Weekly Market Update

Robert Davies, Patersons Securities

Follow me on Twitter @davies_robert

29/10/2012 12:49:47 PM Page 1 of 4

Weekly Commentary
Week ending 26 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

26 Oct 2012
4,496 1,412 2,066 3.25% 1.75% 1,711 355 86 5.0% 80.0 1.04 1.29 6.26

Chg (week)
-2.1% -1.5% -2.9% 0.0% -1.1% -0.6% -2.4% -4.2% -3.7% 0.5% 1.0% -0.6% 0.1%

Chg (ytd)
9.4% 12.2% -6.0% -23.5% -6.9% 9.5% 3.3% -12.7% -20.3% -0.2% 1.5% 0.0% -0.6%
Poor close to the week, under 4500 Outperforming Poor close to the week, ending rally Savers subsidising borrowers Near breakout Holding above $1700 Ranging Oil is cheap, lack of demand Stable Too strong, crushing Aussie economy Strong

The third US presidential debate was held on Monday, this one on foreign policy. Most pundits said Obama came out ahead on this one. That scores it one for Romney, one tie, and one for Obama, giving Obama the momentum going into the final weeks of the campaign. Polling shows the candidates are very close nationally with 3-4 swing states going to make the difference. Despite the rhetoric, there are only small differences between the candidates and the difficult financial situation the USA is in will not leave much for the new president to play with. Difficult decisions need to be made. The EU presented the usual summit squabbles in the past week, though Credit Default Swaps (CDS) and Bond yields remain contained in the Eurozone presenting a background picture of reduced credit risk. The Shanghai stock market is holding, and the economic picture in the US is improving; although later in the year we will run into Debt Ceiling and Fiscal Cliff negotiations. Apparently, Iran and the United States have agreed to sit down and talk directly once the US elections are over. Its clear that the US strategy in Syria is failing as the proxy war (Saudi/Sunni vs Iran/Shiite) spills over into other countries (Lebanon & Turkey) while nothing is getting resolved. Iran has countered this attack effectively so far. Even if Assad leaves Syria, the civil war would likely ramp up even further, as is happening in Libya post Gaddafi. Iran can ramp up the pressure further by unleashing a sectarian war in Iraq, which is largely Shiite. The American strategy of isolating Iran and ruining their economy is slowly working as oil prices stay high with the contraction in supply from Iran. With Western demand for oil contracting, they need to reduce supply also in order to prevent a collapse in oil prices. This is why Iran is under sustained pressure from all sides, their oil is not needed. Greece and its creditors at the EU and IMF have reportedly reached an agreement that will give Greece an extra two years to meet deficit targets under the bailout program. Greece looks a complete basket case. The EU will have to monetise more of Greeces debt at some point, but for now, another crises averted provided it gets formal approval in a few weeks. The French government wrote a report on French industrial competitiveness and what needs to be done to fix their problems. There were so many leaks on what the report was proposing its been withdrawn without being released. Reportedly, the sacred cow of the 35 hour work week was proposed to be eliminated to allow companies to negotiate with unions on a company by company basis (as do the Germans). The cacophony from the fourth estate was too much for the government to handle. French industrial production and economic indicators are falling sharply. A very big storm is brewing on the East Coast of the United States. The stockmarket will be closed and most businesss along coastline areas are battening down the hatches. We can expect some economic disruption from the storm.

Weekly Market Update

Robert Davies, Patersons Securities
Follow me on Twitter @davies_robert

29/10/2012 12:49:47 PM Page 2 of 4

Economy Review
Australian inflation came in a bit over expectations this week. This caused some rethink by analysts over whether another round of interest rate cuts from the RBA is imminent or not. The Australian dollar strengthened on the news. From Markit Economics Italian industrial orders up +0.7% in August following +2.9% in July French business confidence falls to 38 month low in October. Bank of Spain says Q3 GDP falls -0.4% in Quarter 3, down -1.7% y/y Contraction in French private sector output at start of Q4, Composite PMI at 44.8, sept 43.2 France services PMI 46.2 (sep 45), Manufacturing PMI 43.5 (sept 42.7) HSBC Flash China Manufacturing PMI at 49.1 in October up from 7.9 in September German composite PMI at 48.1, services PMI 49.3 (sept 49.7), mfg 45.7 (sept 47.4) Markit Flash US Manufacturing PMI at 51.3 in October up from 51.1 in September UK out of recession, GDP rises by +1.0% quarter on quarter. Services +1.4%, Mfg +1.1%. Strongest growth for five years.

Investment Strategy
Last week I wrote, The market has now convincingly broken above the 4500 resistance level. This is significant due to the number of times (10+) it tested and failed and the length of time (14 months) it stayed under this level. Expect a pullback this week to test what should now be support at 4500. Last week I was topping up on resource and energy stocks which have been oversold and should perform well if the A$ weakens with more interest rate cuts. Watch the Chinese currency for more strength. This weeks commentary On Friday, we closed under the 4500 mark as US futures nosedived. A good GDP number from the US saved the day, but with a disruptive storm approaching the US east coast, along with the close for the week under 4500, caution is warranted, selective profit taking should be considered. Bullish unless the All Ords breaks under 4500 Neutral / Defensive

Monthly Outlook: Yearly Outlook

Weekly Market Update

Robert Davies, Patersons Securities
Follow me on Twitter @davies_robert

29/10/2012 12:49:47 PM Page 3 of 4

Weekly Stockwatch
In the Worley Parsons annual general meeting on Tuesday, they maintained their earning guidance for good growth from FY 2012 to FY 2013. However they advised that earnings for the 1st half of FY2013 would be similar to FY 2012. This leaves earnings growth stacked to the last 6 months and what looks to be a much tougher target for management to credibly achieve. The stock was sold down from $27 on Monday to $23 by Wednesday, a 15% decline. This looks overdone to me and a classic buying opportunity for a quality portfolio stock if you can get them under $24. Worley Parsons provides professional services to the Oil and Gas industry, power, minerals & metals and infrastructure & environment industries, including feasibility studies, design, project services, upgrade services and maintenance services. WOR uses an alliance based approach to provide services for a significant proportion of the company's contracts. Worley has a blue chip client base with operations spanning the globe. Stock Price Price / Earnings 2013 Dividend Yield 2013 Return on Capital Market Cap 12m Price range $24.78 today 15.7, 4.2%, partially franked, 24% $6b+ $23.12 to $30.00

Weekly Market Update

Robert Davies, Patersons Securities
Follow me on Twitter @davies_robert

29/10/2012 12:49:47 PM Page 4 of 4

Chart of the Week

Here is an interesting chart comparing performance of the All Ords index (Australian stockmarket bottom left to top right) vs the US 10 year treasury bond (top left to bottom right). You can see from this how stockmarket performance has been inverse to the decline in interest rates over the past 25+ years. In simple terms, as interest rates decline, the costs of owning assets declines, hence asset prices increase as people borrow more money to finance the purchase. As people borrow more, banks make great returns. The problem is now, that interest rates cannot go lower by any substantial amount. So, if interest rates go up, everyone in the market knows that asset prices go down as the cost of holding assets goes up. The market knows this and will sell everything at the first sign of a backbone from central bankers looking to raise interest rates. This is what politicians, bankers, and traders are deathly afraid of. What would you do if you were king of the world? Currently savers are wearing the cost of low interest rates to the benefit of borrowers/asset holders. The world hasnt really faced this kind of situation before in history without war erupting to mask the problem and reboot the financial system. There are many questions to be answered before we can get a true view of how this will be resolved and who will emerge the winners. Only world leaders, their advisers, and market insiders really know the answers to these questions Will the USA voluntarily give up the US Dollar as worlds reserve currency? When will the interest rate cycle turn up in a committed way? Will there be a currency realignment similar to the Plaza Accord in the 1980s? Will Gold or the Chinese Renmimbi replace the US Dollar? These are all interesting questions, on top of which sits the future of your investment returns. My reading of the situation suggests that the Americans are trying to keep control of the financial system while devaluing their currency and hoping demand from China increases demand for US goods and services. On the other hand the Chinese seem determined to take the lead, but want to ensure they have their hands firmly in control of the worlds financial system before their currency appreciates. Quite a battle.