Weekly Commentary

Weekly Market Update
Robert Davies, Patersons Securities

Follow me on Twitter @davies_robert
1/10/2012 10:42:49 AM Page 1 of 3
Weekly Commentary
Week ending 28 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
28 Sept 2012
4,406 1,441 2,086 3.50% 1.64% 1,772 376 92 5.2% 80 1.04 1.29 6.29
Chg (week)
-0.5% -1.3% 3.0% 0.0% -6.7% 0.0% -0.8% 0.0% 0.0% 0.8% -0.7% -0.9% -0.4%
Chg (ytd)
7.2% 14.5% -5.1% -17.6% -12.9% 13.4% 9.4% -6.6% -17.6% -0.4% 1.6% -0.6% -0.2%
Still holding at 4400 QE Stimulus pushing on a string Bounce off 2000, still in downtrend Expect more rate cuts this year Yields turn and go lower again, risk off Gold continues to shine Oil over $100 is US recession signal Stable, but trending lower short term RBA to cut rates in attempt to lower A$ Euro..surviving This is significant more later on this
Barack Obama continues to lead in the polls in the USA presidential race and appears to be pulling away from Mitt Romney. Three debates are scheduled for the next month, but in my view its unlikely Romney (as skilled as he is) will be able to out-debate Barack Obama. The election is held in the second week of November. The proxy war between Saudi Arabia and Iran continues to rage in Syria but looks to have settled down to a slow burn. The Saudi royal family is fighting for its survival as the old guard has not successfully guaranteed its transition to a younger generation. With assasination taking place and the Petrodollar under threat from the Feds quantitative easing policies, the Saudi regime looks shaky. The Russians and Chinese are now trading crude oil outside of the US Dollar zone. Strikes continue in South Africa, materially effecting the world supply of precious metals. Australia and South Aftrica are the worlds swing producers and exporters of gold. Removal of a significant portion (estimated at up to 40%) of South Africas production will have an effect on the Gold price. The Australian economy continues to stagnate under the effects of the strong A$. Despite generationally low interest rates, I expect further rate cuts from the RBA over the course of the next 6-9 months. The next rate cut could come in early October. China has announced its leadership transition will take place in November (previously October). They now appear to have personality issues resolved and will move forward with growth and investment plans in a few months. Greece and Spain continue in the news with debt and spending problems. Riots have broken out repeatedly in both countries as workers continue to fight against benefit cuts in order for the country to repay its loans.
Economy
From Markit Economics German IFO Business Climate index down to 101.4 in Sept. Reuters consensus was 102.5 Italian retail sales were down -0.2% m/m in July, Fell -3.2% on the year UK retail sales improve slightly in September Spanish retail sales down -2.1% y/y in August, the 26th consecutive month of falls Austrian Manufacturing PMI down to 39 month low in September US GDP for Q2 is revised sharply lower to 1.3% q/q (annualised). Durable goods orders drop -13.2% in August. Largest drop in durable goods since January 2009 Japan manufacturing PMI at 48.0 in Sept, up from 47.7 in August. Eurozone inflation 2.7% in September, Italian inflation at 3.4% Greek retail sales fell -9.1% on the year to July. Inflation accelerates to 6.5%

1/10/2012 10:42:49 AM Page 2 of 3
Investment Strategy
Last week I wrote The market continues to inch higher, now over 4400 resistance, but not yet convincingly so. Monetary easing (money printing) 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. This weeks comment, The market continues to trade sideways around the 4400 level. This is an almost unprecedented length of time that the market has been unable to break this level without a significant correction. In the last two years, we have hit this level more than 10 times without a breakthrough. Truly remarkable.
All Ords, 12 month view
Chart of the Week

Here is a chart of the USD x Renmimbi exchange rate over the last two years. For most of this period the Chinese were increasing the value of the RMB vs the dollar. In the middle of 2011 they stopped the currency appreciation because their export industries were hurting. It now looks like the RMB appreciation is back on and the USD is devaluing again. You would expect this to happen with Quantitative Easing. More paper money means it is worth less. A depreciating currency means consumers lose purchasing power and the economy stagnates. This is happening in the USA. Conversely, the Chinese are not printing money, their consumers are gaining purchasing power, and if they continue to appreciate the RMD, their economy should recover first as the consumer spends up big.

1/10/2012 10:42:49 AM Page 3 of 3
Weekly Stockwatch
I have many clients invested in the stock Orecobre (ORE). Orecobre is developing a lithium mine and processing facility in Argentina in a joint venture arrangement with Toyota Tshshu, and a part interest by the Argentinian government. This will be the first new major lithium resource in the world for decades. It is a low cost, lithium from brine operation. After hitting $4 in 2011, the stock fell heavily as they negotiated royalty arrangements, financing deals, and solidified their business plans. In the last few weeks they have solidified all the approvals they need and this project is going ahead. The share price has now broken above resistance at $2 and is moving up nicely. The stock remains a buy.

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Weekly Market Update

Robert Davies, Patersons Securities

1/10/2012 10:42:49 AM Page 1 of 3

Weekly Market Update

1/10/2012 10:42:49 AM Page 2 of 3

All Ords, 12 month view

Chart of the Week

Weekly Market Update

1/10/2012 10:42:49 AM Page 3 of 3

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