No New Normal Next Year Seen by Strategists Predicting 11% Gain in S&P 500 …

Market sentiment: Positive but no one quite knows what direction to move in next. Reason being by historic standards, emerging market economies are basically fully priced, whilst developed market economies are offering nothing at all – so does the investor take the risk of entering into dangerous territory by buying into markets that are already fully priced – or do they leave the money at home earning nothing? Quite a dilemma!

Market fundamentals: (Countries in order of contribution to global GDP.)

USA. As things stand, is still too early to tell if the US’s is winning the battle to keep the current momentum of the recovery that is under way, going. The fact that Ben Bernanke has pledged to keep interest rates low and to keep markets a liquid as possible for as long as needed is a help, but now we need to get the American consumer spending and the Banks lending again. Things are however looking a little better as we now have some good news coming out of the US and not simply all bad news – but the emphasis remains on the “some” in the good news – and the Fed have indicated that they are far from convinced that the economy is now back on track and have indicated already that they will provide more quantative easing by buying up more government debt. Of course this is keeping US interest rates low and weakening the US$ - which is causing much upset globally – as can be seen in the numerous references made in the media to the words “currency wars”. Contribution to world GDP is 25% at 14 trillion US$ per year. Government debt is 53% of GDP.

China decided not to participate in the global recession and continues to do well. The fact that they continue to peg the Yuan to the US$, thus keeping their exports cheap and their imports expensive is causing a lot of political heat in the US thus putting a lot of pressure on the Senate and House of Representatives to “do something”. One can only hope that they do not as that would be tantamount to firing the first shot in a full blown currency war I think. Contribution to world GDP is 9.1% at 5.2 trillion US$ per year. Government debt is 17% of GDP

Japan has not had a good quarter, with GDP way below estimates and the Yen ending the quarter way to strong. Factor in the size of their debt, 20 years of deflation, and the Japanese predisposition to save rather than to spend makes me wonder just what it is they need to do to break out of this “death spiral”. Contribution to world GDP is 8.7 % at 5.0 trillion US$ per year. Government debt is 190% of GDP

Germany continues to break all sorts of records on the upside. It is however creating problems for the ECB as the ECB needs to keep its interest rates low for most of the other European Union Countries who are battling under a mountain of debt and declining growth rates, whilst it needs to raise interest rates to moderate German inflationary pressures – although latest figures seem to indicate that this may not be a problem at all. So far so good anyway! Contribution to world GDP is 5, 7 % at 3.3 trillion US$ per year. Government debt is 72% of GDP

Together the above countries make up 47% of global GDP, with the US making up more than half of this 47% on its own.

^^^^^^^ NEWS SNIPPETS OUT OF THE US ^^^^^^^

(Bloomberg)

No New Normal Next Year Seen by Strategists Predicting 11% Gain in S&P 500 Rising profits and cash balances will push the Standard & Poor’s 500 Index to the biggest three- year advance since the 1990s, surpassing forecasts for below- average returns, strategists at Wall Street’s biggest banks say.

U.S. Stock-Index Futures Advance, Led by Shares of Apple, General Electric U.S. stock-index futures rose, indicating the Standard & Poor’s 500 Index may extend its advance to the highest level since the week of Lehman Brothers Holdings Inc.’s bankruptcy in 2008.

Real Yields Show Dollar Can Still Outperform With Bernanke Printing Money The U.S. bond market is giving dollar bulls more reason to be optimistic after driving the greenback higher against the other 16 major currencies since the first week of November.

Rising Bond Yields Prove Lowest Financing-Deficit Cost Since 2005 for U.S. At a time when U.S. bond yields are rising at the fastest pace in more than a year, the amount the government pays to service its record deficit is the lowest since 2005 compared with the size of the economy.

Wall Street Sees Record Revenue in '09-10 Recovery From Government Bailout Wall Street’s biggest banks, rebounding after a government bailout, are set to complete their best two years in investment banking and trading, buoyed by 2010 results likely to be the second-highest ever.

^^^^^^^ NEWS SNIPPETS OUT OF CHINA ^^^^^^^

(Bloomberg)

China Said to Plan for at Least $1.1 Trillion Credit Expansion Next Year China is likely to set a target of at least 7 trillion yuan ($1.1 trillion) of new loans for 2011 after leaders met to decide key economic policy objectives for the coming year, said two people briefed on the matter.

China Risks `Rush' to Tighten in 2011 After Inflation Accelerates Past 5% China risks a more abrupt tightening in monetary policy next year after refraining from raising interest rates since October even as inflation accelerated to the fastest pace in more than two years.

Regulators Said to Consider Allowing Banks to Trade Yuan Options in China China may allow yuan options trading to help banks and companies protect their earnings from swings in foreign-exchange rates, according to four people with knowledge of the plan.

Default Swaps Jump Most Among BRICs as Inflation Breaches 5%: China Credit Investor perceptions of China’s credit are worsening at the fastest pace among the largest emerging markets on concern policy makers will slam the brakes on economic growth to curb inflation.

China's Stocks Jump Most in Two Months on Economic Reports, Rate Caution China’s stocks rose, pushing up the benchmark index by the most in two months, after the central bank refrained from increasing interest rates and government reports showed the economy is withstanding tightening policies.

China's Caution in Raising Rates `Positive' for Stocks, Huili Asset Says China’s decision to refrain from increasing interest rates and to order banks to set aside larger reserves instead will benefit stocks, a fund manager at Shanghai Huili Asset Management Co. said.

Hong Kong Residential Property Price May Be Entering Bubble, JPMorgan Says Hong Kong’s home prices may be entering a “bubble” amid a battle between surging liquidity and government efforts to cool the property market, JPMorgan Chase & Co. said.

^^^^^^^ NEWS SNIPPETS OUT OF JAPAN ^^^^^^^

(Bloomberg)

Japanese Stocks Advance on U.S. Consumer Sentiment, China's Rate Action Japanese stocks rose, sending the Nikkei 225 Stock Average to its highest close since May, as U.S. consumer confidence boosted the outlook for the global economic recovery and China refrained from raising interest rates.

Bond Market Signals No End to Deflation for Eight More Years: Japan Credit The Bank of Japan’s forecast for an end to deflation in 2011 and 35 trillion yen ($416.9 billion) of spending have done little to change the thinking in the bond market, where investors see eight more years of falling prices.

Japan Said to Consider Extension of Capital Gains Tax Break by One Year Japan may extend a capital-gains tax break by a year after the Financial Services Agency opposed ending it in 2011 as scheduled, according to two government officials familiar with the matter.

Euro Falls Amid Debt-Aid Disagreement Before EU Leaders Meet; Dollar Gains The euro weakened versus most major counterparts amid signs of division among European governments over how to stem the region’s debt crisis.

^^^^^^^ NEWS SNIPPETS OUT OF GERMANY ^^^^^^^

(Bloomberg)

German Stocks Gain as China Holds Rates Steady; Volkswagen, BMW, K+S Rise German stocks climbed for a second day after China refrained from raising interest rates even as inflation surged and as Europe’s leaders prepared to discuss a permanent mechanism to assist over-indebted countries.

EU Leaders Set to Focus on Debt Crisis Facility as ECB Grapples With Banks European Union leaders will this week discuss the creation of a permanent mechanism to shore up over-indebted countries as the European Central Bank tries to hammer out plans to aid the region’s weakest lenders.

Banks Reduce Greek, Irish, Portuguese Holdings in Second Quarter, BIS Says Banks reduced their holdings of Greek, Irish, Portuguese and Spanish debt in the second quarter as the sovereign crisis roiled credit markets, according to the Bank for International Settlements.

German Bonds Decline as Stock Market Rally Saps Demand for Safest Assets German government bonds fell for a second day as advancing stock markets reduced demand for the safest assets.

European Stocks Climb for Sixth Day; Kazakhmys Leads Mining Shares Higher European stocks climbed for a sixth day, extending a two-year high, after China refrained from raising interest rates even as inflation surged. Asian shares and U.S. index futures rose.

Berlusconi Uses Debt Crisis in Fight to Survive Italian Vote: Euro Credit Silvio Berlusconi’s fight for his political life enters its final round today with the Italian premier using the European debt crisis as a shield.

^^^^^^^ NEWS SNIPPETS OUT OF THE UK & IRELAND ^^^^^^^

(Bloomberg)

Bean Says U.K. Inflation Strength Raises Risk of Higher Price Expectations Bank of England Deputy Governor Charles Bean said the strength of inflation has increased the risk to price expectations and there may also be less spare capacity in the economy than previously assumed.

FTSE 100 Stocks Advance, Led by Mining Companies; Wellstream Shares Rally U.K. stocks rose for a third day as China refrained from raising interest rates and merger and acquisition activity buoyed Wellstream Holdings Plc and Yule Catto & Co.

Raw Material Costs Rise for Third Month in November by More Than Forecast U.K. raw material costs rose in November for a third month by more than economists forecast, driven by higher prices of oil, energy and imported goods.

Retailers See Christmas Sales at Least as Good as Last Year, BRC Predicts Almost two-thirds of U.K. retailers predict Christmas sales will be the same or better than last year as stores step up discounts, the British Retail Consortium said.

Home Sellers May Reduce Prices as Much as 5% in 2011 After December Drop U.K. home sellers cut asking prices for a second month in December to the lowest level in almost a year and may reduce them by a further 5 percent in 2011, Rightmove Plc said.

^^^^^^^ THE NUMBERS FOR THE DAY ^^^^^^^

Against this background the ALSI ended 0.24% up for the day closing out at 31565 which makes it

-0.45% undervalued at optimistic future growth rates, giving a 12 month forward return of 12.33%

9.89% overvalued at pessimistic future growth rates, giving a 12 month forward return of 0.11%

The average Money Market Rate at present is 6.08% (Trend is continuing downwards. starting at 7.26% on the 26/04/2010)

The closing CBT VIX (which essentially measures the degree of fear born out of uncertainty out there amongst share traders globally – with a value of 0 being “no fear” and 100 being unbridled terror. Please remember that as one can never be absolutely certain about the markets, there will ALWAYS be a degree of fear born out of uncertainty, but I would say anything above 20 shows a higher degree of uncertainty than “normal” with “normal” being somewhere between 10 and 20)

5 days ago                  4 days ago                     3 days ago                     2 days ago                     Yesterday

18.13                           17.80                           17.37                           17.45                           17.64

My model portfolio returns on an initial investment of R10, 000 after being invested for 232 days are as follows:

            Cash                            Stable Fund                 Balanced Fund            Aggressive Fund

            R10, 420.37                   R9,837.08                     R10,190.61                    R10,427.33

            +4.20%                         -1.63%                            +1.91%                         +4.27%

The “Cash” assumes a cost and tax free investment of R10, 000 into a money market fund. Returns are based on the average yield of 18 different money market funds.

Note that the figures for the Stable, Balanced and Equity Funds are shown after subtracting MAXIMUM upfront fees of 3.42% (including VAT) from the R10, 000 and applying ANNUAL FEES thereafter of 1.77% including VAT to the remaining balance, into perpetuity.

Have a great day! The CMEFS investment team