Weekly Market Update

Robert Davies, Patersons Securities

Follow me on Twitter @davies_robert

13/08/2012 12:14:27 PM Page 1 of 4

Weekly Overview
Week ending 10 August 2012

Markets have continued to accumulate following the whatever it takes comments from the head of the European Central Bank, Mario Draghi, two weeks ago. With most of the politicians and finance industry on holidays in Europe, its unlikely this is anything more than a short squeeze summer rally. With the German constitutional court decision on the bailouts coming in September, its unlikely any sustainable European rally will occur before this announcement. Data out of China this week was unimpressive. Bank lending slowed sharply from June (to $85bn from $150bn). Weakness was apparent in industrial production, retail sales & housing transaction volumes. Most alarming was the sharp slowdown in exports. At a positive 1% year-over-year, July export growth sank from Junes 11% and was significantly below expectations of 8%. With exports to Europe down 16%, this data point is one of the clearest indications yet of how the rapidly deteriorating European situation is hitting China. (Doug Noland, Credit Bubble Bulletin) The Europeans continue to try and negotiate between themselves on how to resolve a crises of too much deficit spending. Politicians want to keep spending while banks cant handle any more sovereign debt. Either the ECB has to buy the debt which ensures a currency crises, politicians have to stop spending which ensures the people hit the streets, or there needs to be defaults which will leave banks insolvent. Hard decisions certainly, but there is an unwillingness to take them. 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 a 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) Mitt Romney appointed Paul Ryan, congressman from Wisconsin, as his running mate for the Republican ticket for the US Presidency. Ryan is a fiscal hawk and a favourite of the conservative wing and tea partiers. Romney is seen as no-backbone, middle of the road. Paul Ryan will give Romney backbone on the fiscal side and will excite the conservative wing. It will also give Obama more ammunition to say the Republicans will cut benefits and give tax cuts to the wealthy. The election decision battle lines become much more defined with this choice. In my view, Paul Ryan has a plan to restore order to the US Governments fiscal imbalance. He has also staked his reputation on this. A very interesting choice of running mate The Australian dollar has reversed its recent downdraft and is breaking higher, now up to $1.06. Numerous central banks around the world have recently announced they will be holding A$ reserves increasing the demand for our dollars. The dollars strength in the face of significantly declining commodity prices has the RBA concerned about the effects on the Australian economy. They have now started talking the A$ down and if there is no movement, I would anticipate concrete action to follow in the coming months. Chg (week)
1.4% 1.0% 1.6% 0.0% 6.4% 1.0% 0.6% 1.6% 0.6% 0.2% 0.1% -0.8% -0.2%

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

10 Aug
4,302 1,405 2,168 3.50% 1.66% 1,619 339 93 5.7% 82.54 1.058 1.228 6.365

Chg (ytd)
4.6% 11.7% -1.4% -17.6% -11.7% 3.6% -1.3% -6.0% -9.3% 2.9% 3.5% -5.1% 1.0%
Resistance at 4370 and 4400 At its 4 year high Chinese economy in doldrums RBA cuts provide support for Aust Fed stimulus on steroids, rates very low Stable Weak, but recovering Weak, but recovering Oil weak, showing slack demand USD Stable, but weaker vs gold High A$ killing exporters Reflecting European political stagnation Chinese looking to weaken CNY to jumpstart economy

Weekly Market Update

Robert Davies, Patersons Securities
Follow me on Twitter @davies_robert

13/08/2012 12:14:27 PM Page 2 of 4

Economy
The RBA kept rates on hold at 3.5% last week. Chinas july consumer prices rise 1.8%. Wholesale prices deflate 2.9%. This is substantially lower inflation than previous years, indicating the Chinese now have room to move on inflationary monetary policy. It also signals the economy is performing below expectations. Chinas July exports rose 1% vs consensus of 8%. Big impact here from exports to Europe (Chinas biggest market), Once again, the Chinese need to regear their economy to domestic demand. So far they have had limited success.

All Ords Charting

The Market has broken through the 200 day moving average (see chart below) and held above it for two weeks now. Last week closing above 4300. This is a bullish outlook. Resistance is at 4400 where we have been held up for the entire year, with one exception being the breakthrough in April, which failed in May. 4400 remains significant resistance. Another resistance level is the 200 week moving average which is currently above the market at 4375. Since 2010, the All Ords have tried to break through this moving average 4 times and failed in each case. I therefore note that there is strong market resistance to the All Ords going above 4370-4400 level, without a significant economic/political catalyst. A clear breakout from this resistance level would be very bullish.
4309.2, 4339.2, 4309.2, 4325 MA (XAO.ASX@AUX): 200 4269.8177, 35 4201.9853, 10 4300.0269

XAO.ASX@AUX: 11:56:37:

4500

4400

4300

4200

4100

4000

3900

Vol (XAO.ASX@AUX): 0 2000M 0 RSI (100.000000): 14 62.3759

60 30

August 2011

September

October

November

December

January 2012

February

March

April

May

June

July

August

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. 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).

Weekly Market Update

Robert Davies, Patersons Securities
Follow me on Twitter @davies_robert

13/08/2012 12:14:27 PM Page 3 of 4

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 tricky bit is of course, at what point do you buy gold miners. Give me a ring if you want to take a closer look but if the shareprice of Newcrest is any indicator (see chart below), the snapback has started. Newcrest is up 20% in a few weeks from its lows of $21.
24.97, 25.49, 24.86, 25.29 MA (NCM.ASX@AUX): 200 29.1826, 35 22.8726, 10 23.95 42

NCM.ASX@AUX: 12:08:19:

39

36

33

30

27

24

21

Vol (NCM.ASX@AUX): 1601.543T 10000T 0 RSI (100.000000): 14 67.3704 60

30

August 2011

September

October

November

December

January 2012

February

March

April

May

June

July

August

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 for long term investors. A chart of historical Price/Earnings ratios confirm how cheap the market is now.

Weekly Market Update

Robert Davies, Patersons Securities
Follow me on Twitter @davies_robert

13/08/2012 12:14:27 PM Page 4 of 4