Outlook on the S&P500, Impact of a Strong US Dollar & Fed Interest Rate Decision

1

This week…

• Outlook on the S&P500• Will the Fed hike interest

rates?• Impact of a strong US

Dollar on the S&P500

22Invast.com.au 1800 468 278

General Advice & Risk Warning

Please note that any advice given by Invast staff is deemed to be GENERAL advice, as the information or advice given

does not take into account your particular objectives, financial situation or needs.

Therefore at all times you should consider the appropriateness of the advice before you act further.

CFDs and Forex are leveraged products and carry a high level of risk and are not suitable for everyone. You can lose

more than your initial deposit so you should ensure CFD and Forex trading meets your investment objectives. We

recommend you seek independent advice. Strategies and charts used in this presentation are for example only. You are

reminded that past performance is not indicative of future performance.

Invast Financial Services is regulated by ASIC. It's important for you to read and consider the relevant Product

Disclosure Statement and Financial Services Guide which contains details of our fees and charges before you decide

whether or not to acquire any financial products. These documents are available at www.invast.com.au

Invast Financial Services Pty Ltd ABN: 48 162 400 035. Australian Financial Services Licence No.438 283

33Invast.com.au 1800 468 278

This week we look at the following topics:

• Outlook on the S&P500

• Will the Fed hike interest rates?

• Impact of a strong US Dollar on the S&P500

44Invast.com.au 1800 468 278

Dear Readers,

Our analysis this year has so far touched on the 2015broader Outlook Guide and in February we focused onAustralian listed companies. The new push this year is onindividual stocks, powered by Invast’s new DMA platform.The benefit of this platform is that it provides direct marketaccess into several global exchanges.

Our focus in March will be to analyse these major exchanges,as represented by key indices. Indices are important tounderstand even if you trade underlying stocks. All of theindices that we touch on in March are traded throughInvast’s MT4 platform, which remains a powerful trading tooland part of the overall Invast toolbox for traders.

55Invast.com.au 1800 468 278

In April we plan to focus on individual stocks across these indices and we will groupthese stocks into various trading baskets across four individual weeks. But before thatcan occur, we need to study and analyse to see where each index is currently trending.

Our analysis will be broken up as follows:

Week commencing 2 March 2015: Outlook for the German DAX30 Week commencing 9 March 2015: Outlook for the UK FTSE100 Week commencing 16 March 2015: Outlook for the US S&P500 Week commencing 23 March 2015: Outlook for the Australian ASX200 Week commencing 30 March 2015: Outlook for the Hong Kong HSI50

Week commencing 16 March 2015: Outlook for the US S&P500

66Invast.com.au 1800 468 278

We spoke about the FTSE last week and highlighted the difference between itsperformance and the performance of other European peers like the DAX. One thingthat has really stood out to us over the past week since publishing that report is therapid depreciation in the Euro. This is huge and we do not want this to be taken forgranted. It is also important in the context of analysing the S&P500 index this week.The fall in the EURUSD is an event which we predicted in April last year and althoughinitially getting our timing wrong, we stuck to our guns and have been pleased withthe gains to date. But we didn’t think the decline would be this savage and rapid.

77Invast.com.au 1800 468 278

Image: Weekly EURUSD price chart via Invast MT4 platform

88Invast.com.au 1800 468 278

In April last year, when the EURUSD was just shy of 1.40, Invast Insights Chief EditorPeter Esho wrote in his weekly blog post “…The most important part of running acentral bank is maintaining credibility with the market. After all, currencies are justpieces of paper and worthless unless the market trusts a central bank’s willingness tocome good when required. We often forget about the very basics of monetary policywhen dealing with markets.

For me, the European Central Bank is even moreextreme in that it doesn’t represent a singlesovereign country but a collection of members,each with their own rules, regulations andassociated political messes. We saw how thisplayed out in 2012.

99Invast.com.au 1800 468 278

At the end of the day, the Euro is a piece of paper backed by other pieces of paperwhich commit European countries to their obligations. As we know, pieces of paper canbe ripped up. Europe has fought many wars over the past few centuries because certainmembers decided to rip up pieces of paper or prior conventions...”

This week’s discussion is not on the EURUSD, but the factors behind the EURUSD moveare also very relevant to our discussion point – the S&P500 index. Many traders andinvestors were surprised at the huge jump in US jobs last week and the impact it hadon markets, but not those at Invast. Our conviction has been very firmly stated that theUS dollar is on the verge of a long recovery and this was set at the beginning of theyear in our 2015 Outlook Guide (if you haven’t already downloaded the guide, clickhere).

1010Invast.com.au 1800 468 278

We said the following:

“…Discussion around rising US interest rates will start to increase in the first quarterof this year. We think this will be a major focus of the market, just how the world dealswith rising US interest rates albeit from record low levels. We think the markets willcope, just as they did with the tapering of QE3 last year.

There will be initial shocks but nothing that will steer the market off course. Rising USinterest rates will put pressure on global stock market valuations as the discount rateused to value stocks will rise, in effect reducing net present valuation calculations. Thisshould be offset by stronger earnings as rising employment and lower energy costsfeed through to the corporate sector. The big question is, what happens towards thesecond half of the year as these tailwinds start to reduce.

1111Invast.com.au 1800 468 278

We think the greatest threat to markets is complacency, particularly around US stocksand Apple in particular. We spent some time on this again in November and Decemberand will reiterate it thought in this report. At some point we feel that Apple will missmarket expectations and the huge market capitalisation will come under pressure. Forthe rest of the market to follow suit, earnings growth needs to dry up and again this issomething that is potentially likely in the second half of the year…”

1212Invast.com.au 1800 468 278

The only single factor that matters are the moment for the future of the S&P500 isthe direction of US interest rates. The actual interest rate at the end of 2015 doesn’tnot really matter, what the smart money is trying to measure is the direction andmagnitude of future rate rises. The dollar rally is so real and significant to globalmarkets that we have already seen its impact play out on currencies like the EUR andAUD. The impact on stock markets is slightly different because stock prices areimpacted also by corporate earnings. But first let’s get the recovery of the US dollar incontext, before moving to corporate earnings.

1313Invast.com.au 1800 468 278

In January we put up this chart highlighting the US dollar index:

1414Invast.com.au 1800 468 278

Those of you who think the US Dollar recovery is overdone should take a long hardlook at the chart above. Sure, it has moved significantly higher over the past twelvemonths, but from a very low base. The US Dollar index at around 91.00 as of the timeof writing is a long way from the high 120.00 range seen in the late 1980s.

Back then, bond yields were in the mid-teens on US 10 year treasuries compared tothe 2-3% range currently being priced by markets. We obviously don’t see those levelsthis year, but traders should not be complacent and should not underestimate theeconomic recovery we have recently experienced in the United States.

1515Invast.com.au 1800 468 278

We said in January that “…We expect to see the US Dollar index further strengthenthis year and at some point edge higher towards the 100 level. This will be driven byhigher interest rate expectations, we will need to see the 10 year treasury yield moveconvincingly above 3% and towards 4% or thereabouts before the 100 level on theindex is approached…” As we write, the US dollar index is trading at around the 99.30level, just shy of our 100 prediction.

1616Invast.com.au 1800 468 278

Image: US Dollar futures pricing index, four hourly chart as quoted on Invast MT4 platform

1717Invast.com.au 1800 468 278

The US Dollar recovery is a major drag on US corporate earnings, for the two followingreasons:

1) It lowers the value of translated earnings back into US dollar. US companies whogenerate their earnings in Euros or Australian dollars are now around 20-30% lowerwhen they translate back to their home economy purely due to the appreciation of theUS dollar.

2) When interest rate assumptions rise, usually asset prices fall. This is because thetime value of money changes. Investors are now requiring a higher reward for assets,including stocks, which lowers the price they are willing to pay as they price in a highermargin of safety.

1818Invast.com.au 1800 468 278

This all of course assumes all other things are equal, which they are not. The real testfor US stocks and the S&P500 index is the ability of US companies to grow theirearnings at a factor which is above and beyond the currency and interest rateimpacts to their valuation. To analyse this, we breakdown the top 10 stocks on theS&P500 and measure their statistical significance. We then provide our commentaryon each of the companies. As you will see, there is more bearish than bullish direct forthese companies and this is the underlying reason, together with a rising US dollar,that we feel will weigh on the S&P500 this year. The key index weights are:

1919Invast.com.au 1800 468 278

Company Weighting Comments

Apple Inc. 3.95%

Depends on how much of a believer you are in Apple’s ability to continuegenerating currency sales success. We’re doubtful of the ability to matchrecent success, plus has large exposure to sales in Europe which translatemuch lower now into US Dollars.

Exxon Mobil 1.96%

It doesn’t seem like energy prices are about to improve any time soon andas is the case with BHP, BP, Shell etc there will be pressure to write downthe value of current projects on balance sheet, like Gorgon in WA forexample.

Microsoft Corp 1.90%Winner, we think Microsoft has among the best earnings profile in theS&P500 top 10 stock list. Core excellent in the SME market and generallystrong corporate profile helps lend support.

Johnson & Johnson 1.51%Again, a victim of lower translated international earnings from its hugeoffshore operations. Limited growth at home meanwhile, acquisitionsbecoming more expensive through higher debt.

2020Invast.com.au 1800 468 278

Company Weighting Comments

Berkshire Hathaway 1.44%Bit of a mixed bag generally. Has usually had strong upside to highinflation periods and has lagged during bull markets where interest rateshave fallen, so might surprise slightly higher.

Wells Fargo 1.40%As a financial stock, does not benefit from rising interest rates, althoughamong the better of the US banks.

General Electric 1.39%Very similar to Johnson and Johnson in terms of earnings growth drivers,even though vastly difference business.

JP Morgan Chase 1.24%Very similar comments to Wells Fargo, JP Morgan maybe even worst off ifbalance sheet risks start to emerge from a period of really low globalinterest rates. Avoid during rising rates.

Procter & Gamble 1.21%Very similar to Johnson and Johnson, although does have good growth inemerging markets. Need to see how significant these are.

2121Invast.com.au 1800 468 278

Company Weighting Comments

Pfizer Inc 1.17%Will suffer from a rising US dollar, particularly in the next few months. Hasprotection through its product depth etc. but currency cannot be ignoredhere.

Total Top 10 17.20%

2222Invast.com.au 1800 468 278

Image: S&P500 monthly price chart, as quoted on Invast MT4 platform

S&P500 market outlook

What a chart!

2323Invast.com.au 1800 468 278

The trend is impressive by historical standards. What history also shows is that marketsdo not move in a straight line over a long period of time. The chart above is basicallyon long straight line, which to us suggests that the S&P500 rally has run its course. Wewould be a seller at current market prices with risk management in place, just in casewe companies we summarised end up surprising massively on the upside when theyreport their earnings.

2424Invast.com.au 1800 468 278

We think that is a fairly remote and naïve basis. We’ve been cautious on the S&P500previously and wrong in calling it a sell numerous times last year. But that doesn’tmean we change our mind, we stick to our overall convictions and see this indexcoming lower. More comments and analysis in the webinar, with details below.

2525Invast.com.au 1800 468 278

Outlook on major global indices – a correction coming?

Invast Insights chief editor and contributing author Peter Esho will summarise hisoutlook on the major global indices in March. Esho will document his findings basedon the performance of key stocks across these indices and where he believes the bigopportunities lie throughout this year. His presentation will focus on the following 5themes:

Outlook on the German DAX30Outlook on the UK FTSE100Outlook on the US S&P500Outlook on the Australian ASX200Outlook on the Hong Kong HSI50

2626Invast.com.au 1800 468 278

Esho is a regular contributor on CNBC, Bloomberg and host of ‘Your Money YourCall’. His webinar will cover both the fundamental and technical outlook on thesekey themes and a basic introduction to Invast’s new DMA CFD product offeringwhich complements MT4 and other services. This webinar is expected to fill fast.Q&A will be open straight after the presentation. Click here to register.

2727Invast.com.au 1800 468 278

Go to www.invast.com.au/insights to get a complimentary 4 week trial and receive the latest insights as they are published to our live clients.

2828Invast.com.au 1800 468 278

DisclaimerPlease 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 areincluded in this or future reports. The authors of this report may or may not be holding a positionin the securities mentioned. Please note that the information contained in this report and Invast'swebsite 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 beforeopening an account with us.

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

2929Invast.com.au 1800 468 278

Risk Warning: It's important for you to read and consider the relevant Product DisclosureStatement, and any other relevant Invast Financial Services Pty Ltd documents before you decidewhether or not to acquire any financial products listed in this email. Our Financial Services Guidecontains details of our fees and charges. All these documents are available here on our website, oryou can call us on +612 8036 7555. CFDs and Foreign Exchange are leveraged products and carry ahigh level of risk and you can lose more than your initial deposit so you should ensure CFD andForeign Exchange trading meets your personal circumstances.

General Advice Warning: Being general advice, this newsletter does not take account of yourobjectives, financial situation or needs. Before acting on this general advice you should thereforeconsider the appropriateness of the advice having regard to your situation. We recommend youobtain financial, legal and taxation advice before making any financial investment decision.

30