INVESTOR NEWSLETTER 4th QUARTER UPDATE

NOVEMBER 2011

EMIRATES CAPITAL ASSET MANAGEMENT

CONTENTS
1) 2) 3) 4) MARKET COMMENTS TECHNICAL ANALYSIS TACTICAL ASSET ALLOCATION RECOMMENDED HOLDINGS

1) MARKET COMMENTS
By Dwayne Malone It appears this past week could potentially have been a pivotal event in the ongoing European debt crisis. Clearly there was a severe change in sentiment from the previous week where it was generally believed a work around solution would be found to the current European debt crisis. This was clearly spelled out in this weekends Euro market wrap courtesy of DailyFx:

level The Euro hit the lowest level in nearly two months year-tolast week on approach to the year-to-date low at

1.3146 against the US Dollar as the Eurozone newsdebt crisis continued to fester. The news-flow has been nothing short of dismal, with Portugal and Belgium getting downgraded by Fitch and S&P respectively while Greece reportedly picked a fight with its creditors over an upcoming bond

For the week ending Friday, 25 November 2011 the major worlds markets closed as follows: Close Dow Jones Industrial Average ($DJAI) S & P 500 ($SPX) Nasdaq Composite Average ($COMPQ) Japan Nikkei Average ($NIKK) French CAC 40 ($CAC) German DAX Composite ($DAX) British FTSE 100 ($FTSE) Sydney All Ords ($AORD) China Shanghai Composite ($SSEC) EMIRATES CAPITAL ASSET MANAGEMENT 11231 1158 2441 8160 2856 5492 5164 4057 2380 Weekly Change -4.78% -4.69% -5.09% -2.57% -4.67% -5.30% -3.70% -4.45% -1.50%

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swap meant to relieve its debt burden (to say 10nothing of the German 10-year bond auction fiasco). fiasco). These are all minor issues however true relative to investors true concern, that German intransigence will doom the single currency. The abject failure of Eurozone politicians to meaningfully contain the spread of the debt crisis up to this point is arguably a foregone conclusion. Despite countless summits comprehensive producing comprehensive remedies over nearly two years, officials have proven themselves unable to convince the markets that they are truly serious about sovereign risk. As many (including ourselves) have argued for some weeks now, the only two options this late in the game are joint Eurobonds a setup that would coeffectively allow healthier core countries to codebtsign loans to their debt-strapped brethren or bondan aggressive bond-buying program from the European Central Bank to hold down regional buy borrowing costs and buy time for structural reforms. Germany has been quick to reject both options, claiming Eurobonds will allow profligate countries to side-step reform with impunity sidewhile an ECB version of quantitative easing will Eurobond unleash inflation. Admittedly, the Eurobond option is not a great one. Looking past the moral hazard argument, such a scheme would practically take a long time to set up, and time is not something that Eurozone politicians have in surplus at this point. On the other hand, if the given ECB were to be given the green light to enter the fray as a true buyer of last resort for member states bonds, it could do so quickly and provide immediate relief. Indeed, the inflation implications of such a move seem hardly problematic now as slowing growth bears down on price growth, so if ever there was time to print money than this is it. With all of this in mind, the spotlight in the week twoahead will turn to a two-day meeting of Euro area finance ministers starting in Brussels on containing Tuesday, with ECB involvement in containing

spreading turmoil likely in focus. Indeed, if sitpolicymakers emerge out of the sit-down with halfanother half-baked proposal akin to what was announced in October, traders are unlikely to respond favorably. Against this backdrop, a long list of countries including Italy, Belgium, France and Spain are set to hold bond realauctions, giving EU politicians a real-time reading on traders assessment of their efforts via yield levels. If Berlins administration is ready to can meaningfully deal with the crisis, it can sell ECB involvement to their population as a bulwark against deflationary pressure amid slowing growth rather than a bailout (which would not be entirely dishonest considering the sharp slowdown in headline CPI being forecast for 2012). It would be wise for Germany itself, for as an exporter it would benefit from saving the single currency while driving down its value. The rest of the Eurozone is best to press and pray for just such an outcome.

It appears the end of the kick the can down the road exercise is close at hand and we are approaching a climax. Over the past 2 months the market has dealt severe punishment on those countries who have not exhibited a true desire to reform in terms of increased bond yields demanded for sovereign bond sales. In the process two political leaders have been replaced by the market (Papandreou in Greece and Berlusconi in Italy). The key is where we go from here. As said above, the markets were in a fundamental and technical condition to advance into year end. Year-to-date the markets are down on all major indexes and we are entering what is traditionally the best months of the year to be invested in equities (Nov-Apr annually). In addition the Thanksgiving week has traditionally been a

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very bullish time to be in the markets but last weeks Thanksgiving gave the worst performance since 1932! Portfolio managers have severely underperformed the markets given the incredible volatility present over the past year and it is my belief there will be a concerted effort on their parts over the next month to window dress portfolios going into year end. U.S. Economic data has been quite encouraging over the past few weeks and the economy in the U.S. remains in muddle along mode. Fundamentally corporate profits in the U.S. are at record levels due to high productivity gains combined with a consumer who still appears willing to spend despite the terrible jobs picture. This past week I noted both rail and truck traffic in the U.S. remains strong and more indicative of a growth mode as opposed to a slow down mode. Transportation metrics such as the American Trucking Association's Truck Tonnage Index and the American Association of Railroad's Weekly Rail Traffic Report both showed a manufacturing sector that remains in growth mode. Truck Traffic:

said. Over the last two months, tonnage is up nearly 2% and is just shy of the recent high in January of this year. Manufacturing output has been the primary reason why truck freight volumes are increasing more than GDP. The industrial sector should slow next year, but still grow more than GDP, which means truck tonnage can increase faster than GDP too, he said."

Railway Railway Traffic:

The Association of American Railroads (AAR) today reported gains in weekly rail traffic, with U.S. railroads originating 301,919 carloads for the week ending Nov. 19, 2011, up 1.1 percent compared with the same week last year. volume Intermodal volume for the week totaled 243,234 trailers and containers, up 3 percent compared with the same week last year. Eleven of the 20 carload commodity groups posted increases compared with the same week in 2010, including: nonmetallic minerals up 30.6 percent; percent; petroleum products, up 21.3 percent, and motor vehicles and equipment, up 16.3 percent. The groups showing a decrease in weekly traffic included: primary forest products, down 13.8; farm products, excluding grain down 12.4, and grain, down 11.9 percent. Weekly carload volume on Eastern railroads was down 1.2 percent compared with the same week last year. In the West, weekly carload volume was up 2.7 percent compared with the same week in 2010. For the first 46 weeks of 2011, U.S. railroads cumulative reported cumulative volume of 13,444,752 carloads, up 1.8 percent from the same point last year, and 10,584,178 trailers and containers, up 5.2 percent from last year.

"The American Trucking Associations advance seasonally adjusted (SA) For-Hire Truck Tonnage ForIndex increased 0.5% in October after rising a revised 1.5% in September 2011. The latest gain put the SA index at 116.3 (2000=100) in October, October, up from the September level of 115.8. Compared with October 2010, truck tonnage was up 5.7% following an increase in September of 5.8% above a year earlier. Further, Octobers tonnage reading was just 4.4% below the indexs all2005. all-time high in January 2005. Tonnage readings continue to show that economy is growing and not sliding back into recession, ATA Chief Economist Bob Costello

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If Europe took care of business quickly, it is my belief global stock markets would rally sharply as early as next week. Unfortunately, there is a major ongoing political crisis in the region and until it is sorted out the volatility and downtrend will continue.

2) TECHNICAL ANALYSIS
The technical picture this week deteriorated significantly. What started out as a promising setup on both the daily (short term) and weekly (medium term) charts rapidly turned around as of Mondays open. The majority of the price charts are now bearish on the daily and neutral-to-bearish on the weekly. This is combined with bearish confirmation on the monthly charts that has been in place since September. However, short term markets are oversold and due for bullish turn.

Cycles
Decennial -Year 1 of the 10 year Decennial pattern

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The first table shows the DJIA for Presidential Year 3.

-Year 3 of the 4 year Presidential Cycle

Year 1887 1891 1895 1899 1903 1907 1911 1915 1919 1923 1927 1931 1935 1939 1943 1947 1951

Total return -8.42% 11.11% 1.68% 9.20% -24.03% -37.73% 0.40% 81.66% 30.45% -3.25% 28.75% -52.67% 38.53% -2.92% 13.81% 2.23% 14.37% 20.77% 16.40% 17.00% 15.20% 6.11% 38.32% 4.19% 20.27% 2.25% 20.32% 33.45% 25.22% 25.32% 6.43% 14.85%

MDD 16.98% 9.34% 19.35% 24.91% 37.73% 45.00% 16.23% 15.88% 13.43% 18.62% 10.01% 62.03% 9.76% 21.58% 11.14% 11.53% 7.79% 10.02% 9.89% 6.44% 9.92% 16.08% 11.07% 11.25% 6.83% 36.13% 6.93% 3.29% 11.53% 14.91% 10.03% 16.64%

MDD date 10/15/1887 7/30/1891 12/21/1895 12/18/1899 11/9/1903 11/15/1907 9/25/1911 5/14/1915 12/22/1919 10/27/1923 10/22/1927 12/17/1931 3/14/1935 4/8/1939 11/30/1943 5/17/1947 6/29/1951 10/11/1955 9/22/1959 11/22/1963 11/8/1967 11/23/1971 10/1/1975 11/17/1979 8./8/1983 10/19/1987 12/10/1981 8/24/1995 10/15/1999 3/11/2003 11/26/2007

Should we close out the year below 11577 on the Dow Jones Industrial Average (currently 11231) it would be the 1st losing year in the 3rd year of a 7th since Presidential Cycle since 1939 (and only the 1887).

1955 1959 1963 1967 1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 Averages

There has not been a down 3rd year since 1939. October and November each had 7 MDD's, December had 5, March, May, August and September each had 2 and April, June and July each had 1.

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-Within the 6 month strength period of the Annual Stock Market Cycle

We are currently in the 2nd month of the 6 month strength period as defined by the months of Nov-Apr inclusive. Since 1950 the months of Nov-Apr produced an average yearly gain of 7.3% in the Dow Jones Industrial Average whereas the months of May-Oct produced an average gain of only 0.1%. Needless to say the strongest (and safest) time to be in the markets historically is from November-April yearly.

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The SPX monthly chart remains bearish from the end of August 2011. The following constitutes a bearish alignment: 1) price closed the month below the 10 month simple moving average, along with 2) confirmation from the associated technical indicators as indicated on the chart. It is interesting to note on the chart we still have a non-confirmation relative to the previous head-fake in mid-2010 on the RSI (14). It is the only technical indicator on the chart yet to confirm so must be assumed to be an outlier which should come into alignment soon. Until proven otherwise it must be assumed we are headed lower. Good support levels are shown near 1020-1030 on the chart along with the 50% Fibonacci retracement level. This would be a good initial price target for the current bear market decline (which would be an approximate 25% decline from the 1370 peak and typical of a standard bear market decline). THE MONTHLY CHART REMAINS BEARISH AND INDICATES LOWER PRICES AHEAD OVER THE NEXT FEW MONTHS.

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The SPX weekly chart was looking somewhat bullish up until the past week. Most of the technical indicators had come into bullish alignment (as shown by the dashed green line) and there was every reason to believe the probability of the market advancing through Thanksgiving and into the year end was strong. However, it appears the European situation thwarted that attempt and now we need to monitor whether the intermediate term trend reverses back to bearish. As noted on the chart, during the last advance both the ADX and OBV did not confirm the move. This had me somewhat suspicious of the advance. Now, by the same token; this decline is not confirmed by both the Full Stochastic and MACD. Either they are late to the game and will come into alignment over the next week or they are right. Until proven otherwise it is safe to assume the intermediate direction is neutral. It is too early to call for huge downside and too soon to call for huge upside. Unfortunately sometimes when you have conflicting indicators the sit on the fence approach is warranted. NEUTRAL THE WEEKLY CHART IS CURRENTLY NEUTRAL AND INDICATES MARKET INDECISION OVER PRICE DIRECTION IN THE NEXT FEW WEEKS.

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The short term daily SPX chart turned bearish on November 16 (as shown by the vertical red line on the chart) with all technical indicators in alignment. Key price support was broken at the 12181220 level. This is a very important level and clearly indicates the bears currently have the short term advantage. On the bright side, this decline has been on low volume (you always look for volume to support a given price movement) so it appears there are not a lot of institutional investors running for the exits. It is also interesting to note the ATR (Average True Range) has been very well behaved over the decline. Normally strong declines are supported by an INCREASE in average true range due to panic selling. In this case the ATR has continued to DECLINE. This is short term positive. Previous support at the bottom of the blue box near 1120 is evident as well as a parallel declining channel line Ive drawn on the chart. Price is approaching oversold and this suggests a short term bounce is due. THE DAILY CHART REMAINS BEARISH BUT IS SHOWING SIGNS THE CURRENT DECLINE MAY BE ENDING. WITH THE OVERSOLD CONDITION IT IS SUGGESTING HIGHER PRICES AHEAD OVER THE SHORT TERM.

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3) ECAM TACTICAL ASSET ALLOCATION MODEL

The ECAM tactical asset allocation model derives its strategic allocation based upon the same technical analysis strategy utilized for the S&P 500. The given table below shows its current allocation.

Basic Asset Type U.S. Domestic Equities

Basic % Allocation 15%

ETF Name Vanguard Total Market VIPERS-10% Vanguard Small Cap VIPERS-5% Vanguard FTSE All-World ex-US-15% Vanguard Emerging Markets VIPERS-10% Vanguard Total Bond Market-10% iShares Barclays TIPS Bond Fund-5% Vanguard REIT VIPERS10% SPDR Wilshire Intl Real Estate Index ETF-5% DB Commodities Tracking Index Fund-10% PowerShares DB MultiSector Commodity Trust Agriculture Fund-5% Claymore/Clear Global Timber Index-2.5% Market Vectors Gold Miners ETF-2.5% None

ETF Symbol VTI VB

Specific Asset Type U.S. Large Cap U.S. Small Cap

Technical Reading Weekly/Monthly DOWN/DOWN DOWN/DOWN

Current Holdings % 0% 0%

Foreign Equities

25%

VEU VWO

Developed Markets exU.S. Emerging Markets

DOWN/DOWN DOWN/DOWN

0% 0%

Bonds

15%

BND TIP

U.S. Bonds U.S. Inflation Protected Bonds U.S. Real Estate Foreign Real Estate

UP/UP UP/UP

10% 5%

Real Estate

15%

VNQ RWX

DOWN/DOWN DOWN/DOWN

0% 0%

Commodities

20%

DBC DBA

Broad Commodity Basket Soft (food) and Livestock Commodities Managed Forest and Timber Harvest Gold Miners/Producers

DOWN/DOWN DOWN/DOWN

0% 0%

CUT GDX

DOWN/DOWN DOWN/DOWN

0% 0%

Discretionary

10%

0%

Cash

Powershares DB US Dollar Index Bullish Fund

UUP 85%

10

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4) RECOMMENDED HOLDINGS
The weekly and monthly equity charts are both currently bearish. As such, it would be unwise to hold considerable long term equity positions given the current intermediate to-long term charts. In the short term the market has undergone a large correction on low volume and is currently oversold. This bodes well for the near term as cyclically we are entering a strong period in the markets. By way of comparison, the following statistics are for the month of December:

Since 1963, over all years, the NASDAQ in December has been up 65% of the time with an average gain of 1.9%. During the 3rd year of the Presidential Cycle December has been up 75% time with an (average gain of 4.6%. The best December for the NASDAQ was 1999 (+21.3%), the worst 2002 (10.1%). Since 1928 the SPX has been up 75% of the time in December with an average gain of 1.5%. During the 3rd year of the Presidential Cycle the SPX has been up 80% of the time with an average gain of (2.2%. The best December for the SPX was 2008 (+10.7%) the worst 1931 (-13.4%). Since 1979 the Russell 2000 (R2K) has been up 75% of the time in December with an average gain of Presidential 3.0%. During the 3rd year of the Presidential Cycle the R2K has been up 88% of the time with an average gain of 4.4%. The only down year during the 3rd year of the Presidential Cycle for the R2K was 1983, down 2.1%. The best December for the R2K 2008 (+19.8%) following a November that was (down 12.1%, the worst 1983 (-2.1%) Since 1885 the Dow Jones Industrial Average (DJIA) has been up 70% of the time in December with an average gain of 1.2%. During the 3rd year of the Presidential Cycle the DJIA has been up 77% of the time in December with an average gain of 1.3%. The best December for the DJIA was 1903 (+10.7%), (the worst 1931 (-14.6%).
Given the statistical history and the fact we have sold off quite dramatically with the short term charts oversold, the odds favor a market rise over the short term (next 4-6 weeks). Those utilizing a shorter term trading account may want to enter long positions near current levels. Given any rise in the short term will probably move the weekly charts back to bullish, those who are in cash may want to consider a 50% cash/50% equity positioning on any significant move in the short term. Given the monthly charts are bearish, unless the SPX can close above 1273 (10% above current levels) those that are currently fully invested may want to consider moving to a 50% equity/50% cash position on any short term strength over the next few weeks. Legal Disclaimer: The content on this site is provided without any warranty, express or implied. All opinions expressed on this site are those of the author and may contain errors or omissions. NO MATERIAL HERE CONSTITUTES "INVESTMENT ADVICE" NOR IS IT A RECOMMENDATION TO BUY OR SELL ANY FINANCIAL INSTRUMENT, INCLUDING BUT NOT LIMITED TO STOCKS, OPTIONS, BONDS OR FUTURES. The author will reveal his current market positions and holdings but actions you undertake as a consequence of any analysis, opinion or advertisement on this site are your sole responsibility. The author is not licensed as an investment advisor in the UAE and therefore cannot provide individual account advice to individuals and/or institutions. 11