Weekly Market Update

Robert Davies, Patersons Securities

Follow me on Twitter @davies_robert

24/09/2012 11:20:25 AM Page 1 of 4

Weekly Overview
Week ending 21 September 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

21 Sept 2012
4,430 1,460 2,026 3.50% 1.76% 1,772 379 92 5.2% 79.34 1.046 1.298 6.310

Chg (week)
0.5% -0.3% -4.6% 0.0% -6.3% 0.1% -1.0% -6.8% -6.9% 0.6% -0.9% -0.1% -0.2%

Chg (ytd)
7.8% 16.1% -7.9% -17.6% -6.6% 13.4% 10.3% -6.6% -17.6% -1.1% 2.3% 0.3% 0.2%
US QE helping our market push 4400 QE pushing US market close to all time highs on low volume Poor performer, leadership changeover More rate cuts coming to bring down A$ Yields failed to break higher, negative for risk asset markets Overbought in the short term Buy the rumour, sell the QE fact Buy the rumour, sell the QE fact Historical avg 6.5%, Oil is cheap Weaker Too high, expect more rate cuts Short term Strengthening Short term Strengthening

Geopolitical tensions have been rising across the globe in a number of hotspots. o East China Sea - Tensions continue to mount between China and Japan over the purchase by Japan of a small group of islands in the East China Sea, for US$26.18 million from private owners. The Senkaku Islands are controlled by Japan but claimed by China. China has sent two patrol ships to the area, which could contain large underwater gas reserves. China exports approximately US$148 billion of goods to Japan. Japan imports approximately US$194 billion from China. Protesters have caused damage to Japanese manufacture plants in China and to car dealerships. Protests could slow Japanese growth at a time when the country is pressured by high debt overhang and continued fallout from the earthquake and nuclear facility damage. o Middle East / Libya - Following a film said to negatively depict Islams prophet, on 11 September the American ambassador and three other people were killed. Demonstrations have taken place in Libya, Egypt, Yemen, Sudan, Tunisia, Australia and other countries. The Head of the US EIA said that stopping Libyan oil production would spike Crude oil prices given OPECs spare production capacity is currently limited to about 2mbbl/day. Despite this WTI Crude fell into the close of trading last night to finish at US$96.59/bbl. o Iran / Israel - Tensions remain over Irans nuclear intensions, where the country has accused the International Atomic Energy Agency of allowing terrorists and saboteurs to attempt to damage its nuclear program. Israel would like the US to signal a point where military force should be used, however to date the US maintains it is keeping all options open. Iran continues to deny it is developing nuclear arms. One fifth of the worlds oil is traded through the Strait of Hormuz, between Iran and Oman. The Bank of Japan (BOJ) has expanded its asset purchase facility to yen 55 trillion (US$695 billion) from yen 45 trillion, and is maintaining its lending facility at yen 25 trillion. The US FOMC will spend US$40 billion on mortgage related assets per month for as long as it takes to improve the unemployment situation, and the European Central Bank (ECB) will do whatever it takes to maintain the euro. The major central banks, at this stage with the exclusion of the Peoples Bank of China (PBOC), are all acting in ways that should devalue their respective currencies. However, because each country has its own programs and they trade against each other consistent single currency weakness is probably not going to show up other than across the board in the money proxies like gold, and eventually perhaps in the Yen as the countrys trade performance continues to deteriorate. The Spanish Bond yield has lifted slightly on the 10 year to 5.71% (Italy 4.97%). The Spanish Deputy PM has advised that Spain has called for the European Central Bank (ECB) to buy Spanish Government debt, setting out terms and a case for this action. The EU is said to be negotiating bailout measures for the country which could be announced on 27 September. Spain sold euro 3.94 billion of 3-year Bonds at a yield of 3.845% and euro 859 million of 10-year Bonds at 5.666%. Interestingly, Zambia just made their debut on the international bond market

Weekly Market Update

Robert Davies, Patersons Securities
Follow me on Twitter @davies_robert

24/09/2012 11:20:25 AM Page 2 of 4

raising $750m at 5.63% which is slightly less than the financing cost for Spain. Yes, read it again, thats Zambia. Chinese companies are now moving on the small to mid size Australian gold mining sector. It seems apparent that the Chinese are intent on building a stronger currency with a gold component to it. However, in order for this to work they need to have control of a significant portion of the worlds gold flows. This will be a long term project, but Chinese gold miners have spent this year branching out and scouring the globe for gold projects. The USA is looking at having energy independence by 2020 now that the domestic shale oil and gas boom has firmly taken hold. This will have major global geopolitical ramifications as the US is able to downgrade its involvement in middle-east politics by the second half of the decade. The big Israeli push to take on Iran over nuclear weapons is likely somewhat due to foresight as they also see the USA disengaging with the middle east in 5+ years. Knocking out Iran now would clearly be a priority. Iron Ore markets have recovered with the price of a ton or iron ore bouncing from sub $90 to about $110. This puts much of the Australian miners back into the black. However, we cant yet say we wont see more price dips in the near term. If you look above at the results from the Chinese stockmarket this year (down 7.9% since Jan), its saying that things are very tough in China and it hasnt turned yet. Queensland Coal miners are in turmoil, particularly the asset developers.

Economy
From Markit Economics US Business posted its largest gain in inventory in July, up 0.8% on the month US capacity usage rate of 78.2%, off a percentage point from Julys 79.2% US consumer confidence surged in September to 79.2 (August 74.3) NY Fed Empire State Manufacturing index down -10.4 in September (-5.8 in August). Lowest reading since April 2009 German ZEW index at -18.2 in September (Aug -25.5). ZEW expecting German economy to lose momentum over next 6 months. German composite PMI shows resilience at 49.7 HSBC China PMI edges higher to 47.8 (Aug 47.6). Still contracting with index below 50 French Composite PMI down to 44.1 (Aug 48.0) US PMI shows modest expansion in September at 51.5 From Dow Jones Credit Rating Agency Egan-Jones downgrades USA to AA- from AA Swiss government lowers 2012 GDP forecast to 1% (from 1.4%), cuts inflation to -0.5%, and keeps jobless rate at 2.9%. Indian August CPI at 10% year on year. No wonder Indians buy so much gold. TIC Data: China is a net buyer of US Treasurys in July, remains Top Holder with Japan next. S&P affirms AAA rating on Australia, outlook stable. Rating reflects view there is ample fiscal and monetary policy flexibility

Investment Strategy
Last week I wrote Here we are again, pushing up against 4400 resistance. More QE from the Fed pushes the Dow Jones higher, more bailouts from Europe pushes their markets higher. All this will result in a higher A$ and Gold price, and further exacerbate imbalances in the Australian economy, particularly for exporters. I cant see substantial reasons for market optimism here, but I continue to like the investment case for Gold Bullion. This weeks comment, The market continues to inch higher, now over 4400 resistance, but not yet convincingly so. Monetary easing in the US and Europe continue to provide support for risk markets. However, these market moves are on low volumes. Low volume rallies are typically a harbinger of corrections due to unstable foundations. The chart below shows the All Ords since the market selloff in 2008. Once the recovery kicked in weve been more or less moving sideways. This reflects the fact that the A$ has been appreciating strongly which negatively effects corporate earnings. In some distant universe, the government and RBA will decide the A$ is too strong and will change course to a weak A$ policy this will put a lightening rod under equity prices, particularly for exporters. However, until that time, and as I have been saying, best to stay in blue chip stocks and collect healthy dividends.

Weekly Market Update

Robert Davies, Patersons Securities
Follow me on Twitter @davies_robert

24/09/2012 11:20:25 AM Page 3 of 4

Weekly Stockwatch
With the economy continuing to run in a slow gear and the mining sector actively cancelling development projects due to uncertainty from China, I think there is an increasing possibility of a further response from the RBA on interest rates. We could see up to an additional 50 bps cut by Xmas and/or 75 bps by June 2013. This will be positive for mortgage holders and equity investors in high yield stocks. One of the best stocks for income investors over the past year has been Telstra. With a 7.3% fully franked dividend and a business that is operating in a very dynamic and growing market, I think this remains a stalwart portfolio investment. If you are questioning the sustainability of the dividend, note that a large part of their cashflows over the next few years comes from the Australian government as they transfer clients from Telstra to the NBN. Some analysts are forecasting an INCREASE in Telstras dividend from 2015, subject to acquisition and share buyback plans. Heres the 5 year chart.
TLS.ASX@AUX: 10:59:36: 3.87, 3.88, 3.86, 3.865 MA (TLS.ASX@AUX): 200 3.2192, 100 3.1917, 50 3.4867

4.8

4.4

3.6

3.2

2.8

2.4 Vol (TLS.ASX@AUX): 5104.96T 1000M 0 RSI (100.000000): 14 59.673 90 60 30 Oct 2007 Jan 2008 Apr Jul Oct Jan 2009 Apr Jul Oct Jan 2010 Apr Jul Oct Jan 2011 Apr Jul Oct Jan 2012 Apr Jul

Weekly Market Update

Robert Davies, Patersons Securities
Follow me on Twitter @davies_robert

24/09/2012 11:20:25 AM Page 4 of 4

Chart of the Week

The Shanghai market has been massively underperforming this year as they come to grips with many economic challenges and regime change in October. Its now time to watch this market for a change of direction as the new leaders will want to stamp their imprimateur on the economy and how they move ahead. If youve been wondering why your resource stocks have been going down, look no further than the performance of the Shanghai stock exchange since May, see below
SHANGHAI.IF@IF: 2026.686, 2026.686, 2026.686, 2026.69 MA (SHANGHAI.IF@IF): 200 2266.2348, 100 2202.4069, 50 2108.5086 2550 2500 2450 2400 2350 2300 2250 2200 2150 2100 2050 2000 Vol (SHANGHAI.IF@IF): 0 200M 0 RSI (100.000000): 14 36.5886

60

30 September 2011 November December January 2012 February March April May June July August September