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Weekly Market Update

Robert Davies, Patersons Securities


Follow me on Twitter @davies_robert

8/10/2012 11:19:23 AM Page 1 of 4

Weekly Commentary
Week ending 5 October 2012

End 2011
All Ords Index S&P 500 Shanghai RBA Cash Rate US Treasury Bond (10yr) Spot Gold Price Copper, spot Oil WTI Oil/Gold Ratio USD Index AUDUSD EURUSD USDCNY 4,111 1,258 2,199 4.25% 1.88% 1,563 344 99 6.3% 80.23 1.022 1.294 6.299

5 Oct 2012
4,513 1,461 2,086 3.25% 1.75% 1,780 378 90 5.0% 80 1.03 1.30 6.32

Chg (week)
2.4% 1.4% 0.0% -7.1% 6.9% 0.5% 0.5% -2.6% -3.0% -0.3% -0.5% 1.1% 0.6%

Chg (ytd)
9.8% 16.1% -5.1% -23.5% -6.9% 13.9% 10.0% -9.1% -20.1% -0.7% 1.1% 0.4% 0.4%
Breakout through 4400 Stellar gains for the Year Poorly performing RBA is stimulating economy Yields look to be going higher Gold has gained between 10-20% annually for the last 10 years. Holding Weak, supply is in surplus Gold expensive or Oil is cheap QE3 to keep USD under pressure Firmly above parity for most of the year Euro is strong Yuan steady

The All Ordinaries (XAO) was supported last week as the Reserve Bank of Australia (RBA) lowered interest rates 25bp to 3.25%. Scope exists for further rate moves down into 2013, which should assist stocks paying high dividends such as Telstra. If China and the global economy remain under growth pressure the RBAs rates could continue to track down reducing offshore interest rate differentials, and reducing yield returns on bank term deposits, australian government bonds, and potentially placing pressure on the Australian dollar going forward. Approximately 80% of Australian issued government bonds are owned by offshore parties who could pull money out of Australia in future if offshore rate differentials continue to close up and if the China/Commodity story does not improve into 2013. Such a scenario would likely see a big drop in the A$. I have noted previously it is possible to take up hedging options against a fall in the A$ from such a scenario (up to a maximum of 5% of superannuation portfolios) via ETFs such as Australian dollar gold exposures such as GOLD.ASX. The US jobless rate fell to 7.8% last week. This is the first time the unemployment rate has been under 8% for a considerable period of time. Im not expecting any earth shatteringly bad economic statistics from the USA from now until the middle of November when the election has been finished. Only 1 month and $1b of TV advertising to go. The Euro continues to hold firm while the European politicians and central bankers slowly fix their internal problems. Greece looks to be staying in the Euro, now Spains regional government area around the city of Barcelona is making noises about exiting Spain. Looks like a political gambit to maintain state sudsidies. Eurozone unemployment is at 11.4%, with purchasing managers indexs all under 50. Still a long way to go before Europe turns the economic corner. The transition to new leadership in China will now occur in November. This is a more significant event than US presidential elections as it only happens once every 10 years (US elections every 4 years) The RBA cut interest rates last week by 25 bps to 3.25%. This is 25bps away from the GFC emergency levels. Although nobody in government seems to be panicking now, surely savers arent happy that they have to continue subsidising banks and borrowers. Low interest rates result in capital misallocation as businesss and individuals make long term borrowing and investing decisions based on interest rates that are unsustainably low. The Australian trade deficit blew out to its widest in 3 years as falling prices for iron ore and coal eroded export earnings. The Carlyle Group (Washington DCs ultimate insider) purchased a 55% stake in Vermillion, a commodities investment manager with 2.2 billion of assets under management. If insiders are paying cash for commodities firms then I take notice and my inflationary expectations increase.

Weekly Market Update


Robert Davies, Patersons Securities
Follow me on Twitter @davies_robert

8/10/2012 11:19:23 AM Page 2 of 4

Economy
From Markit Economics HSBC Taiwan Manufacturing PMI slips to 45.6, new export orders down at the fastest clip in 10 months. Index below 50 represents manufacturing in contraction, over 50 is expansion Vietnam PMI at 49.2 in September Indonesian PMI at 50.5, India at 52.8 European PMI Poland 47.0, Spain 44.5, Italy 42.7, Germany 47.4, Greece 42.2, Ireland 51.8, France 42.7, Austria 45.1 Other PMI Canada 52.4, UK construction PMI 49.5, German new car registrations -11% on year Russian services PMI 54.5, Composite PMI 54.3 US Factory orders -5.2% m/m in August. Biggest drop since January 2009. German factory orders slide 1.3% in August

Investment Strategy
Last week I wrote The market continues to trade sideways around the 4400 level. This is an almost unprecedented length of time that the market has been unable to break this level without a significant correction. In the last two years, we have hit this level more than 10 times without a breakthrough. Truly remarkable. This weeks comment The market has now moved convincingly through 4400 and is on the verge of breaking out to the upside. The inflationary policies of northern hemisphere central banks and low interest rate policy by the RBA is having a supportive effect on markets. This could continue for a considerable period of time. Consideration should be given to adjusting portfolios towards an inflationary economic outcome (away from cash).

Weekly Market Update


Robert Davies, Patersons Securities
Follow me on Twitter @davies_robert

8/10/2012 11:19:23 AM Page 3 of 4

Weekly Stockwatch
BHP has held support at $30, see 10 year chart below. Trying to anticipate central bank monetary policies is a difficult business. However, with the equity market moving to the upside, the signal for inflationary expectations increasing is growing stronger. BHP is the worlds largest commodity/resources company and a good inflation hedge.
BHP.ASX@AUX: 11:17:20: 33.4, 33.43, 33.21, 33.25 MA (BHP.ASX@AUX): 200 38.0731, 35 33.2331, 10 32.917 50 45 40 35

30 25 20 15

10

Vol (BHP.ASX@AUX):

2232.388T

200M 0 RSI (100.000000): 14 50.7162 90 60 30 O J 2002 A J O J A 2004 J O J A 2005 J O J A 2006 J O J A 2007 J O J A 2008 J O J A 2009 J O J A 2010 J O J A 2011 J O J A 2012 J O

Chart of the Week


A generational low is forming in the percentage of assets held by Australian households in the sharemarket, see chart 3.4 from the RBA. This chart alone will at some point indicate a massive buying opportunity in equities. The question is when will it turn and money starts flowing back into equities. One year? Five years? Or 20 years?

Weekly Market Update


Robert Davies, Patersons Securities
Follow me on Twitter @davies_robert

8/10/2012 11:19:23 AM Page 4 of 4

An interesting chart on the cost of cigarettes compared to average wages on a global basis. Leave it to the cigarette companies to come up with a ratio to show how cheap they are (USA) to justify their profits and existence.

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