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

com Leveling the Playing Field November 7, 2011 _______________________________________________________________________ A sincere Thank You to all the veterans out there as we approach Veterans Day. If you know a veteran, please thank them for their service and sacrifice. Last year I had the honor of meeting a WWII pilot in Philadelphia and with all the protests on Wall Street recently, I thought his email to me last December was apropos: It was a great honor for me to serve. As a poor Latino kid growing up in San Antonio, TX, I had a dream of being a military pilot. At the time, it required a college education. At Jr. High, I was told to "go to the Vocational School and learn a trade, so you can support a family." But my mother encouraged me to look beyond our current circumstances, and my high school math teacher, Mrs. Edith May, gave me a passion for math and science. In 1942, the Army Air Corps dropped the college requirement, and I passed the tests for Aviation Cadet training. During WWII, I flew 82 combat missions in P- 47 Thunderbolts. During my 26 years of service, I lived my dream, and far beyond! Ray J. Garcia Col. USAF (Ret) Something tells me Colonel Garcia is NOT the 99%. Rates retraced much of the previous weeks movement, with the 10yr Treasury dropping more than 0.25% as investors moved to safety during the European mess. Non-Farm Payrolls came in slightly weaker than expected on Friday, posting an 80k gain last month. But lost in the shuffle was the significantly higher revision from the previous two months reports to show an additional increase of 102k jobs than first reported. The unemployment rate dropped to 9.0%, but more importantly the U6 dropped from 16.5% to 16.2%. This is the most positive report we can recall in recent memory. This isnt the 300k+ job gains per month we need to really bust out of the malaise, but it is consistent with stable labor markets and modest GDP growth. Ron Paul suggested that if elected president, he would nominate James Grant, author of Grants Interest Rate Observer, for Fed Chairman. A very enlightened selection indeed, but I would nominate Les Miles. I absolutely cant stand the guy and his open handed bent finger clap, but facts is facts. I also will go on the record as saying that a 9-6 score

basically guarantees that Bama doesnt get a shot at the title if theres another undefeated team. If I wanted to watch to watch 5 field goals get kicked, Id replay the PSU-Iowa game a few years ago and take a nap. Biggest domestic news right now is the Super Committee (super as in very large, not as in good at what they do) tasked with reducing the federal deficit by $1.4T and the rumors gaining momentum that a $3T-$4T reduction plan is in talks behind closed doors. We were surprised the FOMC statement didnt include more specifics about plans for additional quantitative easing. The Fed slashed its growth forecasts but also acknowledged that growth had strengthened somewhat in the third quarter. They cited labor market weakness as a primary concern and that the moderate pace of growth will only gradually reduce the unemployment rate. Last week we said to expect the FOMC to set the table for QE3 at the December or January meeting, and we still think QE3 is on the horizon. But since they failed to mention it last week, this is more likely a Q1 2012 event.

LIBOR Outlook LIBOR is still waiting for Europe to figure itself out.

Fixed Rate Outlook Be on the lookout for a Super Committee announcement. A dramatic increase in deficit reduction spending (austerity anyone?) could be viewed as negative for stocks and create room for Treasury buying. And I have no idea what the European situation does for our rates at this point. Short term, the way the Europeans are handling everything has created some nervousness and I still think Italy is the fulcrum. This has created a flight to safety mentality. But as the Traders Corner section below highlights, as time passes and Europe doesnt implode, there exists a real chance that rates move substantially higher in short order, particularly before year end.

Traders Corner Weve gotten a lot of positive feedback about the recent commentary from traders we speak with. Apparently you guys like to hear educated viewpoints from time to time. One of the great pillars of my bullish thesis is how well understood and entrenched the bearish bias iseveryone knows 15 reasons why the modern world is on the verge of

collapse. Bull markets are born off the back of that negativity as markets are a discounting mechanism. The Death of Equities Business Week cover (1979) and article came at a time when it was difficult to find many reasons for optimismand yet it marked the absolute bottom. (But) I'm disheartened by how easily we were able to retrace 5% early this week I have less risk on than I had 2 weeks ago. I think the Super Committee's resolution is going to equally important as the daily European ridiculous headlinethe fact of the matter is the US economy has stabilized and is growing (albeit not robustly) and US corporates are thriving and have solid balance sheets. The S&P at 12x next year's earnings is just too cheap (both on an absolute basis and discounted to rates/inflation) and absent an 08 like spiral (which I view as exceedingly over-priced in the market), we're likely to continue to see risk assets appreciate at the expense of fixed income.

This Week Light week for economic data, but quite a bit of Fed-speak. Last weeks lone dissenter, Chicago Fed President Evans, is hosting an annual banking conference and Vice Chair Yellen is the keynote speaker. One of the pieces of data to pay attention to is Fridays consumer confidence. With gas prices ticking higher and unemployment stuck at 9%+, we see little reason for this to be pushing noticeably higher. I recently have become involved with the Wounded Warriors Project, which strives to honor and empower wounded soldiers. I would encourage everyone to visit their website and if youd like to make a donation, heres a link: https://support.woundedwarriorproject.org/Default.aspx?tsid=66&source=BIHONLINE

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ECONOMIC CALENDAR
Economic Data Day Monday Tuesday Wednesday Time 3:00PM 7:30AM 7:00AM 10:00AM Thursday 8:30AM 8:30AM 8:30AM 8:30AM 8:30AM 2:00PM Friday 9:55AM Consumer Credit NFIB Small Business Optimism MBA Mortgage Applications Wholesale Inventories Import Price Index (MoM) Import Price Index (YoY) Trade Balance Initial Jobless Claims Continuing Claims Monthly Budget Statement U. of Michigan Confidence 0.5% 0.2% 12.3% -$46.0B 400k 3680k -$105.0B 61.5 Report Forecast $5.475B 90.0 Previous -$9.501B 88.9 0.2% 0.4% 0.3% 13.4% -$45.6B 402k 3683k -$140.4B 60.9

Speeches and Events Day Monday Tuesday Time 8:40AM 1:00PM 1:30PM Wednesday 9:30AM 12:15PM Thursday 10:40AM 11:00AM 11:45AM 1:00PM 1:00PM Friday 1:15PM 1:15PM 2:45PM Bernanke speaks at Fed Conference on Small Business Fed's Tarullo speaks on Regulation Fed's Evans gives Welcome Remarks at Banking Conference Fed's Liang speaks on Financial Stability Fed's Bernanke speaks to soldiers Fed's Evans introduces ECB Board Member Praet ECB's Praet speaks Fed's Evans introduces Yellen at Banking Conference Fed's Yellen speaks at Banking Conference Fed's Williams speaks on Panel at IMF Conference New York, NY Chicago, IL Chicago, IL El Paso, TX Chicago, IL Chicago, IL Chicago, IL Chicago, IL Rosengren speaks Fed's Kocherlakota speaks Fed's Plosser speaks on Monetary Policy Report Place Boston, MA Sioux Falls, SD Philadelphia, PA

Treasury Issuance Day Tuesday Wednesday Thursday Closing 1:00PM 1:00PM 1:00PM 3 year Treasury 10 year Treasury 30 year Treasury Issues Size $32B $24B $16B