Trading Ideas and Opportunities for 2014

Invast Insights

Week Commencing January 30, 2014

www.invast.com.au | 1800 468 278

This week we look at the following topics:

1.0 Welcome to a year of opportunity

2.0 A$ direction following jobs report

3.0 Key takeouts from ECB monthly report

4.0 New section: CEO chit-chat (ELX)

5.0 Client question – portfolio methodology

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Share the link with your friends who aren’t already clients to receive a 4 week

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http://www.invast.com.au/insights









1.0 Welcome to a year of opportunity

We start this year with something special. Invast’s analyst team has been

working hard to bring you our 2014 yearly forecasts while many of you spent

the festive season on holiday - either by a tropical poolside resort somewhere

or along a beautiful Australian beach. We hope that the content in the forecast

guide report helps maintain your holiday mood throughout the year. The

forecast is our big picture look at key opportunities. We think the market

posses big opportunities for the year, particularly when removing the noise

from the daily newsflow or fear mongers among investment banks or

brokerage houses. Our views are balanced, we aren’t extreme or naive enough

to think that we get the market perfectly right but we like to back your

thoughts and opinions with trading calls.



As Invast clients, you will receive the 2014 forecast guide via email. For those

who want to directly download it, the link is here. The focus of our forecast

guide is around changing you way of thinking this year. We make the point

very clear that your way of thinking is what will determine your success. Your

way of thinking is similar to the operating system which runs your computer

or mobile phone. Every so often it needs to be cleared out, reformatted to

ensure your performance runs smoothly. Every so often, your operating

system will require you to update your software. Our 2014 forecast guide is the

software upgrade we think every trader out there needs, the latest version for

trading success. We hope you enjoy it and most importantly, profit from our

key trading ideas.

http://www.invast.com.au/resources/free-trading-guides/Forecast-2014-Free-eBook-Download








2.0 A$ direction following jobs report

Jobs numbers came in line below expectations last week in Australia. The

unemployment rate is flat but jobs are being lost as we enter 2014. Market

expectations were for the unemployment rate to hold steady at 5.8%. Full

time jobs shed 22.6k compared to expectations of 10k additions. Clearly, this

isn’t a good number. The participation rate has again distorted the numbers

and this is likely to reverse in the coming months. If we don’t see an

improvement in absolute jobs being added in February, the door is open for a

cut by the by in March. Make no doubt about this!

To put things into perspective, Australia’s participation rate is now at 64.7%.

The rate was at 65.8% in December 2010. Statistically, this is important. The

slowdown in Western Australia and other mining exposed states is profound.

Western Australia’s unemployment rate now stands at 4.7% compared to 4%

in January 2013. Victoria and New South Wales remain sluggish, not picking

up the slack as expected by fuelling building activity.


http://blog.invast.com.au/finance/audusd-reaction-lower-au-employment-numbers


So will the RBA cut rates? The only thing to prompt the RBA into another cut

in the first half of this year is the outlook for the jobs market. Inflation is

clearly on the backburner and while other pieces of data like retail sales,

building approval numbers, US tapering and the currency are important, they

are insigifnciant when compared to jobs. We think the greatest risk to the

Australian economy this year is the prospect of unemployment breaking out

above 6% and sitting there persistently before falling by the end of the year.

We still see the AUDUSD with an 8 in front of it (cents) until at least the fourth

quarter of this calendar year.

Major support trend line at around 0.8890 but major resistance at around the

0.9020-0.9025 level. The 0.8890 support trend line broke convincingly

following the news and looks to now be heading into the mid 0.80’s level

range where it will consolidate.


Watch the full technical analysis video here: https://www.youtube.com/watch?v=i5DqaezNwI4

https://www.youtube.com/watch?v=i5DqaezNwI4

https://www.youtube.com/watch?v=i5DqaezNwI4


3.0 Key takeouts from ECB monthly report

The ECB released its monthly report on 16 January 2014, you can click here to

read the full text. The statement didn’t contain any real surprises but we

wanted to cast our eye over what we think the ECB is most focused on this

year. The most obvious theme to emerge is a very strong commitment to low

interest rates for a prolonged period of time. Click on the video to the right to

get our latest technical levels on the EURUSD.

Europe is not out of the woods by any means and as we have stated

previously, it is the one thing that keeps us up at night. The ECB has witness

the successful implementation of quantitative easing and loose monetary

policy by the US Federal Reserve and it plans to go down the same path,

albeit lagging the US by around a year or two.

http://www.bloomberg.com/news/2014-01-16/ecb-monthly-bulletin-editorial-for-january-text-.html














For us this means two things:

1) The Europeans want a cheaper currency, they want to manufacture and

export their way out of this economic slump and so as the US dollar

rebounds for years of suppression, the Euro is likely to see its gains

capped in the high 1.30’s range.

2) European indices will start to perform in the same way US indices have

over the past eighteen months. As the banking problems phase out, European

stock markets like the DAX and CAC will benefit from the ultra lose ECB

monetary policy stance. There will be political chest-beating (as usual in

Europe) about the appropriateness of such a monetary stance, but since the

stock market usually front runs the economy by around six to nine months,

companies will start to see a rise in their valuation.


European stock markets are quiet unique in that they are heavily represented

by multinational businesses that have operations globally and are likely to

benefit from a strong US economy and the flow on effects. The availability of

cheap credit is a double benefit for these businesses and this will continue to

help stock prices. We remind clients of our earlier reports on the markets like

the DAX where we broke down the index and spoke about the key drivers in

coming months that would likely impact returns. The DAX has rallied by 14%

since we published this report just over three months ago.

4.0 New section: CEO chit-chat (ELX)

One of the key small cap ASX companies we have been keeping our eye on

over the holiday period has been Ellex Medical (ELX). We first highlighted the

stock in our Invast Insight report dated 26 August 2013.


In our most recent report, we ended off our analysis by saying “Our bottom

line is that we like Ellex and think the turnaround strategy is progressing to

plan. The market will start to pay attention when earnings grow and we think

this will become more evident early in the New Year. We want to get in before

that and think at around 30 cents per share and a market capitlisation of

$30m, the risk reward ratio is more than attractive to justify a holding in a well

diversified portfolio.

Liquidity is thin with the top 20 shareholders holding around 45% of the stock

and directors’ holding 24% - but this also creates opportunities when the

market decides it’s time to buy the stock. We plan to speak to CEO Tom Spurling

sometime in the next few weeks if we can get a hold of time – he’ll no doubt be

busy showing off his company’s products at the 2013 Annual Meeting of the

American Academy of Ophthalmology in New Orleans on 16-19 November.”


We were fortunate enough to speak to CEO Tom Spurling last week, as

promised late last year. A lot has happened over the past few months – Ellex

has successfully funded a new business in the United States to further expand

its product offering while the shareprice has risen to as high as 46 cents in the

days leading up to our chat with Tom Spurling. The market is starting to take

interest in this story, we asked Tom a whole range of questions. These were

generally the key points which came out of the discussion, summarised

below:

* Tom believes the SLT range of products puts Ellex in a world leading

position. Sales are mainly being driven by a combination of direct salespeople

and distributors, depending on the geographic location. Direct sales teams

are in place across Germany, Australia and Japan. Expansion directly into the

United States is a key priority and expected to yield significant results, as

already released to the market. Independent research shows that Ellex has

around 16% market share across key products, in second place compared to

competitor Lumenis. Private equity owns Lumenis and that business is

generating around US$ 150m in annual revenue (across all products)


compared to around $45m for Ellex. The rest of the market is highly

fragmented. Ellex is number one in terms of market share in the glaucoma

market.

* 2RT technology is perhaps the largest game changing product for the

company. The market is different to other medical products whereby new

drugs or technology needs to go through a tight regulatory process which

can cost huge amounts of money. With the type of technology Ellex is trying

to launch, it is common practice to self regulate and convince potential buyers

through self funded studies backed by reputable industry professionals. 2RT

technology has the potential to significantly change the way eye surgeons

manage their patients. Ellex is planning to co-ordinate a 300 patient study

which it hopes will help articulate this point with potential clients. An

announcement around 2RT should come within the next few months.


The average life cycle of these products is somewhere in the order of 10 years.

Doctors have the discretion in terms of purchasing new equipment but it

wouldn’t be uncommon for the typical Australian eye surgery to have around

$100k worth of Ellex products. Estimates will obviously vary depending on size

of surgery, the number of doctors using it etc but this is just a rough guide.

The main incentive for a doctor to purchase the equipment all comes down to

how it will help improve success rates with clients and make the consultation

process easier. Price points are similar to those of a brand new car.

* The recent fall in the Australian dollar makes life much easier. We estimate

that there could be at least a couple of million dollars benefit to gross

margins based on a 10% fall in the Australian dollar relative to the US dollar –

the type we have seen over the past year. This is Invast’s own estimate and not

something that was explicitly stated by CEO Tom Spurling but our estimates

are based on numbers which he analysed on the group’s 2011 financial year

results. This is a guide only but obviously a positive for earnings.


The economic slowdown in Europe is making life harder, distributors are

finding it more difficult to source financing and hence the whole supply chain

is somewhat complicated, but we didn’t sense this to be a material problem.

This was a risk which Tom Spurling pointed out. He also noted the risk of

imitations hitting the market, coming from places like Taiwan, but then again

this is not unique to Ellex.

Australian Ethical Fund – which manages around $800m – has recently been

buying the stock on market and was a participant in the recent capital raising

to help fund the US acquisition. Australian Ethical now owns around 12% of

the stock.


5.0 Client question – portfolio methodology

We recently received a query from a client regarding our model portfolio

methodology. We publish and update our portfolios on a monthly basis, the

next update will be in the first week of February. Client Jack Alexander from

Sydney asks – “I manage my own modest SMSF portfolio & just want to know

how you pick stocks in these portfolios. What system of methodology do you

use...?”

Dear Jack, thanks for the question. The model portfolios are aimed to give you

an idea and framework around managing your investments - they are general

in natural and do not take into consideration your personal circumstances so

please keep that in mind. The portfolios are not benchmarked to any

particular index, they are run with an absolute return basis in mind. They will

also evolve to include global foreign exchange and index positions and so

picking one stock index to benchmark against is pointless.


Common benchmarking to the ASX200 is pointless since the index is just a

measure based on market capitalisation and doesn't really mean much other

than a mathematical calculation and most individual investors do not have to

be invested 100% of the time, unlike fund managers and so the opportunity

cost of investing is being in cash.

Without knowing personal circumstances, our general portfolios are set up to

reflect time horizon. If you are 20 years old and looking at growing your

wealth your portfolio should very different to somebody aged 64 and about

to enter into retirement. Most stock tipping sheets and research services will

tell you which stock to buy but they won't tell you how much and for how

long you need to hold that investment. Even the ones that provide model

portfolios, there isn't enough emphasis on time horizon. Is a balanced

portfolio suitable for the 20 year old just as much as the 64 year old?


In a perfect world we would balance time horizon with risk tolerance etc but

then the value of the portfolios will become too complicated. The portfolios

we update on a monthly basis will just drill down on what we think - on a

general basis - each age category should be looking at (buying/selling) from

time to time. For those 20 year olds that feel like growing up quickly, they

have the choice of adopting a shorter time frame approach and conversely for

the baby boomers looking at going into retirement, they can opt to be young

forever.

We think most investors are in one of three stages - wealth creation phase,

wealth preservation phase and then drawdown phase. A fully franked

dividend is much more important later on in life when income from salary

becomes difficult than it is for somebody who has a life and work expectancy

of more than 40 years. Again, this is a general statement only and individual

circumstances will change. In our portfolios, each category tries to capture:


Wealth Creation – This portfolio has higher tolerance for risk, more exposure

to forex and commodity positions, greater appetite for growth and emerging

opportunities. Taking large losses is tolerable although focus is on very tight

risk mitigation methods like stop losses. Return target above 10% pa. Portfolio

commenced with $50,000.

Wealth Preservation - We have made the money and looking at smart ways to

invest it. Quality is key, income is important but not as important as certainty.

We have some tolerance for the riskier things in life but not too much as

retirement is the next phase of our life. Return target between 5-10% pa.

Portfolio commenced with $50,000.

Drawdown Phase - We have created our wealth, preserved it well and now

need to find ways to generate a reliable income because we are no longer

work and need to make sure we have enough money to pay the bills as they

fall due. Return target around 5% excluding franking credits pa. Portfolio

commenced with $50,000.


So why did we start our portfolios with $50,000 in each? We think this is close

to the average amount most people will start off with investing. We hope to

grow this to much more over time. If you have more or less than this amount

you can just adjust according to your own preferences. The portfolios are not

rigid, rather they are just a guide of trading opportunities which we think

satisfy each type of investor. They will grow and change over time.

With the derivative exposures in the Wealth Creation Portfolios, we allocate

the whole amount of exposure to the size of the portfolio. For example when

taking a position in gold, we recognise the face value of the exposure and not

just the margin requirement. We feel this is more appropriate so clients know

exactly what they are getting themselves into. Some traders may want to

adjust for this methodology which is fine.


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.

General Disclaimer: This newsletter contains confidential information and is intended only for the person who downloaded it. You should not disseminate, distribute or copy this newsletter. Invast does not accept liability for any errors or omissions in the contents of this newsletter which arise as a result of downloading this newsletter. This newsletter is provided for informational purposes and should not be construed as a solicitation or offer to buy or sell any financial product. Invast Financial Services Pty Ltd is regulated by ASIC (AFSL 438 283 | ABN 48 162 400 035).


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documents before you decide whether or not to acquire any financial

products listed in this email. Our Financial Services Guide contains details of

our fees and charges. All these documents are available here on our website,

or you can call us on +612 8036 7555. CFDs and Foreign Exchange are

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your initial deposit so you should ensure CFD and Foreign Exchange trading

meets your personal circumstances.

General Advice Warning: Being general advice, this newsletter does not take

account of your objectives, financial situation or needs. Before acting on this

general advice you should therefore consider the appropriateness of the

advice having regard to your situation. We recommend you obtain financial,

legal and taxation advice before making any financial investment decision.

*Distributed with the permission of Invast.com.au

Investor Relations

Trading Ideas and Opportunities for 2014