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MAGAZINE

BI 2 Y EDRTHEAR IT DA IO Y N

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

Issue 24 - January 2014

Zak Mir Interview Special “Mr Trader Trainer” Greg Secker of learn To Trade www.financial-spread-betting.com

SPECIAl BUMPER NEW YEAR EDITION! DOMINIC PICARDA’S TOP 5 TRADES FOR 2014

FUND MANAGER IN FOCUS ANDREW lAW OF CAXTON ASSOCIATES

FX CONCEPTS HEDGE FUND COllAPSE - WE INVESTIGATE...

WHAT’S NEW IN SPREAD BETTING FEATURE

AND MUCH, MUCH MORE - PACKED FUll OF TRADE IDEAS FROM All OUR CONTRIBUTORS!


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 www.tradertom.com

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

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Editorial list EDITOR Zak Mir

Foreword Well, I cannot believe that I managed to get through the whole of 2013 without mentioning Bitcoin! What I particularly like is the way that this ‘virtual’ (I hope not literally, i.e. it is ‘almost real’!) currency seems to wind up the financial authorities. Pot, kettle and noir spring to mind given the agonies we have seen for the euro, the U.S. dollar and even the Japanese yen.

CREATIVE DIRECTOR Lee Akers www.coyotecreative.co.uk COPYWRITER Seb Greenfield EDITORIAl CONTRIBUTORS Richard Jennings Thierry Laduguie Filipe R Costa Simon Carter Darren Sinden

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

As the now dear departed Mrs Thatcher said: “You can’t buck the market”, and every day that Bitcoin is around provides us with an insight into the potential future of money given the historic debasement of EVERY form of paper money that has previously existed. As we close out the year and move into 2014 with me notching up six months in the role as Editor of Spreadbet Magazine — one that I began at the same time as that other middle aged ‘smoothy’ Mark Carney became Governor of the Bank of England — it is a good chance to reflect back upon our successes and failures. Two other ‘competitor’ magazines that launched at the same time as us have fallen by the wayside — one closing its doors completely and the other unable to get an issue out on a bi-monthly basis… Our subscriber figures continue to grow month on month in contrast. I guess we are continuing to do something right and our “tell it as it is” unbiased style strikes a chord in a compromised and conflicted industry… Failures wise? Well we couldn’t close the year without a mention of our call on the mining sector and gold where we converted from the bear to the bull camp around mid-year. There has been a lot of pain out there for everyone who has bought into the value story here but we expect 2014 to be a lot rosier. Here’s fingers crossed for all bulls of this sector! We have another cracking line up of features in this bumper edition and it is packed full of trading ideas. The Option Corner written by our esteemed founder and now Titan head honcho, Richard Jennings, is another must read (as ever from him) — laying out a way to play the potential Japanese hyper-inflation story. Be sure also to take advantage of all the new 2014 books and guides which cost our readers not a jot! Following our feature interview in the November edition with ex Goldman Sachs trader, Anton Kreil, in which he stuck the knife into trader training industry, we have another no holds barred interview with arguably the UK’s best known proponent of the industry — Greg Secker — another riveting read! I sign off with the very best of wishes for 2014 and successful trading to All our readers. Happy New Year! Zak

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Contents

Zak Mir Interviews Greg Secker Zak gets to grips with “Mr Trader Trainer” Greg Secker of Learn To Trade in this feature interview

24 Option Corner

34

18 28

Titan Investment Partners’ Richard Jennings explains a way to play a continuation of the Japanese equity bull run whilst hedging for currency depreciation using options

Timing is Everything They say “timing is everything” in comedy, but this saying probably applies more so to the markets than anywhere else. We take a look at the difficulties gold bull supremo Eric Sprott has experienced in recent years

2014 According to Zak Our very own editor Zak Mir unveils his top 5 trades for 2014

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Fund Manager in Focus

45

The Collapse of FX Concepts

51

Three Contrarian Picks for 2014

56

In this month’s fund manager in focus piece we take a look at Caxton Associates Andrew Law

SBM investigates what happened with the collapse of the world’s largest currency hedge fund

We take a look at three out of favour stocks and ask could this be the year they come back?

Dominic Picarda’s Top Picks for 2014 Perhaps the UK’s most qualified and respected technician, Dominic offers us his top 5 plays for 2014

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Robbie Burn’s Top Picks for 2014

What’s new in spread betting?

The one and only ‘Naked Trader’ reveals in his own inimitable way his top investment ideas for 2014

In what is a fast paced industry, SBM looks at what’s new in spread betting and the next big idea for 2014

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Titan Investment Partners Key Themes for 2014 In this piece from former SBM editor Richard Jennings and now Titan CIO, he lays out the key investment themes for his firm in 2014

Technology Corner Simon Carter delves into “the next big thing” - 3D printing and asks should we really be excited?

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Alpesh Patel’s Top 5 themes for 2014

83

School Corner

87

John Walsh’s Top Stock Picks for 2014

89 94

In this special piece, investment supremo Alpesh offers SBM readers his top plays for 2013

Parabolic SAR explained by Thierry Laduguie

Trading Academy winner John Walsh reveals the stocks he will be trading in 2014

FTSEDaytrader Outlook for 2014 Nick Hilsden from ftsedaytrader.com maps out his route for playing the FTSE during 2014

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

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Titan Investment Partners

Top 3 Themes for 2014 BY RICHARD JENNINGS, CFA OF TITAN INVESTMENT PARTNERS

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Top 3 Themes for 2014

In this special piece, specialist spread betting fund managers Titan Investment Partners’ Chief Fund Manager Richard Jennings reveals his firm’s key investment themes for 2014... Well, 2013 was certainly an ‘interesting’ year for value players. It reminded me a lot of the 1999/2000 period (shows how old we are getting eh?!). Essentially, what was ‘cheap’ got cheaper, and what was more expensive got more expensive. Witness at the end of 2013 the valuation of Twitter at near $37bn — materially more than the UK’s entire mid cap mining spectrum. Either we are total dinosaurs here at Titan, and simply do not “get it”, or the markets have gotten themselves, once more, way out of kilter.

Of course, it is relatively easy for a fund manager to assert that a certain sector/stock/asset class is under or overvalued, the trick is deploying capital at the most appropriate time when you deem it to be near the end of the cycle. In doing so you minimise the emotional distress of sitting on, potentially in the short term, a losing position as you go against the crowd. This is even more important for us here at Titan given our innovative use of a spread betting account to manage our client funds and where we also apply leverage to enhance returns. Leverage of course magnifies also losses.

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Titan Investment Partners

“We are however playing this position through the use of options akin to the strategy that we detailed in last month’s edition of this magazine: in the final stages of a bull market it can get violent, and naked shorts can be veritably “carried out of the door.”

THEME 1 Exhaustion of the US bull market As we peer over the hill into 2014, with the major equity markets in the US now well into their fifth year in this bull-run, and the last decent 20% correction now being over two and half years ago, it is a very foolhardy man indeed who does not pay heed of the “look out below” sign. There have been a whole plethora of signals recently that are typical harbingers of market tops, from a rush to float companies on very spurious valuations, a sharp decline in net directors buying, complacency evident in both the VIX index and the options market, a number of prominent bears (Hugh Hendry being the most sensational) that have capitulated, retail investor inflows in the US hitting levels last seen during the dotcom boom etc. etc. The list is extensive. In contrast, the bulls’ case seems to us to rest on just two central arguments — valuations are not as extreme as in either 1999/2000 or 1929, and momentum is with the market given the continued unbridled printing of money that is likely under Janet Yellen’s Fed tenure. I would refer readers at this stage to take a look at the Option Corner piece in the last issue of Spreadbet Magazine in which we made the case of an important top being likely to be made in the US S&P 500 index (the global benchmark) from a technical perspective as we enter 2014.

To the right is the 20 year chart of the S&P 500 with the 37 week exponential moving average.

It is not a log chart however, so the percent moves away from this moving average measured by the absolute index is not shown accurately. Still, we can see that whenever the index has been extended by this degree that it has made a topping formation and there have been snap backs towards the moving average. Indeed the snap backs presaged two devastating bear markets. We can also see that the RSI is probing the top of the 20 year trend line too and is in very overbought territory – another ominous sign.

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Top 3 Themes for 2014

S&P 500 20 YEAR MONTHLY CHART Our guess is that the seasonally positive months of January and February will extend the bull run seen this year given the sheer amount of liquidity out there and the minimal likelihood of any real material bond purchasing tapering in the US next year (in fact in Japan it is likely to be ramped up). We have our sights on the area between 1820-1840 on the S&P 500 Index from a short perspective and we have begun to build our net short exposure in our flagship Macro account. In fact we expect to be in an overall short as we move through winter into spring next year.

We are however playing this position through the use of options akin to the strategy that we detailed in last month’s edition of this magazine: in the final stages of a bull market it can get violent, and naked shorts can be veritably “carried out of the door”. Essentially our strategy is a combination of a diagonal bull call spread (selling the longer dated lower strike month) and a ratio bull put spread. Whilst the volatility component of S&P option premium is so low, we believe it is a good time to get the long side of the strategy on too.

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Titan Investment Partners

THEME 2 Gold mining stocks to outperform Given that here at Titan we are so convinced of the fundamental backdrop for gold over the next few years and that with our analyst hats on, we are like kiddies in the sweet shop given the current valuations of many of the gold mining stocks; particularly the juniors, it will come as no surprise that we see 2014 as the year that this asset class fights back. Indeed, we have set up a dedicated (and we believe the only) spread betting Precious Metals fund backed with our own capital in illustration of our conviction. “Money and mouth” and all that. As we write, gold is staging a modest rally after nearing the lows of the year seen in late June of $1180/oz ($1215/oz). The backdrop of our almost being ridiculed for buying generationally cheap stocks, massive ETF outflows from the sector and material net short positions in the actual paper gold futures is music to our contrarian ears.

Sure, it is annoying to watch stock prices fall day after day and to have to constantly repeat the fundamental case to the naysayers, but, as the saying goes: “He who laughs last, laughs loudest.” Gold and gold mining stocks are the pariahs of the investment marketplace and, as we have seen regularly since the very inception of markets, what is today’s rubbish, invariably becomes, excuse the pun, tomorrow’s “gold”. To illustrate just how lowly valued the gold miners are relative to the actual price of the physical metal, take a look at the chart below which measures the Barrons Gold Mining Index as a total constituent capitalisation (and so an index level) relative to the actual price of gold. Pretty compelling, eh? We have to go all the way back to around the time of the Second World War to see a comparable value. The mean level is actually around 1.6 and at the time of writing, it is around 0.6. Rarely have gold miners been valued so low in absolute and relative terms.

BARRONS GOLD MINING INDEX RELATIVE TO GOLD PRICE Take a look at the next chart. This depicts the GLD ETF (a good proxy for gold) against the GDX ETF. We have used the GDX ETF as the proxy for the gold miners as this particular ETF has a geographic spread of exposure across the globe incorporating US, Canada, Australia and South Africa and has a constituent median market capitalisation of over $2bn. It is not an ETF that tracks the junior and more risky components but is comprised of solid large and mid-cap stocks. To us, this is a good proxy for our trade idea.

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Top 3 Themes for 2014

“We have to go all the way back to around the time of the second world war to see comparable value.”

GDX GOLD MINERS V GOLD INDEX X 3 YEARS WKLY CHART In short, the dislocation between the underlying physical product and the actual companies that produce it is displaying a very large standard deviation move over the last three years. To us, this acceleration of underperformance after a number of years of increasing divergence is generally typical of the end stages of a move. We are also encouraged, as bulls, by the rising RSI line that we have highlighted. The simplest way to play our calls is to put on a pairs trade where you sell the GLD and buy the GDX in equal proportions.

As the GLD is 5.5 times the price of the GDX then you would be selling five and half times more of the GLD relative to the purchase of the GDX to get your ratios right. For example, if you sold the GLD ETF at say 120 in, for arguments sake, £10 p/pt, then you would be buying 5.5 times the amount of the GDX ETF at a price of 21.80 and so £55 p/pt. Think about it this way: if the GLD rose 10% to say 132 and the GDX ETF also rose 10% to 23.98, then you would lose £12000 on the GLD (1200 x £10) but make £12000 on the GDX ETF (218 x £55) long position. It is very important to monetarily equal the pairs trade.

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Titan Investment Partners

If you are looking to really turbo boost a pairs trade centred around a re-rating of the gold miners against gold however, then you could use the NUGT ETF which is a three times levered ETF. We intend to construct a pairs trade here through the use of a ratio call spread on the NUGT and a ratio bull put spread on the GLD. You will have, no doubt, noticed that here at Titan we make extensive use of options in our portfolios. Reason being that we know what our downside is — one of the first principles of active fund management and indeed speculation. Where leverage is utilised (which we do), then the fixed premium nature of options (when buying) allows you to manage the risk inherent in your portfolio whilst still looking to take advantage of an anticipated move.

If we are right, then those companies that are actually producing oil and that are valued at lowly Enterprise Values to 2P’s (Proven & Probable reserves) are likely to receive a double whammy of a general sector wide re-rating and an increase in their own relative valuations as industry consolidation stories pick up in momentum.

“Our focus is largely within the top end of the small cap area of the oil E&P sector. We are in fact bullish on the entire commodities spectrum next year and which includes oil.”

THEME 3 Selected oil producers & explorers to come back into focus Our third and final theme is the expectation that the shocking underperformance seen in the small & midcap oil explorers sector over the last two years, following the disastrous drilling campaigns in the Falklands basin in particular, will reverse for the stronger entities. This is, of course, a sector where many a punter risks his savings like an old time wildcatter in the Wild West (and the AIM market IS like a Wild West on many counts!) in the hope of investing in that one stock that goes up 10, 20, 30 + times. The reality is, however, that these multi-baggers are exceptionally rare and, with the exception of Rockhopper, Gulf Keystone Petroleum and Dragon Oil in recent years, I cannot recall another stock out of the hundreds of minnows listed on the UK market that has delivered these life changing returns. Our focus is largely within the top end of the small cap area of the oil E&P sector. We are, in fact, bullish on the entire commodities spectrum next year and which includes oil. The chart to the right shows the WTI crude contract over the last five years and it looks to us that it is gearing up for a sharp move to the upside.

We must stress that our approach here is to play this through a diversified mix of stocks in our Natural Resources portfolio. Concentrating into two or three stocks is all well and good if you happen to be a very lucky investor, but relying on luck as the central tenet of one’s investment approach is something we prefer to leave to others! Stocks that we like and believe are ripe for a re-rating or potential consolidation include Heritage Oil, Ophir Energy, Rockhopper Petroleum and even Falklands Oil & Gas which adds some “spice” around the periphery of a core portfolio. In FOGL’s case, the stock is presently valued around net cash and so any “hope” regarding the drilling campaign scheduled for the latter part of 2014 is not yet “in” the stock price in our opinion. Playing the anticipation cycle as we near the drill and accumulating stock whilst trading at a nil enterprise value could, in itself, prove lucrative irrespective of the drill outcome if you play the speculation cycle right.

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Top 3 Themes for 2014

WTI CHART – 5 YEAR WEEKLY CHART If you’d like more information in relation to our selection of spread betting funds, then click the banner below to visit our site or email us at info@ titanip.co.uk Titan investment Partners hold positions in many of the companies mentioned here. You should not take this piece as an advocation to trade in any of the instruments mentioned and should always take professional advice in relation to your own personal circumstances.

All Titan Funds operate within a spread betting account which means gains or losses are currently free of tax.  However, legislation can change in the future. Spread betting is a leveraged product which  could result in losses of some or even all of your initial deposit. Ensure you fully understand the risks.

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Eric Sprott - Timing is everything

GOLD INVESTORS RE LEARN THE SAYING -

“TIMING IS EVERYTHING!” When it comes to investment decisions, in addition to copious volumes of dedication, the secret to good performance frequently depends upon a further three main ingredients: a good assessment of the investment landscape, appropriate use of leverage, and getting the timing correct.

To use the words of Titan Investment Partners’ CIO Richard Jennings: “…if you position your portfolio appropriately and you’re lucky with the timing and there’s some leverage involved, then you can really outperform. Vice-versa, if you position your portfolio and you’re out with the timing and leverage is involved, you can materially underperform.”

On this particular occasion, in 2007, Paulson was also successful with his timing. Sadly, for him, the perhaps now inappropriately named “Mr Midas” has not been able to replicate this stellar performance in the last few years with his gold bets. He in fact has a sound and reasonable assessment of the monetary landscape but, his timing has been out. Combine this with some leverage and the net result is a crippling loss of around 63% within his gold fund during the first 10 months of the year. Ouch!

Timing is [almost] everything; factor it out of the equation and investment in general would be all the simpler! But when time is a critical variable, as it so often is, the very real difference between making money and losing it arises. Many hedge fund managers have performed considerably well in their assessments of the investment landscape over the course of the last few years. The most famous hedge fund manager in recent years of course is John Paulson who, perhaps with a little help from the Vampire Squid aka Goldman Sucks, made a veritable multi billion dollar fortune out of the MBS collapse in the States, unlike many of his peers who bought into the beleaguered banks too early and were destroyed.

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ERIC SPROTT


Eric Sprott - Timing is everything

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Eric Sprott - Timing is everything

“Gold has declined 25% over the past year whilst the major central banks’ balance sheets have continued to expand — a phenomenon that is perplexing many old-time fund managers and has resulted in a number of them asking openly: “Is the gold market being manipulated?” Another victim of inopportune timing is Eric Sprott, a Canadian hedge fund manager who has also seen his flagship fund decline more than 50% this year, and, to make matters worse, this comes on top of double-digit declines over three consecutive years. Not surprisingly there have been significant redemptions from investors who have withdrawn money at a real pace under Sprott’s management, leaving just $350m on his fund from an initial $3bn in 2008. Sprott had been betting against the current state of monetary policy: that is, betting that the Federal Reserve would eventually generate inflation due to its excessive money printing. Since gold and other precious metals have a restricted supply dynamic, he understandably expected it to be a perfect hedge for the current situation.

With the US economy recovering at a sluggish pace and so keeping interest rates near ground level for much longer than would otherwise be the case, there is a lot of merit in this line of thinking. Unfortunately for Sprott and his investors, the link between the value of precious metals and excessively expansionary monetary policy has been less than perfect this last 24 months. Gold has declined 25% over the past year whilst the major central banks’ balance sheets have continued to expand — a phenomenon that is perplexing many old-time fund managers and has resulted in a number of them asking openly: “Is the gold market being manipulated?” The finger being pointed squarely at the Federal Reserve.

GOLD 40 YEAR CHART

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Eric Sprott - Timing is everything

After hitting $1,900/oz in 2011, gold is now, as we write, falling towards $1,200/oz, a value which is in fact now below the widely accepted cost of production of the metal. Silver, another of Sprott’s top investments, is also performing poorly, declining 33% over the past year. It is an ignominious circumstance for Mr Sprott to find himself in. From founding the company which bears his name in 1981, Eric Sprott has now been forced out of investment decisions. He currently serves as the Chairman of the company, but, tellingly, in a non-executive position as management desperately tries to slow the pace of investor redemptions and effect a turnaround. At the Group level, from $10bn in assets under management last autumn, just $7bn now remains. Yield-hungry investors abandoned Sprott’s economic assessments when they saw their funds, heavily exposed to gold, dragged down and with no income return whilst equities have increased by over 60% over the last three years. It is a fact that many hedge fund managers such as Paulson, Sprott and Daniel Loeb entered the gold market too soon — in itself an excusable stance. But, with too much leverage in the mix, the end result is now almost fatal. While stocks are rising fast, gold becomes less and less attractive, particularly as there is an actual cost of carry due to insurance and storage.

“But, with too much leverage in the mix, the end result is now almost fatal. While stocks are rising fast, gold becomes less and less attractive, particularly as there is an actual cost of carry due to insurance and storage.”

However, we think it is time to ask, is this yet another signal of the point of maximum pessimism now being reached. The economic landscape that has led to the current losses may in fact have changed. If the actions of the Federal Reserve have not catalysed the widely expected consumer inflation, what is unarguable is that their policies have contributed to asset price inflation. Stocks are now clearly overvalued when looking at the Schiller P/E ratio. The current P/E ratio is now above 25x — a full 50% over its long term mean and is back to where it was pre the onset of the 2007-09 bear market. With Janet Yellen seen following in “Helicopter” Ben Bernanke’s footsteps and continuing the excessive monetary easing policy as well as pegging interest rates at generational lows for a further two years, the asset inflation we have seen could yet perceivably spill over into the wider economy and instigate more general inflation.

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Eric Sprott - Timing is everything

SCHILLER HISTORIC P/E CHART Unfortunately for the above fund managers, they have become just another example of those who mistimed investments and compounded matters by throwing leverage into the mix. Third party investors are a pretty unforgiving group and demand results. This creates considerable pressure to perform year on year, threatening permanent capital redemption if this fails to materialise.

A 25% yearly loss over three consecutive years would no doubt effect a drastic reduction in net inflows even if the fourth year yielded a 100% increase. When performance is not forthcoming, the nervous investor swiftly shies away and, like in boxing where you are only as good as your last fight, in the warzone of the markets another saying is you are “only as good as your last trade”. Something Mr Sprott is finding out to his and his investors’ cost…

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Zak Mir Interviews Greg Secker

ZAK MIR INTERVIEWS GREG SECKER OF LEARN TO TRADE GOES UNDER THE SPOTLIGHT... Zak: Greg, can you tell us how you got involved in the financial markets and a little bit of a background about yourself? Greg: Sure Zak. My career actually started at Thomas Cook Financial Services where I moved over to the foreign exchange business to run a brand new business called the Virtual Trading Desk™ (VTD). VTD was probably the first online real-time Forex trading platform, allowing customers to receive real-time quotes for huge foreign exchange transactions. My career took off here and at the age of 25 I was made a Vice President at Mellon Financial Corporation, then a major Fortune 500 investment bank in the United States. I was lucky enough to be working around some of the very best traders in the world and I began using these same trading strategies. I was successful enough in that I was able to make a choice as to how I wanted the rest of my life to work. A fortunate position I accept. Zak: Do you personally trade the markets, and if so what instruments do you find the easiest (and the most difficult) to trade? Greg: Yes I trade every day. As I trade technically, the instrument doesn’t matter; my systems provide me with the tools to trade any instrument that produces price action on a chart. What really matters is how the instrument is behaving at that particular moment; that will determine whether it is suitable to trade or not. The instrument’s current behaviour will also determine how I trade it so I can safely maximise my returns; for example, the way I trade will change when I am trading an overextension near support or resistance, a trend or range.

Zak: Do you know how many of your course attendees actually go on to trade for themselves, and is there any evidence that they have more longevity than a “self-taught” trader? Greg: The majority of our clients go on to trade for themselves, but every client comes in here with different objectives: whether it is someone looking for a hobby during their retirement, to a young exec looking to work in the City or a stay at home mum looking to set up an effective online business and create an extra income stream. We also have a large number of clients that come to see us who are self-taught traders that aren’t making money, they are looking to re-learn if you wish. What we have found is that most self-taught traders fail for three main reasons: 1) They don’t apply safe risk management 2) They don’t have a structured trading strategy as they are mixing and matching many conflicting techniques 3) They don’t understand or have experience of trading in a live market. We also have found that when we teach these clients in a 1-2-1 capacity and in a live trading environment, they become safer, more consistent traders. In fact, many of these clients see such a huge improvement in their trading they come on our advanced 12 month programmes. Zak: What are the typical traits of the successful traders, and can you really teach these on your courses?

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Zak Mir Interviews Greg Secker

“Yes I trade every day. As I trade technically the instrument doesn’t matter, my systems provide me with the tools to trade any instrument that produces price action on a chart.”

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Zak Mir Interviews Greg Secker

Greg: All successful traders need to be disciplined, in particular having the discipline to follow a set of rules. It is also key for a successful trader to understand their emotional states and manage these: you have to have a level head – becoming too confident/unconfident from recent gains/losses can have a direct effect on your trading and make you make decisions you wouldn’t normally. A large part of trading success and success in any aspect of your life is down to having the correct strategies and tools as well as the correct psychology and mind set to achieve success. And yes, we definitely teach this on our courses, psychology is a large part of our trading courses; we teach our clients to manage their mind set and how to have a winning trading psychology.

Once the client is making consistent profits, the sky is the limit; the more capital the client puts into their account of course the higher the earning potential will be. In some cases, if clients don’t have large sums of money, we do offer them the ability to trade our company funds and take up to 80% of the profits of any money they make, which means their earning potential increases hugely in line with their goals. Zak: Can you tell us a little more about your courses and what they involve? Greg: Our foundation courses involve teaching newbie traders the technical side of trading so that they can make a safe and sustainable income from it. In this foundation course we cover price action, cyclicality, trends, how to place a trade on their brokerage platform, how to risk-manage their capital, how to enter and exit the trades and also psychological techniques on how to manage their emotional state whilst trading. We also give the client our own bespoke proprietary trading strategies, along with the software and indicators to support these.

In fact, I have recently written a new programme called ‘The Gift’ which is not only great for creating a concrete winning trader mind set, but it will also give you the ability to apply this to any field or part of your life. Zak: How much capital would you say that you need to start with initially in order to actually make a liveable “wage” out of the markets? Greg: Income requirements for our clients differs massively, some people are looking for a small income of £2,000 a month whilst others are looking for £20,000+ per month. We suggest that a client starts trading on a small account, so that they practise on this and so that they can become consistently profitable and build up their confidence.

The foundation course is taught in both a classroom environment and also during 1-2-1 coaching sessions. We also have a range of advanced programmes, for clients that want to take their trading even further and target higher returns.

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Zak Mir Interviews Greg Secker

“all successful traders need to be disciplined, in particular having the discipline to folloW a set of rules. it is also key for a successful trader to understand their emotional states and manage these.”

Zak: What do you say to your detractors who say that much of the material in your courses is largely available in book form at a lesser cost?

Zak: Where do you see the future of trader training going — on-line? What impact is the increasing importance of social media having on your business?

Greg: In regards to general market information, yes this is widely available. However, the strategies we provide are our own unique proprietary systems and these strategies therefore won’t be available anywhere else. In addition to this, I am a firm believer that self-taught trading or learning to trade from a book is a far longer and more costly exercise than learning to trade whilst sat hip to hip with a professional trader. Learning to trade from a book will teach you the theory, but it won’t teach all the elements you need to know to make money in a live trading market. If you are taught by a professional trader in a live market environment, your learning curve will be far greater, that is why we, as a company, offer face to face training and coaching as part of all our programmes.

Greg: Yes, I think it is good to offer both online trader training and also face to face. As a company, we don’t only provide onsite courses and face to face coaching, we also provide live webinars to our clients, online 1-2-1 coaching sessions as well as an e-learning facility. We feel by providing both we give clients the choice to choose and mix between the best of both worlds.

Zak: Which traders do you personally respect/believe are the best in their sphere? Greg: George Soros, for his incredible sustainability in results and standing the test of time. Curtis Faith (turtle traders), to prove that someone can come from no experience and make huge returns. Warren Buffet, from an investment perspective I greatly respect the fact he has always stuck to his guns and believed in his decisions even when he is going against the herd.

Zak: Will the value of the trading techniques and strategies you offer be eroded by your alumni, using them in the financial markets? Would it not be better to keep them for yourself? Greg: The FX market is huge, with recent volumes estimated at around $5tn per day. With the best will in the world, even with the large amount of clients going through our courses, that is still a small proportion of the entire market and wouldn’t be nearly enough to affect the market place! Our strategies are also based on the core principles of trading that have been around for years, so sharing these systems will not be an issue and, in fact, I gain enjoyment out of knowing that I am empowering people.

January 2014

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2014 according to Zak

2014 ACCORDING TO zak! The prediction game in the financial markets is a very dangerous one. Strangely, however, many pundits and traders alike run the gauntlet of the financial markets and risk the “egg on face” scenario when we look back 12 months later. Personally, I think that the best time to make a 12 month forward prediction (aside from when drunk!) would be at the end of January when the so called “January effect” (rising markets most of the time) had waned.

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2014 according to Zak

My own assessment of my peers, in getting involved in the prediction game at the end of any year, tends to be to risk all and sundry in going long at the top (as bear markets are infrequent, there is no real upside in going against the grain and sticking your neck out with a gutsy call!). With regards to my own predictions, we are totally unbiased at SBM and therefore unlike many brokerages that are compromised with their calls, you can rest assured that we say exactly what we believe will happen. Anyways, “without further a do”, and eggs at the ready, here’re my predictions!

2014 Overview Perhaps what is most intriguing about the run-up to 2014 is the way that we may be in a situation where the fears surrounding tapering next year and potential deflation may not actually become reality. Indeed, we may be about to enter the kind of counter intuitive phase that was seen at the end of last year and going into 2013 where fears of a US debt default/Federal shutdown were actually the catalyst to what became a record-breaking year for the Dow and S&P. So, the theme for 2014 is tapering — to what extent will it continue as the year progresses? These fears have escalated in the final few weeks of 2013 causing the rally in stocks to cool off and the US dollar to stage a mini comeback. However, I suspect that even going into the end of January, and the arrival of a new Federal Reserve Chief in the form of Janet Yellen, aspects that the markets are currently fearing may not be the ones that they are obsessing on even a few weeks into the New Year. In fact, it may be that it is not the US that we should be looking to in terms of a clue as to what might pan out in 2014, but the good ol’ UK which may actually be leading the way in terms of the next phase in the cycle. Here we do have a localised housing bubble in London and parts of the South East, and one which was most likely deliberately created to try to usher the Conservatives into Govt in 2015 and which will likely end in a painful way in 2015/16 — considerably higher interest rates than the market expects. And so it is interest rates that looks set to dominate proceedings over the next 12 months — how soon and how high they will be raised. Admittedly, we are currently in the aftermath of a recent cut within the EU bloc to record low levels, but the euro-zone is very much a special situation.

“Anyways,without further a do, and eggs at the ready, here’s my predictions!” Elsewhere, central banks are likely to remain happy to continue trying to whittle away the relative value of their debt by continuing to print money. However, I personally believe that we are fast approaching the time when it will be almost impossible for there not to be a rush to raise interest rates in order to avoid a runaway asset bubble of the kind seen in the middle of the last decade. An economic overheating situation could actually arise much more quickly, and with greater momentum than is generally expected. It is against such a backdrop then that the Zak view on 2014 is presented. I have alighted upon three main markets and two stocks ideas.

Buy Euro / Dollar: Target $1.45 Stop Loss $1.3450 For some strange reason most FX traders don’t seem to want to be long of euro/dollar at the moment, and of course the financial media, led by vested interests in the U.S./UK, continue to trash the idea of the single currency and in particular its constituent and somewhat ignominiously named “PIIGS”! The worst of these siren voices still continue to threaten the breakup of the Euro, initially via the so called “Grexit” (Greece), “Spexits” (Spain!) and the like… However, much to these pundits’ chagrin, it is still here, and currently trading near the highs of 2013. This does not act like a market ready to disintegrate any time to me. In the end, the worst may of course happen. But in the meantime, I am happy to tease and irritate by going with the trend/price action here, and remain relatively safe in the knowledge that a sell bet on the Euro continues to be a sell on one of the world’s greatest economies — Germany, which at least in terms of its manufacturing base remains “uber alles”! Its ability to bankroll the euro-zone project and maintain its captive audience of bailout and post bailout contenders should not be underestimated, and nor should the ability of Europe to attract the hot emerging markets’ cash from BRIC entrepreneurs! Another debt ceiling crisis Stateside in 2014 could be the final straw for the bears and cause euro/dollar to break back above $1.40 with conviction.

January 2014

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2014 according to Zak

Technicals While everyone and their mother may be going short at the “high” of the range at the moment — towards $1.38, it can be seen from the daily chart of the cross that this is not a market which is overstretched chart-wise on any of the main technical parameters. This comment refers to the way that we are faced with a cross which is far from being overbought in RSI oscillator terms — the indicator in fact being in the low 60s, despite the highs of the year being close. In addition, it can be said that the price action is currently towards the floor of a rising trend channel running from July, and with its support line running at $1.36 — the same level of the 20 day moving average.

Given the way that the implied top of this channel is running towards $1.45, there is plenty of upside to shoot for. This is even for those who wish to wait on an end-of-day close through $1.3833, the October intraday peak as a momentum buy trigger. At this stage, only a weekly close back below the July line/$1.36 point would even begin to suggest a top is in place here. The stop loss on the bull argument is a relatively generous $1.34 — given that this is a call for the whole of 2014.

EUR/GBP CHART

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2014 according to Zak

Recent Significant News

Fundamentals

December 16 – In a recent report, market research group Markit said that its preliminary Germa manufacturing purchasing managers’ index rose to a seasonally adjusted 54.2 in December from a final reading of 52.7 in November. Analysts had expected the index to inch up to just 53.0 this month. A reading above 50.0 on the index indicates industry expansion, below indicates contraction. December 15 – Ireland has become the first country in the euro-zone to exit a bailout programme it was forced to take when it fell on hard times. Taoiseach Enda Kenny said the exit sent out a powerful signal internationally. He said: “Ireland is now moving in the right direction. The bailout programme allowed the country access to 85bn euros in cash to help pay its bills.” Sky.com November 7 – Borrowers across the struggling euro-zone economies received an unexpected fillip on Thursday when the European Central Bank cut interest rates to a fresh record low in a bid to stave off a slide into deflation. After its monthly policy meeting in Frankfurt, the ECB’s governing council announced that it would reduce its key refinancing rate to 0.25% from 0.5%. While the economy of the 18-member single currency area clambered out of recession earlier this year, Mario Draghi, the ECB’s president, warned that the outlook could deteriorate in the coming months.

If ever there was a time when, on a fundamental basis, the euro looked “vulnerable”, one could say that this may have been in the run up to the “surprise” November interest rate cut. Indeed, this could have been a time of mild panic for those few fans of the euro, given the move in rates down from 0.5% to 0.25% and thus marking the end of the line as far as conventional monetary easing policy was concerned. Of course, the ECB could resort to good old money printing to stimulate growth and avoid deflation. This is probably the last throw of the dice as far as Messrs Draghi and friends are concerned on the growth front. The big danger to the long euro argument is most likely on the other side of the cross where tapering kicked in at the end of 2013 and the Federal Reserve announcing a $10bn slice to the current $85bn amount. However, as such a threat has only so far taken the euro marginally off its best levels, and with ultra dove Janet Yellen coming in as Chair of the Federal Reserve at the end of January, the taper is not the Big Bad Wolf that some would have us believe… Therefore, 2014 should see the euro maintain or exceed the 2013 trading range with at least one decent spike towards/through $1.40. To read the rest of my “2014 according to Zak” click the image overleaf for your free copy.

January 2014

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January 2014

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Options Corner

“Under the current Prime Minister Shinzo Abe’s watch who was installed at the end of 2012, Japan has embarked upon a radical economic reform program which, at its centre, lies an unprecedented bond market monetisation program that is even larger than the US’s own experiment. In fact, 3 times larger.”

options corner

A JAPAN SPECIAL By Richard Jennings, cfa Titan Investment Partners

It’s safe to say that my long Japan call at the end of 2012 was probably our best call last year. That, and to go short gold (although we changed tack mid-year and moved decisively to the buy side on the yellow precious metal).

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A Japan Special

Under the current Prime Minister Shinzo Abe’s watch, who was installed at the end of 2012, Japan has embarked upon a radical economic reform program which, at its centre, lies an unprecedented bond market monetisation program that is even larger than the US’s own experiment. In fact, three times larger. Abe means business, that’s for sure, and it seems he will stop at nothing to lift Japan once and for all out of the deflationary mire that has bedevilled her economy for nearly two decades now. The issue for investors in Japan is, however, that what they make on the stock market through a potential continuation of its stellar rise from 25 year lows this year, they could lose on the yen which many expect to continue to depreciate.

In reading Hugh Hendry’s (a true hedge fund manager’s most recent letter to his investors) Hendry relayed that he had purchased back in 2008 a so called “one touch” Nikkei Call option with a strike of 40,000 and expiry in 2018 for a cost of $300,000. And if it plays out, he collects $5m. This trade intrigued me and is either a real gamble (albeit for a relatively modest sum in relation to Hendry’s fund size) or actually showed unbelievable foresight. Time will tell… Hendy observed that over many years it generally takes a market on average around 25 years to take out a prior nominal high and the most recent example being the gold price — see chart below. We can see that the Nikkei is now almost due, on this basis, to take out its prior peak having hit its own all time high of 38957 on the 29 December 1989 — 24 years ago.

GOLD LONG TERM CHART Is it really possible that the Nikkei could rally by nearly 150% over the next year or two? In the markets anything is possible. In fact, if Abe continues to press the pedal on the monetary easing front, then the nominal price of the equity index may in fact be meaningless. Should the monetary base increase by 200-300% (which at the present rate they will produce over the next several years), then why could the index not increase pro rata in nominal terms, if not anywhere near in ‘real’ terms? The effect of inflation could create such an index value near 40,000 and of course PM Abe’s only focus seems to be… inflation. Perhaps Hendry will collect his $5m after all.

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Options Corner

“Is it really possible that the Nikkei could rally by nearly 150% over the next year or two? In the markets anything is possible. In fact, if Abe continues to press the pedal on the monetary easing front, then the nominal price of the equity index may in fact be meaningless.” So how could one play a similar strategy to Hendry in the options market? Remember the issue of the yen weakness? That being that if you purchase yen denominated call options that when you convert back into sterling under such an inflationary scenario in Japan that you would lose most of the gains through currency losses — the concept of “real” gains coming into play as opposed to nominal ones.

NIKKEI LONG TERM CHART

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A Japan Special

Well, there is an ETF that actually hedges the Japanese yen exposure — the Wisdom Tree Japan Hedged Fund. It hedges the Japanese yen into dollars and this means that you can preserve the real gains when converted back into a dollar NAV. And this is very important for this strategy as we have explored. Many a fund manager has bought Japanese stocks before and not hedged the yen exposure only to have the gains eroded when converted back into their base currency.

For example, you can buy the Jan 2016 $54 Calls for around $4. Should the Nikkei double in price to around 32,000 and the correlation between the fund and the index remain similar to its historic performance, then the calls could be worth around $50 depending on residual time value. Your loss is fixed at the $4 cost of course and so a 10-12 fold return could have a material effect on your portfolio if it comes to fruition. For bulls of Japan, here’s hoping Hugh’s right and he collects his $5m!

We can see in the chart below that the ETF has correlated very well with the Nikkei (the thin orange line) and so historically it has been a good proxy to play the Nikkei in pure currency terms.

Disclosure: Titan funds intend to incept a position in these options. You should not take this piece as an advocation to trade in any of the instruments mentioned and should always take professional advice in relation to your own personal circumstances.

There actually are listed options on this ETF and that usefully go out to January 2016. If you believe that the Nikkei is going to take out its old high over the next few years, then the simple purchase of a call option at whatever strike fits your degree of bullishness could be a worthwhile play.

All Titan Funds operate within a spread betting account which means gains or losses are currently free of tax.  However, legislation can change in the future. Spread betting is a leveraged product which  could result in losses of some or even all of your initial deposit. Ensure you fully understand the risks.

WISDOM TREE JAPAN ETF 8 YEAR CHART

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SBM Focus on Andrew Law

SBM FOCUS ON

Andrew Law OF Caxton Associates By Filipe R. Costa & R Jennings, Titan investment Partners

January 2014

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SBM Focus on Andrew Law

Following the retirement of Bruce Kovner, the founder of Caxton Associates in 1983, Andrew Law succeeded him to become the most important man within the firm, one of the most successful hedge funds with more than 30 years of history. Law started working at Caxton only 10 years ago, initially joining the company’s London offices. He quickly rose through the ranks to become Caxton’s Chief Investment Officer and Chairman. Unlike many of his peers who thrive on appearing on TV and in newspapers, Law rarely gives interviews and seems to be in fact quite publicity shy. There are very few references to him in the press and he seems to hate being photographed. So just who is this secretive Master of the Universe, and what can we learn about his approach to the markets? What he does not appear to be is your typical larger than life hedge fund manager. There is no luxury condo on Park Avenue, no £75m, 289-foot private yacht moored in St. Tropez, nor a Gulfstream private jet... What he does possess though is a painting by LS Lowry of his beloved Manchester City, and that was purchased for a cool £1m.

The company had been producing exceptional returns with relatively low volatility for 20 years odd at this point and Law quickly came to founder Bruce Kovner’s attention. Following Kovner’s retirement in 2011, Law, already by this point the CIO, became Chairman of the company. Still only 47 years of age, Law still has many years of active fund management ahead. Unlike Louis Bacon who was featured in the last edition of our magazine, and whom it is said has trading screens installed in the bedrooms of his properties to ensure that he can scan market data when he wakes up without having to lift his head off the pillow(!), Law it seems takes a more hands off approach to the markets and in fact looks to preserve his relaxation time. He goes swimming two or three times a week and also to the gym, believing in the power of exercise as a great release from the unremitting pressure of the trading screens. “I don’t surround myself with them [screens]. I think it’s very, very unhealthy. You can’t take a BlackBerry into a swimming pool yet and I hope you never can”, comments Law.

Law was raised in Cheshire where he attended a state school in Manchester before graduating from Sheffield University with a First Class Honours Degree in Economics. He started his career at County NatWest and Chemical Bank before moving onto Goldman Sachs in 1996. It was here that he made his mark in the finance world, rising to become the head of fixed income trading. In 2003, he made the move from Goldman to Caxton Associates.

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SBM Focus on Andrew Law

Besides being an asset manager, Law is also a philanthropist. He supports several charities through his foundation, including TreatMeUK and Social Finance. The first is run by his fiancée and is aimed at helping women battling debilitating illnesses to regain their self-esteem while the second is concerned with bringing rigorous market-based principles to charitable investments. He is also chairman of the project ‘Speakers for Schools’ which is an initiative aimed at fostering ambition and achievement for young people in state schools by providing talks from inspiring people. In a nod to his upbringing where it seems he realised the difficulties that many youngsters have in progressing from humble beginnings, he now believes that “it is incumbent on successful people to put something back into society.” An admirable trait indeed.

A little More About Caxton Bruce Kovner was the original founder of Caxton Associates LP back in 1983 in New York and where the company is headquartered with additional offices in London, Sydney and New Jersey.

BRUCE KOVNER

It currently employs around 200 people and has 25 portfolio managers — a relatively small team considering the size of funds under management — around $6.5bn at last count. In a unique approach to the stresses of trading, the firm retains an in-house psychologist to help Caxton traders cope with losing streaks and also to allow them to compartmentalise different aspects of their life. Caxton is essentially a global macro hedge fund, speculating on shifts between national economies via currencies, bonds and derivatives. Over 30 years, it has yielded an impressive 14% annual average gain with only half the volatility of the S&P 500. In total more than $13bn in gains have been distributed to its clients.

CAXTON ANNUAL RETURNS

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SBM Focus on Andrew Law

So successful was the firm that it actually closed to outside investors in 2011, only re-opening this last summer. Since 2008 and the onset of the “centrally planned” markets, largely at the US Fed’s direction, many other hedge funds have also returned money to investors. Louis Moore Bacon and Alan Howard both returned billions to investors between 2011 and 2012. Even no lesser a luminary than George Soros closed down his fund to all outside investors in 2011. With an outlook of unpredictable monetary policy and a foggy US political situation, Caxton opted to not take in outside money during 2011-2013. Law seemed to hit a hurdle with his returns in 2011 and 2012 returning just 1 and 2% respectively. However, his form looks to have returned with a YTD return for 2013 of around 17%, benefitting in large part by positioning ahead of the yen’s extensive decline this year and also the rally in US equities. Earlier in the year the firm enjoyed some well-timed bets on Eurozone interest rates and on the US bond sell-off. It was in 2008-2009 that the firm materially outperformed its peers, returning 13% for its investors, but, as an acute illustration of just what difficulties the hedge fund industry faced back then, it also was not immune from huge redemptions, losing one quarter of assets under management. Net result was a sharp drop in the global position the firm held within the hedge fund industry.

Harsh Conditions For Macro Funds This year has been relatively good for Caxton with the company making around a cool $1bn in profits from its funds.

“since 2009, macro hedge fund managers have performed poorly When compared With the s&p 500 index. just look at the table beloW. While the s&p 500 shoWs a cagr of 12.7% for the last four years, the hfrx macro multi-strategy index shoWs just 2.9%.” Global macro funds collectively in contrast have been experiencing a tough time for over five years now due to political and economic unpredictability. Reflecting back over the last few years with the U.S. Government having to step in during the financial crisis to save many companies from bankruptcy, the seemingly endless ZIRP policy and money printing and ever rising valuations, it’s not surprising that many seasoned old hands are struggling to generate returns. It seems that mean reversion no longer applies. The prolonged discussions between Republicans and Democrats around the US debt ceiling, which at one point came perilously close to default, and yet the dollar over the last 12 months proving remarkably resilient has also confounded conventional macro wisdom. Since 2009, macro hedge fund managers have performed poorly when compared with the S&P 500 index. Just look at the table below. While the S&P 500 shows a CAGR of 12.7% for the last four years, the HFRX Macro Multi-Strategy index shows just 2.9%. Macro funds performed better than the average hedge fund industry (here represented by the HFRX Global index), but still, considering the fees involved, investors would have been better off leaving their money in a tracker fund.

HEDGE FUNDS V S&P 500 PERFORMANCE

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SBM Focus on Andrew Law

Let’s say you had £100,000 at the end of 2009 and you decided to put it in a macro hedge fund. You would now have £111,950. If you instead had invested the same amount in the S&P 500, you would now have £161,140. That’s some underperformance. The difficulties faced by the industry are all too apparent to see in the bald statistics. Over the last 12 months nearly 900 hedge funds have shut down, some 10% of the entire industry. It is said that in order to operate a truly efficient hedge fund with half a chance of producing the much coveted and extremely rare alpha that you now need $4-5bn once all costs are factored in.

Law Speaks About The Future In a recent and rare interview with the FT, Law warned that the political debate around the debt ceiling has extensively damaged the US economy leaving the Federal Reserve with no other option but to continue its asset purchase program indefinitely. He realises that the current recovery isn’t as strong as one would have expected given the extent of monetary easing. This seems to be a contrarian view at present as Wall Street analysts believe the US economy will sustain momentum and increase in strength during the next several months, and expects the Federal Reserve to start tapering sooner rather than later. Of course, these are the same analysts who have an absolutely shocking history at predicting anything, always missing the true dynamics behind the economy and financial markets, and so we would rather align with Law’s contrarian view than with analysts! In fact, the view that quantitative easing is here to stay for longer than the markets currently anticipate has been held for some time by SBM and explains our bullish stance on precious metals stocks. So Law doesn’t see a bright future for the US economy and, from a massive short position in Treasuries earlier in the year (which made him a fortune), he has now turned this back into a long position on bonds believing that interest rates will stay low for the foreseeable future. As a result of the grim outlook for the US economy, Law also expects continued appreciation of the Euro and, of course, a potential currency war between the ECB and the Federal Reserve, going on record to state “it will be fascinating to see how the ECB responds”.

With Janet Yellen into the breach in the New Year it will be very interesting to see the tectonic plates of the globe’s two most powerful central banks at play, particularly given the high stakes nature of this game. One trading bloc has to be the loser and it is a brave man that bets against the Fed’s preparedness to debase the dollar. After all, they have veritably decimated it over the last 100 years since the institution’s inception, and so Law can be said to have history on his side!!

January 2014

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SBM Focus on Andrew Law

The Current Caxton Portfolio The latest SEC 13-F filing from Caxton shows that the company had at the end of the third quarter $1.9bn (£1.2bn) invested in securities. Similar to Moore Capital, and in a sign that the world’s most savviest investors are moving themselves ever more short, the firm’s biggest position is a short play on the iShares Russell 2000 and which actually corresponds to 23.5% of the total portfolio – a punchy bet. The next biggest position on the list is a long position in Morgan Stanley (MS), representing 5% of the portfolio, although this position was reduced during the quarter.

CAXTON ASSOCIATES TOP 10 HOLDINGS What can we take away from Caxton’s current positioning? That they seem to be preparing for softness in the US economy next year, a rout in the richly valued small cap arena, more money printing and more dollar weakness — a recipe indeed for a resumption of the gold bull trend that has stalled over the last two years perhaps?

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FX Concepts Implosion

FX Concepts implosion SBM investigates just what happened‌ BY Filipe R. Costa & R Jennings, Titan Investment Partners

January 2014

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FX Concepts Implosion

The Road to Collapse… FX Concepts is just another of the recent casualties in the foreign exchange trading arena. What is, however, all the more surprising is that the fund, run by John Taylor, and founded over 30 years back in 1981, was the world’s largest FX quant fund with assets under management of over $14bn. When you factor in the leverage inherent in FX trading of up to 100 times, you can see that they wielded some serious capital influence, even in the realms of the trillions of dollars a day FX markets.

JOHN TAYLOR

Dr Janet Yellen

In what is a very stark illustration of what can happen when playing in the markets, particularly with a dangerous mix of the new norm of centrally planned economies, hubris and less than rigorous trading controls, FX Concepts is a good guide on how to turn $14bn into $14m!!!

Unsurprisingly, in an environment like the FX world where consistent profits are extremely hard to come by (the most successful ones actually being position traders as opposed to daily “noise” traders), this put the company in the spotlight. It was the advent of the financial crisis which led to a decline in assets from the peak of $14bn to just $4.5bn last year and then spiralling down further to less than $1bn and leading the company’s managers to file for Chapter 11 bankruptcy protection last October. In terms of performance, FX Concepts’ last 10 year figures have been pretty poor. According to CNBC reports, the company had collective annualised returns between January 2002 and August 2013 of only 3.74%. Its flagship multi-strategy fund was down 11.4% in the year through to August 2013, after losing 3.1% in 2012 and 14.5% in 2011. Generally, with equity funds, investors blame capital mass as the reason for decaying performance, i.e. the more money they have to manage, the harder it is to generate returns. Whereas with FX, so large and liquid is the marketplace that this performance limiter was deemed to be much, much less of a factor.

The Recent Court Filings

In the aftermath of the collapse, insiders relayed that so complex were the trading algorithms that had been created to automate the FX trading that at some points no one really actually understood what was going on. Probably makes you feel better when you are offside on your own pairs trading mixed with option overlays and staring into the abyss, eh?! FX Concepts final ignominy of bankruptcy severely wounded the foreign exchange trading investment class, at least for retail investors, and, like LTCM many years before in 1997, is a lesson once more that no matter your capital mass, the market is always bigger than you. For quite a number of years, the firm’s systematic trading strategy delivered decent and sustained returns of the kind that attracts institutional clients.

According to the latest court filings only a few weeks ago, the company had, unbelievably, just $1.62m in assets against $79m in liabilities. That spells insolvency! The biggest part of those assets is in fact a $1.61m loan note from FX Concepts’ Chairman and former CIO, John Taylor. The filings also state that FX Concepts’ income for the past three years was just $173,652 in 2011, $1.13m in 2012 and $35,785 for the first nine months of 2013. The fund’s biggest creditor is a $34m unsecured note to Asset Management Finance (AMF), a company owned by Credit Suisse.

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FX Concepts Implosion

“FX Concepts trading was completely systematic with human emotions being out of the process and the powerful computers pretty much entirely responsible for placing the trades based on pre-set parameters. The success of such a system of course relies on the assumptions behind it. And who programs it? Of course humans.” AMF provided $40m in financing to the company in 2006 and 2010 through revenue-sharing agreements. It seems that Taylor renegotiated with AMF a deferment on eight quarterly revenue-sharing payments and gave his personal guarantee on those obligations up to $5m. Ooops… He then used part of the proceedings to finance a $22m Upper East Side condo (as you do) which, perhaps unsurprisingly, he now has listed for sale to help him pay for that guarantee (maybe we should put a cut price bid in?!). As the restructuring process begins under court protection, the company’s assets are on the block and consist of the following: trading technology and which essentially encompasses the programs that comprise the trading algorithms (value nil?!!); a database with more than 30 years of currency prices and other historical data (Bloomberg, Reuters anyone?); the daily newsletter published by John Taylor since 1981 (toilet paper?); and the FX Concepts’ trademark (value negative?). Collectively we would argue there is about as much value here as a bucket of sand in the desert! Perhaps in a sign that stupidity knows no bounds, a company called Ruby Commodities was prepared to pay $7.48m for these assets. Unfortunately for Mr Taylor, that amount is still a little short of the $79m liabilities the company has… In particular, it is not enough to pay back AMF. With the daily newsletter still left for sale, unless someone pops up to pay $71.5m for this (we’ll bid 71.5c!), then I guess Mr Taylor’s realtor is going to be under pressure to secure a sale, and prompt!

How can a hedge fund be ruined in just a couple of years after having $14bn of AUM? FX Concepts was once the largest hedge fund manager specialising in systematic currency trading, managing at its peak $14bn.

To put the amount into perspective, we can compare it with Paulson’s and SAC Capital’s assets under management that amount to $17bn and $15bn respectively. Not small beer. FX Concepts managed funds for several important institutional investors such as the Pennsylvania Public School Employees’ Retirement System, the Bayerische Versorgungskammer Pension Fund and the San Francisco Employees’ Retirement System. In short, the company was part of the investment “establishment” and which makes its final collapse all the more shocking. The MBS collapse and the subsequent financial crisis changed the foreign exchange game. The complex algorithm behind the trading system that had been profitable for FX Concepts until that point was no longer producing profits. The new norm of the Federal Reserve’s hand in the market has caused problems for many major funds including Paulson and, closer to home, Man Group’s AHL. It seems that what should happen is not. The easiest game in town has been to simply buy an index tracker fund and remain long. FX Concepts’ trading was completely systematic with human emotions being taken out of the process and the powerful computers pretty much entirely responsible for placing the trades based on pre-set parameters. The success of such a system, of course, relies on the assumptions behind it. And who programs it? Of course humans… Post 2007, the rot had begun to set in at FX Concepts. Major macro and FX funds prior to the GFC had largely been successful in exploiting the differences between countries in terms of monetary policy, interest rates etc. But, as the crisis enveloped the globe through 2008-09, all G-10 countries quickly cut interest rates and collectively applied massive liquidity to the market, keeping interest rates at very low levels and, in the aftermath after the sharp volatility, stabilising currencies.

January 2014

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FX Concepts Implosion

With extensive political involvement between countries, the global economy effectively became more centrally planned than market-driven. With very low levels of interest rates across all major economies, interest rate differentials became insignificant. Companies like FX Concepts usually make much of their money out of so-called carry trades (borrowing low yielding currencies and investing in higher yielding ones), but under the new conditions this was not possible anymore, or at least proved very hard to make profitable without taking on even more leverage (echoes of LTCM anyone?). The elimination of carry opportunities mixed with the new “central planning” of the biggest economies completely undermined the value of the existing trading systems at FX Concepts.

It was not only FX Concepts, however, that suffered from the financial crisis and a major shift in public policy, but also all asset allocation funds based on systematic strategies. According to data produced by eVestment, an institutional investor analytics firm based in Atlanta, out of a sample of 70 currency funds with total assets under management of around $20bn, systematic traders lost $1.7bn of assets under management over the past 12 months while discretionary traders gained $1bn. The same company also studied the comparative performance for systematic and discretionary strategies since 2007, coming to the surprising conclusion that returns for systematic trading have been much more volatile and less consistent than for discretionary trading. And when it comes to the crisis period, it seems that systematic trading substantially underperformed discretionary strategies. Under rough economic conditions, systematic managers tend to accumulate big losses, which the discretionary managers seem not to suffer as much.

FX STRATEGY PERFORMANCE 2007 - 2013 The biggest problem with systematic trading is that no matter how complex and how well a model is back-tested, it is always based on past history that cannot possess any predictive power. In 2008, the Federal Reserve and, more recently the Bank of Japan, have engaged in non-conventional monetary measures with the FED injection $3tn into the economy whilst keeping interest rates near zero for approaching five years now.

It also has never been the case previously that all major central banks around the world have adopted the same kind of policies at the same time — testimony indeed to the magnitude of the debt crisis that the global economy faced and in fact still does. More than ever, it seems that non programmable issues such as the speech and tone used by policy makers, public statements and other small clues are important drivers for currencies. As with almost every other trader in a pickle, FX Concepts realised the changed landscape too late…

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FX Concepts Implosion

The Forex game We can actually divide the last 30 years in to two main periods: the first 20 years, where the economic performance of the U.S. was relatively good and monetary policy was more “rules” based; and the last ten years, starting in 2003, during which the U.S.’s economic performance substantially declined whilst monetary policy has been more discretionary and policy makers have been more actively managing interest rates, the supply of money and currency values, all of which completely changed the game for foreign exchange trading. Of course, when you are in the trenches you cannot think, and so many managers have realised this fact too late, after account equity had been eroded dramatically…

“of course, When you are in the trenches you cannot think, and so many managers have realised this fact too late after account equity had been eroded dramatically….”

January 2014

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FX Concepts Implosion

CURRENCY TRADING INDEX PERFORMANCE

The table above illustrates the performance of FX hedge fund managers using the BarclayHedge currency trading index. The bars in the chart show the performance experienced each year for these funds collectively while the blue line shows the compound annualised growth rate, which basically takes into account past performance. For example, in 1996 the CAGR was 12.9%, which means that the index grew an average of 12.7% between 1987 (beginning) and 1996.

It seems that it is becoming ever harder to make money out of FX trading. Central bank intervention has turned the foreign exchange into a very dangerous and unprofitable game. Computer models to trade in this market are useless under the current conditions. If you mix the unprofitability of trading systems with brokerage costs and other transaction costs, you get a negative-sum game. Something that the FX Concepts fund holders sadly found out too late…

The picture painted is very depressing for active FX managers. Until 2003, double digit annual returns were very frequent, but this has not been the case over the last 10 years. In fact, the best year was 2008 when the index grew just 3.5% — given the risks taken on, hardly enough to compensate for inflation let alone pay some poor lowly hedge fund manager’s school fees!

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Top 3 Pan European Contrarian Calls for 2014

TOP 3 PAN EUROPEAN CONTRARIAN CALLS FOR 2014 By Graeme Kyle BA ASIP, Apothem

January 2014

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Top 3 Pan European Contrarian Calls for 2014

CREDIT SUISSE GROUP European banks are so out of favour right now they make income tax look popular. Yet for the quality names in the sector, underlying business conditions are pretty good. Capital ratios have been slowly rebuilt and profitability is improving. Credit Suisse Group (CS) falls into this category. In the Q3 results CEO Brady Dougan reported: “As of the end of the third quarter, we met the 13% CET1 plus high-trigger buffer capital requirement applicable in 2019 with 13.2% on a look-through, adjusted basis.” He continued: “Further reductions in leverage and risk-weighted assets will release capital for future growth especially in (high returning businesses) Private Banking & Wealth Management.” In a nutshell, management are satisfying strict Basel III capital requirements by de-risking and de-leveraging. Capital is being withdrawn from Investment Banking operations via cost cuts and the creation of ‘for sale or closure’ non-strategic units such as the under-performing rates business.

Analysts like what is happening at CS. Earnings estimates have stabilised over the last 12 months and the consensus has ROE rising from 9.4% in 2013 to 10.8% in 2014 which is actually higher than the 10 year average of 9.7%. So why is the stock trading below book value? Using a variation on the Gordon growth model* we calculate the cost of equity to be in the region of 11%, significantly above the equity market as a whole. Given the strides that have been taken to de-risk the business model post Basel III, not to mention the exposure CS has to high growth/high return areas such as emerging market private banking, it is fair to conclude that valuation is anomalously low. Investor sentiment is clearly still very weak. Warren Buffet once said he loves buying great businesses when they are on the operating table. Well CS has been operated on and is now walking unaided out the hospital doors!

CREDIT SUISSE GROUP CHART

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Top 3 Pan European Contrarian Calls for 2014

RWE RWE is under severe pressure from falling wholesale electricity prices in Germany. Q3 showed operating results from conventional generation were down 67% year on year. Wholesale prices (12 months forward) have declined 30% over the last two years and by 10% year to date. Yet retail prices for end customers are rising. This is almost entirely due to the growing levies added to bills to subsidise renewable energy projects. In Germany, electricity from renewable sources is given priority over the grid and is remunerated using a generous system of feed in tariffs (FITs). The sheer number of renewable projects this system has created has left conventional generation on the ropes. The regulator is now under pressure from industry lobbyists to design a fairer system that allows conventional plants to make a reasonable return on capital. Industry sources suggest one solution would be for conventional plants to claim a base tariff when they are running but do not have access to the grid. This would be extremely positive for the bottom line of RWE.

Management aim to improve RWE’s financial position by cutting the 2014 dividend to €1ps (2013: €2ps) and shelving un-economic projects such as the proposed giant wind farm off the coast of Devon. In my opinion this is all in the interest of shareholders. A dividend cut is hardly welcome news, but the stock still yields 4% versus the 10 year bund yield of 1.9%. With a forecast dividend cover of 2.5x, the dividend also has space to grow if generation profits recover. Equity markets are not cheap and dividends may be a key element of investors’ total returns over the next 12-24 months. RWE looks an excellent proposition on income grounds. Technically, the shares are in no man’s land. The MACD weekly is not extended and offers no reliable trading signal. There is technical support in the low 20s which equates to a prospective dividend yield close to 5%.

RWE CHART

January 2014

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Top 3 Pan European Contrarian Calls for 2014

TESCO At first glance, things appear to be going from bad to worse for Tesco. Figures published this week by Kantor Worldpanel show that its share of the UK grocery market has eroded once again to 29.9%. Much of this is down to the continuing vogue of grocery shoppers checking out what’s on offer at German discounters Aldi and Lidl (combined market share up to 7.1%). What is interesting is that 50.1% of all shoppers surveyed have visited either Aldi or Lidl at least once over the 12 week period. Save the dramatic headlines and interpret this in the following way. These stores are used primarily for selective purchases only; they are rarely used for the comprehensive ‘weekly shop’. Okay, this may be enough to dent the dominance of sector heavyweights but, seriously, how long before Tesco improve their sourcing and duplicate the strategy of offering flash sales of £10 griddle pans etc. in order to improve footfall. Aldi and Lidl are talented retailers, but they don’t have a monopoly on those skills. Tesco’s share price reflects the sour investor mood that has engulfed the company.

TESCO CHART

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The medium term weekly chart is dismal — the shares have fallen 26% over the last three years and have under-performed the FTSE 100 by 37%. However, there is a potential support level at 300p. Also if we hit this level in the coming weeks, the MACD weekly could turn at the minus 20 mark indicating an over-sold position and a great entry point for investors. Long-term valuation is also very supportive — see table below. At 300p, the 2014 P/BV = 1.4x reflects huge scepticism amongst investors that market share can recover in any meaningful way and that ROE can mean revert to the 10 year average of 17%. To me, the risk is no longer on the downside with Tesco. Supermarket retailing is notorious for creating cyclical market share patterns amongst the four majors, and with a bit of good fortune Tesco could be running with the baton again before too long, however. With much of the stock-market looking fully valued, you could do worse than selling some of those small cap star performers and re-invest in this sleeping giant.


January 2014

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Dominic Picarda’s Technical Take

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

DOMINIC PICARDA’S TECHNICAl TAKE MY TOP 5 PICKS FOR 2014 Profitable technical trading is typically rooted in hard facts. In most cases, this means following an existing trend, rather than trying to guess when a trend is going to reverse. Nevertheless, it can still be worthwhile to consider where tomorrow’s opportunities may arise. Roaring bull markets often become vicious bear markets, and vice versa. The key to this sort of exercise is identifying a trigger. Simply buying into a strong downtrend on the basis that it is “bound to turn around eventually” is a great way to empty your trading account. Rather than catching a falling knife, therefore, we need to pinpoint the turnaround conditions that have worked in the past for making profitable entries.

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Dominic Picarda’s Technical Take

“simply buying into a strong doWntrend on the basis that it is “bound to turn around eventually” is a great Way to empty your trading account. rather than catching a falling knife, therefore, We need to pinpoint the turnaround conditions that have Worked in the past for making profitable entries.”

January 2014

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Dominic Picarda’s Technical Take

Nasdaq 100 Are the massive gains in US equities over the last year a harbinger of a more sustained economic recovery or a symptom of the generous liquidity being pumped in by the Federal Reserve? My vote is firmly for the latter and I do not think the stock market will prosper as stimulus gets withdrawn next year. The more it goes up meanwhile, the worse the fallout will be.

NASDAQ 100 CHART While I have been obediently following the trend in the tech-dominated Nasdaq 100, the parabolic rise and current monthly overboughtness make me fear a big reversal at some point. A close below the 55-day exponential moving would prompt me to seek short positions here, a stance I’d reverse on a return above that line.

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Dominic Picarda’s Technical Take

Gold Gold has been in a cyclical bear market since September 2011. My fundamental analysis suggests to me that this is a correction within a much larger, long-term uptrend. The key driver of the yellow metal’s price is changes in real interest rates. When rates adjusted for inflation fall, gold tends to rise. I believe that further dips in real rates will be needed going forward to boost economic growth and to prop up asset prices.

GOLD CHART Today’s correction in gold is like the severe one in the middle 1970s. Back then, a good long-term buying opportunity arose when the price finally crossed back above its 10-month exponential average. With the smart money getting increasingly long of gold right now, I would also be willing to buy for the short-term when the 9-day exponential average crossed above the 11-day EMA, and selling up when the opposite happens.

January 2014

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Dominic Picarda’s Technical Take

FTSE 350 Mining The UK mining sector is cheap right now. The dividend yield on the sector is presently much higher than it has been for the last decade. What is surely needed to reignite the sector is sustained economic strength in China and other emerging markets. This is even more important than monetary largesse from the Federal Reserve and other central banks.

FTSE 350 CHART Given its cheapness, the eventual comeback could be very impressive. I would not try and bottom-fish, however. Instead, I would seek to buy as the 13-day exponential moving average crossed above the 55-day EMA. This would serve as a good moment to get long ahead of a new bull market, and, failing that, an opportunity to grab some short-term gains.

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Dominic Picarda’s Technical Take

US Treasury Note future There is a growing consensus that the long-term bull-market in US Government bonds that began in 1980 has ended. I have flirted with this view myself at times, but I am not wholly convinced. America’s economic recovery looks shaky to me and I do not think that it would withstand significantly higher borrowing costs, such as the rate on the 10-year Treasury.

US TREASURY NOTE YIELD CHART The Fed’s plan to pare back its bond-buying programme may not be such bad news going by past experience. The end of Quantitative Easing in 2010 and then in 2011 led to big drops in the 10-year yield. QE tapering and an unanticipated dip in US economic activity in 2014 could do the same. I’d seek to go long of the 10-year note future as its yield dropped through its 200-day exponential moving average.

January 2014

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Dominic Picarda’s Technical Take

USD/JPY The US will try to cut back on its money-printing and bond-buying bonanza in 2014. At the same time, Japan will continue conjuring up new yen out of thin air, in a bid to boost consumer prices and keep Japanese exports keenly priced. As such, the Japanese yen should slide further against the US dollar, against which it has already weakened by some 23 per cent in 2013.

USD/JPY CHART An obvious — and very achievable — target for USDJPY lies around ¥111. Thereafter, I envisage it heading for ¥115 and ¥119. My preferred buying trigger here would be after pullbacks to or through the 13-day exponential moving average.

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January 2014

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Technology Corner

technology corner

A Brief History of 3D Printing BY SIMON CARTER

With the likes of ExOne, Stratasys, Acram and 3D Systems enjoying a remarkable year in the markets, there’s no doubting that 3D printing is catching the imagination of investors worldwide. Is it the real deal however, or another tech based flash in the pan? SBM investigates‌

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A brief history of 3D printing

When the Oxford English Dictionary announced, towards the end of 2013, that the word ‘selfie’ was among the latest crop of freshly coined nonsensical arrangements of letters and syllables to be inducted into the bloated tome, the British media went crazy, quickly publishing lists ranging from “The Year’s Best Selfies” to the “The Year’s Worst Selfies” and everything in between. Of course, people have been taking photos of themselves ever since cameras became lightweight enough to hold at arm’s length, but the press are nothing if not efficient at catching the tail end of a bandwagon. And so we come to 3D printing, 2013’s other en vogue topic. The technology spent most of the year very much in the spotlight, replacing both film and real life as the world’s favourite three dimensional medium. But, as some people would sniffily tell you, 3D printing has been around for a very long time already (since 1984, in fact), so is it another case of the world’s press catching onto something years after it was shiny and new? Is 3D printing just a high-brow version of the selfie? Will the horrifying prospect of a 3D printed selfie ever become a reality? And, hang on, just what is 3D printing anyway? If you want to get a little technical — just enough to set yourself as the ‘expert’ in your group — you’d probably like to know that 3D printing is more properly referred to as ‘additive manufacturing’ (or even stereolithography) and was invented by Charles Hull in 1984.

The idea is a simple one, creating a 3D model of a computer image, allowing designers to quickly produce prototypes before moving on to larger scale testing. The application is also relatively simple with the printer being loaded up with the desired material (or materials in more advanced models) which is then layered successively into a predefined shape. And, as simple as that, you have your print out. Throughout the 1980s and 90s, the technology was something of a niche idea — after all, it didn’t seem too revolutionary given that it is, in essence, very similar to traditional manufacturing robots that remove material from a large block to produce the finished product — with the public at large only hearing tell of headline grabbers such as the world’s first working 3D printed kidney, rolling off the production line in 2002, followed by prosthetic limbs, blood vessels and prototype cars. But something very exciting happened in 2005, something that would set 3D printing on course to becoming a real force in both the industrial and, crucially, the commercial worlds. RepRap, a seemingly random amalgamation of letters that mean little or nothing to anyone, is the brainchild of Dr. Adrian Bowyer of the University of Bath whose ‘Eureka’ moment was an ingenious piece of weird logic.

January 2014

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Technology Corner

Simply, if a 3D printer is capable of printing anything, including intricate moving parts, then there is no reason that it couldn’t print itself. Following this idea through to his conclusion, if this were true, anybody could own a 3D printer thus completely revolutionising consumerism, potentially bringing luxury to the masses. Yet while of course a 3D printer couldn’t create itself from nothing (he and his team of researchers did create both a printer that could print most of its own parts from a minimal starting point, and a printer that could self-replicate), his vision led to an explosion in research into making the technology more affordable, more available, more democratic. In 2010, the average 3D printer cost around £12,500. By 2013, that had dropped to just £600. So 3D printing has enjoyed a pretty solid genesis with the story hitting all the right markers of a natural evolution — normally a sign that it is much more than a flash in the pan. But while history is nice for a story, all that’s really important is the future, and while we’re a good few years away from every home owning a device that can print their every whim, there are many reasons to get excited. Millions of dollars of research money has already gone into printing food with pizzas and pastas leading the way (this was America!) and in September 2013, the New York Times sent a reporter to enjoy a fully 3D printed meal (including crockery and cutlery).

Of course, the relative newness of this phase of 3D printing does lead to volatility in the market with Voxeljet shares jumping up and down since going public in the autumn, and there are bound to be more than a few startups that go to the wall, but what seems clear is that the technology is real, tangible, and here to stay.

Alongside food, we’re also seeing clothing, jewellery, furniture and machinery being printed, and surely it can’t be long before a significant number of homes are downloading custom furniture and consumables designs and printing them instantly.

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January 2014

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Robbie Burns’ 2014 New Year outlook

ROBBIE BURNS’

New Year Outlook Hey, Happy New Year!! As you are reading this I am probably heading down a massive waterslide in Dubai with my nine-year-old son. Can’t stand UK winters so hopefully we are currently enjoying some warmth and light in a very nice hotel.   Of course, I am writing this in mid-December which is always a worry. What if the share I write about produces the mother-of-all profit warnings? I’m going to look like a right idiot right? Oh well, who cares, I’m in Dubai, remember?!

The Ed mails me and says he’s doing a top picks for 2014 edition, anything will suffice: stock, index, currency… you name it! Just get it to me before Xmas! Right, so I’m a miracle worker as well as a soothsayer!   Index... currency... who does he think I am, Dominic Picarda? He’s confused because we are both bald.   I have no idea on indexes (or is it indices? See, I told you I had no idea) or currencies, but I find Dominic’s columns on them strangely relaxing and entertaining. I don’t know how he does it.  Fridays I sit in the bath and read his stuff and enjoy it even though I don’t trade the things he writes about.  Look, us baldies have to stick together alright?! BTW bald guys work harder and we’re better in bed. Seriously… Dominic has some amazing moves, apparently all based on support and resistance...   Anyways, I digress… I dunno about picks for the New Year. It’s all very well picking them, but it’s unlikely they will be held for a whole year. But like a good little contributor, I’ll do what he asks.

I thought I would go for it and get you all excited by picking five risky ones that I think will double.   My reasoning is most Spreadbet Mag readers are essentially gamblers. Be honest, you’re not interested in buying one of my boring ideas that makes widgets and gradually goes up are you?   You want the next big thing that’s gonna double! Yeah!!  I did that already for you in the last issue with Applied Graphic Materials!   So here are my five picks with the potential to double in 2014. But with double the potential comes elevated risks. Or else they wouldn’t have the potential to double now, would they?   So, chances are one or two of these will halve! Don’t ask me which, I don’t know, do I? That’s up to you. But if you buy them, you must realise they are high risk and could go horribly wrong. And if they do, just get out! Don’t just sit around and wait for them to halve.

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Robbie Burns’ 2014 New Year outlook

“So the Ed mails me and says he’s doing a top picks for 2014 edition, anything will suffice: stock, index currency… you name it! Just get it to me before Xmas! Right, so I’m a miracle worker as well as a soothsayer!”

January 2014

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Robbie Burns’ 2014 New Year outlook

Okay, here we go and just like on ‘I’m A Celebrity’ they are in no particular order… 1

SEE - Seeing Machines. 

(I bought at 5p and 6.7p). Of course, right now it’s a small company just scratching a profit. But, amazing potential IMO. Spots tiredness in drivers and so there are applications for it everywhere, such as coaches, planes and the mining sector (yes that pariah!). It’s winning contracts and recently raised £15m but may need to raise more. The potential is so big though. It keeps announcing deals with big companies like Caterpillar and BHP Billiton.  Might even treble this one, if the deals really come through.

2

VEC - Vectura

I bought these ages ago at 72p, but bought more recently at 101p. A drugs company (yeah!) with a compelling pipeline in the airways area including asthma. The great thing is, it has tons of cash so doesn’t look like it will be held back by fundraising. Any approvals will see the price shoot higher IMO. And, as it has some cash, it means the risk isn’t too great here.

3

PRES - Pressure Technology

Bought at 420p. This one has a record order book, profits leaping higher, strong dividend rises and very confident statements — all lead to a must buy for me. And despite recent rises, it still looks cheap valued at under £50m. Could easily see 100m cap in 2014 for a nice double. The wide spread though, is a problem, so nice to buy on a weak day if possible.

4

MOPOWERED

Literally as I write, just about to float on the market at a market cap of around £15m and so I haven’t been able to buy any yet. By the time you read this, I will definitely have bought some and I reckon an immediate double on the list and a market cap of £30m is achievable.

I like the look of its market, right place at the right time I reckon.   The main thrust of the business is making websites compatible to be viewed by mobiles and enabling website owners to make more from mobile phone visitors — all very techy. Hey, maybe this mag could use it?

5 FXI - Fusionex I got these at 303p. It’s in a big growing sector — enterprise software/Big Data solutions. It likes simplicity, like me! It’s just launched its new software, “Giant”, and is building some decent partnerships. If they continue to announce contract wins, the price could double in 2014. It’s the biggest and most liquid of the five. So there you are then. Remember with small, high risk companies if things go wrong, they can be hard to sell so never buy too many (not that you’ll listen of course). Just remember that please though or else you could be celebrating next New Year with a can of coke and a bag of cheese and onion which is all you’ll be able to afford. And just because I bought them, doesn’t mean you should; do your own research, as they say! As you are spread betters though, I’ll leave you with a share begging to be shorted. So how about one that could halve?!   Carpetright (CPR). I’ve been shorting since 700p. And more at 600p, and there should be more downside to come…  It is forecast to make £9m profit (maybe!) and yet its market cap is over £360m. That’s crazy, more than 40x forecast profit to cap! My view is the right price is say 12x forecast profit, call it £110m.  

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Robbie Burns’ 2014 New Year outlook

Blimey, let’s go for it and double that! It’s still overvalued by 50% in my opinion. Call it a share price of 300p to be really generous. Personally? I’d give you 150p for them. The only reason the shares aren’t way lower is they are tightly held and no-one is selling... but cracks are beginning to appear.  

Company directors, Lord Harris and Martin Harris, sold 2.3 million between them at 530p — “For personal wealth management reasons”. LOL, as they say!   Have a brilliant start to the year and see you again when I get back from Dubai!    

“So, chances are one or two of these will halve! Don’t ask me which, I don’t know, do I? That’s up to you. But if you buy them, you must realise they are high risk and could go horribly wrong. And if they do, just get out! Don’t just sit around and wait for them to halve.”

January 2014

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Patel On Markets

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

Alpesh’s Top 5 Trading Ideas for 2014 1

EUR/USD: Short

The euro seems to be overvalued versus the US dollar, certainly when you take a look into the respective regions’ fundamentals. Europe is still struggling to shake off the aftermath of the financial crisis and finally break free from the “stop-start” recession. It is, in fact, the Northern countries and in particular Germany where growth prospects look the best and, as ever, the periphery dragging the euro-zone’s outlook downwards.

Unemployment is consistently dropping and the Fed has started reducing its asset purchases program as the domestic economy now seems competent enough to handle less stimulus. My view for 2014 is to short the euro versus the dollar. I believe that the currency should retreat and the 1.32 to 1.35 region looks more rational to me.

In contrast, the US is recovering strong and continues to beat the market’s expectations.

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Patel On Markets

EUR/USD CHART

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Patel On Markets

2 GBP/USD: Mean reversion on ranges’ extremes I expect that “Cable” will be one of the most volatile currency pairs in 2014 and I am looking to take advantage of its swings during the coming year. The UK is recovering well and the domestic economy is growing back to pre-recession levels. Jobs data are coming in above expectations and the accommodative BoE policy is helping the manufacturing and services sectors’ growth. The US is also on a good path of progress and following the Fed’s signal that it is to slow down its MBS and Treasury assets’ purchases, the dollar will also be back in the front seat.

Thus it will be an interesting struggle to see which currency will emerge stronger, as ever, only the passage of time will tell. Mean reversion tactics at extreme levels will be my tactic for this year.

GBP/USD CHART

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Patel On Markets

3 EUR/GBP: Short The EUR/GBP pair will also be on my radar for the coming year. The difficulties faced by the euro-zone in attempting to harmonise its recovery results in a strong Northern Europe and a weak periphery. As I am bearish the euro and overall bullish the pound, shorting the EUR/GBP pair could also be a good strategy for next year.

The currency pair has been in a downtrend since the middle of 2013 and I believe that this trend will continue moving into 2014. The key level to watch here is the 0.83 level and should this be broken, then a rate of 0.81 seems to be my next target. I am intending to short the currency pair in the new year.

EUR/GBP CHART

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Patel On Markets

4 Gold: Short Gold has lost its lustre in 2013 and prices have fallen nearly $500 since the beginning of the year. However, I don’t see this sell-off stopping now as we move into 2014. The rising dollar will put even more pressure on the yellow metal’s price, and as demand for the commodity is receding I believe that gold will fall even lower.

Furthermore, the stronger dollar will attract more flows in 2014 as it will be considered once more the safest refuge for investors looking to deposit funds. Thus I will be a seller on gold for the new year and I am looking for gold to devaluate even further down to $1,000 per ounce.

GOLD CHART

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Patel On Markets

4 Stock Picks: Blackstone Group/Carlyle Group On the stocks’ front, I am browsing through my proprietary filters and two US stocks are attracting my attention: Blackstone Group and Carlyle Group — both, interestingly, Private Equity companies and both of them looking good in terms of fundamental values with strong earnings and good growth potential.

They both have strong track records through tough times. With the US economy going from strength to strength, I am looking for the financial sector to pick up pace as well and I will be looking to get myself into these two stocks for the 6-12 months.

BLACKSTONE & CARLYLE GROUP CHART

To receive my free daily newsletter or to subscribe to my premium NewsletterPro service, please visit www.InvestingBetter.com .*All charts have been created using the Sharescope Pro platform and my proprietary Alpesh Patel filters.

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What’s new in spreadbetting?

What’s new in spread betting? As we enter 2014, the spread betting industry continues to go through change. Recent statistics out of Investment Trends revealed a decline in active spread bettors during 2013 – something that came as a surprise to us given the continuing bull market in equities and the natural bias of punters to be long the market.

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What’s new in spreadbetting?

It seems that in order to thrive in an increasingly competitive marketplace dominated by the giant that is IG, the smaller players are having to increasingly turn to innovation. Two dominant new themes look to make themselves felt in 2014: Direct Market Access Spread Betting, and what is effectively a cut in spreads but in a different guise – stakes rebates. Both Intertrader and Cantor Index are looking to break into the DMA field — essentially a mechanism where you are able to act as a “market maker”; that is you can create the prices that you wish to buy and sell at and, if you are filled on these prices that you set, then you can take out the underlying market spread. In Intertrader’s case, the DMA facility is offered on instruments other than equities, whereas in Cantor’s case, the facility is offered actually on equities. InterTrader Direct facilitates via one account the ability to trade spread bets on forex, indices and commodities direct into the market via the MT4 platform. All your spread bets are automatically wrapped into pound-per-point orders that trade in the underlying market. On forex, this means you can trade at true interbank market prices (plus InterTrader Direct’s dealing spread) normally available only to spot forex traders.

“Two dominant new themes look to make themselves felt in 2014: Direct Market Access Spread Betting, and what is effectively a cut in spreads but in a different guise – stakes rebates.” The other ground-breaking part of the InterTrader Direct service is their ‘market-neutral broker’ model. By strictly matching each spread bet with a trade in the underlying market, InterTrader Direct is committed to hedging all client positions 100% — something that not every spreadbet firm does and leaves them open to accusations of “trading against” their clients. In effect, it is you versus the market not you vs. the spread bet firm. InterTrader Direct is relying on clients feeling a greater sense of trust due to the transparent trading model, and that their spread betting provider is working with them not against them – something you cannot say about the major companies.

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What’s new in spreadbetting?

“In effect, it is you versus the market not you v the spread bet firm. InterTrader Direct is relying on clients feeling a greater sense of trust due to the transparent trading model, and that their spread betting provider is working with them not against them – something you cannot say about the major companies.” So how does InterTrader Direct make money if it never stands to gain from client trades? Simply through the commission per trade, which for spread betting markets is charged as a small increase to the underlying market spread. Managing Director Shai Heffetz said: “By bringing the advantages of pound-per-point spread betting to the MT4 platform, we aim to give serious traders what they want — tight spreads, direct access and the most powerful trading tools.” InterTrader Direct is backed by online gaming giant bwin.party digital entertainment plc. You can find out more about this innovative new spread betting service at www.intertraderdirect.com or call +44 (0)20 3364 5189. In Cantor’s case, it is only equity spread bets that are offered as a DMA facility. It is a natural evolution of their existing CFD business, but now of course with the tax benefits of spread betting. DMA equity spread bets are similar to DMA CFD contracts, with commissions and finance rates agreed on account opening. Normal spread bet accounts only let clients ‘hit the bid’ when selling, or ‘lift the offer’ when buying; DMA equity spread bet clients, however, can work their order in the underlying equity market to the same level as DMA CFD clients. Unlike commonly traded ‘daily rolling’ or ‘quarterly’ spread bets that many companies offer, there is no need to constantly open and close expiring bets. This keeps the opening price intact so that Cantor’s clients can easily monitor their running profit and loss on open positions Cantor also runs no positions against DMA equity spread betting clients as each equity spread bet is hedged in the underlying equity market. This means that as with InterTrader Direct, their interests are completely aligned with their clients, unlike traditional spread bet providers that can look to profit from client’s losses through un-hedged positions.

Due to the professional nature of the product, account openings are subject to a £25,000 minimum. For more details contact sales@cantorcapital.com or call 0207 894 8883. The other area that seems to be gaining momentum is the “spread rebate” idea. Cantors actually offered this last year and CMC have now jumped on the bandwagon. Basically, the firms rebate a portion of the actual spread to you, and so it is essentially a spread cut. One firm that acts as a “consolidator” of these spread backs and indeed obtains them for you even where the firm itself does not offer it is Spreadback. Spreadback act as a marketeer for the brokers by introducing new traders to them. When these introduced traders (spreadback members) complete a trade, Spreadback get paid a sales commission. Spreadback then pass a percentage of their commission back to that spreadback member in the form of monthly cashback. (Spreadback membership is free of charge). Here’s an example: ‘Gold Rolling Daily’ may be quoted at 1232.0 to 1232.5, a difference of 5 between where you can buy at 1232.5 and where you can sell at 1232.0. If you were to buy and sell immediately for £10 a point then you would have lost £50. This is because you bought at 1232.5 and sold at 1232.0, a loss of 5 points at £10 per point. This £50 lost is your cost to trade and is what the Broker charges you. As a SpreadBack member, on a 15% cashback deal, the rebate for this trade = 15% of £50 = £7.50 (the net result being the trader pays £42.50 instead of £50 for that trade because they are a spreadback member). If you already have an existing trading account with a broker, in the majority of cases you will still be able to receive cashback on your trades. Contact Spreadback and a Spreadback representative will check with the broker if you are eligible. For many members, Spreadback.co.uk gives them the opportunity to save thousands of pounds they would otherwise have given to their spread bet provider. For more details visit www.spreadback.co.uk

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School Corner

school corner

Parabolic SAR Explained by Thierry Laduguie of e-yield The parabolic (SAR) indicator was developed by J. Welles Wilder, the creator of the Relative Strength Index (RSI) and the Directional Movement Index (DMI). His studies are discussed in depth in the book New Concepts in Technical Trading Systems. The parabolic (SAR) is a time/price reversal system that is always in the market. The “SAR� stands for Stop and Reverse, which explains why this indicator is never neutral. The position is reversed when the stop loss is hit.

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School Corner

“The “SAR” stands for Stop and Reverse, which explains why this indicator is never neutral. The position is reversed when the stop loss is hit.” As you would expect with an indicator that follows the trend, the parabolic (SAR) is a trend following indicator. On a chart, the indicator is represented by a dotted line above or below prices. Here is an example:

S&P 500 DAILY CHART

The bar chart above is that of the daily S&P 500, the dotted lines represents the position of the parabolic (SAR). Dots below prices indicate long positions; dots above prices indicate short positions. When a trend begins, the price will rally above a red dot; when this occurs the short position is stopped out and a new long position is triggered. At this moment, the first blue dot is placed at the most recent low price. As prices move higher, the blue dots which represent “stop and reverse” points will move up with prices. The trend is up, and as long as prices stay above the blue dots, the long position remains open.

A reversal signal will be given when prices drop to a blue dot; when this happens the long position is closed and a new short position is opened. As you can see, the parabolic (SAR) is a trend following indicator with a trailing stop loss. Notice that as prices trend higher, the rising dots below prices tend to start out slower and then accelerate with the trend. In a downtrend the same thing happens, but in the opposite direction. That’s because Wilder built an acceleration factor into the indicator.

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Parabolic Sar Explained

Construction Explaining how the indicator is calculated is beyond the scope of this article. For a complete description of the indicator please refer to the book New Concepts in Technical Trading Systems. Should you wish to use this indicator, I suggest that you buy a technical analysis software that comes with it or you may find this indicator free of charge on some TA websites. Basically, when plotting the parabolic (SAR) on a chart you should select 0.02 for the acceleration factor. The software will then plot the dots above and below prices.

Interpretation

SABMILER DAILY CHART

As the charts show, the parabolic system works very well in trending markets. Bullish signals on the S&P 500 chart have been profitable (blue dots) as most of the trending moves were captured by the indicator. However, this is an exception. According to Wilder himself, strong trending periods occur only about 30% of the time. This means markets spend a great deal of time going sideways. As you can see on the above chart of SABmiller, the stock has been trading sideways since June and as a result the parabolic signals have not been profitable. In conclusion, the parabolic system is a robust system in strong trending markets. It enables traders to stay with the trend as long as possible and provides a timely exit strategy. The drawback is that markets do not trend all the time, during the non-trending periods the system will whipsaw constantly and the profits made during trending periods will be lost during non-trending periods.

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John Walsh’s Monthly Trading Record

TRADING ACADEMY WINNER

John Walsh’s monthly trading record It is amazing to think that a full year has passed since winning the City Index Trading Academy which, for me, I think is worthy of a mention as it’s something I’m very proud to have achieved. “Time flies when you’re having fun” as the saying goes and what a year it has been. I have certainly made some mistakes along the way since I began really trading my own account but, what is important to say, is that I have learned from them and will have finished the year by the time you read this with a profit that I am happy with. People who don’t learn from their trading mistakes are destined to repeat them; are you going to be one of those or not? Revisiting ‘The Rolex Trading Challenge’ I set myself, with the recent selloff in the States which is, of course, the focus for my trading in this task (US equities) and my natural bias to go long,

I have in fact been sitting on my hands quite a bit and just watching and waiting. Over the last month I closed four trades: Constellation Brands (STZ), Comcast (CMCSA) — both at a profit— Molson Coors Brewing (TAP) and Bristol-Meyers Squibb (BMY), on the loss side (my first losses in fact since early October). As I was taught, I didn’t like the way the stocks had been acting and felt there was no point letting them possibly get stopped out so they were manually closed by myself, something that I feel you need to be able to do if you want to be a successful trader.

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John Walsh’s Monthly Trading Record

“As this point into my Rolex challenge, I have made 36 trades in total with 21 winners, 7 losers and 8 currently running which leaves my account for this challenge currently (not including the live running trades) at a profit of + 37.15% (Editor interject — that is a cracking return John!). The Rolex is not on the wrist yet, but as they also say: “Rome wasn’t built in a day”…” The trades from last month that are still running are: Life Technologies (LIFE), Paychex (PAYX), Colgate–Palmolive (CL) and Starwood Hotels & Resorts Worldwide (HOT). I also have four other new positions running at the time of writing as I feel, for now, the selloff in the equity markets seen in early December is over. These are Brinker International (EAT), Autodesk (ADSK), Intuit (INTU) and Mondelez International (MDLZ). As this point into my Rolex challenge, I have made 36 trades in total with 21 winners, seven losers and eight currently running which leaves my account for this challenge currently (not including the live running trades) at a profit of + 37.15% (Editor interject — that is a cracking return, John!). The Rolex is not on the wrist yet, but as they also say: “Rome wasn’t built in a day”… So, on to 2014… My plan is still to run my daily scan that I have mentioned in previous months which helps me take the emotion out of my stock picking and gives me a place to start my research. “A man with no plan is a man with no future” — I’m full of the sayings this month, aren’t?! I have five stocks that I think are ones to watch next year and here they are: Las Vegas Sands (LVS) – A developer of integrated resorts that feature accommodation, gaming, entertainment and retail, convention and exhibition facilities which, at the time of writing has a Market Cap of $62.75bn and whose stock price is up 65.88% YTD having increased earnings per share (EPS) every quarter so far this year. It still has a long way to go to get to its all-time highest stock price of $138.93 back in Oct 2007, but 2014 could very well be the year it gets there… Under Armour (UA) – Is a developer, marketer and distributor of apparel, footwear and accessories for men, women and youths. The company’s products are sold worldwide and are worn by athletes at all levels. At the time of writing, the company has a Market Cap of $8.81bn and the stock price is up 72.45% YTD being in a clear uptrend since March 2009.

Who am I to argue with that? I can only see an even stronger stock price in 2014. TripAdvisor (TRIP) – The online travel research company which, at the time of writing, has a Market Cap of $12.68bn and whose stock price is up 94.13% YTD with a stellar recent record in EPS growth has, in my opinion, an increasingly unassailable online presence which I think will only continue to grow in 2014 and so propel the stock price higher. Gilead Sciences (GILD) – The research based Biopharmaceutical company that discovers, develops and commercialises medicines has seen its stock price rise 94.44% YTD. The US Food and Drugs Administration recently approved their drug called Sovaldi, which is a treatment for Hepatitis C. With a solid uptrend on the chart, I only see more upside to come in 2014. Constellation Brands (STZ) – The wine maker and also marketer of imported beer in the United States which, at the time of writing, has a Market Cap of $13.125bn and whose stock is also up 95.87% YTD. The uptrend is longstanding and I believe will keep going well into 2014. As you can no doubt see from the above, I’m very much a technical trader who follows the charts, looking for momentum but with also a touch of fundamentals added in in order to help me see where the company has been and where it is likely to go. Basically, at the centre of my trading is “The trend is your friend”! That’s enough from me for this year anyways. I hope it has been a prosperous one for everyone and I look forward to writing my next piece in the New Year! Please continue to follow me on Twitter @_JohnWalsh_ where I do my best to keep everyone up to date with my trades as I open and close them plus any other thoughts I may have regarding trading. Remember: (for the last time this year) you control the trade; the trade does not control you. John

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FTSE Day Trader 2014 outlook

BY NICK HILSDEN

FTSEDayTrader.coM

2014 outlook As I write this piece in mid-December, mince pies at the ready, it seems like we are just about to start the year-end rally. 2013 has been the year of the recovery, and the recovery that no one saw at that (except George Osborne — well he had to be finally right!). The US markets have continued to make new record highs this year and by the time this is published we might well have seen a new record high on the S&P, perhaps towards 1840. On the FTSE, I am actually expecting a year end close around 6800, and so we’ll see if I have egg on my face when this is actually published…

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FTSE Day Trader 2014 outlook

After a strong close to the year I expect that tapering of the QE program will in fact start to weigh on the markets early into 2014 assuming that the economic data continues to paint an improving picture over the pond. In fact, I would expect that tapering will commence mid Q1. At the announcement of this, then a dip to near 6000 cannot be ruled out as we approach the end of the spring period and the onset of the usual “Sell in May and go away” (which I do intend to do this year!!!).

There seem to be a confluence of supports around the 6000 area, and which is the site of the 200 day exponential moving average. The recovery in the UK is likely to gather pace as the coalition looks to prepare for a more confident economic back-drop in the run up to the 2015 election, and where the Conservatives will be hoping to gain a sole party win rather than another coalition with the LibDems! This will probably act as a strong tailwind to UK equities and could result in the UK being one of the better global markets next year.

Next year is, however, likely to be very much a year of two halves for the FTSE, and I am targeting 7300 or beyond in the second half. I base these estimated figures on the weekly channels that you can see in the chart below.

FTSE 100 POSSIBLE 2014 ROAD MAP Once the tapering reaction has been absorbed by the market, we should then climb towards the 6750 area, where I expect another stutter as the usual summer lacklustre backdrop takes hold. The 6750 is site of the declining trend line from the recent highs seen this year, and I expect the third test to ultimately break it to the upside. I have plotted arrows to indicate the possible route. I won’t try and hazard a guess as to any geopolitical occurrences that might happen as that really is just pure speculation (!) To learn more about my daytrading of the FTSE then visit www.ftsedaytrader.com for more details.

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zakscafe@t1ps.com

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Markets In Focus

MARKETS IN FOCUS DEC 2013

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Markets In Focus

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MAGAZINE

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

January 2014

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Spread Betting Magazine v24