B FE N io iT ED
SPREADBETTING The e-magazine created especially for active spreadbetters and CFD traders
issue 13 - February 2013
Attempts To Corner Commodity Markets Winners and Losers
www.financial-spread-betting.com ADVFN SHARES
A RAGING SHORT?
A NEW SBM CONTRIBuTOR ON MARKETS
ZAk MiR SPECiAL HELi Ski-iNg iNTERViEWS FEATuRE THE “PSYCHO
BRITISH COLuMBIA IN CANADA
TRADER” - JOHN PIPER
SCHooL CoRNER RSI INDICATOR EXPLAINED
ALL youR FAVouRiTE CoLuMNS iNCLuDiNg THE CHANCE To WiN £1000 iN ouR guESS THE FTSE MoNTH END CoMPETiTioN
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.
Alpesh Patel Alpesh Patel is a well known and respected market commentator as well as an accomplished author of 16 investment books. He also runs his own FSA regulated asset management firm from London, formerly presented his own show on Bloomberg TV for three years and has had over 200 columns published in the Financial Times. He provides free online trading education on www.alpeshpatel.com
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 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. As a matter of policy, Spreadbet Magazine openly discloses that our contributors may have interests in investments and/or providers of services referred to in this publication.
Foreword Welcome once more to another edition of our magazine — a publication that I am delighted to say continues to grow in popularity with over twenty thousand views of our New Year edition now, and counting! Hopefully, we are doing something right?! Our market and stock calls are becoming known for their prescience as well as our uncompromising way of delivering our views — for a prime example, check out this month’s Conviction Short call on ADVFN — very few other financial publications would say it as it is like we do. Thank you also to those readers who completed our survey into your spread betting habits etc. This has proved a mine of information and will help us in shaping the magazine further to your desires. Remember, all this content is currently entirely free, but in order to keep it free then you must support our advertisers within the publication. We only work with reputable and financially robust spread betting companies, and those that wish to promote the industry for everyone’s benefit as opposed to purely their own. The Cantor’s “stakes back” offer is a cracking offer and ditto with the tight spreads and guaranteed stops offered on all products at Capital Spreads. I repeat, without your support of our advertiser supporters, the model of a free magazine will inevitably have to change. As trailed in the last edition, I have great pleasure in unveiling our two new contributors this month. Firstly, we have a name that many will be familiar with — Alpesh Patel — a respected financial commentator with many years experience in the industry, and who will be writing a monthly column called “Alpesh on Markets” in which he gives us his overview on global markets — a must read. Secondly, we have John Walsh — a name that those readers who followed the City Index Trading Academy episodes will be familiar with. John is a black cabbie who fought off six other competitors to win the competition and a £100,000 prize — no mean feat. John will update us each month with his experiences spread betting since winning the prize and this promises to be an insightful and entertaining journey! And so to this month’s key features — don’t miss the article on “Commodity Cornering”, this was one of the most interesting features we have written and we thoroughly enjoyed researching this piece. You might be surprised at some of the historic episodes... Also, the “Biggest hedge fund in the world you never heard of” piece — make sure you read it to find out who it is! As always we have all your favourites — Robbie, Zak and Dominic Picarda plus a continuation of Tom Winnifrith’s top ideas too. I wish all our readers another month’s profitable trading and look forward to catching up with you at the end of February!
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Attempts to Corner Commodities A surprising read about various audacious attempts to corner commodities from onions to silver!
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Zak Mir’s Top Pick for Feb Zak sets his sights on capital markets broker ICAP.
The Case Of The Curious Equity Rally A special piece on the minimal retail investor participation in the bull run of the past 4 years.
Robbie Burns Trading Diary
Zak Mir Interview
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The Naked Trader looks back over his trades since the start of the new year.
Zak gets to grip with a man who goes by the rather scary handle of the “Psycho Trader” - John Piper.
Dominic Picarda’s Technical Take Dom takes a look this month at the financial sector for both long and short opportunities.
The Biggest Hedge Fund In The World That You Never Heard Of A must read on what many believe to be the world’s largest hedge fund and yet that very few people are aware of...
Trading Academy Winner John Walsh Update City Index competition winner John Walsh updates us with his activities since walking off with the £100,000 prize
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A Special Heli Ski-ing feature
Currency Corner A special feature taking a look at an SBM Conviction trade for 2013 - Long GB Pound against short the “Aussie” dollar
A focus for adventurous traders
Mispriced & a raging short?
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Alpesh On Markets Market expert Alpesh Patel kicks off with his inaugural post for Spreadbet Magazine, giving us his insights on global markets.
School Corner Thierry Laduguie of E-yield explains how to use the Relative Strength Indicator this month.
Technology Corner Resident Tech expert Simon Carter takes a look at what technology the successful trader should be using.
Getting Into Position Tony Loton follows up on his Swing Trading feature with a piece on “Position trading”.
Tom Winnifrith’s Conviction Trade for Feb Tom takes a look at biotechnology minnow Port Erin Biopharma.
Markets In Focus A comprehensive markets round up of under and outperformers during the month of January.
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The Biggest Attempts To Corner Commodities
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The Biggest Attempts To Corner Commodities
Attempts by unscrupulous individuals to corner various markets have been occurring pretty much since the first markets formed. Traders, companies and even governments at certain times (arguably the Fed & BoE today with their QE measures) have tried to gain price control of a particular asset in order to make abnormal profits or to protect an interest they may have in a commodity. In most cases these attempts have failed and in certain situations the artificial manipulation of prices eventually bought the individuals concerned a ticket to jail and being labelled as a rogue trader to boot. In order to corner a market, the first thing the “cornerer” needs is money and usually lots of it. Without the necessary funds, control of an asset simply cannot be achieved. The cornerer often needs to buy large amounts of an asset and future contracts (where futures are concerned) and without the deep pockets at the first sign of weakness the cornerer would simply be forced to sell his position and register heavy losses before he had even started.
The Onion Market and the Onion Futures Act
The Chicago Mercantile Exchange (CME) has always been an important market in terms of commodity trading. It allows not only for speculators to explore any price opportunities, but also for producers to buy and sell the commodities they need in a (relatively) organised way. Unfortunately what happened in 1955-56 revealed what many traders since this time have found out to their cost, that the futures market can also be the ruin of many...
Although most attempts have been unsuccessful, such is the fascination amongst the investing public that interesting nicknames have been conjured up for the perpetrators. Mr. Copper and Chocfinger are two examples of it.
Back in 1955, onion futures represented 20% of the total contracts traded at the CME, making it the most traded product on the exchange.
We’ll look here at four of the most interesting attempts to corner a market: the onion market attempt back in 1955, the Hunt Brothers silver case which occurred in 1979, Mr. Copper’s decade long operation culminating in 1995 and the “sweetest” case of all — Chocfinger which likely ended in 2010.
Sam Siegel and Vincent Kosuga, two CME traders, hatched a plan to corner the onion market and they set about putting their plan to work in 1955. They bought enough onions and futures contracts to control 98% of the available onions in Chicago at that time. The total amount they bought was stored in Chicago and weighed around 30,000,000 pounds.
“The cornerer often needs to buy large amounts of an asset and future contracts (where futures are concerned) and without the deep pockets, at the first sign of weakness the cornerer would simply be forced to sell his position and register heavy losses before he even started.”
After the first part of the corner operation was accomplished they then, astonishingly, convinced the farmers and onion producers to buy their onions, otherwise they would sell them and flood the market and so pressurise prices down which would most certainly result in heavy losses for farmers. They were successful at this stage and the farmers started buying their onions while they silently accumulated a large short onion futures contracts position! At the end of the onion season, the two traders started flooding the market with onions and in the process quickly drove onion prices down. From a high of $2.75, a 50-pound onion bag quickly saw its price trading at a low of 10 cents. So successful were they in driving the price down, the end result was that onions were basically worth nothing and producers just dumped their stocks into Lake Michigan.
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Jewelers and other businesses and professionals who required silver to produce their final products were in deep trouble as they simply couldn’t buy silver at those prices and effectively pass the rise onto the final consumer.
Many farmers were ultimately forced into bankruptcy whilst Siegel and Kosuga established themselves as one of the few successful traders who cornered a market. The negative consequences of this cornering were considerable. In 1958 the Onion Futures Act was enacted, imposing a ban on onion trading which to this day is still in effect. The CME fought hard against the Act as the lack of onion trading would result in a substantial loss of activity. It lost the case and the exchange went through difficult times but then managed to introduce new products and to recover to be the global trading powerhouse it is today.
Aware of the trouble, COMEX decided to change the rules on the purchase of commodities. They imposed large restrictions on margin trading in January 1980 and even imposed caps on the maximum holdings any individual trader could have. With the FED raising interest rates at this time and so increasing the cost of holding commodities, events conspired against the Hunt Brothers. In just three short months from January till March, silvernose dived, dropping from $50 to $11 and in a single day, on March 27, it dropped the most on record, around 50%, to less than $11 in what became known as ‘Silver Thursday’. Of course, a lot of this selling was the Hunt Brothers’ forced liquidations, and which exacerbated the price declines.
FINAL VERDICT: The market was cornered and substantial profits were made by Siegel and Kosuga.
The Hunt Brothers and the Silver Thursday
Nelson and William Hunt are known universally as the Hunt Brothers. They gained notoriety in 1979 when they attempted to corner one of the largest commodity markets — silver. As a consequence of their operations, they accumulated 100 million ounces of silver and by the end of 1979 they were holding more than half of the globe’s deliverable silver. So effective were they at cornering the market that they were able to push silver’s price from $11 right up to $50 — a level that was only reached in 2011 — some 32 years later. At that point they were up some $3.5 billion in profits. As with the onion case, underlying silver consumers encountered many difficulties as a consequence of the sudden rise in the commodity price.
“In just 3 short months from January till March, silver nose dived, dropping from $50 to $11 and in a single day, on March 27, it dropped the most on record, around 50%, to less than $11, in what became known as the Silver Thursday.” Leverage restrictions introduced by the exchange were very effective in reducing demand for futures contracts. Traders were essentially in need of much more in the way of funds in order to hold the positions or buy new contracts. With the consequent depression in demand, the silver price dropped substantially and the Hunt Brothers, who had borrowed heavily, very quickly received a margin call from their brokers. As they lacked the necessary funds to cover the losses, a wave of panic selling led to the culmination of a single-day loss of 50% on March 27th.
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The Biggest Attempts To Corner Commodities
CHART - SILVER The Hunt Brothers were destroyed and they faced several lawsuits over years, eventually culminating in their filing for bankruptcy protection in 1988. FINAL VERDICT: The market was cornered but the Hunt brothers werenâ€™t able to get out in time. They could have register a record profit but their greed ultimately resulted in bankruptcy.
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“Unlike many other commodities, copper is a heavy-weight and difficult to transfer commodity - a highly illiquid one.” A Decade For Mr. Copper Mr. Copper or Mr. Five Percent, as Yasuo Hamanaka is also known, certainly won’t be forgotten by copper market participants as he was able to dominate the market for a whole decade running until 1995. As head of metals trading at Japanese Sumitomo Corp, he was in the enviable position of having access to the type of money he needed in order to control 5% of the copper market. Unlike many other commodities, copper is a heavyweight and difficult to transfer commodity — a highly illiquid one. A trader buying and warehousing it in the right place could in fact corner the market with just small percentages of the whole deliverable copper, as was the case with Hamanaka. By holding physical copper and trading futures, he kept prices artificially high and so enjoyed premium profits from the sale of physical assets to traders desperately seeking copper to honor their expired short futures contracts. A classic maneuver. Most of the trading occurred at the London Metal Exchange (LME), an exchange renowned for having pretty loose trading restrictions and reporting rules. This was a key ingredient for Hamanaka’s success during the decade because even though many traders knew about Hamanaka’s intentions, they had no idea exactly how much he controlled.
With a deep pocket in Sumitomo and some mysticism attached (which always helps in the rumour driven markets), Hamanaka was able to frustrate any attempt from traders to short copper and attack his supremacy. Each attempt at that goal by his fellow traders failed and Mr. Copper continued to steadily accumulate profits for him and his company. Unfortunately for Mr. Copper it seems that 1995 would herald a new era for copper. Mining productivity became resurgent in China, pressuring prices down. With the new increase in supply, it became very difficult for Hamanaka to control prices and so he was forced to start closing some contracts and hedge some positions — an action that also further pressured prices down. Adding to this negative picture, the LME and the CFTC (Commodity Futures Trading Commission) decided to open up a case to investigate market manipulation in copper. Sumitomo decided to sack Hamanaka from his trading post, probably fearing the probe. This decision was catastrophic. With Mr. Copper out, traders were more than happy to short copper. They were able to drive down copper prices to such an extent that Sumitomo began to lose large amounts of money. Sumitomo went further and labeled Hamanaka as a rogue trader and denied they were aware of his trading behavior. Hamanaka’s manipulation proved lucrative for almost ten years but a deadly combination of greed and negative fundamental developments reversed his gains and led him being sentenced to eight years in prison for hiding $2.6 billion in copper trading losses. He was released from jail in 2004. Hamanaka accepted his sentence but Sumitomo never accepted any guilt — a stance many find incredulous. FINAL VERDICT: This was one of the most successful and long-lasting corners but profits very quickly dissipated and turned into near catastrophic losses.
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The Biggest Attempts To Corner Commodities
“With this singular days trade, Anthony Ward became owner of 7% of the whole annual cocoa production and cocoa price rose to their highest level since 1977.” Chocfinger and His ‘Sweet Plans’ Anthony Ward, previously a little known hedge fund manager, gained notoriety through the concentration of his trades in cocoa. On just one day in July 17, 2010 he spent as much as £658 million on cocoa, purchasing instruments ranging from the physical beans to future contracts, amounting to 240,100 tonnes of “sweetness”. With this singular day’s trade Anthony Ward became owner of 7% of the whole annual cocoa production, and cocoa prices rose to their highest levels since 1977.
CHART - COCOA
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The trade was carried out by Armajaro Holdings, a company co-founded by Anthony Ward. It is interesting to note that back in 1996 it was the company Phibro that bought a larger quantity of cocoa than Armajaro did in 2010. The company bought 300,000 tonnes of cocoa, representing 10% of that year’s annual harvested product. Can you guess the trader’s name? Yes, you guessed it; it was Anthony Ward — Chocfinger himself! Although Chocfinger had enough cocoa to make five billion small chocolate bars in 2010, his trade didn’t, however, produce the desired results... He actually bought copper at a peak, around £2,700/ tonne and since that point copper has been in a sustained downtrend. In 1996 Chocfinger also booked a loss on a large 300,000 tonnes trade, although he had better luck in 2004 when he made £40 million in just two months with a similar trade. FINAL VERDICT: Chocfinger has cornered the market in cocoa on several occassions and made himself a wealthy man. He is one of the few individuals to have avoided a spat with regulators too.
Conclusion Several attempts have been made to corner commodity markets over the years yet the final result in terms of pure profit has not always been fruitful for the perpetrators. Indeed on many occasions not only have they ultimately lost large amounts of money, but they have faced jail time. Certain perpetrators became famous and are now part of history, but at very high cost to them and their families. Commodity exchanges have also learnt lessons and the various attempts to corner specific markets served as basis to create stronger and more robust rules and disclosures to avoid future instability and to protect market participants. There is an interesting side debate here as to whether market participants such as market makers — who attempt to manipulate prices to maximise their own profits, or indeed the large central banks who impose short selling restrictions and currently are manipulating bond prices on epic scales — are in fact cornering markets and why should they be allowed to get away with it? I suppose the answer is it pays to be a rule setter and not a rule obeyer!
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AN SBM CoNViCTioN SHoRT iDEA With the absence of Mr Cawkwell, aka Evil Knievil, from our publication, a consequence of let’s say a “difference of opinion” between SBM’s editor and him, we step into his “short” shoes this month and see if we can do better given his woeful recent experiences in Randgold and Ruspetro! We believe our pick is an absolute classic short opportunity — shares in ADVFN. As active investors and traders, you will very likely be familiar with ADVFN’s website which has been one of the private investors’ favourite financial price discovery services over the last decade. Anybody who has used its service will no doubt agree that it is a useful website and relatively modestly priced. Of old, its three pillars of attraction to the retail investor were the Level 2 price service (that is a premium paid for service and where they generate the majority of their revenues outside of advertising), the News feed and last, but not least, its bulletin board which is one of the most popular in the UK.
Clem Chambers (CEO) In recent years however a number of lower cost Level 2 services have been introduced to the marketplace such as LSE (London South East), Sharescope, Interactive Investor etc. and some stock trading platforms such as idealing and now spread betting ones like ISE Spreads even offer this for free. In short, ADVFN’s lunch is being eaten in front of it. News feeds are similarly available direct from a lot of trading platforms with the highly regarded Ransquawk provided by ISE Spreads and free RNS services on the likes of www.uk-wire.co.uk.
“APPRoACHiNg 50% oF ADVFN’S REVENuE CoMES FRoM THEiR uS SiTE — ANoTHER uLTRA CoMPETiTiVE MARkET WHERE THEy SEEM uNABLE, giVEN THE SiZE oF THE MARkETPLACE, To MAkE ANy REAL HEADWAy iNTo.”
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An SBM Conviction Short idea - ADVFN
“This suggests very strongly to us that rising registrant metrics are not converting into rising revenue, let alone profitability.” ADVFN’s dinner is being eaten here. With regards to the bulletin boards — no discernible revenue in isolation whatsoever is produced from this service.
Management has proved year after year that it cannot monetise the very large amount of traffic that is received by its popular bulletin board.
Approaching 50% of ADVFN’s revenue comes from their US site — another ultra competitive market where they seem unable, given the size of the marketplace, to make any real headway into.
They have shown a complete inability to gain any meaningful numbers of individuals prepared to pay even a nominal £5 per month for membership to its “premium” service.
This is illustrated very starkly through looking at the last set of full year figures that showed turnover largely flat, and also a complete absence of breakdown in any profitability from this region.
It appears the vast majority of its “subscriber” numbers are almost certainly registrants to its “free” bulletin board — all well and good but if you cannot make money out of them and it costs you to provide this service in IT infrastructure, then you can have a billion registrants but it makes no positive difference to the bottom line P&L! In fact, the infrastructure costs will drain your resources.
The real driver of the Group’s rising registrant numbers (NOTE — not paying subscribers) is its free bulletin board service. A look at the last set of full year figures revealed a rise in registrants to 2.6m from 2.2m previously and yet “revenue from external customers” (its key revenue metric) was slightly down (or flat if we are generous and include the “other” amount of £143k within the accounts). This suggests very strongly to us that rising registrant metrics are not converting into rising revenue, let alone profitability. The central fundamental point of our short thesis is that the various services ADVFN offers, particularly the provision of news feeds and Level 2 pricing, have been price commoditised.
A look at the top line revenue metric displays clearly that their new “content” focused initiatives are great PR exercises but have not translated into any growth whatsoever in turnover. Turnover in 2012 was almost exactly the same as 2011. Digging further into the accounts, Clem Chambers, CEO made a big call about the turnaround in cash generation during 2011. Such a statement was ominously entirely absent in the 2012 figures.
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Not surprising really when we look at the two excerpts from the accounts below. We can see in ADVFN (1) that the Group’s entire gilts position was sold during the last financial year and ADVFN (2) correspondingly shows the missing entry in the balance sheet relative to 2011.
ADVFN TABLE 1
ADVFN TABLE 2 They say “cash is king” in the markets and when it comes to profitability lots of accounting tricks can be played by companies, but one area generally reveals the real operational truths — the Cash Flow Statement. And so we arrive at excerpt ADVFN 3 to the right which is also very revealing to us. Take a look at the highlighted red box at the bottom and you will see that “Net cash used in operating activities” was some £448k relative to £691k positive in 2011. This in itself is not the only scary sign to us re the likelihood of a cash raising this year, but looking back at 2011 in the second highlighted box around “trade receivables and payables” we can see that a great deal of the cash generated from operations was simply delaying paying their bills — by some £403k. It is very apparent to us that the business is consuming cash, and with the Group down to their last £1.4m — a drop of £1m in their cash and equivalent resources in one year — you will see why any analyst worth their salt would be expecting a cash raising soon in the absence of a material change in profitability.
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An SBM Conviction Short idea - ADVFN
ADVFN TABLE 3
“It is very apparent to us that the business is consuming cash, and with the Group down to their last £1.4m - a drop of £1m in their cash and equivalent resources in 1 year, you will see why any analyst worth their salt would be expecting a cash raising soon in the absence of a material change in profitability.” Valuation At the current market capitalisation, ADVFN is valued at a whisker under £30m. This for a business that has not been able to produce any meaningful profits for a good number of years (more often losses) is a consumer of cash and that, adjusting for goodwill, has a net book value of £3m. That’s right £3m. This even includes the intangibles that we believe should be in there given the technologically focused nature of the business, but that the auditors and directors value at £2.1m. In essence, the “market” is saying that ADVFN’s registrant (NOT subscriber) base is worth £27m or its position in the marketplace is unique and the brand is worth a sum running up to £27m. We personally don’t see it. The company discloses in its accounts that “a large proportion of its overheads are fixed costs”. This means that it has high operational gearing — a downturn in revenues hits their P&L disproportionately although it’s fair to say that, in theory, a large uplift should flow through to the bottom line, exponentially; some software companies have benefited from this and some have found that the capacity they thought they had was illusory...
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It seems that it is not just us, but the directors also do not believe the current valuation of the company. The RNS of 9 May 2012 is particularly telling in which it notes that Non Exec Director Robert Emmet exercised all his options, options over 3.545million shares and immediately sold them, such that he then had no holding in the company. Hardly a vote of confidence. Perhaps, even more interestingly, the share options issued to key management that were due to expire in 2014 with exercise prices centred around 3p and 4p were extended to 2022. Reason given? “...in order to regularise the position, and avoid any immediate shareholder dilution...” Cough, cough! So, it appears to us that there are only three ways that ADVFN can actually generate any meaningful profitability:
1. Monetisation of rising registrant numbers. Given intense competition in this area and the general acceptance that the market is saturated/mature regarding new price feed subscribers, this will be a hard task for ADVFN. The new content routes of ebooks and the “newspaper” may be being consumed by readers, but whether they are ultimately willing to pay for this, we doubt.
2. Increased subscription costs. Per (1) above, with free level 2 pricing available from various vendors now, the point of differentiation for ADVFN has all but disappeared. Again, increasing end user subscription costs seems impossible and, indeed, in recent months they have been offering discount “deals” on their various packages.
3. Increased advertiser revenue. In this marketplace, of which we are very acutely aware, financial firms are guarding their wallets exceptionally well at the moment. ADVFN’s mainstay advertisers are the spread betting and CFD firms and reports from the likes of LCG and the goliath that is IG have not painted a pretty picture re profitability. One of the first areas to be cut in a downturn is, of course, marketing and a glance at ADVFN’s website shows a lot of their own “ebook” promo’s taking up banner space that was previously reserved for 3rd party paying advertisers as well as likely “non sticky”/ repeat players like film funding and student housing sellers. Another ominous sign...
Taking all the above into context — a woefully undercapitalised balance sheet, intense and intensifying price competition for their subscriber service, a very difficult advertising backdrop and the total absence of any Director’s commitment by way of share purchasing (aside from very low base option exercises) in recent years, then here at SBM we will be shocked if there is not a profits warning to come or a capital raising during 2013 and perhaps both. Mr Chamber’s statement in October of last year, “The future for ADVFN is bright. We have more opportunities now than ever before, as much competition fades. Market conditions appear to change a great deal more than our business performance and affect us a good deal less than others. This allows us to look forward with confidence. We feel it is fair to say bear markets do not last forever”, will come back to haunt him (and his investors) we think. The only other cash outside a capital raising and natural revenues that the company may have coming in is linked to the “sale” of its subsidiary Equity Holdings to Brian Basham and where Basham is potentially liable to pay £50k p.a. Hardly likely to make a dent! Here’s an interesting and important point to make to novice traders/investors — market capitalisations of stocks can remain disjointed from fundamentals for a long time, but when a company needs to raise capital, and particularly from third party investors, the “chickens generally come home to roost” as the new investors take a dispassionate look at the true fundamental worth of the business. This situation was illustrated exceptionally clearly in another stock we have covered extensively in our publication — Ceres Power. When their backs were against it, they were unable to raise capital from existing shareholders, and ultimately from a pre placing share price of over 10p, they raised capital at 1p. Unless Mr Chambers can convince someone else that his business is really worth almost £30m or, most unlikely given the Directors record in recent years, put his hand in his own pocket and fund up the likely required cash, then we foresee the same scenario here — a rebasing to the true fundamental worth of the company which we think is around 1p per share. Disclosure – SBM contributors intend to take a short position in ADVFN, 72 hours after the publication of this feature.
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ZAk MiR’S ToP PiCk FoR FEBRuARy In the meantime, it would be interesting to see how much of the fully tax paid, non-money laundered safe haven seeking cash that currently resides in the London real estate market decides to stay on if Sterling tumbles...?! 2013 has already been a momentous year for the financial markets. The “fiscal cliff” debacle was solved (OK well, in part) at the beginning of the year, the FTSE 100 finally decisively cut up through 6,000 after many attempts and, perhaps even more shockingly, at the time of writing, remained there. Perhaps most importantly of all, however, I finally got to meet with “Keyser Soze” of the spread betting world, the editor of Spreadbet Magazine which was accompanied by some appropriate breaking of bread — in this case a sadistically spiced Real Man Pizza! But, this does not mean that there are no big events to look forward to for the rest of the year. For instance, we can bet our bottom dollar that the UK will lose its triple A credit rating, something it should have lost the day after Northern Rock fell, in my opinion. There will also probably be a triple dip recession and, if our Prime Minister David Cameron doesn’t sharpen up his act, the UK could deliver a rather amusingly coined “Brexit” (short for British Exit) — and head off out of the EU.
RECoMMENDATioN SuMMARy As far as my stock tip is concerned for February, one of the fundamental underpinnings to this is actually based upon a piece of information provided by ICAP CEO Michael Spencer on November 14 last year. He described conditions for the interdealer broker as the worst in 36 years. Quite understandably, given the high esteem this former Entrepreneur of the Year is held in, the share price of the financial services giant — the largest of its kind in the world — crashed to year lows. They fell out of their previous £3.10 to £3.60 range, and hit as low as £2.72 the day after the shock revelation. In fact, this was a good example of why I always attempt to read between the lines of news flow rather than necessarily take things at face value. At least as far as the share price of ICAP was concerned in the following days and weeks, the mid-November warning was in fact a purchase opportunity and not a message to dump stock.
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Technically, the shares of ICAP served up a painful bear trap below the floor of a late 2011 price channel on the daily chart at 290p — by 18p — before bouncing back as if nothing had happened. While there has already been a significant retracement from the worst levels of year, the message currently is that while there is no end of day close back below the present position of the 50 day moving average at 305p, the upside here should be towards the former June 2012 peak zone at 380p on a 6-8 week timeframe.
CHART - ICAP
Recent Significant News 26th September 2012 – ICAP stated that revenue in the six months ended September 30th is expected to be around 14% lower than the previous year. Activity in the global capital markets remained subdued due to the Eurozone crisis and difficulties faced by the global economy. 14th November 2012 – Headline profit before tax in the six months to the end of September fell 26% to £137m from £186m the year before, while statutory profit before tax halved to £50m from £101m. Revenue fell 14% to £746m from £867m from the equivalent period in 2011.
Chief Executive Officer Michael Spencer described the previous half year as one of the most difficult periods in his 36 year career in the wholesale financial markets. This was on the basis that trading volumes this year had fallen significantly across nearly all asset classes and geographies — even OTC trading — with the blame being pointed at global economic weakness, the Eurozone crisis, quantitative easing and low interest rates. 14th January 2012 – ICAP is a ‘recovery to buy into’ according to Prime Markets, who said that the interdealer broker’s shares are responding to the strong Christmas and New Year rally. It added that the recent 12% stake sale of the Traiana trading platforms business had also helped to boost the group’s already robust cash position.
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Zak Mir’s Top Pick for February - ICAP
This view came in the aftermath of the 12% stake sale of ICAP’s Traiana trading platforms business, boosting the group’s cash position by $300m. Traiana provides global banks, dealers, buy side firms and trading platforms with services to automate post-trade processing and risk management of financial transactions in listed and over-the-counter trading markets. The banks that invested in Traiana are BofA Merrill Lynch, Barclays, Citi, Deutsche Bank, JP Morgan, Nomura, and the Royal Bank of Scotland.
Not only domestically in terms of the London Olympics and the Diamond Jubilee, but also a great reason for traders / investors not to get involved in the financial markets as well as waiting to see who would win the U.S. Presidential Election. In fact, as soon as the result was announced on November 6th, volatility increased with the fiscal cliff twists & turns, and then we were off on a squeeze higher both for equities and the currencies — especially the Euro. One would have thought that with the perspective of 36 years in the financial markets and over 25 years at ICAP, Spencer would have got this right and not scared off shareholders.
Despite, or perhaps because of, being a former Treasurer of the Conservative Party, it would appear that CEO Michael Spencer himself was caught “short” in terms of making a correct appraisal of the prospects for the company he founded with his November statement. Given that the financial services group is very much dependent on market trend and sentiment, he managed himself to get blindsided by the mid November / fiscal cliff issue that was blighting the market at that time and ignoring the likelihood that the worst would never happen.
The situation now as we approach February is that the financial markets have flipped into “risk on” mode which is great for the dealing world. The likelihood is that even after the considerable rebound for ICAP shares that we have seen, they are, to my mind, very much in the value zone with a p/e under 10 and dividend yield at 5% plus. These valuation underpinnings coupled with the large net cash balance are attractive and there is the added bonus of a potential continued squeeze to the upside in the stock after the CEO’s inadvertent bull shakeout in November.
It also seems strange to me that Mr Spencer did not take on board the one off negative factors specific to the middle of 2012.
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The curious case of the
4 year bull run and the missing retail investor... The financial crisis that started in 2007 in the US in the sub-prime housing market and metamorphosed into a Sovereign debt crisis as it deepened has been one of the worst events for decades. It led to many corporate (and personal) bankruptcies, to a global recession, rising unemployment and, of course, to a severe decline in equity markets. On October 9, 2007 the S&P 500 peaked at 1,565.15 and in just one and a half years it lost 56.8%, closing at 676.53 on March 9, 2009 before embarking on a multi-year bull run.
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The Case Of The Curious Equity Rally
CHART - S&P 500
“On October 9, 2007, the S&P 500 peaked at 1,565.15 and in just one and a half years it lost 56.8%, closing at 676.53 on March 9, 2009.” Investors were understandably scared for their wealth during the crisis and many jumped out of the equity market right around the nadirs and continued to offload in the early stages of the rally — such is how human psychology works. Statistics show that in the US and, to a lesser degree, the UK that the majority of these investors have not returned, with net redemptions for equity funds being reported almost throughout the last four years.
The S&P 500 closed yesterday at 1,459,37 — almost back at its all-time high and recovering the vast majority of its losses during the crisis. Those brave or some would say foolhardy enough to enter at the bottom observed on March 2009, have enjoyed a phenomenal 28.6% annualised return.
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It seems that US households in particular were too scarred by three major bear markets since the turn of the millennium and many have parked their retirement money into supposed “safer” places like Treasuries. Not even the expansionary monetary policy unfolded by “Helicopter” Ben Bernanke has been able to push mainstream US retails investors out of bonds and bank deposits back to the equity markets. According to Bloomberg data for 401(k) and IRA mutual funds, the proportion of assets invested in stocks is just 72% and has decreased a little since 2009. It seems this strong bull market has completely passed retail investors by and they likely feel they have missed the boat. The percentage of households owning stock mutual funds has also been dropping and is now at the second lowest since 1997. In 2000, just before the tech bubble burst, 90% of mutual fund assets were composed of equities. Do you see a common pattern here? Mainstream investors ALWAYS invest precisely at the wrong moment.
“The percentage of households owning stock mutual funds has also been dropping and is now at the second lowest since 1997.” The GFC was different Unlike many other financial crises, the GFC has proved a resilient and long-lasting one. Even though the equity market has recovered and doubled its valuation between 2009 and 2012, many economic variables still point to moribund growth in Europe in particular and so the bare “headlines” contribute to a lack of confidence. The complete failure of the financial system leading to the once unthinkable bankruptcy of companies like Fannie Mae, Bear Sterns & Lehman Bros has, it seems, hit retail confidence in a way not seen in a generation. With confidence low and depressed incomes, many prefer to be out of the stock market.
We should also consider the harsh conditions experienced in the markets in recent years. Volatility in 2008-09 reached epic proportions and it has sporadically shot higher again on the Sovereign debt woes as well as the “flash crash” in 2010. These daily swings of up to 10% continue to bang the nail in the coffin for retail investor participation. Indeed, August 2011 was the worst August for the last 20 years. Performance was awful while volatility was huge — a killer blow to most investors. Just when confidence appears to be recovering it seems there is always an event that strikes again and scares people out of the equity market.
The Future With markets back to near 2007 peaks, it is legitimate to now ask: so what next? Is it still time to invest? The US economy has been recovering in recent months with the help of the FED and some fiscal stimulus and it seems it will continue on this trend through 2013. Ditto with China and Asia. The first quarter will be another scary one for investors however as the warring US political parties — the Republicans and the Democrats —square up once again over their domestic US national debt and its limit that is about to breached. A deal will be needed to address this otherwise the US Government will default on its payments. The fiscal cliff debacle has just really been delayed and new solutions will need to be found before the end of March. Corporate America is however sitting on a cash pile of over a trillion dollars as companies just don’t know what to do with their excess cash flows. Even with equities back to near all time highs, many stocks are still undervalued, but it seems that until wider macroeconomic confidence returns they won’t attract the average American. The irony is of course that right throughout history it has been shown that when the sky looks blue and mainstream investor participation is high that this is precisely the point when the “clever” money should be bailing out...
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A Heli ski-ing focus for adventurous traders One Hell(i) of an experience but Shhh, donâ€™t tell anyone......
For all you adventurous spread bettors with an eye for danger (that must be the majority, given your chosen past-time right?!), heli skiing is probably the best antidote ever to the stresses of trading, and a fantastic self gift after a few profitable trades! Just you, a few like minded risk takers, the open air and great globs of untracked snow beckon on awe inspiring mountainscapes... Until you have experienced this truly exhilarating activity, it is hard to appreciate what real extreme skiing is all about.
28 | www.financial-spread-betting.com | February 2013
A Heli ski-ing focus for adventurous traders
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“Imagine an area twenty five times the size of Les Trois Vallees in France or sixty nine times the size of all Colorado’s ski resorts. Now imagine bowl after endless bowl, steep lines through the trees and endless glacial expanses blanketed under an average annual snowfall of twenty five metres...” Bell 2 Lodge, the home of Last Frontier Heliskiing, is located in the Skeena Mountains about 220 miles Northwest of Smithers, British Columbia. As the crow flies, it is only 40 miles from Southeast Alaska and 200 miles from the Yukon. With a massive 3,500 square miles of ski-able terrain, it is Canada’s largest single heli skiing area...and even after 17 years of operation, only a fraction of the area has been explored.
Delightful new log cabins surround the main Bell 2 Lodge. Each room has two queen-sized beds, private bathroom, and wood burning stove. Between the main lodge and surrounding cabins there is a large sauna and open-air Jacuzzi, which make a nice stop after a day of heli skiing in the Skeena Mountains. Always on hand is the resident masseuse to ease those aching muscles. In the main lodge you will find a dining room, bar & lounge area.
The Best Heli Ski-ing in the World?
Helicopters & Safety
Last Frontier Heliskiing’s tenure is reserved exclusively for a maximum of thirty heli-skiers per week who are split into groups of a maximum of five to explore this vast expanse of wilderness on the frontier with Alaska. Imagine an area twenty five times the size of Les Trois Vallees in France or sixty nine times the size of all Colorado’s ski resorts. Now imagine bowl after endless bowl, steep lines through the trees and endless glacial expanses blanketed under an average annual snowfall of twenty five metres... that’s right, twenty five metres. Prepare to be spoilt!
Two A-Star 350 B2 or Bell 407 helicopters are used at Last Frontier Heliskiing to service guests. The helicopters are immaculately maintained by a team of on-site mechanics; and are flown by highly experienced mountain pilots. Safety standards at Last Frontier are exemplary. Without exception, all heli ski guides are seasoned professionals who have passed a series of comprehensive exams to qualify them as members of the A.C.M.G and the U.I.A.G.M. The guides continuously monitor the weather and snow stability in an effort to balance maximum time skiing.
When the likes of pro skiers Seth Morrison and Tanner Hall are heading here with movie makers, there must be a good reason. Last Frontier Heliskiing has some of the most varied heli ski terrain in Canada. Some heli ski operations may emphasize tree skiing or glade skiing, but Last Frontier has it all; and at the highest quality - glaciers that stretch forever, wide open bowls and well-spaced trees.
You don’t have to be a stunt skier to go heli skiing, but it’s certainly not for beginners and possibly not for many intermediates unless you are very strong. You need to be capable of coping with a variety of snow conditions including waist deep powder, dust on crust, wind-affected snow, and have the ability to manoeuvre around trees. The level of proficiency for resort skiing on groomed runs is very different to that required for off-piste conditions. Allow us to put together your perfect bespoke ski holiday at www.skibespoke.com
30 | www.financial-spread-betting.com | February 2013
The best of luxury ski
www.skibespoke.com February 2013
Tel: 01243 200202 | www.financial-spread-betting.com | 31
January Trading Diary It’s been a fabulous start to the year hasn’t it? Well, hasn’t it? If you’ve lost money so far, then my advice is quit trading! Conditions have been excellent, and for right now there is no sign of them stopping. Mmmm... Mmmm... Of course the market is perverse. The moment you are making decent sums, the chances are the market will turn on you when you least expect it and bite you on the bum. Those of you who have been shorting the market since early December will have lost money. Your day will inevitably come, but you should never go against a market trend until the trend is obviously broken. Rule number one of trading and ensuring longevity. Here’s an interesting story I received from a reader. He opens a spread betting account and puts 50 grand into it. As the market has gone up a lot, he decides that he should immediately short all the main indices. He loses 20 grand of it quickly as they all rise against him — his trades were at £50 a point — absolutely huge trades for an index and for that size of capital pot!
Then, to try and make it all back, he decides to buy back his bets... and then goes long just as they fall for a couple of days. You get the picture... In other words, of course, he is just gambling and might as well have just gone into a casino playing red or black. No safeguards in place, no stops, no trade plans, no idea of why he is going one way or another. He ends up with 15k left. Now, he feels that he has to make it all back — and quickly. In other words, he is going to continue gambling when instead he should make it back slowly, this time trading properly with a plan and stops. I also met a trader at one of my seminars. She put 150k into one commodity stock. No stop, no plan. Two days later the share tumbles 20% overnight. She loses 30k. However, sensibly at this point she cuts the loss.
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Robbie Burn’s January Trading Diary
She tells me that she has just regained the money over eight months later with slow and sensible trading. That’s the way to do it. In the first example, this reader is going to attempt to win the whole lot back quickly by gambling again. He could get lucky and pull it off, but if he carries on like this he will lose his capital. The second example pulled it back slowly and by being sensible is now likely to make money. Don’t try and make your million overnight. Trade sensibly and slowly with a plan and stops. There, I am like a boring old fart uncle... go and ignore me, you know you want to! And now to brighten things up, a quick look at some shares I like right now. First my three picks of the year in the last edition of Spreadbet Mag are all doing great: Carclo has hit a fiver, 3D Systems has stormed up giving me a profit of over £20,000 and Cash Converters continues to rise most days. More to come from all three this year I think (hope?!). If not, I have a plan and am out faster than you can say Robbie Burns.
In the same sector as 3D Systems, I’ve bought another US company involved in 3D, this time the not so snappily named Stratasys — easy to trade with most of the spread firms. Both companies are big future stars I feel. Recent issue Fusionex is also a goodie; very happy with this one as it races up with its software much in demand. Clean energy provider OCG seems to climb daily too, having recently won a major contract with BA. And my two favourite shares of all time, Telecom Plus and Dialight, resume their journeys northwards. My holding in Telecom Plus now stands at nearly £400,000 and I feel not in the slightest bit worried about that. It continues its gradual uptrend and it should clear a tenner this spring. Let the good times continue to roll; however perhaps with the chill winds of February around the corner we should consider banking profits or partial profits just in case someone comes on the telly and whispers the word we all dread... “Greece...” Happy Trading Robbie
Check out my Naked Trader 2013 diary which you can buy on this link http://books.global-investor.com/books/868876.htm?ginPtrCode=10453.
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Zak Mir Interviews -
“Psycho Trader” John Piper John Piper also known as the “Pied Piper” or the Psycho Trader has been involved in the markets for many years, and more recently has focused upon the little known binaries trading arena of the marketplace.
I reviewed your latest book ‘Trading Triangles’ a few weeks ago and it reminded me that you have a long history not only of being an author, but also in the financial markets in the UK. You have written extensively about many events including the 1987 Crash through to the latest crisis from 2007 in your tome ‘Financial Cataclysm Now!’. On this basis you seem to have some understanding of what may happen in the markets but also the instruments and methods required to trade, from binary bets to so-called “tunnel trading”. All of this seems to go relatively unrecognised. Do you have an explanation for this?
jp: Yes, in fact this shows how being ahead of the
game is not always a happy place to be, as you are outside and at odds with society at large. It makes enormous sense financially, but not everyone can cope with going against the mass flow.
The whole issue with this area is that there are now so many financial commentators, strategists and analysts that unless you do something very special, it is almost impossible to get noticed in contrast to, say, 20 years ago when there was a relatively empty playing field.
jp: Thank you, Zak, nice of you to say so. In fact,
jp: Yes, especially with the cult of celebrity. If
“the herd mentality is alive and well throughout the globe and always will be.”
having written ‘Financial Cataclysm Now!’ in 2006 — a full year just before the problems occurred in 2007 — I was actually vilified by a taxi driver who owned several properties and threatened to throw me out of his cab! I thought the situation at that time was unsustainable as I did not think much for the prospects for property prices at the time.
So it was a bit like the shoe shine boy giving John D. Rockefeller stock tips just before the 1929 Crash? But your taxi driver test worked as a shoeshine indicator. To be fair though, anybody following your advice in 2006 would have lost money, surely?
David Beckham made a market announcement, everyone would be aware of what it was, and it would be world famous. But, its value may be dubious. His opinion on what aftershave to wear may also be dubious but the herd mentality is alive and well throughout the globe and always will be.
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“MacDonalds make food that is arguably crap; I believe this has been proven, yet the masses buy it – how absurd is that?.” ZM: How does an ordinary investor or trader tell
whether the person who might be guiding them in the markets is any good or not? What are the signs you look for? How do you see the wood for the trees?
jp: It is much easier with a short term trader such
as Mark Austin who you very kindly dubbed “Mr FTSE”. He trades most days and you can look at his track record. I have not been able to supply mine however. Longer term timeframes are not so easy. In 1987 and 2006, I called major peaks in the markets, albeit too early, but it is not so straightforward on these types of events which happen far less frequently.
I first spotted you way back in 1992 when I first became a broker and then came across your partner Mark Austin a couple of years ago — something you would expect as I am in the same business. These days every Spread betting company has their own in-house guru / technical analyst, and it is much more difficult to know which of these gurus has an aptitude in terms of calling the markets, or is merely just a jumped up salesman. 10 years ago it was just you, me and maybe a couple of other people, with total domination of a field with little credibility. Now the credibility is there, everyone is a TA guru and it’s impossible to see the wood for the trees.
jp: At the end of the day it is all about self
interest. People have to realise that they are responsible for their own investments. You have to find people who are reliable and trustworthy, and know what they are talking about. But you still cannot pass on the responsibility, YOU have to make the decisions and you have to choose somebody who can help you do that.
But this means that people are relying on us to advertise / promote ourselves over and above everyone else: nothing to do with your service, but rather more related to the amount of cash in your wallet available for marketing. A rather sad state of affairs.
jp: T’was ever thus! Just like the U.S. Presidential Election: all about money and marketing.
The fact that Barack Obama knows how to use email and Facebook and can use it to say how he represents the 95% who are not wealthy gave him a huge edge. I have no particular view on the different qualities of the various presidential candidates, but the selection process has little to do with that — it has far more to do with marketing and how good each look on TV — to me these aspects are completely irrelevant as to how good they are. These themes are repeated right throughout our society today. McDonalds make food that is arguably crap; I believe this has been proven, yet the masses buy it — how absurd is that? They even ruin a raw carrot by soaking it in a sugar solution. But McDonalds have a huge marketing budget and know how to fool our bodies into eating pap. Similarly if you seek an investment adviser you are, by default, liable to find the one that spends the most money on marketing.
I have been following your service for a number of years and was wondering whether you could talk me through that. Why would people wish to go with John Piper and what are your goals?
jp: Let’s take a look at the last full year, 2011,
where we had strength in two particular areas. We were strong on gold, and have not yet put a foot wrong there. We had gone long from 2009, after a triangle break, and this proved to be a great trade. Triangles have been particularly important in recent years. This long position was added to during 2012 when another triangle appeared with support coming in around $1,650 and we then closed that for a profit. We are looking to go long of gold again once the current correction is out of the way, although at the moment it’s fair to say I am long and wrong. The VIX was also bought early in 2011, and we also bought short ETFs on S&P, DAX and FTSE 100. We were up 100% on the VIX after the big declines seen in August 2011, as well as solid gains on the other ETFs. However in 2012 we did something similar and it has not worked out so well as we have not had the big fall.
Is there one trigger when you are going about your daily business that gets you attracted to a market opportunity?
36 | www.financial-spread-betting.com | February 2013
Zak Mir Interviews - “Psycho Trader” John Piper
jp: Well, with gold it has all been about triangles.
The triangle I think is a very powerful signal; you get this coiled spring effect. A market goes into this ever narrowing range and then breaks out and bursts forward. If you get a move out of a triangle you get a tight stop as the price action is very narrow at that point, and secondly you often see very big moves. On the VIX in 2011 we have a simple strategy: buy below 20 and then get out when you see a decent move. For 2012 the strategy was not so good, we are still up overall, in that 2011 profits outweigh 2012 losses, and the current positions may still come good, but nevertheless we are wrong at the moment. For the indices, I tend to look at Elliott Wave theory with other techniques as well. As with all trading, the idea is to make good money when it goes right, and lose less when it goes wrong.
Is there any rule in terms of saying on a wrong trade — I have had enough, I am getting out.
jp: On triangles you have a ready stop loss, of the pattern itself.
But playing devil’s advocate, is it not that for both trend lines and triangles that there is a dependency on the subjective drawing skill of the trader as to where support / resistance may be.
jp: It is easy to become subjective and ignore
breaks in both directions. For instance, I have ignored breaks to the upside in the Dow. In fact the Dow is fascinating to me at the moment. We have had this rising wedge pattern into the recent peaks and this pattern has taken place over a number of years. We have seen false breaks of the upper trend line in the past month, which went straight through the lower parameter, and we are now testing the lower parameter again. A rising wedge is just a triangle that points up, by about 45 degrees. So we have seen this break down through the triangle of this rising wedge pattern — a sell signal. We have had a retest of the floor of the triangle which you often see, and we are now coming down.
“As with all trading, the idea is to make good money when it goes right, and lose less when it goes wrong.”
There is a lot of weakness here which ties in with an old saying that if Santa Claus doesn’t visit Wall Street with a decent rally, then watch out for the next year. In contrast, on the Nikkei Dow the situation is very positive given that it is now firmly above 10,000. But of course this is a very different situation to the U.S. market as the Nikkei has been in a bear market for 25 years.
It seems from our talk that you seem to have many more fundamental and psychological influences on your trading than most technical traders, something which I personally have tried to emulate as well?
jp: Psychology is fascinating, and it is also worth
bearing in mind something which is not often mentioned. For instance, when someone buys a market, the market weakens — quite strangely to them. Of course, if enough people buy a market it goes up. But every time someone buys a market, the potential for them buying it has been removed and the potential for them selling it increased. So if a hundred people buy a market it goes up, but the market becomes potentially weaker as all that potential buying power has turned from positive to negative (i.e. to potential selling power). This is what happens as markets go higher and higher, in that they get weaker and weaker. But you don’t see that new dynamic; you just see an apparently stronger (higher) market.
So in some ways you are really not a technical analyst. Would you describe yourself in any other way?
jp: Our good friend Tom Winnifrith called me, rather unflatteringly, a Psycho Trader which is perhaps as good a description as any.
“Psycho” brings in the aspects of technical, psychological and fundamental as well. Do you think that normal technical analysts are missing out on a large element if they do not look at the fundamentals or market sentiment?
jp: Look, the key thing is does it work? If it does,
then you use it, and it is the same with trading instruments. It is a little like the situation with binary bets a few years back. As a trader and a writer I was staggered by what they offer and was quite amazed that no one else had written about them.
Editor note - Mr Piper notes in the interview that he is unable to supply a verifiable trading record of his returns.
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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.
FiNANCiAL SECToR FoCuS Financials have been among the most exciting trades of the last few years. The FTSE financial services, life insurance and banking sectors cascaded lower during the worst of the credit crunch, respectively losing 60, 71 and 80 per cent of their value between July 2007 and March 2009, much more than the stock market as a whole. Since then, these sectors have come back with a vengeance, all more than doubling, handsomely beating the FTSE All-Share index. For daring traders, this dramatic bust and then boom has provided fantastic opportunities. Can it continue, however? Having posted such strong gains over the last four years, the obvious concern is whether financial services, life insurance and banks can really offer much more in the way of upside potential. Indeed, they might even be at risk of sizeable falls in the event that the credit crunch bites again. While investors are currently more optimistic than they have been in a long time, another Euro-panic remains very likely, in my view. Europe’s main problems of excessive indebtedness, limp economic growth and an overly-strong currency remain unresolved. Financially-related stocks would be especially exposed to any further panic, the main issue being how effectively the authorities managed to contain the problems. Technically speaking, the strongest of the gains in these sectors may now be behind us, but there are still some solid trends that we might exploit in the near term.
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Dominic Picardaâ€™s Technical Take
L&g I am bullish on the outlook for the UK stock market in 2013. I believe large-cap stocks are cheap on the whole and especially in comparison to bonds and cash savings, both of which offer some of the lousiest prospective returns in history right now. If I am correct and the FTSE keeps rising, life insurers like L&G should prosper. The sector tends to move more than one-for-one when the index moves: its beta is 1.2.
CHART - L&G
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Fundamentally, L&G is not expensive, I believe. The share yields 4.4% which is in line with its average of the last two decades. At its last two major peaks it yielded much less than this. Since last summer, the price has been in a nice, steady uptrend; just the sort of move I like to trade. And, its monthly relative strength index — a key way of measuring the long-term health of the trend — has yet to reach overbought levels of 70%. An obvious target for L&G is its 2007 high at 168p. Beyond there, lies a further objective at 179p. For spread-betting purposes, I’d go long as the price rallied from around its 55-day exponential moving average.
HARgREAVES LANSDoWN Pensions and investment planning provider Hargreaves Lansdown is regarded as a class act in its industry. The company has a solid track record of attracting new customers and delivering a high level of service. This is reflected in a none-too-cheap forecast price-to-earnings multiple of 25 times. However, its price took a knock in the autumn as investors fretted over a potential drag on profits in 2013 resulting from loyalty bonuses paid to customers and changes to its interest income. From a high of 786p in November, it recently dipped to 675p.
CHART - HARGREAVES LANDOWN
Despite this correction, the larger uptrend in Hargreaves Landsdown remains well intact. The price has lately recovered to above its 20-week moving average, a line which itself is still rising. And, the recent shakeout has also got rid of the overbought status that had built up on the weekly chart. As such, the share is in a good position to resume its gains, with an eye on fresh highs at 811p. My ideal entry-point would be as the price dips below and then moves back above its 20-day average.
40 | www.financial-spread-betting.com | February 2013
Dominic Picarda’s Technical Take
iCAP One of the main principles of technical analysis is that “volumes equal validity.” In other words, a price movement needs to be backed up by lots of trading volumes in order to make it meaningful. In another sense, volumes certainly equal validity for ICAP, the world’s largest interdealer broker. Unless there’s lots of trading activity going on, its business and profits take a dive, as happened last year. Looking ahead, new regulations affecting the financial industry could keep ICAP on the rack. In mid-November, ICAP’s share price dropped to 273p, a level last seen back in the dark days of March 2009. And, while it has risen in eight out of nine weeks to 332p, it is, in my opinion, and in complete contrast to my learned fellow and technical analyst Zak Mir, still too early to call the bottom here. It continues to be stuck below its 55-week exponential moving average, and which itself is heading downwards. Especially were the rally to reverse around this line, I would seek short positions, targeting a return to the 273p lows to begin with.
CHART - ICAP
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The Hedge Fund You Never Heard About Operating from Reno, Nevada and billed as the biggest little city in the world, Braeburn Capital is an asset management company that you most certainly haven’t heard of... The company was created in April 2006 with the sole aim of managing the cash of a big US company. With modest offices located in a nondescript town, very few people would guess that Braeburn currently holds more than $120bn in assets under management (AUM). Yes, that’s no error, $120bn! Braeburn, a company the world has seemingly never heard of, could in fact be described as the biggest hedge fund in the world. If however you look at the list of the biggest hedge funds published by Bloomberg Markets, not even Bridgewater Associates can beat this amount as they have a mere $78 bn in AUM yet are listed as the world’s biggest hedge fund company. That information of course disregards Braeburn.
44 | www.financial-spread-betting.com | February 2013
The Hedge Fund You Never Heard About
“Apple created this wholly owned subsidiary for two main reasons: to manage its growing cash pile and, much to the chagrin of embattled Governments, to avoid taxes.” Just who Is Braeburn Capital?
Apple nominated its Treasurer, Gary Wipfler, as one of Braeburn’s principals and CIO who then hired additional portfolio managers.
Braeburn was incorporated in 2006 to manage the assets of, you may have already guessed? Yep, the goliath that is Apple. Braeburn is really just another cultivar of Apple as the Macintosh & iPad were. The connection between the companies shouldn’t come as a surprise.
How Well Is Braeburn Managing Assets?
Apple created this wholly owned subsidiary for two main reasons: to manage its growing cash pile and, much to the chagrin of embattled governments, to avoid taxes. Instead of returning the excess cash to shareholders in the form of dividends, or buying back its own stock, Apple decided it could create the biggest hedge fund in the world; one that has just one client and is entirely dedicated to it. With offices in Palo Alto, California, Apple decided to incorporate Braeburn in Reno, Nevada. At first, you’d be forgiven for thinking that they may have been weighing the possibility of investing the money in casinos. Not so, what led the company to Reno was a tax reason. In Nevada, there are no corporate income taxes & no capital gains taxes and, amazingly, the state doesn’t share info with the Internal Revenue Service (US IRS)! In California, state taxes are around 9%. So, Braeburn setting up in Reno fulfilled a key requirement: it provided a perfect legal environment to manage its ever growing cash pile.
First of all, let’s be clear about this. Unlike other hedge funds, no matter how poorly Braeburn manages money, they have effectively unlimited lives. Apple is perhaps the world’s most successful private enterprise and as a consequence a phenomenal cash cow. In fact, Apple makes money so fast that Braeburn likely struggles to deploy it efficiently. In 2006, when Braeburn was incorporated, Apple’s cash and marketable securities were around $10bn. In 2007, it grew to $18.5bn, and so on until, at the last count, it reached the $120.2bn level. And continues to rise...
“Apple is perhaps the world’s most successful private enterprise and as a consequence a phenomenal cash cow. In fact, Apple makes money so fast that Braeburn likely struggles to deploy it efficiently.”
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TABLE - APPLE CASH & MARKETABLE SECURITIES Braeburn likely also helped in building that huge cash pile through active investment management although of course the majority of the pile comes from seemingly insatiable sales of the company’s iPhones, iPads and other Apple gadgets. Braeburn is cloaked in secrecy and even Apple in their accounts do not disclose the individual positions the fund takes. As it is a hedge fund that officially isn’t one — merely investing its own shareholders’ capital, usefully, it has no reporting obligations and accepts no other client so there is no need for additional disclosures.
“It is interesting to note that Braeburn looks to have some simi-larity with the most successful funds in 2012.”
What we can glean however in looking at the table below is that the vast majority of the company’s funds are in debt or money market instruments, and so Wipfler is, in reality, a glorified Corporate Treasurer. Nominally, the structure of Braeburn is that of a low risk fund and, indeed, there may be read-through here as to Apple’s corporate strategy — keeping funds in low duration assets allows them to move quickly either with regards to an enhanced stock buy-back or potential acquisition(s).
46 | www.financial-spread-betting.com | February 2013
The Hedge Fund You Never Heard About
“It is interesting to note that Braeburn looks to have some simi-larity with the most successful funds in 2012.”
PIE CHART - ASSET BREAKDOWN It is interesting to note that Braeburn looks to have some similarity with the most successful funds in 2012. Three of the top five highest earning hedge funds in 2012 were MBS arbitrage driven and Braeburn had some exposure to this area although it is not shown in the end 2012 data here. Recent disclosures revealed it held some $12bn in those securities. With the US Federal Reserve spending $85bn each month purchasing US Treasuries and Mortgage Backed Securities, these funds bet heavily on these instruments, as did Braeburn. Should there be an inflation scare in the US or an earlier exit from the QE policies (as we expect) than the market currently anticipates, however, then Braeburn’s portfolio could be hit. Let’s hope Wipfler is nimble on his feet.
The Risks Apple is of course the globe’s most revered technology company. In the hands of Steve Jobs and now Tim Cook, the company grew substantially to become the most valuable in the world by market cap, currently around $490bn. With a cash hoard of around $120bn, this now represents effectively one quarter of the entire value — a component that grows steadily each quarter too and so compresses the valuation multiple of Apple.
Apple bowed partially to shareholder pressure in 2012 and promised to reinstate a dividend payment which will amount to $2.5bn per quarter and a share buyback program totaling $10bn each year in order to reduce its cash pile. But for many, that isn’t enough. We expect that Apple will aggressively increase its buyback program should the market cap remain depressed. Either that or dramatically increase its dividend — a measure that will enhance its attractiveness to income funds. An outside bet is a major acquisition although we think the chances of this are slim. Some shareholders believe that with the company currently holding almost $60bn in corporate securities and MBS’— almost 50% of the total in effective near cash, that Apple should return that money to them so they could invest more efficiently, particularly if Apple’s stellar growth is over and in fact margins are under pressure. At the moment, when investing in Apple, you are effectively investing in a money market and short term debt hedge fund too — something that perhaps not all those buyers are aware of.
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Donâ€™t miss out!
48 | www.financial-spread-betting.com | February 2013
Trading Academy winner John Walsh
TRADING ACADEMY WINNER
John Walsh’s personal Diary “When I was selected as one of the final 8 traders for the City Index competition I decided that I would grab the opportunity with both hands and learn as much as I can about spread betting and give it my all which I did.” My name is John Walsh and for those that don’t know who I am, I was the winner of the City Index Trading Academy — a competition spread over 5 weeks in which each week a different trading task was set by our mentors Ashraf Laidi and James Chen and at the end of that week one of the traders who finished in the bottom three would be eliminated. During the competition I won three of the five weeks including the final week, and the only week in which I didn’t make any money was a pretty volatile one and none of the other traders did either. From a young age I have always had an interest in stocks and shares, going back to the days when I used to follow stock prices on teletext (shows you how far back that was!). The fascination with the markets has stayed with me ever since. Before the competition I had never actually traded any stocks but had done a little bit of spread betting which was more in line with my resources at the time, and in which I had a little bit of success. When I was selected as one of the final eight traders for the City Index competition I decided that I would grab the opportunity with both hands and learn as much as I could about spread betting and give it my all which I did. One of the things that people have asked me most since my win is what my plans are for the future.
After I won I handed in my notice to the company I had worked at for six years and I am now currently doing the “Knowledge Of London” in the hope of becoming a London black cab driver. Of course, I plan to continue my learning process in the hope of becoming a good trader. I also believe, in the markets, that you never stop learning. Many thought I would turn to full-time day trading and probably blow the £100,000 within a year, but I can reassure you that is not the case! I have put a moderate amount into my spread betting account and plan to try and build up my account slowly as I consider myself more of a long term trader, holding positions for weeks and months in line with my own money management and risk/reward ratio strategy that I was taught during the completion. As I mostly trade equities and also occasionally indices, where I had a lot of success during the competition, at the time of writing I currently have nine positions open with seven being Long and two being Short positions — all equities. The way I trade is relatively straight forward. Before I open a position I take a look at the stocks charts on different time frames, be it days, weeks, months and even years in some cases, to see if I can identify a trend — either up or down. Sometimes this is pretty clear in the charts so then I read all the recent news about the stock to find out the prevailing sentiment of the stock — a measure that I think is important.
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“It currently is my biggest winner and I have not yet closed as I feel it still has some way to go and I don’t want to just snatch profits like novices do, I want to keep with my strategy.” I then use a mixture of fundamental and technical before I make the trade, also looking at moving averages and the stochastics — as I have been taught to do, but I do not live and die by them. I won’t go into exact trade sizes so as to not give away the amount I moved into my trading account (!), some will say too much and some will say not enough, but one of my current Long positions is the Eurasian National Resources Corp (ENRC) who’s share price had a torrid 2012 for one reason or another and that Spreadbet Magazine called as one of the their top picks for 2013 in the last issue of their magazine. The stock has got off to a good start this year and after taking a closer look I decided to go Long. It is currently my biggest winner and I have not yet closed as I feel it still has some way to go and I don’t want to just snatch profits like novices do; I want to keep with my strategy. Another one of my current holdings is a Long position in Barratt Developments (BDEV) which has been in a clear uptrend since June 2012 and brought out some great results yesterday (16/1/13).
Profit taking has set in as the stock price has fallen slightly, but I have no doubt it will continue to rise as it’s a good business and, I think, will continue to move with the prevailing trend — the trend is your friend until the end, as I was taught!! The main thing I learned most from the competition is to have targets and don’t get emotional, be it stop losses for the amount you are most willing to lose on each trade, or limit orders for the most you are hoping to win with each trade This way you take the emotion out of it and you don’t have to sit at the screen 24/7 — allowing me to crack on with another form of “Knowledge”! That’s enough from me for this month; I hope you have enjoyed my first article for this great publication which I have been a big fan of from the start and now had the pleasure to be asked to write for. Please follow me on twitter @_JohnWalsh_ if you want to continue to follow my progress and I will do my best to keep everyone up to date with my trading as well as being happy to answer any questions you may have. Remember: you control the trade; the trade does not control you. John
50 | www.financial-spread-betting.com | February 2013
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Alpesh Patel Alpesh Patel is the author of 16 investment books, runs his own FSA regulated asset management firm from London, formerly presented his own show on Bloomberg TV for 3 years and has had over 200 columns published in the Financial Times. He provides free online trading education on www.alpeshpatel.com
Patel on Markets My favoured Spread bets for 2013 So, in my inaugural submission to Spreadbet Magazine, if I had to risk my reputation on certain 2013 bets – which would they be and why? FTSE 100 I see the FTSE hitting its 2007 peaks this year. That would place it close to its all time highs last around 6900 last seen during the dot-com era. So to my mind, we are looking at least to another 10-15% rise in 2013. This is partly due to momentum with the index looking good on the charts. The other support is the valuation of the Index, where on an earnings basis it is certainly not over-extended and there is ample potential additional support from a wholesale capital reallocation from bonds.
It sounds quite an incredible journey to have all time highs in the middle of periods of recession doesn’t it? But the companies which make up the FTSE 100 are continuing to make due to the heavy exposure to overseas growth regions of the world. Additionally, with sharp cost cutting, margins are holding up. Whatever the reason, the FTSE 100 has risen 50% since the nadirs in 2009 at the bottom of the credit crunch. Why didn’t we buy then we cry? Because we were too scared....
52 | www.financial-spread-betting.com | February 2013
Patel on Markets : My favoured Spread bets for 2013
I declare that I still am an Apple Shareholder after the recent declines. Why? Because share prices are not a guess on future growth, they are ultimately based on the money you can make from owning them and that is based on free cash flows. The company needs very small growth to justify even a relatively large uplift in the stock price in my opinion.
The ever popular Facebook looks also to be on a gradual rise back to the price at which it floated on the stock market - $38. It seems likely this will happen in 2013 as the company announces innovation after innovation including a potential phone and a new Google search competition service. If it does regain close to its initial highs, I would look to re-short however
“All the focus on Steve Job’s death which has acted as a dampener on innovation is overdone I believe and now presents a great opportunity to get long.” All the focus on Steve Job’s death which has acted as a dampener on innovation is overdone I believe and now presents a great opportunity to get long. Waning growth may be a problem sometime in the future but not for the next two years on my analysis. I expect at least a 50% return in the next two years.
Tata Motors The Indian automaker that is listed on the US stock market, trades at $30. It has doubled over the last 12 months and its all time high is $35 - tantalisingly close and they say a force in motion and all that... I expect a 20% return over 18 months from this one, driven by global demand for its products and continued buoyant profits.
GBP/USD So called ‘cable2 looks range bound at present and I am happy trading the 1.53 to 1.66 range for the year based on the trading patterns throughout most of last year and generally accepted PPP measures. So, I will go short at 1.6600 and long at 1.5300. Any breakouts of those I’ll have a tight stop-loss in case it is a genuine runaway.
Gold Very simple here, best bet to me is get long – the precious metal is a good hedge against the forthcoming US debt ceiling issue and that likely will be raised and so adding further debasement pressures to the dollar.
EUR/USD To me, the waves since 2008 in which the Euro moves are quite predictable and periodic. Presently it is in a clear up wave and I expect it to hit around 1.45 before returning back to 1.25. So, there’s my predictions for 2013 - I’m sure I’ll get slipped up on certain of them but there it is anyway - egg and face suitably waiting!
This IT company is cheap to my mind– its share price compared to the profits it earns are extremely reasonable. It’s broken its fall now from $80 to $40 an I expect it to gradually resume its ascent back to at least a 50% gain over two years.
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SCHooL CoRNER RELATIVE STRENGTH
INDICATOR EXPLAINED By THiERRy LADuguiE
The Relative Strength Indicator (comparative) compares two securities to show how they are performing relative to each other. A security’s price change is compared to another security’s price change (the base security). The relative strength is widely used in the stock market to compare a stock to an index. The guideline is to compare the stock to its index, for example if the stock is from the FTSE 100 index, the price of the FTSE 100 will be the base security. Note: Do not confuse relative strength with Relative Strength Index (RSI) which is a different indicator.
The indicator is calculated by dividing the security’s price by the base security. For example, Rio Tinto closed at 3511 on 31st December and on that day the FTSE 100 closed at 5897 and the relative strength was 0.595 (3511/5897). Two weeks later (15th January) Rio Tinto closed at 3490 and the FTSE 100 closed at 6117. The relative strength on that day was 0.570. In this example the relative strength declined because the stock went down while the FTSE 100 went up; the stock underperformed the FTSE 100.
“iN THiS ExAMPLE THE RELATiVE STRENgTH DECLiNED BECAuSE THE SToCk WENT DoWN WHiLE THE FTSE 100 WENT uP; THE SToCk uNDERPERFoRMED THE FTSE 100.”
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There are five situations in relation to the RSI which can occur:
There are various ways to use the indicator, here are a few techniques:
• The security is rising faster than the base security: outperform
1. Buy stocks with strong relative strength (outperform) after a correction
• The security is rising while the base security is falling: outperform
Strong relative strength means the relative strength is rising. If a stock has a tendency to outperform the FTSE 100 over a six-month period or more, it is a good bet because the chances are that it will probably continue to outperform the index — a force in motion and all that. In this situation we would buy the stock on a pull back to the 50-day moving average. A recent example was Associated British Foods:
• Both the security and the base security are moving up or down by the same percentage: neutral • The security is falling faster than the base security: underperform • The security is falling while the base security is rising: underperform
CHART - Associated British Foods
56 | www.financial-spread-betting.com | February 2013
Different moving averages explained
2. Sell stocks that show weak relative strength (underper form) after a rally: This is the opposite of strong relative strength. If a stock is weak over the long term, there may be a fundamental issue with the company. A stock that does not keep up with the main index is never a good sign. In this situation we would sell the stock on a rally to the 50-day moving average. An example is BG Group:
In early October 2012 the stock moved above its 50-day moving average on weak relative strength. The relative strength line had been declining for more than six months. That was a signal to sell and, as we can see, the share price collapsed at the end of October.
CHART - BG GROUP
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There is another way to use relative strength and this method is based on the FTSE 100 direction. This is only relevant if the stock is positively correlated with the FTSE 100 (the stock and the index move in the same direction). When the FTSE 100 is undergoing a correction, towards the end of the decline some stocks will typically begin to show strong relative strength — this is a positive sign. Inversely, if the FTSE 100 has been rallying for a few months without any major pull back, check the stocks that are showing weak relative strength over the last week or two.
Shares in Land Securities rallied with the FTSE 100 from mid November. The stock peaked on 9th January but the FTSE 100 continued to rally. The relative strength is down in January; this is the first indication that the stock could be at the start of a more prolonged decline.
CHART - LAND SECURITIES
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58 | www.financial-spread-betting.com | February 2013
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Computing for the Successful Trader By Simon Carter
60 | www.financial-spread-betting.com | February 2013
Computing for the Successful Trader
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You’ll be hard pushed to find the trader who says that all his success is down to his laptop; and the man who says that his run of bad luck is all due to a lack of RAM or he has been cursed with the typical case of the ‘bad workman’! However, there’s no doubting that while arguably the main tool you need in this arena is your talent, having the right hardware to back up that talent is absolutely essential. Getting the right piece of equipment on your desk means one less headache allowing you to concentrate purely on trading and the good news is that there’s no need to spend a fortune to obtain it (and every penny saved is another one for trading of course). You don’t need masses of memory, or a cutting edge graphics card; you need a computer that will let you play the game your way. And fast - which relies on a strong broadband feed too of course.
Acer Aspire V3 Price: Around £400 Pros: Great budget laptop, good looks, fast, high usability Cons: Only 500GB storage Seriously, if it wasn’t for the need for a little balance, Acer would have dominated the entire feature, such is the exceptional work they are producing at the moment. As it is, we’ve settled on this beauty of a laptop for our lead. Calling the Aspire V3 a ‘budget laptop’ absolutely does not do justice to its slim, good looks (come on, we’re all a little shallow!) and relatively mid-high end credentials. Before we look at those credentials, we must take a moment to congratulate Acer on the keyboard and trackpad. If ever those two components can be called a joy to use, it is here. When you’re paying less than £500 for a laptop, you’ve no right to expect speed and performance like this. The Intel i5 and 6GB RAM combine to deliver a seamless computing experience whether surfing, chatting or trading. Sure, the Aspire isn’t up there with the best gaming laptops but you should be trading anyway!
62 | www.financial-spread-betting.com | February 2013
Computing for the Successful Trader
Dell XPS 12 Price: £1000 Pros: Top hybrid, excellent laptop Cons: Tablet too heavy, requires calibration, the price Ever since Casio first popped a calculator onto a wristwatch, tech companies have been looking for ways to combine popular devices. While some have spectacularly failed (hello Amstrad Emailer), there have been numerous successes. And if all so-called ‘hybrid’ devices are as good as the Dell XPS 12, we could have another success story on our hands. So what is a hybrid? Spawned mainly by touchscreen operating systems such as Windows 8 (which powers the XPS), a hybrid is a laptop that masquerades as a tablet. Though you might expect such a device to be a ‘Jack of all trades’ – and admittedly, as a tablet the XPS is just short of top notch – this is one hybrid that doesn’t disappoint. Still mainly known for their functional corporate output, you don’t associate this level of design from Dell. Used simply as a laptop you’ll love the Gorilla Glass screen, marvel at the sleek, back-lit keyboard and drool over the glass touchpad. Once fired up you’ll be blown away by the i7 processor, the 8GB RAM and you’ll fall head over heels for Windows 8. With the lid open, push the top half of the screen just enough to disengage the magnets and watch as the screen rotates itself into a tablet. As noted above, the tablet is a slight let down given its weight (it weighs little less than a regular laptop) and the propensity for the display to move slightly if you are rough with it. All that aside, this is most certainly the best hybrid on the market today.
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Lenovo H520 Price: £449.99 Pros: Best budget PC, plenty of speed and storage Cons: Are PCs future proof? In last month’s Spreadbet Magazine we predicted that 2013 may be the year that finally sees the demise of the PC, and while innovation seems to be passing the desktop by, there are still many advantages to a traditional PC. True, it can seem archaic to have to attach a screen, keyboard and mouse to a device but for power, storage and expandability at low prices, you simply can’t beat a PC. Maybe there is life in the old dog?! Lenovo aren’t the first name that springs to mind when you think of computing but since acquiring IBM a few years ago, and part merging with NEC more recently, the Chinese company have become the biggest Personal Computing company in the world. The H520 doesn’t need numbers and statistics to sell itself; suffice to say that it is a workmanlike PC that surprises you with what you get for you money (it even has a Blu-Ray player and TV tuner for your downtime). Really, you will have no complaints whatsoever if you invest in Lenovo (disclaimer: that wasn’t a trading tip!).
64 | www.financial-spread-betting.com | February 2013
Computing for the Successful Trader
Microsoft Surface Pro Price: £565 - £630 (based on USD price) Pros: Potentially the best tablet Cons: Windows 8 relatively unproven With a release date slated for the end of the month, it could be time to get excited about Microsoft’s Surface Pro. Following hot on the footsteps of the Surface (AKA Surface RT), the tablet released to coincide with, and showcase, Windows 8 last autumn, the Pro version promises a high end tablet experience. In fact, while the Surface RT was marketed as an iPad competitor, Microsoft are trumpeting the Pro as a tablet without compromise. In other words, a PC you can carry around. And the numbers seem to back that up. Intel’s Ivy Bridge processor (used in Windows 8 laptops) makes its way into the Pro as does a generous 4GB of RAM. The display promises to be astonishing, delivering the full 1920x1080 pixel visuals that you know you’re going to love and you can record and video call (front and rear cameras) at 720p. While in the past Microsoft have admittedly struggled in their efforts to diversify (see Microsoft Zune for one thing), the Surface Pro could be their biggest success since the Xbox 360.
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By Tony Loton
â€œGetting intO Positionâ€? 66 | www.financial-spread-betting.com | February 2013
“Getting into position”
Following on from my previous “Getting into the Swing” article about “swinging” (remember not to tell the wife!) I thought it would be a good time now to talk about “Getting into Position”. Enough of the innuendo which I have only included because I’ve heard that — even in financial writing — sex sells! Actually, this article does follow nicely from the previous one because I left you with the cliff-hanger of a sideways trading (and swinging) market having just broken out into what looked like a “trend”—albeit a downward one. You will no doubt already be aware that “the trend is your friend”, and I know from my own experience that trends are particularly friendly to longer-term position traders.
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What is Position Trading?
My initial “exploratory” trade size will be determined by the overall account size and money management criteria, but for the sake of simplicity let’s take this to be £10-per-point.
Well, it depends who you ask: • Some say Position Trading is a trading style in which equity “positions” are held for a period of weeks or months. They’re right, except that to my mind there need not be any pre-defined duration. A position trade might last as little as a day (if it turns sour and you need to get out quick) or as long as “forever” (just like Warren Buffet, eh?) as long as the capital appreciation and dividend receipts are nicely offsetting the ongoing spread bet financing charges. For me, a longer-term position trading “investment” is a short-term trade gone well! • Some say that Position Trading is akin to trend following. They’re right too, except that you may choose to pre-empt the trend rather than merely following it, by taking an initially-losing or sideways trading position that you believe will nonetheless trend upwards in the longer term. But beware those falling knifes that just keep on falling! My own interpretation of position trading necessitates an additional definition. For me, it’s also about establishing a diverse portfolio of equity spread bets that are each jostling for “position” in a portfolio. Let the flowers be watered and the weeds be cut.
Entering a Position Trade When entering a longer-term position trade I am personally looking for a stock that has massive upside potential (judging by its price history) from a very low — and ideally “flat-lining” — base. You’ll see what I mean in my first example chart. Rather than betting the farm in one fell swoop, I prefer to scale into my position trades either by averaging down or by pyramiding up — or both.
“Rather than betting the farm in one fell swoop, I prefer to scale into my position trades either by averaging down or by pyramiding up — or both.”
If the price goes down, I might establish a second position at the lower price — providing my maximum possible loss is manageable. Think about a very manageable maximum possible loss of only £600 on Aquarius Platinum price at 60p-per-share rather than a maximum possible loss of £6,000 on the FTSE 100 at 6000. I know that “averaging down” is frowned upon in trading circles, but I think there are times when it is safe (and prudent) to do so in the light of the massively disproportionate upside potential. If the price goes up, I might establish a second position at the higher price — providing I can do so using profits recycled from my original position. Suppose the price rises from 60 to 80 and I get to “lock in” £100 of the profit with an ideally-guaranteed stop order at 70, I can then afford to establish a second “pyramided” position at 80 with the same stop order at 70 while being assured of at least a “break-even” result all round. This brings us nicely onto the subject of trade maintenance.
Maintaining a Position Trade For short-term day traders it’s all about entries and exits, with nothing much in between. Position traders will spend more of their time maintaining their open positions by trailing the attendant stop orders to lock-in more and more profits, and optionally pyramiding some of the consequent freed-up funds into the same or other positions. The idea behind position trading is to hang on to your equity positions (it’s usually stocks) for as long as possible while an upwards trend is still being your friend. But, all good trends must come to an end, and ultimately it will be time to exit the position.
Exiting a Position Trade Some traders may prefer to exit or part-exit their positions manually when they consider the particular equities to be fundamentally overvalued or technically “toppy”. Unless I need to free up funds for better uses, I prefer to let my positions “stop out” of their own accord when the prices fall back to meet the attendant trailed stop orders.
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“Getting into position”
“The idea behind position trading is to hang on to your equity positions (it’s usually stocks) for as long as possible while an upwards trend is still being your friend. But, all good trends must come to an end, and ultimately it will be time to exit the Example Early-Days Position Trade I present a chart for a real life early-days position trade on Aquarius Platinum. Notice how the price had fallen a long way (hence much upside potential) before flat-lining, and trust me — or look at the lower portion of the chart — when I tell you that it had fallen much further over a longer historic timescale.
The two lower thin horizontal lines show the two prices at which I scaled into the position; and the higher thicker horizontal lines shows the current placing of the mutual stop orders. Since the stop orders are higher than the entry prices, I am guaranteed a profitable exit on both positions...not least because those stop orders are actually guaranteed ones.
Figure 1 - Aquarius Platinum chart
While the unfolding up-trend remains my friend, I’ll hang on in there for as long as I can, raising the stop order(s) as I go — not too tight — and maybe even pyramiding more funds when I judge the time to be right. In terms of longevity, this position trade is already more than three months old and I’m happy for it to run for many weeks, months, or even years to come. This brings me to...
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“The Trend is Your Friend” Regardless of whether we enter at the bottom of the prior “swinging” range, or on the upside breakout as a traditional “trend follower” might, what we are looking for is for the trend to be our friend for as long as possible. Unlike with the swing trading approach that I examined in my previous article, with trend-following position trading there is no upper limit to the amount of profit you might make.
In an ideal scenario the price will keep on rising steadily with no apparent sign of stopping after the initial “breakout”, as shown in my Barratt chart. The two lower (thinner) horizontal lines show the prices at which I a) bought initially on the breakout, and then b) pyramided when locked-in profits allowed and when the price “broke out” again. The higher thicker horizontal line indicates the mutual guaranteed stop order that assures me of a decent profit all-round.
Figure 2 - Barratt chart
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
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Tom Winnifrith’s Conviction buy Port Erin Biopharma at 6.25p
It is hard to write a conviction buy when you are in two minds about equities. On the one hand, the (understandable) flight from the soon to implode bond bubble may push shares higher. Whilst on the other hand, the UK economy is in poor shape, corporate earnings growth will be poor and yet ratings do not discount this situation and waning earnings which, to me, points to a looming correction. My conviction buy this month is Port Erin Biopharma (PEBI) and which I believe is distanced from the wider macro issues in the UK. I should say that having helped float this company as a director, Real Man Pizza Company, in which I have no beneficial interest but which is owned by a Trust which benefits my dependents, owns shares in Port Erin. Real Man has agreed not to sell any shares until 24 hours after I publish a sell notice on www.onefreesharetip.com Port Erin was incorporated in May 2011 and listed on AIM on 15th September of that year in conjunction with a 10p per share placing. Although I was on the board at the time, I quit in April last year — a fact that Port Erin announced in June. The company was formed to create value for shareholders through investing in biotechnology and biopharmaceutical companies — this being a market sector which Port Erin’s Chairman Jim Mellon considers “to be both undervalued and to offer excellent opportunities in its potential for growth”.
In fact PEBI looks to pretty much mirror Mellon’s own portfolio. Whatever Mellon and I may disagree on elsewhere, Jim (At 53, the UK’s 112th richest man and totally self made) has a cracking track record investing in this sector. I would trust his judgment on portfolio choices without question. Jim Mellon
Jim Mellon The company has performed well in net asset value terms since listing, but the share price has drifted lower and this dichotomy gives you the chance to buy with a real margin of safety, at the current time of writing mid price of 6.25p.
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Noting “tremendous advances being made in the bio sciences as a result of the fusion of computer power and cumulative human discovery”, Jim Mellon has been investing widely in the biopharma industry in recent years. These days Mellon spends much of his time in San Francisco, a biotech epicentre, and is very well connected in the industry. Port Erin is a listed vehicle providing investors with exposure to Mellon’s ideas in this area — with the company investing in/ alongside investments that he has identified. The bulk of the portfolio (approximately 70%) is and will be invested in companies that are cash generative often dividend paying, and which have market caps in excess of US$5 billion. The remainder is invested in a range of smaller to medium sized companies to provide exciting, albeit more speculative, upside to the portfolio.
1st November announced results for the period from the company’s 3rd May 2011 incorporation to 30th June 2012 showed a profit of £425,208 and net assets at the period end of £3.12 million — equating to 9.47p per share. This represented an impressive performance since the share placing on Admission which raised a net £2.70 million after expenses. The recorded profit was largely the result of £510,515 from investments (£16,448 of dividend income, £226,308 of net realised gains on sale of investments — from sales totalling £1.36 million — and £267,759 of net unrealised gains on investments). The offset of the running costs of the business was limited to less than £95,000 as the company is being “very careful to minimise on-going operating expenses”. Owning a large slug of the equity tends to focus one’s mind on controlling PLC costs.
If I am right about huge institutional inflows into liquid equities from those fleeing bonds, the 70% of Port Erin’s portfolio invested in such stocks will fly. If equity markets conk, healthcare stocks as a defensive play will conk less than most. Meanwhile the 30% of the Portfolio invested in small caps will prosper or fail solely as a result of Jim’s stock selection and I back his judgment. So far he has delivered.
An update on the position as at 30th September 2012 showed that the net asset value had risen to £3.18 million — equating to 9.63p per share, with investments totalling £2.86 million and un-invested cash £329,708. Bear in mind that post IPO costs reduced the NAV to 8.56p per share and you will see how, over one year, Jim has delivered pretty decent gains. My guess is that given the recent run in equity markets the NAV is now well in excess of 10p and I would expect the next quarterly trading update to confirm that.
Jim Mellon is a renowned fund manager and investor who has spent much of the last few years researching the biopharma sector, partly basing himself in San Francisco. He has an interest in 4.441 million shares in Port Erin, representing 13.5% of the issued share capital. He is also interested in 2.1 million (out of 30 million) warrants for new shares, these exercisable at 12.5p by September 2013. Remuneration to the company providing Mellon’s services is payable by the issue of shares equivalent to 15% of any increase in net asset value over each quarterly period, with such payments waived until net asset value exceeds 10p per share. These are not generous terms and, although Mellon is very wealthy, Port Erin investing alongside his own portfolio investments should mean he is pretty focused on this venture. Jim has been a consistent buyer of the shares since IPO.
At the present offer price of 6.5p, the shares trade at a 33% discount to the last stated net asset value and I expect that in reality the discount today is closer to 40%. Given that the warrants are exercisable only at 12.5p they would not be dilutive. I accept that Port Erin is not a terribly liquid stock and this — together with the nature of its investments — means that it may never trade at a premium rating. But it might just head to a premium to NAV if people start to appreciate how well Mellon has done and to speculate that he will continue to compound those gains.
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Certainly the current discount is excessive. I would initially be targeting a 10% discount to NAV which, I reckon, means that the shares should be trading at 9p to 9.5p and thus at today’s price the stock is this month’s Tom Winnifrith’s conviction buy.
CHART - Port Erin Biopharma
Tom Winnifrith writes for 10 leading UK and UK financial websites. Links to all his own work can be found on his own blog (which also carries a welter of biting articles on politics, economics, business, football and food), www.TomWinnifrith.com – you can also follow Tom on twitter @tomwinnifrith . Tom also runs a quirky Celtic Italian restaurant in Clerkenwell - www.TheRealManPizzaCompany.com
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Sell the Aussie dollar v Long the British pound
76 | www.financial-spread-betting.com | February 2013
Sell the Aussie dollar v Long the British pound
SBM has covered this trade, selling the so called “Aussie” against the (not so) Great British pound on our renowned blog, on numerous occasions over the last nine months. On each of these calls we have made money. The recent weakness in the pound on fears over a downgrade in its long held AAA rating by the Sovereign debt agencies and renewed “dovish” noises out of the Bank of England, lean us, contrarianly, towards the bull pound / short Aussie trade once more. Let us explain...
“The Aussie dollar has been a hot ticket for yield hunters for nearly four years now, being shored up by central banks looking to diversify their extensive foreign exchange reserves out of the US dollar.” The Aussie dollar has been a hot ticket for yield hunters for nearly four years now, being shored up by central banks looking to diversify their extensive foreign exchange reserves out of the US dollar. The central banks, along with a large volume of speculative money, have piled into the currency in recent years. The Aussie has enjoyed the fundamental support of Australia’s triple-A credit rating, high interest rates relative to most other Western nations since 2010 reaching a peak of 4.75% during the summer of 2011 (although steadily declining since then) and a strong domestic economy buoyed by strong demand for its commodity exports from the rest of the world.
Take a look at table 1 below which charts the movement of the Australian Reserve Banks base rate. You will see that since October of 2011 the reserve bank has in fact been reducing rates in response to a slowing domestic economy. Anybody who has visited Australia from the UK in recent months will vouch for just how expensive the country now is — similar to the situation in Switzerland in 2011 when stories of £10 coffees abounded, and just before the Swiss Franc depreciated extensively. Tales of £7 beers and £200 meals for two are legion — real anecdotal evidence of a currency out of kilter.
CHART - AUSTRALIAN RESERVE BANK INTEREST RATE HISTORY
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Take a look now at table 2 below which depicts the Bank of England base rate. You will see that it is essentially a flat line at 0.5% since 2009 — testimony indeed to just what a sorry state the UK economy has found itself in recent years... The important point here however is that accepted currency theory tells us that, in the short term, “interest rate differentials” are a key driver of currency movement. On this basis the pair should have been rising in the last 18 months. In the long term, it is “inflation differentials” that definitively do move currency pairs. Well, back in 2009 when the interest rate differential was at the same levels (2.5%), the average FX rate between the pair was in fact approaching $2 to the pound. More evidence of a “wrongly priced” FX rate.
CHART - BANK OF ENGLAND BASE RATE HISTORY It is widely accepted by economists that the PPP (purchasing power parity) fair value for the GBPAUD pair is indeed anywhere between $1.95-$2.20. Consider then also table 3 below which depicts the monthly inflation rate in Australia since Jan 2009 and also table 4 which charts the same measure for the UK. The UK has experienced an average inflation rate of around 3.5%, whilst the Australian economy has experienced inflation average just under 3%. Per currency theory, then the pound should have depreciated against the Aussie given the small inflation differential, but certainly not anywhere near that which it has — some 20%+.
“In the early part of 2013, Australia posted its widest trade deficit in nearly five years — generally an ominous sign and precursor of currency weakness.”
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Sell the Aussie dollar v Long the British pound
CHART - AUSTRALIAN INFLATION RATE
CHART - UK INFLATION RATE
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Australia’s macroeconomic picture is also darkening somewhat and so adding weight to our thesis that the pair is materially out of sync. In the early part of 2013, Australia posted its widest trade deficit in nearly five years — generally an ominous sign and precursor of currency weakness. The deficit for November widened to $2.6 billion from $2.4 billion in October and that was the biggest monthly shortfall since March 2008. With the devastating wild fires they have sadly experienced too, there is a real expectation for further softening in the economy this quarter. Australian retail sales also unexpectedly fell in November adding to evidence that an economic slowdown in China last year was hurting more than just the country’s mining industry. Among the indicators of an increasing so called “output gap” (a measure of slack in the economy) are the rising numbers of jobless and the National Australia Bank’s own measure of capacity utilisation. The NAB monthly business survey shows the amount of spare production capacity has been rising since 2010, and increased sharply in the latter half of 2012. The November survey had overall capacity utilisation down to 79.5 per cent, its weakest level since mid-2009 and down from 81 per cent at the beginning of the year. With greater idle capacity comes more intense competition and greater reluctance to push prices higher — a factor that will likely result in the reserve bank cutting interest rates by at least another 0.5% this year. NAB’s chief economist believes construction is well below its long-term average, particularly the sub-sector of house building which is at its weakest level since the period immediately following the introduction of the GST in July 2000. With manufacturing operating at only 74.3 per cent of capacity too it is abundantly clear that the last thing the Australian economy now needs is a strong currency.
It is a heavily export driven one, particularly given it’s commodity exports to Asia and one of the stabilisers of a weak economy is a depreciating currency — something reserve bank officials have openly stated that they welcome. Back to the UK. Given the fact that the market’s expectation that the UK’s AAA sovereign rating is almost certain to be lost this year has been well flagged, then it is arguable that this event “is now in the price” — similar to when the US was stripped of its rating last year — bonds and the dollar subsequently rose after this event. Should the UK actually escape a downgrade, then the pound is likely to strengthen on a pure relief basis. Take a look at the chart below and we can see a very long “saucer” formation has been in the making now for nearly three years. The pair has shown a marked reluctance to remain beneath the $1.50 level for anything other than a very brief period. Having returned to $1.51 at the time of writing, we think this is an ideal time to get long on a risk:reward basis, taking into account the fundamental and technical factors that lean unarguably to the bull side. Should the BoE pull back on their dovish noises and/ or the UK surprise to the upside with the next GDP figures, and in contrast the Australian reserve bank reduce interest rates again, this is likely to be the catalyst that pushes the pair on a trajectory path back towards the $1.80-$1.90 level. Please note that given the interest rate differentials between the two countries, that shorting the Aussie dollar actually costs you each day and so one must expect the pair to move by greater than the interest rate differential – 2.5% which would require, on an annual basis, a move above $1.56 — a level we expect to be taken out and some this year.
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Markets In Focus
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 14 - March 2013
in next month’s edition...
The Biggest Rogue Traders of All Time SBM’S ToP 3 CuRRENCy TRADES FoR 2013 WHy ANALySTS AS A gRouP ARE ALWAYS WRoNg ZAk MiR, DoMiNiC PiCARDA, ALPESH PATEL, RoBBiE BuRNS & ToM WiNNiFRiTH - ALL HERE!
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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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