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



Issue 20 - September 2013

An SBM inflation special It’s a coming and how you can position for it...





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

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

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

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

David Cracknell David Cracknell is the former Political Editor of The Sunday Times, and also wrote for the Sunday Telegraph and Sunday Business. He now runs his own successful media relations business and is a profitable retail trader and spread bettor. His book on trading, “Middle Aged Spreads” will be out next year.

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Editorial List EDITORIAL DIRECTOR Richard Jennings

Foreword It is now just over a year since I first read Spreadbet magazine and was bold enough to ask the founder and editor — Richard Jennings — if I could write for the publication. This summer I was appointed editor, and it can be said, quite fairly, that there has not been a dull moment so far!

EDITOR Zak Mir CREATIVE DIRECTOR Lee Akers COPYWRITER Seb Greenfield EDITORIAL CONTRIBUTORS Thierry Laduguie Filipe R Costa Ben Turney Nick Sudbury Simon Carter Darren Sinden

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

Ideally, the magazine will continue to make a splash in terms of its breadth and depth of content — precisely what first attracted me to the publication and its influence in the City with traders and investors alike talking about its content. Richard was not afraid to make bold calls and was largely correct. I shall watch with interest to see how the Titan funds, that he is sitting at the helm of now, progress. The big theme this month then is one of the big threats we all face over the coming years, and that is inflation. We have a variety of articles in which we set out the inimitable SBM stall over how we see the economic landscape evolving and, perhaps more importantly, how to position for a resurgence in inflation and hopefully how to profit from it. Other features are my interview with Giles Hargreaves of the highly respected Marlborough Special Situations Trust — for those with an interest in fund management and how to pick small cap stocks, I recommend you take a look at this piece. Although “million dollar trader” Anton Kreil was trailed for this month, scheduling commitments mean he will make his appearance in the next edition! Similarly, Tom Houggard, Alpesh Patel and Robbie will all be back — it is only the Mir household, it seems, that has remained in ol’ Blighty this August, although the cracking weather we have seen in recent weeks means perhaps I shall have the last laugh for holding the fort! Take a look at our profile of Paolo Pellegrini too in the new ‘SBM in Focus’ feature — a fascinating read that just shows you are never too old to make your mark in the markets — hope for me yet!! All the usual features are here — we have in fact had stunning success with our currency calls and hopefully this trend continues with our call on long sterling vs the euro. A contrarian stance (as ever) on copper provides food for thought and our feature piece on Zanaga Iron Ore & Co offers up a potential multi-bagger. Our Sep edition will be out right at the very end of the month due to holiday commitments and so as we look forward to an Indian summer to cap a cracking 2013 of sporting success, I wish you all a great remaining summer holiday and continued good trading.


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September 2013 | | 5


Zanaga Iron Ore & Co We set out the case for a new SBM Conviction Buy as part of a diversified portfolio.

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Zak Mir’s Monthly Pick Zak offers up accident prone G4S this month as his pick for September.

The Fed & The End Game for the US Dollar In a special piece, SBM looks at the policies of the US Federal Reserve since the great financial crisis and asks are we now nearing the end game?

Enhanced Security When Dealing with Your Broker In the aftermath of the collapses of Worldspreads and MF Global, SBM takes a look at the new financial security packages offered by some brokers.


Zak Mir Interviews


Small Cap Corner


The Inflation Dragon

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Zak interviews Giles Hargreaves - veteran fund manager from Marlborough Fund Managers.

Pauls Scott aka ‘Paulypilot’ puts Volex under the microscope.

One of our special features this month on the coming inflation in Western economies.

Currency Corner SBM is looking to make it a hat-trick with its currency picks in 2013 with a new Buy call on the Pound against the Euro.

My Day Trading Journey Jason Sen of Daytradeideas provides inspiration for all day traders with an overview of his involvement in the markets.

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Commodity Corner

Dominic Picarda AIM Stocks Special

This month we take a look at “Dr Copper” and analyse whether it’s time to take a contrarian bull stance.

Our resident technician Dom reveals his top 3 AIM picks.


74 SBM Focus on Paolo Pellegrini In the second of our fund manager focuses, we take a look at the real brains behind the “Greatest Trade Ever”.

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Technology Corner Throw away your Sky subscription! Our resident tech expert Simon Carter shows us how we can consume content at a much reduced cost.

Politics Of Trading In the second of our new columns by David Cracknell, David offers up his take on Westminster’s influence on the markets this last month & how we may profit from it.

School Corner Moving Averages Envelopes Explained - Thierry Laduguie of E-yield explains moving average envelopes and the difference between them and bollinger bands.

The Coming Inflationary Boom In the second of our special inflation pieces, we take a look at the issues driving this new theme and how you can position yourself to profit from it.

John Walsh’s Trading Diary Trading Academy winner John Walsh runs us through his experiences this past month.

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

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Special Feature

Zanaga Iron & Core An SBM Conviction Buy Call By Richard Jennings & Darren Sinden

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Zanaga Iron & Core – An SBM Conviction Buy Call

Zanaga Iron Ore Company Limited (ticker ZIOC.L) which has been listed on London’s AIM market since November 2010 is, in our opinion, one of those situations that we love here at SBM — a classic asymmetric risk/reward profile where the downside is limited relative to a potentially explosive upside. It is, in essence, a fascinating “game theory” play and as such there are numerous variables involved that make valuing this stock difficult. That of course presents the opportunity, if you call it right.

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Special Feature

Having taken control, Xstrata committed to funding feasibility studies on the site to standards that are described as representing “international best practice“ ahead of any commercial development. These studies are expected to continue into 2014.

“We actually think that ZIOC is more like an ‘option’ play. An option proposition on the build out of the iron ore resource it has a 49.9% share in the Republic of Congo and which promises to be one of the lowest production cost iron ore mines in the world.”

The feasibility studies are certainly extensive in nature. For instance, more than 84,000 man hours have been spent by consultants looking at the viability and economics of a 380 kilometre pipeline that would transport iron ore slurry to the coast at Pointe Noire where the company believes Cape sized vessels can be accommodated for loading, with minimal dredging, though they will need to build the jetty infrastructure etc. to facilitate this. The pipeline has been identified as the most effective method of ore transportation and is predicted to generate a cost saving over more traditional rail transport of more than US$1 billion.

We actually think that ZIOC is more like an ‘option’ play. An option proposition on the build out of the iron ore resource it has a 49.9% share in the Republic of Congo and which promises to be one of the lowest production cost iron ore mines in the world. With a current market capitalisation of just over £31 million (at time of writing) it is very much a David in a land of Goliaths. However, to date, Zanaga has managed to co-exist alongside its much larger peers. The company was floated on the UK stock market as a means to obtain a platform to develop out its project with an appropriate partner and also, we understand, as an “insurance premium” to allow them to navigate what are likely to be choppy waters. The mine site is actually located east of Zanaga in the Congo but that’s Congo Brazzaville, rather than its war torn and strife stricken neighbour. ZIOC has been working on this project since 2009 through a joint venture with Xstrata, now Glencore, and it is the recently merged mining and commodities house that owns the other 50% (plus one share) in the joint venture vehicle known as “Jumelles”; Xstrata having exercised its option to take voting control of the project back in February 2011. (See xtrata_ziocjv.jpg for a full overview of Zanagas corporate structure.)

It’s clear then that there is something at Zanaga worth looking into. That something is a significant deposit of iron ore. In fact, if Zanaga’s expectations about the project are borne out it would not be inappropriate to describe the resource as world class. The iron ore reserve, which is the amount of ore identified as being economically extractable at the site under Zanaga’s plans, has been certified at some 2.3 billion tones by independent experts CSA, making it the largest reserve anywhere in West Africa and some five times larger than its largest peers. Any mine developed at Zanaga has a projected life span of some thirty years at a rate of production around 30 million tonnes of ore per annum. Studies conducted on the site have shown that the ore found at Zanaga is likely to be of a higher purity than the widely traded 62% benchmark for iron ore, such that Zanaga’s output, which it is thought will be 68% pure, should command a premium price on the world’s commodity markets.

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Zanaga Iron & Core – An SBM Conviction Buy Call

If Zanaga is ultimately brought into operation it’s projected that the mine will have a low cost of operation when compared to peers around the globe. The company’s current estimates are that low operating expenses at the site and the use of the pipeline for transport should deliver the ore slurry FOB (or Free On Board) to vessels at Pointe Noire for around $22.80 per tonne and that, rather rarely, these costs are seen as being constant through the life time of the project, rather than rising with increased production.

If these efficiencies can be attained and maintained then this would place Zanaga as one the cheapest production sites in the world and well ahead of comparable operations run by mining majors such as Vale, BHP Billiton and Rio Tinto, as the graphics below (sourced from the Zanaga company website) show.


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Special Feature


Developing the project will require substantial invest and effort Of course, establishing a world class iron ore mine is not a simple undertaking, and nor does it happen overnight, particularly when the site is located in the middle of a small country in the developing world. The Republic of Congo (where the Zanaga project is situated), according to the CIA World Fact Book, encompasses an area comprising slightly less than that of the state of Montana, has a population of just under 4.5 million and a GDP of around uSD 13.7 billion as of 2012. The country draws much of its income from industry and has a young population with a median age of around 17 years for both males and females. But on the downside, the country is a net importer of electricity and has just 864 kilometres of paved roadways, though it is served by a wider network of unmade roads that total more than 17,000 kilometres. The Capex costs of the Zanaga project have been estimated at US$7.4 billion — not chump change and illustrating very succinctly why they need a major development partner in this project.

It is no good sitting with the veritable gold (iron ore) mining without the means to finance it. To put that figure into context, prior to its merger with Glencore, Xstrata had a projected Capex budget for 2012 to 2014 of US$19.5 billion in total. So the cost of the Zanaga project is not small change even in a capital intensive industry such as mining. As we have already highlighted, the development of the site will involve many challenges including the construction of the 380km pipeline to the coast and the construction of a port / loading facility there to accommodate substantial Cape sized vessels (150,000 tonnes + deadweight). On top of the usual kit out of the mining site itself, the partners in the Zanaga project will need to consider power generation on the scale of 355 to 455 MW per annum. This is around two thirds of the country’s current production. Though I note there is an existing power generation plant at Pointe Noire and that Zanaga Iron Ore believes it will be able to build a new, dedicated gas-fired generator here alongside the transmission infrastructure to take that power to the mine some 380km inland.

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Zanaga Iron & Core – An SBM Conviction Buy Call

The share price has reflected the commodity downturn almost from the point of flotation Zanaga’s share price has declined markedly since the company first listed on AIM back in November 2010. The stock traded as high as 213p in mid-January 2011 before selling off in a sustained and steady fashion over the next two and half years, finally culminating (so far) at 9p in late spring of this year.

Almost exactly month to the day after the break below the 50 day line the shares took a dramatic dive below £1.00 culminating in a low on the 27th of June last year at 48p. That low formed part of a “hammer formation” on Zanagas daily candle chart. Having “beaten out a bottom” with the hammer formation, the shares then rallied and posted a high of 76.25p on July 13th.

From a chart standpoint, the failed move above and the subsequent break back below the stocks 200 day & 50 day EMA (or Exponential Moving Average) in early April 2012 was the turning point for Zanaga.

Unlucky for some, they say about 13, and so it proved for Zanaga as the shares would only drift lower from here, tracked inexorably by the 50 day EMA line.


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Special Feature

Rather disconcertingly, major institutional shareholder Blackrock have been selling down their stake in the company and went below the key reportable threshold of 5% back in April. Readers should also be aware that the stock is tightly controlled with Garbet Limited and Guava Minerals Limited controlling nearly 75% of the share capital. Readers should also note that the potential beneficiaries of these two entities are two of Zanaga’s non-executive directors and whilst it’s always good to see the board having skin in the game, this degree of control could be taking it too far as we recently saw with ENRC. Tax efficiencies aside, it’s not clear to me what the current benefits of a quote for Zanaga are and so there is a danger of the company being taken private on the cheap. When you control 75% of a company you can pretty much do what you want. The current market cap of the company is just over £30m and according to the results for the year ending Sep 31st 2012 (published on the 27/06/13) there was a cash balance of some £26m (at current FX rates). However, the company has bought back its own stock since the end of 2012 spending around £200,000 or approximately $350,000 of its cash reserves in doing so.

I note that in the interim results for the six months to June 30th 2012 the company actually reported a modestly increased cash pile, presumably from interest.

Both the mining sector & iron ore prices have fallen sharply since Zanaga listed As we have established, Zanaga Iron Ore Limited has a minority holding in joint venture Jumelles with Glencore Xstrata. That joint venture has exploration licenses and the potential to develop a significant iron ore deposit with the possibility of high purity low cost production. However, the past three and a half years since Zanaga listed has been a period of contraction in the mining industry. The index of mining stocks within the UK top 350 has fallen from a peak in December 2012 of 20825 to stand at 16846 as of the close on 09/08/2013; a fall of around 60%. (See the chart below)


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Zanaga Iron & Core – An SBM Conviction Buy Call

Commodity prices have also suffered within this time frame with the iron ore price moving down from its peak in January 2011 at US$198.54 per tonne to stand most recently at around US$135 per tonne — a contraction of some 68%. I note, however, that we have seen a rally from the lows in the mining sector throughout July and into early August that has been accompanied by a similar bounce in iron ore prices as well. During this period of contraction, major miners have been looking to trim their Capex requirements, sell assets and undo the worst of the acquisitions they made during the boom times. There has of course been consolidation in the sector recently as Glencore regained control of its protégé Xstrata. However, this is not necessarily seen as being beneficial for ZOIC. After all, the entire Zanaga prospect was an Xstrata project and may therefore not be that well known to Glencore management. Furthermore, Glencore management is currently engaged in divesting assets, for instance the Las Bambas Copper mine in Peru.

Glencore’s mining capex may continue to contract and be focused on actually producing assets Comments made by Ivan Glasenberg, the Glencore CEO, back in May do not look to favour Zanaga. Mr Glassenberg said on a conference call “We will review all the assets (in the combined group)”, adding that “Glencore will continue to favour brownfield projects over higher risk, more capital intensive greenfield initiatives.” Furthermore, the Capex budgets for Glencore in 2013, 2014 and 2015 of US$13 billion, US$9 billion and US$7 billion respectively, would appear to leave little room for a single venture with a projected capex requirement of US$7.4 billion.


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Special Feature

China will likely be the key That said, the low-cost high-yield ore production that the Zanaga project may offer would probably work in Zanaga’s favour were the price of iron ore to take a further leg downward or if transportation costs of the same were to increase markedly. These kinds of variable cost fluctuations would put a spotlight on lower cost, higher margin opportunities such as Zanaga. Much of what happens next will depend on what transpires in China, which remains the single biggest market place for iron ore worldwide.

Time decay, which in this instance is governed by the level of cash in the company, and the major shareholders desire to retain the quote at the current rates of cash consumption should be borne in mind. To my mind, there is likely to be a window for success of no more than ten years and probably a lot less. Are the “options “in or out of the money? At this point in time with no firm commitment to funding Zanaga from Glencore they are decidedly out of the money. However, that is mitigated to some extent by the higher margins an operator might enjoy should the mine be developed.

Japanese investment bank Nomura wrote on this very subject last on the 2nd of August saying that: “The top-down outlook for the Mining Sector is, in our view, increasingly poor, with little in the way of sector catalysts on the horizon. With the lion’s share of commodity consumption still dominated by the Chinese, our house view for weaker-than-consensus Chinese economic growth (with downside risk) underpins our view that the sector is likely to continue to struggle.” There have of course, as ever, been mixed messages from the Chinese economy since those words were written. However, I think they serve to underscore the idea that it will be global macro factors that determine whether or not the Zanaga project moves to production rather than anything the management of the company or its consultant can do. Note though that Glencore itself has an upcoming investor day on the 10th of September, when Swiss bank UBS expects we will hear more about cost & Capex savings at the commodity power house, as they noted in their preview published on August 9th.

Zanaga shares are a call option on the development of the project At the current price, with the stock trading practically at cash and a cash pile that is going nowhere, Zanaga Iron Ore shares are effectively call options on the project moving to a production phase and this is the real way to evaluate them. As with all options there are external factors which will influence the price.

The volatility component of our metaphorical option price comes in the form of the price volatility of iron ore, but also the potential for Glencore to sell on some of all of its interest to a third party rather than pursue the project itself; something that ZOIC may also have the chance to do going forward by virtue of their “tag along rights”. Clearly, investors who venture into Zanaga stock at these prices will need to have a full understanding of their downside risk, i.e. the “option premium” of 11.25p or so per share. But as with all call options the gearing is to the upside and even a minority stake in an active Zanaga project is clearly worth many multiples of the current valuation. This in essence underpins our buy case.

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Special Feature

In summary then, Zanaga represents a way to share in a potential world class asset that offers the prospect of a 30 year life span of high yield, low production cost iron ore. But its development, or otherwise, will be driven by the cyclicality of commodities and the appetite of Glencore or others for capital intensive projects. The project deserves to press ahead and we expect that either Glencore will look to partner with a major developer (probably the Chinese) and where importantly they have a ready-made buyer of the ore and so can see a positive NPV to the project. This will of course involve ZIOC being bought out at what we would expect is multiples of its share price.

Again, such a scenario would likely reap multiples of the share price. We are sceptical of Glencore losing the opportunity, however, as industry analysts have estimated the NPV to Glencore, even after using a heavy WACC of over $5bn. As an inclusion in a well diversified portfolio, we think ZIOC offers a compelling opportunity.

CLEAR DISCLOSURE: SBM Editorial staff and Titan Investment Partners hold a position in ZIOC.

The alternate scenario is that it is Glencore that ducks out and ZIOC themselves look to dilute their stake in the project in exchange for a deep pocketed partner that would replace Glencore.

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Editorial Contributor


RECOMMENDATION SUMMARY While it may be wrong to confess to G4S being a company which causes one to chuckle, there has been something of an air of the BBC’s TV comedy “Fawlty Towers” associated with the running of the world’s largest security group. From failed takeover deals, escaped prisoners, inappropriate tagging, overcharging and the 2012 Olympics fiasco, it would appear that shareholders have been subjected to almost everything that could go wrong!

However, the basis of this “Buy” call for G4S is that the recent weakness and rebound for the stock has, in my opinion, factored in the negatives. The departure of CEO Nick Buckles drew a line in the sand as far as the mishaps are concerned, and in fact re-iterated the old saying that there is no such thing as “bad publicity” (although in Sefton Resources’ case I am not sure this is true!!). Lord Myners and no lesser luminaries than Bill and Melinda Gates being on the shareholder register does not hurt either.

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Editorial Contributor

Technical Analysis It is clear from the daily chart of G4S that the 2012 Olympics fiasco marked the start of a period of dynamic price action — let the battle between “bargain hunters” and “bears” begin. In fact, as recently as early July, it appeared that the stock would remain in free fall following a combination of the bull trap reversal of March/ April and the subsequent unfilled gap to the downside through the 200-day moving average then at 245p. Such gaps through the 200-day line normally suggest not only a prolonged bear market for shares of a company, but also a fundamental sea change.

In fact, on the day of writing it can be seen that we have a likely mid-move “Bull” flag consolidation rebound off former 243p June resistance. The likelihood now is that at least while there is no end of day close back below the 50-day moving average at 229p the upside here could be towards the top of a May gap at 299p. Indeed, from a technical perspective, it should be the case that we see quite a sharp spike to the upside from the present flag formation. Too much dithering going into September would be surprising.

However, what has been seen in the period since the middle of July is an untested “V” shaped reversal — something which looks as though it will trump the 200-day line gap sell signal.

chart - G4S

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Zak Mir’s Monthly Pick

“While it may be wrong to confess to G4S being a company which causes one to chuckle, there has been something of an air of the BBC’s TV comedy “Fawlty Towers” associated with the running of the world’s largest security group.”

Recent Significant News August 12th: Cevian — the investment firm whose UK arm is chaired by Lord Myners, the former government minister for UK financial services — emerged as having a 5.11% stake in security giant G4S.

July 14th: G4S is on the receiving end of a Serious Fraud Office (SFO) investigation into overcharging in government tagging contracts. The company may have to repay tens of millions of pounds.

This comes in the wake of June’s revelation that the Bill and Melinda Gates Foundation has a 3.2% stake in the company. Troubled G4S has faced a series of problems since its 2012 Olympic Games security fiasco last year, including a probe into its government contracts for tagging criminals and the death of someone who was in the firm’s care while being deported.

G4S is said to be looking to emerging markets for future growth and despite the threat of a fine and worries over margins the shares look cheap. The current year earnings multiple is 10, falling to 8.9, and the yield is 4.4%. At this level, they are for speculative investors, but uncertainty means the Telegraph’s Questor column thinks the rating has to remain as a “Hold”.

July 15th: After facing the fall-out from a Serious Fraud Office (SFO) investigation into overcharging on public-sector outsourcing contracts, HSBC cut its target price for G4S, with reports doing the rounds that it has talked with big shareholders about a possible rights issue.

July 10th: Goldman Sachs reiterated its “conviction list sell” recommendation on shares of G4S ahead of the company’s interim results on August 28th. Their investment thesis is based on the poor industry dynamics in security end-markets, resulting in low barriers to entry and limited pricing power creating margin pressures.

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Editorial Contributor

July 1st: Canaccord Genuity analysts argue that the market is underestimating the potential for G4S’s new chief executive to turn the company around.

Fundamental Argument

The broker said investors have “priced in” a “kitchen sinking” of G4S’s accounts and a fundraising when the new CEO Ashley Almanza updates on the security outsourcer’s interims on August 28th.

To cut to the chase, there are a couple of key fundamental triggers here at G4S. What can be said primarily is that whatever the negatives that we have seen in terms of profits warnings, and an SFO investigation, the travails endured by this stock can easily be blamed on the “bad old days” under the stewardship of Nick Buckles.

Canaccord believes the market has not paid enough attention to Almanza’s scope to reallocate capital, report more clearly, generate cash and do more business in fast-growing markets.

With regards to the SFO investigation, G4S is likely to be on the receiving end of a simple “slap on the wrist fine” if we consider the SFO’s recent track record. Or perhaps G4S will be in fact be able to get away with it?

Canaccord argues G4S’s relationship with the UK government is salvageable after the Olympic fiasco and that Almanza can shift resources to expanding developing markets where G4S is already strong. It believes that G4S enjoys “genuine competitive advantage” in many developing markets and that accelerating the group’s exposure to these higher growth and higher margin countries is an appropriate strategy. The broker has seen fit to reiterate its “Buy” rating and 300p price target on the shares.

Nevertheless, there are many reasons to go “Long” of G4S: firstly due to the revelation that the Bill and Melinda Gates Foundation bought a 3.25% stake in G4S — around a month before the shares found a floor. This “bottom fishing” has been backed up by a larger stake, 5% from Cevian, a private equity group. While it may be wrong to go “Long” of G4S on the basis of the reported stake building alone, there is also the possibility that after a string of mishaps, the company could see improvement for the rest of the year, due to the group’s general growth potential in emerging markets.

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Don’t miss out!

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Special Feature


We have lived through an era of incredible monetary policy. A succession of low interest rates and “unconventional” stimulus measures has helped fuel a series of financial bubbles. First, “legendary” Fed Chairman Alan Greenspan opened up the flood gates in response to the Dotcom Crash and then “Helicopter” Ben took monetary policy to a whole new level of profligacy when the MBS market collapsed and threatened the whole system.

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The Fed is playing an end game for the USD

Both sets of actions followed an identical mantra: the Fed will always be there as the saviour of last resort supplying the market with endless liquidity no matter the root causes of the problems and it will seek to inflate financial asset prices in the vain hope that physical asset valuation will eventually catch up. Unfortunately for all concerned, all that the Fed has achieved pursuing this agenda has been to break the link between financial asset prices and the real economy.

While financial assets have kept rising, real assets have stagnated. Once again another massive bubble has formed. The following chart speaks for itself! This chart has tracked the weekly price movements of the S&P500 since 1995. Looking at this, a clear argument could be made that Fed policy has done more harm than good.

CHART - S&P 500 The pins reveal the points at which the previous bubbles have burst. On each occasion Fed intervention helped get markets moving, but financial asset prices were artificially inflated, hence the two collapses. Is there any reason to think this time will be different?

Looking at the real economy

From a certain perspective, this policy has been a success. unemployment has fallen from 10% to 7.6% and there has been GDP growth (albeit at an anemic rate of roughly 1%). yes, it’s taken over $2 trillion, and yes it’s taken unnaturally low interest rates of 0% to reach these “achievements”, but how much worse would the situation have been had the Fed not acted?

Almost five years have passed since the start of the first Quantitative Easing program. Since then, the Fed’s balance sheet has exploded from roughly $1.4 trillion to more than $3.7 trillion (more than enough fuel to supercharge addicted markets!!!).

ultimately this question will be debated by historians for decades to come, but at present the feeling is very much that what has been achieved has been at an absurdly high cost. It’s been like hunting ants with a bazooka!

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Special Feature

The New Financial Economics Of course, the world would be a very different place if central bankers found themselves shackled by a system such as the gold standard. Under the restrictions of such a system, creating money out of thin air would be impossible, as any issuing central bank would be obliged to own the requisite reserves to enable it to expand the money supply. However, as long as Fed vaults are collecting nothing more than cobwebs, they can carry on printing until their hearts are content or, more probably, the market calls time on this increasingly reckless policy. It is now commonly accepted that paper money is a product of rules and regulations. As with its counterparts, the US dollar is rooted in the law and is accepted as the payment mechanism for transactions. The problems start to occur when the rules and regulations, which are meant to bind this currency, can be changed almost at a whim. This is exactly the situation we now find ourselves in and which has allowed the Federal Reserve to engage in the wildly unconventional policies it has been pursuing in the name of being “supportive” of the economy.

“The problems start to occur when the rules and regulations, which are meant to bind this currency, can be changed almost at a whim.” Were the gold standard still in existence today, any such attempt by the Fed to expand the monetary base in the manner it has would simply have resulted in a widespread ditching of dollars in favour of conversion to gold. The monetary base would be forcibly shrunk and the Fed’s policy reversed. In many ways, this would be like an auto-defense against excessive and aggressive monetary expansion. But such a system would also not allow the national debt to rise indefinitely. Once central bankers and government planners realised the power paper money transferred to them, it was little wonder they adopted the concept with such glee. What fantastic invention! Money backed by nothing other than faith in Uncle Sam!!

Sadly though, as with many great ideas, there have been many unintended consequences. Take the futures market as an example. We now live in a world where the obligations relating from all the various financial innovations in derivative productions outstrip the value of the underlying collateral (real assets) by many factors. What is most worrying about this is that no one really knows by how many factors... The paper market for gold is one such market where the extent of this problem is not fully understood. There are estimates that the volume of gold-related futures and options could be worth 100x the value of the physical market. Were all contracts for gold called in, this would be a calamity. This is a very real risk. With the ongoing debasement of the US dollar by the Federal Reserve’s unconventional policies, gold is one of the few assets which acts as an effective hedge against this. When this notion finally seeps into the general consciousness it is quite plausible there will be a mad rush to buy physical gold. If the paper market collapses under the strain of this buying, then expect to see the price for gold set in the physical market rather than through the terminals of COMEX.

Since the start of its recent recovery in July, gold now looks like it is preparing to resume its bullish trend of the last 12 years. If you look at the futures market today, you will see the precious metal is trading in backwardation, which means spot prices are higher than prices for following month delivery. At the same time, lending markets have also been affected by GOFO (the “Gold Forward Offered Rate”) being negative for quite some time. This means traders are willing to lend money and even pay interest on it if gold is used as collateral. These are the first signs of rising stress relating to the availability of physical gold.

26 | | September 2013

The Fed is playing an end game for the USD

“Overall, I believe the Fed is now lost without direction.” The Revenge of the BRICs As you can imagine, the dollar debasement policy followed by the Fed is not popular outside America. A weaker dollar is creating current account distortions in many countries as their products are increasingly difficult to sell at higher prices in America and they also have to compete with cheaper American goods. Brazil has been one of the most vocal opponents of the developing currency war triggered by Fed Policy and the matter has been discussed at G20 meetings.

The BRICs are particularly sensitive to this matter and may seek alternative measures to minimise their exposure to a declining dollar. This might even result in the establishment of a new international reserve currency. Where US equities have been surging over 2013, the stock markets of the BRICs have been suffering. Just look at the following table:

















The main stock indices in Russia, China and Brazil are substantially down this year reflecting their depressed economies, which is a direct result of their deteriorating current accounts, flat global growth and dollar debasement.

What does this all mean? Overall, I believe the Fed is now lost without direction. They have managed to get markets addicted to their easy money policies and it is far from clear how they will wean them off. Internationally, the Fed is fast losing credibility and friends. Their policies could even result in the dollar losing its status as the world’s reserve currency. If that happens, then all bets are off. For example, it would be entirely unfeasible to imagine they would be able to continue to issue 10 year Treasuries at rates of 2.5%.

Worst of all, however, is the gaping chasm that has opened up between financial asset prices and their real world counterparts. At some point they will re-converge, and this could be a deeply painful experience. The real economy continues to labour under a massive debt burden, so it seems unlikely real growth will allow a catch up with financial assets. This means financial assets will have to fall. And of course the problem with this, as we are all bitterly aware after the shocks of the last 10 years, is that bubbles don’t simply deflate; they burst. At this point, there will be an almighty amount of worthless paper out there and one of the only safe havens will be gold. And when I say “gold”, I mean the physical, shiny stuff you can hide under your bed, not the paper kind!

September 2013

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Special Feature


A new insurance policy covering client assets in excess of the ÂŁ50,000 statutory limit could soon be a common feature across the industry.

28 | | September 2013

Enhanced security when dealing with your broker

Safety of client funds should always be a paramount consideration, but it took the high profile failures of MF Global UK and WorldSpreads in 2011 and 2012 to raise awareness of this critical issue. According to KPMG, the administrators of WorldSpreads, the shortfall in the company’s assets is such that clients with funds not covered by the £50,000 statutory protection limit are only likely to receive around 9p or 10p in the pound. For some this could spell financial ruin.

We wanted to ensure that we never fell victim of this again and that’s when we came up with the idea of being able to reassure our clients that we were protected in the event of broker default.”

Extra protection Brokers and their counterparties all have to be authorised by the Financial Conduct Authority and abide by their Client Money Rules. This means that client funds have to be held in segregated accounts away from the firm’s own money. The theory is that if the broker fails, retail customers should always get their cash back, but that certainly wasn’t the case with WorldSpreads and MF Global. Where a counterparty is declared insolvent and there is a shortfall in the segregated client assets, the FSCS will pay compensation of up to £50,000 per retail customer. Anyone with a balance in excess of this upper limit would not get all their money back. This is no longer the case for retail clients of Central Markets who sign up to the new terms of business agreement. The company has taken out insurance underwritten by Lloyd’s of London that allows them to make a claim if one of their counterparties goes bust with a shortfall in their retail customer funds.

Adam Stark, Dealing Director at Central Markets, says that most of them within the firm have been involved in retail broking for many years and have all been indirectly involved in the collapse of both MF Global and Worldspreads.

In the unlikely event that this should happen, the policy would fully reimburse their clients even where they have more than £50,000 in their account. The new product is known as Tradeassured and it has been designed to cover customer deposits and collateral held in segregated accounts away from the firm’s own money.

“Confidence among investors in the aftermath of these high profile broker collapses was fragile. We as a firm were also feeling vulnerable as our future as a business was also in the hands of a broker counterparty.

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Special Feature

Limitations in the cover The insurance protects against a breach of the custody arrangements of the insolvent firm. It does not apply to claims for mis-selling or any losses arising out of the performance of your investments. A further limitation is that it only relates to retail clients, not those designated as professionals by Central Markets’ partners. For the policy to pay out it must be proved that funds have been misplaced by the counterparty or that they have committed fraud. The other main prerequisite is that it triggers a distribution by the FSCS. Tradeassured will not protect you if it is the bank used by the broker where the funds were held that defaults. The cover is not provided in the form of a bank deposit guarantee and therefore it is essential that all customer accounts are used only for trading purposes. Clients who want the extra security will have to sign up to a new terms of business agreement. Although Central Markets says that there is no direct cost, the main change to the contract is the imposition of an inactivity fee of 0.5% of the account value every quarter. “Clients will not be charged if they generate 0.5% in commission over the course of a quarter. This account is most appropriate for clients who already have that level of activity in their accounts and therefore the extra protection will not cost them,” explains Stark.

Watch this space A second UK broker, ActivTrades, has recently followed Central Markets’ example and used insurance to extend the level of client protection beyond the £50,000 statutory limit up to £500,000 per customer.

Similar products have been available in the States for years with the large broker/dealers buying insurance to protect account holders with balances in excess of the $500,000 ceiling covered by the Securities Investor Protection Corporation. It is likely that as more retail traders become aware that the extra security is available they will start to expect it as a standard feature of their broker’s service. After all, why run the risk when you don’t have to? You also have to remember that it is the larger clients that will want it and these are the most valuable accounts. “We would like to think that this sort of extra protection will become a common feature in the UK, as it’s already common practise in Japan and the US. We think once the message reaches all corners of the country, investors would be mad not to have it,” concludes Stark.

“We would like to think that this sort of extra protection will become a common feature in the UK, as it’s already common practise in Japan and the US. We think once the message reaches all corners of the country, investors would be mad not to have it,” concludes Stark.

30 | | September 2013

CFDs | FX | Equities | Spread Betting

Come rain or shine your accounts are protected against broker default

Central Markets were the first UK broker to offer trading accounts underwritten by Lloyd’s of London against broker default. Investing and trading can be risky enough without having to worry if your money is safe. Trade Assured from Central Markets 020 7265 7925 Spread betting, Contracts for Differences (CFDs) & Foreign Exchange (FX) are leveraged products & carry a high level of risk to your capital as prices might move rapidly against you. It is possible to lose more than your initial investment & you may be required to make further payments. These products may not be suitable for all clients, please ensure you fully understand the risks associated & seek independent advice. Trade Assured is the brand name for the cover provided under the CML Excess of FSCS Insurance Policy. The cover is subject to terms and conditions which are contained within CML general business terms which can be found at Importantly, the cover is only valid for CML customers that have accepted the terms and conditions and are eligible claimants under COMP, as defined in the Compensation Sourcebook of the FCA Handbook. Central Markets (London) Ltd, America House, | | 31 2 America Square, London. EC3N 2LU. Authorised and RegulatedSeptember by the Financial2013 Conduct Authority No. 473312

Zak Mir Interviews

Zak Mir Interviews Giles Hargreave, veteran Fund Manager at Marlborough Funds


I first met you over 25 years ago in the offices of Hargreave Hale in London where my father’s stockbroker (since 1976) George Finlay was working — and still does. He has been described as the best stockbroker in London and you are also widely acknowledged as an industry leading fund manager. The combination of Giles Hargreave/George Finlay appears to be no less impressive in the City than Lennon/McCartney in song writing! Am I correct in saying that while part of a larger management team, the two of you have complementary skills in terms of the forensic insight required to identify investment opportunities — particularly in under-researched or sparsely traded companies? Is there read through for private investors too regarding working as a team/sounding boards?


When the Special Situations Fund was started in 1998 with £250,000, the team was a small one, centred on George and myself. For a long time it was possible to carry just one or two people with us, with George coming up with quite esoteric companies such as Chime Communications when it was trading at three times earnings. But now 15 years later, with the fund standing at over £600m, we have built a team and there are over 20 people involved and £1.4bn across the funds.

ZM: In July, you handed over the reins of the

Marlborough UK Leading Companies Fund to Richard Hallett to focus on the Marlborough Special Situations, UK Micro Cap Growth and Multi Cap Income Funds. Ostensibly, this was on the basis that Hallett has proved himself to be a highly capable manager over recent years.

Something I find interesting, as far as fund management is concerned, is not only the method of analysis/approach followed by a fund manager, but also the personal characteristics he or she might have. For instance, someone who is a perfectionist or does not “suffer fools gladly” is likely to be just as rigorous and fuzzy when it comes to investing in the market. How much is fund management dependent on method/approach, and how much on the mindset?


I think that is an interesting question because Richard certainly is a man with a strong character who does not like talking to stockbrokers — for obvious reasons, as they are trying to generate commission. Fund managers are trying to generate performance, so they have a different standpoint. So he is quite happy to form his own opinions, something you need to do in order to hold AIM stocks all the way through. In my view, the perfect fund manager is someone with a strong character, but who is also flexible. He does not say he will not always talk to stockbrokers or follow his own ideas. Conviction can actually be very dangerous in terms of people getting it wrong. You have to be able to listen to the market.


Would you say that even though we are in the age of the internet, a globalised economy, the advent of QE (or its imminent end!) and unknown territory in terms of sovereign debt levels, that the basics of what you do have not really changed over the past 30 years?

32 | | September 2013

Giles Hargreave

Giles Hargreave (64) is Chief Executive of Hargreave Hale Ltd. After starting his career in 1969 as an analyst with James Capel, Giles joined Management Agency and Music as a private fund manager in 1974 before founding Hargreave Investment Management in 1986. Giles then merged Hargreave Investment Management with Hargreave Hale & Co, a provincial stockbroking firm controlled by other members of his family, in 1988 and took over as Chief Executive.

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Zak Mir Interviews

“What are your thoughts on the growing opinion that the AIM market in particular is a “free for all” for directors and Nomads and the poor private investor is just deemed to be cannon fodder to be “legged over?” gh: I think the ability to judge the management

of a company and its results are the same skills as they were 20 or 30 years ago. You need to be able to exercise good judgement so that when a company says that something it hopes will happen, that you have the ability to judge whether it is going to happen, and the likelihood or otherwise of that scenario. In addition, you look at things in the normal way: the balance sheet, the profit/loss, the history of the management etc. If you have known the management for a long time that is obviously very helpful.


Pricing power, niche playing, strong margins, discount to net asset value (NAV), “barriers to entry”. Are these concepts the building blocks of what goes to make a successful investment opportunity/recovery situation or is this a gross simplification?


One of the basic errors of the private investor, that I have seen, is never knowing when to throw in the towel. Is it ever right to risk the whole amount invested in a company even when there has been a material change in fundamentals? How do you address this in your funds? Money/risk management can very often be as important, or more important, than the trading or investing strategy itself. Are there times when you reject perfectly good companies just because they would throw the balance of the fund, exposing it to too much risk? Given that my day job is as a Technical Analyst, I would be interested to know whether “price action” plays a part in the Giles Hargreave “stock selection” process?


I don’t spend a lot of time looking at charts, but one of the things I do when I am thinking about buying a stock is to look at the chart. I don’t pretend to be a technical expert, but usually if the fundamentals are likely to perform well, the chart will reflect this.


AIM stocks are an asset class which you have been focused on within your small caps/micro caps remit. With the investment situation here transformed recently given the new ability for these companies to be placed within an ISA, is this totally a good news story, or can you see any issues emerging?



The margins of a company are obviously quite important, but more important is whether they can maintain them. Are they at an all-time high? And what is their competitive position? What the management would like to tell you is that things are likely to improve, but you have to try not to be so easily influenced. Ideally, you are dealing with management who you know well and who have a history of under-forecasting and overachieving.

I think it is extremely good news as you can see from the performance of the AIM index which, having lagged month in month out, suddenly in August when the new rules came into place has outperformed — certainly relative to the mid-caps and the FTSE 100. It has outperformed even the small caps and this is perfectly understandable considering now these shares incur no income tax, Capital Gains Tax (CGT), inheritance tax and even no stamp duty from next year.

34 | | September 2013

Giles Hargreave

The reputation of AIM could even be enhanced by some companies switching from the main market.


What are your thoughts on the growing opinion that the AIM market in particular is a “free for all” for directors and Nomads and the poor private investor is just deemed to be cannon fodder to be “legged over”?

While of course the small caps space should be immune from such a malaise, do you subscribe to the “doomster” view or are we merely likely to continue with the 5-7 year boom/bust cycle we are all familiar with and if you are a pessimist how does this affect/influence your strategy?


AIM developed a bad reputation largely as a result of some portfolios based on it years ago performing badly. But nowadays it is different as the exceptional performance of our AIM Inheritance Tax Portfolio underlines. You don’t have to have many ASOS (ASC) or Abcam (ABC) situations. Richard Hallett has hung on to ASOS from £1 to £50.


Despite knowing you and George Finlay for over a quarter of a century, I have personally never invested in a fund of any kind — yours or any other. Is participating in this area and finding a star/alpha producing manager with a track record and writing a cheque difficult?


You are backing the fund manager’s character, their judgement and the idea that he will not lose confidence during a period of underperformance, or be led astray by outperformance. Ironically, entry into a fund is rather like picking the entry point on a stock. But if someone has a track record over a number of years, then that is essentially what you are backing. Also, as funds grow they become unwieldy and you need to have someone at the helm that has the interpersonal skills to bring out the best in a team.


At the beginning of August you highlighted your concern over the state of the bond market. However, given QE and the way that this has arguably created a false market in equities for an extended period of time and also the low rates promises made by central banks recently, should we really be concerned? I have also asked several Spreadbet Magazine interviewees in turn whether they think that as far as Western equity markets/economies are concerned, are we now essentially looking at the Japanese model of flat-lining growth and similar moribund equity indices performance for the next decade or even longer?


I am bullish of the U.S., especially in the south, and the manufacturing groups there. They are very confident of being able to compete with the Chinese who are facing wage rises of 10 – 15%, whereas the Americans have a stream of migrants across the Mexico border and lower labour costs. But the key is the sharp fall in overall manufacturing costs as a result of lower energy costs due largely to fracking. I do not see any Japanese model for the U.S. as it has such a flexible labour force driving the economy. But, even in Japan, we now have a new Prime Minister who, courtesy of changes in aspects such as the labour laws, along with the stimulus, will ensure the zombie is no more. So I am very optimistic that equities and equity markets as an asset will be re-rated as compared to property, and bonds in particular. Bonds are vulnerable, as we have to go from A to B, where B is normalisation. How you get to B and normal interest rates is going to be very interesting.

September 2013

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Zak Mir Interviews

“Do you think private investors can ever really beat the markets en bloc or, like many areas of business, are only a few actually destined to be successful?” ZM:

Would you agree that after two years in the wilderness, gold and gold mining stocks really have hit rock bottom?


If you speak today to those who provide drilling services/supplying equipment to the mining industry — even FTSE 100 companies — and assume that there is going to be a recovery in the mining industry, the reality is actually somewhat complex and not straightforward. Overall, there has been a management shakeout in the big miners after the end of the boom period and the over promises leading up to the financial crisis. We are now in a period of cost cutting by new CFO’s/CEOs, with perhaps the situation being that going forward a year, the overcapacity and over supply seen recently will be reduced. But, it is very difficult to see a sustained rise in metals prices, even with a consumption led recovery in China, and the nascent improvement in the U.S. and Europe and Japan continuing. To add to the confusion, China continues to play games in terms of its stated holdings of stocks of copper and iron ore.


Of course they can. Every private investor has specialist knowledge of their own business or profession. They are likely to possess knowledge which will help them compete in a specific area. In addition, with sources such as the internet, if you want a piece of information to help you say, compare companies and are really persistent, you can get it.


Are there any particular opportunities/companies you would like to draw attention to for the final quarter of 2013?


The first thing to say is that there is a genuine recovery in the U.S., and it is a low inflationary one, helped along by the low cost of energy. There are also certain areas in the U.S. where shale gas has been discovered, but in inconvenient areas where there are no pipelines. There are a number of companies benefitting from supplying this industry, the pipelines and equipment. Some of these companies have a five year order book and so we are positive on selected small and mid cap US stocks in particular.


Do you think private investors can ever really beat the markets en bloc or, like many areas of business, are only a few actually destined to be successful?

36 | | September 2013

September 2013

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SBM Focus


By Richard Jennings & Filipe R. Costa In the second of our new pieces in which we take an in-depth look at some of the big names in trading and fund management, this month we hone in on one Mr Paolo Pellegrini, a man some say was the real brains behind the so called “Greatest Trade Ever”...

The biggest, boldest and greatest trade ever... The year is 2004, and after making an uninspiring impression in a few finance jobs, as well as being on his third wife, Paolo Pellegrini approached his friend John Paulson — then a little known “merger arbitrage” small hedge fund specialist — and asked for a job as an analyst. This was to be a fateful year for both investors... Aged 47, and nearing the twilight of his career, Pellegrini was struggling to achieve the success that had eluded him for many years and he was resigned to eking out a modest living in a buried corner of the financial arena. The decision by Paulson to bring him into his firm would go down in history as one of the most inspired hires ever (perhaps more so than our making Zak Mir editor of this mag!)

The path to Paulson & Co Paolo Pellegrini is an Italian native who was actually born in Rome in 1957. His father was a physics professor and his mother a biology researcher. In 1962, at the age of five, he moved to Milan where his father took up an opportunity to teach in the northern Italian city. The young Pellegrini enjoyed classical piano lessons whilst studying Latin and ancient Greek.

As a teenager, he joined the Partito Radicale (Radical Party), a pacifist, anti-establishment party advocating a ban on nuclear weapons, the legalisation of marijuana, and divorce rights. In short, there was little to mark him out as a capitalist extraordinaire whose name would go down in the annals of stock market folklore. It was in 1975 that he was admitted to the Politecnico Di Milano where he pursued a degree in electrical engineering, graduating cum laude in 1980. There were not too many employment opportunities in Italy at the time and so he decided to continue studying abroad, leaving his home country for the hallowed environs of Harvard Business School where he undertook an MBA. It was whilst at Harvard that he became fascinated with data and patterns, developing a deep interest for mathematical models and their application in the financial markets. In 1984 he was recruited by Michael Chek, a partner in the fixed-income division of Bear Sterns & Co, as a summer associate where he became involved in M&A. Can you guess who the M&A Vice-President was at that time? Yes, one Mr John Paulson. The two met for the first time in 1984, but it was 20 years later that they would re-join forces again... Pellegrini took an associate position in corporate finance at Dillon Read & Co in 1985 before moving to Lazard Freres & Co the following year after Traveller’s Corp acquired Dillon.

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Paolo Pellegrini

Birth: 1957 (56 years old) in Rome, Italy Resides: New York, USA Activities: Hedge Fund Manager, Philanthropist

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Special Feature

He worked at Lazard between 1986 and 1994, turning himself into an insurance expert before deciding to run his own consulting business counselling companies on re-insurance. This lasted between 1999 and 2002 until he shuttered the business. Michael Check hired him once again in 2003, this time as an analyst for Mariner. It was here that the seeds of the subprime trade were sown as he developed an interest in so called collateralised debt obligations (CDOs), credit default swaps (CDS), and other derivatives. Not satisfied once more in this role, Pellegrini approached his old friend John Paulson, asking for a job and Paulson duly obliged. When Pellegrini first arrived at Paulson’s new firm, “JP”, as Paulson is known, was running a modestly successful business that was started ten years earlier and which specialised in finding anomalies in the pricing of merger and acquisition situations. The hedge fund also dabbled in so called “event” arbitrage which is a little riskier than plain M&A ‘arb’. The idea was to explore profit opportunities by taking long and short positions at the same time; in the first case exploring potential mergers, and in the second taking positions on corporate events such as potential earnings, potential surprises and other catalysts that could move stocks.

JOHN PAULSON Paulson meanwhile was trying to figure out a way he could make money from what he saw as a growing credit bubble and Pellegrini’s past experience in analysing the housing market would eventually bring new insights into the company, allowing them to formulate their wildly successful strategy.

Paulson assigned Pellegrini into housing research, a task that he conducted exhaustively, spending hours analysing the U.S. housing market and tracking home prices across the country since 1975. He performed a regression analysis which studied the effect of interest rates on prices and came to the conclusion that while house prices rose on average 1.4% per year between 1975 and 2000, they had soared 7% per year over the following five years until 2005. To return to its long-term trend, house prices would have to drop by 40% they reasoned (just as well they didn’t carry out the analysis on the UK housing market which, to this day, still defies gravity!!). He also found that during past corrections prices usually declined below the trend line as the initial reaction is amplified due to credit contraction. The two findings led him to the conclusion that the US housing market was a disaster waiting to happen, and it would happen soon. With the potential profit opportunity already identified, Paulson and Pellegrini just needed to find a way of exploiting it. They needed something that would correlate perfectly with a housing bubble burst.

“The two findings led him to the conclusion that the US housing market was a disaster waiting to happen, and it would happen soon. With the potential profit opportunity already identified, Paulson and Pellegrini just needed to find a way of exploiting it.” Insurance on risky home mortgages was at the time trading at what they perceived to be disproportionately low prices. Enthusiasm about households’ income was so huge that it seems the bean counters just couldn’t countenance the possibility of anyone defaulting. Wonderful names such as “ninja” loans were conjured up (in case you’re wondering, that’s “no income and no job”) and yes, amazingly, these loans were granted! Further, the market seemed to be reasoning that even if people couldn’t repay their loans, with house prices rising at a 7% pace per year, houses could always be sold easily. Buying insurance on mortgage defaults to many was like buying insurance against snow in Angola.

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Paolo Pellegrini

“And so, Paulson and Pellegrini set about buying so called credit-default swaps (CDS) which are derivative contracts that insure against the default on a mortgage loan. They are similar to a put option that insures against a stock price decline.” And so, Paulson and Pellegrini set about buying so called credit-default swaps (CDS) which are derivative contracts that insure against the default on a mortgage loan. They are similar to a put option that insures against a stock price decline. As defaults at the time were not happening, purchasing these CDSs were, using the option analogy again, like buying deep out-of-the-money put options, and ones which were trading at very low values but carrying a huge potential in the event of the underlying moving significantly south. Something that was just about to happen... It wasn’t easy to create a new fund looking to play the housing market as investors weren’t much interested in it (that of course was precisely the reason why the bet was likely to come to fruition, and as we saw recently in our Titan funds with not many takers for the Precious Metals fund we created, just as the sector embarked on an explosive rally!). Many were the No’s Paulson received, and yet the Credit Opportunities I & II hedge funds were brought into life.

Paulson and Pellegrini were able to find the initial investment they needed and, more importantly, willing sellers in significant amounts of the derivative contracts they were buying to position for a housing market collapse and mass mortgage defaults… By mid-2006, the US housing market was peaking and Pellegrini’s research was looking as if it was going to be very prescient. In the early part of 2007 the wheels began to fall off the housing market and the new funds yielded a 19.4% return during the second half of 2006. This was just a foretaste of what was to come however, and during 2007 the funds rose a stunning 590%, with an additional 18.3 eked out in 2008. Paulson & Co’s place in history was now assured and as a consequence of the wildly successful bets, the firm’s assets rose from $7 billion to over $30 billion between 2006 and 2008. In 2007 alone, Paulson made $4 billion in personal profits while Pellegrini received a bonus of $175 million. The trade went down in history as the best ever, eclipsing even Soros’ monster hauls in the currency markets.

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Special Feature

Pellegrini Leaves Even though the partnership between Paulson and Pellegrini proved extremely lucrative for the pair, it came to an end in December 2008 when Pellegrini left Paulson & Co to make his own stamp in the hedge fund world and started PSQR Management LLC. Earlier in that year, Pellegrini created a private fund in order to protect his new found riches. He was expecting massive government interventions with bank rescues, liquidity injections, stimulus plans etc. to save the US economy from disappearing up its own backside. To position for this, he began shorting exchange-traded funds holding financial assets and later funds tracking the S&P 500 index. When investors panicked and plunged into Treasuries driving yields lower and lower, he closed his positions and opened bets against U.S. Treasury futures for longer maturities of 15 and 30 years, waiting for the inevitable retracement. It was once again a master trade undertaken by someone with a keen perception of economics and global markets. PSQR, which stands for Paolo or Pellegrini squared and which is also an anagram for an ancient Roman republic, recorded a 40% profit in 2008 and 62% in 2009 before Pellegrini, much to the no doubt chagrin of his investors, decided to return the funds to outside investors and focus on managing his own money. While Paulson struggled to make a profit, and in fact lost a large part of his company’s funds in the period of 2011-12, first in a failed bet that the Euro would break up and later on an attempt to profit from a falling dollar, Pellegrini, in contrast, continued to make huge profits. So gave rise to the idea that Paulson may have in fact been inappropriately credited with the greatest trade ever and that in fact it should be Pellegrini enjoying the accolades. Was it Paulson or Pellegrini who initiated a genius bet on the mortgage collapse? Unfortunately we can’t say for sure who was the architect, but we can try to piece together the evidence... Pellegrini certainly proved himself to be an excellent market timer — perhaps the hardest thing of all in the markets — and possessing a strong sense of opportunity. Being born into a household steeped in science, this engendered a strong appetite to research markets whilst at the same time he appeared somewhat unstable, having changed jobs several times and being on his third marriage by his mid-40s.

Paulson in contrast suspected that there was a big opportunity being created in the credit market, and he had the resources to profit from it, but was lacking the nerve to go ahead. Together, the ingredients worked and a real prize winning cake was baked! The adulation and recognition that Paulson was receiving began to grate with Pellegrini however. He believed that Paulson was taking too much credit and not relaying Pellegrini’s role in the trade appropriately. Soon after the mortgage collapse, both Paulson and Pellegrini went to Harvard University for a small briefing presenting their case to the students. In what was to be the final straw for Pellgrini, Paulson approached the students alone, making Pellegrini furious and cementing his all but inevitable departure from Paulson & Co. When Pellegrini left Paulson & Co. it was, however, on amicable terms and he even invested between $10 - $20 million of his own funds in Paulson’s funds. Of course in the ensuing years, with the prolonged and deep cold streak Paulson’s funds have experienced, Pellegrini is no doubt furious with him as more than half his funds almost certainly vanished!

The Future Pellegrini certainly proved himself to be a highly skilled analyst, in-depth researcher and fund manager. He certainly played an important role in Paulson’s fame and massive fortune and was credited with much less than he deserved in the subprime trade story. Given that Paulson continues to squander a good chunk of his fortune, it may be the case that JP needs to call on Pellegrini once more and perhaps change the company name from Paulson & Co. to Pellegrini & Co! Pellegrini is on record in stating that he believes the U.S. is a persistent debtor nation and one which will be in deep, deep trouble very soon. The massive stimulus programs and resulting deficits will only make matters worse, notwithstanding the FED’s ‘money out of thin air policies’ which are ultimately doomed to fail. Perhaps he should call upon the “vampire squid” (aka Goldman Sachs) to put together a derivate basket of Govt bonds for him to bet against, this time without Paulson! Either way, Pellegrini is a man to watch in the future.

42 | | September 2013

September 2013

| | 43

Feature Contributor


The last 18 months really has been a golden period of out-performance for small and mid caps, with the FTSE Small Caps Index (SMxx) up 40.8% from 2,549 to 3,589 in the last year (to 16 Aug 2013), and the FTSE 250 Mid Caps Index (MCx) up 27.7% to 14,835 as the chart to the right shows. Many AIM shares have also risen strongly, and indeed were given extra impetus recently from the Government allowing AIM shares into ISAs from 5 Aug 2013. The benefit of this has been masked on the AIM Indices by steep falls in the many resource sector juniors which populate the Index. These widespread price rises present investors with a conundrum — do we continue to hold shares that have risen to fair value, or even above fair value? At Equity Active we take a straightforward approach, which we believe outperforms in the long run — we identify and buy shares in good quality companies whose shares are out of fashion and hence, we believe, too cheap. Then we wait for them to re-rate upwards, collecting dividends in many cases along the way. When the shares have risen to what we consider to be fair value, we sell them, recycling the money into better value shares. Simples! The Titan Small Cap Fund, which uses research supplied by Equity Active, started recently, on 1 Aug 2013, is being run on this basis.

As with all the Titan funds, potential returns are tax free through the use of a spread betting wrapper. The Fund is not attempting to build a balanced portfolio. Instead it only contains conviction buys — shares where we see at least 50% upside potential on fundamentals at the time of buying, and with limited downside risk — so think in terms of strong balance sheets generally with net cash, good dividend yields, etc. We’re not interested in so called ‘story’ stocks. So far the fun has only identified nine small caps which meet our value criteria, and we are therefore sitting with 34% in cash waiting for better priced opportunities which inevitably will appear. The fund manager has flexibility to use gearing when appropriate, but the strategy is to use gearing counter-cyclically — i.e. only when stocks are cheap. This strategy is designed to protect clients’ capital in market downturns, and maximise the returns from a rising market. The fee structure perfectly aligns Titan’s interests with those of their clients.

44 | | September 2013

Small Cap Corner



Turnaround situation - Volex (VLx)

Valuation essentials

Given that so many small caps have risen strongly in the last 18 months, we’ve been searching for laggards, especially fundamentally good companies where something has gone wrong operationally to depress the share price, but where there are good reasons to believe a turnaround in performance (and hence share price) is possible, indeed likely.

Company name: Volex plc ( Ticker: VLX Current share price: 107.5p (at 22 Aug 2013) 52 week share price range: 82p low - 276p high No. shares in issue: 62.92m Market Cap: £67.6m Reporting currency: uS dollar Last reported net debt: $10.8m (at 30 Jun 2013) Pension deficit?: yes, but not significant, $3.6m (at 31 Mar 2013) Enterprise Value: £76.8m (including pension deficit) Next year end: 31 Mar 2014 PER: 11.2 (based on current year broker consensus EPS of 9.6p) Dividend yield: 3.3% (based on broker consensus dividend of 3.6p) Net tangible asset value: $38.6m (at 31 Mar 2013)

In our view, Volex (VLX) is such a turnaround situation.

September 2013

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Feature Contributor

Description of the business Volex is a designer and maker of customised electrical and optical connection cables in four sectors: consumer, telecoms, healthcare, and industrial. So they make the power cords for products like iPhones for example. The group’s factories are based in lower cost areas, and have recently been modernised with a programme of significant Capex — the automation introduced has offset recent wage increases e.g. in China. Volex seeks to avoid the low margin, commodity end of the market, instead focussing on customisation and high quality. Turnover has ranged between $365-518m in the last five years, with operating profit ranging from $4-24m.

Therefore we believe that Volex has already taken the difficult actions to get trading back on track, yet that has not yet been reflected in the share price we believe, and which has just tracked sideways around 100p for all of 2013 to date. We believe these shares have the potential to break out rapidly on the upside, if trading improves.

“A very difficult year” This is how the outgoing Chairman, Mike McTighe, described the year ended 31 Mar 2013. Volex issued two profit warnings, in Sep. and Dec. 2012 which whacked the share price twice. They had been trading between 250-350p for much of 2011 and 2012 (which gives an idea of the potential upside once trading is back on track). The webcast on their website gives a remarkably frank and detailed account of what went wrong, for which the outgoing CEO took full responsibility. He said, “…we consciously made a bet on one particular customer that didn’t pay off”. So the company had geared up production and staff for a large order (believed to be from Apple) which did not materialise. They admit to other operational mistakes and having made some poor hiring decisions, especially in the sales team, who appear to have lost control of their customer relationships.

Changes already made A new CEO, Christoph Eisenhardt who took over on 1 Jul 2013, comes from a motor industry background, with experience of managing global companies. The Deputy Chairman also replaced outgoing Mike McTighe. The senior sales team have also been revamped. More importantly, the group has already substantially restructured its operations, including major cost-cutting with around 2,500 staff cut which will deliver $20m p.a. cost savings.Their factories have been modernised and automated, with $27.1m capex in 2012/13, reducing to guidance of $13m this year.

Current trading Volex issued an IMS on 22 Jul 2013, stating that trading for the first 16 weeks of the current year is in line with expectations, and confirming full year profit guidance too. This is despite the company taking a disciplined approach to low margin business, which will reduce turnover, and delays in new product development. We find this encouraging, and see good upside for the patient investor, even if we may need to ride out another bump in the road as turnaround situations are rarely straightforward. It is also pleasing to read that net debt had reduced to just $10.8m by 30 Jun 2013.

Director buying We are intrigued by the fact that not only did the incoming CEO buy about £26k of shares in June, but the outgoing CEO has also added to his personal holding. That surely indicates that he believes the turnaround is already underway? Why else would he have bought shares when he has nothing to prove, being on his way out? It doesn’t prove anything, but it’s an interesting sign perhaps, and very unusual.

46 | | September 2013

Small Cap Corner


New products


New optical products are delayed, but in the pipeline for next financial year and could provide both growth impetus and investor excitement. The market opportunity is large, estimated at $300m p.a. just from Volex’s existing customers.

We see Volex as a turnaround situation which is likely to be re-rated as investor confidence in the company returns at some point in the next year. More information will be available with the interim results in w/c 28 Oct 2013. There is a risk that the new CEO will “kitchen sink” these results to give himself a clean start. Our view is a significant re-rating of these shares is likely at some point when the turnaround begins to feed through into improved results. We don’t know when that will happen, but are happy to collect the dividends in the meantime whilst we wait.

Balance sheet We don’t get behind companies with poor balance sheets. Volex passed our rigorous balance sheet testing. Net debt is modest. There is a pension deficit, but it is insignificant and the underlying pension fund is small so risk is low. The working capital position appears sound.

Dividend maintained


Another positive sign is that the dividend was maintained, and a total payout of uS$0.05 is forecast for this year. The shares go ex-divi on 4 Sep 2013 for the 3c interim dividend.

September 2013

| | 47

01732 746617

Titan Investment Partners opens up its small cap spread betting fund to the investing public

• A diversified selection of small cap stocks (from £15m - £250m) • Long/short flexibility

• Leverage capped at 2 times • Directors own capital invested within the fund

Titan’s small cap fund aims to outperform the FTSE small cap index through a combination of in depth and thorough analysis, professional portfolio management application and the use of counter cyclical leverage • Minimum investment of only £5,000 • All returns completely free of CGT*

• 90% of gross dividend credit on stock positions

CLICK HERE FOR OUR LATEST FUND PDF SHEET OR EMAIL: INFO@TITANIP.CO.UK QUOTING SMALL CAP Risk Disclaimer Titan’s spread betting funds are leveraged products that involve a higher level of risk to your security and can result in losses of some or all of the capital invested. Ensure you fully understand the risks and seek independent advice if necessary. *Spread betting in the UK is currently tax free but this may change in the future. No tax is payable on any gains made, or allowable for either income or capital gains tax against losses incurred. Authorised and regulated by the FCA. Registration No - 590782

48 | | September 2013

Special Feature

ThE inflation dragon is stirring... and how to profit from it By Richard Jennings & Darren Sinden

September 2013

| | 49

Special Feature

UK monetary policy entered a brave new world in the first week of August 2013 as the new Governor of the Bank of England, Canadian Mark Carney, moved away from decades of tradition in interest rate setting. Rather than nominate a specific interest rate or change to rates on a monthly basis via meetings of the MPC (Monetary Policy Committee), Mr Carney has instigated a policy know as Forward Guidance, whereby the Bank relays to the market what factors would cause them to change rates in future from their current levels of 0.5%. The new Governor has identified an unemployment rate of 7% as the trigger point for a rate rise.

If we should see a marked improvement in employment rates over the coming weeks and months taking us towards the key 7% bench mark, I expect the first “signalling” to the market will be that additional QE is now definitely “off the cards”. There is already dissent on the MPC over new QE increments, and with “Merv the Swerve” (the previous primary advocate of more stimulus) now part of the BoE’s past hall of fame (some would say shame), it would be surprising, to say the least, to see this back on the agenda given the continuing signals of recovery we have seen in recent weeks. Mr Carney’s inaugural address in which he used the Bank’s own forecasts of economic activity intimated that the unemployment (and therefore interest rates) were likely to remain unchanged until 2016 — nearly three years hence. This is however not what the markets now think as illustrated by the short sterling futures curve which measures the expectations for interest rates going forward. This curve forecasts rates to begin to rise from the spring of next year. There is in fact a growing body of economist opinion that the Bank may need to move much faster than the glacial timetable set out by Carney.

Economic optimists believe the UK economy is actually like to enjoy a more robust and faster paced recovery than the doomsayers and official data suggest. The proponents of this theory point to the fact that the long-term average for the UK’s GDP growth since 1955 is 0.62% so that the pedestrian looking growth seen in Q2 2013 of 0.6% is actually pretty much on that figure right now. They expect that we will likely accelerate away from it as consumer confidence returns and business continues to reap the benefits of cost savings and efficiencies implemented in the aftermath of the credit crunch.

“The proponents of this theory point to the fact that the long-term average for the UK’s GDP growth since 1955 is 0.62% so that the pedestrian looking growth seen in Q2 2013 of 0.6% is actually pretty much on that figure right now.” Economists at JP Morgan are bullish about the pace and fortitude of the recovery in the UK. Back on the 8th of July they raised their forecasts for the growth rate of UK GDP in H 2013 by more than 30% from 1.8 to 2.5%. They went on to add that “The swing upward in measures of output growth in 2Q has come as a surprise even to relative optimists. And the move up across available indicators of output suggests that a return to a solid growth pace is increasingly broad-based.” The inference being that GDP growth could surprise to the upside going forward. The second group, myself included, believes that the headline measures of inflation — both RPI & CPI — do not reflect the real situation on the ground in the UK; being artificial constructs that conveniently ignore real and lasting and on-going price rises in indispensable items such as fuel, food and energy that effect both households and business.

50 | | September 2013

The inflation dragon is stirring... and how to profit from it


The inflation genie is now well and truly out of the bottle and it will be very difficult, if not impossible, to recapture the real rate of inflation that is faced by many UK citizens in day to day life, and one that is many times the 2.8% CPI figure served up by the Government. The common factor that is likely to accelerate the inflation path is that old bugbear of the UK economy — house prices. These are now continuing to recover across much of the UK, being driven by London and the Southeast in particular, and banks are once again loosening the reins on mortgage lending — stoking concerns about a house price bubble forming once more. True, wages in the UK have not kept pace with even the Government’s timid inflation forecasts and so for now, at least, wage price inflation seems unlikely, but this may not remain the case for long as well-respected strategist Mark Ostwald of Monument Securities noted in a piece penned immediately after Mr Carny’s inaugural address: “It is difficult to assess how many of the longer-term unemployed are in fact largely unemployable. If, for example, this were as much as 1/4 or even 1/3 of the current number of unemployed, then the UK labour market would in fact be very tight indeed”.

Whilst James Knightley, an Economist at ING Bank London, was recently quoted as saying, “With the U.K. economy appearing to be gaining momentum, we have doubts that bank rates will remain on hold for the next three years,” He added that the “BOE is taking a rather conservative view and the jobless rate could reach 7 percent in 18 months.” With all this in mind, how can investors look to take advantage of an earlier and perhaps faster rise in interest rates here in the UK than has previously been forecast. The answer is back in those Short Sterling Futures — these are contracts on the rates of interest payable on a notional sum £500,000 on deposit for a three month period. Traded on the LIFFE market, the Short Sterling contracts show the implied interest rate that money markets believe will be payable into the future on these notional deposits. The contracts are priced such that the differential between the contract price and 100 is the implied three month deposit rate. Short Sterling is inversely proportional to interest rates so that higher interest rates mean lower Short Sterling prices.

September 2013

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Special Feature

“This is a big disjoint with Mr Carney’s assertions. One is likely to be wrong and our money is not on the collective market relative to the ex-Goldmanite!.” The chart below shows the Short Sterling curve out to Sept 2017, some four years hence. We can see that the market in fact believes that rates for three month money will be around 2.66% against the current read of 0.53% for the September 2013 contract. This is a big disjoint with Mr Carney’s assertions. One is likely to be wrong and our money is not on the collective market relative to the ex-Goldmanite!

This chart shows the interest rate curve out to September 2017 and is effectively the inverse of the chart above. Note how the curve steepens after September/November 2014.

52 | | September 2013

The inflation dragon is stirring... and how to profit from it

Our third chart shows the marginal percentage change that transpires along the curve of Short Sterling contract months out to September 2017. This time note how the incremental changes grow in value after December 2013 peaking at change of some 13.7% in December 2015. Remember that these curves reflect current expectations for UK Interest Rates.

However if, as we and others believe is possible, the UK economy recovers faster than the Bank of England is forecasting, whilst inflation is fanned by rising house prices in the Southeast and a tightening labour market then these curves will likely steepen further and earlier than they do currently. Traders might like to look to a year hence, perhaps to sell September or December 2014 contracts where Short Sterling prices imply base rates of around 0.7 to 0.75%. Should we get a rate rise before the end of 2013, or early in 2014 of say 0.25%, then those prices would surely move to reflect a forward rate of around 1% or more. That is, the prices of the September / December 2014 contracts would move lower.

Consequently, if you are of the same school of thought as us here at SBM, namely that the monetary authorities in the UK & US are deliberately trying to inflate away the massive sovereign debt burdens and that they will, covertly, look to encourage materially higher inflation, then you should look to sell the forward interest curve and also gilts on a snap back rally following the material underperformance they have experienced in recent months. The trend has changed decisively and the near 30 year bull market in bonds is over. We are positioning for this event in our Titan funds. For more information click the banner below.

September 2013

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Commodity Corner

Commodity Corner

The contrarian case for copper By Ben Turney & R Jennings

54 | | September 2013

The Contrarian Case for Copper

We’ve had quite a discussion this month at SpreadBet HQ about copper. Our former Editor and now Titan head fund manager, Richard Jennings, is currently bullish on the industrial metal, while I am fairly sceptical. It takes two to make a market and one view has to be right. However, in looking at the man’s track record that he handed over to Zak Mir, he is clearly a man not to bet against. Judging by the overwhelming coverage of copper I’ve come across from our friends, those veritable fonts of wisdom the analysts (not!), my own scepticism puts me firmly in the majority, and which immediately makes me uncomfortable. Regular readers of SpreadBet Magazine will be well aware of our aversion to going with the consensus. It’s all well and good being part of the herd, but eventually you are likely to end up being someone else’s dinner! So, trusting our hard learned investment philosophy, namely that the majority in extended moves are usually wrong, this month’s Commodity Corner presents to you, what can only be described as, “the contrarian’s case for copper”.

The bearish view

The latest data by the International Copper Study Group (ICSG) goes up to April 2013 and confirms this view. Remember that the ICSG is the primary trade organisation for the industry. Although they are acting as honest brokers of information, it would also be in their interests to talk up any positives. Take a stroll through their website (www. and you’ll see their publications strike a fairly sombre tone. This is understandable as the disparity between production and demand data is not supportive of prices for the foreseeable future. From 2007 to the end of 2012, demand outpaced supply every year. In the context of high copper prices, these really were halcyon days for the industry.

Before setting off down this path, I have to mention why there are currently so many copper bears out there. It would be irresponsible not to and the reason is simple. The fundamental outlook is not encouraging.





















Global copper demand and usage (per MTM) Under such conditions and in a high price environment, it is no wonder that the world’s producers sought to increase capacity. In the immediate aftermath of the Great Financial Crisis, once capital funds became available again, producing nations encouraged investment in new production facilities.

The bulk of this investment occurred from late 2009 through 2010. Looking at the table above, this might not cause too much concern, but there is, obviously, a significant lead time in making new mines and refineries fully operational.

September 2013

| | 55

Commodity Corner

The table below illustrates why many believe the industry could now suffer a supply surplus, possibly as far ahead as to 2017:

2012 2013 JAN - APRIL



2013 MARCH


6,557 6,973













Global copper demand usage like for like comparison (per MTM) In the first four months of this year supply outpaced demand by 267,000 tonnes. In the same period last year the reverse happened, during this period demand outpaced supply by 429,000 tonnes. In the space of 12 months, the switch from supply deficit to surplus has been 696,000 tonnes, or the equivalent of 10% of global demand. It is no wonder that copper prices have fallen in the manner they have.

Even though I personally started the discussions about this piece from a bearish stance, I have to accept what is right in front of me. The chart is usually the smoke signal for fundamentals to follow and of course reflects collective money flow.

A key factor behind this fall has been weak Chinese demand. China accounts for over 40% of global copper demand and her economic problems are well publicised. Persistent global weakness compounds this effect and in the context of increased supply it is fairly difficult to argue in copper’s favour from a fundamental point of view. “Dr Copper” has a definite case of the sniffles!

Why we’re bullish So with this in mind you might well be asking yourself “Are they mad?” Well, the old saying goes: “There is method in one’s madness”. Let us explain. At the very least, there is certainly method to our madness. The technical argument for being long on copper at this stage is fairly convincing. Through close examination of the charts a different picture starts to emerge which leads us to believe we are on the right side of this trade.

56 | | September 2013

There are 3 main reasons SpreadBet Magazine believes copper is a buy: 1

A significant, technical change in trend has recently occurred


The weekly Commitment of Traders data indicates a possible pending shift


Copper has just bounced off long term MIDAS support, meaning the primary trend is still intact

The Contrarian Case for Copper

The first chart below is easy enough to interpret;


The green line is the 50MA and this has clearly turned upwards. With an RSI reading over 70 at present, this currently suggests the market is modestly overbought as prices have already advanced over 10% off the low. If there is a pullback from here, this should be quite healthy and may even present an opportunity to buy more. The next rationale for our trade comes from the weekly Commitment of Traders data (CoT) for copper. Provided by the uS Commodity Futures Trading Commission, through their website (, this weekly report tracks the shifts in long and short positions of various groups of market participants in different futures markets. At the moment we are most interested in the Managed Money group. This represents the large speculative traders such as hedge funds and trading desks. The other two main groups reported in the CoT data are the Producers/Merchants/Processers/users and the Swap Dealers.

We are less concerned about the first of these as we know what the fundamental outlook is and the second group, the Swap Dealers, is usually associated with the amateur speculators and these tend not to be the market movers.

September 2013

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Feature Contributor

The Managed Money group, however, has it in its power the capability to drive prices higher and lower. The recent changing long/short positions of this group are shown below:

CFTC COMMITMENT OF TRADERS CHART What should immediately leap out at you is that the last month has seen a dramatic reduction in the net short position of Managed Money. There has been a sizeable covering of shorts, suggesting that the professional speculators see limited downside from here. There has also been a slight tick up in the net long position, but this is still well below what it was at the start of the year. Our interpretation of this data is that this is not a crowded trade yet, and as such the buying opportunity could still be out there. We expect to see the net longs continue to rise in the coming weeks, which should also lead to a rise in price. The final piece of this jigsaw is provided by the MIDAS Method. We have written in previous issues and on the blog how the precious metals have recently pulled back to long term primary MIDAS support. This was always going to be a crucial test of the decade old bull market and so far prices are passing this test with relative ease. Everything is rallying, copper included. To the right is is copper’s 12 year MIDAS chart.

Unlike gold and silver, during the crash of 2008/09, copper prices crashed through the NOV2001 support line. This is partially explained by the different applications of copper compared to the precious metals, but irrespective of these the fact remains that NOV2001 support had previously been breached dramatically. This counselled caution when using this as a trading signal recently. As it turned out, NOV2001 support coincided with the technical rally we revealed in our first argument and the reduction of Managed Money shorts we showed in our second. The rally off long term MIDAS support encourages us that the structural bull market for copper remains intact, which considerably strengthens the case for going/staying long. Overall, we will accept that this view of copper is not currently a popular one. But we like that. If we are proven right, this trade will grow in popularity and the price should go up. No doubt at this point we will start looking for an exit. Standing apart from the herd, after all, is the name of our game!

58 | | September 2013

The Contrarian Case for Copper


September 2013

| | 59

01732 746617

Titan Investment Partners opens up its precious metals focused spread betting fund to the investing public

• A diversified selection of precious metals related stocks and positions • Long/short flexibility

• Leverage capped at 2.5 times • Directors own capital invested within the fund

Titan's fund managers believe that absolute returns can only be produced through running a concentrated portfolio of best picks derived from thorough fundamental analysis, deploying leverage at appropriate points in the market cycle and patience. We believe the Natural Resources arena is ripe for this strategy with the current depressed valuation.

• Minimum investment of only £5,000 • All returns completely free of CGT*

• 90% of gross dividend credit on stock positions

CLICK HERE FOR OUR LATEST FUND PDF SHEET OR EMAIL: INFO@TITANIP.CO.UK QUOTING PRECIOUS METALS Risk Disclaimer Titan’s spread betting funds are leveraged products that involve a higher level of risk to your security and can result in losses of some or all of the capital invested. Ensure you fully understand the risks and seek independent advice if necessary. *Spread betting in the UK is currently tax free but this may change in the future. No tax is payable on any gains made, or allowable for either income or capital gains tax against losses incurred. Authorised and regulated by the FCA. Registration No - 590782

60 | | September 2013

Currency Corner


It seems the SBM love affair with “the Queens head” (that’s the British Pound, not the Queen herself being more of an anti-monarch relative to a Royalist!) continues. Our call at the start of the year to get long GBP v the “Aussie” dollar has been a cracking trade, in fact returning nearly 13% since our original suggestion. Then, when everybody was suggesting to sell the pound following the sovereign debt down-grade in early spring, we flew in the face of the consensus and recommended buying it vs. the Euro around 1.14 and against the US dollar at $1.50 — the latter call re-iterated last month. Both of these have played out well too. Let us revisit this month the GBP Vs. EUR pair as the old SBM bones think that our holidays are about the get somewhat cheaper on a 12-18 months view...

September 2013

| | 61

Currency Corner

“Since Carney joined the BOE, in the usual way that markets only confound the majority, this supposed “ultra dove” was expected to flush the pound down the plughole and send all our holiday costs soaring.” Since Carney joined the BOE, in the usual way that markets only confound the majority, this supposed “ultra dove” was expected to flush the pound down the plughole and send all our holiday costs soaring. So far, thankfully, the script has not been stuck to, due in large part to two issues — firstly market positioning had gotten pretty short pound against most pairs and secondly, with increasingly positive momentum behind the UK economy and stirrings of rising inflation and bond yields, the yield differential on the pound vs. many currencies has been growing. In particular against the Euro with much of the continent still mired in recession. Data released on 19th of August perhaps most accurately reflects the view that the UK is turning a corner. We had the CBI (Confederation of British Industry) announce that it expects growth in the UK to be 1.2% this year against its original prediction of 1%, and it has bullish expectations for next year of 2.3% growth against a 2% original estimate. Carney has clearly linked the unemployment rate to the rise in interest rates. His target is to hold interest rates at 0.5% until unemployment falls below 7%. Bear in mind that 400,000 people were employed in June alone, and then you can see that it will not be long before unemployment will fall from current 7.8% (Merryn Somerset Webb of Moneyweek — someone whom I respect — highlighted that the 7.8% is the three month moving average and that the true rate is 7.4%). This, coupled with a housing market being stoked by the Government’s ridiculous “Help to Buy” policy, which ministers recently denied would cause a property bubble, and where we can clearly see the seedlings, cannot be reading the current data that SBM is: that we have seen the greatest number of mortgage applications last month since 2007, and estimates of property rises in London of around 8% so far this year. We all know that “Help to Buy” is a politically motivated tool to create a wealth effect so the Government can win the next election. The problems they are storing up could be catastrophic if interest rates start to rise much more sharply than people are prepared for.

The one currency pair that we have most conviction on now, however, and that is usefully somewhat neglected in the trading community, is £/E. Most of us in the UK will go to a European country quite frequently and most of us agree it certainly hurts your wallet! It wasn’t always like this though; if you can cast your mind back to the launch of the euro, trips across the continent were great value. During the financial crisis all this changed, in large part due to the disastrous former Governor of the BoE “Merv the Swerv” King — a man seemingly hell bent on destroying the middle classes in the UK with his Bernanke puppet “print and be damned” advocations that were thankfully pushed back by the rest of the committee. Looking at the economic figures from Europe, it is clear that Europe is still a two tier economy, with Germany and France growing at 0.7% and 0.5% respectively, whilst Italy and Spain and most of Southern Europe remain in recession. With such structural obstacles in the Eurozone such as unemployment, and Germany now exporting less to China, the continent is only likely to struggle in the near term and this means that they need a strong currency like a hole in the head. In order for one currency to be weak, another has to be strong, and we believe the one in the vanguard will be the pound vs. the euro. From a technical perspective, two of my favourite indicators of trend over the medium term are the 19 and 37 day exponential moving averages. Take a look at the two year chart below and where I have circled in red the two moving averages. You can see that the last time the pair crossed through these and maintained it on consecutive weekly closing bases was at the end of 2011 and that took the pair towards 1.30. With the down trend-line break from the peak last summer of 1.28 in recent days and the RSI moving back up off the 50 level, to us this is a constructively bullish chart that is backed by fundamentals and our big picture macro outlook and we remain look this pair in our Macro account at Titan Investment Partners.

This is what the market is starting to believe —if things continue at current rates, then Carney may well have to raise rates, and much sooner than he stated at his new “forward guidance” press meet in early August.

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GBP V Euro


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Editorial Contributor


DAYTRADING THE MARkETS MY OWN PERSONAL JOURNEY I began my trading career on the London Traded Options Market (LTOM) in April of 1987 at the tender age of 18. Stock trading had just gone electronic following the so called “Big Bang” and so the only open outcry market on that floor was for traded options.

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Daytrading the markets – my own personal journey

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Editorial Contributor

“However, the market was growing at such a rapid pace that I was quickly trained as a ‘dealer’ whereupon I was kitted out with a brightly coloured trading jacket and thrown into the thronging mass that was the futures “pits”. It’s fair to say that this was probably the most nerve wracking experience of my life!.” Initially, I had been offered a job as a ‘Blue Button’ clerk at a big stock broker. I was not allowed to trade, but was allowed to answer the phones and take orders. However, the market was growing at such a rapid pace that I was quickly trained as a ‘dealer’ whereupon I was kitted out with a brightly coloured trading jacket and thrown into the thronging mass that was the futures “pits”. It’s fair to say that this was probably the most nerve wracking experience of my life! Entering “the pit” to be confronted by very loud, confident and intimidating market makers shouting prices at me frightened me so much that I would visibly shake. I could hardly speak, let alone make a mental note of who made what price. I would often turn around and walk out without trading. No doubt this amused the market makers no end whose job it was to intimidate you into trading with them so that they could turn a quick profit!

Somehow I got lucky and the successful boss of a privately owned Dutch market making company hired me. I was trained to make prices in options, trade my own book and take on risk on behalf of the company. Options were still a very new product at this stage so I knew this was a big opportunity for me. I studied hard and was very determined, but I did not find it easy to make money. The market started to boom again though and I was offered another job after a couple of years. However, my company were keen to keep me and the result was that I was sent to the London Financial Futures Exchange to trade options there. I knew this was an even bigger opportunity as this is where the real action happened.

All these years later, even though the trading is now largely all internet based with wonderful new terms like “HFT” (no it’s not a disease!), the same type of emotions are no doubt experienced by novice traders when you actually climb into the whirlwind that is the financial markets. Eventually I grew in confidence, enough to do my job properly at least, and then the 1987 October crash happened! The stock market fell about 50% in less than a week. It was incredibly exciting and we were so busy that we could not fill every order by the close. We would have a huge back log, but I loved the buzz. I was hooked. Following the crash of ‘87, with business drying up redundancy hit and I lost my job just before Christmas — not an enjoyable experience. I had enjoyed my taste of open out-cry markets and knew I wanted to continue in the City and build a career, but how was I supposed to do this when there were massive redundancies and no one was hiring, least of all someone with barely any experience such as I?

I thought LIFFE traders were the true masters of the universe. For anybody who remembers the old LIFFE days, you will know just what a seething mass of testosterone and raw capitalism this was. Walking on to the LIFFE floor for the first time made the LTOM floor look like a library! The buzz just hit you smack in the face. The colour was blinding and the noise was deafening. It was like I had been plugged into the wall. In many respects, notwithstanding some of the dubious tactics that many participants got up to, the loss of LIFFE was a travesty for the City. It was one of the few places where a sharp, streetwise kid from the wrong side of the tracks could legally make themselves a fortune, and quite a number did. Sadly, those days are now gone forever...

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Daytrading the markets – my own personal journey

The floor of LIFFE was the most exciting place I could imagine, but it was incredibly intimidating. The LTOM was pretty sedate compared to LIFFE where traders were really aggressive, almost physically fighting to be heard and seen as they battled for a share of every trade. As well as screaming as loud as possible, they used lightening quick hand signals in the pit to communicate and trade. My first step was to learn the hand signals and I thought I was never going to get it. Eventually I did and was sent into the pits to train, first as a broker and then as a market maker to take on risk on my own account. This was the second most nerve wracking experience of my life. It was an intense physical and mental battle every day. You lived on your wits all day and the trader who could do the maths the quickest did the most trades. You could not sit down until you left the pit after the market closed, but for me it was the most exciting job I could imagine and if you got it right the rewards were huge. For me I was lucky to be in the right place at the right time and the exchange just took off, volumes grew and opportunities to make money were enormous. These were the most exciting years of my career. Eventually the floor closed, however, and derivatives trading went electronic. I had gained an interest in technical trading or studying price charts to define trading opportunities for quite a few years having read a lot of books, but I had never really put it all together and been able to structure a strategy from this approach. After initially losing some of my own money I took a long break and began to study. Eventually I set up a business and began writing daily reports for traders. The discipline of having to study the markets before the open each day and deliver something that made some sense and could help a trader meant I was very focused on developing this skill. I was then offered a job at a private brokerage company to provide my analysis and advise their clients on market direction. These were big clients: traders from Deutchse Bank, JP Morgan, Merrill Lynch, Morgan Stanley, RBS, Societe Generale and many others. These guys do not mess about. If you have something useful to say, they will listen. If you do not, they just do not have time for you and they make that clear. Eventually they started to follow me and ask for my opinion on trading levels and market direction. I predicted some big moves that traders were not expecting and they played out exactly as I had predicted they would, hitting targets and bouncing from support levels.

“These guys do not mess about. If you have something useful to say, they will listen. If you do not, they just do not have time for you and they make that clear.” My work got better and better as the months and years went by. The longer you do something the better you get at it. Or as the saying goes, ‘The harder I work the luckier I get’. I left the brokerage company in 2012 and established my own business, My clients from the brokerage company stuck with me and they are all still my clients today, but the list has grown. I am now the only provider of Technical Analysis to Marex Spektron & Schneider Trading, two of the leading direct market access providers to independent professional traders. I have been providing my analysis to them and Tower Trading Group for about five years now. The usual question I am asked is how many indicators and oscillators do I use. Do I follow wave patterns or what is my secret? I’ll let you into a secret... there is no big secret. I have watched financial markets move every single day that they have opened since 1987 when I was 18. This is not my job, but it is my addiction. It has to be or I could not get up at 5am every morning for 50 out of every 52 weeks of the year and deliver analysis on up to 30 markets before they open in Europe. I have never failed to deliver on time in five years. What I can tell you works for me is that I use a minimum of indicators — too many just serve to confuse. The slow stochastic is the only one I really keep an eye on. What I do not do is base a trade solely on this indicator, but throw it into the mix. I look at several different time periods that I find work for the markets that I follow and I scan for chart patterns with support and resistance levels that have worked in the past. I use trend lines and I use Fibonacci levels. My charts are littered with them and I like to spot areas of confluence where they overlap. I keep an eye on moving averages, in particular the 100 & 200 day and week.

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Editorial Contributor

I find that starting with longer term charts to gain a picture of that trend and work into shorter time frames is the best way to get the “big picture”. You have to be aware of what the big banks and funds are looking at as they are the guys who trade the biggest size and can change trends. They don’t bother looking at anything shorter than daily charts, they do not trade hour by hour. Once you establish the bigger trend and any important trading areas from this time perspective, we can move to daily and shorter time frames. We all know the saying ‘the trend is your friend’, but which trend? Each time period can have it’s own trend which all contradict each other. The key is to be aware of the bigger trends but to focus on the time period in which you trade. If you hold position intraday for a maximum of 3-5 hours and are flat by the end of the day, then watch four hour, one hour and perhaps 30 min charts. But still be aware of what is going on, on the daily and weekly charts. Once you have established the trend you wish to follow, you know the direction you want to go. You then have to time your entry and the shorter time frames are often better for this purpose. Look for areas of support and resistance that have worked well recently, where the market has paused or changed direction. I like to use Fibonacci retracements and extensions to see if they overlap with these areas to give me more confidence. The more indicators that line up and confirm what you are seeing, the more other traders are seeing the same thing and may be acting in the markets at these levels. Trick is, like all those years ago on the Pit floors, to compute and react quicker than the next man (or algo!)

If different time frames are all telling you something different, it is probably time to wait till they line up. If the weekly, daily and shorter term charts all look positive then your risk is diminished. If the slow stochastic is indicating a move higher across the majority of the time frames you follow, for example, it is probably a low risk trade to buy on a pull back to support. If a previous day’s low coincides with a Fibonacci support level or moving average, then this is probably where you want to try to enter in the direction of the trend. Sit and wait for the market to reach your entry level. Do not chase it or get in before the level is reached. Trading is all about risk verses reward. If you do not minimize risk by waiting for low risk trading opportunities, then you are increasing your potential loss. Decide on your max risk per trade and ensure this fits with the parameters of the trade opportunity you have spotted. Make sure you can make at least twice as much as you will risk. This way, as long as you are 50% right, you will make money in the long term. Don’t forget to place a stop just below where the market broke down last time. Once the trade starts to move in the right direction be ready to start to move your stop loss to continually minimize losses. And if all else fails and you find you are not cut out for trading, which sadly applies to the vast majority of people, find a good money manager and give them your money. Watch this space for a new fund we will be launching with Titan Investment Partners, and if you have an interest in a dedicated shorter term trading fund then email “Daytrade” to

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Technology Corner

Tech Corner

Cancel Sky! How to get your TV, Movies and Sport Cheap and Legal By SIMON CARTER

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Technology Corner

You know that feeling you get? The one where you’ve just gone past channel 700 on your Sky Guide, fighting that futile fight, just trying to find something to watch. Doesn’t it seem like every time you get into the deep, dark corners of the Sky Guide, there are scores of channels you could swear weren’t there before, but that you know you’ll never watch. Virgin cable customers will no doubt be nodding their heads now too.

“Here’s the thing: the big bosses over at Sky and Virgin know, beyond doubt, that most viewers only watch a small percentage of what they pay for.” Here’s the thing: the big bosses over at Sky and Virgin know, beyond doubt, that most viewers only watch a small percentage of what they pay for. That’s why they’ve starting throwing in On Demand services and Catch Up TV, and that’s why they relentlessly trail their ‘Exclusive’ TV shows, movies and sports — they want you to feel that you can’t live without them. But you can. And maybe you can save yourself a little money in the meantime...

TV Research (and viewing figures) has shown that the vast majority of us spend our viewing hours all essentially watching the same thing.

Old habits die hard and so most of us split our time between the BBC, ITV and Channel 4. Other popular channels include Dave, PickTV and Challenge. There is nothing in that group that you can’t get on either Freeview or Freesat. Catch-up TV services are now available from all five terrestrial channels on computers, smartphones and tablets (4OD now lets you download shows to your device, following a move by BBC iPlayer). Then there’s YouView, a Freeview type platform that even allows you to go back in time through your planner to catch your favourite shows. But what about shows such as Mad Men, Dexter, True Blood and Game of Thrones? The list could go on and on... Whereas in the past your options were to hand over your hard earned cash to Sky or try and access a dodgy illegal download, the world’s most popular TV shows are now available on demand with Netflix and Lovefilm. At £5.99 a month each you can certainly afford to take both, but if you had to pick just one, take Netflix. Why? Netflix are innovative and customer focused, making their own TV shows in America (House of Cards starring Kevin Spacey was a Netflix production) and securing the rights to show the final season of Breaking Bad here in the UK the day after it has aired in America. Breaking Bad isn’t even available on UK TV.

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Cancel Sky!



If you don’t fancy investing £5.99 a month on Netflix and or Lovefilm , you may as well cancel Sky Movies too. With internet enabled TVs and Blu-ray players lining up to offer streaming from your favourite content providers, you can watch the latest blockbusters right there on your big screen. No fiddly little DVD packages to send back through the post either.

Ah, sports... It’s often said that BSkyB’s acquisition of the Premier League football rights back in 1992 saved the flailing platform and transformed the way we consume TV for the next twenty years. And sport is still the trump card that Sky use to lure us in. Football, Formula 1, rugby, cricket, golf and tennis have all handed themselves over to satellite TV, leaving sports fans with little choice other than to sign up… …until this year. If you’re a sports fan, you can’t have failed to notice the noises coming from BT whose BT Sport’s arm have secured the rights to a myriad of sports, most notably 38 Premier League games between August and May. If you’re a BT Broadband customer, BT Sports is free. If you’re not, it’s £12 a month. With exclusive rugby, tennis and American sports on ESPN, there is a feast on show. But Sky do still have many, many exclusive sports and with a basic Sky package plus sport coming in at around £30 a month, you may feel your hands are tied. However, Now TV (see above) also offer Sky Sports day passes at £9.99 for 24 hours, allowing you to view all sports channels for an entire day. Alternately, if you’re a gambler (reading SBM? Of course you are!), you could check out Bet 365 who live stream many sports to their customers.

But hold on, Sky are onto us. They know that we know all about Netflix and Lovefilm and want to keep us where they want us. So all hail Now TV, the streaming service ‘Powered by Sky’. For £8.99 a month you can have access to Sky Movies through your Smart TV or device, with several movies available to you up to 12 months before you can see them on other services.

So, what are you saving? With the full Sky package setting you back over £60 a month you could afford to buy a Freeview, Freesat or YouView system, subscribe to Netflix, Lovefilm and Now TV movies and take the odd 24 hours of Sky Sports, throw in BT Sports and still be well in pocket, not to mention completely in control of your own TV. What are you waiting for — start saving!

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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 AIM STOCkS FOCUS Stock-picking matters, but when it comes to the London’s Alternative Investment Market (AIM) — it really matters. The more lightly-regulated junior market is home to some of the most exciting upstart firms, but also hosts a good many utter basket-cases. Buy a FTSE 100 stock randomly and the odds of wipeout are slim; buy an AIM share without discernment and painful losses very likely await. The FTSE AIM 50 index has gone up by 165 per cent since its credit-crunch lows of 2008. Investors might feel uneasy about involvement in this index after such a strong run given the risk that the good times may soon come to an abrupt end. Come the next bear market in Uk equities, AIM stocks will likely suffer more than most — historical evidence certainly points to such. It shed four-fifths of its value in the last slump whereas the FTSE All-Share dropped by ‘only’ one-half. As a whole, though, AIM stocks don’t look all that toppy. On its monthly chart, the AIM 50 index is not yet overbought, according to its relative strength index (RSI). True, it looks more stretched on its weekly and daily charts, but this is nothing that a mild shakeout couldn’t deal with. In this environment, I’m still especially happy to seek long positions in quality players in strong uptrends.

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Dominic Picarda’s Technical Take



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Editorial Contributor

Majestic Wine Not that you’d know it from the average high street on a Saturday night, but Britons are drinking less overall. And, when we do drink, it’s ever more likely to be wine at home, rather than beer down the pub. These trends are thought likely to continue, with the government estimating a 1.6bn billion drop in pints of beer and cider drunk by 2018, and an 856m rise in big glasses of wine quaffed.

Lately, its share price has broken out to a fresh all-time high of 535p. Such moves are great from a technical perspective, as there are now no past levels blocking its way. At the same time, the monthly RSI isn’t yet at extreme highs, leaving room for more gains. My ideal buying opportunity here would be a bounce from around the 55-day EMA, targeting a move to 600p.

In principle, this should be good news for Majestic Wines, which sells wine by the caseload for enjoyment at home. The company — which has almost 200 outlets — has kept adding new customers in recent years, and has persuaded them to buy better quality products.


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Dominic Picarda’s Technical Take

Songbird Estates If the uK is now recovering more convincingly from the economic sluggishness of recent years, London is positively booming. Demand for prime office space and shops in the capital is therefore in a buoyant state. Songbird Estates — which owns more than two-thirds of Canary Wharf Group, with its famous towers and less well-known stores below — is reaping the benefits. These healthy conditions led surveyors to up their valuations of its portfolio. Songbird’s share price is still some way below its net asset value, the key metric for judging real estate firms. Based on the recent share price of 151p, the discount to trailing NAV was some 29%.


This makes a good fundamental reason why the share price could continue to make headway, despite it already having added some 50% since last September’s lows. Technically speaking, Songbird’s uptrend is still in good shape. Since July’s highs at around 160p, the price has been going sideways around its 55-day EMA. Previous such episodes of sideways activity have given way to strong bursts to the upside, which is what I expect to happen here before too long. My next targets would be 171p and then 185p, buying rallies from around 150p.

Editorial Contributor

IDOx The best way for Britain’s still-bloated public sector to streamline itself is often to turn to the private sector. IDOX’s software helps more than 90% of the country’s local authorities to manage their data, among other things, but also supplies services to businesses in the “real world”. While it has a decent enough track record, this nifty little operator has lately suffered a bit of a stall, with sales largely flat in its last half-yearly reporting period.

A good short-selling strategy so far has been to sell short whenever the price reverses from around its 21-day EMA. So, I’d wait for IDOX to recover to around this line once more and then go short, targeting weakness to 29p and perhaps even to 24p. I’d abandon my near-term bearish stance were the 21-day EMA to cross above the 55-day EMA, by contrast.

IDOX’s share price has been in a pronounced downtrend for several months now, having peaked at 60p in early 2013. And there’s no obvious reason why this is about to change any time soon.


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Editorial Contributor

NEW Monthly Feature

The Politics of Trading BY David Cracknell After a summer of sunning themselves on the beaches and filling out their expenses forms, British politicians this month are looking forward to the annual party conference season.

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Editorial Contributor

“In the ‘good old days’ they used to go to the seaside — places like Blackpool and Bournemouth — and it was always amusing to see the likes of John Prescott and Ann Widdecombe strolling along a windswept pier trying to keep their hair in check amongst the normal people eating ice creams and riding donkeys.”

Remember all those banks that the Government purchased a few years ago to save them from going bust? Well, with the economy looking up, there is a good chance we will soon see a lot of banking shares flooding the market. Lloyd’s (LSE:LLOY) has had a particularly good summer and the stock has risen on speculation that the Treasury will reduce its 39% stake to below the psychologically important 20% mark. Other banks part-owned by the Government are also likely to be flogged off in the run-up to the general election in May 2015 with my Conservative sources predicting a victory based on economic recovery and a new nation of shareholders (well, they would do, wouldn’t they?!).

In the ‘good old days’ they used to go to the seaside — places like Blackpool and Bournemouth — and it was always amusing to see the likes of John Prescott and Ann Widdecombe strolling along a windswept pier trying to keep their hair in check amongst the normal people eating ice creams and riding donkeys (I seem to recall there was one incident when the then Deputy Prime Minister drove his Jag a mere 100 yards up the prom just to protect his wife Pauline’s 1960s barnet!). Apparently he was very fond of her backcombed hair. “Ooh, I love it when your ‘air is all buffoon,” he used to remark with his usual clever wordplay! These days of course the parties have gone all corporate and go to ‘international convention centres’ in big cities like Manchester and Birmingham. There is a secure ring of steel around the conference venues and the official hotel so that the politicians can quaff their champagne all night in peace and don’t have to mix with the egg-throwing, banner-brandishing masses. The Chancellor of the Exchequer’s speech to the party faithful, whoever is in power at the time, always kicks off the week-long drinking … sorry, I mean policy session. In recent years these have obviously been difficult speeches to make, with lots of tub-thumping ‘no turning back’, ‘we must stick to our guns’ noises made. But this year George Osborne, or ‘Gideon’ as he is known by Westminster village idiots (he changed his given first name as “an act of rebellion” when he was 13), should be feeling pleased with himself. His austerity package has seen off a triple dip recession, there has been green shoots growth of 0.6% in the second quarter of 2013 and an opinion poll over the summer showed the number of voters who trust the Tories on the economy shot up from 28% to 40%, with only a fig-leaf rise in credibility for Labour’s Ed Balls.

The Conservative ministers in the Cabinet all grew up during the Thatcher years and are now paying posthumous homage to the deceased Lady by coming up with their own versions of her most successful policies, namely selling council houses and getting everyone to buy shares in former nationalised industries. Now, while subsidies to help people get onto the housing ladder might have Thatcher turning in her grave, creating a new nation of ‘Sids’ might well have received the nod of approval from that particular blond bouffant.

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The Politics of Trading

“Another hunch I alluded to in this column last month when I foreshadowed the new Bank of England’s announcement on forward guidance was that new governor Mark Carney and Gideon are going to fall out one day.” Depending on your trading strategy, you might want to ride the wave to the top and try and get some decent profits by selling at the peak. Just look for the traditional buy signal: wait for a cab driver to tell you he’s buying! Another hunch I alluded to in this column last month when I foreshadowed the new Bank of England’s announcement on forward guidance was that new governor Mark Carney and Gideon are going to fall out one day.

Lo and behold the first seeds of dissent have already been sown according to the minutes of the first monetary committee meeting, with several members casting doubt over the details of the “It’s a Knockout” strategy. The dovish policy of only hiking interest rates when unemployment falls to below 7% has already set the Bank at odds with the markets, which have already priced in rate rises well before dole queues are expected to diminish that far — in 2016. The markets have been wrong before, of course, but they need to be convinced by a more united and decisive approach by the Bank and monetary committee members. To find out who else is benefiting from better economic times, I find it is worth taking the occasional peak at public procurement websites such as London’s for early news on companies winning big building contracts. I see that Costain (LSE:COST) have won a contract to fit out Crossrail tunnels to add to the £900m worth of recent business, and at the time of writing the share could well deserve a re-rating. That’s all for now. I’m off to the seaside for an autumn break — well away from where the politicians are this September!

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School Corner

school corner

Moving average envelopes explained by Thierry Laduguie of e-yield Moving Average Envelopes are lines set above and below a moving average. The moving average, which forms the base for this indicator, can be a simple or exponential moving average.

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Moving Average Envelopes Explained

Each envelope is calculated by multiplying the moving average by the same percentage above and below the moving average. This creates parallel bands that encompass most price action. In many respects it is similar to a ‘Bollinger band’ that we have explained on School Corner before. Moving average envelopes can be used either as a trend following indicator or as a filter for moving average buy and sell signals

Instead of buying when the price crosses above the moving average, you wait until it has crossed above the upper band as well. Conversely, a sell signal would only be given when the price has crossed below the lower band. In other words, the buy signal given when the price crosses above the upper band is reversed only when it crosses below the lower band.

S&P 500 and moving average envelopes

The daily chart of the S&P 500 above is plotted with a 21-day simple moving average (middle line) and 2.5% envelopes. This is how the envelopes are calculated: Upper envelope = 21-day MA + (21-day MA x 0.025) Lower envelope = 21-day MA - (21-day MA x 0.025) Firstly, select the period for the moving average, secondly, select the percentage for the envelopes. Note that most of the price action is contained within the two envelopes.

Interpretation: Because most of the price action is contained between the envelopes, a move above the upper envelope or below the lower envelope is a signal to buy or sell. The idea is that trends often start with strong moves in one direction or another. For example, a move above the upper envelopes shows extraordinary strength, this means the trend is likely to continue.

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School Corner

buy signal whitbread Shares in Whitbread closed above the upper envelope on 26 April 2013. That was a signal to buy and, as we can see, the stock continued to trend higher without any pull back to the lower envelope until August. The drop below the lower envelope on 15 August was a signal to sell. Moving average envelopes are useful in strong trending markets. The drawback to using envelopes is that there are not many periods when strong trends develop. If the trend is not strong or if it is sideways there will be many false signals. Another drawback is that signals to buy or sell are late, this indicator is based on moving averages and a moving average is of course a lagging indicator.

Bollinger Bands Let’s take a look briefly at Bollinger Bands too to see how they differ subtly from a moving average envelope calculation. John Bollinger, a Chartered Market Technician and author, added an element of volatility to moving averages envelopes by creating the 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. 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. A beak above the upper line or below the lower line after a period of low volatility gives a better signal. In conclusion, moving average envelopes offer a useful tool for spotting trends after they develop and so you avoid buying or selling too early — something that can be very painful as the mining sector in recent months has illustrated!

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Special Feature

Current Western Central Bank Policies and the inevitable inflationary boom By Ben Turney

For many traders, and in particular gold bugs, one of the greatest surprises of the last four and a half years has been the absence of runaway inflation. After all, weren’t the trillions of dollars of global QE meant to send gold powering through $2,000/oz? Remember that story?

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Current Western Central Bank Policies and the inevitable inflationary boom

“The glare of media speculation and fear of triggering a market rout appear to have combined to cause a form of policy paralysis on the Fed’s part.” Logically, the vast printing operation should have set a fire under prices. Gold powered higher from early 2009 to August 2011 driven by market expectations of a repeat of the 1970s and/or an imminent financial meltdown. However, things have just not worked out like that. At least not yet... It was surprising that the most recent FOMC statement (end of July) didn’t include any mention of QE withdrawal. The Fed is going to have to start scaling back the bond purchasing programme at some point, but at the moment are behaving like rabbits trapped in headlights, scared to move either way in spite of an onrushing vehicle. The glare of media speculation and fear of triggering a market rout appear to have combined to cause a form of policy paralysis on the Fed’s part.

It is still far from clear if the Financial Crisis has been a liquidity crisis or a more fundamental solvency crisis, but, for now, no-one really seems to care about this issue — although I suspect they will again in the not too distant future. As long as the market doesn’t recognise Fed action for what it is (i.e. the monetisation of deficit spending), the party can go on. So, accepting we live in a fallen world, what is it that has been the latest thing to spook the Fed? Follow this link here to see nearly 80 years of historic “official” US inflation: Leaving to one side the argument about what “true” inflation is, CPI is one of the key measures the Federal Reserve use to measure conditions, and so its application here is valid.

This is not to say that the suggested withdrawal of QE is definitely off the table. There is nothing to stop the Fed initiating this when they choose, but they have reconfirmed their intention to provide advance notification of their plans before acting. The following statement has understandably caused quite a stir: “The Committee recognizes that inflation persistently below its 2% objective could pose risks to economic performance, but it anticipates that inflation will move back toward its objective over the medium term.” Ben Bernanke’s obsession has always been deflation. His infamous “helicopter” speech has been referenced too many times to count. As one bank after another failed during 2008, culminating in the spectacular demise of Lehman Brothers and AIG, he pursued increasingly aggressive and loose monetary measures in order to avert a full blown liquidity crisis. This initial response set the tone for future policy moves and today the Fed’s balance sheet sits at $3.7trillion. History will judge whether or not this approach was right.

The Federal Reserve’s official target for inflation is 2%. Average CPI for this year is 1.5%. The period since 2008 has been the weakest phase of CPI in half a century. However, it has improved and we are now a far cry from the year of deflation that marked the beginning of the Crisis proper. Given that the Fed “anticipates that inflation will move back toward its objective over the medium term”, we find it hard to understand just why they have felt it necessary to raise their concerns about it being “persistently” low now. Of course “the medium term” could mean anything, but are the CPI current numbers sufficient to justify this position?

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Special Feature

Answering this question is probably impossible. No commentator has access to the extensive data that officials at the Fed can lay their hands on. Equally, I don’t doubt that the intelligence of these people is far beyond what I could ever hope to possess (though my editor here disagrees with me on this point!). Even so, one aspect of the data set in the link does leap out at me. Look at the figures from 1963 and 1964, the last period of what could be called “persistently weak” inflation. Once inflation started rising again after this, it carried on almost unchecked and 15 years later had caused all manner of social upheaval. Although circumstances are vastly different today, there are enough interesting parallels we should take note of. As other central bankers around the world seem to be getting on board with the “let’s promote inflation idea” (cf. Japanese, European and British comments), why is it that one of the crucial doctrines of the last 30 years is slowly being forsaken? Price stability has been at the heart of monetary planning and with good reason. It’s not in anyone’s interests to repeat the mistakes of the past and risk the turmoil excessive inflation can cause. Sadly though, we can rarely be collectively relied on to do what is best.

“In a bitter twist of policy logic, the group that has been penalised the most is the one that has behaved most appropriately — savers.” With this in mind, the threat of deflationary forces shouldn’t be reason enough to pursue policies which now very seriously risk encouraging the wider population to readopt profligate and unsustainable spending practices. After five years of economic grind, low wage growth and general worry, it is to be expected that a lot of people will be suffering a form of crisis fatigue. An entirely feasible consequence of this could be the build up of a form of latent demand, as people subconsciously await regaining an element of confidence — the so called “feel good factor” — and then indulge in retail therapy with a renewed vigour. This will be one of the first signs of the inflation giant rearing its head and, we are now seeing real examples of this, certainly in the major cities of the West — London, New York and LA being prime examples.

There is an argument also that, in many ways, the Credit Crisis hasn’t been painful enough. Low interest rates have protected those who borrowed too much and the bond purchasing programmes have saved institutions, which really deserved to fail. In a bitter twist of policy logic, the group that has been penalised the most is the one that has behaved most appropriately — savers. The pain of past crises has been so widespread that enduring societal shifts in attitudes and changes in behaviour were readily accepted. Do we now believe that general attitudes are sufficiently different to those prior to 2008? I would suggest they are not. Next to nothing has been done to blunt the excessive nature of bankers and the latest housing boom in England is quite telling. Don’t even mention the euphoric stock market! If there is one criticism we could make with confidence about central bankers it is this: for all their undoubted intelligence, knowledge and experience, they don’t seem to have much of a grasp of the human condition. Perhaps this is a product of the nature of their work. Wading through statistical spreadsheets and reports, it could well be that they lose sight of what really drives people. I don’t doubt the good intentions of Ben Bernanke and his ilk, but is it any wonder Wall Street has continued to gorge itself on record bonuses, essentially at the expense of taxpayers? When Mervin King left his post and gave a warning about the overheating housing sector, what did he really expect? Has Alan Greenspan really only just cottoned onto the unintended consequences of easy money policies? The message has to be simple. Before the GFC, central bankers feared excessive inflation, with good cause. History has shown time and again that once the inflation fire is stoked it can rapidly become uncontrollable. Abandoning this hard learned wisdom would be folly of the highest order. Just because the vast reserves created by QE haven’t caused inflation yet, their very presence should be a warning to everyone that if too much confidence returns too quickly, the banks (yes the unrepentant and unreformed banks are run by people) are perfectly positioned to fund the next debt fuelled consumption binge. Watch closely in the coming months what Bernanke, Carney, Draghi and Kuroda have to say, but if they all continue to sound inflationary noises, then they are starting to play an increasingly dangerous game; a game that when this one ends, will very likely cause a seismic societal shift.

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Editorial Contributor


John Walsh’s monthly trading record I have a confession to make — this month I have not actually done that much trading at all. At the beginning of the month I thought I would try something a little different from my usual index scalping and instead I thought I would try so called “swing trading” which, I’m sure most of you know, essentially involves having a position (long or short) open for days instead of just hours and so letting the trade have “time to breathe” and move around. I thus opened a long position on the FTSE in early August as I felt that in looking at the daily and weekly charts that an uptrend was still in place. At the end of the first day the trade was down slightly, but nothing to be too concerned about. The next day it started going up putting me into profit, however as this was a swing trade I left it be and by the end of the trading day it was back to basically where it began at the start of the day — at a small loss. I still believed that the uptrend remained intact and so thought that given time I should see a good reward...

When the markets opened on the morning of the third day of the trade things did not go according to plan and the trade went against me by a reasonable amount following some negative overnight news. This was enough for me to decide that I had got the timing of the swing trade wrong and so I closed at a loss, thankfully nothing too drastic in terms of my account size, but a loss nonetheless.

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John Walsh’s Monthly Trading Record

“You’ll not be surprised to hear then that my departure into swing trading was to be a short lived exercise and so I decided that maybe swing trading indices was not for me.” You’ll not be surprised to hear then that my departure into swing trading was to be a short lived exercise and so I decided that maybe swing trading indices was not for me. The loss was not the primary factor though, it was mainly down to the fact that I felt compelled to always be keeping an eye on the position — something which I really don’t like to do. And so, after my swing trade ‘experiment’ I decided to get back to what I seem to do best at and that is to trade what I see and not what I think. I could “see” that the FTSE was slowly but surely moving up and, as I have confidence with this trade, I upped my trade size slightly more than my usual and watched as the FTSE moved up nicely, making me a nice profit and wiping away about 80% of what I lost during my swing trade experiment. After this trade, I then made a couple of more trades on the Dow (both long and short) and due to the low volumes being experienced during the so called “dog days of summer” which can cause some strange moves with the indices, I just closed both trades at a loss. Due to my money management application, thankfully again this was nothing too drastic with regards to my account balance. As mentioned last month, I want to start trading US stocks with somewhat more of a longer timeframe as I can see that there are some good gains to be made (but equally there can also be bad losses if you are not careful!).

At the time of writing, I have not opened any new positions, but I have been watching with fascination the 2nd quarter ‘Earnings Season’ and am amazed at the volatility this can induce. Just take a look at Facebook(FB) and Tesla Motors(TSLA) who both reached new highs after reporting a better than expected 2nd quarter. My watch list of stocks still keeps getting bigger and bigger and one of those on that list is Steinway Musical Instruments (LVB) who recently received a bid pushing it higher from what is speculated to be “Mr Subprime” John Paulson. The recent moves show that maybe I should have pulled the trigger sooner. Lesson learned regarding prevarication! So, the aim for next month is to start opening up some new trades in those US stocks that I have on my watch list. I’ll let you know how I am doing next month, so wish me luck! Please continue to follow me on Twitter @_JohnWalsh_ where I try to keep everyone up to date with my trades as they happen. Remember, you control the trade; the trade does not control you. John

September 2013

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A new special feature


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Markets In Focus

September 2013

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

Issue 21 - October 2013

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A Special QE Edition How to position yourself for its end LEGENDARY FIDELITY FUND MANAGER MARk FABER PROFILED


96 | | September 2013


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