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MAGAZINE

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

M ED AR IT CH IO N Issue 26 - March 2014

Man of the Moment Ben Edelman of Blinkx bear story fame SBM gets to grips with him!

www.financial-spread-betting.com

THE uK’S ONLY FREE ONLINE FINANCIAL MAgAZINE! INTEREST RATES – HOW TO PROFIT FROM THEIR IMMINENT RISE

ZAK MIR’S TOP MONTHLY PICK

INSIDER TRADINg – CAN IT EVER BE STAMPED OuT?

EMERgINg MARKETS IN FOCuS TIME TO BuY AgAIN?

AND MuCH, MuCH MORE - PACKED FuLL OF TRADE IDEAS FROM ALL OuR CONTRIBuTORS!


Feature Contributors Robbie Burns aka The Naked Trader Robbie Burns - The Naked Trader has been a full-time trader since 2001 and has made in excess of a million pounds trading the markets. He’s also written three editions of his book, “Naked Trader” and the “Naked Trader Guide to Spreadbetting” and runs day seminars using live markets to explain how he makes money. Robbie hates jargon and loves simplicity.

Dominic Picarda Dominic Picarda is a Chartered Market Technician and has been responsible for the co-ordination of the Investor’s Chronicle’s charting coverage for four years. He is also an Associate Editor of the FT and frequently speaks at seminars and other trading events. Dominic holds an MSc in Economic History from the LSE & Political Science.

Tom Houggard Tom Houggard was a broker in the City of London until 2009, racking up close to a thousand TV and radio interviews on the likes of CNBC, Bloomberg, CNN, BBC, Sky TV etc. His specialisation now is investor education and he is one of the few commentators who actually puts his money where his mouth is with live trading sessions. Find out more on www.tradertom.com

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

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Editorial List EDITOR Zak Mir

Foreword Although I’m not a great believer in Chinese astrology, the fact that this year is the year of the horse, supposedly “my” year based on my birth year, potentially makes 2014 a little more interesting to me than others. So far so good, I have to say, and I hope to unveil some more good news for all SBM readers next month too. Watch this space!

CREATIVE DIRECTOR Lee Akers www.coyotecreative.co.uk COPYWRITER Seb Greenfield EDITORIAL CONTRIBuTORS Richard Jennings Filipe R Costa Simon Carter Graham Kyle Lee Sandford

Disclaimer Material contained within the Spreadbet Magazine and its website is for general information purposes only and is not intended to be relied upon by individual readers in making (or refraining from making) any specific investment decision. Spreadbet Magazine Ltd. does not accept any liability for any loss suffered by any user as a result of any such decision. Please note that the prices of shares, spreadbets and CFDs can rise and fall sharply and you may not get back the money you originally invested, particularly where these investments are leveraged. In comparing the investments described in this publication and website, you should bear in mind that the nature of such investments and of the returns, risks and charges, differ from one investment to another. Smaller companies with a short track record tend to be more risky than larger, well established companies. The investments and services mentioned in this publication will not be suitable for all readers. You should assess the suitability of the recommendations (implicit or otherwise), investments and services mentioned in this magazine, and the related website, to your own circumstances. If you have any doubts about the suitability of any investment or service, you should take appropriate professional advice. The views and recommendations in this publication are based on information from a variety of sources. Although these are believed to be reliable, we cannot guarantee the accuracy or completeness of the information herein. As a matter of policy, Spreadbet Magazine openly discloses that our contributors may have interests in investments and/or providers of services referred to in this publication.

What I have learnt, however, from Master Simon Wong, a.k.a “The Yellow Dragon”, is that theoretically Horse years such as 2014 are supposed to see increased volatility and, indeed, the confusion associated with this ratchet up somewhat. This did indeed come to pass in January, a month which turned out to be a very painful one as “tapering” of QE took its toll on both emerging markets’ currencies and Western stock markets alike. But perhaps most striking of all is the way that just a few days into February things seemed to flip back to normal as if nothing had happened… Hmm… this may of course be due to the arrival of the Federal Reserve Chair Janet Yellen, a noted dove, or it may be the calm before the storm. But it could also mean we traders have to brace ourselves for a year of schizoid markets. With this in mind, we have some interesting pieces in this edition of our magazine: features on the turmoil in emerging markets by our resident contributor and founder of this publication, Richard Jennings of Titan Investment Partners, and also from Dominic Picarda. Of course, front page is the controversy surrounding Blinkx that has whipped up following the release of the bear piece by Harvard professor Ben Edelman. Bit of a coup for us to get him under interview in this edition. With Abenomics seeming to begin to falter in Japan, the article by Titan on the land of the rising (or is it still sinking?) sun is another must read. Plus it will be interesting to see whether their renewed bull stance on this economy following their maximum short stance on the U.S. going into the January sell off, and their prescient call on the recovery for gold and silver, also plays out. We’ve got special pieces by Tom Hougaard and Alpesh Patel and, as ever, free books and offers exclusively for our readers too. Be sure to take advantage of these. Finally, we introduce Sporting Index to our readers — bringing a new sports betting feature to this publication. We hope you find this new addition interesting and, as ever, if you have any comments on the magazine whatsoever, feel free to email us at editor@financial-spreadbetting-magazine.com All the best in your trading for March. Zak

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Contents

Man Of The Moment – The “Web Sheriff” Ben Edeman under the microscope In this special interview feature, SBM’s editor Zak Mir gets to grips with the Harvard Professor and Blinkx stock bear.

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Why we are rebuilding exposure to Japan Titan Investment Partners explain their rationale for becoming a bull of the Japanese equity market again after the recent routing it has suffered.

Investing in Financially Distressed Companies In this insightful piece, Filipe R Costa and Richard Jennings examine the evidence for investing in companies that have fallen by 90% or more and ask, is it worth it?

Robbie Burns’s Trading Diary Fresh from his recent jollies to Spain & Dubai, Robbie explains the importance of stop losses and how it helps him enjoy his innumerable holidays more!

Dominic Picarda’s Technical Take In keeping with the emerging markets theme this month, our resident TA expert takes aim at his favoured emerging markets.

Tom Hougaard Special – Why Your Mind Is Your Enemy Tom returns with a thought provoking piece on personal psychology and why it can deter you from reaching your trading goals.

Alpesh Patel’s Top 10 Predictions For 2014 As it says on the tin, fund manager and top stock picker Alpesh relays where he sees markets going in 2014 and what his top picks are.

TIP TV – A New Stock Market & Sports Tipping TV Service SBM takes a look at what is behind Nick “The Moose” Batsford’s new internet TV venture...

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Sports Spread Betting Explained

Two Must Know Rules On Shorting

In a new section to our magazine, Sporting Index explain how sports spread betting works and how you can participate in this exciting area.

We introduce trader trainers Opes Academy who explain what they have learnt about shorting with two particularly important rules.

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Submerging or Re-emerging Markets? Richard Jennings of specialist tax free fund managers Titan Investment Partners analyses the case for a tentative toe back in the water on selected emerging market plays.

A Strategy For The Impending Rise In Interest Rates Richard Jennings of Titan Inv Partners and Graeme Kyle suggest ways you can profit from the imminent rise in interest rates based on historical analysis.

Insider Trading – Can It Ever Be Stopped? We take a look at the recent step change in the SEC’s attempt to clamp down on insider trading and ask if they are finally making head roads into this white collar crime that costs honest investors dear.

Technology Corner – The Digital Revolution

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A subject matter very close to our hearts given the online nature of our publication, our resident Tech expert Simon Carter investigates the revolution that has occurred in publishing in recent years.

School Corner In this month’s edition, we introduce Lee Sandford of Trading College in which he explains some of the pitfalls that catch out novice traders.

John Walsh’s Monthly Trading Diary Has Trading Academy winner John managed to reach his goal of trading his way to a new Rolex watch? Read on the find out how he fared in February.

Markets In Focus A comprehensive markets round-up of under and out performers during the month of February.

March 2014

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Submerging or re-emerging markets?

Submerging or re-emerging markets? By Richard Jennings CFA, Titan Investment Partners

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Submerging or re-emerging markets?

The last several weeks have been kind to Titan Investment Partners with our three major themes for 2014 playing out perfectly — initially, a pretty sharp sell-off being experienced in U.S. equity markets; precious metals prices rebounding, in particular the gold mining stocks with some rallying by nearly 100% including Silver Standard Resources that we flagged in the November edition of this magazine (see here on page 80: http://issuu.com/spreadbetmagazine/docs/spreadbet_magazine_v22_generic); and finally, the wider mining spectrum displaying real strength (see our call here at the turn of the New Year: http://www.spreadbetmagazine.com/blog/titan-investment-partners-why-were-backing-the-mining-sector.html The story “du jour” in 2014 has of course been that of the Emerging Markets and the routing they have taken, with the blame being laid squarely at the door of the Federal Reserve and the continued withdrawal of super loose liquidity given the tapering of the QE program that is currently underway. Emerging markets are a sort of high beta play on global growth and so when liquidity is loose, then these markets tend to outperform. Vice versa when money becomes tighter and more expensive and risk is reined in, then they tend to be hit first.

As is usually the case, markets typically throw “babies out with the bath water” and it is our job to attempt to assess the damage and see if such an opportunity has been thrown up. Let’s take a look at some important charts in attempting to assess the landscape and see whether the sharp sell offs seen in certain of these emerging markets are justified. First up is what is effectively a measure of various countries’ susceptibility to capital outflows (see table below).

With the sharp sell offs seen in many emerging market currencies, such as the South African rand and the Turkish lira, and the drubbing many of these countries’ stock markets have also experienced, as ever, this got our contrarian noses twitching again.

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Submerging or re-emerging markets?

This chart measures various emerging sovereigns’ current account deficits relative to their net external debt (foreign claims on their assets). We can see that Turkey is the real outlier here (the bottom left quadrant being the most exposed) and so goes someway to explaining why the Central Bank there had to raise rates aggressively to try to calm markets in January and attempt to contain capital within its borders.

Others on the danger list include South Africa and again this will go some way to explaining the sharp depreciation seen in the rand this year as investors fear the worst with political factors also coming into play what with the forthcoming National elections there in a few months. Next up is a chart which actually reveals that the aggregate Global Emerging Markets’ (GEM) foreign currency debt outstanding is at a 30 year low.

“This chart alone tells me that a re-run of the 1997 emerging markets currency crisis is extremely unlikely, and as we will see a little later, given the collective underweighting of foreign investors in this asset class, arguably the “hot money” is not there to run.” This chart alone tells me that a re-run of the 1997 emerging markets currency crisis is extremely unlikely, and as we will see a little later, given the collective underweighting of foreign investors in this asset class, arguably the “hot money” is not there to run.

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Submerging or re-emerging markets?

The real “story” of the recent drubbing seen in certain emerging markets is really revealed in this chart though: This is very interesting to us in that it is a graphic illustration of the number of companies within the Global Emerging Markets regions, en bloc, that are trading at less than their replacement value (a type of “Q” ratio or tangible book value if you like). We can see that in recent weeks we have in fact taken out the peaks seen in the dark days of the subprime crisis, and are closing in on the dotcom bubble aftermath and 1997 crisis levels from which major multi-year rallies ensued…

Chart 2 below is the real “smoking gun”, however, for value orientated asset allocators like ourselves.

What this is telling us is two things. Firstly, it is a measure of institutional investors’ (the real market movers) expectations of global growth. We can see that the vast majority of them are expecting continued growth in the global economy. In contrast, however, they are positioned one of the most underweight in emerging markets in nearly 14 years.

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Submerging or re-emerging markets?

Something is likely to give here and that is: growth expectations are too high and richly valued developed markets are likely to come under pressure as the second quarter progresses or growth motors on and, together with the newly depreciated currencies of these emerging markets, pulls them along and begins to make already cheap valuation look very cheap thereby attracting capital flows back to them.

From the outside looking in, the mix of arguably undervalued currencies, certainly on a PPP basis, positive real yields, low external debt (aggregately), historically cheap price to book measures, single digit PEs and finally a large international investor underweight position, begins to look like a tempting recipe from a contrarian’s perspective. Even before the recent market turmoil, Emerging markets had been something of an unloved asset class as we can see below in a Bank of America Fund Manager survey:

GEM INVESTOR OWNERSHIP CHART The survey found that fund managers as a group were at, or close to, record underweights in Thailand, Indonesia, Turkey, South Africa, Brazil, Chile and Columbia. Interestingly, however, given all the corporate governance problems there, managers remained keen on Russia with more than 60% of investors surveyed overweight the country.

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As we can see from the next chart which plots the MSCI Emerging index since 2010 (the index tracks the performance of a basket of large and mid cap EM equities), it has indeed been correct to be underweight or even short EM equities since their peak back in early May 2011 when the index printed as high as 1206.45. But, every elastic band gets stretched too far and a trend does not last forever.


Submerging or re-emerging markets?

MSCI EM INDEX CHART More recently, the MSCI EM Index has printed down to 917.735, though in truth this is still some way above the low posted in the Index back in October 2011 at 831.215. What this tells us is that some markets are actually swimming along well, whilst others like Turkey and SA have been veritably sunk. Nevertheless, it’s fair to say that the MSCI EM Index has fallen by as much as 23.5% since the high point almost three years ago, whilst in contrast, the S&P 500, which in this case can act as a proxy for all developed equity markets, has risen by over 20%. This is clearly a massive out-performance by developed market equities over their EM counterparts, and this therefore begs the question of where is the turning point? Investors have also been underweight defensive sectors in Emerging Markets including Telecoms, Staples and Utilities as well as sectors seen as late stage cyclicals in the form of Energy and Materials. Once again, we would question how much longer negative bias can persist before we see a rotation on the part of asset allocators from overweight and overbought developed markets and sectors into these under-owned and underperforming areas. It is our job here at Titan to try to anticipate this and position accordingly.

Emerging market equities are currently trading at a 30% discount based on PE ratios when compared to their developed market peers, according to recent research conducted by the US Investment Bank JP Morgan Cazenove. EM equities presently trade on forward multiples of some 10 times earnings, whilst DM equities trade around 15 times forward earnings. JPM calculates this discount to be some 14% greater than historical median figures. Again, what gives — developed markets fall back in price or EMs catch up? In a TV interview on Tuesday, UBS CEO Sergio Ermotti said that the recent sell off in Emerging markets “looked a bit overdone”. Mr Ermotti added that: “the violent selloff in emerging markets was in keeping with the phenomenon that’s prevailed in recent years”, in which “there are excesses in terms of expectations about one asset class or the other and things move in the wrong direction, you have very violent moves on the other side.” Essentially “babies and bath water” again…

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Submerging or re-emerging markets?

If we look at the performance of selected Emerging market ETFs, we can see how big some of the recent losses have been. For instance, the MSCI Turkey ETF (TUR US) has slumped by more than 40% over the last 12 months with a fall of some nearly 15% coming about in January alone (see chart below).

TURKEY ETF CHART Mexico is another market which has seen a sharp sell off with the Ishares MSCI Mexico Capped ETF (EWW US) falling by nearly 20% over the last year (at time of writing). As with its Turkish peer, however, the Mexican Ishare retains an impressive five performance record, being up by some 137% according to figures sourced from ETFDB.com. Of course, none of these statistics is a compelling reason on its own to buy EM equities, however when looked at collectively as a group they do suggest that a nadir for the developing markets may be in sight.

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We are poised at Titan with ample liquidity to look to take advantage of any further weakness in the EM asset class and position ourselves in the most attractive opportunities. If you’d like more details on our funds and key themes for 2014, then click the banner below for a free report.


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Zak Mir Interviews - Ben Edelman

ZAK MIR INTERVIEWS

BEN EDELMAN OF BLINKX BEAR STORY FAME “Man of the moment” Harvard Professor Ben Edelman created quite a stir in recent weeks with his bearish piece on Blinkx and its spyware activities. Ben teaches MBE elective courses about the online economy and holds a PHD from Harvard university itself as well as being a member of the Massachusetts Bar. More information can be found at http://www.benedelman.org/ Zak: Despite the information overload of the internet and the increasingly draconian over regulation of the financial markets, it remains the case that the private investor is still operating on what is far from a level playing field when compared to his/her institutional counterparts. Is it not somewhat ironic that a Harvard Professor — in theory, part of the establishment — has become something of a vigilante/people’s champion as far as corporate injustices are concerned? Ben: I don’t think of it that way. I’m fortunate to have the time and resources to focus on the research and questions I consider important. That’s a long standing and indeed the proper role of academic research. Zak: Bloomberg Technology described you as a “Web Sheriff”, but isn’t there a risk that like the Wild West law enforcement officer in the Bob Marley song, that the more you hurt your targets, such as google, the greater the risk you have of getting shot down — metaphorically speaking of course.

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“There’s work To be done, work ThaT needs doing. who will lend a hand To keep The inTerneT The way iT should be, and To make The inTerneT work in a fair and balanced way?” Ben: There’s work to be done, work that needs doing. Who will lend a hand to keep the internet the way it should be, and to make the internet work in a fair and balanced way? The regulators? Look what they have done in the financial markets… I invest hundreds of hours on this very issue every year and yes, some of the work is controversial. But I’ve found that public discussion of my findings is an important and useful step towards creating appropriate action.


Zak Mir Interviews - Ben Edelman

“My biggest concern with the Blinkx matter is that so few people seem to have truly internalized the substantive news — that being that Blinkx is still running an adware business, indeed an adware business that falls importantly short of what the US Federal Trade Commission (top consumer protection regulator) specifically required of that very business in a 2007 settlement agreement.�

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Zak Mir Interviews - Ben Edelman

Zak: It is a sad fact that the financial press love to build up people only to knock them down again. Are you concerned that the Blinkx/google story may just be your 15 minutes of fame? The law of diminishing returns may also apply in that even your best scoops suffer from a mess of red herrings regarding who may have hired you and how much you were paid, rather than focusing on the message. Ben: My biggest concern with the Blinkx matter is that so few people seem to have truly internalized the substantive news — that being that Blinkx is still running an adware business, indeed an adware business that falls importantly short of what the US Federal Trade Commission (top consumer protection regulator) specifically required of that very business in a 2007 settlement agreement. Blinkx is clogging users’ computers with extra pop-up ads and privacy-invasive software. That’s what’s really important here. The financial press has shown limited interest in understanding or covering the underlying practices — what the adware does, how it sneaks into users’ computers and the like. Fortunately, the technical press has a good track record on these questions, and in due course I expect that these practices will get the attention they deserve.

But in retrospect it makes sense. Who wants to invest in an adware company? The risks are substantial and quite different from the risks in the kind of business Blinkx had claimed to be running. Zak: There has been criticism that because you disclosed that your research had been paid for by short selling clients, you are not as objective as you appear to be. That said, Crispin Odey, founder of Odey Asset Management, one of the most successful hedge funds around, says that he pays his analysts who have “good ideas” £10m plus a year. Could you not go from being a gamekeeper to poacher and join a trading firm — you could then be (relatively) anonymous, rich and without all the controversy? Ben: I like my job as it is! Zak: What are your thoughts on Muddy Waters? They seem to be “in your space” so to speak… Ben: Yes, they’ve done some good work. Zak: Spreadbet Magazine loves crusades against hubris, humbug and other market conceits, something which really does make you a kindred spirit to us in terms of your blogs. What first triggered your interest in attempting to highlight alleged wrongdoing? Ben: My first case in this vein was brought by the National Football League against iCraveTV, an early copyright infringement site and which they sued in the relative infancy of the net (even before Napster). My work in that case can be seen here: http://cyber.law.harvard.edu/people/edelman/ pubs/icrave-012700.pdf and http://cyber.law.harvard.edu/people/edelman/pubs/icrave-020500. pdf. This case illustrated to me just what a difference could result from careful and appropriate analysis and research, and from having a good lawyer!

Zak: Were you expecting such a “lively” reaction that there has been to your recent work? Ben: I knew that I had found something big. Everyone had thought the ex-Zango business was no more, in part because Blinkx had said so. Proving otherwise was a big deal. The real surprise, to my eye, was how quickly and how sharply financial markets reacted to the information.

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Zak: Would you agree it is easier to knock companies that may be bullying or be puffed up in terms of market sentiment, rather than successfully sing the praises of unloved entities which may provide a bargain hunting opportunity? Is the later of interest to you, or are you really short side focused? Ben: Yes, I tend to focus on exposing bad behaviour rather than praising good. My skills and capabilities are distinctively suited to the former. On the whole, I sense more investors do the latter than the former. Often companies tell much of this story themselves of course.


Zak Mir Interviews - Ben Edelman

Zak: According to the recent Bloomberg Technology article, you do not take positions in companies you provide research on? Do you not feel, however, that there is merit in “putting your money where your mouth is”? Additionally, is it not tempting to go short of, say, a company like Blinkx with a suitable disclosure, given your bearish view on the company? Ben: I’ve never been inclined to do this. Zak: How near or far is the internet and the new economy from the initial 1990s idealism? Are Facebook, google, Apple and Twitter serving us up the happy glow of back To The future or will it be the darker side of back To The future ii?

“i wouldn’T invesT in eiTher aT currenT prices. as adverTising vehicles and plaTforms, They don’T parTicularly impress me. as communicaTion Tools, They’re vulnerable To being replaced.”

Ben: I like many aspects of the Internet and am a big technology fan in general. But there’s plenty of room to improve. It’s striking to see so many sites and publishers depending on a few key firms — so many online sellers who rely so heavily on Google, for example, obliged to pay whatever price Google charges and generally having to dance to Google’s tune. And online ad fraud remains a real mess — advertisers overcharged and tricked in various ways. Zak: What are your thoughts on current technology stock valuations, in particular the likes of Facebook and Twitter — overblown or justified? Ben: I wouldn’t invest in either at current prices. As advertising vehicles and platforms, they don’t particularly impress me. As communication tools, they’re vulnerable to being replaced. Zak: What next for Mr Edelman? Ben: I’ll have more articles in the coming months about academic subjects and about various schemes that would benefit from public scrutiny. Probably some more on Blinkx in due course too. Watch this space!

March 2014

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Small Cap Corner

Small Cap Corner

Investing in Financially Distressed Companies By Filipe R. Costa & R Jennings, CFA Titan Inv. Partners Investors love to look at equities’ past performance as a guide to future performance. Patently paying no heed of the disclaimer at the bottom of almost every fund’s promos, namely that “Past performance is not necessarily a guide to future performance”! En masse, it seems that when it comes to individual stocks, however, that the more beaten down a share is and the worse the performance, the greater the likelihood of past performance actually not being a guide to future. In essence, the lower the price of a stock relative to its past, the greater the expectation of a rebound by the more risk orientated punters. Their fertile hunting ground is 52 weeks lows. In contrast, there is another class of investor, the momentum players that have their hunting ground in 52 week highs — reasoning that the company’s performance will continue positively and that past performance is a guide to future performance. If the shares of a company are trading near record high, it means that there has been strong upside movement recently, likely a good indicator of the company’s overall health. Investors then take this as a positive signal and so buy the shares outright or wait for a small correction to enter the market. A share is of course nothing more than a small fractional claim on a company’s future earnings.

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It is, per capital markets theory, the discounted value of all the expected future earnings (the discount rate being dependent upon the perceived risk in the company). Efficient markets hypothesis should now be well and truly consigned to the dustbin. Ironically, it is the very belief in this now discredited theory that the active fund management industry is based upon, namely that “Mr Market” prices accurately the discounted value of a company at any one point in time! The stock market is the place where millions of buyers and sellers meet each day and the final price for a company’s shares is the result of that interaction. If you are smarter than the aggregate and find a mispricing, you will “take” from the market. If “the market” is smarter than you, then it will pick your pocket. Time is the arbiter that decides who was right and who was wrong.


Small Cap Corner

If, for example, we take into consideration the general economic cycle with its recessions and booms and also the boom and bust configuration that equities have increasingly displayed, then buying near record high prices can seem like a dangerous strategy. If history repeats, then the higher the price we pay for a stock and, importantly, the longer the period of time that it has been making new highs, the greater the probability of the investor actually overpaying and being susceptible to a correction.

S&P 500 20 YEAR CHART Investors, it is said, spend a lot of time trying to time the market correctly, in particular trying to buy at the bottom and to sell at the top. Empirical evidence however tells us that they, again en bloc, do precisely the opposite. Selling at lows as the pain becomes too much and buying at highs as greed and the fear of missing out gets the better of them. The probability, however, is that if the shares of a company are at record-highs, the odds of a top being near increase, otherwise the stock price would be a straight 45 degree line (I’ve seen precious few of those in my career!). Thus one should in fact be cautious when a stock or index becomes over extended in new high territory.

Investing in Depressed Equities – the evidence

During the financial crisis of 2008, global stock markets lost 50% and more of their values with many companies down 70-80%, even the so called “blue chips”. This is the “once in a lifetime” type of opportunity when many perfectly sound companies get dragged down through forced selling and it pays to buy the low. Of course, knowing whether the low is 47%, 61% or 80% from the high is no exact science and is, in reality, a large part “Lady Luck”! During the last 12 months, this very publication has been pointing out to readers the phenomenal value in the mining sector for example. That didn’t stop the dislocation from fair value continuing to increase. What is cheap, in essence, usually gets cheaper. The trick is to ensure that you are still there “at the bottom” and that you have the mind-set to remain resolute in your belief and not, as the market is want to do to people, force you out at the low…

Before proceeding further, we should try to understand the differences in reasons when stock prices fall heavily, and being defined as more than 50%.

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Small Cap Corner

“While technical details about a company’s share price are important for shorter term trading decisions, what drives investment in the long-run is fundamentals.” While technical details about a company’s share price are important for shorter term trading decisions, what drives investment in the long-run is fundamentals. Buying a stock just because it is down 80% or 90% isn’t reason enough to jump in and in fact can be a particularly risky and naïve strategy. There is no substitute for thorough research and establishing just why the company’s equity base has been decimated by so much. While panic selling certainly plays a role during an equity crash, for many companies in the 2008-09 bear period, there was a very real risk of them going to the wall due to debt levels. When the panic disappears, some companies will recover, while others may ultimately end up filing for bankruptcy.

A huge price decline is a symptom that may actually have its origins in a fatal disease (HMV anyone?). Put simply, investors should be very careful trying to build a portfolio from depressed equities which are down 80-90% as there is usually a solid reason behind the decline. Anticipate that the consensus “Mr Market” reasoning is wrong however, or it is about to change due to a particular catalyst, and the returns can be outsized. But, by their very nature, these situations are exceptionally rare. One can have seven go bust or trade sideways for a long time nowhere and maybe two or three out of 10 that rally hard. Diversification of positions when fishing at this bottom end of the market is thus extremely important to ensure you have the two or three out of 10 and not, as probability will likely

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The Value Perspective Study & The 90% Club

A recent study conducted by The Value Perspective and published on the company’s website attempts to analyse and understand the value of investing in severely hit equities that had declined 90%. There is nothing magic about the 90% level and it is just arbitrarily taken as a sufficiently large value to potentially represent a bottom or at least something that is near to one. They then ask the following question: What happens during the next five years to these equities? And, of course, ultimately comes the million-dollar question: Is it worth investing in these equities? The study takes the period between 1998 and 2008 into consideration and found, somewhat surprisingly, that just 3% of the companies in the sample set in the end filed for bankruptcy. Nevertheless, out of the sample, near 36% of the companies continued to experience declines once the 90% mark had been hit, with half of them in fact declining more than 50%. Looked at another way, fully 60% of the companies within the “90% club” effectively recovered in price and so represent a good profit opportunity. Here’s the real mouth-watering stat though: out of this 60% sample, the average rise was some 250% in the subsequent five years.


Investing in Financially Distressed Companies

“The study takes the period between 1998 and 2008 into consideration and found, somewhat surprisingly, that just 3% of the companies in the sample set in the end filed for bankruptcy.”

While the study is tempting from a “bottom fishers” perspective, it does suffer from several problems that investors should be aware of however. The period under consideration may in fact be positively skewed, as bankruptcy filings declined during a good part of the period due to economic expansion. Economic conditions were favourable for the recovery of any distressed firm.

If the analysed period covered the time from 2008 to the current day, we are sure that the results would have been very different and, indeed, prior studies on this subject show a far worse performance than that reported by Value Perspective.

VALUE PERSPECTIVE CHART

March 2014

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Small Cap Corner

Financial Distress Academics and financial analysts have long since attempted to capture financial distress in companies at an early stage as a way to avoid investing in these stocks. One way to determine it is by looking at both market value and at the company’s financial expenses. A company which displays the characteristics of a declining market value for two consecutive years and which has interest expenses above its operational cash flows in the same period is usually considered by these analysts as in financial distress. In essence, the funds it collects from its operations aren’t even enough to pay for its financial obligations and the situation is confirmed by the decline in the company’s market value (through a declining stock price). Companies in such a position are likely in real trouble and thus have a much greater chance of winding up in bankruptcy. If that is the case, then a 90% decline in price is more likely to act as a warning bell than as an entry signal. What we have learnt here at Titan is that when a company falls by such a magnitude, IF there is no debt problem, i.e large gearing of the balance sheet, the probability of a rise on the stock price over subsequent years is much higher.

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Of course, there are many other factors to pay heed of: for example is the industry in which the company operates in perpetual decline, how capable and aligned are management in restoring the company to health etc etc.

When a Bankruptcy Filing isn’t The End When a firm files for bankruptcy protection (in the U.S), financial distress has come to a point where management simply cannot continue to operate the business as an ongoing concern. The company’s remaining assets aren’t enough to cover liabilities (shareholders’ equity is therefore negative). Even in cases where equity is still positive (and thus book value is above zero), the company isn’t able to pay its creditors in the short term, likely due to the illiquid nature of its assets. Recall that a share is nothing more than a residual claim on the company’s assets, on what is left after all creditors are paid. If the company can’t pay its creditors, then there won’t be anything left for shareholders and so you would theoretically expect the stock to be valued at zero. In practice, in the U.S. anyway, this frequently isn’t quite the case…


Investing in Financially Distressed Companies

“In fact, in a research study conducted by Philip Russell from the University of Philadelphia on bankrupt companies, he found that on average investors lose 70% of their stakes in these companies.” The shares of a company that is filing for bankruptcy protection usually tumble, but actually stay above zero, which means that there is a market value remaining. Why is this, you might ask? At first glance, it would seem to make no sense that there is still positive value, but there are two main reasons why this may be the case. First of all, upon liquidation, the assets of the company are sold and no one knows for sure just how much will be obtained. It may be the case these assets are sold above the market value of liabilities and shareholders will receive the remaining surplus. Although possible, this is extremely rare. The second, and main reason why the stock may be worth something, is that during the bankruptcy process, which takes time and is sometimes costly, particularly for creditors, this gives the shareholders negotiating power in trying to extract haircuts from creditors.

Investing in Bankrupt Firms In the States, there actually is an active investment management class specifically focusing upon companies that file for Chapter 11 Bankruptcy proceedings. If shareholders can force claims reduction on creditors, then one may ask if it is worth investing in stocks after the bankruptcy has been announced? There have been many studies on the topic but, again, the findings aren’t encouraging as most of the time, investors are taking small investments in the hope for a long shot that happens very infrequently. If there was something in this strategy, then it would have been arbitraged away now as big capital pursued it.

In fact, in a research study conducted by Philip Russell from the University of Philadelphia on bankrupt companies, he found that on average investors lose 70% of their stakes in these companies. He discovered that in 93 out of 154 bankrupt firms, original shareholders ended up with nothing in their pocket. In just 14 cases they got a positive return, which on average was around 115% — much less than the skyrocketing returns investors usually think they can get from such speculation, and not enough to compensate for the wipeouts on the vast majority.

Final Words Value investment is all about finding undervalued assets with hard asset backing and preferably non distressed balance sheets. It requires the search for a catalyst for a re-rating before the rest of the market is aware of it, and then being patient. If an investor was to arbitrarily pick equities that had declined 90% without the requisite research, then the odds of his success are likely to be much less than the stats would imply. Here at Titan, we are very definitely of the value disposition set and rely upon thorough research in our investment process and a healthy dose of contrarianism. Since inception in August last year, our Small Cap fund that operates on these principles is up 24% against its benchmark of just over 12% — this being achieved without being geared. For more details on our Titan funds, click on the image below or the advert overleaf.

March 2014

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Titan Investment Partners - Small Cap Fund

These figures are gross returns and have not been adjusted for Titan’s performance fees. Past performance is not necessarily a guide to the future.

Returns from inception to 21st Feb 2014 Titan Small Cap Fund + 23.58% v FTSE Small Cap Index Benchmark + 13.24% Outperformance relative to benchmark + 10.34% • Leverage capped at 2.5 times on • A diversified selection of small cap stocks (Market capitalisations from £15m - £250m) stock positions • Directors OWN capital invested within the fund • Long/short flexibility • 90% of gross dividend credit on • Minimum investment of only £10,000 stock positions • All returns completely free of CGT*

CLICK HERE FOR OUR LATEST FUND MANAGER’S VIEWS

0203 021 9100 www.titanip.co.uk Risk Disclaimer Titan’s spread betting funds are leveraged products that involve a higher level of risk to your security and can result in losses of some or all of the capital invested. Ensure you fully understand the risks and seek independent advice if necessary. *Spread betting in the UK is currently tax free but this may change in the future. Authorised and regulated by the FCA. Registration No - 590782 26 | www.financial-spread-betting.com | March 2014


March 2014

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Why we are rebuilding exposure to Japan

Titan Inv Partners

Why we are rebuilding exposure to Japan By R Jennings, CFA Titan Investment Partners

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Why we are rebuilding exposure to Japan

March 2014

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Why we are rebuilding exposure to Japan

Investors en masse certainly seem to have been caught on the wrong foot since the start of the New Year as global stock markets have been both volatile and entered relatively sharp corrections during January, although as February progressed they were rebounding back towards all-time highs (you just cannot seem to break the legs of this bull market can you?). Stats out in early February detailing that retail investors in the U.S pulled the most out of equity markets since records began (see below) shows just how jumpy they are and, again, how the masses are usually wrong given that they went all-in on equities only last year — four years into the bull run and when the best of the gains were very likely behind investors.

WEEKLY EQUITY FUND FLOWS

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Why we are rebuilding exposure to Japan

With the volatility seen at the very birth of the New Year, let’s reassess the investment landscape from a macro perspective to see what opportunities have been thrown up… As the US Federal Reserve continues to cut back on its asset purchases, now at the $65bn level per month from $85bn previously, investors it seems are looking for an alternative reason to justify holding equities. Unfortunately, the state of the world economy just isn’t encouraging enough, certainly from where we are standing, to support continued price appreciation for a stock market that has almost tripled in value since the peak of the crisis six years ago. Many investors, including ourselves, fear that without the help of central banks, financial markets will very likely reacquaint themselves with gravity again as the year progresses, and multiple expansion becomes ever more difficult to justify from here. Ironically, given the extension of QE relative to other markets around the globe, it is Japanese equities that have been under intense fire in 2014 and with the Nikkei, at its lowest in early Feb, down almost 15% in just six weeks — the largest fall of all developed markets. But while market routs deplete the wealth of panicked equity owners, they also create good opportunities for buyers.

Is this a good opportunity to enter Japan again then, or should we stay away? Japanese equities have in fact been through a really tough period for almost a generation now — a true secular bear market with the index still down almost two thirds from its bubble high at the end of 1989 near 40,000. The Japanese economy has also been experiencing deflation for more than 25 years. As this deflation ravaged companies and the yen soared to new highs in recent years, the index was pushed down to a shade over 7,000 in 2009 — nearly 80% down from its all-time high — an almost unprecedented fall in recent times for a major developed stock market. Equities were veritably trashed, to say the least, and in the process one Japanese leader after another was condemned to the political scrap heap, seemingly unable to restore any confidence in the economy. It thus seemed that equity prices were condemned to stay flat for an eternity… Of course, it is at precisely these times that the market catches out the majority, and prevailing sentiment is ripe for turning.

“Japanese equities have in fact been through a really tough period for almost a generation now — a true secular bear market with the index still down almost two thirds from its bubble high at the end of 1989 near 40,000.”

March 2014

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Why we are rebuilding exposure to Japan

Enter stage left one Shinzo Abe — a second time Japanese Prime Minister having previously stepped down due to ill health and who swept back to power in 2012 with a bold promise to reflate the country and recover the lost economy. Abe immediately set about pressing the BOJ to engage in a policy that mirrored the FED’s approach in recent years. That is injecting a large amount of money over a short period of time in the hope that (a) the money multiplier effect would kick in and (b) weakening the yen materially to add a double whammy to exporters. In January 2013 the BOJ announced a new inflation target of 2% and an asset purchase program of around 60-70 trillion yen per annum. Not surprisingly, given this magnitude of liquidity injection, it lit the match under the Japanese equity market. With many global investors underweight this market, the Nikkei went on a veritable tear, rising 43% and the JPY losing 22% during 2013 — both as a direct consequence of the new program and as investors both overseas and domestic chased the market higher. Spreadbet Magazine flagged such an event to its readers literally days before take-off here: http://www.spreadbetmagazine. com/blog/japanese-equities-dont-miss-the-train.

nikkei 225 index 2 year returns

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The shakeout seen in recent weeks, however, has reminded investors once more just how fragile the Japanese economy still is and how interdependent, likely the rest of the world, the country is on what happens with US monetary policy. If, as they say, ‘What happens in Vegas stays in Vegas’, we could also say that ‘What happens in the US surely doesn’t stay in the US!’ And that means that more important than what the BOJ does is what the FED does, even for Japan. We had a warning last year when Bernanke set off the so called “taper tantrum” as to what could happen to other stock markets... In the summer of 2013 the Nikkei crashed by a shade over 20% peak to trough in just a little over four weeks and the hot money flew away to, irony of ironies, the “safety of the dollar”. At the turn of this year the same happened. At first it seemed that the markets shrugged off the first tapering that started in December, but when a mix of negative news coming from the US, China and the emerging markets hit the street, the hot money once more decamped double quick from Japan as the chart below depicts.


Why we are rebuilding exposure to Japan

SHINZO ABE

What we have learnt here at Titan over many years, however, is that investors en bloc are always wrong and that babies do get thrown out with the bath water. During February we began rebuilding exposure again to the Japanese market, reasoning that if the hot money is out, the market is oversold and the reflation story continues full-steam ahead with Japanese officials staying resolute in their economic reform plans, and that this is a good recipe to be involved with from the long side.

From a pure valuation metrics basis, Japanese equities are cheaper than US equities, particularly on a price to book basis and as the chart below shows the rout actually took the market back to touch the top of the flag formation breakout last year. Technically, with the weekly RSI back at 48, in a bull market this can prove a good level to get long again as each of the circles on the chart illustrate. As ever, time will tell, but our clients and our own money here at Titan is on a resumption of the bull market during 2014, otherwise it will be one of the shortest bull markets in history.

March 2014

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Why we are rebuilding exposure to Japan

chart - ?

You should not take this piece as an advocation to trade in any of the instruments mentioned and should always take professional advice in relation to your own personal circumstances. All Titan Funds operate within a spread betting account which means gains or losses are currently free of tax. However, legislation can change in the future. Spread betting is a leveraged product which could result in losses of some or even all of your initial deposit. Ensure you fully understand the risks.

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March 2014

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Robbie Burns’ February Trading Diary

ROBBIE BURNS’

monthly trading diary - top-slicing! As I write this I’m about to head off to Spain for half-term. Yes, I know, I know, last time it was Dubai, I can’t help being an international jetsetter... And on holiday I really don’t want to have to trade much if I can help it. So it’s a time when I consider part-selling spread bets that have done well. That made me think about the one question that I get asked a lot which is: “When do I sell?” Of course, the hardest part of trading!     The great thing about spread betting is it doesn’t cost anything to sell part of a bet, but if you sell lots of bits and pieces with a broker, minimum commissions can soon add up. So before a holiday, I just whizz through my spread bet accounts and top-slice (sell) a lot of my bets. In other words, bank some profits. Makes the holiday seem sweeter… Also, while I’m away, I’ll have trailing stops on most things, positioned well away from the current price so they would only be sold if something majorly bad was to hit the market. If you are really unsure as to whether to sell after your share has gone up quite a bit, the best thing to do is top-slice. Most people seem to think they should sell the lot. I think you should always just sell some, assuming you’re not in some poxy oil company that found water. Again!   In fact, it is rarely that I sell the whole lot of anything in one go. If I made 30% on something, I might sell a quarter of it, or… top-slice.

You getting the hang of this now? If it carries on up, you are still in it; if it starts to go down, well, you banked some of the profit and you may in fact look to get back in. Call it good house-keeping. Probably one of the worst times to sell is after the market has gone down for a bit and you are feeling scared. As Warren Buffet points out: “Buy when people are fearful, sell when they are being greedy.” Or something like that anyway! You get the drift, don’t you?   What this means is that it is usually best to sell on a great market day and not a good idea if shares have fallen a lot on fear, as the fear can often disappear as “Mr Market” changes his mood so they bounce back up confounding you! Even worse, what many people do: “Buy on a bulletin board tip and then sell just when the last pumper has dumped”. Really, they do!   Of course, there is no right or wrong answer as to when to sell. None of us can get out at the top or in at the bottom. Although many try… My thoughts are let’s just go for part of a ride and if you get one wrong then put it down to experience.

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Robbie Burns’ February Trading Diary

“The main thing with selling is this: don’t wait for it to be down 50% plus!! You should never ever be in anything down by more than 20%.” The main thing with selling is this: don’t wait for it to be down 50% plus!! You should never ever be in anything down by more than 20%. And you should not have all your account in one stock! For a lot of traders I meet, that seems to be impossible. Indeed, often I have a look down my spreadbet positions and check anything that is in the red. Then I will ruthlessly just sell them. I entered the trade because I thought I was going to make a profit. I don’t mind waiting for a profit, but I do mind if the share in question keeps going down!   In fact, I have just done this five minutes ago, going on holiday spurred me on…  It might well be a share I have already done well on — I have some winning positions bought lower but a more recent trade on it that may be in the red. So I cut that trade, the losing one.  

Selling, as we can see, is never an easy decision. But if in doubt, you are frowning, not sure, sleepless in Barnsley or Milton Keynes… cut a few. You can always buy back later. Right, now my spreadbet account is looking healthy on the banked profits after a lovely top-slicing session, I’m heading off to London City Airport for some sun.   See you next month! Robbie

March 2014

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Sports Spread Betting Explained

Sports Spread Betting Explained Sports spread betting has perhaps acquired a reputation as a complicated way to enjoy a bet. But that couldn’t be further from the truth and, once the basics are understood, it provides a level of excitement and thrill unsurpassed by any other betting experience (sorry financial spread bettors!). There is one name at the forefront of this market - Sporting Index - the world’s leading sports spread betting company.

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Sports Spread Betting Explained

March 2014

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Sports Spread Betting Explained

Firstly, sports spread betting works on the exact same principle as financial spread betting. As the punter, you are invited to challenge a prediction made on literally thousands of markets concerning a sporting event. All predictions are made in the form of two prices and you can either buy (bet higher) or sell (bet lower) on those quotes. Rather than markets being settled on a simple win or lose scenario – which is what happens in fixed-odds betting – sports spread betting profits or losses are calculated by how right or wrong you are with the outcome. This means the more a result goes in your favour, the more you can win. Likewise, if a result goes against you then you are liable to lose more than your original stake. Let’s take a recent football example. Manchester City versus Barcelona was one of the most anticipated games of the season a couple of weeks ago and Sporting Index traders quoted total goals at 2.95-3.15.

“Rather than markets being settled on a simple win or lose scenario – which is what happens in fixed-odds betting – sports spread betting profits or losses are calculated by how right or wrong you are with the outcomE.” In the end it finished 2-0. Markets are settled as the difference between the result and the price you bought or sold at. That difference determines your profit or loss. So if you had bought goals at 3.15 for £100 you would have lost £111.50 (3.15-2 = 1.15 x 100). Where as if you had sold goals at 2.95 for £100 you would have won £95 (2.95-2 = 0.95 x 100). Sporting Index price up markets on all aspects of a game. Player goal minutes (the aggregate time of all goals scored by a player) for Lionel Messi in the Man City v Barcelona game was trading at 33-37.

If you expected the game to be low-scoring you would have sold goals at 2.95. On the other hand, if you had anticipated a high-scoring clash you would have bought goals at 3.15.

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Messi scored in the 54th minute so his goal minutes therefore made up 54. Buyers at 37 would have made a profit of 17 times their stake. Sellers at 33 would have lost 21 times their stakes.


Sports Spread Betting Explained

There are many advantages with sports spread betting that just don’t exist with fixed-odds betting and exchange betting. Here are a few: 1

There is a wider choice of markets than with fixed-odds betting and you also get more in-play options. During a live event you have the option to close bets (to take a profit or limit losses) as well as open new bets. There are also no limitations in terms of liquidity associated with exchange betting.

2

There is greater potential reward for being right. With fixed-odds betting you either win or lose. Even if a result goes heavily in your favour, you still get the same return as if it wins by a narrow margin. If you back over 2.5 goals in a match with fixed-odds bookmakers your winning stake remains the same whether there are three goals or nine goals. But if you had bought goals at 2.5 with Sporting Index your winnings increase each time a goal is scored. Similarly, if a match doesn’t go your way, you can lose several times your stake.

3

4

You don’t have to win. Fixed-odds betting offers two outcomes – winning or losing. Sports spread betting can be profitable even if you don’t get your desired outcome. For example, you fancy Andy Murray to do well in a tennis tournament and buy him at 16 on the 60 win index. He gets beaten in the semi-final but the market still makes up 20 – a profit of 4 times your stake. If he got beaten in the final, he’d still make up 40 – a profit of 24 times your stake.

5

Better value than fixed-odds betting. Horse racing spread betting for instance has never been more exhilarating. Indices right down to fifth place offer much better place terms than a fixed-odds operator.

6

Most of all, it’s exciting! Imagine you have bought Wayne Rooney’s goal minutes at 28 in a match. He scores after 32 minutes, securing you a minimum profit of four times your stake – and there is still nearly an hour to play. You know every other goal he scores is going to land you a massive pay day and the thrills and spills every time he gets a chance make for the most enthralling betting experience out there.

It’s not as risky as you might think. Spread betting is only as risky as you want it to be. By controlling the size of your stake, you are managing how much risk you are willing to take on. And with Sporting Index accepting stakes as low as 5p on some markets, we cater for all customers.

All new Spreadbet Magazine customers who sign up to Sporting Index can enjoy a free £250 total goals bet after staking an initial five bets. To find out more visit www.sportingindex.com/sbmagazine or click on the advert on the page overleaf.

March 2014

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0 5 2 ÂŁ Free als o G l a t To t e b d sprea bets 5 r e t f a k s i r a with ach* e 0 2 ÂŁ of

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*New clients only only, for full terms and conditions see www.sportingindex.com/sbmagazine, account opening subject to suitability checks

As we approach the business end of the season, now is the perfect time to give sports spread betting a go. Open an account, place 5 bets each risking £20, and we’ll give you a free £250 any Total Goals spread bet to use on an T y live game of your choice. Of course, as with any great offer, conditions.* off offer er,, there are a ffew er ew terms and conditions .* The level of excitement on live sport can be sports magnified tenf tenfold with a spor ts spread bet. Whether you’re a buyer er or a seller seller, whether yyou’re ou’re trading Goals,, a Team Team’s Total Goals T T ’s Winning Margin or even a Minutes,, your winnings (or losses) are Player’s ’’s Goal Minutes directly linked to events on the pitch, putting you more in tune with the action than any other bet.

Apply for an account at www.sportingindex.com/sbmagazine Losses may exceed your initial deposit or credit limit.

.COM

March 2014

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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 four years. He is also an Associate Editor of the FT and frequently speaks at seminars and other trading events. Dominic holds an MSc in Economic History from the LSE & Political Science.

Dominic Picarda’s Technical Take EMERGING MARKETS IN FOCUS Emerging Market (EM) stocks have gone from hot to not. During the last decade, equities in up-and-coming nations delivered terrific returns as developed-world shares struggled. Over the past couple of years though, the tables have turned with Western and Japanese stocks recovering strongly and EM markets crumbling. Since 2011, the MSCI EM index has shed more than one-fifth of its value, meeting the threshold for a bear market. As a result of their rotten showing, EMs as a whole already look somewhat cheap, both compared to their own history and against developed markets. However, experience shows that EMs can lag DMs for five years or more during episodes such as this. With the US Federal Reserve likely to keep paring back its money-printing drive, I expect the dollar to strengthen more and for EM stocks’ rough ride to extend. Still, what’s true of EMs as a whole isn’t necessarily so for each one individually. Here, I explore some of the best long and short opportunities…

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Dominic Picarda’s Technical Take

Chart - Emerging vs developed market cycles over time

March 2014

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Dominic Picarda’s Technical Take

Brazil – Bovespa Brazil is thought to have slipped into a recession in the second half of 2013. South America’s largest economy has been suffering from a nasty cocktail of stubbornly high inflation, a possible housing bubble and failed government attempts to stoke growth. The country’s hardships are leading to social strife, including frequent outbreaks of rioting in Rio de Janeiro. Against this troubled backdrop, the Bovespa stock index is down by almost 40 per cent since November 2010.

Bovespa CHART The downtrend in Brazilian stocks has been a choppy one, rather than a steep drop. This makes short-selling a bit trickier, but not impossible. The best approach is to short the end of the numerous sharp bounces that happen along the way. These have tended to begin from around weekly oversold levels, which the Bovespa is currently not far off, and take the index back above its 200-day average. A big drop back through that line would therefore make a good tactical entry-point for shorting. For nipping in and out meanwhile, I’d be happy selling drops through the declining 20-day average.

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Dominic Picarda’s Technical Take

China A50 In 2008-09, China’s government avoided a much worse slump by overseeing a huge splurge in state spending and credit. However, this may merely have stored up even more trouble for another day. China may well have overinvested in recent years, leaving it with a glut of factories, airports and apartment blocks, while the banking system may well have lent unwisely in many cases. Keeping track of all this is made harder for investors by the iffy quality of Chinese economic and corporate data.

China A50 CHART The FTSE/Xinhua A50 index is not far off where it was at the depths of the credit crunch six years ago. And, it is wholly conceivable that it might re-test the 6000 and 5700 levels as the EM woes continue. My instinct would therefore be to await the next short-lived burst higher — of which there have been a dozen or so since 2009 — and try and short as the price plunges back below its 100-day average.

March 2014

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Dominic Picarda’s Technical Take

South Africa – JSE 40 The “Rainbow Nation” looks rather gloomy from the outside right now. After twenty years of ANC rule, South Africa is failing to live up to its undoubted potential. Inflation, heavy current and budget deficits, high-level corruption and ugly standoffs with organised labour are hindering growth and harming the country’s investment appeal. With the ANC set to keep its grip on power under the clownish President Zuma in this year’s elections, there is little obvious impetus for change for the better.

South Africa – JSE 40 CHART Despite South Africa’s difficulties, its stock market isn’t in bad shape. The JSE 40 index is around its all-time highs. Its lovely, thrusting uptrend has left it somewhat overbought on a longer-term view, not to mention rather dear. Given the forces against Emerging Markets, this leaves it vulnerable. That said, a trend follower would only seek to buy in this situation, perhaps targeting 46.000. I would therefore wait for the currently daily over-boughtedness to unwind, and get long on a rebound from the 21-day exponential moving average.

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No

1

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Try our new trading platform capitalspreads.com/No1 Losses can exceed deposits. *Source: Investment Trends 2013 UK CFD, Financial Spread Betting & FX Report Capital Spreads is a trading name of London Capital Group Ltd (LCG), which is authorised and regulated by the Financial Conduct Authority.

March 2014

Spread Betting | CFDs | FX

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Titan Investment Partners - Precious Metals Fund

These figures are gross returns and have not been adjusted for Titan’s performance fees. Past performance is not necessarily a guide to the future.

Returns from inception to 21st Feb 2014

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0203 021 9100 www.titanip.co.uk Risk Disclaimer Titan’s spread betting funds are leveraged products that involve a higher level of risk to your security and can result in losses of some or all of the capital invested. Ensure you fully understand the risks and seek independent advice if necessary. *Spread betting in the UK is currently tax free but this may change in the future. Authorised and regulated by the FCA. Registration No - 590782 50 | www.financial-spread-betting.com | March 2014


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March 2014

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A Tom Houggard Special

A Tom Hougaard Special

Why Your Mind is Your enemy!

I have a particular trading method which actually made my live trading room WhichWayToday a 20% return in January. What’s more, this was obtained only when trading during the hours of 8am until 11am. As I manage money for clients, it’s fair to say that they are a happy bunch. So too are the people who access my live trading room — one of the few out there in the UK. Just recently, however, someone asked me to disclose the “secret”, in case I was to stop trading or, God forbid, fall under a bus! Quite understandably they wanted to be able to carry on producing results like that. It is a valid point, but unfortunately it is my belief that I could post my exact strategy in this article, word for word, and over the course of the next month I may produce another 20% and yet the reader of my strategy would have produced zero. Confused? Do you want to know why? The answer is because of the way I think vs. the way you think…

I learned over the course of that month that most of us are absolutely addicted to “trying” to feel good and also to avoid pain. The more astute readers amongst you will now see where I am going with this…

I recently completed a 30-day fast where I was eating just raw food. I fasted for 13 days and ate nothing but raw vegetables and some fruit for the next 17 days. I did it for health reasons and I did it because I wanted to lose weight, and because I wanted to learn about myself in the process.

I have studied alternative health for 19 years, on and off. When I was at university I was a heavy smoker, and I didn’t look after myself very well. I contracted glandular fever, and my immune system was in a dire state. I nursed myself back to health, and it was then that my interest for natural health really started.

And let me tell you, it is true what people who have fasted say about the process. It takes around 2-3 weeks before the mental fog begins to clear. You then begin to think clearly and sharply.

Has the fast been worth it? Yes. I lost more than 20 pounds in that month, and I am now into my third week eating normally and I have lost another two pounds. But this is not an article fit for Weight Watchers. As this is a trading magazine article, I better get to my point!

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However, the most important lesson I learned was why 99.9% of people fail at reaching their goals in life. And sadly, this is particularly true when it comes to trading. But before we come to that, humour me in letting me carry on with the health theme a little while longer…


Why your mind is your enemy!

“i recenTly compleTed a 30-day fasT where i was eaTing jusT raw food. i fasTed for 13 days and aTe noThing buT raw vegeTables and some fruiT for The nexT 17 days. i did iT for healTh reasons and i did iT because i wanTed To lose weighT, and because i wanTed To learn abouT myself in The process.” This article is a condensed version of a two part article i posted on www.tradertom.com called “your mind is your enemy”.

March 2014

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A Tom Houggard Special

When I made the decision to fast and “go raw” for a month, I immediately received a mental boost. It was a curious sensation. It felt as if I had already achieved my goal! Somehow I had already received my reward. However, once the fast had begun, and I got through day one and day two, I learned something very important about goal setting and time. I learned that our minds will do virtually ANYTHING to protect us from pain. If my mind thought it through, it would most certainly not have celebrated. The thought of going without solid food for 30 days is not a matter for celebration. Yet my mind gave me a chemical boost. Eating is the one constant in our lives. We may not think about it with food being abundant around us. If you take away food, as you do when you fast, you quickly realise how big a role food plays in your life. Food comforts you. Food brings you together with family, and with friends. It binds you together, and it sets the scene for nourishment, not only for the body but also the mind.

Think about it a moment: have you not made New Year resolutions that you failed to commit to? When you made the resolution, did you not feel a boost? Did it not make you happy to think about stopping smoking or getting up at 5am every morning to go to the gym? But once you started the actual process, the fun quickly disappeared. I now believe this is the reason why so many people make promises to themselves which they never fulfil: because they receive a bodily euphoric high by conceiving the plan/the dream/the goal, but to actually achieve it means you have to live it minute by minute, hour by hour and day by day, until it becomes a reality. And, once the bodily chemical euphoric high wears off, there is nothing to compel them and drive them forward. They have “crashed” and are totally unprepared for the reality of the situation.

When you strip away food, as I did voluntarily, you learn about time. When people around you eat and you don’t, time passes very slow, especially if you are hungry! It was TOUGH going and it was a lot tougher than my mind could have imagined when I was considering doing the fast. I made yet another important realisation: When you set a goal for yourself, you get the reward twice. You get the instant reward of imagining the successful completion of your task and the achievement of your goal. You also get the reward again when you actually achieve the goal. However, the latter “hit” is actually the danger...

“To promise yourself to follow your trading plan has absolutely no merit at all until you learn to anticipate the ways your mind will try to talk you out of following the plan!”

Most people are satisfied just to talk about it, and receive the chemical brain boost it gives them imagining the achievement of their goal. Most people are happy to receive the reward just once. For most people, they never even realise that this is the danger. The mind has cut out all the hard part and jumped straight to the goal line. It has stripped away all the pain, because it is wired to make your life as painless as possible.

In essence, in order to achieve your goal, there better be something very compelling to look forward to at the end of it, something to drive you forward in the face of the mundane repetitious run-of-the-mill everyday experiences we all go through. To promise yourself to follow your trading plan has absolutely no merit at all until you learn to anticipate the ways your mind will try to talk you out of following the plan!

Yet my mind was celebrating that I was going to stop eating. It was totally surreal. Then it dawned on me. I suspect that most people (their minds) never factor in time when they make a plan. In my case, I experienced the concept of “time” of a 30 day fast in a matter of seconds. Not for one moment did I stop to question how long one day is when you are not eating, let alone a whole 30 days…

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Why your mind is your enemy!

One of the great motivational writers and speakers of the 21st century is Anthony Robbins. He has written bestselling books such as Unlimited Power and Awaken the Giant Within. I have had the pleasure of attending two of his marathon weekend seminars together with 10,000 other delegates. It is quite an experience to witness so many people being reduced to single-minded power-houses for the briefest of moments. It is now clear to me that every one of us truly has the seeds of greatness within us, and it is an incredibly intoxicating feeling to be reminded of how great you really have the potential to be. I don’t wish to trivialise Tony Robbins’ contribution to the self-improvement movement, BUT I believe that he is simply tapping into a latent trait we all possess: greatness in our chosen endeavour. He is reminding us of our true potential and he is taking credit for it through the process of association. Maybe I am being unfair to Mr Robbins, because he is doing his best to give us the tools to achieve the greatness. However, I wonder how many of the 10,000 cheering hot-coal walking bombs of inspired energy actually achieved what they decided to over that weekend. I suspect we are talking about a fraction of them.

“However, I wonder how many of the 10,000 cheering hot-coal walking bombs of inspired energy actually achieved what they decided to over that weekend. I suspect we are talking about a fraction of them.” Our energy flows along the path of least resistance, and this path is generally a path which requires only a modicum of effort, just enough to give us the feeling of achievement, but never taking us to our full potential. Again, it is the imagination of the success which gives us the greater thrill than the actual realisation of the success.

Why is that? I go back to my fasting and raw food experience. It was hard work. I had to suffer a lot of pain. I had to dig deep and I had to put up with discomfort, a lot of it. I also had to remind myself constantly that this euphoria I had experienced when I conceived the idea of a 30 day fast, well, that was my mind saying “well done — now go back to where you were — change is bad”. And this is where 99.99% fall by the wayside. The sad part is that they don’t really feel they failed either. For them (and I include myself in “them” given the many of the goals that I set but never achieved in the past) it was enough to set the goal, to imagine the outcome, to receive the chemical boost the body created in response to the brain’s imagination, and to relish in this brief brain induced flood of feel-good hormones. The chemical boost of imagining the outcome is addictive. To say the outcome out loud or write it down is essentially all the motivational speakers are facilitating to create success for themselves and their businesses. Very few of them actually help people, not for the lack of trying, but because of who we human beings are.

When I realised this, I decided to put it to the test. I wanted to do something outrageous. I decided to put my body to another test, something I knew would boost my productivity and my energy exponentially, but something my mind would absolutely detest. I decided to get up every morning at 04:50am, and immediately go to the gym.

March 2014

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A Tom Houggard Special

“And trading? I knew that my mind would congratulate me and flood my body with feel-good hormones when I decided to follow my trading plan, and let my winners run and cut my losses short. Of course it would do that. I also knew that the moment things got tough in the trading arena, my mind would quit on me, unless I was prepared for it.” I knew what would happen. My mind would flood my body with “feel good hormones”, and I would feel like a million dollars, just from thinking that ludicrous thought of getting up in the middle of the night to go to the gym. That is the role of a subset of my mind: to make me feel good. I also KNEW that my mind would categorically say NO THANK YOU the very first time I set the alarm clock to 04:50am. And it did! It was so predictable. So when I rolled out of bed for the first time, I gave my thought patterns ZERO attention. I knew it would talk me out of it, if I listened. I was prepared. I knew what to expect. My mind was the enemy, and I knew how to defeat it. What is the conclusion to all this you may be asking? Nearly there… be aware that your plans for a better future will create a sensation in your body which in itself can be addictive, and to most people this sensation is enough. Be aware that the moment you actually begin changing yourself that you will meet resistance, and it will be painful. If you know this in advance, you can prepare for it. I knew day three would be painful during my fast, so I prepared for it, and I was ready when it arrived. I knew my mind would say no, when I first woke up at 5am. But I was prepared. I knew not to read too much into the brain euphoria I received when I made the goal of going to the gym too. And trading? I knew that my mind would congratulate me and flood my body with feel-good hormones when I decided to follow my trading plan, and let my winners run and cut my losses short. Of course it would do that. I also knew that the moment things got tough in the trading arena, my mind would quit on me, unless I was prepared for it. I was right. My mind did kick up a sh*t storm the first time I wanted to do it in a real trading situation. I was prepared for it. I embraced the discomfort. I embraced the feeling of being out of my comfort zone, without being reckless. I put my other mind into automatic, and I did what I had planned I would do.

It seems to me that our mind is not always our friend. Our minds are our coding facility for our future, the place where we install the habitual software, the habits that leads to consistency, which leads to confidence in ourselves, which leads to success, but once it has done the programming we have to turn it over to the body, and execute. From then onwards, it is now our job to IGNORE our minds and let the body do what we set out to do. It is a complex balance of body mind dynamics; where we have to become an observer of ourselves and our thoughts and action. One moment the mind is your friend, and the next moment it is the enemy, standing in the way of you achieving your goal. So, even if I gave you the exact recipe for a 20% a month trading return, you would be unlikely to follow it until you had prepared yourself for all eventualities that you can foresee. I had to trick myself to the point of almost not caring about the outcome. My mind gave me so much negative feedback when I was losing, begging me to stop. When I was winning, it was now trying to get me to trade bigger and more frequently than the system dictated. I am trying to trivialise trading here, accepted. There are other facets that need to be in place, such as a good trading method. However, I truly have come to believe the words of Richard Dennis, the famous Turtle Trader incubator, when he stated in the book Market Wizards: “we can put the details of our trading system on the front page of the Wall Street Journal, and still only we would make money from it.” Richard Dennis knew that most people would fall by the wayside the moment there was pain involved. The conclusion to all this is that if you want to trade better, trade bigger, trade more consistently, then stop looking in the wrong places. Start looking in the mirror — it is the only place you will find your holy grail, and start embracing discomfort and mental anguish and pain. Then you know you are on the path to lasting change. Thank you for reading! Tom Hougaard

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March 2014

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March 2014

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An Alpesh Patel Special

AN ALPESH PATEL SPECIAL

MY 10 MuST READ PREDICTIONS FOR 2014! I’ve been asked by many people to provide my predictions and forecasts for 2014 after beating every single uK fund manager over the past 10 years in this area, and no less an investment luminary than Warren Buffett over the same period! (Source:www.investingbetter.com/ sharescope) For the record, I was up 350%, the closest uK fund manager was up 250% and Berkshire Hathaway up 89% — over 10 years. So, in the hope of not jinxing my record, here are some of my forecasts and predictions for 2014 using the same techniques I’ve used for close to 20 years now...

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My 10 Must Read Predictions for 2014!

March 2014

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An Alpesh Patel Special

1

Another Positive Year for the FTSE, but not the Dow & S&P

As UK economic growth resumed in late 2013, from the stock markets’ perspective I expect a positive 8-10% plus year for UK equities this year. I know US and UK markets are highly correlated and some may ask how I can be bullish on the UK but not the US., but we are somewhat out of sync this year. I expect the Dow will be flat, as will the S&P given the bumper year last year, and even more bumper expectations for 2014 by most commentators — always the kiss of death! Yes, the taper will continue. But we know that, the market expects it. It is what the market does not expect that moves markets. In any event, we’re spread betting, and so we want movement, and we don’t care if it is up or down.

The key reason for being so bullish on the FTSE is expectations. Earnings forecasts that I’ve seen don’t seem to match likely economic conditions. The collective analysts’ expectations for earnings growth are for a slowdown, and I just don’t think that it is justified given the economic background. Therefore if and when expectations are beaten, the market will likely rise. Simples, as they say! My analysis of the Dow in contrast shows worrying parallels with 2008 and the falls seen then. Still, with macroeconomic conditions presently so different, barring a proper rout in China, I do not expect that to repeat. Thankfully!

DOW FALLS CHART

2

No Global Crash

The pundits and gurus in recent weeks have been all agog about a chart that went viral on the internet showing the current rally since 2008 looking just like the one leading up to the 1929 crash. In fact they have overlaid both and the doomsayers say a crash is imminent… The fact that private investors are buying this story and most private investors are wrong, to me, is a good sign there will be no crash.

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Another good sign is that my school prize in Advanced Mathematics with Statistics tells me if you fiddle with the X and Y axis, you can also correlate the waist size of Lord Lawson with an impending market crash!!


My 10 Must Read Predictions for 2014!

DOW CRASH CHART That said, since 1932 the average duration of a bull market run has been 3.8 years from trough to peak in the S&P 500 and we are now past the average — so, as they say, “caveat emptor”!!

“Another good sign is that my school prize in Advanced Mathematics with Statistics tells me if you fiddle with the X and Y axis, you can also correlate the waist size of Lord Lawson with an impending market crash!” BULL MARKET DURATION TABLE

March 2014

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An Alpesh Patel Special

3

A couple of possible 10% falls throughout the year

Since 1969, the average number of days between 10% falls for the MSCI World Index is 400 days. We are now some way overdue a 10% fall in the world index. Don’t panic, is my advice, such a rout would indeed be healthy, and my guess is that it could come before the summer. Given how correlated global markets have been becoming since 1990, do not be surprised if the catalyst comes from the East not the West. Spread betters — you’re okay — you know how to short!

4

What to spread bet with strong trends

7

The Last Shall Be First

Already this year is proving that the international markets which we loved to hate in recent years are the ones doing the best — markets like Greece, Italy, Argentina and Spain. So, spread betters really should look at playing these international indices on the bull side.

8

Copper

Spread betting on the long side in copper for the year will also likely prove lucrative in my opinion. The reason is that the massive falls which we have seen are due a proper corrective move on the fundamental side. There continues to be an adjustment to over-capacity — something I am well aware of from my days speech writing for the then Chairman of the London Metal Exchange, Lord Bagri!

Those with strong down trends include: SAB, Tullow, Standard Chartered, Morrison, Centrica, William Hill. While in strong uptrends these include: Ashtead, Associated British Food, London Stock Exchange, International Consolidated Airlines, Whitbread.

5

Currencies – GBPUSD & EURUSD

I think we can push on towards 1.80 in “cable”, but if and when the pair gets there, boy am I going to enjoy trading short off this level. Could happen by early summer and coincide with a 10% stock market dip. I am also going to enjoy shorting the EURUSD pair and that has perplexed so many in recent months if and when it gets to the 1.40 level. I don’t think this psychological level will be broken, but the closer we get to it, the more I would want to be short.

6

Gold

The big one! I think the yellow metal will fall back to $1200 to rebase and frustrate the bulls once more before attempting to test $1,600 later this year. If it falls below $1200, then I am short all year long.

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We seem to be in that era again. The industry had common failings with other commodity sectors re overinvestment etc., while on the flip side, a sharp resumption to the upside with global growth re-accelerating later this year is a resolute positive.

9

Ideal Spread bets

The “ideal spread bets” are as ever going to come from those stocks indices that are in smooth price moves and cycles and trends. These I’ve tried to highlight above. The trick as ever will be to avoid long-term bets lasting months, but instead have biases in favour of a direction but being prepared to close the position quickly if it begins to reverse trend. I’ve given you the names above which I favour.


My 10 Must Read Predictions for 2014!

“He had a choice: make money from the broker by trading in and out and making nothing from the market move or, rather intriguingly, try to make from the market move and not from the broker offer.” YTD Equities chart

10 Outsmarting the Brokers! It will be a year where the spread betting winners will be those who outsmart brokers. Take my friend Pan who, through a deal with the broker he uses, got a bonus £10k — as long as he trades to a pretty large degree with them. For instance, if he opens and closes a FTSE trade and it has a two point spread and he bets at £10 per point, then that’s £20 towards his £10k bonus from the broker.

He had a choice: make money from the broker by trading in and out and making nothing from the market move or, rather intriguingly, try to make from the market move and not from the broker offer. Of course ideally he would like to do both! And since he trades with the trend and closes out quickly, sometimes he ends up making with both the trend and the broker’s deal now.

Well, thus far he has traded like mad on the FTSE which has narrow spreads. Why narrow spreads? And why FTSE? Because you need a security which if it moves against you, then will be liquid enough to cut out quickly, and they tend to have narrow spreads too.

This will therefore be a year for outsmarting brokers because they will come up with ever more deals like this to entice active traders. Look out for these offers, weigh up the pros and cons, and, if you think you can outsmart them, take their money!! Alpesh Patel Co-Founder Investingbetter.com

March 2014

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What’s New in the Markets

What’s New in the Markets

“Tip TV” set to Battle the Big Boys “Trading room telly has become tedious and stale”, says Nick ‘The Moose’ Batsford, founder and CEO of Tip TV. “Current broadcast options are consistently dwelling on the past”, he says, “the majority of the content is historical reporting; what happened yesterday, coupled with an often vague long-term view on what may or may not happen further down the line. After 25 years in the City, I don’t believe that’s what people want. No let me change that, I know it’s not what they’re after.” With that conviction in mind, it’s easy to see how Tip TV was born. ‘The Moose’ is a well-known market trader with over 25 years’ experience in the financial markets which includes operating as a stockbroker, hedge fund manager and a specialist provider of technical analysis. Together with David Bick, an equally respected City PR takeover adviser, they both have “coal face” experience of the dramatic evolution that has taken place in the City over that period. They believe that their network of experts promises the most sound and valued opinions across a wide range of tactical betting & trading options. A year in the planning, it was clear that TipTV’s audience would come from a broad spectrum — financial spread betters, day traders and sports betters. And with ballsy conviction, “The Moose” expects his ‘info-tainment’ style will be veritably welcomed with open arms and open minds, not to mention open wallets! Short term profit opportunities is the order of the day for the likely viewers of the new, completely free to access service.

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What’s New in the Markets

So what makes Tip TV so different? In a nutshell, the content and style of delivery. Initially a daily 90 minute programme from 10.00-11.30am will cover equities, forex and commodities followed by sporting tips, talent show odds and even elections. If you can bet on it, the chances are they’ll have an opinion!

Tip TV is completely free to view, just like SBM, and unlike many other analysis and tipping services (mentioning no names!!) who currently charge a monthly subscription. Free access to top analysts and statisticians on a daily basis; almost sounds too good to be true, well it is, so check it out: www.tiptv.co.uk.

But here’s the crunch. No long term yield baloney, no gobbledy-gook analyst speak, no “strategist” from supposedly hallowed investment banks that wouldn’t know their “a*se from their elbow”. No, at Tip TV, just high conviction, high quality tips from well regarded researchers and presenters: actionable trade ideas presented in an energetic and entertaining way. A positive forward looking live video magazine offering short-term profit opportunities, occasionally ruffling a few feathers, but always getting straight to the point. You’ll see why Spreadbet Magazine was happy to assist in the promotion of such a service!

“so whaT makes Tip Tv so differenT? in a nuTshell, The conTenT and sTyle of delivery. iniTially a daily 90 minuTe programme from 10.00-11.30am will cover equiTies, forex and commodiTies followed by sporTing Tips, TalenT show odds and even elecTions. if you can beT on iT, The chances are They’ll have an opinion!”

So what will make Tip TV so robust? The combination of expert and respected opinion from the financial markets, with the passion and occasional irreverence of equally respected sports journalists. Zak Mir, Manoj Ladwa, Malcolm Graham Wood and others provide the spin on equity markets; Ed Pownall, Matt Nesbitt and Chris Buley from the world of sport, and all sharing one goal: to give traders and sports betters actionable tips based on the soundest advice and thorough analysis. But the good news doesn’t stop there…

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And if you miss a live show just click on “Missed It” where all shows are archived. Finally, if there’s a specific topic or guest you’d like to see on the show just email them at info@tiptv.co.uk and they’ll try to accommodate!


March 2014

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An Equity strategy for the imminent rise in interest rates

An Equity strategy for the imminent rise in interest rates By Graeme Kyle and R Jennings, CFA Titan Inv. Partners

Conventional wisdom says that rising rates are bad for equities and vice versa. There are lots of justifications for this claim, the main one being that rising rates means a higher “risk-free� rate must be used to calculate intrinsic stock values.

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An Equity strategy for the imminent rise in interest rates

In the age of quantitative easing however, the opposite of this has held with central banks creating artificial demand for bonds, and easy money generating positive returns for stocks. This has arguably created a stock-market bubble, particularly in the US and UK, that could pop whenever QE ends. Bill Gross, Pimco’s managing director, sees “(asset) bubbles everywhere” as a result of QE and fears for an extended equity bear market once QE ends. This may be too pessimistic as one would hope that the Fed and other major central banks are skilful enough to end QE without completely roiling other financial markets in the process.

“Doug Ramsey, chief investment officer at the Leuthold Group, has looked at US stock valuations and bond yields going back to 1878. He has found that while there is a relationship between the two, major issues for the stock market appear to kick in only when 10-year Treasuries are yielding SIX percent or higher.”

MARK CARNEY

Bear Steepening & Bear Flattening

It is probably also essential to look at the absolute level of yields before concluding that rising rates would instigate an equity bear market. Doug Ramsey, chief investment officer at the Leuthold Group, has looked at US stock valuations and bond yields going back to 1878. He has found that while there is a relationship between the two, major issues for the stock market appear to kick in only when 10-year Treasuries are yielding six percent or higher. Mr. Ramsay thinks the reason for this is that for rising bond yields to hurt the stock market, they would have to be viewed by investors as real competition to stocks. Perhaps at six percent, he said, bond yields are high enough that “they are truly thought of as potential replacements or substitutes for long-term stock returns.”

UK interest rate expectations are however changing! Despite our newly minted governor Mark Carney’s dovish remarks it looks as though 2015 will see a succession of base rate rises as GDP growth returns to trend and unemployment continues to recede. Much like his Fed contemporary Janet Yellen, Mr. Carney is pretty clear about his support for monetary policy as the key tool to stimulate and cool the economy. Earlier this month UBS published a report in which they expect four 25bp rises in 2015 to leave UK base rates at 1.5% at the end of next year. There are two likely outcomes for the gilts curve under this scenario. The first is ‘bear steepening’ where rates at the long end rise faster than rates at the short end. This can happen if investors see monetary policy as remaining too accommodative and eventually stoking inflation. The second is ‘bear flattening’ where rates at the short end rise faster than long rates. This would occur if the Central Bank is seen by investors as too hawkish in their tightening in an overzealous attempt to prevent inflationary pressures. Under each scenario, UBS have measured the average monthly relative sector performance to provide an empirical guide on how equity investors should now be positioned — see figures 1 and 2.

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An Equity strategy for the imminent rise in interest rates

“Earlier this month UBS published a report in which they expect four 25bp rises in 2015 to leave UK base rates at 1.5% at the end of next year.�

FIGURE 1

FIGURE 2

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An Equity strategy for the imminent rise in interest rates

It is interesting to see Housebuilders performing very differently under the two scenarios, whilst Real Estate and Utilities tend to perform poorly no matter what, whether we get bear steepening or bear flattening. We think empirical work such as this is valuable, but it’s also dangerous for the investor to exclusively use a study such as this. The bond market has been subject to an unprecedented period of quantitative easing over the last five years. This has driven valuations in equities and other asset classes to very high levels. The upshot is that the next phase of monetary tightening may well have an exaggerated effect on some sectors and a muted effect on others. As always, the past is not necessarily a guide to future performance. Leaving aside individual sectors for the moment, we think the worst case scenario for equities as an asset class is that central banks overestimate the scale of economic weakness, and as a result keep interest rates too low for too long, i.e. the UBS ‘bear steepening scenario’. In fact, here at Titan, Chinese implosion notwithstanding and all bets being off, we expect that this will happen in the UK in particular, and that interest rates in 2016-2017 will go much higher. The way to play this of course is to sell the long gilt future or buy Puts on it that really kick in if 10 year yields breach 4%. Remember, not so long ago this was actually seen as a low yield.

“The upshot is that the next phase of monetary tightening may well have an exaggerated effect on some sectors and a muted effect on others.” Economic strength stoked by monetary policy that is too loose for too long might be good for corporate profits, but excessively loose monetary policy would also lead to higher inflation down the pipe, and equity markets tend to be negatively affected by inflation. The Economist (Buttonwood Oct 12, 2012) points out that in years when the annual inflation rate has been falling, the real return from American stocks is 9.6%; in years when it has been rising, the real return has been minus 1.1%. The read through for the UK is that a significant jump in inflation would not be great for the UK stock market as a whole…

“Aggregate valuations are clearly very high, particularly in the US. John Hussman points to 13 current indicators of an equity market bubble in his alarmingly titled ‘Anatomy of a Textbook pre-crash bubble’; 5 of these are valuation based (figure 3).”

Empirical guidance such as the above is useful if rather one dimensional though. When allocating between equity market sectors, it is essential to study current valuations and judge what is being priced in by the stock market. This is true whatever stage of the interest rate cycle, but even more important when facing interest rate headwinds. Aggregate valuations are clearly very high, particularly in the US. John Hussman points to 13 current indicators of an equity market bubble in his alarmingly titled ‘Anatomy of a Textbook pre-crash bubble’; five of these are valuation based (figure 3). Whether or not you fully agree with Hussman’s conclusions, it’s easy to conclude that those who follow a historically-informed, value-conscious and risk-managed investment discipline will perform best in this environment.

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An Equity strategy for the imminent rise in interest rates

FIGURE 3 To this end we arrive at our first conclusion. Now is the time to sell or short those speculatively valued, long duration ‘information age’ stocks. From a valuation perspective, the only way that Facebook, Twitter, WhatsApp(!) etc. make any investment sense at all is because the net present value of future cash-flows 10+ years out has been grossly exaggerated by artificially low discount rates applied to DCF models. And even then, to us, they do not make any sense! As interest rates rise, this pillar of support crumbles and these jam tomorrow, ultra-long duration stocks turn to mincemeat very quickly. Caveat emptor on these guys! In our Titan Global Macro fund we judge the time is now right to implement Put option strategies for the latter part of the year that really pay off on a 15-20% downtick in selected overvalued tech plays. The game is long in the tooth here and the stars, to us, are aligning on this particular theme. The corollary of the bear stance is to look for value in short duration stocks, typically the unfashionable, mature, ‘old economy’ companies with little or no underlying pricing power.

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For a 6-9 month trade, its worth dating the Steel, Chemicals, and Paper sectors — just don’t fall in love with them and end up hitched! Another good move is to short the UK Housebuilding sector. We have seen that under a bear flattening scenario the housebuilders tend to underperform the general market (figure 2). Logically, rising short rates directly impact financing rates in the UK and should reduce the demand for mortgages. Also, property prices are stretched in the UK compared to average earnings, particularly in the South East, and housebuilding margins are at historic highs. Affordability ratios admittedly remain benign, but these also start to look stretched if we plug in higher mortgage rates. To top it off, stock valuations are high by historical standards. Persimmon, the sector bellwether, trades on P/BV of 2.3x which is well above the long-term average. Berkeley Group also looks interesting from the short side too and perhaps RightMove.


An Equity strategy for the imminent rise in interest rates

Precious Metals to Outperform Under a bear steepening scenario in the sector, we really like the look of, surprise surprise, precious metals — an area that we are heavily long in across all our funds at present. Commodity stocks are, of course, globally focussed, but we assume that monetary tightening in the UK is replicated elsewhere, particularly in developed markets such as the US and potentially Europe. The precious metals sector is one of the few areas of the stock-market which can outperform when inflation expectations are rising. Demand increases for the underlying commodities (gold, silver, platinum etc.) as they become relatively more attractive as a store of value. Supply restriction means this manifests in the price of the commodity and also the corporate profits of the mining companies. By extension, the commodity sector in general looks a sound investment right now. As per figures 1 and 2, these sectors tend to outperform in either a bear flattening or bear steepening environment and, crucially, current valuations are attractive following a period of significant under-performance. So, if our view on interest rates is correct, then the place to be now is commodity stocks and which, interestingly, fund managers remain underweight on. We may not see the same tide lifting all boats this time around, but there are certainly enough stocks with bathing costumes intact worthy of investors’ consideration!

This mechanically increases the Net Interest Margin of a lending bank and, assuming the bank is well enough provisioned, should feed through into higher earnings. Many banks are busy flipping from a risk taking to risk adverse culture so that there may be some interesting plays on this. Barclays is still lowly valued and looks to be an excellent contrarian call. On Bloomberg consensus forecasts the shares trade on a PE 2014e = 8.7x and P/B = 0.74x. In a “normal” world environment, unlike the last five years, this is a cheap measure relative to history. It is fair to say that now is a critical time for equity investors. Bull runs start when valuations are low and corporate profits are improving. However, we have now entered an altogether different phase of the stock-market cycle, a phase where the value conscious investor with a sense of historical perspective makes the best returns. Investor exuberance, irrational or otherwise, will most likely be curtailed by rising bond yields and tighter monetary policy. There is still value to be had however: investors should focus on good quality stocks in the basic materials, commodity, and banking sectors — precisely areas that Titan is invested in across its four funds. For more details on our funds, click the image below or our advert to the right.

Traditional lending banks also look interesting under a bear steepening scenario, if only because of the widening spread between long and short yields.

All Titan Funds operate within a spread betting account which means gains or losses are currently free of tax. However, legislation can change in the future. Spread betting is a leveraged product which could result in losses of some or even all of your initial deposit. Ensure you fully understand the risks.

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Titan Investment Partners - Natural Resources Fund

These figures are gross returns and have not been adjusted for Titan’s performance fees. Past performance is not necessarily a guide to the future.

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0203 021 9100 www.titanip.co.uk Risk Disclaimer Titan’s spread betting funds are leveraged products that involve a higher level of risk to your security and can result in losses of some or all of the capital invested. Ensure you fully understand the risks and seek independent advice if necessary. *Spread betting in the UK is currently tax free but this may change in the future. Authorised and regulated by the FCA. Registration No - 590782 76 | www.financial-spread-betting.com | March 2014


Shorting Tips By opes Academy

SHORTINg TIPS BY OPES ACADEMY Wouldn’t it be great if you could make money in a falling market? And what about being able to sell an asset even if you don’t actually own it first? Essentially, have the opportunity to simply bet that a particular asset is likely to fall in value and you profit commensurately if your view is proved correct? Well, this is all possible through the power of short selling.

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Shorting Tips By Opes Academy

Obviously, short selling isn’t a new concept, but it surprises me at the number of people who are afraid of it for some reason, who feel it is perhaps immoral, or who just don’t utilise the opportunity fully through misunderstanding of its mechanism

There are two things that you should, however, never do when shorting:

The ability to sell or “short” an asset class opens the trader up to an almost endless stream of trading opportunities. Short selling allows the trader to potentially profit on each phase of a market cycle, not just the bull phase. The trader can thus execute trades in an upward trending market, a downward trending market and even a range bound market (when using options).

This is one of the biggest mistakes amateur traders make when shorting. They get so excited having seen the price of a particular asset fall in value that they decide now is their chance to get stuck in and make some money. The only problem is that they are selling right at a support level. This is crazy. Do you expect your foot to go through the floor when you step on it? Don’t expect the price action to just casually push straight through a level without a very strong reason.

Shorting the market on a spread betting platform has no adverse effect at all on the value of the underlying asset. Traders and investors who are dumping the actual asset are the ones who are pushing the price down and they are well within their rights to do so if they believe it makes financial sense. At Opes Academy we embrace the opportunity of profiting from market swings either up or down — it makes no difference to us. Our trading methodology is purely technical and we therefore have a few basic ground rules that we follow before taking a position in the market.

IMAGE 1 - SHORTING AT SUPPORT

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1

Don’t short at support

Image 1 is a classic example of this. The trader sees the downward trend, correctly identifies the general downward flow of the momentum and then gets sucked in by the sudden drop in the price action and jumps straight into the trade. What happens next? Well, what would happen if you threw a tennis ball at the floor? The price action bounces and rips through all of the short positions that were place by overexcited traders who neglected one of the most basic trading concepts!


Shorting Tips By Opes Academy

The trader must be patient. Shorting the retest of support is great, and that is effectively shorting at resistance and which almost always makes sense. So, first thing to remember: Don’t short at support!

Don’t short after a major 2 downward spike Sorry, I couldn’t think of any clever rhymes for this one. Just some good old fashioned trading sense. This is one of the most popular mistakes and it is such an easy one to make. I don’t know a single trader, successful or otherwise, who hasn’t made this mistake. We have all been in the situation where we see the price action beginning to drop, and drop quickly. The whole time it is falling we are hearing that little voice in our heads telling us to get in and short the heck out of this thing, but first we just want to really make sure that the price action to the downside is real and so we wait a bit longer… Once it has fallen enough, we then decide to jump in head first only to see the price action almost immediately change direction and begin the slow climb right back to where it started, and worse, in the process taking money from us the entire way.

It is important to remember that once the price has made a massive move, it has made a massive move! That is true whether going long or short. Successful traders anticipate the big move and get in at the early stages. Amateurs wait for the move to happen. For some reason it seems to happen much quicker when price moves to the downside, and also takes a whole lot of traders with it. Image 2 is a prime example of a market move that would have caused a lot of traders to take short positions very late and so emptied their pockets somewhat. Second thing to remember then: Do not short after a big downward spike. Successful shorting is all about selling at support before the price action has made its move. The trader must have a strategic approach to this, be prepared to anticipate the move and pull the trigger on it. By Chris Weaver of Opes Academy www.opesacademy.com

IMAGE 2 - SHORTING AFTER A DOWNWARD SPIKE

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City Apprentice Programme COMPLIMENTARY WORKSHOP

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Risk Warning: Please note that Opes Associates Limited t/a Opes Academy is not authorised or regulated by the Financial Conduct Authority and as such is not permitted to offer ďŹ nancial or investment advice to UK resident investors, whether or not the intended investments are regulated or unr as well as up resulting in you receiving less than you invested. Do not assume that any recommendations, insights, charts, theories, or philosophies will ensure proďŹ table investment. Spread betting, trading binary options and CFD's carry a high risk to your capital, can be very volatile and prices ma advice if n

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Knowledge | Wealth | Power

Visit:www.opescap.co.uk or call: 0203 675 8117

regulated. We strongly encourage you to consult an FCA-authorised Independent Financial Adviser before committing to any form of investment. Trading and investing often involves a very high degree of risk. Past results are not indicative of future returns and ďŹ nancial instruments can go down ay move rapidly against you. Only speculate with money you can afford to lose as you may lose more than your original deposit and be required to make further payments. Spread betting may not be suitable for all customers, so ensure you fully understand the risks involved and seek independent necessary.

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Can insider trading ever be stopped?

Can Insider Trading Ever Be Stopped? By Filipe R. Costa

In looking at the headlines out of the States in particular in recent years, it seems that the use of privileged information that isn’t available to the wider investing public has been the primary way to obtain the coveted “alpha” (excess portfolio returns). From the SAC seven — Noah Freeman, Donald Longueuil, Jon Horvath, Wesley Wang, Richard Lee, Michael Steinberg and Matthew Martoma — to the Galleon supremo Raj Rajaratnam, the list of scalps the SEC has managed to snare has grown extensively in recent years. Sadly the same cannot be said of the UK authorities’ efforts in trying to stamp out many forms of market abuse, although a crackdown has been stepped up over the last two years here too. The so-called “mosaic theory” has been the primary defence for many of the accused: that is the process of collecting small pieces of public information that are available on a particular company and mixing this together to arrive at a non-material, non-public information conclusion. This method, of course, requires extensive investigation, much time and thorough due diligence. Not surprisingly, less scrupulous traders were tempted by the best short cut of all, that of “insider information”. With 200 fellows fighting for your job, the top boss pressing for epic performance, and a few million in bonus waiting for you at the end of the year, it no doubt becomes tough to follow the “whiter than white” route of doing things in a transparent and honest way. Since the very inception of markets and indeed until the creation of insider laws in the 70s and 80s, traders seem to have always found the “alternate” way to gain an edge over their peers as the most profitable. In fact, many CIOs and CEOs of large funds and banks often overlooked these situations in the past...

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In the end, all that seemed to matter was the P&L and end of year bonus, and the less they knew about the path to get it, the better. The collapse of Barings bank was a prime example where, at its heart, a smart young thing from the wrong side of the tracks seemed to have a gift for making money, and while the dollars were flowing nobody asked questions.


Can insider trading ever be stopped?

“This method, of course, requires extensive investigation, much time and thorough due diligence. Not surprisingly, less scrupulous traders were tempted by the best short cut of all, that of “insider information.”

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Can insider trading ever be stopped?

Of course, this ultimately ended in disaster and although the collapse was not due to insider trading, it was rooted in large part in the “blind eye” mentality of blue blood boards and the “old boys’ network”. Where SAC Capital is concerned, the eponymous hedge fund run by Steve Cohen, the “blind eye” or “unaware of wrongdoing” defence seems to have held him in good stead as a multitude of his former portfolio managers have been convicted or pleaded guilty to insider trading, and although he was hit with a fine in excess of a cool billion dollars for supervisory breaches, prosecutors thus far have not been able to directly indict him.

“Of course, this ultimately ended in disaster and although the collapse was not due to insider trading, it was rooted in large part in the “blind eye” mentality of blue blood boards and the “old boy’s network.” Countless Number of Cases… The number of insider and rogue trading cases is countless: Nick Leeson, Toshihide Iguchi, John Rusnak, Kweku Adoboli, Jerome Kerviel, so called “Mr. Copper”, Michael Steinberg, Mathew Martoma, Ivan Boesky, Michael Milken, Raj Rajaratnam… the list goes on, and these are just some examples of traders who were tempted to take the shortest route to generating profits, God knows how many more actually got away with it. Several movies have also been dedicated to the subject with Michael Douglas’s Wall Street being a classic and Ewan McGregor’s Rogue Trader shockingly showing how a trader can turn a profitable bank worth hundreds of millions into a one-pound business literally overnight! Many books have also been written on the matter and as long as there is ink available, newspapers will also continue to report dubious trading and illegal behaviour emanating from the hedge fund industry in particular. The key question therefore is can it be stopped?

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Our view is that while there is money to be made in exchange for material information, the only thing that prosecutors seem to be able to do is to make the price of this information rise as it becomes ever more riskier for those crooked individuals to exchange it.

The Effects of the Financial Crisis Insider trading of course distorts markets and delivers outsized returns (the “alpha”, remember?) to those parties with the privileged information. One argument that prosecutors put forward in bolstering their case for pursuing the perpetrators is that in the long run, if people believe that the market is rigged, then they will not commit capital and so the efficient running of capital markets will be reduced. The proponents of this theory can point to the laughing stock that is the modern day AIM market and where, these days, placings and bids seem to always be flagged by abnormal price action. This is evidence that the swapping of non-public material info is very rife in this market in particular. Many institutions now shy away from AIM and in reading bulletin boards, it seems that the private investor is tired of being cannon fodder too. The U.S. Government has really set the benchmark that other financial watchdogs should be judged against, launching a crackdown on insider trading in the last few years as the ugly remnants of the GFC unravelled and scandals such as Madoff came to light. This campaign has been very successful so far with the SEC securing 77 guilty pleas or convictions out of 87 cases — a very high strike rate that positively makes the FCA wilt in comparison. The financial crisis, of course, had a major impact on financial markets and also on the US Government’s fight against insider trading. On the one hand the record volatility and the carnage that was generated turned the markets upside down and in the process made it very difficult to spot illegal behaviour. Thus, in a certain way, the financial crisis delayed the crackdown. On the other hand, however, the financial crash caught many hedge funds out, both losing vast sums of money through positioning and also as investors yanked money out in a panic. Indeed, hundreds closed totally during 2008 and 2009, particularly the more highly levered ones. The pressure to produce performance is always there, and faced with the eye of a storm and bullets flying all around, many traders were willing to exchange readies for inside information, reasoning that the risk of being caught against losing their job or business was one worth taking.


Can insider trading ever be stopped?

Experts’ Networks Traders and portfolio managers at funds such as SAC have for many years been using so called “networks of experts” to assist them in acquiring the necessary technical knowledge to hopefully obtain an edge in trade specific equities. For example, say your speciality is trading in IT stocks, it would therefore likely pay dividends, metaphorically and financially, to acquire extensive technical knowledge about microprocessors and other important issues affecting that particular industry. But ultimately, taken to the logical extreme, such a network brings an increasing risk of the trader/fund manager inadvertently obtaining information that is privileged and not widely available to the public. If your job relies on generating absolute capital returns and you become aware of facts that can give you an edge in the “jungle” over your peers, then what do you do? While one believes that the chances of being caught are low, sadly, certainly considering the type of character that is attracted to the capital markets, most humans are likely to take this chance — it is classic game theory. What the authorities have been trying to do, therefore, is ratchet up the penalties of being caught — a room with “Bubba”, rather unappealing orange jumpsuits as new attire and, perhaps more of a block to the traders, disgorgement of profits and additional fines being the trade-offs of being caught.

“But ultimately, taken to the logical extreme, such a network brings an increasing risk of the trader/fund manager inadvertently obtaining information that is privileged and not widely available to the public.”

MATTHEW MARTOMA During those years, Martoma met on over 40 occasions with one Sidney Gilman, a doctor, paying him over $70,000 for information. With Steve Cohen pressing his trader for results and Martoma’s natural analysis skills patently not enough to provide a significant edge over other traders, Sidney Gilman was viewed as part of the solution as he possessed insider knowledge about the drug trials related to Alzheimers that were being developed by both Wyeth and Elan. At first, the initial data appeared to be positive and so SAC built a huge position worth some $700m in those companies. But then, the same doctor who had been so positive on the trials revealed to Martoma that some worrisome side effects had been identified. You can guess what happened next… SAC Capital not only offloaded its entire position but, in the ultimate example of pushing the envelope in trading on privileged non-public info, actually went short the stock! When the drug trial results became public, Wyeth and Elan plunged 12% and 42% respectively with SAC yielding a total of $276m in profits (and of course avoiding losses). This successful trade delivered a personal bonus of a cool $9m to Martoma.

SAC’s Wyeth and Elan Trades It was during the period 2006 and 2008 that Mr Mathew Martoma of SAC seemed to become something of an “expert” in the health care sector as he built his own network of connections in order to gain insights about the drug trials of Wyeth and Elan.

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Can insider trading ever be stopped?

Pitching Dell It was also in 2008 that Jon Horvath, an analyst operating under the supervision of Michael Steinberg, tipped him off about PC maker Dell’s earnings being worse than the market was expecting for the quarter. Horvath himself received the price sensitive information about Dell from one Jesse Tortura, then an analyst at Diamondback Capital and who in turn obtained the info from a Dell insider. The information led Steinberg to build a position just before the earnings announcement, and which returned a modest $1 million in profits as Dell reported shrinking profit margins and the stock experienced a sharp sell-off.

One down two to go as they say… The six former SAC employees that were accused by prosecutors all preferred to plead guilty to the insider trading charges and in the process enter plea bargains with US lawmakers. But, being supported by Cohen, Steinberg seemingly wasn’t afraid of going to trial. This turned out to be a poor decision as he was found guilty and could be sent to prison in just a matter of months. Now that Martoma has been found guilty, the Feds may finally be getting near to pinning charges that will stick on Steve Cohen. If that happens, they really will have bagged “the big one”.

Other Notable Insider Dealing Cases Two years ago Raj Rajaratnam, Chief Fund Manager at Galleon Group, was sentenced to a record 11 years in prison and hit with a punitive $150m fine after he was condemned for receiving several tips from insiders and which included info about Warren Buffett’s Berkshire Hathaway purchase of Goldman Sachs’ preferred stock before it became public. More than ten people were convicted in this case with sentences averaging three years.

JON HORVATH

At the time that Horvath received this info, the eponymous head of SAC Capital, Mr “Stevie” Cohen himself, was also long Dell. Court transcripts from the case reveal that this led Horvath and Steinberg to be extra careful and re-check the information with the source. After talking with Tortura again, Horvath sent an email to Steinberg confirming the information: “I have a 2nd hand read from someone at the company [Dell]…. I have gotten this read from them and it hasn’t been very good in the last two quarters”, and then adding “Please keep to yourself as obviously not well known.” Cohen ended up selling his entire position of 500,000 Dell shares and Steinberg shorted the stock. Coincidence that Stevie exited? We’ll let the SEC grapple with that one… In March 2013, prosecutors arrested Steinberg accusing him of illegal trading in both Dell and Nvidia shares. The case came about after his colleague Horvath pleaded guilty to insider trading charges relating to the same case and the Feds agreed to cut a deal with Horvath in order to attempt to get Steinberg and Cohen.

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RAJ RAJARATNAM

Other notable cases, not for the trading amounts involved, but because of the notoriety, include the popular magazine publisher and TV celebrity, Martha Stewart. She avoided, what was to her, a relatively paltry $46,000 in losses in the equity of imClone Systems by trading on an insider tip as a cancer drug being developed by the company was rejected by the FDA.


Can insider trading ever be stopped?

“But insider trading is nothing new, and during the 80s, the so called “Rat Pack” were responsible for one of the most well-known insider trading cases in history. Michael Milken and Ivan Boesky were part of a network investing in takeover targets based on insider information. Milken ended with a 10-year sentence and paid a punishing $1bn in fines.” Martha Stewart sold the stock at $60, which after a couple of months was trading at just $10 in the aftermath of the failed approval. But insider trading is nothing new, and during the 80s, the so called “Rat Pack” were responsible for one of the most well-known insider trading cases in history. Michael Milken and Ivan Boesky were part of a network investing in takeover targets based on insider information. Milken ended with a 10-year sentence and paid a punishing $1bn in fines.

The Grey Area It is sometimes difficult to establish a limit on the legality of trading on non-public information. In the above cases, there were clear links between the trading and the use of insider tips but unfortunately that is not always the case. In practical terms, insider trading occurs whenever a person is in possession of material, market-moving information which others participants do not have, and they either act on this or pass it on.

Receiving such information just a few seconds before the majority of others gives you an unfair edge that allows you to reap outsized profits that others can’t. That has nothing to do with one’s research skills and so positions market participants unequally; hence why it is illegal and confidence sapping for markets. But there are borderline cases that make one think. For example, Goldman Sachs and PIMCO are partners of the U.S. Federal Reserve and are key facilitators of the Central Bank’s trading in agency debt. At the same time, these companies hold massive bond portfolios for their own clients. Isn’t this just a “legalised” form of insider trading, to some extent, as they are trading with price sensitive info that is not available to all other investors? One to ponder…

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Technology Corner

The DIY Publishing Revolution By SIMON CARTER

Apart from displaying considerably good taste, when you open your monthly email from SBM Towers and follow that link to the latest issue, you are participating in a revolution. Yes, you, dear reader, are one of millions of discerning readers who are turning traditional publishing on its head, one click at a time, one book at a time, one magazine at a time.

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The DIY Publishing Revolution

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Technology Corner

Though WH Smiths nationwide are still stocked with walls full of printed magazines, and every town still has a Waterstone’s, so called ‘e’ publications – once looked at as a fad or a novelty – are outnumbering and often even outselling their paper based rivals. But why has this happened? Of course we now live in a digital world, but the download charts aren’t full of self-published musicians and film makers. So what is it about books and magazines that has made this DIY approach so successful? While Paul McCartney never sang about wanting to be an eBook writer, those with hopes of being a paperback writer have often found themselves on a one-way collision with a brick wall. To be a writer all you should need is an idea, some talent, dedication and a pencil and paper. Unfortunately, until recently, you also had to convince a publisher that your work would sell. And while you may have been convinced that you could sell a million copies, the famously tight profit margins on printed books meant that many good ideas by good writers were tossed aside in fear.

“While Paul McCartney never sang about wanting to be an eBook writer, those with hopes of being a paperback writer have often found themselves on a one-way collision with a brick wall.” Magazines were even more of a closed shop with the cost of even an initial print run, proving there was a gap in the market for your idea, finding a group of writers willing and able to produce quality work and then targeting the correct audience meant that even just five years ago, respected publications such as this very magazine may never have gotten off the ground. A number of technological and consumer advances were sparked by the success of the smartphone and, in particular, Apple’s 2007 launch of the iPhone. This was the first time that the tech overlords were to realise that the public liked electronic gadgets to do more than just listen to music, make calls and play games. We also liked to read, to share, to learn new information and enjoy new experiences.

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At the same time, social networking was taking over the internet with Facebook and then Twitter taking on the mantle laid out by the likes of MySpace and Bebo and adding sophistication and clever interaction to keep us hooked. All at once, the world was spending its spare time looking at a screen and reading. Now, we just needed something to read. So why aren’t our screens filled with material from the big boys? Well, they are. Up to a point. The evolution of the tablet and ereader isn’t something that has passed publishers by – there are almost no books that are print only, and a very high percentage of magazines are published digitally as well as physically – it’s simply that the cost of producing digital reading materials is now well within the grasp of the masses. And, crucially, publishers are still saying ‘No’ as much as they ever were. But now the tables are being turned. The huge success of self-published authors John Locke who two years ago was responsible for four of Amazon’s top ten selling Kindle books and Hugh Howey, whose WOOL series of ebooks are due to be made into a movie, to name just two, have led many others to join the party. In fact, in 2013, a quarter of Kindle books sold were by authors using Kindle Direct Publishing.


The DIY Publishing Revolution

“In the magazine world, SBM is free, while some magazines, such as the football publication Blizzard, often run a ‘pay what you like’ scheme, and wherever you look there are examples of consumers being able to get work of comparable quality for far less money.”

But there’s more than money at stake, there’s full ownership of copyright, and the ultimate freedom to say as you wish. SBM, for instance, is well known for its forthright views and often controversial opinions. Can you imagine this being filtered by a publishing house? It wouldn’t be half the magazine it is. Could this be the end for big publishing? Probably not, but we may be seeing the beginning of the end. And while the big boys are still stuck in their ways, not taking a chance on new talent, charging extortionate prices for the work, every ebook or emagazine downloaded is another nail in their coffin.

Then you have Brenna Aubrey who became the first high-profile self-published author to actually turn down a £72,000 offer from a publishing house to continue doing it herself. And why not, when the sales are there and there’s money to be made. Those who self-publish are able to charge what they like whereas big publishers are still charging cover prices for digital versions of their publications. John Locke, for instance, charges just 69p for his novellas meaning that authors with publishers behind them “have to prove that they are ten, fifteen times better” to justify the price. In the magazine world, SBM is free, while some magazines, such as the football publication Blizzard, often run a ‘pay what you like’ scheme, and wherever you look there are examples of consumers being able to get work of comparable quality for far less money. And the public are voting with their clicking fingers one download after another.

March 2014

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School Corner

“Day Trading is a profession that Attracts thousands of people every year. Sadly, the truth is that very few of these people will last longer than 3 months in this arena.”

Trading - Thousands have tried... but only a select few succeed In this month’s School Corner we introduce a new contributor, Lee Sandford of Trading College.

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School Corner

Day Trading is a profession that attracts thousands of people every year. Sadly, the truth is that very few of these people will last longer than three months in this arena. Why is this? The boundaries for trading are wide enough that you can trade virtually any time, anywhere, and with any instrument to suit your lifestyle and daily commitments. The markets are constantly evolving for traders to take advantage of hundreds of trading opportunities each day. However, as humans, we are terrible at controlling our emotions and ultimately our actions, and which therefore leads to our success or demise in trading. I’ve detailed below the main reasons that I believe result in most traders failing to succeed. This comes from my own experience as a person who really struggled to get ahead in the first twoyears of my trading career. However, if you really learn how to trade the correct way, I assure you that you can go on to make a very healthy and profitable living out of trading.

Reason 1: No passion, no planning, no control and no milestones or Key Performance Indicators (KPIs) Would you start a new business without the desire to succeed or without any type of well thought out and tested Business Plan? Starting any type of venture in life involves risk. So the sensible route would be to mitigate the risk at the start and on a continuous basis throughout. If you went to your bank asking for a business loan they would no doubt request a Business Plan before processing your application any further. Why should this process be any different when starting a Day Trading business then? You probably have the same goals as starting a business as you do as a Day Trader. After all, both will have goals to make a healthy profit and attain a much better standard of living and lifestyle. Most traders I meet that come into day trading arrive without any plan of action. Big mistake! They have their strategies knocking around in their heads but not down in any simple, tangible process on paper. We are not so good at controlling our emotions and actions where money is involved. When we see the price of the GBPUSD exploding to the upside, we jump into the trade, only to see the price reverse and stop us out for a loss. This can destroy a trading account and our mindset on a large scale. Controlling these emotions is thus critical to our survival.

You will have heard of the word “discipline” many times in trading no doubt, but just how easy is it to acquire this skill? It takes time and patience and perhaps a few losses for it to really sink in how important it really is to hone this skill. If you can master when and when not to click your PC mouse to enter a trade, then you may start to make some headway in this direction. Then, once you have a solid plan (a document in progress, which can be amended in the future), you need to start measuring your performance. Are you getting better at following and executing your strategies, for example? How do you know if you are progressing as a trader? Keeping results and journals is very easy to do, but hardly anyone does this. Yet this is the most telling piece of evidence about you, your personality and your emotions surrounding greed and fear and your ability to trade successfully. Start keeping a journal of your trades and emotions and you will be surprised at what you will discover about yourself and your trading.

“You will have heard of the word “discipline” many times in trading no doubt, but just how easy is it to acquire this skill? It takes time and patience and perhaps a few losses for it to really sink in how important it really is to hone this skill.”

Reason 2: Buying the highs and shorting the lows Unfortunately, new day traders are regular victims of this, and professional traders know this all too well and are eager to pounce on them and take advantage of their naivety. I personally have a strategy in which I take the opposite side to that of a novice trader’s trade, and this provides me with a profitable trading outcome almost every time. Novice traders buy the price highs on a chart, thinking it will continue to go higher, only to see it stop and reverse against them. Most retail traders will have a stop loss of say 15 pips away from their entry level and it only takes a slight correction in the market to take place for them to start feeling the pain. I know that many novice traders trade in this manner because whenever I ask them where they would enter the trade, they never seem to fail me with their predictable answer! To be honest, I used to do exactly the same thing when I first began trading, so I understand their mindset and frustration all too clearly.

March 2014

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School Corner

The chart below shows a typical entry point, with a stop loss order approximately 15 points away.

GBPUSD Chart – Unemployment rate pushing price down after a spike higher One way to avoid leaping in and buying the highs of a market is simply to learn to be patient and sit on your hands and wait for a better price before entering the trade. Much easier to say than to do in practice of course, but unless you begin to do this, you will erode your funds and reduce your chances of success. As long as you have a confirmed the trend across multiple time frames, you should then wait for the pull back before entering the trade; you will have a much greater chance of success. Moving averages can help you with identifying trends in any particular time frame.

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I like to have all my moving averages lined up in the right order. So if the trend is going up, I like to see the 8EMA, 21EMA, 50EMA and 200EMA all in the correct order. With 8EMA being the closest to the current price and the 200EMA furthest away. By trading this way, you will keep the odds of success on your side.


School Corner

The charts below show the moving averages lined up in order and which confirm the down trend on both a 5 minute and 15 minute chart.

Reason 3: “On your marks... get set... GO!” As I have got older, I have become a man of routine and discipline. So when I am day trading, I do the same thing almost every day. I get into the office, turn on my PC, grab a coffee and then I am ready to trade. But, this doesn’t mean I’m going to place a trade — oh no, far from it. Sitting down and starting your day trading session doesn’t mean that you start placing trades without following a proper, systemised process. If there is no set up, then the best thing to do is just sit on your hands back testing and using this time wisely. Learn to preserve your capital at all times and only place trades when you get a good signal. No signal = no trade. Simples!

For many novices, overtrading and placing boredom trades becomes the norm and soon grows into a much larger problem if not handled correctly at the outset. This is when the novice day trader is at their most vulnerable and this could be the start of the self-sabotage process. Trading is like no other profession. Let’s say we turn up to work at 8am to dig some roads or work in a shop. As soon as our shift starts, we get on and do the work. As a trader, if you turn up to trade at 8am, you could easily sit there for an hour and do absolutely nothing. Place zero number of trades! Even as a professional day trader of 12 years, and nine successful, when I am in this phase, it feels like I should be doing something — but actually, I am doing something. Even though I haven’t placed any trades, I’m still monitoring key markets’ levels or getting ready to place trades if the price reaches any of these levels.

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School Corner

I’m being patient and watching like a hawk for the right set-up to occur. This way, when the markets move, I am much more likely to place higher probability winning trades. So, just because I am not placing any trades, does not mean I am not trading. Remember to keep patient, keep your funds intact and preserve capital so that you can live to trade another day. The markets are like a battlefield.

Reason 4: Analysis, Paralysis! We all love a new trading indicator. We get excited as we think it’s going to be the product that is going to turn our trading around and start making us a more consistent trader. I’m sorry to deflate your enthusiasm by saying that the new indicator on your chart may start to confuse and hinder you and do the exact opposite of what you intended it to do.

As human beings we can only process three to five things at once, and so adding another variable to your charts could lead to analysis paralysis. If you have several indicators on your charts, one may be signalling to get long, whilst the other may be displaying an overbought signal. When you see this happen, you will get confused and frustrated which could easily lead to loss of confidence. My advice is to strip back the indicators on your charts and then master each one carefully. Become an expert and understand what each indicator signal is telling you at any particular time. Becoming an expert on just a few, simple strategies will stop you becoming confused and allow you to reap the rewards with an expert’s salary to match. The chart below shows an example of one that has too many indicators on it.

I hope you found my first School Corner piece instructive. Visit www.tradingcollege.co.uk to learn more about us. Lee

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March 2014

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John Walsh’s Monthly Trading Record

TRADING ACADEMY WINNER

Monthly Trading Diary & rolex challenge What a month! For me there has been both good and bad, but sadly mostly bad. In fact, I want to call the last four weeks ‘The Stop Out’ because that’s all I seemed to be getting from my trades —stopped out! That said, I’m pleased to say I have got through it intact, and I hope everyone else has too. So what happened? Well, as I’m sure everyone knows who reads my column (apparently according to people who follow me on Twitter this is a “column”, I have never really seen myself as a columnist!) I set myself a challenge to buy myself a Rolex watch with trading profits from trading US stocks only, and ‘The Rolex Trading Challenge’ was born.

Things were going so well and I was within a whisker of having a positive and not insubstantial 50% account growth from my trades in only just over four months when of course market conditions changed as they can and generally do when it’s all going swimmingly! The New Year sell off in the US equity markets was distinctly un-useful for a long biased stock trader like myself and it’s fair to say that I have taken a bit of a beating (Note to oneself: maybe I should try to short more!).

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John Walsh’s Monthly Trading Record

“I set myself a challenge to buy myself a Rolex watch with trading profits from trading U.S stocks only, and ‘The Rolex Trading Challenge’ was born.” For some strange reason, trading a stock to go down is psychologically counterproductive in my mind and although I can short indices, and have done successfully in the past, I just can’t quite seem to do it with stocks. Anyways, since the last column I got off to a good start by closing a trade previously mentioned in Brinker International (EAT) after a better than expected earnings release. That, however, was when things took a distinct turn for the worse and I started to get stopped out of previously mentioned trades and even newly made trades within just only a few days of opening them (I must add that I ALWAYS put a 10% stop under my entry price, I usually close it before then and quite frankly if a stock drops 10%, then I don’t want to be in it anyway). So, trades previously mentioned last month that didn’t make it through to this month are Yahoo (YHOO): I must mention that this went on to fall much more just a few days after I got stopped out after a not too impressive earnings release and so it could have been worse… Foot Locker (FL): this trade went pear-shaped right from the start, I am sorry to say. Finally, Verisign (VRSN): even though this released better than expected earnings, it absolutely tanked in afterhours trading, and by the time the market opened the next day the stock had gapped down well below my stop loss, and when it was finally closed it delivered me my biggest single loss since I started the trading challenge. I guess that’s how these things can go sometimes…

So which stocks actually made it through the bumpy ride? I still having a couple of old trades that are still running in, for example Colgate-Palmolive (CL), and which I must mention is currently my longest running trade, Mondelez International (MDLZ), where things have taken a turn for the better (sometimes you have to sit on your hands and wait until things do — they generally always do). I have opened new positions in Red Hat (RHT), Green Mountain Coffee Roasters (GMCR), Walt Disney (DIS) and Michael Kors (KORS). Hopefully no stop outs on them this next month!! So where does this leave me now? At the time of writing, for my Rolex Trading Challenge, I have made a total of 44 trades with 26 being winners, 12 losers and six currently running which leaves my account including dividend payments still positive to the tune of 18.05% which after the month I have had I’m very pleased with, and it just reinforces the need for stop losses and strict money management which for me is a must when it comes to trading. That’s enough from me once more for this month, please continue to follow me on Twitter @_JohnWalsh_ where I keep everyone up to date with my trades as I open and close them, be it at a profit or loss, and any thoughts I may have regarding trading in general. I’m also happy to talk to other traders anytime (I can talk about stocks day and night..!). Remember - you control the trade: the trade does not control you. John

With respects to new trades that were opened and closed (stopped out) between the last column and now, they were Melco Crown Entertainment (MPEL): just my luck to open the trade the day before gambling stocks get a downgrade from an analyst! Ameritrade (AMTD) was another one that even after a good earnings release dropped like the rest of the market and I was again, yes you guessed it, stopped out!

March 2014

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Markets In Focus

MARKETS IN FOCuS FEB 2014

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Markets In Focus

March 2014

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MAGAZINE

SPREADBETTING Thank you for reading. We wish you a profitable 2014!

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Spread Betting Magazine v26  

Latest March 2014 Spread Betting Magazine Edition: This month's features include: 2014 - Emerging Markets in focus - Time to buy again? - In...