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

HN RC A io M iT ED

MAGAZINE

issue 14 - March 2013

The Worst Rogue Traders in History We reveal the top five and their subsequent fates... www.financial-spread-betting.com WHy ANALySTS AS A gRouP ARE ALWAyS WRoNg

CuRRENCy WARS EXPLAiNED

ZAk MiR iNTERviEWS ToM HouggARD

ALPESH oN MARkETS

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

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 Lee Akers www.coyotecreative.co.uk Copywriter Sebastian Greenfield Editorial contributors Thierry Laduguie Filipe R Costa John Walsh

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, as ever, to the latest edition of our unique online magazine dedicated to not just spread betting but all things trading. I’m sure you’ll agree that we have an impressive line up of contributors now as you can see from the “hall of fame” on the left. Considering that this mag is entirely cost free, it has been suggested that we should change our strap line to “too good to be free!”. Well, we again ask that you show support for our advertisers. We cannot stress enough that absent your supporting the people who support us, the magazine’s business model will have to change — something we sincerely do not wish to do. Use them or lose the free nature of the magazine is our new mantra. Onto the content this month, as ever some cracking feature pieces written in our usual no nonsense style — a feature on just why analysts (or “anal”ysts as I call them!) get it wrong and how we can profit from this! A piece on the worst rogue traders in history and also some interesting stats gleaned from the completion of our survey that we sent out — check it out to see what your fellow spread bettors are up to. With effect from next edition of the magazine we will also be welcoming on board Tom Houggard as a bi-monthly contributor and who is interviewed by Zak Mir this month. I take my hat off to Tom (and there’s not many that I do, regular readers will be aware) as he actually puts his “cajones” on the line everyday with his live trading room — how many so called “system providers” will show you their records with such honesty? Very few that’s for sure! The over-riding theme in the markets at present is the seemingly incessant grind higher and the unwillingness of the indices to pull back. We have produced a cracking guide that is downloadable from the Alpesh Patel piece that explores in-depth the typical bull market length and postulates an end date — if you’re currently short the market or thinking of shorting it then be sure to take a read first to ensure you have a good data set on your side. Well, spring is around the corner and as I write the first rays of early spring sunshine are filtering through my window — it’s enough to gladden your heart and make you feel optimistic — perhaps this is what the market has in its stride at present, so why fight it?! Until next month — successful trading to all readers

Richard

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Contents

5 of the worst rogue traders in history We unveil the ignominious list and reveal their subsequent fates...

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22

Avocet Mining Spreadbet Magazine reasons for the Buy case in the embattled West African miner

Alpesh on markets Alpesh sets out his outlook for the markets over the coming months

26

Why analysts as a group are always wrong

38

Zak Mir’s top pick for march

An insightful read as to just why analysts always get it, collectively, wrong!

Zak turns short term ‘gold bug’ on the precious metal with his top trade tip for the coming month of march

47

Tom Winnifrith’s conviction buy

50

The highest earning hedge fund managers of recent years

54

Robbie Burns’ monthly trading diary

56

Dominic Picarda’s technical take

Tom alights upon small cap miner Emed Mining as his top trade for March

We reveal the real big hitting hedge fund managers and their monstrous hauls

Always entertaining and a must read, Robbie regales as ever with his trading tales

Dominic dons his currency crystal ball in this special FX piece

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Technology Corner

Ski Feature A late season ski focus special

A focus on the latest tech laden motors

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60 Currency wars explained A feature piece on the currency “war’s” currently being waged in the FX markets

64

Zak Mir interviews Tom Houggard

70

SBM Survey

80

Investors Intelligence

86

School Corner - bollinger bands explained

92

John Walsh’s monthly trading record

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Markets in focus

Zak gets to grips with seasoned market’s trader Tom Houggard

We reveal the trading profile and habits of our readership

A new piece on the markets from Investors Intelligence

Thierry Laduguie of E-yield explains how Bollinger bands should be used in trading

Trading Academy winner John Walsh continues with his trading journey

A comprehensive markets round up of under outperformers during the month of February

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Special Feature

five Of the Worst Rogue Traders in History By Richard Jennings and Filipe R Costa

Do you get frustrated when you make a loss in the markets? Have you ever lost £1000? Maybe £10,000? Forget about it. That’s absolutely nothing when compared with the following traders who lost fortunes, albeit in most cases not their own money but their employers and, unfortunately for them, without their employers’ consent! Many of these traders shocked the world by virtue of the sheer magnitude of their losses and all ended up in prison. The one common theme from each of the trader’s stories is hubris — an all too common human emotion. That coupled with greed, ego and inability to accept that they are wrong were the other common ingredients. I’m sure many of you who are also market participants can recall tales of traders that simply couldn’t accept that their view was wrong and decided to “take on the market”, inevitably ending with disastrous consequences. I guess we have all done it to a degree and it is part of the learning curve of trading in the markets — knowing when to fold your cards. What marks these five traders out is quite simply the sheet magnitude of the money lost.

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5 Of the Worst Rogue Traders in History

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Special Feature

A rogue trader is an authorised employee who, through circumstances and particular personality traits, proceeds to engage in unauthorised trading; an employee who decides unilaterally to expand his mandate and trade without bounds. The common theme amongst these traders is not, ironically, the singular desire to enrich themselves, but, strangely, the need for recognition and adulation. It seems they want to be revered by their colleagues. One way or another, however, when trading becomes gambling, the final result is almost always disastrous — a salutary lesson for spread bettors and traders who leverage themselves to the hilt and cannot accept they are wrong — the odds are stacked against such a strategy. Let’s take a look at some of the worst rogue traders in history...

John Rusnak So far so good.

John Rusnak was hired in 1993 as an experienced currency trader by AllFirst Bank, a subsidiary of Irish Allied Banks. With the Nikkei bubble having just burst, Rusnak reasoned that the Japanese Yen would start rising. He thus proceeded to open what are called forward futures contracts betting on the Yen rise.

What he failed to do, however, in breach of his employer rules, was to hedge that position. Unfortunately for him a crisis in Asia occurred in 1997, prompting a long slide in the Japanese currency, and a tub thumping loss for him. Instead of stopping at that point, he decided, as true gamblers do, to embark upon a double-or-nothing strategy and compound matters further by faking his activities, introducing non-existent trades into the system and, in an echo of Nick Leeson’s actions, using special accounts that he managed to keep from his supervisors for some time. In fact, enough time for his losses to grow to an enormous $691 million. After the losses were finally discovered in 2002, Rusnak was sentenced to seven and a half years in prison, although he spent a little less than six years in jail and is a free man now. He didn’t profit personally from this trade beside his salary.

“Instead of stopping at that point, he decided, as true gamblers do to embark upon a double-or-nothing strategy and compound matters further by faking his activities” 10 | www.financial-spread-betting.com | March 2013


5 Of the Worst Rogue Traders in History

Toshihide Iguchi

Toshihide was born in Kobe, Japan, a city that would also come to be at the epicentre of Nick Leeson’s disgrace some years later as we will see... Toshihide was a trader of the Japanese Daiwa Bank, working as a portfolio manager, mainly trading in US Treasury Bonds at its New York subsidiary. In early 1983, Toshihide’s losses from bond trading were contained at $70,000 — a manageable loss that anyone could have incurred. Unfortunately for Toshihide, and very probably partly due to the Japanese culture as well as trying to keep his job, he decided to hide his losses. In an attempt to recover the relatively small loss, Toshihide continued to average his position, accumulating ever increasing losses until it reached a point where the loss was so big that he was concerned he could actually be putting the whole bank at stake!

“Toshihide continued to average his position, accumulating ever increasing losses until it reached a point where the loss was so big that he was concerned he could actually be putting the whole bank at stake! ” In a moment of contrition, albeit much too late, he decided to write a letter to the President of Daiwa Bank in Japan detailing the enormity of the situation. Some eleven years had passed since the first hidden loss of $70,000 and which had turned into $1.1 billion! He was ultimately sentenced to four years in prison in 1995 and was released in 1999 and now dedicates his time to writing and teaching English in Kobe, Japan.

Nick Leeson Leeson’s role was what is called “index arbitrage”. For anyone who is not familiar with what “arbitrage” is, the standard description is “riskless profit”. The irony of Leeson’s job title and his eventual losses would not be lost on him many years later...

Perhaps the most famous of all the “rogue traders” is the man who broke Barings Bank — none other than Mr Nick Leeson. Everything seemed to be rosy for Nick when he was transferred from the London office with his then beloved wife Lisa (who would come to leave him while languishing in jail) to Singapore to trade on the SIME.

According to Leeson in his autobiography, he describes the first fraudulent trades in the infamous “fives 8’s” account (8 being a lucky number in China) as a consequence of attempting to cover up the mistakes of a local female colleague. Initially, he managed to trade his way out of the mistake and actually book a profit and, if greed hadn’t gotten the better of him, that would have been the end of the matter. Sadly for him and Barings shareholders, the making good of the losses on the five 8’s account gave way to the realisation that Leeson could conduct unauthorised trades and pull the wool over the directors in London. Of course we all know what’s coming next...

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Special Feature

“In short, the coffers were bare. When the curtain finally came down his loss was some £827m.” Leeson accumulated some decent profits initially in the secret account and so continued to enjoy a revered standing within the bank who came to rely on him to produce the required profits in order to dole out the usual year-end bonuses. A case rather of ‘he who is blind is ignorant’. Quite simply, his superiors in London didn’t give a damn how he made the profits, as long as he actually did. Greed was a common thread throughout the bank it seems. Of course, the run of profitable trading came to a juddering halt, exacerbated in large part by a stroke of very bad luck for Leeson (and the people of Kobe) when the Kobe earthquake hit. By the end of 1992 he had a loss of £2 million, but come 1994 this had ballooned to £208 million! As the losses snowballed, Leeson resorted to the usual gambler’s trick of averaging down, simply buying more and more futures in the hope the market would turn around. We’ve all been there, eh? Just not on Leeson’s scale!

On January 17, 1995, the Kobe earthquake almost liquidated him. His overnight bet against volatility simply blew up in his face and he was staring down a loss of £827m. The enormity of this must have dawned on him and he realised that the cash transfers from the London office that he had managed to explain as client positions being covered, were likely to be no more. In short, the coffers were bare. When the curtain finally came down his loss was some £827m. After an attempt to disappear and avoid the music, he was arrested in Germany and returned to Singapore where he was ultimately sentenced to six years in the notorious Changi jail. Whilst incarcerated his run of bad luck continued with his wife remarrying and him developing colon cancer. Barings Bank was brought down and finally sold for the symbolic price of one British pound.

Kweku Adoboli

Kweku Adoboli is another rogue trader who it seems made no money for himself, but was quite simply looking for the adulation and respect of his fellow traders at UBS. He did however lose money personally on his spread betting account with IG Index! Working within the Global Synthetic Equities trading team of UBS and, again, in similar echoes to Mr Leeson’s escapades, Adoboli’s role was supposed to be that of putting together “baskets” of equities in various geographic regions to capture relatively small (but frequent) discrepancies between the representative futures indices — again, a form of arbitrage.

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“in similar echoes to Mr Leeson’s escapades, Adoboli’s role was supposed to be that of putting together “baskets” of equities in various geographic regions to capture relatively small (but frequent) discrepancies ” Adoboli placed a number of unauthorised trades in the S&P 500, EuroStoxx and other main indices and eventually racked up losses of $2 billion.


5 Of the Worst Rogue Traders in History

Adoboli maintained his innocence right up to trial and insisted that his superiors knew what he was doing and that he was being used as a scapegoat for the banks bad trading. Whatever the truth, to us, it is another example of senior management turning a blind eye whilst the traders get up to mischief. As to where the so called risk departments are that seem not to understand simple double entry accounting, well, that’s worthy of an article in its own right...

During Adoboli’s case, pressure on traders has been referred several times in court as one of the triggers for the risky behavior. Our belief is if you can’t stand the heat, then stay out of the kitchen and remember, if you go down a fraudulent and crooked path, then inevitably you will always pay the price.

Jerome Kerviel “The problem for Kerviel is that it seems he “forgot” to implement the second part of the arbitrage trades - selling a portfolio to offset the risk, and in fact just went “naked” in his trades.” Working at French bank Societe General, Jerome Kerviel tops our list of rogue traders in pure monetary terms by virtue of him racking up an inordinate loss of almost €4.9 billion. Kerviel was, yes, you know what’s coming, working within “arbitrage” where he was supposed to be buying a portfolio of securities whilst simultaneously selling another one to capture a small riskless profit. The problem for Kerviel is that it seems he “forgot” to implement the second part of the arbitrage trades — selling a portfolio to offset the risk, and in fact just went “naked” in his trades. At first, and again in common with most of these rogue traders, everything went very well and it has been said that as of January 2008, he was up €1.4 billion. Now, here’s where we believe management and the so called “risk managers” are almost equally culpable — the 1.4bn of profits can’t have been hidden or if they were, then it is a failure of their accounting and trade reporting system that needs addressing; and if they weren’t, then, again, turning a blind eye to “unexplained” profits seems to be a big factor here. In a futile attempt to avoid being caught, Kerviel supposedly sold many of the securities within the portfolio baskets at small losses in order to pretend that he was offsetting his trades.

Unfortunately for him, the bank uncovered the scheme in January 2011 and quickly sold his portfolio and so crystallising Kerviel’s legacy as one of the biggest losses ever incurred through rogue trading — a cool €4.9 billion. Kerviel was ultimately convicted by court and sentenced to prison, but he has always stated that he was not the only one who was in-volved with the trades. With the total amount of trades summing to over €50 billion — more than the bank’s actual capital — we have some sympathy with this assertion, either that, or he had to be a genius to have been able to work alone.

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Special Feature

A Word on Dr. Copper Regular readers will recall the inclusion of the infamous Hanamaka (or Dr. Copper as he is also known) in our piece last month on commodity cornering. Hanamaka is included here given the magnitude of his losses, some $2.6bn, but his trades would very unlikely have been unauthorised. He cornered the market in copper for ten years, something that couldn’t have been done without consent and support from his firm and ultimately ended up losing $2.6 billion.

“Hanamaka is included here given the magnitude of his losses, some $2.6bn but his trades would very unlikely have been unauthorised.” A Final Word It seems the following ingredients are common in all these cases — a requirement on the traders part to be respected and revered by his peers; greed, largely on management’s part who are prepared to turn a blind eye when things are going well; and, in many cases, a sheer lack of understanding of the businesses they are operating by senior management. The “old boy’s network” frequently works to shareholders’ disadvantage, but no more so than in the financial industry where the sharp young bucks run rings around senior man-agement.

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Of course, each of these individuals had persona extremes that prompted them to go that extra bit further and run up the losses of such magnitude, but, again, it is very likely hard to avoid rogue trader episodes in the future as many of the personality elements that a trader requires to have (and that have been compared to psychopathic traits) were present in these individuals. Perhaps the only way to really stamp it out is to ensure that management and risk managers really understand what their traders are doing!


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Special Feature

SBM CoNviCTioN Buy To say that Avocet Mining shareholders have had a torrid few years is something of an understatement. One look at the chart shows that the West African based gold miner has wiped out over 90% of its peak market capitalisation — it is now a fully paid up member of the ignominious 90% club. Question is: what has gone wrong and is there value to be had in the shares at the current price of 23p (time of writing)? Let’s take a sift through rubble in presenting our Buy case... Before we start with our analysis, it is interesting to note that in an echo of our feature piece this month on why analysts as a group are always wrong, that not one analyst rated Avocet as a Sell in recent months and it is only now, after the Inata reserves downgrade, that caution is being applied by the analyst community. If they are always wrong, then this is an additional ingredient; if the fundamentals stack up on the Buy side.

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Avocet - SBM Conviction Buy

BACkgRouND Avocet mining was previously listed on the junior AIM market before joining the Official list as a constituent of the FTSE 250 index in early March 2012. Somewhat ominously now, with the benefit of hindsight, non executive director — Norwegian Harald Arnet — sold out of almost all his position in the group disposing of 23.7m shares at a price of 200p by way of a placing on the 16th March 2012. Arnet also resigned from the board after a period of three years. The stock is dual listed on the Norwegian bourse. Avocet currently operate one gold mine — Inata — in the small West African country of Burkina Faso, but they have a pipeline of exploration projects across 21 licenses in both Burkina Faso and Guinea. Avocet’s exploration licences at Bélahouro in Burkina Faso covers approximately 1,660 km2, whilst at its other main project, Tri-K in Guinea, their exploration license covers approximately 986 km2.

The company states that all of their mining licenses are located within the highly prospective Birimian greenstone belt that dominates West Africa’s geological landscape and is a proven gold resource hub. Avocet’s gold mining and exploration operations were previously located in South East Asia and these assets were sold in June 2011 for US$200 million in cash — a sum which thankfully underpins the Group’s balance sheet to this day, although there is litigation outstanding with former partner PT LT and who are claiming some $2bn, although most legal experts believe the vast majority of this claim is highly speculative to say the least.

TABLE - AVOCETS WEST AFRICAN OPERATIONS

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Special Feature

Instability and violence in Mali recently has also weighed on investors’ minds with a general increase in risk perceptions for those miners operating in West Africa. Avocet’s key Inata mine, and which has been the cause of the cratering in the stock price in recent weeks, has had its proven mineral resource estimates cut from 1.85m to an estimate of 0.9m - 1.2m ounces.

TABLE - INATA PROSPECT, BURKINA FASO

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Estimates of the total reserves body still runs to almost 3 million ounces from this prospect, however, it is simply the commerciality of mining these resources that has prompted the company to downgrade itself. At the Souma project, which is within the Bélahouro region but outside of the Inata mine license area, a further Mineral Resource of just over 0.5 million ounces has been defined. The Inata gold mine is 90% owned by Avocet and 10% owned by the government of Burkina Faso.


Avocet - SBM Conviction Buy

An additional exploration programme in the Tri-K Block of permits in Guinea is ongoing and is focused on three main licences — Koulékoun, Kodiéran and Kodiafaran. The most advanced of these is Koulékoun with a Mineral Resource estimate of 1.83 million ounces. Kodiéran is the second largest with a maiden Mineral Resource of 0.41 million ounces. In their recent announcement of 14 Feb 2013, so negative was the market’s reaction that it seems to have overlooked the statement regarding the Souma deposit of approx 500,000 ounces.

The company stated that it had completed an infill drilling programme and that it will report an updated Mineral Resource shortly but that, “exploration in parallel with the drilling programme has defined several geochemical anomalies and geological structures that indicate potential for a significant resource increase in due course. Avocet will undertake a step out drilling programme at Souma aimed at evaluating the expanded resource potential and generating a new Mineral Reserve by the end of 2014. Of note, gold at Souma commonly occurs as free gold grains in quartz veins hosted by a sequence of volcaniclastic and intrusive rocks. Preliminary metallurgical test work at Souma indicates that high recoveries will be achievable.”

TABLE - GUINEA TRI-K BLOCK

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Special Feature

Valuation opportunity So, with potential total mineral resources of just under 7m oz of the yellow metal across its various licences (adjusted for government shares and the downgrade at Inata), and recent cash costs to the company of mining the actual gold hovering around $950/oz, why is the market cap now a lowly £50m? After all, elementary maths will tell you that with the current gold price of $1600, that this equates to a $650/oz profit. If we assume that only 50% of the resources across its blocks will ultimately be mined, then the gross profit value of these 3.5m reserves is $2.275bn. Of course the market isn’t that stupid and what has gotten investors into a lather is the “hedge book” that was entered into with Macquarie Bank in relation primarily to its main producing mine — Inata. In a nutshell, Avocet has 173,250 ounces of gold to deliver at the hedged price of $950/oz under the agreement. At an anticipated cash cost of $1050-1100/oz, the company is actually losing money on these sales. In the near term, production is expected to be around 135k oz of gold p.a. and with delivery to Macquarie on the hedge around 33,000 p.a. this will result in a loss of $5m p.a. at the gross level. If the company went to delivery on the entire hedge then the total gross loss would be some $26m. Against cash reserves of around $60m and next to no debt, and profitability on the balance sales of 100k oz of gold of approx $500/oz at the current gold price ($50m of gross profit), you may be wondering what all the fuss is about?

TABLE - NET ASSETS

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The issue is that some $38m of the company’s $60m cash pile is sat as effective collateral against the hedge and so with these monies encumbered, and on an EBITDA rate of around $20m p.a, they will struggle to develop Souma and progress their prospects in Guinea. How to get out of this? Sell Souma or some of their licences, invite in partners, or bite the bullet on the hedge to take a one off hit and free up cash going forward to continue the mine’s development. It looks like they are going to take the option of biting the bullet on the hedge, and with a hedged price of $950 and a current gold price of $1600 (ironically the falling gold price actually helps them out here as it reduces the buy-back cost of the hedge) then on 173,250 oz’s, the cost of the entire buy back is around $112m. Of course, they currently have circa $60m in cash and so if they bought back pro rata the reduction in reserves on the hedge (50% of this – approx $56m) then the net cost would be pretty much covered entirely by the cash. This would, however, leave a relatively flimsy balance sheet and hence the speculation that a capital raising is imminent. The difference to the P&L profile going forward would be somewhat enhanced though as they would be able to sell their gold production at the prevailing market price. In effect, Avocet, should they buy back the hedge in part or whole, would be making a call that the gold price is actually going to go higher. Let’s look at the company another way: weighing up the Avocet’s asset base adjusted for both the hedge book loss and the Inata reserves reduction. The balance sheet lists the mine’s value at $270m; let’s be ultra conservative and cut this by one third. We also, in this exercise, write the intangibles down to zero and which is in the books at $50m. We are therefore reducing book value by $140m and which, pre the write down, is listed at $390M (see below).


Avocet - SBM Conviction Buy

This results in an adjusted book value of $250m. Deduct again the hedge liability of $112m, and we get to $138m or around £90m at present FX rates — twice the current market cap. However I slice and dice the numbers, it seems that for existing shareholders, if a rights issue is called for, and likely to be a 1 for 1 with a partial hedge buy back, then you should certainly take up your rights. I see a similar situation to the Lonmin one recently in which the shares shot up after the balance sheet was repaired. Avocet’s profitability profile going forward will be dramatically enhanced and the discount to book value should narrow (its peer group trades around 0.8 times book on average).

Potential Catalysts One intriguing element in this story to me is the name Elliot Advisers who sit on the shareholder list. For those of you who do not know who Elliot are, they are an activist based hedge fund that typically takes stakes in struggling firms and they hold currently around 27% of Avocet — the vast majority, sadly for them, being acquired for well in excess of one pound.

So underwater on the position are they, that I wouldn’t bet against them agitating for the company to put themselves up for sale or actively solicit a bid for the company. Potential names put forth by industry commentators are African Barrick Gold, Semafo or indeed a Chinese player. With the valuation parameters we have presented here, it is inconceivable to us that the slide rule is not being run over the company given the very large disjoint between the company’s fundamental value and the short term difficulties centred around the hedge book that have so decimated the market cap. The other alternate is that the company takes in a strategic partner in some of their prospects. Unless the asset base is completely bogus, again from a corporate activity perspective, what better time to gain exposure to valuable gold producing assets, particularly with the gold price relatively depressed for the first time in several years? Bearing in mind all the above, SBM makes Avocet Mining, in the same vein as our calls on ENRC, BUMI and Lonmin where the asset base v market cap was so dislocated, a Conviction Buy. We disclose that we are long the stock.

CHART - AVOCET MINING

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Editorial Contributor

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

Patel on Markets A Good Start To Last?

Just how bullish are the markets? As I write, the inflation-adjusted Dow is up 114% from its crisis lows and is now trading 10.6% off its 1999 record highs. People are feverishly buying stocks again as they hold on to the stock market saying “How goes the Dow in January so goes the whole year”. Based on historic records since 1987, this saying has actually proved correct 75% of the time. However, I’m wondering whether the spectacular January gains of 7% mean that we should be looking to short the Dow as most of the gains have already accumulated? Well, according to my research, in 15 out of the 27 times since 1987 where the Dow registered a positive January, you would make money by continuing to bet on the market closing even higher at the year end. This looks like nothing better than a coin toss trade to me though as it implies no more than a 50% chance. Of course, if you really want to add fizz to your spread bet, let’s not forget that since 2007 the best performing global indices are Thailand (+200%), Indonesia (+140%), Chile (+100%), Malaysia (+95%), Turkey (+80%).

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None of these are the BRICS which are lauded so much by financial strategists and commentators as the saviours of the global economy you will note (these being Brazil, Russia, India & China). It’s also difficult to find a tradeable instrument in a spread betting account to allow you to play these indices.

“Of course, if you really want to add fizz to your spread bet, let’s not forget that since 2007 the best performing global indices are Thailand (+200%), Indonesia (+140%), Chile (+100%), Malaysia (+95%), Turkey (+80%).”


Patel On Markets

The big question now though is, of course, is a pullback due or will the uptrend continue? If your broker offers it and you like steroids with your spread betting, consider the Nigerian index which I think is likely to continue its strong ascent. Although we are fixated as investors, it seems, by the absolute level of Government debt, let’s not forget that it has risen in recent years primarily as bad debts in the corporate sector have been transferred to the public books. Household and business debt has been falling over the last three years, certainly when measured against the size of the economy such as GDP. This to me is positive news as it loosens the purse strings for corporate activity and potentially a much needed revival in the consumer.

why are the markets so bullish? To me it’s simple. Look at the last quarter of 2012 earnings from US companies. 39% beat the sales and profits forecasts. Another 40% beat either the sales or profits forecasts and so, by default, only 21% were inline or missed forecasts. Given than four in five beat expectations, that’s a pretty good explanation for buoyant stock markets to me, particularly given the undemanding valuation backdrop.

If our expectations are pessimistic because of global uncertainty leading to a reduction in growth expectations, and yet companies perform well due to cost-cutting, then by default growth will not be as poor as anticipated. Similarly with Government spending that adds demand to the economy, again, if we are overly pessimistic and the results exceed our expectations, the stock market goes up. That is quite simply what has been happening and is why we are where we are. In my mind anyway! Indeed, looking at the overall stock market capitalisation in the US as a percentage of GDP, we are currently at 1 to 1 total market cap to GDP ($16trillion). Just before the bubble burst back in March 2000, the stock market capitalisation had reached 1.83 x GDP. When the latest rally started in 2009, the market was valued at just 0.6 times and so we are not overly stretched, either over or undervalued at present. We owe a lot to analysts for the rally —not because they are bullish, but because they have been so bearish. According to Bloomberg, “The 50 stocks in the S&P 500 with the lowest analyst ratings at the end of 2011 posted an average return of 23 percent [in 2012], outperforming the index by 7 percentage points.” This fits well with one of the feature articles in this edition by the editor as to why analysts as a group are always wrong. Still, don’t believe me that returns are driven from expectations and not the known economic outlook? Consider this: in 2012, the Greek stock market (ATHEX Index) outperformed the Chinese stock market (Shanghai Composite) by 48 percentage points. Which of those economies, from a media headline perspective, was deemed to be the worst?

We always, it seems, wrongly focus on what will drive earnings or sales of companies when deciding if they are worth betting on. Share prices are not driven by that. They are driven by whether our expectations of those sales and profits will be met.

In another example of just how ill informed the wider investment class is, here’s a shocking statistic: last year Franklin Templeton asked 1,000 investors whether the S&P 500 went up or down in both 2009 and 2010. Fully two thirds thought it went down in 2009, while 48% said it declined in 2010. In reality, the index gained 26.5% in 2009 and 15.1% in 2010.

“Given than four in five beat expectations, that’s a pretty good explanation for buoyant stock markets to me, particularly given the undemanding valuation backdrop.”

March 2013

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Editorial Contributor

“How long do bull markets last? Since 1929, the typical timescale from the market bottom to the peak in the S&P 500 (a pretty good proxy for the UK markets too) has been 3.8 years on average.” WHAT IS THE LENGTH OF A TYPICAL BULL MARKET? How long do bull markets last? Since 1929, the typical timescale from the market bottom to the peak in the S&P 500 (a pretty good proxy for the UK markets too) has been 3.8 years on average — with two major outliers — the one since 1990 being nearly 10 years long and the one in 1938 being just under a year. The median is worth looking at when you consider such wide variations and the median is 3.6 years in length. Guess where we are now? Over 3.8 years. If you believed only in averages you start getting worried. So we know how we got here, but should we remain at the party? According to Bloomberg, “Americans have missed out on almost $200 billion of stock gains as they drained money from the market in the past four years, thanks to the financial crisis. “ As ever, retail investors get their market timing completely wrong as it is only in recent weeks that they have returned — precisely towards the end, based on historic data, of the bull run!

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March 2013

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Special Feature

Why “anal”-ysts as a group are always wrong The more regular readers amongst you will know that I hold a lot of participants in the financial markets industry in extremely low regard. This is not without reason or experience however. Having been a former fund manager, stockbroker and, horror of horrors, an “anal”yst myself, I have had first-hand experience of dealing with a lot of these individuals. How many of them would I trust to manage a single penny of my money? Yup, you guessed it, none. And, incidentally, this is part of the reason as to why we are launching our new company — Titan Investment Partners will offer all the benefits of professional fund management but, uniquely, within a spread betting wrapper. In recent years, there have been some major market dislocations — at the turn of the century with the dotcom bubble — an event that, some 13 years later, the Nasdaq still has not recovered from (see chart to the right) and more recently the subprime crisis that engulfed the entire globe in 2008-09.

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How many of these highly paid industry professionals saw these dislocations coming? An exceptionally small number as you will see... It is interesting to me that around the turn of the millennium the few lone dissenters were in fact experienced ‘old timers’ — individuals who had been around the block and could see that we were in fact in a bubble. It was the younger analysts and fund managers who were caught up in the hype & were blind-sided by the euphoric extremes and had no experience of a bear market, having cut their teeth in the boom years of the 90s in which stock markets seemed to only go one way — up.


Why analysts as a group are always wrong

“Dye’s answer to his critics was simply that the market was overvalued and he didn’t want to succumb to the “bigger fool” bandwagon, particularly as the months rolled by and he may just in fact, if capitulating, be the bigger fool! During 1999, as stock markets continued to inflate and particularly in the technology arena, he came under increasing pressure from his clients and fellow management to explain just why he was underperforming so badly. At the end of 1999 his firm was ranked 66th out of 67 for performance. Dye’s answer to his critics was simply that the market was overvalued and he didn’t want to succumb to the “bigger fool” bandwagon, particularly as the months rolled by and he may just in fact, if capitulating, be the bigger fool!

TONY DYE

Dr Doom One particular analyst with whom I had a great deal of sympathy at the time was a chap who came to be known as “Dr Doom” given his bearish views — Mr Tony Dye former CIO of what was then known as Phillips & Drew (and now simply UBS). I never got the chance to meet him as a fund manager, but I was aware of his cracking track record and his value bias of investment. Unfortunately for Mr Dye, his logical views and ability to realise that stocks were wildly overvalued was ironically his downfall.

Mr Dye resigned just after the market crashed and he was ultimately vindicated as stock markets around the globe halved through to 2003. Dye started a new fund management company and went on to produce, once more, exceptional returns for his clients before sadly passing away in 2008. To me, he was a true fund manager — a man who made money through thick and thin, who stuck to his disciplines and investment beliefs and not someone who was in the right place at the right time like many of the so called “hot shot” fund managers of recent years.

NASDAQ CHART

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Special Feature

Empirical evidence of the collective uselessness of analysts as a Group Below is a chart that depicts the percentage of analysts who rated US Stocks, in aggregate, as a Buy during the last five years and overlaid on this is the S&P 500 itself. Notice anything in particular? Two major observations stand out to me — firstly, the green line is a lagging and NOT a leading indicator. This means that analysts are just reacting to the market and not anticipating which is what they are paid to do — anticipate and thus add value. Secondly, we can see that at the nadirs of the bear market in early 2009, they had the fewest number of buys in recent history. Think about that for a moment — at precisely the point where these highly paid individuals should be anticipating that valuations were at historic lows and that the downside was minimal, they were similarly so shaken with fear, it seems that they simply could not see the wood for the trees.

In short, analysts as a group in supposedly the most efficient market in the world — the US — have absolutely no predictive power, and in fact are, ironically, only of value as a contrarian signal!

“In short, analysts as a group in supposedly the most efficient market in the world - the US have absolutely no predictive power, and in fact are, ironically, only of value as a contrarian signal!.”

CHART - S&P 500 8 YEAR PRICE HISTORY V ANALYST BUY RECOMMENDATIONS

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Why analysts as a group are always wrong

We are not finished yet in presenting the evidence to the collective “jury” that is the investment marketplace however. An even more damning dataset is presented in all its glory below which looks back at their collective predictive power over 15 years. Spot a pattern? What we should be seeing is a peak in analysts’ Buy recommendations as the market hits a nadir, and a low in such recommendations at the peak. And yet, the historical record portrays precisely the opposite.

CHART - S&P 500 15 YEAR PRICE HISTORY V ANALYST BUY RECOMMENDATIONS

Group-think Let’s look at some of the reasons behind this major value destruction that they collectively create within the marketplace. That vast majority of analysts are in their 20s and 30s and so: (a) simply do not have the experience of an elongated market cycle; (b) the investment industry is entirely about personal nest feathering, in many cases at the expense of the actual investor, and so there is “safety in numbers”. In other words, if you are a recent graduate taking your place on an analyst team at an investment bank and consensus amongst your peers is blithe positivity about a particular stock, why be a hero and go out on a limb?

The other major reason why they are so wrong is quite simply due to what is called “anchoring”. Management of companies put out guidance to the marketplace and the vast majority of analysts simply plug these figures into their spreadsheets. With the “herding” mentality we explained above, then those analysts who are not close to the company simply congregate around this figure. This is ‘group-think’ and humans are hard wired to conform to this.

Best case you make a name for yourself but perhaps upset management of that company and so cut your firm off from lucrative corporate fees; worst case you are too early in your call, still cut the firm off from corporate fees and you lose your job.

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Special Feature

How to profit from their collective uselessness

Vice versa is true on the buy side: i.e. what I look for in deciding, as part of my investment process, whether to purchase a stock are the following:

1

If we know just how useless analysts are, then the question, of course, is how do we use this information to profit? Here’s my shortlist of what I look for in a short position:

1

Relatively low short interest from stock borrowing data implying that should a company slip up with its results or the market face a correction, then heavy short covering will not act as a buying support for the stock.

What I like to see is neutral consensus sentiment with a strong bull and bear argument by one or two analysts and the bull argument from an entirely independent analyst, i.e. not connected to the company. The neutral basis tells me that the company is probably forgotten and surprises are not expected by the investment community. Again, it is the smaller research boutiques that generally produce the dissenting calls and whose clients are hedge funds prepared to pay for good research. A buy argument that is well reasoned is part of my cue for action.

2 Consensus media positivity — pretty much for

all the reasons detailed here — it is very rare that a journalist will swim against the tide and put his own neck on the block (present publication excepted of course!) in making a contrarian call. Almost universal positivity amongst analysts

3 covering the stock, with very few sell

recommendations. Where there is a sell recommendation, and it is produced by an independent research house, then the bear arguments are pored over carefully.

4 The first thing I look at in an analyst note is the

disclaimer at the bottom of the note in which they are legally forced to disclose if they have, or expect to, receive fees from the company in question, generally due to corporate finance fees. This tells me all I need to know about independence and objectivity.

5

I personally never, ever, ever follow a Goldman Sachs Buy note and would likely do the opposite of what they recommend. Nuff said on that one.

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You’ll be surprised perhaps to hear that it is not actually universal negativity around a company. Recall my point about analysts not, in general, being “heroes” with ballsy calls. Well, if a stock is universally hated, then there is usually a very glaring fundamental reason for this such as a declining marketplace, debt problems etc.

2

Large short positions in the marketplace such that positive news can act as a catalyst for the stock and which then receives extra buying fuel through short covering.

Two companies display in perfect graphical form the points above. Shoring up the bear side is Apple: a stock that fitted all the criteria detailed here — universal positive sentiment, few sell recommendations; and on the bull side — a stock with heavy short interest and where very few analysts were buyers — Blackberry (formerly known as Research in Motion). They say a picture speaks a thousand words — take a look at the six month relative chart to the right.


Why analysts as a group are always wrong

BLACKBERRY APPLE CHART One other point that comes out of this analysis is that anybody who still believes in EMH — Efficient Market Hypothesis — is either a prime example of the saying “there’s none so blind as them that can’t see” or just plain dumb. EMH states that a stock price at a point in time is an accurate reflection of all known and unknown information (i.e. it also reflects insider positioning) and so it is, by default, unless you are lucky, impossible to outperform the market. I would argue that the market that is comprised primarily of investment professionals is so biased in their views and riddled with conflicts, that if we can recognise this and know when to go against the grain that precisely this collective inefficiency is our opportunity.

If you like the sound of our investment process which prompted Buy calls on Blackberry, Bumi, Lonmin, ENRC, Nokia, Japan etc etc. and that have all rallied extensively, confounding most of the analysts that cover them, then email TITAN to info@titaninvestmentpartners.co.uk to register your interest ahead of our imminent launch of various funds.

March 2013

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Special Feature

Currency Wars explained By Richard Jennings and Filipe R Costa

The current financial crisis has been extremely frustrating for almost all of the major global economic regions as five or six years after it started the end still seems elusive. Indeed, in recent months the UK has experienced an unprecedented triple dip recession, Europe is still mired in an environment of generational high unemployment and the US, although recovering, is still not generating the jobs growth that many would like.

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Currency Wars explained

“iN ACTuAL FACT, MANy CouNTRiES HAvE BEEN DoiNg JuST THE REvERSE AND ENFoRCiNg AuSTERiTy oN THEiR PoPuLACES THAT iS SiMPLy MAkiNg THiNgS EvEN WoRSE.” Governments around the world have tried literally everything in the economic textbook to boost their economies, but due to the huge public debts that they had accumulated over the last 20 years, they have not been able to apply the necessary fiscal measures to boost internal demand that traditionally would have been used. In actual fact, many countries have been doing just the reverse and enforcing austerity on their populaces that is simply making things even worse. Under the current environment, central banks have been substituting the usual fiscal levers of government that would be expected to be applied, and are throwing everything they have on the monetary side at their domestic economies in an increasingly desperate attempt to boost demand and create self sustaining growth. So far this is proving elusive. The use of such monetary policy tools is aimed at boosting GDP through primarily external demand (i.e. exports) at the expense of neighbour countries in what is known in economic literature as beggar thy neighbour policies. With the Japanese yen devaluing by some 22% against the euro in just three months and with the euro appreciating against pretty much every currency, it is safe to say that a currency war has started in earnest.

THE FouNDATioNS FoR A CuRRENCy WAR A “currency war” is essentially a competitive devaluation of a country’s currency relative to others or against a basket of currencies in an attempt to boost exports (external demand) and so add impetus to that country’s industry.

It is, traditionally, the easiest way to become competitive. Instead of cutting wages and jobs as Portugal, Greece, and Ireland (imposed by the Troika) have, countries sometimes try to just lower the value of its currency in order to make its products become more attractive at a price point. It usually works too and creates a new wave of economic growth, albeit at the expense of that countries purchasing power (higher cost imports for example). This type of economic warfare often results in retaliation by other countries to prevent themselves being negatively affected by those policies. It is thus all too easy to understand how workers in Portugal, Greece, Spain and others inside the Eurozone currently feel, given that they have now endured almost five years of extreme austerity measures and now see their efforts thrown through the window due to the euro appreciation...

A “CuRRENCy WAR” iS ESSENTiALLy A CoMPETiTivE DEvALuATioN oF A CouNTRy’S CuRRENCy RELATivE To oTHERS.” FRoM CRiSiS To CuRRENCy WAR The currency war started in 2008-09, even though at that point the main goal of central banks was simply to try to contain the financial crisis that was just gathering pace rather than trying to influence exchange rates. One way or another, however, monetary policy always influences exchange rates and when it is extremely expansionary, as it is now in most countries, it ends with winners, and losers... During the last few years, central banks have used monetary easing, lower interest rates, currency floors/caps, capital controls, direct market interventions and even verbal interventions in attempts to fix internal demand problems.

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Special Feature

The Swiss National Bank, for example, had to directly intervene in the market providing Swiss francs for the excess demand for its currency — an unprecedented measure for this model of fiscal and monetary prudence. The bank imposed a floor on the cross EUR/CHF of 1.20 to avoid excessive appreciation of the Swiss franc and has been accumulating foreign exchange reserves as it sells Swiss francs and buys the respective pair currency in a continuous battle to maintain the peg. In the US so called “Helicopter” Ben Bernanke has been aggressively expanding the monetary base, buying everything he can lay his hands on, from government bonds to mortgage securities. As yet, he has not intervened directly in the equity market, but give it time..! The Bank of England has followed the same policy buying the UK’s domestic debt and suppressing gilt yields at 300 year lows.

In Japan, central bank intervention is now being taken one step further than others and the independence of the BOJ is actually at stake as Shinzo Abe, the newly minted Japanese Premier, is now adopting a very aggressive stance in favour of material yen devaluation. A policy which, certainly in the very recent past, is proving fruitful as the yen is down 22% and 17% in the last three months against the euro and the uS dollar respectively.

TABLE - 3 MONTH PERCENTAGE MOVES IN THE MAJOR CURRENCY PAIRS

“iN 1931, iT WAS iN FACT THE uk THAT STARTED A CuRRENCy WAR AND WHiCH CuLMiNATED WiTH THE END oF THE goLD STANDARD iN 1936.” 34 | www.financial-spread-betting.com | March 2013


Currency Wars explained

Monetary easing in the US has led to many complaints against it from Latin America, and in particular from Brazil which depends heavily on exports to the US. The current US Fed policy has led to the appreciation of many countries’ currencies against the dollar and some of their central banks have been forced to lower interest rates in response. Countries like South Korea and Taiwan are also making loud noises now as they are losing competitiveness against Japan with the current yen devaluation.

LESSoNS FRoM THE PAST Currency wars have happened in the past, with the best example being just after the Great Depression. In 1931, it was in fact the UK that started a currency war and which culminated with the end of the gold standard in 1936.

Following the Depression, and after suffering from rising unemployment and sluggish growth for several years, the UK decided to leave the gold standard for good and so let sterling devalue against other currencies. The measure was very successful for the country as the uk started recovering before other economies. When comparing with the devastation that enveloped the US economy — cratering GDP by almost a third — a level very similar to Greece today, the UK just went through a mild recession. Indeed, if we contrast this with the present day, we can see that the US has effectively followed the same path as the UK over the past 80 years. This explains why the US has been recovering in recent years with falling unemployment and nominal GDP now actually back above the level prior to the Great Financial Crisis, whilst those countries still in the mire like Southern Europe are tethered to a de facto gold standard — the strong and resilient euro.

CHART - US NOMINAL GDP

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Special Feature

“WiTH iTS oWN iNTERNATioNAL TRADE MoRE THAN HALvED, THE uS SooN uNDERSTooD THAT A STRoNg CuRRENCy WouLDN’T HELP, AND iN 1936 THE goLD STANDARD WAS FiNALLy ABANDoNED By THE uS FED.” Soon after the UK abandoned the gold standard, Norway and Sweden followed the same path. As time passed, it became apparent to others that the only option left to them in order to create growth in their economies would be to follow the same path as the UK and so the cycle of competitive devaluations was started. With its own international trade more than halved, the US soon understood that a strong currency wouldn’t help, and in 1936 the gold standard was finally abandoned by the US Fed. Early movers, however, experienced a more muted crisis than the later ones. Ben Bernanke made his name studying the Great Depression and this fact is unlikely to have been lost on him.

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And so to the present day, it seems that Japan is indeed on the right path in matching the UK & the US in aggressively devaluing its currency. With an economy that is almost entirely export dependent, who can blame them? At some point, however, the gains from the currency devaluations diminish as domestic purchasing power reduces and monetary policy inevitably moves to a tightening stance to rein in inflation. The Eurozone, with the Troika firmly in charge, will be the clear loser here in our opinion as they are the only economic bloc in the world that is currently tightening monetary policy and not leaning into the market to suppress the exchange rate value. In this high stakes game it seems the people of Southern Europe have more pain to come courtesy of Ms Merkel and her band of merry austeres..!


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March 2013

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Editorial Contributor

zak mir’s top pick for march Short term Buy Call on Gold Although the financial industry is keen to present the glamorous side of trading and investing, frequently focusing upon the results of the most successful participants, even for these over achievers the process, on occasion, must be about as comfortable as pulling teeth. Just ask John Paulson who has now endured two annus horribilises! Perhaps the best analogy is to steal from the world of entertainment: you are only as good as your last trade. For me, the real challenge is that very often the best money making ideas in the market are those which are totally at odds with logic, or which most of us would likely shy away from — in essence the true contrarian trades as where the big money is made. For instance, January saw the FTSE 100 deliver its best first month of the year since 1989 — back then continuing its recovery off the 1987 Crash. I can tell you how it happened. We were, it seems, collectively either scared out of our long positions, or even worse, short of the market using the logic that the Fiscal Cliff was still not resolved and the U.S. was staring the barrel of a recession and thus there could be a severe stock market correction.

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At the very least, it seemed that the wise move was to exit before the 1st January deadline just in case no deal was struck. Well, of course a deal duly was struck, literally on the midnight hour! In this particular game of Russian roulette there were only blanks in the barrel, and the winners were those who stayed long from November. Last month’s recommendation in ICAP (IAP) was another counterintuitive play — in fact doubly so. It was taken on the basis that CEO Michael Spencer had, inadvertently, created a bear trap in the stock by suggesting that trading conditions for the interdealer broker were the worst in 36 years. The booming stock market post the Fiscal Cliff fears has reversed this logic. The stock was so strong that it gained nearly 10% even after a Libor investigation was announced on January 24th, and despite my good friend Dominic Picarda disagreeing with my buy call in last month’s edition of this magazine — a case of age before beauty perhaps here?!


Zak Mir’s Top Pick for March

“In this particular game of Russian Roulette there were only blanks in the barrel, and the winners were those who stayed long from November.” Recommendation My call for March is to a short term buy of gold on the basis that bulls of the metal have, or are very close to, capitulating. Certainly the support for the “supercycle” rally in this market appears to be no longer the mainstream view and the first sniffs of fear for the bulls are beginning to appear, usually a sign that a short term bottom is in sight. Similar to the curious case of the Fiscal Cliff and the ICAP example described above, reports that billionaire George Soros has cut his holding in half in the benchmark SPDR Gold Trust (GLD) on February 16th has added fuel to the bear stories and, at the time of writing, has temporarily pushed the metal below $1,600. Given that this is the very same week that it was announced that Mr Soros had pocketed a cool $1bn through shorting the yen, there are unlikely to be many traders who say, “Soros is selling gold, I am buying.” But that in my opinion is the trading trap. Even if this is not the bottom for the post September 2011 retracement for gold, I would suggest that as far as a selling climax trigger that leads to capitulation, that this is a decent example. You are of course welcome to wait to see whether there is further downside back towards the main post 2011 support zone towards $1,500 - $1,530, but I would venture to suggest that in terms of an event to flush out the bulls BEFORE a new leg to the upside begins, then this is it. Technically, the position with gold is that a line of support from 2011 can be drawn through the February 15th low of $1,598. I am writing this 10 days ahead of publication and so even if the $1,598 level is not actually the 2013 low, we are, in my opinion, now in the buying zone, especially given the positive RSI divergence between the lower February support versus January’s $1,626 floor.

Those who feel that this is too much of a catch a falling knife exercise would wait on a weekly close back above the January floor around $1,630 as the big buy signal. I personally have seen enough evidence to have gold as my March Buy Bet however. A stop loss just below last August’s low at $1,584 - perhaps around $1,575 should be run. My first target is back to around $1,680 - $1,700 — sight of all the converging moving averages — before the end of March.

Recent Significant News February 15th – Billionaire investor George Soros is reported to be increasingly bearish on gold. Soros cut his investment in the SPDR Gold Trust (GLD) in half during the fourth quarter. The $8.5 billion Soros Fund Management now owns 600,000 shares of the gold ETF, worth an estimated $97 million. That’s down from 1.3 million shares, worth more than $227 million, in the third quarter – CNN Money February 15th – Gold fellow below the key psychological $1,600 on Friday February 16th — a new six-month low. According to Citigroup’s Tom Fitzpatrick “We believe we have just reached the ideal pivot for gold to form a base and move higher as it did after the 16 month consolidation in 2006-2007,” wrote Fitzpatrick who now has a “...a minimum (price) target of $2,055-$2,060.” – Businessinsider.com February 1st – “Is The Bundesbank Preparing For Global Monetary Collapse?” The German central bank announced it will begin withdrawing part of its massive gold holdings (10% of world holdings) from the United States as well as all its holdings from France. By 2020, the Bundesbank says it wants half its gold reserves stored in its own vault in Germany.

March 2013

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Editorial Contributor

Fundamental Analysis I do not think that anyone would disagree with the view that any call on gold currently is a big call — whether a buy or a sell. This is a multi layered market, relating to fear, risk, economics, jewellery, and of course, all the spills and thrills of a commodity that offers a white knuckle ride. The key is to narrow the key points down, and of course to filter out as much short term noise as possible. For instance, George Soros cutting half his SPDR Gold Trust position was clearly a bombshell in February, until you read that the holding was not dumped in February of course but possibly two months or more previously in “Q4 2012”. It is also noticeable, digging a little deeper, that Mr Soros has been reported as jobbing in and out of gold at various points over the past few years, as you would expect any hedge fund to do. Stepping back from Soros and even the bizarre story of the Bundesbank announcing its intention to repatriate a significant part of its holdings, the main reasons for gold’s weakness year to date centre around the fear that the Federal Reserve may backtrack or “taper” the 2012 QE3 pledge to deliver extended and unlimited bond buying.

CHART - GOLD

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Credence for this was delivered within a couple of days of the ink being dry on the Fiscal Cliff deal at the beginning of January, and since then from certain members of the Fed. The issue though as far as gold is concerned is, however, not so much what the Fed or other central banks may wish to do regarding further QE, but what has to be done as far as spiralling Sovereign Debt is concerned. The floodgates of cheap money over the past five years have not been enough to trigger meaningful growth and therefore there is only one obvious way out of the extended crisis in terms of exiting the debt spiral — extend QE until inflation erodes the value of the debt. This is what Japan started at the end of 2012 and, whatever the rhetoric the other major central banks put, quite simply what they are doing. This is and will remain the driver for gold in my opinion To conclude, gold remains the only true store of value, it is just a matter of buying it on a dip during the extended bull run — we are at that point now.


March 2013

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Berlusconi regains power. Do you: a) Cancel your daughter’s exchange trip to Italy b) Sell the Euro in expectation that the Eurozone will eventually break-up

Can you profit from your predictions? Apply today at CapitalSpreads.com, great value for Spread Betting and CFDs. Spread betting carries a high level of risk to your capital and can result in losses that exceed your initial deposit. This advert should not be construed as investment advice. Capital Spreads is a trading name of London Capital Group Ltd (LCG), which is authorised and regulated by the Financial Services Authority and a member of the London Stock Exchange.

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Technology Feature

Technology corner

THE LATEST IN TECH LADEN MOTORS BY SIMON CARTER

Ahhh Spring! Well, it’s sort of here — I think you can just make out the song of the first swallow above the howling wind, and I’m sure I saw a daffodil poking its head through a snow drift this morning. But never mind all that, March is here, and that can only mean one thing — new cars! As of March 1st, we can welcome the ‘13’ plate (although superstitious folk can insist on sticking with the ‘62’) and so the thoughts of many of us will turn to a new car. But what do you look for in a car? Decent mpg? Nice, big boot? Four wheels? How about a gorgeous looking car, performance to match and absolutely stuffed full of more tech than a robot. In an Apple Store. In Silicon Valley?

March 2013

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Technology Feature

Ford Focus ST £21,995 - £26,595 For years petrol heads have been telling anyone who’ll listen that ‘Hot Hatches’ are where it’s at. The Hot Hatch — think Golf GTI, Renaultsport Megane Cup and the Vauxhall Astra VXR — has kicked its way into the market like a snarling punk, appalling yet amazing industry veterans with its unruly performance and devil-may-care attitude. But, hyperbole aside, the Hot Hatch has developed from niche interest to mainstream phenomenon and one of the best examples is the Ford Focus ST. Performance wise, it’s jaw dropping, churning out 247bhp and striding from 0-60 in just over six seconds. But you were promised tech… The tech on show here is mostly in the drive. Electronic Stability Control might not sound fun, but when enabled it monitors your driving, learns it, and warns you of any changes to your preferred style or driving line (such as skids or swerves). You can also rely on Driver Alert which will tell you when you’re tired. Three extra gauges allow you to monitor engine performance from the cabin and the now standard, mobile phone sync is particularly impressive — even calling the emergency services should your airbags deploy. Traction control software and variable-ratio steering are the invisible technologies which make the drive magic. An incredible car.

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Your New Favourite Gadget….Your Car

Alfa Romeo Giulietta £17,760 - £26,660 While the world salivates and waits for the Alfa 4C (winner of the What Car? Car of 2013 Reader Award), you would have to go a long way to find something more stylish, more suave, more Italian than the Alfa Romeo Giulietta. Since 2010, when the Giulietta ousted the 147 from the Alfa range, people have gone crazy for the looks, the drive (well, not the drive — it is an Alfa) and the style of the flagship mid-range. But what do you get inside? As with all Alfas (and Fiats) you can expect the Blue&Me system which offers the expected mobile phone connectivity, but with the neat inclusion of TomTom. What sets the Giulietta aside is the sleek and sexy Radio NAV which integrates the features of Blue&Me into a specially designed pop-up display. Considering the sound system is powered by Bose, you are looking at top of the range all the way. Alfa would like to point to the cutting edge technology in the MultiAir engine system (first seen in the Fiat 500), the astonishing Prefill early warning braking system and the market leading Start & Stop system. But we don’t have space for such frivolities.

March 2013

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Technology Feature

Audi A3 Sportback £19,825 - £27,180 A car so packed full with technological marvels and curiosities that it seems churlish to talk about the vehicle itself. Suffice it to say that the Audi A3 Sportback is another What Car? winner — the prize here being the ultimate one: Car of the Year 2013. So it’s a great car. But that’s not what we’re here for! Let’s start low-key. Audi have installed the A3 with the Recuperation system which collects heat and kinetic energy from your brakes and stores it in the battery. As you accelerate, the energy is used to give you a boost. Cool, eh? Audi throw a lot of tech into safety and driver assistance and so you can enjoy xenon headlights which swivel and adapt to driving conditions. As well as lane assistance — which vibrates as you veer — you get side assist, which warns you of other cars, and a camera which recognises speed limit signs and displays from on your dashboard. All very helpful, but not very sexy. How about a voice activated satnav? Or a 12 channel, 14 speaker Bang & Olufsen sound system? I’ll tell you what, the DAB radio will sure sound great pumping through that! Then there’s your mobile phone connectivity. The A3 comes with the ‘Phone Box’ which is a dedicated compartment for your mobile and connects the device with the car’s aerial, allowing for better reception (as well as providing a USB socket for charging). The Audi A3 is the gadget lover’s dream. Forget that it’s beautiful to look at, and great fun to drive (while being relatively inexpensive). Get in the car, get comfy and push some buttons — you know you want to!

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Editorial Contributor

Tom Winnifrith’s Conviction Buy EMED Mining at 12p

Barring a late Spaniard in the works (like my good friend Zak Mir, I do love the poetry of John Lennon), EMED Mining is a share that, in my opinion, should double from the current 12p by Christmas. About my only concern is that Zak Mir agrees with this analysis! Notwithstanding that, EMED is my conviction buy this month. EMED’s main project is the Rio Tinto copper mine in Spain. It has peripheral assets in Cyprus and Slovakia. The latter is a 1 million ounce gold deposit which would do many of the riff raff of gold juniors on AIM proud, but for the purpose of this analysis I shall ignore both. The focus is on Spain where, for what seems like an eternity, EMED has been seeking permits to re-open this old copper mine. It was closed a couple of decades ago in an era of low copper prices when it was operating with a cost base that was simply untenable.

There is a reason that tens of thousands of young Spaniards are flocking to London and it is not the weather or a desire to interact with the domestic population to improve their Polish. There are simply no new jobs being created in Spain. Yet, the Spanish regulatory process for EMED — a large impending employer— has proved tortuous. The final permits should be forthcoming within the next two to three months, however, and this is the first catalyst that, I think, will result in a re-rating for the stock.

One would have thought that with Spanish unemployment at c30% and youth unemployment at well over 50% and rising, that the Spanish would be rushing through an opportunity to create new jobs.

EMED has already secured the equity (from copper giant Red Kite) and debt (arranged by Goldman Sachs) to spend the c$220 million needed to bring the Rio Tinto mine back to life.

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Editorial Contributor

However, over the medium term clear supply demand imbalance is emerging and that should push it steadily higher.

There are in fact three mines within Rio Tinto. Initially, operations will only be on mine one where we have a new NI 43-101 study as of 18th February, prepared by consultants Behre Dolbear. On the other two prospects, EMED has data, but since there is no independent study on it, it cannot be released. But the indications are that it will show enough copper in the ground to both increase production rates after a couple of years and also to extend the life of the mine from 14 years up to 20 or more. But those assumptions are not part of the maths at this stage — they must just be regarded as potential upside, albeit very significant potential upside. The most recent 43-101 indicated that operating costs would be some 15% higher than originally anticipated. That has caused a few folks to worry about the project which in turn, to me, creates a buying opportunity. The maths are actually pretty robust. My calculations are predicated on mine construction starting pre Christmas and production starting half way through 2014. As with any mine there is clear operational gearing — that is to say costs are largely fixed so the profit made is heavily dependent on the price of the commodity sold. As I write, the copper price is $3.64lb and I would not expect it to move sharply higher this year.

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The Behre Dolbear report actually uses two copper prices: $2.50 lb which gives a Net Present Value using a 10% discount rate of $171 million, or if we use a price level of $3.50 lb and again a 10% discount rate, this gives an NPV of $427 million — in both cases after tax. At 12p EMED is capitalised at £130 million ($205 million). Thus using a copper price lower than the current copper price and an aggressive discount rate for a fully funded project and assuming nothing for mines two and three the shares should be more than 50% undervalued. Of course at $2.50 lb then the shares are modestly overpriced, but of course the discount rate could be argued is too high. Let’s put it another way — using the same $3.50 copper price and given that mine one has just over 500,000 tonnes of recoverable copper (although this could almost certainly be expanded by further drilling), this project would throw off $130 million a year in free cashflow for 14 years — actually it would almost certainly be up to 50% higher as output increases from year three. But that on its own would see EMED’s debts cleared within 18 months and it then generating two thirds of its current market cap in free cashflow each and every year. I would argue that such an enterprise should be valued at, at least five times base cashflow (given the potential to extend the Life of Mine and add to output). That gives a $650 million value. Knock off the debt and you are still at $460 million — more than twice the current market value.


Tom Winnifrith’s Conviction Buy

Whichever way you look at it, even on the revised economics of the new 43-101, fair value for the stock is around 30p. When those last permits arrive you should therefore see a dramatic re-rating from today’s 12p. Even my friend Zak would not be able to claim that he could time a trade to tie in with when the Spanish give final clearance, although I know that he is well connected in Spain... As such you just have to buy, hold and wait for a potential 150% uplift. Incidentally I chatted to EMED CEO Harry Adams in length a few months ago about the economics of Rio Tinto. You can read that interview here: http://tradingresearchpoint.co.uk/2012/10/04/emed-down-but-far-from-out-long-chat-with-ceo-buy/

CHART - EMED MINING

Tom Winnifrith writes for 10 US and UK websites – links to all of his usually controversial and sometimes prescient articles can be found at www.TomWinnifrith.com You can follow Tom on twitter @tomwinnifrith And in his spare time Tom manages the Real Man restaurant in Clerkenwell where if you are man enough you can try to eat the UK’s hottest pizza – the Snaefell Diabola. More details on that can be found at www.therealmanpizzacompany.com

March 2013

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Special Feature

JAMES SIMONS

STEVEN COHEN

RAY DALIO

CARL ICAHN

The Highest Earning hedge Fund Managers of recent years By Richard Jennings and Filipe R Costa

Even though the hedge fund industry as a whole has consistently underperformed the wider market for the last 10 years, there are always some managers who can outperform and who continue to reap rewards of personal earnings beyond most people’s dreams. Ray Dalio, James Simons and Carl Icahn are just a few of those high earnings individuals and who collectively reaped more than $9 billion in 2011 (the last full year of disclosed earnings) with their funds. In a disappointing year for the industry, which as a group yielded an 8.9% average loss for 2011 in contrast to the S&P 500 which closed flat, the top fund managers made huge personal profits largely as a result of the capital mass that they have under management.

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Hedge funds, once the ‘go-go’ arena for asset allocators, particularly during the boom years of the late 90s in which any jock fund manager with a long bias could make cracking returns (the old adage — a rising tide lifts all boats — certainly applied during this period) have been the underdog for the last decade now posting truly awful returns and well and truly debunking the myth of “alpha” (outperformance through ability) being produced by the asset class.


The highest earning hedge fund managers of recent years

Even the big, well known managers can slip up and having their own “skin in the game”, i.e. their own capital on the table is also no guarantee of being wrong footed by the market.

Truth is, as the industry grew and more fund managers entered the game, the quality of the hires reduced and many were nothing more than traditional long only managers riding the hedge fund boom. Time and volatile markets has exposed the aggregate of these managers.

In a prime example of how the market is no respecter of pocket depth and in fact feed of “hubris”, look at “Mr Subprime” John Paulson’s flagship fund, for example, which returned huge profits at the beginning of the financial crisis due to his outsized bets on the US housing market, but then sank an astonishing 50% in 2011 and an extra 15% last year — both years when the S&P 500 rose.

Looking at HFRX index, a widely used measure for hedge funds’ global performance, returns of +5.2%, -8.9% and +3.5% have been posted for the last three years, whilst the S&P 500 has delivered 0%, +12.8% and +13.4% in the same period — a collective underperformance measure of 26.4%! Whilst it is a tenable excuse that true hedge funds weren’t made to outperform the S&P 500, their primary aim being capital preservation over the long haul (hence the name “hedge”) through protecting the downside risks to capital in bear markets, again, unfortunately for the industry the historical record does not bear this out with the index falling heavily during the twin big bears of 2002-3 and of 2008-09.

“Truth is, as the industry grew and more fund managers entered the game, the quality of the hires reduced and many were nothing more than traditional long only managers riding the hedge fund boom.”

Many hedge fund managers are laying the blame for their sustained underperformance in recent years squarely at the door of Western governments and central banks for distorting the market with too much intervention in the form of quantitative easing, short bans, currency floors etc... They may in fact be right that it is making it difficult for them to exploit under and overvalued opportunities. Problem is, they underperformed before the manipulation... In the absence of an updated list for 2012, let’s take a look at Forbe’s list of the highest hedge fund earners for 2011.

One should certainly think twice before entrusting your hard earned cash with many of these fund managers who ask for hefty fees even before they have performed; with a 2% annual fee being typical unlike the traditional fund management industry that more typically charges around 1.25% and some trackers even less.

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Special Feature

“We can see that all of the top 10 earners made more than $200 million each and in the top three cases, earnings were absolutely massive, exceeding $2 billion each.”

FORBES HIGHEST HEDGE FUND EARNERS FOR 2011 We can see that all of the top 10 earners made more than $200 million each, and in the top three cases earnings were absolutely massive, exceeding $2 billion each. Ray Dalio, James Simons, and Carl Icahn all turned in returns of 20% and above — outperforming the S&P 500’s 12.8%, although whether the margin of outperformance warranted such large remuneration is another question. The reason they did earn so much is very simply due to the sheer volume of capital that they run — in some case in the tens of billions. If you run $10bn and actually return nothing, with a 2% annual fee you are still $200m to the good — nice work if you can get it! What most of the outperformers had in common was the returns achieved largely from “specialty” bets, i.e. being in specific areas for example MBS trading, convertible arbitrage, energy etc. and so perhaps many of these top performers were just lucky enough to be “in the right place at the right time” — something that is becoming ever more apparent in the case of John Paulson — sometimes a hedge fund manager is nothing more than a one hit wonder. This is however not a description we can apply to Icahn, Dalio, Soros & Simons — managers who have been around a long time and churned out market beating returns through bull and bear markets.

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Digging a little deeper into how the managers made their returns in recent years, Ray Dalio made his pay packet in 2012 out of US and German bonds. With the European sovereign debt crisis still far from reaching solution and with the FED throwing money out of the window, Dalio’s bets delivered a 20% return on his flagship fund and contributed to extend his fortune by a cool $3 bn — money he can probably never spend. James Simon, now retired from his CEO position at Renaissance Technologies, continues to invest in the company’s funds and which returned him more than $2 bn. Carl Icahn benefitted from long calls on Motorola Mobility and El Paso — both of which were taken over. He is presently enjoying the ride in his long position on Netflix around $50. Current price — almost $200 — so making over another half a billion dollars this year already! In another stark illustration of just how fickle the market is, however, one should take into account that many of those top earners for 2011 may be on the bottom earners part of the list over the next few years. In fact, Kenneth Griffin and Carl Icahn (and their funds) experienced huge losses during the financial crisis and now are only just coming back. Lesson? If you had a great year last year and are struggling this year, don’t be too hard on yourself, you’re in hallowed company and it’s all part of the market’s great cycle!


March 2013

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Editorial Contributor

ROBBIE BURNS’

FEBRUARY TRADING DIARY Well I don’t know about you, but all this talk of horsemeat has got me really into eating... meat. Pictures of burgers on Sky News made me crazy for them. Yes, meat, I can’t get enough of it now. You’ve probably gathered I’m either crazy, easily led or the ultimate contrarian! The Burns household has seen me grabbing handfuls of mince (probably no horse, but who knows and secretly who cares?) and turning it into burgers. Always add Worcester Sauce, tomato sauce and mayo into the mince and obviously a bit of horsemeat if you have some Findus products to hand… Years ago I owned a cafe and by mistake I handed over a Chicken panini to a vegetarian. She came back that afternoon. “How dare you give meat to a veggie...” I thought she was going to sue or demand money. However she admitted she loved it and started eating meat again. Oops. Not as bad as the woman who complained there was fish in her fish pie though... Why am I gabbling away here (gobbling away?) talking meat — well it honestly does have something to do with writing something for Spreadbet magazine. A piece of news that hits the market and so hits a particular share can often throw up an excellent opportunity for a spread bettor. A share goes down massively. Can we make some quick money on it? Possibly, but you have to get it right and follow a few rules. My article, my rules, okay? I never knew for example a week ago that I would be making money from horse lasagne. But I did... and a pretty meaty amount. Okay, I promise not to use any horse/meat jokes from now on... just don’t nag me if one slips in though (get it?!).

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I had made a very decent sum from food distributor Greencore previously — I’d more than doubled my money and banked more than five grand selling at 111 after it peaked at 115. It then sank to 100 and I felt glad (and smug perhaps, or is that lucky?!) that I had sold, but then immediately started looking to buy it again lower if I could, targeting 90p as an entry. Then one morning I saw the price plunge into the 80s and thought this could be an amazing time to buy back. I turned on the news — reason for the plunge? It has admitted selling horse bolognese sauce to Asda ...mmmm... yummy! When a company has fallen a lot you need to do some quick thinking: how much in percent has it fallen? Now have a guess at how much percent you think it should fall after the news and how likely it is to bounce back. Okay, Greencore had fallen to the low 80s, nearly 30% lower than its recent high. Then I saw this sentence in its statement to the market, “Beef Bolognese Sauce represented c. GBP0.3 million of Greencore’s GBP1.16bn turnover in its last financial year. The annualised revenue of all products withdrawn represents less than GBP1.0 million.”


Robbie Burn’s Trading Diary

The company also seemed to be saying it was unlikely it supplied much else horse flavoured stuff. So. in essence, withdrawal of the sauce meant little to the company’s overall performance. 30% fall? Way too much, I reasoned, and I bought tons and tons on spread bets with various companies in the 80s and some for the ISA too. I figured at the very worst a quid would be a fair price, but actually no reason why the price shouldn’t at some point head back up towards its highs again in time. The price gradually lifted up and it’s back to around a quid as I write this. Profits? Around ten grand. Though I haven’t banked them yet as I write. However, the next thing to do is raise the stop loss up and over break even at the very least, maybe into profit, so stops up to 90p, carry on raising if the price keeps going. On the initial bets in the early 80s I placed stops at 78p - worst came to worst I knew I would then only lose small amounts if the price kept falling and I could start again. Amount of work I did to make these paper profits? Well, very little really. In fact it was all just a bit of common sense. No complex technical analysis etc. needed.

If the price heads back up to the highs of 115 I will probably bank most of the profits and… erm… cheer myself hoarse... So, moral of the story is that with good discipline, bad news can make you serious money. But give yourself rules and boundaries. Make sure you understand the company and are sure as you can be that it has been oversold. The good news is these days bad news companies almost always bounce back because nearly everyone uses stops and they get hit. If you buy the bad news share and it keeps falling, set a tight stop, try again lower. You must make sure you are not catching a falling knife which continues to fall. If you got in near the bottom and it goes up, raise your stop under the price. Keep buying as it heads up. Keep raising the stop. Right, nuff from me for this month, I’m starving — I fancy a steak... nice and rare ... ** Robbie offers Spreadbet Mag readers who have not yet booked a seminar with him a £50 discount on either of his next two seminars, March 1st or April 26th. Email robbie for details at robbiethetrader@aol.com with “SB mag offer” in the subject line. ** The seminars involve spending a whole day with live markets with Robbie and are suitable for beginners and improvers. **

March 2013

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Editorial Contributor

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

DoMiNiC PiCARDA’S TECHNiCAL TAkE CuRRENCy SPECiAL Having a weak exchange rate never seems like much fun to individuals who hold that currency. After foolishly offering to stand a meal for friends on a trip to Switzerland last year, I found myself muttering profanities when the bill came. As well as the cost of travelling abroad, there’s always a nagging sense of inadequacy, that one’s country is some sort of economic invalid. For nations as a whole, though, a cheap currency can do a world of good. A low exchange rate obviously makes it easier to sell more goods and services abroad. China and various other Asian nations have, of course, earned vast fortunes through exports thanks to their deliberately depressed currencies. But it’s more than just a way to steal a march on trading rivals — devaluation can provide vital relief during times of crisis. Sterling’s 1931 devaluation was one reason why Britain had a milder interwar depression than the US or France. Currently, numerous nations want and indeed need to improve their position via devaluation. These include those with very strong currencies, including Japan and Switzerland, and those with somewhat cheaper currencies, including Britain and the Eurozone, as well as many of the usual suspects in Southeast Asia. The catch, of course, is that not all can play this game simultaneously. One currency’s fall is, by definition, another’s rise. While not all can succeed, the determination of certain governments to cheapen their currencies should lead to some strong and tradable trends in the world of foreign exchange. As well as identifying the currencies whose fundamentals point most towards upside and downside, we can use the charts to pick where to try and jump aboard these trends.

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Dominic Picarda’s Technical Take

EuR/uSD If the Euro is to survive in anything like its current form, it must surely cheapen. To stimulate an economic recovery in places like Greece, Spain and Portugal, a weaker currency is essential. These nations are beset by low productivity and inefficiencies, which will take many years to resolve. A weaker currency will not achieve this directly, but it will buy them much-needed time in which to put their houses in order.

CHART - EUR/USD Textbook economics says the Euro ought to buy about US$1.13. In fact, it buys $1.31. So, there is plenty of scope for the single currency to fall towards “fair value.” To confirm that its next downtrend had begun, I would wait for the 21-day exponential moving average (EMA) to fall below the 55-day EMA. For a position trade, I would then remain short so long as the price stayed below the second of these lines. I would also enter tactical shorts on further drops back through 21-day EMA. A test of $1.20 should occur.

March 2013

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Editorial Contributor

gBP/uSD It seems odd to think right now, but there was a period of Euro-panic in 2012 when the British pound was spoken of as a “safe-haven” currency. While the London property market certainly serves as a refuge for many wealthy but worried folk from elsewhere, sterling really has no such credentials, however. The government is way off course with its plans to cut the UK’s hulking debts, such that the country has just lost its top-notch credit rating. At the same time, the Bank of England will likely respond to further economic weakness by printing more money. All this spells trouble for the pound, in my view. Sterling/dollar has just broken decisively lower out of a triangle pattern that dates back to early 2009. Based on the dimensions of this pattern, the standard technical interpretation is that a drop to around $1.30 could now be on the cards. I can well see it revisiting the $1.40 level, and would seek to enter short positions whenever the price rallies to its falling 21-day EMA and then reversed lower.

CHART - GBP/USD

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Dominic Picarda’s Technical Take

uSD/JPy The Japanese yen has been a very strong currency in recent years. During phases of global crisis, the currency has tended to attract safe-haven buyers from around the world. That’s despite the weakness of the Japanese economy, which has never recovered from the bursting of the nation’s economic bubble of the 1980s. The government has some of the heaviest debts around, while Japan is no longer selling more to the rest of the world than the world buys from it. The authorities are now deliberately seeking to undermine the yen in order to kick-start growth. The US dollar/Japanese yen rate is already in a beautiful uptrend, consisting of strong thrusting gains and gentle pullbacks. This is just the sort of trend that I like to try and trade. One drawback is that having risen some 23% since last September’s level of ¥77.09, USDJPY is very stretched on its weekly chart, with an RSI reading of 87%. Nevertheless, I would be seeking further gains going forward, with major targets at ¥94.11, ¥99.85 and ¥104.09. Bounces off the 13-day EMA make obvious entry-points.

CHART - USD/JPY

March 2013

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Ski Feature

Late Season Skiing Special The best of the season..? Unshackle yourself from your desk, switch off your phone and‌.go skiing! With the excellent ski conditions prevailing there is still fabulous skiing to be had until well into May would you believe?

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Late Season Skiing Special

March 2013

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Ski Feature

So what should you expect if you do book a late-season trip? Milder weather is one obvious benefit. As the days lengthen, the lifts stay open longer, while sunshine and warmer air means you can wear fewer clothes — and work on your tan while you ski! Long outdoor lunches and evening barbecues are another late-season ski activity. Resorts also tend to be less busy and lift queues will certainly be shorter than they are during, say, the Easter Holidays. The other advantage to a late-season trip is that longer, warmer evenings offer more après ski options than you get in mid-winter. For this reason, spring is the best time to visit some of the best-known European resorts. Take St Anton, in Austria’s Tyrol region, for example. Spring is when the resort’s après-ski culture comes into its own, and the terraces of bars such as MooserWirt are thronged with happy skiers partying away in the late-afternoon sun. MooserWirt is a St Anton institution, although owner Eugene Scaller has made big changes this year by opening the Mooser, a luxury ski in/ski out spa hotel attached to the bar (the hotel has complete soundproofing should you need to escape from the partying throngs). One worry for skiers looking to book a late-season trip can be the quality of the snow. Blazing sun all day isn’t exactly good for fresh powder. On the other hand, a trip at season’s end means you’ll be skiing on a base (the snow that has fallen to that point) that has built up over the course of the winter, while the on-piste snow itself is usually slushy and more forgiving for beginners.

If snow quality is a real concern, one solution is to head to a resort with high lifts that allow you to access the higher slopes. Zermatt in Switzerland would be a good bet. At1620m, and with a top lift height of 3820m the snow reliability is superb and there are some of the best mountain restaurants in the Alps where you can enjoy a leisurely lunch on the sunny terraces. Of course you can never go wrong with Val d’isere or Tignes as nowhere else in Europe offers such extensive skiing at such high altitudes and you can usually ski back to base right up until early May.

Best across the pond North American resorts usually have longer seasons than their European counterparts. Canadian flagship Whistler Blackcomb usually closes on 21 May, with the glacier slopes on Blackcomb Mountain covered well into the summer. You may want to take this bit out! Ski Bespoke (01243 200 202; skibespoke.com) has seven nights at the Four Seasons Hotel in Whistler from £1,675 per person, room-only basis, including BA flights from Heathrow to Vancouver and transfers, departing on 9 April. Further south in the Rockies, the Colorado resorts in the USA are also a safe late-season bet. They tend to be high and snow cannon cover keeps the runs in great shape into late spring. Winter Park is a good example: the highest lift reaches 3,676m, so there should be plenty of the white stuff to keep even the most seasoned skiers happy. Finally, one more great reason for skiing at the end of the season is the in-resort music festivals that have been growing in popularity over recent years.

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The best of luxury ski

www.skibespoke.com March 2013

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Editorial Contributor

Zak Mir Interviews

Tom Houggard A man who forecasts a 60% drop in stock markets over the next two years.

This month Zak interviews a well known face from the early 2000s — stock market commentator and strategist Tom Houggard.

ZM:

Given the way that most short term traders lose money, isn’t it the case that rather like smoking, it is better never to begin in the market? For those who believe they can outwit the market, how would you point them in the right direction? Particularly given that retail investors are not famous for following strategies of any kind — certainly winning ones!

th: I used to smoke. I was a heavy smoker.

Although I quit years ago I still have a profound respect for the addictive components in cigarettes, but, more importantly, I am acutely aware of the psychological dependence that it creates. To quit was one of the hardest things I have ever had to do in my life. Trading in an incorrect way is very similar to smoking. You get the buzz from the occasional rewards which keeps you hooked on a path which otherwise is doing you little or no favours. For a long time, I had a nagging feeling that my trading was not the best it could be, but the occasional big score numbed my doubts. Whilst I was working in the City I didn’t need to make money from trading consistently. I had a decent salary, but when I was made redundant my security blanket was removed. I made a decision to let go of life in the City. I had become bored and stale and had stopped growing. The flip side was that trading now was my livelihood, and I was forced to look very hard at my techniques.

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The live trading room was my outlet, to prove to myself and others that you can teach and trade. The first year we went for about 30 weeks before we had a losing week. In a sense, I was embarrassed about some of the things I had taught the clients over the years. My assumption was that everyone could trade if they applied the same amount of devotion and time that I could. I could see how some of the tools I used were a reflection of the circumstances of my own life. When you receive a pay cheque each month, you can afford to have wider stops, for example. When you are paid to sit and watch the markets all day, you can make use of tools which may not be suitable for many of the people I taught.

“Trading in an incorrect way is very similar to smoking. You get the buzz from the occasional rewards, which keeps you hooked on a path which otherwise is doing you little or no favours.”


Zak Mir Interviews - Tom Houggard

“When you receive a pay check each month, you can afford to have wider stops, for example.” When I was laid off I realised that I had to deploy a different mind-set to make money consistently. There was a withdrawal period, a transition phase similar to when I stopped smoking, but the trading became much more consistent after the initial setback. When I started the live trading room on my own I achieved a 137% return live trading that year. I became quite religious in my money management, trying to push my point count to the limit by being aggressive when it was called for, and recognising earlier when a trade was awful or it just wasn’t my day. To answer your question in a more direct manner, I owe my ability to read charts to day-trading, and I don’t for one second subscribe to the thought that day trading is a losing proposition. However, if you approach the profession with a lackadaisical attitude, then your result will reflect your mind-set. As the IT profession says: GIGO — garbage in, garbage out. My approach to day trading was to get obsessed with numbers. I bought seven years’ worth of intra-day data on FTSE and DAX from a data company and printed out thousands of intra-day charts and analysed them. It would take me too long to describe exactly what I did, but I will say this: I threw away everything to do with Fibonacci, volume, Oscillators or any other technical tool ever invented, and I focused purely on price and price action. Last weekend I printed out 284 intra-day charts from a new index I want to trade. I don’t think many traders display this kind of devotion to their career. I am not making a case for being a nerd about our profession, but I find it necessary to be prepared for the daily battles. I remind myself and anyone who will listen to me that trading via charts is a function of what you have learned. You only see on a chart what you have trained your eyes to see.

ZM:

Listening to your live trading room broadcasts it is clear you have the enthusiasm for the markets and in attempting to conquer them which is perhaps the minimum requirement for success.

But does potentially falling flat on your face in front of a live audience concern you? Why not just trade behind closed doors?

th: There

were times when I didn’t execute trades in the live trading room because I was scared of the consequences of a losing trade. However, some of my clients became quite vocal about the lack of trades, and I worked very hard on myself to get to the root of my procrastination. I laugh to myself now, but at the time I agonised over the live trading room. I undoubtedly suffer from OCD and I am exceptionally competitive, so it didn’t sit well with me that I had losing days. I went 29 weeks without a losing week, and when I did lose, it was like my ego imploded. I was not as infallible as I had made myself out to be. Today, I am far more at peace with losing. I have a loving family who support me, and who understand that what I do sometimes requires them to leave me alone, to come around from having a bad day. I seem to stray a fair bit from your questions! To answer your last question as directly as I can: I trade in a live trading room because I want to show the world that I can. It gives my seminars integrity, to be able to look the delegates in the eyes and not having to prove that I trade. They can see for themselves every single day. Why do I do seminars? Ultimately because I love teaching, passing on knowledge to help other people and hopefully adding value to their lives.

“I went 29 weeks without a losing week, and when I did lose, it was like my ego imploded. I was not as infallible as I had made myself out to be.”

March 2013

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Editorial Contributor

ZM:

I first met you well over a decade ago when you were in your “market strategist” phase. In what ways did being a leading commentator on the markets in the City of London help or hinder you?

th: I remember our first meeting very well. I was

so green. I knew so little about the City. When we met I was young and naïve. I learned a lot about the City in the decade I was there. I should write a book about the things I saw. It would make 50 Shades of Grey look like a children’s bedtime story! Back then though I was so in awe of the City, I couldn’t get enough of it. I could be on CNBC or Bloomberg for a 05:20am show and finish the day off with a 9pm seminar. Sixteen hour days were par for the course, and I loved it. Being a “strategist” meant money and prestige, and I played up to my own sense of self-importance, but I never forgot where I came from. Underneath the glamorous exterior of the job was a guy who worked his ass off, subsisting on a diet of take-outs and five hours sleep a night. First and foremost I was in love with the markets. I still am. The City job made it possible, but I am glad I am not part of it anymore. My quality of life is so better now.

ZM:

Arguably the end of the asset bubble in 2007 marked the end of not only the City as it was, but also the financial markets as we knew them — like the end of the Jurassic / dinosaurs. Is it easier for a professional trader to make money now than before that time in your opinion? Are conditions better or worse for your forms of analysis and how have you adapted to meet the new challenges?

th: There is nothing new under the sun. What

has been will be again, and what has been done will be done again. The beauty of technical analysis is that as long as the markets are open, you can make money from them. This time is not better or worse. The greatest asset any trader can learn and possess is behaviour modification, becoming a change agent, the ability to flow with the markets prevailing current. I jokingly say to newcomers: I can teach you technical analysis in a day or two, but you have to work on it yourself for the next twenty years. The first ten years are the hardest!

ZM:

There are dozens of trading experts both in this country and of course in the U.S., how would a trader in need of guidance know to go with Tom Hougaard, as opposed to all the charlatans? Are there any commentators / gurus you follow or would recommend?

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“First and foremost I was in love with the markets. I still am. The City job made it possible, but I am glad I am not part of it anymore. My quality of life is so better now.” th: The industry of trading education is by and

large dominated by those with the biggest marketing budget. They are brilliant businessmen. These companies have very enigmatic or charismatic front people who are brilliant at selling their courses. You have to take your hat off for their ability to get people to commit to paying £3000 or more for a two-day course which doesn’t really contain much value. I sent my friend to one of these £3k courses, paying his fee for him because I was curious as to what the competition was selling. My friend has traded for as long as I have, but he is not known in the industry so he could attend without attracting attention which of course I am not able to. On the second day, it was Sunday lunch time, he called me, begging me to relinquish him from his ordeal. He brought home the workshop folder for me to see what he had to sit through. We are talking absolute beginners’ stuff such as what is a stop-loss, what is a limit order, what is a MACD, what is a moving average. It wasn’t until Sunday that they began teaching trade techniques. The material was so basic; you could pick it up from a £25 trading book. You can buy a lot of trading books for £3000! But hey, respect to them for being able to convince people they can learn to trade in a weekend. When I think what David and I do to perfect our trading techniques, paying programmers to test our material, dreaming up scenarios, testing them, I feel I am going about the seminar business the wrong way. I should spend 90% of my time promoting my course and 10% researching, but I don’t.


Zak Mir Interviews - Tom Houggard

I recommend my own course because I know that it is unbelievably good value and none of the techniques come from trading books. I also recommend Larry Pesavento. I learned so much from him. His books are true gems. Ultimately I hope that people see the live trading room as proof that if I can make money before their very eyes, then there must be something to my seminars.

ZM:

Do you have a favourite bankable trading method / indicator / strategy? Is this something you share, or would share?

th: I have one strategy which I use over and over

when I trade during the day. Today has been good, in that I made 108 points. It was Non-Farm Payrolls, so you expect a higher point count (win or lose) on volatile days. Yesterday was a better day from a personal point of view because I started out with minus 18 due to a spike. I battled all day and ended on plus 25. The days I battle are the days I enjoy the most. The days where you get a signal early and you put on your £X a point, and you collect 30-40 points over the course of an hour are nowhere near as satisfying as the days where the market is trying to whip you about, and you have to use all your wit to stay in the game. I love the feeling of a good fight, as long as I win. Bruce Lee was the greatest fighter ever, and his biography inspired me. He said, ‘I fear not the man who has practiced 10,000 kicks once, but I fear the man who has practiced one kick 10,000 times.’ When I lose, I am really miserable. Some of my trading room clients have seen and heard me on days when I lose. It is not a pretty sight. I should re-read the chapter in the Book of Life about losing with grace. I think I have a thing or two to learn. I practise one technique over and over. This approach works because it is day-trading and there will always be trades. When I swing trade I use other techniques. For example I love pattern recognition and Fib tools on swing charts, but those just don’t work intra-day frequently enough. My material is unique, but it is not difficult to learn. The only secret to trading, the REAL secret, is consistency in application. It is the reason why one of my favourite trading books isn’t a trading book at all. It is called ‘Zen in the Market’ by Eddie Toppel, also known as Fast Eddie in the S&P500 pits.

The other trading book is called ‘Phantom of the Pits’. It is not even a published book; it is a bit long-winded at times, but, my Lord, it is brutally good in pointing out the essence of good trading.

ZM:

How much of the fundamental / macroeconomic picture do you involve in your analysis? Do you have an opinion on both the causes of the financial crisis and / or possible solutions? Have the financial authorities got it right?

th:

Technical analysis = 100%, fundamental Analysis = 0% I don’t want to pretend to being something I am not. I am educated as an economist with two degrees to my name, but I haven’t made a penny on the back of my training as an economist. My trading decisions contain zero fundamental analysis. I remember thinking the day when HSBC took a write-down for the year in early 2007 that there probably would be others. I couldn’t have imagined the depth the crisis took, however, and which ultimately cost me and so many of my colleagues our jobs. As I talk to you now, the Dow Jones Index is within 100 points of an all-time high. The market looks ahead, discounting forward, as it is. When HSBC took the charge in 2007 the market rallied another 10% in the next eight months. Why am I pointing this out to you? I am true to my vocation! A market that rallies on bad news is a strong market. A market that falls on good news is a weak market.

“When I lose, I am really miserable. Some of my trading room clients have seen and heard me on days when I lose. It is not a pretty sight. I should re-read the chapter in the Book of Life about losing with grace. I think I have a thing or two to learn.” March 2013

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Editorial Contributor

ZM:

How do you see the rest of 2013 playing out, are there any obvious set and forget trades you are looking at?

th: There is never anything obvious in the

markets. Traders get rewarded for the uncertainty they take on. When it is obvious, it is time to get out. Day traders and swing traders should really not be too concerned about the economy or the forecast for the trading year ahead, but since you ask, here is my take on the major markets. I have looked at bonds and I am pretty sure market interest rates will rise dramatically in the coming years. I can’t technically make up my mind if the stock market needs a new low with the Dow around 6000 or if we have seen the worst. If I am right, then we will have a tough couple of years in the stock market. I see an expanding wedge in the S&P500 with a target of around 1600 and a target date of around 21st June 2013, give or take a day or two. After that the SP500 has a date with 600 in 2014/15. That is a fall of more than 60%.

“I see an expanding wedge in the SP500 with a target of around 1600 and a target date of around 21st June 2013, give or take a day or two. After that the SP500 has a date with 600 in 2014/15. That is a fall of more than 60%.”

Find out more about Tom Houggard at - www.tradertom.com

68 | www.financial-spread-betting.com | March 2013


March 2013

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Special Feature

MAGAZINE

SPREADBETTING

THE SPREADBET MAgAZiNE SuRvEy RESuLTS First of all, thank you to all those who took the time to complete our survey which we sent out during the ‘dead’ period of early January. Hopefully the Zak Mir & SBM Q1 2013 Guide which we produced and that was sent complementarily to all the survey respondents has proved useful to you too. Certainly our lone bear call on gold is proving prescient thus far...

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The Spreadbet Magazine Survey results

The survey has provided us with some insightful information as to just how our readership is made up and what content you enjoy the most. Of course, we will use this information wisely and hopefully continue to deliver to you a value adding publication with a cracking set up of contributors.

A number of spread bet firms have chosen not to support our magazine and, of course, if you do not engage with those that are supporting us, then ultimately the business model will have to change. I’m a great believer in helping those that help me and would impart the same thinking onto you.

One important element, however, that we wish to get across to our loyal and regular readers is that if you want to continue to receive this unique publication for free — everything we produce so far is completely cost free and we have an unparalleled success rate with our calls — then you MUST support our advertisers.

Without further ado, on to the survey results.

March 2013

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Special Feature

1

MoST PoPuLAR CoNTENT WiTHiN THE MAgAZiNE

Interestingly, it seems that the educational pieces that we produce are the most popular. This tells us that you are a readership base that takes your trading seriously and that you are constantly looking to improve your trading. Robbie Burns and Zak Mir were almost neck and neck as our most popular contributors — two very different contributor styles, but both extremely entertaining it seems! Smaller capitalisation stock focuses are also very popular — not surprising given that these are the mainstay of retail punters. We think this area to be an absolute minefield, but intend to run a monthly small cap pick in the very near future.

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The Spreadbet Magazine Survey results

2

SPREAD BETTiNg EXPERiENCE — HoW LoNg HAvE you BEEN SPREAD BETTiNg?

It seems that you are quite an experienced lot with the vast majority trading for over one year and a good proportion over three years too. Very few first time spread bettors and CFD traders make up our readership, and so with this in mind and with the educational popularity, we will increase our content focused around enhanced trading strategies.

March 2013

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Special Feature

3

SPREAD BETTiNg ACTiviTy — iNSTRuMENT TyPES TRADE AND FREquENCy

When it comes to the type of instruments you trade — outright share trading and, not surprisingly, spread betting are your preferred instruments with currencies also popular. Options, although extremely flexible, seem to be used by very few. It looks like the “day trader” is still very much alive and well too with your response to the frequency of trading. Almost a quarter of you trade daily and nearly a half weekly — it seems you really are the bedrock clients of the industry.

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The Spreadbet Magazine Survey results

4

DEMogRAPHiC PRoFiLE

The vast majority of you are aged over 35 with nearly two thirds falling in the group that we would politely describe as “middle aged” (26 - 55) — and of which I am sadly now part of! It looks like ‘austerity UK’ is biting into our younger generation too with only a small number of punters under 25. A surprisingly large proportion are over 55 — perhaps spread betting and trading is being used to pad out your retirement income or indeed as an element of excitement to replace the cut and thrust of business?!

March 2013

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Special Feature

5

LENgTH oF TiME WiTH CuRRENT SPREADBET FiRM

It appears that you are also quite a loyal lot with nearly two thirds trading with your spreadbet or CFD firm for at least a year and a good number for over three years. Bear in mind our opening paragraph here, however, that if these guys are not supporting our publication then it might be time to consider our two anchor firms — Cantors and Capital Spreads.

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The Spreadbet Magazine Survey results

6

MoST iMPoRTANT REquiREMENTS FRoM THE SPREADBET FiRMS

As to what it is that you are looking for in your spreadbet provider, interestingly tightness of spreads marginally pips capital security. Coming on the heels of the MF Global and Worldspreads collapses this certainly took me aback — I would have expected capital security to be a major outlier. Customer service and low margins were also important. A good night’s sleep looks not to be a priority to some with 24 hour trading still quite popular! Perhaps our publication is providing the added value on the research front given that this proved the least important to most of you?!!

Finally, other items gleaned were that you like to hedge your bets with just over 50% having more than one account and many of the suggestions you made involved the analysis of systems and strategies — this is something we intend to investigate later in the year — what really works and who are, quite frankly, charlatans?! Once more, thank you to all the respondents and may we continue to deliver you the magazine you desire. Richard

March 2013

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Special Feature

iNvESToRS iNTELLigENCE CoNTRiBuTioN

“AS JANUARY GOES, SO GOES THE YEAR”? 80 | www.financial-spread-betting.com | March 2013


Investors Intelligence Contribution

Stock markets around the world got off to a great start in 2013. The passing of the New Year without the ‘Fiscal Cliff’ crisis (does anyone still remember it?) greatly excited the bulls. Meanwhile, the economic data in the fast growing regions — China and other BRIC economies — are proving better than expected. And investors are encouraged by the generous QE3, a program where the US central bank will increase its balance sheet by around $1 trillion this year. All these factors are fanning the bullish sentiment. In the US the S&P500 Index climbed by more than 5% in January. According to its long-term calendar pattern, a good January usually portends a good performance for the rest of the year. In the UK the FTSE 100 Index too reported good performances, up 6.4% in the first month of the year. Even more impressive is the mid-cap FTSE250 Index which is sitting at new all-time highs (see chart below). With the equity price trends so bullish, any sensible investor cannot afford to sit by the sidelines and just watch the markets go up. Taking part in the action is what counts for the performance of the portfolio. Here at Investors Intelligence we have been bullish on the market since the start of the year and we continue to respect this trend. Against this backdrop, I highlight some bullish equities that are still in the middle of the bull run and may be worth accumulating on setbacks. See chart below of the FTSE 250 Index — that’s a bullish formation for sure.

CHART - FTSE 250 INDEX

March 2013

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Special Feature

Investors Intelligence Top Buys After the FTSE250 Index, China is at the top of the list of buys. The country is just coming out of a three-year bear market and there are lots of bargains to be picked up in this area. One of the funds listed in the UK that we like is the Fidelity China Special Situations Plc (FCSS LN), run by the eminent grise Anthony Bolton. The stock has doubled over the past few months and broke above the major 90p base resistance — confirming that the primary trend has changed for the better. I suspect the fund is at the start of a multi-year bull market and corrections are to be used as buying opportunities. Another interesting buy candidate is International Consolidated Airlines (IAG LN), formerly known as British Airways. The stock has had a good run since October last year and surged past the major resistance at 180-190p earlier this year (see below). Like FCSS, this confirms a trend change and the tactic here is to ‘buy the dips’.

CHART - Fidelity China Special Situations

82 | www.financial-spread-betting.com | March 2013


Investors Intelligence Contribution

CHART - International Consolidated Airlines

Investors Intelligence Top Sells However, not all stocks are a buy. Some stocks look dire and so should be avoided at all costs. The primary technical evidence that we look for in this group is: 1) new 52-week lows and 2) poor relative strength. The former shows that investors are dumping the stock (in technical parlance: Distribution) while the latter implies the stock is underperforming the market. Currently, the sector to sell is the precious metal mining industry. Why? For one, gold and silver prices are weak, which is dampening investor sentiment towards this sector. Second, many precious metals miners have completed top formations. Some even broke down to new all-time lows. Look at African Barrick Gold (ABG LN) below. In just seven weeks, the stock plunged twice, as it shocked investors with results. Worst, the stock breached the major level at 300p recently and slumped to new all-time lows. Its relative strength against FTSE100 is notably poor. Undoubtedly, the stock is a clear sell. Other candidates to short are Randgold Resources (RRS LN), the gold miner, or Fresnillo (FRES LN), the major silver miner. In both, top formations are developing. The risk is to the downside.

March 2013

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Special Feature

CHART - African Barrick Gold (ABG LN)

Conclusion The market is in a bullish mode. Hence, by and large, investors should stay long. But a word of caution. After a 12-week uptrend, the stock market is technically overbought and due for a correction soon. Some downside hedging — like buying VIX or shorting equity indices — may be considered. Dr Jackson Wong, Director, Stockcube Research

Investors Intelligence: A History of Innovation Since pioneering the use of point & figure charting in the 1950s, many of our analytical tools have become industry standards such as the NYSE Bullish % and the Advisors Sentiment Survey. We now produce technical analysis based advisories for the majority of international financial markets. Our services are subscribed to by investors, traders and financial professionals around the world.

84 | www.financial-spread-betting.com | March 2013


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School Corner

school corner Bollinger Bands explained by Thierry Laduguie of e-yield

Bollinger bands were invented by one John Bollinger, a Chartered Market Technician and respected financial markets author. Bollinger added an element of volatility to moving averages envelopes by creating what was coined ‘Bollinger Bands’. The difference between moving averages envelopes and Bollinger Bands is that envelopes are plotted above and below the moving average by a percentage whereas Bollinger Bands are plotted above and below a moving average by a multiple of the standard deviation. Charts are a graphical representation of prices and each series of prices has a standard deviation. Once the standard deviation is calculated then the upper and lower band can be calculated.

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Bollinger Bands

CHART - FTSE 100

The norm is to use a 20-period moving average for the middle band and two standard deviations to calculate the upper and lower band. For example, if we are working with a daily chart, we will use a 20-day moving average. The above chart shows the FTSE 100 daily chart with Bollinger Bands. The middle band is the 20-day moving average Upper band = middle band + (2 x standard deviation) Lower band = middle band – (2 x standard deviation) Because the standard deviation is a measure of volatility, the bands widen and contract depending on the level of volatility. In periods of low volatility the bands will contract and in periods of high volatility they will widen. As a general rule, the price will fluctuate between the upper and lower band, however, and importantly, there are situations when a move to a particular level will produce a buy or sell signal.

March 2013

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School Corner

Breakout following contracting bands Observe on the chart below how the BP share price consolidated at the end of December and the bands contracted. This indicated a decrease in volatility. When the bands contract it is a warning that the price will likely move sharply up or down. In this example the breakout occurred to the upside. When the price closes above the upper band after a period of low volatility it is a signal to buy, the implication being that the rally will continue in the short term. Similarly, had the price broken down below the lower line, BP would have been a sell.

“The norm is to use a 20-period moving average for the middle band and 2 standard deviations to calculate the upper and lower band.�

CHART - BP SHARE PRICE

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Bollinger Bands

A pull back to the lower band in an uptrend In a bull trend, the price will eventually pull back to the lower band. This constitutes a buy signal. Shares in BHP Billiton are in an uptrend on the chart below. Each time the price pulls back to the lower band a rally follows. In this situation the break below the lower line is not a sell signal but a buy signal. That’s because the trend is up and there is no evidence of a decrease in volatility prior to each decline to the lower band.

“When the price closes above the upper band after a period of low volatility it is a signal to buy, the implication being that the rally will continue in the short term.”

CHART - BHP BILLITON

March 2013

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School Corner

Pattern confirmation The best way to use Bollinger Bands is when the signal is confirmed by another signal, for example from a completed chart pattern. The following weekly chart of Astrazeneca shows a completed inverse head and shoulders pattern:

CHART - Astrazeneca

At the end of January 2013 the stock pushed through the neckline (blue trendline) of an inverse head and shoulders pattern [S,H,S]. This pattern is bullish and is confirmed when the neckline is broken. If we project the depth of the pattern from the breakout point, then the target in the medium/long term is above 3600. This bullish signal is confirmed by the Bollinger Bands signal given a week earlier. The week before, the price closed above the upper band following a period of consolidation in which the bands narrowed. The latest pull back to 2900 was caused by the shares going ex-dividend and so we, per the use of Bollinger Bands, expect the advance to resume.

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90 | www.financial-spread-betting.com | March 2013


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“The best interpretion of the Elliott Wave Theory in the UK”

March 2013

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Editorial Contributor

TRADING ACADEMY WINNER

John Walsh’s monthly trading record This has been an interesting trading month for me for a number of reasons; one being that I have now got back to trading indices. Just the FTSE for now, but I will be looking to start trading the DAX and Dow again which were among my strongest points during the City Index Trading Academy and I’m hoping it wasn’t beginner’s luck as I know they are two of the most volatile indices to trade! After I won the competition, trading indices actually had no appeal to me at all, ironically because of the volatility and P&L swings during the competition. I was not ready to sit in front of my screen all day sweating about every little move like I had to during the competition against the other traders. Given that I swung to a £30k + profit at the 11th hour of the Academy and that clinched the win for me, I felt I’d had enough excitement for the time being! The major market indices have of course got off to a great start this year and I have been trying to scalp profits, trading both on the long and short side where I would have been better simply going with the trend.

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My holding length varies from minutes to hours — I guess I’m what you can call a day trader rather than a swing trader. I’ve had some good days and only one bad day, but one day could have been my worst trading day ever, but I was able to trade myself out of the mess. I learnt that traders shouldn’t get married to a position and certainly not get emotional and I think these disciplines helped me turn around the large loss. Another reason the last month has been interesting surrounds my equity trades — an area that I feel strongest about. I have decided to up my trade size amount and I’m also now trying to take profits a little sooner than I have done previously; trying to take profits little but often. We’ll see how that goes towards building up my account because as the old saying goes “you never go broke taking profit”. So far this has worked out pretty well.


John Walsh’s Monthly Trading Academy

“Given that I swung to a £30k + profit at the 11th hour of the Academy and that clinched the win for me, I felt I’d had enough excitement for the time being!” I also closed my Vodafone (VOD) and Thomas Cook (TCG) long trades and since then they have not pushed on much, although I did close my EasyJet (EZJ) and William Hill (WMH) long trades for a nice profit — both of which have gone up even more, and then some! I guess EasyJet will be joining the FTSE 100 before long. I have closed my PZ Cussons (PZC) short position for a small profit after it released some not exactly inspiring results, but it has since started to move back up and so I may open a new position shortly. I also closed a long position I held very briefly in Safestore (SAFE) which released a positive statement, including its French arm which is doing well. Trades that I still have open from the previous month are the perennial punters’ favourite — Gulf Keystone Petroleum (GKP) and which, with the ongoing litigation with Excalibur, is still very much range bound, hogging the 200p level. My current long position is slightly down, but nowhere near my stop loss for now. Two other trades from the previous month I still have open are my short positions in Stobart (STOB) which has just moved into profit as has my Barratt Developments (BDEV) long after its share price seemed to take a breather following its posting of what I felt were great results a few weeks back.

Another one that I have recently opened is in buliding materials and plant hire company Ashtead Group (AHT) and which has been on a clear uptrend for some time with plenty more to come I think. Since opening both of these positions Lonmin is at a slight loss while Ashstead continues to rise nicely. People have recently asked me what I look for in a trade and my answer is “kiss”, as in keep it simple stupid! I find the simple ways are the best ways because in the markets if you complicate things too much, you may end up looking at everything but trading nothing as we saw with one of my competitors on the Academy competition. I basically stick to looking for stocks in a clear up or down trend and also equities that are hitting new 52 week highs or lows as well as taking a look at the daily risers and fallers to see if any are worth investigating. Well, that’s enough from me for now, I hope you enjoy reading about my trading escapades as much as I enjoy writing them and I look forward to writing more in the coming months for this fantastic publication that I have had the privilege to have been asked to write for. Remember, you control the trade the trade does not control you. Kind Regards, John

Regarding new trades, I have opened a long position in Lonmin (LMI) — a stock that I am aware Spreadbet Mag’s been very positive on and whose share price has come down some recently, but I think may have now turned a corner and we could see some upside back over 400p.

March 2013

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A new special feature

MARKETS IN FOCUS

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Markets In Focus

March 2013

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MAGAZINE

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

Issue 15 - April 2013

in next month’s edition...

A gold Mining Stocks Special We hunt for potential bargains amongst the rubble

WHEN uSiNg SToPS iS NOT APPRoPRiATE

NEW - ToM HouggARD FEATuRE PoST

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iNSigHTFuL ANALySiS ACRoSS THE MARkETS FRoM A WiNNiNg TEAM!


MAGAZINE

SPREADBETTING Thank you for reading, we hope your trading is profitable during the forthcoming month.

See you next month! www.financial-spread-betting.com

March 2013

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Spread Betting Magazine v14  

Latest March 2013 Edition: This month's features include: The Worst Rogue Traders in History; the top 5 revealed and their subsequent fates...

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