Obama Tax Deal May Boost Economy, Reduce Pressure for Fed Debt Purchases …

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)

Obama Tax Deal May Boost Economy, Reduce Pressure for Fed Debt Purchases President Barack Obama’s agreement to prolong Bush-era income-tax cuts may reduce pressure on the Federal Reserve to extend its $600 billion bond-purchase program while spurring U.S. economic growth.

Bank of America Muni Bid Rigging Payments May Be the `Tip of the Iceberg' Bank of America Corp.’s agreement to pay $137 million in restitution for taking part in a nationwide bid-rigging conspiracy for municipal-investment contracts may soon be followed by more settlements to repay the scheme’s victims, the Justice Department’s Antitrust Division head said.

Obama Tax Deal May Spark Business Hiring, Bank of America's Moynihan Says President Barack Obama’s agreement to extend current tax rates may help prompt U.S. business owners to boost hiring, said Bank of America Corp. Chief Executive Officer Brian Moynihan.

Plunging Home Prices Fuel Property Tax Appeals Swamping U.S. Cities, Towns A fiscal flood that threatens to swamp local government budgets across the U.S. overflows from file cabinets in the office of Patty Halm, chair of the Michigan Tax Tribunal.

Credit Ratings Can't Claim Free Speech in Law Bringing Risks to Companies When President Barack Obama signed the Dodd-Frank financial reform bill on July 21, he capped a year-long legislative battle to stop $1.8 trillion in global financial writedowns and losses from happening again.

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

(Bloomberg)

China Purchases $3.1 Billion of Japanese Bonds as Yen Beats Dollar, Euro China bought a net 262.5 billion yen ($3.1 billion) of Japanese bonds in October, the first time in three months the nation increased holdings of yen-denominated assets as that currency outperformed the dollar and euro.

Biggest Bond Slump Since '04 Not Over, Top Fund Manager Says: China Credit China’s bonds are unlikely to recover from the biggest slump in six years until at least March as the government raises interest rates to curb inflation, according to the manager of the country’s best-performing fixed-income fund.

China's Stocks Fall Most in Week on Concern Rates Will Rise This Weekend China’s stocks fell the most in a week on speculation the government will increase interest rates this weekend, boosting concern tightening measures will slow corporate profit growth.

China `See-Saw' Stocks Signal False Rally Will Falter: Technical Analysis Future rally attempts for the Shanghai Composite Index may falter after the benchmark gauge dropped below 3,000 last month, according to Chart Partners Group Ltd.

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

(Bloomberg)

Japan Machine Orders Fall for Second Month, Adding to Sign Growth Stalling Japanese machinery orders fell for a second month in October because of declining demand from the service sector, adding to signs that the nation’s export-led recovery is stalling.

Japanese Stocks Gain as Weaker Yen Boosts Outlook for Exports; Honda Rises Japanese stocks gained, boosting the Topix’s market value to its highest level in more than five months, after the yen weakened, raising expectations exporters’ earnings will improve.

Japan Bond Futures to Extend Two-Year Rally on Support: Technical Analysis Japanese bond futures may extend a rally after holding above a level of so-called support for more than two years, Mizuho Investors Securities Co. said, citing trading patterns.

Dollar Rises for a Third Day on Prospects U.S. Tax Cuts Will Spur Growth The dollar rose for a third day as speculation that extended U.S. tax cuts will bolster the economy drove Treasury yields higher and boosted demand for assets denominated in the greenback.

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

(Bloomberg)

German October Industrial Production Jumps More Than Economists Forecast Industrial production in Germany, Europe’s largest economy, rose almost three times as much as economists forecast in October, led by demand for investment goods such as machinery.

BMW's November Sales Advance 20%, Outpacing Delivery Gain at Mercedes-Benz Bayerische Motoren Werke AG, the world’s largest maker of luxury cars, outpaced sales growth at Daimler AG’s Mercedes-Benz unit last month on demand for the revamped BMW 5-Series and new X1 sport-utility vehicle.

Bund Declines, Pushing Yield Above 3% Mark for First Time in Seven Months German 10-year bonds slid, sending the yield on Europe’s benchmark government debt securities to more than 3 percent for the first time in seven months, as U.S. Treasuries slumped and the region’s fiscal crisis cooled.

German Stocks Decline; Shares of Automakers, Carl Zeiss Drop in Frankfurt German stocks slid, after climbing to a 30-month high yesterday, as losses in carmakers outweighed gains in Allianz SE.

European Stocks Advance for Third Day; Prudential Leads Rally in Insurers European stocks rose for a third day, extending a two-year high, as a rally in insurers outweighed speculation China may raise interest rates this weekend. Asian shares fell while U.S. index futures were little changed.

Banks in Europe Failing Market Tests for Stress With No Central Authority In the five months after the U.S. published results of its 2009 bank stress tests, the Standard & Poor’s 500 Financials Index rose 25 percent. Five months after the European Union released its version, the Bloomberg Europe Banks and Financial Services Index is down 4 percent.

German Exports Unexpectedly Fall as Demand From Euro-Area Countries Eases German exports unexpectedly dropped in October as Europe’s sovereign debt crisis and a cooling global economy curbed demand.

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

(Bloomberg)

Irish Lawmakers Back Budget as Lenihan Battles Country's `Worst Crisis' Irish Finance Minister Brian Lenihan won the backing of lawmakers in the first votes on his 6 billion-euro budget ($8 billion) to tackle what he called the “worst crisis in our history.”

FTSE 100 Stocks Fluctuate Amid Speculation S&N, Burberry May Receive Bids U.K. stocks swung between gains and losses as investors speculated that Smith & Nephew Plc and Burberry Group Plc may be takeover targets, offsetting a decline by Capital Shopping Centres Group Plc.

Banks in Europe Failing Market Tests for Stress With No Central Authority In the five months after the U.S. published results of its 2009 bank stress tests, the Standard & Poor’s 500 Financials Index rose 25 percent. Five months after the European Union released its version, the Bloomberg Europe Banks and Financial Services Index is down 4 percent.

Diamond Fund Seeks to Turn `Talismans of Magic' Into Commodity Investments Former Rapaport Group executives are creating a fund that’s looking to transform diamonds from the “talismans of magic” advertised by De Beers into commodity investments like copper and soybeans.

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

Against this background the ALSI ended 0.02% up for the day closing out at 31769 which makes it

0.39% undervalued at optimistic future growth rates, giving a 12 month forward return of 11.38%

10.64% overvalued at pessimistic future growth rates, giving a 12 month forward return of -0.72%

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

19.59                           17.92                           17.97                           18.13                           17.80

My model portfolio returns on an initial investment of R10, 000 after being invested for 227 days are as follows:

            Cash                            Stable Fund                 Balanced Fund           Aggressive Fund

            R10, 411.95                   R9,824.06                     R10,163.14                    R10,399.22

            +4.12%                         -1.76%                            +1.63%                         +3.99%

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