Weekly Market Update

Robert Davies, Patersons Securities

Follow me on Twitter @davies_robert

22/10/2012 11:53:13 AM Page 1 of 4

Weekly Commentary
Week ending 19 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

19 Oct 2012
4,593 1,433 2,128 3.25% 1.77% 1,721 364 90 5.2% 79.6 1.03 1.30 6.25

Chg (week)
1.8% 0.3% 1.1% 0.0% 6.6% -1.8% -1.7% -2.0% -0.1% -0.1% 0.4% 0.5% -0.2%

Chg (ytd)
11.7% 13.9% -3.2% -23.5% -5.9% 10.1% 5.9% -8.9% -17.2% -0.8% 0.5% 0.6% -0.7%
Breakout from 4400 and 4500 Trending sideways Recovering..slowly Rate cuts supportive for markets and speculators, not good for savers Has not broken its resistance of 1.85% Another year of double digit gains Trending sideways Down for the year, growth slowing Gold up, Oil down Flat for the year, gold up Flat for the year, gold up Flat for the year, gold up Strengthening

The interest rate differential between Australia and offshore is closing up, adding attraction to Australian stock market yields, especially while the property investment sector in Australia remains relatively weak. The global economy is slowing down. Stimulus efforts from central banks are increasing as pressures on growth mount in major economies. Markets are seeing volatility within trading ranges as traders deal with balancing poorer economic numbers against the ability of central banks to step in and lift markets. The US economy is now showing better numbers in both employment and housing. There is scope for the S&P500 to hit new highs on excess liquidity efforts by the FOMC. Lower inflation rates suggest greater flexibility is now available to allow Chinese monetary and fiscal policy changes, however we expect only mild actions out of the Chinese on both sides of policy. While EU problems remain significant, EU Bond demand has been assisted by ECB policy, and Credit Default Swaps in many EU countries have reduced. As EU growth declines debt servicing difficulties will increase, though we see recent EU negotiations as slowly moving the EU towards closer integration to better address debt matters. Japan faces further credit downgrades in future, the country presents a significant macro structural risk going forward. The middle east situation in Syria and Lebanon is getting more and more chaotic. Turkey is now shelling Syria as retaliation for Syria shelling rebel bases in Turkey. Ive also seen reports of assasinations of senior Al Saad family members. The whole region is on a knife edge. Reports now that post US election, Iran has agreen to one on one talks with the USA on its nuclear program. All eyes on the US elections. It seems clear that both Europe and the USA will not suffer debt or economic turmoil in the lead up to the elections. Kicking the can now only sets up 2013 to be another tough year. The so called US fiscal cliff is the biggest threat now. With the US running a deficit over $1 trillion dollars, a withdraw of this spending will have big repercussions across the economy unless they can get private sector investment to step into the gap. This seems unlikely without major structural reform of the US economy. In the meantime, China continues to build infrastructure and move to a more efficient, capitalise economy. Still much work to do there also. The iron ore market has stabilised after suffering a crushing collapse in prices in October. The price of fines is back to $118 per ton. This remains the level where most Chinese production is marginal, if not unprofitable. With many new projects coming on stream in the Pilbara and elsewhere in the world, I believe it will be tough going for high cost iron ore miners for years to come. Rio Tinto enjoys the lowest cost structure of ANY company in the world for its Australian iron ore assets. An interesting article here debating whether we should have debt free money instead of our current system which utilises debt to subsidise banks at the expense of citizens. Take a look, its an interesting viewpoint. The problem with debt free money is that governments usually print too much of it. Hence the need for gold (which cant be printed) to provide a limit on the money supply. Our forefathers has this all worked out over 100 years ago. http://www.macrobusiness.com.au/2012/10/is-debt-free-money-an-option/

Weekly Market Update

Robert Davies, Patersons Securities
Follow me on Twitter @davies_robert

22/10/2012 11:53:13 AM Page 2 of 4

Economy Review
From Markit Economics Japan manufacturing output down -1.6% m/m in August US retail sales in September +1.1%, consensus +0.8% NY Empire state manufacturing index -6.16 in October, better then Sept at -10.4 Eurozone September inflation unexpectedly slows to 2.6% after two months of acceleration US consumer prices rise +2.0% y/y in September US industrial production rises by +0.4% in Sept, -1.4% in Aug. Mfg. output rose by +0.2% Irelands Credit Default Swaps at 200bps, in June 2012 they were at 700 bps. Big recovery. Italian industrial orders up +0.7% m/m in August, follows growth of +2.9% in July US housing starts hig highest level since summer 2008, massive surge.

Investment Strategy
Last week I wrote The market has pushed through 4400 and is now steadying at 4500 resistance. With one exception, we havent been here since August 2011. There are some causes for optimism, including the earlier noted increase in the Chinese currency and potential for consumer demand from China. However, with interest rates still expected to go down, a yield focus remains paramount. Accumulating BHP looks interesting here with the Chinese currency moving up. This weeks commentary, 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.

Weekly Market Update

Robert Davies, Patersons Securities
Follow me on Twitter @davies_robert

22/10/2012 11:53:13 AM Page 3 of 4

Weekly Stockwatch
After a fall of 40% from near $50 down to $30, BHP is now recovering. BHP has broken above its 200 day moving average (black line) at 33.80. This is a significant technical hurdle whereby the market signals a change in sentiment towards BHP. You can see how the market has spent over a month playing with the idea of going above the 200 day moving average before it did so convincingly. With the strength in the Chinese Renmimbi (highlighted last week) and with surprisingly strong US housing starts data, economic strength is getting a new look and demand for commodities looks on the improve. Stock Rating Price / Earnings 2013 Dividend Yield 2013 Return on Equity Market Cap Price range (12m) BUY 10.6 3.5% 25.5% $112b $30.09 to $40.00

Chart of the Week

Here are some charts from the Australian government Mid Year Economic and Fiscal Outlook, which was released today. This is the first time we have had a release in October without an election in November or December. Mining vs non-mining investment, unsustainable jump in mining investment props us up temporarily

Weekly Market Update

Robert Davies, Patersons Securities
Follow me on Twitter @davies_robert

22/10/2012 11:53:13 AM Page 4 of 4

Iron Ore Spot prices, bouncing, but likely trending lower from here on increased supply. Lower tax revenue for the government. Unlikely the Mining tax will result in much revenue.

Government net debt projected to 2021-22. Can this government really stop spending??