values are for provided for information purposes only. They do not represent the level at which we would enter into or terminate any transaction, and should not be construed as an offer to enter into or terminate any transaction. ii. Please note that any daily mark we provide you may not necessarily: 1. Be a price at which either we or you would agree to replace or terminate the swap 2. Be the value of the swap that is marked on our books and records iii. Various factors potentially relevant to the value of your particular swap may not have been assessed for purposes of this mark, including, for example, the notional amount, credit spreads, underlying volatility, costs of carry, your credit support annex or other credit terms, cost of capital, and profits. iv. This indicative mark is an estimate provided to you pursuant to CFTC Regulation 23.432(d)(2) for informational purposes only. It is indicative as of the date shown only and does not constitute an offer to purchase or sell any instrument or enter into, transfer, assign, or terminate. v. In our sole discretion, we may use a variety of methodologies and inputs to prepare the estimated cashflows described. We are under no obligation to disclose to you any confidential, proprietary information about the methodology used or the inputs thereto. In our sole discretion, we may modify our methodologies or vary the inputs used. Such changes may result in unanticipated and significant changes in the daily mark. vi. The information provided herein was supplied in good faith based on information that we believe, but do not guarantee, to be

accurate or complete; however, we are not responsible for errors or omissions that may occur. Ladies and gentlemen, your Dodd-Frank law!!!

Trillion Dollar Coin No. This doesnt get its own section.

LIBOR Outlook The scandal is gaining momentum! DB, JPM, RBS, etc are all wrapped up in the manipulation scandal and it is (allegedly) clear their traders were profiting from artificially low surveys.

Fixed Rate Outlook As we expected, the resolution of the fiscal cliff led to higher interest rates. And with QEternity in full effect, rates have every excuse to continue higher. But GDP just got revised lower and that pesky debt ceiling debate is looming, so I feel like there is a lid on rates unless we start hearing about progress on the debt ceiling. Which we wont.

This Week A LOT of Fed speeches this week, including the new dovish members to partially offset last weeks hawkish speakers. More importantly, Bernanke speaks at the University of Michigan in his first appearance of 2013.

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
Day Monday Tuesday 8:30AM 8:30AM 8:30AM 8:30AM 8:30AM 8:30AM 8:30AM 10:00AM Wednesday 7:00AM 8:30AM 8:30AM 8:30AM 8:30AM 9:00AM 9:00AM 9:15AM 9:15AM 10:00AM 2:00PM Thursday 8:30AM 8:30AM 8:30AM 8:30AM 10:00AM Friday 9:55AM Empire Manufacturing Advance Retail Sales Retail Sales less Autos Producer Price Index (MoM) Producer Price Index (YoY) PPI Core (MoM) PPI Core (YoY) Business Inventories MBA Mortgage Applications Consumer Price Index (MoM) Consumer Price Index (YoY) CPI Core (MoM) CPI Core (YoY) Total Net TIC Flows Net Long-term TIC Flows Industrial Production Capacity Utilization NAHB Housing Market Index Fed releases Beige Book Initial Jobless Claims Continuing Claims Housing Starts (MoM) Building Permits (MoM) Philadelphia Fed U. of Michigan Confidence 370k 3220k 3.4% 0.4% 6.0 75.0 371k 3109k -3.0% 3.6% 8.1 72.9 0.2% 78.5% 48 0.0% 1.8% 0.2% 1.9% 0.00 0.2% 0.2% -0.1% 1.4% 0.2% 2.1% 0.3% -8.10 0.3% 0.0% -0.8% 1.5% 0.1% 2.2% 0.4% 11.7% -0.3% 1.8% 0.1% 1.9% -$56.7B $1.3B 1.1% 78.4% 47 Time Report Forecast Previous

Speeches and Events Day Monday Time 11:55AM 12:40PM 4:00PM Tuesday 8:00AM 8:50AM 12:30PM Wednesday 8:00AM 2:00PM 7:00PM Thursday 12:05PM Fed's Williams speaks Fed's Lockhart speaks on US Economy Fed's Bernanke speaks Fed's Rosengren speaks on Economic Outlook Fed's Kocherlakota speaks on Policy Fed's Plosser speaks on Economic Outlook Fed's Kocherlakota speaks on Policy Fed releases Beige Book Fed's Fisher speaks on Banks Fed's Lockhart speaks at Bloomberg Global Markets Summit Washington, DC Report Place Half Moon Bay, CA Atlanta, GA Ann Arbor, MI Providence, RI Golden Valley, MN Rochester, NY Eden Prairie, MN

Treasury Auctions Day Time Report Size