Weekly Market Update

Robert Davies, Patersons Securities

Follow me on Twitter @davies_robert

30/07/2012 4:01:37 PM Page 1 of 4

Weekly Overview
Week ending 27 July 2012

Debt problems in Spain continue to pour gasoline on the European debt pile. High unemployment, high debt levels, and an inability of the government to spend its way out of their problems is a nasty mix. Expect more volatility in the market from Europe over the next six months. A drought in the American Midwest is hitting primary producers very hard. Its estimated that up to 1/3 of the US corn crop could be damaged along with other commodities. Expect higher food prices worldwide as US corn is a primary component of both food production and livestock feed. This should be a boom for Australian primary producers The war in Syria continues between the government and the Saudi/American backed rebels. It will be interesting to see how the Saudis establish a democratic government in Syria if they win. They will likely model the new government on the strong democratic principles that already exist in Saudi Arabia today. Greece is negotiating with the Troika (IMF, EU, ECB) for the third and final tranche of their bailout funds. The new government will have to sell off a significant amount of assets along with cost cuts before any moneys are transferred. Watch this space. Tony Abbott warned the Chinese that the Liberal Party may take a dim view of Chinese government owned institutions buying up Australian business. He has a preference for commercial arrangements and joint ventures over foreign government controlled assets in Australia. Chinese investment in Australian property and mining is growing substantially with property development now an area of focus. Sanford Weill, the creator of the mega bank while CEO of Citigroup, came out and said he was for breaking up the big banks and re-instituting Glass-Steagal type legislation. This is quite a remarkable turnabout from the creator of Too Big Too Fail banks. Many other top bankers have repeated this call. While they arent necessarily admitting the big bank mantra failed (it did), they are saying the political environment is too vitriolic for the banks to remain the way they are. The next Fed meeting on August 1st is likely to result in extensions to the date the fed has declared that interest rates will stay low until. Expect them to move from 2014 to 2015. The Re-monetisation of Gold is being discussed at various levels of monetary regulators. The Federal Reserve recently put out a discussion paper to move Gold to Tier 1 asset status (vs Tier 3 currently). Tier 3 assets take a capital charge while Tier 1 assets dont. What this means is that banks holding gold will instantly have more capital, and in times of stress, banks would be sellers of assets that have a capital charge. If this change comes through, gold will get substantially rerated in the global asset pool. (Business Insider) Chg (week)
0.1% 1.7% -1.8% 0.0% 6.0% 2.5% -0.7% -1.6% -4.1% -1.0% 1.0% 0.8% 0.1%

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

27 July
4,234 1,386 2,129 3.50% 1.55% 1,623 343 90 5.6% 82.66 1.048 1.230 6.381

Chg (ytd)
3.0% 10.2% -3.2% -17.6% -17.6% 3.8% -0.3% -8.8% -12.2% 3.0% 2.6% -5.0% 1.3%
Outperforming with weak currency

Up 6% vs last week, significant move Up, but must break $1650 to clearly reverse downtrend Stabilising Weaker in the past few weeks Very Strong Weak YTD US Fed not happy with weak CNY

Weekly Market Update

Robert Davies, Patersons Securities
Follow me on Twitter @davies_robert

30/07/2012 4:01:37 PM Page 2 of 4

Economy
US Initial Jobless claims rose to 386k last week versus consensus of 365k. Prior week 350k (Markit Economics) Greek tourism receipts fell -13.9% year-on-year in May. In first 5 months of 2012, receipts down 12% to 1.48 billion euros (Markit Economics) Euro area consumer confidence index at -21.6 in Jul, from -19.8 in Jun, lowest since Aug 2009 (Markit Economics) HSBC flash China Manufacturing PMI rises from 48.2 to 49.5 in Jul, 5-month high. But also shows manufacturing employment falling at sharpest rate in 40 months. (Markit Economics) German flash manufacturing PMI at 43.3 was more than a full point lower than the lowest forecast (44.5) from 32 economists (Reuters) French manufacturing PMI - actual 43.6, lowest forecast was 44.0 (Reuters) US Richmond Fed Composite Index plunges to -17, compared to expectations of a rise to -1 lowest print since Apr 2009 (Markit Economics) UK economy contracted by -0.7% on an quarterly basis in the second quarter (Markit Economics) New US single-family home sales fall in June by the most in more than a year. Downward trend suggests setback for housing market recovery (Sky News Business) US economy expanded at an annualised rate of 1.5% in Q2, in line with Reuters forecast (Markit Economics)

Technically Speaking (All Ords Index)

Since the market dropped heavily in early May we have been climbing the wall of worry slowly. . We are now just over the pivot point of 4200, in between the established yearlong trading range of 4000-4400. We are also pushing up against the 100 day moving average (black line) at 4270 this morning. Fundamentally, I havent seen much that would countenance a change in the markets overall downward bias. My neutral to negative outlook remains. Selected selling at the top of trading ranges remains a preferred strategy. As does continuing to accumulate high quality blue chip shares which pay high(ish) dividends.

Weekly Market Update

Robert Davies, Patersons Securities
Follow me on Twitter @davies_robert

30/07/2012 4:01:37 PM Page 3 of 4

Weekly Stockwatch
Gold has held up well over the last 12 months as other assets have been sold down. Performance from July 2011 to June 2012 as follows
Spot Gold Price Spot Gold Price, Australian Dollars Equity Market Performance, AllOrds Equity Market Performance, S&P500 Aust Equity Index, Gold Miners US$1,599, up 5.6% A$1,558, up 11.3% Down 11.2% Up 3.1% Down 33%

There seems to be a significant market arbitrage between performance of the Gold miners and the Gold price. Its worthwhile to look at this and see where we stand. See the chart of the Gold Miners index below. In 2008 during the GFC in the USA, the Gold miners had a correction of about 50% from peak to trough (about 6000 to 3000). The correction this past year, which looks largely driven by almost equivalent turmoil in Europe, has been about 37% (8000 down to 5000). In 2008, the Australian dollar Gold price kept increasing through the GFC, as it is doing now. A repeat performance and snapback of the gold miners looks a likely scenario as history repeats itself. The trickly bit is of course, at what point do you buy gold miners.

Chart of the Week

The Dividend yields on Australian stocks continue to grow as you can see from the chart published by the Reserve Bank of Australia below We are now sitting with yields at levels seen only three times in the past 25 years. You will notice that the other times yields were this high was during times of substantial equity market turmoil (1987 and 2008). While there is always potential for another market collapse. With yields over 5.5%, reality is that high quality income stocks are exceptional value here.

Weekly Market Update

Robert Davies, Patersons Securities
Follow me on Twitter @davies_robert

30/07/2012 4:01:37 PM Page 4 of 4