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SPREADBETTING The e-magazine created especially for active spread bettors and CFD traders

N Ay o M iTi ED


issue 16 - May 2013

The Biggest insider Traders of All Time We reveal the worst offenders


ToM WiNNiFRiTh’S ToP 5 AiM SToCk BuyS



Feature Contributors 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 four 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, the first pure TA website, in 2001 and which flourishes to this day. In addition, he has written for the Investor’s Chronicle, appeared on Bloomberg and CNBC as well as being the author of 101 Charts For Trading Success.

Alpesh Patel Alpesh Patel is the author of 16 investment books, runs his own FSA regulated asset management firm from London, formerly presented his own show on Bloomberg TV for three years and has had over 200 columns published in the Financial Times. He provides free online trading education on

Tom Winnifrith Tom founded the t1ps website in 2000 and over 12 years his average gain per tip was 42.7% on 241 share tips. He now writes for a range of US and UK financial and political websites and all his content can be accessed via - you can get alerts on everything Tom writes by following him on Twitter @tomwinnifrith or

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Editorial List Editor Richard Jennings Sub editor Simon Carter Design Copywriter Sebastian Greenfield Editorial contributors John Walsh Thierry Laduguie Filipe R Costa

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, spreadbets and CFDs 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. 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. 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.

Foreword Welcome back once again to this special AIM edition of our magazine. I hope you enjoy it as much as we did in putting the ol’ grey matter to work and coming up with some trade ideas in an area of the marketplace that has been a minefield for many investors over recent years. Mrs SBM and I took a glorious two weeks out in mid April, catching the early autumn season down in South Africa. Suitably copious amounts of fine SA wine were consumed and rather too much gourmet food — I’ve resolved to cut down the US hours trading and get out and about in our glorious countryside more often this spring to try and trim down for the summer hols!! I was certainly in need of some ‘R&R’ and settling down on the plane flying down to Cape Town for a full 11 hours of unadulterated peace was pure bliss... These last few months have been tricky to call in the markets as I’m sure many of you will concur. Our mining and gold picks have been like being in a washing machine, but that type of volatility, coupled with extreme undervaluation, is generally a signal of an impending bottom. Lord knows, some of the gold miners cannot fall much more and we in fact expect that there will be a spate of consolidation moves over the next 12 months. This month we have the usual suspects — Alpesh, Zak, Tom Winnifrith etc. — all serving up their own spin on various AIM opportunities, as well as a special Ruspetro feature in which we ask some pressing questions of CEO Don Wolcott after the drubbing the stock has seen these last 12 months. Our feature piece is the “Biggest Insider Traders of All Time” — a must read. We’ve also got a triple Commodity Corner feature with takes on gold, silver and platinum — the former two I’m guessing have dished out a lot of pain in recent months as sentiment was resolutely bullish in the face of the declines — something that invariably is a warning sign and harbinger of further weakness. The piece on the “subprime King” John Paulson will also prove interesting to those who believed in his Midas touch — he is an acute lesson that nobody is bigger than the markets and that the key to trading longevity is rigid risk control — position sizing, hedging, cutting losses and being prepared to fold and walk away when necessary. And, on that note, I’ll wrap this up and let you get into enjoying the unique content we supply each and every month, entirely for free.


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The Biggest Insider Traders of All Time

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Ruspetro SBM takes a fresh look at the beaten down Siberian oil exporer and asks is time to buy?


John Paulson And The Great Gold Bet


Zak Mir Interviews


Dominic Picarda’s Technical Take


Robbie Burns’ Monthly Trading Diary


Tom Winnifrith’s Conviction Trade For May


Technology Focus

Will the “Sub-prime King” give back all his gains on gold?

Zak gets to grips with trading educator Paul Rodriguez

I’m forever blowing bubbles... Dom asks whether there are various bubbles brewing across various markets

“Till Death Do Us Part...” Robbie on falling in love and knowing when to let go!

Tom reveals his top pick for May and a new ebook with five Buy ideas for 2013

Simon Carter investigates the new multi-billion dollar Apple headquarters

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School Corner

Apple Stock Update Following the recent results we ask what is now in store for the tech goliath?

On Balance Volume Explained



Commodity Corner


Gold & Silver after the crash where to next for the precious metals?


Zak Mir’s Top 3 AIM Picks Special


Alpesh On Markets

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The inimitable Zak Mir offers 3 AIM trade ideas for May

Alpesh Patel offers some words of wisdom on spread betting and CFD trading on AIM

Commodity Corner Extra We take a look at the 3rd precious metal - platinum - and ponder whether it is worth buying again

John Walsh’s Monthly Trading Record Trading Academy winner John Walsh continues to bravely share his trading journey with our readers


Investors Intelligence


Markets In Focus

A global markets round up from II market strategist Jackson Wong

A comprehensive markets round up of under and outperformers during the month of April

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Special Feature

The Biggest Insider Traders of All Time You may be surprised to learn that what we now know as “insider trading” wasn’t actually illegal in the USA until the latter half of the last century and, indeed, in parts of Asia it was similarly not a criminal offence until the early 80s.

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The Biggest Insider Traders of All Time

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Special Feature

“There were some state and local laws in the US governing the topic, but no actual Federal law existed.” There were some state and local laws in the US governing the topic, but no actual Federal law existed. It was only when William Cary took over as the US Securities and Exchange Commission (SEC) chairman in 1961 that a seminal ruling was issued to make insider trading a federal crime. From that point on, anyone in possession of insider information was required to either abstain from trading until it became public or to force its disclosure to the market prior to conducting any trading and benefitting from it. The rule later became known as Disclose or Abstain.

Ivan Boesky - The Master Market Manipulator

Attempting to stop insider trading is necessary to protect investors and ensure fairness, efficiency and transparency within the financial markets. If one party trades on information that another party doesn’t have access to and is likely to move the stock price, the trade basis is of course unfair. Taken to its extreme, if insider trading was in fact more prevalent, then we would soon have a very small market comprised largely of insiders, as retail investors would prefer to abstain from trading so incensed at the uneven playing field would they be on. Securities analysis is aimed primarily at obtaining a legal ‘edge’ over other market participants. By connecting available public information with non-material, non-public information, analysts look to evaluate a stock in order to it successfully and hopefully to beat the market. In practice, a very, very small minority do. The piecing together of public information to form a bigger picture is called ‘mosaic theory’. Some analysts and portfolio managers, however, go that little bit further in the hope of generating the much desired alpha... Over the years there have been many insider trading cases which the SEC has investigated and which have resulted in dozens of individuals being formally prosecuted. But it has really been during the last few years that prosecutors have been intensifying their crackdown on insider trading all around the globe and in particular in the UK and US, and which has resulted in record fines and huge jail sentences. SBM has chosen four landmark cases which we think are the most important ever. Let’s take a look at them...

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Born: March 6, 1937 (aged 76) in Detroit, USA Occupation: Stock trader Sentence: $100 million in fines plus 3.5 years in prison (released after two years) Style: traded the stock of companies involved in takeovers using tips from corporate insiders Illegal Trading haul: at least $200 million

Ivan Boesky, or Ivan “the Terrible” Boesky as he was coined by Time Magazine issued in 1986, was known as a powerful stock trader, one who made a fortune betting on corporate takeovers during the go-go days of the 80s.

The Biggest Insider Traders of All Time

Boesky started his career in 1966 as a stock analyst on Wall Street, later starting his own firm in 1975 — one which specialised in arbitrage trading (effectively “pairs” trading). His firm’s trades were mainly targeted at profiting from corporate takeovers at a time when M&A activity was growing exponentially. During the 80s, it was common for 2,000 or even 3,000 mergers to occur during a single year.

Boesky was finally caught when Maxxam Group offered to purchase Pacific Lumber. Three days before the takeover was announced, Boesky purchased a seemingly innocuous 10,000 shares in Pacific Lumber.

Boesky was very successful with his trading ideas and accumulated several hundred millions of dollars during the decade. In the middle of the 80s, he presided over a company worth more than $3 billion with a staff of over 100 in his Fifth Avenue office.

“Boesky was very successful with his trading ideas and accumulated several hundred millions of dollars during the decade. In the middle of the 80’s, he presided over a company worth more than $3 billion with a staff of over 100 in his Fifth Avenue office.” What only became known later was that his profits weren’t just a matter of skill, but also (or mainly) of having the right information at the right time, in particular before other public participants. Boesky was frequently tipped off by corporate insiders about takeovers, and in the seemingly innocent technologically inferior days where being caught was much less likely, he would stock a few days before the takeover was formally announced. Given Boesky’s inordinate and unequalled success rate, this led the authorities to grow suspicious about the origins of his profits and so the SEC delved deeper into his activities. Typically just before takeover announcements, prices in target shares will being rising, highlighting the issue of certain investors who are likely to be trading on non-public information.

The SEC charged him with stock manipulation based on insider trading on November 14, 1986 which resulted in him agreeing to pay a $100 million fine, being banned from trading professionally and, worst of all, being sentenced to 3.5 years in prison, although he was released after two years. His sentence was the result of a plea bargain which saved him from what could have been even worse consequences. Boesky turned “rat” and made a deal with prosecutors which helped them trap several other influential traders such as Martin Siegel and Michael Milken. In the end, prosecutors charged fourteen individuals and more than five important brokerages. It was even said that the SEC allowed him to continue perpetrating his illegal trading for months, using him as “bait” via wire tapping and so enabling them to entrap others. Boesky’s case is one of the most important listed here as it marked the beginning of SEC’s intensification on illegal insider trading. Until that time, the SEC had found it difficult to sustainably build a case against insiders and it was with Boesky’s that securities law was also revised to allow for easier charging. Congress passed the Insider Trading Act of 1988 aimed at increasing penalties for insider trading, providing cash rewards to whistle-blowers and allowing individuals to sue for damages caused by insider trading violations. Boesky ended up paying hundreds of millions in fines and compensation for his role in several insider trading cases, including the infamous Guinness Share Trading Fraud. He never recovered his reputation and now, in the closing stages of his life, operates outside of the investment world. Still, with a large mansion with a swimming-pool and ocean views in the multi-millionaires enclave of La Jolla, California, it seems crime certainly paid for him!

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Special Feature

Michael Milken The “Junk Bond” King

Born: July 4, 1946 (aged 66) in California, USA Occupation: Financier and Philanthropist Sentence: $1.1 billion in fines plus 10 years in prison (reduced to two years) Style: traded high-yield bonds (junk bonds) Michael Milken was known as the Junk Bond King due to his re-markable influence in the junk (high-yield) debt market during the 70s and 80s. Milken was, in a certain way, a visionary, seeing an opportunity to develop an entirely new and profitable area of the securities market. In fact, he earned billions over a seventeen year period. Milken redirected his company, Drexel Burnham Lambert (DBL), into the high-yield debt business — essentially pioneering the issuing of bonds to investors to take over other companies — LBO’s (Leveraged Buyouts). Before the mid-70s and 80s this was not a typical way to mount a corporate takeover with companies more generally seeking friendly mergers or all stock takeovers or cash financed acquisitions.

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“In the 80’s, his company was in fact responsible for more than 60% of the whole junk market issuance and was considered the largest investment bank in the US.”

In the 80s, his company was in fact responsible for more than 60% of the whole junk market issuance and was considered the largest investment bank in the US. DBL helped raise money for many businesses and known personalities including MGM Mirage, Mandalay Resorts, Barnes and Noble and even some of would-be president Mitt Romney’s projects. Anyone in need of money to start or make his business grow would eventually ask for Milken’s help. He could raise tens of millions literally in a matter of minutes. The growth that DBL experienced and the popularity of Milken did, however, rub up wrongly some quarters of corporate US, scaring many companies who felt they could be the target of a hostile takeover financed via DBL, and so pressed government to tighten rules regarding junk bond issues. The SEC also commenced a fierce scrutiny of Milken’s activities since 1979, but initially they couldn’t charge him. It was only after 1986 that prosecutors were able to obtain the break they needed and effectively go after Milken and his beloved DBL. Recall that it was at this time that they were using Boesky as bait; it was in fact he who implicated Milken in several insider trading transactions.

The Biggest Insider Traders of All Time

Milken was accused by the SEC of racketeering, stock manipulation and insider trading, but he denied most of the charges, especially with regards to insider trading. Prosecutors then used arguably “sharp” tactics in order to ultimately get him formally charged and sentenced. They pressured his family, threatening to charge his brother for illegal behavior and even went as far as to involve his 92 year-old grandmother.

Raj Rajaratnam

Boesky surrendered to the SEC to avoid further harassment of his family and accepted the prosecutor’s offer. He ended up paying $200 million in fines, $400 million in restitution to investors who suffered through his actions and $500 million to Drexel’s investors in a related civil lawsuit. In short, he paid out a record $1.1 billion, was barred from the security’s industry for life and also sentenced to 10 years in jail, although the sentence was later reduced to two years.

“Milken was accused by the SEC of racketeering, stock manipulation and insider trading but he denied most of the charges, especially with regards to insider trading.” After being released from jail, Milken was diagnosed with a prostate cancer and was given a very low chance of surviving it. Ever the fighter, Milken battled his cancer and survives to this day. He has built a new life as a philanthropist dedicating his time and money to medical prevention and research. The Junk Bond King became The Man Who Changed Medicine.

Born: June 15, 1957 (aged 55) in Sri Lanka Occupation: Hedge fund manager Sentence: $150 million in civil and criminal penalties plus 11 years in prison Style: traded equities allegedly on tips he received from insiders Illegal Trading haul: at least $60 million Raj Rajaratnam’s insider trading case is fresh in our memory, with his case occurring in the very recent past and receiving a large amount of media coverage as the SEC looked to send a clear message to hedge funds that they are serious about their recent crackdown against insider trading. Rajaratnam was sentenced to a record 11 years in prison even though he pleaded not guilty.

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Special Feature

“In 2008, the fund was worth $7 billion and had recorded an average return of 22.3% until it was closed and assets returned to investors in 2009.” Rajaratnam started his career as a lowly lending officer at Chase Manhattan, later joining Needham & Co. as an analyst. He quickly rose through the ranks from analyst to head of research, finally securing the top job as president. He was then given the latitude to start a hedge fund inside the company.

Raj’s success in managing the initial fund led him to create his own hedge fund company, buying out the initial fund from Needham and renaming it to Galleon. In 2008, the fund was worth $7 billion and had recorded an average return of 22.3% until it was closed and assets returned to investors in 2009. The case against Rajaratnam involved several other individuals including Anil Kumar and Rajat Gupta both of whom tipped him stock takeovers on several occasions. Prosecutors said his illegal trades amounted to at least $60 million in illegal profits and avoided losses. In one example, in 2007, his fund had a short position of 1.5 million shares in Intel, worth $23.5 million, which was quickly reversed to a long position of 1.72 million shares worth $36 million. Prosecutors claimed Rajaratnam was tipped by Rajiv Goel, an Intel insider, that the company was to release better than expected quarterly earnings.

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Other cases against Rajaratnam included a tip he supposedly received in 2008 relating to Berkshire Hathaway’s investment of $5 billion in Goldman Sachs. Prosecutors claim Rajaratnam also corrupted more than 16 individuals and used inside information in more than 20 companies over a period spanning several years since the early 90s. The case was one of the biggest ever and ended up with Rajaratnam being sentenced to a record 11 years in prison and to pay fines amounting to $150 million across civil and criminal charges. Nevertheless, he is said to have a net worth of more than $1 billion — enough to cushion him through his remaining years when he gets out of jail...

SAC Capital

Founded: 1992 in Connecticut, USA Industry: Hedge fund Insider Trading: Several former employees were implicated in insider trading Worst Scandal: $276 million in illegal profits trading pharmaceutical companies

Even though SAC Capital is not exactly an individual, we thought we’d include the company here because of the many insider trading scandals that have been coming to light in recent years within the company. SAC Capital was founded by Steven Cohen in 1992 with just $20 million of his own funds. The hedge fund company is well known and grew to manage $14 billion in assets across various different portfolios.

The Biggest Insider Traders of All Time

The company has recorded an almost unparalleled performance over the years, surpassing 30% per year on average. In fact, so great have been the returns, that SAC has been able to charge investors an unheard of 50% on those profits — way above the usual 20% that is the industry norm. Lately, however, the company has been in the spotlight, not due to the exceptional returns, but as a consequence of the SEC accusing several former company employees of insider trading and in the process casting doubt over the company’s practices used to achieve such performance.

“In fact, so great have been the returns, that SAC has been able to charge investors an unheard of 50% on those profits way above the usual 20% that is the industry norm.” Prosecutors have so far implicated five former SAC employees in insider trading and three have already buckled and confessed. Additionally, three former SAC traders have been charged with illegal trading and two have also pleaded guilty. Prosecutors have been trying, so far in vain, to connect Steven Cohen — the firm’s eponymous boss, with all of these insider trading scandals. We have covered this extensively on our blog. At the epicentre of all the cases are the Jon Horvath, Michael Steinberg and Matthew Martoma cases. Jon Horvath, a former trader at SAC’s Sigma division, passed insider information to his supervisor Michael Steinberg about Dell and Nvidia. Prosecutors claimed the company profited by a lowly $1 million in the case of Dell and just $0.4 million with NVIDIA. Jon Horvath also confessed that the company used insider information to trade in Ingram Micro, Seagate, and Sun Microsystems and, according to SEC filings, SAC had traded heavily in all those companies.

Matthew Martoma, another former SAC employee, was accused of trading on inside information that he received in two pharmaceuticals companies — Elan and Wyeth. Martoma received non-public information regarding the development of an Alzheimer’s drug by the companies Elan and Wyeth. A doctor he contacted told him about the better than expected developments in clinical trials from the drugs being developed and Martoma led SAC to buy a position size of some $700 million shares in those two companies. In July 2008, the same doctor told Mr. Martoma that some side effects has been identified during the clinical trials and which prompted SAC to sell its full position and, stupidly, to even reverse it into a short one. When the results from the trials were released to the public, the shares in Elan and Wyeth plunged 42% and 12% respectively. Total profits from this pick had been evaluated at an astounding $276 million for SAC, with Martoma earning more than $9 million in compensation benefits that year. The case is still in court and it is interesting to note that even though Martoma is no longer with the company, SAC is paying his costly legal bills.

Additional Cases The cases we have included here are just a small sample of the insider trading scandals the SEC has brought to justice. Other notable cases are that of Martha Stewart, the US based self-styled ‘lifestyle guru’, who avoided a relatively measly $46,000 in losses in the stock of ImClone Systems by trading on privileged inside information. Such a figure is nothing when compared with the monies involved with the stories relayed here, but it was given huge media coverage as a consequence of Stewart’s celebrity status. The SEC were likely using her as an example. Other cases are legion, and although we have concentrated on the US here, there are many examples within the UK. We applaud the crackdown by the authorities here at SBM and only wish the FCA would go as far as the SEC in the pursuit of these criminals that pollute the integrity of our public markets and load the dice even further against honest retail investors.

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Special Feature

Is John Paulson going to give back all his sub-prime gains on gold? When choosing a fund manager to manage your money, risk control is likely to be very definitely towards the top of the tree. If so, then we’d wager that John Paulson will likely be at the bottom of investors’ shopping lists now, as it appears he is well and truly entrenched in a bet-the-ranch style exposure to gold. Ironically, Paulson’s reputation as a hedge fund manager was built upon his measured approach and safety first strategy through what is known as risk arbitrage. ‘Risk-arb’ involves buying the stock of takeover targets whilst simultaneously selling the potential acquirer — a type of pairs trade in order to reduce what is termed “systematic” or market risk as much as possible. Paulson slowly accumulated steady profits over 10 years, but it was in 2007 that he turbo boosted his monies under management and popularity. “JP”, as he is known, made a short call on an impending US housing collapse. A call that made him a fortune in the process and placed his hedge funds well and truly at the top of the “Ivy league”. The really clever element about the subprime trade was that Paulson’s bet on so called MBS’s was just a small part of his portfolio and so if he was wrong then he would avoid a serious drawdown. The trade had what is called “asymmetric risk” in that the potential upside far outweighed the downside. In fact, the upside was some $16 billion — one of the biggest hauls in hedge fund industry, certainly over such a short timescale. It seems, however, that his greed grew to such an extent that it virtually annihilated any fear. In effect, Paulson believed he could do no wrong and was “bigger than the market”.

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JP now sits with a top heavy long stake in gold and many of the gold miners and that represents more than 25% of his portfolio. An exposure that will certainly place him at the top of the global rich league if he is right about an exponential rise in the gold price and a take out of the old highs, but that could also possibly lead to bankruptcy in the event that he is wrong... That would be some reversal of fortune. Spreadbet Magazine decided to investigate John Paulson’s holdings by looking at the so called 13-F forms that Paulson & Co and all other hedge funds are required to file and submit to the US SEC every quarter. These fillings are submitted quarterly and are made available to the general public around 40 days after the quarter ends. Through analysing the filings, although we can’t see Paulson’s portfolio in real time, it does give us a good feel for what the hedge fund is doing and what their views are on the market. Paulson’s modus operandi has switched in recent years from risk-arb to “macro” specialisation, largely due to the size of his funds under management which makes it difficult for him to generate returns without taking large bets.

Is John Paulson going to give back all his sub-prime gains on gold?

“JP” as he is known, made a short call on an impending US housing collapse. A call that made him a fortune in the process and placed his hedge funds well and truly at the top of the “Ivy league.”

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Special Feature

He is effectively forced to explore market fundamentals and take outsized positions regarding his view on those scenarios. As we have found ourselves here at SBM this year with our long GBPAUD view and gold mining stock picks in recent months, sometimes being early is painful and it can take time for the market to focus on fundamentals when it’s suffering in an environment of extreme sentiment. Paulson is also re-learning this lesson and it remains to be seen if, indeed, his view on gold is actually correct. With regards to “macro” trading, however, this style does not result in frequent portfolio turnover and so it increases the informative value of 13-F fillings to us. Paulson’s top 10 holdings represented around $9.40 billion at the end of last year — 57% of the total $16.27 billion portfolio. This is meaningful concentration in Paulson’s portfolio. The exposure to SPDR Gold Trust alone was 21.7% and to Anglogold, a senior gold miner, 5.4%. This means that total exposure to gold across his funds on these two positions alone is more than 25%, and which indicates to us that Paulson has been indexing largely the value of the whole portfolio to the gold price. One helluva bet on the yellow metal.

PAULSON - PORTFOLIO The idea behind the accumulation of both physical gold and a spread of the gold miners that led Paulson to start building a position in the first quarter of 2009 is, in fact, very simple and does have a solid rational basis behind it. With the massive cash injections the US Federal Reserve and central banks around the world have embarked upon to give their respective economies a kick-start and continued support, inflation, it is reasoned, is expected to eventually pick up. So the theory goes that gold would be the best protection against resurgent rises in prices and/or monetary debasement in extremis, as investors tend to buy gold as a safeguard against inflation.

With the FED buying essentially every bond that the US Treasury issues, it seems that investors see limited risks in investing in the stock market and, with the record-low yields offered on bonds, they are being forced to seek out alternate assets in order to generate a positive return. The final result is evident in a bullish stock market environment.

Quantitative easing has certainly been inflating stock prices. At a time when growth still isn’t collective and sustaining amongst the world’s major economies, stock markets have powered on with the US actually carving out new record highs in recent months.

Investors are looking at the past twelve year bull run in gold and scratching their heads asking why would they hold the shiny metal instead of investing in the stock market? Particularly when equities have been delivering double digit returns these last few years.

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But, when it comes to inflation, the genie’s ugly head has still to rear itself. Prices in the UK are certainly edging higher at above 3% per year, but that’s not the case in the US, Europe or Japan and so gold’s supposed fundamental pillar as a hedge against inflation is not required, yet...

Is John Paulson going to give back all his subprime gains on gold?

“Investors are looking at the past twelve year bull run in gold and scratching their heads, asking why would they hold the shiny metal instead of investing in the stock market?.”

CHART - SPDR GOLD TRUST & ANGLO GOLD 3YR PERFORMANCE At the same time, as economic data in the US improves, the likelihood of the FED continuing to inject cash into the economy is decreasing, once again eroding gold prospects. Adding to the list of negatives that are now causing consternation to investors is the reduced volume of central bank’s gold buying. What was an important demand source last year but has been sluggish this year. Moreover, Cyprus, which allegedly has been forced to sell gold to finance its bailout, now raises concerns others may follow. All these factors are most definitely not playing out the way Paulson would like and so are placing a serious threat to his portfolio.

Gold has been on a downtrend this year and has lost 13.4% in just two consecutive sessions this last week Friday 12th and Monday 15th — its largest drop over such a timescale in 30 years. The rout in gold and the mining stocks has cost Paulson billions and questions are being asked as to how much more pain he is prepared to take. On past form, quite a bit, particularly given that the majority of the money he manages is his own. That is a dangerous cocktail when mixed with hubris.

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Special Feature

PAULSON PORTFOLIO LOSSES In just two sessions alone in April it was estimated that Paulson lost more than $500 million — over half of this year’s accumulated losses on two holdings — Anglogold and the SPDR. It is, of course, possible that Paulson changed his mind during 1Q 2013 and sold Anglogold and the SPDR Gold fund, but that’s unlikely. We estimate his losses on those two assets alone of over $1bn so far this year. We have only analysed his top 10 holdings, but, given that it represents more than 50% of his portfolio, it is enough for our purposes to estimate his accumulated profits and losses for the year. Highlighting Paulson’s loss may seem unfair as he does have some nice profits accumulated on Life Technologies and Sprint.

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In fact, he is in the green on 7 out of 10 of his top holdings. But the problem relates to risk management. The call on gold is simply too large and may undermine risk management as we see in the above chart evaluating the effects of the gold crash. Paulson has simply lost too much over just two days. 2013 is shaping up to be his 3rd consecutive annus horribilus — largely due to his “all in” bet on gold.

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Special Feature

RuSPETRo TiME FoR A FRESh START? Regular readers might think me something of a glutton for punishment in revisiting Siberian oil explorer Ruspetro. After including the company in our Dream Oil Explorers portfolio late last summer, from that initial trade idea at 104p the shares promptly crashed to a low of just 13.5p in mid March as the market began to question the very survival of the company...

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Ruspetro - Time for a fresh start?

It does seem, however, that management led by Don Wolcott have taken on board investor criticisms in recent months with a more open approach to their shareholders being seen and, to our surprise, given the indifferent nature of many companies to their smaller shareholders, a willingness to engage with this oft forgotten base. One of the purposes of this article is in fact to address the company’s retail shareholders in a wider forum. So, with more confident noises coming out of the company in recent weeks regarding the likelihood of the loan negotiations with Sberbank (and for which news could come any day), a swathe of substantial and collective directors buying of the stock and a material rebound in the stock price, is now the time to give the management the benefit of the doubt?

The failure of management to conclude the issuance of a new tranche of loan capital to reduce their exposure to primary capital provider Sberbank together with the non conversion of shares from some $62m of loan capital provided by material shareholder Limolines, and which was contingent on the senior loan note offering, certainly spooked investors. At its nadir at 13.5p, the company was amazingly trading at a 2P/Boe enterprise value (proven and probable reserves value per barrel of oil equivalent) of less than 20c — the cheapest in the upstream oil universe that we are aware of. Indeed, the Russian oil upstream sector average is $1.60 boe — highlighting the value disjoint that still remains present in the stock. Perhaps the main catalyst for the severe shakedown in the stock during the first quarter of 2013 was the afterhours announcement late on Friday 4th January in which the company revealed that the hoped for 10,000 bopd production that they had been targeting was not going to happen in the near term. Releasing news late on a Friday night is never advisable and only served to cause more consternation amongst their minority shareholders and some analysts and commentators to actually question their integrity. The fact is the company had an immediate duty to disclose its year-end production rate because of its materiality and was only able to confirm the figures by the end of that day.

One thing is for sure, should the company actually manage over the next few years to produce 30-40,000 boepd from their Siberian fields and the oil price remain around current levels, then the current enterprise value will look extremely cheap. In the near term, however, the saving grace for the company has been the signing of a gas sales agreement with a regional, internationally owned electricity generator. The value of the agreement is some $700m and cash flows will commence in 2015 and although the plant will need financing, the increased cash flows will enhance the company’s ability to obtain credit. The gas monetisation directions is a new strategy for the company, but one that will help the balance sheet through the immediacy of sales receipts whilst they continue with the pursuit of efficient extraction of oil condensate from the hard to drill fields.

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Special Feature

With 1.8bn barrels of 2P reserves, the value gap is immense as the diagram below clearly illustrates. Ruspetro’s current enterprise value of $550m compares with a peer group comparable proven (1p) value of $ and peer group comparable for 2P reserves of over $10bn. If management are ultimately successful in getting the black stuff to flow freely, then one can see just what type of returns are potentially available to shareholders.

VALUE DISCREPANCY CHART At their April 14 analyst presentation, management laid out a clear plan to close the market v fundamental gap which hinges around 3 steps as relayed in the slide below and which is essentially the renegotiation of the Sberbank loan with additional financing measures which may involve equity issuance, fast tracking of the gas off-take sales, and use of these proceeds to finance their crude oil development program.


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Ruspetro - Time for a fresh start?

At the current stock price of 40p (time of writing), house broker BoA Merrill’s have the stock on 5 times 2014 EV:EBITDA and just over 3 times for 2015, although these forecasts do not account for any increase in debt (so expanding the EV side) nor gas sales receipts (on the EBITDA side). They have a price target of 132p. One particularly interesting element of the recent slew of directors purchasing, to us, was the announcement of early April which, it seems, confused some retail investors. In a nutshell, it seems there was a legacy call option (the right to buy stock) that was written by Don Wolcott to Alexander Chistyakov before the IPO with an equivalent exercise price of around 83p per share (at the prevailing FX rate at the time). The call option pertained to 50% of Mr Wolcott’s stock and it was, in fact, exercised in October of 2012, but took some 6 months to complete due to the closed period the company was in. Chistyakov bought 11.43m shares from Wolcott for the sum of $15.3m. There are two ways to read the announcement: one, that Mr Wolcott’s purchasing of a further circa 2m shares does not replace anywhere near the stock he sold, or that alternately Mr Chistyakov saw value in the stock at 83p and was so confident in the future of the company that he was prepared to part with $15.3m to buy this stock. In any event, the additional purchasing by other board members than Chistyakov and Don Wolcott is a good sign, we believe. It is generally always worth paying heed to such collective shows of faith, and this we touch upon in our questions below to management.

A. Yes, we do expect to reach and surpass 10,000 boepd. Our March average production rate was 6,350 boepd of which 1,100 boepd was condensate. We are also producing 9,000 boepd of gas which is not sold. At this production level the business is operating cash flow positive. We do not have a target year-end production rate for 2013 but rather see 2013 as a year in which we will put in motion several strategic directions for the company: firstly, renegotiating our loan from Sberbank to give us time to develop. Secondly, developing and monetizing our gas business and thirdly to examine strategic partnerships at the asset level to develop our crude oil production. Selling gas will give the business the cash flow required to accelerate drilling and build crude oil production. Q. I see that there has been a “vote of confidence” in the company recently with some additional directors share purchasing; is it fair for your shareholders to conclude that you perceive the worst is now behind the company? A. We are pursuing a strategy of strategic development at the asset level. This is aimed at closing the gap between the enterprise value of the ccompany and the ccompany’s fundamental value. Therefore the ccompany is doing everything it can to restore and build value for shareholders. Q. What do you say to those detractors who state that if the majors could not get the oil out of the difficult to drill fields in the 80s, then why will Ruspetro be more successful? A. Technology has moved on significantly since then — witness the shale oil boom in the US. We have a top team of geologists and petrochemical engineers who are using the latest technology to develop the field. Q. Can you give us a 1 and 3 year major target thresholds for the company, for example debt paydown, production levels etc?

I caught up with Don Wolcott, CEO, and posed the following questions to him: Q. Do you still expect to achieve the 10k bopd production target that was missed last year and, if so, what timescale are you looking at?

A. Restructure Sberbank debt — H1 2013 Develop Gas monetisation – on-going Strategic partnerships to develop crude oil on-going Appraisal drilling in the crude and gas/condensate fields – on-going

May 2013

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Special Feature

Technical view Taking a look at the current technical position, we can see that, at the time of writing, the stock is sat squarely on the downtrend around 45p. Volume in recent weeks has been high and so is confirmatory of the move higher. Our favourite medium term moving averages — the exponential 19 and 38 days — have both turned up and are now just crossing back through each other to the upside. Finally, the MACD measure has crossed back through the zero line which is typically a bullish harbinger.


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A positive medium term technical picture is thus painted, with only a weekly close back below 30p negating this. Potential upside targets are the gaps at 50p initially and then 80p. News on the refinancing could be the catalyst that pushes them up there.

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Trade Up

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Editorial Contributor

Zak Mir Interviews Paul Rodriguez of Think Trading

Paul Rodriguez is one of the UK’s most qualified trading educators running courses at the City University Business School in the 1990s which were widely attended by City professionals. He also worked as a technical analyst and trader for Natwest during the 90s and in 1999 set up to teach a broader range of people. Working in partnership with the Investors’ Chronicle in the early 2000s he was a regular guest on Bloomberg TV, CNBC and Reuters Financial TV. He is currently working actively with who are recruiting traders and expanding globally.


Paul, I know you from over a decade ago when you were involved with Think Trading. What was the idea behind that, and how is that going now?


Think Trading was set up in 1999 following the work I was doing with City University, lecturing there and running a 10 week evening course in Technical Analysis. The course was attended by a lot of City professionals, as well as a lot of private investors interested in trading their own money via the Internet ahead of what turned out to be the ‘Dotcom Bubble’. This I could see building and so I set up Think Trading primarily to try and educate anyone interested in getting into the financial markets, but who did not know where to start. The idea was also to introduce people to technical analysis as a trading tool as opposed to the more typical economics and fundamental analysis.

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But this is all a long time ago. Technical Analysis was not exactly the pillar of the financial markets that it is now — if indeed it is now! It was still classed as being in the horoscopes / tea leaves division at that time, do you not agree?


Interestingly, back then it was actually outside the UK, in places like India where there was a far greater acceptance of the subject than here at home. Although in the U.S. it had already achieved acceptance, in the UK it was very much the poor cousin to economics / fundamental analysis. I think that this state of affairs continued until the Financial Crisis of 2007-2008 when there was such a massive failure of conventional economics and analysis to see the crisis coming. It is typical of a bull market that economics is generally relied upon because you can’t see its flaws at the time. It is only when the markets fall that people scramble for alternative explanations and analysis.

Zak Mir Interviews - Paul Rodriguez

“In Technical Analysis you have a method that works in both bull and bear markets, but which seems to receive greater credibility in bear markets - prime example being the gold market at the moment which looks to be in the early stages of a bear market.” In Technical Analysis you have a method that works in both bull and bear markets, but which seems to receive greater credibility in bear markets — a prime example being the gold market at the moment which looks to be in the early stages of a bear market.

ZM: Going back one step, how did you get into



I got into it through empirical study about the correct way to learn and trade the markets. I started out trading with a friend of mine in equities, with very large positions in the early 1990s — hoping they would go up and we could get out, and trying to hold on when they went against us. I learnt the hard way that this was not the way to make money; it was the way to lose. So from there I realised I needed to learn to analyse financial markets. By reading about TA and testing the news flow to see whether these stories / reports on companies actually had any bearing on the share price. I found that in many of these exercises that I could predict price action more successfully from technicals than from reading news stories that seemed created to fit what the markets have done and not the other way around. News stories may be ‘correct’ in their own right, but, as far as trading is concerned, they tend to be reactionary rather than predictive. TA seemed to have a greater precision as far as trading and being predictive was concerned. For instance, with a chart you may be wrong — but at least you know where you are wrong. If you choose to ignore that signal, that is down to you. With fundamentals there are things you cannot know about. For instance, with Enron it was not possible to know what was going on at that company, and I had people coming up to me and saying what a great buy it was. I was looking at the chart and saying I can’t tell you what is wrong with the company, however, what I can say is that it is going down. TA can keep you out of a very dangerous market. We don’t need to know why because sometimes you can’t know what the fundamentals are.

It is from there, off the back of all the studying and research I have done, which revealed to me the framework that TA can provide for successful trading.


One of the issues I face and what is evident all around us now is cynicism regarding he who ‘advises’ investors and just what their money making credentials are. How do you address this issue: analysing the markets versus being able to trade the markets successfully? In footballing terms would you judge Alex Ferguson’s likely ability as a manager from his playing abilities, or Wayne Rooney’s potential as a manager from his football skills?


Any good trader needs to be a combination of a good trader and a good analyst. There are times when you can look at a situation objectively as an analyst and you can feed that to a trader. When I worked for Natwest and Lloyds it was as a technical analyst advising traders. I could look at a chart and say that there was going to be a breakout. The trader would then make the decision as to whether to buy or sell, and they would manage the position from there. Splitting the two roles was useful. You need the analyst to have the objective view and you need the trader to take that position and manage the risk.

“Any good trader needs to be a combination of a good trader and a good analyst.” One of the things I can say, when it comes to trading, is people can be prevented from losing money through education. There is also the aspect of when someone like the Governor of the Bank of England also provides an opinion on the markets, but who also does not necessarily trade. Does that mean he would be good at managing the position? Probably not.

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Editorial Contributor

In contrast, someone who runs a big position in the market and is good at managing it, say at an FX company, may not have any predictive ability. So there are different roles within the City.


Is there is problem if someone who is teaching you to trade is not a trader, or is not able to trade?


To trade for yourself you have to ask, what are your expectations? If you want to trade your own money, you have to have a lot of capital as expectations of how much money you are going to make are related to how much capital you have. Let’s say that you want to make 10% a year and that you have £50,000; you are not going to be able to live off that. But 10% a year for a fund manager is a great return if achieved year in, year out.

“Let’s say that you want to make 10% a year, and that you have £50,000, you are not going to be able to live off that. But 10% a year for a fund manager is a great return if achieved year in, year out.” If you go into the market without education there is of course a strong chance that you will lose in the end, even if you initially succeed. Therefore, being taught the things to look out for - you can see the risks you should try and avoid - are important. What someone is teaching you about the markets – whether they are themselves successful or not, are things that they would perhaps have lost money on in order to find out. But at the same time such new traders are very often not prepared to spend money to avoid such losses.


How does a ‘would be’ trader decide who is the best educator, there are so many out there?

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What I would be looking from a trainer is to seek out those who have been trained previously and the feedback. Clearly, it is difficult to know unless you have been on a course first.


But some courses cost as much as £1,000 a day. This can be an expensive process. It is boring to repeat this, how do you solve this? I haven’t actually cracked this myself.


There are a lot of companies that have emerged to soak up the higher number of people who are looking for a career change, people both from the City and outside. The first thing I do is to try and dissuade people from the “Oh, I’ve always fancied being a trader” type whim. The reality can be sitting in front of a computer all day, isolated and with their life ticking away. It’s not what they expected it to be. Even if you don’t spend all day trading, it can be all consuming which, if you love it, is great. But, there is a more romantic image associated with trading that, to be fair, is paralleled in many aspects of life and other businesses. If you enjoy this concept, then fine. You could be successful, but that is not normally the initial motivation by new traders.


What about longer term strategies, a fund manager’s style versus a day trader’s?


You still need discipline and support. In fact, at the moment I am working with professional traders and university graduates who wish to have a career in this area. This is a much better approach.


So you provide an academic type framework?


Yes, providing capital management support, experience, and a structure with longer term support.


Much in the same way that it takes years to be a doctor or lawyer? Indeed, isn’t that the problem with trading as a profession, that you can’t feasibly do it from home on day one? Rather like it would be ridiculous to conceive a surgeon or rocket scientist to crack on within a few weeks?

Zak Mir Interviews - Paul Rodriguez


With trading, the barriers to entry are very low — and that is the problem why so many fail. But, with the internet, there is usefully a lot of information out there. Working through it and filtering out what is important is a big task. This can be taught to save the beginner time. When you first start out you don’t instinctively know what the important issues are.

“One of my favourite expressions is as follows: Eventually, everything happens eventually .” One of the biggest barriers in trading are the dangerous assumptions people make, such as, “the Fed will always save the market”, “house prices will always go up”, “you can’t go wrong with gold”, “this time it is different, you cannot value Apple (AAPL) like a normal company” etc. The markets will show all these assumptions to be false eventually. But at the time, many people are holding onto such positions that the ‘professionals’ would not be. One of my favourite expressions is as follows: Eventually, everything happens eventually. You will see hyperinflation, deflation, interest rates near zero, interest rates over 20% / 30%, governments go bust and so on. I am not saying this is about to happen, but an experienced trader knows that all of this can be part of a long term cycle. Whether it is a low percentage or not, we know these things are a possibility, and understanding this is the first step to understanding the markets. Low probability events can be much higher than you think.


The difference now may be that you have boom and bust occurring at the same time in different geographies. Before, the world economy tended to move in unison, with the Great Depression being experienced almost everywhere — a point also highlighted by the aftermath of the Oil Crisis in 1973 and the 2003 - 2007 Asset Bubble. Now, we have not only the divergence between emerging and “developed” economies, but also, say, a boom in prime London real estate and a bust in the same asset class in the EU Periphery.


Over the past 10 years we saw a synchronisation of the markets which has started to break down. And you normally see that kind of phenomenon when a bull market is false, with the example of London house prices going up and everywhere else in the UK going down. This fragmentation makes you think that the prevailing upward trend is not as strong as it seems. For instance, we are seeing the same in the financial markets now with the Dow at a new all time high, but the Nasdaq not yet there. Tech may follow, we shall see, but all the indications are that this could be a false breakout in equities. Whilst you can’t short the market here, you should be dancing near the door in my opinion. The market here reminds me very much of the real estate market in 2003-2004 — where the trend was going up very aggressively. Could you short it? No. But you could not trust it either. The after affects are still being felt now of course. Saying that it just does not feel right is not very scientific, however, but the warning signs are there and your trading strategy has to be nimble in this environment.

“Whilst you can’t short the market here, you should be dancing near the door in my opinion.” I think we are going to see a very interesting 2013. My personal view is that we could be very close to another 2007 – 2008 style collapse. The lights are flashing amber, and we are waiting on red. The situation is interesting as I think it will be driven by interest rates. The second the market senses rates are going to rise you are really going to see whether we have been looking at a sustainable rally — one that can absorb higher interest rates. Time will tell.

May 2013

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School Corner

school corner

On Balance Volume Explained by Thierry Laduguie of e-yield On Balance Volume (OBV) is an indicator that essentially measures whether volume is flowing in or out of a security, this information is used to confirm the trend. The OBV measure relates volume to price change and its purpose is to identify buying and selling pressure. The indicator is plotted as a line at the bottom of a price chart with the line being used to confirm the price trend. When the OBV line rises it indicates accumulation and when the line declines it indicates distribution.

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On Balance Volume Explained

The OBV was developed by Joseph Granville who noted that standard volume bars plotted at the bottom of a price chart don’t tell the analyst which way the volume is flowing. He developed the OBV to makes it easier to follow the volume trend and the price trend. The construction of OBV is simple. The total volume for the day is assigned a plus or minus value depending on whether prices close higher or lower for the day. A running cumulative total is then maintained by adding or subtracting each day’s volume based on the day’s close. If today’s close is greater than yesterday’s close then: OBV = Yesterday’s OBV + today’s volume If today’s close is less than yesterday’s close then: OBV = Yesterday’s OBV – today’s volume If today’s close is equal to yesterday’s close then: OBV = Yesterday’s OBV


FTSE OBV CHART The rising OBV line at the bottom of the FTSE 100 daily chart during January-February indicates that the uptrend can be trusted. Note that when the FTSE 100 went sideways from 30 January to 26 February the OBV line continued to rise, indicating accumulation of the market by traders. The general rule is that the OBV line should rise and fall in line with prices. When the FTSE 100 declined from 12 March, the OBV line declined too, and so this downtrend could be trusted too. As long as the OBV line continues to decline we can expect lower prices. The basic assumption is that OBV changes precede price changes. The theory is that smart money can be seen flowing into the security by a rising OBV, as seen on the above chart. During the period from 30 January to 26 February the smart money was moving into stocks; the FTSE 100 did not make any progress but the OBV did. As we can see, the uptrend in prices resumed after 26 February.

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School Corner

Divergence Sometimes the OBV can warn the trader of a potential change in trend. This occurs when prices are making new highs, but not the OBV (or when prices are making new lows, but the OBV is higher). This is called a divergence. In an uptrend the divergence is a warning that the smart money is moving out of stocks while prices are still making new highs. Here is an example:

FTSE DIVERGENCE CHART Shares in BHP Billiton made a new high in February, but the OBV failed to move above its previous high set in December 2012. This bearish divergence was a warning that the trend was changing from up to down. The smart money was moving out of BHP Billiton while prices were still rising. As you would expect in this situation, the trend turned down and the stock is now making new lows. You can see how the OBV indicator is a good measure of investors’ conviction in a stock or other instrument — it allows you to see in graphical form the accumulation of distribution of that particular instrument. When coupled with other indicators such as RSI or ROC it is a particularly good confirmatory technical signal.

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36 | | May 2013










“The best interpretion of the Elliott Wave Theory in the UK”

May 2013

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Special Feature

Where to next for Apple Shareholders? One of the most anticipated moments of the current earnings’ season occurred on the 23rd April after the close of the US equity market. The behemoth that is Apple unveiled its Q2 earnings... After rising from a pre-iPhone level of $120 all the way through to a record high, seen last year, of a smidge over $705, Apple shares have since been in a seemingly interminable dive this last eight months, plumbing a low of $385 in recent days.

The capital distribution ramp-up is the company effectively admitting that they are unable to deploy their large cash reserves in a manner that would generate higher rates of returns than the company itself will at the current equity valuation.

Investors have become seriously worried, it seems, with the increasing competition the company is facing, in particular from Samsung, together with the absence of new and innovative products coming from the company’s pipeline.

The buyback of stock commitment was increased by a whopping $50bn, such that by 2015 they expect to have purchased back almost $6bn of their own stock. With a market cap of $377bn that is almost 20% of their own stock that they expect to buy back. Point number one for bulls of the stock: that magnitude of stock purchasing, together with a rising book value (a virtuous rise could actually occur as the Treasury stock of their own shares will increase the book value if the stock rises) as the cash pile continues to rise, is likely to act as a brake on any material slide further in the stock price. This is setting up a good risk:reward trade for bulls.

Margin pressures continue

The post results conference call did however offer some hope to bulls in revealing a substantial ramping up of the company’s capital distribution plans — something the likes of David Einhorn and other investors have been calling for from Tim Cook for some time.

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The negative from the results, even though Apple modestly beat earnings expectations with a $10.09c EPS figure delivery on revenue of $43.60 billion, was that they also revealed, although widely expected, the first profit decline in more than a decade. With no new products in the company’s immediate pipelines, and during the last quarter no new device upgrades, it is not surprising that sales comparables slowed. This was all too evident in terms of gross margins with a huge decline from an enviable 47.4% in Q2 2012 to the current 37.5% in Q2 2013. According to Peter Oppenheimer, the company’s CFO, the slide in gross margins will continue over the next quarter which he has attributed to the “new product mix”.

Where to next for Apple Shareholders?

“The buyback of stock commitment was increased by a whopping $50bn, such that by 2015 they expect to have purchased back almost $6bn of their own stock. With a market cap of $377bn that is almost 20% of their own stock that they expect to buy back.�

May 2013

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Special Feature

iPhone sales’ importance remains

How does Apple get its mojo back?

IPhone sales hit 37.4 million units during Q2 — a rise from 35.5 million over the same period of last year — whilst iPad sales rose from 11.9 million to 19.5 million which surprised some analysts who had not expected that particular product’s share of revenues to grow so quickly to this extent. Nevertheless, the iPhone continues to dominate sales and is definitely the most important product for the company. Sure, the iPad is becoming more important with time as the tablet market continues to grow, but this is at the cost of the notebook market which will likely decline further and so crimp Mac sales.

In terms of next quarter’s guidance, Apple forecast $33.5 - $35.5 billion in revenue — quite a reduction from prior consensus estimates of $38.25 billion. This not only shows the difficulties the company currently faces in terms of competition, but also that no new “killer” product will be introduced any time soon.

Apple had been growing more than the competition for many years. Back in 2007 when the iPhone debuted it was a huge success and indeed was considered one of most important and valuable innovations of the last few decades. Not long after that, Apple introduced the iPad in 2010 — another big success. Its innovative stance gave Apple an edge over its competition which at that time was almost none.

Further, the market for smart phones, and to a lesser degree tablets, is now entering the first phase of the maturation stage — ‘first mover’ supernormal margins are being eroded away and this is precisely the dynamic that has been pressuring the Apple share price over the last eight months as the market begins to take this on board. Apple may need to change its strategy to regain market share.

“The company’s top line revenue growth seemed to rise exponentially as no one could come close to them for consumer appeal. Then Samsung’s resurgence happened.” The company’s top line revenue growth seemed to rise exponentially as no one could come close to them for consumer appeal. Then Samsung’s resurgence happened. Before they began eating Apple’s lunch, Apple’s gross margins were in fact higher than 50%, translating into a very healthy profitability and almost untouchable return on investment and equity. Unfortunately, one year in the tech industry is like ten years in others... Six years after the introduction of the iPhone, the product line hasn’t changed that much. The iPhone is lighter, faster and has a long-lasting battery for sure, but it’s pretty much the same product, and each re-edition of it will probably have less and less impact on the public and thus on the profits.

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The company’s bitter rivals at Samsung are offering cheaper products with increasing numbers of features and some fear that Apple’s inertia may turn the company into a Nokia. We expect, however, that a cheaper iPhone specifically for the Chinese market will arrest the EPS decline as although such a product will retail at a lower margin than its existing iPhone, it will bring a whole new mass of sales from such a large consumer market. I also wouldn’t bet against Cook or Ives (widely seen as Job’s protégé) actually having a “rabbit” in the hat to silence his critics — a new and innovative product that captures the public’s imagination. With 72,000 employees brainpower at his disposal and $150bn he certainly has the resources.

Where to next for Apple Shareholders?


Cash Disbursement and Capital Allocation After months of heated debate about Apple’s capital allocation strategy and, at one point, even a lawsuit from hedge fund manager David Einhorn over the waiving of a particular resolution at the shareholder meeting, Cook finally relented and agreed to return a substantial portion of the company’s cash reserves. The company also unveiled an increase in its quarterly dividend of 15% to $3.05. At the current share price of $406, the dividend yield is around 3.0% — not phenomenally high, but certainly putting the stock in the top quartile of S&P500 constituents, and of a sufficient level that it is likely to attract the attention of income funds now. The expanded disbursements are definitely welcomed by investors, and it is a signal that the company is changing to a more shareholder-friendly stance. Adding to these two capital redistribution measures we also had the announcement that the company will also borrow money in order to return excess cash to shareholders.

“At the current share price of $406, the dividend yield is around 3.0% — not phenomenally high, but certainly putting the stock in the top quartile of S&P500 constituents, and of a sufficient level that it is likely to attract the attention of income funds now.” This is a positive from two perspectives. Firstly, it avoids disturbing the tax advantage the company has with a large proportion of its cash pile held offshore and that would trigger a tax charge in the event of its repatriation.

May 2013

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Special Feature

Secondly, through the use of debt, this is also tax chargeable and therefore is an efficient way to reduce the tax burden further, particularly given the likely low interest rate the market will demand. Good old fashioned efficient capital restructuring is at play here.

Pricing Apple Only several months ago when Apple dropped to $600 from its all-time high of $705, almost everyone thought it a buying opportunity.


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Then the stock fell to $500, then $400 and now, we get the sense that going into the last set of results, many had finally given up on the stock after the drubbing of the last eight months. Exactly what a contrarian is looking for. Take a look at the table below which shows Apple compared to some of its peers and the S&P and Nasdaq index. Although the PE figures are not there for the indices, the S&P 500 is trading on around 16 times and the Nasdaq around 17 times. Even on the new pared down profits and EPS estimates for Apple, the stock now trades for almost a 50% discount and it offers a higher dividend yield.

Where to next for Apple Shareholders

So, after a drop of around 42%, and with revenues still growing, the forward P/E ratio on the reduced estimates with a likely EPS delivery for FY 2013 of $42 is around 9.6 times. Strip out the cash and the stock’s on a little over 6 times earnings and a major discount to Google and Microsoft. With the new revenue growth profile we would say that an ex cash P/E of around 8 times is about correct and which would put Apple at a ‘fair’ stock price of around $500.

“Strip out the cash and the stock’s on a little over 6 times earnings and a major discount to Google and Microsoft.”

Take a look also at the table below which illustrates Apple’s stock price relative to its book value over the last 30 years. You will see that we are back to trading around 3 times book value which is in fact below its average over this long period. For a tech business that is maturing, this is about right, but, in Apple’s case, so prodigious is its cash generation that book value will likely rise around $25-30bn p.a. for the next 2-3 years. And so, with a rising dividend yield too, this will act as a material support for the share price. Should Apple “pull another rabbit out of the hat” or the “Chinese sales story” really deliver, then the stock could push on toward a good premium to book and back into the double digits PE field.


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Special Feature

So, if we consider the current market cap of $381 billion (at time of writing) and subtract its current cash & equivalents from it, we are left with a “premium” of $236 billion. If the company continues to generate $30bn of free cash p.a. then in less than eight years a stock purchaser today would have a business entirely backed by cash and so the IP, goodwill, plant etc entirely for free.


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With all the above in mind and considering the “kitchen sink” job that was done in the last quarter’s results, we think Apple shares present a good entry opportunity or alternately a smart “pairs” trading of an equal short on the Nasdaq or S&P 500 relative to a long position in the stock as the chart here shows the disconnect that has opened against them both over the last year.

The US government’s fiscal difficulties continue. Do you: a) Wonder why they don’t consolidate their debts into one easy monthly payment b) Sell the Wall Street index in anticipation of a stock market crash

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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 four 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 i’M FoREvER BLoWiNg BuBBLES... is the recent, out-of-the-blue crash in gold the start of a scary new trend? Following the yellow metal’s 17 per cent collapse in just five days, some traders are wondering whether other assets might be in for the same. The theory is that we now live in an age of bubbles, where many markets have become artificially inflated by all the central-bank money being pumped into the financial system. While the bursting of a bubble typically causes misery to buy-and-hold investors, it’s a great opportunity for short-term traders. Bubble-moves — both up and down — can deliver super-charged profits to those bold enough to get involved. Because of the speed of these moves — and particularly the reversals — timing your entries and exits is even more important than usual however. With this in mind, it makes sense to look at some leading financial markets and ask whether they are in a bubble and what opportunities there may be now and in the future. As well as gold, US stocks and UK government bonds are probably most often mentioned as being in a bubble.

gold Having soared by 650% between July 1999 and September 2011, gold appeared to many to have gone too far, too fast. The yellow metal is an obvious candidate to suffer a speculative bubble: it bears no income, making it very hard to value. The range of opinions out there reflects this. Following the recent plunge to $1321, one enthusiast said it should head for $10,000 in the years ahead, while a cynic wrote that $800 represented “fair value.” How’s that for divergent views?

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Dominic Picarda’s Technical Take

CHART - GOLD Fortunately, we do know what a genuine mania in gold looks like. The 1970’s saw a rise of 2346% — three times greater than that between 1999 and 2011. In the final eight months of the craze alone it more than trebled, a near-vertical ascent on the price-chart. And it only peaked once the age of loose money came to an end. Today’s era of ample liquidity has farther to run, by contrast. in light of this, gold’s sell-off should be regarded as a buying opportunity in the making, rather than the bursting of a bubble. A return through the 200-day moving average will likely mark a good moment for longer-term traders to buy in once more, in advance of major gains back to the all-time highs of $1925. For the more active traders, meanwhile, I’d be shorting failed rallies to the falling 21-day exponential moving average. Drops to $1257 and $1148 are entirely possible.

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Editorial Contributor

S&P 500 It is hard not to be impressed by the S&P’s performance in 2013 so far. The world’s most important stock market recently hit a new all-time high of 1597, up 14 per cent on where it was at the start of 2013. This does not seem wholly justified given the fundamentals. The US economy and many big corporations are showing signs of slowing growth, while Wall Street is hardly cheap. At 1554, the S&P trades on around 22 times its average earnings for the last ten years, which is certainly high by past standards.

CHART - S&P 500 What is driving the S&P upwards despite the dodgy outlook is cheap money? Since late 2008, US stocks have tended to surge when the Federal Reserve has been pumping money into the system, and have retreated whenever it has stopped doing so. A market where price gains are powered by investors buying in expectation of further increases based on monetary manipulation is clearly at risk of becoming a bubble. For as long as the Fed is pumping liquidity into the system, i would be seeking long positions in the S&P. A cluster of interesting targets exist up at around 1674. Rallies from around the 13-day exponential moving average make obvious entry-points. I would begin to get nervous about a major market sell-off once the 10-year earnings multiple gets above 25, and extremely nervous once the Fed starts withdrawing stimulus.

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Dominic Picarda’s Technical Take

UK 10-year gilt Government bonds in Britain and across much of the developed world have been in a bull market since the start of the 1980s. This fantastic boom has gone on for much longer than almost anyone could have predicted, with state borrowing costs hitting record lows in recent times as a result. The yield on the 10-year gilt — the main UK long-term government bond — stands at 1.67%, having already reached an all-time low of 1.38% last June.

CHART - UK 10-YEAR GILT Over the past century, and more, very low yields have twice given way to major bear markets in bonds. I expect the same to happen again this time round. The UK authorities have little choice but to inflate away the giant debts amassed by years of chronic overspending and the more recent bank bailouts. Inflation is deeply toxic for government bonds, and indeed the yield on UK gilts is already well below the rate of British consumer price inflation. When the bond bubble bursts, the moves could be sudden and dramatic, with prices dropping hard and yields spiking — exactly as we saw in Japan recently when the QE programs were ramped up dramatically. If the 10-year yield got above its 21-month EMA and that line were rising, I would be aggressively looking to go short. For now, I would not fight the trend, instead seeking to ride the end of the bond mania by going long of the 10-year gilt future when the yield reverses lower from its 55-day EMA.

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Editorial Contributor


april TRADING DIARY “To have and to hold from this day till death do us part...” etc. is what many of you might have said at one point, yes? And many of you have also probably broken that promise. You held someone else, didn’t you; you broke that vow, didn’t you..? You mean son of a... Anyhow... just where is this somewhat cumbersome and possibly irritating start to this month’s SBM column leading me? (It’s already irritated me and I’m the one writing it — time to visit the therapist!).

Shares in the end aren’t there to be held till death do you part. However, confusingly, I am also going to argue you might want to marry the odd one for quite some time before cruelly ditching them for a younger sexy model.

Well. The now labour-some point I want to make is this: you’re not marrying your stocks and falling in and out of love with them all the time. I’ve met so many traders who marry a share. They nearly always own it, moan about it, love it, hate it. Bitch about it to their mates... Told you. Just like a marriage!

So here are some shares I am currently involved with, either married to, having a fling with, or even just starting out on the road to potential happiness...

They watch it all the time, try to play it, usually maintain a holding. It’s usually bad news... Best to get divorced, have done with it, move right along.

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One share I am married to is Telecom Plus (TEP), very happily married for many years. Since it was 18p, actually, and it’s now 11 quid. That’s right 11 quid! We had our ups and downs, but I have stayed mainly faithful and boy has it paid off. It’s made me around £500,000. Then the dividends too, over the years. Probably £50,000 on those. That’s what I call a loving marriage! And it just gradually goes up over time. We get along well. I never moan about it. I’m staying in the marriage till it does something really bad to upset me, but I can’t see a major row on the horizon and expect that there is possibly at least another five years of our union to run.

Robbie Burn’s Trading Diary

I’ve also been married for some time (since 2009) to Dialight (DIA). From 150 to a tenner. Again, nothing there yet to make me think of a divorce. But if it comes up with anything bad, I am so out. Potential new marriage: Porvair (PRV) – one I’ve held for some time and keep adding as it goes up. Lovely trading statement this month. I am beginning to think I’ll be with this one for some time to come too. An ‘in and out’ thing (‘scuse the intimation!): Kentz – A great buy around 360s/70s, a great take profit around 430s/40s. What’s not to like about a predicable trading range? And perfect for a nice rolling spreadbet — it does take its time to do it though, the lazy thing. A new affair: London Capital Group (LCG) has new management and I’ve bought some in the low 30s. Directors have been buying and it trades under its net cash. If the new boys and girls can change things around, it wouldn’t take too much to see it into profit; could be a nice tasty fling for me.

Bid prospects too, further down the line. Probably will only end up as a quick fling, although you never know. Shiny and New: (Touched for the very first time) Filtronic. (FTC) Really sexy one. 4G. See, told you... 4G !!! Wow!! Yeah I haven’t a clue what 4G is either, but who cares? Great trading statement — in at 16p, and the 30s, I was out around 69 and back in at 53. That is it. I’m not married to this magazine plus I only get paid in two nice meals a year (editor note — expensive ones!). So I don’t see why I should write anymore this month. I’m out, where are the divorce papers?! PS. A final tip: the one song you should never ever consider as your first dance at your wedding: “What’s the sense in sharing this one and only life, ending up just another lost and lonely wife, you’ll count up the years and they will be full of tears...” PPS. I have not had a row with the wife. (Well a minor one, but we made up).

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Editorial Contributor

Tom Winnifrith’s Conviction Buy of the month Entertainment One @ 184p

The esteemed editor of this publication wishes me to write about a resource stock. No can do. Both oil and mining stocks are right now about as popular as the guests at a Radio 1 1970s reunion being held at the local primary school. There is no rush to buy into oil or mining stocks and I’d rather look smarter by buying the quality plays in a few months’ time.

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Tom Winnifrith’s Conviction Buy

And so I am drawn instead to a stock that my pal Mark Slater owns in his funds and which he explained the merits of in his presentation at the UK Investor Show on April 13th. In case you missed his talk, the slides and a video of it can be found at — the stock in question is Entertainment one (LSE:ETo) The shares traded at more than 200p into 2012 as the company announced it was “considering its strategic options, which may include a sale of the company in response to interest it has received from various parties”, but fell back when it later announced that it had concluded that “various proposals” for all or parts of the group “do not adequately reflect the company’s value”. Despite good progress subsequently, including “a key strategic” acquisition, the shares currently trade at 184p mid. The company is a leading independent entertainment group, which acquires, produces and distributes films, television programming and music as well as associated merchandising and licensing, internationally. Before the above noted acquisition — which completed in January — Entertainment One’s rights library included more than 24,000 film and television titles, 2,700 hours of television programming and 45,000 music tracks across a network including Canada, the U.S., the UK, Ireland, Benelux, France, Germany, Scandinavia, Australia, New Zealand and South Africa. The acquisition was of Alliance Films (the price c$225 million (£141 million), and up to Canadian $272 million). It is the largest independent film distributor in Canada and a leading independent distributor in the UK and Spain with a catalogue of more than 11,500 titles including some of the most commercially successful independently produced titles of the last twenty years such as ‘Pulp Fiction’, ‘Good Will Hunting’, ‘Lord of the Rings’, ‘The King’s Speech’ and ‘The Hunger Games’. It was emphasised that “as a result of the acquisition, Entertainment One will be a more competitive business in each of the geographic markets that we serve, allowing us to act as a more valuable partner for content producers and expanding the quality and depth of the content that we offer to our customers”. The deal particularly provides increased access to the most successful independent film studios and deepens the company’s global reach — including adding a material position in Spain.

CEO Darren Throop has more than 20 years executive management experience in the entertainment industry and has been with the group since 1999 and CEO since July 2003. His total remuneration for the year ended 31st March 2012 was just shy of £900,000 (including £431,000 salary & fees and the same in bonus payments) and he holds 5,965,562 shares in the company (2.2%). He is supported in an executive capacity by Patrice Theroux who has more than 25 years of experience in the motion picture distribution industry and 1,609,201 shares in the company (0.6%) and CFO Giles Willits, a chartered accountant and former director of group finance at Sainsbury plc, who has 1,645,744 shares (0.6%). Yes I do think that Throop is overpaid, but at least he is being rewarded for success not failure, and having a stake in the company worth c£11 million (or 24 times base salary) means his real incentive is share price gain, not base corporate troughery. The company most recently updated on trading on 27th March — reporting that film revenues are expected to be “significantly ahead” of the prior year, driven by over 200 theatrical releases (including more than 25 Alliance titles since acquisition) compared to 152 releases in the prior year, and that television revenues are anticipated to be approximately 15% ahead.

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Editorial Contributor

It added that it plans to release over 275 films theatrically during the next financial year, including ‘The Hunger Games:Catching Fire’, ‘RED 2’, ‘Now You See Me’ and ‘Ender’s Game’, and also has a “strong” television pipeline, including “‘Peppa Pig’ maintaining its status as the #1 pre-school toy licensed property in the UK, and rolling-out in numerous international markets”. Results for the year ended 31st March 2013 are expected “to be in line with management expectations”, with the integration of Alliance “proceeding ahead of schedule with synergies being delivered more quickly than originally anticipated”. The business is inherently dependent on audience acceptance of its programming — meaning production of and relationships with producers of good-quality content is key. This requires significant financial investment and the maintenance of strong relationships with content producers in what is a competitive marketplace. The acceptance and timing of releases can result in the group’s financial results fluctuating, though its enlarged size — the integration of Alliance seemingly currently going well — should mitigate this risk somewhat. There is, though, still the possibility of Alliance integration challenges emerging. The company also currently finances a significant portion of its production budgets from certain governmental incentive programs and tax credits in Canada — and there is thus risk of any adverse change in these. There is also a need to adapt to the regularly changing formats of entertainment delivery.

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However, the company looks well positioned to benefit from an overall market which is expected to continue to grow and to exploit emerging digital opportunities. Following the Alliance Films acquisition, net debt is estimated at £115 million with a pre-tax profit of approaching £50 million (earnings per share of circa 15p) pencilled in for the year just ended, £73.5 million (earnings per share of around 19p) forecast for the current year and 21p provisionally estimated for next year. There is no dividend currently as the company focuses on investing for growth, but a price-earnings multiple of 9.2x falling to 8.3x looks harsh given that the debt looks comfortably manageable and the positive prospects for the enlarged business. Joint broker to the company, Cenkos, argues that “the increased scale, track record and growth prospects of the enhanced group warrants a re-rating”, whilst fellow brokerage Peel Hunt most recently updated that “we remain positive on the company’s attractive and low-risk content model” and has a 250p target price. Paid for researcher Edison concluded an update on the company earlier this week: “…our Discounted Cash Flow and sum-of-the-parts also point to a value of 254-262p… Thus we see plenty of upside as the progress of the enlarged group becomes more apparent, and as eOne begins to attract a wider investor base now that its market capitalisation has passed the £500 million mark.”

Tom Winnifrith’s Conviction Buy

Like Mark Slater, I note that if Peppa Pig (a quite ghastly creation that 2-5 year olds adore) replicates in the US her success in the UK, then the upside on forecasts is on a quantum scale. That would be a bonus. If the shares reach 250p, this would still only leave the stock trading on a p/e of little more than 13x, falling to less than 12x. Given the foundations for future growth that have now been established here, this seems non too aggressive a rating to and thus the shares, at 184p, are my conviction buy for this month.


Tom Winnifrith writes for 10 US & UK websites, but his main outlet is the recently launched website offering free data, breaking news and cutting analysis from a team of 14 ( and growing) writers — — you can follow Tom on Twitter @tomwinnifrith

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Commodity Corner

Commodity Corner duo special

Gold & Silver after the crash - a new buying opportunity? Given the drubbing that the two primary precious metals — gold and silver — have taken in recent weeks, we thought it appropriate to have a round up on the trading action in the pair and attempt to answer just what was behind the precipitous drops, and is now the time to buy again?

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May 2013

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Commodity Corner

It seems rather odd to many, in the face of headlines of record demand for physical silver in particular, that the precious metal should have declined over 25% during the last three months; ditto with gold. How can there be record demand for the actual solid stuff and yet the “paper” market fall almost 20% at the nadir over a few short days in mid April?

Indeed, the US Mint sold a record 63,500 ounces — a whopping two tonnes — of gold on April 17 alone to investors, bringing the total sales for the month to 147,000 ounces — that’s more than the previous two months combined. The Indian markets, where consumers are more oriented to physical metal, now have a premium of US$150 over the futures price in Chicago. Demand at coin dealers has similarly also increased dramatically as the price has dropped too.


For many years, the physical and paper markets traded largely in lockstep with each other, but during the last five years the explosion of ETFs (Exchange Traded Funds) has brought a whole new swathe of investors to the gold and silver arenas. One little known fact is that an ETF does not actually have to have their investments backed by the physical metal. It is, in essence, a “derivative” of the gold or silver price and one that ironically likely invests in derivatives of the physicals — namely gold and silver futures.

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Gold and Silver - where next after the crash?

At any one time, there can be more futures positions (in fact this is the case in any commodity) in existence relative to the underlying instruments deliverability. This doesn’t act as too much of a disproportionate influence on the price, though, as the very vast majority of futures contracts are in fact liquidated before settlement with very few going to delivery aside from the commercial hedgers. These futures contracts require very small amounts of margin — as little as 5% of the value of the commodity — to gain potentially large swings in the outcome of a profit or loss. Thus, futures markets appear to be a speculator’s paradise, but the statistics show just the opposite: over 90% of traders lose their shirts. You will see the clue here as to how the futures price of gold and silver was cut so dramatically and yet the physical demand remained largely the same. We postured here at SBM that the gold price had gotten ahead of itself last year in our Gold Bear Call guide.

One of the primary pillars of our argument then was the overshoot of the gold price relative to the US monetary base. However, with the gold price declining to $1320/oz at the lows, we can see from the chart below that it has in fact now moderately overshot to the downside. In fact, to get back in sync we would likely be looking at a value towards $1600/oz. I have circled in green below the period when the gold price actually undershot the monetary base and we can see that it remained undervalued for quite a time, in fact from 1999 – 2005, and it was only the onset of the GFC and the subsequent QE programs that really lit the fire under the price. Now, just because there is a disconnect between the monetary base measure and the gold price that has worked so well from a correlation perspective this last eight years does not mean that it will immediately correct — other dynamics at play in the market like large positions requiring liquidating etc. can affect the price. But it does rebuild the fundamental pillar for the gold price back in your favour.


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Commodity Corner

Turning to silver and its own sharp drop this year we can see from the chart below that silver in fact experienced a parabolic rise going into 2011, running from just under $10 per oz to almost $50 per oz in a little over two years. By any stretch, it certainly had gotten ahead of itself. But similar dynamics in the physical market are at play presently in silver in that real underlying demand for the precious metal is at record levels.

What this means is that if the one sided bull positioning has been wrung out of the futures market, then the risk reward equation is back on the bulls side. In fact, the recent data from the COT (Commitment of Traders) data shows a very material reduction of speculative positioning in both gold and silver futures. In short, speculative froth has been taken out of the market.

SILVER 10 YR CHART Here’s another chart we think interesting and that is an historic representation of the price of silver relative to gold. When the ratio is high it means that silver is undervalued and/or gold overvalued relative to each other and vice versa when low. The blue line represents the rough and ready mid range over the last 10 year period.

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You can see we are now modestly on the cheap side relative to gold. Any further weakness in silver relative to gold and this could present a good pairs trade opportunity and so a lower-risk way to play the market as you would be long silver and short gold.

Gold and Silver - where next after the crash?


“AS ThEy PRiNT MoRE MoNEy, ThE PuRChASiNg PoWER oF EACh uNiT DECLiNES.” So, just what did cause the drop in the gold and silver markets? It seems that a large sale order of 400 tonnes of gold that was dumped into the market on April the 13th was ‘the straw that broke the camel’s back’ and caused the remaining excess speculative positioning in the futures markets to exit en masse — particularly when the raising of margins by the CME was thrown into the mix. One thing I have learnt over the years is that “selling begets selling” and where levered markets are concerned, this is even more accentuated... To me, quite simply what occurred on those black days in April for gold and silver bugs was a plain old mini panic. We would suggest that we are, however, now within 5-10% of a new equilibrium floor price and also that the “black swan” premium that remained embedded in the two metals has now dissipated.

In effect, should there be an exogenous shock (perhaps courtesy of our Korean “friend” Kim Jong Un or an exit from the Euro by one of the major Southern European economies), then the two metal prices are primed for a new spike. The long-term fundamental reasons to hold gold and silver are most definitely still with us. The major central banks are now acting in concert in “currency wars” or “the race to debase.” As they print more money, the purchasing power of each unit declines. They are caught between the rock of having to keep interest rates low to support their governments’ huge deficits and the hard place of the long-term effect of diluting their currency. If rates rise, even First World governments will be forced to pay higher interest fees, leading to a loss of confidence in their ability to pay back their debt which will bring on a sovereign debt crisis like what we have seen in the PIIGS or Argentina recently.

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Commodity Corner

To conclude, if you believe that the Fed, BoE and BoJ will, however, ultimately dramatically unwind their QE programs (hardly seems likely in the foreseeable future given the magnitude of the debt bubble that preceded the GFC and the lack of primary demand in the Western economies from mainstream consumers) and shrink their balance sheets — and so the monetary base — then you should keep selling gold in particular. If you are of the mindset that unless the major central bankers want to ultimately unleash on their people a long and drawn out economic depression as the excesses of the 80s through to the noughties finally get washed out, and they have shown little interest in embarking upon such a route, then the QE programs and step change in the monetary base are unlikely to be exited in full.

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Any further weakness in the gold price towards the key psychological level of $1000 and silver towards $20 are likely to be exceptional medium term buying levels. Remember also though that the “market” is a savage machine, and just as it can take prices much higher than you could ever believe, it can also take prices much lower. Trade size accordingly!

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Trade Up

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Technology Focus

Steve Jobs, Apple and the $5 Billion Campus Controversy BY Simon Carter

“We have a shot at building the best office building in the world. I really do think that architecture students will come here to see it.” Those were the words of the late Steve Jobs at his last ever public appearance, back in June 2011. He was talking about his vision for Apple’s new $5bn headquarters; his legacy. But in the two years since Jobs faced Cupertino City Council, the project has run into delays, debates and angered shareholders. The campus was also to be beautiful, built in a doughnut shape and housed completely in curved glass. In short, the campus was to be an iPad you could work in.

Four months before he died, Apple’s charismatic leader stood and unveiled his plans for a utopian hub to house his company’s operations. The so-called Apple Campus 2 would host 6,000 employees and boast as many features as its flagship products: features such as a fitness centre, underground parking, and 700,000 square feet of solar panels.

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Jobs, of course, passed away before the final plans for the campus could be submitted, but there is little sign that Apple are looking to reign in some of Jobs’ more outrageous ideas (more of which later). For one thing, Apple needs space — even after Campus 2 is completed, they will still maintain their main headquarters housed on Infinite Loop, not far from the new building — and for another, they certainly have the money to make it happen. Ah, money. It’s been well documented that Apple enjoy a cash pile. At the time of writing, the mountain of cash underneath the lifestyle heavyweights stands at around $137bn, with the cost of Campus 2 being little more than a moderate splash in the ocean.

Steve Jobs, Apple and the $5 Billion Campus Controversy

“The campus was also to be beautiful, built in a doughnut shape and housed completely in curved glass. In short, the campus was to be an iPad you could work in.�

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Technology Focus

But costs have ballooned, and Apple’s shareholders, already disgruntled at the notorious lack of dividends, are starting to make their feelings known. And, some would say, with good reason. Nobody will complain when the company is raking in the profits by standing legs astride over the smartphone world or when Apple sells as many tablets in a week as most competitors do in a month. But when the likes of Samsung, Nokia, and to a lesser extent Blackberry, start chipping away at the crown, the smiles are bound to fade. Indeed, Apple’s share price has fallen sharply since last autumn and there is genuine concern about the lack of innovation and excitement surrounding recent and future product releases.

APPLE 1 YR CHART So, about those ballooning costs. Jobs’ vision — and it would be disingenuous, and inaccurate, to call such extravagance anything other than a ‘vision’ — was as you would expect: the best of the best. The famous, but perhaps apocryphal, story of him dropping an early iPod prototype into a fish tank to see if it contained any air bubbles (the theory being that if it contained air, then it could be made even smaller), serves only to prove that this was a man with a fanatical eye for detail.

The sound-bite that is most often repeated from Jobs’ speech are the words, “there isn’t a straight piece of glass in the whole building.” If this sounds expensive, that’s because it is. The entire building will be housed in 40-foot floor to ceiling windows, each manufactured using a cold bending process invented and perfected by a company in Germany. Why? Because bending glass with heat causes tiny imperfections and distortions and, for Jobs, that just wouldn’t do.

“The sound-bite that is most often repeated from Jobs’ speech are the words, “there isn’t a straight piece of glass in the whole building.”

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Steve Jobs, Apple and the $5 Billion Campus Controversy

This ‘best of the best’ mantra is repeated inside, with super-polished floors and ceilings, ‘heartwood’ (the centre of the tree — the purest, and most expensive wood source) from just one specific species of maple tree, and concrete ceilings that will be moulded on the floor to avoid the jagged ruts and blemishes that would inevitably form from being moulded on scaffolding. If all of this sounds crazy to you, think how the plans and mutterings of spiralling budgets must sound to shareholders. Keith Goddard, Chief Executive of Capital Advisors (who own more than 30,000 shares in Apple), summed up the feelings of many investors when he said, “It would take some convincing for me to understand why $5 billion is the right number for a project like this… at a time when they’re being so stingy on dividends.” With the original budget of under $3bn now forgotten, the figure of 6,000 employees now at more than double, and with moving in day now pushed back by 12 months to 2016, who can say where the spending will stop? And what about the rest of Silicon Valley? Maximum productivity is the ideal of any self-respecting tech company, hell any company full stop. So the idea of a doughnut shaped building — with chance meetings and facetime reduced to a bare minimum — is being roundly scoffed at (no double pun intended). Facebook, for instance, are insisting on a routinely cubic building for their new operational HQ to give employees maximum interaction opportunities.

The man who replaced Steve Jobs, the less extravagant Tim Cook, has made noises recently which suggest that Apple, or at least Cook himself, share some of the reservations held by shareholders and competitors saying, “Hopefully we’ve made it better during the design phase. We want to do this right.” Whether those noises are simply to placate dissenting voices remains to be seen...

So Campus 2, with its 60 kilometres of cold bent curved glass, hundreds and thousands of prefabricated fixtures and fittings, concrete ceilings and polished walls, four-storey underground car park, 15 acres of grassland, over 300 different species of trees, enough solar power to run a small town and an underground auditorium because, well, just because its Apple, is happening. One way or another. It might be controversial; it might be sniggered at; it might upset a few investors, but, under Steve Jobs, that was always the Apple way. Perhaps Campus 2 really will be his legacy.

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Editorial Contributor

A zak mir MONTHLY top pick special

a trio of AIM offerings for May I have to confess that I was rather late in becoming a fan of AIM stocks. Rather believing, as with many others, that this arena of the London market was slightly shady, poorly regulated, highly speculative and very risky with poor information flow. In fact, what’s to like about such an insider riven section of the market that has been the graveyard of many a private investor?! However, by the autumn of last year I realised that this negativity towards AIM was actually an opportunity, in the same way that lots of the banking and mining stocks in recent years were thrown out with the bath water only for investors to realise finally that there were bargains to be had once they had been sold down to silly levels. Indeed, so poor is sentiment here that the few good companies are being tarnished by the poor perception of AIM and this could be a cue for us to buy.

For a chartist like myself, AIM also offers up an extra dimension of a challenge and, indeed, not many in my “profession” seem to have the stomach to ‘attempt’ to deliver technical analysis in this area on a regular basis. What I would say is that while making technical calls in this most volatile arena of the stock market is potentially embarrassing, to say the least, the value here is not only to help out those involved in trying to make money, it is also to stress test signals and strategies, all too often via baptisms of fire!

Still, let me preface this piece by stating that when trading AIM you are in fact trading in the equities equivalent of the Wild West! For every ten bagger that AIM serves up, it has to be admitted that the path is strewn with dry wells, sleepy Nomads, half told truths and terminal cash burn. And they’re the good ones...! But, if you are looking on a timeframe somewhat shorter than Warren Buffet would typically go for (i.e. a lifetime) or where PEG values are not always present in the way that Jim Slater might like, then the cut and thrust of AIM may actually be for you.

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This month, therefore, I am putting my head on the block in attempting to choose three of my favourite stocks that I think are primed for up moves, so cut me a little slack!

Zak Mir’s Top Pick Special

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Editorial Contributor

Buy IGas Energy (IGAS) @ 82p Recommendation Summary: IGas Energy is my current close second to Gulf Keystone (GKP) as the stock to watch on AIM but, with the CEO selling the bulk of his holding in the Iraq focused group, and major support in the 160p’s giving way, IGas has to be a more straightforward prospect RIGHT? We were reminded of this by the way that the CEO of the company Andrew Austin responded to a Department of Energy & Climate Change (DECC) acknowledgement of the substantial benefits to the UK that shale gas can offer: - “Natural gas from shale has the potential to transform the UK’s energy market and boost the economy, create thousands of jobs, generate significant tax revenues and reduce our reliance on imported gas.”


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Given the way that AIM listed IGas is currently the only direct quoted vehicle on what could be the Gold Rush of the next decade (especially after Gold’s latest crash), a dabble in this company seems to be something that all but the most defensive of portfolios should have a little exposure here. You would have to go a long way, even on AIM to find a stock that has delivered the kind of white knuckle ride recently seen at IGas on its daily chart, with an understandable spike to the upside following the Government giving fracking the nod on December 13th, but a baffling decline from 150p a share the following month. That the shares might be worth picking up if they halved back towards 75p might have been suggested, though certainly not expected. What finally rescued the bulls was a combination of a red uptrend line from 2010 and black support line from last year both running through 67p. At least while the mid 60p’s now prop up IGas shares we should be looking at a partial, or even full retest, of the initial 2013 resistance zone. Above the 50 day moving average at 86p should target the top of the unfilled January gap to the downside at 114p over the next 1-2 months, especially as the stock is backed by two bounces off an extended one year RSI support line.

Zak Mir’s Top Pick Special

Recent Significant News:

Fundamental Analysis:

April 26th: AIM-listed onshore hydrocarbon producer IGas Energy intends to drill two additional wells commencing this year so as to further appraise potential resources in the Bowland Shale, an area in northwest England home to large quantities of shale rock.

To my mind as a relative late comer to the AIM stocks area in general, one of its current great white hopes at the moment is IGas. It has to be admitted that the word “risk” really comes into play here however. There are not only the usual pitfalls of being involved in a resources play – with all the questions over cash being delivered out of the ground or not, but of course you never know if / when a new placing is just around the corner... We assume that the money raised at the start of the year will however tide IGas over for the near term.

January 15th: IGas is proposing placing up to 24.3 million new ordinary shares at 95p, with new and existing institutional investors to facilitate investment in IGas’s shale resource. The issue represent approximately 15% of the company’s existing issued share capital and is being conducted through an accelerated book-building process.

December 21st: IGas Energy, which has a share of the huge Bowland rock formation in the North West, bought Star Energy a year ago, and said it is in the process of acquiring other UK conventional onshore assets in West Sussex. These should provide it with enough cash to allow the company to continue with the shale prospect. Interim figures to the end of September show positive cashflow of £15.5m, The Times.

Nevertheless, this is just about as cautious as it is in my nature to be regarding this company which seems to be at the Zeitgeist of the E&P boom, both in the real world and amongst investors, especially given the way that the epicentre of interest is Fracking / Shale Gas extraction. The best case scenario here over the next decade is that a successful campaign by the likes of IGas onshore UK could have the type of transformational effect on the UK in the 2020’s as North Sea Oil did to prop up Thatcherism in the 1980s. It is estimated that the 300tln cubic feet of shale gas under this country could provide over a century of supply.

Given such a mega fundamental backdrop it appears somewhat churlish for me to quibble about the inclusion of IGas but, as things stand, we have a typical high risk / high reward resources play, one that is gilded with more upside than most minnows in my opinion, but after the lifting of restrictions on exploration for shale gas announced by the UK Government on December 13th will likely prove to be irresistible to compulsive small cap punters...

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Editorial Contributor

Buy Iomart (IOM) @ 236p Recommendation Summary: Although it could be said that “The Cloud” (detached data storage in vast centres located away from the main server you are using) was so 2012, or perhaps even 2011, the fundamental concept of network delivered / stored hardware and software cannot be underestimated as a major transformation event even within the fast moving computing space. It is also the case that even though the stock market went crazy over this new buzz concept, we may not find, for quite some time, just how great the benefits will be, if only in terms of infrastructure cost savings for corporates. In addition, if I am being a little on the facetious side, my guess is that given that most people are relatively technologically un-savvy (me anyway!), Iomart may have the advantage of relative pricing unawareness amongst its customers when offering up its contracts.


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This is over and above the company’s statements that with most of its contracts lasting 2-3 years and so delivering great earnings visibility it locks in “today’s” prices in an area where deflation is quite severe over time as competitors come on stream. But despite the soaring earnings, prospects and acquisition boosts, Iomart would not be in my top three AIM stocks were it not for the supportive technical’s to back up the fundamentals. The shares have almost exactly doubled in a year, something which together with the PE ratio hitting 30 for FY 2013 might ring some alarm bells for cautious traders. However, this does not concern me after looking at the daily chart where we have not only seen a relentless uptrend (“the trend is your friend” and all that), but also one that has a very bullish construction with new support coming in at or above old resistance. The view currently is that while there is no end of day close back below the floor of a rising July price channel at 230p, the upside over the next 1-2 months should be towards 280p. The best stop loss level in my opinion is the 215p March intraday bear trap low.

Zak Mir’s Top Pick Special

Recent Significant News:

Fundamental Analysis:

May 29th: Iomart reported that it had doubled full year pre-tax profit and lifted revenue by a third. Boosted by acquisitions, the cloud computing and managed hosting services group revealed pre-tax profit up to £5.8m for the year ended 31 March 2012 from £2.8m the year before. Revenues were up 33% to £33.5m.

At this stage of Iomart’s point in its life cycle — relatively early growth stage — the market is still trying to assess whether there is longevity to its model and whether it is likely to be an acquisition/ merger target. While the premium rating of the company certainly places it squarely in the strong growth sector, it would appear that, unlike other comparable tech situations, we do have relatively long range visibility on both demand and earnings and so bolstering its potential for a takeover.

September 27th: Iomart revealed a strong half year performance and said that it expects full year results will be ahead of current consensus market expectations as revenue and profits in the six months to the end of September 30th were substantially ahead of the comparative period last year. March 26th 2013: Iomart said it expects to report full year EBITDA and profit ahead of market forecasts and remains confident of further growth as a growing number of companies sign up for their online services. It expects to show an adjusted EBITDA of no less than £16.4m for the year to March 31st 2013 compared to £11.2m before, and adjusted pre-tax profit of around £10.6m, up from £6.9m and ahead of market consensus.

I actually believe that the performance called for in the outlook period (13) is probably rather too pedestrian when compared to what may actually pan out. This point was underlined in both the September and March updates from Iomart, with it guiding significantly higher on both occasions after better than expected results. It would not be surprising if Iomart continues to deliver this kind of result, and on this basis the shares should continue to respond accordingly.

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Editorial Contributor

Buy San Leon Energy (SLE) @ 6.9p Recommendation Summary: As many in the market will have noted in the wake of the announcement in February that hedge fund legend George Soros had lightened the load as far as his gold holdings were concerned, it usually makes little sense to trade against the legendary investor. However, those who copied Soros in buying into the Poland focused shale gas group San Leon Energy would have to concede that at the very least it has been a very rough ride on the share price front in the last couple of years with a large range between 5p and 40p being seen — roller coaster probably underplays the reality of what has happened here. With the stock now bombed out and trading at the floor of the aforementioned range, we are potentially looking at a possible bargain hunting opportunity.


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Clearly, after an extended downtrend in a stock or market — with the one here in San Leon’s case lasting from the beginning of 2011 to the end of April 2013 — something transformational is needed to change both the trend and sentiment towards the company. This transformational issue appears to have come on tap with the news of a natural gas and light oil recovery from the Czasław-1 well in San Leon’s Nowa Sol Concession in Poland announced on April 19th. The effect on the price action of the shares was a one day jump of 30%, enough to cement a sustained rebound off the floor of a falling 2012 price channel at 4.6p, the bear trap rebound back above the initial April 5.5p intraday low and a bounce off an October RSI support line at the very oversold 25 level. The implication is that while the 5.5p zone is held on a weekly close basis, we should be looking at San Leon at least hitting the post November resistance zone at 9p plus — and probably much more on a 2-3 month timeframe.

Zak Mir’s Top Pick Special

Recent Significant News:

Fundamental Analysis:

November 12th: San Leon Energy said it is to acquire fellow explorer Aurelian in an all-share merger. Aurelian shareholders will receive 1.3 new San Leon shares for each Aurelian share. The motive for the deal was said to be the potential of the enlarged group to become a leading exploration and production company across Europe and North Africa.

In looking at the fundamental picture over the past couple of years, it’s fair to say that there have been a couple of surprises for shareholders. The first is that even with the presence of George Soros and, indeed, Blackrock on the register, shares of San Leon were hammered in a way that you would not have expected any “normal” explorer to be hit whilst waiting for its potential to be turned into reality. However, from the autumn onwards, pretty much post the Aurelian deal the market seems to ‘cool’ further on the merged entity. To me, this was particularly surprising in the wake of the MOU with Halliburton.

March 18th: San Leon Energy signed a memorandum of understanding with Halliburton Company Germany GmbH to develop gas projects in Poland. The possible joint venture will explore the gas potential of San Leon’s Wschowa, Gora and Rawicz concessions. San Leon remains the operator and manager of the concessions, while Halliburton will explore the Siciny-2 well in the second quarter of 2013. April 19th: San Leon Energy confirmed that natural gas and light oil had been recovered from the Czasław-1 well in its Nowa Sol Concession in Poland. It added that recent measurements of the well have shown that the well is building pressure. The group predicted that by early May it will be able to make a decision on long-term test and oil production based on the results of an acid stimulation and testing.

The position now from my perspective is that we should expect San Leon’s correction in its stock battered stock price after being kept in the “doghouse” for so long to be over compensated, as far as valuation and sentiment are concerned — a point underlined by the massive jump for the share in the wake of the Leon’s Nowa Sol Concession find.

So, that is my trio of picks. I must caveat that given the magnified volatility of AIM and particularly when married with the leverage of CFD and spread betting, that anyone who likes the ideas relayed here should under leverage oneself. I have seen one too many an individual getting into a mess through taking on too much gearing and risk over the years. Trade carefully!

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Editorial Contributor

Alpesh Patel Alpesh Patel is the author of 16 investment books, runs his own FSA regulated asset management firm from London, formerly presented his own show on Bloomberg TV for 3 years and has had over 200 columns published in the Financial Times.

Patel on Markets Spread betting / CFD TRADING on AIM stocks

Key problems with spread betting/CFD trading AIM stocks? The spreads! The availability! The re-quotes..! So should you bother? Well, there are rewards with the correct strategy. Let me explain... Longer term Holding for a longer period — say months — can reduce the relative cost of the higher bid-offer spreads. I use an indicator on Sharescope to look for value / growth / income stocks. Names at the moment that fit the frame include: Matchtech, Polar Capital, SpaceandPeople, Total Produce, Fairpoint, GVC, Mattioli Woods, Origin Enterprises and Hasgrove. These are my top picks for the next 12 months. I have a simple rule that if any drops 25%, then I don’t hang around and I go into cash in that one. Key is to have a basket of stocks and not stick it all on one name.

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So how do I come to these names? My filter looks for stocks with good valuations based on P/E and PEG (Price Earnings to Growth) as well as a sound earnings base and stability and also revenue growth with well backed dividend yields. It then analyses them for momentum. More on this at What do these have in common except that their financials look good? Well, they are all, with the exception of Matchtech, in financials or consumer industries. You would not expect either to be doing well, but that’s the point — expectations being beaten are what leads to prices rising.

Patel On Markets

Check the spread Double-check the online quoted spread. Sometimes the broker just leaves a ridiculously wide ‘holding’ spread which they’ve got from the underlying market. Rules prohibit this in the underlying market, but it can ‘slip’ through for the unwary on certain spread betting platforms.

Consider the Index Of course, for instant diversification check out the AIM UK 50 index which comprises the top 50 AIM stocks such as punters favourite, Gulf Keystone Petroleum. How is it doing this year? Well, sadly not good... Sure, we’re up since the bottom in 2008/9 — but who isn’t? We are nowhere near the go-go 2007 levels however.

So you may ask, then, where does that leave us short term? Given the recent downtrend in the AIM 50, perhaps shorting is a better proposition? Well, looking at the chart below, a case could certainly be made for that with a falling RSI and the key 19 week exponential moving average turning over and the index just cutting through it to the downside. You’ll notice the green line that is the uptrend since the lows of 2009 — this implies to me further downside of around 10% and so for those holding the likes of Gulfkeystone, it could be worth thinking about a short position on the index as a hedge.


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Editorial Contributor



When shorting, I look for candidates based on simple trend following as opposed to some immense industry insight or poring over their annual reports — there’s a saying that “stock price never lies” and, in my experience, a persistently falling stock is generally a precursor of bad news...

The editor of this mag will no doubt be happy to hear this, as he constantly bangs on about the need to refrain one’s use of leverage when trading, an in particular in relation to AIM stocks. As my friend Zak Mir will pay testimony to in his piece too, when taking a position in an AIM stock, don’t leverage yourself to the ying-yangs! My own personal margin rate is 50% meaning that I will only trade twice the size I would have if I was buying for cash. That way, when coupled with diversification in the positions, it is very difficult to blow yourself up!

I sift though those stocks that have been fallers over periods of two weeks to four months, ideally against a flat or rising market and so displaying material relative underperformance. I then ensure the price has rebounded high enough to get a decent short on — typically the 8 or 13 day moving average is used as my trigger level. Not all spread bet platforms will allow you to trade in minnows / small cap stocks though, particularly on the short side as it can be difficult to borrow the stock and so something at a 1p is out! Poor Albemarle and Bond are typical of what I am talking about!

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Happy hunting!

Commodity Corner Extra

Commodity Corner Extra

is the Platinum Bull Run spluttering?

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Commodity Corner Extra

On Friday, April 15th, gold suffered its greatest fall in 30 years, and took another pummelling on Monday the 18th, again down 8.7%. The five day peak to trough decline was from around $1560 per troy Oz to lows of around $1320. In recent days it has recouped some of these losses, rising to $1440 as we write. Gold wasn’t the only metal to take a hit however; silver is down nearly 25% and many of the other Industrial metals followed suit, including platinum and copper. SBM had called for short trades back in January 2013, and I quote, “we are almost a lone dissenting voice in our call for gold weakness — a stance we find comfort in.” Investors, who have enjoyed stellar gains in gold over the last decade of some 700%, are now feeling the pain. Gold has increasingly made up between 2-10% of investor portfolios as it appeals: as both an inflation hedge and in times of general economic uncertainty. The sell-off in gold was initiated by weak data from China, where underwhelming first quarter growth of 7.7% instead of the expected 8.0% sent jitters through the markets. Concern is that demand from China is now withering and this caused a sell-off in commodities as a whole as well as a slide in the Aussie Dollar. Some market analysts believe that recent falls are only the beginning and that we are now entering a multi-year bear market. Quotes that gold could find equilibrium around $900 per oz are widespread. At that level, however, many gold miners would be under water and so supply would diminish sharply and, of course, the immutable law of economics — supply and demand — would come into effect. We think the downside in gold is $1150-$1200.

“SBM had called for short trades back in January 2013, and I quote, “we are almost a lone dissenting voice in our call for gold weakness — a stance we find comfort in.”

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One metal that could demand a further look is platinum. Platinum is often thought of along the same lines of gold due to its jewellery association. However, whilst over 60% of gold demand is for jewellery, platinum has a much higher industrial use in comparison. The platinum price has also been affected by the slump in gold prices, but the market has considerably different supply dynamics — whilst gold production is global (US, Australia, Africa, China etc.), platinum is different. 80% of the world’s supply is exclusively from South Africa, with Zimbabwe and Russia being the other main suppliers. The key to industrial use of platinum is that this greyish white metal is resistant to oxidation and has important catalytic properties — hence it is estimated that 45% of platinum goes into the catalytic converters for automobiles. Thus developments in the auto industries and its growth are closely correlated to platinum prices and, more accurately, what happens in the diesel engine market.

Platinum production by geography PIE CHART

Current platinum prices stand at $1420 a troy Oz, way off of the highs before the financial crisis in 2008.

Can the platinum bull run continue?

20 YR platinum chart If we take a look at a chart over the last two months, the overall price action has been generally bearish:

60 DAY platinum chart

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Commodity Corner Extra

So, what are the issues that have been going on with the platinum miners in South Africa and what implications does it have for platinum? Cast your mind back to last year when platinum was in the news for all the wrong reasons. On the 10th August 2012, 3000 miners had a wildcat strike at the Marikana mine not far from Johannesburg which is owned by London listed producer Lonmin. Workers at the mines were frustrated by the high profits of the mining companies in contrast with their low wages (not surprisingly). Workers were, in effect, demanding a tripling of their wages from approx. $500 per month to $1500 per month. On the 16th August, the SA security forces at the mine opened fire on the miners, killing 34 miners and injuring a further 78. The labour unrest appears to be a problem that is endemic in the platinum mines in the region. In October 2012, Anglo American (Amplats), who mine platinum in the Rustenburg region just like Lonmin and, as a company, accounts for some 38% of world supply, fired 12,967 striking miners. They went on to announce in January this year that they planned to cut production of platinum by some 400,000 oz, or 7% of global supply. We contacted one industry watcher who has a very good grasp of current affairs. Here’s his response to what is happening in the platinum market and the current mining situation: “On the platinum front, things are pretty bad and unlikely to get better any time soon. The main issue is that the main mining companies are caught (excuse the pun) between a rock and a hard place. At one end, global platinum demand is sagging, while at the other, costs, especially labour costs, are rising.

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While demand may increase as the global economy starts to improve, this won’t happen for a while and the labour issue will likely drag and drag. Mining is a very political industry in South Africa and Zimbabwe where most platinum mines are; and as the ruling parties in those countries face re-election, they will use the mines as a proxy to rouse popular sentiment. As a result, they will be indifferent to what the mining firms are telling them about the need to streamline their operations, while pretending to be on the side of the miners. So, basically, not a great time to be involved in platinum.” We think the political dynamics are open to interpretation, but, in a nut shell, it would appear that margins for the mining companies are being squeezed and demand remains muted. Counterbalancing this, however, is the sharp forward reduction in supply given the closing of quite a degree of mine capacity. The miners’ strikes have resulted in a material decrease in supply (Amplats announced that supply was down 2% this quarter due to the strikes) and so this will help buoy prices somewhat. The mining companies will keep cutting production if prices get much softer and if there is a re-flaring of unrest, this could cut production further. What is apparent is that platinum prices are likely to be volatile whilst there are constant threats to supply. From a fundamental point of view, favour would be for a further modest softening of platinum prices, but any other strikes again could cause violent movements. Elections coming up in South Africa in 2014 mean that the platinum mines will most likely be used as a political football. Any move back towards the $1280/1320/oz is likely to be a good opportunity to get long.

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Editorial Contributor


John Walsh’s monthly trading record Whilst the last month was the worst month of my short trading journey so far, this month has been my quietest. This is due to the fact that, as I relayed in the previous article, I’ve been using my time this month rather more wisely in carrying out much more in-depth research regarding the equities I’m looking to trade. I’m also taking a break from trading indices until I’m comfortable with my ability to trade them again, as my account took a bit of a dent around in the middle of February. Don’t get me wrong, I’m still keeping an eye on all the major indices each day and could have caught some nice moves if I had been playing (don’t you hate it when that happens?!), but instead I decided against trading them for now and trade what I consider my true trading passion — equities. Indices are all well and good for the fast buck, but equally I can see now how easy it is to lose your shirt, particularly if your position size is too big. So, just what do I mean when I say I have been researching equities to trade?

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In a nutshell, what it means is a hell of a lot of reading to start with, be it publications similar to this one, other traders online blogs and also other great sites that are out there for traders to discuss what they like and don’t like (and yes that does also include bulletin boards, but I must stress I only read, never post and I take everything with a very large pinch of salt! The whole bulletin board arena is a law unto itself...). What I do is build a “watch list” of stocks and look deeper into the ones that interest me, waiting for a trigger to go long or short. Aside from the fundamental backdrop of each company, I then take a look at their chart pictures, but over many time frames — long and short — to try and see if there is an established trend that I can jump on and, if so, which way.

John Walsh’s Monthly Trading Record

“Aside from the fundamental backdrop of each company, I then take a look at their chart pictures, but over many time frames — long and short — to try and see if there is an established trend that I can jump on and, if so, which way.” Once I have done this I then take a look at the most recent statements that the company has released to get a better picture of its trading and immediate prospects. I find that a combination of both technical and fundamental analysis works well for me and that relying on one in isolation is not advisable. Better to be overly informed and armed than under, when going into battle, eh?! As I’m now thinking more long term with my trades, I have opened only four new positions this last month and which, intriguingly, given the difficulties the stock market has faced during April, are all long positions. My first position being in Speedy Hire (SDY) as I think it’s a solid business whose share price has been in a clear uptrend since the end of July 2012 and which has still more to come in my opinion. Certainly nothing in the chart leads me to believe that a reversal is imminent. Another of my new positions is Moneysupermarket. com (MONY) — another stock whose share price has slowly but surely been moving up these last few years after a big drop in the GFC of 2008 and I don’t see why this cannot continue and reach new highs. One of my other new trades is St Ives (SIV) who look to be in the process of changing some of the ways in which they do business, and for the better. The market is beginning to take this on board and this has been reflected in the share price since September 2012. I personally cannot see it changing anytime soon.

My fourth and final trade for now is in a company that I have previously had an open position in and where I did make a small profit. One of the things I was taught during the Trading Academy is that if a stock price rises from your exit level, but the rising trend looks to remain intact, then don’t be afraid to get back in — the old traders adage that “no stock price is too low for selling nor too high for buying” is to be adhered to. The company in question is William Hill (WMH) and I hope for new highs this year. All my positions have sensible stop losses and my plan is to give them time to “breathe” and not continuously check each day on their progress as I have done so in the past. If they look as if they are going to hit their stop loss, then so be it; I have never had a problem with getting it wrong and having a losing trade, that’s just the way it goes sometimes. The only time I want to have to think about any of the positions is if they rise nicely, then I will need to decide if the reason behind opening the trade is still valid and if so, leave them be, if not, then take the profit (my biggest problem with trading that I have personally found is knowing when to take profit, not cut a loss). I will, of course, be on the lookout for new trades be they Long or Short and I will, of course, update you on twitter where you can find me @ _JohnWalsh_. Thanks again for taking the time to read this as I enjoy writing them. Remember, you control the trade; the trade does not control you. John

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Special Feature

gLoBAL MARkETS RouND uP By JACkSoN WoNg oF iNvESToRS’ iNTELLigENCE Spring is in the air, but many of the global stock markets have traded sideways after a blistering start to the year. is this a lull before markets spurt once more higher or, as many doomsayers are saying, is a correction right around the corner? Technically, I do agree that many stock patterns are toppy. But I am not comfortable shorting into a market where many indices are trading close to their highs — there is an old saying, “no market is too high for buying nor too low for selling” — in other words stick with momentum, particularly one as resolutely strong as the current bull run. In the US, indices have remained stubbornly bullish. Both the S&P500 & Dow indices reaffirmed their range support levels in recent weeks and look to me like they want to reassert their bull trends.


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While here in the UK, the FTSE100 index is staying firmly above the 6200 support, despite a steep decline in the sector’s point-and-figure breadth chart. (Investors Intelligence produces a wide range of breadth indicators which are highly useful for investors. See for more details). In Europe, even the laggards like Spain and Italy are on the rebound.

John Walsh’s Monthly Trading Academy Investors Intelligence

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Special Feature

Bullish stock market action is fuelled by aggressive monetary easing from central banks. The Fed is engaged in the biggest monetary easing in years, buying $85 billion of Treasuries per month, while the ECB may cut rates soon. Not to be forgotten is the Bank of Japan’s gargantuan monetary printing program too. So, how should investors trade this market? Tactically, I would not favour a highly directional portfolio, be it long or short. This is because of the risk that still remains of a market correction. A combined long-short approach is better. To select stocks, I would go bottom up and filter out stocks that have poor risk-reward ratios. This way, even if the market weakens into the summer — typically a weak period during the year — then the risk to one’s portfolio is minimised.

In this month’s edition, I highlight three interesting long offerings in the UK market.

Supergroup Owner of the fashion brand Superdry — looks to be developing a large base formation to me. The stock had an exceptional run in the months following its IPO in 2010. Alas, expectations were too optimistic and had gotten somewhat ahead of themselves at the heights of 1800p and the stock subsequently crashed to 300p a year later. Now, its chart is starting to look better. The pattern of rising lows from 400p may lead to a base breakout at 800p, especially as the stock is affirming the 150 day simple moving average as support.

chart - supergroup

“From the perspective of a long-term investor looking for a buy, nothing beats a decisive break out of a multi-year base.” 92 | | May 2013

Investors Intelligence

Japan From the perspective of a long-term investor looking for a buy, nothing beats a decisive break out of a multi-year base. Buying into a base breakout has one major advantage: favourable risk-reward ratios. The upside is large and downside small. Japan’s long-suffering equity market is exhibiting this classic base pattern. The main catalyst for the breakout in Japan was the election of Shinzo Abe as the prime minister. Fed up with the persistent deflationary cycle, he forced the central bank to try a new economic policy — QEE: Quantitative and Qualitative Easing.

The central bank is about to double the size of the BoJ’s asset base in just two years by engaging in massive monetary printing. This has set off a sharp devaluation in the Japanese Yen which, in turn, is sending the Japanese equity market higher in a sort of virtuous cycle. Highlighted here is the JP Morgan Japanese Smaller Companies IT (ticker JPS). The fund is up by about 33% year-to-date. But judging from the size of the base, another 33% rally from here is a distinct possibility, especially as there is no resistance above.


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Special Feature

housebuilders The UK housing industry, especially within the London area, has defied almost everyone’s expectations. Housebuilders that have big property developments in London are doing well, notably the Berkeley group (ticker: BKG). But I suspect the London housing boom may radiate out to regional areas. The recent budget is continuing to support the industry via various ‘NewBuy’ schemes.


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One particular stock that caught my attention recently is Redrow (ticker: RDW) — a regional builder. The stock is testing major base resistance around the 200p. A break of this ceiling may send prices sharply as there is no credible resistance until 260-280p. The stock price is also exhibiting good uptrend consistency — a nice chart characteristic to have because it lowers volatility. To me, this is an interesting stock to add to a medium term, medium risk portfolio.

Some financial advisers can’t tell you about all the products on the market, so it really pays to speak to one that can. As truly Independent Financial Advisers we are free, unlike many other advisers, to offer our clients unbiased and, most importantly, unrestricted financial product advice on the whole of market. Whether our clients need investment advice, retirement strategies, inheritance tax planning or simply to reduce costs, we consistently find the most appropriate solutions to meet their requirements. If you’d like to discuss any aspect of your personal finances or simply have a free financial review, we’d love to hear from you. So for financial advice without the red tape, it really pays to talk to Financial Relationships. Call us on 020 7002 7715 or visit


relationships May 2013

Independent financial advisers

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A New Special Feature


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Markets In Focus

May 2013

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SPREADBETTING The e-magazine created especially for active spread bettors and CFD traders

Issue 17 - June 2013

in next month’s edition...

Sell in May and go away? We put the theory to the test

ToM houggARD ZAk MiR ThE oN gLoBAL iNTERviEWS MiNERS REviSiTED LuCiAN MiERS MARkETS 98 | | May 2013



SPREADBETTING Thank you for reading, we hope your trading is profitable during the forthcoming month.

See you next month!

May 2013

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Spread Betting Magazine v16  
Spread Betting Magazine v16  

Latest May 2013 edition now out! The e-magazine created especially for active spread bettors and CFD traders.