N Ja N io iT ED
SPREADBETTING The e-magazine created especially for active spreadbetters and CFD traders
issue 12 - January 2013
Special New year Edition Packed full of trade ideas from all our contributors
www.financial-spread-betting.com ToP 3 aiM oiL PiCKS FoR 2013
gETTiNg iNTo ThE SWiNg
SWING TRADING EXPLAINED
INTERVIEWS FX SPECIALIST WMD
MaJoR CRaShES oF ThE LaST 100 yRS PART 2
SPECiaL JaPaN FEaTuRE
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.
Zak Mir Zak Mir is one of the UK’s pioneers in modern charting methods since the early 1990s, joining Shares Magazine as its first Technical Analysis Editor in 2000. Zak founded www.Zaks-TA.com, the first pure TA website, in 2001 and which flourishes to this day. In addition, he has written for the Investor’s Chronicle, appeared on Bloomberg and CNBC as well as being the author of 101 Charts For Trading Success.
Tom Winnifrith Tom founded the t1ps website in 2000 and over 12 years his average gain per tip was 42.7% on 241 share tips. He now writes for a range of US and UK financial and political websites and all his content can be accessed via www.TomWinnifrith.com - you can get alerts on everything Tom writes by following him on twitter @tomwinnifrith or www.TomWinnifrith.com
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Editorial List Editor Richard Jennings Sub editor Simon Carter Design www.coyotecreative.co.uk Copywriter Sebastian Greenfield Editorial contributors Tony Loton Phil Seaton Thierry Laduguie Filipe R Costa Chris Chiilngworth
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.
Foreword And so there it was, hopefully a very Merry Xmas was had by all and you’re all looking forward to a healthy and prosperous 2013? We certainly are after a cracking first year for Spreadbet Magazine. I’d like to thank everyone involved in the publication - contributors, advertisers and the design team. It’s been a lot of hard work but our readership metrics speak volumes with almost 20,000 regular readers each month now. It looks like we have certainly struck a vein in the industry and that we are filling a gap for intelligent and educated commentary on all matters spread bet and CFD related as opposed to the usual financial information regurgitation that is so prevalent these days. With a line up that’s a veritable “who’s who” in the spread betting world including Robbie Burns, Dom Picarda, Zak Mir and now Tom Winnifrith (welcome on board Tom!), we doubt there is anywhere else that you can find such a line up of esteemed contributors in one spot. We ask all our readers that if you wish to continue to receive this publication for free that you continue to support the magazine and in particular the advertisers within here. Without your support and patronage then the publication will not be able to remain free forever. On to what we have in our New Year “goodie bag” - a bounty of tips and ideas from all our feature writers - Oil stock special, SBM’s own 3 Conviction picks for 2013, Part two of the worst crashes of the last century and a special feature on Japan - a market that topped the global markets return table for 2012 and that was our pick of the markets at the start of the year. We also have a new market data page we hope you find useful. Next month we will be unveiling 2 new contributors - a well known name in the world of financial markets and a new writer that regular readers of the magazine will be familiar with from some of our recent stories... Tune in next month to find out! I wish you all a great trading year in 2013 and thank you once again for your patronage.
As a matter of policy, Spreadbet Magazine openly discloses that our contributors may have interests in investments and/or providers of services referred to in this publication.
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SBM’s Top Picks for 2013 ENRC, Man Group and Gulfsands Petroleum make up our list
Getting in the Swing
Zak Mir Interviews
Spread betting expert Tony Loton explains “swing” trading
This month Zak gets to grips with FX trading expert WMD.
Stock Market Crashes of the Past Century (part 2)
Dominic Picarda’s Technical Take
Robbie Burns Top 3 trades for 2013
Top 3 AIM Oil Picks for 2013
Tom Winnifrith’s Conviction Trade for 2013
Zak Mir’s Big 3 Calls for 2013
We continue our special piece on the major shakeouts of the last 100 years.
Dom takes a look into his technical analysis crystal ball to see what is in store for 2013.
The inimitable Robbie Burns supplies his top trade suggestions for 2013.
Bowleven, Madagascar Oil & Xcite Energy.
SBM welcomes on board Tom Winnifrith.
Zak explains his thinking behind his key trade ideas - Aviva, Ibex and the Euro.
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Special Japan Feature
Year in Tech Review
We set out the Bull case for the Japanese market in 2013
Resident Tech expert Simon Carter looks back at all things tech related in 2012
Markets in Focus
A new markets round up feature
Chris Chillingworth’s December Trading Diary Chris continues his monthly diary revealing his spread betting experiences during the past month.
Trading Academy Final The concluding piece to the unique City Index Trading Academy experiment with the £100,000 prize up for grabs.
Different Moving Average types explained.
Ssshh... resorts. Secret ski resorts in the alps.
Commodity Corner A special focus on Gold in which we set out our bear case for the year ahead.
2013 Outlook by David Buik Cantor Index’s resident market expert David Buik looks ahead to see what we can expect in the markets next year.
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SPREADBET MAGAZINE’S TOP 3 PICKS FOR 2013 In keeping with the theme this month of “sticking our heads on the block” with a variety of trade ideas for 2013 with a 12 month timescale from each of our contributors, SBM’s own editor offers up the following 3 trades. The pick basis does, however, incorporate the flexibility and potential downside protection of options trading, with the valuation, fundamental and historical returns evidence we present below underpinning each of our chosen stock picks to hopefully stack the odds in our favour.
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Spreadbet Magazineâ€™s top 3 picks for 2013
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Assumption one The worst performing sectors & stocks within those sectors in any one particular year tend to outperform the following year It was an American Investor by the name of Michael O’Higgins who came upon an investment strategy in the early 90’s that is commonly known as “The Dogs of the Dow”. At its base level, he suggested purchasing the 10 highest yielding stocks in the Dow and holding them over an undetermined period. The reasoning for the investment strategy is that blue chip companies rarely change their dividend payouts to reflect trading conditions, therefore the dividend is a measure of the average worth of the company and the stock price, in contrast, fluctuates through the business cycle thus throwing up opportunities at cycle nadirs. This should mean that companies with a high yield are likely to be near the bottom of their business and so on the sentiment chart, that a stock follows, should likely outperform their low yielding counterparts.
“This is borne out through empirical evidence over many decades that shows that the majority of equity markets’ total returns are actually produced from their dividend reinvestment.” Additionally, under the O’Higgins model, an investor annually reinvesting in high-yield companies should out-perform the overall market by virtue of the compounding effects of the high yield. This is borne out through empirical evidence over many decades that shows that the majority of equity markets’ total returns are actually produced from their dividend reinvestment.
In the case of ENRC, the O’Higgins model actually falls apart slightly in that purchasing the high yield stocks should additionally be tempered by ensuring there is good dividend cover and little or no debt and so giving you a good measure of additional comfort in the payout ratio. The cyclicality of ENRC’s earnings and its relatively high net debt level debunks this part of the O’Higgins story, in fact our second pick below — Man Group — fits this mould rather more neatly.
Assumption two Price to book discounts generally narrow Price to book is a measure of the price of a stock relative to the per share Net Asset Value (NAV). Now, NAV is pliable by Finance Directors through a couple of mechanisms — shifting debt “off balance sheet” which is, mercifully, something that the International Accounting bodies have clamped down on in recent years, particularly in the wake of the collapse of many banks during the Great Financial Crisis. The second malleable measure is Goodwill or “Intangibles” — the very name “Intangible” gives the game away and lot’s of FD’s keep high figures of goodwill on their balance sheet as a way of shoring up the asset value. In our picks below, we have chosen 3 stocks that we believe trade at excessive discounts to TANGIBLE NAV and where off balance sheet debt is non-existent. Tangible NAV deducts for goodwill and, albeit assuming that property, plant and equipment is fairly valued and ditto that the debtor book will pay in full, this results in a much truer measure of the potential liquidation value of a company. What we are therefore looking for are companies where the discount to tangible book has reached excessive levels — either trading at the extreme end of their long term range or where there is a catalyst to re-rate the book side of the equation through property revaluations, for example, or in the case of Gulfsands Petroleum below, a lifting of sanctions which is currently preventing them from receiving revenues from their Syrian assets. Some companies quite rightly do trade at discounts to book value, usually property companies in a downturn and where the sale of the property will likely not reflect the carrying value, or companies that struggle to generate profits or are loss making — the market discounts for potential dilution in new capital raisings. Each of our 3 picks do not fit into this category, however, with them all profitable at an operational level.
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Spreadbet Magazine’s top 3 picks for 2013
Assumption tHREE The global macro economic backdrop is likely to continue to improve Recent global economic statistics, in particular out of the US and China — combined, the 2 major components of the global economic engine — have been encouraging. The US jobs market continues to improve, inflation remains controlled and so not causing any alarm on the liquidity spigots front and, at the time of writing, it seems that the so called “fiscal cliff” is likely to be averted — it being in neither party’s interests to drive the US back into recession. The new cabinet that have just taken their seats of power in China are likely to want to put their foot on the pedal in 2013 in applying new stimuli too. Industrial production is already on the turn upwards and it looks like the Shanghai Composite has put in a bottom after falling heavily in 2012. In short, should the Chinese locomotive begin to fire on all cylinders next year, then expect commodities and the miners to outperform materially, hence our inclusion of ENRC. The new Japanese Prime Minister, Shinzo Abe, has already made clear to his electorate that he intends to, once and for all, re-flate the Japanese economy and rid it of the deflation that has bedevilled the economy for nearly 20 years now. Make no mistake, if he is successful in his endeavour, then Japanese equities will respond accordingly and add a new dimension to the global equity market sentiment backdrop.
The major “bogeymen” on the horizon are the Eurozone sovereign debt crisis and the US debt ceiling. The latter will, as ever, be fudged and the ceiling likely raised again early in the New Year, but it is the Euro situation that we think can cause most trouble for investors likely around the early summer period. It is our contention that 2013 will be the year that Greece finally exits the Euro. The fact that it has been anticipated for so long and yet the politicians have not pulled the trigger, leads us to believe that the actual economic effects in Europe will be muted and for Greece, similar to Iceland in 2009 when they defaulted on their debt, the best thing to happen to her people for 5 years. This potential scenario is the reason why we will be backing our picks with 75% of the available trade capital, to ensure that in the inevitable knee-jerk reaction to such an event that we can add to our positions — prudent trading principles.
“The new Japanese Prime Minister Shinzo Abe has already made clear to his electorate that he intends to, once and for all, re-flate the Japanese economy and rid it of the deflation that has bedevilled the economy for nearly 20 years now.”
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CHART - CHINA STOCK MARKET Taking all 3 observations above, each of our picks below are well disposed to one, or indeed all, of these underpinnings, and so each should be expected to benefit accordingly.
ENRC - current price 286p We first covered ENRC in the October edition of our magazine where we included it within our SBM Dream Miners portfolio (link here - http://issuu.com/ spreadbetmagazine/docs/spreadbet-magazinev9_generic). It’s fair to say that our Conviction Buy call was a little premature as the stock has fallen around 10% (at time of writing).
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We can see from the chart to the right that the stock has also underperformed the FTSE 350 Mining sector by around 12% (at time of writing). But hey, there’s an old saying: “Nobody ever rings a bell at the top or bottom of the market”, and an equally appropriate one: “The money’s usually created in the buying” which basically means that if you buy a stock/asset at the right price, ensure you can hold the position(s) and be patient, then value will usually ‘out’. We think this applies to ENRC...
“We can see from the chart to the right that the stock has also underperformed the FTSE 350 Mining sector by around 12%.” The reasons why we are including ENRC in our Top 3 picks are as follows:
Spreadbet Magazine’s top 3 picks for 2013
CHART - ENRC V MINING SECTOR OVER THE LAST 2 MONTHS
Worries over debt load overblown Since flotation in 2007 at a price of 570p, as we can see in the chart below, the stock is now trading at a shade over half the price. At the time of its flotation the Group was carrying net debt of just over $1bn and the company had an equity market capitalisation of £6.8bn. The so called Enterprise Value of ENRC was (at the then FX rate of around $2) therefore £7.3bn. The group was earning around £1.6bn (again using the 2007 GBP-USD FX rate) and so the “market” collectively valued the Group as being worth 4.5 times EV:EBITDA (the general measure used in valuing mining companies). Fast forward to 2012 and the stock’s current Enterprise Value (in sterling) is now approximately £6bn — a decline of just over £1bn. The company has had a difficult time so far in 2012 due to the slowing of activity in China and the fall in prices of iron ore in particular. At the half year stage they reported EBITDA of $1.14bn and so, assuming the same profit run rate for the full year, management will likely report sterling EBITDA of around £1.4bn — giving a circa 4.3 times EV:EBITDA current valuation.
The EV:EBITDA measure is a good way to try and put an accurate value on the equity of a company as it is something of a “see saw”. By this I mean that on the one side of the see saw there is the equity and on the other side there is the debt. Both instruments have claims on the assets and profits of a company. As we have seen with the likes of HMV & Mouchel etc, when the profitability of a company declines, the equity shrinks for 2 reasons — usually a compression of profit multiples applied by investors and secondly, where the debt load is problematic, as the market adjusts for the debts prior “claim” on the company’s assets. In ENRC’s case, the debt side of the equation is what has caused a compression of the equity component in the EV equation with net debt rising from just over $1bn to £3bn. Question is: is the debt likely to prove problematic to service? On the key interest cover measure, even at a cyclical low for the company’s commodity exposures, the interest burden was still covered almost 5 times — certainly not a sign of a distressed balance sheet. Ironically, the company also has a higher current and quick ratio (short term liquidity measures) than the sector as a whole.
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Book value discount excessive In recent months, Chairman Mehmet Dalman has made public his intent to continue to clean up the corporate governance image of ENRC in the City’s eye. The discount relative to the company’s peers like Kazakhmys, as a consequence of its reputation is too excessive in our eyes, as evidenced by the discount to net TANGIBLE book value (which is currently £5.75bn at current FX rates) of almost 40%. This is the largest discount of all the major mining plays. So, what could be the catalyst for a re-rating in 2013? Firstly, the stock is very oversold as evidenced by the monthly chart below. Absent a real debt scare or collapse in book value then the only other issue that could take the stock materially lower from here is another sharp leg down in iron ore and other base commodities prices. If we are right on the global outlook for 2013, and specifically regarding China’s resurgence, then iron ore in particular is likely to continue to recover in 2013 and other base commodity prices like ferro-alloys that are ENRC’s mainstay revenue generators. This means that as we move through 2013 analysts could be upgrading earnings estimates for the Group — always a positive sign for a stock price.
CHART - ENRC SINCE FLOTATION
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Potential corporate activity - divestments, Kazakhmys stake sale Secondly, as we touched upon in our October edition piece, the 26% stake held by Kazakhmys in the Group may be sold next year to a number of potential parties with Glenstrata being at the top of the list. Should this occur, then a premium to the current market price will be required for such a stake size and this would give visibility to the market as to the true value of the Group. At least a 25% premium to the current share price would be required to be paid to tempt Kazakhmys to sell and this would put a price towards 400p on the stock. Finally, asset divestments may occur and so firm up the book value of the company. In effect, industry players would be crystallising for shareholders in ENRC the value of their assets as well as, of course, adjusting the EV equation as debt is paid down and all things being equal the equity side should rise.
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Of course, investment is rarely as easy or as simple as that... Let’s looks at the current picture in relation to this stock to try to get a handle on the true value of the company.
Man Group - current price 82p Asset manager Man Group is presently the highest yielding stock in the FTSE 250 (having recently been ejected from the FTSE 100 and so tracker fund selling also adding to the recent weakness in the stock price) and currently pays out a dividend of 10.6p, so producing a phenomenal yield of almost 15%! If the payout is maintained then in a little over 6 years you have your money back and the stock for free.
Man Group has struggled in recent years as the investment landscape of sharp gyrations with no real trend has proved problematic for their flagship fund “AHL” to generate any real returns. Man Group, like most hedge funds, is remunerated by way of performance fees for absolute returns. Each time a fund reaches a new high point, a so called “high watermark” is created. What this means is that before any more performance fees can be generated, then the high watermark needs to be exceeded. Problem is, AHL has not exceeded the high watermark for some 4 years now and, additionally, the fund is still around 20% adrift from the peak as the table below illustrates.
“Asset manager Man Group is presently the highest yielding stock in the FTSE 250.”
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Spreadbet Magazine’s top 3 picks for 2013
So, absent an immediate return to being able to generate performance fees on its main fund, Man has been reliant on its other more traditionally managed hedge funds from the GLG acquisition of 2 years ago. Again, performance has been relatively lacklustre here as many active fund managers struggle in an environment of “centrally planned” macroeconomics with “Helicopter” Ben Bernanke at the helm of the levers of global economic power. This has led many in the City to now question the security of tenure of current CEO Peter Clarke. Indeed, at the time of writing it looks like his head is to roll and he will be replaced by current COO Emmanuel “Manny” Roman who joined from GLG.
“As is usually the case, the City analysts are well behind the curve.” As is usually the case, the City analysts are well behind the curve and from collectively calling the stock a buy when the shares were over 500p, certain of them now have price targets of 50-60p which they deem to be the liquidation value of the company. We take issue with this as the rule of thumb in the industry is that so called AUM (Assets under management) are valued at around 3%. Assets under management have fallen from $75bn to $52bn over the last 18 months and the company currently sits with net cash of around £300m. In fact, so strong is their balance sheet that the group has actively been buying back their debt in the capital markets. Taking the low end value of AUM of 2% together with total cash resources available in a liquidation gives a floor value of around 70p per share — pretty much where we are now. One individual with a stellar record in assessing value within the financial industry is Odey Asset Management head Crispin Odey who, together with his wife Nichola Pease, are known as “the Posh & Becks of the City!” After an illustrious career spanning over 20 years in the fund management industry, Odey cemented his reputation in the depths of the Great Financial Crisis through shorting both Northern Rock and Bradford & Bingley and making millions in the process for him and his investors.
Odey recently popped up on Man’s shareholder list with a 5% stake in the company, likely bought around the mid 80p’s. In short, if history is any guide, then Odey certainly knows his onions and patently believes there is value in Man at the current price. I personally am more inclined to follow his lead than the analysts who are advocating to sell the stock some 80% lower than when they were buyers!! So what could be a positive catalyst for Man? In the first instance a return to “normalcy” in the markets where trend following once again works. The market goes through cycles and for the last 5 years it has been a “trader’s market” — buy and hold on any measure beyond several months has resulted in give back in many asset classes. However, trend following will come back into vogue and work again once more — it is one of the oldest investing techniques there is. When this occurs, AHL should do well again. Once the high watermark is taken out, then the money creation starts once again as performance fees drop down to the bottom line and the operational leverage inherent in the business structure of hedge funds kicks in again. There will be a double kicker too in such a scenario as the cost cutting in recent months that has been occurring at Man will additionally flatter profits. Secondly, although I doubt Odey would be able to muster the fire power to launch a bid for Man himself, he is probably weighing the chances of another peer taking a pop at Man, particularly following Clarke’s likely departure. $50bn of funds to play with is no small sum and this has got to be attractive to the likes of BlackRock and others and so, there is in our opinion, a better than evens chance of an approach over the next 12 months. Finally, given the robust balance sheet of the Group, then absent a serious incremental withdrawal of funds under management, we doubt the dividend is likely to be cut materially. To be sure a halving of the dividend is possible, but still this would result in a yield of approaching 8%. Such a high yield is therefore likely to act as solid support at current levels. To conclude, we think the stock to be now trading at or close to liquidation value and also being supported by the dividend yield (even if cut). We again have what is a positive risk:reward skew in the stock given the potential catalysts for a re-rating.
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â€œTo conclude, we think the stock to be now trading at or close to liquidation value and also being supported by the dividend yield (even if cut). We again have what is a positive risk:reward skew in the stock given the potential catalysts for a re-rating.â€?
CHART - MAN GROUP
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Spreadbet Magazine’s top 3 picks for 2013
Gulfsands Petroleum current price 113p We have also covered Gulfsands Petroleum previously in our Dream Oil Explorers portfolio (July edition), catching a move initially of nearly 40% as they rose from 90p to 130p. Since the high point of 130p during the summer, however, the stock has tumbled back towards the year’s lows of 80p as the sad humanitarian situation in Syria has worsened with the Assad regime seemingly determined to hold onto power no matter what the cost to its people.
Our Gulfsands call is very simple — should Assad seek exile and flee the country or indeed he be deposed by the Syrian rebels, the sanctions on the receipt of oil revenues from Gulfsands 50% share with the GPC (General Petroleum Corp of Syria) will likely be lifted and a very material uplift in the stock would occur. The market is valuing Gulfsands’ Syrian assets at zero, whereas before they were valued at least at 200p per share. We can see very quickly the sort of re-rating that would occur on a resumption of activities there. It is also worth pointing out, as we did during the summer, that the Production Sharing terms remain in place with GPC, and although the company is not presently receiving the revenues that it does accrue, the asset base is thus increasing. To give you an idea of the real potential upside, take a look at the table below (courtesy of Edison Investment Research) which puts a Risked NAV of almost 600p per share on the stock.
“The current EV/2P & 2C (Enterprise Value to Proven & Probable reserves) has fallen from $7.70/bbl to less than 50c/bbl in the last 12 months and the shares are now trading towards the cash position of 66p per share.”
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The second table below uses various discount rates and oil price assumptions in the event that Gulfsands resumes operations in Syria. Worst case assumptions with a collapse in oil prices and a very heavy discount rate to compensate for legacy political risk give a value of around 4 times the current stock price and best case scenario over 10 times the current price. Two parties that seem also to be positioning themselves for the Syrian endgame are Soyuzneftegas Capital Limited and Waterford Finance & Investment Ltd who hold between them just under 27%. Waterford is the investment vehicle of Russian investor Michael Kroupeev who held a controlling interest in Emerald Energy before it was sold to the Chinese state-backed group Sinochem for £532m. Yuri Shafranik is the former Russian energy minister and now chairman of Soyuzneftegas .
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It is also worth pointing out that he sits on the board of Waterford. Oh, and he also had a stake in Emerald Energy before it was bought by the Chinese... Should either party move to 30%, the Takeover Panel is likely to deem them a “concert party” and so force a bid for the entire share capital.
Spreadbet Magazine’s top 3 picks for 2013
Sinochem bought Emerald Energy in 2009 to gain access to “Block 26” in Syria and it was expected the Chinese would want to eventually gain access to the other 50pc of site which is owned by Gulfsands. Six exploration and one appraisal well were in fact drilled on Block 26 in 2011 (see diagram below).
Four of the exploration wells encountered potential commercial levels of hydrocarbons and reserves were consequently increased by 34% to 76mmboe — this alone is worth at least $4/bbl and before the conflict the Syrian assets were valued at just under $8/bbl. NPV to the likes of Sinochem is therefore 80 - 160p (at current FX rates and adjusted for 50% they own) for this alone.
BLOCK 26 SEISMOLOGY MAP
“Additionally, another potential catalyst in the near term, albeit likely to be much less explosive to the stock price than a Syrian resolution, is the potential of near term production from their Tunisian fields and also continued disposals of the Group’s Gulf of Mexico assets which could act as a cash injection into the business and so bolster the balance sheet further. ” To conclude, Gulfsands trades at a modest premium to cash, a discount to its risked NAV, even with the Syrian fields marked down to zero, and it has two potential predators sat on its share register. Throw into the mix a serious re-rating should Assad be deposed and the sanctions on the Company lifted and this has the potential to be a multi-bagger in 2013.
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CHART - GULFSANDS PETROLEUM
1. Be patient with the trades. These plays are of the kind that look for an overnight re-rating on a particular catalyst. Expecting the stocks to move sharply higher without the catalysts is folly. We hold firm the age old investment adage that “value always outs in the end”. 2. We intend to buy initially only 75% of our intended position size so that should any one of the stocks (or indeed all) trade an additional 10-20% lower, then we still have the flexibility to buy down. Recall that “nobody ever rings a bell at the bottom” and the market invariably always tries to catch you on the hop. By not over committing our capital base, then we can comfortably add again. 3. Given the potential of a Greek exit next year, debt woes in the US and UK and spill over from the fiscal cliff, “systematic risk”, i.e. market wide risk, is still, as ever, present. To counter for this we intend to take out a FTSE Jun 5200 - 4800 1 x 2 Ratio Put Spread.
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Net cost is zero as we are selling twice the amount of Puts. Additionally, given the beta on the stocks being around 1.5 combined, then if we are to take a total gross notional position of £100,000 in the 3 stocks, we would look to purchase £150,000 gross notional equivalent in the Puts and sell £300,000 of the lower strike puts. The option play thus protects us for a crash type event between now and June 2013, although having sold twice the amount of Puts at the 4800 strike we are exposed below to further weakness below this level should the market fall further. We have reasoned, however, that 4800 has been a floor for the market in the summer of 2011 and at that level would present immense value. The way to mitigate this risk in the option position is to look to buy back the ratio’d element (i.e. 50% of the position) when the premium erodes as time passes. This would then neutralise us.
Zak Mir Interviews -
Haron Ejaz of WMD This month Zak interviews self trained and controversial currency trading “expert” Haron Ejaz of WMD — short for “Weapons of Mass Destruction”! It is difficult not to be intrigued by the FX trader and educator known as “WMD”, and not because he just goes by his alias! Whilst his initial trading brought him, in his own words, only “humbling experiences”, his turning point in the markets came from keeping a journal of his trades and internet threads such as “Trading With Deadly Accuracy” that made his (pen) name.
ZM: Just what does WMD refer to? WMD: WMD is an internet pen name that stuck when I first began explaining how to trade FX markets using price action.
I was referred to you via a Twitter endorsement by a respected Goldman Sachs / Million Dollar Traders guru. I then looked on your website and saw a way of determining support / resistance using trend-lines that even I had not been aware of before. So, on that basis, I thought you might have something new to offer. In addition, upon talking to you, your “bedside trading manner” seemed somewhat “soothing” and encouraging. All this you think defines you as having an edge when compared to other FX traders and so, I ask you, how or why do you think you can do better than other people in terms of identifying opportunities in the market?
WMD: I would describe myself as a price
action trader, which is actually a very loosely defined concept among traders. But, I think the most important aspect of trading is to have a rational and scientific explanation of price behaviour.
To be able to link cause with effect, so that when you are able to do this under laboratory conditions, relating input to output, then you have what price action trading is all about.
“But, I think the most important aspect of trading is to have a rational and scientific explanation of price behaviour.” So when I am looking at a chart I am looking at price formation and at wave structure. I will use line charts or candlesticks, the proximity of price to a line or level, to a trendline, or to a trend wall. Simply by looking at the way that price moves, if I’m looking at an outcome to that sensory input, then that is what allows me to trade and that is what gives me the confidence to trade.
But isn’t it the case that anyone would say that, even losing traders.
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“From the experts that I have interviewed before for Spreadbet Magazine, they really seem to do 90% of what everyone else actually does, as far as the trade preparation is concerned. The difference is that they have the discipline and the brains to carry out a strategy, whereas it seems most people don’t.” They would tick off the points in your checklist one by one and then wham bam come to the opposite conclusion that you have — and lose money. From the experts that I have interviewed before for Spreadbet Magazine, they really seem to do 90% of what everyone else actually does, as far as the trade preparation is concerned. The difference is that they have the discipline and the brains to carry out a strategy, whereas it seems most people don’t.
WMD: I think that everyone has the capability.
If you take the example of a medical student who studies for 4/5 years, I do not think anyone is going to provide a scalpel to that person from day 1 after graduation to start some brain surgery. But this is the analogy that many traders find themselves victim to in that they read up about trading and digest all the theory. But there is a big difference between say, understanding the definition of support and resistance and knowing what that looks like on screen. Sometimes what you need is that guiding hand, just like a newly qualified doctor. It is about taking the theory and understanding its application on screen. Once someone has explained that to you, it accelerates the learning curve. The key is to transfer all the theory towards its practical application. People tend to jump into the markets thinking it is simply going to be an easy ride.
But as it is not easy, would it not be best to use your service blindly rather than go through the process of trying to learn, get it right and change one’s way of thinking? Let’s be lazy, so to speak, and just follow the few people out of every 100 who can call the markets consistently.
WMD: I think it is more a question of your
trading objectives, so if you wanted to actually learn, then you would get into the market psychology, the dynamics.
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We allow & encourage you to do that. Alternatively, if you are an investor and not a trader, you would take that particular route that “Trading With Deadly Accuracy” provides. We offer a viable route for both of these services.
What do you think your “edge” or your difference actually is? For me it seems you have a very cool, level headed approach to the markets and in that way it is very unlikely you will get rushed into doing anything rash — one of the key reasons I believe that most traders fail.
WMD: I think the key element is that I have the
discipline and the patience to wait for the trade to set up to before pulling the trigger. There are a couple of other issues here also which come to deliver an edge, certainly in my trading. The first, as I have already mentioned, is price action and being able to link input with output. I have a very good understanding of market dynamics and the ability to interpret not only an entry, but an exit price, of which the exit is very important. In fact, from a trading textbook approach this would be very unorthodox; I take a trade because there is an exit. I do not trade because there is an entry condition that has been satisfied. Just to give you a brief example of what I mean, normally if you are a second hand car salesman you go to an auction and buy a car and then look out for someone to buy it. My situation is a little bit different. Someone comes to me and says that he wants to buy a car and he wants to pay £5000 for it. Then I will go and buy that car and I will sell it to him. That is the difference between not having an exit before you on entering a trade and not having one determined beforehand. Something that stands out in my analysis over a period of time is the way that I have positive expectations about somewhere where the price needs to be, so that after that, taking entry is a secondary issue — once you’ve outlined that exit point.
Zak Mir Interviews - Haron Ejaz of WMD
There will only be two conditions, the first is that they have been on a coaching program with me, and after that they need a three-month trading record. They will then be funded. It is still in the very early stages of negotiation, but I think it presents an opportunity to access a trading group which perhaps a lot of people don’t have access to already.
It is a huge flaw for many who are new in the market to underestimate the requirement for that exit. A lot of their energy instead goes into determining a good entry. But first off it is important to understand how price behaves, and after that it is about understanding the need to have an exit strategy for that trade. Ultimately, trading is about wanting to make money; it is not an intellectual exercise; it is not about being right. You can only make money on the exit, you cannot make money if there is no exit. I put a lot of planning into that and again, use price action to determine this.
Finally, where do you think most traders go wrong? What can be done to change this?
WMD: One of the biggest problems in the
“Ultimately, trading is about wanting to make money; it is not an intellectual exercise; it is not about being right.” ZM:
So overall, if you are looking at the exit, you are in a position to win the war even before the battle has begun; hence the used-car salesman analogy. But how would you handle the question: what is your call for the Euro in 2013? Would you just try and shrug it off?
WMD: I would laugh. Laugh and have a little
chuckle. So here is my trading tip for Euro Dollar... It’s very, very, simple. If you want to determine the direction of price movement you need a line or a level. For myself, considering that we’re coming up to the end of the year, then the price I would be looking at is the price when the market closes on December 31, and the price I would also be looking at is when the market opens on 1 January 2013. That is the yearly opening price, and the price is going to move away from there, if it’s not moving then no one is making any money. As long as the price is above the yearly opening price, then I will be a buyer. Below the yearly, and I will be a seller. That is my prediction for 2013!
Are there any new developments with your web service that you would like to tell us about?
WMD: We are in the process of negotiating
with some proprietary trading firms as a result of the substantial growth that we have witnessed in the past six months. One of the offers which has been presented to us is that if we recommend traders to these prop firms, then they will fund these traders.
markets is that there is so much misconception in terms of what is right and what is wrong and people, as a consequence, take on so many duff philosophies. They end up losing out on their trading, going nowhere because they are trying to apply ideas which don’t match the reality of how the market moves. My approach is unorthodox. People look at the way I draw trend-lines and ask, why do you draw them like that when you are supposed to draw them like this? My answer is should you draw like that because Edwards and McGee taught you, or because it works? My approach is to turn everything on its head. So I would ask you why do you spend the whole thought process and exercise your mind wearing yourself out looking for an entry in the market? Why don’t you look for an exit and trade the price to look for that exit? This turns everything on its head and shows that you are thinking the wrong way. What about money management? The standard theory of money management is get a decent risk:reward ratio, of say 2 to 1, and even if you wrong six times out of 10, you are still going to make it. If you believe the application of this money management idea, you are accepting failure just by accepting this notion that that you can fail six times and be right four times and still make money. Show me a successful trader who’s made money by getting it wrong that many times, and getting it right that few times. Reality and what you are taught in the textbooks are two different things. We need to look at a concept and ask the question, does this idea really hold water? The problem may be that all these gurus and self-help trading books, they simply seem to be setting you up to fail by telling you to accept the fact that you are going to have losing trades. I became successful not by increasing the number of winning trades, but by cutting the losing trades out. This was done by, amongst other things, recognising what a losing trade looks like on-screen, something which is just as important as recognising a chart pattern or a pattern failure.
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stock market crashes of the last century Part II By Filipe R Costa & Richard Jennings
Last month, we kicked off the first of two articles looking back over the major stock market shakeouts of the last 100 years. We started by analysing two sets of panic (the Panic of 1901 and the Panic of 1907) both of which resulted from failed attempts to corner a market in the early 1900’s and which ultimately resulted in heavy sell offs that destroyed many fortunes and kicked off periods of recession. The liquidity problems that resulted from those particular panics led, in fact, to the creation in 1913 of the anchor of the global monetary system that is known as the Federal Reserve System in the hope of avoiding such situations in the future.
In 1929, a series of events led to what is known as the “Granddaddy” of all crashes — The Great Crash of 1929 in the US. The Great Crash resulted in very heavy capital losses that metamorphosed into a long and deep depression, akin to the situation Greece is presently facing, and which gave way to an unemployment rate in the States of almost 30%. Quite unbelievably, at its nadirs, the Dow Jones index fell to less than 10% of its pre-crash value. Nothing like it in development markets has been since, although in developing markets the Asia currency crisis in 1997 led, in dollar terms, to 80-90% capital losses in the equity markets and similarly in countries like Greek and Cyprus in the last few years.
“Quite unbelievably, at its nadirs, the Dow Jones index fell to less than 10% of its pre-crash value.”
On this count, I think it’s safe to say the Fed has failed miserably, and regularly!
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Stock Market crashes of the last 100 years
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CHART - BOOM AND BUST Above is a chart showing how various global markets have charted a path in the aftermath of these monster bouts of capital destruction.
The Friday the 13th Mini-Crash of 1989
In 1987, another historically important crash occurred that became known as “Black Monday”, where the major global markets including the US & UK fell by over 20%. Lessons from the past, however, helped in avoiding a major recession as the global central bankers of the day used serious monetary stimuli to contain most of the negative effects of an asset price shock.
Although this crash seems minor when seen today, it is important in the context of this piece to analyse it as it highlights two problems that we still need to fight against today: the excessive dependence on computer trading, particularly more so with the growth in so called “high frequency, algo” trading, and the age old human psychology element of blithely following the crowd...central bankers of the day used serious monetary stimuli to contain most of the negative effects of an asset price shock.
In this magazine edition we will conclude with the Friday the 13th mini-crash of 1989, the October 27, 1997 mini-crash, the 9/11 aftermath crash of 2001, the 2008 Great Financial Crisis crash, and finally the curious phenomenon of the 2010 flash crash.
On the morning of the superstitiously “spooky” October 13th, 1989, the market suddenly turned down on very heavy volume. At the close, the Dow showed a 6.91% loss while the S&P 500 dropped 6.12% leaving many traders scratching their heads as to just what the catalyst was.
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Stock Market crashes of the last 100 years
TABLE - TOP 20 STOCK MARKET CRASHES Many commentators believe that the trigger for the drop was actually a failed leveraged bailout deal whereby UAL Corporation was attempting to acquire United Airlines. The deal was bunkered when the Association of Flight Attendants (AFA) voted against accepting the proposed deal which was backed by management. Consequently, the $6.9 billion deal collapsed and with it the whole market. The problem is that this reasoning doesn’t stand up to closer scrutiny, as the market actually started dropping before the breakdown of the deal. Again, a lot of market commentators blamed automatic selling by computers as one of the main causes that led to the large drop, as in the 1989 crash. Two lessons to learn: first, sometimes it is required to just halt the market to allow traders to get some fresh air and clear their thoughts — hence the introduction in later years of so called “circuit breakers”. Secondly, the pre-programmed strategies of multitude computers to sell on declines could be disastrous. The first warning was in 1987. This was the second...
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October 27, 1997 Mini-Crash The Western economies were, however, able to avoid the worst of the crisis as their exposure to the bad loans of the all but bankrupt regional banks in Asia was minimal. Still, the mini-crash that occurred on that day led all global markets substantially lower. In New York, the NYSE was halted twice to avoid continuing panic selling, but the loss at the end of the day still amounted to a serious 7.2%.
The crash occurring on October 27, 1997 is probably one of the least known in recent years, but it had its origin in the Asian currency crisis and carried out many a professional fund manager operating in that region. The day certainly didnâ€™t start well in Asia with the Hang Seng index alone dropping 6%. Nerves got the better of traders in the region with continued worries over the regional property market and the collapsing of domestic currencies.
CHART - 1997 MINI-CRASH During the following sessions, the Hang Seng Index continued the drop but this was not followed by US markets and, in the end, the Dow Jones ended the year with a 22.6% gain and the event was seem-ingly swiftly forgotten.
This meant that overseas markets, and in particular Europe, took the brunt of selling that the US fund managers were unable to implement in their home market. Over the course of a few days, UK & European markets lost around 20%.
9/11 Twin Towers Aftermath Crash
The US markets re-opened on Monday, September 17 and it was very evident that a crash would occur. In the initial event, the drop was remarkably contained in the US, considering how much overseas markets had tumbled. The Dow closed down 684.81 points on the Monday, corresponding to a loss in value of 7.13%.
The biggest difference between this particular crash and the others is that in the immediate aftermath of the atrocities, people knew what was coming in the markets. The terrorist attacks occurred on the morning of September 11, 2001, just before the markets actually opened in New York, and such was the devastation and confusion that a decision was taken by the NYSE officials to keep the markets closed.
The losses did, however, extend over the balance of the week and the Dow accumulated a decline of 14% over five consecutive negative sessions. Airlines and insurers were heavy losers on September 14.
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Stock Market crashes of the last 100 years
“The biggest difference between this particular crash and the others is that in the immediate aftermath of the atrocities, people knew what was coming in the markets.”
Anthony Correia / Shutterstock.com
One intriguing element of the 9/11 crash is that there was “suspicious” and very heavy activity in airline and index Puts in the days leading up to the attacks. Somebody made hundreds of millions on these bets and, to this day, the culprits still seem to remain in the shadows. This only adds weight to the conspiracy theorists’ stories that many more people knew what was coming on that terrible day than is widely believed. United Airlines and American Airlines, two of the airlines used by the terrorists in the attack, saw the shares drop 40%. Global air traffic declined considerably over the following months which led to a decline in revenues and profits amongst the global airline industry and ultimately to the bankruptcy of US Airways and United Airlines, and also massive layoffs at American Airlines.
The attacks on the Twin Towers shocked the world and set the geo political stage for the adventures by the UK & US into the Iraqi & Afghanistan theatres. The markets grappled with the implications for many months in the immediate aftermath of Sep 11. One particular compounding issue that led to the markets making decade lows almost a year later was the fact the world economy was still coming through the effects of the bursting of the end millennia technology bubble and the devastating wealth decimation that occurred in this arena. A final bottom was made in April 2003 — ironically just around the time of the Invasion of Iraq. A few lessons here — anticipation of a crash and selling elsewhere, as in Europe in the days after the Sep 11 attacks, generally means that the worst will not come to pass as “those who want out are out”. Two, as occurred in April 2003, once valuations reach historic nadirs, news flow can become an obscuring factor and inherent value becomes more important. Many would have been forgiven for expecting the first shots in Iraq to set off another downturn in the markets, but, in the event, this marked the low point for a strong 4 year bull run. The old adage “Buy when blood is on the streets” rings true more often than not.
TABLE - 9/11 AFTERMATH CRASH
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“once valuations reach historic nadirs, news flow can become an obscuring factor and inherent value becomes more important.” The recession of 2002-03 may not be attributed directly to the terrorist attacks, but, still, Osama Bin Laden’s attacks had far reaching consequences that, one could argue, have now culminated in the fiscal cliff we see being debated 10 years later. George “dubya” Bush initiated a so called “war on terror” and in the process sub-stantially expanded the defense budget to fight in Iraq & Afghanistan and to protect the country against future attacks. This spending frenzy has most certainly contributed to the current high levels of national debt the U.S. currently hold, and that is at the heart of the fiscal cliff issue.
2008 Great Financial Crisis Crash If we use the common definition of a crash, then, strictly speaking, the “GFC”, as it is known, wouldn’t fit the category of a large, very short term decline.
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It really belongs more to the bear market definition than to a market crash. In fact, in recent years, a 7% or 8% drop in a day is becoming more commonplace than it was in the first half of the last century. This is in spite of the likes of “circuit breakers” being introduced. Nevertheless, there are four declines which occurred during the 2008 financial crisis that make it into the top 20 Dow declines and with that in mind we include them here. The 2008 financial crisis was one of the worst economic slumps to affect the globe for over 80 years. The economic shocks quickly spread throughout the whole world and put Europe & the US in serious trouble. Even today, some 5 years later, global interest rates remain at record lows. As a result of the GFC, the US housing sector slumped by record levels once venerable banks had to go “cap in hand” to their governments for bailouts, and seemingly impenetrable financial institutions like Lehman Brothers collapsed. The origins of the crisis lay within the US housing market and the improper evaluation of risk, coupled with plain human greed. During the nineties and noughties, the U.S. current account deficits just kept on growing, leading the country to borrow ever large sums from abroad — particularly China which was desperately trying to recycle the mirror of the US’s export deficit — their own massive current account surpluses. As yields continued to fall during the seemingly never ending bond market bull run, investors began to search for yield elsewhere, and so financial institutions expanded credit to U.S. households and consumers who in turn assumed an unprecedented debt load (mortgages, auto credit, credit cards, etc).
Stock Market crashes of the last 100 years
“The economic shocks quickly spread throughout the whole world and put Europe & the US in serious trouble. Even today, some 5 years later, global interest rates remain at record lows.” With the housing market in the US appearing to be on a path of ever greater prosperity, the mortgage banks embraced the sub-prime sector of the market in their search for returns and credit risk just went out of the window. Put simply, an event of default was just ignored. With so much interest in the housing market, financial institutions created a way of selling a section of the market to investors through what are called mortgage-backed securities (MBS) and collateralised debt obligations (CDO’s). The bonds were split into safe and not so safe tranches and, of course, whilst everything was appearing to be going swimmingly, nobody looked too closely at what was actually included in these pools of bonds...
Unfortunately, what goes up also generally comes down and the US housing market started to crack in 2007. With this decline, the MBS securities dropped in value and, given the leverage that many of the investment banks had taken on with regards to holding these assets on their balance sheets, they became technically insolvent. Consequently, banks tightened credit conditions, the housing market continued its collapse and foreclosures grew exponentially. The financial meltdown was now in full swing.
CHART - DOW 2008 CRASH
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“When the GFC finally ended in March 2009, the Dow had dropped 54% from a peak at 14,164 to its final bottom at 6,547 in just 17 months.” In just 8 weeks, between September 29 and December 1, 2008 there were four “crashes” that gained a place in the top 20 list. The first was on September 29, when the Dow declined 777.68 points, or 6.98%. The second slump on October 9, erased 678.91 points from the index — corresponding to a percentage loss of 7.33%. A few days later, on October 15, the Dow lost another 733.08 points, or 7.87%, and, finally, on December 1, the index suffered the fourth sub-stantial loss amounting to 679.95 points, or 7.7%.
The 2010 Flash Crash The 2010 “flash crash” occurred on the afternoon of May 6 and came, quite literally, out of nowhere. To this day, the main reason behind it is still argued over. If the necessary steps had been taken in the aftermath of the 1987 and 1989 crashes, however, the 2010 crash could have been avoided. The continued growth in computer trading and its automation quite simply exacerbated the fall and so the same risks still remain. With the advent of computerised trading, a good proportion of the traditional “market maker” role is now disappearing and pre-programmed computers take decisions based on complex algorithms.
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Instead of the human trader placing dozens of trades a day, computers are programmed for high-frequency trading (HFT), holding shares for less than a few seconds in many cases whilst trying to exploit infinitesimally small pricing anomalies. On the morning of May 6 2011, traders woke up to fresh news coming out of Greece and sentiment was poor. The Dow opened in the red, initially dropping little more than 2%. A mutual fund then decided to sell a large number of E-mini S&P 500 contracts in the futures market in order to hedge an equity position they had. Although the orders were placed in a way to avoid disturbing the market, some selling pressure was obviously created. With a broad negative market sentiment, the HFT’s started selling aggressively, quickly passing positions back and forth to exploit the perceived opportunity and, in the process, massively contributing to the amplified selling pressure. With the eroding market conditions the HFT’s then stopped trading, but panic selling continued. Other institutional investors using complex algorithms added to the blood bath. In just a few short minutes, the Dow stood down more than 9% and it seems that sensibility kicked in as real “human” traders shut off the autopilot and assumed the manual commands to drive the market higher again with the index recovering almost all the losses by the close. In an investigation, the SEC blamed the mutual fund that triggered the order for the sharp shakedown, instead of acknowledging that computers were responsible for the scary episode and that new measures should be taken to at least create longer time scaled circuit breakers to protect retail investors. Shares of global companies like Accenture and Exelon dropped to just one cent, and Procter & Gamble declined 37%. Although the markets managed to quickly recover, many retail investors with leveraged accounts certainly saw their funds vanish.
Stock Market crashes of the last 100 years
“Shares of global companies like Accenture and Exelon dropped to just one cent, and Procter & Gamble declined 37%.” Conclusion Crashes have been a part of markets since they were created — wherever human emotions are concerned — and with the pendulum of greed and fear, and self enrichment thrown into the mix then they will continue to occur.
With the exception of the GFC, unlike what happened in the 1901, 1907, or 1929 crashes, the most recent episodes haven’t resulted in recessions as the global “backstop” of the US Federal Reserve rides to the rescue with new liquidity injections.
At the beginning of the last century, several attempts to corner a particular market were the main driver for these crashes and, in a lot of instances, resulted in a bear market due to the absence of a “firewall” able to provide the necessary liquidity to stop the downfall. Most of these episodes were preceded by an extensive bull market that resulted in a bubble being formed.
The snag is: the Fed’s now out of bullets — sovereign debt requires a major reigning in and so fiscal levers will not be available in response to a new episode — interest rates have hit the zero bound and QE’s power is now definitely waning with bond yields so low — the incremental “hit” of each injection of new cash being progressively more limited.
Over the last half of the 20th century, the increased processing power of computers has changed everything. The speed with which news is disseminated is resulting in ever more of these episodes.
The lesson? When (not if) the next one hits, it probably will be the “big one”!
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DoMiNiC PiCaRDa’S TEChNiCaL TaKE Dominic Picarda is a Chartered Market Technician and has been responsible for the co-ordination of the Investor’s Chronicle’s charting coverage for four years. He is also an Associate Editor of the FT and frequently speaks at seminars and other trading events. Dominic holds an MSc in Economic History from the LSE & Political Science.
ToP PiCKS FoR 2013
It’s important to have strong views as a trader — but also to hold those views weakly. What I mean by this apparent contradiction is that you should only make trades in which you have great conviction, but be ready to ditch them sharp-ish when they don’t work out. More money was lost in trading by doggedly clinging on to what originally seemed a great idea than by any other means. I went into 2012 with a bearish outlook on equities for the months ahead, but quickly changed tack as I saw the results of the European Central Bank’s liquidity splurge. I then remained bullish, even through the summer shakeout, which I correctly insisted was not the start of a major downtrend, even as others were heading for the hills (SBM were one of the few bulls at the summer nadirs too). With this in mind, I enter 2013 with a broadly bullish outlook for developed-world stocks. I see the US and European indices continuing their bull run, spurred on by cheap central-bank money and gradual improvement in the economic outlook. Commodities too should benefit from this process, and I am specifically looking for precious metals to resume their long-term uptrend.
“i SEE ThE uS aND EuRoPEaN iNDiCES CoNTiNuiNg ThEiR BuLL RuN, SPuRRED oN By ChEaP CENTRaL-BaNK MoNEy aND gRaDuaL iMPRovEMENT iN ThE ECoNoMiC ouTLooK. ”
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Dominic Picarda’s Technical Take
DaX 30 Germany’s leading stock index has been one of the star performers of 2012, rising by more than 30 per cent and registering new post-2009 bull-market highs in the process. I fancy this process to continue into next year. I believe that the European authorities will do what is necessary to keep the single currency intact, and that the Eurozone economy should begin to recover, albeit slowly and weakly.
CHART - DAX 30
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While the aggressive strategy for exploiting Eurozone survival and recovery would be to go long of, say, the Spanish or Italian index, I am attracted to what I see as the higher-quality DAX. The German market is especially sensitive to economic upturns, given the number of industrial companies it contains. It is also inexpensive, trading on just 11.5 times its average earnings of the last 10 years. The DAX is well poised to make it back to its all-time highs in the 8152 region in the coming months. While it has twice peaked and then suffered major bear markets having reached those levels, I donâ€™t think it would necessarily do so again. I would seek to enter position trades after the index has dipped below its 13-day exponential moving average and then rallies back above it.
CHART - SILVER
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SiLvER I have a very bullish outlook on silver and think 2013 could be the year when the semi-precious metal starts to live up to my expectations once more. Admittedly, there are more than a few who believe silver to have been in a bubble that burst in April 2011, and that further significant declines await. But I see the action since that time as being a major correction within a long-term bull market. Silverâ€™s dramatic run-up and collapse in 2011 does have some of the hallmarks of the end of a speculative boom, as in 1980, however, although I argue that the parallel is overdone.
Dominic Picarda’s Technical Take
The semi-precious metal’s last boom ended only once the US authorities got tough on inflation and hiked interest rates dramatically. For now, I see the likeliest outcome as continued, albeit moderate, inflation combined with very low interest rates that don’t compensate savers for the loss of purchasing power suffered. These conditions tend to drive silver’s price higher. As such, I have medium to long-term targets for silver above those highs at $49.82. In the months ahead, I would be looking for a move to $37.99 and $40.78. A rise above $35.44 would be a good sign this process was getting underway. I would seek to join the trend on bounces off the rising 13-day exponential moving average.
hoME RETaiL gRouP The UK retail industry faces a tough year in 2013. Consumers are likely to remain under pressure as a result of a feeble jobs market, slack wages growth and a difficult housing market, among things. This could make for further business hardship at Home Retail Group, owner of the Home Retail and Argos chains. A combination of high fixed-costs and too many stores has been causing particular problems at the latter.
CHART - HOME RETAIL GROUP Of course, Home Retail does offer potential as a turnaround story. Management is trying to modernise and move upmarket by shifting from paper catalogues to digital ordering and by stocking classier goods while it’s also shutting stores. However, fierce retail competition and ongoing consumer weakness could well hinder the effect of these efforts.
Home Retail’s share price has surged in recent months, from a June low of 68.45p to a recent high of 131.7p. However, it is too early to declare the longer-term downtrend since May 2007 as over, in my view. Should the price drop back below its 13-week exponential moving average, I reckon it could revisit 89p and possibly even those 69p lows. Once below that average, I would seek to short rallies failing around the 21-day EMA.
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Robbie Burn’s Top 3 Picks for 2013 So there it was — Merry Xmas; did everybody have fun or just overindulge on the turkey & mince pies per usual?! I’d love to be able to go short of Christmas music, can’t stand it! The Editor told me this edition was a top 2013 trades special. So could I pick my top 3 trades for 2013? Okay, well he’s the boss, and he is my only boss. Although I could actually fire him. But he already gave me an expensive lunch so given there could be more great food on the table in 2013 I’ll try and keep him sweet! Well, before three potential trades for 2013, I see we enjoyed the usual Christmas rally. I bought the FTSE 100, the FTSE 250 and a basket of banks, and the intention to get out fast early New Year as you read this.
I predicted in my last month’s piece that we could be in line for some festive stock market cheer and it duly delivered! So, three trades eh..? Well, I could easily pick some boring companies I think will have a good 2013, but my guess is readers of this mag don’t want that! You want multi-bagging oil and mining stocks, don’t you? Yes you do! Um, well I’m no good on those, but here are three risky ones then that I think could double in 2013 (or halve!) First one, I am already in from 55p and 65p. The stock is Cash Converters. I love this one. It is, in essence, a pawnbroker/moneylender. A bit like Scrooge in ‘A Christmas Carol’ in fact! And Scrooge did well, didn’t he?
42 | www.financial-spread-betting.com | January 2013
Robbie Burn’s Top 3 picks for 2013
It’s mainly traded in Australia, but I bought the listing over here. It is rapidly growing in the UK and recently easily raised a big slug of cash which was impressive. I can’t see its growth stopping in 2013. People are still going to borrow money and still going to sell stuff off. Take a look at its website to see how it makes its money. If you don’t have a Cash Converters store in your high street, expect to see one next year (unless you live somewhere very posh like Chelsea!) I hope to convert my shares into cash (get-it?) sometime in 2013. Another potential doubler for 2013 is Carclo. I’ve topped up recently here and already nearly doubled my dough on it, but I think it could double again in 2013, although it is not without risk of course. It all hinges on its CIT technology. Look it up for yourself; I’m not doing the work for you right now, I have left over mince pies to eat (still!). It used to be a boring engineer. Well, not anymore. Underneath its dull name and sector is actually a gleaming tech company. And the market I don’t think has quite realised it yet... It’s in partnership with Amtel, the US giant, and the royalties should start to build next year. And all it has to do to get an even bigger share price is to change its name to Carclo Technology! If it had the same rating as other tech shares, it would already be two quid more. And staying with technology, my final choice is a really risky one, but, again, a potential doubler.
Indeed, it has already doubled for me once, back end of this year. It’s a US listed stock which has gone from 25 to 50 dollars for me, and here’s hoping for 100 dollars by the end of 2013. It’s 3D Tech (NYSE:DDD). And it’s involved in 3D printing technology. My thought is this technology will either prove total bollocks in 2013, in which case I will be out fast, or we are at the start of something big. You can trade it as a spread bet easily enough with most of the firms that provide US stock spread bets. Take a look at its website, quite fascinating. Instead of ordering something by mail, you make it yourself at home. Almost a bit like the replicator in ‘Star Trek: Next Generation’! After all, the original 60’s Star Trek had IPad variants! If the next gen has it right, then this company could be the equivalent of a tiny Apple to be. Or, as I said, it could be pants. It’s been very good to me so far, however. Anyway, those are my three double or halves for 2013. If they double, I shall be in the money, and if they keep going up, I’ll also continue to scale up. If they falter or their businesses look like they are stinkers and not stars, I’ll be out. No messing. Have a cracking New Year and here’s to good trading for 2013! Robbie
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top 3 oil picks for 2013 46 | www.financial-spread-betting.com | January 2013
Top 3 oil picks for 2013
Well, itâ€™s certainly been a volatile year for AIM oil and gas investors, with the index currently sitting close to its 52 week low right now (3,274), and 53% lower than its February peak (4,998) as investor appetite for riskier energy assets has waned, and there has been a catalogue of wild cat drill failures as illustrated by the recent action in the Falklands Islands (Falkland Oil and Gas is 70% below its year high of 99p, Borders and Southern is 86% below its year high of 131p and even Rockhopper is 60% down on its 393p high).
CHART - AIM OIL AND GAS INDEX Still, for those stoic investors with a continued appetite for a contrarian trade in 2013, there are a few companies that stand out in the sector with some strong potential assets that underpin their future prospects. For each of these companies, some positive news flow from either drilling, field development activity or a sector re-rating could see substantial gains.
However, AIM oil and gas is cursed by extreme volatility so investors should be sure to lock in profits where they occur and be ready to cut losers when it is clear that prospects have dimmed. For each of these companies, some positive news flow from either drilling, field development activity or a sector re-rating could see substantial gains. However, AIM oil and gas is cursed by extreme volatility so investors should be sure to lock in profits where they occur and be ready to cut losers when it is clear that prospects have dimmed.
â€œStill, for those stoic investors with a continued appetite for a contrarian trade in 2013, there are a few companies that stand out in the sector with some strong potential assets that underpin their future prospects. January 2013
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CHART - XCITE ENERGY
As we head towards the end of 2012, North Sea focused oil explorer Xcite Energy sits at just over 90p, valuing the company at £264 million, although during 2012 there were periods where it spiked as high as 165p on takeover rumours by Statoil of Norway and also dropped as low as 67p as the overhang of stock from Esousa weighed on the stock. The major pieces of news flow during the year were the reserves upgrade from 28 million barrels to 116 million barrels (so called 2P – proven and probable) in February; the signing of a $155 million reserved based lending (RBL) deal with a consortium of banks during the summer, and then the successful completion of the extended well test on the company’s core asset, the Bentley North Sea heavy oil field, in September culminating in the production of 147,000 barrels of oil from the Rowan Norway rig.
Though the share price sits at a disappointingly low level following significant dilution through various discounted placings to help fund the early phases of the Bentley field development, there is, we believe, much for shareholders to look forward to in 2013. Following the success of the extended well test on Bentley, Xcite is currently working on modeling the new well data to allow an upgraded reserves report in the first quarter of 2013. The well test demonstrated that productivity of the field was likely to be better than expected and new enhanced oil recovery techniques would likely improve recovery rates even further (e.g. polymer flooding). As well as the reserves report, a new field development plan will be submitted to DECC (Department of Energy and Climate Change) in the first quarter that will unlock the reserves based lending deal.
48 | www.financial-spread-betting.com | January 2013
Top 3 oil picks for 2013
“The final and key piece of news for investors will be the farm out deal which we expect is likely to be concluded after the upgraded reserves report is published and that will pave the way for the full funding of phase 1b and phase 2 of Bentley. ” The company also just recently acquired new deeper water acreage in the 27th licensing round to the East of Bentley and which could produce lighter oil and tie back to original field development. DECC field approval, and then further information on when full production will be expected in 2014 following the acquisition of a suitable rig, will also be critical. So, in summary, some significant news flow which should help sustain significant investor interest in 2013 and move the share price much higher from its current subdued level.
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CHART - BOWLEVEN
West African focused oil and gas explorer, Bowleven, has had a shocker of a year. At 66p it is valued at just £194 million and is down over 50% since its February 2012 peak achieved during swiftly aborted takeover talks with Dragon Oil. The poor share price performance resulted in the controversial news this month that Bowleven had postponed the payout of an incentive plan to directors, including chief executive Kevin Hart. For Hart it would have meant receiving a relatively meagre 117,000 shares, worth around £80,000. Bowleven holds onshore and offshore exploration acreage in Cameroon and onshore acreage in Kenya. Its key asset is a 75% equity interest in the Etinde Permit, offshore Cameroon, but it also holds a 100% equity interest in the Bomono Permit, onshore Cameroon. In September 2012, Bowleven entered into a farm-in agreement to acquire a 50% equity interest in exploration block 11B, in onshore Kenya. In April, the company signed a Memorandum of Understanding between SNH, German company Ferrostaal GmbH and EurOil Ltd to supply natural gas to a chemical fertilizer plant in Cameroon, potentially making its existing gas find a commercial proposition.
In early November, the company announced a strategic alliance deal with Petrofac for it to invest up to $500m (£313m) to help develop Etinde, with the aim of starting gas production in 2016. In return, Petrofac will receive a share of the cash flows from the development. In late November, the company announced that it had submitted the formal Etinde Exploitation Authorisation Application (EEAA) to the Cameroon authorities. Drilling operations commenced on the IM-5 appraisal/development well on Etinde block MLHP-7 in mid-Septmber with target depth due 14 weeks later and results due mid-January. A second well will be drilled in the first quarter of 2013 with its location depending on the result of IM-5. With cash of $120 million (as of October), potential resources of 1.2 billion barrels, the Petrofac deal in the bag; a potential update on a farm-out for its Bonomo prospect and further drilling news due from Cameroon over the coming weeks; a bit of luck with the drill bit, and progress on the development of Etinde could lead to a healthy rerating in 2013.
50 | www.financial-spread-betting.com | January 2013
Top 3 oil picks for 2013
CHART - MADAGASCAR OIL
At the higher risk end of the spectrum is Madagascar oil, but an interesting heavy oil prospect for 2013. At its current 19p, its market cap is around £48 million. The company is the largest oil explorer in Madagascar with five contiguous blocks covering almost 30,000 square kilometres, including the Tsimiroro block and the Bemolanga block which are 60 per cent owned by Total and have prospective resources of between 1 billion and 6 billion barrels of oil. Of particular focus is the Tsimiroro which is a heavy oil field holding 1.7 billion barrel contingent resources, and with the potential to produce 150,000 barrels of oil a day at peak production. The company first listed in November 2010 at 95p, but quickly ran into trouble with the government about the validity of its licenses, leading to a rapid plunge in its share price. The licensing issue was resolved in April 2012, but doubts about the company and the political situation in the country remain as well as its ability to commercially extract its heavy oil resources.
Madagascar’s goal is to prove that it is possible to get the heavy crude oil in its fields out of the ground using a multi-zone steam flood, and that it can do so on a commercial scale. Continuous vertical steam flood is a technology used to pump steam into multiple oil-bearing zones via a vertical injection well, freeing up the crude which is pumped to the surface through production wells. At its half year results in September, the company announced all of the 25 planned injection and production wells on the Tsimiroro Steam Flood Pilot (SFP) had been drilled and completed with first cold oil produced. The net oil sand thickness averaged 70 meters across the pilot area, 40% greater than initially projected. The company plans to introduce steam to the reservoir to increase productivity and this “Huff and Puff” technique was on schedule for completion by the end of 2012.
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Final results for the airborne gravity graviometry (AGG) survey over the Tsimiroro field complied by Fugro are expected to be issued in Q4 2012, and work will continue towards developing conventional oil prospects on the Tsimiroro Block as well as identifying additional exploration prospects in Q1 2013. With $25 million of funds on the balance sheet at the interim stage, Madagascar is fully funded for its 2013 drilling programme. In December it was announced that the Benchmark Advantage Fund had accumulated 25% of the company and so giving credence to the fundamental prospects for this company. Madagascar Oil has been beset with numerous setbacks early in its life as a public company, but a positive update from the Tsimiroro heavy oil field and the sheer scale of its potential reserves should provide some excitement for shareholders early in 2013, assuming its problems with the government are a thing of the past. An interesting company indeed.
52 | www.financial-spread-betting.com | January 2013
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Conviction Trade for 2013
Given this headline by your esteemed editor, I suspect the boss is looking for what we once knew as a “tip of the year.” I will start with a bearish observation on a sector before, ironically, picking a stock from within that sector as one to flourish. The sector in question is the mining juniors of which there are about 160 on AIM. A handful are already producing. Another cluster will go into production during 2013, but about half not only will not produce a jelly bean in 2013 (or indeed ever in most cases) but, very importantly in the current environment of cash raising difficulty (without giving away equity), have less than a year’s cash left... Far too many of them have been run as “lifestyle companies”, or have delivered drill results which make their projects look less than attractive unless one uses wildly bullish metal price forecasts. I sense that investors have a profound sense of ennui and in some cases anger. Thus raising additional equity will be at best incredibly dilutive and at worst, well, nigh impossible.
As such, the AIM mining sector could, I fear, have a woeful 2013, to follow on from a pretty dismal 2012. A conviction buy trade in this sector, therefore, has to be pretty spectacular. But there are a few that cut the mustard. I return to an old favourite. I expect gold to head sharply higher during the next 24 months and when that happens, this company will benefit greatly. But even on a static gold price, shares in Archipelago Resources (AR.) look very good value at 59.5p — my target price (and with a gold price $100 below the current level so giving me an additional margin of safety) is 95p. Given operational gearing, if we see $1800 gold in 2013, you should double your money, in my humble opinion. In the first half of 2012 Toka Tindung produced 60,386 oz of gold at a cash cost of $783 oz. That meant that the group generated a gross profit of $37.7 million, an operating profit of $32.5 million and net income of $17.1 million.
“I will start with a bearish observation on a sector before, ironically, picking a stock from within that sector as one to flourish. The sector in question is the mining juniors of which there are about 160 on AIM.” 54 | www.financial-spread-betting.com | January 2013
Conviction trade for 2013
Cashflow generated from operations was $35.4 million and at the period end it had debt of $63 million and cash of $22.6 million.
Drilling will continue over the remainder of the year and an updated ‘Resource & Reserve Statement’ is expected to be published in early 2013.
The second half will see increased output and thus lower cash costs per ounce — 3rd quarter numbers which came out on October 30th confirmed this. The guidance is for full year output of 135-145,000 oz and at a cash cost of $580-640 oz. The increase in output will be largely down to greater tonnage being processed but also down to the fact that Archipelago is now consistently finding higher gold grades in situ. Toka Tindung has a mine life of 9 years with an additional 7 years output guaranteed from stockpiled rock. Output is sustainable at c140,000 oz for the Life of Mine. But, it gets better. That LOM estimate is based on the current 2.58m oz Au Resource and 1.47m oz Au Reserve. However, Archipelago is continuing to drill the area around its existing pits and a few weeks ago announced a series of drill hole results from that programme. I will not bore you with all the grades, but the concluding statement reads:
This indicates that the company can increase the life of mine, but also by tackling higher grades sooner can increase its output in earlier years.. With a fixed cost base that would have a material impact on free cashflows and any DCF based valuation.
The results confirm the highly prospective nature of Toka Tindung and indicate significant potential to extend Archipelago’s already substantial 2.58m oz Au Resource and 1.47m oz Au Reserve.
For now, I treat all of that as “potential” upside and allow very little for it. Instead, I value the company purely based on the nine plus seven years production we have at Toka, and using a 10% discount rate (arguably harsh) and a $1600 gold price, I arrive at a valuation of 95p per share. At $1800 gold in 2013 that jumps to c120p per share. And I suspect that the new resource estimate will also prompt me to increase my valuation in the early part of 2013. This is not a stock that promises to be a ten bagger. But it is a sound, cash generative and expanding company. And amid the detritus of the AIM mining sector its shares, I believe, are significantly undervalued.
CHART - ARCHIPELAGO RESOURCES
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56 | www.financial-spread-betting.com | January 2013
Japan our top pick of the markets for 2013 It seems unbelievable that the Nikkei 225 index was trading at 22,500 in 1996 and above 20,000 at the beginning of the new millennium - just ahead of entering a massive downtrend that culminated finally with the index hitting 7,000 in 2009 right in the midst of the Great Financial Crisis.
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“The market capitalisation of the Japanese stock market is now less than its book value and, indeed, its Tobin “Q” measure (an assessment of the replacement cost of assets) is less than 1. Equities, quite simply, are selling for depression era prices.” The Japanese public has long since given up on equities, and foreign investor participation is at record lows, not unsurprisingly, following a 25 year bear market. Meanwhile, dividend yields relative to government bonds provide one the highest spreads in the world. As a contrarian, if you were baking an “asset class” cake, this would have the best ingredients possible.
However, in the closing months of 2012 the Nikkei has found its mojo again as it has risen sharply once more, moving in lockstep with the dollar-yen exchange rate. The table below (to 11 Dec 2012 — time of writing) shows the relative returns of the Japanese market, MSCI all world index (in dollars) and S&P 500 (in local terms), and you can see that it has modestly outperformed the all world, although is lagging the S&P 500 by a slim margin.
We have been bullish on Japan since the beginning of 2012, expecting the market to outperform the MSCI World index. For the first 6 months of the year, the index duly obliged, outperforming the S&P 500 and the World Index by quite a margin, but the wheels fell off during the summer as the military spat with China was ratcheted up and the Yen remained stubbornly strong.
CHART - NIKKEI TABLE
Shinzo Abe 58 | www.financial-spread-betting.com | January 2013
Japan - Our top pick of the markets 2013
So, fundamentally, why are we picking Japan as the star market for 2013? Political changes are afoot in Japan with the installation of new Prime Minister Shinzo Abe (for the second time) of the Liberal Democrat Party. With a transition in politics will come new policies, particularly relating to quantitative easing & Yen devaluation.
Abe is a big proponent of inflation targeting. He is looking to rid Japan, once and for all, of the deflation that has saddled the economy for nearly 20 years now. We think the Japanese authorities are on the verge of printing unlimited yen to bring about a wholesale devaluation in their currency, and the yen is beginning to take fright as the chart below shows.
CHART - YEN With every other major nation printing money and devaluing their currencies, Abe has no choice but to step up to the plate, particularly when faced with hard evidence that against the likes of the South Korean Won, the Yen is nearly 70% overvalued — that’s a second tsunami that Japanese exporters have to swim against... ‘Print or die’ will likely be the new mantra of the Bank of Japan as its quantitative easing program changes up several gears from first to fifth.
Abe has already called upon the Bank of Japan to implement “unlimited easing” in order to hit a 2% to 3% inflation target. This type of overt political influence in Japan is almost unprecedented. He has additionally also urged unlimited liquidity provisions until the inflation target is hit, and indicated an interest in cutting the bank’s policy rate to zero or below. Abe also said an LDP government could move to coordinate policy with the central bank.
“Print or die’ will likely be the new mantra of the Bank of Japan as its quantitative easing program changes up several gears from first to fifth.”
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If these policies are implemented, it could set off a powerful rally in the stock market that looks already to be germinating to us and which would eventually pull the Japenese public back in, having been largely absent the market for several years now. With a substantial fall in the yen, Japanese corporations would become more competitive and the “E” side of the PE ration could rise quite sharply, given the inherent operational leverage in Japan Plc. There could also be a massive switch of capital from Japanese government bonds back into equities as an inflationary dynamic comes into play. We also think the rally in the Nikkei would far outweigh a plunge in the yen, but of course one of the beauties of spread betting the Nikkei, is the fact that the devaluation risk is taken away from you as the bets are denominated in sterling. In a cracking technical sign that is almost failsafe over medium term timescales, many stocks in Japan have now broken out to the upside for the first time in nearly 2 years, despite seemingly “dismal fundamentals”.
Bonds are the order of the day, but pressure on the yen and from a rapid money supply expansion could see capital begin to migrate back into equities and property — and which has also had similar bear market conditions. The Nikkei is unquestioningly cheap with the current valuation essentially factoring in pretty much zero or even declining GDP on a continuous basis and, ditto, a falling population. Many of the top 225 companies that make up the index are still trading at less than book value - in complete contrast to the US where stocks, on average, trade at nearly 2 times book. In looking at the 20 year monthly chart of the Nikkei v S&P 500 below, and contrasting with the valuation parameters of each of these markets, our call for sustained outperformance of Japanese equities relative to the US, and likely the World index, looks to be very much intact. We can see from the chart that effectively every 4-5 years the Nikkei outperforms the S&P by quite a margin and we think we are in the nascent stages of this. For the more risk adverse traders, this looks like a cracking medium-term pairs trade.
The market seems to be pricing-in a major sea change in the economic environment and we believe this event will be a substantial change in monetary policy settings at the Bank of Japan as a consequence of Abe’s election win. The Japanese public has pretty much disengaged from equities altogether since the bear market began back in 1989 — 23 years long and one of the longest in recent memory for a development economy’s equity market.
60 | www.financial-spread-betting.com | January 2013
Japan - Our top pick of the markets 2013
â€œWe also think the rally in the Nikkei would far outweigh a plunge in the yen, but of course, one of the beauties of spread betting the Nikkei, is the fact that the devaluation risk is taken away from you as the bets are denominated in sterling.â€?
CHART - NIKKEI V S&P
So, what is likely to happen to the Japanese stock market if the politicians can rid the country of deflation once and for all? A comparable period is, of course, the US in 1933 and which sparked a huge rally.
One thing that never changes is human nature, and a new generation of Japanese are likely to rediscover the equity market over the next few years. Japan remains our top pick of the global equity markets through 2013.
For the Japanese consumer who currently considers the JGBs as savings, should the capital value of these erode through rising yields, then a veritable tsunami of domestic money would likely hit the equity market as the public chased yield and capital returns again.
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Zak Mir’s Big Three Calls for 2013 There is, to my mind, a slight problem (English understatement) as far as making a call on specific stocks or leading markets going into 2013, and it is that we don’t actually know whether we are staring into the abyss, or metaphorically looking to the stars currently (I’m assuming that if you’re reading this, of course, that the earth didn’t end on the 21st Dec — unless we’re living in a parallel universe!!). At the time of writing, the “Fiscal Cliff” negotiations hang like the sword of Damocles over the markets. I personally believe that the powers that be on Capitol Hill will not reach a “proper” accord given how boxed in they are with political dogma. In addition, if only due to the vanity/ego aspect, people like John Boehner et al have little reason to retire from the spotlight upon which the whole world is watching and get back to their normal daily grind — such is the nature of politicians and the cult of celebrity these days. However, I think that in the three choices I have made below in a stock, an index and a currency, that a Fiscal Cliff/no Fiscal Cliff resolution have each largely been factored in.
Buy Euro / Sterling: Target 86p Stop Loss 78.8p Over the autumn, for my sins, I really discovered Twitter. Recently I read a re-tweet from this time last year which predicted the end of the Euro by end of 2012 and yet, last time I looked, the Euro is still here. ECB President Mario Draghi warned traders not to go short of the Euro in the summer — under $1.22 and under 78.50p (v Sterling) and he was correct (as you are when you control the second most powerful central bank in the world!). But my call on Euro / Sterling is not so much to do with “Super” Mario Draghi, it is much more to do with Basil Fawlty! Let me explain: it is harmless “revenge” by the Eurocrats against all the smug people on this side of the English Channel who think that the EU was a bad idea, would never work and was doomed to failure.
62 | www.financial-spread-betting.com | January 2013
Zak Mir’s big three calls for 2013
Well, the UK is threatened with a triple dip recession next year, the U.S. of course has its fiscal cliff, China could have a soft landing, and Japan is ready for QE9, or is it QE10? There are not ideal party conditions anywhere for leading economies. My buy call on Euro / Sterling comes in the wake of the ratings agency S&P cutting the UK’s outlook on debt to negative. It suggests that there is a one in three chance of our great nation losing its AAA rating. This comes right on cue for me with regards to a long held belief I have had which is that the end of the crisis in the Eurozone would coincide with the UK losing its top rating.
From a technical / trading perspective, it can be seen on the daily chart that we have a rising trend channel drawn from May, with its floor at the 200 day moving average at 80.51p. The view here is that while this combination of support is held, the target for the cross is towards 86p over the first two to three months of 2013.
CHART - EUR/GBP
“It suggests that there is a one in three chance of our great nation losing its AAA rating.” January 2013
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Buy IBEX 35: Target 10,000 Stop Loss 7,200 The inspiration for the buy recommendation on the Spanish blue chip index is two-fold. The first is the way that, as far as the financial media is concerned, this country is a one way street of 25% unemployment, massive sovereign debt and a burst real estate bubble. Indeed, apparently there is not one positive thing to say about the Costas and there has not been for over five years. Even worse, to my knowledge, you do not even have Spanish people blowing their trumpet either, largely so as not to antagonise our Catalan friends who have managed to muster up enough bravery in an attempt to abandon what is a sinking economic ship named Titanic (i.e. secession from Spain).
Given such a background, the current technical set up on the daily chart of the IBEX actually looks quite appealing (technicals, of course, always lead, and so sunnier uplands may be around the corner for the good ship Spain). This is said on the basis of two tests of support in both October & November around the falling 200 day moving average â€” now at 7,363. In fact, the probes did not touch the 200 day line, something which you normally only see ahead of strong continuation moves to the upside. The upside for the start of 2013 while the 200 day line is held should at least be between the 2 year resistance line at 9,500 and the old July 2011 resistance at 10,000 plus.
CHART - IBEX 35
64 | www.financial-spread-betting.com | January 2013
Zak Mir’s big three calls for 2013
Aviva (AV.): Target 450p Stop Loss 345p I complete my Eurozone friendly trio for 2013 with insurer Aviva (AV.) which, more than most stocks in the FTSE 100, has been a proxy for the Sovereign Debt crisis among the so called PIIGS nations due to the exposure it has had to bonds in the Eurozone periphery. While as recently as last year, the group insisted it was happy with the £1bn plus worth of potential “junk” sat on its balance sheet and did not need to write it down; the share price has been a decent performer in the second half of 2012 implying the market is coming around to their way of thinking.
The shares have been helped along by speculation of a $1bn sale of its U.S. life insurance business, and with this outweighing and squeezing out the “euro- zone jitter” players, it could very well be that the present set up on the daily chart and the 450p target implied by the May rising trend channel could be seen before the end of February.
If you’d like to learn more about my technical analysis approach then click here to download my new “Zak’s Top 25 Technical Triggers” FREE e-guide.
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2012 — My EXPERiMENTaL yEaR By ChRiS ChiLLiNgWoRTh
you can follow my journey on my blog where i post all my trades, warts and all, winners and losers at www.spreadbetbeginner.co.uk and you can follow me on Twitter @traderchilli
66 | www.financial-spread-betting.com | January 2013
2012 — My Experimental Year
“ThiS May SuRPRiSE MaNy ShoRTER TERM TRaDERS, BuT ThiS PaST MoNTh i havE PRoBaBLy oNLy ChECKED My ChaRTS aBouT 3 MayBE 4 TiMES.” I feel as if I have reached quite an important turning point on my spread betting journey this month. As each month passes, I begin to feel more and more comfortable with my strategy and I feel like I’m starting to bed down into it. I think (hope?!) I “get it” now. This may surprise many shorter term traders, but this past month I have probably only checked my charts about 3 maybe 4 times. Just today, for example, I’ve had to download 14 days worth of data on my charting software. It’s been two weeks since I last took a look at them. The reason is that I’m taking a longer term look at my trading. For example, in the last month or two, I have recently taken long positions based on prices moving above the 200 day moving average. Historically I noticed that when a price crosses this average it tends to go on for some time before crossing back down. During this time I’ll look at the price against the 100 day moving average as my exit. All very simple stuff, yet what this offers me is a good & steady trading strategy. I don’t need to keep an eye on daily price moves, in fact, over the last 2 weeks, many of my stocks have gone up, gone down and ended up pretty much back where they were! More importantly, I’ve saved myself a lot of stress. I’m also continuing to cut out the news reports. Sometimes I can’t help but see them, although I largely just ignore them now. I’ve seen enough to know that much of the time these reports or news feeds talk about what they “think” is going to happen, yet the only truth of the matter is that no one knows what the market is going to do. I must say though it feels very refreshing not to be glued to the financial news everyday. At one point I thought learning about the financial world was going to be crucial to my success. I’ve quickly learnt that I don’t need to know anything. If the price goes up I’ll buy, and I’ll sell when it goes down. Moves of 50 points in a day mean little to me. I’m more interested in the 400 points a week movements.
So far my strategy has been relatively successful. I’ve not opened nor closed any trades in the last 3 weeks or so, and none of my stocks are close to hitting my stops yet. I’m trailing these stops, so every week I’m slowly locking in profits. I’m still using my money management system to help me place my stops. The simple calculation of stop required / £ risk per trade = £ per point bet is still one of my fundamental rules that I’ve adopted from many other traders. This means that on many trades I’m using the minimum stake of 25p per point, but then this is balanced by the fact I’m 300/400 points from being stopped out and I’m looking for 1000+ pt moves.
“i MuST Say Though iT FEELS vERy REFREShiNg NoT To BE gLuED To ThE FiNaNCiaL NEWS EvERyDay.” I realise this is slow going, but it fits my style nicely. It’s been an incredible year. I’ve had a baby girl (not personally, that would be incredible!), my local football side Hastings United FC have made it into the 3rd Round of the FA Cup to play Middlesbrough— the furthest they have gone throughout their history, and they are now the lowest ranked team left in the competition. It was, of course, Olympic year which I enjoyed immensely, and I’m seeing the close of my first year of consistent spread betting. At the moment I’m probably on course for a Return on Investment (ROI) of approximately 20%. It’s not what I hoped for. I was looking at that 40% mark a while back. However, it’s also been a bit of an experimental year. I’ve made a lot of mistakes throughout 2012 and learnt from all of them. I’ll be a much more disciplined and, therefore, better trader in 2013, and having a 20% return target to beat should be a nice challenge. And so I’ll end this month by wishing all my fellow traders a prosperous New Year in 2013!
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City Index Trading Academy
BLaCK CaBBiE TRaiNEE DiSPLayS ‘ThE KNoWLEDgE’ To WiN CiTy iNDEX TRaDiNg aCaDEMy. 68 | www.financial-spread-betting.com | January 2013
“iN aN EXCiTiNg FiNaLE, JohN WaLSh TooK guTSy, yET CaLCuLaTED DECiSioNS To DELivER a STRoNg RETuRN oN iNvESTMENT oF 23.6 PERCENT aND ovERCoME FELLoW FiNaLiSTS ShaZaD aShER aND RyaN oLivER-ThoMPSoN.” A 29 year-old aspiring Black Taxi Cab driver has beaten off seven competitors to win City Index’s Trading Academy, and scoop the £100,000 cash prize. In an exciting finale, John Walsh took gutsy, yet calculated decisions to deliver a strong return on investment of 23.6 percent and overcome fellow finalists Shazad Asher and Ryan Oliver-Thompson. The Trading Academy was launched by City Index, the retail trading services leader, in October 2012 as an innovative web series to demonstrate that, with the right education and technical support, anyone can be taught how to make money from the financial markets. After five weeks of competition, the eight challengers had been narrowed down to a final three by an expert judging panel who deemed that they had demonstrated the ability to learn and put in place successful trading strategies. In a tense final showdown at London’s City Hall, Trading Academy Mentors, Ashraf Laidi and James Chen, were joined by City Index’s CEO, Martin Belsham, to decide on who should take home the title and £100,000 cash prize.
The winner, John Walsh, was praised for his strong final week in which he delivered a strong return on investment and impressed the judges by demonstrating the ability to trade out of his losing positions. Walsh was also praised for the high level of consistency he demonstrated throughout the competition. Despite the substantial cash windfall, Walsh plans to continue his knowledge of London studies, although he admits that trading will continue to play a big part in his life The runners up, recruitment Consultant Shazad Asher and freelance journalist Ryan Oliver-Thompson, were rewarded for their achievement of reaching the final with £5,000 in a new City Index trading account. “The message at the heart of Trading Academy is that if you are disciplined and committed to embracing the educational element, you can have a successful trading experience, and it was very pleasing to see all of the competitors making such significant strides in a short period of time,” Ashraf Laidi explains. “John won not only because he had the best ROI, but his willingness to continue learning and then applying this to his trading throughout was what impressed the judges the most.”
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“The Trading Academy shows that no matter what your background, with the right tools and support, anyone can learn to trade the markets,” says Belsham. “It was hugely encouraging to see John and the other competitors demonstrating big improvements in their trading over a matter of days and weeks, and developing the skills that will allow them to keep going beyond their Trading Academy experience. We hope, after watching the show, people from a host of backgrounds will be inspired to give it a go themselves.” The turmoil in the financial markets has encouraged ordinary people who are taking a much more hands on approach towards investment. It has also mobilised retail investors to take a greater interest in the opportunities market movements can create for them, and there is now a real demand to learn more about the techniques they have at their disposal.
For those with an interest in the financial markets and an appetite to learn to trade, Walsh has a clear message: “It can seem so daunting, but with the right support, anyone can develop the skills and confidence to trade. The key is not to gamble and to have a strategy for every trade you make. Remember: you control the trade; the trade does not control you!”
The series can be viewed at the following address: http://www.cityindex.co.uk/trading-academy
“The Trading Academy shows that no matter what your background, with the right tools and support, anyone can learn to trade the markets.”
70 | www.financial-spread-betting.com | January 2013
Trade today at cityindex.co.uk/theglobe Spread betting and CFD trading can result in losses greater than your initial deposit. *1 point spread available during market hours on daily funded trades & daily future spread bets and CFDs (excluding futures). January 2013
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school corner Different Moving
Averages explained by Thierry Laduguie
A Moving Average (MA) is an indicator that shows the average value of a securityâ€™s price over a period of time. There are two variables used to construct a moving average: price and period. By default, the price is the closing price at the end of the period. For example, on a daily chart the simple moving average is calculated using the price at the end of the day. Moving averages can, however, be calculated on any data series including a securityâ€™s open, high, low, close, or an average price for the period. For example, some analysts define the price as (high + low + close)/3. The period is the number of days, hours, weeksâ€Ś based on the chart under observation. When working with a daily chart and selecting 21 for the period, the moving average is calculated over the last 21 days. If the chart is an hourly chart it would be the last 21 hours.
The first thing we notice is that the smaller the period, the more sensitive the moving average is to the market trend. Traders use the direction of the moving average to determine the trend. For example, on the above chart the 13-day moving average was down in November (short term trend is down) but the 200-day moving average is up (long term trend is up). Popular periods used by technicians are the 13-day (short term), 55-day (intermediate) and 200-day (long term). A swing trader would use the 13-day or 55-day moving average, or a 55-period moving average on a 2-hour chart. A long term investor, who holds positions for many months, would use the 200-day moving average. An intra-day trader, however, has a very short term objective, positions are held for a few hours and in this case a 55-period moving average on a 10-minute or 30-minute chart can be used.
The chart to the right is a daily chart of the FTSE 100; I have plotted three moving averages: the 13-day, 55-day and 200-day moving average.
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Different moving averages explained
CHART - FTSE 100
There are many types of moving averages but the most popular are simple, exponential and weighted. The only significant difference between the various types of moving averages is the weight assigned to the most recent data. Simple moving averages apply equal weight to the prices. If n is the number of time periods in the moving average: Simple moving average = Sum of the last n prices divided by n Exponential and weighted averages apply more weight to recent prices. For example, to calculate a 10% exponential moving average first we take today’s price and multiply it by 10%.
Next, we add this product to the value of the moving average in the previous period multiplied by 90%. For example on a daily chart: Exponential moving average = (today’s price x 0.10) + (yesterday’s moving average x 0.90) To draw an exponential moving average, web applications and technical analysis software require a time period and not a percentage and there is a formula to convert the percentage into a time period. The formula is: Time period = (2 divided by percentage) - 1 For example a 10% exponential moving average on a daily chart is equivalent to a 19-day exponential moving average [(2/0.10) – 1].
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Interpretation The recommended interpretation of moving averages is to buy when the market’s price rises above its moving average. A sell signal is generated when the price falls below its moving average. The problem with this interpretation is that it does not take into account the trend. As explained above, if the moving average is rising the trend is up. A far better way to use the moving average is to buy when the moving average is rising AND the price touches or drops below it. As long as the moving average rises, the trend is up so buying the pull back is a better proposition.
“A far better way to use the moving average is to buy when the moving average is rising AND the price touches or drops below it. ” In a downtrend, the moving average declines and a rally to the moving average gives a sell signal.
chart - Apple The 200-day moving average (red trendline) shows the long term trend. The general rule is that when the stock declines to its 200-day moving average the trendline should act as support. In the case of Apple the 200-day moving average failed to provide some support and the stock broke down. At first it appears that the long term trend has turned down, however this is not yet confirmed as the 200-day moving average is not declining.
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An attempt to rally back above the 200-day moving average at the end of November failed. The kiss of the red trendline gave a good sell signal. This clearly indicates that the trend is down. In the short term the 55-day moving average is declining, any rally to the 55-day MA would trigger another sell signal. Apple’s decline should therefore in my opinion, continue in the near term.
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76 | www.financial-spread-betting.com | January 2013
Shhh don’t tell anybody…
GLAMOUR, CELEBRITIES, THE ULTIMATE FEEL-GOOD FACTOR AND... THE RELAIS & CHÂTEAUX ROSENGARTEN
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“The Rosengarten epitomizes Kitzbühel 2012, pioneering cutting edge design with spades of style and one of the most talked about restaurants in Central Europe, simply the hotspot for exquisite and grown-up ski glamour; at prices that don’t need an off shore bank account!” There is a new buzz amongst the Ski jet-setters, tweets are a-plenty and the glossies can’t get enough: Kitzbühel is the place to be and to be seen this winter. The season is already promising to be the best in recent history and it is no longer a secret that the town has reinvented itself for the benefit of the international ski elite. From gleaming new lift technology to amazing après ski and nightlife via a fresh attitude to hospitality with global credentials — Kitzbühel is the magic word. An extensive ski domain waits with some 168 km of perfectly prepared pistes, marked ski routes for all levels of ability, an action-packed snowboard fun-park, and great deep-snow descents. The modern cable cars and lifts take skiers to the top of the mountains with speed and comfort The most notable new player in the hotel stakes is the Relais & Châteaux Rosengarten in beautiful Kirchberg, just on the edge of Kitzbühel — more importantly just 500m from the Maierlbahn, taking skiers to the unique and legendary slopes. On arrival the exterior of the hotel looks a little dated, harking back to the 1970’s, but this wonderful hotel is definitely the proverbial wolf in sheep’s clothing.
The Rosengarten epitomizes Kitzbühel 2012, pioneering cutting edge design with spades of style and one of the most talked about restaurants in Central Europe, simply the hotspot for exquisite and grown-up ski glamour; at prices that don’t need an off shore bank account! From the moment you enter you could not imagine yourself anywhere but in a swish, contemporary, urbane hotel. The bar and bistro restaurant are both informal and relaxing. The rooms and suites are all decorated to a very high standard, with benefits of modern technology (although most of it is beyond me). The spa is the perfect place to indulge your senses after a hard day on the slopes or in my case not so hard! And if this was not enough, having a 2 Michelin * restaurant just a mere couple of floors away — bliss. One thing that struck me about the gourmet restaurant was the informality, no serious dress code required, smart casual was the order of the day. This, however, did not detract from the impeccable service, attention to detail and, of course, an absolutely sublime dining experience. I won’t spoil it for you and describe it all in glorious detail; I will let you experience it for yourself, but remember — shhh, don’t tell anybody... Allow us to put together your perfect bespoke ski holiday at www.skibespoke.com
78 | www.financial-spread-betting.com | January 2013
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Tel: 01243 200202 | www.financial-spread-betting.com | 79
By Tony Loton
Getting into the Swing
Sshhh! Don’t tell the wife, but lately I’ve been thinking about “swinging”. I’m not that adventurous, actually, so of course I’m talking about swing trading rather than whatever it was that sprung into your mind! And I was thinking about it because European indices such as the FTSE, DAX and CAC have been trading sideways in recent months rather than trending decisively up or down — precisely the sort of markets that are difficult for punters to trade (and seemingly for the spreadbet firms to make profits from!) When markets don’t trend, my preferred position trading strategy doesn’t work too well, so I either have to sit it out and wait for better times or adjust my trading to match the prevailing market conditions. When markets trade sideways within an observable range, swing trading may be the best match.
About the Author Tony Loton has authored the books “Stop Orders” published by Harriman House and “Position Trading” published by LOTONtech, and he runs the spread betting web site at www.betterspreadbetting.com
80 | www.financial-spread-betting.com | January 2013
Getting into the Swing
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aN EFFiCiENT EXaMPLE In order to find an efficient example of swing trading, it may be no surprise that I found such efficiency in Germany — in the form of the DAX index. Look at what the DAX did between mid-September and mid-November this year:
Now imagine if you had bought whenever the index hit 7200 (just before it swung upwards) and sold whenever the index hit 7400 (just before it swung downwards). If you had bought long and sold out during each cycle then, by my reckoning, you would have made £200 x 4 = £800 per £1-per-point that you had staked. If you had bought long on the troughs and sold short at the peaks you could have notched up profits of £200 x 8 = £1600 per £1-per-point that you had staked. The DAX index went nowhere, in the grand scheme of things, for a full two months, yet you still could have made money — as regular as clockwork.
auToMaTiNg youR SWiNg TRaDiNg Once you’ve identified that a market is trading within a defined range, or if you can somehow predict that it will, you don’t have to sit there watching and waiting for the price to hit your prospective buying and selling levels.
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You can automate your swing trading using limit orders.
aLL gooD SWiNgS MuST CoME To aN END! Did you notice in my example chart that the price eventually broke downwards through what we might have considered to be the lower support price? It’s a problem because at that point the swing trader would be holding a net long position while the price was falling. The solution to this problem comes in the form of the stop order.
Getting into the Swing
In this example it would have made sense for the trader to place protective stop orders to buy at 7500 (to close any prevailing short position) and to sell at 7100 (to close any prevailing long position) as shown in the following chart:
“X” marks the spot at which the swing trader’s final long trade would have been stopped out when the price broke downwards out of the trading range and embarked on what looked like a sustained downtrend. He would have lost £100 per £1-per-point staked, which — considering his £1600 accumulated profits (scale to your tastes) — would have been a small price to pay for the assurance of sidestepping the falling market. Taking this one final stage further, we could envisage a stop order that not only takes the swing trader out of the position, but also takes him net short (in this case) when the final swing turns into a trend.
It’s a swinging market that, hypothetically, I caught early. But, of course, for the purposes of this article, I had the luxury of perfect hindsight in choosing the best market (and timescale) to demonstrate the principle. The problem is that once you have observed that a market is swinging — after say three decisive swings, just to be sure — it may be too late for you to take advantage of your observation. The market may be just about ripe to stop swinging and start trending. Just like in my example. But still, some traders make good money by “getting into the swing”. Maybe you can too!
EvERyThiNg iN ThE SWiNg TRaDiNg gaRDEN iSN’T RoSy I’ve painted a rather rosy picture of swing trading, based on a market that has been swinging very nicely between clearly identified support and resistance levels over the medium term.
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Tech review of the yearâ€Ś and a sneak peek at 2013 By Simon Carter
In the spirit of Janus, the Roman god who had this very month named in his honour, it seems more than pertinent to use this space to take a little time to look back at 2012 and take stock of twelve months of gadgets, tech and lawsuits while brushing ourselves down and looking forward to 2013. What was big in 2012? What will be big in 2013? And will Blackberry finally get their act together? (Spoiler Alert: We have no idea about that last one â€” apart from the SBM editor!)
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2012 Phablets More than anything, the year just passed will be marked for the lack of a true breakthrough product, or even an amazing leap forward in existing technology. Where 2010 was the year of the tablet, and 2011 was arguably the year of the e-reader, 2012 was the year of business as usual. Some would say it’s a sign of a maturing industry, after all, when was the last time you saw something truly amazing in web development for instance, but tech fans remain expectant. We’re still waiting for OLED TVs and for a genuinely jaw dropping electric car, so this year we had to make do with innovative uses of existing technology. The so-called ‘phablet’ is probably the most successful example of this. Put the words phone and tablet together and you get the ‘Brangelina’ of the gadget world. While there are those who claim that the devices are too big to be practically used as a phone, and too small to claim tablet credentials, the 10 million sales of Samsung’s Galaxy Note II say that the world is ready to phablet.
86 | www.financial-spread-betting.com | January 2013
Tech Review of the year
Gaming losing its way? It’s fair to say that the gaming industry didn’t have the best of years, but the question endures of who is to blame. Early in the year Sony released their PlayStation Vita; a fantastic games console which finally brought high quality gaming to a handheld device. However, while the device is almost universally revered, it has struggled to hit sales targets all over the world. So, what’s the story? Apart from a handful of release titles that made excellent use of the Vita’s features, there has been little for gamers to get excited about other than ports of existing titles from other consoles. Of course, it isn’t Sony’s fault that third party developers are risk averse, but it is a problem that needs addressing. There is also a strong argument that, thanks to the rise in smartphone and tablet gaming, only hardcore gamers need a device with the kind of power that the Vita can throw out. Elsewhere, Nintendo finally released the Wii U. The console allows you to play games through a touchscreen gaming pad and your TV simultaneously. Again, few games have been released that really make the most of the technology and pre-Christmas sales figures were disappointing. The major consoles, Microsoft’s Xbox 360 and Sony’s PlayStation 3, are both clearly at the end of their lifecycle, yet no successors have been confirmed and so, other than a few standout titles, 2012 will be remembered as a poor year for gaming.
Lawsuits This was the year that big tech companies all over the world were at each other’s throats in the courtroom, and mobile giants were the worst culprits. Throw Apple, Nokia, Research in Motion and Samsung into a room and within a few seconds they’ll all be filing lawsuits against each other for perceived copyright infringements and asking increasingly bored judges to ban handset sales for the most spurious of reasons. The biggest court battle of the year was, of course, the interminable Apple vs. Samsung debacle that dominated the late summer. Taking to the US courts to argue over who copied whom, the case reached farcical levels when a judge was forced to ask a lawyer if he “was smoking crack”. At the time, Apple’s victory — and the subsequent $1billion fine — seemed like huge news, not to mention the end of the saga, but within weeks the two were at it again in courts in the UK, Germany and the Far East. Hopefully CEOs of mobile companies have made a resolution to simply ‘play nice’ in 2013.
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Amazon Kindle phone?
The end of PCs?
This is absolutely in the rumour phase at the time of writing, but the release of an Amazon Kindle phone in 2013 seems logical and inevitable. Since moving into the tech world with their Kindle ereader two years ago, the online shopping giant systematically conquered and revolutionised that industry before moving into the tablet arena.
Each ‘big new thing’ from the laptop to the netbook to the tablet has individually been hailed as the device that would kill the PC, and yet none have. However, 2013 could be the year we begin to hear the death rattle for cumbersome desktop behemoths.
The Kindle Fire tablet is a great device and has enjoyed more than a little success so, with the technology already largely in place, you’ll struggle to meet anybody who could confidently say that there will be no Kindle phone.
People love their personal devices and as the internet moves away from traditional web browsing into application based browsing, the need for a PC lessens. Added into the mix is the sheer number of gadgets that can now give users email, streaming video, music, internet and gaming without ever having to go anywhere near a PC (or even a laptop). The major killer could be the advancements we should see this year in terms of processing chips and storage space (not to mention cloud technology). Without the requirement of a hefty box to store all of the chips and hard drives, why would anybody buy a PC? The next twelve months should have the answer.
OLED TVs The Organic Light Emitting Diode is a humble thing in and of itself, but its ability to deliver rich and awe inspiring colours and visuals to any screen has made OLED’s completely desirable. All of the top smartphones, tablets and handheld gaming devices come furnished with OLED screens but, as yet, no TV has hit the market. That’s not to say that nobody is working on one. LG are leading the way in the charge to release the coveted screens, but have had several release dates held back — a sign at least that they’re close. With this in mind it seems inconceivable that we wouldn’t see OLED TVs on the market before the year is out.
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Tech Review of the year
Driverless cars For a few weeks towards the end of 2012, there was a flurry of driverless car stories. The most famous of all was Google’s version which was revealed to have ramped up thousands of hours of hassle free driving (in fact, the car did have one accident — when it was being driven by a human). A change in legislation in California (others have since followed) has legalised the theory of a driverless car on the roads of the state so, while it’s hugely unlikely that we will see a commercially available driverless car this year, expect to see a number of road tests and success stories in the coming twelve months.
Gaming finding its way Gaming fans worldwide will be hoping that the disappointing 2012 was simply the calm before the storm. As noted above, there is nothing concrete in terms of next generation gaming consoles (the Xbox 720 and PlayStation 4), but the amount of rumours that are flying around seems to suggest there may be at least a little substance. One fly in the ointment, however, is the release of Grand Theft Auto 5. The game, thought to be the last marquee release for the existing consoles, has had its release date pushed back to spring so, while tech companies aren’t famed for keeping their customers’ best interests in mind, it looks more than a little unlikely that we’ll see new consoles until the very end of the year. So will 2013 be the year of driverless cars, new gaming consoles, fancy TVs and the end of PCs? Or will it be a year of minor upgrades to expensive devices like 2012? Either way, we can’t wait to find out.
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90 | www.financial-spread-betting.com | January 2013
the gold uptrend is spluttering...
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Gold has most certainly been in an impressive uptrend for the last 15 years. In fact, pretty much from the point when probably the UK’s most ineffectual Prime Minister, Gordon Brown, sold almost all our stock in the late 90’s at around $250! Since his infamous “sale of the century”, gold has run from just under $300 to a record level of $1,900 last year. As a consequence of the serious growth these BRIC countries have experienced during the last 10 years, their orders for gold have certainly been making gold bugs very happy indeed, resulting in a seemingly never-ending bull market. Unfortunately, in the markets, more often than not, what goes up generally comes down as the weight of bulls in a position gets top heavy and then prices deflate...
There have been two key drivers of the uptrend and one has been the rising demand from countries like China and India which, together, represent as much as 50% of the total physical demand for the precious metal.
During 2012, gold has been absent the physical demand driver and, even though its price has risen modestly, the trend has not been as linear as in prior years. In the process, this has scared some investors given the sharpness of some of the sporadic declines. Are we approaching a peak in the gold market as this type of trading pattern typically signals, or is the trend just pausing, ready for a renewed ascent?
CHART - GOLD 10 year
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Physical Demand It seems that many of the gold bulls have forgotten the simple laws of supply and demand and, at a physical level, demand for gold has been waning in the last 18 months with Indian and Chinese market participants openly stating that the current spot price is too high. This leaves financial demand from ETF’s and investment funds (and of course John Paulson!) to support prices. With the exit from the extraordinary monetary easing in sight in the US following continued evidence of strength in the economy, movements in interest rate futures in the US are our smoke signal that gold is likely to retrace at least half the gains seen during the last 15 years (a typical retracement of a bull run) and revert back to $1000-1200 which is, of course, where physical demand comes in again...
“demand for gold has been waning in the last 18 months with Indian and Chinese market participants openly stating that the current spot price is too high.”
Selling begets selling too, and should gold take out the $1600 level, then we’d expect a crescendo of selling by the investment and hedge funds that are carrying the bull positions as the trend reverses decisively. Remember too that gold pays no yield and so when holding gold you actually have real carrying costs of storage and insurance. The only return to those exposed to gold is capital return and so if gold falls in price there is no reason to hold. With China no longer growing at the blistering near double digit rates of recent years, and more likely around 6-7% in future as it attempts to rebalance the economy from inefficient investment pro-jects to domestic consumption, the China-gold underpinning story is also crumbling. India’s growth rate is also similarly slowing and so a declining GDP growth rate here takes away another of the “investment” case stories wheeled out by the gold bugs... To be sure, gold is, at the time of writing, still 9% up on the year and has been one of the better performing asset classes as the table below shows, but this masks some hairy negative periods. Between Feb 28 and May 28, a three month interval, gold declined almost 9% reflecting a drop in international physical demand that occurred in quarter two. It recovered in quarter three as physical demand modestly recovered. As we can see from the chart below, however, the market does not seem to be buying the “inflation hedge” story any more, as since the QE3 announcement, gold has actually fallen in price.
CHART - gold & qe3
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“The FED is able to continue with the liquidity spigots fully open as the inflation bogeyman has yet to rear its head, and so “Helicopter” Ben still has latitude to ease.” A Second Component of Physical Demand Besides the physical demand for gold from China and India, the exchange-traded funds (ETFs) and also Central Banks around the world have been buying up gold stocks at an increasing pace during the last 10 years. Investors have been searching for alternate assets as hedges against inflation given the continued debasement of the monetary base in the US in particular. The ETF funds have sounded additional warning shots to the bulls this year, however, through being reduced buyers and ditto with the Central Banks — both these factors have weighed on the gold price and are likely to continue to do so based on current trends.
Quantitative Easing & the End Game In order to fight the raging global economic fire that was the Great Financial Crisis occurring 2007/8, Central Banks embarked upon what any good fireman would do to extinguish a fire — they doused the global economy with liquidity. Interest rates came down to near zero levels and massive asset purchase programs were announced. The U.S. Federal Reserve alone is now on its third round of quantitative easing and is expected to inject in excess of another trillion dollars into the domestic economy through more bond purchasing. The FED’s balance sheet now runs to over $3tn. There are unmistakable signs in the US that QE and its dampening effect on mortgage rates is having a positive effect on the housing sector, although its effect on stock prices has been much more muted of late. The FED is able to continue with the liquidity spigots fully open as the inflation bogeyman has yet to rear its head, and so “Helicopter” Ben still has latitude to ease. Indeed, the employment market in the US has begun to stir again during the last 18 months.
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One thing is for sure, however, and that is if the housing and labour markets continue on their current trajectory, then, ultimately, and perhaps sooner than the market thinks, this will ignite inflation. And this is the central fundamental point of our bearish stance on gold — the US monetary easing program is closer to the end than the beginning and we expect in late 2013 (a full 18 months ahead of the markets current expectations) that the FED will begin to exit their QE programs and nudge interest rates up. This will be a hammer blow to gold as the relative attractiveness of bonds, in particular, increases with higher yields. After all, why hold a non-income producing asset that actually costs you to hold, particularly when the capital growth side has vanished?
What to Expect in 2013 We expect global growth to continue to build momentum through 2013, led primarily by China and the US — the two major global economic locomotives. If we are right, and the turn in the US interest rate cycle is much closer than the consensus thinks, then gold will almost certainly take a hard knock. Since the start of the bull-run in the late 90’s there has not been a sustained period of major underperformance and, given the length of the bull-run, this is very rare. The current chart structure looks ominously like a topping formation to us and we are almost a lone dissenting voice in our call for gold weakness — a stance we find comfort in. To be sure, a Greek exit from the Euro next year would likely cause a knee jerk run to safety and gold would likely benefit under such a scenario. This would be our cue to implement a secondary short during 2013. We think gold overbought, over owned and exposed to continued weakness. A brave call for 2013, but one in which we have a high conviction with regards to expectations of further weakness.
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2013 OUTLOOK THE TALK IS ALL ABOUT EQUITIES! by DAVID BUIK OF CANTOR INDEX
Had we all known that growth was going to fall out of bed globally throughout 2012, and that Europe would be virtually asphyxiated by a toxic sovereign debt crisis, one would have been forgiven for disbelieving that the DAX would rise like the proverbial grilse — up by 28.7% at the time of writing (17th December 2012), the Hang Seng responding similarly by 22.5%, the NIKKEI by 15.2%, the DOW by 7.5%, the S&P 500 by 12.4% and the FTSE in contrast by a meagre 6.2%.
Since then, a combination of Ms Merkel’s ‘Dulcamara styled love potion’, which mesmerised the EU in to believing her gospel (!), plus the ECB’S loquaciously charming Mario Draghi’s steely control of the ECB has calmed the frayed nerves of investors and traders.
The Greek debt crisis, the parlous state of Spain’s banking sector and its gargantuan level of unemployment and Italy’s seeming political incompetence until Monti grabbed hold of the reins, sent 10-year bond yields into orbit by the end of June — Greece debt yielded 28%, Spain 8% and Italy 7%.
These punters genuinely believed that the EU and the IMF would do whatever had to be done to deliver financial peace in our time (and no doubt goodwill to all men!). All I can say is that it is just as well that I was nowhere near a trading desk, as
So long as a bottomless cesspit to accommodate as many unappetising securities remains, the system will remain afloat...
I would have been buried without trace... I would have been a reluctant buyer of equities and would have definitely have missed out on a massive bond rally. And so, I would have missed out on both counts. As a representative bookmaker of the spread betting fraternity, I don’t offer advice. However, what I can do is to pass on comments made to me by the many contacts I have made in the last 50 years in the City. It is imperative to remember a few fundamental points with regards to European markets. The FTSE 100 is not a barometer of UK economic activity, as 70% of its earnings are gleaned from abroad.
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2013 Outlook - The talk is about equities
In the case of the DAX (30 stocks) and the CAC (40 stocks), the same observations are applicable. Apart from domestic retail and some utilities, most others have a preponderance of overseas earnings. Looking ahead to 2013, I am told that the banks, with the exception of HSBC, have too many imponderables facing them in terms of regulation and fresh capital to make them a buy for the next trading year. Also, UK banks made huge gains in 2012 — Lloyds 72%, RBS 42%, Barclays 38% and HSBC 28%. So, to crack on, may prove a bridge too far.
“Most people I have spoken to think global stock markets are the place to be and despite the dark economic storm clouds, that they could rally by between 10-15%.”
Equities, according to most market luminaries are cheap — not so much from a valuation perspective; more on a yield basis. Dividends will become increasingly important. In Europe, analysts are making exciting comments about SAP, BASF, BMW and Bayer in Germany — great exporters! It looks also as if there will be a soft landing in China and that growth could breach through the 8% threshold. In the UK, the word on the street is positive for Unilever, Reckitt Benckiser, John Wood Group, Tullow and Salamander Energy. Some believe that the energy sector will see some frenetic M&A activity with certain of the energy giants looking to add value to their businesses. Continued recovery in the US economy seems more likely and the technology sector will surely play a key role. The market expects Intel and Cisco to rally to the cause, with investors keeping an eagle eye on Apple and Google which have fallen sharply this year. I am told that we neglect Honeywell, Caterpillar and Dow Chemicals at our peril! Happy New Year!
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A new special feature
MaRKETS iN FoCuS
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Markets In Focus
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SPREADBETTING The e-magazine created especially for active spreadbetters and CFD traders
Issue 13 - February 2013
in next month’s edition...
attempts To Corner Commodity Markets We take a look at previous attempts to manipulate various commodity markets.
WhEN uSiNg SToPS iS NOT aPPRoPRiaTE
TWo NEW CoNTRiBuToR’S To BE uNvEiLED...
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TRaDE iDEaS, TiPS & iNSighTFuL aNaLySiS oN aLL ThiNgS SPREaD BETTiNg & CFD RELaTED
SPREADBETTING Thank you for reading, we hope your trading is profitable during the forthcoming month.
See you next month! www.financial-spread-betting.com
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