Analysis of our current position

1.)  Gold has lost its status as a safety haven, instead acting as a risk asset with a higher beta than usual, on a % basis it’s moving down more than u.s indexes and other commodities, most notably Crude oil.

2.)  Chinese GDP growth slows which is seemingly the catalyst for gold and silver prices falling; slow demand in China could justify the drop in price.

3.)  With Chinese growth and inflation slowing, Chinese monetary policy easing becomes a more probable event, which would be a positive for Gold.

4.)  Currencies, especially the USD, remain fundamentally low in value, especially in relativity to gold.

5.)  Asia will continue to buy gold through next year, Central banks need a strong store of value in the face of on going foreign reserve debasement, namely the Dollar.

6.)  Gold’s lost status as a safe haven is harming the demand for it, and hence spurring selling by investors looking to de-risk their portfolios. With a more volatile market environment characterized by on going large swings, gold correlating with indexes is proving to be a negative, exposing investors to higher volatility in their portfolios.

Upon entering Gold, it was our hypothesis that Europe will buy time to shore up their banking sector and Italy & Spain. This part of the hypothesis has so far proven to be true, with a G20 summit focused on the issue taking place and political pressure on Europe to act being mounted. October 23^rd is the date the European Summit will take place. Calming words, and a more concrete plan was formerly expected, and subsequently the market rallied on the notion. However, Germany came out saying that investors should not expect the end of the crisis solution they are expecting. Nevertheless, a plan to systematically dissolve the crisis through next year is now expected. Overall, this is an uncertain market environment, we wake up to find Moody’s placing France on a negative watch for a possible downgrade, and find the market moving down with vigor. We’re in a position of uncertainty, and no trader can tell the direction of the market simply because no one knows what may come from the European Summit, or what more events will take place in this dynamic market. It’s our view that we should continue to hold on to our position, but to sell if resistance is broken and that level becomes support, our $350 revenue generated after selling call options on our position should buffer against 3.5% of the downside. To the extent that Gold keeps its current trading channel intact, we expect to exit in December.

Authored By:

Samer Sweidan,

Head of Global Market Strategy

Overview

-       The financial market was highly volatile in September, as government indebtedness remains a major concern for investors.

-       Economic growth outlook has been cut by various institutions (mostly in developed countries, US especially) for 2011 & 2012 due to high uncertainty

Breakdown

-       US real GDP growth dipped under 2% after Q2 indicating a halt in economic recovery

-       Consumer spending in the US has increased at a decreasing rate from Q1 to Q2, (2.1%, 0.4% respectively)

-       Consumer confidence grew by 1% from Q2, reaching 45.4. This marginally exceeds the 45.2% recorded in august. This indicates the easing of pessimism; however, consumers are still wary of the outlook and continue being cautious with their spending.

-       A hint of good news comes from the non-residential side, as US businesses seem to be embracing the low central rate and continue to increase investments. Business investment activity is expected to remain high for at least another two quarters.

-       Unemployment rate shows a slight increase from 8.9% to 9.1% from Q1 to Q2 respectively. However it is a significant improvement from the 9.7% recorded in Q1 of 2010. The unemployment rate is expected to decrease gradually as the business investments continue to strive. (Note that there is a lag between the implementation of fiscal spending and detectable effects in the economy. Fiscal stimulus will take time to trickle down to consumers, and is expected to take even longer when people are conservative with their spending).

-       Consumer spending:

• Durable goods: Spending in durable goods took sharp drop of approx. 15% from Q2. This is expected to improve as consumer confidence shows small signs of recovery. There is a possibility that consumers are holding out on spending in hope to make the same purchase at a lower price during the holiday season. Therefor we can also expect holiday season in Q4 to contribute to increased spending on durable goods. (Auto sale is an exception, showing an increase from Q2)
• Non-durable/Services: Spending in non-durables/services show small (0.4%) increase from Q2. Increased spending in non-durables/services is expected in Q4, but not as much as durable goods.

-       Personal income growth has decelerated with employment growth. Personal income is expected to hover around the same level unless another stimulus or export growth occurs (which could be possible if the free-trade agreement with S.Korea, Columbia, and Panama passes).

-       Average individual disposable income is getting relatively close to the same level recorded back in May 2010. The average has decreased steadily since Nov 2010 and has not shown significant improvement. (Note: The lower “average” individual disposable income may be caused by the increase in part-time employment. since individual who do not work are not included in the average, a high average could be miss interpreted as equivalency of high national income when the reality is that only a few high-income individuals are employed)

-       Overall, housing starts have been marginally decreasing since Q1 2010 (with exception of Q1 2011), and continue to decrease in 2011. Homebuilders remain cautious as housing permits slipped slightly in July 2011.

-       Inflation is expected to remain low and steady. With West Texas Intermediate oil prices falling approx. 10% in August, there will be less upward pressure on energy prices to fuel inflation. The core rate is expected to stay around 1.7%, and will likely remain unless inflation surges. Recorded inflation in August is approx. 3.7%

Overall, the US government bond yields are expected to remain low given the gloomy economic outlook. Key economic indicators suggest deceleration of growth, and the Fed may possibly put in place another program to keep term rates low. The debt crisis in Europe will likely discourage any FDI in the area, thus continue to stagnate the demand for US export to that region. The marginal easing in pessimism is visible in the market, but not enough to create any major forward momentum. The US economy is expected to remain at its current level, with marginal gains going forward.

Kevin Chu

Chief Economist

Mac Global Active Trading Club

The clubs first meeting for a discussion of the market environment.

Agenda:

1 – The Market Environment in it’s current form; events, fundamentals & technical.
2 – The drivers behind current Market Activity; the Macroeconomic environment, Europe, and China.
3 – The outlook for market conditions going forward
4 – Strategy discussion; the Investment Committee’s discussion on what the club should invest in.

The meeting will last for around an hour, all members are encouraged to come out and participate in the strategy discussion

The market today is reminiscent to that of 1929 where we witnessed the crash of the Stock Market. There indeed is a difference in what has caused todays market to resemble that of 1929 but the underlying effect remains the same, a decline in confidence. What we saw in the past was that leading up to 1929 the stock market offered the ability to make large amounts of money. Here we saw the creation of a speculative bubble. Eventually that bubble popped and we saw rapid reductions in prices. Investors had lost confidence in the system and began withdrawing whatever cash they had in banks, with minimal deposits a plethora of banks failed and we entered the Great Depression. The take home message is simple, when investors lack confidence they become increasingly risk averse and abstain from investing in equities.

Today the source of our uncertainty primarily comes from the Euro Zone and the likelihood of a default. Greece has admitted that it won’t meet its deficit reduction targets and every day the likelihood of a default increases. Along with this, many European banks will likely fail if drastic measures are not undertaken. A large concern is weather the default of Greece will exhibit a ripple effect similar to that of Lehman Brothers and its Bankruptcy on other banks in the United States. If it indeed is similar then we may see the global economy collapse. With so much uncertainty what are investors/countries to do?

The United States response was the creation and implementation of Operation Twist. In theory Operation Twist would lower mortgage rates and encourage investment.  The Fed intends on trading its shorter dated bonds for longer dated alternatives. The demand for these longer dated alternatives will result in an increase in prices. An increase in price will decrease yield which results in the decline of the interest rate. A reduction in yields results in a reduction of interest rates on fixed-rate mortgages. This makes housing more affordable and facilitates an increase in spending. Theoretically it is sound however in practice has been ineffective. The primary reason why it has been ineffective is because of confidence. Consumers simply are not willing to take on more debt in an unstable economy and fear the repercussion if one becomes unemployed.  Now lets examine what investors are doing in this volatile climate.

The majority of investors are abstaining from purchasing equities and purchasing safer assets referred to as “safe havens”. Today these safe havens consist of Gold, the US Dollar and the Yen

Lets take a more in depth view of gold and our concerns associated with it. In the past 12 months we have seen a surge in the price of gold. Gold is perceived as a safe haven and concerned investors have been increasingly investing in it. Gold is threatened by deflation. Recently we saw a decline in the price of Gold. During the decline we saw a strengthening USD, which was largely attributed to the demand for relative safety havens. Gold is priced in US dollars, if the US dollar goes up, ones purchasing power increases and the price of the gold goes down. However this decline in the price of gold did not last very long. The US does not have the current cash flow to cover its regular bills and interest expense. The FED is likely to increase the printing of its currency devaluing the US dollar. If they abstain from printing than they will not be able to meet their liabilities and subsequently will default. This cannot/will not happen, so the threat to gold remains minimal. Everyday the fears of Greek default rise and subsequently we see Gold rise. It is essential for one to either invest in either Gold or use Gold as a hedge.

Now does the added instability from the Euro Zone mean that one should avoid all equities or should one exploit the current situation by investing in stocks that have minimal risk and are under priced? There exists a stock that holds more cash than the US government, has continually met and exceeded quarterly expectations. It goes by AAPL on the NASDAQ and the company is formally known as Apple. They are a company whose products are representative of those seen in our dreams, a company that continues to produce its products with the consumer in mind and its products continues to dominate whatever market they are intended for. When observing Apples financials it is easy for one to overlook the effect of the external climate on the stock and exhibit a confirmation bias. Apple is not immune to what happens around the world. Apple indeed offers a superior product but with this superiority comes a premium. With consumer spending slowing down as incomes fall will consumers be willing to pay the “Apple Tax”? Also as competitors innovate and begin to offer the Apple experience for a lower price will we see dent in Apples sales. Below is a chart that illustrates the fluctuations of AAPL

What we observed was a peak in stock price on the 21^st of September and a steady decline to todays date. Apples products continued to sell at expected rates yet the stock price declined. Why did this occur and is it indicative of the future? There is no one answer to this question. It may be attributable to the Eurozone financial crisis, continued concern over how the company will fare without Steve Jobs and even more so after his death or it may be simply based on the “law of Large numbers”. Essentially the thought process here is what goes up must come down. Apple most definitely is not immune to the effects of the global economy and before making any sort of investment one needs to consider both sides of the spectrum.

Even with the presence of said uncertainty/risks we still believe investing in AAPL would be a wise decision. Apple isn’t your typical brand, with it comes the association with a group of people. A cult like group immersed in its products and dedicated to give their servitude to their leader Steve Jobs.  Apple continues to reduce its premium charged on its products and this increases sales drastically. This was recently seen with the Macbook air line. A relatively large price adjustment has transformed it into a major success. Pre 2007 this group was relatively small as Apples products were limited to its Notebooks/Desktops and the Apple tax was much larger than what it is today. In January we saw the introduction of the IPhone and at 199 on a 2/3-year term you could get a taste of the Sweetest Apple you had ever tasted. At this price point the product served as a gateway drug to future purchases of Apple products. Once consumers got a taste of the IPhone more were willing to save and purchase an Apple based notebook/desktop/tablet.

On October fourth Apple will be having a keynote dedicated towards the IPhone, and the future of its flagship device. We expect to see an eight-gigabyte IPhone 4 priced competitively to appeal to those consumers who are on a budget. We are also likely to see the introduction of a new IPhone, which will either be redesigned, or take the existing Iphone4 body and upgrade its internal components. This places a little concern on the future stock price. If the product is newly designed and innovative, it will likely exceed expectations in terms of sales and we will see an influx of positive news. Positive news facilitates confidence and confidence will create demand which will increase the price of the stock. However if the device is similar in its design with upgraded components the intrinsic value of the device to each consumer will likely decrease.  Sales will likely meet expectations but there will be an influx of pessimism from the market. Enthusiasts everywhere will wonder why Apple waited 15 months to simply upgrade the internals. We would likely see a drop in stock price that would be later balanced by an update expected sometime in January where we will likely see a revamp of the MacBook pro and Mac Pro line. The tablet market is also an area of interest. Currently there exists no competitor to Apples IPad 2. The Honeycomb based tablets have minimal market share and are often quoted in units shipped not sold. The operating system is nowhere near as user friendly and has satisfactory Application store. Amazons recent introduction of the Kindle Fire creates a little bit of uncertainty around future sales of the tablet. Although the Kindle fire is intended for different purposes it will serve as an alternative for the price conscious consumer. We do not expect a very large effect on the IPad, and expect strong sales during the holiday season.

Apples creativity remains and even with consumer spending down Apple products create tremendous intrinsic value. This intrinsic value will continue to justify purchases. Apples innovation has not yet reached its threshold and the Company as a whole will continue to grow and innovate and turn our dreams into reality. The future stock price is contingent on the IPhone. A redesigned IPhone almost guarantees a rise in stock price where as an iPhone with modified internal will likely result in stagnant growth of the stock.

Authored By: Faisal Uddin, Analyst, Global Market Strategy

It was once the case that Greek default was seen as an avoidable event. Indeed, after the demise of Lehman Brothers and the subsequent destruction in global wealth, how could we allow Greece to default? A Greek default has repercussions that are hardly exclusive to the country its self. French & German banks, most notably Societe Generale and BNP Paribas, are heavily exposed to Greek debt. If the mere notion of default is confirmed, a run on these banks becomes imminent. But the notion has already been confirmed and these banks have seen their shares plummet, and large American money market funds hold back on lending to them, prompting the European Central Bank to coordinate with the U.S treasury to provide dollar liquidity to these banks; another artificial measure to uphold European institutions. Italy, the Euro zones 3rd largest economy, has the highest debt levels in the region. Italy also has one of the more restrictive economies, a slowing economy, and an inefficient political process. Originally forecast to grow at 1.3%, the Italian economy is now slated to grow well below 1%. Spain, the 4th largest economy in the Euro zone seems to be doing a little bit better, having cut their deficit as a % of GDP to the extent that they may well reach their target ratio by year end.

Last week, the German parliament voted to expand the euro-zone bailout fund, and to bring forward the permanent European stability Mechanism rescue fund. Good news perhaps, but the markets did not really believe in the viability of the fund, European indexes ebbed between slight gains and losses. Not surprisingly, 75% of global investors predict Europe will fall into a recession in the next 12 months. 75% also believe that the European sovereign debt crisis will “derail” the global economy over the next year. I would have  to side with this quartile, the global economy is fragile, and ever worsening. Even China, the beacon of the recovery, is seeing moderating growth, which is not surprising seeing as how Europe is China’s largest customer. Moreover,  the debt of Italy alone amounts to nearly two trillion euros, and the combined debt of Greece, Spain, Portugal, and Ireland adds up to about 1.3 trillion euros. The bailout fund amounts to 440 billion euros. An alarming statistic.

But while it is indeed a gloomy period, one glimmer of hope which should work as the inflection point that upholds the U.S economy is the Jobs creation bill being sold to congress by President Obama. Through payroll tax cuts, infrastructure spending, and other measures, President Obama plans to stimulate the job market and add a couple of % points to GDP growth in 2012. While Government analysts are very positive on the bill, other experts believe a growth rate of between 0.5% – 1.5% is more realistic. Republicans are unimpressed, but why would they be when it’s their sole goal to control the white house once again? One can put no credence in much of their arguments the same way one can rarely trust a biased persons opinion on a subject. It’s alarming that personal incomes fell the most in 2 years last year, the unemployment rate is stuck at 9.1%, confidence is down to April 2009 levels, spending is ever decreasing, and most other economic indicators keep coming in below consensus, seemingly in free fall. Operation Twist, announced this month by the Fed, is hardly a solution that will do much given the depressed housing market and real wealth of the American consumer, who will likely not want to take on more debt even at the lower rates the Fed plans to install. How can one promote debt to an economy that sank because of too much debt? This is only a sign that the Federal reserve has very little left to fight this stubborn economic state.

Commodities are down across the board, with Copper and other ores, often hot items in an expansion, plummeting in a free fall fashion. Crude Oil is down to levels before the Arab Spring, even though supply issues have not yet been fully resolved; a weaker economy has been priced in. The U.S dollar is seeing pressure as most exit risk assets and seek the relative safety of the currency and U.S treasury bonds. The TED spread, while down through last week, has doubled since August, indicating lesser willingness by banks to lend to each other as they continue to view the economy negatively. This is an inherently uncertain market environment, stocks and other assets move on a short term basis after mere words from Central Bankers are whispered, or rumors are spread. One cannot forecast a direction. It’s out collective view that the volatility in the market will remain through the end of the year, with a weaker shopping season this winter affecting company sales. We believe the safe havens to be the outperforming assets. Consumer Staples and Gold remain a favorite in this fast paced downward spiral. It should be noted, however, that the passage of the jobs bill could be what’s needed to revive the market, hence providing us with numerous attractive opportunities in commodities and select global indexes relatively immune to European woes; an orderly Greek default with limited contagion would also be a positive if restructuring for the long term is successfully undertaken.

Authored By: Samer Sweidan, Head of Global Market Strategy

• German Parliament passes a proposal that boosts the European Financial Stability Facility’s lending power to 440 billion euros ($599 billion) from €250 billion and gives it power to buy sovereign bonds, provide credit lines to governments and facilitate bank recapitalizations.
• European markets seemingly unconvinced about the ability of policy makers to fight the cancerous debt crisis; most European indexes up/down very slightly.
• German unemployment falls for a 26^th straight month; 26000 more Germans go to work, the German economy showing resilience amidst a faltering Europe.
• U.S Stock Indexes in the green ahead of the open, up 0.65% on average after the German parliament’s expansion of the EFSF buoys trader sentiment.
• Dollar Index down 0.5%, 10-year government treasury yields down very slightly, Gold up .31%, WTI & Brent Crude up .53% & .41% respectively on dollar weakness.
• Asian markets fare better for the day ahead of and after the German vote on the expansion of the EFSF.
• To contradict the notion of a improving market, the TED spread is up 0.98%, indicating lesser willingness by banks to lend to each other, and a dimmer view on the state of the economy.
• Consumer confidence down to April 2009 levels, Durable good orders down more than expected, and home prices improve ever so slightly as legal proceedings put off foreclosures.
• Italian, Irish, and Portuguese 10-year government bond yields up slightly indicating a decreased willingness by investors to tolerate sovereign risk.
• Spanish government made headway on cutting it’s deficit as a % of GDP this week, with the Spanish government stating confidently that they remain on track to reach their end of year target.

Authored By: Samer Sweidan, Head of Global Market Strategy

Global Trading Drivers; And Central Bankers keep on fighting..

• European markets in the green, with Germany registering up to 4.4% intra-day gains; France and UK on equal footing.
• Politicians and central bankers around the world call for the immediate fortification of the European Union; European Stabilization Facility to launch earlier than it’s 2013 launch date; Germany will not oppose such a measure
• Bank of Canada’s Mark Carney calls on Europe to raise up to 1 Trillion Euros to shore up it’s stability fund
• Asian markets firmly in the red as investors lose confidence in Europe’s ability to stem its debt woes and protect the overall economy; Chinese economic indicators moderate; Europe is China’s largest customer.
• WTI Crude rebounds slightly, up .4% to $80.13 while Brent rebounds stronger up 1.01% to 105.02 as of 8:52 am; a price north of $80 is required by OPEC members to meet budgetary obligations.
• Dollar Index down 0.38%, 10-year U.S Treasury bonds up .01% indicating a market weary of rallying, comfortable in the relative safety of government bonds.
• Gold & Silver continue the free fall as the CME raises margin requirements and hedge funds sell off to meet margin calls amid worsening losses in other asset classes.
• TED Spread down .6%; the spread has doubled since mid August, indicating a worsening view on the general economy and increases reluctance by banks to lend to each other.
• Italian & Spanish 10 year government bond yields fall slightly on news of renewed Euro Zone efforts.
• Volatility index up 30% since the start of September.

Authored By: Samer Sweidan, Head of Global Market Strategy

Don’t forget to come out to today’s Career Workshop run by Fahad Meer, Associate & Recruitment Blogger @ PwC along with Zohaib Naqvi, Associate @ PwC. 5:30 pm, DSB 505!

For more information and to confirm your attendance, go to:

http://www.facebook.com/event.php?eid=194133303989384

Mac Global Active Trading Club is currently looking for two Accounting Assistants. The Accounting Assistants will help with the creation of the daily reports as well as the financial statements.

Accounting Assistants must meet the following qualifications to be considered for an interview:

(1) A minimum of 10 (A-) in Commerce 2AA3 or relevant work experience in the accounting field;

(2) A flexible schedule, the chosen candidates will be required to commit to at least 4 hours a week;

(3) Experience with Microsoft Office (Knowledge of Excel is required)

To apply, email your resume to info@macglobal.ca by Friday September 23rd.