18th February 2009

Dear Investor,

Market trends - what are they?

The last year has seen unprecedented turmoil in the world markets. In particular there has been a lot of "talk" about market trends.

Generally speaking, a "market trend" is the direction in which the financial markets are moving. These trends can be classed as "primary", "secondary" or "secular" trends.

A trend is referred to as being "primary" when it lasts for a year or more, whilst a "secondary" trend is one that is of shorter term, such as a few weeks or a few months. It is important to note that whether a trend is "secondary" or the beginning of a "primary" trend can only be determined once it has either ended or has exceeded the extent of a "secondary" trend. Secular trends on the other hand, are trends that are deemed long term and can last from 5 to 25 years. These secular trends relate to much broader economic and social changes, such as urbanisation, technological developments and changes in political structures.

Trends can be either up or down and are usually described as "Bull Markets" or "Bear Markets".

Bull Markets are associated with increasing investor confidence. This confidence motivates investors to buy in anticipation of future price increases leading to capital gains. The expression "bullish" is used to reflect an optimistic outlook.

Bear markets are associated with a steady drop in the market over time. In this market environment investors who are anticipating further losses are often motivated to sell. This negative influence has lead to the expression "bearish" reflecting a pessimistic outlook.

Economists often refer to the "ups and downs" of Bull and Bear markets forming a "V" graph. The "V" describes over time the shape of market performance in a Bear Market i.e. the going down and the subsequent recovery of a Bull Market i.e. the going up, when graphed.

The current Bear Market we are experiencing has been unique given the speed of decline and breadth of wealth destruction that has occurred in a relatively short time frame when compared to other Bear Markets which have occurred. The Great Depression Bear Market took 34 months from peak to trough, while the 1973-74 Bear Market took 20 months and the 2000-02 tech wreck took 33 months.

This highlights that some Bear Markets can take years before they hit bottom. However, a positive note is that in the majority of instances (historically) most Bear Markets ultimately result in "V" shaped recoveries.

This however, does not mean the current market situation will follow such a prescribed script. Relying on history may not be helpful as the current Bear Market has a root cause that has never been experienced before - an unprecedented build up of decades of debt. There is no certainty on how the deleveraging of debt, the collapse of the shadow banking system, the freezing of global credit markets, hedge fund disintegration and possible deflation will play out. No one knows how the consumer psyche has been damaged with the equity declines last year. Some believe it will take years for consumers to rebuild their balance sheets, in turn creating a graph that more resembles a "U" or even a "L" shape pattern in which markets take a decade to recover.

On the other hand, there has been an unprecedented global response to the crisis, with many Governments globally, including the Australian Federal Government, implementing huge rescue packages and many Reserve Banks around the world implementing significant easing in monetary policy. The responses have largely been a coordinated effort, with all major economies pulling in the same direction.

All of these actions are designed to ensure that the markets can recover in the quickest possible time and to help ensure that the turnaround in investor and consumer confidence resembles the traditional "V" graph of recovery.

Best regards,
Chris Andrews


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Chris Andrews
Head of Funds Management

t  +61 3 8610 2811
e  candrews@latrobefinancial.com.au

Chris Andrews is the Head of Funds Management for the La Trobe Group and has responsibility for the La Trobe Australian Mortgage Fund.
Read full profile here.

La Trobe is one of Australia's leading independent specialist mortgage Financiers. Its business includes residential mortgages, commercial mortgages, and investment services operating one of Australia's largest Mortgage Funds under AFSL 222213. It employs over 115 staff and has raised over AUD$10Billion to assist over 100,000 customers since inception in 1952.

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