The Pensford Letter - 7.22.13

Leveling the Playing Field July 22, 2013 _______________________________________________________________________ With Detroit declaring bankruptcy on Friday, we expect Moodys
and S&P to downgrade the city within the next year or so. Moodys, always priding itself on being ahead of the curve, upgraded the US rating to stable. Meanwhile, equities responded by sending the Dow and the S&P 500 to all-time highs. The 10yr Treasury has a more benign trading week, starting week at 2.54% and ending it at 2.49%. The other big headlines were primarily generated by Bernanke during multiple speeches. As expected, he took the opportunity to help settle markets. He committed to keeping QE in place as long as needed, reiterating that "If the outlook for employment were to become relatively less favorable, if inflation did not appear to be moving back toward 2%, or if financial conditions--which have tightened recently--were judged to be insufficiently accommodative to allow us to attain our mandated objectives, the current pace of purchases could be maintained for longer." He also added that its way too early to make a tapering call. We continue to believe that December is the most likely beginning of tapering, but economists and traders we trust are suggesting September as the most likely start of tapering. Adding to the confusion is that all signs of tapering align with the end of Bernankes tenure in January 2014. How will the succession plan fit into the overall timing of the withdrawal? How will the nomination process fit into the timing? Markets are expecting Vice Chairman Janet Yellen, would a surprise nomination spook markets? All of these questions, and Obamas remarks a few weeks ago, could potentially lead to the resignation of Bernanke and the early nomination of a new Fed Chairman. We dont view this as likely, but it cannot be ruled out.
Eric King put together some interesting graphs that draw alarming parallels between the current economy and the one we all remember so fondly in 2007. Credit bubble time
Detroit Detroit declared bankruptcy on Friday, but a judge issued an emergency injunction. Detroit has $18B in debt with more than 100,000 creditors, 20,000 retirees and 10,000 current employees. I so closely associate Detroit and the automakers that when I asked myself, What about that $80B bailout? I failed to realize that Ford and GM can being doing just fine while the city itself goes under. Flashback time. October 13, 2012, President Obama says we refuse to let Detroit go bankrupt. Just like when Tim Geithner assured us that the US would never be downgraded. Perhaps the only politician making any sense right now is Detroit Mayor Bing, who said We may be one of the first. We are the largest. But we will absolutely not be the last. And so we have got to set benchmark in terms how to fix our cities. Maybe since the government bailed out the automakers, theyll bail out Detroit? Bing was asked if hell seek a Fed bailout and he responded with, not yet. Michigan governor Snyder indicated, if the federal government wants to [bail us out], thats their option. "Everyone will say, 'Oh well, it's Detroit. I thought it was already in bankruptcy,' said Michigan State University economist Eric Scorsone. "But Detroit is not unique. It's the same in Chicago and New York and San Diego and San Jose. It's a lot of major cities in this country. They may not be as extreme as Detroit, but a lot of them face the same problems." Which cities might be next? One potential clue could be in population loss. Here are two graphs that illustrate the greatest population loss among US cities over the last 70 years. Detroit, whose population has shrunk from over 2mm to 700k and whose automaker manufacturing jobs has declined from 300k+ to just 27k, is #1 in total population loss and #2 in percentage population lost. This obviously casts a very broad and general net, but its no coincidence that most of the cities in these graphs are northern/Midwestern manufacturing towns.
LIBOR Bernanke did reiterate that tapering is not the same as tightening. Tapering is the gradual reduction in bond purchases from the current monthly level of $85B. Alternatively, the Feds commitment to keeping short term interest rates at or near zero will continue until at least mid-2015. LIBOR should remain low for the foreseeable future, although the transition to the next Fed Chair could muddy the waters on this front.
Fixed Rates Still range-bound. We will be surprised if rates break out one way or the other substantially from 2.50% - 2.80% before we have greater clarity around tapering. The bias remains towards higher rates, particularly with the 10yr currently trading at the bottom end of the range.
This Week Much calmer week, with no scheduled Fed speeches. With the usual Treasury auctions and a light slate of data, we may see a sleepy week.
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 10:00AM Tuesday 9:00AM 10:00AM Wednesday 7:00AM 10:00AM Thursday 8:30AM 8:30AM 8:30AM 8:30AM 11:00AM Friday 9:55AM Report Chicago Fed National Activity Index Existing Home Sales (MoM) House Price Index (MoM) Richmond Fed Manufacturing Index MBA Mortgage Applications New Home Sales (MoM) Initial Jobless Claims Continuing Claims Durable Goods Orders Durables ex Transportation Kansas City Fed Manufacturing Activity University of Michigan Confidence 1.9% 340k 3022k 1.2% 0.5% 2 84.0 Forecast 0.00 1.7% 0.8% 9 Previous -0.30 4.2% 0.7% 8 -2.6% 2.1% 334k 3114k 3.6% 0.7% -5 83.9
Speeches and Events Day Time Report Place
Treasury Auctions Day Tuesday Wednesday Thursday Time 1:00PM 1:00PM 1:00PM 2-year Treasury 5-year Treasury 7-year Treasury Report Size $35B $35B $29B

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Leveling the Playing Field July 22, 2013 _______________________________________________________________________ With Detroit declaring bankruptcy on Friday, we expect Moodys

Speeches and Events Day Time Report Place

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