Leveling the Playing Field March 25, 2013 _______________________________________________________________________ After submitting my bracket Thursday afternoon, I got a surprise

text. From my bracket. Apparently it has its own data plan and was so frustrated with my losing streak over the last 20 years that it decided to contact me directly with some suggestions.

How bad do you have to be to have a bracket sign a two year contract with a service provider just so it can contact you about your awful picks? The answer: JP bad.

Cypridiotic Simulation As Goldman Sachs pointed out this week, the entire GDP of Cyprus is less than the amount Chinas GDP grows by on a weekly basis. So why does Cyprus matter? Draghi promised to bail out even the peripheral nations at all costs. Ooops The euro experiment takes another hit since the Cyprus government cant turn on the printing presses to monetize their way out of this situation. Is this the straw the breaks the camels euroback? The ECB has approximately $11B in pledged collateral from Cyprus as part of the continuing Eurozone bailout. If the Cyprus government defaults, the ECB just had $11B of collateral wiped out. Geopolitical implications of east vs west with Germany taking backdoor shots at Russia. Would Cyprus leave the euro and align itself with Russia? Property law implications if the government can seize your assets by changing the rules after the game has started, why would anyone leave money in that nation? And if the troika is pulling these strings, which nations, if any, are considered safe havens for deposits in the Eurozone? Germany feels pretty good right now, but would you deposit money in France? ATM withdrawals are now limited to 100, crippling the underground March Madness wagering industry. If Cyprus defaults, there could be a run on peripheral nations, which forces the troika to ramp up LTRO or initiate more drastic measures. Bernanke said Cyprus doesnt represent a threat to the US economy, which confirms that Cyprus represents a threat to the US economy.

In the grand scheme of things, we dont believe Cyprus ultimately matters that much from a market standpoint - it is the principal of it that is so worrisome. Can the ECB be seen as forcing a democratic nation to act like a dictatorship? The bailout is tiny, just $13B. Why is the ECB risking so much market uncertainty over such a small amount? This was probably a test run for the troika, a live simulation if you will. A relatively safe way to see how markets and citizens will react to certain situations in the event they were ever needed for a more economically significant nation. And now they know justifiable market panic and revolt by citizens. The S&P is looking for an excuse to make new all-time highs, and what better reason than a resolution to a crisis? Never mind that we are still worse off than before the crisis, lets focus on the good news and throw an equity party! Watch the S&P break records this week if there is the slightest hint of good news out of Europe. The Senate passed a budget for the first time in nearly four years, but it was largely symbolic. The House will vote it down. And the President plans on introducing his own

budget (finally). This is to set the framework for the negotiations that will take place in the coming months. On the positive side, however, the Senate passed a resolution that should help avoid a government shut-down at the end of the month, which means the debt ceiling should be raised over the summer without a default. Its like giving a kid an allowance and then giving them more money every time they run short before the next week. If you were the kid, would you stop asking for more money? Me neither. LIBOR Outlook Anchored near zero. The threat of a Eurozone nation going bk hasnt caused even the slightest blip here. Probably because it is the most manipulated market index in the world. Fixed Rate Outlook Rates continue to be range bound, with increased intraday volatility. Three months ago the 10 year Treasury rarely moved more than 1-2bps per day, now 5-6bps is a more common fluctuation. The 1.85% - 2.10% range continues to hold in the face of euro news. A collapse in Cyprus may push yields below 1.85%, but we doubt a resolution creates enough confidence for yields to break through 2.10%. Bond markets are usually more cynical than equities, so while the S&P is congratulating itself for breaking new ground, bonds and rates are more likely to be stuck in neutral in the midst of good news. But QE and the FOMCs continued commitment to aggressive intervention has probably kept domestic markets more stable than they would have been under similar circumstances several years ago. Bottom line we would expect the range to hold unless things deteriorate significantly.

This Week Markets are closed Friday for the Easter holiday, so if you need to trade this week it should be done by lunch time on Thursday. Tuesdays Durable Goods release may be the most important number of the week. The consensus forecast is for a gain of 3.9%, but BNPs economist (one of our favorite) is

calling for a gain of 5.3% on the back of a big pick up in Boeing orders. After several months of stronger than expected data, housing may finally hit a slowdown as forecasted by the 4% drop in mortgage applications. Bernanke cited a stronger than expected housing market in last weeks release, but also cited concerns over banks overly restrictive credit. Hey, if were going to inflate your balance sheets, you guys need to start giving back even just a bit to the little guy, ok? Otherwise it looks like were colluding with the banks at the expense of the tax payer. Not coincidentally, the Fed speakers for the week are all dovish members likely to reiterate the Feds commitment to open-ended QE until such time the intervention can be safely withdrawn without risk to a fragile economy. With Europe in a mess right now, Bernanke doesnt want anyone creating concerns about the Feds accommodation policy.

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Economic Calendar

Economic Data Day Monday Time 8:30AM 10:30AM Tuesday 8:30AM 8:30AM 9:00AM 10:00AM 10:00AM 10:00AM Wednesday 7:00AM 10:00AM Thursday 8:30AM 8:30AM 8:30AM 8:30AM 9:45AM 11:00AM Friday 8:30AM 8:30AM 9:55AM Report Chicago Fed Nat Activity Index Dallas Fed Manufacturing Activity Durable Goods Orders Durable Goods Transportation Case-Shiller 20-city Index Richmond Fed Manufacturing Index Consumer Confidence New Home Sales (MoM) MBA Mortgage Applications Pending Home Sales (MoM) Initial Jobless Claims Continuing Claims GDP (QoQ) Personal Consumption Chicago Purchasing Manager Kansas City Fed Manufacturing Activity Personal Income Personal Spending U. of Michigan Confidence -0.4% 340k 3042k 0.5% 2.1% 56.5 -2 0.9% 0.6% 72.8 3.7 3.9% 0.5% 7.80% 6 67.5 -3.9% Forecast Previous -0.32 2.2 -5.2% 1.9% 6.84% 6 69.6 15.6% -7.1% 4.5% 336k 3053k 0.1% 2.1% 56.8 -10 -3.6% 0.2% 71.8

Speeches and Events Day Monday Time 12:15PM 1:15PM Tuesday Wednesday 1:10AM 11:30AM 12:15PM 1:00PM Report Fed's Dudley speaks at Economic Club Fed's Bernanke speaks Fed's Fisher speaks on Economy, Monetary Policy Fed's Rosengren speaks on Economy Fed's Pianalto speaks on Monetary Policy Fed's Kocherlakota speaks on Monetary Policy Place New York, NY London Abu Dhabi Goffstown, NH Cleveland, OH Edina, MN

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