R BE M ON vE TI O I N ED
MAGAZINE
SPREADBETTING The e-magazine created especially for active spread bettors and CFD traders
Issue 22 - November 2013
One Step Closer To Oblivion... The US moves closer to its debt end game www.financial-spread-betting.com
FEATURE PACKED AS EvER WITH TRADING IDEAS DOMINIC PICARDA’S TOP 5 PICKS FOR Q4 2013
OPTIONS CORNER SPECIAl By TITAN INv PARTNERS
ZAK MIR - TIME TO GO lONG CRUDE OIl?
ROBBIE BURNS - 5 NEW ISSUE PICKS
ZAK MIR INTERvIEWS JUSTIN URQUHART STEWART OF SEvEN INvESTMENT MANAGEMENT
Feature Contributors Robbie Burns aka The Naked Trader Robbie Burns - The Naked Trader has been a full-time trader since 2001 and has made in excess of a million pounds trading the markets. He’s also written three editions of his book, “Naked Trader” and the “Naked Trader Guide to Spreadbetting” and runs day seminars using live markets to explain how he makes money. Robbie hates jargon and loves simplicity.
Dominic Picarda Dominic Picarda is a Chartered Market Technician and has been responsible for the co-ordination of the Investor’s Chronicle’s charting coverage for four years. He is also an Associate Editor of the FT and frequently speaks at seminars and other trading events. Dominic holds an MSc in Economic History from the LSE & Political Science.
Tom Houggard Tom Houggard was a broker in the City of London until 2009, racking up close to a thousand TV and radio interviews on the likes of CNBC, Bloomberg, CNN, BBC, Sky TV etc. His specialisation now is investor education and he is one of the few commentators who actually puts his money where his mouth is with live trading sessions. Find out more on www.tradertom.com
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.
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Editorial list EDITOR Zak Mir
Foreword
Since the fall of the Berlin Wall humanity has taken many great strides forward in creating a truly global society. New technology, the internet, economic miracles in developing countries, greater liberalism and other notable forces have combined to make this perhaps the most exciting time ever to live in. There is a whole world of opportunities out there. To seize them, all we need is genuine leadership.
EDITORIAl DIRECTOR Ben Turney CREATIvE DIRECTOR Lee Akers www.coyotecreative.co.uk COPyWRITER Seb Greenfield
It would be nice if a certain group caught onto this notion. I am of course talking about America’s politicians.
EDITORIAl CONTRIBUTORS Richard Jennings Thierry Laduguie Filipe R Costa Simon Carter Darren Sinden
Early October was dominated by the latest round of unedifying squabbles as the Republicans and Democrats publicly set about each other. In the end, the Republicans suffered a humiliating defeat, but the Democrats can hardly celebrate their Pyrrhic victory.
Disclaimer
Well the answer is simple. The “deal” that was reached was, in fact, no deal at all.
Material contained within the Spreadbet Magazine and its website is for general information purposes only and is not intended to be relied upon by individual readers in making (or refraining from making) any specific investment decision. Spreadbet Magazine Ltd. does not accept any liability for any loss suffered by any user as a result of any such decision. Please note that the prices of shares, spreadbets and CFDs can rise and fall sharply and you may not get back the money you originally invested, particularly where these investments are leveraged. In comparing the investments described in this publication and website, you should bear in mind that the nature of such investments and of the returns, risks and charges, differ from one investment to another. Smaller companies with a short track record tend to be more risky than larger, well established companies. The investments and services mentioned in this publication will not be suitable for all readers. You should assess the suitability of the recommendations (implicit or otherwise), investments and services mentioned in this magazine, and the related website, to your own circumstances. If you have any doubts about the suitability of any investment or service, you should take appropriate professional advice. The views and recommendations in this publication are based on information from a variety of sources. Although these are believed to be reliable, we cannot guarantee the accuracy or completeness of the information herein. As a matter of policy, Spreadbet Magazine openly discloses that our contributors may have interests in investments and/or providers of services referred to in this publication.
Why is this?
Nothing was agreed that fixed America’s mounting fiscal troubles, the long term liabilities of the Federal Government haven’t been addressed and no-one has suggested a plan for how the country is going to be able to repay the debts it has already accrued. And this isn’t even to mention the toxic morass that the Fed’s balance sheet has become. As bad as all this sounds, the situation could actually be much worse than our friends in the media have reported. In this month’s cover story my colleague, Ben Turney, explains how the finer detail of the latest “deal” strongly suggests that the debt ceiling has been all but done away with. A specific clause inserted into the law means that when America next hits its self-imposed debt ceiling, President Obama should be able to raise the borrowing limit relatively easily. And this spells big trouble. Intuitively we all know how wrong printing money to cover expenditure is. Even if you don’t, history offers a stark warning of what happens when a government loses control of its spending and its currency. I am, of course, talking about the Weimar Republic in Germany in the 1920s. The conditions that led to the collapse of the Weimar took several years to develop, but when the crisis broke it happened suddenly and hyperinflation took off. By the end, Germans were shopping for bread with wheelbarrows of cash. Whether or not we see a repeat of such scenes remains to be seen, but the trend of events is clear. Unless some drastic action is taken to alter the course we are on, another widespread collapse looks increasingly inevitable. This will almost certainly see the end of the dollar as the world’s reserve currency, and could inflict a painful period of adjustment on us all. We might still be some way off from this doomsday scenario, but, as we have been continually pointing out at SpreadBet Magazine, there are alarm signals sounding everywhere. I do hope we are wrong, but with the appointment of “uber-dove” Dr. Janet Yellen as Bernanke’s replacement, it looks as if events this month have indeed taken us a step closer to financial oblivion. Zak
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Contents
One Step Closer To Oblivion After October’s latest debt ceiling debacle, Ben Turney examines the long term dangers posed to the global economy through America’s inability to deal with its burgeoning debt crisis.
8 Unreported Inflation
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22 30 42
Unreported inflation is a growing problem starting to make itself felt in the economy. Richard Jennings and Filipe Costa assess the risks posed by this, drawing from historical precedents.
Zak Mir Interviews Justin Urquhart Stewart Justin Urquhart Stewart is one of the more famous market commentators. Widely known for his red braces, he is co-founder of Seven Investment Management with £5.2billion under management.
Dominic Picarda’s Top 5 Q14 Picks Dominic Picarda has just released his top 5 picks for Q4 of 2013. We publish the first of these in this month’s issue, and the others can be downloaded in a free guide.
Zak Mir’s Monthly Pick Long oil. As straight to the point as ever, our editor, Zak Mir, builds the case for going long WTI.
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Robbie Burns’ Monthly Trading Diary
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Alpesh On Markets
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This month Robbie takes a look at 5 new floats on AIM which he feels could provide decent trading opportunities.
Once more Alpesh shares his insights on movements in global markets, focussing this time on developments with the USD and how these might influence the trading environment.
Travel Corner Our proprietor, Richard Jennings, has been off sunning himself again. It’s a hard life! This time he has been to Kefalonia.
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Small Cap Corner Paul Scott introduces some of his research methods in stock picking and builds the case for buying Zytonic (ZYT)
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66 72 76 82 86 88
SBM Focus On Elena Ambrosiadou Greek fund manager, Elena Ambrosiadou is a hyper-achiever in every sense of the word. Filipe Costa profiles this extremely successful professional investor.
Commodity Corner Titan Investment Partners made a bold call at the end of October - all in on gold mining stocks. Here Richard Jennings explains the rationale behind this prediction.
School Corner Thierry Laduguie returns to help guide us through the use of standard deviation to help us manage risk. He provides a simple formula which anyone can use with an Excel spreadsheet.
Options Corner Titan Investment Partners Richard Jennings builds the case for an extremely interesting trade in a silver stock - SSRI, using a risk minimising options strategy.
Taurus - The £800m Pile Of Bull Simon Carter reviews an embarrassing chapter in the history of the City; the failed implementation of the Taurus order execution system.
John Walsh’s Trading Diary John’s back to let us how he has done with his trading this month. He’s started a new Rolex Trading Challenge, but we’ll let him tell you about that...
Markets In Focus A comprehensive markets round-up of under and out performers during the month of October.
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October 2013 - one step closer to oblivion
October 2013 one step closer to oblivion October has a bad reputation among investors and traders. It is the financial calendar’s ‘witching’ month. Although the statistics of historical stock market performance don’t support the existence of the dreaded “October Effect”, the great crashes of 1907, 1929 and 1987 have left deep cultural scars. October is meant to be the month when all that can go wrong will go wrong. Taken at face value, this October was pretty good. The price action continued to confound the bears with the S&P500 breaking out to yet more new all-time highs. The catalyst for this was the US avoiding crashing through its self-imposed debt ceiling and an ensuing unprecedented debt default. The shutdown in fact proved temporary and economic data pointed to continued recovery, albeit somewhat moribund. As the month draws to an end, September’s “taper tantrum” is but a distant memory. So, as we enter November, you’d be forgiven for feeling that all is well with the world and we are through the worst of the crisis.
However, as we should all be acutely aware of in this QE-manipulated world of ours, “face value” is an increasingly treacherous commodity… In spite of nominal prices reaching new peaks, October 2013 has otherwise been a disaster for anyone with a serious interest in the long term financial health of the global economy. So why is the tone of this piece so pessimistic, when most other commentary is encouraged by the apparent green shoots of recovery? The answer is both simple and complex.
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October 2013 - one step closer to oblivion
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October 2013 - one step closer to oblivion
BARACK OBAMA
JOHN BOEHNER
The simple answer is that October 2013 marked the point at which America’s leaders told the world there is no plan for resolving the country’s debt crisis. Naturally, they didn’t officially announce this, but thanks to October’s inaction they might as well have done. What has to be clear to everyone now is that the politicians have neither the willpower nor motivation to reform government spending and the Federal Reserve lacks either the courage or the conviction to bring to an end its extraordinary stimulus measures. America’s political elite has failed. There is no Plan B. The US authorities seeming only plan is that somehow the looming debt crisis can be resolved through more debt! Worse still, this debt isn’t even bona fide debt as you or I would normally understand it. Instead the debt the US Treasury now issues is wholly reliant on the $45billion a month of Treasuries that the Fed purchases through its open markets operation.
Otherwise known as “deficit monetisation” this process has many harmful consequences, but the biggest flaw it can never address is that there is just not enough genuine demand for American public debt. If this sounds perverse it is because it is. The historical precedents for when governments have had to resort to printing operations to sustain spending have universally ended in calamity.
The numbers behind the mess The table below shows how America’s federal debt grew over 2013:
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October 2013 - one step closer to oblivion
“As of October 1st 2013 the Federal Reserve had bought $405bn of Treasuries this year; in other words, $90.2bn more Treasuries than the US Treasury issued in the same period.” The total amounts should be familiar to anyone who has followed the debt ceiling debacle. However, the significant number is the amount US borrowing has grown by – $314.8bn. Now, take a look at the Fed’s purchases of Treasuries over the same period:
The top line of this chart might appear slightly less familiar to followers of QE. The headline figure of the Fed’s bond purchasing programme is $85bn a month, however of this $45bn is dedicated to buying US Treasuries. US Treasuries are the debt instrument the US government uses to borrow money. (As an aside the remaining $40bn a month of Fed purchases is on Mortgage Backed Securities, but more about these in future issues).
As of October 1st 2013 the Federal Reserve had bought $405bn of Treasuries this year; in other words, $90.2bn more Treasuries than the US Treasury issued in the same period. As mentioned, the technical term for the process of creating money to fund excess expenditure is called “deficit monetisation”. If you haven’t heard of this phrase before, expect to hear much, much more of it over 2014. It spells serious trouble.
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October 2013 - one step closer to oblivion
Thanks to its interventions in the market, the Federal Reserve now owns $2.1trillion (yes that’s right, trillion!!!!) of US Treasuries:
So, the Federal Reserve owns 1/8 of all the debt issued by the US Government. And this proportion is growing rapidly. If this doesn’t indicate a system that is fundamentally broken, we don’t know what does.
And yet the Fed keeps on buying The obvious question to ask about all this is “why on Earth is the Fed still pressing ahead with its full Quantitative Easing programme?” The deeply unpalatable answer for policy makers is that they have no choice. As a direct result of all the policy missteps in the last 5 years, the members of the Federal Open Markets Committee know all too well that if they cease Quantitative Easing, this will bring the whole house of cards crashing down. That this is inevitable isn’t the issue. Instead, the issue is who gets blamed for this and, let’s be honest, who in their right mind would want to be held accountable for what could be the greatest financial crash of all time?
Sound dramatic? Possibly, but just look at the numbers above again. There is no arguing with them. They are published facts. We were told to expect a tapering of QE by the end of 2013. Even this looks off the agenda now, but what most market commentators missed is that a tapering is just that; a reduction. It is not a cessation. The Fed could taper its buying of Treasuries by $10bn a month and would still be buying more than the US Government issues, based on their current borrowing requirements. Deficit monetisation is here to stay.
Doing away with the debt ceiling So, if we can’t look to the Fed for our salvation, perhaps America’s politicians will lead the way? Pah! Not a bit of it! October 2013 also marked the latest (and possibly most fatal) round of squabbling in the debt ceiling debacle.
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October 2013 - one step closer to oblivion
“a tapering is just that; a reduction. It is not a cessation. The Fed could taper its buying of Treasuries by $10bn a month and would still be buying more than the US Government issues, based on their current borrowing requirements.” A misguided, yet widely reported assumption, in response to October’s debt ceiling “deal”, is that the row is set to reignite in February when the next limit is forecast to be breached. There are two reasons this should prove to be incorrect. The first reason is because it is highly unlikely the Republicans will have the desire to subject themselves to another mauling. Not only did they suffer a humiliating defeat in October’s vote, in which they failed to win a single concession on Obamacare, they also have been roundly blamed for taking America to the brink once more, according to the polls. Even though the American voting public doesn’t seem to understand that America is on the brink, irrespective of Republican intransigence, just like the Federal Reserve, the Republican Party does not want to shoulder the responsibility of causing the final crash. With Congressional mid-term elections due in November 2014,it is hard to see the party gambling on repeating its “success” of summer 2011 (even though that “success” did nothing to alleviate the root causes of federal overspending). As compelling as the first reason is for there being no repeat of the debt ceiling row in February, the second explanation is possibly more powerful and relates to the specific details of October’s “deal”.
The bill that was passed by Congress and the Senate to avert an American default was called “H.R. 2775 – Continuing Appropriations Act, 2014”. If you want to read the fine detail of what was agreed, it is freely available through the Congressional Library (www.congress.gov). The most relevant section of this Act can be found towards the end of the text. Section 1002, otherwise known as the “Default Prevention Act of 2013”, specifies the mechanism through which the Federal Government was permitted to extend its borrowing. It also states how the debt ceiling may be raised in future. In short, when federal borrowing next approaches the debt ceiling (as is surely inevitable) President Obama is authorised to raise the limit (which is also inevitable). Should Congress or the Senate object to this increase of the debt ceiling then either house can prevent it by issuing a “joint resolution”. This is the tricky part. Under the rules of the American legislative process, joint resolutions require a two thirds majority to be passed.
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October 2013 - one step closer to oblivion
Currently the Democrats control 200 of the 435 seats in Congress and 54 of the 100 seats in the Senate (including two Democrat aligned independents). To stop Obama raising the debt ceiling in February either 56 Democrat Congressional Representatives or 16 Democrat Senators will need to switch sides and vote with the Republicans.
This is even assuming that all the Republicans would support such a measure, which seems highly unlikely, as explained above.
UNITED STATES HOUSE OF REPRESENTATIVES
KEY :
DEMOCRAT
Republican
INDEPENDANT
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October 2013 - one step closer to oblivion
“Although the debt ceiling still officially exists, to all intents and purposes it is now at Obama’s sole discretion whether or not to raise it.” The significance of this procedural technicality should not be underestimated. Although the debt ceiling still officially exists, to all intents and purposes it is now at Obama’s sole discretion whether or not to raise it. Given that his Presidency has been characterised by a dramatic expansion in federal spending rather than urgently needed reform, this spells trouble for anyone hoping for a managed resolution to America’s debt crisis.
So what can be done? Unfortunately the answer to this question is another flippant, trite one. Nothing can be done. It is quite simply too late. The fiscal problems in America have been building for nearly two decades. They are also much larger than the official debt numbers suggest. There isn’t the space here to write about the estimated $86.8trillion (yes, that’s trillion!) the US Government is responsible for in unfunded liabilities. We will write more about these in this month’s blog, but suffice to say for now that current federal spending in America is set to continue increasing indefinitely.
As long as the Federal Reserve maintains its bond purchasing programme and the market continues to accept this deficit monetisation, stocks and all other financial assets should continue to rise. Much more worryingly, however, this also continues to remove any pressure on the political system to engage in serious reform. The longer this happens, the worse the final outcome will be. At some point the market will no longer accept this charade and, if history is anything to go by, this will happen very suddenly. And if you think this will just be America’s problem, well guess again. An American default will change the world. Any assumptions we might have about our economic existence will be shattered. All bets will most definitely be off. After what we’ve seen this month just past, we are all several steps closer to this increasingly inevitable reckoning. The only true safe have will likely be physical gold.
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SBM Focus on Elena Ambrosiadou
SBM FOCUS ON
Elena
Ambrosiadou By Filipe R. Costa
From her office in the beautiful Principality of Monaco, Elena Ambrosiadou manages one of the most successful asset management companies in the world. In an industry that is overwhelmingly populated by men, she most certainly stands out. Ambrosiadou in fact co-founded her hedge fund operation with her then husband Martin Coward in London in 1991. With their exceptional quantitative analysis skills they were able to build one of the most valuable trading algorithms ever seen in the markets, and which allowed both of them to go on and build immense personal wealth. Ambrosiadou has, not surprisingly, gone to extraordinary lengths to protect this data. So what is inside the algorithm? No one knows exactly. But one thing is for sure, it was designed to completely eliminate human judgement and emotions and it has been delivering consistent stunning profits as the $100 million yacht Ambrosiadou bought pays a very visual testimony to. IKOS is currently headquartered in Limassol, Cyprus, but has trading offices around the world. Why in Cyprus? Well, if the fantastic climate is not enough, the many tax advantages and the proximity to the Middle East where many of her clients are based are additional draws. The company is totally privately owned and, unlike the types of SAC Capital, this business doesn’t rely on any “network of experts” where traders and portfolio managers receive tips, but rather depends on the quantitative skills of a team of software engineers and mathematicians.
IKOS employs what is known as statistical arbitrage and market neutral strategies to build its portfolios. Asset picking is based on factor analysis, econometric models and other scientific techniques that put human emotions and decision-making to one side — traits that almost all human traders eventually fall foul of. Precisely because they are, of course, human (well some anyway!) Out of curiosity, the name IKOS derives from the name of the treasury on the island of Delos in Ancient Greek.
“But one thing is for sure, THE IKOS ALGORITHM was designed to completely eliminate human judgement and emotions and it has been delivering consistent stunning profits as the $100 million yacht Ambrosiadou bought pays a very visual testimony to.”
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SBM Focus on Elena Ambrosiadou
Birth: 1959 (54 years old) in Thessaloniki, Greece Resides: Monaco Activities: Fund Manager, CEO of IKOS AM
From Engineering To Fund Management Elena Ambrosiadou is aged 54 and was born in Thessaloniki, Greece. Her father had his own business and wanted his daughter to follow in the same steps as he, believing that was the best route towards success. After excelling in maths and science at college, her father sent her to Britain to study chemical engineering at Leeds University where she received her bachelor’s degree. She then moved to Cambridge to complete a PhD in control engineering, a subject that was also heavy in maths and tailored towards modelling (see the fertile ground here as to her ultimate calling?). It was whilst at Cambridge that she met Martin Coward who was also studying for a PhD in control engineering. Later, Ambrosiadou gave up on the doctoral program and went to the Imperial College London to complete a master’s degree in technology and development.
Coward and Ambrosiadou married in 1983 and then followed different professional routes. After completing her master’s degree, Ambrosiadou took a job at British Petroleum. Seemingly still not having her fill of studying she applied to Bedfordshire Cranfield University and this time completed her MBA studies. Her background in chemical engineering along with her freshly acquired management skills allowed her to quickly progress through the ranks at British Petroleum where she was promoted to Manager of the company’s chemical business. However, his wish was to ultimately be granted and she quit BP returning to Greece to work in her father’s business. Her husband, however, followed a different route, indulging his passion on the maths front which resulted in him being headhunted by Goldman Sachs to work as a quant manager. It was at “the Squid” where he developed his enthusiasm for financial markets, shortly moving onto InvestCorp, a Bahrain-based investment bank.
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SBM Focus on Elena Ambrosiadou
In 1990, Ambrosiadou decided to join her husband in Bahrain and started a job as consultant at KPMG. But her MBA gave her new insights into the business field and she spotted an opportunity to open a business in the asset management industry. It was at a conference she attended where she met another female who described how she had raised $50 million to trade futures contracts. This served to inspire Ambrosiadou who already had experience investing her father’s money. And so it was, in 1991, that Ambrosiadou and Coward finally founded their own business. IKOS asset management was born.
IKOS And Its Most Valuable Asset In 1992, emboldened by their early returns, the couple quit their day jobs in Bahrain and returned to London to dedicate themselves to the freshly founded IKOS AM, a business in which Coward had just 10% with Ambrosiadou owning the remaining 90%. They started with just £375,000, mainly trading Japanese equity warrants and index futures in managed accounts. In 1995 they raised a further £1.9 million, and so small acorns, the seeds of what was to become a wildly successful asset management business, were germinating.
On the back of this sustained early success, Ambrosiadou was able to raise substantial funds to keep the business growing. In 2006 they had reached the point of £2.2 billion in assets under management. The trading algorithm was of course the most valuable asset. It seemed at that point that it was possible to put the trading on effective autopilot, let the computer work alone and just collect the profits at the end of each quarter. Can you guess what happened next..?
The Hunt For The Trading Algorithm After more than 20 years of marriage and with the extraordinary success and money at the heart of their relationship, a distrust started to eat away at their marriage in 2006. On the one side Ambrosiadou was the manager, orchestrating the whole team into delivering profits, but Coward was the brains behind the whole money-making algorithm. In 2004, Ambrosiadou was in fact named the UK’s highest paid woman earning almost £16 million during the year. She would have achieved the same title again in 2005 had she not moved from the UK to Cyprus.
Ambrosiadou was the de-facto CEO, managing IKOS systems, meeting with investors, hiring staff, dealing with regulators and monitoring performance, whilst her husband was the brains behind the trading algorithm. He dedicated himself to raw research and trading, devising algorithms and continually developing the trading software. The couple were an unusual pair in the hedge fund industry that had no other husband and wife team. And their results were exceptional.
“In 2004, Ambrosiadou was in fact named the UK’s highest paid woman earning almost £16 million during the year. She would have achieved the same title again in 2005 had she not moved from the UK to Cyprus.”
Ambrosiaodu was growing ever more nervous and anxious, however, about the dependence of the business on its algorithm, and she began suspecting that her husband was planning to open his own hedge fund company, probably taking the algo with him and using it at his new company. Not surprisingly, she did everything she could to protect the algorithm and keep it inside IKOS. Historically she had many issues with employees who had filed claims against the company for being unfairly dismissed and also asking for a share of the profits.
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SBM Focus on Elena Ambrosiadou
The truth is that Ambrosiadou caught employees illegally copying computer files at IKOS, probably with the intent of using them for their own profit or, as she suspected, for Coward’s new company. At the end of 2008, tensions and mistrust had grown to such an extent that she fired an entire research team while her husband was away. A long divorce started at that point with the ex-couple filing, in what was a greedy lawyer’s dream, more than 60 claims against each other. Ambrosiadou was of course trying to retain the algorithm whilst her soon to be ex-husband was hell bent on taking his life’s work with him to use as the heart of his new business, only this time without his ex-wife. The divorce was a lengthy and troubled distraction for them both. Ambrosiadou was accused of installing a camera to spy on Coward’s apartment, of hiring operatives to follow him from his Monaco apartment to his office and restaurants in order to photograph him, and of hiring a consultant in covert investigations to spy on a prior employee.
Recently, during this year, a judge finally attributed the creation of the IKOS algorithm to Coward but, in a bitter twist for Coward, ruled that IKOS actually owns the intellectual rights. It may be true that Coward developed the algos, but they were developed while it was his job at IKOS. Consequently ownership should be attributed to the company. At the same time, it was also determined that if Coward was involved in the initial development of the software, his role became less and less important as time passed. It was the responsibility of a team of twelve to update and upgrade the system as needed and not Coward’s. IKOS continues to deliver stunning results and has received several awards even after Coward’s departure. The IKOS Futures Fund won the HFR award for the best Managed Futures Hedge Fund, while the IKOS FX Fund won in the Best Foreign Exchange Hedge Fund category in 2010. Below is a chart of IKOS’s main hedge fund relative to the benchmark illustrating its outperformance over the last five years:
Coward meanwhile was accused of trying to illegally copy files from IKOS for his own benefit and of conspiring with other IKOS employees.
CHART - IKOS PERFORMANCE
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SBM Focus on Elena Ambrosiadou
Elena Ambrosiadou was selected to be included in the FN200’s most influential European Women in Finance and was ranked in the Top 50 Leading Women in Hedge Funds by The Hedge Fund Journal in 2010 & 2011. She is an Advisory Board member of Cranfield School of Management and a Dean’s Council Member of Harvard Kennedy School. Let’s take a final look at IKOS’s current top 10 holdings:
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Zak Mir Interviews Justin Urquhart Stewart
ZAK MIR INTERvIEWS
JUSTIN URQUHART STEWART This month Zak Mir talks to celebrated market commentator and co-founder of Seven Investment Management Justin Urquhart Stewart. Seven Investment Management now has £5.2billion under management. Zak: In terms of your public persona, you are an ebullient character and people are probably more familiar with your red braces than you as Marketing Director of Seven Investment Management. Jus: It is a brand I am probably stuck with, but at least it keeps my trousers up. Zak: On your website I read that you founded Seven Investment Management in 2002 and now have over £5bn under management. Are you part of the decision-making process in terms of the markets? Jus: I chair the Strategic Asset Allocation Committee which is composed not only of people from Seven Investment Management but also people from across the City with several decades and cycles of experience. I do not believe that one single person can cover the entire area. The trick is to bring in the wisest and brightest heads and coordinate accordingly. Zak: So you are an aggregator of the best investments brains as much as anything else? Jus: Yes. While I appreciate that people do their own trading and dealing, I think it is important that they only do that with a certain level of risk and a certain proportion of their money. What made me so angry when I worked for a large bank was when I saw people’s money not being treated properly, and that long term money being traded for the short term.
In founding Seven I wanted to go back to disciplines and processes that can actually be regarded as quite dull in terms of asset allocation, with commissions being paid based on performance within given risk levels, as well as there being a greater level of predictability in terms of long term money where possible. Too often I have seen people look at their pensions at the wrong side of their career in utter horror only to be told by their fund manager “that is what stock markets do.” And that is not true. It is what that fund manager did not do. Zak: Is that why there is the statistic that 20% of people will be working until they drop? Jus: Absolutely. It sounds a bit holier than thou, but we teach people economics in this country, yet we don’t teach them finance, including basic information such as how much money you can afford to live on after you retire. On the basis that we are probably going to be around for 20-30 years plus after we retire, the rules have changed. The politicians are no use whatsoever and a lot of the industry is simply dysfunctional in terms of what they are providing, in that it doesn’t provide real value. Now with greater use of technology people have the ability to take more control of their affairs. These will be more exciting times as they will have their long term money under their control, and at the same time be able to look at trading and see whether they are good at it. Trading won’t be for everyone, but it should at least provide them with a greater understanding of how they should manage money.
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Zak Mir Interviews Justin Urquhart Stewart
“there is noise in the market directed at you for a reason.�
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Zak Mir Interviews Justin Urquhart Stewart
Zak: What were the reasons that Seven was set up? Was it to do with the nature of the regulatory environment at the time?
Zak: But can you really predict an event like in 2007 when you have Northern Rock shares plummeting to zero? Is it possible to ride out that kind of disaster?
Jus: What we could see was wrong then were regulators who were looking the other way; you had stockbrokers charging whatever they liked, with the final straw in that respect being the inactivity fee. I want people to have a greater awareness of what is going on and we want to make sure the next generation is better educated. This is so that they don’t see financial services as run by a bunch of dubious warlocks in the City, but by people who are responsible and through their best endeavours are looking after their money.
Jus: In any given year you’ll be affected by something like that. But if you are doing longer-term investing, as opposed to shorter term trading, you’re always going to look at something for five years plus. On that perspective the answer is that yes you can avoid that kind of disaster. Are you affected by that kind of disaster? Yes, the entire market was. But were you affected by people who are taking a much more high-risk approach? No.
Zak: In simple terms, what is the difference between what you do and what a hedge funds does? Jus: A hedge fund will generally be looking to take a higher level of risk. Hedge funds are primarily designed for the benefit of those who run the hedge funds, rather than necessarily the investors in them. And it is not always as clear and transparent in terms of how they go about their business. Zak: But you may be getting into Lloyds shares at the same time as hedge funds are going long, so it may not be that different?
So the answer is that over the past 12 years we have actually achieved what we set out to do with our portfolios operating at 6.5% to 7% after all charges. This is giving us a steady return which means that people are effectively doubling their money every decade. This may sound dull, but when it comes to pension money I like dull. Zak: Which asset classes are you primarily focused on? Jus: Primarily the global range of equities and fixed income. Add in commodities and fixed income, property, private equity and currencies. So long as it is tradeable and we can package it up in one form or another, then fine. Zak: Hardly anyone got the plunge in gold from $1,900 to $1,200 right, or the extended bear market in Japan. Are there times when you have been caught high and dry on your investment choices, and how do you deal with these situations? Jus: You are never going to get it right the whole time; that is impossible. What you do is take a long term strategic view of how these asset classes have behaved in terms of both performance and volatility. You know private equity goes up and down like a yoyo, you know cash doesn’t, a blend of the two may be better. If you mix that along with a whole load of other asset classes, you may have something which behaves in a more predictable manner. This does not mean that when that black swan flies over, you may be shaken, but that shake is going to be less damaging.
Jus: They would probably be taking a higher level of risk than us as we would be looking for a level of stability. In fact we might even be using a number of hedge funds ourselves. This is because they may have a higher level of expertise than we can apply to our portfolios on particular occasions.
Zak: But isn’t it ironic that many private traders and investors tend to trade the conundrums? The gamble is when is gold or Japan going to turn for good? But they are there trying to get in ahead of time and getting burned. However, going for a “steady” investment in Tesco (TSCO) or Morrisons (MRW) very often does not appeal.
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Zak Mir Interviews Justin Urquhart Stewart
Jus: With Abenomics we were able to take a view on Japan. Would you bet the house on it? No you wouldn’t. But why would you do that? Not for the fun of the trade, but what impact Abenomics might have on it having evaluated it. The same thing with Draghi’s “whatever it takes” in 2012, which was the equivalent of “don’t bet against the Fed”. Admittedly this was a gutsy statement as he did not have much fire power, but that was enough to take some of the pressure off. So taking a view on Spanish or Italian debt at that time would have been a very good stance for trader as well as for an investment portfolio. Zak: Did you take that view at the time after Draghi?
If you go back and look at the stochastic models that insurers used to send to the financial advisers and stockbrokers, for many years they would have said “you need to be in property. It should be UK property and about 20% of your portfolio.” But this would have meant that for a fair proportion of the time you would have been better off burning £10 notes in the street. Such a strategy would have lost you less money for your clients. The strategy was dogma. “In the long term it will be fine.” In the long term I will be dead. It is far better to take a strategic view on all the asset classes, including property, and then tactically move either side from that.
Jus: We took that view very shortly after and ran that to our portfolios at various levels of risk. Zak: Just after the Draghi news there was also the revelation that Rothschild had gone short of the Euro — not helpful. Jus: To a great extent you have to put news like that in its box and decide that there is noise in the market directed at you for a reason. What you have to do is to evaluate and say that on the basis of these decisions what is the next move and is that what we would like to participate in? Of course, some we do get wrong. A classic example was a couple of summers ago — another Euro crisis — in August suddenly we have the issue with Italian debt. This was a situation where we had said this is going to happen at some stage, but not yet. However, it did happen. You can’t always time the markets. Zak: How much do you employ in terms of risk profiles on a particular situation — say, in the case of the Draghi situation?
Zak: Going around different markets and taking property first. If you could go short of London property now, would you do so?
Jus: We have four main risk profiles — with the defensive Personal Injury Fund making up five. For instance, in the Balanced Portfolio which has 30% bonds in it we might have placed 6% of those particular Spanish and Italian ones in there at the time. Or for the Unconstrained Portfolio — higher risk — we had a higher ratio, but have been shortening the duration of the debt as time has gone on.
Jus: High end property yes. I don’t see how the flow of overseas money can continue. I look at other UK property and it is fascinating and would be a lot more appealing, especially industrial property — business parks — which are really rather busy. The London property market is too far, too fast for me and I would not participate. Zak: Gold rebound – inflation / deflation?
Zak: Although we are supposed to believe in the idea that long term is good and short term is bad, isn’t it the case that it is possible to get it wrong just as badly in the long term as the worst of the day traders? Jus: Sometimes saying that you have a long term view, and that is it, can be a very blind dogma.
Jus: Five years ago Lehman Brothers blew up and we were teetering on the edge of financial Armageddon and there was the safe haven of gold. Gold to me at that stage was something which you had 5% or 6% in your portfolio. But earlier this year we cleared the rest of our gold holdings and said no. We were getting no yield on it and can’t see where the growth is going to come from.
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Zak Mir Interviews Justin Urquhart Stewart
“So yes, we have some green shoots, but they could still easily turn into some advanced moulds.� Zak: We too have a wonderful recovery here in the UK and George Osborne is taking a bow. Is the Scottish independence issue a serious destabilisation risk? Jus: I think Osborne has to be very careful at the moment as this is not a very strong recovery. This is largely due to the fact that many of our politicians have very little business and economic experience. Come to that, nor does the Treasury when you go there these days. So yes, we have some green shoots, but they could still easily turn into some advanced moulds. The economy has been benefitting from a high level of support. As far as Scottish independence is concerned we all come from the same country: you can be proud and patriotic, but please do not be parochial. It would be a very negative move indeed and could be far more damaging to Scotland than to England.
We do not have a properly functioning banking system. America carried out surgery; we decided to use Savlon and sticky tape on our banks. We should now be looking to develop regional peer to peer lending structures. We should also remind people that in 1945 we had 45 stock exchanges in Britain, and 20 of them were actually quite good, raising money for local business. Last year Britain started 420,000 new businesses — 50% will die within three years. Nevertheless, you can compare that with the 1980s when it was 150,000 - 180,000 new businesses per annum. We need to find a mechanism to harness these new businesses and raise money for them. Zak: A couple of months ago I interviewed fund manager Giles Hargreave in the wake of AIM stocks being eligible for ISAs. Is that an area of the market that you are involved in? Jus: It is going to allow us to have more exposure which is encouraging. AIM was actually started by five of us in Glasgow as we could not get London to start a second junior market. It is only when we started developing it as a regional exchange that they finally relented. Zak: So AIM is your fault? Jus: Yes, AIM is my fault!
What Osborne needs to be concentrating on is getting the levers of the economy working properly.
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zakscafe@t1ps.com
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Dominic Picarda’s Technical Take
Dominic Picarda’s Dominic Picarda is a Chartered Market Technician and has been responsible for the co-ordination of the Investor’s Chronicle’s charting coverage for four years. He is also an Associate Editor of the FT and frequently speaks at seminars and other trading events. Dominic holds an MSc in Economic History from the LSE & Political Science.
Top 5 Picks for Q4 2013 This month we have a special Dominic Picarda Q4 2013 Top Picks offering. The first of his picks is listed below with the other 4 available by download here: http://www.spreadbetmagazine.com/dominic-picardas-top-5-trades/ George Osborne is looking especially smug right now. The UK economy’s ongoing recovery has defied the many predictions that government spending-cuts would deepen and prolong the gloom. It has also forced the IMF to retract its previous criticism of his policies. The same is happening elsewhere. Even in some of the longest-suffering parts of the eurozone — such as Spain — the recession seems to have come to an end. The Chancellor’s smugness could yet turn out to be misplaced, however. In the spirit of the railway operators that bemoan the “wrong type of snowfall,” the growth that is happening in the UK and in the US may also be of the wrong type. While British banks are willingly lending vast multiples of salary to those wishing to buy already overpriced houses, real businesses struggle to borrow to survive and invest. Put simply, too much today is resting upon speculation fuelled by ample cheap credit, from the stock market through to the housing market. This is no accident, but a deliberate ploy. No modern government has ever paid off its debts. Instead, the passage of time and the depreciation of money’s value have been left to work their destructive wonders. That inflationary process is well underway today and it is set to continue for a long time yet. The proof of the pudding will come when the authorities try and withdraw the lavish flow of cheap money, or rampant inflation forces their hand. I do not foresee a happy outcome here. Based on ten-year earnings, the US stock market is now almost as dear as it was going into the long-term slumps of the early 1900s and middle 1960s. In response, hardcore bulls are trying to explain why this proven valuation technique is wrong.
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Dominic Picarda’s Technical Take
Trading and tactical investing will continue to be the best approach in the coming months and years, as they have been since the year 2000. My near-term strategy is to seek to ride the ongoing liquidity-driven bull trend in stocks, while also keeping an eye out for big reversal opportunities in commodities. Just as I suspect the era of turbulence in stocks has not yet passed, I reckon the commodity boom is not yet dead either.
“the growth that is happening in the UK and in the US may also be of the wrong type.� November 2013
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Dominic Picarda’s Technical Take
Nikkei 225 The Land of the Rising Sun has seen more than its fair share of false dawns over the past quarter of a century. Since its Nikkei stock market peaked at an all-time high of 38,957 at the end of 1989, the authorities have repeatedly and unsuccessfully tried to kickstart a lasting economic recovery. The authorities are, of course, at least partly to blame for this failure, having stifled growth by raising taxes or keeping monetary policy too tight. But there have been real signs of change alongside their latest effort. The government of Shinzo Abe’s plan is to keep money ultra-easy, spend more, and boost the efficiency of Japan’s economy. It has already succeeded in weakening the formerly overly-strong yen, in persuading people that consumer prices are likely to rise rather than fall, and in getting people to spend more. But there is a long way to go, especially when it comes to efficiency. The country’s powerful farmers and many service industries, for example, are likely to resist vital reforms that threaten their coddled livelihoods.
JAPAN SLUMP
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Dominic Picarda’s Technical Take
Since reaching a five-year peak at 15943 in May, the Nikkei 225 has been going sideways in a contracting range. This sort of behaviour is typical of a market that is treading water after a strong advance, ahead of yet another powerful move upwards. The pullback from those springtime highs was needed, as the market has become eye-wateringly stretched, with a weekly relative strength reading of 87%. This has now been resolved though. My call is that Japan’s bull market will resume, taking it back to this year’s highs and on to an important long-term retracement target at 17138.4. Strong corporate profitability this year and next should provide the fundamental underpinning for this move. An initial buy-signal would be the 8-day exponential moving average crossing the 21-EMA. Further long entries could be made on rebounds from the former line. A close below the latter line would represent a natural place to exit.
NIKKEI CHART
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Unreported Inflation
Inflation the real risks on the horizon & historic episodes of hyperinflation
By Richard Jennings, Titan Investment Partners & Filipe R Costa
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Unreported Inflation
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Unreported Inflation
A Brief Overview Of Money And Inflation People tend to think that “money” is wealth and attempt to accumulate as much of it as they can. History actually shows us that money per se is not actually the basis of a fortune, but rather just a means of payment and exchange that helps acquire other assets (and so real wealth).
If one doesn’t have money, we shouldn’t simply give away money (pay attention Mr Bernanke!), but rather create conditions for individuals and companies to produce goods and services that generate the money that will in turn allow you to then exchange it for other needed goods.
Money allows us to acquire the goods and services we that we both need and want. Without actual goods to acquire, money is really worthless — it is just a piece of paper or electronic digits. Just imagine an economy with goods but no money. Now imagine the opposite: an economy with money but no goods. In which would you prefer to live in? The output of an economy is measured by its GDP, and which is a rough estimate for the total goods and services produced within a country. We often look at real GDP numbers as a global wealth indicator for a country, not nominal GDP. This is because we are interested in knowing how much we produced and not by how much prices changed. Real GDP adjusts for the impact of inflation.
“History actually shows us that money per se is not actually the basis of a fortune, but rather just a means of payment and exchange that helps acquire other assets (and so real wealth).” From all this, the natural conclusion then is that the final output of a country should be the main policy concern. If an economy isn’t in good shape, we simply need to encourage production. We need to promote investment, create additional capacity and promote full employment.
This is the bit where Mr Bernanke gets excited… If money isn’t wealth but just a means of acquiring it, why not then print money and give it to the population? Imagine the Bank of England decides to put its printers to work and give £10 million to each citizen. That would be great, wouldn’t it? Well hang on a minute... With that kind of money, many of you would no doubt decide to take a break and perhaps stay in a luxury hotel, so paying others to serve you while you enjoy your life with family and friends. However, as all others all have the same amount of money, they will look to do the same. And that, sadly for you, includes the very same hotel staff! What will happen is that goods and services become increasingly scarce and so increase in value as fewer people, with their new found wealth, feel the need to actually produce them (or serve in the hotels). Instead of paying £300 for a great room in a five-star hotel in London, you will be asked £3,000 or probably £30,000 per night! And a small piece of bread may cost £5 instead of 50 pence. Prices will simply rise dramatically. The value of the £10m relative to goods it can buy will have diminished dramatically. People will try to exchange it for assets or for other currencies whose value has not been decimated.
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Unreported Inflation
Believe it or not, hyperinflation has occurred several times in history. Hyperinflation is defined as a generalised rise in prices by more than 50% in one given month, although the worst historical cases resulted in much, much more… One example was what was experienced in Weimar’s Germany after World War I. The heavy war damage compensation that the country had to pay completely emptied the Government coffers and so the Government resorted to the printing presses to pay the reparation costs.
The final result was phenomena inflation that saw prices rise by as much as 29,500% in a single month (October 1923).
In the Hungarian example prices were actually doubling each 15 hours. Imagine you had money in the bank. A mere 15 hours later your money would be worth half its value. In just a few days, your money would be worthless. The table below helps understand the effect that inflation has on your money. If, for example, inflation is 200%, it means that prices are now 3x higher and hence the purchasing power of your bank notes is one-third of what it was before.
In the case of the Weimar state of the 20s, if you had £1m in your bank account at the beginning of October 1923, you would have had the equivalent of just £47,619 at the end of the same month. In the Yugoslavian case, occurring in January 1994, your million pounds would have been turned, incredibly, into less than one penny in just a month!
The Weimar experience wasn’t an isolated case, there are many others on record. Some actually worse than this. Examples are Hungary, Zimbabwe, Yugoslavia and the Republic of Srpska, with the last three in fact having happened very recently. Take a look at the table below:
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Unreported Inflation
“Hyperinflation was destroying the value of any bank notes even before they went into circulation. In January 1994, inflation peaked at 3.13 billion percent for a single month.” A small piece of bread, priced at 50 pence before inflation picked up, would cost £148 after one month in the first case, and £156m in the second. As for the hotel room — don’t go there!!
The Yugoslavian Case In 1988 the highest denomination in Yugoslavia for a bank note was 50,000 dinars. With inflation running at very high levels, it took less than a year for the central bank to start printing a new bank note with a denomination of 2,000,000. If they hadn’t done this, people would have had to carry a bag of notes just to pay for a simple coffee!
During the period between 1971 and 1991, inflation was already running at an average of around 75% per year in Yugoslavia, but it was during the breakup period and the Yugoslavian war that inflation peaked at gigantic levels. To pay for the war efforts, at the time representing 80% of the country’s expenses, Milosevic ordered the central bank to print money. Per capita income plunged by more than 50% in two years. It is safe to say that, aside from the human toll, it was a disastrous outcome.
So Just What Is Money And How Does It Work? As we relayed at the start, money exists primarily to serve as a mean of payment to facilitate the exchange of goods and services. Fiat money, besides facilitating trade, is also widely accepted simply due to government imposition. It has legal course imposed by law. Fiat money has value due to a physical mandate, which is different from intrinsic value. Thus if money derives its value from its legal course imposed by the law of the land, on the other side its intrinsic value will be set by its usefulness: that is its capacity to acquire goods and services.
In 1990, Yugoslavia conducted a currency reform and the freshly minted dinar was exchanged for ten old dinars. The highest denomination was then 50,000 dinars. In 1993 they had to print new bank notes with an even higher face value though, this time worth 10,000,000. The dinar was then further redenominated with a new dinar worth 1,000,000 old dinars. Before the year was over, the highest denomination was 500,000,000. Hyperinflation was destroying the value of any bank notes even before they went into circulation. In January 1994, inflation peaked at 3.13 billion percent for a single month.
Basically, fiat money derives its value from two main components: acceptance value, given by legal course; and quantity value, which is the utility of money as a store of value. As you can imagine, the acceptance value is stable as the rule of a country’s government and law can simply enforce it. However, the quantity value is subject to the free markets and external influence. This is intrinsically unstable and, as we have seen, can on occasion result in a monetary collapse. In the Weimar’s Germany and Milosevic’s Yugoslavia cases the quantity value dropped so much (due to generated inflation) that the countries experienced a complete monetary collapse. In a sovereign country with its own currency, government is actually a default-free entity.
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Unreported Inflation
The United States is, theoretically, a default-free entity as it can always print more money to pay its bills (as long as it has printers and ink to do it!) At the limit, the Federal Reserve would have to hold 100% of Treasury bills and notes, but, again, that is always possible. Here’s the really interesting bit, if government has no solvency limits, however, it then rubs up against inflation constrains. Purely pumping money into an economy leads to misallocation of resources and economic impoverishment as it allows for the exchange of something (goods and services produced) for nothing (money printed out of thin air).
You will see then how simply printing money, which the world’s central banks have been doing in recent years at an unprecedented rate, will ultimately result in a new price plane for goods and services. We have already seen this with the equity markets, selected commodities, cars, art and fine wines — largely goods at the disposal of the rich who have benefited disproportionately from this policy. Take a look at the chart below which shows the growth in the balance sheet (essentially cash injections into the banking system) by the world’s major central banks overlaid with the gold price. This chart alone is what keeps us bulls of gold and the gold producers.
This was, until the GFC and the last few years, the main reason for modern central banks to have price stability as the focus of their mandate.
CENTRAL BANKS CHART
At some point all this money that has been created will trickle down to the wider populace and then the inflation genie will well and truly bust out of the bottle. At Titan we think this day is growing ever nearer…
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Unreported Inflation
“Put another way, you would need two tickets for the same seat. Printing additional tickets (money) for the same capacity doesn’t create value at all (output), it just serves to devalue your ticket (inflation).”
Conclusion Here’s a final example: money can be seen as like a ticket for a football game. If there are 40,000 tickets for a capacity of 40,000, then one ticket will give you access to one seat. But if the club decides to print 80,000 tickets, then one ticket will give you access to just half a seat, as capacity is still the same. Put another way, you would need two tickets for the same seat. Printing additional tickets (money) for the same capacity doesn’t create value at all (output), it just serves to devalue your ticket (inflation). Current central bankers, and in particular our friend Mr Bernanke, think otherwise. They are putting all their efforts into ultra-loose and unorthodox monetary policy in order to try to drive economic output higher. They expect that by creating additional ‘tickets’ they can create additional seats and yet the tickets will be worth the same (perhaps someone should take Bernanke and his band of merry men to a football game at capacity?!)
It has been said that the Federal Reserve’s current quantitative easing policy hasn’t caused hyperinflation because the increase in bank reserves as a consequence of the money printing has been kept largely on their balance sheets, and the money multiplier effect has not kicked in — the final ingredient needed. That is partially true. The Federal Reserve is, however, buying Government assets and indirectly giving an incentive for the US Government to spend more. And if more is spent out of the same output, then inflation will pick up — basic economic theory. We have seen this before and if history is to repeat itself, buying hard assets is the most rational behaviour. Gold is certainly one of those assets because of its inelastic supply, but any asset with a limited supply would do the trick. At the heart of our Precious Metals fund — the only dedicated spread betting fund investing in gold and related assets — is a selection of gold and silver and precious metals producers. We think that 3000 years of history, as to where to turn when bouts of serious inflation occur (i.e. gold and silver), are worth paying heed to.
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Zak Mir’s Monthly Pick for November
ZAK MIR’S MONTHly PICK FOR NOvEMBER
BUy DECEMBER WTI: TARGET $110, STOP lOSS $97
I’ve been mulling over this piece for the best part of a month and in this time have been praying that oil would deliver a decent buying opportunity. It has been grinding steadily lower and my fear was that an errant eruption in geopolitical tensions or early autumn freezes might ruin my plan to write this note. Now my monthly pick is out, I say bring on the madness! Oil has looked like it’s been gearing up for a move higher now for a while and a retest of August’s resistance at $110/bbl is my target. I am pleased that my bullish view on oil is backed by no less than SpreadBet Magazine contributor, the Market Sniper. He waxed lyrical about the case for buying oil at the Traders’ Forum even on October 5th. As is usually the case, he is much more ambitious in his target than I am, believing we could even see a move above $130/bbl. From a technical perspective the consolidation in oil is clear. In July there was the surge through the all-important $100/bbl level. The price topped out at just over $112/bbl intraday and has since been consolidating in a $10 range.
One interpretation of the chart could be a Head and Shoulders top formation, with the neckline now at $100/bbl, but I believe there are several factors which go against this view. The first is the apparent strength of the chart. Since breaking through February’s resistance at $98.55/bbl, oil has traded well above this level for a sustained period. Were the market really topping out, I would have expected a quicker fall. The lowest post-break support has been no worse than $99.65/bbl. As a general rule in charting, when you see new support form well above former resistance, with no overlap, you should assume this is a very bullish market. The second reason for not trusting the Head and Shoulders scenario is the rising 200MA at $97.38/bbl. This appears just above the stop loss I have assigned to this call.
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Zak Mir’s Monthly Pick for November
“Oil has looked like it’s been gearing up for a move higher now for a while and a retest of August’s resistance at $110/ bbl is my target.”
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Zak Mir’s Monthly Pick for November
Ideally I would like to see no sustained price action below the 200MA from this point forward. The best case scenario would see oil find a floor at the bottom of the April trend line at about $100/bbl. This might prove to be a little ambitious, but it looks like the retreat since the end of summer should have taken up the slack. Were I to be wrong in my assessment of this market and the 200MA give way at any point by the end of this year, this would cause me to adopt a completely different stance towards crude. Such a break to the low side would suggest fundamental problems within the market and that 2014 could be a difficult year for prices. However, for the time being my expectations are fully geared towards the upside, and a recovery from $100/bbl taking us back up to $110/bbl.
Recent Significant News Oct 17th – (Reuters) U.S. oil prices settled at their lowest level in more than three months on Thursday as stockpiles in the Cushing, Oklahoma oil hub began to reverse a month-long decline, and as signs of progress in talks over Iran’s nuclear program also pressured prices. European Brent ended the day with the biggest one-day percentage loss in one month. Oil lost ground as some dealers fretted over the economic fallout of the partial U.S. Government shutdown of the world’s largest oil consumer, even after Democrats and Republicans in Congress reached a temporary funding agreement. A combination of rising global oil supplies and weak refinery demand due to seasonal maintenance also weighed on prices. Oil stocks at the Cushing, Oklahoma oil storage hub rose by 836,798 barrels in the week to Oct 11th, data from energy intelligence company Genscape showed, while industry data from the American Petroleum Institute indicated Cushing stocks rose for the first time since early July. October 17th – (Channelnewsasia.com) Global oil prices rose modestly after China reported healthy economic growth, raising hopes for stronger energy demand in the world’s no. 2 economy. New York’s main contract, West Texas Intermediate (WTI) for delivery in November, closed at $100.81 a barrel.
China, the world’s biggest energy consumer and oil importer, said that its economy expanded 7.8 percent year-on-year in July-September, snapping two quarters of slowing growth. The dollar fell especially against the euro as US bond yields eased after the US Congress reached a deal to fund the Government and raise the nation’s borrowing limit, averting a potentially devastating debt default. Citi noted that the market remained well-supplied “with robust US production growth and seasonally weak refinery operating rates leading to rising inventories.” October 14th – (Aljazeera America) Even amid the recent surge in oil production, the U.S. economy won’t escape from ever-fluctuating international oil prices anytime soon, according to analysts. Despite “improvements in its oil security, the United States would remain far from being truly insulated from the high and volatile oil prices characteristic of the global oil market” said Securing America’s Future Energy (SAFE), a nonpartisan group aiming to lessen America’s dependence on oil in an Oil Security Index. While the U.S. is moving toward self-sufficiency, its oil consumption is the highest in the index at 1.7 gallons per capita each day. And it seems unlikely that the U.S. will meet its own energy needs in the short-term, despite the domestic production that could rise over the long-term by methods like hydraulic fracturing. Oct 1st – (Reuters) Oil prices ended lower, extending losses after the market closed as U.S. politicians continued battling over how to overcome a budget impasse that shut down Federal agencies and programs. The U.S. government began a partial shutdown for the first time in 17 years which is largely expected to crimp demand in the world’s largest oil consumer as nearly one million workers go without pay. While analysts predicted a swift end to the Government shutdown, commodity markets were less certain. Gold lost nearly three percent on speculation of forced liquidation by a distressed commodities fund and selling related to fund rebalancing. The White House scoffed as the Republican-led U.S. House of Representatives offered legislation that would fund parks, veterans and the District of Columbia. U.S. Senate Democratic leader Harry Reid said Republicans must agree to open the Government before Democrats would consider their latest offer to end the budget stalemate.
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Zak Mir’s Monthly Pick for November
Fundamentals In many ways the market for crude oil has been the mother of all conundrums in recent years. While global growth has stuttered, the price of oil has remained consistently high. Gold collapsed, yet oil went higher. Trying to explain the vagaries of the drivers of this market could send a writer mad! Thankfully I like to keep things simple and I have my charts to fall back on. Two of the big fundamental questions at the moment are whether China will experience its soft landing, and has the Eurozone really put its recession behind it? Assuming the answers to these are positive and with a return to a state of normality in America, then the foundations should be in place for a rally from $100/bbl. The alternative view is that this is indeed the end of the line for oil bull. Tensions between Iran and America seem to be cooling and the political upheaval in Syria and Egypt looks already priced in. In fact, I recently read a piece which concluded “no one wants to be the idiot who buys crude oil at $100 just before it collapses.”
I have to admit that referring to crude as being on the “cheap” side in its current triple digit form is not as easy as it was earlier in the summer. However, going into the end of 2013 with the prospects of a calmer world and China reaffirming its long-term growth story, the fundamental glass should remain half full rather than half empty. I have had to take a risk in writing this piece, as I’ve submitted it ahead of October’s delayed nonfarm payrolls report, due in a few days. If there is a nasty surprise there, this could be another case of bad news being good in that it will likely further hold-up the Fed’s plans for tapering. This would be positive for equities and commodities such as oil. So for now, my advice is to buy any dip in this market as long as the floor of the recent range holds.
CHART - CRUDE OIL
November 2013
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Robbie Burn’s Trading Diary
ROBBIE BURNS’
OCT TRADING DIARY New issue fever’s been hitting the market! Bee Gees’ fans altogether now: “New fever, new fever, you don’t have to do it. But it might be worth it...” Royal Mail soared after its launch on the market — I’ve had a decent £400 profit on mine so far, even though I only got the tiny amount we were allowed. We must all thank business guru Vince Cable for getting the pricing just right — for us smaller investors! How can the silly old duffer have possibly thought it was only worth 330p? Good old Vince, you’ve gotta put him in the category of a real business guru along with Gordon “sell gold at the bottom” and “no more boom and bust just before the bust” Brown! When I owned a busy cafe many years ago I always thought I wouldn’t like this great country being run by someone who couldn’t run a cafe. I can just imagine the duo Clegg & Cable (good name eh?) running it. I guess Nick would charm the female clientele, but you can imagine them making a total hash (as in brown!) of it. “That was two medium lattes Vince... come ON get a MOVE ON!” Anyway, enough of this pathetic, weird rambling… Not that you read any of this, do you? You’re scanning down to see which companies I mention; you won’t do any research on any of them but just punt them, right?
Anyway, I haven’t sold my Royal Mail as yet, though maybe by the time you read this they’ll be long gone. It takes the bods at SBM around two weeks to publish this article after I write it; I mean how long does it take to cut and paste this? ;-) (editor interject — I wish it was that easy!)
It’s not just Royal Mail that’s been floated recently however, there are loadsa floats around. Indeed, the market is float crazy!! Float, float on, groovies.
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Robbie Burn’s Trading Diary
Now, among current and upcoming floats there’s going to be the good, the bad and the downright ugly. Here are my top five of what I think might be good floats. Of course they could turn out ugly…
1 Arrow Global This one has just listed on the market in the low 200s — it’s a debt collector, yes, the equivalent of the big guys who come round your house to take your TV if you lost all your money spread betting (told you not to punt oil companies!) Very fast-moving profits for this one: 55% rise in revenues to end June this year and looks very good value to me.
2 Applied Graphene Materials
Probably floating in November, Graphene’s a new type of material expected to revolutionise medicine and manufacturing possessing light but strong and conductive properties. ‘They’ reckon interest in Graphene is growing, but up till now it hasn’t taken off as it’s been hampered due to being hard to produce efficiently and to scale. The company reckons the listing will raise £10m to develop it to the scale needed. So, it could be the next big thing. Or it all might fizzle out. One of those ones where it might be worth having a nibble, but you should realise that risks are there.
3 Merlin Entertainments
This company operates all those vile theme parks that us poor parents get dragged to: full of fat families eating well over-priced crap food. But, that is good news for us canny investors! They operate horrible parks like Legoland (hell), Chessington (really vile), Sealife (boring) and The Eye (which is actually brilliant).
Interesting to see whether any of my comments get through the SB Mag censors. What happened to free speech? (editor interject 2 — you know this is the most controversial publication around that really does tell it as it is. Feel free to rant Rob!!) They’ve had a good year with revenues — up over 11% and plan to build more tedious parks all over the world so that more parents can spend a fortune entertaining our spoilt children. The more overpriced crap they stuff in their fat gobs, the more money us investors will make. Bring it on! Load me up with high margin pizza and pasta! Watch out though, the shares could be a roller coaster ride (geddit?)
4 Just Retirement
Afraid we all get to just retire in the end, well except us obsessed traders. I’ll be on my death bed... don’t take my laptop away, just one last trade before I go...! Xcite Energy is definitely going to go up one day... Lol! This one provides annuities and equity release lifetime mortgages. Yes, it is all horrible and I don’t want to dwell on it — quite depressing — but it is probably going to be a good investment. “Till death do you part” when the government will step in and tax any profit you made on it. The bastards (editor interject — allowance 3, that’s your lot now!).
5
Kromek
Just listing as I write this. It develops high performance materials and products for radiation detection. Plenty of markets for this including detecting explosive materials for airports and identifying cancerous materials. I rather like it as its markets look good. About 59p to buy as I write, but hoping to get it a little cheaper than that.
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Robbie Burn’s Trading Diary
“The government will step in and tax any profit you made on it. The bastards!” I’m hoping all these should have plenty of upside, although not quite to the same extent as Royal Mail (they don’t all have Clegg & Cable at the helm). Royal Mail was an easy one to spread bet. Some of these might be a little trickier as it can take spread firms a few days to make a market in them.
And also you need to look at the valuations and decide for yourself whether they are too hefty or not. One float coming up next year is one I am going to stay clear of. Poundland. I mean, come on, it can never put its prices up. What sort of investment is that?
However, often it can be best to wait a few days for the price on these newbies to settle.
See ya’s next month!
November 2013
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November 2013
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Patel On Markets
Alpesh Patel Alpesh Patel is the author of 16 investment books, runs his own FSA regulated asset management firm from London, formerly presented his own show on Bloomberg TV for three years and has had over 200 columns published in the Financial Times.
Patel on Markets
US Dollar outlook for the coming period and how it will affect major currency pairs It has been a rather busy few weeks for the US Dollar as it has been at the forefront of everybody’s attention when daily news headlines became more and more panicked. The American currency was hit heavily in September when the United States Federal Reserve Bank decided not to taper its asset purchases program. They cited a slowdown in fiscal recovery. The market thought that tapering was a “done deal” and was caught by surprise by this latest policy ‘can-kicking’. A few days later and it was the turn of our friends the politicians to deliver a blow to the dollar. Not only could the Republican and Democrats not agree a deal on the Federal budget, which led to a shutdown of government offices, they also grossly mishandled the latest debt ceiling row. Even though a deal was reached, in the two weeks that the shutdown occurred up to 0.6% could have been shaved off GDP according to Standard & Poor’s.
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Patel On Markets
November 2013
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Patel On Markets
So what will the future bring for the world’s reserve currency? To answer this question there are three important factors to consider: the Fed’s intentions with regards to tapering; the next round of political deliberations on the debt ceiling, and the succession of Janet Yellen as Bernanke’s replacement in the hot seat at the Federal Reserve. It is perhaps easiest to begin with the third of these factors. President Obama’s decision to nominate current Fed vice-chair Yellen to replace the retiring Ben Bernanke signals concerns about the fiscal recovery of the economy. Yellen is a known dove and her views on sustained monetary policy support are well known. It is more than likely that Dr. Yellen’s appointment as chair of the Federal Reserve means a likely continuation of Quantitative Easing. Tapering could well be further down the road than many still seem to expect. Moving to the debt ceiling debacle, the latest “solution” agreed by America’s politicians is nothing more than a temporary fix. The bill that was passed only funds the government until January 2014 and it is projected that the debt ceiling will next be breached as soon as early February. The next round of arguments will almost certainly begin in the New Year, destabilizing the dollar once more. Finally, looking at the Fed’s stance towards tapering, their role has been made much more difficult by the shutdown. This meant that a host of data releases were delayed, so it is hard to see how they will be able to form a view on whether or not tapering is required before the end of the year. My personal feeling is that the Fed won’t act in 2013, which will add to further dollar weakness.
How does this affect the major currency pairs? Well, the euro seems as equally troubled as the dollar and it is only rising thanks to American weakness. The eurozone area is not showing great signs of improvement and this could indicate a bumpy road ahead. Try to capitalize on short-term swings caused by economic data releases and keep an eye out for developments in the all-important US employment and housing reports. These data sets could move the pair over the medium term. Meanwhile Britain’s recovery signals better days ahead for Sterling. It is true that the British economy had a few data misses, causing Cable to fall to $1.5900, but the outlook is brighter. Optimistic predictions from policy makers and other encouraging data have combined to push the pound higher. It now looks on course to regain previous highs and maybe even break through these. Finally, the most volatile pair of the majors is dollar/ yen. Abenomics is in full force and yen weakness is likely to continue to surpass dollar uncertainty over the medium term. This pair looks destined to retest ¥100 level in the coming weeks. For daily updates on my views over the markets and interesting trading ideas and suggestions you can visit my latest financial site: www.InvestingBetter. com and subscribe for my premium NewsletterPro service. NewsletterPro is a daily financial newsletter prepared by market professionals, aimed at serious investors and traders and delivered to subscribers every morning by 7.30 am. Alpesh Patel www.investingbetter.com
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November 2013
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Small Cap Corner
SMALL CAP CORNER
ZyTRONIC (ZyT) IN FOCUS By PAUl SCOTT OF EQUITy ACTIvE
In this issue of SBM, we discuss one of our recent picks within our Titan Small Cap managed spread betting fund. We are also going to demonstrate our process for researching shares at Equity Active, whose research is used by Titanip.co.uk.
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Zytronic (ZYT) in focus
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Small Cap Corner
Dec 2012 Meeting with management Zytronic is a specialist producer of high end touch-sensitive display screens for things like vending machines and ATMs. The company had an exemplary track record until May 2013, as can be seen from the chart below (courtesy of Stockopedia):
Zytronic performance measures
Look at the remarkably steady growth in EPS from around 5p in 2007 to 22p in 2012. In December 2012 I felt it appropriate to meet management of the company and so had lunch with both the CEO and FD when they presented solid results with turnover flat at £20.4m, but higher profit margins which drove a 21% increase in EPS to 22.2p.
Fully priced at 318p My conclusion at the time, published on my blog (paulypilot.blogspot.co.uk) on 11 Dec 2012, was that while I liked the company and the management (the PER of 14.3 looked “about right for a solid growth company in a nicely profitable niche”), there was a slight question mark over the outlook statement which said that “current trading is behind the equivalent period last year...”, but management assured me that all was well with a strong pipeline of orders.
All investing is about risk/reward, and in this case I decided at the time that there was not enough upside potential in the valuation to justify taking the inherent risk of buying a small cap which might at some point warn on profit (an ever-present risk with smaller companies).
Profit warning in May 2013 It was a good decision not to buy at 318p as the shares plunged in May 2013 on a profit warning. See the 12-month chart to the right, with the comparison (beige line) being the SMXX Index (Small Caps excluding Investment Trusts, being my preferred measure):
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Zytronic (ZYT) in focus
12 months Zytronic share price chart
It was a pretty bad profit warning too, with delays to orders meaning that “the result for the year will be very significantly behind market expectations, with year to date profitability more than halved.” Clearly this dented management credibility, but once again I spoke to them and they gave me a lot of colour about the situation, making me feel reasonably comfortable about their explanation of the gaps in the order book and that they were not in fact symptomatic of deeper problems.
Signs of Recovery However, it still seemed too much of a ‘shot in the dark’ for us, even with the share price now trading around 150-160p over the summer of 2013. EPS forecasts had come right down from about 25p to under 10p, as this useful Stockopedia graphic demonstrates:
Zytronic Broker Forecast Trend
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Small Cap Corner
“Experience has taught me that assuming a recovery will happen can be a dangerous mistake.” And so, our thinking was that at 150-160p the shares were not actually that cheap with the PER on reduced forecasts still in the mid to high teens. However, if management could recover the situation and bring EPS back towards the previous levels of 22p or more, then the shares would be cheap.
Under Titan’s strict dealing policies, staff and advisers are barred from trading in any stock for 48 hours either side of Titan dealing, so personally I was not able to take advantage of this share opportunity, although I do have some of my own money in the Titan Small Caps Fund so benefit that way!
We decided to sit and wait. Experience has taught me that assuming a recovery will happen can be a dangerous mistake… It’s generally better to wait for a positive sign that recovery is underway before jumping in, even if that means having to pay a little more. So we sat and waited…
What Happens Next? Our view is that Zytronic’s trading is recovering now, and while there are no certainties, the scenario that we believe most likely is that its earnings will continue to recover. We believe that there is potentially exciting upside from larger, curved, and multi-user touch screens that they are developing for the vending and gaming sectors. These are not commoditised products, they are bespoke. Once developed, orders tend to run for several years and be more predictable. To us, they just hit a bump in the road in 2013 because gaps opened up in the order book. The share price weakness in the summer of this year gave us an opportunity to buy into a fundamentally good company, in a profitable niche, at an attractive price. There is also a 5% dividend yield, which has been maintained, although it has to be said that this dividend is only just covered by earnings in 2012/13.
Positive Trading Update That positive sign came on 9 Oct 2013 when, on reading the Zytronic RNS announcement of that day, I quickly contacted the Fund Manager at Titan and briefed him on the situation. He agreed with my analysis and decided to put the Fund into Zytronic, and I was delighted that he was able to get us in at 173p on the opening bell. A few minutes later the price had risen about 10%, so we secured an instant profit for our clients by being prepared, and moving fast — a hallmark of all good traders.
The company also passed our stringent balance sheet testing which greatly reduces risk, as a company with cash in the bank can trade through a rough patch. Clear disclosure: Titan IP Small Caps Fund holds a long position in Zytronic (ZYT). Disclaimer - Spread betting involves the use of leverage and so could result in the loss of some or all of the funds invested.
At Equity Active we are fully prepared with research files on about 500 UK listed small caps. When news is published we can quickly digest and act on it while our clients are free to do other things. We sort the wheat from the chaff so they don’t have to — especially appealing to people who are interested in the markets but simply don’t have the time to do the research.
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0203 021 9100 www.titanip.co.uk
November 2013
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Travel Corner
TRAVEL Corner
Late season sunshine! By Richard Jennings
Well, it’s that part of the magazine again where I get to indulge my inner travel writing bug and regale you with stories of where Mrs SBM and I have been in recent weeks!
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Kefalonia in autumn
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Travel Corner
For those readers who are not encumbered by children, and thus have flexibility as to just when they can travel, it will likely come as no secret that September and October in the Mediterranean are probably the most sublime months to visit. The water is at its warmest, having absorbed a full seven months of sunshine, the crowds are gone, accommodation costs are much cheaper, flights are less full and airports are less stressful. There is none of the, sometimes intense, humidity of July and August. In short, if you could choose a time to enjoy the best of the Med, then the “secret season” of the latter half of September to the middle of October is the only time to go. This year we decided to return to the Greek island made famous by the book (and later film) Captain Correlli’s Mandolin. The war time romance story was set in Kefalonia, which is also one of the greenest of the Greek islands — testimony to the copious amounts of rain it receives over the winter season.
The most cosmopolitan of the Kefalonian resorts is Fiskardo, which is situated in the North East of the island and requires you to navigate a perilous drive around hairpin bends suspended hundreds of metres above the ground. This is said by someone who hates heights, so try to avoid any flight that lands in the dark if you are driving yourself, and simply hope that it doesn’t rain!
“September and October in the Mediterranean are probably the most sublime months to visit...”
Even with the woes facing the Greek economy, like the other so called “sophisticated” Greek islands, Santorini and Mykonos, you’d be hard pressed to notice that there was a deep and severe recession ravaging Greece’s people. Cocktails still cost 8-10 euros and most of the quality accommodation was almost fully booked, even so late in the season. The food in many of the restaurants is fantastic traditional Greek fare, although I must admit, as a wine lover, that the Greek wines are a bit of an acquired taste. Even so, there is a wide variety of places to eat in Kefalonia, including a cracking Thai restaurant somewhat perplexingly called the Lord Falconer! Sitting around the harbour in the early evening as dusk falls and the candles are lit, and looking out over the calm bay at the gently bobbing fishing and sailing boats, is an incredibly relaxing experience.
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Kefalonia in autumn
“if you are wondering just where to go late in the season, then do yourself a favour and avoid the well-trodden path of the Canaries and take a look at Kefalonia.” The harbour is, in fact, a popular sailing stop off point and there seemed to be a number of holiday companies offering sailing tuition holidays (definitely on my hit list when retirement finally beckons). It was mildly amusing watching the novice sailors trying to park their boats for lunch, I can tell you!
For those looking for the best standard of self-catering villa accommodation then we can highly recommend the Fiskardo View Villas (link: http://fiscardoviewvillas.com/) that are situated in an elevated position on the periphery of the centre of the village. They enjoy commanding views over the harbour and out to the island of Ithaca. Hotel recommendations include the Emelisse and Almyra hotels. The Emelisse hotel is a bit more of a walk out of the village, but is also well situated higher up from the shoreline and has its own private, although rocky, beach. A little cheaper is the Almyra hotel that, not surprisingly, is even more of a trek up the hill. Of course, the trade-off for staying here is a dramatic view into the distance. The hotel provides transport, at designated times, down into the village as well.
So, if you are wondering just where to go late in the season, then do yourself a favour and avoid the well-trodden path of the Canaries and take a look at Kefalonia. This stunning island certainly comes with SBM’s approval, so much so, in fact, that we have already booked to return during the other “secret season” — from the end of May to the middle of June. We are counting down the days already!
Boat hire is readily available in Fiskardo and Mrs SBM and I took ourselves off on two separate days down the coast to drop anchor in a number of the secluded bays (easy..!). These were wonderful opportunities to indulge in some swimming and general whiling away of our time away in this beautiful and secluded corner of the Earth.
November 2013
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Commodity Corner
commodity corner
all in on gold mining stocks! By richard jennings, titan investment parners
Prior to printing this month’s edition of SpreadBet Magazine, our proprietor, Richard Jennings, and who has now moved onto pastures new running the Titan spread betting funds (www.titanip.co.uk), made an extremely bold call on our website’s blog. In fact, this call was so bold we felt it merited a wider audience. It is a dangerous stance for a fund management house to go out “in print” as it were and state that we have gone “maximum bullish” on a sector that remains resolutely out of favour. If we are wrong, then people can point back at the statement with glee and say “fools”; while if we are right, then we simply collect the returns for ourselves and our clients with no real wider recognition. The brave stance is fraught with risk.
Music to our ears!
However, that is precisely what our game is here at Titan — to analyse the risk and reward profile of our intended investments. This involves anticipating the major market moves that in our minds both the “lemming analysts” and immutable human elements of greed and fear miss. We understand this fundamental investment principle intently — without risk there is no reward.
When the boat is tipped so extensively one way, as it is now, and yet the background fundamentals are ironically immensely supportive and sector valuations screamingly cheap, it is, usually, the buy signal of all buy signals.
In recent weeks we have been speaking with many individuals — fellow industry participants, traders, potential investors and even our own staff members and magazine contributors. You know what the predominant theme is? The consensus is that investing in gold and gold stocks is folly. I don’t know of very many bulls of this sector today, least of all those with their own money on the table.
The only party that we spoke to that actually seemed to grasp that stocks in this sector are currently generationally cheap (see charts on the next page with explanations) was a seasoned fund manager from Investec of (being polite!!!) “senior years”. He has seen various market cycles and recognises value when he sees it.
I personally invested through the dotcom boom and the early part of the millennia when tobacco and so called “old economy” stocks were ragingly cheap and yet you couldn’t sell them for toffee. A man that many modern day fund managers could learn a lot from, and has now sadly departed, Dr Tony Dye, could see the value. Known as Dr Doom (and profiled recently in this very magazine) he stood pat on this unloved sector and bought these stocks shunning the “booming” internet bubble. History proved him right, but he had to sweat along the way (he also lost his job at Phillips & Drew in the process — irony of ironies!).
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All in on gold mining stocks
“When the boat is tipped so extensively one way, as it is now, and yet the background fundamentals are ironically immensely supportive and sector valuations screamingly cheap, it is, usually, the buy signal of all buy signals.� November 2013
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Commodity Corner
Patience is required in investing. If you learn nothing else from what we try to teach, this is the fundamental lesson. And that doesn’t mean holding for a few days (ask Prince Charles!). If you really want to profit from this generational opportunity, then take a two year timeframe. There could well be dips between now and then. These might even cause many to question our judgement. However, like Dr Dye, hold firm. We are planning to. The fruits of this call will be there for all to share as macro events play out. Here’s a link to our latest PDF illustrating just why we are fundamentally positive on the gold mining spectrum: http://www.titanip.co.uk/wp-content/ uploads/2013/07/PREC-METAlS-PDF.pdf if you want to read our current thinking.
I want to draw your attention to the two charts below. The first one is the ARCA Gold Bugs Index (a spread of gold related stocks) relative to the actual price of gold. It is pretty unequivocal in illustrating that they are the cheapest they have been since the start of the bull run that began in 2000. One of three things is likely to happen here. Either (1) the gold price declines further (which we do not expect) and the gold miners will largely tread water, or (2) the miners will rise in price while gold continues to plateau or modestly rises, or finally (3) the gold price rises and the miners rally hard. We expect outcome 3.
HUI GOLD BUGS INDEX SINCE 1997
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All in on gold mining stocks
Now take a look at the GDXJ (junior gold miners ETF chart) over the last three years. Note the divergence between the gold price (the orange line to the top) and the sector. While the gold price has actually been flat over this timescale, the sector is down nearly 80%. That is some underperformance and, of course, correlates to the chart above. What this shows us, however, is the collection of positive price action signals as detailed in the chart:
2 YEAR GDX CHART
When sentiment is at an extreme, you are a lone voice and valuations scream buy. Strangely, to many this seems to be a “risky” proposition. To us here at Titan, we would argue that in fact buying stocks like Netflix on 30 times book and triple digit PE’s represents the real risk, and that we are at an inflection point in the markets now. Those of strong constitution, experience, pocket depth and also patience, we expect will be handsomely rewarded on an 18 month timescale in the gold miners arena. In our Precious Metals fund — the only spread betting fund in existence dedicated to the precious metals sector — we hold a diversified portfolio of related stocks, options and futures positions. To find out more please visit www.titanip.co.uk/funds
November 2013
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School Corner
school corner using standard deviation to assess risk by Thierry Laduguie of e-yield Standard deviation is a well-known mathematical function which demonstrates how much variation exists from the average. For investors there is a simple to use application of this method, using a basic Excel spreadsheet, which helps demonstrate how much risk a portfolio of shares or fund manager engages in.
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Using standard deviation to assess risk
“The standard deviation measures the level of risk.” In financial markets we assume that there is a positive relationship between the risk of a security and its expected return. The higher the risk, the higher our expected return from the security. The standard deviation measures the level of risk. When used to measure the risk involved in a particular portfolio over a given period, standard deviation is a measure of the dispersion of returns around the average return over this period. In other words, it helps track volatility.
Copy the data above into a worksheet in an Excel spreadsheet. Into a cell under the “% Change” column enter in the formula “=stdev()”. Within the brackets select the cells from “1.2%” to “0.2%.” Hit enter and you will see the standard deviation in this sample is 0.01 or 1%. Now, if we take a second portfolio with sharper monthly variations, the risk will increase. Portfolio B has the following monthly returns:
If the returns had a high standard deviation over a chosen period, it means that there were large swings in the returns of the portfolio, indicating large movements in the underlying prices. And as we all know, large movements suggest greater risk. Alternatively, if the portfolio had a low standard deviation over the same period, we could say that the uncertainty and therefore risk associated with the securities held in the portfolio were smaller. Generally speaking, an investment is risky if the standard deviation of returns is high. Example: If we set up an Excel spreadsheet to calculate standard deviation (risk), the formula is STDEV. For example, portfolio A has the following monthly returns: Repeat the same steps used for Portfolio A and you will see that Portfolio B has a standard deviation of 0.043 or 4.3%. This is higher than Portfolio A. What we can say, therefore, is that Portfolio B is riskier than Portfolio A. This does not mean that one should not invest in Portfolio B; the higher level of risk should be compensated by higher returns. To help make a decision what to invest in, it is wise then to look at the average returns. If we calculate the average monthly return for Portfolios A and B, we obtain 0.6% for Portfolio A and 1.1% for Portfolio B. The question an investor would ask is: is it worth taking more risk by investing in portfolio B in order to get a higher return? In this example an investor could be tempted to take more risk and to invest in Portfolio B as Portfolio B has returned nearly twice as much as Portfolio A.
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School Corner
However, to gain double the return, the investor would also take four times the risk in choosing Portfolio B over Portfolio A. The truth is the decision to invest will be based on the investor’s personal circumstances and his/her risk preference. What is clear is that the standard deviation is a good indicator of the variability of monthly or annual returns and makes it easy to compare investments. For example, if we were comparing two portfolios with identical annualized returns, the portfolio with the lower standard deviation would be more attractive.
A technique typically used to illustrate the risks taken by a fund manager in managing a portfolio is to plot the realised return and standard deviation of the fund, plus the realised return and standard deviation of any relevant benchmark portfolio on a graph. A fund manager’s performance would be considered satisfactory if the fund manager achieved a higher return than his benchmark with the same amount of risk.
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November 2013
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Options Corner
options corner a low risk, high return play on silver standard resources By Richard Jennings Titan Investment Partners It’s been a while since there was an options corner in Spreadbet Magazine. In this issue I thought it would be a good idea to cover a sector which here at Titan are very keen on - Precious Metals.
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A low risk/high return silver play
“The problem of course with a traditional pairs trade, is that unlike a conventional directional play, you can actually lose money on both sides if your long goes down and your short goes up — something that ‘sod’ and ‘law’ generally dictate happen more often than not!.” The idea this month is essentially a ‘pairs’ trade, but one that is constructed via options instead of the actual physical stock. We’ve used options to lower the risk profile of a conventional long and corresponding short position. The problem of course with a traditional pairs trade, is that unlike a conventional directional play, you can actually lose money on both sides if your long goes down and your short goes up — something that ‘sod’ and ‘law’ generally dictate happen more often than not!
JANET YELLEN
One stock that we hold in a variety of our Titan funds is Silver Standard Resources — a US listed silver miner with operations in both North and South America. The company also mines zinc and is already producing around 8 million ounces of silver per annum. This is even before their new mining developments come on stream, in particular in Mexico. The company actually has more proven and probable silver reserves than any other silver mining company. It also has the second highest silver reserves in the sector, trailing only Fresnillo.
For those readers who are not familiar with our underlying bullish stance towards the precious metals landscape, this link here is a good place to start to gain an understanding: http://www.titanip. co.uk/wp-content/uploads/2013/07/PREC-METALS-PDF.pdf In essence, we believe that global central banks know that they are well and truly cornered from a debt payback perspective, and they have no choice but to attempt to inflate away their sovereign debts. Witness what Japan, the Fed and the UK have all been doing during the last five years since the start of the Financial Crisis. Any attempt to curb the wanton printing of money will likely be met by either a stock market collapse followed by even more printing to stave off a serious demand crunch, or a material rise in bond yields. The Fed in particular has stuck itself in a box with no possible exit and the arrival of uber-dove Janet Yellen is unlikely to provide any change in direction. It is a little like a car careering at 200mph into a wall that is only yards away — no matter what you do, there is an inevitable impact as the course is now set. The only question is the degree of carnage in the end.
Fundamentally, we believe the stock to be exceptionally cheap and, as we can see from the chart overleaf, it has had one hell of a fall from grace during the last three years with the stock pricing declining by over 80%. We actually turned a nice profit on this company several weeks ago, selling the stock towards the $9 mark after buying in the $6’s — illustration indeed of the type of returns that can be achieved when getting your timing right.
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Options Corner
Reasons for the fall back towards five year lows are, of course, the continued decline in the price of silver as well as fears over their ability to finance their key Pitarilla mine in Mexico. It has to be said, though, that the stock was trading higher when silver was priced around $18.70 compared to the current price of $21.30, at the time of writing. The chart below compares SSRI’s price with that of silver over the last four months:
4 MONTHS SSRI V SILVER CHART
SSRI has also been hit by a couple of downgrades from our friends the “anal”-ysts which to us, after falling near 90%, likely spells opportunity and not a reason to sell. Finally, SSRI holds a near 20% stake in fellow silver miner Pretium (PVG), which reported in recent days that its independent geological auditor had resigned and sent its stock price down by almost 40% in a day. So, why do we like SSRI? Well, in order to reap the real returns out of stocks, the time to buy is at the point of maximum pessimism and we would argue here at Titan that it doesn’t get any bleaker than the present! At the current price of just $5.30 SSRI is priced quite frankly at liquidation value. If anything goes right on various fronts, not least should our bullish view on silver prove right, then this stock could rally very sharply indeed.
From a technical perspective, the stock is now trading far from its key 10 & 40 week moving averages which are centred on the $8.40 mark. Moves away from the averages of this magnitude generally see some type of retracement towards them unless the company is fundamentally broken — usually due to serious debt issues which is something that certainly does not apply here with SSRI and its c.$390m cash balance (last reported accounts). In fact the liquidation value of SSRI is likely slightly higher than the current stock price.
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A low risk/high return silver play
We can see in this chart just how the price of SSRI has diverged dramatically from the underlying silver price during the last two years:
5 YEAR SSRI V SILVER CHART
November 2013
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Options Corner
So how do you play this via options? One strategy that would effectively deliver you gains IF the view of a rebound in SSRI shares is right, and would also limit your downside in the event of silver continuing to fall would be to build a position comprised of the following:
1
2
Buy SSRI $6 Mar 14 Calls while selling the $6 Dec 13 Puts and buying the Dec $4 Puts. Net cost (at time of writing) on this is actually a credit of around 40c. With volatility so high it pays to sell put options to offset against the call cost. Of course, we are really creating a synthetic long position here but covering our downside should we be really wrong (always possible!) and silver collapses to $15/oz or below. The downside is covered between now and the Dec expiry. Depending upon your view at the time of the expiry you might sell another similar Bull Put spread. Your worst case downside here is $1.60 ($6 - $4 + the net credit). Your upside is unlimited between now and March. The other side of the leg is the silver leg. Remember we are expecting (I) SSRI to rebound independently of a rise in silver and/ or (II) to narrow the major underperformance v. silver over the last two years, as we saw in the chart above. So here we would simply look to sell what is called a Bear Call spread. We would sell the silver $23 SLV Apr 14 calls and buy the Jan 14 SLV $25 calls, reasoning that if silver rallies back towards six months highs that (a) it is likely to continue to go on by virtue of momentum and (b) SSRI is likely to follow or even outperform.
The beauty of this strategy is that we are capping our losses at the difference between the call spread ($2) and the net credit (circa 65c) and so the net loss is $1.35c (excluding residual time value in the Apr 14 Calls at the point of the Dec expiry). Of course, unless we replace the Jan $25 Calls after their expiry, then we have unlimited loss on the short $23 calls until the Apr 14 expiry. Remember also, if you do follow this strategy, that you have to get your money weighting correct. That is you must ensure that the value of (1) is equal to the value of (2) on an underlying basis. SSRI options are in lots of 100 as are SLV options, and so with the SLV underlying price at $20.50 and SSRI priced at $5.30 you would have near as damn it four times the number of options in SSRI v SLV. To be ultra-precise you should, in fact, delta adjust. With earnings being released on the 5th November (just days after this piece gets published), it might pay to implement half the position ahead and half post these results for the ultra-cautious, and to take out the earnings risk in this strategy. If you’d like to expose yourself to this type of trading strategy then visit us at www.titanip.co.uk for more details on our funds.
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The trend is your friend‌
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Taurus – The £800m Pile of Bull
TAURUS
The £800m Pile of Bull By Simon Carter
Almost thirty years on you could say that the City of London was always backing a loser when they named a project TAURUS. What will have seemed like a clever and funny idea (naming the system after the most famous ‘bull’ of all) was surely a harbinger of good fortune; looking back, they were doing no less than tempting fate. But to understand how a computer system that was only ever supposed to cost £1m, and was set to revolutionise the London Stock Exchange, wound up costing closer to £800m before being unceremoniously scrapped, you have to understand why the system was introduced and why the unique nature of trading in the UK meant it was doomed, from the outset. Ultimately the City was able to pull itself out of this mess with a little credit, but the whole episode remains an embarrassment to this day.
The move, too, to electronic trading meant that the ‘old’ London way of doing things was at best antiquated, and at worst an embarrassment. Trades would take weeks to settle in London (compared to just days in America and Japan) and the primarily paper-based systems were creaking under the strain. Cue the Transfer and Automated Registration of Uncertified Stock project, or TAURUS for short. The concept of a completely paperless environment, where lists of investors and their holdings would be stored in a database and share transfer would be as simple as two clicks of a mouse, seemed like a no-brainer. There wouldn’t even be a need for Share Certificates. All of that unwieldy paperwork would be a thing of the past. Millions would be saved. Unnecessary jobs could be culled. It would, in an instant, send the London Stock Exchange hurtling into the 1990s.
Following the ‘Big Bang’ of the mid 1980s, the London Stock Exchange was transformed as de-regulation led to unprecedented levels of trading on the market.
Excitement abounded. Brokers, custodians, registrars and major investors from over 280 institutions were to be linked by TAURUS. But very quickly TAURUS the bull turned into TAURUS the bear.
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Taurus – The £800m Pile of Bull
“the money that the Federal Reserve has “created” is in fact best described as “bank reserves.” November 2013
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Taurus – The £800m Pile of Bull
“Vista were effectively signing their own death warrant with each contract variation.” After a short tendering process, Vista Concepts won the contract to develop the system and their flagship product, the Vista database software, was to form the core of the London system. The software in its off-the-shelf format was simple but powerful, able to process efficiently online information in and out of databases. The system was good, but two major failings were just around the corner. First, the project was being run by committees who were made up of people who didn’t fully understand computers, their capabilities or, crucially, their limitations. Not only that, but the committees seemingly didn’t understand the importance of talking to one another. The second major failing was that Vista were too keen to please. Though the company took a lot of criticism in the aftermath of TAURUS, the simple fact is that Vista tried to do everything that was asked of them, no matter how difficult (or impossible) and how far that took them from their core product. OK, so Vista were handsomely recompensed for their troubles (£14m up from £1m for complying with requests), but they were effectively signing their own death warrant with each contract variation. After being conceptualised as a settlement system, the needs of the customer — read City of London, those 280 institutions mentioned earlier and the multitude of committees, not to mention ever changing legislation — the “finished” system wound up as a fully formed share registration and transfer system; just not a very good one. Eventually more than 60% of the original software was rewritten to the point where it was almost wholly unrecognisable from that which had been originally purchased.
As anyone with any software experience will tell you, such a major change meant that at each turn there were inevitable bugs and glitches undermining the system, and the project, at every turn. In an attempt to rescue the project and to give it some credibility, a timetable was produced in late 1991 detailing a number of milestones that would be hit on the way to TAURUS becoming a success. In that same document, there were a number of possible risks that needed to be avoided. Given everything that had gone before, it seem predestined that milestones would be missed, and further risks would be encountered. In the end, all but a handful of milestones were missed and almost every single risk became a realised problem. Although the problems with TAURUS were well known within the industry, it wasn’t until 1992/3 that it came to wider public consciousness with publications such as Computer Weekly and The Sunday Times running exposés. With the pressure mounting and the backlash in full flow, it was announced during 1993 that TAURUS would be scrapped, with the final cost running at £800m and the project ending in complete failure. Of course what followed was a period of wound licking, but the City of London did eventually walk away with some credit for stopping the flow of money towards a doomed project, and for not rushing into the next one. Eventually, in 1996, the CREST system was introduced. While emerging and improving technologies certainly helped, each of the lessons learned from TAURUS were implemented into a project which, after being taken over and rebranded as Euroclear in 2002, still thrives today.
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John Walsh’s Monthly Trading Record
TRADING ACADEMY WINNER
John Walsh’s monthly trading record Well, I’ve certainly had a busy October trading wise. As relayed in my column last month, I am going through a bit of a change in my approach, so each day brings with it new lessons about what I trade, how I trade and, perhaps most importantly, what I want from my trading. My newfound level of organisation is already starting to yield results, but I have a new idea to help me improve my focus. When I won the City Index Trading Academy last year I said to myself I would buy something nice to mark this achievement. I never got round to it. In recent weeks I was out with my girlfriend and planned to buy a decent watch (for me that is!). After browsing through the stores I didn’t come across anything that grabbed my fancy, however I did have a flash of inspiration. I thought to myself “Why not put future trading profits towards rewarding myself with an expensive timepiece?”
Too often we can find that the money we make is simply numbers on a screen. By rooting my performance in the real world I hope this will encourage me to perform better. And so the Rolex Trading Challenge is born! So how am I going to win my Rolex Trading Challenge? Well, as I’ve said in previous articles, I am now most interested in US stocks and have made these my sole trading focus. This month has been one hell of a ride for American equities, with all the madness that has come out of Washington.
What I really like about this idea is that it ties my trading performance to a real reward.
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John Walsh’s Monthly Trading Record
“However there are some guiding principles I would like to share. At heart I am a trader, not an investor. The Warren Buffet style of buy and hold isn’t for me. When there is profit on the table my rule is to take some.” In terms of what I have been trading, there are the stocks I mentioned in October’s issue, but I added to this group long positions in Facebook (FB), Under Armour (UA), Oasis Petroleum (OAS), Las Vegas Sands Corp (LVS), Comcast (CMCSA) and Kroger Co (KR). However, since scaling back, I now only have kept positions in Lockheed Martin (LMT), Comcast (CMCSA) and Kroger (KR). Overall for my new Rolex Trading Challenge I made 20 traders. 12 of these were winners, five were losers and the three mentioned above are still running. I fully expect to open new positions in the coming days.
Regular readers of my column will know that I have been playing around with stock scans to help me identify opportunities. So far I’m pretty happy with the results, but it’s still too early for me to write about the specifics of what I am doing. However there are some guiding principles I would like to share. At heart I am a trader, not an investor. The Warren Buffet style of buy and hold isn’t for me. When there is profit on the table my rule is to take some. Last month I mentioned that I had 14 positions. Since then, after some opening and closing, I ended up with 16 positions at one point, all of which were long and all of which were in US stocks. To be honest this was too much for me to manage (one of my lessons of the month!), and so I scaled back. After all, you don’t have to be 100% invested in the market all the time. It pays to keep some money in cash, in case things turn against you as they did for me on October 9th. On this day the market pulled back. I closed some positions and got stopped out of some others, but there was no major harm done. As the saying goes “Keep some powder dry.”
So this just leaves me to tell you how I will judge my Rolex Trading Challenge to have been a success. Quite simply my goal is to triple my account size. So far I am 11% up, which is reasonable enough, but I still have a long way to go. I am going to stick with the same trade sizes I used at the start, but I will need to do better in the coming months to achieve my 200% return. As for the downside, well, in reality there isn’t really any for me. Even if my Rolex Trading Challenge doesn’t work out, I might as well just go ahead and buy the watch anyway, lol! Please continue to follow me on Twitter @_JohnWalsh_ where I keep everyone up to date with my trades as and when I open and close them, be they a winner or a loser. Remember, you control the trade; the trade does not control you. John
November 2013
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Markets In Focus
MARKETS IN FOCUS OCT 2013
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Markets In Focus
November 2013
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SPREADBETTING
N T TIO EX I N ED IN HS T N O M
MAGAZINE
Released on Sunday December 1st 2013
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