The Federal Reserve and the Future of Money Printing 2013

Invast Insights
Week Commencing September 23, 2013

www.invast.com.au | 1800 468 278
This week we look at the following topics:
1.0 The Federal Reserve and the future of money printing
1.1 How does the September decision impact Australia
1.2 Quality of assets for Australian banks
1.3 The key data set to watch
2.0 Brent crude back to "normal" trading range
3.0 Pivot points explained
4.0 Client question and answer - liquidity

1.0 The Federal Reserve and the future of money printing
Despite market expectations of the Federal Reserve easing its money printing
by around US$10bn a month - Bernanke has made it clear that the pace of US
improvement is still below expectations and the door will remain open for
money printing until the unemployment rate reaches 6.5% from around 7.2%
currently.This is now NOT NEGOTIABLE.
The Federal Reserve has been busying printing money really since the global
financial markets shocked investors globally. The most recent strategy, called
QE3, had the Fed buying $85 billion of bonds every month. The bank has said
it will phase out those purchases as the economy improves. The timing of that
phasing is now subject to market speculation - it's not really a matter of if, but
when. The September meeting showed that the foot will be taken off the
pedal, only when unemployment approaches the 6.5% benchmark level set
by the Federal Reserve.

If you are a currency or commodity trader you would have noticed some large
volatility on Thursday morning Australian time when the news was
announced. We update the Invast blog daily with important pivot points for
traders. This week we have explained how these pivot points work, read on
below to section 3.0.
1.1 How does the September decision impact Australia
We think the Fed is cautious on the quality of job creation in the US economy
and potentially sees some of the gains made by the Reserve Bank of Australia
(RBA) over the past two years stalling in the months ahead. Risk currencies
will remain in favour and that means a lot of the hard work the RBA has been
doing to drive down the currency will now be eroded.

The RBA must maintain its door-open policy and hope the financial system
bares the consequences of its loose policy - which banks will probably exploit.
The only saviour for the Australian economy at the moment is a breakout in
commodity prices and a resumption in some large project spending which
will kick start the stalling job market - a long shot. The US economy can cope,
the Australian central bank though has a very tough task between now and
the end of the year. It will try its best to caution the financial system against
poor lending but it knows that the cost of cheap rates can mean asset quality
deterioration in banks over the medium term.
It's a bet the RBA must take. We see some major resistance for the A$/US$ at
around the 96 level which could be tested over the next few days. Vito will be
updating the blog on a daily basis with his key support and resistance levels
but this is our view as at the time of writing. We don't see a major upward leg
on the Aussie towards parity unless the copper price can break out of the
US$3.30-35/lb level. We wrote about the copper price in the Invast Insights
issue published on 2 September.

1.2 Quality of assets for Australian banks
The RBA released its September meeting minutes a few days before the
Federal Reserve meeting. The minutes showed the trade-off with lowering
interest rates in Australia - stimulating below trend growth but also watching
the unintended consequences towards asset quality within the banks and the
health of the financial system overall. Many offshore investors have been
burnt badly by shorting the Australian banks on hopes of a housing collapse.
ANZ Bank, Commonwealth Bank of Australia, National Australian Bank and
Westpac have over the past year posted total shareholder returns of 31.6%,
39.6%, 45.4% and 39.8% respectively.
Most banks blow up because of bad loans and a loosening of lending
practices, as warned by the RBA, will be the main trigger for bad loans
accumulating. Luckily, because of the fantastic disclosure requirements the
Australian regulators impose on the domestic banks, we have access

to data which foresees trends in bad problematic loans. One of the best
indicators we use is the trend in arrears - loans that have not been paid on
time but have not yet turned into bad loans for the banks. Arrears don't pre-
empt bad loans (sometimes loans go bad overnight) but the trend is very
important to watch. The most common measure of arrears are those with a
term of around 90 days - loans which are overdue by 90 days by the borrower.
Below is the trend in arrears as reported by Australia's largest bank -
Commonwealth Bank of Australia - in August this year. Keep in mind that the
report is for a financial year ending June and so the loans below were loans
which were overdue by 90 days as at June. Since then, the unemployment rate
has risen gradually and this is the greatest risk to people paying off their
loans late or defaulting.

Image: 90 day arrears in Commonwealth Bank result presentation to ASX 14 August 2013

As the chart above shows, the level of arrears in home loans remains at
manageable levels and is actually falling. The other three Australian banks will
report over the next few months and their numbers should show a similar
trend. We will be writing a report on each bank when they report. But our
point here is that those shorting the Australian banks probably should know
that at the moment, asset quality is solid. Perhaps that is why the RBA is so
vocal in maintaining this quality and discouraging the banks from taking on-
board more risk in order to grow their profits.
1.3 The key data set to watch
With all this in mind, the key data to watch from US markets will be job
numbers. In Australia, the RBA will be hoping and praying for a good number
so that the Federal Reserve can start to taper, wind back its money printing
and stop devaluing its currency. To date, the US unemployment rate has been
falling but the quality of the numbers are not convincing enough to see the
Federal Reserve into action.

Image: Unemployment rate and employment growth via US Bureau of Labor Statistics September 2013

The smart traders know that the Federal Reserve will eventually act and the
key trigger will likely be a nonfarm payroll number somewhere between
250,000-300,000. We haven't had that type of job growth since February this
year and while in the short term traders are moving out of USD and into risk
currencies, this shift won't last forever. Keep an eye on the nonfarm payroll
numbers particularly the November and December read.
2.0 Brent crude back to "normal" trading range
In the Invast Insights report published on 2 September 2013, we spoke about
the oil price and how the headlines around Syria were much more frightening
than the actual economic situation. We cautioned against buying oil on news
headlines and discussed the range of military possibilities and how they will
impact oil markets. We also ended up report section by saying "...Aga in it is
important to not buy into the headlines before reading through the facts.
There is still a remote chance that no military action takes place in Syria and
somehow, things are sorted out..."

The latter has now occurred. We don't intend on going into another deep
analysis on Syria but instead want to make the point that Brent crude is now
coming back to more normal levels and we think it will continue to trade
within a brand of $107-$117 per barrel between now and the end of the year.
There could be some solid support at around the US$105 per barrel level if it
slips below this range.That's where we would be looking to buy.

Image: Brent crude spot price daily line chart via Invast MT4

3.0 Pivot points explained
Pivot points have been in use by traders long before technical charting was
introduced, and up to this day pivot points are still extensively used by both
fundamental and technical traders. Because both camp of traders employ the
same calculation method, pivot points became one of the most efficient
indicators in predicting potential support and resistances.
Some traders often referred to pivot points as pivot levels instead, and
typically consists of 5 points/levels. The pivot point, resistance 1, resistance 2,
support 1 and support 2; although it is also common to see traders employ
resistance 3 and support 3 to pre-empt major movement in the market during
high impact news releases.

Pivot points are a multipurpose tool used to provide an estimate of the
market range as well as key support and resistance levels for traders to work
with. Its use is very similar to the Fibonacci levels and it’s also considered as a
leading indicator.
Traders typically employ pivot levels as entry and exit levels to complement
their own trading strategy. Unlike Fibonacci which relies on swing highs and
swing lows in the market, pivots rely on the previous day’s open, high, low
and close. For this reason, it is more popular with traders. There are various
calculation methods to obtain pivot points, to name a few these are the more
common method of pivot calculations:
• Traditional
• Classic
• Fibonacci
• Woodie

• DeMark
• Camarilla
The traditional arithmetic average method is the most common and well
known calculation methods employed by traders globally and is generally
referred to when pivot points are discussed in general technical analysis.
The traditional arithmetic average calculation starts by determining the Pivot
point.
Pivot = (High+Low+Close)/ 3
There are variations by including the open of the day as well;
Pivot = (Open+High+Low+Close)/4
Throughout this article we will be referring to Pivot = (High+Low+Close)/ 3

Resistances and Supports can be derived from:
R1 = Pivot + (Pivot-Low)
R2 = Pivot + (High – Low)
R3 = R1 + (High – Low)
S1 = Pivot – (High – Pivot)
S2 = Pivot – (High – Low)
S3 = S1 – (High – Low)
Support 2 (S2) and Resistance 2(R2) are often considered as the highest
support and resistance for the day during normal market conditions, as such
the distance between the two is considered as the potential range of the
market for the day. Resistance 3 and Support 3 are typically reserved for
market moving events such as last week’s FOMC tapering decision.

Apart from the main pivot points, some traders employ mid points, these are
pivot levels located between key levels described above. These mid-points are
less accurate and carry little importance most of the time, as most traders
simply bypass them and look up to the main pivot points as reference. It is
best for new traders to avoid using mid- points as it could confuse them with
too many levels to work with. In this article, however, we will include the
calculation:
M1= (S2+S1)/2
M2= (S1+PP)/2
M3 = (R1+PP)/2
M4 = (R2+R1)/2

The shorter the distance, the less volatile the market is. However do note that
extensive periods of minimal volatility often sets the market up for potential
breakout situations. During market breakouts price tends to move beyond
S2/R2 and S3/R3. If no trend is visible market typically moves back and forth
around the pivot point.
Daily pivots and weekly pivots are commonly used amongst traders and the
only difference between the two is the data used to calculate them and their
purposes. Daily pivots are calculated based off previous day’s close, typically
traders uses London close (GMT+0/1) or New York close (EST+5). Forex and
futures traders normally prefer the London close while Stock traders in
America naturally use the New York close to calculate the daily pivots.
Australian stock traders would need to use the open/close during the
Australian session between 10:00 to 16:00 GMT+10. Different daily candles
will yield different results as such a thorough research of what majority of
traders are using for different markets is a necessity.

Weekly pivots, as the name suggests requires a weekly candle for its
calculation and since the open is ignored in traditional arithmetic calculation,
market closes are the only thing that would make a difference. Because of the
lack of potential variation, weekly pivot is considered to be the standard
benchmark that will not differ too much from traders to traders. Daily pivots
are typically employed by intraday traders to predict turns in the market
within the day. Weekly pivot points are a favourite amongst swing and longer
term position traders as it covers a much larger range of the market.
Traders generally agree should price in the market trade above the pivot
point, the market would be considered as carrying a bullish sentiment and
the expectation is for the market to continue moving higher. On the other
hand, with a price trading below the pivot point, traders expect the market to
fall even lower. This by itself is an additional purpose to gauge sentiments and
bias in the market.

Pivot points are one of the simplest indicator to use, in a nutshell market price
is attracted to pivot points. Think of it as a magnetic pull between price and
pivot points. For example, price trading above the pivot level carries a bullish
bias and will likely pull higher, attracted by the magnetic pull of R1. This
applies to all the other points as price pushes through them just like how
magnets with opposing polarity attracts. The flip side to this is that these
points also act as support and resistance levels, and has the potential to repel
price just how positively charge magnets repel one another.
Price bouncing off from supports and repelled from resistances are typically
due to market psychology and their reaction towards these pivot points.
Buyers would come in around support levels and sellers around resistance
levels; adding to this are traders with positions taking profits or cutting their
losses; hence the potential that these points could be the turning point
during the day, considering a lot of traders are looking at these same levels.

Below is an example of AUD/USD on the daily chart restrained by the weekly
pivot point following FOMC’s announcement to hold back tapering of
quantitative easing for now. Keep in mind that the R3 that kept the pair from
progressing further was projected 4 days before the FOMC announcement,
relying on previous week’s data.

Figure 1 Weekly R3 restraining the market post FOMC "no taper" .Source: INVAST MT4

Below is another example of the daily pivot constraining USD/JPY throughout
the transitional trend change from the 6thof August till 14th of August 2013;
as seen from the hourly time frame.

Figure 2 USD/JPY movement const rained by Daily Pivots.Source: INVAST cTrader

As you can see from the examples illustrated above, Pivot points provide a
reliable level to work with and with minimal confusion. Entry level traders can
pick it up very easily, while traditional traders of ten rely on it as well.
At Invast, we believe Pivot points are the easiest and one of the more reliable
methods to help our traders obtain key levels to plan their trading day ahead.
We also published Pivot points daily covering the Currency majors including
EUR/USD, GBP/USD, AUD/USD, U SD/JPY and USD/CHF. These daily pivots are
published every morning around 8am GMT+10 (Sydney) and employ the
traditional arithmetic method together with Lon don Open/Close. We also
publish a weekly pivot covering the same majors as the daily pivots, every
Monday morning. Our blogs at http://blog.invast.com.au/ host these reports.

4.0 Client question and answer
Question: Most of the stocks discussed in your 15 hidden gems report (Invast
Insights 0 2.09.13) seem to have very low liquidity, so would you consider
technical analysis to assist in timing entry to the stocks? Do you consider these
as buy and hold stocks or can they be considered for trading as well? – Abel
Answer: Abel, thanks for your question. Many of the stocks we identified in
that report do have low liquidity because of their market capitlisation and
nature of business. These are generally stocks that are not that known in the
market and so their turnover might also be low. But we think, having taken
this into consideration, the absence of large investors can sometimes be
positive.

Let's take Dominos Pizza Enterprises (DMP) as an example. The stock has been
illiquid in the past and a reason for many small cap fund managers and large
investors staying away. But as the business has grown, so too has turnover in
the stock and the amount of subsequent liquidity on the market. Dominos'
annual shareholding turnover has grown from 20.8% in 2011 to 50.8% this
year. The average buy/sell spread has also fallen from around 2% to 0.3%
during that same period. As the business grows, so too does the universe of
investors who can start allocating funds. Dominos has returned 35.9%
annually on average over each of the past three years - no doubt a market
darling with a current share price just under $13.
Illiquid stocks can also be dangerous when the market starts to decline. A
panic seller will often cause a spiral of fear which sometimes turns into a self-
fulfilling prophecy - the share price falls, lenders get edgy, customers are
cautious, business and earnings decline etc. So with opportunity comes risk.

The best way to trade illiquid stocks from our experience is using limit orders
and being patient. Averaging in and out of positions is also helpful so take
these tips into consideration. It's not easy but when everybody decides to
jump on-board, the share price gains can be significant. Our list of stocks is
built on the premise of businesses with earnings growth potential, so the list
is obviously compiled with share price gains in mind.
In terms of technical analysis, this can be useful but when liquidity is low the
historical price action can be easily distorted and so you need to treat the
charts with caution. It would be wise to include volume indicators or use a
volume weighted average price. In our client only webinar held on 17
September 2013, we said out of the 15 hidden gems, our preference were:
Looking attractive at the moment in terms of pricing - ADJ, EPD, JIN, TAN, VEI
Looking attractive if prices fall slightly from here - IMF, VOC, RFL, PPS, ALU
Nice business but attractive on a decent pullback - ELX, NEU, ITL, WBA, RNC

Please note that you should consider your own individual circumstances and
Invast is not licensed to provide you with personal advice. The views above
are of a general nature and please see the disclaimer below for more details.
We hope this answers your question Abel.

5.0 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).
Risk Warning: It's important for you to read and consider the relevant Product
Disclosure Statement, and any other relevant Invast Financial Services Pty Ltd
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
leveraged products and carry a high level of risk and you can lose more than
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

The Federal Reserve and the Future of Money Printing 2013

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The Federal Reserve and the Future of Money Printing 2013