Seeking Absolute Returns

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Central Bankers are throwing money at the ecomony to fight deflation. They may create that perception in the short term, but getting individuals to spend on borrowing when the cannot service their current debt is not a long term solution. We may have found a respite, but we are prbably not out of the woods yet.

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Seeking Absolute Returns

  1. 1. MODEL PORTFOLIO SEEKING ABSOLUTE RETURNS 20th March 2009 Sound Advice EquityBell Securities was set up in October 2008 by a collective of seasoned market professionals to provide outstanding investment advice to clients running non-discretionary portfolios through direct market access brokers and wealth managers. The credo is absolute returns by giving sound advice in asset classes that are individually appropriate to the risk appetite and base currency of each particular client. The EquityBell Securities leveraged model portfolio was started on 27th January 2009 as a paper trade with an initial value of £100,000. The portfolio currently has an NAV of £94,459 -5.54% in 51 days* Starting Value £100,000 Leverage 0.25 times Portfolio NAV £94,459 Loss £5,541 -5.54% Only our most robust investment ideas will be placed into the portfolio explaining the rationale, entry price with comments on reasons for holding and explanation of the exit Loss taken £4,003 and price and net profit and loss. Current Positions Open trades FX Date Asset size FX price value margin Price value £ P/L none now 26/1/2009 MRW Long GBP 258.00 25,026 7,500 240 23,280 -1,746 shares 9,700 Commodities CFD’s None 26/1/2009 SBRY Short GBP 309.75 -25,012 7,500 307 -24,790 222 shares 8,075 CFD’s Fixed Income none Conclusion Equities As a “perception of coming inflation” play, we will look to buy Gold for the longer term at Food Retail Spread US$922 per ounce. US Treasury rates have come down quickly after the Fed Long Morrison CFD 258p announcement on Wednesday and we look for a retreat on the futures to buy another Short Sainsbury CFD 309.75p short term trading position. Longer term we look for quantitative easing to weaken the US$ and have set limits to sell the USD Index June futures. We are looking at a “deflation busting” countertrend rally in equities starting close to the support levels seen earlier this month to establish a trading long position. 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. 2. MODEL PORTFOLIO SEEKING ABSOLUTE RETURNS 20th March 2009 Sound Advice Closed trades Date Asset size FX price £ value margin Exit Exit £ P/L date price taken 26/1/2009 EURJPY Short EUR 118.606 92,988 2,800 02/02/ 113.35 4,155 FX 100k 2009 26/1/2009 Carrefour Long €50k EUR 26.495 50,341 7,000 04/03/ 24.97 -2,580 shares CFD’s 2009 26/1/2009 LVMH Short EUR 43.42 -50,367 7,000 04/03/ 45.25 -1,890 shares €50k 2009 CFD’s 26/1/2009 June Gilt Short 1 GBP 118.71 118,710 3000 05/03/ 122.00 -3,290 Future 2009 26/2/2009 Gold Long 100 USD 913.5 91,350 1300 16/03/ 926 921 10/3/2009 ozs 2009 25/2/2009 EURUSD Short EUR 1.2786 88,152 1,763 18/03/ 1.3080 -2,113 FX 100k 2009 18/3/2009 UST 1o Long 1 US$ 121.50 121,500 2,700 20/03/ 124.875 2,318 yr June contract / 2009 future GBP 26/1/2009 MRW Long GBP 258.00 50,052 7,500 20/03/ 240 -1746 shares 9,700 2009 CFD’s 26/1/2009 SBRY Short GBP 309.75 -50,024 7,500 20/03/ 307 222 shares 8,075 2009 CFD’s *These are gross figures that do not include commissions and funding charges on some products FX We have previously covered quantitative easing by the Bank of England (BoE) and Federal Reserve Bank (Fed). Both are on a path of using printed money to buy back their own government bonds which provides liquidity at longer dated maturities in addition to the short term interbank rates that have been slashed to virtually zero already. The Fed is buying back up to US$300 million of treasuries and the BoE is buying £75 billion (US$110 billion) gilts. The chart below is the US Dollar Index, which is a measure of the value of the US$ relative to a weighted geometric mean basket of the EUR, JPY, GBP, CAD, SEK and CHF. The US$ has weakened from since 2002 through to recent low in July 2008 @ 72 and is currently 83.72. USD Index @ 83.72 130 120 110 100 90 80 70 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
  3. 3. MODEL PORTFOLIO SEEKING ABSOLUTE RETURNS 20th March 2009 Sound Advice The chart on the right shows the US$ has appreciated 37% against Sterling since July 2008. Source: Saxo Bank The chart on the right shows the US$ has appreciated 18% against the Euro since July 2008 Source: Saxo Bank The chart on the right shows the US$ is down 15% against the Yen since August 2008 Source: Saxo Bank Fed Governor, Ben Bernanke will suffer a lower US$ to create inflation. The problem for investors is which currency pair to buy against shorting the US$ in these volatile markets. The European Central Bank may not be able to reach a consensus on lowering rates, quantitative easing and bank assistance for some time, which may keep the Euro higher for a while. As the USD Index is the basket measure of US$ weakness, it may be the best vehicle to trade as individual currency pairs are volatile. We would suggest selling 1 contract of the June NYBOT USD Index futures at a limit of 84.85 with an initial target of 80.5 and longer term target of 74.
  4. 4. MODEL PORTFOLIO SEEKING ABSOLUTE RETURNS 20th March 2009 Sound Advice Commodities Ben Bernanke’s quantitative easing package has encouraged investors to believe that inflation will return in late 2009 or early 2010. Looking at the chart below, Gold avoided the worrying head and shoulders pattern that was forming and bounced off the uptrend support line. Longer term we still support Gold rallying above US$1,000, but appears overbought considering the scale of Middle East Sovereign Wealth Fund and Asia individual selling pressure. We will look to buy back into Gold at a limit of US$922 for 50 ounces, which is half of the total position intended for the longer term. Source: Saxo Bank Fixed Income th We have taken profit on the 1 contract of the 10 year UST June future bought on 18 march at 121.00% at a 124.875 price of and booked a profit of £2,318. The Fed will continue to buy bonds to provide long term rate liquidity and manage an orderly decline of the US$. We will consider another short term long position if the 10 year UST June future approaches 122 26/32 Equities Source: Saxo Bank The S&P500 index (chart right) has rallied th 17% from the 6 March low of 666.79 mainly on short covering, but the breadth the market does not suggest wide acceptance that deflation has been defeated yet. 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”.
  5. 5. MODEL PORTFOLIO SEEKING ABSOLUTE RETURNS 20th March 2009 Sound Advice For economies to pull out of a recession, individuals need to have confidence to spend and the ability to borrow. Printing money to be lent out and spent to people who have already unsustainable debt levels is not a viable recovery strategy, but doing nothing is not an option for politicians. Government rhetoric and Central Bank action have scared off equity short sellers and may spark some buyers into equities thinking the economy “has got to be better this time next year”. There are promising signs for corporate growth coming through soon as bank lending resumes, but earnings expansion into the second half of the year, may stall as individuals refuse to spend. It should become apparent that debt has to be serviced from earnings and savings rates will continue to expand slowing consumer spending. This could be the trigger to return to the primary downtrend of the equity market and make new lows for the indices. Once equity indices come back to levels near the lows seen on 5th March 2009, we will consider a trading buy for the model portfolio, but the scale and duration of such a rally is an unknown risk. Food Retail Spread Morrison Supermarkets 250.00p on a 12.28 PE and a 2.01% div yield, 2009 est EPS 20.80p Sainsbury 314p on a 15.94 PE and a 4.17% div yield, 2009 est EPS 19.10p The spread between Morrisons and Sainsbury widened out to 67p triggering our stop loss to cut the position in half. We are long 9,700CFD’s of Morrisson @ 258p vs short 8,075 CFD’s of Sainsbury @ 309.75p and have crystalised a loss of £1,524. We continue to hold the reduced position. Conclusion As a “perception of coming inflation” play, we will look to buy Gold for the longer term at US$922 per ounce. US Treasury rates have come down quickly after the Fed announcement on Wednesday and we look for a retreat on the futures to buy another short term trading position. Longer term we look for quantitative easing to weaken the US$ and have set limits to sell the USD Index June futures. We are looking at a “deflation busting” countertrend rally in equities starting close to the support levels seen earlier this month to establish a trading long position. EquityBell Securities Dowgate Hill House, 14-16 Dowgate Hill, London, EC4R 2SU Tel: +44 (0) 20 3189 2108 www.equitybell.com 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.

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