Reserved Bank Of Australia Statement and China's Political Instability

Invast Insights

Week Commencing February 10, 2014

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This week we look at the following topics:

1.0 RBA Statement & what you didn’t miss

2.0 New ASX small caps for your watch-list

3.0 Brent crude about to break-out?

4.0 Technical outlook for the Dow Jones

5.0 Zeng Qinghong – write the name down


1.0 RBA Statement & what you didn’t miss

If you didn’t read the Reserve Bank of

Australia (RBA) statement today, you haven’t

missed much. Unless you have a couple of

free minutes in your day, the rest of this note

is not really that necessary. For those with

some time to ponder, read on. There

basically was no real new news, again a

whole statement about where the economy

is and despite higher than expected inflation

the RBA is still expecting the rate to remain within the target range of 2-3%.

The RBA knows very well that what happens overseas is really the key driver

for where Australian rates are heading. It is very difficult to see the RBA raising

rates when the yield on US 10 year treasuries is falling and at last check

somewhere in the order of 2.50%. If there was one line worth reading in the


RBA statement, we think it would have been the last one. The sentence said

“…on present indications, the most prudent course is likely to be a period of

stability in interest rates…” That means the RBA still hasn’t figured out if the

global economy is back in good enough a condition for it to start increasing

interest rates. The situation is not bad enough to consider more cuts so 2014 is

likely to be a year of waiting and seeing. Don’t expect much.

Bottom line: Interest rates will remain low in Australia for some time yet. The

key risk is a rise in the rate of unemployment and any increase in inflation is

still unlikely to spook the RBA until it starts rising consistently above the 2-3%

target band range. We need at least two more quarters to confirm this. US 10

year bond yields are the key trigger – if they continue falling then the

appetite for global risk assets will continue to fall. The Australian dollar spiked

briefly on the RBA statement but still remains within a downward trend.

Shorts were squeezed but any upward momentum on solid volume, over a

prolonged period of time, is difficult to see until global appetite for risk

reverses. If you’re expecting an excitement from the RBA in 2014, you may be

disappointed.


Image: AUDUSD daily timeframe chart via Invast cTrader platform


• The 78.6% Fibonacci retracement off January’s fill is currently at around

0.900 where we see resistance. This is the “gateway” level and the most

important to watch.

• Any break above this level could see the next resistance tested at 0.9015

and then somewhere in the order of 0.9200-0.9300.

• Any failure of the 0.9000 gateway level could see downside support at

0.8850 and 0.8800 – both these are the previous support and resistance

levels as well as the 50% and 38.2% Fibonacci retracement levels.

2.0 New ASX small caps for your watch-list

While the mainstream media and finance community ponder on the falls in

the global indices and the RBA decision, we at Invast have our head down

working hard to find you more hidden gems listed on the ASX. Our first

publication introduced 15 hidden gems which were revised and updated in


in our 2014 Forecast Guide special report. The performance of those stocks

has been excellent and even surprised us. The three stocks we introduced

were Adslot (ADJ), Mobile Embrace (MBE and Moko.mobi (MKB) which has

since been renamed. The report was published on 9 September 2013.

As of the time of writing the three stocks are up 72%, 105% and 235%

respectively. This might be hard to believe but you can check the price

performance for yourself. We didn’t expect such a large magnitude of gains

but our premise was that while most of the market focuses on where BHP, Rio

Tinto and the Big 4 banks are heading we think the smart money is focused

on the small growth opportunities which go under the radar. Regular readers

of this report will also note that we have been closely monitoring the

performance of Ellex Medical (ELX) which has also been a solid performer

since we first introduced the stock and have published our interview with the

CEO over the past couple of weeks.


Most fund managers don’t catch onto these businesses until the large gains

have been made. At Invast we aim to bring you these opportunities where

possible – there will be times when we get them terribly wrong and other

times where we see phenomenal returns like the three stocks above so you

need to take this into consideration.

At no point do we consider our selections to be perfect or immune from

shocks. The three stocks mentioned above can easily fall in value overnight.

They are small businesses and liquidity in trading can cause large levels of

volatility. So with that in mind we have a selection of new businesses that we

think are very well placed to benefit this year.

Freedom Foods (FNP) – Australian food and agricultural businesses have

come under the spotlight after the much publicised takeover battle for

Warrnambool Cheese and Butter (WCB). One of the stocks on our 15 hidden

gems list published in August was Webster Limited (WBC) – a land based

good production company with two main operation businesses in walnuts


and onion production. The stock has rallied more than 60% over the past six

months. We think Freedom Foods (FNP) has similar attributes and is shaping

up like a very attractive business.

Freedom has a market value of around $375m and is

trading on a very high price to earnings ratio –

somewhere in the order of 50x but there is room and

scope for significant upside. The business

manufactures food in to the niche nutrition and long

life markets. It also owns around 18% of New Zealand

listed A2 Corporation – you might recognise A@

products in your supermarket is you have intolerance to certain types of

lactose based products. Freedom is starting to leverage its production

facilities – its Pactum product range white labels long life milk and other

similar dairy products, it has specialty seafood brands and is pushing into

the nutrition space in the United States with distribution deals in major

supermarket chains.


Gearing (debt/equity) is now down to 10% which means the business can

draw down on its debts and make attractive acquisitions. This stock is a major

play in the growth of the world’s population and demand for food

manufacturing businesses. The world’s population is projected to rise to 9.1

billion people by 2050 which will require a 70% increase in food production

over the next forty years. Many food producers use genetically modified

organisms (GMO) but Freedom has built its business around excluding these

and opting to produce and market a more natural range of products through

its supply chain. We think it is worth a close look.

Analytica (ALT) – We believe biotechnology stocks are a great way to lose

money. Out of all the blue sky stories that your author has seen over the years,

very few actually make money yet alone post positive returns to shareholders.

Most businesses in the biotechnology space end up going broke, running out

of cash before they can commercialise their technology. It’s not that the

technology itself isn’t interesting, but it takes exceptional management and a

bit of luck to take an idea through the regulatory hurdles and then into

commercialisation, without completely diluting shareholders into oblivion.


As your author writes this report his wife is expecting to deliver her third child

– one of the many joys in life. You might be asking what this has to do with

investments and stock selection. Analytica have

a key product that helps in the treatment of

female incontinence – one of the

inconveniences of females falling pregnant. It’s

not just pregnancy, Analytica estimate that this

impacts one in three women. The key product

produced by Analytica (image on the left) to

target this health issue is called PeriCoach and

you can judge for yourself its success by visiting

www.pericoach.com.

We reason we think this stock is worth adding to your watch list is because the

market capitlisation is currently at around $16m and the business has around

$1.4m in cash which might be enough to see it through until cash starts rolling

through from sales of its products. This is an Australian product which has the

potential to help change people’s lives. The probability might be very low of

http://www.pericoach.com/






this actually succeeding but the payoff is massive if things work out well. The

business raised $2.2m in an underwritten placement via Patersons Securities

in October so there does seem to be some corporate support if cash dries up

again. The board was recently boosted by the appointment of life sciences

industry veteran Carl Stubbings who joined last month. The chart below

summarises where Analytica is in its commercialisation process. Image

sourced from November investor presentation.


Nearmap (NEA) – You have probably spent time on Google Maps and seen the

amazing work that the free service has to offer. You can zoom into your house

from a street or satellite view and a whole industry has grown off the back of

of this. Real Estate agents now

and easily incorporate

Google’s data into their listing

to help market your property,

builders and trades people can

quickly review the nature and

scope of your house and a

whole list of other professions

benefit from this amazing free

service. Nearmap is in the

same space – it provides high

resolution aerial images to a

whole list of clients including

professionals like agents and


architects plus governments and construction businesses looking at scoping

work.

Nearmap recently signed an agreement with Google. Nearmap will provide

high resolution coverage maps to areas that aren’t already captured by

Google’s own imagery. Nearmap now has agreements with Amazon and

Google. The technology covers more than 85% of Australia’s population. The

current market capitlisation of the business is sitting at around $185m but the

business is yet to book a profit, barely profitable at the operating level. The

market is of the view that more clients will eventually opt to pay for

Nearmap’s high resolution imagery and content providers will start

integrating more of their business functions off these features. Google for

example plans to launch driverless cars, has purchased taxi booking software

providers and looking at potentially integrating this all into their business

model.


It’s unclear if Nearmap will continue to evolve or become an obsolete product

provider in the next ten years. Melbourne IT is a perfect example of a business

that once had a dominant position (the only domain registrar of .com.au in

Australia) but then was subject to competitive pressures as the online and

technology space evolved. Nearmap has rallied hard over the past year, the

shareprice has risen by multiples but net operating cashflow continues to

build solidly so we think it still deserves to be on your watch list and perhaps

even part of a very well diversified portfolio. It has the potential to be a

game-changer, if management can execute well and commercialise the

technology. We aim to speak to the company in the coming weeks and report

our findings in the same way we did for Ellex Medical (ELX) via a CEO chit-chat

section.

1300 Smiles (ONT) – Fancy a visit to the dentist? 1300 Smiles is likely to be one

of your dental clinics if you live in one of the ten most popular cities in

Queensland. The business also recently launched into Adelaide. It’s not usually

one of the first stocks investors think of when looking for exposure into the

small cap spaces but ask any of your friends and relatives which profession


they think make good money and

there is no doubt that dentists will be

on the list. We like the businesses

because it has scale capabilities, it has

the ability to expand into other parts of

the country and become a national

brand with marketing and operating

cost advantages – like Specsavers for example. The dental industry is

currently going through a rough patch after the removal of a government

scheme which subsidised dental work for those on low incomes or with

chronic diseases. Like all government subsidies this created and artificial

inflation in the earnings of the average dentist practices. As the work dried up

in a very short period of time, many dentists were left with an earnings gap

and so there has been widespread angst with some looking at exiting the

industry or opting for early retirement. The long term demand for oral

services by a dentist meanwhile continues to remain strong, particularly with

an ageing population.


Smiles has been successful in working with the public sector who is starting

to outsource certain dental procedures for which waiting times have risen to

an unsustainable 10 years in some cases. It’s a nice niche business that we will

continue to monitor.

3.0 Brent crude about to break-out?

We recently published an update on the Brent crude prices where we noted a

rejection around the Ichimoku cloud region. While we are generally more

bullish than bearish on energy this year – we wrote extensively why in our

2014 Forecast Guide earlier in January – there could be a temporary pullback

which will create a medium term buying opportunity.

Brent crude is looking vulnerable on the charts as of the time of writing. Click

on the video like above to hear Vito Henjoto talking talk through charts and

giving his exact levels. We have a strong rejection at around the US$108 per

barrel level, the level has been tested at least six times over the past two


Click here: http://blog.invast.com.au/finance/forex-trading-strategy-update-with-vito-henjoto-03-february-2014#.U3igVvmSx1Z

http://blog.invast.com.au/finance/forex-trading-strategy-update-with-vito-henjoto-03-february-2014.U3igVvmSx1Z




















weeks and there has been a strong rejection near this level. On the downside

US$105.25 will be a key test level – a level we mentioned last year where we

though Brent would trade within the $103-112 range. We are now tightening

that range.

4.0 Technical outlook for the Dow Jones

We continue to see the markets falling lower in the first quarter of this year, as

advised in our 2014 Forecast Guide special. As you can tell we have mentioned

this document several times now in this report and so it’s worthwhile casting

another eye over it in case you have forgotten some of our key calls. The Dow

Jones is one of the indices which we continue to see downside momentum,

US corporate results have been reasonable but they have not performed as

well as expected. When the market rises analysts boost their earnings and

good corporate earnings eventually become a victim of their own success. The

expectations bar continues to rise towards unrealistic levels.


Watch the full technical analysis video here:

http://blog.invast.com.au/finance/forex-trading-strategy-update-vito-henjoto-04-february-

2014#.U3ip8ihqnp1

http://blog.invast.com.au/finance/forex-trading-strategy-update-vito-henjoto-04-february-2014.U3ip8ihqnp1


















This downturn is welcomed, we are starting to see more sensible valuations

which is very important for the long term sustainability of equities markets.

For the US30 Index we see the following:

• Temporary base support potentially around 15,363 level despite the large

falls already booked

• We see momentum still to the downside, major test will be at around

15,700 to see if that level can hold on any short term rally of if this is

rejected then continuation to the downside.

• The US30 is now trading below the Ichimoku cloud on the daily

timeframe, not seen since last October. On the weekly timeframe we still

haven’t touched the Ichimoku cloud so still room for more downside. If

support gives way at 15,363 area then we could see next support level all

the way down at 14,200 range.


5.0 Zeng Qinghong – write the name down

We’re hearing rumours that the next target for Chinese President Xi Jinping’s

anti corruption campaign is Zeng Qinghong – write down the name. We aren’t

sure if these rumours have any substance but if they do turn out to be true

the ramifications of

prosecuting somebody

like Zeng are significant.

Zeng served as chief of

the Communist Party’s

powerful Organisation

Department and sat on

the previous Politburo

Standing Committee

under the former

President Hu Jintao. He

is a senior figure, albeit


albeit from the former regime.

Any efforts to prosecute Zeng will be met with large pushback and resistance.

We have already seen the huge political stalemate from the prosecution of Bo

Xilai – a former member of the Politburo and secretary of the Communist

Party’s Chongqing branch. The decision to target Zeng – if the rumours are

true – either suggests that Xi’s administration is confident in its position or is

desperate to strip its opponents of power. The Chinese rumour mill often

contains fabrications but occasionally – like the case with Bo Xilai and Zhou

Yongkang – reveal some truth. Zhou is believe to be under close supervision

and while he has not been official prosecuted yet, his involvement in the state

owned oil sector and energy bureaucracy was aided by Zeng’s promotion.

We’re not sure what will come of this but China is at a crucial moment in

history, political instability is the greatest threat to the entire system and

while we are bullish on China’s long term prospects, we will continue to watch


rumours and anecdotal evidence that might evolve into a large scale political

crisis. For now, we just want you to take note and write down the name.

Read through our blog for more relevant trading insights.

http://blog.invast.com.au/category/news










7.0 Disclaimer

Please note that you are receiving this report complimentary from Invast Financial Services Pty Ltd (AFSL 438 283). Invast staff members may from time to time purchase securities which are included in this or future reports. The authors of this report may or may not be holding a position in the securities mentioned. Please note that the information contained in this report and Invast's website is of a general nature only, and does not take into account your personal circumstances, financial situation or needs. You are strongly recommended to seek professional advice before opening an account with us.

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Reserved Bank Of Australia Statement and China's Political Instability

Investor Relations

Transcript of Reserved Bank Of Australia Statement and China's Political Instability