Leveling the Playing Field April 8, 2013 _______________________________________________________________________ Following an April Fools newsletter and spring break at the

beach with consistent rain and 25mph winds, its good to be back. This will be short and sweet since I was out all week, so lets dig in. The big news from last week was Fridays disappointing labor data. The economy added just 88k jobs last month. Although the Unemployment Rate dropped to 7.6%, this was entirely attributable to a stunning 0.2% decline in the participation rate. In other words, roughly 500k people gave up looking for work last month. Had the participation rate held constant, the UR would have ticked up to 7.9%. This brings the three month average down to 168k gain/month from 212k. Construction and retail were among the more disappointing sectors, which probably means the December-February data was inflated by the holidays and Hurricane Sandy rebuilding efforts. Another interesting factor is the delayed retirement among the older workers, which translates into fewer positions down the age demographics, resulting in a very rough employment picture for the 20-25 year old group. The Fed faces an interesting dilemma if the labor force participation rate continues to drive down the UR. At some point, the UR could dip below 7% without the sort of labor force strength this type of improvement would normally imply. Since the Fed has targeted 6.5% as a benchmark for the withdrawal of QE and ZIRP, it may have to amend its language to reflect the disappointing manner in which we approach that UR level. This wont happen anytime soon as we are only seeing drops in UR in .1% increments, but it could pop up in an FOMC statement later this year or early 2014. Lacker indicated on Tuesday that he expects asset purchases (QE) to end later this year or early next year and Williams said in a speech that the Fed could begin to taper purchases this summer. This feels very optimistic to us. There is no way Bernanke risks removing support too soon. He has zero risk of inflation right now, which provides a lot of cover fire to remain patient and prop up the economy for the foreseeable future. The S&P was on the verge of closing at an all-time high on Tuesday, before reversing course and ultimately ending with the worst week of the year. The 10 year Treasury has been firmly entrenched in the 1.85% - 2.10% range, but with last weeks negative run, the 10T closed at 1.71%. So what happens from here? We think (barring some sudden intervention or very strong news), we have established a new range. There is definitely a trend towards lower yields

right now, and we wouldnt be surprised to see the 10T down at 1.50% in the coming weeks. Of course, it could be much worse. We could be Europe, or even Kevin Ware. The total Eurozone UR is 12%, while our friends in Greece are at 27%. The Cyprus Finance Minister resigned while the GDP is forecasted to contract by as much as 13%. Draghi, the eternal optimist, even noted on Thursday that the European outlook is subject to downside risk. And Portugal is now cautioning that a high court struck down some austerity measures, which jeopardizes its bailout package. Oh yeah, and theres that whole thing in North Korea. Nuclear war or something.

LIBOR Outlook Still at 0% and unlikely to move before mid-2015, not counting April Fools pranks.

Fixed Rate Outlook We broke through the 1.85% lower resistance level on the 10yr Treasury, settling at 1.71% on Fridays close after the weak job reports. This suggests a new range on the 10T of approximately 1.50% - 1.75% and we think it could certainly move towards 1.50%. We spoke with a trusted trader about long term rates, Im scared of headlines, weve been reacting so violently. North Korea, Cyprus, BoJthe trend is definitely to lower yields. With Japan, German, and Swiss 10 year yields so low, why arent we lower?

This Week Pretty light week for data ahead, with Fridays retail sales probably being the most significant as it provides some insight into consumer spending and confidence. This also gives markets a chance to focus on other events like the official beginning of earnings season, Obamas budget, and Europe. Bernanke speaks Tuesday and after Fridays disappointing job data, there is little doubt he will use this to reaffirm the FOMCs commitment to its current accommodative stance.

We also have three Treasury auctions beginning Tuesday, and we suspect demand will be very strong with the recent global turmoil. This will further put pressure on yields to move lower. If anyone has free Masters tickets they dont feel like using, send em over. Also, Louisville will win tonight and I will of course not win my bracket. Again.

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Economic Calendar
Economic Data Day Monday Tuesday 7:30AM 10:00AM Wednesday 7:00AM 2:00PM 2:00PM Thursday 8:30AM 8:30AM 8:30AM 8:30AM Friday 8:30AM 8:30AM 8:30AM 8:30AM 8:30AM 8:30AM 9:55AM 10:00AM NFIB Small Business Optimism Wholesale Inventories MBA Mortgage Applications Monthly Budget Statement Fed releases Minutes from March FOMC Meeting Initial Jobless Claims Continuing Claims Import Price Index (MoM) Import Price Index (YoY) Advance Retail Sales Retail Sales less Autos Producer Price Index (MoM) Producer Price Index (YoY) PPI Core (MoM) PPI Core (YoY) U. of Michigan Confidence Business Inventories 360k 3067k -0.5% -1.6% 0.0% 0.1% -0.1% 1.4% 0.2% 1.7% 78.5 0.4% 385k 3063k 1.1% -0.3% 1.1% 1.0% 0.7% 1.7% 0.2% 1.7% 78.6 1.0% -$160.50B 90.5 0.5% 90.8 1.2% -4.0% Time Report Forecast Previous

Speeches and Events Day Monday Time 8:30AM 7:15PM Tuesday Wednesday 9:30AM 2:00PM 5:00PM Thursday Friday 6:00AM 8:45AM 12:30PM Report Fed's Pianalto speaks on the Economy Fed's Bernanke speaks at Atlanta Fed Conference Fed's Lacker speaks Fed releases Minutes from March FOMC Meeting Fed's Fisher speaks on Economy, Monetary Policy Fed's Plosser speaks on Monetary Policy Fed's Rosengren speaks Fed's Bernanke speaks at Conference on Low Income Communities El Paso, TX Hong Kong Boston, MA Place West Palm Beach, FL Atlanta, GA Richmond, VA

Treasury Auctions Day Tuesday Wednesday Thursday Time 1:00PM 1:00PM 1:00PM 3-year Treasury 10-year Treasury 30-year Treasury Report Size $32B $21B $13B