Mortgage-Bond Slump No `Fun' for Housing as Rates Increase: Credit Markets …

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)

U.S. Retail Sales Rise More Than Economists Forecast as Consumers Recover Sales at U.S. retailers rose more than forecast in November as holiday shopping got under way, a sign consumers will play a bigger role in the recovery.

Producer Prices in U.S. Climb the Most in Eight Months on Costs for Fuel Wholesale costs in the U.S. rose in November by the most in eight months, led by higher prices for gasoline, heating oil and fruit.

Mortgage-Bond Slump No `Fun' for Housing as Rates Increase: Credit Markets A slump in government-backed mortgage bonds that’s sent yields to the highest level since May is threatening a recovery in the U.S. housing market, which had been bolstered by record-low borrowing costs.

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

(Bloomberg)

Shipping Loan Market Share Tumbles 94% as Yuan Beats BRICs: China Credit Chinese banks, avoiding dollar- denominated loans as the yuan appreciates, are scaling back funding to shipyards and vessel owners two years after the government told them to boost their commitment to the industry.

China's Rate Pause May Show Consensus Difficulty, Deutsche's Jun Ma Says China’s pause in adding to October’s interest-rate increase may reflect the difficulty in reaching consensus as the State Council consults with government agencies, according to Deutsche Bank AG economist Ma Jun.

China's Stocks Rise as Software Companies Rally; PetroChina, Banks Decline China’s stocks rose to the highest in a month as computer software companies rallied on speculation the government will boost investment in the industry as part of new economic reforms, overshadowing declines by energy producers.

Taiwan Dollar Rises to 13-Year High as Fastest Growth in Asia Draws Funds Taiwan’s dollar, Asia’s best- performing currency this quarter, finished with an 0.5 percent gain after retreating from a 13-year high on suspected central bank intervention.

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

(Bloomberg)

Japanese Stocks Rise for Second Day; Nomura Leads Financial Shares Higher Japan’s stocks rose for a second day, led by financial shares, on speculation tax breaks will be maintained and after Deutsche Bank AG restated its “overweight” rating on bank shares.

JGBs Signal Economy Rebound as Tankan Points to Contraction: Japan Credit Japanese bond yields are rising the most since June 2008 as traders look toward faster global growth just when the nation’s economy shows signs of starting to contract.

Dollar Weakens on Speculation Fed to Signal Increase in Debt-Purchase Plan The dollar depreciated to a three- week low against the euro on speculation the Federal Reserve may buy more bonds to bolster the economy, while stocks and U.S. futures were little changed. Copper and cotton gained as Spanish and Belgian bonds dropped.

Asia Stocks to Gain as Much as 30% in 2011 on Stimulus, Deutsche Bank Says Asian stocks will next year offer “substantial” returns given the outlook for a recovery in the global economy and earnings growth, and as the U.S. takes steps to stimulate growth, according to Deutsche Bank AG.

Kan Orders 5 Percentage Point Cut in Japan Company Tax Rate to Spur Growth Japan’s Prime Minister Naoto Kan ordered a 5 percentage point cut in the nation’s corporate tax rate starting in the next fiscal year to boost an economy that is showing signs of contraction.

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

(Bloomberg)

Trichet Seeks Increased Bailout Fund to Allow Flexible Response to Crisis European Central Bank President Jean-Claude Trichet said European governments should consider extending and broadening the region’s bailout fund, stepping up pressure on leaders to fight the fiscal crisis.

DAX Benchmark Fluctuates; Lufthansa Gains, Shares of ThyssenKrupp Decline German stocks swung between gains and losses after the benchmark DAX Index rose to a 31-month high yesterday.

Most European Stocks Decline After Six-Day Rally; Outokumpu Shares Retreat Most European stocks declined as the Stoxx Europe 600 Index dropped for the first time in seven days before the Federal Reserve’s last regular meeting this year. U.S. stock-index futures fluctuated and Asian shares rose.

ECB Said to Consider Asking for Capital Increase as Cushion on Bond Losses The European Central Bank may ask members for a capital increase to protect itself from any losses stemming from its government bond purchases, said a euro-area central bank official with knowledge of the talks.

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

(Bloomberg)

Inflation Unexpectedly Quickens to Six-Month High of 3.3% on Food, Clothes The U.K. inflation rate unexpectedly accelerated to a six-month high in November, adding to the case for policy makers to rein in cost pressures.

U.K. Housing-Market Gauge Stayed Close to Lowest in 18 Months in November A U.K. housing-market gauge stayed close to the lowest in 18 months in November as demand for homes waned, the Royal Institution of Chartered Surveyors said.

Britain's Banking Market Is Too `Concentrated,' Metro Bank Chief Hill Says The U.K. banking market is too concentrated and not serving consumers well, according to Metro Bank co-founder Vernon Hill.

Irish, Portuguese Bonds Outpace Peers as ECB Speeds Purchases: Euro Credit European Central Bank purchases ensured Irish and Portuguese bonds beat their euro-region peers this month even as Deutsche Bank AG predicted Portugal will be the next country forced to seek aid.

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

Against this background the ALSI ended 0.32% up for the day closing out at 31666 which makes it

-0.13% undervalued at optimistic future growth rates, giving a 12 month forward return of 11.97%

10.18% overvalued at pessimistic future growth rates, giving a 12 month forward return of -0.21%

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

17.80                           17.37                           17.45                           17.64                           17.70

My model portfolio returns on an initial investment of R10, 000 after being invested for 233 days are as follows:

            Cash                            Stable Fund                 Balanced Fund             Aggressive Fund

 

            R10, 422.06                   R9,846.94                     R10,203.34                    R10,440.36

            +4.22%                         -1.53%                            +2.03%                         +4.40%

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