Chartered

Fortrend Securities - Wealth Management

Joel Hewish is an Investment/Financial Adviser at Fortrend Securities. The opinions expressed are his
own.

Edition No. 5
12th May 2010

Bottom Line: While the end of the bear market rally has yet to be confirmed, the evidence overwhelmingly
points to the conclusion of the bear market rally from March 2009 and the commencement of the next leg
down in the larger degree bear market. If you have not moved to manage these risks already, you need to
ask yourself WHY NOT, and begin to do something about it!!

Chart 1 US S&P 500

Events over the past fortnight have proven that the positive earnings surprises coming from the
United States werent enough to keep the bulls in control of global stock markets.
Worries surrounding, in particular, European sovereign debt became evidently too much for
investors to feel comfortable with and a subsequent swift and scary sell-off ensued.
In the last edition of Fortitude we highlighted the blow out in spreads on Portugals Credit Default
Swaps and the significance of the move. It now appears that other investors thought the move was
significant as well.
Whether or not the peak in the S&P 500 we saw in April was the market top for the rally or not,
although we believe it likely is, these are not normal times.
Structurally, the global economy is heavily indebted and history suggests that circumstances such
as these do not tend to be resolved smoothly.
Chart 2 S&P 500 A closer look

Taking a closer look, the S&P 500 broke briefly below the uptrend line (green line) which connects
the low of March 2009 with the low of February 2010.
This signals a potential trend change but does not confirm it. This break is further complicated by
suggestions the sell-off was caused by several erroneous trade errors.
The blue line which connects the high in April 2010 with the lower high 3 days later signalled the
beginning of an intermediate downtrend, however, so far a larger degree downtrend has not been
confirmed.
Key resistance levels which the recent bounce will likely run into will be at either the blue
intermediate downtrend line or the red resistance level around 1,200, if it gets to either of those
points.
Rejection down from either of these areas will see a continuation of the intermediate downtrend
and indicate lower prices in the short term.
Confirmation that a larger degree downtrend has begun will be dependent on whether the market
breaks below the lows of February 2010, being 1,044, and the subsequent price action after the
break.
However, as discussed over recent weeks, all the necessary ingredients are in place for a significant
market top for the S&P 500.
Chart 3 - S&P ASX 200

The Australian S&P ASX 200 has bounced off an approximate level of support around 4,500. As
such, technically we cannot yet definitely conclude that the bear market rally since March 2009 has
concluded, however, as with the S&P 500, the evidence overwhelmingly points towards a market
top now being in place.

Chart 4 S&P ASX 200 A closer look

We draw an intermediate downtrend line (blue line) connecting the high in April 2010 and the
lower high 4 days later and extend it down.
This downtrend line is likely to provide resistance for the market to move above this in the short
term with a break above only likely to move as high as the red line and thereafter the green
uptrend line.
If prices rise to these resistance levels and break down, this would be a clear negative for future
prices.
 Any break below approximately 4,500 should be watched carefully. The price action following a
break below will confirm whether we have commenced a larger degree downtrend. A trend that, if
we are correct, and current events support this view, will see prices decline significantly from
where they are now.

Chart 5 US Monthly Mortgage Rate Resets

We are here

(Source: Credit Suisse)

This is a graph that was first published in the first edition of Chartered. It shows the value of US
mortgages which are due to reset to higher interest rates over the coming years.
The purpose for showing this graph again is to highlight that the issues currently faced run far
deeper than just the current sovereign debt problems in Europe.
It is estimated that almost of US mortgage holders owe more on their mortgage than their
property is worth.
This graph shows that the US property market, unfortunately, is unlikely to receive any reprieve
over the next 24 months with another wave of mortgages due to reset to higher interest rates over
that period.
What impact will this have on an economy that is faced with 9.9% unemployment, a housing
market that has almost 25% of its mortgage holders owing more than their property is worth and
an economy with a debt to GDP level at almost 400% (approximately twice the level of that
reached before the start of the great depression)?
Chart 6 AUD/USD Exchange Rate

In the first edition of Chartered, we highlighted the relationship between the AUD and the USD in
times of economic uncertainty. In that edition we displayed what occurred during the Asian
financial crisis of 1997-98, the bursting of the tech bubble between 2000 and 2002 and again
during the height of the Global Financial Crisis between 2008 and 2009.
This chart serves to only reinforce that relationship but on a more micro level. Once again we can
see that when the problems surrounding Dubai came to light in mid October 2009, the AUD was
sold off, when Greeces debt problem first came to light in January 2010 through to February 2010,
the AUD was again sold off. More recently with concerns surrounding the rest of Europe coming to
light, the AUD was again sold off.
Quite clearly, one can extrapolate that if you are of the view that further weakness is likely ahead,
one could reasonably assume that we can expect to see the AUD deteriorate as well.
The reasons for this relationship are numerous, but primarily can be linked to the following: firstly,
the Australian dollar is tied to the outlook for resource prices, which in turn is tied to the future
prospects for global economic growth. When demand for commodities weakens, so does the
demand for our dollar.
Secondly, the US dollar is the worlds reserve currency and there is a perception, true or not, that
the US is the safest place to put your money in times of financial stress. Safety, it is thought, can be
found in the biggest economy which has the most liquid currency.
Thirdly, the majority of investment capital tends to come from overseas. When investors get
nervous, they tend to want to sell down assets they dont have at home and invest within their
own regions, regions that they naturally tend to be more comfortable with.
And finally, most of the worlds debt is denominated in US dollars. In times of financial uncertainty,
particularly when investors wish to deleverage or are forced to deleverage, as was the case during
the Global Financial Crisis, they need to buy US dollars in order to pay down US dollar denominated
debt. The period between July 2008 and October 2008, where the US dollar appreciated
approximately 63% is a case in point.
Therefore, if concerns continue to persist, as per our expectations, then one would likely do quite
well to hold a good proportion of their assets in US dollars, even if it is just in cash earning almost
zero percent.
Chart 7 Debt to GDP Ratios

(Source: McKinsey Global Institute, ABS, Morgan Stanley research)

The above chart shows the extent of the debt problem is simply not limited to Europe, or the
United States, but basically every developed economy.
Because this chart is based on 2008 data, the actual picture is worse than that above.
To put this chart in context, every country listed above has a total debt to GDP ratio greater than
200%. It was this level of debt which in 1929 helped lead to the great depression in the United
States.
If we fast forward to today, the United States alone has a total debt to GDP ratio estimated at
approximately 400%.
That represents approximately $70 trillion dollars worth of debt which the United States
government, corporate sector and households alone have accumulated.
When you add the rest of these countries above to the picture, the problem gets a whole lot
worse.
Yesterday the European Union put together 500 billion of support with an additional 250 coming
from the IMF, i.e. non-Euro countries, meaning predominately the United States.
The European Central Bank has also decided that it will open up its balance sheet and conduct a
purchasing program of public and private debt, effectively monetising some of this debt like the US
Federal Reserve over recent years.
However, when you are talking billions in an extraordinary trillion dollar problem, confidence that
any of these measures will have a lasting desired effect is low.
Markets are nervous and large institutional investors are aware of the extent of the problems being faced.
Violent and scary price swings are nothing unusual in times of uncertainty and when extreme levels of
optimism quickly changes to pessimism, it can leave many investors exposed.

The greatest uncertainty provides the greatest opportunity.

As such we strongly encourage you to contact us to discuss your portfolio, how it is positioned, how you
can manage the risks and prosper during these uncertain economic times.

We hope you have enjoyed this edition of Chartered and found the content of interest. If you would like
me to analyse a particular market or chart from a technical point of view, please email your requests to
jhewish@fortrend.com.au and we will endeavour to look at any requests in upcoming editions.

In the meantime, if you would like to arrange a time to discuss your portfolio and some of the strategies
which can be used to help you navigate the prevailing market conditions, please do not hesitate to contact
me.

Until next time, have a great fortnight!!!

JOEL HEWISH B.Bus (Bank & Fin), GDipAppFin, GCertFinPlan, SA Fin

Investment / Financial Adviser
FORTREND SECURITIES - WEALTH MANAGEMENT
Australian Financial Services Licence No. 247261

Chartered is a fortnightly publication from Fortrend Securities Wealth Management and is provided for the
purpose of general information only. The views and opinions expressed in the publication are those of Joel
Hewish and do not necessarily match those views of Fortrend Securities International Advisory. This
publication is provided as general information only and does not take into account your personal
circumstances, aims and objectives and should not be considered personal advice. You should first consult
a licenced Investment or Financial Adviser before acting on any of the information provided in this
publication.