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Leveling the Playing Field

September 16, 2013

_______________________________________________________________________ Dear Mr President After much behind the scenes negotiation and backstabbing, it has become abundantly clear that the nation is not yet ready for my genius. Although you can strike Syria without Congressional approval, you cant do the same with the next Fed Chair position. Since I have spent the majority of my career intentionally belittling these peons, I must acknowledge that they will not confirm me as the next Fed Chairman. Ironically, this only confirms their stupidity and reinforces what I have been saying all these years. What your administration needs now more than anything is a win. And while Janet Yellen may never be asked to host a Mensa meeting, she the next safest thing to betting on whoever the Panthers are playing. If you are still in office when this ridiculous inflation check comes due, please dont hesitate to call on me for my wisdom. Best of luck with that Yellen lady - see you on the speaking circuit in a few. XOXOXO, Larry Summers (If youre keeping track at home, that makes it JP: 1, Market Consensus: 859.) Before you say even a broken clock is right twice a day, just know that after a weekend of watching my teams get taken to the woodshed, I will take any little win I can get. For example... The Eagles cant tackle. Its a scientific fact. And my anger that grew while watching them blow an easily winnable game drove me to check my work emails on Sunday afternoon. And what did I find? This little headline: Larry Summers Withdrawals from Fed Chairman Race. Well, duh!!! JPs first win of the weekend! Weve been saying all along that Summers wouldnt be the nomination. He has upset way too many people to pass a confirmation hearing. The Fed is in the midst of tapering the massive quantitative easing policy under Bernanke at the very same moment he is stepping down as Chairman. Yellen is Bernanke 2.0 - and this reassures markets. She has been the most logical choice for as long as weve been on Fed -watch and we suspect her nomination will be forthcoming shortly.

Since Summers was generally regarded as more hawkish (exit QE sooner, raise rates faster, etc), this should put downward pressure on interest rates in the near term;

however, any move is likely limited by Wednesdays FOMC meeting. Why bet the farm on Treasury yields going down when the Fed could announce tapering Wednesday? Which leads us to the original focus of this week... To Taper or Not To Taper, That Is The Question The FOMC meets Wednesday and if youve been reading our newsletter for any amount of time, weve been at direct odds with market consensus on both the Fed nomination and tapering. Between the two, we felt more strongly that Summers would not be the nominee. It seemed borderline absurd that he was considered the leading candidate. The tapering issue is more challenging, but we still believe the Fed will not announce a formal start to tapering at Wednesdays meeting. To be very clear, we are the outlier here. Everyone from my dog Lucky to my grandmother knows the Fed is going to begin tapering this week...but were still not buying it. The Fed first seriously discussed tapering in May, and since then the 10 year Treasury yield is up 1.00%. This caught the Fed off guard (Bernanke has admitted as much) and made them rethink the use of Fed-speak around tapering. Other than one Fed non-voting member that has publicly discussed tapering beginning this week, what signals has the Fed been sending us? Nothing. This is a Fed that has prided itself on transparency and signaling and yet the voting members have been remarkably silent. After the fallout from the May commentary that caused yields to spike, wouldnt the Fed being going above and beyond to make it abundantly clear that it is reducing monthly asset purchases on Wednesday? But it hasnt. What it has done is consistently reiterate any change to Fed policy will be data-dependent. Did the jobs report come in gangbusters? Nope. The official unemployment is falling because people have quit looking for jobs, so they stop being counted. Inflation is probably a threat though, right? Not really, with the underlying inflation rate around 1.7%. The surge in Treasury yields caused a substantial slowdown in home purchases. Stocks are basically at the same level as they were in May when tapering was first mentioned. GDP improved, but only to 2.5% and the full impact of the sequester has yet to be felt. Weve got a debt ceiling debate, budget battle, a tense situation with Syria and Fed Chairperson nomination/confirmation looming in the coming weeks. Bernanke has tried to reassure markets that tapering is more akin to taking the foot off the accelerator rather than slamming on the brakes. He has tried to explain that buying a smaller amount of bonds each month means the pace of monetary accommodation is slowing, but that is not nearly the same as tightening. The market didnt see eye to eye with him on this fact and reacted as if tapering = tightening. The market isnt stupid, it understood what Bernanke was saying, but investors have to be forward looking. And the surest sign that tightening is out there someday is to begin to slow the pace of accommodative policy today.

Heres What Happens Perhaps our greatest strength is our complete disregard for embarrassing ourselves by making calls that contradict the market. The Fed will not taper because: - economic data has not been strong enough - the 1.00% spike in interest rates has cooled mortgages and CMBS - Fed Chair transition - Debt ceiling debate and possible governmental shut down - Budget debate - Sequester impact - Bernanke/Yellen Fed errs on the side of caution - Middle East tensions - German elections - Stocks like QE, and Bernanke likes stocks setting all-time highs on his watch Heres What The FOMC Will Say - The Fed will remain committed to accommodative policy, citing data dependence - The 7.0% Unemployment Rate threshold to end QE will be modified, possibly to 6.5% or removed entirely - The 6.5% Unemployment Rate threshold for ZIRP will be modified or removed entirely, providing forward guidance that reinforces the Feds intentions of keep ing Fed Funds (and thereby LIBOR) at or near 0% as long as inflation remains below its 2% target How Interest Rates Respond - downward pressure on interest rates, possibly pushing the 10 year Treasury towards the low end of the range, approximately 2.75%.

JP Is Wrong A Lot, So Make Other Preparations, aka Market Consensus - The FOMC tapers, albeit it less than the consensus $20B reduction currently priced into expectations. We think $10B-$15B max with a commitment to monitor future reductions and adjust as necessary. - Any reduction in purchases is likely to be just Treasurys, trying to mitigate the impact on mortgages - Extended forward guidance on Fed Funds, helping to offset the fear that tapering = tightening

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 Time 8:30AM 9:15AM 9:15AM Tuesday 8:30AM 8:30AM 8:30AM 8:30AM 9:00AM 9:00AM 10:00AM Wednesday 7:00AM 8:30AM 8:30AM 2:00PM Thursday 8:30AM 8:30AM 10:00AM 10:00AM Friday Report Empire Manufacturing Industrial Production Capacity Utilization Consumer Price Index (MoM) Consumer Price Index (YoY) Core CPI (MoM) Core CPI (YoY) Total Net TIC Flows Net Long-term TIC Flows NAHB Housing Market Index MBA Applications Housing Starts (MoM) Building Permits (MoM) FOMC Rate Decision Initial Jobless Claims Continuing Claims Philadelphia Fed Existing Home Sales (MoM) 2.7% -0.4% 0.25% 330k 2900k 10.5 -2.6% -$15.0B 58 Forecast 9.00 0.4% 77.9% 0.2% 1.6% 0.2% 1.8% Previous 8.24 0.0% 77.6% 0.2% 2.0% 0.2% 1.7% -$19.0B -$66.9B 59 -13.5% 5.9% 2.7% 0.25% 292k 2871k 9.3 6.5%

Speeches and Events Day Wednesday Time 2:00PM 2:00PM 2:30PM Friday 12:30PM 12:40PM 12:55PM 1:45PM FOMC Rate Decision Fed releases Summary of Economic Projections Fed's Bernanke holds Press Conference Fed's George speaks on Economy Fed's Tarullo speaks on Regulation Fed's Bullard speaks on Economy and Monetary Policy Fed's Kocherlakota speaks Washington, DC New York, NY New Haven, CT New York, NY New York, NY Report Place

Treasury Auctions Day Time Report Size