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

R Be N eMTIO eC I D eD


Issue 23 - December 2013

louis Bacon Moore Hedge Fund legend In Focus






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

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

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editorial list eDITOR Zak Mir

Foreword The twists and turns of financial markets and the day-to-day noise of economic data continue to throw up numerous conundrums for traders, but it looks like there is one thing we can be certain of apart from death and taxes: the Federal Reserve will not taper any time soon.

eDITORIAl DIReCTOR Ben Turney CReATIve DIReCTOR Lee Akers COPYWRITeR Seb Greenfield eDITORIAl CONTRIBUTORS Richard Jennings Thierry Laduguie Filipe R Costa Simon Carter Darren Sinden

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.

This autumn kicked off with the “taper tantrum” when the market threw its toys out of its pram in a sulky reaction to Bernanke’s proposal to reduce the bond purchasing programme. Yields jumped and stocks fell. Thanks to the impasse in Congress over the latest deficit ceiling debacle, Federal Reserve officials were thrown a face saving lifeline. When September’s meeting of the FOMC came they were able not to act on their apparent commitment to taper because of the ongoing “political instability”. Of course, by October’s meeting, when this “instability” was apparently resolved, there was still no taper. What a shock! With uberdove Janet Yellen a near certainty to replace Bernanke at the helm of the Federal Reserve in February, the prospect of any serious attempts at fiscal tightening are on a par with a snowball’s chances in Hell. This is because the tapering issue is, of course, nothing to do with the health of the US economy. It is, in fact, everything to do with American attempts to lower the real value of the trillions of dollars of debt they owe. As such, I just cannot see tapering happening in the near future. Against this backdrop is the ongoing slide in gold — a massive theme on the Spreadbet Magazine blog, in the magazine itself and beyond. The Gold Bugs’ keenly held view is that any attempts to inflate away the debt will kickstart a resumption of the decade old rally, so rudely interrupted in September 2011. As I’ve written on the blog, I have two main issues with this theory. The first is that so many people have been wrong footed by gold’s decline that I would personally wait for undeniable proof of a change in trend before getting long again. The second reason concerns the 200MA. As the main technical indicator of a trend, the fact that gold is languishing $100 below this level doesn’t exactly fill me with any confidence of the prospects for the metal in the foreseeable future. However, it takes two to make a market and in this month’s issue my colleague, Ben Turney, offers an alternative view on the precious metal and how it could be set for a comeback in 2014. Let’s see who’s right! On a more cheerful note, the year end is fast approaching. Unless there is a Black Swan out there, waiting to swoop down on the world, this is usually the time of year when markets perform very well. Indeed, given the recently announced peace deal with Iran (an irony in itself in that debt-laden America cannot afford another large war), we end 2013 on a pretty bright note. For stock indices around the world, they should probably follow America’s lead and charge to record highs. For the FTSE100 this implies a target of 7,000 plus by the end of December. It is now trading at about 6,700 so this shouldn’t be too much of a challenge. In fact, the main driver for such a move came into play with BP’s rally in October. If this continues and BP goes back to 520p (versus its current 493p), then this could well be enough to fulfil the FTSE’s early Christmas present for traders. This would be the first new high in 14 years and would mean we can party like it’s 1999! To finish, I’d just like to congratulate the irrepressible Robbie Burns. In last month’s issue he tipped Applied Graphene Materials (AGM). It doubled within six days of listing! — I’ll let him tell you more about that... Zak

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Fund Manager In Focus Louis Bacon Moore is a hedge fund legend, with much to teach traders. This month, Spreadbet Magazine takes a look at what made this man the success he has become.



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Battle of the Technical Analysts Zak Mir puts Dominica Picarda under the spotlight in his usual inimitable monthly interview.

Bitcoin Update After our cover special in July, and with Bitcoin’s wild ride continuing, we thought this a good opportunity to revisit our view on this new “currency”

Robbie Burns’ Monthly Trading Diary Flush with the success of an extremely profitable 2013, Robbie returns to share his market views with us.

Small Cap Corner - AIM failing to succeed Ben Turney takes a detailed look at the Alternative Investment Market and asks the question on many people’s lips - is AIM failing?

Dominic Picarda’s Technical Analysis In the second of his exclusive Top 5 Quarterly Picks for Q4 2013, Dominic Picarda reviews the prospects for African Barrick Gold (ABG).

Zak Mir’s Monthly Pick This month Zak makes the case for going long Serco (SRP). This stock has certainly fallen out of favour with the market, but therein lies the possible opportunity.

Best Of The Blog Once again we look at three of the most popular blog posts on our

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Janet Yellen should we be worried?

Option Corner Special SBM and Titan founder Richard Jennings offers a potential low risk way to short the stock market.

With Janet Yellen all but guaranteed to succeed Ben Bernanke at the hot seat in the Fed, should the world be worried?


64 Top Women In Finance


56 59 74 78 82 86

Guest columnist Louise Cooper reviews for Spreadbet Magazine the women who have managed to succeed in an otherwise male dominated industry.

Alpesh On Markets The euro/dollar currency pair is finely poised for a significant move, but which way will it go? Alpesh Patel provides some suggestions...

Commodity Corner It’s been a pretty torrid end of year for one of Spreadbet Magazine’s big calls of 2013, but what is in store for gold in 2014? Ben Turney investigates...

Travel Corner If he’s not glued to his trading terminals our founder, Richard Jennings, is off swanning around the world. This month he’s been to the Abruzzo region of Italy.

Markets In Focus Our regular review of what’s been hot and what’s not in global markets over November.

School Corner This month Thierry Ladugie introduces a new method for valuing stocks using sentiment based valuation.

John Walsh’s Trading Diary Last month John started his “Rolex Challenge”. So far, it’s proving to be a great success. We’ll let him tell you all about it...

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SBM Focus on Louis Moore Bacon


Louis Bacon Moore By Filipe R. Costa & R Jennings

The Early Years If you were to meet Louis Moore Bacon during the 1970s, you would probably have encountered a highbrow and educated man, more disposed to reading Hemingway and Fitzgerald than skimming through the Wall Street Journal. The young Louis Bacon graduated cum laude in American Literature. However, after meeting Walter Frank while working on his boat, he received a job offer at his firm Walter N. Frank & Co where he worked initially as a clerk during the summers, and which sparked his early interest in financial markets. Little did he know that this lowly clerk’s job was about to change his life and deliver to the hedge fund industry one of the most intelligent and judicious fund managers it had ever seen… Louis Bacon was born into an affluent family in Raleigh, North Carolina in 1956. His father ran his own real estate business while, sadly, Bacon’s mother passed away when he was only in his 20’s. Her remaining family were to prove influential in Bacon’s future actions, however, as we shall see. After receiving his bachelor’s degree in American Literature and already working within Walter’s business, Bacon proceeded with his studies at the prestigious Columbia Business School where he went on to complete an MBA degree in finance in 1981. The basis for a career in finance had been fully formed.

Perhaps Bacon’s really lucky break was meeting Paul Tudor Jones — another legend in the hedge fund arena and with whom he still speaks regularly. It was in fact Tudor Jones who helped him to get a job at Bankers Trust. This proved to be a somewhat short-lived career stepping-stone and he soon returned to Walter N. Frank & Co, but this time to trade currencies. From this platform he obtained a job working on the floor of the New York Cotton Exchange as a so-called “runner” but, like many successful hedge fund managers who display a trait of restlessness in their early careers, he switched jobs again to work at Shearson Lehman Brothers as a broker of financial futures. Here he later became the senior vice-president of the futures trading division.

Getting Started In The Hedge Fund Business In 1987, seven years after concluding his MBA and after a few job switches, Bacon decided it was time to try his own luck, founding Remington Trading Partners while still working at Shearson Lehman Brothers. Perhaps the luckiest break of his entire career, Bacon got off to a flying start as he correctly predicted the market crash a few months ahead of time. Not only this, but Bacon went further in betting on the subsequent recovery, making significant profits both on the short side and also riding the recovery on the upside.

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SBM Focus on Louis Moore Bacon

“Bacon is one of the best ‘cutters’ in the business that is being very fast at cutting losses”

Birth: 1956 (57 years old) in Raleigh, North Carolina Resides: New York Activities: Fund Manager, CEO of Moore Capital Management, Philanthropist

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SBM Focus on Louis Moore Bacon

Two years later he founded Moore Capital Management and launched the Moore Global Investments, seeding the fund with the $25,000 he inherited from his mother. It is interesting to note that Bacon used his mother’s family name for the company’s name. It was one Antoine Bernheim, then president of Dome Capital Management, who was the first big client Louis Bacon was able to snag. In 1990, this client alone accounted for more than 80% of the assets under management Moore Capital Management had, and which amounted to just $1.8 million. But, with Bacon succeeding in bet after bet, the business grew substantially and several other funds were launched. The company created the Global Fixed Income Fund, which was later renamed the Macro Managers Fund, evolving to become a mainstream “macro” fund — one which places wagers on the big economic trends.

These first two funds are still the most important that the company currently manages, with the Global Investments now some $7.4 billion in AUM while the Macro Managers Fund has surpassed $4.5 billion. From just a few million dollars at the end of the 1980s, Louis Bacon has been able to win the confidence of sceptical investors in growing his funds under management into the billions — no mean feat, rest assured on that! A history of consistent profits, outperformance when compared with his peers and the ability to position ahead of key macro turning points all help explain the basis of his firm’s success.

However, it was Bacon’s risk management capabilities in particular that really set him apart from his peers (and that we can all learn from). In a nutshell he is one of the best “cutters” in the business; that is, being very fast at cutting losses short and additionally being patient in waiting for the next opportunity, even if that means holding just cash for a while — again, something that many investors should pay heed to — you don’t need to be in the market all the time.

Discipline, Discipline, and Even More Discipline! Bacon is known for his macro skills: in being able to absorb a considerable amount of information on the economy, the Government, central banks etc. and then piecing all these together to come up with a few trading ideas. Risk management is his forte though. If he is wrong in his piecing together of the jigsaw, unlike 99% of other investors, he knows the key is to say “When” early and get the hell out of Dodge before the position erodes his capital too quickly. It was none other than the revered hedge fund legend Stanley Druckenmiller from Duquesne Capital who once said when advising a client to put his money at Moore Capital, “He won’t blow your money... he’ll conserve your money.”

“However, it was Bacon’s risk management capabilities in particular that really set him apart from his peers (and that we can all learn from).”

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SBM Focus on Louis Moore Bacon

“it was none other than the revered hedge fund legend stanley druckenmiller from duquesne capital who once said when advising a client to put his money at moore capital - ‘he won’t Blow your money’, ‘he’ll conserve your money.’ His management style seems, at face value, to be somewhat autocratic, rarely giving more than $1 billion to an employee to manage. He also created a system to crack down on losses very quickly and so avoid the worst of them. When a manager is down 5% below the historical high-water mark, a formal discussion between the director of risk and the portfolio manager occurs and the entire portfolio is reviewed in depth.

If the portfolio continues to decline and surpasses the 10% below the high-water mark, then risk levels are capped and a discussion about exit strategies is entered into with day to day trading being closely scrutinised. If a drawdown of 15% is reached, then the portfolio is traded with an exit in mind only. It is this strong discipline and attitude towards risk that helps explain why Bacon managed to outperform his direct peers during the financial crisis as the table below shows:

The great Financial Crisis The financial year of 2008 was of course disastrous for many, with once venerable banks like Bear Sterns and Lehman Brothers collapsing. Even a manager of Bacon’s standing couldn’t avoid a loss on his main fund. In a letter to investors he admitted that he did urge his portfolio managers to lower their risk, but that wasn’t good enough as he should have forced them out of the market completely.

His main fund was positioned short and so he did correctly anticipate the financial hurricane that blew through the markets but was ironically hurt, actually, by the financial rescues of Bear Sterns, Fannie Mae and Freddie Mac and by the short-selling restrictions imposed on financials. On this occasion it seems he forgot one of the old adages in the market: “Leave a little for the next man.” He hung around too long on a profitable trade. Sometimes it pays to take a profit and not to “run your winners (to excess)…”

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SBM Focus on Louis Moore Bacon

Indeed, later in the year it was the Lehman collapse that threw the fund underwater as it continued betting that the US Government would save Lehman like Bear Sterns. Of course that didn’t happen… The following years were again very difficult for the hedge fund as panicked investors started redeeming funds, being battle scarred by the Financial Crisis. Even though Moore Capital held up much better than its peers during the Financial Crisis, the truth is that the business became more difficult to manage both in commercial terms (as clients became worried) and in technical terms (as macro variables became less predictable). When the Federal Reserve launched its first quantitative easing program, this was the time that the smart money realised it was time to go back into the stock market, which was at very depressed levels with valuations at recent historical lows and investors shell-shocked. The first mover benefits that were derived from a massive asset purchase program were substantial but, with the continuing distortions from the US Federal Reserve and the US Government, not to mention interventions from Europe and Japan, the global macro picture became more difficult to decipher. To manage a hedge fund successively, you now probably need an expert in politics to carefully analyse words rather than numbers! Global central bank intervention in particular continues to distort the investing landscape with widespread capital misallocation. The problem for savvy hedge fund managers is that even when they have spotted this, such is the force of capital that the mad printers are unleashing on the markets, that reversions to norm no longer seem to apply. This causes them to choose between accepting “the bigger fool theory” and blithely going along with the train to maintain performance (at the expense of the risk of an overnight shakeout where it all unravels in a flash), or underperforming for a potentially prolonged period before the immutable laws of free market economics finally assert themselves.

Bacon, as with many others, has found it difficult to adjust to the central planning of markets in what is supposed to be a free market system. In 2003 Moore Capital Management was ranked 3rd in the US hedge funds industry while now the company currently sits in the 20th position as assets under management have decreased substantially.

Moore Capital Today Moore Capital currently has more than 400 employees spread over offices around the globe. The company was once headquartered in London, as Bacon looked to exploit the benefits of Greenwich Mean Time for global trading but he later relocated back to the US to New York. The firm now offers six offshore funds and some US domestic equivalents of the two largest funds. Even though the company has several investment strategies, it remains largely a global macro player with bets being placed mostly based on big macroeconomic themes using cash, futures and derivatives. Currently, Moore’s equity portfolio is worth $4.7 billion according to the firm’s most recent filing at the US Securities and Exchange Commission in the third quarter of this year. During the period, the investment firm bought 204 new equities and sold 146, increasing holdings in 55 companies while decreasing in 70. It is interesting to note that Moore Capital has several offsetting positions as part of its strong risk controls. We can see this in the table to the right with the two first positions in its top 10 holdings — both a call and a put on the S&P 500, and also by a holding of Cisco equity together with a put option on the same company — something that is particularly prescient given the poor earnings figures released by the tech giant at the time of writing:

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SBM Focus on Louis Moore Bacon

“it does look, however, that the firm is preparing for a Bearish turn in the market as the portfolio holds a much larger put position relative to calls on Both the russell 2000 and the s&p 500.”

It does look, however, that the firm is preparing for a bearish turn in the market as the portfolio holds a much larger put position relative to calls on both the Russell 2000 and the S&P 500.

Bacon As A Philanthropist With great wealth also comes great responsibility and one can either shirk from this or take it to heart. Thankfully, Bacon chose the latter and has been a keen philanthropist since 1992 creating the The Moore Charitable Foundation to provide support to non-profit organisations working to preserve and protect wildlife habitats and to improve water systems around the world. And it is at this point that we come back to Bacon’s ties with his mother’s family, as his grandfather Louis T. Moore was also an environmentalist during the early 1900s.

Final Remarks louis Moore Bacon has, without a shadow of a doubt, proved his investment capabilities as a successful long-term fund manager, creating near 20% in annualised returns since his company’s inception. As is the case with every other single fund manager, however, he has weathered difficult times — something that many newbie investors forget. It is impossible to predict correctly and time the markets all of the time. What matters is minimising the damage when you are wrong and, as relayed earlier, this is where Bacon excels and this is anecdotal evidence that we can all learn from a master trader.

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Bitcoin – The new gold or just another bubble?

Bitcoin The New Gold or just another bubble?

By Filipe R. Costa & R. Jennings, titan investment partners

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Bitcoin – The new gold or just another bubble?

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Bitcoin – The new gold or just another bubble?

When Bitcoin was created in 2008, we suspect very few people would have imagined just how serious the project would become. At first it was simply an elegant computer code set up to serve the interests of just a few computer geeks. The virtual currency then took on a life of its own, growing to the point of being an actual means of exchange to buy real assets such as pizza, technology and even casino chips (irony of ironies!). People started trading the Bitcoin in exchanges that popped up around the globe. Not surprisingly, all this increase in popularity brought a great deal of extra attention, but this time from both Central Banks and governments. At first, the US government dismissed the Bitcoin as just another silly fad but, as its popularity grows by the day, the authorities are focusing in upon potentially regulating this bastion of free currency expression.

Nakamoto wanted a new currency, entirely independent from governments, which would put the creation of money in the hands of people and, importantly, be limited in its supply. This is the central idea behind Austrian economics. Austrian economists believe that unmanaged money supply eventually leads to better-formed investment decisions and to real wealth generation. Central banks cease to exist, meaning no one can control the money supply. When it was traded for the first time, one Bitcoin was worth just 10 cents of the dollar. But as it grew in popularity, its price relative to the dollar also rose. In February 2011 it was already trading at parity.

Of course, the basic premise for regulation is that they are looking out for the usual money laundering and illegal activities. By highlighting the risks of the digital currency and attaching it to an illegal field, the US Goverment hopes it can hide the real threat behind the Bitcoin. Bitcoin is becoming an expression against unsound Government and Central Bank policies aimed at enriching the few while stealing from the many‌ The Bitcoin was, of course, created by the mysterious and unknown figure known only as Satoshi Nakamoto, and with a very simple idea behind it.

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The elusive Satoshi Nakamoto?

Bitcoin – The new gold or just another bubble?

Bitcoin 1 month view Oct-Nov 2013

At this point, it is embarrassing for the US Government to let the Bitcoin continue to trade higher and higher against the dollar as it raises many issues… First of all, why is Bitcoin rising so much while gold is unaffected by money printing? With both the supply of gold and Bitcoin relatively stable, they should be moving in tandem against the dollar. The Bitcoin rise just highlights what many have advanced. The gold market is being manipulated. Second, the US Government is losing potential tax revenue, just like it was with online gambling a few years ago. If there’s a large market, they want to be part of it. First they rule it as illegal. Then, in the tried and tested form, they regulate and tax it.

Third, the Bitcoin threatens central banks as it is a substitute for fiat currencies. If people perceive the Bitcoin as a serious project, they will exchange their dollars for the Bitcoin as long as the wanton printing continues, just like they did during the gold standard whenever the Government tried to accelerate money creation. Just a few days ago, Raoul Pal, head of Global Macro Investor, made a bold Buy recommendation on the Bitcoin. He analysed the Bitcoin in terms of demand and supply and came to the conclusion that 1 Bitcoin should be equivalent to 700 ounces of gold when one equates the underlying supply dynamics of each. That means the correct price for the Bitcoin would be $1,000,000! That’s right, one and six figures! Is he right? As ever, only time will be the ultimate arbiter…

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Robbie Burn’s Trading Diary


xmas TRADING DIARY So it’s Xmas already? I can hardly believe it. Seems like a few minutes since the last one. The Burns’ family are off to Dubai for some sun and warmth and mucking about on waterslides. OK, OK, I just want to show off my shiny new Speedos.. I hope not to have to look at the laptop much for trading while I am away though. . Usually the great thing about the Xmas period, pre-Xmas and the bit up to January is that markets are normally very strong. And so I would normally leave my positions hopefully to continue to gain, and buy a few more mince pies!! Some of the strongest historical trading days of the year are pre and post Xmas, I’m sure this magazine’s chartist Zak Mir will happily play with some lines and stuff and show you how to make money out of this. Me? I personally find it better to just sit and stay long. The thing is though, we have had a very strong market up to now, so it is going to be tempting this time to sell into a bit of the Xmas strength. Mind you, we could have said the same last year… Anyways, I suspect I’ll simply be selling some but not all of my favourites after Xmas and pop some cash aside.

In a moment, I will reveal the ones I doubt I will sell at all. Goodness me, who’d have thought 2013 would be such an amazing year? I’ve had terrific gains all year, making myself well over half a million quid in tax free profits using spreadbets and ISA trades. So I thought I would have a look at one or two of the shares that made me money this year and possibly, unbelievably, why they might have a bit more to go. So here they are: five shares I have made a packet on in 2013, but ones I intend to hold and buy more of on dips as I think all have the potential for much more in 2014.

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Robbie Burn’s Trading Diary

“Goodness me, who’d have thought 2013 would be such an amazing year?.”

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Robbie Burn’s Trading Diary


Telecom Plus.

A long-term winner, and up £600,000 plus on these over the years. Grown from 18p to nearly 18 quid. Top dividend too. I think eventually this one is going to end up in the FTSE 100 and I confidently expect it will be a million pound plus profit. Indeed, as I write, I am entitled to buy another 1,000 at 1475 giving me an instant fat profit. The company is hoping to become a “big seven” rival to the big six energy companies and has raised mega amounts buying back energy customers from npower. This will substantially raise its profits and enable it to offer, in time, cheaper energy prices. If it can then get those energy customers to take telephony too, this looks a giant of a company in the making.



One I have nearly doubled on this year. It’s a smallish online casino that is growing steadily and so the share price gradually rises and keeps going. So despite its current good rises, I see more on the (casino) table, but the true excitement for me still yet to come is a bid from one of the major players in the market who will, I believe, want to pick this company up on the cheap. I reckon, all in all, another 50% to come.


Entertainment One.

Some good money made on this one in 2014 and it is gradually being re-rated. Has a massive library of shows and films worth a fortune and is involved with the big hit children’s winner Peppa Pig. Indeed, I just watched a movie it is involved in, Hunger Games 2 (which was pretty good). Expect more hits and more share rises and I expect this to be a core holding in 2014.

4 3D Systems. I don’t trade US stocks normally, but this is a great one — doubled and trebled on this in 2013 making more than £40,000 via spread bets which is the best way to deal it!

I love it as it is 3D printing which I think is the next big thing. Potential in buying into this one is like buying the next Apple or Microsoft early on. One problem though is it is very volatile and can move 10-20% in a short time. So it is one I look to top-up on after a decent dip. Could be a stormaway winner for 2014...


Applied Graphene Materials.

Well goodness me, this was a pick in my last Spreadbet Magazine column. I thought it would double in six months maybe, but not in SIX DAYS! Picked it up around the 200 level and it simply rushed higher. Hope one or two of you picked this one up from me in the last issue of the mag. Graphene’s a new type of material expected to revolutionise medicine and manufacturing with light but strong and conductive properties. One if its biggest potentials is for use in condoms, yes to give you guys a much better experience, it could perhaps “harden” (sorry, couldn’t resist!) the share price even more. Of course it is impossible to value and will swing violently, but if you buy on a bad day, it could have a fantastic 2014. I wish all readers of Spreadbet Magazine a very happy Xmas and another, hopefully, prosperous New Year, and I would say that I only write for this publication because I think it is of high quality and has a beautiful layout so well done to all concerned in its production. You should raise a toast to those behind it. Well done! I leave you with one final old-fart thought — money isn’t everything. Enjoy yourself with loved ones and others; try and be kind and generous to everyone you know. Forgive those who have wronged you if you can. Try and be healthy in heart and mind for 2014 as well as trying for a healthy (hopefully) bank balance! Clear disclosure – Robbie personally holds stakes in the companies mentioned here.

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Small Cap Corner

Small Cap Corner


is it now JUST a marketplace for zombie companies and crooked management? BY Ben Turney

This month, I caused a bit of a stir on our blog highlighting AIM-darling Bowleven’s suffering of insider trading immediately prior to its announcement of a deeply discounted placement. The response we received to this article clearly struck a nerve and encouraged us to delve a bit deeper into the state of AIM. There is a lot of disquiet out there about this market, but how much is just sour grapes at punts gone wrong and how much is justified discontent at a system that could be failing? The London Stock Exchange website proudly claims that its Alternative Investment Market is “the most successful growth market in the world”. Founded in 1995, over 3,400 companies have been admitted to AIM, raising over £82.7billion in the process. This all sounds very impressive, but there are problems with the headline numbers.

They mask a very different reality. Scratch just a little below the surface and another view of AIM emerges pretty quickly. And it is not at all healthy. You don’t need to be a savant chart reader to recognise that AIM has not performed well in investment terms.

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AIM failing to survive

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Small Cap Corner

“there are oBvious structural flaws in this market, which must Be addressed for the good of the British economy and the good of British investors.” When it first launched, AIM’s baseline number was 1,000. On November 25th it closed at 819.3 – an 18% decline in eighteen and a half years. Below is a fifteen year view of this market:


This is the charting equivalent of a hospital patient flat lining and has a strong whiff of investment death about it. Were this the chart of a company you would either expect it to pay a considerable dividend or not to be too long of this world!

However, this does not make AIM’s failure any more acceptable. There are obvious structural flaws in this market, which must be addressed for the good of the British economy and the good of British investors.

To be fair to AIM, compared to its global peers, such as the TSX Venture Exchange or Australia’s S&P Emerging Companies Index, its performance is on a par.

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AIM failing to survive

A deeper look at the numbers Before examining some of the structural faults of AIM, it helps to understand more about the numbers, especially that headline “£82.7billion raised”. Below is a chart plotting the annual distribution of capital, since 1995:


Once again, this is another chart that doesn’t exactly need the Rain Man to interpret it. From 2003 to 2007 funding took off on AIM and a total of £47.5billion was raised. Perhaps this was a reflection of the credit driven boom, but whatever the case, since the Great Financial Crash of 2008/09, the fund-raising on AIM has collapsed. In the last five years, companies have raised just £22.5billion.

You’d be forgiven for thinking that £22.5billion is still a pretty decent figure in the context of all that has happened over the last few years. After all, £22.5billion invested into nascent up and coming companies surely has to be great news for the economy, doesn’t it?

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Small Cap Corner

This is true. It would be, except for one small detail.

Money raised on AIM £m

Of that £22.5billion raised only £4billion was for new issues (about 18%). The rest has largely been used for corporate life support. Take a look at the breakdown of money raised for new issues versus money raised for further placements to the right:

“thanks to the efficiency of AIM at raising money the walking dead are allowed to survive.”

From 2000 to 2007 more was raised each year for new entrants to AIM than for existing companies requiring follow up funding. This changed dramatically in 2008 (highlighted in red above), when the ratio of new issues to further placements dropped dramatically. There is an obvious argument that in a world of little to no genuine growth it stands to reason that fewer and fewer companies have sought to enter the stock market, but this doesn’t justify the £18.5billion discrepancy. Remember that one of the key arguments in defence of AIM’s poor performance is that this is the highest risk end of the market and so failure is to be expected. However, therein lies another great contradiction of AIM. Companies seldom fail in this market. Once they’ve been admitted onto the board, they are given almost free license to keep tapping the market for discounted placement after discounted placement. This has led to a disproportionately high number of “zombie” companies haunting the London Stock Exchange.













































































2013 (Oct)







For whatever reason, business models might not have lived up to expectations, but thanks to the efficiency of AIM at raising money the walking dead are allowed to survive. The cynical among you will no doubt suggest that this allows the rapacious and fee-hungry army of City professionals to keep extracting their pounds of flesh from the carcasses of once treasured investments. For what it’s worth, we agree!

Graduate from AIM? No chance! Supporters of AIM will claim that it is all well and good writing a hatchet piece like this at the bottom of the market, but it misses a vital point. AIM is a conduit for successful companies to graduate to the main boards.

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0203 021 9100

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Small Cap Corner

It makes perfect sense, therefore, that the index value doesn’t move higher and that companies require additional funds to fulfil the optimistic dreams of ever-hopeful boards of directors. In an investment paradise, where such fantasies were reality, I could accept this argument, but back here in the real world, certain inconvenient facts belie such utopian dreams. In 2013 not a single company has graduated from AIM to the main exchange. Not one! In a world where stock exchanges have taken off and increasingly absurd multiples are being paid, none of the 1,090 businesses currently listed on AIM has made the step up. This is not to say every company on AIM is a dog. Gulf Keystone (GKP) was meant to move to the main board, but has postponed this, and ASOS (ASC) would no doubt perform extremely well with a main listing. Even so, the point still stands that these genuine success stories (with, I am afraid to say, the jury still being out on GKP – cue howls of derision...) are sadly few and far between.

An officially sanctioned pyramid scheme Perhaps the final and greatest contradiction with AIM is in its very name. The Alternative “Investment” Market is a very misleading title. A traditional investment is the outlay of capital for income or profit. Dividends and other shareholder rewards for success form an integral part of this in free markets. Not on AIM. On AIM investors (which should read speculators) seek to profit through “capital appreciation”. This is little better than a euphemism for an officially sanctioned pyramid scheme, in which worthless stock gets passed from holder to holder until eventually some poor sap pays far too much money for something they can never hope to sell and never hope to see a real return on. Were this scheme operated by a backstreet boiler operation the authorities would rightly clamp down on it and people would go to jail. However, the veneer of respectability offered by the London Stock Exchange means all is well, no matter that such a miniscule proportion of the companies listed stand a cat in hell’s chance of delivering a real return. This is an incredible waste of capital and an incredible waste of people’s saving.

Worse still it calls into question the wisdom of the government’s recent move to allow investors to put AIM stocks into their ISAs. Just what the country needs! With a demographic time bomb set to explode in the not too distant future, as the nation state struggles to pay for an increasingly ageing population, is it really a sound strategic move to encourage people to buy AIM stocks for the long term?

What future for AIM? AIM should perform a very important role for the British economy. Britain has a long tradition of successful free enterprise and start-ups should be the lifeblood of growth, creating jobs and opening up exciting new markets. With QE not filtering through to the real economy, growth capital remains scarce and we cannot afford for it to be wasted. Of the £18.5billion raised in further placements over the last five years, little to none of this has resulted in investors seeing returns on their investments through dividends, share buybacks or other rewards of success. Clearly people have woken up to the flaws in AIM, as reflected by the decline in investor interest for this market. Whether the decline is terminal remains to be seen, but clearly something has to be done if AIM is to stand any chance of performing a genuinely beneficial role to UK PLC. To finish, I’d like to leave you with one thought. This might sound counter-intuitive, but to save itself from failing, perhaps AIM needs to allow more companies to fail. This would mean fewer listings and, yes, fewer fees to go around, I am afraid. Investors would also face total losses in certain holdings, yet the advantages of this approach would mean capital would be freed up for the next generation of companies to come to market, the calibre of new entrants would rise (as certain directors would realise this is no longer a free for all to gorge themselves on) and investors would be far more reticent in deciding where to place their money. Who knows, this might actually result in the reformation of a genuine investment market rather than the pyramid gambling aberration we all have grown to know and love.... Is that a pig I just saw flying by?

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Dominic Picarda’s Technical Take

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

Top 5 Picks for Q4 2013 This month we have the second of Dominic Picarda’s Q4 2013 Top Picks. Last month, Dominic picked the Nikkei 225 and it has since gone on a rip. This month he reviews African Barrick Gold (ABG). To read the rest of Dominic’s picks for Q4. Click here to download. George Osborne is looking especially smug right now. The UK economy’s ongoing recovery has defied the many predictions that government spending-cuts would deepen and prolong the gloom. It has also forced the IMF to retract its previous criticism of his policies. The same is happening elsewhere. Even in some of the longest-suffering parts of the eurozone — such as Spain — the recession seems to have come to an end. The Chancellor’s smugness could yet turn out to be misplaced, however. In the spirit of the railway operators that bemoan the “wrong type of snowfall,” the growth that is happening in the UK and in the US may also be of the wrong type. While British banks are willingly lending vast multiples of salary to those wishing to buy already overpriced houses, real businesses struggle to borrow to survive and invest. Put simply, too much today is resting upon speculation fuelled by ample cheap credit, from the stock market through to the housing market. This is no accident, but a deliberate ploy. No modern government has ever paid off its debts. Instead, the passage of time and the depreciation of money’s value have been left to work their destructive wonders. That inflationary process is well underway today and it is set to continue for a long time yet. The proof of the pudding will come when the authorities try and withdraw the lavish flow of cheap money, or rampant inflation forces their hand. I do not foresee a happy outcome here.

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Dominic Picarda’s Technical Take

“I think the bull market in gold has yet to run its course.�

Based on ten-year earnings, the US stock market is now almost as dear as it was going into the long-term slumps of the early 1900s and middle 1960s. In response, hardcore bulls are trying to explain why this proven valuation technique is wrong. Trading and tactical investing will continue to be the best approach in the coming months and years, as they have been since the year 2000. My near-term strategy is to seek to ride the ongoing liquidity-driven bull trend in stocks, while also keeping an eye out for big reversal opportunities in commodities. Just as I suspect the era of turbulence in stocks has not yet passed, I reckon the commodity boom is not yet dead either.

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Dominic Picarda’s Technical Take

African Barrick gold Gold miners have been a cracking investment over time. Between 1973 and 2012, the global gold mining industry went up by more than both gold bullion and developed market stocks more widely. Not only do they offer exposure to the price of gold, but also a dividend yield, which is key to earning good long-term returns. Lately, though, the industry has been in the wars, with the DS World Gold Mining index dropping by around two-thirds since its highs of August 2011.


The price of gold miners as a group is driven by several different forces. Falling real interest rates, a weakening US dollar, a rising gold price and a high dividend yield all tend to boost the sector’s performance. However, rates, the dollar, and the price of gold have all gone against the miners in recent times. At the same time, high costs have helped to eat into the individual companies’ profit margins. I am nevertheless attracted to the industry because of its cheapness and because I think the bull market in gold has yet to run its course. Tanzanian miner African Barrick Gold offers an especially interesting play right now. The dividend yield of 6 per cent is hard to ignore as a measure of its cheapness. It is also sitting a pile of cash, while it trades at a steep discount to its 489c-a-share book value. More importantly, the stock has come back to life in impressive style since its July lows of 94p. True, the ride has been a bumpy one so far. My buying advice was triggered on 23 October, when the 13-day EMA crossed above the 34-EMA. The price then rose from 160p to as high as 215p, before its latest sharp pullback. For those not in positions, another sharp rally through the 13-day EMA would be a good moment to buy.

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Don’t miss out!

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Options Corner

options corner

A POTENTIAL low risk way to short the US stock market By Richard Jennings Titan Investment Partners

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A low risk way to short the stock market

So, the current consensus is that the stock market is overvalued, but that it has further to go in the near term due to seasonal effects, too much scepticism (a contrarian signal), outstanding short interest, low VIX measure etc. etc. in fact, pretty much any real reason you can conjure up to justify the elevated valuations. Here at Titan, however, we wonder whether investors are collectively engaging in “bigger fool theory”. Of course, when investors en masse are blindly buying stocks knowing they are overvalued in the expectation (hope?) that there is another fool around the corner ready to buy at even higher prices, to us this is a classic late stage bull market action and we question who the next “fool” is, as retail money has come back into the market with vigour this year…

The script we are seeing today looks remarkably like the end of 1999/early 2000, where fellow fund managers and investors would openly say to me: “The market’s crazy, but hell, let’s go along with the party.” Of course, that ended in carnage just 18 months later as the chart below shows. Some equity prices, at the higher end of the risk spectrum, fell 90-99%, including supposed tech “blue chips” like Cisco.


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Options Corner

“when the index has traded between 12 and 15% from the 18 month exponential moving average, it has subsequently fallen over the next several months by around 10%. Where are we now? Around 14% from this key average; the 1 occasion it has yet to snap back.” Picking the precise top of a market is impossible. You may get lucky and be within a week or so, but the odds are stacked against you. Shorting futures outright, particularly if heavily levered, is a very dangerous strategy and is the origin of many a spread betting firm’s profits!! It has carried many a man out the door before. There is a more risk adjusted way to play a short view however and this involves the use of options. In fact, there are a variety of option strategies one could implement from outright Put purchasing to Bear Put spreads etc. Let’s take a look at the chart on the previous page again to try to decide the correct strategy to play the view of a rout that could come anytime over the next few months.

We can see that nudges on the RSI into the 80 region (the typical extreme overbought value) have also coincided with the onset of bear markets and the MACD measure is in extreme territory. So, taking the fundamental backdrop together with the historic technical picture, we have, in our opinion, a pretty good risk/reward set-up for taking a short position on the index. Of course, in the final throes of bull markets, and with the incessant liquidity support in the background we have today, the market can go further than you think (just like in a bear market it invariably falls much further than many expect). Naked shorting is dangerous heroics. We like the following strategy that addresses a further lift of 2-3% that busts us through the 20 year deviation extreme seen at the turn of the millennium towards around 1850 on the S&P 500.

If history is any guide (which it invariably is), then we can see a repeat pattern here over the last 20 years. The first thing we notice is the typical length of the bull market during this era of loose Fed policies. From early 1995 to early 2000 we had a shade over five years. Then, from early 2003 to late 2007 it was just under five years. If we take the start of March 2009 and extrapolate the past two bull markets forward then… we are closing in on five years. To us, this is a signal that we are definitely in the last innings and, without stating the obvious, the real gains are now behind us, not ahead of us! The next thing to notice from the chart is the deviation of the index from the 9th and 18th month exponential moving averages (three green lines pointing to the extremes). We can see that on every occasion previously (we can count nine) when the index has traded between 12 and 15% from the 18 month exponential moving average, it has subsequently fallen over the next several months by around 10%. Where are we now? Around 14% from this key average; the one occasion it has yet to snap back. The other 2 technical takes for us are the RSI measure and the MACD.

The first element of the strategy involves selling a Bear Call Spread across calendars — we’d prefer the March 1790 at the money Call sale vs. buying the Jan 1840 Calls. Net credit on this is around 40 pts. In effect, between now and the January expiry you have shorted the market at 1830 and are covered if it melts up further. Of course, after the Jan expiry you need to make the decision as to whether you buy further long call cover until the March expiry. This element of the strategy also takes into account the typical seasonal effect of a Xmas/New Year rally.

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A low risk way to short the stock market

The current part of the strategy only delivers you a fixed premium of 40pts (the credit) however, and so to turbo boost a down draft in the market you need an option play to capture this. How would we play this? Simply using the call spread premium receipt to buy a Ratio Put Spread and using again the March and January strikes. Remember, we are protecting ourselves in the event of a further sharp rally between now and January, and so the counter way to play this, should the seasonal effect not apply this year and the market falls sharply between now and January, is possibly to buy the March 1730 Puts but also sell twice the amount of the Jan 1620 Puts (a little above where the 18 month EMA is). Net cost of this would be around 30 pts.

Again, one does not completely obliterate risk (sorry, markets don’t work like that!) as there is risk that the market falls through the 1620 Put level and so you are then long the market here. Of course, offsetting this will be very handsome profits on the short call spread and the long side of the ratio put spread. If you’d like to be exposed to a fund that uniquely uses a spread betting account to trade the markets and engages in the type of strategies detailed here, click the image below or email us at for more information.

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Zak Mir’s Monthly Pick for December



I hate big government, hated nationalism and loathe ongoing bureaucracy and red tape! When governments tender for contracts, the worst inefficiencies rear their heads, and it is usually the case that taxpayers suffer the consequences... The key problem is that the people responsible for awarding the contracts, from toilet roll acquisition to procuring IT services, usually have no clue how to get a good deal. They are, after all, pen pushing civil servants. As far as they are concerned their money supply is infinite. It is just taxpayers’ cash, so why worry about it? This license to waste money is a universal problem for governments engaged in big business of any kind. Unless there is systemic reform, what we have witnessed recently from the likes of outsourcers Serco (SRP) and G4S (GFS) is likely not only to continue but could also prove to be the tip of the iceberg. As has been the case with banking and the food sector (dodgy horse meat anyone?), even in this Information Age of ours, public ignorance allows rip-offs and scandals of waste to continue unfettered for years, leading to hundreds of millions in losses.

So why then am I advocating SRP as a buy in my monthly pick? The main reason is that I am a technical analyst and the chart tells me this stock looks like a buy. From current levels, the share price should be a win/win for the bulls. No matter what the Serious Fraud Office does to Serco, whether they fine them, admonish them or administer other wrist slapping measures, the contracts the company has been awarded will continue. Sure, SRP will suffer reputational damage, but the money will keep flowing in. Even if the SRP share price remains at current levels for an extended period of time, this will only make it an attractive target for a third party takeover or private equity buy out. The prospect of this alone could encourage bargain hunters back into this market causing the share to rally, exactly as we saw with G4S in the aftermath of their Olympic fiasco.

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Buy Serco (SRP)

“Even if the SRP share price remains at current levels for an extended period of time, this will only make it an attractive target for a third party takeover or private equity buy out.�

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Zak Mir’s Monthly Pick for December

Technicals Apart from the obvious fundamental strength of SRP, the technical position for this apparently ailing outsourcer actually suggests a good deal more strength than the market currently believes. My favourite technical signal was the starting gun for the latest sharp declines in the stock, way back in late August. There was an unfilled gap to the downside, through the 200MA, which was almost at exactly at the same level as now — £5.92. Over the following months after the breakdown, a double top formed below the 200MA, ahead of the latest unfilled gap to the downside through August’s £5.06 support. It is often the case that a pair of such downside moves is completed by a third unfilled gap. However, given the way that SRP’s RSI is in the teens, this suggests the stock is significantly oversold and has hit the floor of a descending price channel from August, currently towards £4.10. It is for this reason that SRP presents traders with an intermediate opportunity to go long.

Recent Significant News Nov 14 (Reuters) – Serco warned on Thursday its profits in 2014 would fall as the impact of multiple high profile contract problems in Britain and Australia hit margins. The firm said that the mid-point of estimates for operating profit in 2013 was £307million, the same as in 2012. It said that its operating margin in 2013 would be slightly lower than the 6.4 percent a year earlier. Then in 2014, lower revenues and margins on its Australia immigration contract would lead to profit being slightly lower than in 2013. Serco said it would cut around 400 jobs in its UK and business process outsourcing operations, from a total headcount of 47,000. November 11 – A Sunday Times report said Serco may warn on 2013 profit when it updates the market on trading on Thursday. The Sunday Times report follows a note from RBC Capital Markets last week in which it downgraded its forecasts for the firm, taking into account problems on contracts in Britain and Australia. RBC now expects the firm to post 2013 EBITA of £314m, down from £326m, and lowered EBITA projections for 2014 and 2015 by 10 and 19 percent respectively. November 7 (Reuters) – The British minister who launched a review into G4S and Serco’s Government contracts said he expected increased competition in the markets where the outsourcing firms operate. “There will be new entrants coming into that market, both international players but also new entities coming into existence and suppliers who currently don’t supply central government,” Cabinet Office Minister Francis Maude said at a presentation to analysts.

With a stop loss set at £3.90, allowing some wriggle room below the psychologically important £4.00 level, I would look for a dead cat bounce towards the former post August support zone at £5.00. This said, I must stress that any long positions must be tightly monitored, as there is still a chance of that third gap to the downside. Discipline is key in this trade.

November 4 (Reuters) – Britain’s Serious Fraud Office (SFO) has opened a criminal investigation into G4S and Serco’s electronic monitoring contracts, increasing pressure on the embattled contractors. The SFO investigators will now decide whether to take the companies to court after an audit showed that, under a 2005 Government contract, they charged for tagging criminals who were either dead, in prison or had never been tagged.

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Buy Serco (SRP)

The investigation could ultimately lead to fines or prosecution and neither G4S nor Serco can win further British Government work until the completion of a second investigation by the Cabinet Office into every deal it has with the companies worth more than £10m. The result of that investigation is expected by the end of November. Britain’s Ministry of Justice says that it spent £107m on the two tagging deals with the companies in 2012/13. Since the scandal first broke in May, both companies have lost their chief executives, launched their own internal inquiries and begun top-down reorganisation. Both companies said that they will cooperate fully with the SFO investigation. Oct 25 (Reuters) – Serco, the outsourcer at the centre of a Government contract scandal, said its Chief Executive Chris Hyman had stepped down in a last ditch bid to restore its reputation. The group also announced plans to strengthen its board and restructure the company, splitting the British central government work into a separate unit which will be more closely monitored to improve transparency. Global outsourcing group Serco was told in September it could be investigated by Britain’s Serious Fraud Office (SFO) alongside rival G4S after an audit showed they charged for tagging criminals who were either dead, in prison or never tagged at all.

“The market reacts very badly when companies lose or are threatened with losing supposedly secure revenue streams.” fundamentals Some may argue the SFO’s track record is an embarrassment, as demonstrated by the collapse of the case against the Tchenguiz brothers. This could mean that SRP stands a decent chance of slipping out of the net it now finds itself in. What we’ve seen in terms of the dramatic drop in the share price is quite easy to understand.

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Zak Mir’s Monthly Pick for December

The market reacts very badly when companies lose or are threatened with losing supposedly secure revenue streams. However, although SRP’s reputation has been damaged, the chances are that the revenue streams will remain, irrespective of the outcome of the SFO’s investigation. The introduction of a new CEO and a large fine could turn things around for SRP quite rapidly. Although this view runs the risk of making light of the very real challenges now facing this stock, it is, nevertheless, feasible. The only question is how long this might all take to play out. In this “non-essential” sector, there is a chance that an example is made of SRP and a heavy punishment handed out. Were this to happen, then it should be expected that the stock overshoot to the downside.

In a most extreme scenario the company could even be broken up. Nevertheless, the likelihood of either scenario seems pretty remote, especially when you consider it is the Government (through the Ministry of Justice) which bears ultimate responsibility for not having completed sufficient due diligence. There are no business rules written anywhere requiring that companies prevent customers from paying top dollar for a third rate product — caveat emptor after all! I’ll leave the final words on the fundamentals of SRP to broker, UBS. They upgraded SRP from neutral to a buy on November 15th, the day after the profit warning. In its note, UBS suggested that the company was reaching a point of maximum pessimism and that 2014 should be the year the company bottoms out. Although 12 months seems a long time to wait for a flattening out of a crushed stock price, the essence of UBS’s analysis seems correct.


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Best of the Blog November 2013

BeST OF THe BlOg NOV 2013 visit for our latest calls on markets. Just about every media outlet out there is predicting the long term demise of gold. Not so Spreadbet Magazine! As is ever our wont, we like to stand apart from the herd and position ourselves to buy what they want to sell and to sell what they want to buy. Make no mistake this can often be an excruciating challenge, throwing up many personal challenges uncertainty and causing one to question one’s view of the world.

However, we are sticking to our guns (apart from Zak, who’s been quite clear he’s not a fan of the precious metal!). In one of pieces covering this market, our founder Richard Jennings, spelled out the technical conditions that could point towards an end of year rally for gold. So far, we’ll admit it’s not looking too good for the timing, but there is still another month to go...

In one of the most popular pieces ever to hit our blog, Ben Turney wrote a contentious article about the suspicious price action of AIM-listed stock Bowleven (BLVN) immediately before the company announced a deeply discounted placement. In case you missed it, BLVN announced this news on Tuesday November 12th, but on Monday November 11th the stock “mysteriously” plunged to form a new 52-week low.

At Spreadbet Magazine we urge the FCA to investigate this matter, as the sudden price drop just doesn’t smell right. Unfortunately for BLVN’s beleaguered shareholders this will do little to ease their plight, as the stock has continued to fall. However, we’ve seen similar price movements happen too often before simply to ignore this any longer.

Towards the end of November, our editor Zak Mir introduced his theory of “selective hyperinflation” to readers of the blog. In summary, Zak demonstrated how obvious signs of excessive inflation in certain aspects of life are not reflected in others. For example, while stock prices have taken off into orbit, deflationary forces have continued to put pressure on consumer pricing and labour costs.

Although Zak agrees with the view of many Gold Bugs that the current state of affairs is likely to end in much higher general inflation, his view of selective hyperinflation suggests that predicting when this might happen is probably near impossible. As such, he is not a fan of the prospects for gold, but as we often say here “it takes two to make a market”.

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Best of the Blog November 2013

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December 2013

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The most powerful women in international finance

the most powerful women in international finance

With Janet Yellen’s appointment as Ben Bernanke’s successor looking like a formality, this month Louise Cooper takes a look at the top women in international finance.

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The most powerful women in international finance

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The most powerful women in international finance

Dr Janet Yellen is currently Vice Chair of the Board of Governors of the Federal Reserve, but looks guaranteed to succeed Ben Bernanke as Chair in February next year. In its 100 years, the Fed has never been led by a woman and President Obama could make history with the choice of Dr Yellen. She is married to the economist George Akerlof who has won a Nobel Prize. She is the female half of a serious power couple.

Dr Janet Yellen With a PhD in economics from Yale University and a previous career as Professor of Economics at the University of California in Berkeley, Janet Yellen has academic credentials aplenty. No one can doubt her immense intelligence, but critics question whether she has the required gravitas for the top job.

“When asked about being one of the few female central bankers in the world, Dr Yellen said: “I really think this is something we’re going to see increase over time, and it’s time for that to happen.” In her two years as boss of the IMF, Christine Lagarde continues to impress. As the first female head of this august institution, she took on a difficult job, after the rapid downfall of the previous boss, Dominique Strauss Kahn. She’s been criticized over the IMF’s involvement in the Eurozone bailout and yet has risen above the animosity. Articulate, smart and always well-dressed, Lagarde is every inch the power player on the global stage.

However, the fact she is even being considered is a feat in itself, as central banking is still an old boys’ club.

Christine Lagarde

The new Governor of the Bank of England, Mark Carney, may have assuaged feminists with his choice of Jane Austen for the ten pound note, but his Monetary Policy Committee is female free. Out of the six members of the Executive Board at the European Central Bank, none have double X chromosomes either. And not one woman heads up a central bank in any of the 28 EU member states. The Bank of Japan has Sayuri Shirai as one of the nine members of its Policy Board. But surprisingly, it is in Russia that a female head of a central bank is to be found. Elvira Nabiullina took office in June of this year after her appointment by President Putin — not a man well known for his feminist views. When asked about being one of the few female central bankers in the world, Dr Yellen said: “I really think this is something we’re going to see increase over time, and it’s time for that to happen.”

A lawyer by training, she went on to do well in the traditionally masculine world of French politics. She was the first female finance minister of the G8 and has held various other posts in French government.

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The most powerful women in international finance

In her early years, she represented France in synchronized swimming — the demanding training preparing her well for her future career. Like all who make it to the top, she has a strong work ethic. And she clearly still keeps in great shape — another effect of her early sporting career. Controlled, measured and focused — this is a women highly unlikely to suffer the ignominy of her predecessor. But she is not just the most powerful woman in finance; she is arguably one of the most powerful women in the world on any measure. Forbes may rate Melinda Gates and Michelle Obama higher, but these only occupy positions of power thanks to whom they married. Christine Lagarde made it to the top on her own abilities.

Leda Braga

The Brazilian born Leda Braga, President of Bluecrest Capital Management, frequently tops the list of the most influential women in the hedge fund industry. But like the rest of the hedgie community, she is notoriously secretive. She is reluctant to be interviewed and especially to be involved in any women-in-finance debate. Nonetheless, thanks to massive recent losses at her fund, her photo was splashed over the British tabloid The Sun. A reported loss of £1.8bn in just six weeks of trading ensures such coverage.

In a recent interview for she explains: “I always liked the mathematics and maths methods. Engineering is the edge of applied science. Engineers like to solve problems more than anything and then apply these scientific tools to solve problems.” After beginning her career in derivatives at JPMorgan, she has become one of the world’s experts in modeling complex derivatives and also “black box” trading. However, such trading systems can break down in financial turbulence, as the massive recent losses at the fund — 16.9% in just six weeks to end June — highlights. Reportedly, it was her husband who first entered the financial industry as an options trader and persuaded her to get into the same business. If he hadn’t have done that, no women would have been on that Forbes list at all. We move from the secretive and sexy world of hedge funds to the more staid and much more open fund management industry. This is a profession that has far more women at the top and it was difficult to choose which one to feature. Ann Marie Petach is CFO of BlackRock which manages almost $4trillion globally. Elizabeth Corley is CEO Allianz Global Investors and writes thrillers in her spare time — four published so far. Mary Callahan Erdoes is CEO JPMorgan Asset Management with a Harvard MBA and three children. And of course the apparent Fidelity heir is Abigail Johnson, expected to take over from her Father in the family business.

Helena Morrisey

According to the Forbes 2012 list of the highest earning hedgies, she comes in thirty-fifth in the world with earnings of $50mn. In fact, she is the only woman in the top 40. Again, she is another super achiever academically, with a PhD in Engineering from Imperial College in London with a further three years as professor / researcher. And it is her mathematical ability that has ensured her success.

But for a woman who is a super achiever both in her career and family, Helena Morrisey, CEO Newton Asset management, fits the bill. She has had extraordinary career success combined with an astonishing nine children.

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The most powerful women in international finance

Unlike Leda Braga, she is also fighting for the females of the future — she is the founder of the 30Percent club trying to get more women on Boards. She’s the opposite of secretive and is an active tweeter — mostly about promoting women in business, some recent comments against intervention in Syria and also a retweet of the Dalai Lama which may have something to do with being married to a Buddhist!

Moving to probably one of the most publically hated areas of finance, investment banking, it should be no surprise that few XX chromosomes make it to the top in these ruthless and often immoral firms. But a few have done so. The Frenchwoman Isabelle Ealet is at the top table at the most powerful investment bank in the world.

But what is particularly impressive about Helena Morrisey is that, unlike many on this list, it appears she does not come from wealth and privilege. She was educated at a comprehensive school in Chichester from which she got a place at Cambridge University to study philosophy — an achievement in itself as Cambridge takes mostly from private schools. However, like the others, she is intelligent and clearly super motivated. The next woman on the list shapes the opinions of virtually all those in the financial industry. The Financial Times is read by over 600,000 professionals and Gillan Tett is its assistant editor. She has had a great financial crisis, being one of the first to spot the dangers of excess credit and complex credit instruments. In some ways she succeeds as a woman twice: both in the male dominated world of newspapers and the macho world of finance.

Gillian Tett

Isabelle Ealet

She is co-head of Goldman Sachs Securities Division and ex global head of Commodities. She is boss of the division, currently driving profits and thus she wields much power within the firm. She started off her career at Goldman as a commodities trader in 1991 and made partner just nine years later in 2000 — a remarkable rise. After studying at the elite French school, Institute d’Études Politiques de Paris, she began her working life as an oil trader at Total. Dubbed the ‘Queen of Commodities’, she dominated the markets. Like others of her profession, she rarely gives interviews. But a quote does appear in a French magazine from some years ago. She said: “what I appreciate most is the culture of results. At Goldman Sachs, you are judged on your performance, not on your relationships or diplomas. It is fairer.” Basically she made so much money for Goldman, she had to be promoted.

Highly intelligent, she has a PhD in Social Anthropology from Cambridge University, having spent a year in Tajikistan. Her ability to speak Russian gave her her first career break as a trainee at the FT and from there her rise has been meteoric. Apparently she can milk a goat — a useful skill, she jokes, if she ever faces redundancy.

Another secretive world is that of private equity and venture capital. No surprise after being described as “locusts” in 2005 by a prominent German politician. Other unflattering adjectives abound — “barbarians” and “raiders” to name but two. These are not attributes typically associated with women. According to a recent report, the private equity industry employs even less women than the rest of Wall Street. Like central banking, this is still a boys’ club — there are only a few female top names.

54 | | December 2013

The most powerful women in international finance

“when asked aBout Being one of the few female central Bankers in the world, dr yellen said: “i really think this is something we’re going to see increase over time, and it’s time for that to happen.”

Suzanne O’Donohue

Suzanne O’Donohoe joined the biggest name of all in this industry — KKR — in 2009 and was the first female managing director at the firm. Her background has been purely top drawer: undergrad at Georgetown University, MBA at Wharton, 17 years at Goldman Sachs — rarely interviewed with a low profile. But Adena T. Friedman, CFO at Carlyle group and the first women on the executive board, is more female friendly. She worked part-time at NASDAQ while her two sons were young, but notes that “men struggle with it (balancing career and family) as much as women do”.

“It’s a hard thing to balance, needing to be at home, and needing to be at work, and making sure you’re performing in both arenas,” Ms. Friedman said. “To be honest, the guilt is extreme.” This industry boomed in the days of cheap and plentiful credit, benefitting far more than the companies they leveraged up. But times have been difficult since. Even so, as the industry has expanded and become more institutionalised, the need to attract more female talent has emerged. Most of the big names have put special programs in place to attract more female trainees. Writing a similar piece in ten years should see more top women to choose from. Women have come a long way in the financial profession, but any cursory glance at the Extel rankings of analysts or executive boards of banks shows this is still a male dominated world. In time that may change. But the ladies above do have some common characteristics: great intellect, tenacity and a capacity for hard work are their secrets of success. But that goes for men as well as women.

Adena T. Friedman

December 2013

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Patel On Markets

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

Patel on Markets

Which Way NEXT FOR THE US DOLLAR V THE EUR? A POSSIBLE strategy IS PROPOSED... The last month has a been a very interesting period for currency investors as it held a number of important developments that could potentially shift the outlook for most major currency pairs. The US dollar has once again been at the forefront of the market’s attention with events that drew our attention session after session. To pick it up where we left off last time, the Government shutdown in the United States didn’t end up having a major negative effect on the domestic economy. Recent data revealed that the shutdown didn’t make much difference at all to employment, which continued to show steady signs of continued recovery.

USD Beating However, the dollar took quite a hit over this period as Janet Yellen, the current front-runner to succeed Ben Bernanke, took the stand in front of the US Senate’s Banking Committee.

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December 2013

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Patel On Markets

The Vice Chairwoman of the Federal Reserve and the first woman ever to lead a major central bank expressed her views on the current state of the economy. Yellen was firm in her belief that the recovery is still weak and any reduction in the current asset purchase program wouldn’t be the right move. This was perceived by the markets as a clear hint not to expect tapering any time soon and definitely not within 2013. This statement which was also accompanied by similar comments from other FOMC members during the past weeks undoubtedly took their toll on the dollar. The American currency weakened against most other majors with the euro and the pound gaining the most. The sell-off in dollars was interrupted by a brief relief rally when the minutes from October’s FOMC meeting were released. However, after investors took a second look at the optimistic comments included in the minutes they realised that nothing new came out of them and indeed the dollar’s outlook had not changed.

Medium Term Now, what does this signal for the medium-term future of the US currency? In my view, the US economy is showing steady signs of recovery, but not at a pace that would enable the Fed to start reducing its stimulus, at least not at the moment and most probably not in December. This translates into continued instability for the American currency and mild weakness to be shown against the other majors. I believe that as we come closer to the end of the year the discussions for early versus later tapering will intensify, but keep in mind that around that time the chatter regarding the US debt ceiling will also return. The current deal has the US Government financed until early February and this means that a complicated discussion will begin. Unless something changes radically, we are headed for a heated end-of-year period with the dollar most probably being under pressure.

Euro Better? Across the Atlantic, we have the European currency and its own troubles to take into consideration when deciding where to invest our money. Last week the European Central Bank went ahead and surprised everyone when they cut their key interest rate by 0.25%.

Everyone was shocked, as such a move was definitely unexpected, but the ECB President Draghi thought that this was the right time to go ahead and try to stimulate the region’s economy. Recovery in the European region continues to be very weak and the ECB governing council fears that low inflation could turn into a state of stagflation with Europe becoming a new Japan.

So what’s the take-out from this development and how could we get some actionable insight? In my view, the euro’s outlook remains weak and its recent uptrend should be mostly attributed to the dollar weakness. Every time the dollar gets pressured the euro gains versus the buck, but each negative development for the region’s outlook that comes out translates into steep sell-offs.

A Strategy I think that the way to go for the coming month is to try and capitalise on the swings and stay away from any long term investments. Moreover, keep in mind that we’re going through the last days of November and Germany still hasn’t been able to form a stable government. This fact doesn’t pose a significant risk in itself, but it definitely adds to the uncertainty of the region. You can either wait for the break and then bet in that direction, or take more risk and take a view beforehand and place the bet in both directions and then close the loser with a pre-placed stop loss and let the winner run. So, to sum up my views on the coming period, I think you need to keep it simple and play it safe. Try and get onboard with short term swings to capitalise on the uncertainty surrounding both the euro and the dollar and understand that in times of high volatility the best recipe is to get as much as possible out of every swing and get out of it fast. For daily updates on my views over the markets and interesting trading ideas and suggestions you can visit my latest financial site: www.InvestingBetter. com and subscribe for my premium NewsletterPro service. NewsletterPro is a daily financial newsletter prepared by market professionals, aimed at serious investors and traders and delivered to subscribers every morning by 7.30 am. Alpesh Patel

58 | | December 2013

Commodity Corner

commodity corner

Gold’s fundamentals for 2014 BY Ben Turney

It’s been a pretty torrid end to the year for our magazine’s biggest call of 2013. Gold has tanked and the market seems to be in complete agreement that further falls are all but guaranteed. The summer’s rally died a death and we on the cusp of hitting new 52-week lows. Worse still, the precious metal is set to record its first annual price decline in a decade, much to the chagrin of the ardent bulls. If the talking heads are to be believed, the bull market is finished. Even our editor, Zak Mir, has jumped on the band wagon and enjoyed greatly telling us how wrong the rest of us are here!

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Commodity Corner

So what’s gone wrong? The flippant answer is there is not enough international demand for gold so the price has fallen. Globally, central banks have pulled out all the stops to underpin failing economies, inflation hasn’t erupted, bond yields are falling and stock markets are stratospheric. Measures of fear are in decline and confidence indicators are on the up. All in all, there is just too much damned Christmas cheer out there for us miserly Gold (bah hum) Bugs. (Note to editor – sorry that is the only Christmas reference in this month’s issue, but I couldn’t resist!) We go into 2014 riding a wave of optimism. All is well, the nastiness of the last five years is behind us and we can happily go back to the way things were. Crisis well and truly averted! Great!

This deficit monetisation is a disaster waiting to happen and is a candid admission that the system is broken beyond repair. But investors don’t seem to care about this. The complacency that is driving indices to new heights is as staggering as it is disturbing. The market is behaving as if the accumulated troubles of the last 15 years have been resolved. This is self-delusion on an epic scale. By welcoming more and more QE from America, Japan, probably from Europe and possibly from Britain, the message is clear. Global investors are saying they believe that a debt crisis can be solved by more debt. Perhaps the flaws in this logic are too obvious and we are missing something in our assessment of the state of the global financial system and the health of the major OECD nations. Maybe it is true that this time is different and the hard learned economic lessons of the past no longer count...

Apart from one small fact. Uck, I can’t even go on writing that nonsense! This naive view of the world is wholly misguided. Nothing has been fixed, debt burdens have become ever more intense, serious growth is a distant memory and political deadlock means there is a lack of leadership to confront the vast challenges still facing us, in any meaningful sense.

Of course, this view is not at all popular with the powers that be. Just consider Janet Yellen’s testimony to the Senate Banking Committee earlier in November. Her confident statements about the proactive role the Federal Reserve has taken in leading the US economy through the worst of the crisis won resounding praise. The pity was that these comments weren’t based in any sort of reality. The Federal Reserve’s balance sheet is a toxic $3.9trillion morass and the US Government is wholly reliant on the bond purchasing programme to sustain spending. As I showed in last month’s magazine, over the course of 2013 the Fed has bought more US Treasuries than the US Treasury has issued.

Of course this time isn’t different. It never is and as soon as people start believing such rubbish the likelihood is a rude awakening is around the corner. The market is at its most fickle when people start to believe they’ve conquered it. The turn, when it comes, is usually as savage as it is sudden. Very quickly, market forces remind all those who have forgotten exactly who is in charge. But, to be brutally honest this reasoning applies equally to gold bulls. I could have written most of this piece at any point over the last few years. What was true yesterday is true today, will be true tomorrow and will remain true until the inevitable catastrophic correction occurs. Unfortunately, this helps little in deciding on a trading strategy for 2014, as that conclusion could be a decade or more away.

“So, leaving to one side the “gold to $5,000/oz” calamity trade, there are increasingly compelling fundamental reasons why gold could be the trade of 2014.”

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Gold’s fundamentals for 2014

Why gold could be the trade of 2014 So, leaving to one side the “gold to $5,000/oz” calamity trade, there are increasingly compelling fundamental reasons why gold could be the trade of 2014. The first of these is the most obvious. Everyone is saying it won’t be! Think back three years, as we went into 2011. Everybody was convinced that gold was going to break through $2,000/oz. It was a certainty. It is true that the price made a valiant attempt at scaling those lofty heights, only to be toppled in sight of its goal. The price peaked at $1,913/oz on August 23rd that year and the trend has been solidly down ever since. Fast forward to today and the situation is not too dissimilar. The consensus is that gold has had it. From taxi drivers to tea ladies, all you hear about is gold’s demise. Even my mother lectured me recently about why I should stay away from gold. Sorry mum, but that’s exactly why I want to be long the yellow metal next year! Then there are the fundamentals. On this front we’ve had a recent helping hand from those wonderful people in the global PR department at Goldman Sachs. God bless them. They really are fantastic at their jobs. As soon as one of their analysts pumps out a cleverly contrived recommendation (ahem, which we’re sure their traders don’t take positions on the opposite side of...) about why such and such market is going to collapse/fly to the moon (take your pick!) then it suddenly appears in every single major and reputable financial news outlet the world over. There is a wonderful art to their craft, but as far as contrarian indicators go there really aren’t many that are better than those from the Vampire Squid.

In a series of articles over the last few years, Hebba have built a convincing model of how much it costs gold mining companies to extract gold from the ground, taking into account all expenditure, including items such as exploration and replacement. You can judge for yourself if you think this analysis is worthwhile, but I am fairly certain that this research has been widely picked up, as I have seen an increasing number of references using figures which bear remarkable similarities to Hebba’s numbers. The latest quarter’s review by Hebba can be found here. For a quick summary, Hebba’s most recent results are based on the 6 million ounces of gold mined by the largest publicly listed miners, which apparently represents 25% of total global production. Hebba calculated that it cost on average $1,221.75 to mine an ounce of gold in Q2 of 2013. This is the highest quarterly figure they have published and costs continue to increase.

“Hebba calculated that it cost on average $1,221.75 to mine an ounce of gold in Q2 of 2013.”

It is quite astounding how willing the likes of Bloomberg, Reuters, the FT, CNBC and the like are to parrot the latest proclamations from Goldman, without the slightest hint of irony. The most recent of these has seen Goldman analyst Jeffrey Currie declare that gold is a “slam dunk” sell and is heading to $1,050 by the end of next year. On this basis alone, I would be amazed to see gold trading at anything less than $1,400/oz by December 31st 2014, as the latest muppet massacre draws to an end. On a slightly more serious note there is another factor to consider, which could be highly supportive of prices over 2014; the all in mining costs of the industry. To help me here I draw from some excellent running commentary published on, by an analyst of Hebba Investments.

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Commodity Corner

The table below gives a breakdown of some of the all-in costs of a selection of the largest listed miners;

All in mining

All in mining



cost/oz ($)



cost/oz ($)

Barrick Gold



Alamos Gold






Kinross Gold



Yamana Gold






Newmont Gold






Eldorado Gold



Richmont Gold






Silvercrest Mines



Allied Nevada Gold



Agnico Eagle



With today’s gold price languishing just above the critical $1,221/oz level it is a reasonable bet to assume that plans are in place (if not already being acted upon) to cut supply. There have already been a series of high profile rounds of capital raising by some of the major gold mining companies, which point to the strain the collapse in the gold price has placed on balance sheets. Of course, reducing mining operations is no simple matter, but substantially lower gold prices have been with us for some time now. A widespread reduction in gold mining won’t necessarily have a great impact in driving the price higher immediately, but it could well serve to put in place a floor. If the price does drop much lower (which has to be on the cards, in spite of what I said earlier), this could lead to a flurry of announcements that mines are to be closed. With sentiment as battered as it currently is, investors could quickly wake up to the fundamental strength gold could offer.

The point to take away from this is simple. From late 2008 until fairly recently, gold has been viewed purely as a catastrophe trade. However, the decline in price over the last two years, combined with the increasing cost base for miners (including windfall taxes) strongly suggest that a supply squeeze is likely in the next few years. This will transform gold from being purely a hedge against the world ending to a solid play with solid fundamentals. We might not have reached a bottom yet in the price of gold, but if I am right in my assessment of the market we might not be very far away from one. Stay tuned to the blog for more technical analysis on gold over the next month.

62 | | December 2013

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Janet Yellen - should we be worried?

JANeT YelleN

THe MOST POWeRFUl (AND DANgeROUS?) FeMAle IN THe WORlD BY FIlIPe R COSTA & R JeNNINgS It looks almost certain that Janet Yellen is set to be confirmed as the new Federal Reserve Chair, just in time for the Central Bank’s hundred year anniversary. And what a hundred years it’s been — a period in which this institution has presided over the total and utter decimation of the purchasing power of the US dollar.

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Janet Yellen - should we be worried?

The US Federal Reserve has been seen in recent years as a perpetual bubble blower and most certainly of “dovish” leanings. First it was Alan Greenspan who sat back and allowed the millennium stock bubble to build, then Ben Bernanke, an academic who should have stayed at Princeton and never been let loose on the global markets. He didn’t see the building of the US real estate bubble, which went on to wreak so much havoc around the globe when it burst. Now, we have Yellen who, aside from the hair on the top of her head as the feature picture of this piece so succinctly shows, is almost indiscernible from Mr. Bernanke in terms of policy. At the time of writing this piece, readers could no doubt hear a resounding thud from the hallowed land of Yorkshire as my jaw hit the ground at the comments she uttered to the Senate. To quote just a few: “YELLEN SAYS FED DOESN’T SEE BUILD UP OF FINANCIAL RISKS” “YELLEN SEES LIMITED EVIDENCE OF ‘REACH FOR YIELD’” “YELLEN SAYS FED LOOKS OUT FOR ANY POTENTIAL ASSET PRICE BUBBLES” “YELLEN DOESN’T SEE `MISALIGNMENTS’ IN ASSET PRICES” It almost makes you wonder if these people are living on the same planet as you and I. When seasoned and extremely successful investors from Mark Faber to Julian Robertson to Bill Gross all state that there are, without a doubt, multitude bubbles presently growing in various asset markets, it really does begin to beg the age old question: “Are the lunatics truly in charge of the asylum?” It gets better… Janet Yellen is not just a Keynesian supporter (whose policies have been proved time and again to be nothing but noise in the wider context of free markets and, arguably, just interfere with market “clearing”), but she is a strong believer in the power of monetary intervention as a way of boosting capital investment and the economy. In a recent conference she argued that full employment cannot be achieved without government intervention, and to us is almost certainly paving the way for a continuation of the current super loose monetary policy. It seems she believes the aim of monetary policy is no longer to generate price stability but to drive growth, and beggared be the consequences.

“she is a strong believer in the power of monetary intervention as a way of boosting capital investment and the economy.” We need to look back at Ms Yellen’s background to obtain more of an understanding of her thinking. She was a PhD student at Yale, studying under James Tobin, the 1981 Nobel Prize winner and a staunch Keynesian. It was here that her interventionist leanings were honed by the Professor, who is another strong supporter of government intervention. In fact, Tobin was invited by President Kennedy to serve on the Council of Economic Advisors and the Board of Governors of the Federal Reserve System during the 1960s. At that time, the US economy was in need of a boost and Tobin proposed what was known as Operation Twist: a plan to buy long term bonds while selling short term bonds, with the aim of supporting economic recovery while keeping a strong dollar. Sound familiar? Well it should because Operation Twist has been in use in the US financial markets in the last two years as a means of getting long-term interest rates down, although the dollar’s strength was not a necessity! Tobin did, it is admitted, partially succeed with his policies in the 1970s as the US economy entered into a period of growth. But, unfortunately, the bold policies also led to inflation as we can see in the chart below. This also ultimately resulted in the end of the Bretton Woods system with President Nixon unlinking the dollar from gold. Since that time, the dollar has been even further decimated relative to gold, in fact losing 97% of its value.

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Janet Yellen - should we be worried?

US CPI 1950-2012

Tobin’s ideas always came at the cost of huge inflation. Even though he only had one opportunity to apply them (during the Kennedy administration), we can see them reflected in current policies around the world today. One of Tobin’s other students, who is behind the bold push for quantitative easing in Japan, is none other than Mr Shinzo Abe. So just what can we expect of Ms Yellen? Well, we expect her to continue to press the throttle on quantitative easing well into 2014, particularly as there are renewed signs of softening in the US economy and the European central bank, under Super Mario Draghi, which has stepped up the pace with its own easing. With calls for Abenomics to unleash even more money printing, we doubt she will stand idly by in the ongoing “currency wars”, certainly if the soft data becomes more entrenched and unemployment begins to rise again. In fact, we think that the FeD will increase its $85 billion asset purchase program in 2014 as they are, in reality, the only buyer of size of US debt. As we said, the lunatics truly are in charge.

We leave you with one further chart — a measure of the US outstanding debt with the gold price overlaid. Until early 2012, that was what you would call a measure with a high R squared between gold and the debt outstanding. With Obama’s “spend and be damned” administration and Yellen and her merry band of Fed members’ “print and be damned” policies, we doubt the decoupling of the last 18 months will go much further, certainly as the debt figure looks likely to bust through $20tn at the present pace in the next 18 months.

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Janet Yellen - should we be worried?


December 2013

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68 | | December 2013

Zak Mir Interviews Dominic Picarda



This month Zak Mir interviews Dominic Picarda, one of our favourite contributors. “What a rip-off!”, we hear you cry. Well, hang on a minute and read what he has to say! There’s a reason we are so keen on including his insights in our magazine and on the blog... Zak: Given the way that most short-term traders lose money and mostly profess to be using technical analysis, does this mean that TA is actually the wrong way of trying to make money from the market? Dominic: I think TA may actually be the best way to make money over shorter horizons in many markets, as fundamentals are often of little or no relevance over short periods. There are really two issues here: what sort of TA people use and the way they use it. TA splits into two camps: evidence-based and faith-based. Evidence-based is stuff you can back-test: buy when the price crosses this line, sell when it reverses from this level. You can go away and find out with a spreadsheet how a strategy has done in the past and then might do in the future. You know your odds. Faith-based TA is stuff you can’t empirically prove. The Elliott Wave Principle is a great example of this, as are a lot of chart patterns generally. It’s basically your interpretation based on an abstract theory. A lot of people are drawn to this sort of approach, but I don’t have a lot of time for it any more. I’ve been there, done that, halved my trading account. The next thing is how you use whatever branch of TA you’re into. Some people use evidence-based principles — such as moving-crosses and momentum — in a discretionary, unsystematic way. Other folks use faith-based disciplines like financial astronomy, but apply it in a disciplined way.

To be clear, I think the best approach is evidence-based and applied systematically, rather than on gut-feelings.

“to Be clear, i think the Best approach is evidence-Based and applied systematically, rather than on gut-feelings.” Zak: Over the past few years we have seen a big rise in the dominance of computer trading and algorithms in global financial markets. Is this something which threatens to eclipse or even eradicate the need for human technical analysts such as yourself? Dominic: That’s the way things are going and I think it’s a good thing. The role of the analyst should be coming up with ideas that work and then leaving it to a computer to execute the strategy, refine the strategy and so on. I think the old model of someone eyeballing charts, applying their own gut-feelings and then trading is dying.

December 2013

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Zak Mir Interviews Dominic Picarda

I am just trying to get my coding skills up to scratch, as that’s what the future is. I’m an anorak by nature, but sadly not a really technologically-minded one. So there’s a lot of huffing and puffing as I get myself up to speed. Zak: When we first met a few years ago, you confessed that one of the inspirations you had in terms of becoming a chartist was seeing Zak Mir on financial TV in the early 2000s. Although it required an effort on my part not to be swayed by this ageist comment, we have been good friends ever since! Could it not be said that the golden age of technical analysis was probably a decade or more ago when it was not as ubiquitious as it is now, and when everyone was apparently an expert on the subject? Dominic: Yes, you’re one of the main reasons I got interested in this whole gig in this first place, so I should either be thanking you or cursing you! (note from our proprietor - get a room!) I think TA is evolving now like it always has. Go back 25 years maybe and chartists were still stitching together giant bits of paper and drawing stuff by hand each day. Probably some of them complained when computers first came in as it was going to take the analyst away from the nitty-gritty of first hand contact with the charts or something. But computers have been an incredible driver in this industry. I just find it all very exciting.

In addition, you are fully laden with qualifications on technical analysis and the financial markets such as the CFA and CMT. Which ones would you recommend in particular? Is it really the case that in this area you can never really stop learning even if you wanted to, as it is constantly evolving? Dominic: I did my MSc in Economic History at the LSE and I wrote a thesis on the London Stock Market crash of 1929. I think it probably scarred my outlook for years afterwards, as it just kept me forever in a bearish frame of mind! Some of the professional exams I’ve done have been much more useful in my job, though. I’ve just passed the final level of the Chartered Alternative Investment Analyst exams, and that was really fascinating. A lot of it is about hedge funds and commodities, and I came away with stuff that I’m now back-testing for myself. At the end of the day, there’s no substitute for direct experience, though. I’ve got trading friends who’ve never passed any of the stuff I have and maybe never could, but they’re much more profitable in the markets than I am. And that’s what counts.

Zak: Do you still have the heroes that you had in the financial markets from day one, or does your position now mean that any sense of awe has been diminished? Dominic: You’ll always be a hero of mine, Zak! But otherwise, I have to admit my heroes’ gallery has been something of a moveable feast. A few years ago I was really into some of the faith-based TA stuff and I’ve rejected that — and the gods of that field — in a pretty decisive fashion. In the strictly technical field, my main heroes today were the champions of evidence-based TA, like Jack Schannep of, but also those who integrate TA into a broader asset allocation approach, like Mebane Faber. Zak: You studied at the LSE for rather more than the six weeks I managed to accomplish. How much do you think that academic knowledge actually prepares those in the market for what they are confronted with in reality?

Zak: I have described you to many people as being something of a human Wikipedia in terms of your knowledge of the financial markets. While you are best known as being a technical analyst for the Investors Chronicle, are there any other particular themes/methods of analysis away from your day job that you would like to share with Spreadbet Magazine readers? Dominic: Don’t forget how much false and misleading information there is on Wikipedia! Never confuse volume of knowledge with the quality of it! The best advice I could give to anyone is to focus on a single area. All the most profitable traders and investors I know are specialists, both in the markets they trade and in their approaches.

70 | | December 2013

Zak Mir Interviews Dominic Picarda

“Find something that you like, confirm that it works in backtesting and then trade it over and over.”

So, I have this mate who trades nothing but GBPUSD, using only technicals. He makes good money. I have another contact who only invests based in UK mid-cap equities based on some fundamental value screen, and he cleans up most years. I’m currently trying to focus my attentions on equities, from a top-down perspective, marrying together momentum and valuation. I only wish I’d done it earlier. Zak: It is normally the case that most technical analysts or chartists tend to use the same indicators/setups again and again in terms of these being their bread-and-butter ways of getting a handle on a stock or market. What are the methods that you have found most useful over the years, and do you actually use any other secret indicators or methodology that you keep up your sleeve in terms of being a type of Picarda trade secret?

Are there certain techniques that work less well than they used to or better that you are aware of? Dominic: I don’t honestly believe there are any secrets in technical analysis. People are just resistant to the idea that you can make money by doing something simple, like staying long above one moving average. Instead, they believe they need to find the Enigma Code for the FTSE, usually with a big dollop of mumbo-jumbo to boot. Every few months I get an email from a reader or someone off Twitter telling me about his Gann-angles and how the Dow is just about to fall off a cliff, often telling me that I’m playing with fire by staying long or whatever. The crash doesn’t come and I never hear from them again. Find something that you like, confirm that it works in backtesting and then trade it over and over.

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Zak Mir Interviews Dominic Picarda

Zak: A major issue in the market is the way the many cynical traders do not take notice of market commentators that do not trade or do not have a track record in terms of what they are talking about. This is the idea of having skin in the game. However, there is also the issue of those who deliver commentary in the financial markets and who are merely talking their own book. On which side of this particular fence do you sit, or do you think this concept of objectivity/subjectivity as far as commentators are concerned is something of a red herring? Dominic: I believe in putting skin in the game, but I’d readily admit that trading is not the mainstay of my portfolio and nor should it be. Most of my money is usually in index trackers etc. and is held for periods of more than twelve months. I switch in and out of ETFs on a tactical basis, based on fundamentals and technicals. My spread-betting account, on the other hand, is the money I can afford to lose, the last ten percent maybe of my investment funds. I trade my recommendations, of course, but try and focus it on one or two markets, rather than all of the six I cover daily. There’s nothing wrong with talking your own book, in my view. As long as you disclose your interest, people can make up their own minds. I guess it partly comes down to what you’re trading. My views on the FTSE 100 are hardly going to make any difference to the price, are they? But if I were the leading expert on some AIM mining stock, then clearly I could move the position with my comments. Zak: As far as the state of the financial markets is concerned, do you think that after five years of recovery we have finally seen enough water passed under the bridge in terms of the aftermath of the great implosion of 2007/2008? Can it be said that the worst is over and normal service will resume? Dominic: It’s hardly normal service, is it? The whole bull market — whether you’re talking shares, bonds, real estate, whatever — is built on cheap liquidity and state guarantees. In the long run, this can’t end well, in my view. But as Chuck Prince, the head of Citigroup, said back in 2007, “When the music’s still playing, you’ve got to keep dancing.” And I’m still dancing. The real question for me is really how it all ends in disaster. My money is on inflation getting out of control and maybe another big blow-up in the financial system, what with all the leverage building up out there.

But like I say, that’s a problem for another day. Traders shouldn’t obsess over the long-term, it’s all about the immediate outlook. What I don’t think will happen is a deflationary 1930s style collapse. The central banks are committed to inflate away the debt burden. There’s no turning back at this stage. So the people who are saying that Europe’s near-deflation is a sign of things to come are way wide of the mark in my view. Zak: Given the expertise you have, has the idea of setting up a fund of your own that people can invest in on the basis that they were following a Picarda approach ever appealed? Dominic: Yes, but it’ll be a tactical asset allocation fund, rather than a day-trading one, most probably unleveraged. I’m working on the principles right now. Zak Do you have any particular favourites in terms of markets you follow and trade on? Dominic: I trade the S&P, DAX and FTSE 100, as well as a bit of EURUSD and GBPUSD. I had a lot of fun trading gold in 2011, but I’ve shied away from that lately. Zak: Would you say publications such as Investors Chronicle or the Financial Times can be enhanced by the internet or social media such as Twitter, or are these relatively new phenomena a threat to traditional forms of financial reporting and the provision of information? Dominic: I love it how the traditional media now finds itself scouring for stories on Twitter. But Twitter’s a bit like Wikipedia: where there’s a huge amount of chaff, and little wheat. I’d say traditional sources were the other way round, at least in relative terms. Zak: You have written books on pairs trading and beginners’ guides to technical analysis and spread betting. Do you have any more waiting in the wings, and would you acknowledge that books can only teach us so much, ahead of actually having money on the line in a trading account with all the stresses and strains that such a pursuit can involve? Dominic: Of course. I’ve no doubt that my books are better than they’d have been if I’d never have done any trading. But nothing really prepares you for the heat of real battle. That’s why I prefer systematic approaches. I don’t trust my own gut-instincts at the end of the day. A computer isn’t going to lose its bottle like a human will after some nasty news event. The sooner I become a pure researcher with a computer doing everything else, the better!

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The trend is your friend‌

Specialist CFD Advisors 01872 26 26 22

CFDs may not be suitable for all investors as they carry a high degree of risk and you can lose more than your initial deposit. You should ensure you understand all of the risks.

December 2013

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Travel Corner


Modern day medieval luxury By Richard Jennings

I thought I’d drop a surprise weekend away in Italy on Mrs SBM at the end of October to catch the last rays of Europe’s Indian summer. Unfortunately for her, this region is not in one of Mr Clooney’s haunts as per our last Italian sojourn to the Lake Como region in the early summer, but she survived nevertheless!

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Travel Corner

“The Gran Sasso National Park is phenomenal walking country with countless walks over the various foothills and each turn offering jaw dropping views.” Located several miles outside the now surreal ghost town of L’Aquila that was almost destroyed in the earthquake of 2009, the quaint hilltop village we stayed in dates from the 11th century and sits in the foothills of the Apennine mountains at an elevation of over 4000 ft. Perched overlooking the absolutely stunning Gran Sasso National Park, this area receives strong sun in summer and suffers from cold winters. The Gran Sasso National Park is phenomenal walking country with countless walks over the various foothills and each turn offering jaw dropping views. Eagles drifting overhead, complete silence and powder blue skies relieve you of all the stresses of daily life and make you realise what a beautiful part of the world Italy is. We were exceptionally lucky with the weather too, which was unseasonably warm so late in the season. Given the time of year, it felt like we had the entire region to ourselves. Zero humidity and ultra-fresh air certainly invigorates the body as well as the soul…

The Abruzzo region and the Apennine Mountains caught my fancy, not to mention the rather intriguingly named “Sex”tantio Albergo Diffuso, when the offer dropped into my email inbox! Before our more red blooded readers (and if you’re reading this publication you are a red blooded trader, right?!) get excited, the preface of the name refers to the company that embarked upon a noble architectural pursuit some years ago. Their goal was to restore various medieval villages to their former glory and then offer out the accommodation to holidaymakers. If the idea of living like a peasant appeals (or indeed you are forced to, if you have been on the wrong side of a big punt recently!), then I can highly recommend a stay at the San Steffano outpost of the Sextantio Group (web address: But, of course, when I say “living like a peasant”, you would need to be able to put up with Philip Starke baths and scrumptious local Italian food!

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Travel Corner

To us, though, the best restaurant was at the foot of the village — a few minutes’ walk through the cobbled and narrow streets and called La Locando Sullago. To say they do a mean Gnocchi Pomodoro is an understatement — so good was this dish that we ate there three times in as many days. The local speciality is the lamb — reared in the surrounding hills and cooked in a wood-fired oven. Sublime! Of course a cracking selection of local Abruzzo wines is on offer too. For those readers looking for something different from their next holiday, I can definitely recommend a visit to San Steffano. Late spring or mid-autumn, when the colours of the mountains are out in full force, are my suggestions for the best time to experience the best of this region.

So what is it like staying in a medieval village? Well, with most of the rooms being lit principally by candlelight and a real fire roaring in the restaurant, it is most certainly atmospheric. For the really cold nights they have installed under-floor heating and the glazing to the room windows (which of course are exceptionally small) is also double paned, so you feel cosy and warm. In fact, Mrs SBM and I remarked that on a cold February/March day with snow underfoot and sub-zero nights when the stars really come alive under a cloudless sky is probably an equally spectacular time to visit. There are three restaurants in the village, but with three very different options. In the first you have no choice over the selection of food. It’s a bit like a mini tasting menu and is a very interesting place to eat. The second restaurant offers snack type fare, while the third is owned by the hotel and provides standard a la carte choices. Here food is eaten off wooden plates and the wine drunk from goblets if you wish to add further to the medieval authenticity of the experience. With the progression of the old “head poking through the hair” (i.e. MPB!!), all I needed was the Friar Tuck gown to look quite the part!

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Markets In Focus


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Markets In Focus

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School Corner

school corner

Sentiment based valuations by Thierry Laduguie of e-yield There are many ways to value a share: the three main valuation models are asset based, dividend based and earnings based valuations.

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Using standard deviation to assess risk

“if a company has been paying a dividend regularly in the last five years, this does not mean the company will pay a dividend in the next five years.” The problem with traditional valuation models is that they rely on estimated data up to five years or more in the future and these numbers can change due to unfolding events. The longer in the future, the less accurate the data becomes. There are simply too many risks that could occur between now and in three or four year time. Risks like: ­ • Uncertainty of income • Interest rates • Exchange rates • Inflation • Economic risk • Default risk For example, if a company has been paying a dividend regularly in the last five years, this does not mean the company will pay a dividend in the next five years. The other problem is that these valuation models do not take into account general market sentiment. If sentiment is bearish and the general market goes down, most shares, whether undervalued or not, will still go down with the general market. I therefore think that there is an alternative way to value shares based on information that is more relevant to the present or near term. If we can value a share with actual data, the valuation becomes more accurate. The only one-year forward data that I need is earnings per share. The rest is current or near term data like sentiment, share’s beta, FTSE 100 forecast and sector P/E ratio. Research shows that end of corrections in the stock market coincide with a high level or an extreme in bearish sentiment. When sentiment becomes extremely bearish it is often the time to buy shares as the market is likely to rally and the bearish sentiment will turn bullish during the advance. Based on this information I can calculate a potential target for the FSTE 100. The expected return on the FTSE 100 (Rm) together with the share’s beta (β) is used to calculate the expected return (Rs) on a share: Rs = β x Rm

The next step is to calculate the share’s fair value. The fair value depends on the expected increase/ decrease in the P/E ratio as a result of the change in sentiment. If sentiment is bearish, it won’t stay bearish for long (unless we are in a bear market). As the market rallies, bearish sentiment will turn to bullish sentiment and the rally will extend. This will push the P/E ratio higher. The basic relationship is that when shares are expensive and sentiment is bullish, shares become dearer, and when shares are cheap and sentiment is bearish, they become cheaper. After an extended advance the P/E ratio will become dearer, this assumes that the share was not overvalued in the first place. When a share is trading on a high multiple prior to a general market rally the P/E ratio may not increase at the end of the rally. The key to this valuation model is that it assesses what valuation multiple investors are willing to pay at market bottoms (extreme bearish sentiment) and what they are willing to pay at market tops (extreme bullish sentiment). If I spot a potential upgrade, i.e. a potential increase in the P/E ratio, in a share and the fair value is higher than the expected value, the share is a buy.

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School Corner

“The key to this valuation model is that it assesses what valuation multiple investors are willing to pay at market bottoms (extreme bearish sentiment) and what they are willing to pay at market tops (extreme bullish sentiment).” Different scenarios: If expected value > fair value, the share should underperform. If expected value < fair value, the share should outperform.

Example: On 9th October bearish sentiment had reached an extreme on my sentiment indicator (ESI — available to subscribers of e-Yield and and Petrofac (PFC) was trading on a forward P/E ratio of 9. Based on this information, the forward earnings per share was 148p and the FTSE was due to rally. That date marked the end of the FTSE 100 decline; the UK index then rallied by 7% in the next three weeks. Because Petrofac’s beta is 1, the expected return on the share at the end of the rally on 30th October was 7%. In reality the share price advanced to 1,478p which is an increase of 10.6%. The outperformance was the result of a re-rating of the P/E ratio due to a change in sentiment from bearish to bullish. Sentiment turned bullish on 16th October and by the end of October bullish sentiment was near an extreme.

Say my model was giving a FTSE 100 return of 5% and a P/E ratio increase of 10% on 9th October. Based on this information and forward earnings per share of 148p, the share’s expected value was 1,403p and the fair value was 1,465p. Because the fair value was higher than the expected value, the share was a buy. The advantage of this method is that if I am wrong and the FTSE 100 falls further, sentiment will become more bearish which translates into greater upside potential. And because the share price is undervalued, downside risk is limited. Note: I use my own sentiment indicator (ESI — available to subscribers of e-Yield and to gauge sentiment, but there are other sentiment indicators one can use such as the Put/Call ratio or the percentage of bullish/bearish advisors.

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John Walsh’s Monthly Trading Record


John Walsh’s monthly trading record October has been a good, solid month for my “Rolex Challenge”. As you will remember, I started the “Rolex Challenge” last month to bring a new level of focus to my trading. It really is a simple idea. My goal is to triple my trading account and when I achieve this I will use some of the profits to buy myself a new Rolex. For too long I had been trading without the level of purpose I felt I needed. Sure, my aim was always to make money and trade profitably, but my “Rolex Challenge” has now anchored my forays into the market with a tangible reward. And so far it looks like it’s working! As I am only focussing on US stocks for the challenge, it gives me plenty of time each morning to run through my scan ahead of the afternoon’s open in New York. I am still fine tuning my daily market scans, so am still not yet ready to publish the parameters I use. However, I’m more than happy with the results so far.

Regarding my trades that I spoke about last time, I closed Lockheed Martin (LMT) and Kroger (KR) for a profit, and my Comcast (CMCSA) position is still running at the time of writing. In terms of new positions I have opened and closed since last month, there are United Parcel Service (UPS), Gilead Sciences (GILD), TripAdvisor (TRIP) and First Solar (FSLR), again all at a profit. As for my new running positions, these include Life Technologies (LIFE), Paychex (PAYX), Bristol-Myers Squibb (BMY), Colgate-Palmolive (CL), Molson Coors Brewing (TAP), Starwood Hotels & Resorts Worldwide (HOT) and Constellation Brands (STZ).

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The Rolex Challenge

“However there are some guiding principles I would like to share. At heart I am a trader, not an investor. The Warren Buffet style of buy and hold isn’t for me. When there is profit on the table my rule is to take some.” I can open and close a position on the same day or I can let a trade run for several weeks or even months. What I have learned though is never to be afraid to take profits. When there is a profit on the table be prepared to take it and move onto the next trade. Don’t worry if the stock continues to go up. Leave some money on the table for the next player and generally you can’t go wrong.

(And in case you’re wondering, I did watch the Twitter (TWTR) IPO with interest, but didn’t believe the hype. As it’s yet to appear on my scan I stayed away from it. Discipline is key in the “Rolex Challenge”!) To manage my risk I’ve put sensible stop losses in place. I find that deciding on a stop loss strategy before trading helps improve performance massively. It takes the emotion out of trading and allows me to accept losses, almost robotically, and not go chasing them. Chasing losses has been the death of many a trading account.

To finish I’d like to give you the running scores for my “Rolex Challenge”. Of the 31 trades I’ve entered into, only five have been losers and they all happened on the same day (October 9th). Since then I’ve not had a losing trade, which reflects how well the market has performed since. I’ve closed a further 18 winning trades to book a 34.4% gain over two months. I must admit I am delighted with how my new trading approach has begun. If I keep this up, it won’t be long before a shiny new Rolex is proudly on my wrist! That’s enough from me for this month, please continue to follow me on Twitter @_JohnWalsh_ where I keep everyone up to date with my #TheRolexTradingChallenge trades as I open and close all positions. Remember, you control the trade; the trade does not control you. John

At the other end of my decision making (deciding when to take profits!) I generally wait to see how the stock reacts, once I’ve opened my position. I don’t really follow any hard and fast rules here.

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Frigid winter blows ice in early. Do you:

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

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Spread Betting Magazine v23  

Spread Betting and CFDs Magazine Latest December 2013 Edition: This month's features include: Bitcoin Update - Gold Fundamentals for 2014 -...