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Global Financial Market Review


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Investors who are hoping for a better world within 18 months may be disappointed. The only way to get out of debt is to earn and pay it off. Europeans seem ready to endure short term pain of debt …

Investors who are hoping for a better world within 18 months may be disappointed. The only way to get out of debt is to earn and pay it off. Europeans seem ready to endure short term pain of debt readjustment now, instead of prolonging the problem with more debt like the UK and USA.

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  • 1. CLEAR AS A BELL VIEWS ON THE PAST, PRESENT AND FUTURE 2nd April 2009 Sound Advice SPEND YOUR WAY OUT OF DEBT!!! James Vinall – Senior Investment Officer A guy walks into a bank and his account manager says “you are so badly in debt, I’m not sure whether you are banking with us or we’re banking with you; how about we lend you more money so you can speculate to earn your way of this mess”. That is what Brown and Obama are doing and it is hardly surprising that Sarkozy, Merkel, Berlusconi et al think this is NOT a good idea. The only way to get out of debt is to earn and pay it off. The table below shows the G20 stimulus packages that have already been announced which total 1.4% of 2009 GDP. What is interesting is the official GDP figures for 2009 may end up being optimistic given the global nature of this recession (depression) Source: OECD The US Treasury announced 2009 estimates GDP US$ bil GDP growth % Stimulus per GDP Stimulus US$ bill on 17th March 2009 that US Saudi Arabia 603 0.4% 3.3% 19.89 Spain 1,344 -2.5% 2.3% 30.90 National Debt is $11 trillion, Australia 822 -0.3% 2.1% 17.27 which is US$36,000 for every USA 14,259 -2.2% 2.0% 285.18 citizen or US$71,000 for every China 8,268 6.0% 2.0% 165.36 South Africa 502 -0.8% 1.8% 9.04 tax paying worker. It now Russia 2,181 -2.0% 1.7% 37.07 requires US$6 of debt to South Korea 1,203 -5.9% 1.5% 18.04 produce US$1 of GDP and Mexico 1,537 -2.6% 1.5% 23.05 Germany 2,771 -3.2% 1.5% 41.57 debt is growing and GDP is Canada 1,316 -1.5% 1.5% 19.74 shrinking. This will take more Japan 4,249 -5.3% 1.4% 59.49 than a generation to pay back. UK 2,210 -3.1% 1.4% 30.94 Indonesia 950 1.9% 1.3% 12.35 Argentina 569 -2.8% 1.3% 7.39 Equity markets are up 26% France 2,057 -1.9% 0.7% 14.40 from the 6th March 2009 low India 3,485 5.0% 0.5% 17.42 on expectations of economic Brazil 2,022 -0.4% 0.4% 8.09 Italy 1,752 -2.7% 0.2% 3.50 recovery by late 2010. Given Turkey 911 -2.0% 0.0% - the truly enormous level of GDP US$ bil GDP growth % Stimulus per GDP Stimulus US$ bill debt and the indicated G20 Total 53,011 -1.3% 1.4% 821 willingness of the European leaders to let companies go bankrupt and unemployment rise, investors who are hoping for a better world within 18 months may be disappointed. Europeans seem ready to endure short term pain of debt readjustment now, instead of prolonging the problem with more debt like the UK and USA. THIS IS A MARKETING COMMUNICATION Intended for information only and should not be construed as an invitation or offer to buy or sell any investment vehicle or instrument. This note has not been prepared in accordance with legal requirements designed to promote the independence of investment research; and is not subject to any prohibition on dealing ahead of the dissemination of this marketing note. EquityBell Securities will provide extra detail on data or graphs used in this note upon requested.
  • 2. CLEAR AS A BELL VIEWS ON THE PAST, PRESENT AND FUTURE 2nd April 2009 Sound Advice FX We have previously covered how the US and UK are printing money within quantitative easing which should depreciate the US$ and Sterling. At the G20 meeting in London, both China and Russia are calling for a new reserve currency. They both appear keen on expanding on an internationally recognised basket of currencies created by the IMF in 1969 called the Special Drawing Rights (SDR). SDR comprises the US$, Yen, Euro and Sterling and is only used for international accounting like setting the maximum goods carried liability of airlines. The Chinese want to establish a new basket global reserve currency, managed by the IMF that can be used for trade, bonds and borrowing. This is because there is no other bond market of the same US$2 trillion size as the US market that can accommodate US$ sellers. In August 2005, China revealed the Renminbi currency (CNY) is fixed against a basket of world currencies that comprise the US$, the Euro, the Japanese ¥en, and the South Korean Won, with smaller weightings of UK Sterling, Thai Baht, Russian Ruble and the Canadian, Australian and Singaporean dollars. The weightings of the components within the basket are undisclosed, but analysis reveals the Japanese ¥en, Euro and Korean Won have a greater influence than the US$. What most commentators appear to have missed is that China’s currency is pegged to a basket that is remarkably similar to the SDR. The Financial Times reported today “China, which is pushing to end the dominance of the dollar as a worldwide reserve, has agreed a Rmb70bn ($10.24bn) currency swap with Argentina that will allow it to receive Renminbi instead of dollars for its exports to the Latin American country”. This looks like the first step for China to turn its currency into a fully convertible reserve currency. It will be interesting to see if China offers to pledge their vast US Treasury holdings into the IMF SDR “rescue deal” and swap the US$’s forward into SDR’s as a way of reducing their US$ exposure. The negative effect on the US$ would be substantial, but China would be hedged. While it will take many years to set up SDR as a liquid reserve currency alternative, rhetoric at the G20 may weaken the US$ in the near term. If an alternative to the US$ is being created like the SDR and countries are bypassing the US$ with their own swap agreements like China and Argentina, how long can faith be sustained in the Greenback. Harmony was the key objective G20 meeting in London as no one wished to undermine the fragile confidence politicians are trying to foster with the existing US$821 billion of G20 stimulus. Of the US$1.1 trillion “rescue deal announce today at the G20, US$750 billion was previously announced and the only real money is coming from the IMF sale of 403 tons of Gold which was also announced in February 2009. Source: Saxo Bank USDNOK Chart We suggest a target for the USDNOK around 5.92.
  • 3. CLEAR AS A BELL VIEWS ON THE PAST, PRESENT AND FUTURE 2nd April 2009 Sound Advice We also suggest a target for June 2009 US Dollar Index futures around 81. Commodities Gold Chart Source: Saxo Bank Gold is still seeing considerable scrap selling from Asian individuals (particularly China) as individuals need cash in the face of job losses and sharply contracting economies. Gold may also come under pressure from the G20 SDR creation rhetoric which is touted as a viable alternative to owning Gold. We are looking for Gold to head much lower (maybe US$835) before we consider buying for the longer term sometime in the future. Fixed Income Data Source: Yahoo Finance Central Banks around the world are 10 yr US Treasury Note yield currently very low @ 2.74% providing liquidity by bringing short term rates down close to zero. The US and 16 UK quantitative easing programs are 14 buying longer dated government bonds to provide liquidity further out on the yield 12 curve. At some time this year, longer 10 term interest rates (over 10 years) should start to rise. 8 6 When 10 year US Treasury rates come down to 2.5% (from the current 2.74%), 4 we suggest to sell short the 10 year UST 2 June future or buy the CFD of the 0 UltraShort 20+ years US Treasury Bond 1963 1965 1968 1970 1972 1974 1977 1979 1981 1984 1986 1988 1991 1993 1995 1997 2000 2002 2004 2006 2009 ProShares ETF (code TBT), expecting rates to rise.
  • 4. CLEAR AS A BELL VIEWS ON THE PAST, PRESENT AND FUTURE 2nd April 2009 Sound Advice Equities The S&P500 index has rallied 26% to 845 from the 6th March low of 666.79 mainly on short covering. Commentators are saying many investors want to buy on any pullback as they believe the economy will improve over the next couple of years and want to grab a bargain now. We are highly aware that the primary trend of equity markets is lower. The current fiscal stimulus packages are designed to halt deflation and inspire inflation as politicians and central bankers throw money at the economy until they perceive the “green shoots of recovery”. Below on the right is a chart of equity index performance each day past the ultimate peak of the market during a financial crisis caused by overburdening debt. We can directly compare how Wall Street 1929, Japan 1989, NASDAQ 2000 and the S&P500 2007 pan out over the subsequent days as Governments struggle to reflate economies. This would indicate that we have NASDAQ Comp from Mar 2000 Dow Jones Ind from Sep 1929 not seen the worst yet and the current reflation rally may run out Nikkei 225 from Dec 1989 S&P 500 from Oct 2007 of steam soon. “Sell in May and 100.00% S&P 500 - YOU ARE HERE go away” springs to mind The primary trend is lower. However, markets 90.00% rarely go down in a straight line and we should We suggest equity markets will expect a short covering rally/consolidation soon. 80.00% have a bull run to reach the Later we are likely to resume a grinding slide with possible technical targets of 400 for the S&P 500 and January highs of 870 and then 70.00% 2,000 for the FTSE 100 on sharply lower earnings 930 on the S&P 500, despite gloomy economics. 60.00% 50.00% Given that we consider this counter trend rally as a risky, 40.00% short term momentum trade, the scale and duration of this rally is 30.00% an unknown risk. We will review clients establishing a longer term 20.00% short position in equity indices 10.00% sometime in the next four weeks. 0.00% Conclusion 10 146 275 406 540 667 798 931 1060 1192 1336 1465 Data Source: Yahoo Finance The current “perception of coming inflation” momentum (not value) rally in equities should continue to the end of April and reach the resistance levels set in January (S&P 500 at 870 and then 930). After that we expect equity indices to resume the primary downtrend through to October / November 2009. We like Gold for the longer term, but remain short during the current selling pressure. We are looking for a retreat on the 10 year US Treasury yield down to 2.5% for a reversal and longer term advance in rates. Longer term we look for quantitative easing to weaken the US$. EquityBell Securities Dowgate Hill House, 14-16 Dowgate Hill, London EC4R 2SU Tel: +44 (0) 20 3189 2108 Risk Warning Notice: Equity Bell Securities is a trading name of Equity Bell Limited (registered office: Talbot House, 8 – 9 Talbot Court, London EC3V 0BP. Registered in England and Wales No. 6725781) is an Appointed Representative of London Islamic Investment Bank Limited, which is authorized and regulated by the Financial Services Authority. Whilst every attempt is made to ensure the accuracy of the information provided, no responsibility can be accepted for any inaccuracy. The information provided cannot be relied upon as constituting a recommendation, nor construed as any offer to sell, or any solicitation of any offer to buy investments. No liability is accepted for any loss whether direct or indirect, incidental or consequential, arising out of any of the information being untrue and / or inaccurate, except caused by the wilful default or gross negligence of EquityBell Securities, its employees, or which arises under the Financial Services and Markets Act 2000.