Weekly Market Update

Robert Davies, Patersons Securities

Follow me on Twitter @davies_robert

27/08/2012 11:13:02 AM Page 1 of 3

Weekly Overview
Week ending 24 August 2012

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

24 Aug
4,376 1,411 2,092 3.50% 1.69% 1,670 348 96 5.8% 81.63 1.040 1.250 6.355

Chg (week)
-0.4% -0.5% -1.1% 0.0% -7.1% 3.4% 1.9% 0.2% -3.1% -1.1% -0.1% 1.4% -0.1%

Chg (ytd)
6.4% 12.2% -4.9% -17.6% -10.1% 6.8% 1.4% -2.7% -8.9% 1.7% 1.8% -3.4% 0.9%
Failed to get through 4400 again Peaking, on low volume This market is in real trouble Still more room to cut Failed to push higher, bearish signal Good breakout, $1700 next resistance

USD Stable A$ too strong w/ low commodity prices

We have again hit the 4400 level on the All Ords and the market has stopped. Since July 2011, the market has tried to break through this level 10 times and failed each time. Conversely, over this time the market has tried to break down under 4100 (All Ords) about 7 times and rallied each time. This is healthy, the market is building a significantly strong base here from which it will eventually rally or breakdown. A move to either side of the 4100-4400 range is therefore technically significant, irregardless of what you are reading in the paper. The market knows before reporters. The S&P500 held 1400 support finishing at 1411, after Ben Bernanke said, There is scope for further action by the Federal Reserve to ease financial conditions and strengthen the recovery. Chinese Premier Wen Jiabao said China needs to target measures to promote steady export growth, and reiterated that the country needed to increase the "intensity of macro economic adjustments" which all translated into economics actually makes no sense. There is a growing view in the EU that the European Central Bank (ECB) will hold off on any bond purchases and perhaps comments in regard to the Spanish and Italian Bond markets until after the ratification by the German Constitutional Court of the European Stability Mechanism (ESM) on 12 September. Merkel said that she was working towards Greece staying in the euro. Bond yields: Spanish (10 year 6.36%) and Italian (10 year 5.68%) up slightly. The Australian dollar pulled back to $1.0403 against the US dollar as Stevens said that the resource investment boom will peak in the next year or two. There have been a lot of comments on whether the mineral commodity boom is over. The reality is the commodity boom was over in 2008, the lift in prices seen after this date was due primarily to a lift in government stimulus. Meanwhile Greece is facing an even greater budget shortfalls. According to information obtained by SPIEGEL, the troika of the International Monetary Fund, the ECB and the European Commission recently determined that Athens is facing a budget shortfall of up to 14 billion, and not the 11.5 billion previously reported by Greece. A greater bailout would seem necessary as the Greek economy continues to contract. Germany remains a serious obstacle to more bailouts. (EPJ) Commodities entered a technical bull market this week. They are now up 21% from the June lows. A gain of 20% is a new bull market. The gain is mostly a result of the surge in grain prices becasue of the most severe U.S. drought in 50 years. (EPJ) Iron ore prices continued to decline - Fines US$108/t down US$9.50/t for the week. BHP said it expects long term price declines for its commodities on slower growth in China, however that volumes should increase in future. Caterpillar is seeing a slump in big ticket mining equipment in China. The Iron Ore market has serious issues, with growing demand/supply imbalances. See the below Chart of the Week for more details.

Weekly Market Update

Robert Davies, Patersons Securities
Follow me on Twitter @davies_robert

27/08/2012 11:13:02 AM Page 2 of 3

Economy
From Markit Economics. (PMI under 50 signals contraction) o Japans exports fell 8.1% on annual basis in July, stronger decline than expected (-2.9%). Shipments to China down -11.9%. Exports to Europe plunge -25% o HSBC Flash China Manufacturing PMI posts 47.8 in August, second lowest since 2009. Record rise in inventories. o France Manufacturing PMI @ 46.2, Services PMI @ 50.2, combined 48.9 o Germany Manufacturing PMI @ 48.3 for August. (under 50 is contraction) o Eurozone Manufacturing PMI @ 45.3, a four month high but still contracting. o UK 2nd Qtr GDP falls 0.5%, economy contracting Thailand 2nd qtr GDP +4.2%, solid growth (Dow Jones)

All Ords Charting

Last week I wrote We closed the week at 4393, above the 200 week moving average but just below 4400. You can see from the chart below that the 4400 level has been breached once in the past year. We have come back to this point again. The last time we breached this level we sold off quickly and hard. A significant break above 4400 would breach a number of technical barriers and would provide a very bullish signal. The barriers include 200 daily and weekly averages, and the 4400 level. We pushed up to the 4400 level and failed (once again) to push through. Valuations in some sectors are now stretched (banks) while resource stocks are under pressure due to economic stagnation around the world. The catalyst to push through 4400 would be a favourable ruling from the German Constitutional Court on 12 September in support of the bailout bonanza. A negative ruling would see a selloff from here. Expect a ranging market until the ruling.

Weekly Stockwatch
For the past four weeks I have been writing about the market arbitrage that has opened up between the gold price and gold equities. Gold was up 5% for the year to June 30 while Gold Equities were down 33%. I also mentioned a particular focus on Newcrest. Since July 25th, Newcrest has gained 30% and continues to power ahead. The next level of resistance will be $29, then $33 which is the long term uptrend line The daily chart of Newcrest is below

Weekly Market Update

Robert Davies, Patersons Securities
Follow me on Twitter @davies_robert

27/08/2012 11:13:02 AM Page 3 of 3

NCM.ASX@AUX: 10:36:52:

27.35, 27.53, 27.29, 27.52

MA (NCM.ASX@AUX):

200 28.7439, 35 23.5966, 10 25.719

39

36

33

30

27

24

21

Vol (NCM.ASX@AUX):

520.45T 10000T 0

RSI (100.000000): 14 74.3672

60 30

August 2011

October

November

December

January 2012

February

March

April

May

June

July

August

Chart of the Week

Iron Ore is in the news with both steel prices and iron ore prices collapsing. With economies around the world slowing and/or contracting, steel demand is falling. Additionally, the Chinese growth model relies on ever increasing amounts of infrastructure investment. They have not been as free spending on infrastructure recently as they try to rebalance their economy and slow inflation. Hence we have the rock of slow demand for iron ore hitting the hard place of increasing supply as the miners rushed to expand capacity over the past few years. It is now crunch time. The first to go will be producers in China and India who have cost levels over $100 / tonne. BHP/RIO/FMG are reportedly around the $50/tonne level. The Aussie producers wont go belly up, but there will be a big reset on profit expectations and the price resets permanently under $100.