Investment Note

Market Insights 2011


Retrospective 2011

In this note we review our thoughts and predictions we made at the beginning of 2011. For all intent and purposes 2011 was looking to be another year of recovery for global economies and the financial markets. How wrong this was. The optimism enjoyed in the first months of the year evaporated quickly as global economies were battered by civil unrest in North Africa, a Japanese earthquake of nuclear proportions and the developing crisis in Europe.

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Silver Bullet?

Will the salvo of collective action from global central banks be big enough and of sufficient calibre to add up to a silver bullet? Earlier this week the US Federal Reserve led a group of other international central banks in reducing the rates paid by the European Central Bank for US dollar loans in an attempt to alleviate liquidity problems for Euro zone and other non-US retail banks needing to access affordable US dollars via swaps.

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Mon Dieu!

Markets remain on tenterhooks and are easily panicked. Late last week, bond markets were suddenly hit by the news that the rating agency Standard and Poor’s had apparently downgraded the AAA credit rating of France sending bond yields skyrocketing from 3.19% to 3.45%. It transpired that the news was false created and nothing more than a website link to a section on the S&P’s website entitled “downgrade”.

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Flash Rally

Investors resolve will be tested as the big issues refuse to go away. Anyone who’s ever been caught up in a flash mob will probably agree with the popular definition of a group of people who assemble to perform an unusual and sometimes seemingly pointless act for a brief time and then disperse. At TAM International, we think we have seen a similarly puzzling event taking place in the stock market rally the catalyst for which being the latest rescue package for Greece and politicians hailing a final “comprehensive solution”.

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Look In Rough Seas –The Advice is “Look to the Horizon”

Market Volatility - However difficult we must look to the future. When travelling by boat we are told to focus on the horizon to prevent sea sickness and when skiing, not to look at our feet but rather ahead to prevent us from falling. This advice could apply equally to the situation in which we now find ourselves; in an incredibly volatile financial market, one dominated by an endless stream of negative headlines speculating about the collapse of the global economy.

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Tectonic Plates

Expect Increased Volatility As We Move Into a new “Normal”. Corporate earnings and economic growth are not always easy bedfellows; often an increase in one precedes an increase in the other, and vice a versa.This ‘normal’ action causes both volatility and investment opportunities over time. It is not uncommon however for these two “tectonic plates” to stick, then shift violently to cause severe spikes in market volatility and value. A catalyst typically precedes such events.

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Insider Trading?

Conspiracy theorists of the world unite! As we highlighted in our investment note of Friday there was no one piece of economic or fundamental news that should have caused an almost ten percent sell-off in global equity markets. Mostly the news, whilst not particularly negative, was “tepid” and we were ourselves somewhat surprised at the depth of the reaction. Our thoughts last week were there may be much to consider in the coming 7-10 days as it all seemed a little too contrived.

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A Time to Defend not Attack?

As “Short” Traders Make Hay Whilst the Sun Shines? It is difficult to point to a single event that triggered this move towards safe haven assets causing equity markets and bond yields to fall to their lowest levels of the year. Indeed much of the bad economic and geopolitical news has been in the public domains for weeks if not months! Debt issues in the US and the Euro zone are well documented and so is the inability of our central bankers and politicians to effect any meaningful (and long lasting) solutions!

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Greek Hangman

The policy options on both sides are running out. As the Greek debt crisis enters a crucial phase, speculation over whether a solution is even possible is leading to greater volatility in stock and bond markets. Predicting how the end game plays out is guesswork hinging as it does entirely on the policy decisions of the IMF, EU,ECB and the Greek Government. A way out of the default scenario may be possible but will require remarkably courageous political decisions which have eluded the various parties thus far.
 

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Risk On, Risk Off

Directionless markets focus on short term news. A glance at the chart of any of the major global equity markets reveals that equities have barely moved a step since the beginning of February, around the time when events in Egypt began to escalate. Since then geopolitical events and natural disasters have seen equity markets develop into a saw-edged pattern reflecting very short term “risk on, risk off” trading with no real direction.

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1923 to 2011 Any Colour as Long as it’s NOT Black!

Earthquakes and the Global Supply Chain. Henry Ford in 1923 is reputed to have said "Any customer can have a car painted any colour - so long as it is black." Ninety years later Ford have now released a statement stating that customers can now order certain models in any colour BUT black as there is a shortage of paint pigments from their Japanese suppliers.

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Earthquake in Japan

Is the Tragedy in Japan a Tragedy for Global Financial markets? The Japanese markets were hit hard early Monday morning, with the Nikkei trading sharply lower around the 9,600 level, down 6%, triggered by a panic sell off by investors fearing a slowdown in the Japanese economy following the deadly earthquake. The rest of the markets around the Globe, at this point, seem to have absorbed this bad news and are for the most part trading normally.

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Oil Shocks & Inflation

Will higher oil prices force the hand of Central Banks? With growing international support for rebel opposition in Libya, including the sending of arms, trade sanctions and embargos, and the seizure of billions of dollars claimed to belong to Gaddafi in Switzerland and the UK, one can only expect tensions in the country, and indeed the region to continue for now. Against this unsettled backdrop in one of the world’s more significant oil producing areas, we discuss the probable effects on both the oil price and the knock on effect for commodity price driven inflation – a key issue for investors this year!

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Emerging Markets

Are the emerging markets becoming overheated? Recent tensions in Egypt and Tunisia have highlighted the fragility of emerging markets; not necessarily economic fragility, but fragility of sentiment. Following overall strong performance in 2010, investor sentiment has quickly soured leading to significant outflows from funds investing in emerging regions. Below we ask if this is a knee jerk reaction to the Middle East unrest, or symptomatic of a wider problem.

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TAM Outlook for 2011

"Traversing the financial markets in 2011 will be more straight forward but we must remain viligent as to the path we follow" - Lester Petch - CEO TAM Asset Management. We believe that 2011 will be another year of good opportunity for investors able to proactively position themselves to deal with transient volatility and market dislocation we can anticipate. The fragile economic recovery which started in 2009 gathered strength last year and proved resilient enough to overcome a number of obstacles thrown in its path.

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A Review of our 2010 Outlook

In this note we review our thoughts and predictions we made at the beginning of 2010. At the beginning of 2010 many were still shell shocked from the rollercoaster ride that was 2009 but some investors, including us, predicted a profitable investment year for 2010. Indeed we believed that the 2010 would mark the beginning of a new era of opportunity for investors, an era that would not take its cues from the ‘lost decade’ we had just witnessed but one that would see the beginnings of solid longer term growth.

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