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

com Leveling the Playing Field March 12, 2012 _______________________________________________________________________

January 29, 2010 "Restructuring is not going to happen. There are much broader implications for the eurozone should Greece have to restructure its debt. People fail to see the costs to both Greece and the eurozone of a restructuring: the cost to its citizens, the cost to its access to markets. If Greece restructures, why on earth would people invest in other peripheral economies? It would be a fundamental break to the unity of the eurozone." George Papaconstantinou, former Greek Finance Minister. Unfortunately, his batting average is about to improve from 0 to .500. Greek Update Total participation in the Greek PSI came in at 83.7%, meaning this percentage of bond holders voluntarily tendered their Greek bonds, figuring this would be the best deal they could hope for. By hitting certain benchmark participation rates, this allowed Greece to activate the Collective Action Clauses (CACs I just heard a collective giggle from Boston) and effectively force these restructuring terms upon all bondholders. You may recall that Greece retroactively added these CACs to its bond contracts a few weeks ago. Thats right, somehow lost in all of this is the fact that a government changed the rules on an existing contract to suit itself at the expense of the investor. Imminent domain indeed. How do investors price this in going forward? Maybe AAA sovereigns price the same, but will peripheral nations see a widening in pricing? There are 5 different pools of bonds with varying degrees of participation; however, the CAC activation in one of these pools will bring total participation across all pools north of 90% (again, this would not have happened without the retroactive addition of the CACs), which is the threshold needed to meet the conditions of the second 130 billion bailout. It also eliminates about 100 billion of Greek debt. It gets better. Banks that buy the New Fresh Start Greek bonds for effectively pennies on the euro can immediately turn around and repo these bonds to the ECB for cash assuming 100 cents! Another creative tactic to provide bailout proceeds to struggling banks without calling it a bailout.

Bondholders stand to lose as much as 75% off the face amount, which is comprised of a 53.3% writedown and interest rate loss from exchanging the bonds for lower paying securities. On the flip side, ISDA changed its mind and said this constitutes a credit event, meaning owners of Greek CDS should be paid out. CDS in Greek debt only has total net exposure of about $3.2B, so we suspect ISDA figured hey, lets save our bullets for a more important battle (Portugal, Spain, or Italy) and call this a default. Because had ISDA not called this a default, they would have less legitimacy than John Calipari speaking on ethics.

Ladies and Gentlemen, IntroducingPORTUGAL! Lets be honest here, this was never really about Greece. Sure, this keeps the wheels spinning and avoids payment default in a few weeks, but is anything really resolved? The Greek economy has shrunk by 20% in the last 4 years. Unemployment is 21% and youth unemployment is 51%, double what it was in 2007. And lets not forget that we were assured the first bailout package 18 months ago was supposed to be the only bailout package. But Greece is a tiny economy by all measures except number of letters used to spell This was really more about Portugal and other peripheral countries, which will likely be facing similar default conditions later this year. One year ago, Greek 5yr yields were about 12% and now they are north of 50%. One year ago, Portuguese 5yr bonds were yielding 6% and now they are yielding 20%. Where will they be this time next year? This is also about Spain and Italy, which arent far behind. Spains economy is about 5x larger than Greeces, while Italy is about 7x larger and has the 3rd largest bond market in the world. Also, dont be surprised to hear more calls from Germany to amend the EUs Lisbon Treaty to provide greater regional oversight. If they are going to serve as the backstop for the entire Eurozone, they want more power in disciplining countries that fail to exhibit fiscal responsibility. This will not be the end of the Eurozone debt crisis. As you may recall, the Bear Stearns subprime hedge fund collapsed in June 2007, a full year before the worst of the meltdown occurred. European banks are leveraged 30:1, more than 2x US banks.

Job Reports Headline job growth came in as expected, with a gain of 227k jobs last month. The unemployment rate held steady at 8.3% while the real unemployment rate (U6) fell

from 15.1% to 14.9%. Last months reports were also revised higher, showing a gain of 284k jobs. The unemployment was unchanged because the labor force participation rate increased from 63.7% to 63.9% as previously discouraged workers returned to the job search market. Overall, this is certainly encouraging news that the labor market is adding 200k + jobs per month, but keep in mind we really need to be adding between 300k 400k per month to put a real dent in the unemployment rate. Our conclusion is that hiring is improving at a steady pace. Heres a graph that compares this hiring cycle vs previous cycles following a recession. The current environment trails the historical average trend (and even the Great Depression), but looks to be on a similar trajectory as the recovery after the 2001 recession.

LIBOR Outlook Heels crush Dook by 18 and I cant even celebrate in this weeks newsletter because we blow the conference championship against the Seminoles.

Fixed Rate Outlook Very range bound still, but Goldman Sachs is calling for the 10yr Treasury hitting 2.50% by summer. This probably means their traders are going the other way.

This Week FOMC meeting on Tuesday should be a non-event. Nothing has occurred to change their commitment to low rates through 2014. This statement will probably be very similar to the last one and the Fed will just keep an eye on data trends in the coming months to determine if changing conditions warrant a revision to forecasts. The Fed is also subtly leaking hints that the bank stress test results will reveal higher mortgage and credit card losses than the banks themselves have been projecting. There have been 12 bank failures YTD, with GA leading the way.

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ECONOMIC CALENDAR
Economic Data Day Monday Tuesday Time 2:00PM 7:30AM 8:30AM 8:30AM 8:30AM 10:00AM 10:00AM 2:15PM Wednesday 7:00AM 8:30AM 8:30AM Thursday 8:30AM 8:30AM 8:30AM 8:30AM 8:30AM 8:30AM 8:30AM 10:00AM Friday 8:30AM 8:30AM 8:30AM 8:30AM 9:15AM 9:15AM 9:55AM Report Monthly Budget Statement NFIB Small Business Optimism Advance Retail Sales Retail Sales less Autos Retail Sales ex Auto & Gas IBD/TIPP Economic Optimism Business Inventories FOMC Rate Decision MBA Mortgage Applications Import Price Index (MoM) Import Price Index (YoY) Initial Jobless Claims Continuing Claims Producer Price Index (MoM) Producer Price Index (YoY) PPI Core (MoM) PPI Core (YoY) Empire Manufacturing Philadelphia Fed. Consumer Price Index (MoM) Consumer Price Index (YoY) CPI Core (MoM) CPI Core (YoY) Industrial Production Capacity Utilization U. of Michigan Confidence 0.6% 6.0% 355k 3408k 0.5% 3.2% 0.2% 2.9% 17.50 11.3 0.4% 2.9% 0.2% 2.2% 0.4% 78.8% 75.8 Forecast -$229.0B 94.3 1.0% 1.2% 0.5% 50.2 0.6% 0.25% Previous -$222.5B 93.9 0.4% 0.7% 0.5% 49.4 0.4% 0.25% -1.2% 0.3% 7.1% 362k 3416k 0.1% 4.1% 0.4% 3.0% 19.53 10.2 0.2% 2.9% 0.2% 2.3% 0.0% 78.5% 75.3

Speeches and Events Day Tuesday Wednesday Friday Time 12:00PM 9:00AM 3:00PM FOMC Rate Decision Fed's Bernanke speaks to Community Bankers Fed's Evans speaks on Monetary Policy Nashville, TN Frankfurt, Germany Report Place

Treasury Auctions Day Monday Tuesday Wednesday Closing 1:00PM 1:00PM 1:00PM 3 year Treasury 10 year Treasury 30 Year Treasury Issues Size $32B $21B $13B