Weekly Market Update

Robert Davies, Patersons Securities

Follow me on Twitter @davies_robert

4/06/2012 12:06:24 PM Page 1 of 3

Weekly Overview
Week ending 1 June 2012

Greece has election on June 17th. So far, Syriza (anti bailout) looks to be in the lead over New Democracy (establishment/bailout party). Neither party wants to leave the Euro and its unlikely they would be allowed to leave anyway. Bank runs are increasing in southern Europe with deposits moving to German banks. Unfortunately, this wont necessarily save depositors because the Euro is a closed system with the ECB holding the net position. i.e. if funds move from Spain to Germany, the ECB will hold a debit with Spanish banks and a credit for German banks. This works fine if the money eventually moves back, but if the Spanish banks go bust, the ECB (and the German banks) are on the hook with whatever collateral the Spanish banks have. Needless to say when something looks so bad that it cant happen, it probably wont be allowed to happen China looks to be headed for a period of lower growth as their mercantilist economy relies on demand from foreign countries, particularly Europe. While there are rumours of a big stimulus initiative from the Chinese government, they are also saying it wont be anything like 2009. While we see China remaining under pressure, they are still growing and they have capacity to loosen monetary policy. As China and the world continue to slow, the resources boom is clearly coming to an end. Just in time for the government to start trying to tax it. I continue to remain sceptical of iron ore stocks where massive volume increases are coming through the system, I prefer LNG and Gold, where the underlying dynamics are more supportive. Retail sales in Spain dropped 9.8 percent in April in year-on-year. The fall in sales was the 22nd straight monthly decline, and was more than double the 3.8 percent fall posted in March, Spain's National Statistics Institute reported. This can only mean a further downturn in Spanish tax revenues and a worsening of the country's crisis. Spanish 10-year bond yields traded up to 6.5%. Be aware that 7% is generally seen as the make or break level. At 7% plus, it becomes obvious that a country can not support its debt structure and default may be the only answer. Any move close to 7% would likely see the ECB re-enter the market as a buyer of Spanish debt. From June 1st, Japan and China will start direct currency trading without the intermediation of the US Dollar. This is a significant loss to the international credibility of the US Dollar as worlds reserve currency as it will not be used between the worlds 2nd and 3rd largest economies. Currently, 60% of the China/Japan trade is denominated in US Dollars. Japan has also been approved to buy Chinese government bond issues. Chg (week)
0.9% -3.0% 1.7% 0.0% -16.1% 3.2% -4.1% -8.7% 0.7% -0.6% -0.7% 0.5%

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

1 June
4,116 1,278 2,373 3.75% 1.46% 1,624 331 83 82.85 0.970 1.243 6.371

Chg (ytd)
0.1% 1.6% 7.9% -11.8% -22.3% 3.9% -3.7% -16.0% 3.3% -5.1% -4.0% 1.1%
Flat for the year

Another cut due this month This is signalling depression Strong spike up on Friday Growth slowing indicator Growth slowing indicator USD, best of the currencies

On the Economy
Another poor week for the Australian housing market, with the RP Data-Rismark daily home price index recording a -0.24% decline in national capital city home values in the week ending 29 May 2012. Falls were experienced in Melbourne (-0.94%), Perth (-0.92%) and Adelaide (-0.28%), but Sydney (+0.41%) and Brisbane (Macrobusiness).

Weekly Market Update

Robert Davies, Patersons Securities
Follow me on Twitter @davies_robert

4/06/2012 12:06:24 PM Page 2 of 3

April retail sales fell 0.2% month on month, well below consensus of a 0.2% rise. March was revised up 0.2% to 1.1%. The internals were uniformly weak with only food and eating out eking out growth: So, more evidence of an April freeze but not dramatically so outside beyond the household sector. (Macrobusiness) May Purchasing Managers Index (PMI) data came out for many countries on Friday and further reinforced the drop in economic activity. A result under 50 shows a contraction in manufacturing activity. Here is a sample of the results, from Markit Economics, China 48.4, Holland 47.6, Poland 48.9, Czech Rep 47.6, Italy 44.8, France 44.7. You get the picture unfolding here, Recession. For comparison, the US is at 53.5 down from 54.8 in April. The US has a stagnant recovery, Europe is clearly contracting at a very fast clip. The jobs report also contributed to market falls on Friday. The US economy created only 69,000 jobs in April. Thats half of what they need to keep unemployment stable.

Market View (All Ords Index)

Today, the Australian market has moved below its two week trading range signalling another down move potentially to about 3950. Europe continues to drive the bad news but we can expect policy makers to come up with another dose of fix-it-up medicine to send the markets back up in the medium term. Value at this level is very good in dividend paying stocks. Weve had a hold / sell bias since February, but after a 10% correction since we peaked in april, and despite the negative news, I have to become more positive about the sharemarket simply on valuation terms. The dividend yields out of quality blue chip companies are outstanding and far in excess of term deposits. 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 higher would be an Australian federal election, currently 18m away, but could be closer. Irregardless, you are not buying for capital growth at this point, strictly dividends and income.

Stock of the Week

The Bank index chart is below. The index has again moved below their established trading range over the last year. Valuations a dividends are attractive at these prices.

Weekly Market Update

Robert Davies, Patersons Securities
Follow me on Twitter @davies_robert

4/06/2012 12:06:24 PM Page 3 of 3

How good are the dividends? Commonwealth Bank pays $3.25 in annually dividends for a share price of $49, or 6.6% plus franking credits. ANZ bank pays $1.42 for a shareprice under $21, or 6.7% plus franking credits. Term deposit rates, set to go down again in June, are around 4-5%.

Chart of the Week

Here is a chart of the A$ Gold Price (blue) vs and index of Australian gold mining stocks (green) for the last 1 year. The Gold price has increased by 17% while the gold miners have fallen by 30% during this period. Is this a buying opportunity? Well, it certainly looks like there is value in Gold mining shares!

SPTGLD.IF@IF / AUDUSD.FX@SFX: 9:57:10:

1673.8547

XGD.ASX@AUX: 11:57:06:

5281.1 1840

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4800 June 2011 July August September October November December January 2012 February March April May

1360 June