M AR ED C IT H 1 IO 5 N
The e-magazine created especially for active spread bettors and CFD traders
Issue 38 - March 2015
Clash of the Titans Media Convergence and the Quadruple Play
www.financial-spread-betting.com
THE UK’S ONLY FREE ONLINE FINANCIAL MAGAZINE! ZAK MIR GETS TECHNICAL WITH LLOYDS
AN INTRO TO INVESTING IN FINE WINES
MARK MOBIUS IS THIS MONTH’S FUND MANAGER IN FOCUS
THE NAKED TRADER ROBBIE BURNS’ TRADING DIARY
AND MUCH, MUCH MORE - PACKED FULL OF TRADING IDEAS FROM ALL OUR CONTRIBUTORS!
Feature Contributors 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.
James Faulkner A true stockmarket anorak, James Faulkner began investing in the stock market in his early teens. James is a devotee of the PEG-based growth investing model pioneered by Jim Slater in his seminal book, The Zulu Principle, while also being t1ps.com’s resident economic ‘guru’. James is an Associate of the Chartered Institute for Securities & Investment and holds the CISI Certificate in Investment Management.
Jim Mellon Entrepreneur and former fund manager, Jim Mellon, is worth an estimated £850m according to the Sunday Times Rich list. With a substantial international property portfolio and interests in a variety of companies Jim is a highly experienced and successful investor.
Samuel Rae Having completed his Economics BSc Degree in Manchester, Samuel Rae quickly discovered that the retail Forex industry was for him. His personal trading style combines classic candlestick analysis with a simple, logical and risk management driven approach to the financial markets - a strategy that is described and demonstrated in his best selling book, Diary of a Currency Trader.
Richard Gill SBM Editorial Director Richard Gill, CFA, is a smaller companies specialist with an investment philosophy focussed on cheap growth companies operating in booming sectors. He was a judge at the 2013 and 2014 Small Cap Awards.
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Editorial List EDITORIAL DIRECTOR Richard Gill
Foreword It is normally the case that each month’s foreword is timed to be written at a point which will appear relevant for each issue of the magazine. But this month was special. The first reason for holding back on my “words of wisdom” was to see how the Greek debt debacle would pan out. Of course, it now looks so obvious that the EU would cave in and the Greeks would be forced to avoid a Grexit.
EDITOR Zak Mir CREATIVE DESIGN Lee Akers www.cfdmedia.co.uk COPYWRITER Seb Greenfield EDITORIAL CONTRIBUTORS Alpesh Patel Filipe R Costa Simon Carter James Faulkner Samuel Rae Dave Evans Jim Mellon Maria Psarra Robert Sutherland-Smith Miles Davis
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.
However, as most of us are all too aware, having a view is one thing. Presumably, there could still be a curve ball in this crisis over the next few weeks, but at least for now the standoff seems to be settled. It always seemed to me that a settlement was likely given the way that, just a week before Syriza was voted in, the ECB offered its €1.1 trillion QE “bazooka”. Given that this is approximately three times what Greece owes, even the Germans would find it difficult to argue that there is not enough cash swilling around for yet another bailout. The other reason for delaying writing this foreword may be described as the most joyous of all that we could be treated to in the UK financial markets - a new all time high for the FTSE 100. The long slog back to the highs of the dot.com bubble has taken a whopping 15 years, an astonishingly bad statistic by any standards. While we are assured that £1,000 invested in the stock market in 2000 would now be worth over £1,600 with dividends reinvested, this is still not much consolation given the way that many of the FTSE 100’s counterpart markets, especially in the U.S., managed to clear former record highs months ago. Of course, we can blame the collapse in resources stocks over recent years for the slow progress, but this is unlikely to assuage too many people. The hope now would be that with the index only on a P/E of 16 – rather than near to double this figure the last time a record was made – there will be a decent follow through. The main hurdle now of course is the approach of the general election in May, and all the uncertainty that entails. One would assume though, that it is the Conservatives who will prevail, winning on the economy and the housing market. The waiting game has also been apparent in terms of one of the UK’s most widely held stocks, in one of the most controversial sectors. Lloyds Banking is set to resume its dividend for the first time in six years. This is clearly a watershed moment, and perhaps will finally lay to rest the ghost of the shotgun wedding between the Black Horse bank and the disaster zone which HBOS became. Cynics such as myself may suggest that it is an illustration of how much cash that there is still to be had in this sector, that even the catastrophic losses of HBOS have been sufficiently covered for Lloyds to start paying out to shareholders again. Lloyds Banking is therefore the subject of my monthly pick. All the best for March, Zak Mir
As a matter of policy, Spreadbet Magazine openly discloses that our contributors may have interests in investments and/or providers of services referred to in this publication.
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Contents
Zak Mir Gets Technical with Lloyds Technical analyst Zak Mir’s investigates the prospects for Lloyds Banking Group after its return to the dividend list.
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Fund Manager in Focus – Mark Mobius Filipe R. Costa examines the life and times of Mark Mobius, the “Pied Piper of Emerging Markets”.
Zak Mir Interviews Martin Luke of Vox Markets Zak Mir talks to Martin Luke, founder and CEO of Vox Markets, the premier online and offline community for stock market professionals.
The Best of the Evil Diaries Highlights of what infamous short seller Simon Cawkwell (aka Evil Knievil) has been trading and gambling on in recent weeks.
Mellon on the Markets Read the latest thoughts and trading ideas of multi-millionaire investor and entrepreneur Jim Mellon.
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Three Small-Cap Media Plays
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Clash of the Titans
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Richard Gill, CFA returns with his favourite picks from the small-cap media space.
As Sky and BT lock horns, we assess the prospects for these two UK media bellwethers.
The Limpopo Dispatches – Survival in Telecoms and Media In his debut piece for SpreadBet Magazine, City veteran Robert Sutherland-Smith gets Darwinian as he explores evolution and survival in Telecoms and Media.
Robbie Burns’ Trading Diary The “Naked Trader” reveals his favourite M&A prospects.
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Master Investor Show 2015
Currency Corner
Richard Gill, CFA gives readers a sneak peak of Master Investor 2015, the UK’s foremost investing show.
Trader and author Samuel Rae gets bearish on the Yen.
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An Introduction to Investing in Fine Wines Miles Davis, founder of Wine Asset Managers, explores the exciting world of fine wine investing.
Alpesh Patel on the Markets Fund manager Alpesh Patel explores the trials and travails of trading at home and on the road.
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Maria Psarra School Corner - Part 5
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Binary Corner
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Maria Psarra, Head of Trading at Prime Wealth Group, advises traders to stay humble.
David Evans of binary.com thinks the euro’s day of reckoning is approaching.
Technology Corner Simon Carter, SBM’s resident technology specialist, takes a look at social media convergence.
Book Review James Faulkner reviews Detlev Schlichter’s Paper Money Collapse, which offers an unconventional but thought-provoking assessment of our economic problems.
Negative Interest Rates - A Dangerous Game Filipe R. Costa, SBM’s resident economics guru, looks at how negative interest rates are wreaking havoc with the economic fabric of society.
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Zak Mir Interviews
ZAK MIR INTERVIEWS
MARTIN LUKE OF VOX MARKETS This month Zak interviews Martin Luke, founder and CEO of Vox Markets, the premier online and offline community for stock market professionals. Zak: Vox Markets – a new product for traders and investors. Who is it aimed at? Are you reinventing the wheel? Martin: In the time that I’ve been working in the stock market, there has been a dramatic shift in the availability of information. When I first started, clients would often not have much access to company data, as information was limited and there was little access to the internet. Information was relatively scarce, although, as brokers, we had access to Reuters and Company Refs. Today, scarcity of information is no longer a problem. The challenge is filtering out the noise to get the most relevant data. Even now, some of the data available can be incorrect or you have to go to five or six places in order to find it. For instance, if you want social media news it is Facebook or Twitter. Then you go to the bulletin boards for retail commentary and the company investor relations site for their announcements. So what we wanted to do is aggregate all of this information into one place. That was the initial idea in terms of getting data in one place to save time.
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The platform is aimed at anyone involved in the stock market. We’ve placed more emphasis on professional users, fund managers, asset managers, brokers and the like but we also welcome retail investors. One thing that we’re doing, which existing retail platforms don’t, is insisting that users provide and use their real identities. That way we hope to provide an antidote to some of the commentary that you see on the bulletin boards and maintain a high quality of content on the site. Zak: Isn’t the main problem these days that there is actually too much information? How do you address this? Martin: That’s right and one of the features of the Vox Markets platform is that users can personalise their timeline. You can choose who you want to hear from - whether it is a news source, announcements from a company or an individual commentator whose opinions you value. Just as importantly, you can choose who you don’t want to hear from! We’re also addressing the challenge of scanning Twitter for content that is relevant to investors.
Martin Luke
Zak: All of this sounds like good news. But who is your core customer? The bulletin boards are not exactly bastions of intellectualism. In contrast we have the hedge fund brigade which verges on rocket science. Who is your typical end user?
We have a proprietary Twitter search algorithm, so that if someone tweets about a company, you are following and it is linked to investing as opposed to, say, a customer complaint, you will be alerted straightaway. Equally, you can go to that company’s page on the site and see all tweets about that company.
Martin: We are aiming to achieve a broad mix of users. Essentially, anyone with an interest in the stock market is welcome, whether they are hedge fund rocket scientists or individual investors. However, as you point out, we want to avoid some of the perceived shortcomings of existing bulletin boards. As I mentioned earlier, when you log on to Vox Markets you are doing so under your own name. Only authenticated people will be posting comments. The cloak of anonymity that these bulletin boards provide encourages people to say things they would never usually say. In contrast, we are trying to encourage genuine, reasoned comment. Ultimately, it is a difference of opinion that creates a market and it’s the market that’ll decide who is right and who is wrong. In the meantime we’d like our users to be respectful to one another and enjoy the social experience of sharing ideas and reasoned debate.
“WE MEET COMPANIES, MAKE INVESTMENT DECISIONS BASED ON A ONE-TO-ONE BASIS, AND JUST KEEP A WEATHER EYE AS TO WHAT THE LONGER-TERM TRENDS MAY BE.”
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Zak Mir Interviews
Zak: How would you describe the experience of using Vox Markets? Martin: In one word – “intuitive”. We have placed huge emphasis on user experience, both in terms of the way the site looks and how easy it is to find the information that you are looking for. We set out with an aim to put every piece of information within three clicks of the main dashboard and we have standardised the appearance of the company pages so that users always know where to find a particular piece of information regardless of the company they are looking at. We’ve consciously tried to step away from the somewhat intimidating appearance and complex user interfaces of some of the existing investor tools on the market.
“ANYONE WITH AN INTEREST IN THE STOCK MARKET IS WELCOME, WHETHER THEY ARE HEDGE FUND ROCKET SCIENTISTS OR INDIVIDUAL INVESTORS.” Zak: But isn’t the problem here that the people at the top end of the spectrum do not particularly want everyone to know what they are thinking or doing? For instance, George Soros might not really want everyone to know he has gone short of the FTSE 100 at £10,000 a point? Mr Jones, a part time trader down the road, may not mind telling you he has just bought 2,000 Royal Mail shares at 440p. In addition, professional investors have to be loyal in the first instance to the people they work for, or who pay them. Engaging with others on your platform is likely to come second in terms of priorities. Martin: That’s a good point and reflects how people interact with all social media. Some users are very active contributors while others are more passive consumers of information. Partly that may reflect people’s professional roles, so perhaps we would expect financial PR people or journalists to be more actively contributing content than some fund managers or professional traders. However, some leading fund managers are quite vocal about what they are doing.
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For example, if you look at one of the most high profile fund managers at the moment, Neil Woodford, he publishes what he does and has been very open about it. Zak: So there has been a culture change? Martin: There has been a gradual move towards greater openness but I think more noticeable is the huge shift in the ways information is presented to investors with the explosion of social media. More and more news stories are now breaking on Twitter and Facebook. In April 2013 the SEC made a ruling that U.S. companies could release price sensitive data on social media. So Apple (AAPL), if they want, can now release their results on Twitter. That isn’t permitted yet in the UK but I think it is only a matter of time before the FCA does allow it. That will make access to a high quality, investor driven Twitter feed like the one we offer with Vox Markets essential to all investors. Zak: Putting on your market commentator hat. Is this new transparency the type of development which could get rid of many of the ills of the financial markets like the LIBOR/PPI scandals? Martin: I certainly think it will help but it’s only a part of the systemic failings that have led to the recent scandals.
Martin Luke
We think Vox Markets can be at the forefront of how investor relations teams at those companies communicate with their existing shareholder base and identify potential new investors. Zak: Does this mean that the private investor/person in the street is finally going to see the landscape as it should be after all the scandals and suffering? Martin: There will always be rules that mean the landscape for private investors differs from the landscape for professionals but equally, private investors are, quite rightly, afforded protections that the professionals do not have. However, one area I am critical of is the Financial Promotions Act. For example, a highly qualified analyst can write a piece of research on Barclays, say, but a retail person is not allowed to read it. That analyst would get into a lot of trouble if a retail person got to read that research. Yet that retail client can go onto any bulletin board and read a piece of research produced anonymously by “Trader Joe” who may or may not exist, and make an investment decision off the back of it.
“APPLE (AAPL), IF THEY WANT, CAN NOW RELEASE THEIR RESULTS ON TWITTER.” The people involved must have known what they were doing was wrong but either thought they would get away with it or perhaps saw safety in numbers. As Warren Buffett said, the five most dangerous words in business are “everyone else is doing it”. I would hope we are now at a point where we can see a shift in attitude within the financial markets backed up by decent regulation. Alongside culture, changes in the way people are compensated and the introduction of rules like MiFID II will have an impact. One area where we think Vox Markets has a role to play is in the shift in the equity research model driven by MiFID II. Historically, research was paid for through trading commissions but going forward it will be paid for directly by fund managers. We think this will reduce the amount of research available, particularly for smaller and medium sized companies, which in turn reduces the visibility of those companies among investors. MIFID II is going to create a revolution in the communications between companies and investors.
While I understand why that rule is in place, it seems to me that the retail investor is being denied access to better informed comment. But the crux of the matter is that we believe there will be less and less research produced by banks in the next few years. This should lead to new growth in independent research, especially for smaller companies with only a £300-£400 million market capitalisation. Zak: So to sum things up, Vox Markets could be a one-stop shop for traders’ needs over the course of any given day? Martin: Yes, it allows you to keep your finger on the pulse with up-to-date news and social media feeds and it includes a secure messaging system to engage with other users. It is the service I would use. We are very happy with what has been achieved so far but we also have a pipeline of ideas that will enhance the site over the next 12-18 months. Zak: On a wider perspective, do you see the City and the financial markets improving after the crisis of 2007-8? Are you an optimist or do you see threats? Martin: I am far more concerned about the geopolitical arena than the economics. I’m obviously pleased that the risk of a Greek exit from the euro has been averted but I am far more concerned with issues such as ISIS and Russian brinksmanship in Ukraine and, perhaps, the Baltic states.
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Zak Mir Interviews
From a broader market perspective, my concerns are around asset allocation. Put simply, in a prolonged period where yields on government bonds are close to 0%, where do you invest? I think that is what is driving the strength in equity markets at the moment and what are seen as historically high valuation multiples. In particular, income investors are allocating more cash to equities as they chase yield. Zak: So you are not concerned about the Mansion Tax and the aftermath of the May general election in the UK? After all, there is going to be uncertainty, especially amongst the “buy to leave” brigade, the non-doms and others who have parked their money here over recent years. Martin: Tax has always been used as a political tool and inevitably the upcoming election will create some near term uncertainty but, no, I don’t think that’s the ultimate threat.
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Take the Mansion Tax as an example - I think Labour have said it will raise tax income of £1.2 billion for the government although other parties dispute that amount. Against annual UK tax revenues of around £600 billion, I think it’s a total red herring. The Mansion Tax is clearly a policy of limited benefit to the country’s tax income, particularly once the cost of implementing it and going through the process of valuing all the properties is taken into account. I am not denying that the wealth divide has grown but if the Government really wanted to sort out this area, it could do so. Equally, if they really want to chase money there are plenty of glaring loopholes that would have more impact that the Mansion tax. Zak: I am sure the Labour Party will get back to you after the election!
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The Best of the Evil Diaries
THE BEST OF THE
Evil Diaries
The man the Daily Mail dubbed “The King of the Short Sellers”, Evil Knievil (aka Simon Cawkwell) is Britain’s most feared bear-raider. He mostly famously exposed the fiction that were the accounts of Robert Maxwell’s Communication Corporation, an event which helped to earn his pen name.
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The Best of the Evil Diaries
A big man with a bigger reputation, Evil Knievil famously made £1 million by short selling shares in Northern Rock during its collapse. He also uses his knowledge and experience to buy shares, often resulting in the same devastating effect. Three times a week Evil provides his thoughts and musings on the markets. Now writing EXCLUSIVELY for Spreadbet Magazine at http://www. spreadbetmagazine.com/blog/category/evil-diaries He doesn’t just deliberate about the financial markets on The Evil Diaries, but also comments on politics, current affairs, which horses/sports bets are his latest favourites, with the occasional film and book review thrown in for good measure. Here we take a look back on the highlights of Evil’s diaries in the month of February.
2nd February
It is partly through a disciplined approach to the business in hand but it must surely also be true that she is a natural. And she uses her brain. But that is not so readily said of Prince Charles, as I now evidence: last weekend’s Spectator featured an article by Nick Cohen, who self-declaredly is a republican and who here covered the strange affair of Edzard Ernst. Ernst is a seriously clever fellow who specialises in investigating cancer cures and has done so for twenty-five years. He was so engaged at Exeter University until Sir Michael Peat, Prince Charles’s bookkeeper complained to the Exeter University authorities such that Ernst got the bullet. Ernst’s crime? He queried Prince Charles’s comments on curing cancer with alternative therapies. Let’s be clear: it is one thing to have a wally as future king but it is quite another to have one throwing his weight around and deeply damaging a scientist’s career.
4th February
“LET’S BE CLEAR: IT IS ONE THING TO HAVE A WALLY AS FUTURE KING BUT IT IS QUITE ANOTHER TO HAVE ONE THROWING HIS WEIGHT AROUND AND DEEPLY DAMAGING A SCIENTIST’S CAREER.”
At last the House of Commons is waking up to the frauds perpetrated on price comparison web sites. Moneysupermarket (MONY) is now around 250p - a surprise, really, given the publicity attending curious practices within this industry.
(I suppose that I should add that Charles has a nose which is very similar to my own even if, inevitably, not quite as handsome. However, it is tending pretty red. Is this a consequence of sunshine or drink or both? I think we should be told.)
In this connection, Which? is mildly caught up in this price comparison web site scandal. This is a shame. For I well remember when Which? got going in the sixties it was regarded by most sane people as some sort of ordered attempt on behalf of consumers orchestrated by the Consumers Association, proprietors of Which?
6th February
Apparently, the British electorate votes in its own interest. As 7th May approaches it will realise that a vote for Labour greatly increases the chance of a Lab/SNP coalition and, at that point, the English will vote English or Conservative. The Conservatives will get a majority of seats and probably end up running the country. So back ‘em at 4/5 and better, big time, first to get most seats and second to form a government.
Once Which? loses this reputation it will take a lot of effort to re-establish it. Which? has itself withdrawn from hiding the incidence of its taking undisclosed commissions. But it is still liable to compensate consumers who have been deceived. Perhaps the FCA can step up to the plate - well, occasionally, pigs have wings. HM Queen is a staggeringly successful monarch. She never puts a foot wrong.
Hargreaves Lansdown (HL.), now 980p, is on a PE of 28 or whatever. But the easy days of handling funds are over and that rating is just too rich. I closed my longstanding short in Avanti (AVN). I had to pay 245p which surprised me in the light of the substantial placing at 210p. I suppose the market engaged in a relief rally. Mind you, as ever, volume was slight. One of the points that always has to be borne in mind is stock borrow costs and, in my case, my borrowing contract in respect of Avanti was overdue for settlement. Had that not been the case, I might have run the short for longer even though there is no getting away from the fact that money troubles for Avanti are over for a few months at least.
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The Best of the Evil Diaries
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The Best of the Evil Diaries
Oxus Gold (OXS) moved sharply into what is in effect recent high ground yesterday afternoon. In such circumstances one is bound to reserve the possibility that there has been a leak somewhere along the line. Here the leak, if any, would not have been from the London end but possibly from Uzbekistan. I toyed with selling stock at 4p but decided otherwise. It seems to me to be worth all of 5p since (I may delude myself) it is long odds on to receive a beneficial arbitration award. This could see the theoretical receivable come to many times 5p.
The judges must collectively be mad. If you have not yet seen it, do not do so. You will want to walk out after about quarter of an hour and thereafter it gets worse.
Finally, at dinner in Oxford earlier this week, I sat at one stage adjacent to some incredibly bright bloke (a Nobel prize winner as it happens) and noting that he was about 50 checked his age. He is in fact over 70. He also advised that he is a vegetarian. So there is a downside to a sense of self-preservation.
16th February Apparently, HSBC (HSBA) has closed the accounts of all its customers who purport to be bookmakers. This can only be a decision taken on the basis of an opinion of bookmaking in practice. But what can this basis be? An individual bookmaker might bank cheques which are not originated by customers (for instance, a limited company) but it is not and cannot be the duty of HSBC to know whether a constructive trust has been established in favour of the beneficial payer of such funds. It could of course be the duty of the bookmaker (this is long established under English law). However, there is no chance of HSBC facing a loss through being compelled to refund such funds. So, something odd is going on and it is consistent with the many lunacies that emerge quite frequently nowadays in the conduct of banks. And I posit that this is in turn caused by the mad regulators who dream up all this trouble. As a society, we cannot afford this.
23rd February There is no accounting for taste. Birdman, renamed Birdbrain, wins best picture at the Oscars.
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Fund Manager In Focus
FUND MANAGER IN FOCUS
MARK MOBIUS BY FILIPE R. COSTA
When Mark Mobius was hired by Templeton Asset Management in the 1980s, there was no such thing as an “Emerging Market”. International organisations and economists used to distinguish rich countries from poor countries, but in a rather static way, either classifying a country in one group or the other. Poor countries were frequently labelled “Undeveloped Countries”, the “Third World”, or even “The South”. Mutual funds were diversifying across bonds, money market, equity, or some kind of hybrid mix, but most of the assets they were invested in were from the US and other developed countries. But in recognising the high growth potential and rapidly changing reality observed in some of the “Third World” countries, in 1987 International Finance Corporation (IFC) introduced a new category of country, which they labelled as “Emerging Markets”. The new category was aimed at highlighting the specific circumstances faced by some countries, which allow them to grow faster than others, while at the same time being in need of financing to sustain such high growth. In 1987 Templeton Asset Management hired Mark Mobius and created the first emerging markets mutual fund available to US investors. In five years, the fund’s assets under management rose from a paltry $100 million to a huge $5 billion.
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Templeton was then acquired by Franklin Resources Inc., giving rise to what is known today as Franklin Templeton Investments, one of the world’s largest investment firms. While IFC was the first to recognise the special characteristics faced by emerging markets, it was Sir John Templeton and Mark Mobius who translated the funding needs of such countries into investment opportunities for US investors. At the age of 78, Mark Mobius now has more than 30 years of experience trading and managing emerging markets portfolios. He currently oversees the entire emerging markets team at Franklin Templeton, who collectively manage around $45 billion (£29.2 billion). When the words emerging markets and investment appear together in the same sentence, the name Mark Mobius is never far behind, and as he is frequently referred to as the “Pied Piper of Emerging Markets” or as the “Dean of Emerging Markets”.
Mark Mobius
“IN FIVE YEARS, THE FUND’S ASSETS UNDER MANAGEMENT ROSE FROM A PALTRY $100 MILLION TO A HUGE $5 BILLION.” March 2015 | www.financial-spread-betting.com | 21
Fund Manager In Focus
Early Life Joseph Mark Mobius was born in New York on 17th August, 1936, to German and Puerto-Rican parents. Born a US citizen, he was also eligible for German citizenship by descent, which he recently embraced while renouncing his US citizenship. Many connect such a decision to a strategic method of minimising tax payments, a tactic adopted by many wealthy individuals every year; but for a man who lives in Hong Kong and spends 250 to 300 days a year travelling, he no more belongs to North America than to Nigeria or Myanmar. An interest in finance and economics was not with Mobius from the very beginning, as he started by studying communications at Boston University, where he obtained a Bachelors and a Masters degree in the field. Only later did he decide to progress his studies, this time in economics, obtaining a PhD at the MIT in 1964. Mobius has also studied at the University of Wisconsin, University of New Mexico, and Kyoto University in Japan, and has published several books on international trade, investment, and of course emerging markets.
Templeton Asset Management It was in 1987 that history started to be written, when Mobius’ international investment knowledge was merged with Sir John Templeton’s invaluable mutual funds expertise and long-term, disciplined approach to investment. Mobius was hired as President of the Templeton Emerging Markets Fund, an equity closed-ended fund that for the first time in history allowed US investors exposure to some of the high growth being delivered by emerging markets. The fund started slowly with just $100 million (£64.2 million), as the number of available emerging markets was ridiculously low. According to Mobius, they were investing in just six markets at that time - five in Asia plus Mexico in Latin America.
“FOR A MAN WHO LIVES IN HONG KONG AND SPENDS 250 TO 300 DAYS A YEAR TRAVELLING, HE NO MORE BELONGS TO NORTH AMERICA THAN TO NIGERIA OR MYANMAR.” The world as we know it today is characterised by free capital flows from and to almost everywhere, but that was certainly not the case in the 1980s. Investing in emerging economies was not always possible because there were many barriers to capital flows. Additionally, capital structures were deficient, regulations almost non-existent, and political structures were often unstable and riddled with corruption. Six countries were left as the basis to build a portfolio in 1987, while today the number has risen to around 50.
Before crossing paths with Sir John Templeton from Templeton Asset Management, Mobius worked at the international securities brokerage firm Vickers-Da-Costa (now part of Citibank) and was later President of International Investment Trust Company in Taiwan. He even ran an independent consulting company.
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In 1992 Templeton attracted a lot of attention and Franklin Resources acquired the company leading to what is known today as Franklin Templeton Investments, an S&P 500 constituent company with around $850 billion of assets under management. Mark Mobius and Sir John Templeton continued managing emerging markets funds at the new company, but Templeton died in 2008 at the age of 95.
Mark Mobius
Mobius is currently executive chairman at the Franklin Templeton Emerging Markets Group, directing the emerging markets research team and managing all related portfolios worth a combined total of $45 billion.
Mobius’ Views With extensive experience of international markets, Mobius believes that emerging markets offer double the growth of the developed world, even if at an increased risk level. Diversification is key to capture the additional growth while minimising the risk coming from a deficient structure. As he puts it, the difference between a rich and a poor country is the level of corruption. Poor countries lack regulations, don’t have structures like the SEC or FCA to protect investors, and allow for corruption to expropriate the poor in favour of the richer.
For investors it represents additional risks, which means that holding a well diversified portfolio of international securities is key, as is the complete exclusion of some countries with potentially high growth. For example, while he is comfortable with investing in South Africa, he has no confidence at all in Nigeria. Having learned much from Sir John Templeton, who always rejected technical analysis in favour of a longer-term view on investments, Mobius believes that over the long run emerging markets offer the best fundamental value. Over a longer period these markets have always outpaced the growth of the developed world and when the investment horizon increases, investors are able to reduce much of the short-term erratic movements and thus hedge against volatility. At the same time, these countries usually hold greater foreign reserves and much lower debt-to-GDP ratios.
DEBT-TO-GDP CHART
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Fund Manager In Focus
GDB-GROWTH CHART In a similar fashion to his views on emerging markets in the 1980s, Mobius now speaks of frontier markets as a good investment opportunity. These are smaller countries, particularly in Asia and Africa, which although being small, still offer good growth opportunities in the long run while essentially being uncorrelated with other economies and thus providing diversification to a portfolio.
A Negative View on Central Banks and Bailouts While recognising the increased risks now faced by smaller economies due to the liberalisation of capital flows, Mobius still believes that central banks are to blame for most of the currency crisis, as they often pursue unrealistic policies. When asked about the Thai baht crisis he recognises that careless lending from banks was a problem, but blames the central bank for pegging the baht to the US dollar while allowing inflation to grow faster.
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Mobius said on the matter, “I am a believer in the elimination of central banks. I think central banks should be eliminated in all countries, and currency boards should be adopted, where there is a fixed rate administered by an independent currency board that has no discretion whatsoever, whatever you want to fix it against, another currency or against gold or whatever. I think it’s the only answer in the long run.” He also believes that the excessive injection of liquidity faced today can cause havoc in terms of volatility in the near future, as deflation can very quickly revert to inflation if that excess liquidity enters the economy. Another interesting reflection of Mobius’ is the existence of a vicious circle involving developed countries and emerging markets, which further contributes to the corruption level of the latter. “Banks are really institutions for transferring wealth from the poor to the rich. Why do I say that? Well, what happens is that the poor are putting their deposits in these banks; the money is siphoned off and lent to people related to the bank, the bank owners and their friends and families, and those loans are never paid back. So the banks go bankrupt.
Mark Mobius
And then the depositors are left out in the cold or the government bails the bank out, and then if the government bails the bank out, of course the government’s currency becomes worthless, because they are never going to be paid back. So then they go to the IMF or the World Bank, they get a bailout, money flows in that’s never paid back, and it’s a vicious circle. And of course what happens, ironically, is that the money that flows into these people that have taken loans out of the bank, where do they put that money? Swiss banks. Where do Swiss banks put it? U.S. Treasury. So that gets cycled back in again. Yeah, this is the problem. They really have to rethink the whole process.”
Final Words With a long term approach and decades of experience, Mobius has been delivering investors a share of the growth opportunities that come from emerging markets while helping to raise capital for these economies.
While the companies that are part of the S&P 500 index now trade on average at a price-to-earnings ratio above 20, the Templeton Emerging Markets Fund shows an average price-to-earnings ratio below 13 and a price-to-book ratio below 1.9, while being constituted by companies with substantially higher growth opportunities. China, Thailand, and Brazil are at the top of Mobius’ preferred list to deliver future growth. While many believe China is in a soft landing, he believes the country is just at the beginning of a bull market. While others believe central banks are solving the deflation problem, he believes they’re part of the problem. The risks are always large and the key is to follow value, not the crowd, all the while keeping to a sound diversification strategy, as “the only person who shouldn’t diversify is the person that knows it all”.
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Fund Manager In Focus
“WHILE OTHERS BELIEVE CENTRAL BANKS ARE SOLVING THE DEFLATION PROBLEM, HE BELIEVES THEY’RE PART OF THE PROBLEM.”
TEMPLETON EM FUND TABLE
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Mellon on the Markets
MELLON ON THE MARKETS
GRADUATING FROM THE LOST DECADES The markets continue to grind higher, with Japan showing the biggest gains. I imagine Japan will continue through my target of 20,000 on the Nikkei, as it is the only major market to have classically aligned buy signals – rising operating margins, lack of alternatives to invest in, super low interest rates, a falling currency and a relatively low PE ratio.
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Mellon on the Markets
You might well ask, what about Europe? Surely that benighted continent has at least some of the same characteristics? To a certain extent, yes, but the problem is that systemic shocks are still likely. The Greek situation has become one of extend and pretend, but waiting in the side-lines are the Spanish elections and the rise of Podemos, anti-Europe stirrings in other Eurozone economies, and of course the upcoming UK election. On top of this, domestic demand is still very anaemic in most Eurozone economies, albeit offset by an interesting but unlikely to succeed monetary policy emanating from the ECB.
“JAPAN IS GRADUATING FROM ITS LOST DECADES, SLOWLY EMERGING FROM THE ZERO GROWTH UNDER WHICH IT HAS LABOURED FOR WHAT SEEMS LIKE FOREVER.”
Among them are a slowing housing recovery; weakening export growth in response to the strong dollar and to a slowdown in China; and renewed credit problems, principally in the energy sector. Indeed, my friend Steen Jacobsen believes that US growth could grind to zero by the end of this year. He is famous for extreme forecasts, so I don’t agree with him, but I take his general point. This means that US markets look set to become even more expensive. With US stocks already trading on an elevated CAPE ratio, the US is wildly overstretched, the quantity of new issues is becoming oppressive, and bullishness abounds. Meanwhile, interest rates are slowly edging up, and corporate balance sheets are not as pristine as they were. Buybacks make a difference to EPS growth but can’t go on forever. So, as for the last few missives, the picture is a mixed one. Japan remains my favourite market, and I don’t think a yen hedge is needed here. Almost everything else appears to be range bound, with the only enlivening activity being takeovers in the biotech space and the shenanigans at almost every single big name bank. That leads me to a short-term buy.
While the scale of this much-heralded ECB intervention is impressive, what Europe really needs is a broad tax cut, underwritten by the ECB, which would stimulate demand, and thereby some inflation, much more effectively .The effects of the ECB intervention has already been to drive interest rates to zero or even negative levels, which in theory should force banks to offload bonds back to the ECB and to start lending elsewhere. The problem is that Eurozone banks are still not properly capitalised and have failed to properly account for their non-performing loans in an adequate way. This is going to hold back Europe for many years, and any idea that there will be a quick rebound is a fanciful one. Ultra-low interest rates are a sign of failure, not of success. Japan is graduating from its lost decades, slowly emerging from the zero growth under which it has laboured for what seems like forever. Europe is just going into its third or fourth year of elementary school. It is notable that European productivity growth, economic growth and per capita income have fallen hugely behind those of the US in recent years. There is a sense that the US is set up for strong growth for some time to come, but actually there are worrying signs.
HSBC, which suffers from arrogance and a surfeit of self-satisfaction, has been beaten down recently. There has been a lot of noise from the analytical community about its cost of capital being roughly equal to its return on equity, which basically means it might as well be shut down. This isn’t going to happen, and I imagine its cost base will be ruthlessly pruned, and some management heads will roll, though I really think the treatment of the CEO has been unfair.
In the meantime, HSBC trades on less than 10 times earnings, its dividend yield is 6%, its combined Tier 1 capital ratio is 13%, and it will one day return to growth. It is really a global business, and exposed to the Pacific Century in the best possible way. Headlines sometimes make for good buying opportunities and this looks like one to snatch. I see 20% upside.
March 2015 | www.financial-spread-betting.com | 29
Mellon on the Markets
In Japan, I would buy Fanuc, the world’s leader in robotics - robots are going to be everywhere, and very soon. Fanuc has about a third of its market capitalisation in cash, and Daniel Loeb, an unpleasant but effective US raider, has taken a position with a view to getting them to pay some of it out. I think it’s a very good long-term investment. In a macro sense, I would really be looking at shorting the highly overvalued German bunds. When QE starts, I think interest rates in Europe will RISE, which is what happened in the US. The same could be said for French OATS, or indeed Japanese bonds, where yields have recently been rising – albeit from nothing to twice nothing. We are still short the Euro/Dollar, and surely parity must be somewhere in sight. Sterling I am neutral on, and the same goes for the yen. The Australian dollar is a sell, and any short term rise above US 0.79 is a clear sell.
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“HEADLINES SOMETIMES MAKE FOR GOOD BUYING OPPORTUNITIES AND THIS LOOKS LIKE ONE TO SNATCH.” I would go short the S&P against the Nikkei. In the meantime, I wish you all happy hunting, and don’t forget to book your tickets for the Master Investor conference next month!!! Jim Mellon
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Zak Mir’s Monthly Pick
ZAK MIR’S MONTHLY PICK Buy Lloyds Banking (LLOY): Above 75p Targets 95p Recommendation Summary
Technicals
Recent goings on in the banking sector have seen enough to make one’s blood boil. The key buzzwords here include “bonus pool”, “moral hazard”, “LIBOR”, “PPI” and the latest gem, “tax avoidance.” But it would appear that as we start 2015, and some seven years since the financial crisis ended, there is some good news - the return of the Lloyds dividend payment.
From a technical perspective there is an increasing amount to shout about in terms of the daily chart at Lloyds. This is because we have been treated to a gradual progression within a rising trend channel from January 2014. There is also backing from the way that, ever since there was an unfilled gap to the upside at the beginning of August 2013 through the 69p level, the shares have remained above the gap floor. This so called failed gap fill signal is one of the strongest in charting in that it indicates that the bears have been unable to gain traction below the 70p level despite several attempts, and of course despite subsequent chunky Government stake sales in the interim.
While some may suggest that this is only getting the company back to where it was in say 2006, the fact that the group has been able to absorb the write downs and claw back the cash lost when it was “forced” to tie up with HBOS is an achievement. It also underlines how much the major banks still make out of retail clients in this country. The obvious conclusion to draw now is that without the burden of the HBOS inspired losses, this is a company which should thrive, even with the added competition and over-regulation in the sector
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The price action remains no less compelling for the near term. This is because we have seen the floor of last year’s price channel at 74p, with the shares recently oscillating between this level and the 200 day moving average at 75.5p after a January bear trap rebound from below former December support. The likelihood now is that while the 2014 uptrend line remains in place as support on a weekly close basis we could see significant upside. The favoured destination in this respect over the next 2-3 months is as great as last year’s resistance line projection at 95p. At this stage any weakness towards the 200 day line is regarded as a buying opportunity.
Buy Lloyds Banking (LLOY)
“WHILE THE 2014 UPTREND LINE REMAINS IN PLACE AS SUPPORT ON A WEEKLY CLOSE BASIS WE COULD SEE SIGNIFICANT UPSIDE.” March 2015 | www.financial-spread-betting.com | 35
Zak Mir’s Monthly Pick
LLOYDS CHART
Recent Significant News
23rd February - Telegraph.co.uk
27th February - Reuters
The Government has taken its holding in Lloyds below 24pc, with the bank on the brink of paying its first dividend in more than six years.
Lloyds Banking Group is paying its first dividend in more than six years after reporting a rise in profit and improvements in its capital strength, a milestone in the bank’s recovery after it was bailed out during the financial crisis. The bank, which was rescued at a cost of £20 billion to British taxpayers, said it would pay a dividend of 0.75 pence for the 2014 financial year. Chief Executive Antonio Horta-Osorio said Lloyds, which offered some of the highest dividends in Britain before the crisis of 2007-2009, intended to pay out at least half of its sustainable earnings in the medium term. Lloyds reported an underlying profit of £7.8 billion, up from £6.2 billion the year before and ahead of market expectations for a profit of £7.5 billion.
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Lloyds revealed in a stock exchange announcement on Monday that the Treasury has sold off some 678m shares in the bank this year, worth around £530m at Friday’s share price. The Government said it had made £500m from the sell-off. In December, George Osborne revealed plans for a third sell-off of Lloyds since the bank’s taxpayer bail-out in 2008, which is expected to take the Treasury’s stake below 20pc by the middle of the year. Lloyds must disclose to the market every time a major shareholder crosses a percentage threshold. On Monday, it said that a share sale had taken the Government’s shareholding below 24pc, from 24.9pc at the end of last year.
Buy Lloyds Banking (LLOY)
Under a “drip feed” process operated by Morgan Stanley, the taxpayer’s stake is being gradually sold via brokers. The last two share sell-offs, which have taken the Treasury’s holding down from 38.9pc in the last 18 months, were one-off disposals to institutional shareholders. 22nd February - FT.com Lloyds Banking Group is set to resume its dividend payments for the first time in more than six years, just as the government is expected to reveal it has offloaded another chunk of its stake in the taxpayer-backed lender.
10th February - Yahoo Finance Shares in Lloyds Banking Group (LSE: LLOY) (NYSE: LYG.US) have continued to flail during the past year, despite the fruits of significant restructuring vastly improving the bailed-out bank’s earnings outlook. The company shed 3.3% during the course of 2014 and is flat in the year to date, leading many to question whether the market has missed a trick.
The bank, which has one of the biggest shareholder registers in Europe at about 3m, is on course to receive the green light from the UK’s financial regulator ahead of its results this week. Restarting the dividend will be a watershed moment for the lender and could spur the price of its shares, as the Treasury seeks to offload its remaining 25 per cent stake. UK Financial Investments, the body overseeing the government’s stake in part-nationalised banks, is soon to announce that it has sold another 1 per cent of Lloyds stock following the launch of a programme in December to drip-feed shares into the market, according to people familiar with the situation.
“IT COULD BE ARGUED THAT THE BANK’S PRICE MERELY REFLECT THE VAST LEVELS OF RISK INVESTORS HAS FACTORED IN, RATHER THAN PRESENTING AN OPPORTUNITY TO SNAP UP AN OVERLOOKED BARGAIN.” The City’s army of analysts expect Lloyds to swing from losses of 1.2p per share in 2013 to earnings of 7.8p in 2014, results for which are due on Friday, February 27. And growth is anticipated to roll on thereafter, albeit at a much steadier pace -- rises of 4% and 5% are pencilled in for 2015 and 2016 correspondingly. As a result Lloyds is, on paper at least, one of the most appetising stocks on the FTSE 100, the business carrying a P/E multiple of 9.1 times prospective earnings for this year and 8.7 times for 2016 - any reading below 10 times is widely considered too good to pass up.
It comes after a dramatic turnaround for the bank, which has cleared out billions in toxic assets, shifted funding from the money markets, slashed costs and retrenched to focus on the UK.
However, it could be argued that the bank’s price merely reflect the vast levels of risk investors has factored in, rather than presenting an opportunity to snap up an overlooked bargain.
March 2015 | www.financial-spread-betting.com | 37
Zak Mir’s Monthly Pick
Fundamentals From a cynical perspective, something which it is not difficult to possess with regard to the UK banking sector, one has to say that the timing of a resumption of the dividend at Lloyds Banking Group is somewhat obvious. The UK Government is in the run up to the May general election. To be able to cash in on its remaining 25% stake in Lloyds to add some additional firepower to all of the election promises would be very useful indeed. This idea is helped along by the obvious way that shares of Lloyds are likely to be greatly boosted in terms of their attraction to would-be investors with a yield of say, 5.6%. This is not of course as much as the 6-7% or so seen before the shotgun wedding with HBOS. But the likely renewal of interest in the group with the new payout should all help the stock to rally – and enable the Government to exit with a relatively happy ending. That said, while it may be tempting to argue that this is only a dividend story, there is still much more to look at here on the fundamental side. For instance, despite all the upheavals for the sector, it is difficult to say that the stranglehold of the big five players has really been altered. Indeed, it may be argued that the so called “challenger” banks have not essentially changed the dynamics of the sector, rather merely added to it. For Lloyds itself we have the way that it has taken six years and more to pay off the toxic debts it assumed with the HBOS merger, something which underlines the prospect that the next couple of years could be particularly sweet. How so? There may be a clue in the way that the bank can still pay savers next to nothing, but lend money to mortgage holders at 3% plus. This differential is clearly highly lucrative, even if interest rates start to rise later this year.
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It is to be noted that the bonus pool at Lloyds Banking remains generous, with as much as £375 million to be shared out, including £7 million to CEO António Horta-Osório. What is interesting about this is that after all the controversy in the financial press, companies like Lloyds still managed to take public cash and pay a part of it into their bonus pool, even when they were still losing money.
“THE MORE UK FOCUSED GROUP SHOULD BE SAVED THE EMBARRASSMENT OF THE CURRENT TAX AVOIDANCE SCANDALS.” The good news here though, as compared to more internationally focused groups such as Standard Chartered (STAN) and HSBC (HSBA), is that the more UK focused group should be saved the embarrassment of the current tax avoidance scandals.
March 2015 | www.financial-spread-betting.com | 39
Three Small Cap Media/Telecoms Plays
THREE SMALL CAP MEDIA/ TELECOMS PLAYS BY RICHARD GILL, CFA
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Three Small Cap Media/Telecoms Plays
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Three Small Cap Media/Telecoms Plays
STV GROUP (STVG) Probably best known for previously producing the hit TV series Taggart, STV is a solid and established TV broadcaster & producer based in Scotland, being the Channel 3 (ITV) franchise holder for the country. The company is organised into two divisions, STV Consumer (Broadcast and Digital) and STV Productions. The core STV Consumer division (90% of revenues) delivers the full Channel 3 programme schedule via digital terrestrial, cable and satellite television in Scotland and on digital channels via the STV Player. February 2014 saw the renewal of the Channel 3 licence for another ten years to 2024. In 2012 STV was awarded licences to operate new local television services in Edinburgh and Glasgow, withthese having been launched in recent months. The firm claims that 92% of Scots interact with STV every month and over half use at least three of its services. The majority of revenues are derived from advertising, both from “national” sales via the ITV sales house and from its own regional Scottish airtime slots.
Supporting Consumer is the STV Productions business, which creates and produces programmes for broadcasters in the UK and overseas, including the BBC, ITV and Channel 5. Some of its most popular content includes Catchphrase (ITV), The Link (BBC One), Antiques Road Trip (BBC One), Celebrity Antiques Road Trip (BBC Two) and The Lie (TV3).
Numbers Results for 2014 were well received by the market, with STV reporting revenues up by 7% at £120.4 million and earnings up by 13% at 38.7p per share.
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Net debt continued to fall, being cut by 18% to £29.4 million by the period end – and down from £189.4 million in June 2007. The company also announced that the full year dividend would be 8p per share, well ahead of the market consensus for a payment of 6p per share. Notably, and providing guidance for investors, the firm revealed it is targeting a compound annual growth rate in earnings of 10% between 2014 and 2017. STV Consumer performed strongly in the year, with revenues up by 8.6% at £107.1 million as it benefited from a strong performance from national airtime revenues. Other operational highlights included revenues from the digital business rising by 23% to £5.3 million, with margins being above target. Core channel STV maintained its position as Scotland’s most watched commercial channel, achieving 3.6 million viewers a month. STV Glasgow, the first City TV service, was launched in June, followed by STV Edinburgh in January this year. January saw the total reach of both channels hit over one million viewers, with over 100 new advertisers signing up.
“JANUARY SAW THE TOTAL REACH OF BOTH CHANNELS HIT OVER ONE MILLION VIEWERS, WITH OVER 100 NEW ADVERTISERS SIGNING UP.” STV Productions performed less well, with revenues down by £0.2 million at £13.3 million, missing its £16.8 million target for the year, with operating margins of 3% behind the target of 5%. On the outlook STV said that national airtime revenues in the first quarter are expected to be up by 11%, boosted by the timing of Easter. However, Q2 revenues are expected to be lower than last year due to strong comparatives from last year’s World Cup and the UK general election being likely to have an impact. Scottish airtime revenues were down 3% in Q1 and are expected to be flat to 5% down in Q2 due to the same effects mentioned above.
Three Small Cap Media/Telecoms Plays
What’s it worth? STV shares have grown strongly over the past three years, gaining 360% since the start of 2012 as progress was made across the business, including the substantial reduction of certain risks. Driving the performance were a significant reduction in net debt, a return to the dividend list, rising advertising revenues, renewal of the Channel 3 licence, a pension deficit recovery plan being agreed and uncertainty being removed over last year’s Scottish referendum. Despite the share price rise we still see further gains ahead. The 10% earnings growth target looks achievable in our view given the recovery being seen in the wider UK economy (which drives advertising spend), potential in the digital and local businesses and management’s recent performance.
Add in a forecast dividend of 10p per share for 2015 (giving a yield of 2.65%) and we have a potential ten month gain of almost 13%, assuming that the shares rise in line with earnings growth. More significantly, blue sky upside comes from a potential re-rating of the shares, which we see scope for given the firm’s track record in recent years and growth prospects. The shares currently trade on a multiple of 9.45 times consensus market forecasts for 2015. If the rating were to move up to ITV’s comparable rating of around 15 times then we are looking at a target price of up to 638.5p for the end of the year. Buy at 378p.
March 2015 | www.financial-spread-betting.com | 43
Three Small Cap Media/Telecoms Plays
Audioboom (BOOM) Having come to market in May last year via the reverse takeover of investment business Digital One, Audioboom is looking to take advantage of the rapid growth in online and mobile advertising – a market which, according to researchers at Strategy Analytics, is set to grow by 9.5% to £8 billion in 2015 in the UK alone. The firm is looking to do this by, in its own words, “reinventing radio consumption for the digital age”. The firm’s core offering is a digital social media audio platform, also known as Audioboom, which enables the creation, broadcast and consumption of audio. Previously referring to itself as the audio equivalent of Youtube, the firm now focuses on professional (as opposed to user created) and non-musical content by working with a raft of content partners across the world – now it likes to be called the Netflix of audio. Audioboom currently has over 2,300 such partners, across a number of sectors such as sport, entertainment and current affairs, who use the platform to distribute their spoken word content. Some of the big name brands working with the company include the BBC, Telegraph, Guardian, CBS, Sky Sports, Sky News Radio, Premier League, Reuters, CNBC, Universal and Fox.
Users can access Audioboom’s partners’ content in several ways via downloading the Audioboom app, listening on the website, embedded content within partners’ websites or social media sites such as Facebook and Twitter. November last year saw the company reach 3.14 million registered users on its platform, up 64% over the previous 12 months, with the figure being reported at 3.4 million at the latest update in February. Listeners are distributed around the world, with 39% coming from the UK, 31% in the US, 10% in Australia and the remaining 20% from the Rest of the World. Despite having been founded in 2009 and having made considerable operational progress recently, Audioboom is still at a very early stage in terms of revenues – not uncommon for a business in the social media sector as it focuses on building up its content and listener base.
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However, the company is looking to monetise its content in a number of ways, including via targeted advertising, partnership deals and users paying for a premium version of the service.
Recent news In October Audioboom raised £8 million at a price of 12.5p per share in a heavily over-subscribed placing, which also saw the directors put in a combined six figure sum. The money is being used to drive growth in a number of ways, including accelerating geographic expansion; creating a bespoke app, website and content specific to Hispanic clients and users; and accelerating the roll-out of an aggregated audio advertising network through Audioboom’s content partners. Crucial for monetising the user base, last December Audioboom announced two major media sales partnerships, with Global Radio in the UK and AdLarge Media in the US. Global Radio will be selling Audioboom inventory across news, current affairs, politics and business channels, to all of the major media planning and buying agencies in the UK. They join talkSPORT as the firm’s exclusive UK sales partner for sport related advertising. In the US, AdLarge Media will be representing all of Audioboom’s inventory across all content genres. Within one day of the companies working together US auto insurance company Geico booked a $36,000 campaign. Another potential revenue stream comes from the January signing of an agreement with US business Nobex Technologies. Nobex runs an app for streaming live radio content which has over 20,000 worldwide radio stations on its platform and 500 million users. Under the deal, Audioboom will provide radio stations using the Nobex app, Audioboom’s full content and technical functionality. Audioboom will pay Nobex a referral fee for every radio station that opens an account but it will then receive all of the revenue, net of advert sale costs and partner payments, until the referral fee has been recouped. Following this Nobex will pay Audioboom a fixed percentage of revenues generated via the Nobex app. January also saw the company sign a deal with African mobile content aggregator Cloud Africa under which the Audioboom app will be either pre-loaded onto new handsets, or offered to current mobile contract users, covering around 100 million subscribers.
Three Small Cap Media/Telecoms Plays
What’s it worth? With a current market capitalisation of £44.64 million and having just posted an 11 month loss of £2.53 million on revenues of £51,000, investors might well be reminded of dotcom bubble type valuations here. There are considerable risks, not least of which is Audioboom’s being able to build up its platform to the scale required to ensure consistent profitability – estimated at around 8 million registered users. Competition is also a notable threat, coming from the likes of Soundcloud and Mixcloud. Given the early stage nature of the business, funding will also be a concern to potential investors. In recent results the firm was vague, saying that its £8.9 million cash resources, ”will allow for the on-going running costs and enable the growth of the business until advertising and other revenue becomes significant.” For reference, we note that the company’s house broker is currently forecasting break-even for the 2016 financial year. From then on the operational gearing effect on profits could be huge, assuming that the number of listeners continues to grow rapidly.
Valuing early-stage, technology-driven businesses can be a thankless task. However, we can get some sense of what the company is worth by applying a value per registered user figure, a valuation method often used in the industry. In a recent interview with SpreadBetMagazine, CEO Rob Proctor suggested a figure of $30 - $40 per user would be justifiable. That suggests a current value in the range of £66.8 million to £89 million, or 13p to 17p per share. These figures are considerably higher than the current market cap and with significant potential for further growth in user numbers, both in English speaking countries and elsewhere, the upside here could be spectacular. The risks are clear, but having fallen from a peak of 16.625p in September, now might be the time for more adventurous investors to make a highly speculative buy at 8.75p.
AUDIOBOOM CHART
March 2015 | www.financial-spread-betting.com | 45
Three Small Cap Media/Telecoms Plays
Manx Telecom (MANX) As its name suggests, Manx Telecom is an Isle of Man based provider of telecoms services. Originally part of BT but spun off in 2001 as part of the mmO2 business, Manx was acquired by Telefónica in 2006 before being bought in June 2010 by private equity firms HgCapital and CPS Partners. Manx then joined AIM just over a year ago via a £156 million placing which saw its major shareholders exit. As of today, the firm provides a full range of telecoms services, including fixed line, broadband, mobile and data centre services to businesses, consumers and the public sector on the Isle of Man. As well as being one of the largest local employers, Manx Telecom’s services are crucial to the infrastructure of the island. It is the only operator of a fixed line network and has around 75% of the local mobile market. The firm launched a 4G mobile service in the summer of 2014, which is now available to 99% of the population, and has also launched a high speed VDSL broadband service (“Ultima”) which is available to 87% of homes. A superfast fixed linebroadband service that offers speeds of up to 80 Megabits per second is now available to around 50% of homes and businesses. Manx also has three data centres and an “Other” category which provides services such as the Manx Telecom directory, inbound roaming, hardware equipment and managed services. Supporting the core Isle of Man market, the firm also has a fast growing hosting and “Smart SIM” services business which it provides to “off-island “customers under the Global Solutions division.
“IT IS THE ONLY OPERATOR OF A FIXED LINE NETWORK AND HAS AROUND 75% OF THE LOCAL MOBILE MARKET.”
Supporting the strength of the company is a resilient economy on the Isle of Man. The most recently published national income accounts, for the year 2012/13, by the island’s Cabinet Office reported growth in GDP of 6.1%. Notably for Manx Telecom, growth in the ICT sector was an impressive 28.7% in real terms, with e-gaming firms being a notable driver. Being domiciled on the island also means that a zero rate of corporate tax applies to the majority of Manx Telecom’s business.
Financials & recent trading Results for the six months to June 2014 showed revenues up by a modest 4.4% to £39.5 million. This was driven by a 30% rise in sales from the Global Solutions business to £8.3 million. Elsewhere, revenues from the core fixed line, broadband and data business (39% of sales) grew by a modest 1.4% to £15.6 million. While Manx posted a statutory loss of £5.07 million, the period saw £7.57 million of expenses booked to the income statement in relation to the February IPO – yes this was an expensive listing, with several million pounds’ worth of fees paid to advisors in relation to HgCapital’s exit! However, the underlying trends looked good, with adjusted operating profits rising by 14% to £9.7 million and net operating cash flow of £11.2 million, up 5%. One area of the accounts worthy of further explanation is the finance expenses. The interim accounts look quite messy and difficult to understand given certain transactions completed at IPO. But following those deals the balance sheet and cashflow statement should be simplified. While a total of £14.8 million of financial expenses were booked in for the first half (and will also be reflected in the full year numbers) they should be much lower in 2015 and beyond. This is because the IPO expenses will not be repeated, nor will £4.5 million of non-cash capitalised loan costs. Interest payments on debt should also be much lower, with Manx using the IPO proceeds net to the company (£89.53 million) to pay down various loans. This took net debt to £58.3 million as at the end of June, down from £134.1 million at the end of 2013, with a new £80 million revolving credit facility being entered into. February this year saw further good news. The company confirmed that trading for 2014 was in line with expectations and also revealed a number of renewal agreements with the Isle of Man Government for mobile services, local and wide area network infrastructure, fixed line, internet and network services under its ‘ConnectMan’ agreement, under which Manx has been providing services to the Government since 2005.
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Three Small Cap Media/Telecoms Plays
What’s it worth? Investors who got in at the 142p IPO placing have seen a decent return from Manx Telecom shares. They are currently standing on a capital gain of 30%, and a 9.9p dividend expected for the full 2014 financial year takes the total return up to 37%. While we see more modest gains ahead, the shares still look decent value. The firm has a progressive dividend policy, and we see the potential for it to be increased at around 5% per annum given the expected growth. For 2015 that would equate to a payment of 10.4p and a yield of 5.62%, which is firmly at the top of the telecoms sector and higher than that offered by the likes of BT, Vodafone and TalkTalk.
The markets are looking for earnings growth of around 7% for 2015, so assuming the stock maintains its rating of around 15 times earnings (which looks reasonable given the strength of the firm) investors are looking at a potential one year total return of around 12.6% - a good return given the low interest rate environment and risks involved. Buy at 185p.
MANX CHART
March 2015 | www.financial-spread-betting.com | 47
Clash Of The Titans – Sky vs BT
CLASH OF THE TITANS SKY VS BT BY JAMES FAULKNER AND RICHARD GILL
“We’re going to be led by what we see the customer wants,” said Sky CEO Jeremy Darroch in 2014. So far, his appraisal of the situation has been that the UK consumer is not clamouring for quad-play. However, clearly Sky only has one piece of the puzzle missing – a mobile phones operation – and it would seem foolish for the firm to leave this stone unturned for long, especially given that arch-rival BT recently re-entered the mobile space with its takeover of EE (subject to review by the competition authorities). Perhaps realising this, Sky announced a deal in January to piggy-back on TelefónicaUK’s O2 network via a MVNO (mobile virtual network operator) deal commencing in 2016. Whether or not this will be sufficient in order to compete with the newly merged BT/EE, which has the advantage of owning its own network infrastructure, remains to be seen. Unsurprisingly, Sky’s core strength remains its unrivalled content offering. Its market leading position was recently bolstered via last year’s acquisition of Sky Deutschland (SD) and Sky Italia (SI), which makes it the largest Pay TV player in three of the four largest European markets. The principal opportunities created by the combination of these assets are an, in Sky’s own words, an “enlarged growth opportunity”, “benefits of scale” and “significant synergy potential.”
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Clearly, Europe represents a major growth opportunity given its relatively low levels of penetration versus the UK; pay TV penetration in the German/Austrian and Italian markets stands at c.19% and c.28%, respectively versus c.50% in the UK. The enlarged business will also become the biggest content buyer in Europe with a total budget of £4.6 billion, giving it a clear edge when it comes to differentiation via content. In addition to these benefits, management expects the deal to generate c.£200 million of synergies by the end of the 2017 financial year (at a one-off cost of £150 million). Supporting the strength of the company is a resilient economy on the Isle of Man. The most recently published national income accounts, for the year 2012/13, by the island’s Cabinet Office reported growth in GDP of 6.1%. Notably for Manx Telecom, growth in the ICT sector was an impressive 28.7% in real terms, with e-gaming firms being a notable driver. Being domiciled on the island also means that The flagship of Sky’s dominant content offering is its stranglehold over the UK Premier League, although this is increasingly being challenged by BT of late.
Clash Of The Titans – Sky vs BT
“THE FLAGSHIP OF SKY’S DOMINANT CONTENT OFFERING IS ITS STRANGLEHOLD OVER THE UK PREMIER LEAGUE.” March 2015 | www.financial-spread-betting.com | 49
Clash Of The Titans – Sky vs BT
The latest bidding round saw the two companies stump up a whopping £5.1 billion for the rights for the three years beginning in the 2016/17 season, versus £3 billion under the current agreements. Although Sky managed to slightly improve its offering, securing 70% of top pick matches (versus just 53% under current arrangements), there is a sense that this could prove to be a pyrrhic victory in light of the huge cost – a 69% increase in price per season to £1,392 million – which came in ahead of most analysts’ expectations. Although the enlarged Sky is certainly in a better position to absorb the extra cost, management certainly have a job on their hands if they are to meet their promise to offset this with efficiency savings through the “Digital First” initiative.
While we don’t see these metrics as overly demanding given Sky’s obvious quality, competitive advantages and growth potential, the challenges are certainly beginning to stack up. First and foremost, BT now represents a serious competitor to Sky in the Pay TV market – an area where it had hitherto enjoyed a virtual monopoly – albeit with Sky remaining the clear leader in terms of content. In addition to this, Sky is now a more highly geared entity, which means that extracting the aforementioned cost savings and synergies is all the more imperative. And thirdly, it isn’t all that clear that growth in Europe will be pain-free, as German and Italian consumers have remained stubbornly reluctant to subscribe to Pay TV services for some time now.
What’s it worth?
Overall, we offer a ‘neutral’ view on Sky, but it’s worth noting that 21st Century Fox retains a 36% stake in the company and its president Chase Carey said at the end of 2014 that he could not rule out a new bid for full control of the company in the future.
In terms of the fundamentals, the SD/SI transaction was financed through a placing (156.1 million new shares/c.10% of the company’s equity), new debt facilities and cash resources (recently boosted by the disposal of Sky’s 6.4% stake in ITV for £481 million and the £600 million proceeds from the disposal of a majority stake in Sky Bet) and is expected to be “at least” EPS neutral in the second full year of ownership (FY2017) and “strongly accretive” thereafter. However, debt has almost doubled as a result of the acquisitions, which has led to a downgrade from rating agency Moody’s to Baa2, the second lowest investment grade, albeit with a “stable” outlook. The current broker consensus is for earnings per share of c.55p for the year to June 2015, rising to c.65p in 2016. This implies a current rating of 17.9x (based on a share price of 985p at time of writing), falling to 15.2x for 2016. There is also a decent prospective dividend yield of 3.3%, rising to 3.6% for 2016.
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The rise, fall, and rise of BT As the FTSE reaches a new record high, not seen since 1999, it seems timely to remind ourselves of how BT has performed since those heady days of the dotcom boom. At the turn of the century the firm was the second largest company in the blue-chip index, commanding a 7% weighting as telecoms firms were at their peak, investors willing to pay more for those involved in the internet revolution. The shares hit their all time high on exactly the same day as the previous FTSE high on 30th December 1999, being valued on a heady multiple of 31 times historic earnings. But as the technology bubble burst BT went with it, the shares losing 82% of their value over the next three years - the firm also announcing a monumental pre-tax loss of £1.6 billion for 2001 after writing off £3 billion of goodwill, a deeply discounted £5.9 billion rights issue and a halting of the dividend.
Clash Of The Titans – Sky vs BT
BT trundled on, making decent profits in the high £2 billion levels in the years leading up to the financial crisis but never retaining its high rating, investors being concerned by high competition, high levels of debt and the largest defined benefit pension deficit of any UK listed firm. But a number of recent developments, driven by CEO Gavin Patterson, have brought BT back to life from an investment perspective.
A new lease of life? In 2012 BT, somewhat unexpectedly, took on rival Sky by snapping up the rights to 38 live Premier League games and launching its BT Sport channel. The rationale behind the deal was that consumers increasingly want to buy both broadband and TV services from one provider, thus providing huge cross selling opportunities within its existing customer base. BT have made the sports channel free to broadband customers - helping to reducing customer churn, attract new customers and encourage existing customers to buy more BT products. This was a bold move, described by some as aggressive and costly, especially given that the cost of £256 million per season for the rights was expected to have a negative effect on short-term profits. The gamble looks to be gaining traction however, with the firm announcing in its 2014 results that the BT Sport service was in three million homes as part of a broadband package and in another two million via wholesale deals. BT’s desire to further strengthen its content offering has been further demonstrated, with the company winning the joint rights to show the FA Cup from 2014-18 for a reported £25 million a season and exclusive rights for all UEFA Champions League and Europa League games from 2015/16 for three years, for £299 million a season. Then in February came the headline grabbing news that BT had bagged the exclusive live rights to 42 Premier League matches for the 2016/17 to 2018/19 seasons, for an increased cost of £320 million a season. BT has clearly shaken up the market with its investment in content rights. However, the jury is out on just how successful this will be given the huge investment being made. Perhaps a more compelling move on a financial basis is recently announced transformational takeover of EE, which gives BT a mobile capability in the UK which it lost after spinning off O2 in 2001.
The two companies agreed definitive terms at the start of February, with BT looking to buy the business for £12.5 billion. In what looks like a deal, given the minor overlap between services, the acquisition gives BT 31 million customers, 24.5 million being mobile customers, and an additional 834,000 broadband customers. Not only does BT get those customers at a stroke but synergies of around £360 million are expected in the fourth year following completion, which BT calculates is worth a net present value of £3 billion after integration costs. There are obviously huge cross selling synergies as well, with BT planning to sell its broadband, fixed line services and pay-TV services to EE customers. These revenue synergies are estimated to be worth another £1.6 billion on a net present value basis, with the whole deal expected to be accretive to earnings in the second year following the acquisition. However, there is one big threat to the EE acquisition not going ahead, with it being subject to approval from the UK Competition and Markets Authority, the review expected to complete before the end of March 2016. Of course the deal has its critics, not least from major competitors such as Vodafone, whose CEO Vittorio Colao said if the deal goes ahead it would create “The new, old BT”, referring to the company’s previous monopoly dominance of the UK fixed line market. Perhaps one likely outcome will be that the deal will go through but that BT is forced to sell or spin off its Openreach business, which enables other telecoms companies to access its network. This should open up competition in this area of the market given that most of the UK’s mobile and broadband operators, including the likes of Vodafone, and TalkTalk, are Openreach customers.
What’s it worth? With new life having been breathed into the company BT shares have performed well over recent years, currently trading up by 549% from their 2009 nadir. Assuming that the EE deal does not go through, the shares currently trade on a multiple of 15.4 times consensus forecasts for the financial year to March 2015. They also offer a reasonable yield. In Q3 results released in January BT reconfirmed that it intends to grow its dividend per share by between 10% - 15% in both the current and 2016 financial years, regardless of whether the EE deal is completed. At the mid-range this implies payments of 12.26p and 13.8p, equating to reasonable yields of 2.65% and 3%. On balance, we believe that these figures look reasonable value for a company which has clear growth plans. And should the investment in sport pay off and the EE deal go through then there is the potential for significant upside.
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The Limpopo Dispatches
THE LIMPOPO DISPATCHES
SURVIVAL IN TELECOMS AND MEDIA BY ROBERT SUTHERLAND-SMITH
A City veteran with a career stretching all the way back to 1967, Robert’s experience encompasses fund management (including a directorship at County Bank Investment Services), stock broking analysis and advisory, and investment research (notably as head of Quartz Capital Partners, a pan European investment bank). In his debut piece for SpreadBet Magazine, he explores the concept of evolution and the survival of the fittest in the telecoms and media sectors. As I watch from my hammock, strung between two bongo trees on the Bank of the Limpopo, I engage with my parrot in a discussion of the differences between the world nature and the world of business – most particularly, the urge to diversify in nature and the urge to consolidate in business. In nature, the secret to success has been diversity, which - as the parrot points out - was famously described by Charles Darwin in his ‘Origin of the Species’: each species adapts to its circumstances in order to survive by differentiation. This is a process that has led to the natural world’s wonderful bio-diversity, which is now alarmingly beginning to succumb to the destruction of species in our own time through humankind’s power and technology and, frankly, through thoughtless and often pointless human desire for consumption and endless technological innovation. “What are those evangelical Apple new product launches all about?” I ask? The parrot looks stumped!
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Whether it is farming in the Amazon or Chinese ‘medicine’s’ ill found belief in so called ‘medications’ derived from the bodies of tigers and other living things , entire species are now on the verge of extinction, threatening the balance of nature. I begin with this observation not only because it is important and interesting but also because it reminds us that we live in a complex world of competing choices. Moreover, the processes of the natural world provide parallel and contrasting consideration in relation to economics and finance. It seems that an estimated 16,928 species - around 37% - are listed as being close to extinction. Some species are now down to the low hundreds of living examples. I may not see tigers, leopards and elephants roaming Hampstead Heath, nor glimpse the hidden botanical and plant life of the Amazonian forests in Regent’s Park, but I like to know that they are there, safe in their habitats somewhere in the world.
The Limpopo Dispatches
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The Limpopo Dispatches
“TODAY, OUR VALUES OF SUCCESS AND BIGGER FINANCIAL RETURNS IN THE COMPETING REALMS OF ECONOMICS AND FINANCE TEND TOWARDS MORE CONCENTRATION OF BUSINESS.” I don’t know about you, but I would be prepared to give up the latest digital gizmo rather than live with knowledge that the price of having such a thing is the mass extinction of the diversity of life on our uniquely blue planet. Particularly, since the gizmo will be undesirably out of date in a few years hence. Not that I am going so far as to suggest that I have to sacrifice the elephant or the tiger to possess an Apple iPhone. The trade-off is not as simple or direct as that. In the world of economics and financial investment the urge and logic is different. The urge is not towards diversity as in nature but for consolidation that creates economies of scale and barriers to entry. Today, our values of success and bigger financial returns in the competing realms of economics and finance tend towards more concentration of business. It is driven by changing technology but its motivating force is a desire for economic and financial “efficiency” based on ideas of scales of economy, lowest unit costs, and largest market share etc. And of course, the benefits that accrue to holders of ordinary shares in the equity of a company, particularly where that equity is highly geared with fixed interest debt when its cost is below the return on investment and executive directors have share options. All of these factors are visibly at work in today’s electronic media, entertainment and communication industries where technologies are converging and companies merging. It is a process which begins with diverse technological innovation - the initial diversity bit – and is followed by ‘natural selection’ through consumer choice, leading in turn to mergers and amalgamations to form large scale operations, thereby achieving lower unit costs to maximise demand and total returns. It is a commercial phenomenon that fuses the eighteenth-century classical economics of Adam Smith - the ‘theory of the firm’ as they used to call it - and modern technology, creating rapidly changing customer demand and investment
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And of course, at the bottom of all of that is the irresistible ambition to make money out of large scale personal desires. The problem of saving the rain forests and the tiger is that it absorbs cash rather than generates it and that there is no profit in saving them – not usually in the short term at least. That comes under the heading of what economists call ‘opportunity’ cost – doing something else instead. We see the process at work in the merger in the telecoms industry where BT (BT.A) has just clinched a deal to acquire EE, which brings me to a problem of definition. Once it was newspapers, television, radio and telephones. No longer, O dearly beloved! Now it has been fused with personal and business communications on the hoof. ‘Mobility’ is the key word as more of these things have migrated to the hand held devices not long ago known as hand held telephones – voice telephone communication only – but now known as smart phones, which link us to the global internet, landline telephones, databases etc. and the world of entertainment and information, as well as enabling us to politely inform the wife that the bus is running late. With a smart phone you can wait for a bus in Brighton bus shelter and still have the world as your oyster. You may ultimately lose the art of conversation but you have cyberspace instead. The up-to-the-minute mobile has all of the myriad utility associated with the famous Swiss army knife. It can do many things and perform many functions. With a mobile device in one hand and a Swiss army knife in the other you can pay a bill on line, shoe a horse and still wait for a bus. We have all been turned into super electronic digitalised Merlins. Arthur’s Excalibur, for all it magical powers, is no match for your modern iPhone with all its web connected smartness. And now the ‘smart’ television has arrived uniting entertainment, computing and hand held voice and data communication.
The Limpopo Dispatches
All of this of course has investment and stock market implications. BT has agreed terms with Deutsche Telecom to buy its EE mobile phone business (pending approval from Ofcom), making it a leading ‘quad player’. If you do not know what that is, I am sure that you soon will and indeed soon be using the phrase as if it had been learnt long ago when your mother read stories to you in your infancy. Put simply, a quad player is company that can bundle home telephone, mobile telephone, broad band, television and film entertainment etc., into one complete service package. Quad playing is based on the notion that we want all these services from one provider. The message is that it works elsewhere.
“ARTHUR’S EXCALIBUR, FOR ALL IT MAGICAL POWERS, IS NO MATCH FOR YOUR MODERN IPHONE WITH ALL ITS WEB CONNECTED SMARTNESS.” There is a mammoth bit of consolidation going on in the telecoms sector, in which Vodafone (VOD) has increased its “footprint” into the cable sector with the acquisitions of Kabel Deutschland (in Germany) and ONO (in Spain), followed by BT buying Deutsch Telekom’s UK mobile business (EE) for £12.5 billion. It takes BT back into the mobile phone market and brings it an estimated 34% of the mobile sector – on top of 31% of broadband and 38% of the home phone market. Those numbers suggest that here is another sector where consolidation takes us to the very limits of competitive markets.
One commentator expressed the view that “no sane regulator would give the [BT/EE] merger the ‘green light’ “. Clearly it makes BT a powerful player, particularly in the provision of broadband services where it has the strongest competitive position as the provider of connections to households through its subsidiary “Openreach.” Here it competes with other broadband service companies like Talk-Talk (TALK), who have complained that BT prices its connections to them in a way that reduces the competiveness of their own prices when trying to win customers from BT. This is obviously perceived as a possible major regulatory hurdle to the merger. It has been proposed by BT’s broadband services competitors that it should sell its Openreach subsidiary as a condition of regulatory approval for the EE deal.
BT has also chosen to compete with Sky (SKY) by competing in the sport TV sector as a means of expanding its broadband market share. It has bid successfully for a smaller number of Premier League football matches but in doing so has pushed up the price massively for Sky, which nevertheless remains the football fans’ TV provider of choice. Some believe it will cause Sky to raise prices to recover the cost. BT’s policy includes offering its sports coverage free as a means of marketing its broadband offer. Back in the Premier League, players and their agents have their eye on the billions – £10 million a match – which Sky is paying the Premier League. It all looks as though it may end up in higher prices, more gearing and even better paid footballers – just what the world needs!
March 2015 | www.financial-spread-betting.com | 55
The Limpopo Dispatches
PREMIER LEAGUE CHART Another mooted advantage of BT’s transformation into a dominant “quad” player is that bundling services together will protect its market share because of the alleged greater difficulty in cancelling a service when a customer takes several of them as part of a bundle of services. How exactly do you get out of a contract for a service when it’s bundled up with others. Another job for the regulator no doubt! All in all, the acquisition of EE mobile would seem to confer considerable advantages to BT over its competitors, subject to the judgement of the findings and conclusion of the Ofcom findings.
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Until we have that, it is impossible to work out the investment attractions or otherwise of such a merger. If it does succeed in winning full unconditional approval, which must be a matter of some doubt, it will have a commanding position on the fields of competition once the merger has gone ahead.
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Robbie Burns’ Monthly Trading Diary
ROBBIE BURNS’ MONTHLY TRADING DIARY If you’ve seen a story about a company that’s been bid for and the bid didn’t happen, it’s always worth thinking about an investment. It happens quite a lot. Company X receives an approach, its price soars. Then an announcement is made that talks have been terminated, and the price goes back down. It’s often worth buying some shares once this has happened, because more often than not, the company ends up falling to a bidder in the future. If you’re patient, buying after the bid is rejected is often a clever strategy.
The talks duly ended, and when the price came back that morning I bought again but this time in the 140s.
A good example is 888 Holdings. It’s been the subject of a bid once or twice previously. Each time, a buy after the bid talks were called off would have paid off rather well. I got some at 115p a while back they’d previously turned down a bid from Ladbrokes. Last month (February) it was announced William Hill was bidding and the price soared to 175p. I took profits immediately, as the rumours suggested that 888 wanted a much better price than a mooted 200p from William Hill.
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The thing is, with so many betting companies around, it’s likely after the Hill bid that others will be eyeing up 888.
Robbie Burns’ Monthly Trading Diary
The newspaper rumours suggested that a major shareholder was looking for 300p a share. My feeling is that a more realistic takeout price could be 230p per share.
Two of my palm oil companies have been bid for recently at great prices – Narboro Plantations and New Britain Palm Oil.
I simply intend to be patient - just like I was with Kentz, another company that often turned down bid offers.
If February is a bad month and the shares go down to 450p, I think I would load up! I’d be surprised if the shares ever needed emergency care. (Yeah OK, it took me ten seconds to think of that rubbish pun).
Kentz was originally bid for at very low prices such as 450p per share, but eventually went for the lovely price of 932p, making me a fortune in the process.
In gaming, there are lots of smaller companies around that might tickle the fancy of the big boys. My favourites include 888, GVC and 32 Red.
Another one that recently became the subject of a takeover approach was Iomart. The mooted bid price was around the 300p level.
With prices very depressed in the oil services sector, it wouldn’t be surprising to see a sudden increase in takeover activity. There are many possible targets there including Hunting, Wood Group, Petrofac, and Gulf Marine Services.
When bid talks were terminated, the shares slumped to 165p, which is where I initially bought, followed by further purchases at 180p and near 200p. Takeover rules specify that the company that made the original bid is able to bid again six months later, and with Iomart in the hot big data sector it would be no surprise if others weren’t tempted to have a look. So again I intend to be patient. There is no better feeling than waking up to the news a company you’re invested in has been bid for. Often you’ll see a rise of anything overnight between 20 and 40%, sometimes more if you’re lucky.
Sometimes, if a sector becomes active and you’re not sure which one to go for you can buy a sector spreadbet – many spreadbetting companies provide these – so you are buying a basket of companies rather than just one. So I’ve bought an oil services spreadbet containing a basket of shares like Gulf Marine, Hunting, and Lamprell. If the sector as a whole makes a comeback the bet could pay off; and if there’s a bid for one of them, again the bet will benefit a lot! Happy trading! Robbie
It is often the case that M&A is a sector story and my three hot sectors for bidding activity are currently gaming, oil services and palm oil.
Get the latest copy of my book the Naked Trader, which has just been published! You can get Naked Trader 4 only from my website and also from Amazon. The book updates Naked Trader 3 which I wrote in 2011 – a lot has happened in the market since then and I cover all the changes. There are tons of ideas, trader stories, psychology, biggest trading mistakes and 20 trading strategies to make money. It’s only £14.99 and the first 500 who order it get a free pack of Naked Trader T-bags made from only the best tea! To get Naked Trader 4 click the link at my website www.nakedtrader.co.uk
March 2015 | www.financial-spread-betting.com | 59
Alpesh Patel On The Markets
Robbie Burns’ Monthly Trading Diary
ALPESH PATEL ON THE MARKETS
TRADING FROM HOME OR TRADING ON THE ROAD?
“WITH PRICES VERY DEPRESSED IN THE OIL SERVICES SECTOR, IT WOULDN’T BE SURPRISING TO SEE A SUDDEN INCREASE IN at the recent On-Target Trading During my speech TAKEOVER MasterClass I met a lot of people that kept asking ACTIVITY.” me the same question and I thought it would be a nice subject for this month’s article.
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Alpesh Best Patel of On theThe BlogMarkets
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Alpesh Best Patel of On theThe BlogMarkets
The question was pretty simple: is it better to trade confined inside the four walls of your home or should one try to trade while at work or on the bus? The true question behind this dilemma is whether trading requires complete focus or can it be done while having a morning job or taking care of other things during the day. The answer I gave to these knowledge-hungry folks was that trading is not like most other business. There are no “standard operating procedures” on how to trade or what’s the best setup to use. There is no definitive answer as to whether two or four screens are needed or that a laptop or a tablet is all you need to have. Trading offers you the freedom to adjust your tactics and your expectations around the time that you have available and you can combine it with your everyday schedule.
“YOU SEE, THE IMPORTANT THING WITH TRADING FOR YOURSELF IS TO UNDERSTAND THAT IT SHOULD BE DONE IN A WAY THAT FITS YOUR OWN, UNIQUE LIFESTYLE.” So the real question that needs to be asked is what kind of trading do you want to do? If you want to actively trade the markets – through focusing on small intra-day opportunities to get in and out of the market quickly, make a small profit and then repeat it time after time – then this requires time and focus. It requires being in front of a monitor for the best part of the day to find these opportunities, take advantage of them, manually manage these trades and try to end the day in profit.
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However, with the advances of technology and the amount of resources provided by so many providers out there, trading can definitely be done on the road as well, via an iPad or even from your mobile. There are different ways to take advantage of each day’s price action. You can set your trades in the morning with their pre-set levels and let them play out during the day. You can have intra-day signals coming into your e-mail inbox that you can execute from your tablet or mobile phone and you can even focus on economic events and try to trade during the volatile minutes after each event. You see, the important thing with trading for yourself is to understand that it should be done in a way that fits your own, unique lifestyle. A busy businessman has a totally different day from a stay-at-home mum or a college student and thus their approach to the markets needs to be different.
Alpesh Best Patel of On theThe BlogMarkets
One thing that I always found disturbing with several seminars or courses I have being invited to in the past is that they all tend to teach everyday people to “trade as professionals”. This couldn’t be further from the truth of what’s really required. Professionals dedicate a full working day to nothing other than trading. They arrive very early in the office and stay until late, stuck in front of the monitor to make sure that they capitalise on every opportunity they find, no matter how big or small. Everyday retail traders, however, don’t have this opportunity or luxury because they have other things to attend to everyday. That said, this needn’t be a disadvantage, because a bit of detachment from the market often gives you precious clarity to understand the general theme and not get “analysis paralysis”. So my advice to these people and to you is to find your own comfort zone, your own unique way to approach the markets and benefit from them. The resources and the technology are out there so all you have to do is mix and match and create your own trading style.
But what about the issue of how much you can make? It used to be that you had to be in front of the screen to make more – to day trade. And if you didn’t have the time, you traded end of day charts after work. Modern tech makes that unnecessary. Now the guy who comes home from work in the evening can day trade on a tick by tick chart for an hour. Indeed, most importantly, he can monitor the markets from work with his phone. This critical factor of technology means you now have the best of both worlds – day job and day trade. Sadly most people have not realised the full opportunity. They still think you have to be in front of four screens in your home to make the most out of trading. No longer is that the case. Happy Trading, Alpesh B Patel
Alpesh is a hedge fund manager who set up his asset management company in 2004. His Sharescope Special Edition has outperformed every UK company’s fund manager over the past decade, as well as Warren Buffett. He has written over 200 columns for the Financial Times and presented his own investment show on Bloomberg TV for three years. He is a former Visiting Fellow in Business & Industry at Oxford University and the author of 18 books on investing. Find out more at http://www.investingbetter.com and http://www.inter.tradermind.com
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School Corner
SCHOOL CORNER
ARROGANCE IS A SIN BY MARIA PSARRA HEAD OF TRADING AT PRIME WEALTH GROUP
This is the fifth in a series of educational articles on the best habits of winning traders and investors, the most common mistakes traders make and the best ways to avoid them. Today, we are looking at arrogance, and how this can “kill” any trader or investor suffering from it.
Now ladies and gentlemen, this article is by no means religion related. I am only here to discuss the markets, and hopefully help you learn and improve from my past trading ”sins” and yours. So let’s get on with it.
I also had the unfortunate privilege of watching even the best of the best losing one too many millions for themselves and investors just because, amongst other things, they became too complacent, too convinced they were right, and too arrogant.
Let me start by saying that I started my trading career at what was then one of the City’s biggest proprietary trading desks, and I had the luck to sit next to and learn from some of this world’s best proprietary (“prop”) traders.
Back in those days when one of us lost too much on any given trading position, our risk managers would come out of their own office, stand next to us at the trading desk, and ask us to close our positions.
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School Corner
“ANYONE ARROGANT ENOUGH TO CLAIM THAT THEY ARE NEVER WRONG IS REALLY IN BEYOND-A-JOKE TERRITORY – OR AS PSYCHIATRISTS LIKE CALLING THIS CONDITION, SUFFERING FROM ‘’DELUSIONS OF GRANDEUR.’’
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School Corner
What do you think happened next? Scenario No 1. The trader closed their losing position as requested. Scenario No 2. The trader refused to listen, expressing their wrong and arrogant views in a not so kind way, the house’s position was closed by the risk managers, and the trader was escorted out of the office with the command not to bother returning until he or she could trade “reasonably”.
Enough with my trip down memory lane. Let’s talk about you… and let’s look at the uncomfortable truth. Whatever you may think about yourself and your trading abilities, you are NOT God. I am not preaching any religion whatsoever, rather, I am merely trying to bring home the message that the markets are bigger than you, me, or any individual trader or even institution. Anyone arrogant enough to claim that they are never wrong is really in beyond-a-joke territory – or as psychiatrists like calling this condition, suffering from ‘’delusions of grandeur’’. Well, luckily for UK investors, the Financial Conduct Authority (FCA) prevents any regulated company or individual from promising that they can deliver “100% guaranteed” returns to potential and existing investors. As follows, you should neither deal with nor trust anyone promising they can deliver this.
Scenario 2 occurred in the vast majority of cases. Let me add to this that back then, after a few years of successful trading, a prop trader would add their own funds on top of what the company and its (institutional) investors were entrusting him/her with. In the cases where the trader was too arrogant to exit their position, risk managers would only close out the part of the position that corresponded to the company’s and investors’ holdings, leaving the trader’s personal percentage of them still running. In other words, they would let any of us traders “blow ourselves up” so that we, and ONLY we could ‘’feel the pain’’. To this day, I thank them for doing this to me and the traders around me, because it taught me, among other things, that in the markets ‘’arrogance IS a sin’’, and those that refuse to believe this will have to learn it the very hard way.
Equally importantly though, as many of you trade and invest for yourselves, you should not trust yourself to deliver such a thing either. Instead you should only trust those that say AND prove that they can deliver a realistically good trading performance. Without wishing to go into too much detail in terms of numbers in this article, this is essentially those people that can consistently and over a period of time, pick many more winning than losing trades, and manage risk in such a way that guarantees trading accounts are “up” at the end of the chosen time period. Actions and as such real trading performance, good risk management, AND lack of arrogance speak for themselves. They ARE by default louder than anyone’s words. Until next month, Happy trading everyone!
Maria Psarra is Head of Trading at Prime Wealth Group (PMW), supervising a team of experienced brokers, and advising High-Net-Worth Individuals on suitable investment strategies. Maria employs different investment styles in order to construct personalised portfolios best suited to the risk and return preferences of PMW’s clients. Typical portfolios primarily comprise of UK and European Equities and Equity Indices, and to a lesser extent Commodities and Fixed Income exposure.
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Master Investor
THE INVESTOR SHOW OF THE YEAR!
For 13 years the Master Investor conference has been one of the highlights of the small/mid cap investment calendar. From speculative oil explorers to junior miners, exciting technology firms to British manufacturers, the exhibition showcases a multitude of investment ideas and opportunities under one roof. Held in the convenient location of the Business Design Centre in Islington, London, this year’s show will be held on Saturday 25th April from 9am to 5pm.
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Master Investor
Main stage speakers Dominating the front of the Master Investor exhibition hall is the Main Stage, which plays host to some of the biggest and most successful names in the world of investment.
If there ever was a Master Investor it is Jim Mellon, SBM contributor and our headline speaker at this year’s show. For those who do not know him, Jim made his fortune in the emerging markets of the 80s/90s as a fund manager, before branching out into areas as diverse as mining, property and most recently the biotech arena. According to the Sunday Times Rich List, Jim has an estimated fortune of £850 million and is the 117th wealthiest person in the UK. Previous show attendees will know that Jim is a passionate, entertaining and intelligent speaker, always performing to a capacity crowd.
“JIM MADE HIS FORTUNE IN THE EMERGING MARKETS OF THE 80S/90S AS A FUND MANAGER.”
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Master Investor
In a major coup for Master Investor, this year the Main Stage hosts man of the moment, UKIP leader Nigel Farage. A former metals trader in the City of London, The Times’ Briton of the Year in 2014 and a highly controversial figure in UK politics, Nigel is sure to give a thought provoking speech, just days before the UK general election. Not to be missed!
“ATTENDEES CAN GAIN UNIQUE INSIGHTS INTO BOTH CURRENT AND POTENTIAL NEW INVESTMENTS.” We expect up to 100 exhibiting companies at this year’s show, with a selection of those currently signed up including...
Other Main Stage speakers include Merryn Somerset-Webb, editor-in-chief of Moneyweek, and James Ferguson, who has over 25 years’ experience as a stockbroker, sector analyst and macro-economic strategist, with one other big name speaker to be announced.
Exhibitors The heart of Master Investor is the exhibition floor. Here, investors have the opportunity to meet with top company executives, find trading ideas and discuss investment opportunities. What makes Master Investor stand out from other shows is that it provides direct access to the men and women in charge of running public companies. With companies represented at CEO and Finance Director level, attendees can gain unique insights into both current and potential new investments.
Port Erin Biopharma, Webis, Manx Financial Group, Forbidden Technologies, Aegis Power, Avation, Condor Gold, Cytox, The Diabetic Boot Company, ECR Minerals, Plastics Capital, Eleco, Plethora Solutions, REX Bionics, Summit Therapeutics, Synergy Pharmaceuticals, Thundelarra, Stroma Medical Corporation, Stanley Gibbons, Tri-Star Resources, Ventri-point, Viveve Inc, Symphony Environmental, Binary.com, Rare Earth Minerals, Miraculins, Arria NLG, Cyan Technology, Rhinomed and VectorVest. For the full list of exhibitors visit http://www.masterinvestor.co.uk
As well as sourcing new investment opportunities there are lots of other things to do and see on the exhibition floor. Attendees can experience the latest technologies as we demonstrate the virtual reality system Oculus Rift. Meanwhile, biotech firm Miraculins will again be showcasing their non-invasive cholesterol and diabetes tests, with many more surprises on the day.
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Master Investor
Breakout sessions If there wasn’t enough to see at the show already, Master Investor also showcases a variety of other investment speakers across breakout rooms and our “Rising Stars” stage. The breakout sessions kick off at 9:15am with our special breakfast presentation, where four handpicked companies will present their investment cases. Lunch sees the ever popular “Trader’s Session”. Hosted by Spreadbet Magazine editor Zak Mir this is an hour long session with other top traders including SBM contributor Maria Psarra and others to be announced.
An ever present and ever popular speaker at Master Investor is Simon Cawkwell, the UK’s best known short-seller, perhaps even better known by his pen name “Evil Knievil.” In a private session Simon will be giving some of his best short selling ideas at the show, along with a few long options thrown in for good measure. Traditionally known for retiring to his dedicated sofa, attendees have the opportunity to meet Simon after his speech. Over on the Rising Stars stage, our more intimate location, there are a multitude of exciting small cap companies presenting including Thundelarra, Summit Therapeutics, Cyan Technology, Asia Plantation Capital, Rhinomed and Symphony Environmental Technologies, along with many more throughout the day.
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Currency Corner
School Corner
CURRENCY CORNER
WHY I MAINTAIN MY BEARISH YEN BIAS BY SAMUEL J. RAE
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Currency Corner
Those familiar with my trading strategy will be fully aware that I follow a simple price action driven method, supported by strict risk management principles. They will also be aware that I include an element of discretion in my trading, dictated by a fundamental bias I form based on the underlying economic conditions of the country in question. If you follow my trade blog (www.diaryofacurrencytrader.com), you will be aware that, for the last six months at least, my underlying bias in the USD/JPY has been bullish primarily as a result of weakening Japanese economic conditions. In mid-February it was reported that the Japanese economy is “hobbling” out of recession, but my bias remains firmly towards a weak Yen.
What’s my reasoning? First, let’s look at the argument against my bias. Analysts’ forecasts had the latest Japanese gross domestic product (GDP) data at 3.7%. The actual figure came in just shy of this, but still showed that – on a quarter over quarter basis, at least – the Japanese economy had returned to expansion. High-end purchases are on the increase, and trade data for January revealed a 17% increase in imports. Further, the Nikkei 225 has hit 15 year highs. All this suggests a surging and resilient economy, right? Well, not so fast. The underlying problem in Japan is two-fold.
USD/JPY DAILY CHART
First up is the nation’s reliance on consumer spending. Consumption accounts for a little over 60% of total Japanese GDP, and it is this 60% that has been consistently week over the past couple of years. Shinzo Abe’s three arrows policy had the effect of temporarily stimulating consumption levels throughout 2013 and during the first quarter of 2014, but the April sales tax rate hike quickly put an end to the stimulus.
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We saw a spike throughout February and March 2014 as consumers rushed to purchase goods that would increase in price with the tax hike, but since then retail sales and consumer spending have been flat or declining. Further to this, the decline in consumer spending comes despite the fall in energy prices. Why is this important? Because, logically, a decline in energy prices increases the real world purchasing power of an individual’s wage packet. With less expense put towards heating and travel fuel, consumers in an average nation would reallocate funds towards superfluous spending.
Currency Corner
Well, as aforementioned, high-end purchases are on the increase, but the high street remains flat. This suggests to me that the driving force behind the Japanese economy (consumption) is not there.
With economic activity stumbling, the government’s tax income has remained relatively flat for the last couple of years – and is forecast to continue to do so in the coming couple of years.
The second problem lies in Japan’s ageing population, and the government’s inability to meet its future social security liabilities.
In a booming economy, the answer would be simple: raise taxes and use the increased revenue to meet social security obligations. In Japan however, as the aforementioned April sales tax rate hike proved, consumption is highly responsive to a potential hike. The government had just such a hike scheduled for the coming October, but it has put it on hold for this reason. In short, the Japanese government has ever increasing social security obligations, but it cannot raise taxes to meet these obligations, because doing so would plunge the economy into an even worse recession then we are currently seeing.
Japan has the most rapidly ageing population in the world, and one of the longest living. While this stands as a testament to the nation’s standard of living, it is a real problem for the Japanese government. Each year, the government must contribute approximately 50% of the pension equivalent to its over 65s (with private industry footing the remaining 50%).
USD/JPY SMALL CHART
So what does the future hold? Simply put, weakness. We have seen two or three decades of economic stagnation in Japan, and despite the best efforts of Shinzo Abe, I predict that we are about to see another. Yes, we’ve seen Japan climb out of recession, but if we don’t see a contrasting figure in the next few weeks I will be very surprised.
How does this translate to a strategy for me in the Forex markets? Again, the answer to this one is simple. I will be primarily looking out for bullish candlestick patterns in the USD/JPY. Yes, the US economy may have its weak points, but the US dollar remains a safe haven at times of global uncertainty. Japan’s struggle will undoubtedly have more of an impact on the value of the yen than any such faltering in the US.
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The Fine Wine Investment Market
AN INTRODUCTION AND POTTED HISTORY OF THE
FINE WINE INVESTMENT MARKET BY MILES DAVIS
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The Fine Wine Investment Market
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The Fine Wine Investment Market
The basic premise for investing in fine wine is a very simple one: you buy a truly great wine that is produced in a finite quantity and store it, carefully. So whilst others are drinking theirs, thereby reducing the supply of that wine, you enjoy the price appreciation that naturally results from the increased rarity value. The growth in global wealth has helped fuel the desire for these wines. For example, Chateau Latour 1982 was released in 1983 at c. £400 per case of 12 bottles. That case could today be sold for £16,000, implying an annual growth rate of a little over 12% per annum over the course of its life (and it will continue to be enjoyable for another 50+ years). So is it as easy to make money as it sounds?
Very few of these specialists, however, are authorised by the FCA or an equivalent and, thanks to the great bull market of 2005-2011, a proliferation of new companies designed to take advantage of this phenomenon were formed. Like all markets the wine market continues to evolve although the last decade has proved to be probably the most turbulent period in its history. Previously, wine price performance was generally very steady with long term returns going back to the seventies averaging just over double figures. Once a decade or so, a global crisis would cause a healthy reality check – as it did during the oil crisis of ’73, the stock market crash of ’87, the Asian currency crisis of ’97 and the Lehman debacle of ’08 (although the latter turned out to be very short lived) – and then things would revert to normal.
First a bit of background. The investment market is dominated by the red wines of Bordeaux where production levels of top quality wine far exceed any other area of note. Other areas which spark interest include the finest wines of Burgundy, Champagne, Tuscany and Piedmont and to a lesser extent some of the trophy wines from the new world. For decades, centuries even, ‘gentlemen’ have been investing in wine, maybe unintentionally, but certainly filling their cellars with good Bordeaux and Burgundy, Port and Madeira and the like. Auction houses commenced wine sales in England in the middle of the last century and now there are all manner of brokers, merchants, exchanges and on-line auctions in existence. The internet has lent transparency to what was an opaque market, brought an endless flow of information and with it various offerings from a wide range of ‘investment specialists’. Investing in wine has become a more commonplace activity.
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“PRICES WERE PUSHED EVER HIGHER AND NO-ONE WANTED TO SELL AS THE VALUE KEPT ON GOING UP, UNTIL ONE DAY IT ALL STOPPED.” The great bull run that began in 2005 was propelled by exceedingly high levels of new demand emanating from mainland China. The fast expanding Chinese economy created easy money that flowed through the hands of the relatively experienced Hong Kong based merchants all the way to London, the global centre of secondary market wine trading (the primary markets being located at the point of production). Prices were pushed ever higher and no-one wanted to sell as the value kept on going up, until one day it all stopped.
The Fine Wine Investment Market
In the good old days this was the opportunity to get in on the ground floor and the majority of investors and consumers benefited. That game is long gone and arguably the market has split between the recent vintages where the release price still influences and the older vintages where the secondary market controls pricing. The market for older wines is, in any case, more compelling as pricing is more logical, there is greater assurance of quality and the dwindling of supply has begun.
What had not been appreciated at the time, by either the market or its participants was that this money was not just coming from the newly wealthy and aspirational individual but mainly from officials and employees of state owned enterprises. Their ostentatious extravagance was legendary - lavish dining in top class restaurants and hotels accompanied by lashings of fine first growth wines, the corporate gifting of wine that oiled the wheels of business and the need to be seen only drinking the very best. The government had lost control - and that was not going to wash with the incoming new President, Xi Jinping. In mid-2011 all luxury items and their markets were knocked back as the new environment of anti-graft measures were introduced, and these measures remain firmly in place today. Having risen c. 260% from ’05 to mid-2011, the Liv-ex 100 index, the leading market indicator, then fell by 36% between mid-2011 and mid-2014. Since then the market has stabilised and in recent weeks has started to appreciate once again. The natural order is returning and the madness of this extraordinary period has receded; the river of cash from China has dried up and a lot of the new, often dubious, players have been washed up on that river’s banks. Another major factor that came into play during this period of flux was the stratospheric pricing of two Bordeaux vintages of outstanding quality, the 2009 and 2010. Not wishing to miss the party the Bordelais lost their heads; 2009 sold but the market just couldn’t stomach the prices from 2010. Subsequent vintages were not reduced to commercial levels and have also failed to sell. Some readers will be familiar with en primeur, meaning the first release, which is the first opportunity to purchase wine from the new vintage.
Opportunities abound, especially now we are ‘ex-China’. Pricing has never been more competitive and the information available have never been so sophisticated. So, yes, it is easy – if you know what you are doing! Seek advice only from the very best, whether it is a wine merchant or ‘investment specialist’. The independent website www.investdrinks.org provides a good guide on who not to trust, whilst the FCA badge of approval is a good clue to the latter. Otherwise check with someone you trust or a non-conflicted party such as Liv-ex or another of the wine exchanges.
About Miles Davis I remember my first (half) glass of wine, aged 12, and have never looked back. It was a humble glass of Muscadet on a family holiday in Brittany to accompany a superb seafood vol au vent! I started my first wine club with friends in my early twenties and by the end of that decade had started collecting wine in earnest. Following a successful career in the city and having specialised in investment funds, including senior roles at Bear Stearns and Teather and Greenwood, I took the skills learnt in the financial sector into the wine world and co-founded Wine Asset Managers (WAM) in 2005. WAM has created and launched two investment funds investing in the very finest ‘investment grade’ wines; these are predominantly Bordeaux wines but also included are Champagne and Italian wines. On a personal level I am interested in all sorts of grape varieties and all sorts of wines from all over the place, except Sauvignon Blanc (largely)! I feel emotionally attached to Burgundy and have a house there, not quite in the wine country but in the excellent Charolais beef country.
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Binary Corner
BINARY CORNER
EUROPE: A POLITICAL CRISIS BY DAVE EVANS OF BINARY.COM
At the time of writing, the deadline for a resolution between Greece and European powers is fast approaching and market traders are increasingly nervous.
Market rumours are rife and the euro is dancing to the tune of the latest tweet about the crisis. In one newsflash the German Der Spiegel newspaper reported that the ECB was drawing up contingency plans for a ‘Grexit’, only for Angela Merkel and Francois Hollande to issue a joint press statement stressing that keeping Greece in the Eurozone is a priority.
The situation is fluid and it is increasingly looking like Europe will reach for its favourite solution of a sticking plaster that will not solve the core problem, but will provide breathing space until the next round of talks.
Disclaimer: This financial market report is intended for educational and information purposes only. It should not be construed as investment or financial advice and you should not rely on any of its content to make or refrain from making any investment decisions. Binary.com accepts no liability whatsoever for any losses incurred by users in their trading. Fixed odds trading may incur losses as well as gains.
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Binary Corner
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Binary Corner
EUR/ USD MONTHLY CHART FRIDAY 20TH 2PM
This approach is part of Europe’s problem and ultimately a result of the Eurozone’s faulty structure. The Greek crisis is ostensibly about finances, but it is in reality about the political framework of the entire Eurozone. The Greek crisis is and always has been political at its root. That Greece should never have been allowed into the Eurozone is well documented. Financial engineering and massaged accounts accelerated what should have been a carefully structured process. Greece should have been applying the sort of market reforms pre-euro that it has been forced to apply in accordance with the bailout conditions. Germany may rail about Greek profligacy and atoning for the sins of the past, but it still misses the point that Greece is not the problem per se – Europe is. The question is whether the political union is binding enough for the strongest members to help the weakest. In the United Kingdom, those in the South East of England and London grumble about subsidising other less prosperous regions such as Wales and Northern Ireland. Yet these grumbles remain frustrations rather than dramatic calls for separation. The United Kingdom remains just that - a union.
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Despite a very close Scottish Independence referendum and ever present criticisms of the Barnett formula, the concept of spreading wealth around the regions is generally accepted by the population. Greece could be any other country in the Eurozone. At any point, another member state could have or might run into financial problems of its own making or due to external factors. There will always be stronger and weaker regions in Europe and there will always be political grumblings about the peripheral regions not pulling their weight, or stronger regions acting in their own interests.
Binary Corner
The question is whether the individual blocks are willing to think as a European whole, or act in terms of their own nations’ interests. Within this conundrum the Eurozone establishment is acting to maintain a unified front when a separation may actually offer the better long term solution. The picture is rather like one of a warring married couple avoiding divorce for the sake of the children only to cause greater long term harm.
“THE QUESTION IS WHETHER THE INDIVIDUAL BLOCKS ARE WILLING TO THINK AS A EUROPEAN WHOLE, OR ACT IN TERMS OF THEIR OWN NATIONS’ INTERESTS.”
The Euro’s Day Of Reckoning A full political union may in realty be the key to the euro’s survival, because until then, there will inevitably be another Greece whether this crisis blows over or not. Yet a political union is unpalatable for many member states, not least Germany where there is a clear sense of wanting individual nations to remain accountable for their own actions. The demise of the euro is not inevitable and the single currency may even survive (indeed thrive) following a Greek exit, yet the current Greek talks are following a depressingly familiar path. This is a path of being unwilling or unable to come to a comprehensive solution for the future of Greece and indeed the Eurozone.
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Technology Corner
SOCIAL MEDIA CONVERGENCE
HOW BUZZFEED IS TAKING OVER THE WORLD BY SIMON CARTER
SBM’s resident technology specialist, Simon Carter, takes a look at the next phase of evolution for social media.
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Technology Corner
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Technology Corner
There is little doubt that social media has driven the convergence in the media sector, with content that was traditionally the preserve of one medium, such as text, images or video, being grouped together into one ‘feed’. Looking at an average user’s Facebook News Feed, for instance, will provide you with as many image and video shares as status updates. Throw in game requests and advertisements and you kind of see the point. But beyond the content itself, it’s how it is consumed that makes social media truly convergent, bringing together the technologies of desktop computing, smartphones, regular mobile phones, tablets and even televisions to deliver content from one source. This trans-platform, trans-content delivery system has been so disruptive to ‘old media’ that everyone from The Times to the BBC is experimenting with delivering as many different content types to people’s devices as possible. You can now experience a breaking news story in many different ways on many different devices, or many different ways on one device, through one platform. It’s essentially your choice. Admittedly, all of that does sound more than a little confusing, and you wouldn’t have to go that far out on your limb to suggest that many of the big media names don’t really understand it either. Why should one news story get a million video hits while the text based article withers, when a similar story could get the exact opposite results? Facebook doesn’t care, it’s simply a content delivery platform (of course, that’s slightly simplistic but essentially true), but for those producing the content, it’s a frustrating and time consuming experiment. So the arena was truly ready for somebody who did understand why some content worked in one format but not the other and who did understand how to deliver that content. What they also needed of course was the perfect technological moment: multi-media devices capable of handling their load, and infrastructure capable of delivering it. And from this perfect moment sprang BuzzFeed. Most of you will have heard of BuzzFeed (although few of you may have visited their site), but despite having been around for six years, the site is still seen as the young pretender, perhaps a flash in the pan even. In fact, as I type this in Microsoft Word, BuzzFeed alerts the spell checker whereas the likes of Facebook, YouTube and even LinkedIn pass right through. Why will so many of you have heard of BuzzFeed, even if you’ve never even frequented it?
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What is it they do and how successful are they? In terms of visitors, they are on the verge of being hugely successful, with over 150 million unique monthly visitors. To put that into context, Google+, seen as many as a failing social network, has 120 million unique monthly visitors, but BuzzFeed’s hit rate puts them above Tumblr and Instagram and hot on the heels of Pinterest and LinkedIn.
“GOOGLE+, SEEN AS MANY AS A FAILING SOCIAL NETWORK, HAS 120 MILLION UNIQUE MONTHLY VISITORS, BUT BUZZFEED’S HIT RATE PUTS THEM ABOVE TUMBLR AND INSTAGRAM AND HOT ON THE HEELS OF PINTEREST AND LINKEDIN.” The site, and app of course, was created almost as a by-product of an experiment. Founder Jonah Peretti was working for the Huffington Post when he found himself puzzled by the question posed earlier in this piece - namely, why do some things hit online whereas others don’t? So he set up BuzzFeed Labs and wrote an algorithm called Trend Detector which looked at factors such as topic, content type and medium and tracked the popularity – or otherwise – of the content.
Technology Corner
However, take a minute to visit the site and you’ll see a mix of videos, written articles and images on a huge range of topics veering from the serious to the stupid, each given the same billing. In terms of convergence of social media, you’d be hard pressed to find a better definition.
With a stack of data, Peretti then decided to experiment, actually using BuzzFeed Labs to create and publish content based on his interpretations and expectations of what should and shouldn’t hit. With each success or failure, the Trend Detector was refined until, after almost three years, Peretti was confident enough to leave the Huffington Post behind and launch BuzzFeed in its own right. Being experts in the type of content that would go viral goes some way to explaining why you’ve probably heard of the site even if you haven’t visited it. The content is designed to be shared, meaning that social media feeds the world over are filled with links back to BuzzFeed. They’re almost unique in the Alexa top 100 (the world ranking for websites) in that the majority of their traffic doesn’t come from web searching or direct URLs, but from social media referrals.
“THEY’RE ALMOST UNIQUE IN THE ALEXA TOP 100 (THE WORLD RANKING FOR WEBSITES) IN THAT THE MAJORITY OF THEIR TRAFFIC DOESN’T COME FROM WEB SEARCHING OR DIRECT URLS, BUT FROM SOCIAL MEDIA REFERRALS.”
All of which led to some slightly snotty reporting in old media outlets back in October of last year when BuzzFeed raised $50 million from Andreessen Horowitz, valuing the site at $850 million. Reports focussed on the number of ‘Which Disney Princess are you?’ type quizzes and encouraged us all to look down our noses at them.
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Book Review - Paper Money Collapse
BOOK REVIEW
PAPER MONEY COLLAPSE THE FOLLY OF ELASTIC MONEY AND THE COMING MONETARY BREAKDOWN BY DETLEV SCHLICHTER
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Book Review - Paper Money Collapse
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Book Review - Paper Money Collapse
“The US government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many US dollars as it wishes at essentially no cost.”
A BOOK REVIEW BY JAMES FAULKNER
Such was the observation of Ben Bernanke during his time as an academic before he became chairman of the Federal Reserve. Although Bernanke was speaking with reference to the response of policymakers in the face of a deflationary environment, there was essentially nothing radical about his prescription; the Fed had already been steadily increasing the money supply for some time.
In fact, during the 50 years up to the onset of the recent financial crisis, the amount of dollar notes and coins in circulation increased by a factor of 26, while the level of industrial output increased by a factor of only 5. The constant injection of new money into the economy by the central bank lies at the heart of the secular inflation that industrial economies have experienced ever since they left the gold standard. Policymakers would have us believe that steady, modest inflation is good for the economy, so long as it is managed responsibly by them. In what could be poised to become his seminal study, Detlev Schlichter contends that the system of ever-expanding paper money is in fact a disaster waiting to happen, and a central cause of our current economic malaise.
The solution? Unfortunately there is no easy way out other than to allow the emperor to realise that he’s not wearing any clothes. As Ludwig von Mises, a chief proponent of the Austrian school of economics – and a major influence on this book – observed: “There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved”.
“DURING THE 50 YEARS UP TO THE ONSET OF THE RECENT FINANCIAL CRISIS, THE AMOUNT OF DOLLAR NOTES AND COINS IN CIRCULATION INCREASED BY A FACTOR OF 26.” Far from creating the stable economic conditions so sought after by central bankers the world over, Schlichter argues that the ongoing expansion of the money supply artificially lowers interest rates which in turn allows misallocations of capital to build up in the economy, thereby exacerbating the gyrations of the boom-bust business cycle – gyrations which are getting worse. In Paper Money Collapse, elastic money is likened to a Ponzi scheme, which by definition requires ever increasing injections of new money in order to perpetuate the illusion of sustainability. And like all Ponzi schemes, it is only a matter of time before this one unravels.
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Schlichter, an investment manager by trade, sets out his case with systematic logic and is almost clinical in his analysis. Indeed, some would be put off by what is undoubtedly not an ‘easy’ read, but in truth I have hardly been able to put this book down. One by one, the fallacies of the supposed superiority of elastic money fall prey to Schlichter’s intellectual juggernaut. In fact, it is remarkable that the public are so accepting of the status quo given the historical record: Of the 30 hyperinflations recorded by history, 29 were in the 20th century (i.e. when elastic money was in the ascendant).
Book Review - Paper Money Collapse
“ONE BY ONE, THE FALLACIES OF THE SUPPOSED SUPERIORITY OF ELASTIC MONEY FALL PREY TO SCHLICHTER’S INTELLECTUAL JUGGERNAUT.” By the same token, Schlichter explodes many of the myths surrounding commodity-based money – to which he urges a return – chief of which is the assumption that the secular deflation associated with commodity money is necessarily harmful to the economy. On the contrary, history shows that economic and social progress was facilitated rather well during the thousands of years that the world used commodity money, which provided remarkable levels of price stability; major financial crises were usually due to some attempt by the authorities to impose elastic money on the public. Although Schlichter is remarkably sparing with his criticism of individuals, he is clear that the main beneficiaries of the current system are the state and its agents – including the banks, which are considered to be little more than extensions of the monetary policy of the state.
Indeed, the concept of the free market is now almost anathema when applied to these institutions, which are fed a limitless supply of fresh reserves from the central bank. This in turn creates a situation where it is no longer in the interests of commercial banks to run a prudent lending policy through the maintenance of reserve levels – essentially precipitating the moral hazard which led to the financial crisis of 2007-09. A compelling, albeit rather alarming critique of contemporary economic doctrine, I am disturbingly convinced that Paper Money Collapse will prove prescient. The last words are reserved for Schlichter himself: “The present fiat money economy is ripe for some Schumpeterian creative destruction. In the meantime, the debasement of paper money continues.”
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Negative Interest Rates
NEGATIVE INTEREST RATES
A DANGEROUS GAME BY FILIPE R. COSTA
Irrational Exuberance Those who thought that zero interest rate policies (ZIRP) were so exceptional that they could only survive for a very short time now have to deal with the irrational exuberance of a negative interest rate policy (NIRP). Forget all you know about economics and rationality, as the new monetary paradigm is made of revolutionary concepts such as being paid to borrow and paying to lend. Central banks are stubborn and willing to go off limits to solve the worst problem they have ever faced. They want to avoid deflation, no matter what the consequences are, even though there’s no reason to believe it to be such a monster. While usually supporting their actions with academic research, this time central banks have decided to challenge prudence, rationality, and reason, such is their despair. From low interest rates to quantitative easing, and now from quantitative easing to negative interest rates, there’s so much invested in this monetary madness that in the end something has to yield positive results. At least the bankers hope it will!
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But, can the ECB really boost lending? Are negative rates a real possibility? How far can they go with these policies? This time they’re flying blind and the consequences could be drastic. The asset purchase programme was successful in the US, so can the ECB can do the same in Europe, right? Can they even go deeper by setting negative rates and forcing banks to lend, people to consume, and businesses to invest… Unfortunately, I believe that not even Keynes would have supported such a major central bank intervention. All he would say is that we’re missing fiscal policy and are trapping ourselves in an epic mess.
Negative Interest Rates
“UNFORTUNATELY, I BELIEVE THAT NOT EVEN KEYNES WOULD HAVE SUPPORTED SUCH A MAJOR CENTRAL BANK INTERVENTION. ALL HE WOULD SAY IS THAT WE’RE MISSING FISCAL POLICY AND ARE TRAPPING OURSELVES IN AN EPIC MESS.”
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Negative Interest Rates
GLOBAL RATES TABLE
Messing With Interest Rates Japan has been trapped in a very low growth environment for more than 20 years. They have tried everything to reflate their economy, including a major quantitative easing programme when Shinzo Abe came to power, but they never attempted to lower their key interest rates below zero. In the US the same applies and the central bank pays a rate of 0.25% on money deposited as reserves. They believe the zero lower bound for nominal interest rates exists and shouldn’t be messed with. Why? Because strange things may happen when interest rates turn negative. In one of her first speeches as Chairman of the Federal Reserve, Janet Yellen mentioned that cutting the deposit rate (IOER in the US) to zero could potentially “completely disrupt money market activities”, while her predecessor Ben Bernanke noted in 2010 that if rates were pushed to zero, money markets might not “continue to function in a reasonable way”. Their concern about setting rates at zero is very explicit. I wonder what they think about negative interest rates. If you ask this same question of the Austrian school economists, they would say that a negative rate is unthinkable because of time preferences.
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Any individual faces a decision between consumption today and tomorrow (in the future). In order to give up present consumption (and thus save part of his present wealth) he needs to be compensated. If interest rates are negative, there’s no reason to save because consumption in the future would be inferior. In such a situation, consumption increases and savings come down to zero. There would be growth in the short term but the economy would be impoverished in the future, as no share of current income would be set aside for productive investment. In the future, the problem would be even bigger, as the mismatch between supply and demand would lead to a quick decline in prices and to the liquidation of many projects that seemed good under artificially low interest rates. A new crisis would set in. But even if we suppose the Austrian school is wrong, there are some limits to the central bank action. Bankers just can’t set deposit rates at -5% and expect growth to occur. First of all, I believe that below certain levels, at which the interest rate is extremely and unusually low, the message to the economy is a negative one, raising fears of deflation and recession and thus negatively impacting consumption and investment decisions. Second, a bank deposit is just one of many alternative assets which share some degree of substitution amongst them.
Negative Interest Rates
Let’s suppose that I am wrong on the first issue and in fact there is a linear relationship between interest rates and consumption (and investment), thus justifying all central bank action, even below certain levels, to induce some extra consumption. Assuming that is true, let’s then revert to the second issue. The main question that comes to mind when your bank sets a negative deposit rate and starts charging money borrowed from you is, why do I keep money at the bank after all? It would be smarter to convert deposit money into physical money – real notes and coins. Physical money is anonymously held and thus doesn’t pay any interest rate, so one would be better off carrying the physical money instead of keeping it at the bank. But there is a limitation here, as holding cash is not entirely costless. There is an implicit negative yield, a “cash yield” which represents the cost of safety deposit boxes and such like (in order for individuals to keep the money safe), the cost of secure warehouses or vaults (for companies and institutions), the cost of insurance, and the cost of convenience (to process payments instantaneously and to remote locations). Bank accounts are more or less safe and extremely convenient, and that should be valued. The ECB estimated the social welfare of money at 2.3%. If true, the cash yield would then be 2.3%, meaning that on average people would be willing to pay 2.3% as interest on their money for safety and convenience. This means that the zero lower bound is not really zero but something less than zero, allowing central banks to set negative rates if they desire. This is the main reason why the Swiss National Bank is able to set deposit rates at -0.75% and is targeting short-term rates as low as -1.25%. People do have other alternative assets like gold and silver available to them, but the same reasoning applies.
It has been estimated that the annualised cost of carry for gold is about 2%, which after adding the problem of convenience would certainly come near the 2.3% social cost estimated by the ECB for money. So, as for the simple question, Is it possible to set a negative deposit rate without triggering bank runs? The answer is yes, indeed it is, and the lower bound is lower than first thought.
Desperately Seeking Yield and the Global Boom-Bust Cycle The ECB introduced negative deposit rates last year and a quantitative easing programme earlier this year. This led many of its neighbours and trade partners to react with similar action to avoid a massive capital inflow and a deterioration of their external trade position. The first victim was Switzerland, which had to abandon its peg of the franc to the euro and introduce deposit rates of -0.75%. With foreign reserves amounting to 80% of GDP, the Swiss could no longer allow the peg to persist. Denmark was the second victim and had to cut its deposit rate four times in less than a month to follow the Swiss onto the -0.75% rate. Lars Rohde, governor of the Danish National Bank, pledged to do “whatever it takes” to defend the krone’s peg to the euro, one that has 30 years’ of existence. With an inflow of $230 million into Danish-focused mutual funds in less than six weeks, I believe there’s still much trouble to come. A few days ago was Sweden’s turn. The Swedish central bank cut its main repo rate to -0.10% while cancelling all scheduled government debt issues for the year. This move was the first to set a negative lending rate, meaning the central bank is willing to pay to lend to banks.
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Negative Interest Rates
“EVERYONE IS TRYING TO PREVENT THE HOT MONEY FLOWS THAT ARE PRECIPITATED BY THE DESPERATE HUNT FOR YIELD.”
Everyone is trying to prevent the hot money flows that are precipitated by the desperate hunt for yield. These flows will force many other countries to cut interest rates, some to negative levels. There is excess liquidity in Europe, which will end somewhere in emerging markets as the ECB and other European central banks are closing all possibilities of getting a decent return on capital. I am convinced that extreme and prolonged expansionary monetary policy is at the root of the boom-bust cycle we have been experiencing for the last few decades, and that this cycle has harsh consequences at the global level due to free capital movements. Combining unlimited credit expansion with free capital flows is like mixing glycerine and sulphuric acid. It can only end in a massive bubble ready to explode. The past shows a pattern of bubbles that connects the crisis of several regions of the world across time. Persistent low interest rates and ultra loose economic policy should only be used as temporary tools, to smooth the business cycle, and never as an attempt to change the longer-term route of an economy. Sometimes an economy faces structural problems that just can’t be dealt with via outright asset purchases and extreme and unpredictable measures like negative rates. I believe Europe faces such structural problems now.
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During the 1980s, industrial firms in Japan could borrow as much as they wanted from banks. Credit was unlimited, house prices skyrocketed, equity prices boomed and some pernicious things happened. At some point the value of the land under the Imperial Palace in Tokyo was greater than the value of the whole of California. But then the central bank decided to act and limit credit growth, which not only sent Japan into two lost decades but was also the main reason why the Asian financial crisis happened. Money then flew from Japan to Asia – until it stopped and Southern Asia collapsed. In 1998 there was again a major inflow of money to the US, which contributed to the dotcom bubble. After the dotcom bubble interest rates were kept too low for too long while the US was accumulating a trade deficit and China was accumulating a trade surplus. With no better use for their money, the Chinese invested heavily in US treasuries and real estate, further holding down interest rates while massively adding to a new asset bubble that was about to burst in 2007.
Negative Interest Rates
All these crises are connected, which means we are kicking problems over to our neighbours and down the generations. Now Europe is accumulating a trade surplus similar to the Chinese case a few years ago. Can you guess what will happen at a time interest rates are so low?
Money will flow from Europe to US treasuries, UK gilts, and many emerging markets until the point when it will stop. That will herald the start of the next crisis.
CURRENT ACCOUNT CHART
“I AM CONVINCED THAT EXTREME AND PROLONGED EXPANSIONARY MONETARY POLICY IS AT THE ROOT OF THE BOOM-BUST CYCLE.” Some Final Words We are living in extreme times, under which market forces have been completely replaced by a new kind of centrally planned economy, with independent central banks mandated to do “whatever it takes” to keep inflation near a target of 2%. Far from fine-tuning the business cycle, as argued for by many schools of thought, the new order prescribes a complete replacement of market forces.
Company valuations no longer reflect future prospects but rather an artificially-generated demand seeking for yield. Free capital flows no longer help emerging markets finance their growth but are speculative in nature and mostly induced by central bank policy. In the end, the cure to a financial crisis may plant the seeds for another.
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Markets In Focus
MARKETS IN FOCUS FEB 2015
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Markets In Focus
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Thank you for reading. We wish you a profitable February!
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