SPREADBETTING The e-magazine created especially for active spreadbetters and CFD traders
N IO IT ED AY M
Issue 4 - May 2012
Evil Knievil’s how to short stocks Continued - Part 2
All your favourite columns including... Directors dealings, Dominic Picarda’s Technical Analysis & Robbie Burns features www.financial-spread-betting.com
What are they and how do you use them?
Special stock focus
Editorial Contributors Simon Cawkwell aka Evil Knievil Simon Cawkwell aka Evil Knievil lives in West London and has successfully navigated the markets for nearly 45 years. Although he started working life as a chartered accountant, he came to prominence with the collapse of the infamous Robert Maxwell’s affairs where he cleared £250,000 profit some twenty years ago - no small sum back then. His specialisation is short-selling and he is a self confessed inveterate gambler. One thing’s for sure he doesn’t pull punches and tells it as it is!
Dominic Picarda Dominic Picarda is a Chartered Market Technician and has been responsible for the co-ordination of the Investor’s Chronicle’s charting coverage for 4 years. He is also an Associate Editor of the FT and frequently speaks at seminars and other trading events. Dominic holds an MSc in Economic History from the LSE & Political Science.
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.
Reliance on content disclaimer Material contained within the Spreadbet Magazine and its website is for general information purposes only and is not intended to be relied upon by individual readers in making (or refraining from making) any specific investment decision. Spreadbet Magazine Ltd does not accept any liability for any loss suffered by any user as a result of any such decision. Please note that the prices of shares, spreadbet’s and CFD’s can rise and fall sharply and you may not get back the money you originally invested, particularly where these investments are leveraged. In comparing the investments described in this publication and website, you should bear in mind that the nature of such investments and of the returns, risks and charges, differ from one investment to another. Smaller companies with a short track record tend to be more risky than larger, well established companies. The investments and services mentioned in this publication will not be suitable for all readers. You should assess the suitability of the recommendations (implicit or otherwise), investments and services mentioned in this magazine, and the related website, to your own circumstances. If you have any doubts about the suitability of any investment or service, you should take appropriate professional advice. The views and recommendations in this publication are based on information from a variety of sources. Although these are believed to be reliable, we cannot guarantee the accuracy or completeness of the information herein. As a matter of policy, Spreadbet Magazine openly discloses that our contributors may have interests in investments and/or providers of services referred to in this publication.
Foreword Welcome to the fourth edition of Spreadbet Magazine. Well, it’s certainly been an interesting month, to say the least, what with the collapse of Worldspreads and a re-ignition of debt fears in the Eurozone, this time with Spain in the crosshairs making for difficult market conditions again. In the wake of the Worldspreads collapse, we have written a special piece this month on just what you need to know as a client with regards to your personal classification. After the collapse into administration of now 3 companies in recent years - Global Trader, MF Global and Worldspreads, we think that our readers should be made aware, as much as possible, of their client statuses and the implications of these. If there are any other suggestions as to what you’d like to see in our magazine please email me at : firstname.lastname@example.org. We particularly encourage letters/emails from our readers, and for each one printed we will send a bottle of (decent!) French red - another subject close to my heart! This month we conclude our special 2 part Evil Knievil piece on shorting stocks and also re-visit some of our stories on certain companies that we have written about so far this year including JJB, Groupon and Xcite Energy. I am also pleased to introduce another new contributor to you - Precogz, who have a unique way of analysing the markets. I’d recommend you visit their site - www.precogz.com - to see what they are all about. Our main article attempts to take a view on where we are in the never ending bull: bear market cycle. We, of all people, know that trading the markets is not easy, and so hopefully a true spreadbettor’s take on where we currently are will at least provoke thought amongst our readers, and maybe concentrate your views and help you with your strategy. I sign off with a few words to reflect on - leverage - it’s like alcohol - there to be enjoyed, but remember to control it! Profitable trading to you all. Andy
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Bull market continuation or impending bear market?
Large cap focus - HSBC
Research in Motion
Robbie Burns aka The Naked Trader
Evil Knievil’s guide to successfully shorting stocks
A FatProphets feature on the banking giant.
What you need to know and questions to be asked.
A Conviction Buy recommendation on the eponymous Blackberry maker.
This month we take a look at how to use calendar and ratio spreads.
InterTrader’s Dafni Sedari covers silver this month.
Our regular feature writer regales us with some trading wisdom.
Part 2 of our special feature by the Uk’s most feared bear raider.
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School Corner Binaries explained
A traders guide To successful spreadbetting
Unloved, forgotten and materially undervalued
Dominic Picardaâ€™s Technical Take
Small cap feature
Contrarian UKâ€™s 2012 outlook.
A fresh look at the online coupon company.
One noteworthy sale and two interesting purchases.
Our special contributor Dominic Picarda covers the Dow Jones, S&P 500 and the FTSE 100.
JJB Sports update.
Range Resources, Rocket Science and just who are Precogz?
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Bull market continuation or impending bear market? The beauty of spreadbetting and CFD trading is that it presents the opportunity for active traders to position themselves either long or short on a multitude of financial instruments.
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Bull market vs bear market
This flexibility gives you an edge over typical long only share traders and, as regular readers will now no doubt be becoming acutely aware of from our educational posts that continually hammer this point home, as long as you control your leverage then the ability to switch from bull to bear at the click of a mouse is a powerful trading tool.
My own investment ideas have proved to be somewhat thinner on the ground as latent value began to disappear from the stock market the last few months. Coupled with a reduction in Directors’ buying and indeed an increase in selling on their part in recent weeks and months, the warning signs from a fundamental perspective were becoming ever more apparent.
2012 has so far proven to be quite profitable (at least the first 2 months were anyway!) for many spreadbetters. My sources at certain spreadbet firms tell me that clients ‘en bloc’ made money during Jan & Feb but that the buffers have been hit in recent weeks. As Eurozone debt worries have resurfaced and the bull run from September last year has become somewhat exhausted from a pure technical position, simply sitting on the long side has not delivered in recent weeks.
From a technical perspective, one of the proprietary indicators that we use that gives us a measure of market sentiment (click here if you would like more details about this) and that is analysed from a contrarian perspective has been flashing warning signals for several weeks now. A key component of our indicator is the so called “Put:Call ratio” that is based on the level of activity in the US indices as reflected in the options market.
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In the charts below and to the right, you will see how this seems to have an uncanny record of alerting its followers to bottoms in the market in particular. Whenever it exceeds the 1 level (i.e. 1 put being purchased for every 1 call) - albeit with a typical 4 - 6 weeks lead time - the market seems to rise strongly over ensuing months (circled on the chart). With the ratio now down at the 0.6 level, we are definitely back in the bottom of its range (and which has historically been a neutral sign at least and in a number of instances an outright danger signal). This is definitely worth keeping a close eye on. On the S&P 500, the MACD lines have begun to roll over and the index recently pierced the 20 day moving average to the downside. Having not touched the 50 day since December of last year, a case for further consolidation with a probable downwards bias can certainly be made. A move down towards the 1350 level would represent around a one third retracement of the move from December 2011 - markets have a habit of retracing previous moves by typically one third or one half, and this can be expected with a reasonable degree of conviction in the next few weeks. Back in the UK, for home biased traders, the weakness that we have seen over the last 5 weeks that has taken the FTSE 100 index down from just under the 6000 level to 5600 (at time of writing) - a move of approximately 5% - is likely to have been influenced to a fair degree by end of tax year selling, certainly within the mid and smaller cap area of the marketplace anyway.
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It is in this area that I am now seeing renewed value opportunities present themselves once again in stocks like CWC, Blnx and many of the sub ÂŁ250m oil explorers like BLVN & XEL. It is Spreadbet Magazineâ€™s view that 2012 is likely to be a stock pickerâ€™s market from here-on out, and that simply buying an index and remaining long is not the best strategy. With the FTSE 100, as you can see from the chart to the right, strong support is centred around the 5550/5600 level and any penetration of this price-band on heavy volume that ends with a strong rise on the day back over 5600 is likely to signal that the re-tracement consolidation we are currently seeing is likely coming to an end.
Bull market vs bear market
If you are minded to the bull side, then I would suggest averaging into positions over a period of a couple of weeks on any weak days that take us back towards the 5500/5600 level. The RSI that is moving back towards the 50 level is also adding weight to the case that a nice set-up for a long swing trade is in the making.
Conversely, for those of a bearish tendency, a decisive break back below the key 5500 level will likely presage a difficult summer, and a re-test of last yearâ€™s 4800 level cannot be ruled out. The weekly chart shows a potentially worrying roll over in the MACD and again illustrates just how critical the 5600 level is - particularly on a weekly closing basis.
One thing that I personally find useful is to construct a list of positives and negatives for the markets, to produce a kind of scorecard of bull and bear ndicators. This generally serves me well as a guide to the likely medium-term direction. We can thus construct the following check-list:
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Bull Points 1
Underweight retail positioning
Retail investors (unfortunately the perpetual ultimate contrarian indicator) in the UK continue to remain underweight equities and their participation in the stock market in recent years has been much reduced. This is, of course, a potential source of future buying power and therefore a bullish point.
Equities remain cheap v Bonds & Cash
The primary argument for the bulls is that alternate asset classes - basically cash and bonds remain very unattractive relative to equities. You can still buy quality blue chip stocks with well covered dividend yields (and that are likely to rise in coming years - outpacing inflation) of around 4-5%. With cash rates at 0.5% and bond rates around 2%, this is a powerful incentive for equity investment - an incentive that has not yet been taken up by the retail investor mainstream.
ISA & new tax year sales season generally a bullish time
The ISA sales season and new tax year has just begun - this is a seasonally positive time for equities, particularly when coming off a period of recent price weakness and where new buying opportunities are becoming more evident.
As with the point about retail investors seemingly constantly buying at tops and selling at bottoms, when the media is positive about an asset class this is typically because the commentator finds comfort in the majority - in essence they will be bullish on what has gone up and bearish on what has gone down - another indicator that the trend is becoming exhausted. How many times have you seen scaremongering economic stories and TV news headlines (late last summer, in particular, springs to mind) precede price rises in equity markets? At present, the media is certainly not bullish on equities and this is therefore a contrarian bull sign.
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Bull market vs bear market
Bear Points 1
Large outstanding margin position in the US
In the US stock market, in particular, there is presently a large margin debt situation - historically a signal that has also preceded price weakness. The US has sharply outpaced the UK this year with the FTSE up just over 2%, yet the S&P up a whopping 11% year to date (at time of writing). Remember the old investment adage - “when the US sneezes the rest of the world catches a cold” - if the US should continue to grind lower and the excess margin get squeezed out of the system, it will likely prove difficult for the UK market to make headway against this backdrop - another re-iteration of our view that stock-picking will be key to generating good returns this year.
No more QE
Additional QE (Quantitative Easing) looks to be off the table for now following remarks from the FOMC at their last meeting in early April and also given increasing signs of a strengthening labour market. With no new injection of incremental, cheap liquidity (there is, however, already a large amount of liquidity washing around the global financial system that will tend to support asset prices), then this is likely to at least reduce one of the tailwinds behind the recent price strength in equities.
Waning directors stock buying across all markets
As has been flagged in the last 2 issues of our magazine, directors’ participation in the market through purchases of their own stocks has been neutral at best, with a steady reduction in the volume of purchases and in fact net selling in recent months. As we are now in a new tax year, it will be interesting to see just how this group of influential investors react over the early part of summer, and following recent price weakness in the market. The one market that Spreadbet Magazine does remain particularly bullish on is Japan, as flagged at the start of the year in our inaugural issue that included our “10 Contrarian bets for 2012.” The Nikkei 225 index has been the star global performer this year - up a whopping 24% YTD at the peak in mid-March, with an almost unbroken run of weekly rises from just over 8000 to 10250. With the yen weaker against its major trading pairs and thus providing a bullish backdrop for Japanese exporters (a large component of their index) and the Nikkei breaking its 4 year downtrend decisively, we remain resolutely long here and continue to recommend bull positions in the 9300/9500 index range - the 50% retracement level.
To conclude, we believe that the battle between bulls and bears is likely to continue on in the near term with no meaningful victor. In the UK, the 5550/5600 level on the FTSE 100 is likely to be a good point to look to get long, and we expect Japan is likely to continue to show strength this year relative to most other markets, indeed, we strongly suspect that this market is in the very early stages of a multi-year bull run. If you are struggling with your own trading in this difficult environment and particularly on indices and commodities, then we’d definitely suggest that you take a look at LS Traders trading system that is a medium term trend following system and that has delivered fantastic returns over the last 5 years.
Click here www.lstrader.co.uk/spreadbetmag for a free 1 months trial that is being offered exclusively to our readers.
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Fixed FX spreads. (No change there then.)
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A traders guide to successful spreadbetting A tried and tested way to put the odds back in your favour and begin to spreadbet profitably.
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A Traders guide
My name is Phil Seaton and I am the system creator and owner of our proprietary trading system - lstrader.co.uk In this brief article I am going to explain just what the LS Trader system is, how it works and the philosophy behind it. Firstly, I have been trading since the late 90s, and my focus for much of the past decade has been almost exclusively on spread betting, although I do have a background in futures trading prior to that. When I initially began trading I made all the mistakes that novices make, but I learned from them quickly. I realized that to try to figure the markets out single handedly was an ominous task so I did the obvious thing; find traders that are successful and learn from them and copy what they do.
Longevity and results = confidence This led to my reading virtually every book on trading that I could get my hands on and exposed me to literally hundreds of ideas and concepts, many of which were contradictory! The question was then, how do I sort the wheat from the chaff? How do I find out what really works and is really profitable in the long run? It seemed obvious to me that I had to start with a clean canvas, and test every concept and theory, so this is what I did. The first question to answer was, which main approach was I going to take? Trading essentially falls into one of two categories, or a mixture of both: fundamental trading or technical trading. I realized very quickly that very few individuals will ever succeed trading on fundamentals. There are many reasons for this, but in short, it is simply impossible to stay on top of all the information and news that is available for all the markets that I wanted to trade and, even if I could do that, there is no way that I could gain an edge when I am effectively going up against all the numerous major funds with their seemingly unlimited resources and research staff. This is simply not an approach that will work for the typical stay at home trader and I stand by that view today. Very, very few individuals will ever succeed using a fundamental approach to trading.
Therefore, I knew I had to be technical in order to succeed and still have some time left over in order to lead a normal life! Over the next few years I researched and tested out every kind of indicator that you can name, from moving averages to Bollinger Bands to Stochastics. The list could go on, but essentially you name the indicator and I have tested it rigorously against real market data that spans many different markets. In fact, I used an exhaustive 20-year data history. I therefore gained an edge as to what works and what does not work in the markets, and from that knowledge I built what is now known as the LS Trader system. The original system research was completed in 2002 and the system has remained pretty much as it originally was with only a few minor tweaks and occasional changes to the portfolio of markets that it trades. This is possible only because the philosophy that the system is built upon is so sound and the system itself so robust that it will very likely continue to work well indefinitely without much in the way of further revision. What my research did conclusively reveal is that there are 4 principles that must be incorporated into any successful trading system and these 4 key points form the basis of the LS Trader system. These 4 key concepts are: 1. 2. 3. 4.
Trade with the trend Let winning trades run Cut losing trades short Manage risk
If a system incorporates the above 4 rules, it is very likely that it will be profitable in the long run if followed consistently.
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Let’s just take a very brief look at each of these 4 points:
Trade with the trend
You will likely have heard the phrase, “an object in motion tends to stay in motion”. This means in market terms that the most likely outcome at any time is that the market will continue to move in the direction that it is currently heading. Therefore by following the trend instead of trying to fight it, you are taking advantage of the laws of physics and momentum. It is no accident that the vast majority of long term successful money managers use systems that are based on trend following, and it still remains the most profitable approach to trading the markets almost a century after it was first pioneered.
Let winning trades run
No matter how good a system or a trader is, he is always likely to have more losing trades than winning trades. This is a fact, in spite of what many others may tell you with bogus claims of 80% plus win ratios. If you analyze the track record of the most successful traders, their win ratio is often between 30-40%. In order for them to be profitable, it is obvious, then, that the winners must be larger than the losing trades on average. This can only be accomplished by allowing winning trades to run, in order to give them a chance to grow into large outsized winning trades and observing rule 3.
Of paramount importance to successful long term trading is cutting losses short
One must always allocate a small amount of capital and have a set worst-case scenario exit point before entering a trade, and only relatively small bets must be placed. One should never take a large destabilizing loss. Furthermore, once one has set a stop loss it should never be moved away from the market in order to give a trade more room. Stops should only ever be moved closer to the market, initially to reduce risk and subsequently to lock in profits as the trend progresses.
The worst thing that can happen to a trader is that he loses all his money. This is akin to the roulette player who loses all his chips. Once the chips are gone, you can no longer play. This is known as the risk of ruin, and ensuring that one never approaches that state should be at the forefront of every trader’s thinking. If a trader has a system that has a positive edge or expectancy, such as the LS Trader system, then one needs to ensure that one stays in the game to get into what I call “the long run.” In doing so, the odds or success are so highly stacked in the trader’s favour that success becomes exponentially more likely.
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LS TRADER www.lstrader.co.uk
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Benefits of the LS Trader system Low Frequency trading system - 5 trades per week on average. Easy to use and can be followed in less than 1 hour per week. It is a weekly system which is largely unaffected by “noise” in the markets. Very sound money management rules incorporated into the system. Medium to long term time frame.
About the LS Trader System The LS Trader system is a complete financial spread betting information service which covers everything you need to trade the world’s financial markets. The system trades 40 different financial markets including stocks, commodities and forex. Within the members area you will find custom built position sizing software, market updates and extensive trading manuals which cover all aspects of financial spread betting as well as the all important weekly trade sheet.
Trade alert emails are also sent during the week as part of the service. The LS Trader system is based on very sound trading principles that have stood the test of time. It draws on the trading philosophies and trading rules that the world’s most successful traders use and all of these principles and trading rules have been vigorously tested.
FTSE 100 YTD return of +3.55% LS Trader YTD return +17.73% 5 year CAGR of LS Trader +69.68%* Don’t take our word for it. Click here to learn more about how our system could help you and take advantage of a 1 month free trial # To sign up, simply go to : www.lstrader.co.uk/spreadbetmag to get started today
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* Disclaimer - LS Trader results reflect the weekly trades updates from 2007 to end of 2011. Since not all trades were necessarily taken then the results should be seen as hypothetical. Hypothetical performance results have inherent limitations including the fact that they are generally prepared with the benefit of hindsight. In fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular trading system . No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. Future results may be higher or lower than past results. May 2012 | www.financial-spread-betting.com | 17 # Free one month trial. Subscription costs apply thereafter.
All systems will have lean times and losing periods and that is a fact of the markets. The markets simply do not trend all the time and often have periods of directionless, choppy markets where it is very hard to make money. During these times the trend trader will often get whipsawed out of numerous trades shortly after he has entered. It is necessary, therefore, to be able to sustain a series of losses so that the trader is still around to take advantage of good trading conditions when they return, and they always eventually do. This can only be accomplished by taking small bets, so that when trading conditions are not favourable, the minimum amount of damage is done to account equity and the majority of trading capital remains intact following a losing period to capitalize on new trends. The LS Trader system incorporates all of the above 4 rules and has rules to ensure that these principles are consistently applied. This takes all of the guesswork out of trading as there is a rule for everything such as where to get in, where to get out and how much to stake depending on account size.
Extensive support and guidance Subscribers to LS Trader receive everything that they need in order to spreadbet successfully. This includes an extensive manual that covers all of the key concepts required, but most importantly includes our trade updates. This is a summary of the 40 markets that we trade, including stock indexes, commodities and forex. This summary, that we call the weekly trades sheet, lists all 40 markets that we trade, whether we have a position in each market or not, the entry price and date as well as the current stop loss for each market. We also include a list of entry stops for all markets for the week ahead with the associated exit stops.
In addition, we send out a weekly email with updates on what has happened during the previous week as well as our thoughts on what may happen in the week ahead, as well as key technical levels to look out for in the coming week. We also send out a market commentary email that covers all of the market sectors that we trade. Additionally, we send out mid-week email notifications if and when any of the entry stops â€“ the trigger to trade - have been hit. Since we launched the LS Trader system into the marketplace in 2007 andin spite of coinciding with perhaps the most volatile few years in recent market history, the results have been extremely impressive, with a CAGR of 75.64%*. The back-tested results going back to the start of our data (1982) are even more impressive and bring in a CAGR well in excess of 100%* per year. These sort of returns coupled with our rigorous risk processes are absolutely perfect for spreadbettors. We have many profitable subscribers who have been using us for years. As an exclusive to Spreadbet Magazine readers we are offering readers a free 30 day trial to see just how our system works and hopefully help generate some profits for you too! Visit www.lstrader.co.uk/spreadbetmag to take advantage of this offer. Next month weâ€™ll look at some of our trades that we have undertaken this year and talk through the mechanics of this. Good luck with your trading this month. Phil Seaton, LS Trader
*Disclaimer: Results are the outcome of back-testing and should be viewed as hypothetical since not all trades were taken. Future performance may be higher or lower than past performance.
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School CornerBinaries explained and how to use them. Binary options are quite simply a form of option that offers one of two outcomes and hence the name â€˜binaryâ€™ which typically describes an outcome of either 0 or 1.
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In spreadbetting, binaries are available on a wide variety of instruments for example the FTSE 100, S&P500, currencies, European indices, gold etc. You can also bet on a binary outcome with as little as 10 mins to the expiry - this is more akin to true gambling, however, than typical spreadtrading. The price range of a binary in spreadbetting is zero 100. Zero representing the 100% probability of the outcome NOT occurring, and 100 representing the 100% probability of the outcome occurring. Let us look at how one works using the FTSE 100: The FTSE 100 may be trading at say 5600 at the open of business on a particular day. If you were to play a daily binary bet on the probability of the FTSE closing UP on that day, it might be priced at say 50. What this means is there is a 50% chance at the time of the bet purchase of the FTSE closing either up or down. Let’s say that as the day progresses the FTSE actually falls and the index is trading down 50 points at midday. The probability of the index closing up, particularly taking account of the time remaining that day (4 1/2 hrs), has therefore diminished materially now and so is likely to be somewhat less than 50% at that point. Thus, in this instance, the binary is likely to be priced at say 20, i.e. there is now only a 20% chance of the FTSE 100 closing up on the day. There are 2 ways you can play a binary - you can either buy the binary, or you can either sell the binary. In the example above, you might think to yourself that the 20% probability of the FTSE closing up on the day is mispriced and that historically, when the FTSE is trading down over 50 points and with only around 4 1/2 hours to the close, that less than 10% of the time would the FTSE stage a rally of that magnitude and close up. Thus, you would sell the binary at 20. If, however, the FTSE did close up on the day, your loss would be 80 (100 - 20) x your stake.
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Here’s a list of some of the types of binaries that you can play:
A Straight closure/ expiry binary
This is the same as the example used above. There is a fixed expiry point and the binary is a bet on the probability of the underlying instrument closing up (or down if a bet on an instrument closing down) at that particular binary’s expiry point. This is the simplest type of binary to understand and is the most popular, and is generally available on a wide variety of instruments.
One touch binary
This is also a relatively straightforward type of binary that is, as the name says, a bet on the probability of the underlying instrument on which the binary is based touching a particular price point during the life of the binary bet, and which could be anything from 10 mins to 1 week. For example, you could enter a binary bet on the GBPUSD which is trading at say $1.5960 touching $1.60 during the next 30 mins. The price might be say 55 which means there is, at face value, a deemed 55% probability of GBPUSD touching the $1.60 level. With the ‘one touch bet’ you are basically stripping out the necessity of the binary actually expiring over (or under) the trigger level.
Two/Double touch binary
This type of binary involves the underlying instrument touching TWO price levels - one that is above the current price and one that is below the current price. For example, the S&P 500 might be trading at say 1350 and you enter a weekly binary on the S&P 500 that requires it to touch both 1330 & 1370 (the wider apart the two touch levels are and the shorter the timescale, the cheaper these binaries of course are).
These binary bets are suited to volatile markets where there is a higher probability of the particular instrument gyrating around the two trigger points - they are likely to be more successful in markets that are in the latter stages of a deep sell off where the downside is invariably lower than you always expect, but where sharp reversals can occur. If the underlying instrument only touches one of the price points, the binary still expires at zero.
Either-or touch binary
This type of binary is very similar to the double touch binary except that it only requires the underlying instrument to touch ONE of the 2 trigger points. If it touches either of the trigger points, then it makes up at 100.
At its heart, a ladder bet is quite simply akin to an ‘accumulator’ bet that one would place on the horses. A trader on a ladder bet is looking for the underlying instrument to trade through a number of particular price levels at pre-determined time points. The price levels are arranged just like the rungs of a ladder, hence the name. For the trade to be successful, the asset has to have “climbed the steps” at certain times in order for the trade to expire with a profit. Let us look at an example to see how this would work and we’ll use the FTSE again. The index level may be say 5600. You could have a ladder with trigger points of 5630, 5650 & 5670 - expiry in this instance being 16:30 close of business. The ‘payout’ ratios ascribed to each of these trigger points may be for example 20% at 5630, 30% at 5650 and 50% at 5670. If the FTSE trades over 5630 at the expiry, you will receive a 20% payout and 30% at 5650 and 50% at 5670. It is basically a succession of one touch binaries.
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How to use binaries Below is a list of how we, at Spreadbet Magazine, would suggest that you use binaries to the best effect:
Say you are in a medium term trade where you are long the FTSE 100 at 5600 and you have profit on side with the index rising to 5700 (we’ll use a bet size of £10 per point for this illustration). On a particular day you might think that the FTSE is prone to a fall, but you do not want to exit your long bet which has, as we established, a medium term timescale to you. What you could consider here is buying a binary for the FTSE to close down on that day. If, for example, it is 1pm and there’s just under 3 hours to go and the FTSE is up perhaps 20 points, then the binary might be priced around 25. You could thus buy a binary equivalent to say half your long spreadbet (£5) costing you therefore £125 (£5 x 25), and so if the FTSE did fall back and closed down on the day, then you would re-coup £500 (5 x 100 - the binary make up level). Your profit is therefore £375 (£500 - £125 cost). Remember though, your long bet of £10 per point would have lost £200+ (20 points + fall back x £10) and so you have mitigated your loss somewhat here.
This type of trading is where you have a high conviction in a particular bet but you still do not want to expose yourself to a large potential equity drawdown should you be wrong. For example, you might believe that the DAX is oversold at the 6500 level, but you are fearful of further volatility and the possibility of more sharp falls and so you are reluctant to open an outright long bet. You could, therefore, use binaries at this point to take a position on the Dax rising on successive days, safe in the knowledge that your downside is fixed at the cost of the binary (i.e. if your bet size is £20 & the binary costs 30 the cost to you is - 600).
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Should the market continue to fall and your conviction grow further then, assuming you have not exhausted too much equity buying the market down via the binaries, you would progressively increase your binary bet size thus maximising your profit making potential when the upswing does come.
I particularly like these types of trade opportunities. Basically you are looking to take a contrarian view on a particular news feature, for example the non-farm payrolls figure. If the market is expecting a low jobs creation number and there has been a degree of weakness in the market in the preceding days leading up to its release and with the market being down going into the release of the figures, then this is the type of set up I like on the bull side. The Dow might be trading around 11900 (down say 40 points) and so you look at a “one touch bet” at 12000 - in a lot of cases you get very sharp knee jerk reactions on important statistics and so, assuming the binary is priced appropriately (less than 30 is what I would look for here), this is the type of classic catalyst/contrarian trade you can play.
High Probability swing trades
This type of trade is where there has been a long run of successive rises or falls (history tells us 9 days down in a row and 8 days up without a reversal of either is a good point to look to take a countertrend trade) and the market is ripe for a corrective so called ‘swing’ trade.
I would typically play this by entering the countertrend outright long (or short) spreadbet in stages, and if the market continues to move away from me, then I would use the binaries as fixed cost ways to average in. To conclude, binaries are really orientated to the more quick-fire short term type of trading or traders - it really is skirting the boundaries of typical spreadbet position taking and outright gambling. We would suggest that you allocate no more than 10% of your account value to this type of trading and that they be used in the scenarios highlighted above, particularly the deep oversold markets where the probability of a ‘swing’ trade back in your favour is high. We would also caution against selling any binary below a price of 20 - no matter how likely the probability of the binary expiring at zero seems to you. The unexpected generally happens in the markets much more frequently than you would expect and if you’ve sold a binary at 20 you have basically laid odds of 5 to 1 against - do this frequently and have a run of bad luck and you’ll be staring down some pretty chunky losses quickly.
Similarly, I would also caution against buying a binary below 20 just because you think it is ‘cheap’. The old saying “you get what you pay for” springs to mind - the chances of a binary that is priced below 20 ultimately making up at 100 is very slim. There is a time to buy these bets and that is as highlighted above with regards to high probability swing trades. Finally, one thing I would say is that you can, of course, trade out of a binary at any time before the expiry - you do not need to run it right to the wire. If, for example, you bought a binary at 45 and let’s say it rises to 75, think about selling half or one third of your position - this way you are locking a good profit on a very high risk bet instrument. You will greatly extend the life of your binary account this way as it is plain and simple good risk management - the cornerstone of ALL successful traders.
May 2012 | www.financial-spread-betting.com | 25
Heritage Oil Unloved, forgotten and materially undervalued
26 | www.financial-spread-betting.com | May 2012
Unloved, forgotten and materially undervalued
May 2012 | www.financial-spread-betting.com | 27
For holders of Heritage Oil, the last 12 - 15 months have been painful, to say the least, with the shares falling from over 300p in Feb 2011 to plumb the recent lowly depths of 130p. The reasons put forth by numerous commentators and analysts for the collapse in value range from questions over the company’s management and strategic direction, to disappointment in the finding of gas as opposed to oil in their key Miran prospect in Kurdistan, to continued worries over when the $405m currently held up in arbitration proceedings through their dispute with Tullow Oil and the Ugandan government will be ultimately returned, through to wider concerns with the general global economic environment. Spreadbet Magazine believes that, as is always the way, the stock market has over reacted and, quite extensively so to the issues surrounding Heritage. In fact the depletion of value has been so great that within the entire mid cap Oil & Gas exploration sphere we believe they now offer the most compelling value on a risk to reward basis. At the current price of 135p (time of writing) the company has a market capitalisation of £361m and sits with cash reserves of approximately £200m. This puts a value of just £161m on the following asset base and which we will attempt to find a realistic value for each of them ((i) The prime Kurdistan asset - 75% share in the Miran block, running to over 1,015 sq/km (ii) Producing Russian fields (iii) The Tanzanian assets covering over 25,000 sq/km (iv) High-impact exploration in Malta (v) Mali field prospects (vi) Pakistan fields (vii) A 51% equity interest and control of Sahara Oil Services Holdings Limited which has the necessary long term permits and licences to provide onshore and offshore oil field services in Libya as well as the rights to own and operate oil and gas licences. (viii) Approximately 34 million Heritage shares held in Treasury (ix) Just over 15% of Petro Frontier, owning c.9.75m shares
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(x) The ‘option’ value of the return of $405m from the Tullow/Ugandan dispute. Let us look at each asset in turn -
The market seems to think that a find of up to 9.1 trillion cubic feet of gas (gross in place P50 estimate) has no value whatsoever. This is the only way one can rationalise the current share price. The company however believes that monetisation of this asset will commence in 2013 - not too far away now and sufficiently close in timescale that any large time value discount is not warranted. The early production will run in parallel to full field development and the export of gas to Turkey and/ or Europe with the full production of blended oil and condensate. Independent gas marketing studies have highlighted increasing gas demand in Kurdistan, Turkey and Europe that can potentially provide valuable markets for the gas volumes. In April 2011, Turkey’s energy regulatory authority ran a licensing process for importation of gas from Northern Iraq and Kurdistan, with first gas to be imported in 2014 starting at 700 mmcm/yr and plateauing at 3 Bcm/yr up to 2033, demonstrating real demand for the gas and in a market on the door step of the Miran Field. There is an existing transmission pipeline system in place in Turkey with only a 330 km pipeline needing to be built in Kurdistan to the Turkish border. We believe this will be a transformative event for Heritage as the market will then have to ascribe a value to the gas as it finds a natural export path. See diagram to the top right showing the existing transmission system in Turkey.
Unloved, forgotten and undervalued
Full field valuation models for the Miran Block constructed by various independent analysts anchor around the $3.5 boe (barrel of oil equivalent) range. This equates to circa £1.22bn if the Kurdistan Regional Government backs in and reduces Heritage’s share of the resources to an estimated 558m boe. It is worth taking a look at the table below which produces a value graph of what is called EV/2P reserves - basically this is a company’s Enterprise Value (market cap + debt) to so called ‘proven and probable’ reserves.
You can see just how lowly valued Heritage is relative to the entire sector. Even if one assumes an unheard of $1 boe value then this equates to £350m based on 558 mmboe, add in the cash of circa £200m and you get the equivalent of £2.13 per share. Remember this excludes any value at all for any of the company’s other assets. More realistic estimates of the discounted value of the Miran Field are between 200 & 300p per share. Some analysts estimates in fact go up to and over £4 per share.
May 2012 | www.financial-spread-betting.com | 29
Below is a cross section of the Miran East and West structures which illustrate the hydrocarbon potential. It is by no means certain that within the East structure, where drilling commenced in March 2012, that Heritage will find hydrocarbons due to the nature of an exploration well, however, the structure is contiguous to the very large hydrocarbon bearing West structure.
The company is also continuing to drill down past 3,000 metres on their Miran West-3 Well following the update in early March and again as can be seen from the section below this area is where the company is appraising the gas discovered in the previous well.
It is worth also reflecting on the recent arrival of Exxon Mobil into Kurdistan too as an illustration of the political de-risking of this area. The world’s largest oil company signed a deal for six exploration blocks with the Kurdistan Regional Government (KRG) last November and thus firming up Western oil majors’ perceptions of this potentially very important region.
Genel Energy plc, formerly Vallares (the ex BP CEO Tony Hayward’s vehicle), holds the balance 25% of the Miran licence following their merger with Genel Enerji and, in Spreadbet Magazines opinion, once the route to monetisation of the large gas find becomes clearer, we wouldn’t rule out the possibility of Tony Buckingham selling the controlling stake in this asset to them, after all Tony Buckingham’s history is to explore, establish value and then sell on the development prospects of those assets.
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Unloved, forgotten and undervalued
Russia Heritage’s Russian assets are currently the only oil producing component of the company located in the West Siberian province of Khanty-Mansiysk. The last independent industry valuation resulted in an estimate of circa 61m barrels of oil and a net present value valuation at that point of around £186m - approx 74p per share. Analysts typically value this asset at a conservative 43p per share.
Tanzania The Tanzanian onshore acreage awarded to Heritage in Q4 2011 and Q1 2012 appears to display a similar profile to the Albert Basin in Uganda and which of course Heritage ultimately sold for $1.45bn (of which a portion is subject to the tax dispute with the Ugandan Government). The company is currently in the process of acquiring 2D seismic data and should they find oil here, given the sheer size of the block, this would be another transformative event for the company. On an unrisked (potential attributable value if success in exploration is achieved) basis Tanzania is widely valued around 87p per share equivalent with a boe assumption of circa $3.50.
The 2 blocks in Mali look, at this point, to be not material to the company. Heritage has a 75% working interest here having been farmed into the prospect in exchange for carrying out the seismic mapping on the acreage and also drilling one exploration well. Unrisked values go up to 65p per share, although the recent coup will most likely lead to delays in the work programme.
Any discovered hydrocarbons could be very easily connected to the existing infrastructure in this region as one of the main pipelines actually runs through the Zamzama acreage. We ascribe a nominal 10p valuation here for the moment.
Sahara Oil Services Holdings Limited (SOSH) It is too early to attach any real attributable value to the 51% controlling interest in this company but make no mistake, the potential value of these licences could be considerable. The company’s purpose behind their purchase was to play a significant role in the future development of the oil & gas industry in Libya including participating in future licensing rounds. In fact, we believe that part of the reason for this investment was also to give them leverage in the boundary dispute with Malta and assist Heritage with the drilling programme there.
At time of writing the company held approximately 34 million shares in Treasury giving a current market value of £46 million.
Option value of Ugandan tax dispute One can debate the merits of Heritage’s case against the Ugandan Government & Tullow until the proverbial cows come home but ultimately, only the outcome of the arbitration process will determine who is right and wrong here. Applying simple mathematics of a 50% probability of the return of the monies at some point in mid 2013 and applying a further 5% NPV discount gives an option value of around 46p per share. Of course if they are successful in the arbitration then they would receive back approx £1 per share.
The two Pakistan blocks in which Heritage holds a 54% and 48% interest respectively, are the Sanjawi and Zamzama North blocks.
May 2012 | www.financial-spread-betting.com | 31
I was able to catch up with Paul Atherton, Heritage’s Finance Director and posed the following questions to him -
Furthermore, many commentators and analysts consider there will be considerable M&A and so consolidation of existing licence holders in Kurdistan which is another way to monetise an asset.
Q. What distinguishes Heritage from its peers? A. The Company has many competitive strengths including:
Q. What do you say to those shareholders that believe the purchase of the Heritage shares by the company has been a monumental waste of money?
• a strong balance sheet; • a proven management team; • strong and established technical expertise with a history of finding oil and gas; • a geographically diversified portfolio of high impact exploration plays; and • well-established connections in all areas in which we operate.
A. We are focused on building long term shareholder value. This can take some time, but the management team has a track record of delivering success and is very much aligned with other shareholders as we own over one third of the company. We have personally not sold one share and Heritage has undertaken a significant share buy back programme as we consider the company to be materially undervalued.
Q. What are the main catalysts that you see on the horizon for value realisation?
Q. Do you have a message for shareholders?
A. 2012 will continue to be a very interesting year for Heritage as we have a diversified drilling programme and the financial flexibility to accelerate programme execution in several of our core areas. In the near-term the main priorities for the Group are to continue to drive our current portfolio forward with exploration or development and drilling programmes in Kurdistan, Tanzania and Malta. We currently have two rigs drilling in Kurdistan and are reviewing results from seismic campaigns that could provide future growth in the portfolio. We are looking to further develop the existing portfolio and continue to look for value generating opportunities within our core areas. Q. What options are open to you for the monetisation of your Miran Field? A. We consider the Miran Gas Field to be of such a size that it is a commercial discovery and independent engineering studies have confirmed the potential for a fast-tracked, phased development of the field, with local gas sales in 2013 and full field development through export of the gas to Turkey in 2015.
A. The Company has an excellent track record built over many years, one that we continue to live up to, having found in excess of 2 billion barrels of oil in Africa and one of the largest gas fields in Iraq. Management is very aligned with existing shareholders and is focused on rebuilding shareholder value through the existing portfolio and diversification by acquiring assets in our core areas of Africa and the Middle East.
Catalysts The potential catalysts for value realisation are multi-fold and could include any or all of the following a) Success in drilling the balance of Miran West and Miran East with the presence of oil and gas b) An accelerated path to market for the major gas find in Miran including access to the lucrative gas market in Turkey c) News on the Tanzanian, Maltese, Pakistan and Mali exploration programmes d) Potential corporate activity - sale of Miran, farm in of the Malta prospect or indeed a bid for the company or a transformational acquisition e) A positive outcome in the arbitration process.
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Unloved, forgotten and Undervalued
Cumulative valuation possibilities Taking the figures above we result in the following as a potential upside value to Heritage (in p) -
Given recent security issues in Mali and Pakistan we have assumed only nominal value for these licences. Drilling delays in Malta mean that we have only included 50% of the Potential value for the Malta licences too. Technical Picture Looking at the short term chart we can see the stock is beginning to probe the downtrend from early February - this comes in around the 150-155p level. A close above here targets next resistance around the 160p level.
A number of consecutive daily closes above 150p will be the confirmation signal I am looking for that the stock has broken the intense downtrend in recent weeks.
May 2012 | www.financial-spread-betting.com | 33
A move beyond 165p will likely take us back towards 200p in short order and, as can be seen from the longer term chart will be a decisive break of the longer term down trend from early 2011.
Conclusion As can be seen from Heritageâ€™s individual prospects breakdown above, news flow this year into 2013 will be thick and fast and any number of positive outcomes from a sale of the Miran Block through to drilling success in Malta in particular could come to pass. The Company has indicated that it has been searching for material transactions and so could one of these transformational deals be completed? At the current price of 135p (time of writing) and with cash and stock assets of almost 100p, we struggle to see any downside whatsoever from here.
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The upside is considerable and this is our second Conviction Buy in this issue. Regular readers will know my usual caveat however and that is - be careful on your leverage (do not gear yourself more than 3 times current surplus cash on your account) and so give yourself headroom for further market volatility. In the interests of clear disclosure, I declare myself presently long the shares in this company.
Rock-like. Not rocky.
AIM listed. Debt free. Segregated client accounts. For safe and secure trading create a financial spread betting account at capitalspreads.com Losses can exceed your initial deposit. Spread betting may not be suitable for everyone.
capitalspreads.com Capital Spreads is a trading name of London Capital Group, which is authorised and regulated by the Financial Services Authority and a member of the London Stock Exchange. Registered Address: 2nd floor, 6 Devonshire Square, London, EC2M 4AB. Registered Number: 3218125.
A capital place to spread bet May 2012 | www.financial-spread-betting.com | 35
Large cap focus
HSBC Among UK listed banks HSBC is one of the last men left standing. It is distinguished by exposure to emerging markets and is viewed as relatively conservatively run. A re-focusing of the group to improve returns and an attractive dividend ensure we rate the stock a buy. Few banks come out of the global financial crisis smelling of roses and HSBC is no exception. However, the strong diversification of the business helped it to weather the storm and it now looks to be well positioned versus competitors. This can be seen by looking at the market leading position HSBC now has in some areas of UK banking. Although 80% of HSBC revenues do come from outside the UK the fact that the group is able to grow lending here shows that it is not capital constrained. In the UK mortgage market, for example, HSBC had a market share of 2.5% in 2007 but lending since then has grown by three-quarters to £13.2bn in 2011 giving a 9.6% market share. A cursory glance at the UK mortgage tables shows why with HSBC having market leading rates. Meanwhile in the UK commercial lending market HSBC made record loans of £49.4bn in 2011. With competitors having retrenched loan margins have widened and loan conditions tightened. This ensures that HSBC’s lending growth looks to be profitable. In the UK HSBC’s 2011 profits rose 17% to £1.5bn with top-line income flat at £5.6bn looks to have been due to a 35% reduction in impairments to £796m. Meanwhile in the context of the UK ISA deposit accounts marketed by the banks the stock of HSBC stands out for its superior dividend yield. The shares offer a 5% yield in the current year with this payment covered more than twice by earnings. The yield is the highest among UK bank stocks while prospects for the international bank look solid. This is as the shares weakened on the European Sovereign debt crisis which took hold from Q3 2011.
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FatProphets - HSBC
In the near term support is located at the technically important 200 day moving average at 537.83p. We would expect the downside to be limited to this level. A sustained break above the 50 day moving average would signal a continuation of the uptrend targeting an initial retest of the 587.2p highs.
May 2012 | www.financial-spread-betting.com | 37
Large cap focus
With reference to the weekly chart, prices have respected the 61.8% Fibonacci retracement at the 460p region. This is bullish, and we would target an eventual test of the 200 week moving average at 615.95p over the coming months.
HSBC 2011 results by region
A new strategy for the business was announced in May 11 by CEO Stuart Gulliver who was appointed in January 2011. This will see the business strive to improve returns by becoming more focused, streamlined and centralised. The financial results for 2011 for the business as a whole showed some progress but it is clearly going to be a long-haul for the group. In the meantime growth from emerging markets and a return to dividend growth supports the stock.
HSBC profile HSBC defines itself as â€œone of the few truly international banksâ€? with retail banking in Hong Kong and the UK. By contrast other banking groups are more localised with the US banks generally sticking to North America for example. In 2011 49% of revenues came from faster growing economies which compares to 44% the year before. The group expects economies considered as emerging now to increase five-fold in size by 2050. The position in both developing and developed economies allows the group to sustain a crisis in either relatively well. This is illustrated by the recent financial crisis in the West and also by the 1997-8 Asian financial crisis. CEO Stuart Gulliver is keen to retain this balance and also points out that it offers benefits to the group by allowing it to support trade and capital flows between the developed and emerging world. Turning to 2011â€™s financial results and the benefits of this diversification are clear.
The above graphic shows that strength in Asia Pacific, MENA region (Middle East and North Africa) and Latin America helped to offset some of the weakness in Europe and North America. Thus profit before tax on an underlying basis for the group was down just 6% to US$17.7bn. Key markets seeing strength in terms of profits growth were China (236% growth) the United Arab Emirates (73% growth) and India (22% growth). One of the biggest countries for HSBC in terms of profits was Brazil which produced USD$1.2bn profit before tax after growth of 13%.
38 | www.financial-spread-betting.com | May 2012
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May 2012 | www.financial-spread-betting.com | 39
Fat Prophets - HSBC
HSBC is also diversified by business divisions with weakness in investment banking (global banking and markets) offset by retail and commercial banking. A notable success was commercial banking which saw record revenues in 2011 and a “leadership” position in global trade.
HSBC results by division
Progress wasn’t seen here in 2011 with the figure coming in at 57.5% having increased due to restructuring costs, customer redress programmes and a UK bank levy. However, there was also the effect of wage inflation and higher staff numbers. Progress was seen on returns on average equity which came in at 10.9% in 2011. However this was outside the target figure of 12-15% but it was up 1.4% on 2010.
In January 2011 Stuart Gulliver took over as CEO and he outlined a new strategic direction for the company in May 2011. This centred around making the business more focused, setting financial targets, reducing costs and centralising control.
Underlining HSBC’s strength its core tier 1 capital ratio was up on 2007 at 10.1%. This is the ratio of the capital measure to average risk-weighted assets (RWA’s). The figure did increase on 2010 due to an increase in assets.
Given HSBC’s history this approach looks appropriate as the business is currently decentralised which has meant incoherence, higher costs, duplication and an unclear strategy across the business. In 2011 16 disposals or closures were announced with three more in 2012.
Summary and Valuation
These included 195 retail branches, mainly in New York, the US Card and Retail services business, the business in Costa Rica, Honduras and El Salvador. No meaningful acquisitions were made in 2011.
The medium term will focus on lowering costs and re-focusing the business. The longer-term will see the group take advantage of emerging market growth and a re-positioning in developed markets.
The group’s dividend was cut in 2008 and 2009 but since then has been increasing year-on-year. It will be supported by the return to earnings growth and in any event is covered twice over.
Key targets set to Stuart Gulliver are for cost efficiency in the range of 48% to 52%. This is the operating expenses divided by net operating income before loan impairment and other credit provisions.
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Some investors are sceptical towards HSBC, viewing the company’s financial targets that have been set as not likely to be met. In our view, targets should be difficult to achieve in order to obtain results.
Accordingly, we recommend HSBC as a buy.
Worldspreads collapse what you need to know
May 2012 | www.financial-spread-betting.com | 41
The sudden collapse into Special Administration on Friday 16th March 2012 of the quoted mid-tier spreadbetting company Worldspreads was a shock to many - both industry participants and clients alike. At its heart is the shocking fact that client funds, which are supposed to be completely segregated from company funds, were used by Worldspreads for purposes yet to be made clear. The shortfall runs to approximately £14m - no small sum and almost half of the then client funds. There are two types of client classification in the UK spreadbetting and CFD marketplace and these are either Retail or Professional designation. Below is a description of these two statuses and what each infers for such a client.
Retail clients funds (defined as cash and unrealised profits) are required by FSA regulations to be kept in a completely separate bank account to the company’s own funds, and further that they are ring-fenced from any creditor claims. Should the underlying bank itself that holds the funds go into liquidation then each client would be covered up to the £85,000 FSCS deposit taker limit as an additional safeguard. If a regulated spreadbet/CFD firm goes into liquidation then you are protected, irrespective of Professional or Retail status, up to the £50,000 FSCS compensation scheme limit. As a Retail client you also have the right of recourse to the Financial Ombudsman Service (FOS) - a service that provides an alternate complaints resolution procedure to the Courts and that is entirely cost free on the client’s part. If a complaint is necessary against a firm and you are unable to resolve the issue(s) direct with the Compliance department, then the FOS is a particularly useful service that you can turn to and for this reason alone one should be very careful of relinquishing Retail Status.
The requirements on a firm to classify a client as a Professional are quite onerous as all individuals are deemed initially to be Retail and the following items must be fulfilled in order for the firm to be able to re-classify them as such: (a) The client itself must effectively ‘elect’ to be reclassified and the firm must give written notice of the protections that the client will lose, namely the loss of ‘segregated’ status and the right of recourse to the FOS. This ‘election’ can be either generally or in relation to particular services or transactions. The process goes one stage further in that the client must state ‘in writing’ that they are aware of the consequences of losing such protections. (b) The firm must undertake a quite extensive assessment of the client’s experience, understanding and knowledge of the transactions and services they expect to use and the risks inherent, and have reasonable assurance that the client fulfils this criterion. (c) At least 2 of the following ‘qualitative’ criteria must be additionally satisfied too: (i) The client has carried out transactions, in significant size, on the relevant market at an average frequency of 10 per quarter over the previous four quarters
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What you need to know
(iii) The client works or has worked in the financial sector for at least one year in a professional position, which requires knowledge of the transactions or services envisaged A Professional Client can request to be re-classified as a Retail client at any point and, similarly, where a firm becomes aware that a client no longer fulfils the requirements to be classified as a Professional Client then the firm must re-classify - in practice this is likely to be a reduction in the Clients portfolio value below 500,000 Euro’s. It can be seen, therefore, that the number of clients who would fit the quite extensive requirements to be classified as a Professional is very limited. In reality no client would ever ‘elect’ to be professional, but the unfortunate fact is that some clients (or groups of clients) are simply bigger than the company that is transacting their business. If a client has a large sum with a company and then takes out positions requiring a similar sum as margin, then the platform provider must use its own funds as collateral with the exchange/broker. As you can imagine, a handful of high net worth clients would soon use up all the cash resources of the company involved. For this reason providers may then take the route of saying to the client - either agree to be professional, or we are unable to transact your business.
Spreadbet Magazine joins a growing chorus of other commentators who are calling on the FSA to tighten the procedures and reporting requirements by all investment firms (not just Spreadbetting and CFD firms) in relation to segregated client funds. As the Worldspreads scandal has shown, and also following the MF Global collapse, rules and regulations are all well and good, but if there is a determined desire by a particular firms staff to ignore these regulations there is, in practice, very little that can be done. This is why draconian legal repercussions should be brought to bear on those parties that do breach these rules and regulations. We pride ourselves on our independence at this magazine, but one firm that currently treats all clients as Retail and so ensures the maximum level of protection is Capital Spreads. In conversation with the company this is a consequence of their very strict risk control systems that require cash on client accounts (as opposed to credit) to fund their actual trading, and also their policy of insisting on stop loss orders for all open positions. The consequence of this is that the ‘whales’ (the only clients who, by failure to honour their debts, are generally the biggest risk to companies offering CFDs/spreadbetting services) do not trade with Capital Spreads and go to their competitors. These ‘whales’ can of course bring down a firm as in the case of Global Trader - sometimes it pays to know who you are ‘swimming’ with.
Further measures you can take is to split your accounts into 2 separate ones if you are married for example, and thus you would have two potential FSCS £50,000 payout safeguards. Of course, the ultimate safeguard is not to have more than £50,000 invested with any one spreadbetting firm.
May 2012 | www.financial-spread-betting.com | 43
Special US Feature
Research in Motion Conviction Buy recommendation. Current Price - $13. Price Target -$20 Conviction Buy? That’s a punchy call on what is currently one of the most hated stocks in the marketplace. What makes Spreadbet Magazine so confident of a rising share price in the much derided Blackberry maker? The answer is simple everything has its price and RIMM’s current price is now too cheap. We flagged RIMM as a potential takeover candidate in our New Year “10 contrarian bets for 2012” feature, and as the year has progressed our confidence in some type of corporate activity has grown. At the current price (at time of writing) of $12.70 the stocks market capitalisation is a little over $6.5bn. It is entirely debt free, trades on a prospective PE ratio of just 7 times for 2012, a price to tangible book of just under 1, price to sales of 0.3 and price to cash flow of an almost unbelievable 2.3 times. In short, the stock is not just cheap it’s ludicrously cheap.
The stock has been hated for almost 18 months now and there seems no shortage of analysts prepared to bet on its continued demise - perfect potential contrarian hunting territory for the value biased buyer. The announcement on the 6 April from newly minted CEO Thorstein Heins that the company was looking at “strategic options” codeword for potential sale of the company, is the catalyst we have been looking for. RIMM actually has various options open to it to unlock value including licensing its software to other manufactures, entering into JV’s with perhaps the likes of Samsung or re-focusing its efforts on purely the business sector and abandoning the consumer sector, where it is plainly fighting a losing battle and is the primary source of its woes.
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Research in motion
The Blackberry’s primary asset as a handset is its keyboard feature - as a personal user of the Blackberry and shortly due an upgrade, it is the ease of typing on the keyboard that will prompt me to renew my subscription to the Blackberry service. As more affluent users now have 2 personal phones, one for business and one for personal use, RIMM would be well advised to concentrate on the business aspect and this is an avenue that it seems management have taken on board, and indeed are now to focus upon. The most obvious potential acquirer of RIMM and also the most appropriate commercial fit is of course Microsoft. With Google and Apple continuing to encroach on Microsoft’s once seemingly unassailable entrenched PC software retail position of their Windows product, a concentration on the business sector seems a likely medium-term direction for Microsoft. With a cash pile of some $50bn, RIMM is an almost morsel sized acquisition to them. Microsoft probably wouldn’t even need to pay in cash, as the company trades on a higher PE than RIMM. A stock acquisition (in whole or part) pitched around $20 would likely have RIMM shareholders biting their hands off - certainly Jaguar Financial that has been pressing for a sale of the company from the mid $20’s and is now likely heavily under water.
From a technical perspective, I am getting particularly hot and bothered under the collar. Looking at the monthly chart (bottom left) the stock has re-traced all the gains from 2006 that took it from around $15 up to nearly $150 - a shocking 90% drop and, I can count 5 clear waves per Elliot Wave theory that typifies the end of a trend. On the daily chart we look to be probing out a classic triple bottom too. All the monthly, weekly and daily stochastics show an oversold situation, and each time we touch the $12/13 level volume increases dramatically - technically, for bottom fishers, this is about as good as it gets. For those readers who are inclined to agree with our analysis and are looking to trade RIMM on the long side we would suggest, as ever, that you ensure your account can carry at least a further 15% downside without causing you sleepless nights by way of a margin call.
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Options Corner Calendar & Ratio Spreads Hopefully readers who have previously not been too familiar with options and their potential uses are now becoming a little more educated as to how they can be incorporated into their trading strategies. The beauty of options, certainly paid for premium (as opposed to writing options), is that you know exactly what your downside is - you pay (X) p for an option and that is your fixed risk. Sleeping easy is an important element of any spreadbettors life!
Last month we looked at how simple Bull Call & Bear Put Spreads could be used as part of a traders armoury to lower the cost of an option when taking a view on a particular stock or index. This month we take that one stage further and see how spread strategies can be further evolved depending on your view on how a particular situation may play out. Let us look at how a Calendar Spread works using, in this example, a Bull Call spread on the FTSE. At the time of writing the FTSE is trading around 5600. A trader may have looked at the historical monthly distribution of returns and barring major disruptive events such as 9/11, Lehmanâ€™s etc, the monthly distribution of returns appear to be typically around 2% with the maximum move to the upside being around 12% over the last 10 years. With this data in the background, a trader might be minded that the FTSE is relatively oversold having fallen over 400 points in recent weeks and that a rally to 5700-5750 is likely in the next week.
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Bull Call Calendar Spread The trader can thus construct what is called a Bull Call Calendar Spread through, for example, purchasing the April 5650 FTSE Call at around 35. Now, he may look at the historic monthly distribution of returns and think to himself, what is the chance in the next 6 weeks of the market rising above 6000? If he believes this is slim then he can sell the May 6000 FTSE call against his purchase for around 12. Another reason a trader may wish to do this is if he is already long the market through a selection of stocks and he is happy to see the FTSE rise towards 6000 as it will take his stock portfolio up in price. In essence he is purchasing a fixed price (thus known risk) long exposure on the FTSE for the remainder of the period until the April expiry with a short position on the May 6000 Call (and therefore hedge against his long portfolio) for the remainder of that month.
Calendar & Ratio Spreads
The breakeven level of the strategy is the Long Call strike price (5650) + the NET premium cost (35 - 12 = 23) = 5673. If he purchased say £50 per point, the net cost to him in premium is therefore £50 x 23 = £1,150 - his maximum initial loss. His potential profit profile is the difference between the strikes (6000 - 5650) less the cost of the option = 327 x £50 = £16,350 - in this instance, over a 15 times potential return. Please note - this excludes movement in so called volatility and the residual theta (time value) on the short call side. Let’s say that the FTSE expires in April at 5800 thus making the traders 5650 Calls worth 150. At £50 a point his bet his therefore value at £7500 - not a bad return on £1,150. However, before we retire to the pub with our profits, we must not forget about the May 6000 Call - this will still have some time value and may, in this instance be valued around 30 at the end of April and with a FTSE level of around 5800.
As the trader is still short of this he then has the choice of either buying this back to neutralise his exposure at a cost of £1500 (30 x £50) and thus reducing his profit by this amount or alternately, taking the risk of leaving it to run towards expiry as time decay will begin to set in - see chart below that shows how time decay affects an option in the last 30 days of its life. If the trader remains short this option then he will still have the risk of the FTSE rising above 6000 and thus accruing losses at a rate of £50 per point. As stated earlier however, if he has a long portfolio of stocks correlated with the FTSE then he may be happy to see the FTSE rise all the while knowing that time decay is working in his favour. Similarly, he could choose to simply buy back half the exposure (£25) thus cutting his risk. The beauty of options is that there are so many ways you can play out your view.
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The Advantages Of Bull Calendar Spread are 1. A trader is able to profit even if the underlying asset stays stagnant. 2. A trader is able to offset losses if the underlying asset drops in value. 3. Initial losses are limited to the net debit.
Disadvantages Of a Bull Calendar Spread are 1. Profits are limited even if the underlying asset rallies. 2. Losses can be sustained if the short call options are assigned when the underlying asset rallies.
Ratio Bear Put Spread Let us now look at the simple concept of a ratio spread and, in this example, look at a so called Ratio Bear Put Spread and explain just why a trader may wish to construct this. Let’s take HSBC where a trader currently holds a long position of perhaps £100 per point in this stock. At the current price of 540p with the recent flare up of worries over Spain’s debt profile he might reason that there is a fair chance that the stock could fall to 500p over the next few months. However, if the stock did fall to say 460p he would be happy to buy more of HSBC. A trader could therefore buy a May 520 Put for say 6 and sell an August 460 Put for twice the amount for say 5. The net effect is that he has paid out 6 yet received in 10 thus creating a net credit of 4. Assuming this is done for £100 per point on the purchased side & £200 his short put sale side then his account has received a cash credit of £400 (6 x £100 cost = £600 & 5 x £200 receipt = £1000).
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Let us look at what scenarios could occur. If during May HSBC falls to 500p then his May 520 Puts would be worth 20 (520 - 500p). His profit on this would thus 14 (20 - 6 cost). This will go some way to offsetting his notional loss on his long stock bet. Of course, as in the example above, we must not forget the Puts that do not expire until August that he is still short. As with the Bull Call Calendar spread, the option could be bought back either in whole or part or, alternately, run towards the expiry if the trader is prepared to buy HSBC around the 460p level (the exercise price).
Advantages Of Ratio Bear Put Spread are 1. A profit can be made even if the underlying stock rises if a net credit is received. 2. A much higher profit can be made than a simple non ratio Bear Put Spread when the underlying stock closes at the strike price of the short put options at expiry.
Disadvantages Of Ratio Bear Put Spread are 1. Margin is required. 2. The trader is more exposed to a rise in volatility through his short puts being sold in a greater quantity than the purchased ones.
Spreadbet Magazine is to produce a special Guide to Option Spreadbetting during the next few months. If you would like to receive a FREE copy of this then please click here.
Is a black swan coming for silver?
Silver started off 2012 with remarkable gains. After rising 19.15% in January, the precious metal added another 6.49% to its value during February, reaching the dizzy highs of $37 per ounce - a level not seen since September 2011. In March, the precious metal entered a downtrend channel and has been trading within a sideways range since the 14th March. As the risk-off attitude came back into the markets on Monday 24 April, silver broke below support level at $31.28 consolidating above the key $30 level. Considering the downtrend movement of the US Dollar index in April, the bearish pressure in the silver market could be explained by the negative effect of a possible lack of industrial demand on the prices but it also leaves room for ample speculation that the silver market could be currently manipulated.
If we look back to 2007/08, gold and silver rallied significantly while the S&P 500 was crashing and it looks like the conditions in the financial markets are quite similar which makes for the potential of an imminent spike in the price of silver. From a technical viewpoint, despite the breaking of the $31 level, support extends all the way down to the $30 mark. With the MACD signal line poised to cross above the zero line and the RSI hovering around the 50 level since mid-January on the weekly chart, the bulls could step back in and move prices upwards again. The picture on the daily chart remains indecisive with the bearish failure to break below key support at $30 also suggesting that the bears could be running out of steam.
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The first targets for the bulls to watch sit at $34.29 and $38.21, the 38.2% and 50% Fibonacci retracements respectively from the April 2011 high to the October 2011 low. If triggered, this could set the stage for a run towards August highs above $43. At $30.86 at time of writing and with the next key support sitting at $27.90, the ratio of the upside potential to the downside risk is around 1 to 4. The market would begin to look very weak on a break below $27.90, but unless this level gives away, we could expect a spike soon. A long call is our option in the silver market but taking into consideration the denomination factor it is clear that the price of silver is not only subject to the laws of supply and demand, but it can also be heavily affected by the forex market. To eliminate the base currency factor, a long position in the US Dollar Index could be used as a hedge in this case.
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By eliminating the potential forex effect, we are actually removing the base currency factor from the equation and trading silver in absolute numbers. Should the price of silver spike all the way up to September 2011 highs around $43, the US Dollar index would likely fall back to test key support at 78.80. In case the US dollar gains in value either due to the recovery of the US economy or due to the weakness of the Euro, a long position in the US Dollar index could offset the losses in the long position in silver. Dafni Serdari Market Analyst
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May 2012 | www.financial-spread-betting.com | 51
Robbie Burns, aka The Naked Trader offers some words of wisdom this month... There are many advantages to spreadbetting, but one of the best ones must remain bagging a quick profit with hardly any costs involved. When a share puts out some kind of warning, these days the knee-jerk reaction is to overdo it on the downside. So when a share should have been marked down say ten percent, sometimes that markdown can be 30%. Why? Well, aswell as initial fear taking hold, of course all the stop loss orders get hit and tons of shares have to be unloaded onto the market because of that. But that knee-jerk reaction is something that can be taken advantage of.
Using a rolling daily bet for a day pretty much costs nothing - over a few days still not much and in any event cheaper than paying typical commission and stamp duty if the shares were purchased instead of a spreadbet - oh, and no tax on profits! A recent example is APR - this was knocked down to the low 800s from 1100 - nearly 25% on delayed results, yet the figures looked OK, certainly not worth a 25% markdown, perhaps 10% maybe. So a quick rolling spreadbet was used; in at around 850 for a tenner a point and lo and behold it soon rises back to a tenner! Half the spreadbet can then be sensibly cut and taken as profit, leaving the rest to run for a bit. Costs minimal, profits large! Hereâ€™s a really good rule of thumb I am now using to judge whether a share price might rise after an initial overdone fall - make a note of the opening price.
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Robbie Burns’ Trading Diary
In APR’s case it opened up on the day of the delayed results statement at about 950. This is interesting because this is what the market thinks is about the right price before the panic sellers come in and stops are activated flooding the market with shares etc. APR’s shares duly went a lot lower into the mid 800s which was a perfect point to buy and the shares worked their way back up to 950 in a few days. Another example is Supergroup - opened up at 415 after a profits warning. Then it sank down to the 320 area where it was easy to spot the turn and grab a rolling daily up bet. The hope here is it will shortly rise to the 400-415 area at which point profit can be taken again with minimal costs given tight rolling spreads, and the small overnight cost of carry. If bets like these don’t work out and the shares sink further, of course it is best to get out with a small loss just in case.
Of course one has to judge the company concerned and check it’s not going bust! I would be a bit more careful about using this strategy perhaps with an oil company. One way, once the share is going back up, of protecting the bet is simply to gradually raise any stop as the price starts to rise, though making sure to keep a decent distance away from the current price to avoid getting spiked out. And one thing that a reader quite rightly pointed out to me recently and I mention in my books: when it comes to stop losses don’t forget ex dividend dates (usually Wednesdays). Say your share has a 30p dividend due and so it opens up 30p lower, you really don’t want to be out of it just because of the dividend! So a good lesson is - it is worth checking your stops and doing your homework on the dividend payments! And I reckon that for this edition, this is a good place to... stop! See you next month. Robbie
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How to set about successfully shorting stocks (part 2) In our special 2 part feature we continue Evil Knievilâ€™s - perhaps the UKâ€™s most prominent bear raider piece on what to look for when shorting stocks, and the pitfalls that you should look to avoid when trading short.
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Have the courage of your convictions and be comfortable in the minority
Bearing in mind my observations in points (1) & (2) last month regarding the most fertile backdrop to look for in taking a short, and assuming one has done one’s homework and that you are short, the trick is to control the emotional side of the trade. One can be caught out by an out of the blue bid. Thankfully, this is a rare occurrence, but nevertheless there is an amazing amount of hubris and stupidity displayed by company directors, and the lure of a bargain can tempt a move on an ailing business. In this instance, depending on your spreadbetting firm and their offers of ‘Guaranteed Stops’, it pays to use a guaranteed stop to lock profits on the way down and protect yourself from the possibility of a 30-40% gap up. The ‘guarantee’ is generally set at a minimum of 10% from the current share price and is typically only offered on the top 350 stocks.
If you are on the right side of a short position, the short tack should hopefully be a relatively lonely existence. The more there are loud voices on the bulletin boards and in the press proclaiming what a cracking buying opportunity this stock is, the better. Experienced traders have time and again witnessed what happens in the early stages of a bear market; the media and investors in general, so conditioned by the recent rise in prices, believe that the first pull back is yet another buying opportunity. This buying into the decline generally continues. That this buying is contrary to experience is evidenced by the fact that the 1,3 & 12 months’ biggest risers’ and fallers’ lists, which you can find in publications like the FT, disclose that the biggest fallers generally display a continuing theme in that they persistently feature in all three lists. This bears out the adage that “the trend is your friend”.
Be aware of borrowing restrictions, particularly when a company is in its death throes
This is an important technical point that can catch out the novice shorter. To understand the development of the problem, it is important to appreciate what happens when you short a stock. Your spreadbet firm will sell the actual stock in the market. On the other side of this, there will be a buyer, who will need delivery of stock. Therefore the spreadbet firm has to borrow stock from an institutional lender.
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Incidentally, the institutions which lend out their stock receive a borrowing fee in exchange for this that than can vary from less than 1% per annum to double digits, depending on how much the stock is in demand to be borrowed. The institution that has lent out the stock may, at some point, wish to actually ‘call the stock back in’. This means that your spreadbet firm, in the absence of being able to find a new borrowing avenue, will very likely require you to close your short, i.e. buy back the shares in the market so that these can be delivered back to the lender. If there are no ready sellers of stock for whatever reason, there can be a mad scramble for stock. What can now occur is the dreaded ‘short squeeze’.
How to successfully set about shorting stocks
In the UK it is quite difficult to get accurate ‘stock on loan’ data. Therefore you are more at risk of a sudden call from your spreadbet firm asking you to cover your position than might be the case in overseas markets. In the US there are a number of websites that show stock on loan data such as here http://www.nasdaq.com/symbol/amsc/short-interest.
I caution against going short of minnows, i.e. stocks less than £10m in market capitalisation. Aside from the fact that you’d be hard pressed to find a spreadbet firm that would take on this trade, price spikes can be material. It is best to leave these alone unless you have a profound indifference to adverse fluctuations.
Another lesson here is that, if you have made 80-90% of the potential fall, do not be a stubborn theorist. Instead, do look to take spoils off the table, i.e. if you have shorted at 100p, say, and the stock is presently priced at 20p, don’t be hero and look to take the last scraps and expose yourself to a short squeeze.
Covering your shorts
And so we come to the all important short covering element. Basically, there will be 3 primary buy back reasons. They are: (i) you are stopped out by way of a price rise that has triggered your own personal money management parameters (hopefully with a stop loss guarantee in place).
(iii) Finally, in the immortal words of John Maynard Keynes, “when the facts change, I change my mind. What do you do sir?” If the reasoning for the short changes, and leaves the argument to be short in doubt, close the short. Be warned that most investors are indecisive when confronted with this problem.
(ii) the stock no longer offers an attractive risk/reward profile. A banked profit feels much nicer than a paper profit.
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Xcite Energy 2012 outlook
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Xcite Energy gears up to kick off crucial Extended Well Test Following the Reserves Assessment Report (RAR) written by oil and gas auditors, TRACS, on 30th April 2011 which gave Xcite Energy’s Bentley field 2P (proven and probable) reserves of 116 million barrels, the company is pursuing the next stage of its journey towards being one of the North Sea’s largest independent oil companies, or readying itself for a takeover by a major oil company.
Chief executive Richard Smith said in an interview with the Scotsman in February that the company is not aiming to maximise the flow from the wells it plans to drill this year. Instead, it will be focused on resolving technical issues about how the water table under the oil behaves, which is key to extracting as much of the reserves as possible in the long term.
The 9/3b-7 well is currently being drilled with the Rowan Norway rig following a spudding on 18th March 2012. The Phase 1A work programme is planned to be undertaken within the 240 days initial term under the rig contract which started in early March.
That knowledge will allow the company to book proven reserves for the core area of the field which, it hopes, will be at least 116 million barrels. It will also help it to finalise a field development plan that is eagerly awaited by investors. Smith said: “It’s important that the market understands that what we are seeking to get out of this well is not necessarily what they are hoping to get out of it.”
Phase 1A of the development programme will see Xcite drill two development wells and carry out an extended production test, which is expected to last 90 days in total. The objective of Phase 1A is to provide Xcite with additional reservoir and longer term performance data, to confirm and calibrate the existing reservoir model. DECC stated in a letter to Xcite in December 2011 that the “...reservoir geology and future reservoir performance as currently predicted, I am broadly satisfied with your approach to the proposed phased development of the Bentley field from a resource recovery perspective. We do however consider there to be remaining uncertainties in future reservoir performance, and we note that you plan to drill a further appraisal well and conduct an Extended Well Test this Spring, which we understand is intended to resolve the majority of these uncertainties. As a consequence and as discussed with you, following the EWT, we will need to review the results to confirm that the proposed phased development plan as described in your FDP dated 25 November 2011 remains appropriate.” The company undertook a flow test on the Bentley field in December 2010 producing a headline figure of 2900 barrels a day under constrained conditions. This flow test was enough for TRACS to assign the 1p and 2p reserves. Therefore, it is very important for investors in Xcite to understand that the current well programme is a technical test, not a headline flow rate test.
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The Field Development Plan for the Bentley Field, Phase 1B and Phase 2, was originally submitted for approval to the Department of Energy and Climate Change (DECC) at the end of 2011. The FDP will be updated with the information obtained from Phase 1A, resubmitted to and reviewed by DECC to seek confirmation that the phased development plan described in the FDP remains appropriate. With the well likely to be complete by the end of April, Xcite are likely to have the results from the 90 day flow test by the end of July or August, giving time to potentially appraise an unexplored area of the Bentley field using the Rowan Norway rig allowing the 2p reserves of 116 million barrels to be upgraded. The rig is handed on in November 2012. The second half of 2012 is, therefore, looking very interesting for Xcite investors, and will hopefully coincide with a rerating of the company to a higher level than its currently woeful $3-3.5 a barrel valuation.
Technical picture Looking at the medium term and short term charts below, you will see that Xcite is currently positioned right at a critical resistance level. The stock is just probing the top of a large wedge formation, and it sits underneath the 20, 50 & 200 day moving averages. A move up through 135-140p on large volume is our trigger to buy. The RSI crossing back up towards the 50 line is a positive sign too. Basically, the overbought status of mid-February has been well and truly shaken off as the stock recently tested support around the 100p mark - the area of resistance that capped the stock during Dec and Jan - the move back up from here is a positive technical sign.
The medium term chart also shows the down trend line from the highs of almost 400p at the beginning of last year. A decisive move through 150p would be a very bullish move. Looking at what could go wrong on the bear side - any move back down towards 100p and a number of consecutive closes below this, particularly if coupled with strong volume - will give us advance notice that all is not well.
(%) XCITE ENERGY
394 - 72
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Following on from our Feb edition feature on Groupon in which we stated, “Groupon’s shares are a trader’s dream, with the stock being one of the most volatile on the US stock market, regularly moving over 10% in a day. At the current market capitalisation the company is worth as much as the combined market values of The New York Times Co, Abercrombie & Fitch Co, Hasbro and Weight Watchers International! With analysts projecting losses into 2012 and a net negative book value, it will be interesting to see how the Groupon story plays out during 2012...” Groupon has provided traders with a cracking short opportunity during the first few months of the year as the stock hovered in the early - mid $20’s range and indeed, this paid off handsomely on April 2nd with a profits warning that resulted in a sharp fall of almost 20% on the day from just under $20 to $16. At the time of writing, the shares trade around the $14 mark.
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It seems that the increasing requests for Groupon customer refunds were the ‘excuse’ management used as to the revenue and profits miss. For those readers who have been studying Simon Cawkwell’s “Guide to Successfully Shorting Stocks” feature in this months and last months edition, you will note that Groupon seems to fit the bill of many of the stated requirements for a good short candidate - flimsy balance sheet, cash-flow issues, possible requirement to raise new finance and the all-important greed/fear pendulum consideration. Spreadbet Magazine’s conviction in a long-term short position on Groupon has now increased materially and we expect the shares to lag the market on any overall rise, and be in the vanguard of any serious market weakness. With many of the company’s former Wall Street cheerleaders now growing cautious on the stock and wider questions already being whispered with regards to the company’s financial controls, considering the market capitalisation is still around $10bn the shares could have a lot further to fall. With the stock short term oversold, any rise back towards the $16 level could prove an opportune point to open a long-term short position.
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Directors Dealings We have 3 interesting Directors trades for you this month - one being noteworthy on the sale side and two on the purchasing side.
Melrose - Current price 429p Let us look at Melrose the engineering company first. As detailed in our Feb/March edition of Spreadbet Magazine, within which I explained what to look for with regards to true potential warning signs in relation to Directors selling; where there are sales in meaningful monetary amounts by a collective number of Board members this usually makes me sit up. Where the FD in particular sells then that is generally noteworthy.
With Melrose, the Executive Chairman, CEO & COO were each awarded shares under a Company incentive plan. The haul was worth around ÂŁ30m to each of them and ÂŁ19m to the FD Geoff Martin - not bad work if you can get it, eh? The group sold in total just under 17m shares worth ÂŁ71m on the 12 April - such a massive outlier from a monetary value perspective on the Directors dealing chart that we felt it was worth investigating further. The stock was sold by way of what is called an institutional placing at a price of 400p (basically an auction type process that attempts to obtain the optimum price for the seller and buyer) - a discount of around 5% to the then prevailing market price.
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3 interesting trades
Now, given that largely the same Board members were purchasing shares (approx £3.5m worth) in just October last year around the 290p mark, this illustrates to me that at the 400p+ level the Directors do not perceive too much more in the way of outperformance, particularly given the re-gathering of darkening economic clouds... The stock currently trades on nearly 15 times earning too - a premium to the market of around 20% - for a cyclical stock this is a pretty punchy rating. Looking at the chart below we can see just how much the shares have increased in value over the last 3 years and how much of a deviation has opened up with its 200 day moving average (positioned down at 220p) - this usually will, at the very least, put a ‘brake’ on a stock if not being a precursor to an outright decline. I have also circled each time the RSI reached the 80 level during the last 3 years and you will see that consolidation occurred.
The stock has held up remarkably well following this placing (and which in itself is a positive sign), illustrating the strength of institutional demand for the company, and we think it is worthwhile continuing to watch for any further extension in the stock as a potentially interesting point to open a short. I would, however, caution that the chart shows no sign of breaking down yet, and so if a short is opened - work a stop and stick to it (readers will know I prefer 2 staggered ones so that if ‘sods law’ asserts itself and you get stopped out on half your position that you still have to suffer a second ‘poke by Sod’ to take you out the other half!). A possible early downside target could be the old resistance at 380p.
May 2012 | www.financial-spread-betting.com | 67
Breedon Aggregates - Current Price 21p On the potentially interesting Purchase side is Breedon Aggregates, the building materials business. A clean sweep of the Board participated in the placing of 15m shares at 18p - the proceeds of which are to be used for potential further acquisitions or the de-gearing of the balance sheet through a reduction in the company’s debt. In fact, within the placing announcement the company stated that it was currently in discussions with a number of “potential vendors” (companies to be acquired). The Executive Board largely held their own in the placing and so preserved their stake with the biggest purchase in monetary terms being by Peter Tom, the Company’s Executive Chairman, who dipped into his pocket to the tune of just under £300,000. What’s interesting is that during the late summer of last year there were a couple of other Director purchases by Peter Tom and Mrs Susie Farnon - the latter who increased her holding by one fifth at that point.
The purchase prices were around the 19p mark too. This sends the message to me that the Board sees value at this point and, importantly in the lower market cap spectrum of the market place where shady and amoral Directors appear all too commonplace, are prepared to back their strategy with their own money. Looking at the technical’s, the chart displays an almost classic bullish set up with the shares just recently taking out prior resistance at the 20p level and a ‘golden cross’ (a crossing of the 50 & 200 day moving averages) forming some weeks ago (circled). The RSI returned back towards the 50 line and is also beginning to rise again now. A long spreadbet or CFD position in Breedon seems to have the ingredients in place for a steady rise in ensuing months.
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3 interesting trades
Bumi - current price 500p The second interesting stock from a potential purchase perspective is Bumi - the Indonesian Coal miner that is majority owned by the Bakrie family and that was listed recently by Nat Rothschild - scion of the revered Rothschild family. The Indonesian focused group has been at the centre of a corporate governance spat between Nat Rothschild and Mr Hari Hudaya, CEO of Bumi, and that resulted in a formal letter of criticism being made public. It is actually rather surprising that the Boardroom spat has spilled out into the public arena as one of the primary reasons for Nat Rothschild in getting involved in Bumi was to enhance the company’s corporate governance through listing in London, and so adding an overlay of acceptability to the Indonesian Group. All has been quiet in recent weeks...
The shares have fallen from just over £12 when listed only last June to a new low of 543p (at time of writing) - a drop of 50%. What piqued my interest was the purchase of just over £3m worth of stock by Nat Rothschild at 617p in early April. This comes on top of a slew of modest purchases last year in mid November around the 900p level. Looking at the chart below I have circled the RSI and that shows the last time the stock was trading with an RSI in the late teens (an exceptionally low figure that more often than not precedes a sharp counter-trend rally). A rally back up towards the 660-670p level to meet the old support line and touch the area where the 20 & 50 day moving averages are centred looks probable in the near term, and so the set up here makes for an interest potential long ‘swing’ trade around this level (500p).
May 2012 | www.financial-spread-betting.com | 69
Dominic Picarda’s Technical Take
Dominic Picarda is a Chartered Market Technician and has been responsible for the co-ordination of the Investor’s Chronicle’s charting coverage for 4 years. He is also an Associate Editor of the FT and frequently speaks at seminars and other trading events. Dominic holds an MSc in Economic History from the LSE & Political Science.
Rather than a game of two halves, the stock market has been a ‘game of three thirds’ for the last couple of years. Equities got off to a cracking start both in 2010 and 2011. From around late spring, however, they suffered either a serious correction – or an outright bear market in some countries. Finally, they came roaring back towards the end of both years. Are we in for a hat-trick performance in 2012? Despite my reservations about the economic outlook at the start of this year, I have consistently recommended taking long positions in stock indices these past four months, especially the US indices. And I am not about to change my bullish outlook for now. There are few signs on the charts that a major top is imminent. Even allowing for a bit of customary seasonal weakness between May and September, I continue to look to buy the dips for now.
Dow Jones Industrials The US indices have led the way higher for much of this year. I had thought the US would enter a recession in 2012, but that is now looking much less likely than it did at the end of last year. Leading indicators of economic activity have generally improved, although employment growth hasn’t been particularly hot lately. As long as money remains cheap and the economy avoids contraction, the components are in place for further gains.
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Dominic Picarda’s Technical Take
Ahead of a major top, breadth – which measures the number of shares in an index that are participating in the market’s gains – typically starts to tail off. That hasn’t happened for the US yet. Also, the Dow typically records an overbought reading of more than 70 per cent on its weekly relative strength index, something it has not yet done during the bull-run since October 2011. While it is possible for a peak to occur without these two things happening, it is worth mentioning that this is very rare indeed. As such, I am looking for the Dow to push higher still. One of my more modest objective lies at 13700 and thereafter 13929. But I think there’s also a decent chance that this index will at least match its all-time high of 14198 in 2012. The next significant top is more likely to come next year than this, in my view. I would seek to enter long positions when the price retreats to its 21-day exponential moving average (EMA) - which is where it currently is, and then rallies anew.
FTSE 100 Despite my bullishness on equities, I have generally steered clear of buying the FTSE in 2012. As a trader, I like to get involved where the action really is, which has been the US. The UK large-cap index has faltered, by contrast, just as it did in early 2011. Having reached 5960 in late February, the FTSE failed to make any significant progress, and has more recently suffered its deepest pullback since November last year.
May 2012 | www.financial-spread-betting.com | 71
I have looked back at previous episodes where the FTSE has lagged behind the US markets by the same degree, or more as it has done this year. It is not a negative omen. Generally, it has happened during strong bull markets, such as I believe us to be in now. The most likely outcome is for the UK index to rejoin the American markets in due course. Once it finally breaks above 6000, there is another big barrier at 6100. The FTSE could reach 6400 this year, although I will not try and buy until it regains the territory above its 55-day EMA. Nikkei 225 Although I was not convinced that the Nikkeiâ€™s two-decades long bear market was over, I said in January that the index might head higher to 9139, a target that it easily achieved. Japan has disappointed repeatedly since 1989, relapsing every time it appears to have turned the corner.
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While the authorities are now acting more aggressively to end the deflation that has dogged the country since the mid-1990s, I am not getting overly excited about the longer-term outlook for now. That said, the Nikkeiâ€™s recent good run has the potential to continue for now. If it can remain above its 55-week EMA (9318) and then pierce through the 200-day week EMA (10235), the picture will brighten further. So long as the index is above that first line, my strategy would be to buy on rebounds off the 21-day EMA. A really important target lies at 10891.
Small Cap feature
JJB Sports Update Current price - 14p. The surprise news in early March of Dicks Sporting Goods investment in JJB at a stroke essentially safeguards the company’s future for the next 24 months, in particular with Bank of Scotland renewing their facilities right through to 2015. The additional support by Adidas illustrates just how important they deem a strong alternate to Sports Direct is for the sports retail sector. Much to the chagrin of their arch nemesis Mike Ashley of Sports Direct, it looks JJB just won’t lie down! The impending Olympic Games is an extremely important period for JJB, and we believe this was likely a critical element of the attraction to Dicks. With early signs of a brightening economic outlook and the legacy stock clearance that has depressed margins now behind JJB, it is not out of the question to expect JJB to actually post a modest profit for the full year ended 2012 - something the market has yet to begin to consider.
With a still not insubstantial short position floating around, the new equity going into secure hands, and the important requirement of the Directors to actually buy stock in the market in order to trigger their ability to participate in the Equity Incentive Scheme (EIS) coupled with the still very limited free-float; these particular dynamics are likely to act as a strong foundation for the shares to rise further. It is Spreadbet Magazine’s opinion that the still dominant bearish sentiment and deep seated scepticism towards the stock is the ideal fertile ground in which stock bull runs are born, and that the investment being made by Dicks is a precursor to ultimately absorb the entire residual equity - quite possibly in the next 18 months. It is interesting to note that applying a market cap to saleable square foot comparison to JD Sports results, on a fully diluted basis (adjusted for the potential conversion of the loan capital tranches), in a price of around 40-45p.
The first initial equity tranche issuance of just under 90m shares provides an immediate injection of working capital to JJB whilst the convertible loan amounts of up to £40m will underpin the company’s working capital requirements and continued store refurbishments over the next 12 months. What is important to bear in mind is that if Dick’s do convert their Loan stock into equity, then they will (unless a Takeover Panel waiver is granted) trigger an automatic bid for the company. (%)
May 2012 | www.financial-spread-betting.com | 73
Range Resources, Rocket Science and just who are Precogz? In an attempt to make the readers eyes glaze over (!), we shall explain a bit about who Precogz are. Our “thing” is Linear Acceleration and Deviation. The nice folk who work with Rocket Nozzles or even the Particle Accelerators at CERN in Switzerland use the same formulaic method. Our success rates, thankfully, are higher than theirs as our particles already exist. You will know our particles as Shares, Forex, Precious Metals and Commodities. We target where the price action is going next by using a blend of logic and with many years of trend experience. Sometimes, the results can be quite spectacular. The one thing missing from our mumbo jumbo is technical indicators! We don’t entirely ignore them, but it’s no accident MacD graffiti or RSI nonsense is missing from our published charts. None of these indicators suggest what the future price of an instrument will be so they’re less than useful from our viewpoint. Technical indicators do have a use though. They let us know how humans are liable to react when a share is both popular and volatile.
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At Precogz, we’ve actually caused irritation amongst AIM players by referring to Range as ‘not a proper share.’ Our frustration emanates from the way it has been shamelessly manipulated at the expense of the private investor who naively thinks the stock market is honest and fair. Its fall from grace commenced in April 2011 and was finally arrested at the end of 2011. Since then, it’s shown a little recovery, but nothing particularly inspiring as there’s a heck of a lot of damage that needs undoing and the chances of price rises sticking are being weakened due to the sheer number of folks whose savings have been trapped. From a chart perspective, this isn’t going up until sufficient private investors have been scared silly and bailed at break-even (at best) or at a loss. Take a look at our marked chart that gives various targets for this stock. There’s actually a number above 24.64p, but it’s not shown and to do so would be irresponsible as there’s zero chance of it happening anytime soon.
We’ve computed a trigger level on this stock at just 16.1p. Once RRL successfully closes above this level – and the IMPORTANT word is CLOSES – we’d regard it as in recovery mode but until then, it’s floundering around. Only once the price closes above the trigger level will we regard RRL as safe for a long term position.
Of course not, is the answer. It’s a share and it is currently suffering from its own popularity. You can see the chart shows the price closing in on our 9.5p target. Once that’s achieved, would it really be so unbelievable for the price to attack the longer term support level shown in black? I would suspect not… It looks to be presenting itself as a viable short to us, with a stop at 11.35 currently.
So, is it doomed? And finally, are we going to reveal how our target levels are computed? Maybe next time…
May 2012 | www.financial-spread-betting.com | 75
SPREADBETTING The e-magazine created especially for active spreadbetters and CFD traders
In next monthsâ€™ edition...
Interview with a spreadbet dealer Myths exploded & secrets revealed
How to spreadbet profitably continued 5 Pairs trading ideas 76 | www.financial-spread-betting.com | May 2012
Issue 6 - June 2012
Technical analysis v fundamentals which suits you best?
Robbie Burns, Dominic Picardaâ€™s Technical Take & much more!
May 2012 | www.financial-spread-betting.com | 77
Thank you for reading, we hope your trading is profitable during the forthcoming month. See you next month!
78 | www.financial-spread-betting.com | May 2012