INFORMATION LEAFLET N°18B MAY 2013 INVESTMENT FOR …

COMMODITIES - BLOOMBERG TICKER - IWCOMPE:LX - LU0762436201 LOW RISK - BLOOMBERG TICKER - IWLWRPE:LX - LU0762435906 REAL VALUE GROWTH - BLOOMBERG TICKER - IWRVGPE:LX - LU0762436110

INVESTMENT FOR WEALTH

General reportComments for May 2013

The confusion is over, the market has clearly spoken !

On the US

Fed speakers and minutes forced the market to discount tapering QE somewhere between July and the end of 2013. In any case, markets will give a positive spin to the tapering and push the US dollar and the US equities up. If the tapering is postponed, the dollar and the Dow will thrive on liquidity flows. If on the other hand the tapering starts, it will be interpreted as a strong vote of confidence for the US economy. Personally I beg to differ on the reason why Bernanke and co would long to taper QE. I see it as trying to maintain control on the markets and the mainstream economic thinking. Let me explain. When they continue their QE and the equity and bond markets bubble up until an abrupt crash hits with QE still in full throttle, it would prove that the fed cannot create a real sustainable economic growth. The fed would be recognized as the naked emperor. Why now? Because with Abenomics on since the 4th of April, the coming European QE (post German elections) and a little help from Marc Carney (the new British central banker and super dove) and amid lesser growth in ALL of the BRICs, a free fall in US markets is not plausible now. (Money has to flow somewhere.) And yes, the injection of 85 billion newly printed dollars per month has lifted the prospects for US growth for 2013 to 2.5%. And if the fed miscalculated the markets resistance, it can always up the QE again, since it was announced as being open ended.

In such a world environment the US dollar will be perceived as the most liked kid in town. What are the practical implications for your allocations?

First on the US dollar

The US dollar index (DXY) broke above 0.84. After some arm wrestling around this level (possibly till the end of July) we see the dollar advancing to 0.89 and even to 0.96 for the end of the year. A top of 1.5 to 1.6 by July 2015 is technically in reach. A rate of 1.5 euro

per dollar may seem lunatic for some people but remember our defunct Belgian franc quoted at more than 66 for a dollar in the years before the start of the euro. These extreme concentrations of money towards the US can happen if some conditions are fulfilled. I cite just the most important ones:✪ An implosion of the yen and the JGB’s after a failed Abenomics experiment✪ A shell shocked euro market where 18 months of abstinence of austerity has not altered the recession and has even made Germany becoming part of it. In short, more debt and no growth in the Eurozone demoralized by chaotic social disorder, make capital flow massively to the US in 2014-2015.✪ A lower Chinese growth affecting exports from commodities producing countries such as Australia, South Africa and most of the emerging markets.✪ Other BRICs: balancing on zero percent growth levels for 2014-2015 because of internal inflation and distrust in their currency values, hamper their governments and central banks to intervene successfully. Putin has already criticized his economy minister. Brazil had to lift it interest rate by 0.25% followed by another 0.50%, while most analysts lowered its already feeble growth rates. India isn’t able to find acceptance for policies that would curtail the century old preferences of its people for physical gold and silver as a store of value. Government would be taken out if they would block gold imports completely.✪ Emerging markets are losing attraction because falling commodities cause their incomes to drop and they and their enterprises are beginning to default on massive quantities of dollar loans they contracted during the fed zero interest rate years. Not a pretty picture amid a rising dollar.✪ The perception that the US economy will continue to grow based on the business cycle until the end of 2015, the reinforcement of the ‘wealth effect’ from rising US equities and real estate, the money inflow from abroad that helps stabilizing US government rates even while tapering QE. The rising dollar would reduce internal inflation, helping US bonds and equities.✪ Currency wars and trade barriers affecting general trade and thus aggravating a lack of dollars abroad.

INFORMATION LEAFLET N°18B MAY 2013


Will all these risks converge to push the DXY to the cited levels? Time will tell but betting on a rising dollar for the coming years looks like a safe bet.

US corporate bonds and treasuries

Capital inflows and low internal inflation will only produce moderate changes in these markets until the end of 2015. Even if the fed would temper QE completely we don’t see much higher yields. Reach for safe heaven could even – after an initial rise – provoke lower rates than we are seeing now. Junk bonds however are a risky play because the start of effective tapering would dictate a sell.

Junk bonds: risky, sell once the fed begins to taper

Government bonds: look for duration in order to take the higher yields, you will have time to sell before the summer of 2015, liquidity to sell will be present. The equity crash and real estate plunge beginning at the end of 2015 will protect treasuries if you hedge the dollar value from that moment.

Corporates: the more we advance towards the summer of 2015 the more you should look for high grade bonds. In the fall after 2015 they risk to be a better bet than treasuries as bail ins will come to the US between 2016-2020. The same remark on duration applies. Do not sacrifice revenue looking for too short maturities as the yield is not there. Once the downturn on the US dollar sets in (2016-2020) corporates will have compensations from their activities abroad, if chosen wisely.

US equities

We see the current rally to continue until the beginning of August 2013. Protection should be bought for the period of August 2013 to February 2014. The discussion about tapering risks to distract the bulls temporarily during that period while the replacement of Bernanke will cause some uncertainty as well. This coincides with the looming German elections and a first evaluation of Abenomics. After a possible 15 to 18% correction we see the bull regaining traction until August of 2015. A full blow up towards 30.000 is

technically not out of reach but a top of 24.000 would be within reasonable exuberance.

Europe

The German elections are important. The winning of Merkel is needed to continue the EU unification process in banking and government debt (euro bonds). The Italian prime minister Letta, while losing popularity, is looking to manipulate the deficit rules even more. He proposes to remove investment spending from deficit calculations. Hollande an Rajoy will surely applaud. But this attempt to fraudulent bookkeeping is only consistent with the whole euro imbroglio. Remember how Dexia was among the safest in the euro banking stress tests before its virtual bankruptcy. The new bank stress test that was demanded by Germany and the ECB aiming at a continuous advance on centralized bank regulation and a resolution law is now postponed to somewhere in 2014. Simple analysis shows that European banks still have a capital shortfall of at least 800 billion in order to level the playing field with US banks. So there is no mystery why banks aren’t transferring the low interest rates in to the real economy. It’s strange how rapidly European politicians are exhausted by the austerity burden. I wish they had the same endurance in their fiscal zelotism. Their witch hunt against the rich and for more revenues are making a pure libertarian of Obama in comparison. The bail in template was voted on by the EU parliament in the end of May. No real growth perspectives for the short term while still a renewed acute survival war for the euro for 2014-2015.




The euro

We think the euro should be shorted before August. We see the euro storm reengaged and it will bring renewed pressure on the euro. Look for a good entry between now and the 1st of August.

European sovereign debt

The lack of budget discipline and the legal obstacles for the ECB to actually use its bazooka (Draghi’s OMT) are not growth inspiring. Germany will become under attack on its export markets by a devalued yen. European trade retaliations on for example solar and telephone network products won’t help either. China is protesting already. Debt keeps on growing and in the not too distant future I see the fear factor on the PIIGS solvability to again overpower the reach for yield. Sentiment can turn rapidly. For the bund there is still potential for lower yields if Germany falls in to recession. France is more and more becoming a problem.

Corporate debt

Corporate debt – except for the financial sector – is less risky than sovereign debt and a bit more yielding. They are not subject to possible bail ins. Banks are reacting with fully collateralized issues, so bail ins will be even more destructive to bank shareholders and to non-protected debt holders. Again very short durations are not necessary.

Japan

Recent turbulence in the JGB’s forced Kuroda to intervene when the 10 years surpassed 1%. After QQE (Qualitative and Quantitative Easing) he invented and e f f ec ted FBO (F lex ib le bond Operations) which meant printing an equivalent of 19.7 billion dollar of new yen and buying 3 trillion of JGB’s from banks until the 10 year regressed back to 0.84%. The yen rose and the Nikkei corrected. We see that as a new buying opportunity in the Nikkei and yen dollar shorting opportunity.

No more confusion to know the most sure trade. It’s shorting the yen rather than the JGB’s. Indeed every time the rates on the JGB’s rise 0.10%, Japanese financial institutions lose about 1% of their tier one

capital. So no more lending to the real economy, chaos in the carry trade, lack of collateral in the shadow banking system and explosion risks in the derivatives linked to JGB’s and yen carry. Think of it as a mature Ponzi scheme generated by 15 years of zero interest rate policies. So with FBO JGB’s will be controlled even if it means a 100% monetization of government expenditures. All of this with less than 2 months of Abenomics in operation. Abe and Kuroda can’t lose face and say that the experiment is already over. So the variable in the equation will principally be the yen. The Nikkei appreciation will only be a consequence of a devaluating yen. If they would continue this road, hyperinflation in Japan could ignite in about 2 years. Abe and Kuroda promise better communication on Abenomics to reassure the JGB market. It makes me think of Napoleon (Abe) and Squealer (Kuroda) in Orwell’s Animal Farm speaking to the crowd. If necessary I see Japan – covertly or even plainly in the open – prohibit massive selling of JGB’s by its banks, insurance companies and pension funds. Just in case… talking (communication) you know, is not enough.




On the yen

Short yen dollar even from a euro point of view. Take profits when warranted. The fall will have its regularly counter moves just as we saw at the end of May.

JGB’s

Refrain from leveraged shorting. Brutal interventions can break your winning trade in a blink. Only when the market sees Abenomics as a failed experiment will the JGB market fully crash. We are just getting started.

Japanese equities

Go with the flow for now and profit from the undervaluation of the Nikkei where PE’s will be lifted in nominal yen terms. Hedge your currency exposure.

China

As stated we see China maintaining growth until 2015. As doubts about the sustainability of its 7 to 8% growth rate will grow louder every quarter, even here the US will be the better play for the moment. Doubts on China’s possibility to peacefully transform itself towards more internal consumption and becoming less export driven, will reinforce the US preference.

The other BRIC’s

They all dissapoint on growth rates and surpass on inflation and budget’s. We advise to underinvest in these markets until their governments and central banks find a credible path to recouple with sustainable real growth rates in excess of 3%. Look how the Brazilian central bank had to intervene by selling 900 million dollar to help the real, even after the selic was raised by 0.5%.

On gold

The bounce from 1320 dollar is not (yet) strong enough to assure that this level will be the bottom of the correction that began after reaching 1900 dollar. For now we see a rising possibility for a short covering rally. This could take place from coming August to February. Mines are showing a positive divergence. If the dollar rallies strongly as mentioned above, gold risks to retest

the support at 1320, after the short covering rally have peaked. We continue to see 3000 to 3500 dollar per ounce by end of 2015.

Performances and trading

iW Alternativ SIF – Low RiskThe fund has decreased by 1,98% in May, NAV 9733,11 EUR.iW Alternativ SIF – CommoditiesThe fund has decreased by 1,73% in May, NAV 493,27 EUR.iW Alternativ SIF – Real Value GrowthThe fund has decreased by 0,29% in May, NAV 74,39 EUR (I), NAV 73,47 EUR (P)

Best regards,The fund manager

Note : This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of, or located in, any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation. Additional information is available upon request.

The information, tools and material presented in this document are provided for information purposes only and are not to be used or considered as an offer or solicitation to buy, sell or subscribe any securities or other financial instruments. Past performance should not be taken as an indication or guarantee of future performance and no representation or warranty, expressed or implied, is made by “iW” regarding future performance. Information found in this report has been prepared based on information provided by various financial sources. Information usually attributable to a unique specific source is quoted whenever such information is available. Otherwise, the information may have been gathered from public news dissemination services such as Bloomberg, Reuters or any other news services.

Information and opinions presented by “iW” have been obtained from sources believed to be reliable, and, although all reasonable care has been taken, “iW” is not able to make any representation as to its accuracy or completeness. Accordingly, “iW” accepts no liability for loss arising from the use of this document presented for information purposes only. “iW” has no obligation to update, modify or amend this report or otherwise notify a reader thereof in the event that any matter stated herein becomes inaccurate.



Documents

INFORMATION LEAFLET N°18B MAY 2013 INVESTMENT FOR …