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US manufacturing industry concern

US economic conditions should be booming. In August, tax rebate cheques worth $US17.495 billion were sent out to taxpayers in addition to $US6.779 billion in rebates distributed the previous month. And interest rates are at historically low levels.

However, in September a survey by the National Association of Purchasing Management (NAPM) suggested that manufacturing activity was declining for the 14th straight month.

The Federal Reserve is expected to reduce interest rates further Tuesday by 50 basis points, bringing the wholesale rate to 2.5 per cent. This reduction may be pre-empted in Australia, with the RBA expected to deliver a 25 basis point interest rate cut Wednesday.

This would bring the cash rate to a 34-year low of 4.5 per cent.

Despite these conditions, economic sentiment is negative, with sharemarkets very volatile and susceptible to wild swings. In Australia, the market remains nearly 5 per cent lower than its levels before the September 11 terrorist attacks, and 11 per cent down from its record closing highs at the end of June.

Considering these statistics, October should not have the wobbles that it usually confronts. The Dow Jones ended its worst quarter last Friday since the 1987 stock market crash.

As the stock market is usually a barometer for the economy six months out, media and banks are very good areas to be as the economy recovers. Standout media stocks to watch include Fairfax, Austereo, Ten Network and PBL Enterprises.

BANK ENDOWMENT WARRANTS

Bank Endowment Warrants are a leveraged share market investment that allow you to purchase shares at some point in the future at today’s prices. The warrants usually cover a period of 10 years, and relate directly to the “top four” banks.

The Endowment Warrants offer investors leveraged access to the performance of the “top four” bank stocks with no obligation to make additional payments, no margin calls and no income tax implications. They make ideal investments for bank investors, self-managed super funds and for parents investing for children.

To buy an endowment warrant, the investor makes an initial payment which is equal to around 50 per cent of the market value of the underlying share at the time of purchase. If you decide to purchase the underlying share you make your second and final payment (to cover the outstanding amount) on any date the investor chooses before the warrant expires in around 10 years’ time.

The minimum investment is $1,000 and the warrants are tradeable at any time.

The advantage with endowment warrants is that all dividends are paid to the warrant owner to reduce the final payment, and the leverage works in the investors’ favour as prices rise in the underlying shares. Leverage is simply borrowing money to invest, and helps you get a larger investment for the same cash outlay. An endowment warrant works much like a margin loan, except the loan is “built-in” to the warrant. Unlike a margin loan, you are not required to make any further payments, nor are there any margin calls. The returns from previous warrants over the past five years include the following:

Endowment Warrants Shares

NZ 432.9% 175.2%

CBA 698.2% 284.4%

NAB 516.2% 238.7%

WBC 347.3% 192.0%

These returns are magnified once the underlying share outperforms. Bank shares are the perfect tool for these instruments, as they pay very good dividends and have exponential growth. The dividends are important with endowment warrants as they are used to pay off any outstanding amount. It is possible that the investor could receive their shares without the need for any payment at all.



Peter Hayes

Investment Manager

Authorised Representative

ABN AMRO Morgans Limited

Phone: 9261 0836; Fax: 9261 0889

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