CLEAR AS A BELL
VIEWS ON THE PAST, PRESENT AND FUTURE
Sound Advice 24th June 2009
KEEP CALM AND CARRY ON
James Vinall – Senior Investment Officer
This is the first truly global financial crisis caused by over burdening debt and poor government and will probably
take more than twenty one months (from October 2007 to June 2009) to turn around and say we are past the
worst. That said, the sun is shining and central bankers and politicians are working overtime to highlight the
“green shoots” of recovery. European Central Bank (ECB) President Jean-Claude Trichet said on June 4 that the
region’s economy may be past the worst and return to growth by mid-2010. However, dissenting voices are now
appearing as IMF chief, Dominique Strauss-Kahn said on 15th June that "the G8 stance is that we are beginning
to see some green shoots, but nevertheless we have to be cautious as the large part of the worst is not yet
behind us."
Let’s focus on what we know
Servicing the massive debt in the USA, Japan and Europe suggests that their currencies have to depreciate.
Quantitative easing (QE) printing of money in the USA and UK is adding selling pressure. Longer term interest
rates are being pushed up by demand for restructuring and rescue package borrowing from both governments
and corporations, but note that this is not growth and expansion borrowing.
Since the beginning of the year we have seen the benchmark 10 year US Treasury note yield rise from 2% to a
peak last week at 4% and is currently 3.69%. Bond markets are implying difficult economic times ahead.
th
Equity markets are consolidating the gains seen since 9 March, but are besieged by new share issues with
much more expected.
US creditor nations are actively looking to hedge against a falling US$ and are accumulating hard assets (see oil
and copper inventories), giving an impression of increasing industrial activity. Commodity prices have risen with a
resulting appreciation in asset-backed currencies like Australian Dollar, Canadian Dollar, Norwegian Kroner,
Russian Rouble and South African Rand. Unemployment is still growing and earnings are still decreasing.
While inflation is picking up from increasing commodity prices, fiscal stimulus money from governments has been
slow to emerge in the real economy because rescued banks are deleveraging debt to survive. This suggests
consumer costs are going up without the necessary credit available to fund earnings expansion.
Market participants that have faith that the rescue packages will deliver the world from deflation back into growth
as though nothing has happened, brand arguments to the contrary as heresy. Time will reveal who is right.
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.

CLEAR AS A BELL
VIEWS ON THE PAST, PRESENT AND FUTURE
Sound Advice 24th June 2009
FX
The main currency economies of the USA, Euro zone, Japan and UK are all severely compromised by huge debt.
Their currencies can be likened to four patients in intensive care where it is not possible to predict which one will
be in greater trauma than the other three at any moment in time. Event risk makes predicting the cross rate
direction for the US dollar, Euro, Japanese Yen and Sterling extremely difficult.
The USA and UK realise they cannot meet their obligations without printing money via quantitative easing (QE).
The Euro zone collective has no agreed centralised mechanism at the European Central Bank (ECB) to print
money. Japan’s public debt is so huge from printing so much money over the past 20 years they cannot
realistically do much more.
In the face of paper (fiat) money being created out of thin air, hard assets are being sought by the major creditors
of the indebted nations. This would suggest that the commodity currencies like the Australian Dollar, Canadian
Dollar, Norwegian Kroner, Russian Rouble and South African Rand should outperform the fiat currencies in the
longer term.
Longer term, the US$ seems set to depreciate and we would suggest accumulating hard asset commodity
currencies against the US$ on dips.
Australian Dollar - AUDUSD chart Source Saxo Bank
Australian Dollar – AUDUSD
currently 0.7863
entry target 0.7860
stop loss 0.7710
Canadian Dollar - USDCAD chart Source Saxo Bank
Canadian Dollar – USDCAD
currently 1.1567
entry target 1.1610
stop loss 1.1780

CLEAR AS A BELL
VIEWS ON THE PAST, PRESENT AND FUTURE
Sound Advice 24th June 2009
Commodities Source: Saxo Bank
Gold Chart
Gold is seeing selling from speculators
as higher inflation expectations fail to
materialise and continuing scrap
selling from cash strapped individuals.
Gold should embark on significant long
term rally over $1,000 an ounce when
inflation expectations rise and the
Chinese are suspected of overtly
exiting the US$.
We are looking for Gold to head lower
to the US$905 an ounce technical
support.
We suggest buying ahead of this level
at a limit of US$911.
Data Source: Yahoo Finance
Fixed Income
TBT left scale 10 yr US Treasury Note yield (right scale) @ 3.69%
We are entering a period of 75 4.25
consolidation in the bond markets.
70 4
US Treasury 10 year note yields
have risen from 2% at Christmas 3.75
th 65
to 4% on 10 June and have since
3.5
dropped back to 3.69%. Bonds 60
are currently being bought as a 3.25
safe haven from over bought 55
equities and oversold US$. 3
50
Investors are looking for greater 2.75
signs of real economic recovery. 45
2.5
While central bankers are likely to 40
2.25
keep short term rates close to zero
for quite some time, longer term 35 2
rates are in a rising trend as
30 1.75
demand for money grows.
In the short term, flight to safety
could see US Treasury 10 year
yields come down to 3.25%,
before resuming the advance.
We suggest selling the 10 year US Treasury bond futures once yields reach 3.30% for a long term increase in
rates. Alternatively, buy the ProShares Ultra Short US Treasury 20+ years ETF as a CFD @ US$48.

CLEAR AS A BELL
VIEWS ON THE PAST, PRESENT AND FUTURE
Sound Advice 24th June 2009
Equities
Stocks have had a phenomenal rally since the 9th March 2009 low and the dose of economic reality that is
currently tempering the prices is being viewed as a buying opportunity. Having missed the last rally, there are
many individuals and fund managers who are determined to be in the next rally. They have faith that much
vaunted “Green Shoots” of recovery will emerge despite little real evidence.
Market participants are pre-disposed to be bullish and want to believe that economies are over the worst of the
recession. It does not seem to matter that unemployment, loan defaults, bankruptcies and inventories are still
rising, global GDP continues to be revised lower, US industrial capacity utilisation is 65% and air, sea and rail
freight volumes are still falling.
In the short term, equities and Gold are likely to continue to fall back, while money is shifted into bonds and the
US$ is bought.
Medium term, buyers of equities and Gold are likely to emerge as inflation expectations pick up and bonds and
the US$ get sold.
Data Source: Yahoo Finance
On the right is a chart of
equity index performance NASDAQ Comp from Mar 2000 Dow Jones Ind from Sep 1929
following the ultimate peak of Nikkei 225 from Dec 1989 S&P 500 from Oct 2007
the market during a financial 100.00%
S&P 500 - YOU ARE HERE
crisis caused by The primary trend is lower. After this consolidation we should
90.00%
overburdening debt. We can see the final last gasp rally to 1,000 on the S&P 500 and 4,650 on
directly compare how Wall 80.00%
the FTSE. Then a grinding slide down towrads the 6th March
2009 low of 666 for the S&P 500 and 3,460 for the FTSE 100
Street 1929, Japan 1989,
NASDAQ 2000 and the 70.00%
S&P500 now pan out over
60.00%
the successive days as
governments struggle to 50.00%
reflate economies.
40.00%
As we have not yet sucked in 30.00%
all the bystanders to reach
the “point of maximum 20.00%
bullishness”, stock markets
10.00%
are likely to have a last leg
higher with the FTSE 100 0.00%
reaching 4,667 (the high set 10 146 275 406 540 667 798 931 1060 1192 1336 1465
rd
on 3 November 2008) after
a pause at 4,520. The S&P 500 should reach 1,003 (the high set on 4th November 2008).
By September 2009 (or sooner) we expect a toping pattern around 4,650 for the FTSE 100 and 1,000 for the S&P
500. It should then start to become clear that forward corporate earnings are not strong enough to support
elevated equity prices, while bankruptcies, defaults, redundancies, repossessions are increasing and consumer
confidence is falling.
These concurrent events should see equity markets retreat in a grinding slide to the year end. There is potential
for the FTSE 100 to retest the 6th March 2009 bottom of 3,460 and the S&P 500 at 666. Remember, the Dow
Jones Industrial index took three years to finally bottom at 10% of its ultimate peak.

CLEAR AS A BELL
VIEWS ON THE PAST, PRESENT AND FUTURE
Sound Advice 24th June 2009
We keep a close eye on equity option implied volatility via the VIX index which is a good fear indicator.
Data Source: Yahoo Finance
The chart on the right reveals that
when the S&P 500 (in red – left hand S&P 500 VIX Index = 31.2
scale) falls sharply, the VIX index (in
blue – right hand scale) as a measure 1400 90
of option implied volatility, rises as put
1300 80
option protection is bought in a falling
market. 1200
70
60
Implied volatility in a normal market is 1100
generally between 18% and 28%. 50
Fear in November 2008 saw the VIX 1000
40
index hit an all time high over 80%.
900
The VIX is currently 31.2% showing 30
that there is little fear of a substantial 800
20
decline in equity indices at this time.
700 10
We had previously said “sell in May
600 0
and go away” but this current bear
08-Apr-09
08-Sep-08
08-Feb-09
08-Jul-08
08-Mar-09
08-Jun-09
08-Dec-08
08-Aug-08
08-Oct-08
08-Nov-08
08-Jan-09
08-May-09
market rally could take a little longer
before the reality of falling earnings
and consumer confidence brings high
valuations sharply into focus. We continue to believe the best opportunity in the stock market will be on the short
side during the second half of this year.
Conclusion
As bond markets are more than twice the size of the equity markets, fixed income flow data is the window to the
soul of global economies. While the bond markets are absorbing record amounts of new paper from
governments and corporations, the “keep calm and carry on” recovery will remain on track.
We see equity markets having a last gasp rally after the current consolidation, until the bond market starts
demanding sharply higher rates to lend money. When bond US Treasury 10 year yields reach 5%, equities may
peak and head lower towards year end.
We suggest that the US$, Euro, Yen and Sterling will underperform commodity currencies like AUD and CAD.
We suggest that Gold is set to advance in the longer term as a hard asset US$ and fiat currency hedge.
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