Smart Investment & Financial Strategies for the new financial year

By Joel Hewish B.Bus (Bank & Fin), GDipAppFin, GCertFinPlan, SA Fin

General Advice
The advice contained in this Seminar is general advice only. It has been prepared without taking into account your objectives, financial situation and needs. You should consider the appropriateness of the advice by taking into consideration your objectives, financial situations and needs before acting on the advice. Fortrend does not offer any information in this Seminar as a substitute for financial advice and recommends you obtain your own independent financial advice prior to making any decision based on any information contained in this Seminar. Joel Hewish is an Investment/Financial Adviser at Fortrend Securities. The opinions expressed are his own.

Wealth Management
Investment Themes for 2010 and Beyond • 26 April 2010 marked the end of a 13 month cyclical counter trend rally which forms part of a larger degree secular bear market and the commencement of Part 2 of the Global Financial Crisis. Very High probability of another wave of debt deleveraging most likely on a scale larger than GFC Part 1. Very High probability that global share markets will continue to fall significantly over the next 3 months. Very High probability that global share markers will decline below the lows of March 2009 before the end of 2012, but quite possibly much sooner than that. Expect most commodities to decline inline with global financial markets including GOLD during this same period. Expect the USD to APPRECIATE significantly against major currencies during much of this same period.

• • • • •

Wealth Management
BOTTOM LINE…………………

THE FUNDAMENTALS AND TECHNICALS ARE SIGNIFICANTLY SKEWED TO THE DOWNSIDE FOR THE COMING 24 MONTHS…..

BUT………….

You can still make money and LOTS OF IT!!!!!!!!!!!!

The Macro Economic Environment
The Great Debt problem

Debt to GDP before the GFC
Approximate level of US Total Debt which contributed to the 1930’s Great Depression

(Source: McKinsey Global Institute, ABS, Morgan Stanley research)

Total US Debt to GDP Ratio Now! Approximately $56 TRILLION
US Debt to GDP Ratios
450

Household
400 350 300

Total Private Government Total

Percent of GDP

250 200 150 100 50 0 1920

1930

1940

1950

1960

1970

1980

1990

2000

2010

(University of Western Sydney Associate Professor Steven Keen, www.debtdeflation.com/blogs/)

Australian Debt to GDP Ratios
Debt to GDP Ratios
100 200

Per cent of GDP (components)

80 70 60 50 40 30 20 10 0 1975

Personal Business Government Total Private (RHS)

160 140 120 100 80 60 40 20

1980

1985

1990

1995

2000

2005

0 2010

(University of Western Sydney Associate Professor Steven Keen, www.debtdeflation.com/blogs/)

Per cent of GDP (aggregate)

90

Mortgage

180

Australian Private Debt to GDP
Australia's Private Debt to GDP Ratio
175
But Australia’s different right? 1890’s Depression

150

125

Percent of GDP

1930’s Depression

100

75

50

25

0 1860 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 (University of Western Sydney Associate Professor Steven Keen, www.debtdeflation.com/blogs/)

Debt Contribution to Demand & Unemployment
Debt Contribution to Demand & Unemployment (Australia)
20
Debt levels begin to influence demand in the economy

0

10

4

5

6

0

8

5

Debt-driven Demand Unemployment (RHS)
1965 1970 1975 1980 1985 1990 1995 2000 2005

10

 10 1960

2010

(University of Western Sydney Associate Professor Steven Keen, www.debtdeflation.com/blogs/)

Unemployment Rate (Inverted)

15

2

Percent of Aggregate Demand

Household Debt Relative to Gross Income
Accumulation of US housing debt increases

Accumulation of Australian housing debt increases

(Source: ABS, Federal Reserve, Morgan Stanley Smith Barney)

US/Australian Real House Price Index

Australian and US housing prices commence multidecade uptrend

(Source: ABS, OFHEO, BLS, Morgan Stanley Smith Barney)

Re-capping what occurred during the GFC

US response was to keep the bubble alive.
US Fiscal and Monetary Stimulus (% of GDP) Length (Months) 43 13 11 16 16 8 8 ? Decline in GDP 27.0% 3.4% 1.7% 3.1% 2.6% 1.3% 2.0% 3.8% Combined % of GDP 8.3% 2.2% 3.3% 4.0% 2.8% 2.8% 7.2% 29.9%*

Peak to Trough Aug '29 - Mar '33 May '37 - June '38 Nov'48 - Oct ' 49 Nov'73 - Mar '75 July '81 - Nov '82 July '90 - Mar '91 Mar '01 - Nov '01 Dec '07 -

Monetary 3.4% 0.0% -2.2% 0.9% 0.3% 1.0% 1.3% 18.0%*

Fiscal 4.9% 2.2% 5.5% 3.1% 3.5% 1.8% 5.9% 11.9%*

Keeping the bubble alive appears an unlikely options next time. At some stage deleveraging will be needed, orderly or not. Decline in GDP would be much worse if it wasn't for the extraordinary level of stimulus
(Source: Federal Reserve, US Department of Commerce – Bureau of Economic Analysis, Congressional Budget Office; as cited in Grant’s Interest Rate Observer) * As estimated by James Grant in Grant’s Interest Rate Observer

Graphing the stimulus
Concerns of a debt induced deleveraging deflationary crash between 2000 - 2003 after the dotcom bubble lead to fiscal and monetary stimulus which appears out of proportion to other past crises. It now appears that given the size of the past stimulus and the current levels of debt in the US economy that debt saturation appears as though its likely here.

US Fiscal and Monetary Stimulus (% of GDP)
30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0%

Aug '29 - Mar '33

May '37 - June '33

Nov'48 - Oct ' 49

Nov'73 - Mar '75

July '81 - Nov '82

July '90 - Mar '91

Mar '01 - Nov '01

Dec '07 -

(Source: Federal Reserve, US Department of Commerce – Bureau of Economic Analysis, Congressional Budget Office; as cited in Grant’s Interest Rate Observer)

US Government Exposure
Total Financial Exposure of US Government ($bln) Asset Purchases Total Cumulative $2,269 $2,269 Hard Guarantees 12,890 $15,159 Implicit Guarantees 7,286 $22,445 Soft Guarantees $6,624 $29,069

(Source: Federal Reserve, Congressional Budget Office; as cited in Grant’s Interest Rate Observer)

All this from a government that is collecting just over $2.0 trillion dollars in revenue a year, is spending approximately $3.5 trillion and has ran 4 budget surpluses since 1970.

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

0

-2,000,000
Outlays Receipts Surplus or Deficit(−)

-1,000,000

Just 4 budget surpluses in the past 40 years!!!

US Government Fiscal Position

(Congressional Budget Office)

1970 1971 1972 1973 1974 1975 1976 TQ 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 estimate 2011 estimate 2012 estimate 2013 estimate 2014 estimate 2015 estimate

US Government Debt Position
Gross Federal Debt (‘000,000)
$25,000,000.00 $20,000,000.00

$15,000,000.00

$10,000,000.00

$5,000,000.00

$0.00

(Congressional Budget Office)

US Federal Reserve Expanding its Balance Sheet

But Australia’s different right?
Or are we just lagging by one cycle
US Financial cycle US Time period 1995 – 2000 Characteristics Aust’ Financial cycle Resource Boom Aust’ Time period 2003 – 2008 Characteristics Technology Boom • Internet lead technology revolution. • Initially lead by quality companies and market leaders. • Followed in the later stages by speculative companies with no or low cash flows. • China urbanisation lead resource revolution. • Initially lead by quality companies and market leaders. • Followed in later stages by speculative explorers with no or low cash flows.

Technology Bust

2000 – 2003

• Interest rates lowered to record lows. • Record fiscal deficits • Shallow recession
• Low interest rate fuelled housing and consumer lead recovery

Resource Bust

2008 – 2009

• Interest rates lowered to record lows. • Record fiscal deficits • Shallow recession (3rd qrt 2008 and 1st qrt 2009)
• Low interest rate fuelled housing and consumer lead recovery

Stimulus Induced Housing Boom & Economic Recovery

2003 – 2007

Stimulus Induced Housing Boom & Economic Recovery

2009 – ?

Sub-Prime Lead Housing Bust

2007 – 2009

• Record defaults by borrowers who were suspect from the start

First Home Buyer Lead Housing Bust? ?

?

• Risk of default by highly indebted late Gen X’s early Gen Y’s.

Extraordinary stimulus lead stabilisation

2009 – 2010

• Non-conventional stimulus approach

?

?

With all that liquidity and the recent stock market recovery, we are surely looking at a V shaped recovery............. AREN’T WE???

So why is the Money Supply Contracting?

Significance of M3 Contracting
"It’s frightening,“ said Professor Tim Congdon from International Monetary Research. "The plunge in M3 has no precedent since the Great Depression.

By Ambrose Evans-Pritchard Published: 9:40PM BST 26 May 2010 Telegraph.co.uk

Why is the Money Multiplier falling off a cliff?

Because US Banks are hoarding cash!!!

Maybe because no one can afford to borrow!!!

Number of new mortgages declining rapidly

And the second wave of mortgage resets has just started
WE ARE HERE

Economic Cycles Research Institute
Since 1968 a reading of -8.3% has ALWAYS been associated with a recession!!

Baltic Dry Index

Break of uptrend and sharp decline. Down 61.4% since Nov ‘09

But aren’t valuations attractive?? NO.... THEY STINK!!!
Major Bottom

S&P 500 12 month Trailing Dividend Yield

Does this look like a yield that signifies a major bottom?

Major Bottom

Major Top Major Top

Major Top

(Source: Standard & Poors, Robert Shiller)

Mutual Funds Fully Invested

All this and I haven’t touched on
The Debt & Deficit problems of….. • Greece


• • • • • • •

Spain
Portugal Italy Ireland Japan United Kingdom Dubai Eastern Europe

OR • China’s property bubble or its over exposure to US Federal Debt

Why the focus on just the US?
2008 Gross Domestic Product - Published by the World Bank 7 October 2009
$16,000 $14,000 $12,000 $10,000 $8,000 $6,000 $4,000 $2,000 $0

Global Gross Domestic Product
2008 Gross Domestic Product - Published by the World Bank 7 October 2009
United State Japan 25.1% 23.4% China Germany France 1.5% United Kingdom 8.1% Italy Brazil 1.7% 2.6% 2.7% 2.7% 3.8% 4.4% 4.7% 6.0% 7.1% Russian Federation Spain Canada India Mexico Australia Korean Republic Other

1.8%
2.0% 2.3%

The Technical Outlook
&
The Secular Bear Market & Market Tops

Elliott Wave Theory
End of Dotcom Bubble

We are here – GFC Part 2
Start of GFC

End of GFC Part 1 End of Dotcom Crash

(elliottwave.com)

Basic Theory • •

Elliott Wave Theory

Markets are patterned Those patterns subdivide into fractals (self-similar patterns appearing at every degree of trend) or degrees of patterns and are reflective of changes in social mood (investor sentiment). Markets are the best indicator for a change in social mood Social mood can be measured in waves, 3 waves up with 2 counter trend waves between. Social mood and changes in social mood dictate economic conditions NOT the other way around. Extremes in optimism indicate a change in social mood to pessimism is likely and vice versa.

• • • •

3 Basic Rules • Wave 2 never retraces more than 100% of wave 1.


Wave 3 is never the shortest wave.
Wave 4 never enters the price territory of wave 1. (elliottwave.com)

Elliott Wave Theory
3 Guidelines • • • The three-wave correction following an impulse usually terminates within the price territory of the previous fourth wave. If wave 2 is sharp and steep, wave 4 is usually a sideways correction, and vice versa. The wave most likely to extend is wave 3; the next most likely is wave 5.

Key wave characteristics
• • Wave 3 is always the strongest impulse wave. Wave C is usually the strongest corrective wave.


Impulse waves always sub-divide into 5 waves.
Corrective waves sub-divide into 3 waves, or a combination of 3 waves that move in the opposite direction of the larger trend.

(elliottwave.com)

US - S&P 500

Dow Jones Industrial Average

Australian - S&P ASX 200

United Kingdom - FTSE 100

Germany - DAX

Japan - Nikkie

AUD/USD Since 1983 Float

AUD/USD Cross Rate

Spot USD Gold Price

Spot USD Gold Price

Recommended Portfolio Strategy
Conservative Investors • • • Long - Short Term AUD Cash, Short Term Government Debt, Short Term Bank Bills. Long - Short Term USD Cash, Short Term Government Debt. Refinance property to enable extraction of equity for potential opportunistic purchases. Take advantage of high property prices.

Aggressive Investors
• • Long - Short Term AUD Cash, Short Term Government Debt, Short Term Bank Bills. Long - Short Term USD Cash, Short Term Government Debt.


• •

Short – Australian shares – covered short sales where available, long put options.
Over Weight Short – US shares – covered short sales where available, inverse etf’s, long put options. Refinance property to enable extraction of equity for potential opportunistic purchases. Take advantage of high property prices.

Investment Advisory & SMSF Admin Services
Investment Advisory • • • Personal Ongoing Investment Objectives & Risk Profile Assessment Personal Strategic Asset Allocation Advice Minimum 4 x Quarterly Tactical Asset Allocation Reviews


• • •

Minimum 4 x Quarterly Investment Reviews
Minimum 4 x Quarterly Liquidity Reviews Discounted brokerage on share transactions Notification of new issue of securities


• • •

Automatic settlement account for share transactions
Notification of change in investment recommendations Notification of new investment opportunities Portfolio administration and record keeping


Internet access to your investment portfolio
Pre-completed administrative documentation

Investment Advisory & SMSF Admin Services
SMSF Admin • Establish new funds including establishing Trust Deeds together with Product Disclosure Statements to be given to members of the new fund. ($1,237.50 - $1,775.00) For existing funds, if required, we can: • Arrange for a review of your fund’s Trust Deed and provide a Deed of Variation to ensure that the Deed is up to date and your fund can be administered effectively and does not pose any unnecessary restraints upon the trustees (Cost to transfer an existing fund is $1,375.00). We maintain records of all transactions of the fund;


• •

We maintain records of all transactions of the Fund;
We assist clients with documentation requirements; We provide clients with online access & reporting on all transactions and investment performance through the Investment Advisory & Administration Service.


We prepare all the funds annual financial statements, tax returns and audit; and
Where desirable register the fund for GST.

Fees & Charges
Investment Advisory Service
Sliding Scale – Funds Under Management
FUM Value $0 - $1,000,000 $1,000,001 to $2,000,000 $2,000,001 and above % on FUM incl GST 1.10% pa 0.88% pa 0.77% pa

Australianminimum $4,400 pa incl GSTsubject to minimum $110 incl GST Subject to a brokerage = 0.825%
Australian brokerage = 0.825% subject to minimum $110.00 International brokerage = 2.00% subject to minimum $100.00 Account Keeping Fee = $374.00 incl GST

SMSF Admin Service
$121.00 per hour. Fees generally range between $1,100 to $3,300 depending on number of investments & complexity.

How Our Costs Compare
Assumptions $500,000 investment portfolio invested in a balanced investment portfolio 60% invested in Australian listed securities 20% invested in International listed securities 20% invested in Australian cash and term deposits 10% portfolio turnover i.e. 10% exiting sold and 10% newly purchased VIC SUPER Admin Fees @ 0.5% capped at $1,500 per annum FUM @ b/w 0.53% - 0.55% Financial Adviser Fee b/w 0.80% – 1.10% FEES $1,500.00 pa $2,650.00 - $2,750.00 pa $4,000.00 - $5,500.00 pa FORTREND SECURITIES Admin Fees @ $121 per hour FUM @ 1.1% Account Keeping Fee Australian listed securities ($500,000 x 60% x 10% x 10% x 0.825%) International listed securities ($500,000 x 20% x 10% x 10% x 2.00%) TOTAL FEE ESTIMATE $8,150.00 - $9,750.00 pa $7,869.00 - $10,069.00 $400.00 pa FEES $1,100.00 to $3,300.00 pa $5,500.00 pa $374.00 pa $495.00 pa

The above fees have been provided as a guide only. Actual outcomes will vary depending on a range of factors including the alternative advisory firm used, investment performance, investment conditions, investment risk tolerance, investment options chosen etc. We recommend you speak to your adviser to gain a greater understanding of your likely fees and charges.

Fortrend Securities – Wealth Management
Please do not hesitate to contact us to arrange a time to meet with one of our advisers for a free no obligation meeting to discuss your needs and circumstances and find out how we can help you.
Contact details Website www.fortrend.com.au, Email info@fortrend.com.au, Phone During business hours (03) 9650 8400, Fax (03) 9650 8740, Toll Free: 1300 362 684, Postal address Level 41, 55 Collins Street Melbourne, Victoria 3000 Australia.

ABN: 95 055 702 693 AFSL: 247261