David Jones Takeover and Valuation Summary

Invast Insights

Week Commencing April 28, 2014

www.invast.com.au | 1800 468 278

This week we look at the following topics:

1.0 Trade review on the Dow Jones & monthly outlook

2.0 David Jones takeover & valuation summary

3.0 Technical outlook on Japanese Yen crosses

4.0 Upcoming client only webinars

5.0 Invast’s NEW daily Forex podcast channel



1.0 Dow Jones monthly outlook

The following note was published by Chief Market Analyst Peter Esho to

clients on 7 April. Here it is with more detail.

It’s always difficult to pick the top of the

market. Many analyst, advisers or fund

managers point to periods of time where

they have been right in picking an

upward or downward point but many of

these guys won’t show you instances

where they have made a call and got it

wrong. Hindsight is always correct! When I

look at markets, I take on board all the fundamental and technical informa -

tion but the most importance part of the trade is having my own conviction.

I follow my instincts.

Taking action is the most important part of becoming a successful trader.


Sometimes doing nothing is the best decision, but not in this instance. I think

global stock markets will continue to rise over the next few years but I feel

that the US market is running out of puff and might be due for a small

correction as part of an ongoing upward trend. The worst case scenario is that

I’m wrong, the best case is we back this conviction that I have and capture

some trading profits.

Let’s explore the way I would trade this.

1. My first assumption is that I can be incorrect, there is a good chance that I

don’t get my conviction right. I don’t pretend to be perfect. It’s not about

‘being right’, it’s about making money. If I get things wrong, I need to be brave

and disciplined enough to take a loss. I then set my stop loss level – the

maximum amount of money I am willing to lose if my conviction is incorrect

and the market moves against me. This level will dictate what my reward

target is. Without risk, we cannot forecast reward. If you don’t factor in the

chance that you are incorrect you will eventually find it difficult to trade


successfully like the pros.

2. The US market and particularly the Dow Jones Industrial Average hit an all-

time high recently. Sure the economy is recovering, but things are far from

perfect. The US Federal Reserve has been pumping the financial system with

cash and this has fuelled investment across all risk assets, particularly US

dollar dominated ones like stocks. I learnt a very important lesson from one of

my mentors many years ago – an investor who has successfully been trading

the markets for more than 40 years – his advice was not to fight the Fed when

they pump money.

3. But what about following the Fed when they withdraw the money? I wasn’t

experienced enough to ask him that those many years ago. Perhaps I will the

next time I bump into him. Following the Fed the other way seems to make

sense to me. I think eventually the US Federal Reserve will have to start

warming the market to higher interest rates. It will need to do this without

sacrificing the fragile recovery in the economy but based on recent data,


things are not as desperate as they were a few years ago. Every central bank

needs to ensure credibility and the US Federal Reserve needs to start

warming the market to the prospect that rates will need to start rising. It has

already done this but will continue to do so, the market will listen. The market

will start to look forward by around 12-18 months and so the very first sniff

that the Fed is more hawkish than expected will see higher rate assumptions

and pressure on stocks – which have run very hard.

4. The reason why I think the Dow Jones Industrial Average is a good Sell at

the moment is that we had a reasonably unchanged FOMC meeting last week

and we are also about to enter into another round of quarterly reporting

season. I went through the Dow Jones names each individually, adjusted their

market cap weighting, looked at their price to earnings ratios and market

expectations around their earnings. I then multiplied index weighting by

earnings growth to find the most statistically significant companies to report

for the Dow Jones to maintain its current high levels. I highlighted these, most

of them will start reporting in a couple of weeks. There could be

disappointment out there in the market.


5. It’s also worth noting that the riskier elements of the market have already

started falling. For example, the Nasdaq Biotechnology sub index was down

around 4% on Friday as many names struggled to hold onto their recent

gains. The index has now completely given away its 2014 gains, admittedly

after running very hard last year.

Very few traders successfully pick the top or bottom of markets. I’m not trying

to be a hero who wants to pick the market top. I just feel that the Dow Jones

can fall by around 8-10% over the next few months while the overall market

remains in a decade long overall upward trend. It’s nice to be able to capture

this pullback. I’m willing to accept a 2% move against my position if I’m

wrong, back to record high levels on the market. My risk reward on this trade

will be around 1:5 which is very reasonable. If the market falls by more than

10%, I’ll continue to ride my position and adjust my stop loss on a trailing

basis. My target for the Dow Jones on this trade is around 14,985 based on the

technical analysis below. Our technical analysis shows resistance at around

16,650 but I’ll round this up by another 100 points to set my stop loss level

which is 2% away from the current spot price as I write.



Figure 1, US30 Daily, Source: Invast MT4


In conclusion I reiterate the fact that I’m not trying to call the top of the market here, I just like trading risk reward probabilities going into reporting season. Over the medium term I am more bullish than bearish, I continue to look for buying opportunities but I just feel the risk reward payoff on the Dow Jones at the moment favours a Sell trade with a time horizon of around four to six weeks. The market should find some solid support at around 15,700 or so which is where the 200 moving average is currently sitting.

We hope this is the most insightful piece of research you read this week. These are our initial impressions only, please make sure you read all disclaimers at the bottom of this document carefully. If you would like to discuss further, please feel free to contact me on the details below.

2.0 David Jones valuation summary

Many clients have asked what we think of the David Jones takeover offer – is it a fair price, is it fully valued and if we think it is likely to proceed successfully. We completed a valuation review once the news came out, as per the screen shot and notes below.



Normally we wouldn’t publish our valuation thoughts in this way but the

image above shows our working – just like in high school or university where

each line is required in order to get full marks for answering the question. We

want you to learn our way of thinking. It’s not all about fancy charts and

computer models, sometimes business valuations are as simple as this image

below. We attach our notes and why each calculation is performed.

The whole point here is that the David Jones offer is reasonable, basically in

line with the type of ballpark premium you would expect from a foreign

company to get the deal over the line. If we assume the 18.8x times multiple is

correct, that would represent roughly a 30% premium to a 14.5x price to

earnings ratio which is really where David Jones should be trading.

This explains why the Board has endorsed the offer and entered into an

arrangement to get things rolling. We think the South African listed

Woolworths group who pitched the deal knows very well the property

valuation upside to David Jones’ portfolio and has figured if it can successfully


divest these assets there would be some nice surplus cash available to recycle

back into the business. It took us five minutes to come to this view, based on

the calculations above. Our aim is to get you thinking the same way. We will

continue to provide similar type of analysis – outside of the ‘usual’ analysts

notes some of you might have been accustomed to by now.

3.0 Technical outlook on Yen crosses

In the last report we talked about potential exhaustion of the upside

momentum on the AUD/JPY, with resistance between 96.50 and 97.50. The

pair did hit 96.50 and immediately found itself rejected by the level. While our

longer term view for the pair is still to the upside, as with any rally a

correction in the market is inevitable. This week we are anticipating this

correction to occur.

Short term outlook - The rejection at 96.50 is within 10pips of the Daily

161.8% Fibonacci Extension and being a psychological level, we had anticipa -


ted some loss of momentum due to profit taking to occur around this level.

We also noted AUD/JPY reliance on AUD/USD strength for guidance and the

lack of momentum in AUD/JPY in the past week is directly tied to the

sideways movement in AUD/USD between 0.9200 and 0.9300. A technical

correction could be triggered by a daily close below 95.25, where the current

23.6% Fibonacci retracement is located. Support to the downside is located at

94.50 where the 38.2% Fibonacci retracement is located, followed by 93.85,

where the 50% Fibonacci retracement and the Ichimoku kijun-sen overlaps.

Stochastic oscillator is also coming off the 80 level, a sign that the pair is

becoming overbought and due for a technical correction. Overall in the

medium-short term, the trend remains to the upside. This is evident from

price above the Ichimoku cloud and the chikou-span indicating a bullish

sentiment in the market compared to 26 days ago.


Figure 2, AUD/JPY Daily, Source: Invast MT4


Long term outlook - Changes in the short term outlook are very important for

our longer term outlook, more so than ever. First of all, the 50% retracement

level of the drop in 2013 at 96.00 remains a key resistance that has not seen a

weekly close above it. The second concern is the formation of the candle, if

AUD/JPY remains within the range of 95.00 and 96.00 this week; a bearish

Harami pattern could develop on the weekly chart.

While the pair is now trading above the Ichimoku cloud on the weekly chart,

Ichimoku cloud is relatively thin until the first week of May 2014. A move

below the Ichimoku cloud support (currently located between 92.70 and

93.80) could see the pair reverse all its gains. We are holding off judgement of

the longer term view for the AUD/JPY and change our view from bullish to a

slightly more neutral stance. We need a convincing close above 96.00 on the

weekly chart for our bullish view to be reinstated.


Figure 3, AUD/JPY Weekly, Source: Invast MT4


Strategy for the week - Because of our neutral stance on the longer term view,

we want to focus on the short term strategy. Since we expect a technical

correction to occur, we prefer to go long on bounces from support around the

Daily Kijun-sen and 50% Fibonacci retracement (refer to figure 4 on the next

page), with stop loss just slightly below the 61.8% Fibonacci retracement at

93.00. Target will be an extension of the correction and we are looking for a

potential push towards 97.00. Please refer to Figure 4 below for all the key

levels on the strategy for the week.


Figure 4, AUD/JPY Daily, Source: Invast MT4


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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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David Jones Takeover and Valuation Summary