Invast Insights
Week Commencing March 10, 2014
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This week we look at the following topics:
1.0 Russia and the situation in the Ukraine
2.0 Monthly portfolio review
3.0 Property vs. shares and gold performance
4.0 Focus on the Yen crosses
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1.0 Russia and the situation in the Ukraine
First, the facts. Russia produced around 10.6 million barrels of oil in 2012
according to BP’s Global Statistical Review. This was second only to Saudi
Arabia who produced around 11.5 million barrels. BP will release its 2013
statistics in the next few months; we don’t expect to see too much
proportional change. Total global oil production is currently at around 86
million barrels, this highlights Russia’s position. Russia is even more prominent
in natural gas production; it produced around 592 billion cubic metres in 2012
which was the largest single production by a nation. A large proportion of this
gas exports through legacy pipelines, which run through countries like the
Ukraine and end up as a major energy source for most of Western Europe.
We suggest you read a note by global intelligence firm Stratfor called “Ukraine
and the Little Cold War’. You can view the article by clicking here. This is
probably the only single piece of analysis we read in the past few days that
explains the issue to its core. It will also help you map out where this fits in
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the overall tussle between Russia and Europe in terms of energy dependence.
As Stratfor notes “The Orange Revolution in Ukraine, from December 2004 to
January 2005, was the moment when the post-Cold War world genuinely ended
for Russia. The Russians saw the events in Ukraine as an attempt by the United
States to draw Ukraine into NATO and thereby set the stage for Russian
disintegration. Quite frankly, there was some truth to the Russian perception.”
At the end of the day, Western Europe needs its energy and Russia knows this
well. This brings us to the second point, politics. Russia can afford to negotiate
its geopolitical interests on its own terms because it knows that whatever
reasonable measures it puts into place, there is little that Western Europe can
do economically. A military occupation of Crimea and other Russia interests in
and around the Ukraine will be met with nothing other than Western vocal
opposition. Russia knows that it can push its military to certain points with
little consequences. The West will use its media and lobbying to try and paint
Russia as an aggressor but this is not likely to make any difference, as has
been the case in Syria for the past two years.
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The third point is economics. If there are military strikes in the Ukraine, which
is not likely, there might be a slight spike in the gold price. Russia needs
global markets to sustain its economy; it cannot afford to isolate itself. It
knows that military operations are a just a means to prove the point that it is
a force to be reckoned with. The whole issue highlights a bigger theme
around energy prices. Western Europe is held hostage to a dominant and
defiant Russia which is still a completely dominant force in energy markets.
Stratfor notes in its report “In an energy-hungry world, Russia's energy exports
are like heroin. It addicts countries once they start using it. Russia has already
used its natural gas resources to force neighbouring countries to bend to its
will. That power reaches into the heart of Europe, where the Germans and the
former Soviet satellites of Eastern Europe all depend on Russian natural gas.
Add to this its other resources, and Russia can apply significant pressure on
Europe.”
This means Western capital and technology will chase diversification in the
coming decade. North Africa and the Mediterranean are key areas of energy
development for Western Europe, particularly for liquefied natural gas. If the
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West cannot get this type of diversity up and running fast enough, we feel the
squeeze on oil prices will be profound.
We remain bullish on energy this year and the Ukraine situation is one of
many examples which we expect in the coming years. Here at Invast we
believe play it safe, play it smart. Elsewhere, oil we see is a buy on any short
term pullback, there is the prospect of an upward break in the region of
US$115 for Brent.
2.0 Monthly portfolio review
It’s been a mixed month for our portfolios. The good news is that the Wealth
Preservation portfolio has started to improve its returns, Woolworths has
been a solid performer during the month posting some impressive sales
numbers. Westfield has also recovered and seems to have formed a nice base.
Woodside reported reasonable numbers and we have also attributed the
dividend to the cash balance. Next month will see Woolworth’s balance being
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banked. The Drawdown Phase portfolio we feel, is also doing great, Telstra’s
dividend has been banked and the remaining stable securities are providing
the rock solid certainty that this type of portfolio requires.
The biggest disappointment this month has been in the Wealth Creation
portfolio – the one that has been performing the best in recent months.
Adslot (ADJ) shares fell heavily during the month and triggered a stop loss
which we mentioned as part of our portfolio rules when launching them in
September. We have a firm 20% stop loss rule for any change in that order
over one week. Stocks in the Wealth Creation portfolio are usually small and
illiquid so it is important to have these types of measures in place.
We will be running another webinar in the next few months for new
subscribers and clients to keep them up to date with our portfolio
methodologies and portfolio rules in place. Still, all three portfolios have
posted positive returns since inception and should outperform their targets
by the end of the year. The Wealth Creation portfolio still has around $9,500
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in cash and we are continuing in our hunt for small cap gems. We will be
making a key acquisition next month with a whole section on the particular
stock.
The diversity in the Wealth Preservation Portfolio continues to highlight the
low volatility and steady growth stream. We still feel comfortable with all the
three individual stocks we own. Woodside Petroleum did fall after its result
but we think it is very well placed to benefit from rising energy prices. Even if
the stock doesn’t move for a while, the dividend is very attractive and we will
continue to bank it. Westfield as we mentioned early is due for an upward leg,
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we maintain our full confidence. Woolworths is very well placed to benefit
from inflation returning into its average sales basket in the coming years.
Deflation was somewhere the order of 4% over the past six months, a level
that is clearly unsustainable. Food and grocery prices will start to rise
modestly and this will all flow through into higher absolute earnings and free
cashflow for Woolworths.
We continue to build cash steadily in the Drawdown Portfolio and remain
pleased with the fact that the annualised rate of return is sitting at 8.3%. The
decision to exit AMP was in hindsight a little premature but it’s better to be
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safe than sorry. Our focus here is on extreme caution and modest income.
3.0 Property vs. shares and gold performance
We recently ran a comparison of four key markets ahead of our presentation
at the Trading, Franchise and Property expo in Melbourne later this month. We
thought it would be a great opportunity to show the performance of
Melbourne property, Australian shares, Gold and Silver over the past ten years
on an initial investment of $100,000. The chart below shows the performance
of each asset class on the initial investment. It’s worth keeping in mind that
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we excluded fully franked dividends which are an important part of the stock
market, so if we included these shares would have actually performed better.
We also excluded income from property – rent – in order to level out the
playing field.
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Image source: ABS website, ASX historic performance, Kitco Metals website
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The chart performance speaks for itself. We don’t advocate people just jump
straight into Gold and Silver and forget the rest, rather we think the average
investors needs to take into consideration that property does tend to rise, but
so too do other markets that can be more liquid and flexible to exit. The
perception that shares are risky is true depending on what type of shares an
investor builds their portfolio around. The chart shows that despite the global
financial crisis, the Australian market overall has managed to generate a very
respectable return in ten years, almost doubling the initial investment of
$100,000. The purpose of our portfolios is to provide you these consistent,
long term sustainable returns.
For those looking at some current trading ideas, short term in nature, we
recently ran a scan across all listed companies in Australia and we screened
for stocks which matched the following criteria:
• Are in a robust uptrend.
• Priced in the low cap range between 10 cents and $1.20.
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• Daily turnover is at least $50,000, so the really small low cap stocks are
removed or at least those stocks that have a low (relative) turnover.
• The cover a broad range of sectors for potential diversification.
Our results are as follows, data is compiled as of 5 March 2014.
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www.invast.com.au | 1800 468 278
www.invast.com.au | 1800 468 278
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4.0 Focus on the Yen crosses
As the risk aversion in the market fades away, the Japanese Yen is likely to
resume its depreciation against the major currencies. Most of the Yen crosses
are trading near key levels, and we think it is worth the time to focus on these
currencies this week.
USD/JPY: The pair has been traded in a range following the completion of
market correction at the end of January. USD/JPY retraced 50% of its Q4 rally
before finding support at 101.00 support level. Resistance for the range
remains at 103.00 previously a support turned resistance, and until mid-March
this level coincides with the Ichimoku Cloud resistance. While we expect
further depreciation in Japanese Yen, USD/JPY we see will remain range
bound as long as 103.00 resistance exists. Our focus this week will be 103.00
level as a rejection here could see the pair track down towards the lower end
of the range, while a confirmed close above 103.00 on the Daily chart signals
an uptrend continuation for the pair. Our preferred strategy is to sell USD/JPY
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close to 103.00 with a stop loss of no more than 103.50. We will target 102.00
and 101.50. Please keep in mind that a daily close above 103.00, is a bullish
sign and can also be used as a signal to reverse this trade.
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www.invast.com.au | 1800 468 278
EUR/JPY: EUR/JPY correction in the month of January is much more
significant, going as far as 61.8% Fibonacci retracement. The bounce from
61.8% at 136.69 triggers a rally, but as with most Yen crosses the risk aversion
in the past 2 weeks halted further progress. We do anticipate an uptrend
continuation in the near future and our trigger is the daily close above 141.00
key resistance that has kept the pair from progressing further in the month of
February. On the support side we have 139.00. Momentum for the pair is
currently neutral as indicated by price trading within the Ichimoku cloud and
Stochastic Oscillator just hovering around the 50 level. We prefer to go long
EUR/JPY preferably on a confirmed close above 141.00 with stop below 139.00
key level. Targets to the upside are located at 142.75, 144 and 145 where last
year’s high was.
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www.invast.com.au | 1800 468 278
GBP/JPY: Out of all the Yen crosses, GBP/JPY got a head start on the back of
good economic numbers from UK last month. The pair is now trading above
the Ichimoku Cloud on the Daily chart, and is on track for progress towards
172.50 and 175.00. Stochastic Oscillator is now crossing up indicating a bullish
sentiment and more momentum to the upside for the GBP/JPY. We prefer to
buy on dips for the GB/JPY, preferably around 170.00 and 170.50, with stop at
168.50 and targets at 172.50, 173.50 and 174.50.
AUD/JPY: Chart below. The pair bounces off 90.00 key levels last week and
with some help from the better than expected GDP numbers from Australia;
AUD/JPY manage to trade back above the Ichimoku Cloud, indicating a shift
in sentiment and trend in the near future. There is a resistance trend line in
the vicinity of 92.50 that will test AUD/JPY this week, but stochastic oscillator
suggests more upside momentum behind the current push higher.
Considering that the pair is traded within a triangle, our strategy will be one
based on a breakout. We are looking for a daily close above 92.50 before
buying AUD/JPY with stop at 91.00 and targets at 95.50.
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Read through our blog to keep updated with important trading information.
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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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