SPREADBETTING The e-magazine created especially for active spreadbetters and CFD traders
Hedge Fund Managers Who blew up! An Options Special
Low risk, explosive pay-off strategies
Directors Dealings Is it time to short IG Group?
Aim Oil & Gas Update
Is the sector on the brink of a new rally?
Global Bonds
A once in a generation short opportunity
www.financial-spread-betting.com
N IO IT ED PT SE
MAGAZINE
Issue 8 - September 2012
Editorial Contributors MAGAZINE
SPREADBETTING Robbie Burns aka The Naked Trader Robbie Burns - The Naked Trader has been a full-time trader since 2001 and has made in excess of a million pounds trading the markets. He’s also written three editions of his book “Naked Trader” and the “Naked Trader Guide to Spreadbetting” and runs day seminars using live markets to explain how he makes money. Robbie hates jargon and loves simplicity.
Dominic Picarda Dominic Picarda is a Chartered Market Technician and has been responsible for the co-ordination of the Investor’s Chronicle’s charting coverage for 4 years. He is also an Associate Editor of the FT and frequently speaks at seminars and other trading events. Dominic holds an MSc in Economic History from the LSE & Political Science.
Zak Mir Zak Mir is one of the UK’s pioneers in modern charting methods since the early 1990s, joining Shares Magazine as its first Technical Analysis Editor in 2000. Zak founded www.Zaks-TA.com, the first pure TA website in 2001 and which flourishes to this day. In addition, he has written for the Investors Chronicle, appeared on Bloomberg and CNBC as well as being the author of 101 Charts For Trading Success.
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Reliance on content disclaimer Material contained within the Spreadbet Magazine and its website is for general information purposes only and is not intended to be relied upon by individual readers in making (or refraining from making) any specific investment decision. Spreadbet Magazine Ltd does not accept any liability for any loss suffered by any user as a result of any such decision. Please note that the prices of shares, spreadbet’s and CFD’s can rise and fall sharply and you may not get back the money you originally invested, particularly where these investments are leveraged. In comparing the investments described in this publication and website, you should bear in mind that the nature of such investments and of the returns, risks and charges, differ from one investment to another. Smaller companies with a short track record tend to be more risky than larger, well established companies. The investments and services mentioned in this publication will not be suitable for all readers.
Foreword Well, here we are already on the downhill leg to Christmas can you believe?! The older I get, the quicker the years seem to roll around... After yet another washout summer, it was pleasing to have some ‘feel good factor’ injected back into the market with a nice rise in global equities during the Jun - Aug period, in fact, one of the strongest rises over this traditionally seasonally weak period for a number of years (the S&P 500 — the global benchmark — has actually risen over 10% during the last 3 months). Similarly, the impressive staging of the Olympics in London (and without incident) and, not least, the exceptional performance of “Team GB” gladdened the heart — here’s hoping it continues throughout the autumn (and we experience an Indian summer!). I am also pleased to introduce a new contributor to our magazine this month that many of you who have been in the markets for a lengthy period will be familiar with — Zak Mir — a respected and competent Technical Analyst. Zak will be providing us with his ‘top pick’ for the following month and we have given him free rein across all markets — stocks, currencies, indices and commodities. I, for one, am looking forward to his trade ideas. He will also be producing regular interviews with “names” within the industry and kicks off this month with Alpesh Patel which we hope you enjoy.
You should assess the suitability of the recommendations (implicit or otherwise), investments and services mentioned in this magazine, and the related website, to your own circumstances. If you have any doubts about the suitability of any investment or service, you should take appropriate professional advice. The views and recommendations in this publication are based on information from a variety of sources. Although these are believed to be reliable, we cannot guarantee the accuracy or completeness of the information herein.
We have a continuation of our Supercar feature this month in conjunction with P1 International and our regular travel feature to lighten the content. Our feature article on “Hedge fund managers who blew up” is a must read that goes to show that no matter how clever, experienced or, indeed, how deep your pockets are, that the market can (and invariably will) make a fool of you. Risk control, measured leverage and being prepared to fold your cards when necessary will help you prolong your account. Here’s to a fruitful autumn in all ways! Richard
As a matter of policy, Spreadbet Magazine openly discloses that our contributors may have interests in investments and/or providers of services referred to in this publication.
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Contents
Hedge Fund Managers Who blew up!
6 16
Lamprell PLC
22
Robbie Burns’ Trading Diary
26
Zak Mir Interviews
30
Directors Dealing
42
Capital Spreads Global FX report
48
Zak Mir’s top pick for September
51
September in the Med - Travel Feature
We take a look at the oil and gas equipment services company following the trio of profit warnings this year and ask is it time to buy.
Robbie regales us with his monthly trading exploits.
Zak shines a spotlight on Alpesh Patel this month.
We identify a potential short candidate in spreadbetting goliath - IG Group.
Where have their clients been placing their bets this year?
Zak highlights Ophir Energy.
Destinology offers some late summer sunshine destinations.
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School Corner
A shortcut to trading success
Japanese Candlesticks explained
70
12
Aim Oil & Gas Update The sector looks poised for a near term rally
54
Phytopharm
58
The bubble in bonds
64
Options Corner
75
34
An update on our bio-technology potential ten bagger.
We highlight a once in a generation short opportunity in global bonds.
Low risk explosive pay-off strategies.
SuperCar special P1 International takes a look at the Bentley Continental, Aston Martin Rapide & Ferrari California 30.
80
Dominic Picarda’s Technical Take
85
Must have gadgets for the successful trader
88
Commodities Corner
This month Dom takes a look at the retail sector.
Our resident tech guru offers up some suggestions for our readers.
A pairs idea in gold and silver.
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Special Feature
Hedge Fund managers who blew up I thought this month that I’d write a piece on famous hedge fund managers who have struggled or previously blown themselves up — if only to make many spreadbettors who have most likely had a difficult couple of years in the markets feel better! Hopefully, there are one or two common themes / lessons that we can take from their experiences too.
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Hedge Fund managers who blew up
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Special Feature
A look at the list below includes arguably the world’s most famous hedge fund manager — John Paulson who has had not one, but two years to forget recently. There is also, a participant in the Black-Scholes creators, Nobel prize winning hedge fund LTCM and which nearly collapsed the entire financial system back in 1997! If that doesn’t tell you that anybody can slip on a banana skin then nothing will. No matter how big your b*lls are, how deep your pockets are or how much experience you have, the market can, and invariably will, find a way to trip you up — that I can guarantee. Let’s look at the issues faced by each of the hedge fund luminaries during their anni horribiles!
John Paulson
Mr Paulson was thrust into the limelight from relative obscurity in 2008, having run a small hedge fund out of New York that had concentrated on so called “Event/ Merger Arbitrage” since the late 90’s, and where his firm churned out steady, if not spectacular, returns. There is some contention over who was the real architect of the so called “trade of the century”, with Paolo Pellegrini seen by many as the real catalyser of the US subprime bond trade that made Paulson’s name and his multi-billion fortune. Controversy also surrounded the aftermath of the trade with Goldman Sachs being at the centre of allegations that JP and the Vampire Squid had ‘rigged’ the so called Subprime CDS tranches that Paulson bought options/insurance on to other investors detriment. Nonetheless, JP managed to keep his haul intact — a haul that summed $3.5bn personally. Until 2011 that is...
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Poor old “JP”, as he is known, suffered one of the biggest drawdowns (profit give back) in hedge fund history during 2011 — a year to forget for many. His flagship fund, the “Advantage Plus” fund, fell by an amazing 52.5% in 2011 — a year when the S&P 500 essentially finished flat. That measure of underperformance against his benchmark is almost unheard of for a fund manager of his calibre. What makes it doubly hurtful for him is that the majority of the monies in his funds are his and his employees! If you’re wondering how much in cash terms the funds lost, the answer is around $15bn — give or take a billion! That’s gotta hurt, no matter how much you have. So why did JP stumble so much in 2011? The answer is essentially simple — firstly his big macro call — that the US economy would resurge, was wrong. Get your primary asset allocation call wrong and you are basically going to swim against a tsunami. Secondly, not only did he get it wrong, but he bet too big — he made the same elementary mistake most novice traders do and that is he position sized too large. Makes you feel better eh? That even the “Pro’s” succumb to human nature! Finally, he quite simply failed to reduce his positions quickly enough. His 2012 has not gone much better either with Paulson down at the time of writing another 18%. Again, this is in contrast to an S&P 500 year to date return of almost 13%.
Hedge Fund managers who blew up
Two consecutive years of this magnitude of underperformance for such a goliath of the industry is frankly unheard of and some investors have begun to pull money, openly opining that JP’s haul in 2008 & 2009 has skewed his thought process such that he believes he “can’t be wrong” — in a word, hubris has taken hold. JP has now essentially gone “all-in” on gold with news at the time of writing revealing that he has effectively tied 44% of his fund to the gold price.
In a nutshell, he has bet the ranch once more on an unleashing of a 3rd and massive tranche of QE that sends gold to the moon. The problem for him is that the odds of such an event have been lengthening this year and he is so heavily into mining plays and the gold price itself that if he needs to get out, the whole market is going to see him coming... It will be extremely interesting to see how this saga ends.
Victor Neiderhoffer
Victor Neiderhoffer first came to my attention in the late 90’s when he blew himself up spectacularly with the Asian Currency crisis. His first blow up however was in fact back in 1987 when Black Monday hit and he wiped both himself, his investors, and his firm out. Up to the point of the crash of 87, he had been engaging in what is akin to “collecting pennies in front of an oncoming train” — Put premium selling without any hedge in place or assessment of volatility risks. He would simply sell way “out of the money Puts” on any market dip and, as the market had continued to go up for years at that point, it seemed the easiest money in the world (Note — NO money in the markets is ever easy! It may appear it at times, but trust me, hang around long enough and the market will look to call in its “loan”). Victor is something of a “maverick” figure within the industry it’s fair to say, seeking out “clues” to financial market cycles in studying sand patterns, musical notes and, more recently, tree rings.
True! He started trading in the 70’s and at one point in the early 80’s was actually in business with no less a giant of the industry than George Soros so he has experience and association on his side. Still, in 1997, he embarked on a trade in Thai banking stocks — an area he had no experience in. I think you can guess what is coming next? Yup, as the Asian Financial Crisis took hold and the Thai Banking sector continued to plumb new lows, Victor again wiped himself out and, strangely, tried to sue the Chicago Mercantile Exchange (CME) for his losses in which he alleged that floor traders colluded to drive the market down on the 27th October 1997 (a day when the Dow fell 7%) to force him out of his positions. Talk about thinking that the market’s got it in for you! To give the man his dues, however, he dusted himself down, albeit leaving his investors slain on the street, re-mortgaged his house and his antique silver collection and started trading again. He did achieve exceptional returns during the 5 year period between 2001 & 2006 in which he compounded at 50% per annum — not to be sniffed at. However, during 2007, as the Great Financial Crisis took hold, Victor again succumbed to gravity and experienced a drawdown of some 75%. Take a look at his website — www.dailyspeculations.com which is interesting to say the least! Lessons from Mr Neiderhoffer? Some people never learn and should therefore not trade in the market and also, somewhat ironically, given the man’s record and the seeming preparedness of new investors to back him — “another fool is born every minute!”
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Special Feature
John Meriwether
Conclusion What lessons can we learn from the experiences of the hedge fund managers above? To me, the glaring thing that stands out is that your luck never lasts forever. You have a winning streak? Take the money out of the market — spend it, put it in “safe investments”, do anything with it, but take some out.
John Meriwether learnt his craft at the venerable US investment bank Salomon Bros where he was an exceptional bond trader and ultimately rose to become Vice Chairman of the bank. He went on to start the infamous and rather inappropriately named Long Term Capital Management (LTCM) hedge fund in 1994 with the creators of option modelling and pricing — Myron Scholes and Robert Merton — both of whom shared the Nobel prize for Economic Sciences in 1997 (1 year before LTCM’s collapse!). LTCM was engaged in exploiting tiny pricing anomalies in bonds, so called statistical arbitrage, and for its first few years it produced cracking returns — in excess of 40% after fees. When the Russian Financial Crisis hit in 1998, a year after the Asian one, LTCM came a cropper and in fact needed Fed intervention to avoid a collapse of the financial system. The reason? Again, leverage. So small were the individual returns on each of the positions that the fund needed to borrow to the hilt to amplify these. At the time of the collapse the fund was levered 25 times! Alan Greenspan rounded up his buddies on Wall Street as the unwinding of the positions threatened to create a cascade of selling in S&P futures and a consortium of investment banks took the positions on their books with Fed help and rode the storm through. At its heart, the underlying positions were fundamentally sound. Where they went wrong was again the twin evils that seem to befall many a successful trader — hubris and greed.
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Secondly, the vast majority of returns on accounts that appear spectacularly successful pretty much without fail come from asset allocation — get this right and then run with the position and you shorten your odds of success — this ties in with the best trend following systems modus operandi. Of course, choosing the right asset class is easier said than done — major technical dislocations, glaring fundamentals that support the investment case and en masse disgust with the asset class are all ingredients you want to see on the buy side — Spanish equities anyone? And, of course, vice versa on the short side. Thirdly, the word “crisis” seems to crop up quite a bit in this article — that’s because people continue to make the same mistakes. Always have, always will. If the markets have been going great for a few years, this leads to complacency and excessive risk taking and, it seems, a new crisis. If you’ve been sailing on the calm waters of a conducive market environment for some time, and feeling good about your trading, then this is precisely the point you should be dialling back leverage and reducing risk.
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Special Feature
The Shortcut to trading success Do the hard thing
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The shortcut to trading success
Trading is a zero sum game. You’ve no doubt heard that before, but just what does that mean? In order for you to buy a market, someone has to sell to you. If you want to buy a Crude Oil contract, for example, someone has to be willing to sell you a Crude Oil contract or the trade does not take place. This means that in the real world, money is not created or destroyed in the markets, but simply changes hands. In the long run, money moves from the losers to the winners.
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Special Feature
In spread betting it’s essentially the same thing. For you to place an up bet on any particular market, someone else has to take the other side of the trade. In simple terms this means that the spread betting firm will either match your long bet up with another client’s short bet, will take the other side of the trade themselves or take the bet directly to the market. Either way, whatever you do, someone somewhere is taking the other side of your bet. So, what does this mean and how can we use it to help us be more profitable as traders? Simple. For you to win, someone else has to lose and vice versa. So, if we want to be successful, all we need to do is find out what winning traders do and do the same. We can also find out what losing traders do and resolve to do the opposite. Why? According to statistics around 94-95% of traders lose money and only 5-6% of traders win money. Therefore, if we want to be part of the winning 5% or so, we must do the same things that winning traders do and must stop doing what the losing traders do. Ok, so this is all very well you may say, but how will you find out which approaches fall in to which category?
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We will cover a few of them here and you will see most of it is actually common sense. In addition to that, I will show you a virtually foolproof way of knowing which is which and what is the right thing to do in almost any circumstance you may find yourself in. That alone is extremely valuable information. Markets are essentially made up of people and people do predictable things, especially when trading. They trade largely on greed and fear and are irrational. They repeatedly make the same mistakes and do not learn from their mistakes. Einstein once said that the definition of insanity was to do the same things over and over and expect different results. But that’s exactly what most traders do. They employ losing strategies over and over again and expect that they will win. In the long run this is a losing approach. Losing traders never learn from their mistakes as by definition that is only something that winning traders would do. Consider this quote from legendary trader Jesse Livermore: “Wall Street never changes, the pockets change, and the stocks change, but Wall Street never changes, because human nature never changes.”
Special Feature
This tells us that people have been for the most part trading in this way for many years. On balance we will see that losing traders will always do the easiest thing. The successful trader though will do the hard thing and he will do the hard thing consistently. Consider this list: • • • •
Taking profits too soon Giving losses more room Adding to losing trades Trying to buy at the bottom and sell at the top, in other words trading against the trend. • Trying to have a high percentage of winning trades without paying attention to how much they win when they are right and how little they lose when they are wrong. • Being overly concerned with being right even at the expense of making money. As absurd as this sounds, it is often true. All of the above are human nature and are easy to do. They are all wrong. It is easy to take profits too soon for fear of losing them by giving them back to the market. It is hard to leave those profits running in order to give them time to grow in to big winners Compare the above list with this list, which is it’s opposite: • Letting winning trades run • Cutting losses • Adding to winning positions • Buying strength and selling weakness - being willing to buy markets that are making new highs and selling short markets that are making new lows • Being unconcerned with win ratios or being right, instead focusing on how much money is made on winning trades and how little is lost on losing trades • Not caring about being right, only about making money. Taken to the extreme, a trader should be happy with winning only 10% of trades if those 10% winning trades were more profitable than the 90% of losing trades.
By contrast to the first list, it is hard to risk giving profits back by allowing profitable trades to run, it is hard to admit that you were wrong on a trade and take your losses, and hard to not want to average down your cost on losing trades by adding more at a lower price. It is harder still to want to add to a winning trade or add another correlated position in to your portfolio. These are all, over time, the right things to do and, of course, they are all hard to do. These lists are far from exhaustive and I could easily have added many more. The point, however, is not to make a complete list, but instead to get you thinking in these terms for yourself and realizing that by choosing to do the hard thing you will, in the long run, come out ahead. So, in summary, losing traders will always do the easy thing. The easy thing is almost certainly the wrong thing to do. So by doing the hard thing you automatically do things that losing traders are unwilling to do and therefore move yourself in to the winning 5%. The next time that you are deciding what to do when trading and are thinking about whether you should book a profit or, even worse, move back your stop to keep yourself in a losing trade, ask yourself: “What is the hard thing to do here”. The answer will be obvious and you will always know what the right thing to do is. This will very probably be the opposite of what the losing trader will do. If you consistently do the hard thing, you will be consistently employing winning strategies and avoiding losing strategies. That is the path to long-term trading success. One way of ensuring that you consistently do the right thing as a trader is to follow a system that is based on sound trading rules that cover all eventualities. The LS Trader system is such a system, and as a reader of SpreadBet Magazine you can sign up for a 30-day free trial of the system at a real world value of £147 at the following link:
www.LSTrader.co.uk/spreadbetmag
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Special Feature
Lamprell PLC Lamprell PLC is a UAE based oil equipment and services company which supplies contracting and engineering services and products to both the oil and gas and renewable energy industry. Areas of specialisation include the construction of jack-up drill rigs, rig refurbishments, feasibility studies and the management of safety through the control of toxic H2S gases.
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Special Feature
I think it’s fair to say that Lamprell will most certainly not be looking back fondly on the first half of 2012, with the company going from a relative stock market darling and a stock price approaching £4 to an intra-day low of 67p just 6 weeks later! What set the train in motion was the first ‘out of the blue’ profit warning in May when it announced that a trio of global equipment shortage, contract postponements and cost overruns on wind farm machinery had all pressured profits. Chairman Jonathan Silver fell on his sword as a consequence of this.
Looking at the valuation metrics of the business, the one thing that sticks out to me is the lowly net margins that the company works on. For the year ended 2012, management are expecting to report net profit margins of just 2.5% on sales of $1.1bn, down from a net margin of 6.4% for the year ended 2011. This means that the operational gearing in the business is high and when coupled with the debt covenant issue spells R-I-S-K to equity holders. That said, net debt fell from $173m to $91m as they delivered the Hull 108 rig in June.
It is an old stock market adage that profit warnings are ‘like buses’, i.e. they come in threes; what is not usual is that all three come inside of 3 months as in the case of Lamprell! Dependent upon fundamentals, it can sometimes pay to buy a stock after the third warning (unless the stock is JJB which seems to deliver an unending stream..!). The question for us now is: does the current share price offer sufficient value relative to its asset buffer that they are now worth purchasing?
Positivity can be drawn from 2 factors in the Group’s Trading statement of 16th May and that is $1.6bn of orders sitting on the Company’s books through to Q1 and the fact that they had tenders out on some $4.8bn of work. If the Group wins some of these bids, then I doubt that the banks will play hardball over a technical debt covenant breach, particularly as they have embarked on quite an aggressive cost cutting program. Although management have not disclosed what the actual debt covenant breaches are, it is very likely to be EBITDA to interest payments or net cash flow to interest payments as opposed to Fixed cover issues. A current market cap of £223m relative to net debt of circa £60m indicates that the market does not see real survivability issues for the company.
In the latter RNS of 25th July there was a statement that included 2 words generally guaranteed to strike a chill into the hearts of equity holders — “banking covenant”. Lamprell stated — “as a result of these anticipated first half losses, Lamprell will be seeking waivers from certain of its banks in relation to its banking covenants.” Make no mistake, this is not a good sign and it has prompted some institutional holding movement with Ignis and Standard Life, in particular, reducing their exposure to the stock whilst Schroders, interestingly, has been adding. Net debt at the end of June was $91m (approx £60m at current FX rates). There has also been a token amount of stock purchasing by Director Colin Goodall who dipped in for just over 44000 shares at 112p in late May just after the first profit warning (seems he was not aware of the “three” rule!). What has really raised eyebrows, however, is the sale of 450,000 by 2 directors at just over 360p raising a cool £1.62m for Scott Doak & Kevin Isles. These sales occurred just 2 weeks before the profits warning of 16th May that devastated the stock.
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If the Company can return to net margins of around 6% for 2013, then net profits of around £40m could be booked. With a market cap of £223m, this is cheap exposure to the all important oil services industry. The question of course is ‘IF’ they can return to these types of margins. Even if they do, the market is unlikely to award Lamprell a premium rating again of 20 times earnings, certainly not for a long time, but a rating of 8 -10 times should not be out of the question and would imply a stock price of 130 - 150p. Of course, in these types of circumstances, there is always the potential for an out of the blue bid for the company too. If this were to occur, then a price approaching 150p would be expected.
Lamprell PLC
What is also supportive for the shares is the net tangible asset value of 75p. This doesn’t guarantee that the stock will not fall through this on any more bad news or issues over the debt covenant waiver, but it is noticeable that the shares twice found support (with heavy volume) just shy of here in the late 60’s. The company is a global leader within its industry, and the sector within which it operates is a growing one.
These are attractive business attributes to a potential acquisitor. The fact that there has been no mention of a dividend cut, as yet, although we wouldn’t rule this out. The current yield if the divi is maintained is slightly in excess of 10% — a nice cushion whilst management sorts out the operational and cost cutting issues.
Technical Overview
Lamprell Chart Looking at the chart, we can see that the stock recently plumbed the depths seen at the nadir of the 2008-09 bear market where it hit a low of 56p. The shares bounced twice off the 67p level during May and June of this year, and we can also see that the RSI measure is as oversold currently as in the March 2009 trough — hovering around the 30 level. A natural medium term target is the 200p level which would also coincide with around a 50% retracement of the fall from 360p.
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Special Feature
SBM view At 86p/share, Lamprell offers a medium risk/high reward option that could recover throughout 2012 and prosper into 2013 if margins are restored and a global slowdown does not intensify further hurting their prospects. Results on the 28th August (just after this magazine is issued) should be read closely for clues to (a) dividend issues and (b) debt covenant waivers.
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Any positivity here and we would be inclined to buy the stock south of 100p whilst any further negativity that took the stock down towards the early 60’s and we would similarly be a buyer in the expectation of potential corporate activity.
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Editorial Contributor
Robbie Burns’
aka The Naked Trader September Diary So, the best law in trading worked in August. Yes you guessed it — Sod’s law. Last August was horrible so this one was bound to be good, right? This month I’d like to talk about averaging up. Okay with you? No? Well, tough, go and read about shorting instead and see if I care! A lot of traders make, what I think is, a big mistake of “averaging down”, i.e. you bought something, it’s gone down, so you buy more now hoping at least to breakeven. It goes down some more and you repeat this same thing ending up with a massive loss. Averaging up is what has made me a lot of money over the years. Averaging up is buying something then carry on adding to it as it goes up.
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I know there are some commentators/writers, whatever, who suggest never to let one position grow to more than a certain percentage of your total pot. I don’t agree — so there! And I’ve got the trading balance to prove it! I’m quite happy to let big positions in spreadbets build up if I have one that carries on producing good news. Dialight is one that springs to mind, first bought as a spreadbet at 150, I added all the way up in the 200s, 300s and, right up to the current price of around a tenner. I think it probably has further to go so I don’t rule out getting more. Spreadbet profits in this are up and over the £100,000 mark — not to be sniffed at. Another is Carclo, bought in the early 100s, I added as it went up and that’s now around a fiver.
Robbie Burns’ Trading Diary
An example would be Sepura which I bought this month on a rolling bet. At the time of writing I’m up about 7 points and now considering my first “average up”. However, if I’d bought it and it was now down 7 points, I suspect I would simply have already taken a small loss. If it carries on rising, I expect I will continue to average up. However, of course, if question marks should appear I would start to exit. Of course, averaging up or taking quick losses doesn’t work for everything. After all, sometimes I’m not sure. So remember last month’s mag I took you through one trade? You don’t? Course you don’t, but if you want you’ll find it in last month’s issue. As reported last time, I bought at around 325, targeting somewhere near 400. I’m up nearly a grand at the mo. I am going to carry on following the plan. If it carries on going up, I may well average up, especially if it heads though the 400 mark.
If it starts to sink, I could maybe sell half and wait and see about the rest. Anyways, September is on the way (can you believe it?!) and usually time to be a bit cautious, especially as it’s been a good summer. If things start to sink, what better route than spreadbetting to take advantage, because we can go short. September can be a stinker. Fund managers are back from the beach and they might want to take profits, Euro troubles are still there, make no mistake about that, and do remember Sod’s law... It’s best to follow the trend of the market and take an open view. Visit Robbie’s site at www.nakedtrader.co.uk to learn more about his seminars or drop him an email at robbiethetrader@aol.com referencing Spreadbet Magazine
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Zak Mir Interviews Special Feature
Zak Mir Interviews
Alpesh PatelThe Mind of a Trader Zak: Alpesh, at the beginning of the 2000’s you were somewhat the “People’s Champion” in terms of being a commentator / educational force and, most importantly, an objective figure in the financial markets as compared to the banks / fund managers and their legion salesmen. In those days, most of us could probably not even guess the number of sharp practices and scandals that were waiting to be uncovered... 10 years later, the retail customer / investor seems to be in no better a position than back then even with your efforts, the media and the role of the internet to inform us. Being cynical, has your influence for good made any difference whatsoever?
Alpesh Patel is, to my mind, one of a kind. An independent and somewhat maverick figure in both the City and the business world. His list of activities over the past decade is breathtaking simply by virtue of the sheer variety of roles — trader, author, trained barrister, asset manager and adviser to companies and Governments. In this article, it is his “Mind of A Trader” that we explore...
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Alpesh: I am sorry to say that it has probably made no difference to the vast majority of people even though I was writing for the FT or being a guest presenter on Bloomberg. My position put me somewhere between being an investigative journalist and a Member of Parliament, rather than a trader. Individuals were helped on a case by case basis, but in a broad sense, no, my crusade probably fell on deaf ears. The big institutions seem to have more and more resources at their disposal and have become ever more adept at hiding and, in some instances, cheating. Perhaps this has been a symptom of our times where City individuals are solely focused on cash based incentives, or perhaps it is indicative of a more general moral decline. Either ways, it would appear that individuals are tempted to cheat to get their hands on money.
Alpesh Patel - The Mind Lamprell of a Trader PLC
Zak: It is interesting that you say that, in the sense that in my research of your background and previous quotes, my perception of Alpesh Patel was changed markedly. I had the impression that you were something of a “goody, goody” / teacher’s pet kind of person — a barrister establishment figure, whereas it would appear that you in fact veer towards being a maverick, and at times “anti-establishment” even. For instance, in terms of banking sector bonuses you suggested that they should only be paid out as a factor of corporate tax paid, so if Barclays (BARC) pays £4bn to HMRC, the bonus pool should be say no more than say 1% of this figure — which was interesting. Or even more controversially, on a geopolitical theme, when Anglo French forces in Libya mopped up the Gaddafi regime in a few weeks you commented that it was just as well the U.S. was not involved as they might still be hanging around a decade later. Are you concerned that such comments may be damaging? Alpesh: I am. It is funny you should mention that. Some things have happened of late that underline that I should be mindful of what I say. For instance, on the BBC News Review which has an audience of 75 million people there was an overwhelmingly positive response. Many people know that I am just an ordinary guy from Armley, Leeds, not part of a big company or a political party, just the man on the Clapham Omnibus. An example of this is when the former Syrian Prime Minister said that the Government there is a terrorist organisation! I said on the BBC that the Chinese and Russian support of Syria makes them state sponsors of terrorism, a terrorist environment in which children are dying. To me, this is what most people feel but are not willing to say. I am prepared to speak out where I see injustice and blatant wrongs. Zak: So, are you saying that scandals continually erupt but that no one is really that bothered; it is headline grabbing at the time and we seem to largely enjoy seeing Bob Diamond squirm as a kind of spectator sport in front of a Select Committee, but the status quo remains?
Zak: Back down to earth and your Northern roots, how did you get into the markets? Alpesh: I originally got into bonds when I borrowed £100 from my aunt in 1984 and invested in Gilts. I liked the idea of being a stakeholder / shareholder and the words from Karl Marx / Das Kapital, the ironic message that it was “better to be a capitalist than a worker” resonated with me! Oh, and I wanted to get out of the paper round! Zak: So there was no notion of get rich quick / become millionaire , not a greed thing? Alpesh: My primary motivation was not money and perhaps I really do need to motivate myself in this regard! Zak: You have stated before that 90% of short term traders lose money and with the FTSE 100 flat for more than a decade, it has not been a party for long term investors either. What is the answer for the man on the street? Is stock picking key? Alpesh: There are actually several answers. I personally have gradually moved from active trading to holdings of a more longer-term nature, quite simply because active trading is so time consuming. The word I would use is CROCI — not the flower! CROCI is something which most people most likely won’t have heard of: Cash Return On Capital Invested. It is actually at the core of what investors like Warren Buffett do and it is hugely misunderstood. It has however enabled me to predict, for example, recently on the BBC’s Money Programme, that Facebook (FB) would fall by 50% from the IPO price of $38 — which it essentially has at this point on the basis of the discounted cash flow calculations that my asset management company Praefinium uses. It started off as a hedge fund and moved into private equity and which, at its heart, utilises discount cashflow. The breakthrough for us was applying this model to the equity market to get more accurate predictions.
Alpesh: I think we may be being too cynical, hope springs eternal! Journalists and Select Committees can lead to changes. But just because change is slow even when we know the answer immediately, delay is not a denial.
September 2012 | www.financial-spread-betting.com | 27
Zak Mir Interviews Special Feature
The vast majority of private equity investors end up being merely index trackers through a ‘managed’ fund or ETF, or they are attracted by the glitter of what is exciting, interesting or innovative — in most cases omitting to analyse just how much cash a company is throwing off — free cashflow. We like predictability in cash flows — similar to the venerable Mr Buffet’s approach and which also explains why he would never be involved with a company like Facebook as there is no track record of consistency or, equally importantly, when you project forward their revenue figures, no net present value that came close to their flotation market capitalisation. Zak: On the basis that I am interviewing you for Spreadbet Magazine, I would put it to you that investing for the long term is not rocket science, find a boring blue chip like Diageo — people always need to get drunk(!) — buy the shares and wait a few years. It is not rocket science, even an old fool like Warren Buffett can do it. We do not want to wait until we are 80 to be rich. But the real challenge and excitement is in short term / day-trading even though it may be the North face of the Eiger for many. The $64,000 question is what should the first steps in this area be? Alpesh: First point is that you can still spreadbet for the longer term. The second is that whether it is the long or short term, you still apply the same principles, such as money management, thorough analysis and discipline. Money management is number one — don’t bet or leverage yourself too much where you get into a bind and can’t emotionally take the loss. Here’s an interesting comment for you — David Kyte, now a fully paid up member of the the UK’s Rich List said that when he was on the Liffe floor (futures trading exchange) they used to consult Page 3 of The Sun when deciding what to buy! True! This may be sexist, but what he was really saying was that he did not care in which direction the market went as long as there was momentum he could follow as well as not allowing his downside to exceed his upside expectation. Another approach the private punter can take is technical analysis. Of course we all know nothing is 100% in trading, if it were you would be God. 7/8 times out of 10, then you are son of God.
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But I am happy with a 6 out of 10 strike rate. I do not search in vain for the Holy Grail in the markets — it doesn’t exist. Find a system that works for your personality profile and stick with it — applying money management rigidly and if it works, get on with it. If it doesn’t, analyse why and change. Zak: I think what you are missing out on is the emotional side, the common sense side. Unlike you, most people do not have the analytical abilities of a barrister, two degrees, and an IQ north of 150! They also do not have nerves of steel. Most people cannot help buying at the top and selling at the bottom — in the manner of the Bell Distribution Curve, and do not know whether the strategy they employed will work, especially after a few consecutive stop loss hits. Alpesh: Actually it is 3 degrees and an IQ of 178! As for the ‘balls’ — I won’t comment! In actual fact, I believe that over-analysing and having an excessive belief in one’s own intelligence can actually get in the way of trading. You tend to overthink these things. Some of the most successful people in business I know just get on with the job, they are not thinking about the meaning of life, they are just getting on with the task. You should be removing the emotion out of trading, as the moment you get emotional you are not following the process. This should be a detached process. Certain research done on this subject has found that the best traders are actually slightly psychotic or emotionally detached. As well as three degrees I also have two ex-wives, and at least one of them will vouch for my emotional detachment, something which proves helpful in terms of writing the alimony cheques via trading! Zak: Isn’t short term trading for most people the equivalent of smoking, it would have been better if they had never started. There is no upside, unless you know you have the right aptitude or strategy? Alpesh: It is not like smoking; it is like Facebook. For most people it will be absolutely pointless, but it will give you joy and pleasure. How does losing money do this? I will tell you how. What you do, you start small. The common sense thing to do is that while you are determining whether you have the aptitude you start small, say £5 bets for a few minutes a day. Be patient, and start with small amounts.
Alpesh Patel - The Mind of a Trader
Zak: From your experience in brokerages and beyond, are you able to spot who the winning and losing traders are going to be? Is there something you see in people? Alpesh: Yes. The losing traders are those who get excited, talk about how much they made, extrapolate forward by thinking that a win can be repeated again and again. Those who understand the economics of trading and also that the expected gain times the probability of achieving it, something Prospect Theory will do well in the long term. Either you know it beforehand or are taught it. Detachment of the money is the key.
Zak: Who are your market heroes? Alpesh: David Kyte, Bill Lipschutz — both in my first book, Mind of a Trader. And just for sheer enthusiasm, a real Grandfather of the City — Brian Winterflood, a man with a lust and passion for life. One of the people who make Britain what it is.
Zak: Do you still provide resources for traders, whether directly or otherwise? Alpesh: As compared to doing seminars which are very time consuming I do webinars for free on Alpeshpatel.com. This means common questions and new ideas can be broadcast as and when they arise.
September 2012 | www.financial-spread-betting.com | 29
Directors Dealing
Directors Dealing Time to look at a short opportunity in the shares of IG Group
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The repetitive sales around the 450-500pp level by certain of the IG Directors in recent years got our noses twitching at Spreadbet Magazine, not least because of the applicability of our magazine subject matter and of course IG’s position within the industry. On the 30th March this year, Mr Stephen Hill, a non-Executive Director, sold just under half a million pounds worth of shares at 444p. This followed a similar sized sale by non-Executive Chairman Jonathan Davie in January of this year, who sold 130,000 shares at 489p (impeccable timing I must say, catching almost the years high), and again just a few weeks ago when he offloaded half his remaining stake (particularly noteworthy unless there is a specific tax/ family reason) of 200,000 shares at a price of 458p.
In November of 2011, option exercises over the stock were carried out by Peter Hetherington and Andrew Mackay with the former selling his entire option allocation in relation to that particular tranche at that point. Again, a share price around the 450p level tempted them to cash their chips raising just under £300,000 for them both. It is noteworthy also that Andrew Mackay sold approximately £2.3m of shares in September 2010 at the key 500p level — almost half his entire holding at that point — whilst Jonathan Davie sold just over 10% of his then stake at a similar level. It looks to us that there is a signal being given here; that around 450-500p management are tempted to monetise their stakes. IG are no fools and I believe these signals should be noted.
September 2012 | www.financial-spread-betting.com | 31
Directors Dealing
The Group has also been suffering in Japan in recent months following the crackdown by the regulator on leverage levels that can be offered to retail traders although, to be fair, this is less than 5% of the Group’s global trading revenue and is not likely to be a smoke signal for issues in other regions. The vast majority of the Group’s net trading revenue was derived from equity index trading by predominantly UK clients (almost 50% of revenue), and together with the Australian activities, this is the most profitable area for the Group. The company’s ‘own funds’ cash balance increased to £388m and adjusted for broker party margin requirements sat at £192m — so called “net own cash available”. Stripping out intangibles, the Group’s Net tangible value is just over £300m and the Group’s current market Cap is £1.6bn. The stock is also supported by a well covered dividend yield of 5% and the PE is not demanding at 12 times — in line with the market.
IG Group Chart
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If, however, the recent stock sales prove to be a precursor to a slowing in the rate of growth for IG, or, indeed, should an out of the blue trading statement occur (always an occupational hazard in the volatile world of spreadbetting), then the chart below gives a clue as to the magnitude of a potential fall. A move down towards the 200p level would still be twice book value and, as we have seen with relative peer Man Group, book value doesn’t always stem a share price decline. We can see from the technical picture that the stock has been tracing out a large wedge formation for just over 2 years now. What looks worrisome to us as technicians, however, is the ‘dead cross’ formation (where the 50 day moving average crosses through the 200 day moving average and the stock price trades below them both) that has occurred, and also the falling RSI that is cutting below the key 50 centre line. These are signals that bulls should pay close attention to and, in fact, should there be any more pressure to the downside that takes the shares back towards the 400p level, indicate potentially a good outright short candidate.
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SpecialFeature Feature Special
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AIM Oil & Gas Update
AIM Oil & Gas Update As our features on the AIM oil sector are some of the most widely read, we intend to keep readers up to date on this sector of the marketplace on a regular basis. In recent weeks, the price of oil has recovered strongly with the price of Brent Crude currently sitting at $115 (time of writing), with an 18.8% gain in July driven by several factors. Brent hit a recent high of $128 in March before falling sharply in June to hit $88. It hit an all time high of $147 in July 2008, before dropping to $40 at the beginning of 2009 as the global financial crisis took its toll.
The price has rallied once more on lessening fears of a global economic slowdown particularly in the US and China, increasing tensions once more between Israel and Iran, and a reduction in oil inventories.
September 2012 | www.financial-spread-betting.com | 35
SpecialFeature Feature Special
We provide an update overleaf on those stocks included within our Dream Oil Explorers Portfolio list and which is playing out nicely — the only real disappointment so far being Xcite Energy. Before we get into the individual stocks, I want to share the chart below with you which is a depiction of the AIM Oil & Gas index and which I personally found very interesting. To look at the bulletin boards of late (and which are always great contrary sentiment indicators, or so I find), you would be mistaken for thinking that the AIM O & G sector was plumbing new lows what with many stocks languishing at valuation troughs comparable to those seen at the nadir of the 2009 bear market. However, as you can see from the chart below, the index is actually up around 100% from those lows. Yes, it is down over 30% YTD, but the level of pessimism around the sector is unjustified.
Even more interesting, to us, is the technical picture of the index when viewed in the context of the current strong bearish sentiment. We count 5 clear waves (if you are an Elliot Wave theorist) numbered in the chart below, and that per Elliot wave theory, such a pattern usually concludes a particular move. Our arrow indicates that we expect a rally back towards the upper resistance line of the flag formation over subsequent months and a break back towards and beyond the old highs. We can also see that the index is perched bang on the support line from early 2009 and that we have retraced around 50% of the gains made from March 2009 to early January 2011. In short, coupled with the negativity around the sector and the many technical factors pointing to an important bottom being carved out, the chart picture emboldens us further with our stock picks.
Aim Oil & Gas Index
Before we get into the individual stocks overleaf, take a look at the most recent EV:2P (Enterprise Value relative to Proven & Probable reserves) table to the right and you will see that our picks (with the exception of Ithaca Energy) are still very firmly in the lower half and more particularly around the $2-3 price range — a level that has set off takeovers in other companies (red squares).
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The real outlier is Gulfsands Petroleum whose reserves are valued at less than a dollar a barrel due to the sanctions currently imposed on the company as a consequence of the ongoing issues in Syria.
AIM Oil & Gas Update
September 2012 | www.financial-spread-betting.com | 37
SpecialFeature Feature Special
Gulfsands Petroluem
Heritage Oil
When Gulfsands Petroleum was first featured in the “Oil Explorers Dream Portfolio List” in July this year, its share price was 90p having plummeted from over £4 in 2011 to a low of 77p in June due to concerns about its exploration and production assets in Syria. Since then, the shares have rallied to 125p (time of writing), and still valuing the company at just £148 million.
Plenty of recent news flow from Heritage Oil which was 130p at the time of the original article (we called a Conviction Buy at 142p in April). In early July, the company announced it had formed a joint venture, Shoreline Natural Resources, with a local Nigerian partner, Shoreline Power, to acquire a 45% participating interest in OML 30, in Nigeria. It subsequently announced a $370 million rights issue to fund the $850 million acquisition with the remainder coming from a $550 bridging loan. The terms of the Rights Issue are expected to be announced by the 28th August 2012.
In July, the company said that its Chorbane permit in which Gulfsands has a 40% interest and is operated by ADX Energy (located onshore Tunisia) has been renewed for a further period of three years. The minimum work obligation for this further three year period consists of the drilling of one exploration well to a depth of at least 2,500 metres, and if the well is successful, Gulfsands will have the right to become its operator. In June, the Sidi Dhaher exploration well on the permit was plugged and abandoned since, despite good flow rates from the two reservoir zones, the fluids did not contain any oil. Clearly despite the rerating from the lows, the value of Gulfsands’ Syrian operations has been pretty much discounted in its entirety by the market. Any potential resolution to the Syrian crisis and a resumption of activity could have a significant impact on the share price — probably starting with a 2 — and if not, then triggering a bid for the Group. For now the situation remains uncertain, but for patient investors it continues to be worth the wait and the shares should be added-to on any weakness.
Bowleven At 60p in July and now at 64p, investors are waiting for key pieces of news from the company which is due to begin drilling in mid-August, and agree a farm out deal for its offshore Cameroon assets as well as the onshore Bomono acreage by the end of the year. Recent broker reports estimate a valuation of 189p a share based on the $4.7 per barrel achieved in the recent farm out by Rockhopper to Premier Oil. Keep adding.
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The OML 30 assets were acquired from Shell, Total and ENI and will increase Heritage’s production significantly to around 11,500 barrels per day. The fields will be 45% owned by Heritage with the remainder being in the hands of the Nigerian government. The company expects OML 30 production to increase from 35,000 to 145,000 barrels per day by 2018. Heritage estimates that OML 30 has gross proved and probable reserves of 707m barrels of oil and 2.5trn cubic feet gross reserves of gas. The shares were suspended at 123p in early July at the time of the announcement. The shares returned from suspension on August 7th and have since rallied to 173p (time of writing). The cash flow from the Nigerian deal will enable Heritage to develop its other assets such as the Miran field in Kurdistan. In our opinion this is a smart deal to allow funding of more speculative parts of the company’s portfolio, and more importantly bridge the cash flow of the company through to monetisation of their key Miran field in Kurdistan. It also avoids some of the financial pitfalls that many smaller oil and gas companies are presently experiencing.
AIM Oil & Gas Update
Xcite Energy Xcite Energy shares have remained in a tight range around 77p despite positive news flow from its North Sea Bentley field over the last few weeks. The Rowan Norway rig drilling the 9/03b-7 well was producing at a stabilised rate of approximately 3,200 barrels per day with no associated basic sediments or water as of the beginning of August after an initial 2,900 barrels a day rate with 47,000 barrels of dry oil being collected by the Scott Spirit tanker. Investors are waiting for further news from Bentley on the reservoir performance and potentially maximised flow rates as well as a potential farm in deal to allow phase 1b of field development to begin in 2013. Patience required for now, but everything remains on track with a highly attractive asset in the North Sea.
Falkland Oil and Gas Falkland Oil and Gas sits at 92p compared with 97p in July, but plenty of news flow since then. FOGL has struck a deal with Noble Energy Falklands Ltd, an affiliate of Noble Energy, with a farm-in to the northern area licences of the South Falklands basin for a 35% interest except for two excluded areas. FOGL will secure total investment over the next three years between $180 million and $230 million leaving the company with around $200 million at the end of the current drilling campaign to continue exploration work or appraisals later in 2014 (equivalent to just under 50p per share). FOGL will continue as operator of the entire Northern Area Licences until early 2013 when operatorship of the farm-in area will be transferred to Noble. In June this year, FOGL announced a farm out deal with Edison International.
The Loligo exploration well 42/07-01 was spudded on Friday 3rd August 2012 using the Leiv Eiriksson rig. Following Loligo, the rig will move to the Scotia prospect in Q4 2012. To sum up, investors looking for a bit of action from the Falklands Islands have plenty to keep them excited in FOGL given the potential size of Loligo and Scotia in coming months. Plenty of risk, of course, but significant upside at 92p.
Northern Petroleum Northern Petroleum was 60p in July and is now at 67p following some positive drilling announcements. In mid-July, Northpet Investment, which has a 2.5% interest offshore Guyane (Northern owns a 50% equity interest in Northpet), commenced operations on the GM-ES-2, the second well on the Guyane Maritime permit on Friday 6th July. GM-ES-2 follows up on the Zaedyus oil discovery in late 2011 which encountered 72 metres of net oil pay. Results are expected in October from the well. In early August, Northern Petroleum announced that it had commenced drilling operations on the La Tosca-1 well in Italy, targeting a 43 billion cubic feet of gross mean prospective resource gas prospect with results expected in October. To conclude, with a freshly buoyant oil price, a supportive technical picture, cracking valuations relative to the sector for our stock picks (on a EV:2P basis) and also relative to recent corporate takeover benchmarks, we sit expectantly awaiting material gains from this area of the market over the next 12 months.
September 2012 | www.financial-spread-betting.com | 39
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Global FX / Capital Spreads
Where has the action been in global FX this year and which have been the favourite plays of Capital Spreads clients? September 2012 | www.financial-spread-betting.com | 43
Special Feature
You won’t win any prizes for guessing that the euro is the most popular currency to trade at the moment, and it has held onto its popularity crown for a considerable amount of time. The single currency has been a topic of conversation ever since the banking crisis of 2008 morphed into the sovereign debt crisis of 2010 and now, two years on, we are still talking about the eurozone every day with seemingly no end in sight to the woes of the Eurozone region...
Most recently the President of the ECB, Mario Draghi, said that he would do “whatever it takes” to save the euro which triggered a prolonged rise in risk assets and in particular a recovery by the single currency. This was an exceptionally bold statement for any central banker to make, especially since it was during a speech that was outside of any official policy meeting and regular press conference.
Mario Draghi It certainly got investors pressing the buy-button faster than you can say “bid” and took EUR/USD up towards the 1.2400 level which many had not expected to happen since only a few weeks ago the calls were growing for a return to 1.1800 and even 1.1500. A short squeeze, many might say, but at least those clients who had been trying to pick the bottom of the bearish euro-move were happy to see the bounce. So now we’ve seen this bounce within a clearly bearish medium to long term trend, is there room for more upside or will the calls of sub 1.2000 be right?
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The concern is that Mr Draghi’s comments were carefully planned and designed to prevent a catastrophe. We know that in the past he’s done that with his Securities Markets Program (SMP) and Long Term Refinancing Operation (LTRO) which meant another banking crisis had narrowly been avoided, so what was he so scared of this time? Was Spain about to go kaput? Was Greece about to exit, or was Italy’s Prime Minister about to pick up the telephone to request a bailout? We are unlikely to ever know, but it is very possible that something was amiss otherwise he wouldn’t have said it and, to date, so spectacularly misled the markets as he hasn’t backed his words with actions. The general consensus is that the euro is well supported over the near term and any other talk of protecting it from Mr Draghi could put more pressure on the mass of shorts that are still expectant of a complete euro collapse. But over the longer term the view is that the trend still has a southward tinge to it and the sticky plasters will not prevent the inevitable. Whatever happens in the coming months, I am sure we will still be talking about the euro for a long time to come... Next up for our clients is GBP/USD or more commonly referred to as “cable”. Sterling has been impressive in recent months in its resilience and, in general, it is still perceived as a safe haven currency. But many argue that with the UK’s growth prospects continually being downgraded and record low interest rates of 0.5% — which could even be slashed further later this year — the days of sterling strength are numbered. Let’s face it; the debt mountain that the coalition government have been at pains to reduce has barely had a dent put in it over 2 years into this exercise.
Capital Spreads global FX
EUR / USD Chart
GBP / USD Chart
September 2012 | www.financial-spread-betting.com | 45
Special Feature
Against the euro, the Great British pound also seems to be defying gravity and, in this instance, there are few punters who would bet against the euro making back much ground against GBP due to the continual woes affecting the eurozone and single currency. But, where our clients are expecting the real action when it comes to sterling is in GBP/USD as sellers of cable have been creeping in. There are quite a few bears of sterling against the dollar, but the greatest challenge to their view is that no matter how poor the UK’s fiscal position looks, if the US starts ramping up the stimulus measures again this could easily send the dollar tumbling once more...
“Down under”, the Australian economy continues to boom and the Reserve Bank of Australia had raised interest rates way above those of Western central banks.
Last but not least, the Aussie dollar is another favourite for clients.
It would seem that whatever happens in the currency markets that for the rest of this year there are two major events that could impact them — the euro and the Fed. We will watch and wait to see how things unfold.
Whilst they have gradually been bringing that base rate down in the past year, their currency remains strong against the US greenback. The parity level remains a force to be reckoned with and, for now, those commodity bulls remain in the ascendancy. As with cable above, if the Federal Reserve does get QE3 underway, then this could precipitate another sudden move higher for AUD/USD.
AUD / USD Chart
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46 | www.financial-spread-betting.com | September 2012
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0.8 point
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Min IMR 40
GBP/USD
2 points
24 hours
Min IMR 60
Jan - May 2012, spreads fixed 100% of the time. Spreads may vary overnight and in extreme market conditions.
capitalspreads.com Losses can exceed your initial deposit. Spread betting may not be suitable for everyone. Capital Spreads is a trading name of London Capital Group Ltd, which is authorised and regulated by the Financial Services Authority and a member of the London Stock Exchange. Registered Address: 2nd floor, 6 Devonshire Square, London, EC2M 4AB. Registered Number: 3218125.
September 2012 | www.financial-spread-betting.com | 47
Zak Mirs Top Pick for September
Zak Mir’s
Top Pick For SeptemberOphir Energy
48 | www.financial-spread-betting.com | September 2012
Ophir Energy
As things stand, the state of my adopted country — Spain (via my Spanish wife of 10 years) — is not looking like such a great economic prospect, in contrast to the optimism and exuberance at the start of my Spanish adventure a decade ago. Indeed, the fate of the Spanish financial markets currently appears to rest on when Prime Minister Mariano Rajoy does what is “best for Spain” and gets out a begging bowl big enough to fit a few hundred billion Euros. Significant News: August 3rd – UBS reduces its target price on Ophir Energy as results from its Cretaceous Papa well, offshore Tanzania, were smaller than pre-drill expectations. The price target is marked down from 740p to 725p — a 10% discount to NAV for “country risk”. But at least the setup we have going into such an event is a very positive one for equities, underlined by the way that the FTSE 100 served up a 50 day / 200 day moving average golden cross buy signal in the second half of August. While such signals are, of course, not fail-safe, they do provide a very good excuse to give the benefit of the doubt to the upside argument in situations such as Ophir Energy (OPHR). This is the type of high octane monthly call I will be going for at Spreadbet Magazine, one where a big move is possible — to lead to a big win or, if there was no stop loss, a big loss! Note — ADHERE TO STOP LOSSES. Whether the call is a winner or not, hopefully it should be impossible for anyone to suggest that the Zak Mir monthly SBM call is a dull one.
Recommendation Summary: My Ophir Energy Buy Call from just above 500p (time of writing) is a classic buy on the dip / trend following play. It is predicated upon the resources scramble currently underway in Africa, the sharp rebound in the price of crude oil over the summer, heightened Israel / Iran tensions and the fact that the story from an original recommendation at the start of the year on Zaks-TA. com (at close to 300p) is still intact. Ideally, a flurry of new discoveries, particularly in Gabon, should flag this group as a M&A candidate, with its joint venture partner in Tanzania BG Group (BG.) being the most likely and appropriate contender in this respect.
July 25th – Ophir Energy announces its third major discovery of 2012, this time in Equatorial Guinea. May 16th – Jefferies reiterated its Buy recommendation and 550p target price for the oil and gas group after its joint venture with BG Group made its fifth consecutive gas find in Tanzania.
Fundamental Argument: Not a million miles away from being the size of a FTSE 100 company in terms of market cap, it would appear that Ophir Energy is one of those companies that tracker funds have piled into on the basis that the group’s day as a blue chip may not be too far away. Given the success on the oil discoveries that have kept rolling in this year is reminiscent to me of Tullow Oil, with the dip in the share price following a disappointing showing in Tanzania likely to be outweighed by future good news on the drilling side, especially given the joint venture with BG Group (BG.). If not, there is always hope on this front from Gabon and the ever present prospect of Ophir becoming a M&A candidate as UBS pointed out in August.
September 2012 | www.financial-spread-betting.com | 49
Zak Mirs Top Pick for September
Technicals: A mega uptrend this year for Ophir and, if only for the benefit of the cynics, it would be appropriate to suggest that the chances of this powerful bull-run ending just as a Buy recommendation is served up here seems unlikely. This is especially the case given the way that since April Ophir has found support on no less than six occasions at and fractionally below the 500p level. It is not expected that a seventh bounce will be seen or required given how oversold the RSI at 25 / 100 presently is — usually a good platform in a bull trend to move higher. Even so, the stop loss is 484p — just below previous lows. I anticipate a return to June’s 650p plus peak over the next 1-2 months — around a 25% move (ungeared). The late July neckline support at 582p is the initial target for those of a dourer disposition.
Ophir Energy Chart
50 | www.financial-spread-betting.com | September 2012
Travel Feature
September in the Med Be enchanted by Europe this autumn September is a time when the weather in the UK is waning and fast becoming wet and miserable as the interminable march to winter starts. The kids are about to head off back to school, it’s time to start wearing a thicker jacket to work and most of us feel even more ready for a break away to the sun! Resorts throughout Europe are popular year round — what with shorter flight times and more exotic locales like the Indian Ocean and Caribbean — even a simple weekend break becomes more feasible, so we’ve pulled together a selection of tempting European retreats that are much more likely to allow you some glorious weather at this time of the year than dull old Britain.
The Canary Islands are always an excellent chance for some late summer sun, retaining the warm weather far longer than many other European destinations and being hot practically every month of the year. Tenerife in particular is the perfect Canarian place to visit for stunning scenery and some of the most spectacular luxury accommodation — Abama in the lesser known rugged coastal resort of Guia de Isora and Gran Hotel Bahia Del Duque on the Costa Adeje being two of the isle’s finest. Hire a car or charter a private driver to show you the sights and sounds of the island, including the UNESCO World Heritage Site of the volcanic Teide National Park, or take the short trip across to the nearby and much less visited neighbouring island of La Gomera, accessible via a local ferry, but well worth the trip.
September 2012 | www.financial-spread-betting.com | 51
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September in the Med
Cyprus is another easily accessed destination for sun-seekers looking for a September escape, with resorts across the island offering some of the very best in deluxe accommodation and exclusivity.
With its own marina and private beach and evoking a real sense of elegance where privacy is of paramount importance, it is an excellent choice for travelling with the whole family, with a renowned Junior Club programme and personal service that is second to none.
The Eastern coast of Cyprus is famed for its white sandy beaches, and the azure surrounding waters are perfect for some snorkelling or diving while most luxury hotels include fabulous spas offering an enormous range of exotic therapeutic treatments if you crave a slower pace of life on your travels. Visit the quaint, boutique retreat that is Anassa Hotel in Paphos and which is a more intimate hideaway exuding more of a traditional Cypriot village vibe than that of a busy touristy resort. Still, the resort is in close enough proximity to the main town that a lively night out can still remain firmly on the cards. Located on a hillside overlooking the glistening sea below, Anassa is less of a brash complex and more of an authentic getaway, with classical low-rise, whitewashed buildings located around a charming square — the ideal place for a secluded romantic getaway perhaps… Limassol, on the Southern end of the island, is more appropriately located for visiting the likes of Choirokoitia, a Neolithic settlement which is one of the Mediterranean’s most important archaeological prehistoric sites and many believe holds the key to the very evolution of human society as we know it! For something a little less deep and meaningful, stay in Amathus, a short distance from bustling Limassol, perhaps testing out the Amathus Beach Hotel which is accredited as one of the Leading Hotels of the World.
For a Grecian departure, the rugged, volcanic island of Santorini is a must-see. Famed as being brought to life from one of the most enormous volcanic eruptions in the world (rumour has it that this eruption sparked the mythical story of the Lost city of Atlantis), the island is essentially the uppermost area of one huge volcano poking out of the Aegean Sea, and, as such, is a craggy, hilly cliff-side island. The picturesque whitewashed villages and towns afford panoramic views out across the submerged caldera and add to the exclusivity and romance of the location. Small, boutique hotels take full advantage of this, and exquisite properties like Andronis Luxury Suites and Mystique include rooms (some with private cliff-side pools) and restaurants that overlook the waters for some truly spectacular evening sunsets over dinner. Let’s face it, when this time of year rolls round, we all feel like we deserve a little pampering, so take a few days off, get on a plane and in a few hours you could be enjoying a cocktail and some much needed peace and quiet with an unquestioningly more pleasing outlook than a dreary City office window. Swap the city for the beach and escape to Europe this year, while you still can!
September 2012 | www.financial-spread-betting.com | 53
Special Feature
A potential 10 bagger update Phytopharm announced on the 16th August in its Interim Management Statement (IMS) that it is seeking to strengthen its partnering package for its Parkinson’s disease candidate Cogane with the start of an important Phase I bioavailability study with solid dose capsule formulations. Results by end 2012/early 2013 are significant to making Cogane, currently being tested as a slightly less convenient liquid formulation, more commercially viable and attractive to potential partners. However, Cogane’s true magnetism is ultimately dependent on top-line results in February 2013 from the Confident-PD Phase II study, a binary event for Phytopharm. We maintain our rNPV (risked Net Present Value) of £48m, while noting that success in both trials and securing a partner would raise our valuation to £83m — four times the current share price.
54 | www.financial-spread-betting.com | September 2012
Phytopharm - A potential 10 bagger update
September 2012 | www.financial-spread-betting.com | 55
Special Feature
Getting Phase III ready - make or break results Feb 2013 Cogane has the potential to become the first small-molecule, disease-modifying therapy for Parkinson’s and therefore could attract a lucrative licensing deal. However, this depends on the outcome of the Confident-PD study in 408 patients with newly diagnosed, treatment-naive Parkinson’s disease which should render top-line results in February 2013. The concurrent development of a solid dose capsule formulation of Cogane is also important as positive results in both studies would present potential partners with a Phase III-ready asset and help Phytopharm extract best value from partnership discussions.
ALS option Cogane has also demonstrated potential as a treatment for amyotrophic lateral sclerosis (ALS), with positive data from four different models of ALS. Depending on the outcome of Confident-PD, ALS could offer an additional valuation parameter in any licensing discussions or may provide a fall-back avenue of development for Cogane if the drug fails in the Parkinson’s trial. son’s trial.
Ahead of data from the Confident-PD trial, we assign a 25% probability of success — positive results and securing a partner would raise that probability to 50% and therefore our rNPV to £83m. Importantly, Phytopharm has reiterated prior guidance that existing cash reserves are sufficient to fund operations to the end of 2013.
SBM Take It is a very binary potential result in early 2013 for Phytopharm — success in the Phase 2 trials and a multi-fold return on your investment; failure, and a likely 80-90% drop in the stock price. That being said, the stock market is based on leaks and speculation and it is likely to be very difficult to contain results as we near the end of the trial — patients will invariably talk. As with oil exploration stocks that approach well drill results, animal instincts coupled with speculative tendencies typically take hold, and so we wouldn’t discount a run in the stock price towards the end of the year. At the current level, for those readers who are prepared to not margin this position and only place a small amount of their portfolio in the stock, the risk:reward is attractive at this price, in our opinion.
Valuation: rNPV of £48m with significant uplift potential We maintain our risk-adjusted NPV of £48m which compares favourably with Phytopharm’s £10.4m enterprise value, based on net cash of £13.3m as of 31st March 2012. Over 50% of the valuation is assigned to Cogane’s potential in Parkinson’s.
Disclaimer - The basis of this research has been supplied by Edison Investment Research (EIR). EIR do not advocate buy or sell recommendations and the opinion expressed within this piece is solely that of Spreadbet Magazine.
56 | www.financial-spread-betting.com | September 2012
Phytopharm - A potential 10 bagger update
Phytopharm Chart
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Special Feature
The bubble in bonds A 10 year trade By Filipe R Costa & Richard Jennings
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The bubble in bonds
September 2012 | www.financial-spread-betting.com | 59
Special Feature
Investors have been desperately and blithely seeking the relative safety of bonds as the Great Financial Crisis and, more recently, the European debt crisis have cast their long shadows over global markets. In recent weeks we have seen yields on government bonds hit record lows, in some instances actually going negative — meaning that investors are paying for Governments to hold their money! Why are yields sinking this way and just why are investors willing to pay governments to take their money? The Great Financial Crisis that had it origins in the subprime loan issue in the US in 2008 quickly infected the real global economy and set in motion a train of events that has culminated in global interest rates falling to unprecedentedly low levels.
It seems hard to believe now, but key interest rates set by the Federal Reserve (FED), the Bank of England (BOE) and the European Central Bank (ECB) were at 5.25%, 5.00%, and 3.00% respectively on the eve of the global crisis at the end of 2006. Some people have begun to question whether rates will rise at all throughout the remainder of this decade as the heavily indebted global banks attempt to repair their balance sheets — so weighed down by sour investments and governments impose deflation on their populations as they attempt to pay down their own debt burdens.
BOE
60 | www.financial-spread-betting.com | September 2012
The bubble in bonds
It’s fair to say that while the efforts by central banks to lower not just short but long term interest rates have been successful, they have been a total disaster with regards to convincing businesses and consumers to invest and buy real assets. This is, in part, due to a dislocation in the traditional dissemination mechanism of the banks that continue to hoard capital, much to the politicians chagrin. Quantitative Easing — a measure that was first coined in Japan in the 90’s following the collapse of their real estate bubble — has had a distorting effect on long term interest rates in particular. The FED committed $1.75 trillion to a first tranche of monetary easing in 2009 and then an additional $600 billion in 2010. The BOE flooded the UK with £375 billion split over 4 years and 3 separate programs. The ECB, much more limited in terms of mandate and being influenced disproportionately by the inflation fearing Germans, avoided engaging in a clear monetary easing program having preferred to launch two long-term refinancing operations that guaranteed banks access to cheap loans. The effects of all the monetary easing to date in the wider economy remain to be seen as growth is still slow in the US, and, in fact, negative in the UK and EU. This slow economic growth thrown into the mix has been the perfect recipe for record low, never before seen yields. A direct consequence of this mix is that many savers are now in trouble, struggling to get any income from buying Gilts or Bunds, and annuity rates for pensioners have collapsed.
A Rush For Safety
Generational opportunity - the ten year trade Adding to the growth and contagion fears that have led to this unprecedented rush for “safety” has been the additional incremental buying of bonds by governments. We believe that bond prices have been artificially inflated by central bank intervention and a bubble has formed that is now in the embryonic stages of deflating. We are, in our opinion, where we were with Technology stocks on the eve on the new millennium. We all know how that ended. The case is as simple or as complicated as one wishes it to be. We prefer the simple one — everybody who could be a buyer of bonds has already bought. Think about that for a moment — central banks have expanded their balance sheets and hold debt that will, at some point, need to be returned to the market, fund managers are full to the brim with bonds, pensions legislation in the UK has forced pensions schemes to chase bonds ever higher, retail investors have been heavy buyers of bonds in recent years — where is the extra demand going to come from? The headwinds for bonds are material and include an unwinding of the central banks’ balance sheets, inflation actually making its way into the system in sync with a strengthening economy or continued monetary debasement, increased lending by banks as their own balance sheet reparations conclude over the next few years and increasing competition by equities to global fund managers (many solid stocks yield 4, 5 and 6%). In short, it is a blind man who buys bonds here — 32 years long in the tooth with the bull market.
The sovereign debt crisis in Europe has led to Greece, Ireland, and Portugal having to ask for direct financial help as they have seen yields demanded on their government debt rising to unsustainable levels. In contrast, demand for deemed “safe” government debt in the UK, US, Germany, Switzerland, Scandinavian countries, Austria and the Netherlands has seen yields dropping dramatically.
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Special Feature
The following table helps understand how low government debt yields currently are.
Germany, Switzerland and Denmark currently offer negative yields for their 2-year bonds. At the same time, the low yields seen in 10-year bonds hardly ompensates for inflation which will most likely result in negative real returns for its holders.
Inflation Expectations In order for investors to expect a profit out of the current flat yield structure, they need inflation to be almost zero or eventually negative. Inflation in the UK has been around 3% recently. Even if the BOE can engineer a lowering of inflation back to its target around 2%, a yield of 1.60 percent currently implied on 10-year Gilts does not cover for a 2 percent average inflation for the period. If that is not a clear cut indicator of a bubble, I don’t know what is — it is the equivalent of paying 300 times earnings for an unproven dotcom!
The Trade Opportunity A number of commentators still expect the FED to engage in an additional round of monetary easing starting at the September 12th FOMC meeting. We believe that the odds of it actually happening are dropping. The FED has seemed reluctant to launch QE3 and in looking at the chart overleaf we can see that the “smart money” is betting against it with the chart of the US T Bond looking ominously like it has made a top — and not any old top, a generational top. The weekly chart shows 30 year US Treasuries sat on a key support line at the $145 level — it is the site of previous resistance, exactly where the support line from early 2011 comes in and is where the 50 week moving average is centered. If we break through here (likely on Sep 12th), then it’s a long way down to the 200 week moving average at $129 — a level that the bond price comes to meet regularly and is a little overdue. The RSI and MACD are both confirming the break from the top — the collection of technical signals married with the fundamental argument we have set out here make for a good trade basis to us, and narrow the odds for success.
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The bubble in bonds
30 year US Treasury bond chart The question is which bond instrument to short — Bunds, gilts or T-bonds? From a pure liquidity perspective, the US Treasury bond market is the best. From an overvalued perspective, we think that Gilts are the most overvalued. The wild card is what if the politicians in Europe are so glued to the Eurozone that they do actually unleash the bazooka and the ECB monetizes debt or issues new Eurobonds — in such a scenario, before you can say Bund they will hit the floor.
One is almost spoilt for choice and so perhaps a diversified short trade across all 3 is the way to go. I would urge you to run a wide stop on such a position, however, as volatility going into the FOMC meeting will likely be high and, in the short term, they are a little oversold — too tight a stop could take you out of an “account maker” over the next few years.
September 2012 | www.financial-spread-betting.com | 63
Options Corner
Options Corner Time bombs aka Ratio Spreads and how to use them The beauty of options is their versatility. You can use them in directionless markets when there is excessive volatility (invariably through selling premium) and also when volatility is at a low (similar to now) for hedging, speculation and even income generation. In short, if you know how to use options, then the power they place at your disposal over and above the usual spread betting arsenal is considerable. This month I want to introduce you to what I call ‘time bombs’ or, in options parlance, Ratio Spreads.
64 | www.financial-spread-betting.com | September 2012
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Options Corner
Let’s start with an explanation of what a ratio spread is: it is essentially a standard Call or Put spread (either bullish or bearish) that involves buying or selling one leg in a higher ratio than another — generally the sold leg of the strategy. For example, a typical Bull Call spread that one may construct could be as follows: Buy the FTSE 5850 Sep Call versus selling the FTSE Sep 6150 Call. Here’s a pay-off diagram to the right of a Bull Call Spread. You can see that it is a limited risk, limited profit pay off (gains being capped once you exceed the sold Call level).
A Ratio spread is typically constructed through selling more of the sold leg (for the same expiry). The primary difference with the conventional Call spread is that through selling more of the higher strike leg you essentially create a naked Call position at that point. Of course, if the underlying instrument trades through the short leg, then you also have the profit on the covered Call spread element to mitigate any loss. Thus, a ratio spread is a limited profit, unlimited risk strategy. Contrast the pay off diagram to the right with the one above.
66 | www.financial-spread-betting.com | September 2012
Time bombs aka Ratio Spreads and how to use them
Of course, the Call spread can be reversed with bearish leanings via a Bear Put Spread, and again you can insert a ratio element into this (through selling more of the lower strike Puts). Now, here’s a really interesting twist on how to play a ratio spread that can result in an explosive pay off — hence the term ‘time bomb’. Let’s say that you are sat watching the FTSE at this point (time of writing at 5850) and are fearful of a serious shakedown should either Span or Italy need a full bail out or the Euro does, finally, blow apart. You expect a 15-20% rout in the market. All things considered, however, you do not wish to incept an outright short position and potentially sit with it for months. Here’s how you can play such a scenario via a Ratio Put Spread, particularly in the current environment where volatility is so low. Take a look at the chart below of the Vix index over the last 5 years — we can see the phenomenal blow off post the Lehman crisis when everyone felt the world was coming to an end, but, more pertinently, look at the red circles — these show clearly that every time the Vix hits lows around 15 that volatility rises sharply over the ensuing months.
So how do you play a ‘time bomb’ and what exactly are we looking for? Well, you are basically looking for a sharp move (around a 15 - 20% move) in the market over a 5 - 8 months period. If the market is at a relatively elevated point, you would look to create a Ratio Bear Put Spread (like now), and vice versa if the market is at a depressed point, you would look to create a Bull Call Spread — essentially in the expectation of a reversion to mean. Alternately, you can be direction neutral and look to incept both strategies. The trick is in what is called ‘legging’ into the trade. Let’s take the bearish stance on the FTSE at this point. Here’s how I’d play a ‘time bomb’: I’d look to purchase the February 5250 Puts currently at 120, but only sell 50% of the long position side in the Feb 5000 Puts at 90 (currently). If this was done in £20 per point on the long side and £10 (50%) on the short side, the net cost to me is £1500 (£20 x 120 = £2,400 minus £10 x 90).
The VIX five year chart
September 2012 | www.financial-spread-betting.com | 67
Options Corner
Now, what I am looking for is either a volatility spike (perhaps on euro issues) or a decline in the market that pumps the cost of the Feb 5000 Puts up to say 120. If this were to occur (ideally both), then I would sell a further £20 of this strike and so haul in a further £2,400. Net cost to me for the strategy is, in fact, actually a credit of £900 overall (£1500 minus £2400). What I have on is a position that will make money if the market declines towards 5250 as I am long £20 of the FTSE Feb 5250 Puts and short £30 of the Feb 5000 Puts. The total delta (sensitivity to market movement) is higher overall on the Feb 5250 Puts even though I am long only two thirds relative to the short 5000 Puts as the higher strike is closer to the money. Here’s the neat thing: if the market goes up, then I have received a net £900 and so I can leave the position to run. If the market goes sideways, again, I can leave the position and look to collect the net £900 at expiry. If the market goes down, then the position will begin to accrue a higher delta and thus will make money too. The reason the strategy works this way is contingent upon ‘legging’ into it with the initial decline that allows me to sell the lower strike for a higher premium. What I personally like to do, however, is if a number of weeks passes by and I am able to buy back the incremental short leg (i.e. the extra £10 in the example above) for equal to or less than the net credit I have received, then I definitely do this. The reason one is frequently able to do this is because of the concept of time decay — as time rolls on, premium gets cut (all other things being equal). The end result is that I am left straight with a straight Bear Put Spread for NIL cost, that’s right NIL cost! If the market should fall to 5000 or below, then the collect is £20 x £250 = £5,000.
68 | www.financial-spread-betting.com | September 2012
I have personally found that ‘time bombs’ work best when an index has been in a particular up or downtrend for a 12 - 18 months period of time, and where the deviation from the 28 week moving average is about 10-15% (the larger the better). What you do is incept the bought side of the strategy at this point and wait for the market to move 2-4% in your favour over as short a period as time as possible hopefully, then you sell the short leg on a 1:1 for basis for ideally a small debit. Should the market continue to move in your favour over successive weeks, you sell the second tranche of the short leg so that you are in on the strategy for a net credit. If you are playing the FTSE via this strategy, the ideal distance between the strikes is 250-300 points… It is important to remember the tweak to the strategy, and that is: if at any stage when you have got the ratio spread running you can buy back the ratio’d element of the short leg and get your strategy cost on the remaining simple Call (or Put spread) down to nil or perhaps 1 -4 points, you should ALWAYS do this. When you’re looking at a potential payout of 250-300 points whether you pay zero or 2, 3 points for this is simply irrelevant.
FTSE range Chart
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SchoolFeature Corner Special
Japanese Candlesticks by Thierry Laduguie
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Japanese SpecialCandlesticks Feature
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SchoolFeature Corner Special
Candlestick analysis first emerged in the 1600s in Japan. The Japanese used this method of analysis to analyse the price of rice contracts. This technique is called candlestick charting. Today, candlestick charts are widely popular with day/swing traders where they are used to analyse the financial markets. Candlestick charts are slightly different from conventional bar charts; they display the open, high, low and closing price, but in a different format. Instead of seeing the price action on a bar, each candlestick has a real body which is coloured.
If the closing price is lower than the opening price, the real body is black (or red). If the closing price is higher than the opening price, the real body is white (or blue or green).
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A white candlestick indicates bullish price action as the close is higher than the open. A black candlestick, on the other hand, is bearish. Some important signals are given by a single candlestick; others are based on a series of two or three candlesticks. The analyst looks for patterns that are created by the position of two or three consecutive candlesticks. There are essentially two types of patterns — continuation and reversal ones.
Each candlestick represents the price action in a period (day, hour...). The advantage of using candlesticks is in the immediacy of the visual message. Important turning points in the market can be easily identified by looking at the position, size and colour of the real body. Most charting tools use the colours green and red, or blue and red in the real body, others use black and white.
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Continuation patterns occur in the middle of a trend (where the momentum indicator, be it the RSI, MACD or any other, is neither overbought nor oversold). The following patterns are continuation patterns:
Japanese Candlesticks by Thierry Laduguie
Bullish engulfing pattern
Bearish engulfing pattern
It occurs when a small black candlestick is followed by a large white candlestick engulfing the body of the black candlestick. This pattern is a strong buy when it occurs at market bottoms (reversal).
The opposite of the bullish engulfing pattern.
Piercing line (bullish)
The first candlestick is black, the second candlestick opens lower than the first candlestick’s low, but closes more than halfway above the first candlestick’s real body.
Morning star (bullish)
A star is a candlestick with a small real body that occurs after a candlestick with a much larger real body where the real bodies do not overlap. The bullish white candlestick that follows confirms the uptrend. This pattern often occurs at market bottoms.
Dark cloud cover (bearish) The opposite of the piercing line.
Evening star (bearish) The opposite of the morning star.
September 2012 | www.financial-spread-betting.com | 73
SchoolFeature Corner Special
Reversal patterns occur at the end of a move, they can mark a top or a bottom. After a long advance when the market is overbought, the formation of a bearish engulfing pattern or evening star is bearish. In a downtrend when the market is oversold, the formation of a bullish engulfing pattern or morning star is bullish. The following patterns are also reversal patterns:
Long-legged doji (bullish at the end of a decline, bearish at the end of a rally) This pattern signifies indecision. It occurs when the open and close are the same and the range between the high and low is large (long shadow). Indecision is a feature of tops/bottoms.body.
Dragonfly doji (bullish)
This pattern occurs when the open, high and close are the same. This pattern is significant at the end of a decline.
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Gravestone doji (bearish)
This pattern occurs when the open, low and close are the same. This pattern is significant at the end of a rally.
If you’d like to learn more about Technical Analysis and the methods of E-yield, visit www.e-yield.com
Special Feature
P1 International Supercar Club Following on from our feature last month on how to ‘affordably’ own a supercar, the fleet at P1 International Supercar Club offers something for everyone and every occasion.
September 2012 | www.financial-spread-betting.com | 75
Special Feature
We featured three of the greatest cars on the planet in the last edition — the Ferrari 458 Italia, McLaren MP4-12C and the Lamborghini LP560-4 Spyder, all selected as proper hardcore driving cars for those who like to live life on the ragged edge and make a lot of noise whilst doing it! The club also offers another type of car for its members. These are not for screaming down the autobahn, but rather for turning up in at Brocket Hall for a round of golf, or to Royal Ascot. These are the cars for those people in life who ‘have made it’, who are no longer out clubbing until all hours and getting in just in time for the market to open somewhere on planet earth! They are for those who have moved out of the bachelor flat in Canary Wharf and now (yawn!) it’s time to grow up. Welcome to the Gentleman’s Express!
Bentley Continental Supersports The king of this category surely has to be the Bentley. The marque has an unsurpassed heritage as the most elegant of speed machines, but this latest generation is perhaps a little more hooligan than the genteel models of old. This car does, however, retain the style and class it has always been renowned for: it still has plush carpets and acres of the best cow skin on the planet, and under the bonnet it also has an almighty 6ltr W12 engine; for those that don’t know, a W12 is basically two V6‘s bolted together! It produces over 620 bhp and has a top speed in excess of 200 mph. Even more impressive, considering the car weighs nearly 2.5 tonnes, this supercar will achieve 0-62mph in less than 4 seconds.
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Thankfully, because of the ceramic disc brakes (the largest and most powerful ever fitted to a production car), it can also stop! The Continental Supersports also has power by the bucket load, but, more importantly, it also has class and presence. Attention to detail is astonishing and it must be said that if you are going to be stuck in traffic, then sitting in the most comfortable ‘arm chair’ that is the Bentley seat, listening to an expensive music system and being massaged as you go is not a bad way of travelling — if only you were permitted to enjoy a large G&T as you go, then this car really would offer everything!
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Special Feature
Aston Martin Rapide Nearly every new member that joins P1 International wants to drive an Aston Martin. They have invariably grown up with James Bond and of course watched Top Gear avidly and have therefore fallen in love with the car and the brand even before they have sat in it.
This Jekyll and Hyde quality really does offer you two cars under one skin as it is a true sports car and yet is also a refined classic. This is almost the car that Ian Fleming should have given to Bond as it is as two dimensional as he is — ladies’ man and assassin.
The Aston Martin range is, quite possibly, the most beautiful in production anywhere. The Italians will always consider themselves the best designers and makers of supercars but there is something that is quite simply gorgeous about an Aston Martin and that, to us, is unmatched anywhere else.
The Rapide is a popular car on the P1 fleet because it genuinely offers comfortable seating for four people and with four doors! It is incredible how they have managed to hide the doors into the beautiful curves of the car, but manage it they have and this car is truly special. You sit cocooned in comfort and style. The Rapide is the perfect Trans-European Grand Tourer, and if you do find yourself in Cannes or Milan, or even Munich, there is not a continental chap anywhere that would not look enviously at an Aston Martin.
Powered by a hugely impressive 6ltr V12 engine, that growls and burbles like a caged beast, it will reward the driver with bags of grip and superb handling if you work the 6 speed touchtronic gearbox, but can also act in a docile and tame manner for city driving.
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P1 International
Ferrari California 30 Once again, it is impossible to write an article about supercars without mentioning Ferrari and so we make no apologies for this. The most iconic supercar brand in the world has launched a car that has split opinion among supercar aficionados everwhere — The Ferrari California 30. First of all the “30” is a signal to the marketplace that this is the latest evolution of this beautiful car. It is 30 kilos lighter and boasts 30 horsepower more than its predecessor and has some very subtle chrome grills as the only visual clue to the improvements. The “Cali” as it is affectionately known is a 2+2 hard top convertible with the engine in the front. To many a Ferrari enthusiast this seems implicitly wrong. The two rear seats are only big enough to sit a golf bag at best, and a front-engined Ferrari is almost a sin! The hard top convertible also causes angst due to the added weight. However, for those that embrace change and design; these are not negative changes at all. They are merely different options in what has become a diverse fleet of supercars from the stable of the prancing horse.
Firstly, the most important feature is the hard top roof. It lowers and raises quickly and smoothly, allowing the driver every excuse to keep it down until the very first rain drops splash upon them. When lowered, the roof sits into the boot space at the rear of the car and yet still allows room for a proper hard suitcase — very rare in supercars! When raised, the rigidity of the roof really helps the car’s handling and it becomes more of a beast. Although the engine sits in the front, the Cali is still very well balanced and the traditional Ferrari V8 engine still accompanies your drive with its awesome soundtrack. It remains, of course, a rear wheel drive car and the handling balance can be enjoyed just like any other Ferrari. This car is a plush car at home on the coiffured streets of Knightsbridge as well as the twisting alpine Stelvio Pass. It is a convertible when the sun is out and a coupe when you really want to push it or if it rains. There is a boot, four seats (kind of) and it is simply beautiful. Throw in a slick 7 speed F1 style gearbox (think of this as a volume knob!) which allows you to really ‘drive’ the car, or simply stick it in full auto, park it outside Harrods / Boujis / The Ivy and let the world admire you!
If you’d like to learn more about our unique P1 Supercar members club and perhaps come down and admire our stable, call us on 01372 721711 and mention Spreadbet Magazine.
September 2012 | www.financial-spread-betting.com | 79
Editorial Contributor
Dominic Picarda is a Chartered Market Technician and has been responsible for the co-ordination of the Investor’s Chronicle’s charting coverage for 4 years. He is also an Associate Editor of the FT and frequently speaks at seminars and other trading events. Dominic holds an MSc in Economic History from the LSE & Political Science.
Dominic Picarda’s Technical Take A retail stock focus Morale is currently low on Britain’s high street. With the country mired in a double-dip recession and consumer prices rising faster than the average pay-packet, the public is hardly in the mood to splash out. Despite these pressures, however, retail sales are not in a state of total collapse. And, while the outlook remains sticky, retailers may be able to continue to muddle through. Against this unpromising backdrop, the FTSE 350 General Retail sector has actually performed rather well lately. It has rallied 14 per cent since late July and could be on the verge of breaking out of the range in which it has been trapped since late 2009. It has already tried and failed five times to escape this zone. But, if it gets above and stays above 1853, a further up-move of around 25 per cent could quickly ensue.
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Dominic Picarda’s Technical Take
FTSE 350 General Retail sector chart
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Editorial Contributor
Next Its wares aren’t nearly as chic as Zara’s, nor as funky as H&M’s. Never-theless, Next remains the outfitter of choice for many Brits. It is also chic in the eyes of City investors, thanks to its habit of frequently surpassing the financial targets that it sets itself. And, the clothing giant has weathered the tough conditions in the industry rather better than many of its peers have done.
Next Chart Next’s share price is clearly in vogue right now, having lately touched an all-time high of £36.10. This puts it in “blue-sky territory”: there are no historic resistance levels standing in its way. The main drawback is that the share is very overbought on daily, weekly and monthly timeframes. Such periods of overboughtness in the past have resulted in substantial pullbacks of more than 20 per cent.
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Still, for the moment, it would be unwise to fight the trend. My strategy would be to allow a retreat to below the 21-day exponential moving average and then go long as the price rallies back above there. New record highs around £40.00 would be my objective.
Dominic Picarda’s Technical Take
Marks & Spencer Like many other retailers, M&S suffered lost trade owing to the unseasonably wet weather during April and June this year. But, not all of its recent problems have been beyond its control. Poor planning resulted in stock shortages within its key women’s wear lines, for example. All this helps explain why M&S shares look unfashionably cheap right now, with a dividend yield of some 4.8 per cent.
Marks & Spencers Chart
M&S’ chart is a much less inspiring chart than that of Next, and more similar to the picture for the sector as a whole. Its share price has gone sideways in a broad range since the middle of 2009. During that period, several strong rallies have occurred, but each has then been totally reversed. The rallies have typically stalled around either the 390p or 414p levels.
There is certainly scope for the present rally in M&S to continue for the moment. Generally, the peaks have occurred when the price reaches overbought or near-overbought levels on its weekly chart, with a relative strength index reading around 70 per cent being particularly important. The current reading is only around 60 per cent, however. I’d allow for further gains towards 390p-414p, aiming to enter long positions around the 13-day exponential moving average.
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Editorial Contributor
SuperGroup Shareholders in clothing retailer SuperGroup are definitely feeling like fashion victims. The company has suffered a series of self-inflicted problems in recent times, especially with the management of its stock. A rapid expansion programme may have added to its difficulties, while sales growth has been disappointing of late. This has fed through into much lower than originally expected profitability.
SuperGroup Chart The share price chart is decidedly ugly. From its all-time high of ÂŁ17.96 in February 2011, SuperGroup dropped to as low as ÂŁ2.61 in early June. And, despite an almighty rally into mid-July, the larger downtrend remains in force for the moment. The price is still below its 200-day moving average, although it does appear to be pausing in advance of fresh gains. The next target for such a move lies at 508p.
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On a short-term view, I would seek to ride a further move higher beginning from current levels around the 13-day exponential moving average. I would become more positive still on a breach of that 200-day simple average.
Special Feature
Must Have Gadgets for the Successful Trader by Simon Carter
Within the industry, it’s seen as something of a truism that technology is the great leveller. What is a rich man’s plaything one day is available to all in a matter of months or years. One day a portable music player that holds thousands of songs is a work of science fiction; before you know it everyone in the world seems to own an iPod. But if you’re having a good run in the markets, and you’ve got a bit of money in your pocket, why wait until tomorrow? Treat yourself today to something cutting edge, desirable and oh-so-pretty.
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Special Feature
Beats by Dr. Dre Price: £279.95 If you saw any of the Olympic Games this summer there is no doubt that these headcans (‘headphones’ seems too pedestrian) will have caught your eye. Everyone from Tom Daley to the record breaking Michael Phelps was seen wearing their Beats, instantly making them the hottest headphones in the world.
There is so much more to Beats than street cred, and the amazing build quality is backed up by incredible sound. You are guaranteed not to hear a peep from the outside world and the outside world will be protected from the teeth shattering bass and pitch perfect sounds that the Beats throw out. The sporting credentials of these headphones mean that they won’t look out of place in the gym or on the road and any self-consciousness that may come from slipping them on is instantly negated by the extensively cushioned and ergonomic design. In short, they’re comfy. If you’ve been listening to your mp3 player with its original headphones, do yourself, and your music, a favour and buy Beats.
Samsung UE55ES8000 Price: £2499 (varies) AAlthough it’s impossible to predict where the future of television lies, it would be hard to argue that Samsung won’t be involved and their latest flagship TV is this 3D Smart TV with voice and gesture control. What at first feels like a gimmick, speaking into the touchpad remote or waving your hand at the screen, soon becomes second nature and you’ll wonder how you ever managed with buttons to push. Aside from the headline features, the ES8000 comes absolutely stuffed with extras such as the built-in Freeview HD and Freesat tuners, two USB ports, four HDMI inputs and a LAN connection for Smart TV (though it also has wireless capability).
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The picture quality is breath-taking and the 3D is super-rich. The Smart TV is as wonderful as always and the screen itself looks beautiful. You suspect this is the TV that Samsung executives own.
Must Have Gadgets for the Successful Trader
I’m Watch Price: £249 You won’t believe what this watch can do. It was only a matter of time before somebody finally cracked the touchscreen watch but nobody expected this Italian beauty. The so-called ‘smartwatch’ runs Android 1.6 and boasts connectivity, via Bluetooth, to your smartphone instantly allowing you to check your emails, catch up on Facebook or Twitter, read messages and even make and receive calls like you were James Bond.
Aside from the ‘phone on your wrist’ features, you can use the sleek HD touchscreen to enjoy the built-in audio player, image gallery and catch up on the news. If these features weren’t enough to have you, and everyone around you, staring at your wrist in wonder, you can navigate the Google Play store to download all manner of apps. Oh, and it also tells the time.
iPad Price: £399 - £659 Although there are whispers of a new iPad on the horizon, it’s worth remembering that there are always whispers of a new iPad on the horizon. While industry insiders do expect an iPad Mini this autumn, the new iPad (or iPad 3 if you prefer) is still, and should continue to be, the high watermark for portable tablets. As with all iPads, this comes in various flavours from the budget 16GB Wi-Fi only form, to the ‘expensive but worth it’ 64GB Wi-Fi plus 3G version.
If you’ve never owned an iPad, or even a tablet, and think that the web experience could never get any better than on a PC or laptop, think again. Browsing the web is a joy on an iPad but where it really comes into its own is the App Store. Magazines, books, games, sports, news… you can find pretty much anything on the App Store and if you are a Sky subscriber there is nothing in the world you’ll enjoy more than sitting back with the Sky Go app and watching your favourite movie, or the cricket on your new iPad.
There are some who already own an iPad and wonder whether to upgrade but the new Retina Display (four times sharper than the iPad 2), super-fast A5X chip and 5 megapixel camera should help make up their mind. As with all of Apple’s devices, the quality of the product is absolutely second to none and if you own an iOS device already, you’ll have mastered the interface within seconds.
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Special Feature
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Commodities Corner
Commodities Corner A Pairs trade idea in Gold & Silver Filipe R. Costa
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Special Feature
Gold and silver have certainly been shining areas of the marketplace during the last few years as central banks around the world lowered interest rates to historic lows and incrementally flooded the world with cheap money through QE measures. In fact, gold and silver are up around 90 percent since the beginning of 2008 whilst the global index S&P 500 is negative by 4.5 percent — that’s some outperformance. As commodities, demand for gold and silver has historically principally come from actual producers, for example of jewelry. But, in recent years, there has been an incremental amount of demand for both precious metals from investment funds — so skewing the demand equation and adding upwards pressure on price. Only recently I was shocked to learn that, apparently, all the gold ever mined in the world would fill just 3 Olympic sized swimming pools — amazing!
It is our contention that probably the vast majority of the rise, in gold in particular, over the last few years wasn’t because of underlying industrial use, but simply financial investment demand due to the fear of currency debasement and, ultimately, material inflation being just around the corner. Analysts en masse are still bullish on both precious metals as they anticipate another round of monetary easing to occur later this year in the US and possibly Europe. However, we think that the long rally in gold is now running out of steam.
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Silver In April last year, silver hit a 31 year high of just under $50/oz as concerns over the debt crisis in Europe intensified and a weak US dollar forced investors to look for other safe havens, with equities deemed too risky at that time. It is important to note that the last round of quantitative easing in the US was actually announced in November 2010. In recent months, many commentators have been expecting more QE from the FED but, excluding Operation Twist, the FED has actually been dampening these expectations as a consequence of recent economic statistics in the US actually pointing to a modestly growing economy and therefore less need to embark upon the QE measures again. With gold up 90 percent since 2008, a number of global macro funds that have been heavy buyers of the metal in recent years have been booking sales to make up for the losses on their equity positions. This thesis goes a long way towards explaining the decline over the last 10 months coupled with a tempering of underlying industrial demand as the price was deemed too high. Considering its peak last year at just over $1900, gold is now down more than 10%, with silver a tub thumping 43%. In the event that the US economy in particular gathers steam, or the worst doesn’t come to pass in the Eurozone, we would wager that gold will likely continue to re-trace the spectacular gains experienced over the last 15 years, and wouldn’t be surprised to see a move back towards $1200 over the next few years. If the recent weakness in treasuries also continues (see our call this month on a “once in a generation short opportunity” here) then this is likely to continue to be a lead indicator for further weakness in gold in particular — gold and treasuries have been pretty highly correlated in recent years as the “anti-dollar/ safe have play”. This is something worth watching closely...
Commodities Corner
5 year chart: Gold - black; Silver - red; EUR/USD - blue; S&P500 - green
We can see from the chart above that silver has re-traced entirely the outperformance relative to gold over the last 15 months. Adding to the (currently minority — which is encouraging as a contrarian) bear argument on gold, just recently, the World Gold Council (WGC) released data showing that gold demand fell to its lowest level in more than two years in the second quarter of this year. A large drop in demand from China and India led to this result. The Chinese economy has been deteriorating fast and demand for precious metals as a commodity to be used in industrial production will obviously suffer.
Many analysts and hedge funds have been bearish about silver prospects due to growth concerns around the world, but a recent report disclosed that individual investors have been buying the metal following the large retracement from $49/oz — an interesting situation between the so called “smart money” and “dumb money”. We have a sneaking suspicion that, in fact, the “dumb money” could, on this occasion, prevail. We think that there is an interesting ‘pairs’ play between silver and gold at this point and we would suggest a long silver:short gold position in equal measures.
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Special Feature
World’s biggest power failure is a wake-up call for India And for UK Equity investors When you cast around for investment opportunities, do you confine yourself to UK companies? If so, you really ought to have wider horizons. In contrast to Britain, which faces austerity for years to come, two giant nations in particular are currently growing at 7.5% and 6.5% respectively and between them, account for 40% of the world’s 6.5 billion population. They are of course China and India respectively. Don’t they sound much more attractive than poor old Blighty?
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Indian Power - Trendwatch
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Special Feature
Don’t get me wrong – I’m not suggesting that you go and open brokerage accounts in Beijing or Mumbai. On the contrary, there are some great Chinese and Indian companies listed on the London stockmarket. Although the IMF predicts that China will overtake America in GDP terms by 2016, thus becoming the world’s biggest economy, I’m rather wary of China as an investment destination for several reasons. For a start, I’m always suspicious of the financial results of its companies – there’s an awful lot of fraud and corruption in China. Second, China looks to us like one huge property bubble that’s set to implode; something we wrote about at length in a recent issue of TrendWatch. Third, recall that star UK investment manager Anthony Bolton moved to Hong Kong to try to emulate his success there. So far, his Fidelity China Special Situations fund is around 25% down since its launch in 2010. If he can’t hack it, with all of Fidelity’s backup resources, imagine how hard it must be for everyone else. So our current preference is for India, if only because it’s thousands of miles closer to home than China; it was part of the British Empire until 1947; and English is one of the nation’s two official languages (the other is Hindi). And here’s a little-known forecast: India is expected to overtake China between 2025 and 2030 to take over the crown as the world’s biggest economy. India is already the owner of many brands once considered quintessentially British, including steel-maker Corus (formerly British Steel), Jaguar, Land Rover, Tetley, Typhoo, Yardley cosmetics, the Grosvenor House Hotel and even Blackburn Rovers football club. Debenhams and Next could be the next to go.
If you’ve been paying attention to the news recently, there’s one investment theme that has leapt out and slapped you around the face like a wet kipper: electricity generation. On 31 July this year, the grand-daddy of all power failures occurred in northern and eastern India, bringing half the country to a halt. It affected 670 million people, or an incredible 10% of the world’s population. That’s more than six times the impact of the previous biggest power failure (110 million people in Indonesia in August 2005). The direct cause was the cascade failure of three vast power grids, probably due various Indian states drawing more power from the grid than their entitlement. But the basic problem is that India’s electricity-generating infrastructure has been left trailing by the nation’s rapid economic growth. At peak times, demand falls short of supply by around 9%, which is why there are so many smaller power outages in India lasting up to 10 hours. Around 27% of India’s total electric power disappears through leakage or theft; and some 300 million people (1 in 4 of the population) are not even connected to a grid. There you have it: an investment theme if ever I saw one. No Indian electricity generator will have any problems in selling its output, given that demand will outstrip supply for years to come. If you find it difficult to visualise how Indian electricity can be stolen on such a large scale… this should help!
But India is still a vast country with a somewhat alien culture. How on earth would you know what company in which to invest? The trick here is not to grope around in the barrel like some sort of lucky dip, hoping to come up with that nice rosy apple of a share. Rather, you should be looking for some particular investment theme.
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Indian Power - Trendwatch
For some strange reason, the LSE has managed to attract quite a few Indian power companies. Here’s a list of the best of breed – I wouldn’t want to put you off buying any of them:
Essar Energy (ESSR). By far the biggest of the bunch, capitalised at £1.6 billion. It currently owns and operates 2,800MW of electricity generation capacity and has a further 9,670MW under construction. It made a thumping loss in 2011, thanks to a tax dispute, but things could now be improving. Worryingly however, it has $5.8bn in long-term debt.
KSK Power Ventur (KSK)
has 933MW of coal, gas and wind operating capacity with a further 3,600MW under construction. Unfortunately, it has an erratic profit record, and therefore an erratic share price.
Greenko Group (GKO) is focused on clean energy projects. It currently has 214MW of capacity, consisting of hydroelectric and biomass facilities, and is making a determined effort to move into wind power in partnership with General Electric. Greenko’s target is 10,00MW by 2014. Its focus on renewables could be a major benefit if current problems with coal and gas supply in India continue.
OPG Power Ventures (OPG) is a smaller version of KSK, with a market cap of £167 million. If we have a favourite, it’s this one, if only because it has just returned to uptrend and we recommended it in the latest issue of TrendWatch. We especially like it because much of its output is sold directly to large, local industrial concerns, with the balance being sold to a regional utility, thus minimising the problem of theft. I(t’s lightly geared, with cash of £38m and net debt of just £31m. Although it barely made a profit last year, thanks to disposal costs of some old facilities, it’s well placed for the future, with 700MW of capacity targeted for this year, rising to 460MW in 2014. In the past, our investment management arm has had no difficulty in spread betting all of these shares. One word of warning, though: we always advocate that you use guaranteed stops for equity trades. Why? Because unlike most other markets, equities can gap to zero. Or, almost as bad, a company can issue a profit warning at 7 a.m., resulting in the market-makers slashing the price by 40% when the market opens. Let’s put it this way: The chance of your house burning down is pretty low. But the day it happens to you, you’ll be so grateful you paid the premium on your house insurance.
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