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SPREADBETTING The e-magazine created especially for active spread bettors and CFD traders
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MAGAZINE
issue 17 - June 2013
The gold Standard Explained A Complete History and overview
www.financial-spread-betting.com
FEATuRE PACkED AS EVER WiTH TRADiNg iDEAS SELL iN MAy AND go AWAy?
ZAk MiR iNTERViEWS BEAR RAiDER LuCiAN MiERS
THE MiNERS REViSiTED - Buy, SELL HoLD?
DiRECToRS DEALiNg guLF kEySToNE CoVERED
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 www.Zaks-TA.com, 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 www.alpeshpatel.com
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 www.TomWinnifrith.com - you can get alerts on everything Tom writes by following him on Twitter @tomwinnifrith or www.TomWinnifrith.com
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Editorial List Editor Richard Jennings Sub editor Simon Carter Design www.coyotecreative.co.uk Copywriter Sebastian Greenfield Editorial contributors Tom Houggard Thierry Laduguie Filipe R Costa Andrew Sillitoe
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 Summer greetings to you all! I hope as you are reading this, that the weather has improved and the sun has finally made an appearance in these rain lashed isles! Talking of “sunny uplands”, it seems that the world’s central bankers have indeed found the golden recipe for permanently levitating assets - simply print money. Hmmm... if only life and economics were that simple.... I’d recommend all readers take a look at our feature on the Gold Standard and its history in this edition of the magazine - food for thought about the debasement of fiat money and what the effects of the old Gold Standard are. It’s our opinion that this “print and be damned” will, inevitably, have very serious consequences for global markets down the line and is why we have been buying up selected gold miners in recent months. We revisit some of our mining picks too this month to update you on our thoughts and the current valuations here. With the drubbing that the entire sector has taken this year, as ever, we believe the market is throwing the baby out with the bath water. Patience, fundamental analysis and under leveraging should deliver those brave enough to take the other side of the sell button profits on a medium (and possibly short) term timescale. Other features include a cracking interview with Lucien Miers, Tom Houggard taking aim at the charlatans in the “investment seminar” arena and trading system sellers once again - our own thoughts are that if their advice/system was that good, then do as we do and put your money where your mouth is and trade your bloody system! You’d be amazed how many of these so called “guru’s” shirk when asked to step up to the plate and put their b*lls on the line. Our advice - save your money and download our Trading Guides instead! Be sure to take a look at our piece on the US equity market and the question as to whether we are about to enter a bear market. Valuations are stretched once more and the markets are heavily overbought, and with the bull market now over four years in length, the risk of remaining at the party are ever increasing... As we write, the markets are indeed beginning to break down and so remain vigilant and don’t believe the QE infinity stories would be our stance. And so, from sunny uplands to cloudy skies - both metaphorically and, sadly, in actuality as I peer out of the window! I wish you, as ever, profitable trading this next month.
Richard
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Contents
The Gold Standard Explained SBM takes a look at the history of the gold standard and potential implications for the future.
8 52
The Miners Revisited With valuations continuing to fall, we revisit some of our recent picks to reassess the landscape.
16
Zak Mir’s Top Monthly Pick
24
Spread Betting Fund Management Arrives
30
Dominic Picarda’s Technical Take
40
Tom Winnifrith on Nomads
63 68 72
Zak unveils his prime pick for the month of June.
We investigate how this unique, new asset class works.
Dom gets under the hood of some of the lesser known commodities in this month’s feature.
As ever, pulling no punches, the inimitable Tom Winnifrith takes aim at the AIM market and it’s NOMAD’s.
Tom Houggard Feature Observations from a Master Trader - with a free e-book offer from Tom, this month’s column is a must read.
Alpesh On Markets Wealth creators and wealth destroyers - this last few years have turned up surprising results...
Zak Mir Interviews - Lucian Miers The “new Evil Knievil”, specialist bear raider Lucian Miers is the interviewee this month.
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Sell in May and Go Away?
The World of Hi Tech Hotels A special feature on some of the most cutting edge technology focused hotels around the globe.
Is the old stock market adage actually based on fact?
20
36
Is the US on the brink of a new bear market?
44
We ask are we now in the last throes of the long four year bull market.
78 84
Directors’ Dealing We try to get to the bottom of the recent stocks sales by Gulf Keystone directors.
Robbie Burns’ May Trading Diary In the last of Robbie’s diaries until the end of the summer, the Naked Trader offers up some trading ideas.
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School Corner
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The 40 year Old Virgin and the Psychology of Trading
94 96
Thierry Laduguie of E-Yield explains DMI (Directional Movement Indicator).
A guest piece by Andrew Sillitoe on getting into the mindset for successful trading.
John Walsh’s Trading Diary Trading Academy winner John Walsh runs us through his experiences this past month.
Markets In Focus A comprehensive markets round up of under and out performers during the month of May.
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Special Feature
THE GOLD STANDARD EXPLAINED By Filipe R. Costa & R Jennings
Given all the talk around QE and its link with the gold price, we thought it would be interesting to explain just what the Gold Standard is and where it came from...
“There have in fact been several attempts in history to use precious metals as a means of exchange and as a nation’s real guarantee against its obligations and issued currency.”
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The Gold Standard Explained
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Special Feature
There have in fact been several attempts in history to use precious metals as a means of exchange and as a nation’s real guarantee against its obligations and issued currency. References to the use of precious metals and metal standards go all the way back to the Middle Ages, but it was only in the 14th century that a formal gold standard was established. It was the adoption of the British Gold Sovereign that created the foundations for a gold standard which was formally introduced in the UK in 1821 and then followed by Canada in 1853 and the United States and Germany in 1873. Until it was officially dismissed in 1971 by U.S. President Nixon, the gold standard lasted for more than a century. Through fixing the price of a currency relative to the gold price and by assuring full convertibility between both, the gold standard effectively steals monetary policy control from the hands of central bankers (and eventually politicians). It stops them being able to simply print money as they wish (where on earth would Mr Bernanke be under a gold standard, eh?!). PRESIDENT ROOSEVELT
As a direct consequence of the gold standard, inflation remained low for more than a century, but at the expense of prolonged periods of painful internal adjustments. In fact, some recessions were so harsh during the 19th and early 20th centuries that governments on occasion interrupted the convertibility of paper currency into gold. In 1933, at the peak of the Great Depression, the U.S. President Roosevelt enacted a law making it illegal to own gold privately to reduce the pressure on the U.S. Federal Reserve at a time everyone was trying to exchange U.S. dollars for the precious commodity.
“As a direct consequence of the gold standard, inflation remained low for more than a century...” At the same time, when facing exponential expenses during periods of war, governments simply decided to cut the link between currency and gold to allow for extra printing. That happened during the American Civil War and after World War I. After Richard Nixon dismissed the gold standard in 1971, abandoning the Bretton Woods agreement, the printing of dollars monopoly reverted to the FED. A new era had begun, an era that has coincided with the massive depreciation of the dollar. The gold standard was abandoned worldwide and the FED printing machines have never stopped since. As a consequence, gold has risen from $35/oz to more than $1,900/oz — the record high seen last year.
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The Gold Standard Explained
“You can begin to see how this was a fantastic inflation containment mechanism, but also how it could restrict a country’s ability to make itself competitive versus other gold standard bearing countries.”
CHART - GOLD PRICES
What Is The Gold Standard? While so called fiat paper currency has no intrinsic value within itself — simply being cotton and paper — it is universally accepted in good faith around the globe, coming with the backing of each country’s respective government. With the gold standard, all notes and coins in circulation were physically backed by gold. What this means is that the Federal Reserve could not print money at its discretion, but instead only as its gold reserves allowed. Here’s the key: in order to print additional money, the FED had to get its hands on more gold first. That could be done in two ways. One way was through discovering gold. That happened during the gold rush of the 1840s in California. Another way was by means of international trade. An exporting country would get gold in exchange for the products sold and then be able to expand its money supply. You can begin to see how this was a fantastic inflation containment mechanism, but also how it could restrict a country’s ability to make itself competitive versus other gold standard bearing countries.
Under the gold standard, the value of a currency is fixed in terms of gold. In the United States the exchange rate that was fixed from before the Civil War was $20.67, meaning one ounce of gold could be exchanged for $20.67, or, thinking the other way, a dollar could buy 1/20.67 gold ounces. Even though the official mint rate was held at a fixed price (only revised from time to time), the market rate could change. This prevented central banks from simply being able to print money. Let’s say the FED decided to print too many dollars. The excess supply of dollars would eventually lead to more people willing to exchange their dollars for gold, as they would perceive gold to be more valuable than the official rate states. This would contribute to depleting the central bank’s gold reserves and so reduce the money supply. Basically, any attempts from the central bank to control the money supply would be frustrated by market forces.
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Special Feature
From The Bimetallic To The Gold Standard Before adopting the gold standard, which only occurred after the end of the American Civil War, the United States had a bimetallic system in place allowing for double metal circulation. The idea was to adopt gold for large denominations and silver for smaller, while fixing the rate at which one metal is exchanged for the other. But, in order for this to work, the price of gold relative to silver had to be stable, something which wasn’t the case. In 1848, gold was discovered in California. Now, that was good in terms of increasing the country’s prosperity, but the other effect was the widening of gold supply which led to prices dropping. With the silver supply relatively stable, the price of silver relative to gold increased substantially, while the official mint rate wasn’t changed by the government. Can you guess what happened? Yes, silver disappeared from circulation. People preferred using gold for payments while keeping silver.
The onset of the civil war in 1861 made it difficult for the U.S. government to raise the necessary funds to pay for the rising costs involved with this without stopping the gold and silver convertibility and thus allowing for some inflation. Then, in 1873 the coinage act demonetised silver and gave rise to the gold standard, but only in 1879 was the country able to restore gold convertibility. Instead of revaluing gold from $20.67 per ounce to a higher value, the U.S. government decided to keep the exchange rate unchanged. For the value of the dollar to rise, the money supply would need to contract. The stock of money supply then rose at a lower rate than real output and in 1879 equality was obtained and gold convertibility fully restored. There then followed a lengthy period of deflation and economic contraction which clearly depicts one of the drawbacks that come with the gold standard.
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Potential gains coming from price stability often have painful real economy adjustments on the other side of the coin. We can see here some similarities with the current situation inside the Euro area. Without monetary policy in their own hands, Portugal, Greece, Italy and other peripheral countries had (and still have) a tie on their monetary levels and so a similar form of the gold standard.
World War I and The First Currency War The advent of World War I led to real misery and it was during this time that the gold standard was severely wounded as a monetary stabiliser. Again, and similar to what happened during the Civil War, expenses rose exponentially during World War I and many countries had to simply stop gold convertibility.
With limited sources of tax revenue the US needed to print money on a large scale. Simply relying on its gold reserves to expand the money supply wouldn’t bring in enough money to cover all her expenses. Similarly, printing more money than could be backed by gold reserves would lead to a run on banks with people trying to convert dollars into gold. The only way out was to abandon the gold standard for some time. After the war came to an end, the US economy recovered during the so called roaring 20s and the gold standard was re-adopted. In the UK, re-adoption of the standard was done in 1925. But in 1931 the pound was hit by speculation. External aid wasn’t enough to avoid the worst and Britain decided to abandon the gold standard allowing for the currency rate to adjust and the economy to recover. Instead of following the same steps as the Brits, the U.S. insisted on keeping the standard alive — a big departure from the present day FED’s ‘print and be damned’ policy, that’s for sure!
The Gold Standard Explained
“Similarly, printing more money than could be backed by gold reserves would lead to a run on banks with people trying to convert dollars into gold.” The increased pressure on the dollar led the FED to raise interest rates at a time when the economy was in a very fragile situation. Contraction turned into one of the worst recessions in US history — the Great Depression. A lesson was learned here. Monetary policy could be a valuable tool to make adjustments to an economy in particular when the problems start from within the financial sector. Countries who first left the standard allowing for currency exchange adjustments, as Britain did, recovered much faster than others, avoiding a long period of painful internal devaluations. Today’s central banks learned the lesson and that’s why they are all trying to manipulate their own currencies.
From the Bretton Woods Agreement until the end of the Gold Standard After the Second World War a system similar to the gold standard was implemented by the Bretton Woods agreement. Many countries agreed to fix their exchange rates relative to the U.S. dollar. Currencies were all pegged to the dollar but — one key element — individuals were no longer able to exchange paper currency for gold. This convertibility was only allowed for by central banks which agreed between them for an exchange rate of one gold ounce per $35.
Gold Standard Critique Many academics, politicians and professionals today blame the gold standard for the long depression period that characterised the 30s — certainly in the US. The standard effectively prevented the FED from expanding the money supply in order to stimulate the economy, provide liquidity to insolvent banks, fund government deficits and avoid painful internal devaluations made at the expense of job and wage cuts. Instead of lowering the interest rate, the central bank had to raise it to avoid a run on banks which were faced with people looking to exchange the depressed dollar for gold. Real interest rates during the early part of the depression remained high for quite some time, encouraging savings and depressing consumption, further contributing to denting output levels. Instead, China and Spain, for example, avoided almost completely the contagion effects. By running a silver standard, China hadn’t pegged its currency to gold and therefore was able to create an automatic adjustment of silver to gold. The lesson to learn here relates to the power of exchange rate as an adjustment mechanism to avoid crisis contagion — something modern day central bankers are all too aware of. Recovery from the Great Depression was very slow and it was in 1934 at the height of the economic woes that the U.S. Congress was forced to revalue gold from $20.67 to $35/oz against the dollar.
But, again, the system didn’t last forever. In 1970 France started exchanging U.S. dollars for gold inflicting a contraction on the U.S. money supply. At that time, the US was facing increasing expenditure due to the Vietnam War and so President Nixon ended the direct convertibility of the dollar into gold on a date that effectively was the end of the gold standard – August 15, 1971. Over the subsequent years the U.S. dollar was devalued several times against gold until in 1976 the U.S. government finally removed all links to gold and changed the monetary system to pure fiat money which remains to this day.
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Special Feature
Conclusions The gold standard lasted for more than a century and clearly illustrates the importance of getting central banks and governments away from printing machines if we are to avoid inflation. Because central banks have largely always presided over inflation when given control of the money supply, many advocate against it and in fact a return to the gold standard or a form of it. But the vast literature on the subject also shows that the Great Depression could have been minimised with the help of monetary policy. Rising interest rates during contractions just generate depression.
“ALL ELSE EquAL BEiNg EquAL, WE EiTHER NEED u.S. DEBT To BE REDuCED By A FACToR oF 15 TiMES oR goLD PRiCES To RiSE To $21,633.” That happened during the American Civil War, the Great Depression, the Carter hyperinflation era and at the end of World War I. If we were under the gold standard, I am sure that “Helicopter” Ben Bernanke would eventually have lifted the gold standard already in order to lower interest rates and buy assets as he has done. The alternative would likely have been a depression comparable to the 1930s — something that nobody wants apart from the crackpots that hide out in the mountains with cans of baked beans and a personal armoury of guns!! For those, however, who do believe the U.S. should return to the gold standard, just let us remember that at the current price per ounce of $1,430, U.S. gold reserves are valued at $373.8 billion while U.S. Treasury securities in foreign possession amount to $5,657 billion. All else being equal, we either need uS debt to be reduced by a factor of 15 times or gold prices to rise to $21,633. ouch!
The average inflation rate was much lower during the gold standard (+1.36%) than after it (+4.36%). It is clear that every time gold convertability was cut, inflation rose substantially. That was the case during the American Civil War (+11.86%) and during World War 1 (+10.83%). As the gold standard doesn’t allow for expotential money supply expansion, periods following wars were tough to surpass and deflation always ocurred.
The gold standard certainly has its positives, but returning to it would not automatically guarantee price stability. What matters the most is not the system but the commitment to it. Just remember that, in the past, governments took their own countries out of the gold standard whenever they needed to raise material amounts of new capital.
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Editorial Contributor
ZAk MiR’S MoNTHLy PiCk FoR JuNE Buy kAZAkHMyS (kAZ): TARgET 420P SToP LoSS 295P i have no real reason to plug my first book — “101 Charts For Trading Success” given that it has already been at the number one slot in the Amazon investment books chart, and so satisfying my pride. At just £2.99 it would have to sell in the hundreds of thousands in order to change my lifestyle!
RECoMMENDATioN SuMMARy: The cue for mentioning it is however relevant to the current position in Kazakh copper miner Kazakhmys, where the group is a major shareholder in present bid target and all round example of good corporate governance (cough, cough!), ENRC. This is because despite the title of the book, there was also an extended (and as far as I know quite unique) study into the anatomy of bid situations, i.e. just what happens in the build up to them, the price action during this period and a noticeable number of “flush outs” and traps which tend to occur. My view is that if traders had appreciated that the book contained such treasure, it would still be number one on the charts to this day! Indeed, it may be worth writing a new book describing just the price action around bid situations and how to take advantage of them — just to spell things out once and for all.
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In fact, I watched as Spreadbet Magazine’s editor, Richard Jennings, flagged a potential deal for ENRC in the most poetic manner, and the collateral advantage to Kazakhmys — one of his favoured picks at the current price.
However, there was perhaps one aspect which was forgotten in the whole bid process, and that is the general rule in that when a bid approach has been revealed to the newswires, and hence there is an insider secret aspect, that there is almost always an event — usually a couple of weeks before the deal actually goes ahead — when there is a flush out that would cause the majority of long/hot money to exit.
Zak Mir’s Monthly Pick For June
Take a look at a lot of prior situations, in particular the BAA deal in 2006, to see what I mean. This event duly arrived on May 17 as ENRC’s independent board (we hope!) rejected a proposal from a consortium of its founding shareholders. There may indeed be a higher offer, there may not, but historically there is always a dive in a target stock at this point in the proceedings. My bull call in Kazakhmys is based on the notion that whether or not a deal is forthcoming (the idea is not reliant on there being one) we have now seen the floor in the shares. On a technical basis, I would argue that there are three factors competing here.
The first is the risk that the post March price action roughly, between 300p and 400p, is an extended bear flag, and that as little as an end of day close back below the April £2.91 intraday low could trigger fresh, and possibly painful, new losses. However, it would appear that the natural support for Kazakhmys is in the £3.30 zone, an area that has, until now, been tested successfully on four occasions with just the single mid-April flush out below 300p. While there is the option for bulls to simply wait on end of day close above the 50 day moving average at 405p as a buy trigger, and hence avoid the current noise in the middle of the range, going long close to £3.30 with a stop loss just below £3 would be sufficient in terms of risk / reward for me at this point. The upside is seen as a test of the former April 422p peak over coming weeks.
KAZAKHMYS 4 MONTH CHART
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Editorial Contributor
Recent Significant News:
Fundamental ARGUMENT:
April 25th: Kazakhmys stated that it was on track to meet its annual production targets, as revealed via its interim management statement for Q1 2013. It reported copper cathode output of 73 thousand tonnes (kt) and said that it would meet its own targets of between 285kt and 295kt. Production was boosted by uninterrupted ore output and processing and extraction of ore increased by 3.0% and 17% compared to the fourth quarter of 2012 and the first quarter of 2012 respectively. By-product output was on track to meet annual production targets.
Since the start of the year we have seen mining stocks punished heavily almost whatever their financial or profits position may be. Those focused in the area of precious metals, in particular gold, continue to spiral to the downside. This is in contrast to the position of copper in which Kazakhmys specialises. Here it is fair to say that prices have been stable over the past couple of months and show early signs of rising.
March 26th: Copper miner Kazakhmys was hit with a 2.2bn dollar impairment charge on its holding in ENRC, the group’s audited results for the year ended December 31st have shown. The group said that ENRC, in which it holds a 26% stake, experienced sharp declines in pricing for its major products, iron ore and ferrochrome, in 2012. EBITDA came in at $1.9bn for the year due to lower commodity prices, higher costs and lower sales of copper products. As far as the impairment charge of $2.2bn on its stake in ENRC is concerned, Kazakhmys said that the carrying value reduced to $2.0bn or 375p per share.
Clearly, traders are entitled to mark down miners on the basis of Chinese hard landing fears which currently appear to be well founded. However, with the share prices of many plays already having halved since the beginning of the year it would appear that in many instances valuations are now relatively bombproof. As far as Kazakhmys is concerned, without even mentioning the potentially beneficial effects of the sale of its 26% stake in ENRC, there are further possible M&A possibilities with the sale of its 50% stake in power division Ekibastiz. The fundamental view regarding the ENRC situation is that even if the worst-case scenario does occur and no deal is struck, that from now on ENRC is likely to be valued significantly more highly than in recent months, with a floor put in, if only on the basis that at any time the M&A situation could reignite. This is obviously good news for Kazakhmys and its shareholding in the group, hence the view that towards 300p there is exceptional value in the copper miner. In addition, we have the more run-of-the-mill way of analysing Kazakhmys derived from recent trading updates, especially in the Interim Management Statement at the end of April. Here the group said that it was on track to meet management expectations, with solid production levels and, perhaps most importantly, good demand for its products. In the absence of any fresh bearish input on these aspects it can be said that even the harshest critic of the group would be hard pushed to suggest that the stock has much more downside. And with a catalyst for upside, certainly coming from the Eurasian situation, and should metals prices finally reach a bottom anywhere near current levels, then Kazakhmys is very well geared to any upside for the sector as a whole.
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RISK WARNING SPREAD BETS, CFDS & FX ARE LEVERAGED PRODUCTS & CAN RESULT IN LOSSES THAT EXCEED YOUR INITIAL DEPOSIT. JN FINANCIAL IS AUTHORISED AND REGULATED IN THE UK BY THE FINANCIAL SERVICES June 2013 AUTHORITY. | www.financial-spread-betting.com | 19
Special Feature
Sell in May & Go Away Myth or fact?
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Sell in May & Go Away - Myth or fact?
Although at the time of publication we are in fact just coming to the end of May, with the FTSE looking to have the old 1999 highs of 6990 in its sights, it seems prescient to ask if the stock market old wives’ tale of “sell in May and go away; don’t come back til St Leger Day” is worth heeding, and also just where it came from? The saying came from a rather more genteel time when the City of London and the participants in the stock market would decamp for much of the summer, attending sporting events and generally enjoying the fine weather (sounds like an idyllic Britain, eh? Certainly not one I recognise in recent years from a weather perspective where it has been hard to distinguish summer from winter!). The net result was a rather more volatile market environment with far fewer people trading in stocks (again, most definitely in an era pre HFT where stocks can move 10% in a day!) and so it was reasoned it was better to remain out of the market during these months.
FTSE 15 YEAR CHART
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Special Feature
Historically, after St Leger Day, which falls on September 14, all those well-to-do market participants and the City’s great and good would return to the office, refreshed from their sporting events and fine weather, and the fun and games of investing would begin again. How times change, eh? An entire summer watching sporting events may be an occupation of the “shameless” generation, but for the vast majority of investors little more than a pipe dream...
There are however those who still believe that the St Leger strategy holds good and in looking at the last three years, as the chart below shows, those heeding the old saying would in fact have avoided some pretty decent losses during the summer months although, it has to be said, holding out right until St Leger’s day in 2012 would have resulted in one getting back into the market at higher levels than when sold on the 1 May.
FTSE 3 YEAR CHART Dr Ben Jacobsen, an academic from Massey University in New Zealand, actually carried out an academic study into the effect which is also known as the Halloween Indicator in the US (where you are advised to reinvest on October 31).
“The effect tends to be particularly strong and highly significant in European countries, and also proves to be robust over time.”
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Sell in May & Go Away - Myth or fact?
“Surprisingly, we find the ‘Sell in May’ effect is present in 36 of the 37 countries in our sample,” said Dr Jacobsen. “The effect tends to be particularly strong and highly significant in European countries, and also proves to be robust over time. Sample evidence shows that in a number of countries it has been noticeable for a very long time, and in the UK stock market we have found evidence of a ‘Sell in May’ effect as far back as 1694.” Jacobsen analysed trading volume, changes in interest rates and a whole host of other factors and was unable to come to a definitive conclusion as to just what causes this recurring phenomenon. What was striking in relation to the sample period of 1998-2012, however, was that on average the November-April returns are larger than the May-October returns in all 37 global markets they studied — the difference is equal to about 10 percentage points — a very significant sum, but equally when using other rolling periods then, frustratingly, differing conclusions were arrived at. An interesting statistic in relation to our home market is as follows: if an investor sold out of the FTSE 100 on May 1, 2010, and bought on St Leger’s day the same year, repeating that in 2011 and 2012, they would have been up 39.53pc today. That compares with a rise of 25.84pc for someone who “bought and held” from May 1, 2010. However, over a longer and more statistically useful 10-year view, the St Leger strategy is less of a dead cert, actually underperforming the “buy and hold” method in the UK. It seems that 50 percent of the time it works and 50 per cent of the time it doesn’t — hardly a useful trading strategy to follow and no better, in fact, than flipping a coin.
The saying also holds, over most periods, more credence when applied to the European markets too, relative to the US and Asian ones. And so, with the German Dax in particular probing new record highs on a daily basis, it may in fact be wise to take capital off the table for those who have been positioned long here. Another way to play the effect, which has a hit and miss basis, is perhaps via the options market where one takes an outright Put position on the index against a Long position or alternately a Put spread. This way you do not miss out on further gains to the upside if we happen to be on the ‘tails’ side of the coin this year when it doesn’t work and only the premium on the Put is lost. With option premium cheap, as the Vix is so low, this is a very sound strategy in fact. A particularly interesting element about the May October period, however, is that the study showed the following effect in many countries during this period: returns are, on average, systematically negative or lower than the short term interest rate which also goes against the efficient-market hypothesis (something that regular readers of this mag will know we certainly do not subscribe to!). With current interest rates near zero and many markets in intermediate overbought territory, then this does perhaps not bode well for this summer...
June 2013
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Special Feature
Titan investment partners - a fusion betw management and the unique attributes o onto the marketplace... 24 | www.financial-spread-betting.com | June 2013
Titan Investment partners
ween traditional fund of spread betting arrives
June 2013
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Special Feature
One of the major criticisms levelled at spread betting is that most punters ultimately lose and so, why should they bother? The reasons for the large number of losers is debated widely within City circles, and the true answers are actually legion; so complex a matter is the interaction between trading and human psychology. At its heart, though, are two primary factors that account for the losses: trading inexperience (which covers a multitude of no no’s, from the inability to cut a loss quickly through to a basic lack of research) and, secondly, what is known as “over trading” or taking on too much leverage. This publication has covered extensively in almost all of our prior issues the dangers of over leveraging, but unfortunately whilst copious amounts of gearing remain available within the industry to traders (for example with mining stocks one is able to trade on just 3% initial margin, FX trading can be levered 200, 300 + times etc...), the number of losing traders is unlikely to change. It seems that we are simply hard wired to take on crazy risks when the words ‘spread betting’ (and ‘CFD trading’) are used.
“Partnering with specific spread betting firms, Titan is pioneering this new blend of disciplined fund management with all the benefits of spread betting.” Enter a new type of fund management company — Titan Investment Partners. A company that marries the important principles of institutional type fund management — diversification, thorough research, experienced trading capability and rigid discipline — with all the best elements that spread betting offers — namely the ability to go both long or short, more tax advantageous dividend treatment for higher rate taxpayers, funding rates more typical of large institutions and, most importantly perhaps, the possibility to make completely tax free gains*.
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Titan has been founded by the editor of Spreadbet Magazine who is a chartered financial analyst and former institutional fund manager, together with the former CEO of publicly listed tech company Synchronica. They are supported by a dedicated trader with over 10 years trading experience and holder of an Economics BSc and CISI Diploma, a compliance manager, third party research and their own proprietary research capability. This magazine has produced an enviable record of successful trading calls over the last 15 months: correctly calling the turn in the Japanese market, the sharp end of year rally in global markets and the mining sector cyclical rally, as well as a host of individual stock picks right throughout the market capitalisation spectrum. Partnering with specific spread betting firms, Titan is pioneering this new blend of disciplined fund management with all the benefits of spread betting and, most importantly, have placed their clients squarely at the front of the consideration list: FCA authorisation and so the important segregation of client funds for retail clients, automatic participation in the Financial Services Compensation Scheme (FSCS) for eligible clients and so meaning that in the unlikely event that either it or CFE were to go into liquidation and there was to be deficiency in the client money bank account, eligible clients are covered by the FSCS up to £50,000 (for further information see www.fscs. org.uk). They have also negotiated reduced funding rates of LIBOR +/- 1.75% which compares to +/- 2.5 - 3% with most other spread betting firms, and embedded spread rates of just 10bp (excluding market spread) against industry comparable rates that can go up to 50bp. Fees are also at the lower end of the fund management industry spectrum with initial fees of just 1.75% (compared to 5% with many unit trusts and managed funds) and annual management fees of 1.25%. The directors and managers have their own capital on the table in each and every fund and so “your gain is their gain and your pain is also their pain” helps concentrate the directors’ and fund managers’ minds!
Titan Investment Partners
“The managers will be unveiling a further suite of funds as the summer progresses including an index, FX, small cap and US equities fund.” Performance fees are of the typical “hedge fund” type — 20% of any gains generated subject to what is known as a “high watermark” which means that the performance fee is charged only once on each gain. The 20% performance fee is less than the current CGT rate of 28% and so, in periods of positive returns, the investor is making a saving of 8% relative to a typical fund that doesn’t levy a performance fee. Of course, should losses be made, however, the client doesn’t have the ability to offset these against capital gains, but that is the case for any spread betting account whether managed or otherwise.
Leverage is, however, tempered at 2.5 times invested capital in relation to stock positions (commodity, index and currency positions are higher levered) which means that for an account of £10,000 in size that the maximum value of the underlying stock positions will be £25,000. Contrast this with many spread betting accounts that are levered 10-15 times and where the risk of a ‘blow up’ is inordinately higher.
So how does it work? The process is pretty simple: an application form is completed on line at www.titanip.co.uk and submitted to Titan whereupon the appropriateness of spread betting for the applicant is assessed by our partner firm and suitability of the Titan spread betting managed funds offering is assessed by Titan. Assuming these checks are passed, an account is opened with the partner firm; this account is “view- only” (i.e. you cannot trade on it; only Titan’s fund managers can make trades on the account, but you can view it at all times). All trades are made from a “master account” which is essentially the directors’ or managers’ own money (an illustration of their conviction and alignment with their clients) and the “sub account” trades are made at exactly the same time. In effect, all orders are aggregated and placed directly into the market through the DMA (Direct Market Access) mechanism or via Titan’s and our partner firm’s traders. No client benefits at the expense of another — all trades are booked at the same price for each sub account.
Positions are diversified with no one stock position accounting for more than 10% of the underlying funds geared value and, when fully invested, a minimum of ten individual stock positions are held — so reducing “unsystematic risk” whilst at the same time allowing for a concentrated best ideas basis of operation and so the hoped for “alpha” within the portfolio.
The minimum investment is set at just £5,000 and there is no maximum. Client monies can usually be withdrawn on demand, although a seven day notice period is included in the T&Cs to protect all other clients should a large liquidation notice be given by one or more clients in order to attempt to minimise portfolio liquidation issues. Initially there will be three funds — the Titan Macro, Oil Explorers and Natural Resources — the latter two will be almost exclusively stock focused with the flexibility to hedge via commodity instruments. The Macro fund’s mandate allows it to invest globally across all asset classes.
The managers will be unveiling a further suite of funds as the summer progresses including an index, FX, small cap and US equities fund.
Titan’s fund managers will produce quarter end portfolio reviews explaining the basis behind the trading that has been carried out and their outlook on the various asset classes. Although the fund managers of most of the funds are prepared to invest on a very short term basis, they are believers in the adage that “over trading” generally mutes returns and so quick fire trading is rare. Thorough research, appropriate timing of investment and a value bias lend the portfolios to a more medium term nature, particularly the stock focused ones and so the accounts should not be viewed as high octane day trading funds — again an illustration of how Titan’s basis of operation is on an almost dichotomous manner to a typical spread betting account. One final and important differentiation of Titan’s offering is that the risk parameters overlaid on the Titan funds are such that their partners have agreed to offer non-recourse to their clients on certain funds, which means that a client cannot lose more than they deposit — this is in complete contrast to almost all other spread betting facilitators.
June 2013
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Special Feature
To summarise, here are the main attributes of the Titan offering: 1
FSCS protection for all retail clients.
2
Directors’ and managers’ own capital on the table in each and every fund.
3
Professional fund management background.
4
A dedicated and experienced trader to assist in the execution of the trades and provide best and capable execution.
5
More cost effective funding and commission/spread charges than is typical of a personal retail spread betting client account.
6
Value bias of investment in the stock funds with long/short exposure, diversification of positions and leverage constraints.
7
Unlike an ISA, no limit on the tax free investment.
8
90% dividend credit on stock positions – a material saving for higher rate taxpayers.
9
Regular reporting of fund performance and managers’ outlook.
10
Non-recourse basis of investment: meaning clients cannot lose more than they invest, unlike almost every other spread betting facility.
Our flagship fund in which we have carte blanche to invest across asset classes in the pursuit of absolute returns. The fund can invest in spread bets stocks, commodities, currencies, indices, bonds and options across the globe and has specific position size limits and maximum overall leverage levels with stop losses employed where appropriate. This is our true “hedge fund” type offering.
This fund invests in principally commodity related stock spread bets and spread betting instruments based on commodities such as oil and gold futures. The underlying spread bet stock bias will be towards the UK however. Once the fund is invested in full then it is subject to a minimum of eight individual positions and as with our Oil Explorers fund, will be allowed maximum gearing of 2.5 times net equity.
To learn more about this unique new concept & register your interest, visit www.titanip.co.uk * Whilst spread betting is currently tax free, legislation can change at any point. Spread betting involves the use of leverage and so could result in losses of some or all of the funds invested. As such, investments in Titan funds are riskier than investments in conventional non-leveraged funds. Leverage increases both losses and gains and you should only invest capital where you are prepared to accept a high level of risk to its security. Margin calls may be made at some point in the future and should you be unable to meet the margin call then you may be forced to crystallise a loss at that point. Spread betting in the UK is currently free from Income and / or Capital Gains Tax, but this may change in the future.
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As the title states, the fund invests in a leveraged manner in a diversified portfolio of oil exploration stock spread bets but can also invest in oil futures and options spread bets. Even though leverage is contained at 2.5 times invested capital, given the inherently risky nature of oil exploration companies, particularly smaller caps, this should be viewed as towards the higher end of the risk spectrum of our funds. The natural bias of the fund at any point in time is likely to be long and as with the TIP Natural Resources fund, once fully invested there will be a minimum of eight individual positions.
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Trade Up June 2013
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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 ALTERNATE CoMMoDiTiES SPECiAL Commodities have had a rotten run this year. For those long of various instruments, that’s probably an understatement! While stocks and corporate bonds have been booming, the CRB Commodity Index — which tracks the prices of 19 individual agricultural, metal and energy products — is down by 3 per cent. Quite a few investors are now suggesting that the massive boom in commodities that began in 1999 is now well and truly over. I have personally been taken by surprise by commodities’ weakness in recent months. I had expected the aggressive money-printing drive by the Federal Reserve to stoke another boom in gold and silver at the very least. Instead, many traders have dumped the precious metals and shied away from other raw materials, seeking out income-bearing investments instead, such as shares and corporate bonds. The recovery of the US dollar is one of the main reasons behind commodities’ poor showing. A dearer greenback tends to mean cheaper commodities and vice versa. This represents a big worry for these assets going forward. I reckon the dollar could strengthen a lot against the Euro in particular, something that really needs to happen, in fact, in order to ensure the single currency’s survival.
“iNSTEAD, MANy TRADERS HAVE DuMPED THE PRECiouS METALS AND SHiED AWAy FRoM oTHER RAW MATERiALS, SEEkiNg ouT iNCoME-BEARiNg iNVESTMENTS iNSTEAD, SuCH AS SHARES AND CoRPoRATE BoNDS.”
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Dominic Picarda’s Technical Take
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CRB COMMODITY INDEX CHART
Ultimately, my view is that the great commodities bull market of the last decade and more is not over, but is merely resting. Sooner or later, I expect inflation to become a serious problem in the Western world and emerging markets alike. In those conditions, gold, silver and other commodities should prosper once again, making new record highs in many cases. But, as any trader worth their salt should do, I do not let my big-picture outlook affect my short-term trading: indeed I have been shorting precious metals of late.
June 2013
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Editorial Contributor
CoPPER According to the pessimists, the recent sag in the price of copper is a sign of impending economic hardship and a likely collapse in equities. I do not share this particular view, barring a significant change in the Federal Reserve’s money-printing programme. Weaker economic growth in China is something of a worry, however, as the Middle Kingdom is a big consumer of the red metal.
CHART - COPPER
It’s worth noting that copper’s latest decline has been much gentler than the savage sell-offs in 2011 and 2012. While I reckon the next stage of copper’s bull market will see it make new all-time highs above 465c, I see a significant risk of further near-term downside. So long as it remains below its 200-day moving average — currently at 354.02c — I’d be looking to go short, targeting the 295-285 zone. Drops through the 21-day exponential moving average make obvious shorting entries.
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Dominic picarda’s Technical Take
PLATiNuM Despite its consumer image as one of the classiest metals of all, platinum has some decidedly unglamorous uses. The metal is a key input in the car-making industry, specifically in catalytic converters for reducing exhaust fumes. Demand for the precious metal is therefore sensitive to the state of the economy, and beats the likes of gold when the outlook for growth is picking up. European consumer demand is an especially important factor here, so recovery on the continent is key.
CHART - PLATINUM The price of platinum has been going sideways in a broad range since September 2011, between $1348 and $1745. Trying to play the moves within this zone seems the likeliest strategy for now. Specifically, the best buying opportunity in the near-term would come on a firm close above the 55-day exponential moving average at $1524.86, targeting the range highs of $1745. I would add to my long position once the 21-day EMA then also crossed above that line.
June 2013
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Editorial Contributor
SoyBEANS Unlike many other commodities, soybeans actually hit an all-time high as recently as last September. Since then, this crop has suffered a bear market drop of 24 per cent or so. However, the long-term uptrend beginning back in 2002 is still very much intact. As such, a strategy of buying on the rebounds from dips can make good sense. At the moment, it’s noticeable how soybeans have found stability around 1427c per bushel.
CHART - SOY BEANS
The coiling range of recent months suggests a big breakout is on its way. The last few of these sideways periods in recent years have clearly been followed by decisive breaks to the upside. From current levels, I would see a strong move through 1500c as being a good sign that soybeans were resuming their ascent. Ideally, I’d then seek to buy bounces from around the 21-day exponential moving average, targeting 1700c or so to begin with.
34 | www.financial-spread-betting.com | June 2013
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June 2013
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Technology Corner
The World of Hi-Tech Hotels BY Simon Carter
Time was that booking a hotel was something of a hit and miss game where you could count yourself lucky if a lumpy mattress and dripping shower were the extent of your problems. Thankfully, we now have the likes of Trip Advisor to put an arm around us and guide us to best accommodation anywhere in the world. It’s likely, however, that as a discerning person (and, as a reader of SBM, you must certainly be a discerning person!) you’ll find yourself wanting a little more from your hotels. Sure, excellent service, quality food and a decent selection of wine is a good place to start, but what if you want something a little cooler? Something with a little more razzamatazz. Something that you can’t wait to tell the folks back home about?
Whittle away the hours playing with the complimentary iPad (connected to high speed wireless internet) and call everyone you know on the VOIP telephone.
So join SBM as we take you on a guided tour of the world of hi-tech hotels...
Eccleston Square Hotel, London Where to start? Let’s start with the bed: electronically adjustable with variable massage settings? That’ll do! After all, you need somewhere to relax while you’re watching your 46” 3D NeoPlasma TV, supplemented by surround sound (and free 3D movies on demand). Mind you, it could be difficult to relax with totally unlimited Nespresso made in your own Nespresso machine. Coffee is a good idea, as sleep is a bit of a waste when there’s so much to enjoy.
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You could tell them about the underfloor heating in the bathroom and hall, or the flat screen embedded behind steam proof mirrors for you to watch while you enjoy the rainfall shower and handheld massage shower. Rooms at the Eccleston Square are surprisingly reasonable given that you’ll never want to leave, starting at just £175 a night.
The World of Hi-Tech Hotels
“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.�
June 2013
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Technology Corner
The Weinmeister, Berlin According to its own website, The Weinmeister is a “Golden Cage” in the heart of Berlin and one of the coolest ‘design hotels’ in Germany. While this all sounds a little vague (as does the stated remit that the hotel “is aimed at business travellers from the film, music, fashion and other creative fields, as well as leisure travellers”) this is the place to come in Germany to see design married to technology. Every room comes equipped with an Apple iMac which doubles as a TV, and you have the option to hire an iPad for the duration of your stay. State of the art is the watchword for the rooftop spa which uses the very latest technology to help you relax while you enjoy the views of the Mitte district of the city.
Mama Shelter, Paris The darling of the New York Times, the Mama Shelter in Paris is one of four in Europe (the others being in Marseille, Lyon and Istanbul). Like The Weinmeister, the Mama Shelter is beautifully designed with the word ‘chic’ seemingly sewn into the very fabric of the place. While the tech here is less showy (they boast that each room contains a microwave oven), if you can stretch to the Mama Suite, you’ll be impressed with the gadgetry to hand. Like all rooms, the Suite houses an iMac but you will also be showered with 54” Samsung LED TV, an iMac Mini and an office “for you to act like the international big shot you are”. Oh, and there’s a microwave if you’re too busy trading to get out and sample Paris’ finest cuisine!
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The World of Hi-Tech Hotels
Sax, Chicago It’s not often you’ll see a review open with the words “If it’s good enough for Jim Belushi…” but as the Sax’s website is so keen to promote the Blues Brother’s recommendation, it’s worth including here. So, with so much competition, what makes the Sax the stand-out hi-tech hotel in the States? Well, firstly there’s the guest-only gaming lounge. While not everyone’s cup of tea, the Studio Sax Lounge is stuffed with the latest consoles and 10 minutes on Guitar Hero seems almost mandatory. If you’d prefer to stick to your room, enjoy the 42” flat screen TV, relax while listening to the iHome sound system or make your way to the top of the range gym for a hi-tech workout.
Blow up Hall 5050, Poland Personally, I’d be tempted to stay in this Poznan based hotel based solely on the nonsensical, but very cool, name. It’s fair to say that the name does give you an idea as to what type of hotel this is, as it’s all a bit, well... different. Poland is an increasingly popular destination for explorers of Eastern Europe and the Blow Up Hall 5050 is fast becoming a word of mouth hit for hip travellers. Arriving at the hotel you are asked to pick a card as you check in. It’s true pot luck as the card you pick decides which room is yours, but the card is not your room key. Instead you’re given an iPhone which is yours for the duration of your stay. The iPhone guides you to your room, acts as a room key, operates your TV and lets you interact with the hotel, even going so far as to let you order your breakfast. One other thing; you’re filmed constantly during your stay with footage looped in the lobby. Unique.
June 2013
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Editorial Contributor
Tom Winnifrith SPECIAL
Why AIM is a Cesspit and the failure of the Nomad system
AIM is a cesspit. It has ceased to be a respectable market and has become a casino. In this casino, once the house (corrupt directors and fat corporate advisors) have taken their turn, investors must inevitably lose and lose big time. It is not just that half the stocks on AIM are patently not investment grade, it is that the whole Nomad based system is structurally flawed. And, as an added bonus, the regulatory team provided by the LSE is quite happy to see investors screwed. Wholesale change is needed at once if AIM is to survive. Let’s start with a history lesson for the under 45s. In the bad old days, junior companies listed on the USM. In its heyday it was a stepping stone to the main market for quality growth stocks. But greed entered the building. Advisors desperate to cover their bloated overheads floated any old crap. Companies told lies to raise more cash. And by the early 1990s the USM was regarded as a joke. And so it was abolished and replaced by AIM. AIM was meant to be different in that the prime regulatory responsibility lay with Nomads, Nominated Advisors — corporate finance houses regulated by the FSA. To be a Nomad you must employ at least four qualified individuals (folks with certain regulatory experience and who have worked on a certain number of transactions). That means that even a small Nomad has a pretty steep fixed overhead. A Nomad must sign off on any release issued by an AIM company. Essentially it is the prime regulator.
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“AIM was meant to be different in that the prime regulatory responsibility lay with Nomads, Nominated Advisors – corporate finance houses regulated by the FSA.”
In theory, if a Nomad allows PLCs to issue lies as a result of either its own corruption or just negligence, it is in the merde with the LSE AIM team and will face sanctions including the loss of its license. That big stick is meant to ensure AIM is an orderly house.
Tom Winnifrith Special
“As you can work out this can be a lucrative business. Float a company and raise it £5 million and you will in one year earn £400,000 as a result.” So how does a Nomad earn its fees? Three ways. It charges a company a retainer of anywhere between £20,000 and £50,000 per annum just for being a Nomad, signing off on releases etc. Secondly, if it advises on a specific corporate transaction/has to produce a document etc., it charges a one off fee. For an IPO, for instance, a Nomad will earn a minimum of £75,000, in most cases much more. Thirdly the Nomad is often also the broker (each company must have an FSA approved broker as well as a Nomad). The broker also charges a retainer but also earns a commission (usually 5%) on any fund raise. As you can work out, this can be a lucrative business. Float a company and raise it £5 million and you will in one year earn £400,000 as a result. Hence in the boom years, the number of Nomads ballooned and with the prospect of earning £400,000 from floating just one company, greed took hold and any old shit was listed on AIM. But, you cannot list POS companies forever because at some stage investors look at their returns and say enough is enough. And that is where AIM is today. Of course that is a problem for the Nomads because suddenly the big windfall income they used to earn from corporate transactions/fund raising just is not there anymore. Yet they still have high fixed overheads... Merely to stay solvent it is vital to get as many clients paying monthly retainers as possible.
“When was the last time you read about a Nomad being sanctioned?” As such what happens when a company issues an RNS which is a lie or behaves in a manner which is otherwise not acceptable? Does the Nomad dob them in as they should and lose a retainer or does it do nothing? Some Nomads will do the honourable thing. But I am afraid that others at the bottom end will not. But surely then the FSA, or whatever it is called now, or the LSE’s AIM Team will sanction that Nomad? Well it appears not. When was the last time you read about a Nomad being sanctioned? Exactly. The problem is that the regulators know that AIM is a stinking cesspit, but would rather that you did not know that and so have taken an attitude of brushing scandal under the carpet.
Let me take you back to 2005. I exposed an AIM company called 3DM for telling a stack of lies. It responded with a stream of letters from expensive lawyers and by letting it be known that I had been reported to the FSA for market abuse. In fact I was working with the FSA handing over a dossier of material that I could not publish because I was not at that stage structured to fight a libel case. Wind forward three years and the FSA publicly censured 3DM for telling more lies and disclosed only then that back in 2006 it had privately censured the company as a result of my work. Today 3DM is called Environmental Recycling Technologies. It is still on AIM. The very same chairman who made those misleading statements in 2005, Mr Ken Brooks, is still chairman. The Nomads who signed off on all those statements are still Nomads. Had 3DM stopped telling lies in 2007, no-one would ever have known of its errant behaviour. Even today a quick change of name and who can remember its old sins? It is still AIM listed. Let me now take you to 2012. Sefton Resources misled investors. We understand that its Nomad, Fox Davies, went to the FSA and reported Sefton and told the AIM team it wanted to quit at once. If a company loses its Nomad, it gets thrown off AIM. That would have been a scandal. So Fox Davies was told by the FSA that it could quit but had to give Sefton notice so that it could find another Nomad. The FSA, again we understand, said that the new Nomad would be told to read the riot act to Sefton and so things would get better.
June 2013
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Editorial Contributor
“Bad companies are kept going with pointless fund raise after pointless fund raise organised by fee desperate advisers.� Sure enough, Allenby Capital it seems, was desperate enough to secure another fee paying client and so it agreed to act as Nomad. As such, the regulators are fully aware that a company has misled investors, but instead of flagging this they cover it up allowing companies like Sefton to carry on issuing shares to mug punters who will no doubt inevitably lose more money. Sefton has had two fund raisings since Fox Davies quit including one 24 hours after it issued an RNS on production numbers which even it now admits was misleading. There is always some Nomad greedy or desperate enough to play ball. A scandal is hushed up but, in the end, investors are screwed by duff company after duff company, and that creates a bigger scandal which is that at least half the companies on AIM will never, ever make a profit and so will ultimately destroy shareholder value. Good companies are leaving AIM to list on other markets — Kryso is the most recent departure. Bad companies are kept going with pointless fund raise after pointless fund raise organised by fee desperate advisers. In the end, such a market ceases to be credible. It becomes a vicious circle. That is what happened to the USM. That is what is happening to AIM.
What can save AIM? A few simple changes are needed. 1. If a company fails in its business plan, it must be allowed to go bust. What happens today is that AIM allows it to become an investment company. A pointless sub critical cash shell which ends up investing in other AIM stocks. There are now a couple of hundred such zombie entities, simply existing to pay retainers to Nomads and brokers and to give a living to directors. Cull the lot of them. For a market to be credible it must be efficient and that means companies must be allowed to go bust. Capital will thus be allocated efficiently. 2. If a Nomad fails to report a company for telling porkies, it should lose its license at once. 3. If a company tells porkies, it should get a formal public warning and all of its directors should be automatically prosecuted for market abuse and sent to prison. The regulators have big sticks. But their failure to wield them is killing AIM.
Tom Winnifrith is an often controversial investment writer with a penchant for exposing companies at the bottom end of AIM that mislead investors. His main outlet is www.shareprophets.com
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June 2013
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Special Feature
Is the next bear market in US equities just around the corner? Positive market sentiment has certainly been rising continuously over the last few months — certainly amongst US investors and in particular institutional ones. The financial crisis, the 2000 tech bubble, the MBS collapse — all have seemingly been consigned to the nether regions of investors’ memories. The trade du jour for many investors is to remain with the momentum and buy every dip, no matter how small. The old adage “the trend is your friend” is the mantra, forgetting the second part of this saying “until it ends”... There have been some stunning moves in recent months in the more speculative arena of the market with the likes of heavily indebted (off balance sheet) Netflix rising from just under $50 back towards $230. Ditto with Linkedin and many other tech names. Valuations no longer matter, it seems, and there is blind faith in the U.S. Federal Reserve and the so called “Bernanke Put” — a belief that “Helicopter Ben” has eliminated any downside risks in equity markets and that the current extensive and sustained monetary easing program is the infallible recipe that keeps the engine of the market oiled only to the upside. Mmmm...
BEN BERNANKE
“The old adage - “the trend is your friend” is the mantra, forgetting the 2nd part of this saying - “until it ends”... ”
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Toparound 3 oil picks 2013 Is the next bear market in US equities just the for corner?
June 2013
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LKND & NFLX YTD CHART A particularly worrying sign to us is that after the material bear market of 2008-09 in which US retail investors ran for the exit and continued to be net sellers right up until the early part of this year — four whole years of selling — it is only now, with the S&P 500 up almost 140% from the lows, that they are turning bullish again. This to us is madness — the game is to buy low, be patient and sell high, not follow lemming-like into equities at a valuation high in the hope of missing out on further gains. Those readers with longer memories will recall this script from 1999/2000, and we all recall how that ended...
There are increasing signs that professional investors in the US are now selling into this strength and, coupled with the dearth of corporate deals, certainly for cash, this is surprising given the heavily padded balance sheets of corporate US. This also tells us that executive management en bloc does not see value in the market at large. The much anticipated deal boom for 2013 has not even got started.
“This to us is madness - the game is to buy low, be patient and sell high not follow lemming like into equities at a valuation high in the hope of missing out on further gains.”
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Is the next bear market in US equities just around the corner?
S&P 18 YEAR CHART There is also no doubt that the U.S. economy itself is recovering, and indeed has been for the past four years in unison with the bull market and unlike the stop-start situations in the UK and Europe. Data coming out of the US labour market gives us reasons to believe the worst is behind us with regards to economic aftershocks from the GFC, although the same most certainly cannot be said for Europe. Of course the stock market is a discounting mechanism — generally between 6-9 months — and it is entirely understandable that equity markets have risen in advance of the real economy catching up. The question now however is have the markets gone too far and is the belief in the Bernanke Put warranted given that the first noises about the QE exit plan are now being made.
While the S&P 500 is now trading at the time of writing at 1,633, unemployment is still near 7.5% — an historically quite high level and the Fed is targeting just over 6% as a point to really unwind their balance sheet. Bulls take solace in this as a reason for the market to continue higher — reasoning that it will take some time before this level is hit and the liquidity spigots are turned off. The unemployment number is however a distortion of the cruel reality faced by many people in the US as it is more the result of a narrowing workforce and economic inactivity than of a growing number of jobs being created. One thing to reflect on too: if the market continues to rise at the current pace, when the unemployment rate hits 5% we will have the S&P 500 trading at around 4,000!
June 2013
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Special Feature
With the bull market now in its fourth year and getting long in the tooth, it’s time to take a look at some objective facts: • On 9 March, 2009 the S&P 500 closed at its worst level during the crisis, hitting a floor of the Devil’s number itself — 666. Since then it has risen in 35 out of 51 months and currently registers a gain of 141% — one of the largest bull market gains on record. • On 3 October, 2011 the market hit a mid bull market cyclical bottom after a few months of successive declines. On that day the S&P 500 closed at 1,099.2 and it has now managed to recover 49% during the course of just 20 months. It rose in 16 out of those 20 months. • The current month is the seventh consecutive rising month. • During the last 12 months, the S&P has declined in just one month —it was last October and by a pretty small 2%. • Currently the S&P 500 is 14.5% higher YTD and up 20.3% over the 12 months period. These statistics should certainly cause caution to be exercised for bulls of the market and one could be forgiven for concluding that a decent correction is now long overdue. Question is what would be the catalyst?
S&P 500 RELATIVE TO FED’S BALANCE SHEET
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Compared with history, the current bull run is one of the strongest and most persistent history. Even rivalling the increases seen into the 1929 and 1937 highs, and yet the real economy has not performed anywhere near as well as the rebounds seen back then. The explanation for this unusual strength? Two letters: QE. When QE ends so goes the bull market and the recent declines in gold are, in our opinion, the “canary in the coal mine”. Take a look at the chart below to see just how tight the correlation has been between the S&P 500 and the size of the Fed’s balance sheet. The R squared is almost 100%.
Is the next bear market in US equities just around the corner?
“The average for this ratio over a hundred years is 16.47 and it is currently showing a reading of 24.26.” Throw into the mix the present valuation on the US market and the warning signs look ready to switch from amber to red to us. With corporate margins near all-time highs and the unemployment rate falling, there could be pressure on margins from the costs side. Additionally, many of the cost savings of the last four years are likely now exhausted and so high PE multiples against potentially compressing margins and profitability seem at odds with each other.
The average for this ratio over a hundred years is 16.47 and it is currently showing a reading of 24.26. It has been rising substantially over the last few months and is now approaching its pre-financial crisis levels. Of course, QE has distorted this, but remember that if QE ends and the so called “Bernanke Put” proves to be no more, then should the market take a sharp tumble in anticipating this, those recent retail buyers will most likely act according to norm and run for the exit once again. This is how bear markets begin...
One of the most useful ratios to use in order to assess the markets under or overvaluation is the P/E CAPE ratio, or Schiller’s ratio. It is a price to earnings ratio adjusted for inflation and one that is a smoothed measure.
SCHILLER CAPE MEASURE - 100 YEARS
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“The average for this ratio over a hundred years is 16.47 and it is currently showing a reading of 24.26.”
Both rising interest rates and inflation pose a serious threat to the market. If inflation finally rises as the banks’ repaired balance sheets gives them the room to begin lending en masse again (and there are early signs of this), then the money multiplier effect which has been absent during the QE programs in the wider economy will likely finally kick in. End result: rising inflation. Rising inflation = rising interest rates and so a brake on equity valuations. JON HILSENRATH
50 | www.financial-spread-betting.com | June 2013
At the time of writing, one of the WSJ’s columnists Jon Hilsenrath, widely seen as the media mouthpiece of the FED, has been tentatively making remarks on their behalf about the FED’s exit from the QE programs. Initially he has said that the amount invested each month in bonds will be tapered and this has, at the time of writing, been largely shrugged off by the markets. Once this becomes a reality, we doubt it will be accepted in such a muted manner by the equity markets though. And so, if QE is the primary explanation for the outsized bull market gains, then it is logical to assume that upon its withdrawal, even in part, that one of the fundamental pillars to this bull market will be pulled away. One thing is for sure, the stock market is now arguably out of sync with the real economy and is once more overvalued. Adding to long positions here is becoming an ever increasingly risky business.
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June 2013
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Special Feature
The Miners revisited It seems that there is no end in sight to the pain for certain sub sectors of the mining arena, in particular the gold and silver miners. A good proxy for this sub sector is the Gold Bugs index in the US and one look at the chart below relative to the gold price itself illustrates very succinctly just how much the sector has underperformed this year. Whilst the gold price is down over 20% YTD (time of writing), the gold bugs index is down over twice the amount at 40%. The picks we made in the April edition of our magazine have in fact now fallen on average around 20% with the likes of African Barrick Gold plumbing, on an almost daily basis, new lows. It seems, in looking at the bulletin boards, and the usual suspects — the “anal”-ysts — that sentiment is about as poor as it can be. Certainly, it is as bad as I can recall on a particular sector and is, to me, reminiscent of the market nadirs in 2009 and the aftermath of the tech crash in 2001.
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The million dollar question of course is: how much more is there to go on the downside? The market always has the capacity to surprise — that is a lesson which I have learnt many times over the years — and extrapolating prior events out to present day can be a dangerous game. One thing that any investor worth his salt always falls back on though is the fundamentals: when does a stock/sector become so cheap that it is a complete “no brainer”?
The Miners revisited
“One thing that any investor worth his salt always falls back on though is the fundamentals - when does a stock/ sector become so cheap that is a complete “no brainer”?”
GOLD BUGS V GOLD PRICE CHART We would argue that in certain mining plays, given their discounts to tangible book values, price to cash-flow multiples (our preferred, non-malleable measure) and cyclically adjusted PE multiples, that we are actually now through this point. Throw into the mix some of the most oversold conditions I can recall and the stage looks to be set for an explosive rally in the sector through the second half of 2012. The recent bid approach for large cap ENRC by its three major shareholders is likely to be just the first of a spate of mining mergers and acquisitions going forward, certainly whilst the valuations remain as depressed as they are.
Management of many of the small cap miners are openly commenting that at the current share prices it is all but inevitable that takeovers will occur. The only fly in the ointment would be if the gold, copper and silver prices fall another 20-30% which would put the viability of many of these mines at risk and so cast a question over the true book values of these business. Take a look at the table to the right which (at mid May) shows the relative performance of various commodities.
June 2013
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Special Feature
COMMODITY PERFORMANCE TABLE We can see that with the exception of gold and silver that many of them, in particular iron ore, copper and platinum, are actually some way off their 52 week lows, and yet the stocks of the likes of Anglo American, Kazakhmys and ENRC (and is of course precisely what prompted the bid) are still hovering near their 52 week lows. Remember, this is against a backdrop too which has seen the major FTSE 100 index move back to within spitting distance of its all time highs. “Mr Market� either believes that commodity prices are going to continue falling or, per usual, the pendulum of bearish sentiment has now swung too far on some of these stocks. With many of the large cap miners purging their balance sheets of overvalued asset values in recent months, and taking heavy write downs in the process, whilst still generating prodigious free cash flow, the stage looks to be set for the stronger players to pick up the assets of some of the smaller and more cash strapped companies.
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The Miners revisited
Returning to the ENRC bid situation, for example, the market sold the stock down from over 400p to just over 200p inside of six weeks as the chart below shows and, at that level, the stock was trading at a discount of nearly two thirds to its book value. Sure, in ENRC’s situation the bid is likely to have been given additional impetus through the corporate governance woes that overhang the company and the requirement to actually sell further stock — hardly palatable at such a lowly valuation — but, still, it highlights that industry insiders see real value in their stocks at current levels.
ENRC YTD CHART
June 2013
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Special Feature
Let’s take a look at some of the individual companies we have covered recently and so provide quick updates as to our thinking...
AMARA MiNiNg We initially suggested that Amara be included as part of a gold mining stocks portfolio in our April edition at a price of 37p. At the time of writing, the shares now trade at the lowly level of just 24p. We highlighted in our piece that the company was in fact one of the lower cost producers with an all in cash cost of around $800/oz — still plenty profitable when compared with the gold price around $1400/oz (time of writing). The Baomahun mine in Sierra Leone is expected to transform the company’s production profile when it comes on stream in 2015, although the market is worried about the costs of development of this mine in particular and, I guess, expects a heavily dilutive equity issue. However, management have stated categorically that at the current share price they will not issue equity and will in fact look to finance its build out in other ways.
Given that Samsung are actually providing a good chunk of the required development finance for Baomahun, the company has demonstrated the ability and willingness to look to non equity routes for capital raising purposes, and we actually think that the market is overly pessimistic in assuming they will not raise the funds required to bring the Sierra Leone mines to production. With broker targets in excess of 100p, some of the lowest cash costs of production in the sector and the likelihood of financing for the development of the mines being resolved over the next 6-9 months, Amara remains a resolute Buy in our book.
BuMi Well, if there’s one thing we can say about Bumi, it’s that it has certainly been a roller coaster ride for shareholders this past nine months... What with the open warfare between founder and shareholder Nat Rothschild, and on the other side the Bakrie family, accusations of corporate embezzlement and skulduggery and now a suspension (at the time of writing) of the shares pending clarification of certain balance sheet items, one could be forgiven for thinking that this company is best steered clear of. One man’s trash is another man’s gold however...
NATHAN ROTHSCHILD
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We originally recommended the stock around the 340p last summer and re-iterated our Buy stance at 230p in September. The shares duly rose to over 450p as the separation of the Bakries and a cash payment of some $273m was approved by the Board (not without further disruption from Mr Rothschild it has to be said) and is now awaiting completion. We are, it has to be said, “flying blind” somewhat at the time of writing with the shares still suspended and also being absent any further information on the balance sheet item adjustments. Bearing this in mind, we do think that it will take a long time before the company is rehabilitated in the City’s eyes notwithstanding what comes out of the accounting review, but should the stock fall back towards the old lows of last year around 140p on its re-list, believe that one cannot rule out the possibility of Rothschild and his supporters making an outright offer for the group, particularly if a large portion of the market cap is sat in cash, so making the financing of a bid much easier.
The Miners revisited
LoNMiN South African Platinum producer Lonmin has also come through an annus horribulus in 2012 what with the loss of its CEO Ian Farmer, a large rights issue (which was touch and go as to whether Xstrata — its major shareholder — would back), and the tragic events at its mine in Marikana that resulted in the shooting of a number of its mine workers by SA police. In recent weeks, the stock has fallen back from almost 400p per share to near 250p at the time of writing, as trouble has once more flared at the Marikana mine in the NW Province of SA. In fact, as we write, the RNS from the company revealed that all work had ceased as the miners have once more gone on strike. It seems to us that there will need to be a step change in the remuneration of the SA miners to put the labour issues to bed once and for all or there will be continuous interruptions to production.
That will of course crimp profitability, to a degree, going forward and will be exacerbated by further platinum weakness. However, with a number of other platinum producers reducing materially their mining of the metal, this is likely to be a fundamental support for platinum prices in the medium term. The long term story for the metal, namely growth in its usage from the auto industry in China in particular, is still very much intact, and with the restored balance sheet health, new CEO and a weakening rand to help profitability, should the stock dip much below 250p then we would be a renewed buyer.
kAZkAHMyS Regular readers of our blog will know that this has been a decent position of ours for a couple of months. The main reason is extremely simple — the sum of the parts of the business is worth around twice the current stock price. This is actually pretty easy to calculate too as KAZ’s 26% stake in ENRC is publicly traded and so we can attach a clear value to this; there are peer businesses to value against for Kaz’s large copper mining division, and then there is the value of the Kazak power generation business Ekibastuz that has stable cash flows and can be priced relative to other utilities.
2. Ekibastuz has been valued at between £1 - £1.5bn so taking the mid range we get £1.25bn.
At the time of writing, this is how the constituents breakdown:-
3. Copper division – the copper peer group trades on an average of three times EBITDA. Kaz’s copper division is slated to produce around £450m for 2013 and so results in a value of £1.35bn.
1. ENRC – Kaz owns 26% of ENRC and, at the current price (time of writing pre bid approach conclusion by the three oligarchs being concluded) of 300p, this equates to approx £1bn.
The net sum of these = £3.6bn. This also excludes their auxiliary services and copper refining businesses. on this valuation, adjusting for the £450m of net debt, the shares should be trading at 600p per share.
June 2013
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Downsides? Well, copper could collapse and their earnings fall by say half, Ekibastuz valuations are out of the window (highly unlikely) and no sale is achieved — this hardly impacts the price, however, as the “market” is presently giving no value to either the copper revenues or Ekibastuz. Finally, ENRC could fall back towards 200p. Given that it was this very value destruction in ENRC’s shares that prompted the trio of major shareholders to break cover and look to bid, then we doubt the stock will revisit these levels.
With the very real potential sale of their 50% stake in Ekibastuz on the horizon and a conclusion to the ENRC bid story imminent, as well as signs of copper turning higher, the stage looks set to us for a meaningful rally in Kazakhmys through the second half of 2013 and accordingly we remain long.
AVoCET MiNiNg It is fair to say that Avocet Mining has been our worst pick out of the gold miners’ portfolio, the stock falling from 24p to 14p at the time of writing, even though the company successfully managed to renegotiate its hedge burden with Australian investment bank Macquarie. Many retail holders believe that management were at fault for entering the hedge on the West African mining operations. However, we believe this a little unfair as the hedge was actually inherited when they took over the West African mines. Sure, criticism could be levelled at them for inadequate cash management in not anticipating the costs of the Guinea and Burkina Faso developments accurately enough, but all the same we do have sympathy with them in this predicament and feel that they handled the renegotiation well, certainly through avoiding dilution for their equity holders. It was in fact major shareholder Elliot Management who most likely drove the avoidance of equity dilution given their 27% holding in the company, and which was purchased at much, much higher levels. It seems that numerous analysts believe the loan from Elliot of $15m will need to be refinanced later in the year and that the spectre of another equity raising is likely to raise its head, particularly with the gold price under pressure again. With the stock trading at a 70% discount to adjusted book value and, at probably the cheapest EV/resource measure in the junior gold miners’ universe, we feel that fears over the viability of the business are more than priced in, although we would like to see management dip their hands into their pockets in a meaningful fashion given the depressed valuation. We caught up with Rob Simmons, Avocet’s IR head, and put the following questions to him:
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Q. Can you answer your shareholder base when they ask why, at this depressed share price, there has not been any directors’ buying of the stock showing their faith in the future of the company? A. As a full board listed company, it is not normal for our independent non-executive directors to actively trade Avocet shares; regular buying and selling of shares is not only difficult in view of the frequent closed periods imposed by the listing rules, but it might also be seen as impacting their independence. Our executive directors (David Cather and Mike Norris) both own shares and are incentivised to increase the share price through stock options and other share-based remuneration schemes (details of which are in our annual report). Q. When can shareholders expect a Souma reserves update? A. Souma currently has a resource estimate of 0.8 million ounces, and is progressing towards becoming a maiden reserve. The process to advance Souma to this point in time would require infill drilling of the existing resource, and we are currently reviewing an exploration programme for 2013/14 that would complete this work. At the moment, we have not published a timeline for Souma as our current focus is on upgrading resources both in and around the Inata mining licence in order to publish an improved reserve estimate and related revised life of mine (LOM) plan during the second half of this year. This revised LOM plan will provide the basis on which we refinance the Company at the end of the year, and this should show an improved mining/processing schedule compared to the March 2013 plan.
The Miners revisited
Q. Do you believe the Company is vulnerable to a bid at this price? A. Valuations right across the gold mining sector are depressed at the moment, with valuations on a resource basis in Avocet’s peer group dropping from around $75/oz a year ago to around $35/oz today. That said, Avocet is currently valued below our peers at less than $5/oz, and we feel that this does not reflect the value of our assets, and we are working hard to correct this. At Inata, we intend to publish an updated reserves estimate and life of mine plan before the end of the year, and which will form the basis of the Company’s refinancing and should lift the uncertainty that is clearly weighing on our share price at the present time. At Tri-K, by the end of the year we intend to have achieved the following: a maiden reserve, a feasibility study showing the project’s robust economics, and we will have submitted our application for a mining licence. At Souma, we have already taken the decision to progress work on this asset as a satellite pit for Inata and we will therefore avoid the substantial capital expenditures that would be associated with bringing Souma into production as a standalone operation. We have not published a timeline for Souma’s development, as this will largely depend on the prevailing gold price and Inata’s ability to fund exploration. Q. With the gold price falling, how do you intend to manage your cash costs of production given the slimmer margins that are now a reality? A. We recognise that we are now in a lower gold price environment and we are adapting our strategy and spending accordingly. We have significantly reduced capital expenditure at Inata for the remainder of 2013, and we have reduced headcount at both the mine (10% decrease) and at our head office in London (20% decrease). We are also implementing efficiency measures to further drive down costs; many of these are initiatives developed during Q1 2013 and the full impact will be realised during the remainder of 2013. An example would be with our mining fleet, which now regularly moves over 110,000 tonnes per day, whereas the average in the first half of 2012 was 83,000 tonnes per day.
A. Any equity raise would be dilutive; the question is whether any such raise is undertaken at an acceptable level. We recognise that the share price is heavily depressed at the present time and, as per my comments above, we feel that the market is not ascribing full value to the Company’s assets.
We have already made progress in unlocking value at Inata, and are working to have the value we see in Souma and Tri-K reflected in the share price. When we refinanced the company in March we did so without the need for an equity raise as we felt this was not in shareholders’ interests, and this was achieved in a very short timeframe and in difficult circumstances. Looking forward to the year-end refinancing, we will review all options available to the company over the coming seven months, and (as outlined in our AGM presentation, available here: http://www.avocet.co.uk/downloads/presentations/presentations_2013/20130423_AVM%20-%20 AGM%20final.pdf these options include bank debt, junior debt subordinated to MBL, convertible bonds, gold/royalty streaming agreements, as well as an equity placement or a rights issue.
Q. What do you say to those critics of the company that believe you will need to have a dilutive equity issue towards the year end to pay back the Ellliot loan?
June 2013
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AFRiCAN BARRiCk goLD African Barrick is another stock that is currently testing the patience of a saint and setting new records for just how oversold a stock can become. The downtrend has been absolutely relentless since the collapse of bid talks with China National Gold, with the stock falling from over 500p to, recently, just 125p. I have to rack my, now sadly ever expanding with age, memory in recalling when a profitable, cash backed business ever fell so much in such a short space of time.
AFRICAN BARRICK CHART
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Either the stock is warning of gold falling to sub $1000/ oz and quickly, or there is the bounce of all bounce’s to come here...
The Miners revisited
This strategy generally pays off when married with these types of fundamentals; the issue is sticking with the conviction and having the patience to hold it through the pendulum swing.
Here’s a reminder of the fundamentals at the current price: 1. Net cash backing of 70p per share 2. Dividend yield of over 7% 3. Prospective EV:EBiTDA for 2014 of less than two times 4. Price to net tangible book value (goodwill eliminated) of 0.3 times
Of course, should gold fall below $1000/oz and remain there, then all bets are off but, with the cash backing, and the very real possibility of parent company Barrick Gold tendering for the 26% of African Barrick that they do not own, we argue that this is now very much an asymmetric risk/reward position and accordingly remain long.
The above metrics are a value investor’s dream, and throw into the mix the predominantly bear sentiment on the stock (see chart below of analysts) with very few analysts advocating a buy, and you have a contrarian investor’s dream too. Remember, the game in investing is to buy low and sell high. If you get the opportunity to buy extremely low - this can, of course, only come about if you are a lone dissenting voice and going against the crowd — that is precisely what creates the price opportunity.
BROKER CONSENSUS TABLE
Our sister company — Titan Investment Partners — will be launching their Natural Resources spread betting fund within the next few weeks and will be managed very much along the lines of tempered leverage, thorough research, diversification of positions and stringent risk management. With the sector trading on these sorts of valuations, we believe there could not be a better opportunity to launch.
Visit ww.titanip.co.uk to register your interest.
June 2013
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TITAN I N V E S T M E N T PA R T N E R S
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Titan Investment Partners opens up its natural resources focused spread betting fund to the investing public
• A diversified selection of commodity related stocks • Long/short flexibility
• Leverage capped at 2.5 times • Director own capital invested within the fund
Titan's fund managers believe that absolute returns can only be produced through running a concentrated portfolio of best picks derived from thorough fundamental analysis, deploying leverage at appropriate points in the market cycle and patience. • Minimum investment of only £5,000 • All returns completely tax free*
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CLICK HERE TO REGISTER YOUR INTEREST OR EMAIL: INFO@TITANIP.CO.UK QUOTING NATURAL RESOURCES Risk Disclaimer Spread betting involves the use of leverage or gearing. As such, investments in Titan funds is riskier than investment in conventional non-leveraged funds. Leverage increases losses and gains and you should only invest capital where you are prepared to accept a high level of risk to its security. Margin calls may be made at some point in the future and should you be unable to meet the margin call then you may be forced to crystallise a loss at that point. *Spread betting in the UK is currently tax free but this may change in the future. No tax is payable on any gain you make, however, should losses be incurred these are not allowable for either 62 | www.financial-spread-betting.com | Juneincome 2013 or capital gains tax.
Editorial Contributor
ToM HouggARD
oBSERVATioNS WATCHiNg A MASTER TRADER i run a live trading room, where i trade live. it does exactly as it says on the tin. i call my trades out live. Editor’s note: unlike many of these so called fantastic trading systems that purport to deliver you to the sunny uplands of trading riches, yet the system sellers really need your £30,40, £150 per month. If they were that good, they’d simply trade their system! Three weeks ago I spoke to my mentor and close friend Larry Pesavento. For those of you who don’t know Larry Pesavento, here is a very brief bio:
LARRy PESAVENTo • Traded since 1968 • Pit trader in Chicago in the 1980s • Author of 10 books on trading
June 2013
• Specialises in pattern recognition • Simply an awesome trader
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Editorial Contributor
I happened to mention that I was running my live trading room and he asked me if he could join me as a teacher for a few weeks. I naturally agreed and we settled on a time zone which suited him. Larry would teach my group from 3pm to 4pm every day and trade live. I have had the pleasure of observing Larry actually in action trading over the last decade, but the last few weeks have been particularly enlightening, probably because my own understanding of technical analysis is so much better than it was when Larry started teaching me.
Author’s side note: i have created a manual which focuses on how i swing trade Forex. The material in the manual draws heavily on the material that Larry has taught me over the years. you can download the manual here: http://www.tradertom.com/free-guideforeign-exchange-markets/
JAPANESE YEN CHART
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Pattern Recognition Larry trades patterns. To give you an idea of what patterns he is looking for, let me clarify a few things first: Pattern recognition is not a double top or a wedge or a bull flag. This is not what is meant by pattern recognition. Sorry, you are not a pattern recognition expert because you can spot a head and shoulders pattern. Larry uses ratios and combines them with simple ABCD patterns. The ratios are 61.8% and 78.6% on the retracements, and he uses 1.272% and 1.618% on expansion trades. An ABCD pattern is simply a two-wave move in the market. Market moves up, market retraces, market moves up again. That is a potential ABCD move.
Confluences Next Larry will look for places where the ABCD patterns coincide with a Fibonacci retracement level. A recent example is included below:
Observations Watching a Master
“Pattern recognition is not a double top or a wedge or a bull flag. This is not what is meant by pattern recognition. Sorry, you are not a pattern recognition expert because you can spot a head and shoulders pattern.” The example to the left is incredible. I witnessed Larry call this in real-time and I personally made money from it. I also witnessed the questions that came with the trade posting in the live trading room. By far the most urgent question people asked was “Why are you shorting dollar yen when the trend is so clearly up?”
I often see people discuss stop-losses and the overriding philosophy is that stops must be as tight as possible. There also seems to be a widely spread agreement that if the entry on a short signal is say 101.90, then it is perfectly reasonable to have a stop loss only 10 pips away. Having studied under a trader with an enormous amount of experience from the trenches, I have been schooled to have wider stops, but with proportionally smaller stakes. It allows for much more stress free trading.
His reply was humble and sincere, “I don’t see it as up. The market is trending lower on the time frame I am looking at. I know the daily and the weekly and the monthly chart is up, but I am looking on a 5-min chart and on the 5-min chart the trend is down.”
Stress
I should quickly point out that Larry trades all time frames, and the pattern approach works on all time frames. The outcome of the trade is almost immaterial because it is just one of many. It happened to be a winning trade, but not before it had gone against me by 20 points. This leads me to another observation on stop-losses.
This is the final point of my observations. To watch him trade is very calming and soothing. You feel he has all the time in the world to answer questions and to ponder the market’s next move. Maybe this is the result of his 46 years in the market, or maybe this particular trading strategy simply allows you to flow with the market with ease.
Stop Loss
The trading manual is free of charge.
It immediately becomes clear that he takes his fair share of losses and it doesn’t bother him the slightest. It also became clear that his stop-loss on his positions is wider than I have seen before. On this particular dollar yen trade we entered short at 101.86 with a stop-loss at 102.25.
Enjoy. Tom Hougaard
June 2013
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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 three years and has had over 200 columns published in the Financial Times.
Patel on global Markets Wealth Creators & Wealth Destroyers
As I write this piece, I am preparing for a speech to global wealth managers based in the UK on ‘wealth creators and wealth destroyers’. Let me highlight what I will be speaking about... The following quote from the “vampire squid” Goldman Sachs in recent weeks caught my eye: “First, we recommend that clients be at their full strategic allocation to US equities. Current US equity valuations have historically resulted in positive returns and we do not see enough risks over the horizon to justify an underweight position, particularly given the strong tailwinds of earnings growth and dividends in today’s ultra-low interest rate environment. Within the US equities spheres, we continue to recommend an overweight to US banks. Second, while we expect Europe to remain in a mild recession, we believe that companies in the Eurostoxx 50 Index are, in aggregate, trading at depressed valuation levels and provide some attractive long term upside.”
68 | www.financial-spread-betting.com | June 2013
My own observations of many sectors over the years is that wealth destroyers are often sectors and themes we think are wealth creators, and the wealth creators are the themes we think are wealth destroyers. For instance, I put together a portfolio of Chinese solar stocks. Chinese solar, given the focus on cutting greenhouse gases, the strong economic growth in China and the ever growing push to alternative energy sources, you would think is a sure thing, yes? Wrong. A wealth destroyer. All the major players are substantially down. The excessive hype and non delivery has most likely led them to fall sharply (Canadian solar being the exception and actually up 66% in one year). Suntech is down 76%, LDK is down 52%...
Patel On Global Markets
“My own observations of many sectors over the years is that wealth destroyers are often sectors and themes we think are wealth creators, and the wealth creators are the themes we think are wealth destroyers.” These are not mild falls. This is alarming wealth destruction losing hundreds of millions of shareholder capital. China’s internet then, surely that is a wealth creator? Big country, more people on the internet blah blah blah... No. Wrong again. A resolute wealth destroyer. The names that have underperformed the US market include Baidu (down a whopping 31%), Renren down 51% (that’s a cool $1billion dollars wiped off the market cap). The list goes on... Whether in internet portals, gaming or ecommerce there are massive losers out there from sectors you would initially expect to be wealth generators. Who’s looked good over the past 12 months in this arena? Very few, such as Vipshop, SouFun, Changyou.com and Qihoo What about wealth creators then that you would expect ordinarily to be wealth destroyers? Well, with no major wars in progress, the US pulling out of Afghanistan and Iraq and government austerity, you would expect armament companies to be poor performers. And yet... in recent years they have been net wealth creators.
You would expect Japan to be a wealth destroyer too, given 23 years of flat markets. But guess what? It’s the Japanese companies benefiting from their government’s QE policy who are outperforming the US markets. Toyota, Honda, Nomura and Mizuho Financial have all been fantastic performers over the past 12 months. All of the above are non-British companies, but any sensible portfolio should always have shares in overseas international global companies for diversification. You can buy all the above through any stockbroker that trades US stocks as they are all listed in the US. The morals here: today’s seeming basket cases can actually be tomorrow’s gold; that markets wax and wane with fashion and that the real game of outperformance can only come from thorough research, buying deep value, being patient and being prepared to be contrarian —something that the lemmings now chasing the US indices should be wary of, and similarly those selling deeply discounted mining stocks... Alpesh Patel
Command & Control companies like CACI, SAIC, Rockwell and Raytheon all have done well in the past year, as have smart bomb makers like Alliant Techsystems, GenCorp. For advanced aerospace you have outperformers in Northrop, Lockheed and Orbital.
www.alpeshpatel.com
June 2013
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Editorial Contributor
Zak Mir Interviews notorious bear raider lucian miers ZM: I would like to begin with how you became
known as a great bear trader rather than a great bull?
lm: I started off as a mere broker, when I was
young and naive, and where I used to play in shares for other people as opposed to myself. Then I started to realise that temperamentally I was much better at spotting the shares that were going to do badly! In a sad example of just what a minefield the markets are, it became apparent that the numbers were actually on my side, namely that a lot more of these AIM type start-ups (then known as the USM) did somewhat more badly than they did well!
ZM:
But isn’t it usually the case with most recommendations that the punter receives either a tip or so called “professional” broker research and, as sure are eggs are eggs, the shares will actually go down initially and then, if you are lucky and patient, you might eventually get onside?
lm: Yes, especially when you are getting the
hard sell on stocks “in play” and where a lot of the ‘characters’ involved with these companies talk a lot of hype. More often than not, and as you can see with the AIM market at the moment, things tend to end in tears... Human nature dictates that people tend to promise much more than they can actually deliver. Obviously there are exceptions to that, and as someone of a predominantly bearish nature you have got to stay away from the exceptions and quite simply buy them. I am in fact not averse to buying a situation if I really like it.
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However, with the more hyped stories, the ones talked about on the bulletin boards and that capture the private investor’s imagination, there are far more occasions when it ends in tears than when everyone makes money and is happy. That’s a fact.
“Just to pick you up on one point and possibly the most controversial aspect of what you said: private investors, are they simply doomed to lose money?” ZM:
Just to pick you up on one point and possibly the most controversial aspect of what you said: private investors, are they simply doomed to lose money?
lm: I think most private investors lose money. By
private investors I mean traders, people who try and trade. There are probably many private investors who are smart and buy and hold. But the type of investor who spends time writing on or reading bulletin boards, getting in and out of stocks and talking the talk, yes, I think over 90% of them lose money because basically they are not equipped for dealing with trading.
Zak Mir Interviews - Lucian Miers
“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.” They buy when they should be selling; they sell when they should be buying. They are hard wired as a human to react in this way. In many instances they are dealing on margin so they get stopped when things go wrong, they do not really understand how to analyse companies and, sadly, believe what they are told by company management. For the average Joe or average private investor, I am sorry to say that in my experience, and what I have seen, that it will always end in tears and recriminations.
ZM:
I think I have been on the receiving end of those recriminations myself in recent weeks, in the sense that I believed that Gulf Keystone was a sell below £1.70 — the two-year uptrend line — and people did not want to hear that. The flak I took was quite something.
lm: It is a cycle of blame; who’s the first in the
firing line? For instance, private investors are very patient people with management, not mentioning any company in particular... But the first people to take the blame when things go wrong are the bears. There is this ridiculous term “de-ramping” that is used. Surely de-ramping is a public service as it presupposes that a stock has been ramped, and to thus de-ramp it and add balance is a good thing? So basically, the bears, de-rampers and nay-sayers / merchants of doom, however you want to describe us, get it in the neck first. Then when things go seriously wrong it is the brokers, the management, advisers and the board of directors who follow. Generally speaking it is the board of directors who are to blame 99.9% of the time with a company’s demise / poor performance, and yet they are the last people to receive the ire of the private investor when the company finally keels over.
ZM:
You say the management are to blame, but is it not very often the case that the management don’t actually know significantly more about the business they are running than the investors who are backing them? They run a mining company, but they haven’t got a clue about mining?
lm: In many cases, management can be running
a mining company even though they know nothing about mining, just get in there because it’s the latest hot thing and typically the “old boys’ network” has put them in that position. However, at the end of the day, it is 99% of the time management’s fault if things go wrong. You could argue that it is the investors’ fault for investing in it, but when a company fails to deliver on what it promises, it is generally speaking the management’s fault, particularly when they have been economical with the truth — as they are wont to do — remembering the “over delivering” desire of humans and that very few actually can do.
ZM:
Is this a problem specific to the AIM market or small caps, in that the larger companies have, by definition, proven themselves?
lm: Yes, once a company has become larger,
unless it is a bubble stock like in the dotcom boom, then there is typically more checks and balances and greater governance. Still, that doesn’t stop inept management ruining a large cap — HMV being the prime example. So yes, this does seem to be something which is specific to AIM what with its lax rules as to what people can get away with...
ZM:
But isn’t the good thing about this area of the market that you can make millions given the risks involved, that it is the Wild West / New Frontier? Would investors be best served by being philosophical about the whole issue?
lm: It is always caveat emptor in the markets, and so in part you are correct. I do however feel quite sorry for retail clients who get into a stock and end up losing a lot of money. I do not have a particular moral judgement against it, but I do think that the AIM authorities are actually fairly gutless when it comes to dealing with downright dishonesty: the purveying of false and misleading information, lying to shareholders and investors.
June 2013
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Editorial Contributor
When directors are actually guilty of misconduct there is a very strong case for saying that AIM should be much more vigilant, rather than “You knew it was an AIM company — caveat emptor.” That is the kind of thing that seems to be their attitude and that to me, is very, very wrong.
ZM:
You could have said that for shareholders of Lloyds Bank (LLOY) and RBS (RBS), could you not?
“I do not have a particular moral judgement against it, but I do think that the AIM authorities are actually fairly gutless when it comes to dealing with downright dishonesty: the purveying of false and misleading information, lying to shareholders and investors.” lm: Yes, you could have said that for a lot of
financial institutions in 2008. That was a fairly exceptional time however, but whatever the market conditions, there always seems to be skulduggery going on in the AIM market, and no one seems to care a jot about doing anything about it.
ZM:
Without giving away your trade secrets, are there any tell tale signs that people should look out for, either if they are long and have got great hopes in a company, or want to go short? Giveaway language or financial ratios?
lm: For a company to fail, then of course they
have to ultimately run out of money, and so what I always look out for in a company which I regard as being over hyped is when are they going to run out of money, or need to come to shareholders for more money. When did they last ask shareholders for more money and at what price?
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In particular, a lot of resources companies are obviously completely dependent on the goodwill of smaller institutions and private clients to stump up money every time they run out of it. So, as a bear, one has to gauge when investors’ patience may run out. A company like Pursuit Dynamics was a good case in point where investors’ patience finally ran out. They were happy to give it money all the way up from 100p to 700p and even on the way down from 500p to 300p to 100p to 3p before finally they say ‘enough is enough’ you are not getting any more money, and that is when a company will fail.
ZM:
Pushing that a little further. From a non expert perspective let us say I thought that Thomas Cook (TCG) was going to go bust, or that Ocado (OCDO) should have gone bust. How come they are still around?
lm: Thomas Cook was actually a very good
example of a company that was priced to go bust, and in my view in late 2011 actually came within a whisker of going bust. I was in fact short of the shares at about 30p — they went down to about 10p. In fact, I would put in the same category WPP (WPP) in 1989 and Next (NXT) trading at 12p. These were companies that came very close to being extinct and were priced accordingly. If you are short of the likes of Thomas Cook and then you realise that they are probably going to survive, well, you have to close your position very, very quickly. I actually then went net long of Thomas Cook and think that after the latest fund raising that they could go a lot higher.
ZM:
So, being short can actually be a very good vantage point in terms of judging objectively whether a company is going to survive?
lm: You have got to be on your toes Zak. Clearly, Thomas Cook is now not in danger of going bust any time soon. They have new bank facilities and have just raised equity. But, in 2011 David Cameron actually mentioned Thomas Cook in Parliament and said it would be a shame if they went under — an illustration of just how close they were. The major bank lenders to the Group, given that they are now mostly government owned, did lean over backwards to save Thomas Cook — it is a big brand name and in people’s consciousness. It would not have been helpful to the government if it had gone bust at the end of 2011.
Zak Mir Interviews - Lucian Miers
When these things do survive, you have to be ready to jump ship, as in the case of WPP and Next; they have gone up several hundred times from where they were when priced for bankruptcy. Thomas Cook is now around 160p from 10p, and could go a lot higher — it was a FTSE 100 company at one point. If their profits recover, there is no reason why it could not be again.
ZM:
So are you saying that if you are a bear, you should be wary of established brand names in trying to go short?
lm: You should be wary when a company is priced
for bankruptcy and it looks like it is going to survive — that there is political will, lenders prepared to cut them slack. It is in fact irrelevant if it is a brand name — look at JJB, Jessops, HMV. What is key is when it is apparent they will be refinanced and survive that you close your positions very quickly and do not hesitate. You have to say, this company looks like it is going to survive — bang. Cut the position and, if necessary, actually reverse it by going long. This is what I did at Thomas Cook — I bought them again last Christmas at 35p after they had already gone up three times. I in fact got out again too early at about 80p, and they have doubled again since then.
“It depends. With Ocado I was short at 70p and I did not have a set stop loss. But when Stuart Rose got involved I could see sentiment was changing, and knowing that there was a huge short position out there I cut them at 90p – 95p.”
ZM:
That brings me to money management. When you get into a position, do you already know where you may be getting out in terms of the stop losses / profits?
lm: It depends. With Ocado I was short at 70p
and I did not have a set stop loss. But when Stuart Rose got involved I could see sentiment was changing, and knowing that there was a huge short position out there I cut them at 90p – 95p. Of course, it was not a very nice loss, but something which was manageable rather than disastrous which would be the case if I was still short now as they approach 300p. I am not saying that I am a genius, but you didn’t have to be particularly smart to realise that sentiment was changing when Stuart Rose got on board.
ZM:
But isn’t that the difference between you and the average private investor, in that you have a antenna for detecting whether a situation is going well or not, and most people just do not have that skill? I have spoken to numerous traders now for Spreadbet Magazine in recent months, and they apparently just wake up in the morning, look at the screen, act and make money.
Simple as that! These people have the IQ, the experience and the academic qualifications. With that backing you are likely to succeed in the way that the average person with average abilities is not and so, for them, is there actually any point getting into this game?
June 2013
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Editorial Contributor
“They are not interested in a compound return of 10% a year for five years. They want to double their money tomorrow. Therefore they cut corners and fall prey to very persuasive salesman out there who peddle the jam tomorrow / get rich quick stories.” lm: I think probably not. By nature, most
human beings are greedy — it is what our evolution and Western capitalism is based upon. They are not interested in a compound return of 10% a year for five years. They want to double their money tomorrow. Therefore they cut corners and fall prey to very persuasive salesman out there who peddle the jam tomorrow / get rich quick stories. You tend to get those companies where the management and / or the brokers are persuasive et al and these are the ones the private investors go for and which are very often unsuitable for them. In fact, one of the things that I attach very little importance to is meeting the management. I know a lot of people who get charmed and seduced by snake oil salesmen, rather than looking at the numbers. You can understand a lot by reading the accounts and also the style of an RNS announcement. But actually meeting people in City presentations I find pretty unhelpful. The danger is you get caught up by the sales skills and take your eye off the ball. It is quite useful when examining a company not to meet the management.
ZM:
Just to finish. The FTSE 100 is getting near to its all time highs, does this mean you are shifting your stance in terms of bear opportunities?
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lm: Obviously if you are predominantly bearish
it is helpful if the market is going down. However, dodgy companies on AIM are always going to be failing whatever the market is doing. I am actually long of quite a few stocks at the moment. As everyone is frightened of cash, the market could have legs for some more upside. I am long of the Japanese index and long of some UK mid caps. But the FTSE 100 is such an international index it is very difficult to link it with the UK now, it is heavily dependent on overseas earnings and has a large commodity element. Certainly, there is value remaining in mid cap UK stocks in my eyes.
ZM:
So we are not in a bubble situation, more a business as usual phase in your opinion?
lm: I think that we probably are in a bubble as
it is unlikely that the answer to the enormous debt overhang is as simple as printing of money. It can’t, to my mind, end in anything other than tears. We are just, to quote a common phrase, constantly “kicking the can down the road”. But, short to medium term, which is happening in all asset classes, other than cash and bonds, this rally could have further to go. People are frightened of sitting in cash and government debt. I think that is why equity markets all around the globe are doing so well. I am long of Japan and it is looking like it is going to cross the Dow Jones in pure numerical value shortly. I am old enough to remember when it crossed it on the way down. It has taken some 20 years for the Nikkei to cross the Dow on the way up. The Nikkei is around 14,000 now and the Dow 15,000 and, with the momentum behind the Nikkei, it is probably just a matter of time before they cross.
ZM:
This is a rhetorical question Lucian: the Japanese authorities have been able to weaken the yen in order to try and inject inflation and hopefully growth into the economy there. Why didn’t they do this 20 years ago?
lm: :
A very good question. I think 20 years ago people did not indulge in “Mickey Mouse” economics.
ZM:
But this has got to end badly as otherwise any time there is a recession you could just print money surely?
Zak Mir Interviews - Lucian Miers
“I am old enough to remember when it crossed it on the way down. It has taken some 20 years for the Nikkei to cross the Dow on the way up.”
lm: I agree. I have asked people the question
The answer was “No, that is what they do in Zimbabwe and Banana Republics; we don’t do that in the West.” But now we do do it in the West, and in spades, and I cannot see why it is not going to end in tears just as it has when anyone else has done it before.
ZM: We are obviously so much cleverer now!
What a wonderfully bright note to end on — for a bear.
myself and I admit that I do not understand. Why is it acceptable now with everyone doing it, not just Japan, but the U.S., the UK and to a lesser extent the rest of Europe? If it were that easy then why weren’t we all doing it in every crisis in history?
lm: We are much brighter now. Certainly when I
was a kid at University and stuff in the 70s if you put up your hand in class and asked, “Sir, why don’t we just print money to get out of problems?” you would have been laughed out of class.
ZM:
Lucian writes a weekly column on the Nifty Fifty share website. But his words also appear on www.shareprophets.com
June 2013
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Directors’ Dealing
Directors’ Dealing
Gulf Keystone PETROLEUM This magazine has steered away from coverage of Gulf Keystone and also omitted to include it within our Oil Explorers portfolio list for a couple of reasons...
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Gulf Keystone
June 2013
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Directors’ Dealing
Firstly, the editor had a rather large number of these in 2009 at around 8p that he proceeded to sell for 13p — doh! That leaves a bitter taste... Secondly, there is so much bull sentiment in the stock and too much takeover froth, certainly when it was trading at 300p+, that we felt the risk:reward ratio was not favourable, notwithstanding stories of £10+ takeover bids. TOD KOZEL
We cover the stock this month in highlighting the share sales by CEO Todd Kozel and a fellow director during the last 18 months. Back in early 2012 Mr Kozel was in the unfortunate position of losing just under 17.5m shares to his ex wife as part of a divorce settlement (my guess is these have long been sold as there was no restriction on their sale attached to the divorce terms). He then sold a further round 1m shares on the 1st March 2013 at 187p. These two sales in themselves would not be too worrying as (a) the divorce settlement stock was out of Mr Kozel’s control and (b) were relatively small in relation to his entitlement via the employee benefit trust (EBT). What has, however, got various individuals scratching their heads is the transfer out of the EBT in late February of what appeared to be his entire non option stock entitlement and then the subsequent “transfer” (not described as a sale) of 10m shares at £1.68 on the 22nd April, leaving him with just 255k shares.
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It is fair to say that many of his retail shareholders now have more stock in the company than him, although he does still have stock option entitlements of just under 14m shares. There is confusion and much speculation over what this transfer of 10m shares is related to, and which was described as “payment in full in respect of a financing transaction”. Was Mr Kozel in debt; were there further obligations to his ex wife in relation to the divorce settlement? What is for certain is that the lack of clarity over this financing obligation has hurt the shares. Numerous commentators have made the point that if the company really was worth north of £10 per share, then one would have done everything one could have to hold onto that stock, after all, the forfeiture cost if the true value is £10+ is likely to be a darn sight more than whatever the financing cost was on pledging this stock to raise the capital to pay back the party he was obligated to. Another director Mr Mehdi Varzi also began selling stock — just over 250k shares at a price of £2.54 in March of 2012. As with Mr Kozel, he also sold a further 268k at 1.87 on the 1st March. It was interesting that he was prepared to sell at a lower price and further reduce his holding — these are signs holders of the stock should pay heed of. In taking a look at the chart to the right, there is simply no other way to describe it other than ugly. Pretty much every single bearish technical indicator you can name is present: head and shoulders break, falling RSI, rising volume into the decline, dead cross etc etc. But what is even more worrying is the fact that pretty much every retail man and his dog is still long this stock. A great deal of them will be margin players too and so if the company loses the Excalibur court case then it will most probably be a case of ‘watch out below’ as any decline from the current levels will likely set off a crescendo of margin calls.
Gulf Keystone
CHART - GULF KEYSTONE PETROLEUM
June 2013
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June 2013
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Editorial Contributor
ROBBIE BURNS’
MAY TRADING DIARY Summer greetings, dear SBM readers (what summer I hear you cry!). Right, when we go in and buy a share we think we are making the right choice right? After all, we made an effort. We did our research, we did TA, we looked at the charts. Waiting to get our timing right... Except for the intelligent readers of this mag who just went on the new bulletin board, and because some bulletin board bloke “filled his boots” with this “ten bagger” you bought it. I know your type! But who knows? Some of you may have even looked at the bollinger band stochastics macd crossover elliottwave deadcrossricepudding signals. And any other cobblers you could find to validate your choice.
Anyone who thinks the share has got problems is a total turd brain. We’re right. The charts say so. And the fundamentals. And the tipster bloke. And anyway, there’s going to be a bid next week!! That bulletin board bloke sure knows his stuff. And so, despite the share price continuing to go down, we will continue to scour the internet for more validation of our choice.
The trouble is, you see, us blokes (and it is nearly all blokes) who trade, once we’ve made up our mind and pressed the buy button then that is it. We are now “in”. We expect this share price to rise because we are pretty good at stock picking, right? And once we are “in” the next thing is to look around and make sure our choice is validated by others. So it is off to the bulletin boards to check everyone else agrees the share is going up. And “Boo Sucks” to any moron who thinks differently!
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Sell it? Are you crazy? Time to buy more!! Look how cheap it is now!!!! It is purely money lent! The markets always get things wrong. The market is such a moron!
Robbie Burn’s Trading Diary
Now, it’s got even cheaper. Well, that is GREAT news. Look at the price I can get it for now; it’s like the sales. I’m in for MORE.
But then there comes another problem. If we sell it now, we validate the fact we got it wrong and that we ended up taking a big loss.
Okay, so you know what I’m getting at?
Now, we can easily talk ourselves out of selling it. “There’ll be a bid the minute I sell it”. “Oh well, I lost a lot already, might as well stay in.” “Too late to sell it out, I’m stuck with it.”
What should we do instead of trying to obtain the validation that we are right about the share? Instead of always thinking we got it right? We should do the opposite. Indeed the hardest thing in the world to do. Start again and maybe, just maybe, consider we were wrong. And perhaps, even worse, consider getting out before it gets worse. We should look at the alternative argument. In fact, we should imagine looking at this share in six month’s time. It has fallen 50%. Why did it happen? How could it happen? Could we end up with a stinker on our hands? What if we were wrong? What if the oil it is supposed to have turns out to be water? Hang on, what about the big debt? Never noticed that... Hang on, when I looked at the chart the gapuphangingmancrossover was pointing up. Now, well maybe... And maybe the one guy on the bulletin board who was spelling out the problems with the share, is it possible he was right and the rest of us were wrong?
In the end, though, it is always the same story: it is always better to cut the loser quickly and realise you got it wrong. You can always go back in lower. Okay, okay, that was a boring old fart lecture and it is now over. Go back to not selling your stinkers and see if I care! Moving on to what you really want to know and that’s some buys! I’m taking the summer off writing about finance so I’m going to leave you with some ideas for longer-term trades that won’t go bust (but I am willing to change my mind if question marks appear!!). Indeed, my dentist asked me the other day which shares would I buy with a three year view — companies whose share prices should be nicely higher plus some income? Good question. And so I’ll leave you with a few shares that I think are unlikely to be down by 50% in the blink of an eye because they didn’t find oil etc...
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Editorial Contributor
And all these have a great chance of being much higher down the line, ignoring the usual market ups and downs. Dialight: First mover advantage in the LED market. This market continues to grow and over time so will DIA’s share price. I would suggest another 50% to come, ignoring short-term volatility. Coastal Energy: Dual Canadian and AIM listed stock that can go in an ISA — this one really has got some oil and keeps finding more. Already been a takeover target once and would be surprising if it wasn’t taken out at a much higher price. Telecom Plus: I made my fortune with these but there is more left in my opinion. Great management and business model and supplies things everyone simply needs: utilities and telecoms. Dignity: We are all likely to use this company at some stage. Yes, we are talking death. It’s buying up all the other funeral directors. And, given more of us are dying apparently, there is only one place for the share price to go over time... up. And so we may as well cash in. They don’t do a discount on coffins for shareholders though, I did ask.
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32 Red: Nothing like investing in a bookie, they hardly ever lose do they? And this is one of the last smaller ones left on the market so looks a likely takeover target sooner or later. And in any event, it’s making a mint on bingo and poker. Bingo online is huge. People love playing internet games that they are certain to lose over time. Go figure and take advantage of these losers. HIlton Food Group: Supplies processed meats etc. across Europe. As people get lazier and lazier about their food they buy more and more packaged products like ham. And so the share price over time is only going one way. HellermanTyton: A hell of a name but a hell of a new issue. Rising profits and a good market make this one that should be nicely higher as time goes on. Should also get into the FTSE 250 next month or in September, and so raising its profile. Well, I reckon if my dentist tucks a few of those away in his portfolio that it will look pretty good in three years. But if I got those wrong, then I am definitely going to need a new dentist as I don’t fancy being in the chair if I gave him some stinkers... Ouch!
School Corner
school corner Directional Movement Indicator Explained by Thierry Laduguie of e-yield
The Directional Movement Index (DMI), developed by Welles Wilder and explained in his book New Concepts in Technical Trading Systems, helps determine if a security is “trending�.
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School Corner
Welles Wilder’s Directional Movement decomposes price movement into a positive and negative component. It is made up of three indicators which are: 1. The ADXR line is the Average Directional Movement Index and indicates the strength of the trend on a scale of 0 to 100. The higher the value, the stronger the trend, whether up or down. A very low ADXR (below 20) indicates a non trending environment. 2. The +DI line is the Positive Directional Indicator and indicates what percentage of the true range over the period selected is up movement. This indicator measures upward movement. 3. The -DI line is the Negative Directional Indicator and indicates what percentage of the true range over the period selected is down movement. This indicator measures downward movement.
daily chart of the FTSE 100 relates to the DMI period using 14 days.
The calculations of the Directional Movement system are beyond the scope of this piece. Wilder’s book, “New Concepts In Technical Trading”, gives complete step-by-step instructions on the calculation and interpretation of these indicators. The above daily chart of the FTSE 100 relates to the DMI period using 14 days.
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Directional Movement Indicator Explained
Interpretation Buy signals are indicated when the +DI rises above the -DI, and sell signals are indicated when the +DI falls below the -DI. In addition, this indicator gives early warning signals. Each time the ADXR line changes direction it is a warning that the +DI may cross over the –DI (or the –DI may cross over the +DI). In this instance, the DMI indicator is confirming the current FTSE bull moves and so should cause caution in the bears. We can see that we have had very few down moves over the last six weeks as reflected in the red -DI line.
BAE Systems CHART
On the above chart of BAE Systems we can see three signals: two buy signals and one sell signal. When the +DI (blue line) rises above the -DI (red line), it is a buy signal. This signal occurred in February and May this year. In April the DMI gave a sell signal when the +DI fell below the -DI. As you can see, the ADXR line (green line) did a good job at anticipating the two signals. The ADXR line turned up ahead of the buy signal in February and turned down ahead of the sell signal in April. A more aggressive strategy would be to take a position based on the direction of the ADXR line but this is not recommended, always trade when the +DI and -DI lines cross each other. As noted above, when the ADXR line is below 20 the market is non-trending which would not be suitable for a trend following approach. In this case one could use an oscillator like the RSI or the MACD to time buy and sell signals. The ADXR line would be used as a filter, when it is below 20 and the oscillator is overbought you would sell and when the oscillator is oversold you would buy. In conclusion, the DMI is a good indicator of future direction, in particular when the ADXR line is above 20. It should really be used in conjunction with other signals to confirm a trend.
June 2013
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Special Feature
psychology of trading
Are you trading like a 40 year old virgin? By Andrew Sillitoe of Winning Mindset
Did you watch the documentary ‘40 Year Old Virgins’ on 4oD? By the way, it is nothing like the film; it follows a 40 year old man who has never had sex, that is, until he meets what is known as a ‘surrogate sex partner’. The one barrier for him was getting naked with another person. I often think trading can feel this way (metaphorically speaking). Stay with me…
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Special Feature
Imagine for a moment that you have walked into a crowded room; it is busy, everyone is talking, you recognise some of the people and some of them are strangers to you. You feel awkward, people are talking but they aren’t acknowledging you, you think they may be talking about you... Your body is paralysed by fear, you are suffering with the white mist, every corner of the room seems like it is miles away. The feeling of anxiety is enhanced due to the fact that you are completely naked. Everyone can see that you are naked and there is nothing you can do about it. Then you wake up.
“The dream I have described is likely to have a meaning of feeling vulnerable or anxious. The market can feel like a crowded room.” The dream I have described is likely to have a meaning of feeling vulnerable or anxious. The market can feel like a crowded room. As a day trader, this type of paralysis will seriously inhibit your performance. You be able to make sense of the data, your hand controlling the mouse seems to have a mind of its own and you simply can’t function properly... Now, imagine this: You enter a crowded room and you are wearing zero clothing. It doesn’t faze you in any way; you approach people and you meet them and greet them shaking their hands with a smile. You feel light, free and liberated. You have no concern whatsoever with what people are thinking, they can think what they like about you because you are comfortable in your own skin. You have an air of confidence about you; you feel tall when you speak; you feel calm and your voice resonates and fills the room. People listen and want to hear what you have to say. They haven’t even noticed that you are naked. With this mind-set you are trading in the ‘zone’. You are calm, your breathing is slow and you have a competitive edge over the market.
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Still with me? Getting comfortable with being naked in a crowded room is a metaphor for unlocking your presence. Trading with ‘presence’ is essential for maintaining clarity and rational thought. Getting comfortable with your vulnerability is the key to freeing yourself from fear and anxiety over the next trade. Embracing the unknown is the key for successful trading. You won’t always get it right, that isn’t a problem; it is how you respond to it that will separate you from your peers. Unfortunately, in the ‘moment’, you are biologically designed to deal with a threat, i.e. the market, in a certain way. Without this instinctive behaviour the human population would have been wiped out a long time ago! Rory Mcilroy’s brain doesn’t differentiate between putting on the 18th hole for the Championship or being confronted by a grizzly bear. The brain simply recognises it as a threat which can have a negative effect on behaviour if not managed properly. It is likely that Mcilroy has developed the ability to keep the Championship winning putt in perspective and through practice he has learnt how to manage his emotions in this familiar situation. Through developing self-regulation and emotional management you will achieve the same; this is what I refer to as ‘managing the mist’, the ability to focus and maintain clarity of judgement. It is what all the great traders are able to do. Whilst analysis and rational thought is a part of trading, we have to remember that the market is made up of emotional human beings — all making emotional decisions — therefore the market is a mass of emotions which can react in a dysfunctional way — this is why you get extreme initial reactions like the “flash crash” in 2011. The aim is to be prepared for this; accept it and remember that losses are part of the process, keep the threat in perspective, as well as position size appropriately, and contain those losses. No doubt many of you will have made a trade and then later come to regret it. In hindsight without emotion you then rationalise your poor decision vowing never to do it again only to find an hour later you have done exactly that! This is normal, every trader has done it; it is all part of the process. The key along the way is not to blow all your capital while learning.
Are you trading like a 40 year old Virgin?
“THRougH DEVELoPiNg SELF-REguLATioN AND EMoTioNAL MANAgEMENT you WiLL ACHiEVE THE SAME; THiS iS WHAT i REFER To AS ‘MANAgiNg THE MiST’, THE ABiLiTy To FoCuS AND MAiNTAiN CLARiTy oF JuDgEMENT.”
Here are my four steps to beating the market and ‘managing the mist’:
It is likely that you have reacted to something instinctively without any real level of conscious thought and later reflected, “What the hell was I thinking?” Well, you weren’t really thinking, the thought process was happening at twelve milliseconds (twelve one-thousandths of a second) i.e. fast! This can also work in your favour when making fast decisions. The fact is there are thousands of other people making these types of decisions around the world. So it is time to get naked and show them that you mean business.
1
Accept the market is dysfunctional and that failure is a possibility and indeed probability with certain positions. This is what stop losses are for.
2
Ask yourself what is the worst case scenario? Plan for that and ensure that it does not have too much an impact on your capital base and/or hedge for it.
3
Keep the threat in perspective — again this links to position sizing — if you have too much exposed in one position then you will have no room for manoeuvre.
4
Get naked and enter the market!
Andrew is the founder of Winning Mindset Consulting Ltd. a company that is passionate about performance improvement. His uniquely intuitive philosophy underpinned by neuroscience has facilitated high performance in over 5000 individuals during the last 10 years to realise and exceed their goals. Andrew holds an MSc in organisational Psychology and draws upon his strong commercial experience as a top sales performer, entrepreneur and a performance coach to deliver remarkable results for clients using what is described as a “subtle, yet direct approach”. For more information on “getting into a winning mind-set” visit: http://www.winningmindset.co/
June 2013
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Editorial Contributor
TRADING ACADEMY WINNER
John Walsh’s monthly trading record What a difference a couple of months can make in the world of trading. After having my worst trading day ever at the end of February I could not face trading indices for a couple of months so started to trade with a more long term outlook in just equities. But after the way the indices have been reaching new highs recently, who can blame me for wanting to get back in on the action? And so far it has gone quite well as I’m sure it has for many others, even though at the same time it seems that everyone is waiting for the bull party to end. When will that be — who knows? Regarding the open stock positions which I mentioned last month, I added one more long position which was in Mitie Group (MTO). At the time of writing, however, I have now closed all my long positions, including the one just mentioned, as I want to concentrate on just trading indices for now, but of course I still watch my ever expanding watch list each day as trading stocks is my real trading passion. With the way the indices are at the moment though I feel I need to focus on these now.
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I did in fact close my MTO trade for a small loss, and at the time of writing its current stock price is pretty much where I closed it at. Another of the trades I closed at a small loss was my St Ives (SIV) position which has, since I closed it, of course gone on a great little move to the upside which goes to show that I may have been a little too hasty in closing for a loss (I never seem to have a problem closing losing trades; it is, in fact, closing winning ones I have the problem with...).
John Walsh’s Monthly Trading Record
“After having my worst trading day ever at the end of February I could not face trading indices for a couple of months so started to trade with a more long term outlook in just equities.” The other three positions I had last month have also been closed. These included William Hill (WMH) which I closed for a profit and which I had taken money out of earlier in the year. Since closing, the price has edged up a little more which is fine by me and I may go back in at a later date as I have done previously. The other two long positions were both closed at a profit and these were in Moneysupermarket.com (MONY) and Speedy Hire (SDY) which have since both gone on to make further small gains, which just goes to show that even though they move slower than indices, there are gains to be made in the long term — something which I intend look at more closely in the near future. Now, concerning trading indices, I trade what I consider to be the main three indices which are (in no particular order) the FTSE, DAX and the DOW and which, during my time on the City Index Trading Academy, were my strongest asset class out of what I trade. I had a good track record (most of the time!) trading them. Since I have started trading them again I now take a different approach insomuch as I don’t look at the money earned, but rather at the points which I hope to make. In fact I now treat it as a business with both daily and weekly targets of points that I hope to make each week, and so far I have achieved the amount I’m looking for which has included a few losing trades. With my all important risk management in place, though, I am still able to achieve my target.
I have spoken to a few other traders recently who are interested in what indicators I use and the truth is that at one time or another I have looked at them all, but the best one for me I have found is simply the price action, as all the others follow behind this and I simply try to trade what I see not, what I think. Obviously, I’m only human and I don’t do this all the time, but as time goes on I hope to improve on this. I was also very fortunate recently to be asked back to the City Index offices to do an interview with Philip Hampshire from the BBC, which by the time you read this you may have heard on the radio or seen on TV, to talk about the recent upsurge in people day trading the markets (which is apparently what I do now, although I never considered myself as a day trader!) and which is being put down to the current bull run that seems to be never ending. Of course it will when we least expect it... That’s enough from me for now. I hope you enjoy reading this as much as I enjoy writing it, and I look forward to writing next month to keep you up to date on my trading journey. Please continue to follow me on Twitter @_JohnWalsh_ where I try to keep everyone up to date with my trades as they happen. Remember, you control the trade; the trade does not control you. John
June 2013
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A new special feature
MARKETS IN FOCUS
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Markets In Focus
June 2013
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MAGAZINE
SPREADBETTING The e-magazine created especially for active spread bettors and CFD traders
Issue 18 - July 2013
in next month’s edition...
Bitcoins We investigate what all the fuss is about
iNVESTMENT SEMiNARS & SySTEMS - ARE THEy ALL A WASTE oF MoNEy?
LEgENDARy HEDgE FuND MANAgER JEFF ViNik PRoFiLED
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THE oiL EXPLoRERS REViSiTED SAFE To go BACk iN?
MAGAZINE
SPREADBETTING Thank you for reading, we hope your trading is profitable during the forthcoming month.
See you next month! www.financial-spread-betting.com
June 2013
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