Weekly Market Update

Robert Davies, Patersons Securities

Follow me on Twitter @davies_robert

28/05/2012 12:01:52 PM Page 1 of 3

Weekly Overview
Week ending 25 May 2012

The Greek tragedy continues to unravel. Support seems to be coalescing around both Syrize (antiausterity) and New Democracy (pro-austerity) parties. Elections are on June 17th. Meanwhile Greeks are actively moving money out of Greek banks into mattresses and foreign banks in anticipation of the possibility of a new currency. Multinational firms are clearing their accounts daily. I consider a move to a new drachma possible but unlikely even if Syriza wins the election. If the Europeans stop subsidising and the Greeks dont want to exit the Euro, the government will be forced to balance their budget. Bank runs are now stepping up a gear in Europe. In addition to the Greeks, the same goes for Spanish and Italian bank deposits. See the chart of the week below for more detail.. Lots of pundits now calling the end of the resources boom in Australia. I would be more circumspect. There remains a major investment boom in LNG and natural gas. Gold remains over $1500 per ounce. Remember all the people who called Gold a bubble when it went through $1000 per oz? While commodity prices will come down, volumes will increase to offset the loss in price. Panic is an opportunity to take cheap stock from the frightened. China in the news due to a lagging economic performance. Concerns over bank lending results (flat), and the purchasing managers index (negative). While there are concerns over China, it retains the capacity to stimulate its economy through both monetary and fiscal policy (unlike the USA or Europe). The dip in economic activity from China could be partially due to the political handover due in the latter part of the year. New leaders bring new plans and initiatives. Chg (week)
-0.4% 1.7% -0.5% 0.0% 0.6% -1.2% -0.6% -0.7% 1.4% -0.9% -2.1% 0.1%

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

25 May
4,081 1,317 2,334 3.75% 1.74% 1,573 345 91 82.31 0.976 1.252 6.338

Chg (ytd)
-0.7% 4.7% 6.1% -11.8% -7.4% 0.6% 0.4% -8.1% 2.6% -4.5% -3.3% 0.6%
Market expecting more cuts

US$ strongest currency

Market View (All Ords Index)

Last week I noted a change of focus back to accumulation after big drops in the index. The market has stabilised at these lower levels so risk-on opportunities should be looked at. You should be looking for high quality dividend paying stocks, such as Telstra, banks, utilities Overall, I see stocks as cheap relative to historical Price Earning ratios, the main near term growth catalyst to take them significantly higher would be an Australian federal election, currently 18m away, but could be closer.

Weekly Market Update

Robert Davies, Patersons Securities
Follow me on Twitter @davies_robert
XAO.ASX@AUX: 11:20:36: 4086.1, 4111.8, 4086, 4101.9 MA (XAO.ASX@AUX): 200 4278.5267, 100 4328.7238, 50 4351.8507

28/05/2012 12:01:52 PM Page 2 of 3

4800

4600

4400

4200

4000

3800

Vol (XAO.ASX@AUX): 0 2000M 0 RSI (100.000000): 14 30.9485

60 30

May 2011

July

August

September

October

November

December

January 2012

February

March

April

May

Stock of the Week

Nab has dropped significantly in the last few weeks from $25.20 to $23.50, about 7%. However, NAB still has a 90c fully franked dividend which goes ex on May 31st. At this price level the 6m dividend pays 3.8% plus franking. When you compare this to returns in term deposits, its clear where the better returns are. How cheap is the price? NAB is on a 2013 Price earnings ratio of 8.5. Historically banks trade around 11 to 13 times earnings. Could the banks get cheaper? Is the housing bust in Australia going to hurt the banks? Will Europe continue to effect the banks? Will they need to raise more capital? Yes, Yes, Yes, and Maybe. However, the market knows all this and the banks are cheap.

NAB.ASX@AUX: 23.5, 23.69, 23.47, 23.56

MA (NAB.ASX@AUX): 200 23.7447, 100 24.0326, 50 24.5514 28

26

24

22

20

Vol (NAB.ASX@AUX): 2742.683T 20000T 0 RSI (100.000000): 14 31.7295

60 30

May June 2011

July

August

September

October

November

December

January 2012

February

March

April

May

Chart of the Week

This chart shows the extent what is happening in Europe now with money moving from the Southern region to Germany. This is a classic bank run in peripheral countries.

Weekly Market Update

Robert Davies, Patersons Securities
Follow me on Twitter @davies_robert

28/05/2012 12:01:52 PM Page 3 of 3