OC ED T IT 14 IO N The e-magazine created especially for active spread bettors and CFD traders
Issue 33 - October 2014
An SBM Energy Special Profit from the small cap energy specialists
www.financial-spread-betting.com
THE UK’S ONLY FREE ONLINE FINANCIAL MAGAZINE! THE “NAKED TRADER” ROBBIE BURNS RETURNS!
ZAK MIR’S MONTHLY PICK IS JUST EAT
KEN GRIFFIN IS THE FUND MANAGER IN FOCUS
SPORTING INDEX’S PREVIEW OF THE OCTOBER SPORTS ACTION
AND MUCH, MUCH MORE - PACKED FULL OF TRADING 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.
James Faulkner A true stockmarket anorak, James Faulkner began investing in the stock market in his early teens. James is a devotee of the PEG-based growth investing model pioneered by Jim Slater in his seminal book, The Zulu Principle, while also being t1ps.com’s resident economic ‘guru’. James is an Associate of the Chartered Institute for Securities & Investment and holds the CISI Certificate in Investment Management.
Richard Jennings Richard was the founder and original inspiration behind Spreadbet Magazine. A prolific trader for many years and former institutional fund manager, he holds the CFA designation and now runs the unique tax free investment house www.titanip.co.uk. A natural contrarian and true to his Yorkshire roots, his primary investment approach is of a value bias.
Samuel Rae Having completed his Economics BSc Degree in Manchester, Samuel Rae quickly discovered that the retail Forex industry was for him. His personal trading style combines classic candlestick analysis with a simple, logical and risk management driven approach to the financial markets - a strategy that is described and demonstrated in his best selling book, Diary of a Currency Trader.
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.
4 | www.financial-spread-betting.com | October 2014
Editorial List EDITORIAL DIRECTOR Richard Gill
Foreword I am not sure how merit worthy it is having a mischievous streak, alongside cynicism and a tendency towards schadenfreude. But as you might imagine the month of September brought with it opportunity to flex all these traits, and many more related ones.
EDITOR Zak Mir CREATIVE DESIGN Lee Akers www.cfdmedia.co.uk COPYWRITER Seb Greenfield EDITORIAL CONTRIBUTORS Alpesh Patel Richard Jennings Robbie Burns Filipe R Costa Simon Carter James Faulkner Samuel Rae Dave Evans Patrick Callaghan Jim Mellon
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.
The occasion was of course the Scottish Referendum, an event covered in such a painfully one sided fashion in the Unionist media (the separatists were relegated to the streets) that I am certain observers in the Kremlin and Pyongyang could only look on in wonder. The lesson to learn from this particular episode could very well be that there is nothing like a “democracy” to show how a dictatorship should work. Indeed, it was surprising that the vote on September 18th was actually as close as 45% - 55%. The fact that it was impossible to read a headline anywhere which was not threatening, bullying or cajoling would be “Yes” voters to take the High Road gave the whole exercise a distinctively Orwellian hue. From my perspective as a Glasgow born observer, the economic disaster and the alleged imminent starvation of newly independent Scottish citizens would have been worth it just to see the losing faces of Messrs Cameron, Milliband, Brown and Darling. Interestingly enough, despite all the promises of Better Together, the FTSE 100 fell a couple of hundred points in the wake of the “No” victory. Sterling could only muster a token rally to $1.65. The conclusion is that while this may have been a case of it being better to travel than arrive, it could also be the case that the United Kingdom will never quite be the same again, especially in terms of foreign investors admiring our “safe haven”. But it is not just the Scottish issue which has been focus over recent weeks. The “smart” money has been willing the stock market into crash mode since the start of 2014 – the year when the QE punchbowl with its ultra low interest rates would finally come to an end. In fact, it now looks as though 2015 may be the year when rates in the US and UK may finally get hiked, if excuses such as low wages, deflation and even geopolitical factors can no longer be resisted. In the meantime though, the S&P and the Nasdaq continue to soar, and it would appear that the momentum on the buy side is simply too strong. True, a geopolitical shock such as Russia / Ukraine, or even an expansion of Ebola out of Africa could spook the markets. However, this is not the argument of the bears. They have been saying that equities are overvalued – painfully so. If Putin or an obscure disease do cause a 20% correction for the FTSE 100 or the Dow it would not be the bears getting it right, especially as their one note song has been playing for the best part of five years. As I said in a recent Spreadbet Magazine blog, the doomsters have got it wrong “even if there is a crash tomorrow.” It would appear that I am not alone as we discover in this month’s interview with mega stock market bull Andre Minassian. Enjoy this month’s issue and happy trading. Zak
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.
October 2014 | www.financial-spread-betting.com | 5
Contents
Three Small Cap Energy Focused Stocks to Buy Three small cap energy stocks to buy - James Faulkner of t1ps. com looks at three trading ideas in the small cap energy arena.
60
08
16 20 28 45 49 69
Zak Mir Interviews Andre Minasian Zak Mir speaks to Andre Minasian, CEO at vwww.clevergamesuk.com, which provides a serious alternative view of trading in the stock markets.
The Best of the Evil Diaries Highlights of what infamous short seller Simon Cawkwell (aka Evil Knievil) has been trading and gambling on in recent weeks.
Fund Manager in Focus Ken Griffin of Citadel is in the spotlight this month.
Robbie Burns’ Trading Diary The “Naked Trader” Robbie Burns returns from his holidays and covers how to make money on “boring” shares.
Alpesh Patel on the Markets Fund manager Alpesh Patel looks at six trading tools you can use to consistently profit from the markets
Mellon on the Markets Read the latest thoughts and trading ideas of multi millionaire investor and entrepreneur Jim Mellon.
Small Cap Corner - ITM Power James Faulkner returns and looks at how you could profit from hydrogen energy systems specialist ITM Power.
6 | www.financial-spread-betting.com | October 2014
Zak Mir’s Monthly Pick SBM editor Zak Mir takes a technical and fundamental look at Just Eat.
The Growth of Equity Crowdfunding Platforms Donald Gillies of crowdfunding platform Fireflock argues that equity crowdfunding is not a new concept.
55
75 36
80 86 92 96 101 106
The day of reckoning for equities continues to be postponed… Richard Jennings and Filipe R. Costa ask if there is still upside potential for the equity markets. Or are stocks way over-valued.?
Binary Corner Dave Evans of binary.com examines trading opportunities in the US and New Zealand dollars.
Sporting Index’s October Sports Preview How should you bet on the upcoming horse racing, Formula 1 and NFL action? Find out here.
School Corner - Stop Loss Orders Maria Psarra, Head of Trading at Prime Wealth Group, looks at how to effectively use stop loss orders in your trading.
Currency Corner New SBM contributor Samuel Rae, author of the best selling book “Diary of a Currency Trader”, argues the case for a further rise in the US dollar/Yen.
Technology Corner SBM’s resident technology specialist, Simon Carter, takes a look at Acorns, a revolutionary new iPhone investment app.
Markets In Focus A comprehensive markets round-up of under and out performers during the month of September.
October 2014
| www.financial-spread-betting.com | 7
Zak Mir Interviews
ZAK MIR INTERVIEWS
ANDRE MINASIAN
This month Zak interviews Andre Minasian, CEO at www.clevergamesuk.com, which provides a serious alternative view of trading in the stock markets. Zak: I first came across the “Minasian” phenomenon on TipTV, where it was actually refreshing to hear someone make a strongly positive call in the stock market, as opposed to many traders and so called “market professionals” who appear to be permanent doomsters. Firstly, why do you think it is fashionable for so many to adopt a negative line, and is this anything more than the fact that markets go down more quickly than they go up, or that most retail investors are long and they like to go against the herd? Andre: I think all of the above to a certain extent. The fund managers and analysts need to come across as conservative and cautious in their approach as their most important instinct is to keep their jobs. At the same time I feel that quite often buy, sell and hold calls are made on certain stocks – and even the markets overall – to move the retail investor to the direction to suit themselves. I gave up reading or listening to any calls within the first year of my trading life, as almost always the calls were wrong, changed within days, and almost never benefited the retail investor. To me, it is all noise and my suggestion is not to take any notice of them. Most of the time I am unaware of the calls that are being made as they seem irrelevant.
Let’s just say that I have learnt to only trust my own judgement. At least then I have only myself to blame for getting it wrong. Zak: I would like to ask you whether you are a natural bull, or whether it is just the post financial crisis set-up that means you are looking on the bright side. Andre: I am not a natural bull. I do not see the calls I make as bullish or bearish, I simply try to figure things the way they are. Once we have reached the end of the current phase of the bull market you will probably see me making bearish calls until the time that we reach the limits of the correction and the markets become a buy again. My main and only purpose is to make money from the markets. Having said that, I would rather make money from a bull market than a bear market. It just feels more natural. Zak: It is difficult not to be bowled over by the contents of the www.clevergamesuk.com home page where you take “A Serious Alternative View of Trading in the Financial Markets.”
8 | www.financial-spread-betting.com | October 2014
Andre Minasian
“I gave up reading or listening to any calls within the first year of my trading life, as almost always the calls were wrong, changed within days, and almost never benefited the retail investor.�
October 2014
| www.financial-spread-betting.com | 9
Zak Mir Interviews
For instance, the last few years for you have apparently been something of a lap of honour. In 2008 you predicted the major indices would reach new record highs, despite the gloom of the time in the aftermath of the fall of Lehman Brothers. The call for Dow 14,000 proved to be right on the money, with a call of 17,000 being hit this year. But what is interesting about all of this is the way that you do not reveal your methodology, something which many comparable “gurus” do. Can you give us at least a basic outline of how you achieve your predictions, or whether it is simply the product of years of experience? Andre: A very interesting and often asked question. It is of course many years of experience, thousands of hours of analysing, staring at the monitor, watching events unfold and seeing what they bring as a consequence. But the bare truth is that at the end it all comes down to instinct and intuition. Without sounding arrogant, I started making correct calls within the first year of trading. As far as methodology is concerned, the macro economy, macro geo-political events, agendas and looking at the drivers of events – and especially the people involved in them – are what has enabled me to make the correct market calls so far. More often than not, you just need to look at a few drivers of events and the people driving them in the macro geo-political scene to get the picture and what I call “THE GAME PLAN”.
“More often than not, you just need to look at a few drivers of events and the people driving them in the macro geo-political scene.” I believe the markets are driven by those game plans rather than the simple supply and demand and speculation scenarios that most people and even sophisticated traders assume about the stock markets. Apart from the general market bull and bear calls, I have very often made calls on individual stocks and exact prices that they will reach, and their fluctuations.
I see it all coming from a passion I have for the markets. When you have passion about anything, you learn fast. You often see things that others miss, you approach it with absolute conviction and you never tire of it... and that is when you get intuition. Finally, I never wanted to be a “guru” or even ever have a website. All I wanted to be was a trader doing my thing. But I have been kind of elevated to “guru” status by traders who did not want me to stop putting my thoughts out there. Even the creation of Clever Games was from a meeting I was asked to go to by some young guys in London who wanted me to have a specific place to write and be contacted. They had no other motivation except for me not to stop writing my thoughts and calls publicly. Zak: One of the biggest problems that many traders and investors have is that they can be correct on the direction of a stock or market, but are unable to manage risk, getting kicked out of what would have been correct positions in the process. This is largely due to being over leveraged and not appreciating the effect volatility has on margined trading accounts. Is this an area you advise on?
Andre: Being over leveraged as you rightly said is in my opinion the biggest reason why a lot of traders are taken out of the market. This is something which is discussed during my trading courses. Zak: What is the USP of what you offer as opposed to the other offerings in the market place for retail investors? Do you not regard options trading, in which you give guidance, as being overly risky for the average private investor?
10 | www.financial-spread-betting.com | October 2014
Andre Minasian
Andre: Seriously, I am not aware of what others are offering. I suppose what sets my courses apart is… me and the way I do it. My angle on things and the passion and honesty I have in making sure I prepare someone for what they intend to do. My intention is to give to the course far more than I receive, which is how I try to conduct my life in general. The course was created because people asked me to do it, not because I had a sudden brain child or thought, “Hey, let’s start some courses”. Option trading is risky of course, but I do not see it as more risky than going long or short or leveraging on shares. My options course is specifically about index options and not stock options. Stock options are too volatile, but indices are manageable. The courses are for people who want to do short term trading. I am starting a course in November called “How to trade stocks” for beginners, intermediate and advanced levels as I feel I might be able to benefit more people that way. Most people are scared of options and will always be. If so, then come to my stock trading courses. You will certainly get the benefit of many years of experience. It might set you up as a very successful private trader, but note that it’s all about the passion. The courses are a “one day weekend course” at present, just in London.
The other very significant event that has just happened to Clever Games is the joining in of an ex-City trader, Stella Chadwick, who has 15 years of experience. In her last post at Dresdner Kleinwort Wasserstein (DKW) Stella was the Head of Structured Derivatives, responsible for the structuring of equity derivative products worth over £50bn. She is charming, super intelligent, a natural teacher and as passionate as me in everything she decides to do. She will be helping me in teaching the courses. She only joined because she believes in the same things that I do. That is to help the private trader navigate his/her way through the markets and not get eaten. There is more about Stella on my web page.
Finally, I would like to say the price for every course I do is surprisingly affordable, I want the courses to be accessible to a wide spectrum of friends. Zak: How much has your own trading experience helped in you making calls on the market? Do you feel it is obligatory for someone who is a guru to be trading themselves in order to teach/guide others? Andre: It is necessary, fundamental and yes obligatory for any “guru” – if you would like to call me that – to have at least traded at some point. All my knowledge and experiences come from hands-on trading. How else can one know what a trader would feel? The moments of panic, greed, resignation and success, never mind the realities and technicalities of trading, which you simply cannot know unless you trade or you have traded for a long time. Zak: It is interesting that just about the only major asset class you do not appear to be bullish on is the banks? Is this a fundamental or a technical call, or a mixture of the two? Andre: It is purely fundamental. Since the banking crash I feel banks have not been allowed to recover. The fundamentals behind them prevent them from doing so. Let us say that I feel the central banks have no current or future plans to allow the banking sector to repair. Their hands are tied with nowhere to go.
The entire banking sector is changing and will change even more dramatically in years to come... beyond recognition. I feel it will become more and more centralised. If you are investing in banking stocks for the medium or long term in the hope of a big recovery, I would say you could be greatly disappointed. There are much better sectors to invest in. Sorry to say this to people who have money in the sector – I understand and sympathise.
October 2014
| www.financial-spread-betting.com | 11
Zak Mir Interviews
I myself saw my Lloyds shares crash from over ÂŁ3.20 to 30p, but I feel the curtain is not going to rise on the sector in any significant way. Perhaps liquidate and re-invest.
I also have never attempted to figure out currency movements. I am certain there are excellent people out there who can do it, but it is not something that I claim any useful knowledge or expertise in.
Zak: Obviously, no one gets it right all the time. Do you have any blind spots in terms of not being able to read certain situations and setups? Can you provide any examples?
Zak: You have 15,000 followers on Twitter, which is a big number by any standards. Are you ever concerned regarding what a responsibility making calls on the financial markets is? People being what they are, they take the credit when they make money, but put the blame on the person the idea came from when they lose.
Andre: Of course, I am not able to read all situations right all of the time. I mean, I missed the whole banking crash of 2008. I could not see it coming. There were almost no indicators out there for me to see. I was utterly and completely blind to it and surprised by the timing, but so were the majority of institutional professional traders. I have since learned to scan my eyes into places that I did not consider before, to make sure this time I do not miss such events.
Andre: Of course it is a big responsibility, but I do not get nervous about it as this “following� was built over many, many years. Gradually, I have talked, written and spoken the same way as I did when I wrote my first post in a financial forum, never ever dreaming of having this many friends taking notice of me with some even telling me that their entire trading strategy is based on my calls.
Another example is gold. I do not understand it, never will and never have tried to predict the price movements (although I feel it is a buy for the long term, fundamentally and not technically).
12 | www.financial-spread-betting.com | October 2014
Richard AndreJennings Minasian
My comments are always simple, to the point and exactly how I feel or see a stock or the markets. That is all I have ever done: said it exactly as I see it, without any agenda or self interest. I have never asked for anyone to follow my calls and I have never ever asked anyone for anything in return. I love doing it. That has been my pay off. Zak: Would you ever be interested in managing money/being a fund manager on the basis of the calls you have made in recent years? Andre: I think at present I am at the top of my abilities: more knowledgeable, more experienced and even more focused. I would love to be a fund manager or in some useful way be involved in a fund. I will naturally put all I have and more into making it a great success, and I am certain I will. I approach everything with one purpose in mind, and that is success.
If anyone wants to contact me and set me up with a fund then of course I will consider it. It could be the best decision they ever make. It would not be just about the money but the personal feeling that one has reached the top of what one loves doing... plus the fact that so many people could be so much better off because of you. It would all sit very comfortably with me. Yep! I would love to do it. Zak: Who are your personal trading heroes? Andre: I am not sure if I have any heroes as such, but at present I am intrigued by Richard Jennings, Graeme Kyle and Mark McDowell for what they are trying to do with Titan IP. I like their ambition and energy, offering a unique product, onshore and free of tax. Their record so far seems quite impressive. FOR MORE DETAILS ON ANDRE’S OFFERINGS VISIT www.clevergamesuk.com
October 2014
| www.financial-spread-betting.com | 13
INVESTMENT PARTNER S Specialist Tax Free Fund Managers
+157.92%
Have you l spread bett
Your fund manager both Advisory firm collected Looking for a way to leg
Flagship Global Macro Returns
If the took
WE OFFER A SEL
+19.74%
MSCI World Index (in constant $’s)
FUND RETURN
BENCHMARK RETURN
GLOBAL MACRO
+157.92%
MSCI World Index (in constant $‘s) +19.74%
NAT RESOURCES
+88.37%
FTSE 350 Mining Index +14.69%
PREC METALS
+2.87%
ARCA Gold Bugs Index (constant $‘s) -5.1%
Past performance is not necessarily a guide to the future. Gross fund returns (before Titan’s fees) from inception (01/07/2013) to 12/09/14.
GLOBAL MA
Titan Investm utilises current account to be r
To find out mo
Risk Disclaimer - Titan’s funds use a spread betting or CFD account and are leveraged produ you fully understand the risks and seek independent advice if necessary. *Spread betting in regulated by the FCA. Registration No - 590782 14 | www.financial-spread-betting.com | October 2014
I NONIT PE W IA RM W L F AN AIV EE EN ED TL Y
lost money ting or CFD trading?
h over promised and under delivered? d commission and left you nursing a loss? gally avoid CGT and supplement your ISA?
e answer to all of these is YES, perhaps it’s time that you a look at our innovative approach to fund management?
LECTION OF FUND TYPES -
ACRO
NATURAL RESOURCES
PRECIOUS METALS
ment Partners - professional fund management which uniquely t UK tax legislation in allowing returns from a spread betting received completely tax free*.
ore call us on 0203 021 9100 or visit www.titanip.co.uk
ucts that involve a higher level of risk than conventional non-leveraged funds. Ensure that the UK is currently tax free but this may change in the future. Authorised and October 2014
| www.financial-spread-betting.com | 15
The Best of the Evil Diaries
THE BEST OF THE
Evil Diaries
The man the Daily Mail dubbed “The King of the Short Sellers”, Evil Knievil (aka Simon Cawkwell) is Britain’s most feared bear-raider. He mostly famously exposed the fiction that were the accounts of Robert Maxwell’s Communication Corporation, an event which helped to earn his pen name.
16 | www.financial-spread-betting.com | October 2014
The Best of the Evil Diaries
A big man with a bigger reputation, Evil Knievil famously made £1 million by short selling shares in Northern Rock during its collapse. He also uses his knowledge and experience to buy shares, often resulting in the same devastating effect. Three times a week Evil provides his thoughts and musings on the markets only at theevildiaries.com. He doesn’t just deliberate about the financial markets on The Evil Diaries, but also comments on politics, current affairs, which horses/sports bets are his latest favourites, with the occasional film and book review thrown in for good measure. Here we take a look back on the highlights of Evil’s diaries in the month of September.
5th September 2014
“I am told that there is nothing wrong with the oil assets and that the shares are a stonking buy.” Hargreaves Lansdown (HL) is taking an eternity to tip over. I had no ideas just how successful they would prove to be in reeling in the cash despite RDR. Even so, HL are not making the money they were and it is time to get short.
10th September 2014
Enegi (ENEG) is now to withdraw from Newfoundland, presumably at quite a loss. This is disappointing and explains the constant weakness of the share price, now 3.75p, in recent months. However, called to my Norfolk salon was a fund manager who assures me that the Buoy Technology side is still all go. Given that Enegi is capitalised at a trifling £7m and presumably does not need more cash, I would much sooner a buyer be. (I won’t buy - I have got enough.) General ignorance: Monitise (MONI) continues to decline. I understand that if it ever produces cash it will not do so before 2017. So I’d stay short here at 47p, a capitalisation of £900m+. However, and here I rely upon my wholly unreliable knowledge of the relevant technology, my guess is that there are lots of companies gathering to offer secure payments by mobile. One of them is Proxama (PROX), capitalised at a much more reasonable £35m. I do not know whether this one is a buy and, as a matter of fact, I have sold mine. I do not know whether this was a sensible move.
I was telephoned about developments at Apple: apparently Proxama (PROX) are put in a very favourable light by announcements from Apple. Do not ask me how. But it is so. I bought 1m at 4.7p. An energetic voice thinks I should buy Talisman Energy (TLN) at $9.90 in the US. This is capitalised at around $10bn.
12th September 2014 I am told that African Minerals (AMI) is finished. Anyway, I shorted 200,000 at 20p. I do not know how long this collapse will take. However, I suspect that shorters ought to get on with it.
8th September 2014 Charles Stanley (CAY) warn that brokerage volumes are down and that profits will also suffer. I am not surprised. For, although I like Charles Stanley as a firm and have indeed known them for close on twenty-five years on a close up and personal basis, I am sure that in recent years they have come under the malign influence of regulators who have twisted Charles Stanley’s thinking and grotesquely and wholly unnecessarily inflated costs. Charles Stanley will never win unless they punch these regulators firmly on the nose, thus recognising that FCA-sponsored regulators are often ignorant and presumptuous bullies and fools.
October 2014
| www.financial-spread-betting.com | 17
The Best of the Evil Diaries
It took a while but Naibu (NBU)’s results are deeply revealing. The company alleges that it is making buckets of money but it cancels the interim dividend. Naibu has now declared itself a very high risk investment. In the meantime, I hear that all is well and encouraging at Victoria (VOG). Keep buying below 2p.
15th September 2014 My wife and I went to a wedding in Oxford on Saturday afternoon. I therefore missed out watching out on winning £1m on the Scoop 6. But the rest was pure memory lane. The service featured Sydney Carter’s Lord of the Dance “I danced in the morning when the world was begun, ...”. This hymn also featured in the groom’s parents’ wedding where the reception was also held at Rhodes House thirty-seven years ago. I know this since we were there. Back at the coalface, both metaphorically and in fact, New World Res (NWR) keeps slipping down. And it is still a sell at 2.5p. It is most mysterious that Proxama (PROX) should retreat on Apple’s adoption of NFC. Perhaps there are insiders who know something that I do not. That has happened before. But 4p strikes me as a terrific buying opportunity. (I still do not understand Monitise (MONI). This morning’s results do not hot me.)
17th September 2014 Beximco Pharma (BXP) keeps edging up in Dhaka and the London GDR responds accordingly - but only by lagging at the same time. The Dhaka price is 51p and London’s is a miserable 16p. Keep buying London. The London yield is now 4%+ p.a. and presumably rising. Concha (CHA) has simply been called up in a bear squeeze. But pay no attention. This is a clear short at above 2.0p bid. (Don’t forget: even Concha itself has said so.)
But this fund freely admits that all that will be left - at best - is a shell company. However, at 26p the capitalisation is £80m. That is a helluva lot of hope for a mere shell.
19th September 2014 A friend went to a planning meeting in west London late yesterday afternoon, has driven to Gleneagles to meet an 8.00 a.m. tee off time this morning and, he assures me, will be at Ayr racecourse this afternoon (I excuse him if he does not make the first race.) He is 65 years old. Who says the youth of today have all the stamina?
22nd September 2014 What is striking to me about the ASOS (ASC) margins decline is that I thought it would occur through competition from comparable organisations. In the event ASOS are marketing clothes etc. from suppliers who resent the attack on their pricing policies elsewhere. The result is that these suppliers do not wish to supply ASOS. It’s dog eat dog out there and it surely means that ASOS is still going down. The price is now 1,980p. Plus500 (PLUS) looks to be breaking down again. It would probably be best to give it a further kick. Meanwhile Beximco Pharma (BXP) continues to tick up in Dhaka and is now 70.9 taka or 56.5p. This suggests that the London price, which should be at least a third of this, should be 18.8p. I’m waiting for the mystery voice calling from Switzerland offering to pay me 35p for my stock. This will of course be the signal to fill one’s boots. It is important to recognise that sterling interest rates for a Dhaka borrower of BXP’s standing would be fairly steep (10% p.a.?) but the board must recognise that the London price is not going to lead that of Dhaka in the foreseeable future. And finally, if I were a London-based auditor of an AIM-quoted China stock which stands at a discount to net cash I would try to work out how to fake cash. It’s not easy. All suggestions gratefully received.
As also is African Minerals (AMI). Here a hedge fund has closed its short - hence yesterday’s rise.
18 | www.financial-spread-betting.com | October 2014
October 2014
| www.financial-spread-betting.com | 19
Fund Manager in Focus
Fund Manager in Focus
Ken Griffin of Citadel By Richard Jennings, CFA of Titan Inv Partners, & Filipe R Costa
Behold an era of spectacular growth If there is one industry that has experienced spectacular growth over the last 20 years, it most certainly is the hedge fund industry. From around $118bn (£68.9bn) in assets under management (AUM) at the end of 1997, the industry grew to a staggering $2,156bn (£1,258bn) by the end of 2013. Such growth equates to a near 20% annualised rate and, if it were not for the mortgage backed securities (MBS) crisis, growth would probably have been even more spectacular. While this is very good news for the fund managers who now have much more capital (with leverage, running to several trillion) available to unfold their strategies and earn their lucrative fees, it has also resulted in competition growing substantially, and thus making it ever more difficult to beat the S&P 500.
Citi Research recently published an outlook report for the industry which painted a very optimistic future, predicting assets to double again until 2018, pointing out that sophisticated investors will likely continue to direct increasing proportions of their funds into the so called “smart money” industry. While we believe there is still growth to come, in particular because the industry was battered by the MBS crisis and only now is capital freely flowing again (another sign of “risk on” and animal spirits at play in the market), we are not as optimistic as Citi. With the Fed appearing to underwrite downside risks, many hedge funds have been pressed to take on more and more leverage and to reduce their “hedges” just to attempt to merely match the S&P 500 and stay in business. We believe the industry is showing many cracks at the margins, and the lack of real downside protections strategies, precisely at the point where investors really need it, is likely to prove a crimper on money flows in the near future if the long awaited correction finally arrives.
20 | www.financial-spread-betting.com | October 2014
“In this issue we will take a look into one of the biggest names in the hedge fund game: Ken Griffin, a man who founded Citadel back in 1990 and so has been around for over 20 years in an industry where longevity is generally measured in single digit years.�
October 2014
| www.financial-spread-betting.com | 21
Fund Manager in Focus
AUM CHART
In this issue we will take a look into one of the biggest names in the hedge fund game: Ken Griffin, a man who founded Citadel back in 1990 and so has been around for over 20 years in an industry where longevity is generally measured in single digit years. Benefitting from the great opportunities thrown up during the 1990s, Griffin saw AUM at his firm quickly grow from a few million to billions. Citadel’s record is not unbroken and the firm was severely hit by the 2007-2009 crisis, accumulating losses for investors that took years to recover from. But, despite the pressure, Citadel maintains sound risk management and their portfolio is composed of thousands of individual companies and so almost completely addressing unsystematic risk.
The Early Years Kenneth Cordele Griffin, or Ken Griffin for short, was born in 1968 in Florida.
From the very beginning he developed an interest in numbers, becoming President of the Math Club at High School. A few years later, while still at University (Harvard), he quickly jumped into the roots of fund management when he started two funds from his dorm room. He claimed that he could manage the trades in between classes. At that time the internet was not widely available and Wi-Fi was non-existent, so he installed a satellite dish on the roof of his residential house to receive real-time market data. The funds were started with $265,000 (£154,600), including some money from Griffin’s grandmother. His primary initial strategy was convertible-bond arbitrage, where he was looking to take advantage of pricing anomalies in such bonds. In October 1987 the market crashed and Griffin made a substantial profit from his short positions. With such a resounding success (luck?) at just 19 years of age, Griffin, it seems, had found his calling in life that would lead him to become one of the world’s most successful fund managers.
22 | www.financial-spread-betting.com | October 2014
Ken Griffin of Citadel
After graduating, he moved to Chicago to work with the investor Frank Meyer at Glenwood Capital Investments. During the first year he achieved a stunning 70% return on the $1m Frank Meyer put under his management. The next year, Meyer helped him raise a modest $4.6m to found his own hedge fund business. And so it was in 1990 that Citadel was born and which would grow to become one of the most prominent hedge fund businesses in the world, currently occupying the top 20 in terms of assets under management.
Citadel is Born Upon incorporation, Citadel’s flagship fund “Kensington” was born with the name Citadel being chosen to suggest strength in times of volatility, one of the most important characteristics for a hedge fund at that time. Citadel has performed pretty consistently across the years with an evolved strategy that regular readers of these pieces will be familiar with from some of the savviest names in the business – that of snapping up distressed businesses, buying at very low prices in expectation of recovery.
In 2002, the fund made a well-timed bet entering the energy market just after the collapse of Enron. Rich dividends were reaped as the oil price proceeded to make multi-year highs over the ensuing few years. In 2006 he purchased the soured natural-gas investments held by Amarant Advisors at a huge discount and multiples of his capital were made here too. Fresh from success in some ballsy well-timed trades, in mid-2008 Citadel peaked at $20bn (£12.2bn) in assets under management. From $4m in 1990 to $20bn in 2008 was some growth in AUM, and Citadel established itself as a pre-eminent fund management business with Ken Griffin sitting at the very top of the entity. With a net worth estimated at $5.2bn ($3bn) by Forbes, he just misses out on the inclusion in the roster of the top 20 richest hedge fund managers, but, at the age of 45, he is the fifth youngest billionaire in the investment industry (as compiled by Forbes), just below Chase Coleman III, John Arnold, Isabel dos Santos, and Daniel Ziff. With 25 years of experience, Griffin is already a veteran in the industry, but at the age of 45 he still has many years of potential fund management, years that very well may turn him into a legend such as George Soros or Warren Buffet.
October 2014
| www.financial-spread-betting.com | 23
Fund Manager in Focus
On the approach to 2007 it seemed that nothing could go wrong, but then, almost overnight, things changed dramatically with the MBS crisis and the collapse of Lehman Brothers. Very few hedge fund managers avoided being severely hit and Citadel was no exception.
With the mortgage collapse and the crash in the financial sector, the market for convertible issues simply froze up. In the advent of the financial crisis, Citadel was hugely exposed to downside risks as the firm was one of the most highly leveraged, borrowing $7 for each $1 in assets. In the aftermath of the Lehman collapse, the company was forced to cut its leverage to a more modest (but still high) leverage ratio, of around four times. The problem was that with all investors selling at the same time, the market they were selling into was not conducive to receiving decent bids. Suffice to say, the year of 2008 was the worst ever for Citadel, with its flagship funds Wellington and Kensington down on average a tub thumping 55% when the average hedge fund was down 18% in that year. Griffin was in fact forced to put in place restrictions on capital withdrawals from the fund to avoid pushing Citadel out of business.
24 | www.financial-spread-betting.com | October 2014
Ken Griffin of Citadel
“With a net worth estimated at $5.2bn ($3bn) by Forbes, he just misses out on the inclusion in the roster of the top 20 richest hedge fund managers, but, at the age of 45, he is the fifth youngest billionaire in the investment industry (as compiled by Forbes), just below Chase Coleman III, John Arnold, Isabel dos Santos, and Daniel Ziff.” With the world going to hell in a hand basket, the Fed decided to engage in massive asset purchases and the rest is now history. The new accommodative monetary policy capped market losses and the sustained recovery started in the equity market. In 2009, Citadel’s funds recorded a whopping gain of 62%, and have continued to perform well in subsequent years. In 2012, Citadel flagship funds bested the hedge fund industry and in 2013 they not only outperformed their peers, but also more than doubled the average performance, achieving returns of 19.3%. From the peak of $20bn in AUM, Citadel lost almost $8bn during the crisis, but has now partially recovered to the current $16bn.
Other Endeavours With the rewards reaped from his asset management business, Griffin and his wife are very active art collectors, owning several valuable paintings and sculptures. They also often donate funds to support arts in general, but their philanthropy doesn’t end there. They have made donations to several causes related to public schools and health access. In terms of political and economic leanings, for someone who has been living in Chicago for more than 20 years he couldn’t be more aligned with the Chicago School of Economics, whose main tenets are that free markets allocate resources in an economy and minimal government intervention is best. Nevertheless, he believes financial regulation is desirable and necessary because risk management is now in the hands of “29-year-oldkids…” – a somewhat ironic statement given that he started at 19 years of age!
Final Comments Ken Griffin is one of the best money managers in the hedge fund industry, one with an enviable 25 years’ experience at the relatively young age of 45. He has been able to deliver profits in excess of his peers, something which is a tough task particularly when we consider the large volume of AUM at the company. After a financial crisis that hit almost all investors around the world, Griffin was able to reposition the funds to recover every cent lost and surpass the previous high-watermark set before the crisis – no mean feat. The decline of over 50% experienced in a single year also illustrates important warning signs that not only apply to him but to the industry as a whole. Most hedge fund managers are well equipped with leverage tools to outpace the market, but unfortunately that very leverage works not only when the markets are rising, but also when they’re declining. The huge competition faced today has forced hedge fund managers to take on too much leverage to the point where they can be forced out of the market in a single year should a “black swan” event occur; even if that occurs after 20 years of above average performance. While being roughly in the top 20 firms when measured by AUM, Citadel holds the number one spot in relation to equity assets, something which coupled with the still relatively high leverage and holding of mostly long positions may spell renewed trouble in the near term if the predictions of turbulence in the equity markets made by the Bank of International Settlements are to be taken into consideration.
October 2014
| www.financial-spread-betting.com | 25
BRING YOUR EDGE
Tight spreads We charge less, so you can trade for less.
Fixed spreads Total transparency on what you pay before you tr
Trading credit Because we want to make it easier for good trade spread bet we offer a sensible amount of trading ★★★
Open an account today at corespreads.com and take advantage of our welcome bonus worth up to £10,00 ★★★ 26 | www.financial-spread-betting.com | October 2014
rade.
ers to g credit.
ke 00*
corespreads.com UK100 Wall Street 30 Germany 30 EUR/USD USD/JPY Gold
0.8pt 1pt 1pt 0.7pt 0.7pt 0.4pt
We don’t tell you how to get your edge. We just help you put it to work. Currently the choice for a trader who knows their edge is limited. Spread point, all of these free extras – the endless tuition, the republished news feeds – just raise costs, which have to get passed on to clients, normally through wider spreads. We don’t think a trader should pay for something they don’t use. So gone are the add-ons you already have or don’t need. Instead, we have clients that appreciate a good bet when they see one.
Don’t fear risk, understand it Financial spread bets are leveraged products, which means you could lose more than your initial deposit. If you’re hazy on exactly what that means, you shouldn’t trade. Core Spreads is a trading name of Finsa Europe Ltd (Company No. 07073413) registered address 6th Floor, 110 Fenchurch St, London EC3M 5JT. Finsa Europe Ltd is authorised and regulated by the Financial Conduct Authority (FRN: 525164). A full risk warning notice can be found on www.corespreads.com. *Terms and conditions apply. October 2014
| www.financial-spread-betting.com | 27
Robbie Burns’ Monthly Trading Diary
ROBBIE BURNS’
monthly trading diary Boring but brilliant shares The “Naked Trader” Robbie Burns returns from his holidays and this month covers how to make money on “boring” shares. Hello SBM readers! I’m back fresh from my jollies and this month I’m going to write about boring shares. Right… for the two of you left reading this. Oops, make that one... Look, I am well aware you’re not flicking through this mag looking for boring shares. You want excitement! Oil!! Mining!! Something with Gulf in it. But when writing the new edition of my book (out now) I pondered where I had made most of my money over the years. Then I realised. Boring shares. Shares no-one else was really that interested in. Shares that looked cheap to me but didn’t do much until a bigger company thought they looked cheap too and made a bid. An example would be Kentz. Private investors were never much interested. Its bulletin board rarely attracted posts (often a very good sign!). But it made profits, they always rose, they had tons of cash. I bought them at £2 in 2010 and more at £4 in 2012 and 2013.
“when writing the new edition of my book (out now) I pondered where I had made most of my money over the years. Then I realised. Boring shares.” Next thing they were taken out at 930p and I’d made more than 30 grand over the years. And on some spread bets that had sat there getting rolled over every quarter.
It sells fridges and stuff over the internet, for God’s sake! It’s not about to come up with a cure for cancer or something similarly sexy.
So here are a few boring companies I am in right now. They all look cheap. I’m looking for a predator to think the same, whenever that is. I’m happy to be patient. Value always outs in the end. There is a caveat though: if a question mark or two started to show themselves in statements, then I’d be out.
They stayed around 4 quid for ages, a couple of years.
Let’s start off with the really boring award over the page....
28 | www.financial-spread-betting.com | October 2014
Robbie Burns’ Monthly Trading Diary
Gulf Marine Services (GMS) Vaguely in the same line as Kentz, Gulf Marine services the oil industry with equipment. It is the leading provider of self-propelled, self-elevating support vessels. See, told you – boring! But... profits are heading higher and the company is bullish.
Then, maybe one day in the future, a bid.
I haven’t made a bean on these so far. I wouldn’t be surprised if the shares were still around the same price at Christmas. However, I suspect one morning I’ll wake up, there will be an announcement, maybe a big contract, and they will suddenly zoom up.
So I am perfectly happy stacking them away in an ISA and a far month spreadbet. I don’t even look most days. Just waiting... for boring to become exciting... Next the incredibly tedious award…
GULF MARINE CHART
October 2014
| www.financial-spread-betting.com | 29
Robbie Burns’ Monthly Trading Diary
Polypipe (PLP) Guess what? It supplies pipes! How dull is that? Except… pipes are in big demand right now. Especially in the UK construction sector, they just can’t get enough. Road and rail projects are all piping up. And it sells to France, Ireland and the Middle East too. Again, there is nothing much to see here yet. But maybe it will attract attention at some time. Whenever that is, I will be there.
And next up is the “This One is So Boring I am Never Going to Read Anything You Write Again You Boring Git” award…
Anyway, if you don’t like it you can stick it in your pipe and smoke it (though not in a public place).
POLYPIPE CHART
30 | www.financial-spread-betting.com | October 2014
Robbie Burns’ Monthly Trading Diary
Safestyle (SFE) Yes, it is safe and doesn’t have much style – the firm makes conservatories. Well, PVC replacement windows and doors. Laugh all you like, but this one is doing well. Turnover and profits are leaping, especially in the South of England where sales were up 21% in the last half. With cash coming in, this one is nicely under the radar and at some point I think my patient buy will pay off. Next up the “Why Didn’t I Buy Something Boring Instead of Averaging Down on F**king Xcite Energy“ award…
SAFESTYLE CHART
October 2014
| www.financial-spread-betting.com | 31
Robbie Burns’ Monthly Trading Diary
Servelec (SERV) The firm provides software, hardware and services predominantly to the UK healthcare, oil and gas, nuclear, power, water, utilities and broadcast sectors. Hey, well software, perhaps that is vaguely more interesting. Certainly profits and revenue are on the rise. And in July the firm announced four major project wins. It has no debt and a large cash pile.
So I expect to sit on all these for as long as it takes unless question marks surface. And at some point I hope for a big payday.
I can imagine more project win announcements and a steadily improving share price. And I’ve even made some money out of this one so far.
I thought a great way to finish off this boring article would be to consider death! Well, the company that specialises in it anyway.
SERVELEC CHART
32 | www.financial-spread-betting.com | October 2014
Robbie Burns’ Monthly Trading Diary
Dignity (DTY) Well as the satnav might inform you, Dignity will probably be your “final destination”. Coffins, funeral services, they are never going to run out of customers. I’ve made a lot on this over the years, the price gradually rises and they pay out massive special dividends too, another is on the way before the year is up, the firm proposing a 100p cash return. They keep buying up independent funeral parlours to continue the profits march.
The only downside is that shareholders don’t get a discount on their coffins. I’m not a tipster but reckon if you bung these five tedious shares away in an ISA or far future spread bet on a 1/2 year view, you might consider these five aren’t as boring as I made them sound when you are counting the cash you made.
That’s it, I’m so bored I’m off for a bath with a copy of the Radio Times. Now off you go, click the button and read something way more interesting on the next page.
DIGNITY CHART
October 2014
| www.financial-spread-betting.com | 33
Robbie Burns’ Monthly Trading Diary
Get the latest copy of my book the naked trader, which has just been published! You can get Naked Trader 4 only from my website and also from Amazon. The book updates naked trader 3 which I wrote in 2011 – a lot has happened in the market since then and I cover all the changes. There are tons of ideas, trader stories, psychology, biggest trading mistakes and 20 trading strategies to make money. It’s only £14.99 and the first 500 who order it get a free pack of Naked Trader T-bags made from only the best tea! To get naked trader 4 click the link at my website www.nakedtrader.co.uk
34 | www.financial-spread-betting.com | October 2014
Get the latest copy of my book the Naked Trader, which has just been published! You can get Naked Trader 4 only from my website and also from Amazon. The book updates Naked Trader 3 which I wrote in 2011 – a lot has happened in the market since then and I cover all the changes. There are tons of ideas, trader stories, psychology, biggest trading mistakes and 20 trading strategies to make money. It’s only £14.99 and the first 500 who order it get a free pack of Naked Trader T-bags made from only the best tea! To get Naked Trader 4 click the link at my website www.nakedtrader.co.uk
October 2014
| www.financial-spread-betting.com | 35
The day of reckoning for equities continues to be postponed…
The day of reckoning for equities continues to be postponed… By Richard Jennings, CFA of Titan Inv Partners, & Filipe R Costa
Is there still upside potential for the equity market or are we near the top? Are investors overconfident and is there excess speculation? Are stocks merely trading at their intrinsic value or are they way overvalued? These are some of the questions that come to mind at a time when the current bull market rolls on, seemingly unstoppable into its sixth year. While rising asset prices work like bait attracting ever more money into the market, at some point there will come a time where there is no new “marginal” money left to invest. At this point the rally will end and a new market environment, that of a bear market, will be set in motion. For the smart money, they realise that it is better to make one’s exit early before it’s too late. But, human nature being what it is, investors get ever greedier as the market rises, and only realise they are in the midst of a bear market when it is too late. Contrary to attendance at a hip party where it is said one should not arrive too early, in the stock market, as with many other rules in “real” life, this should be turned on its head.
Historically, the retail investor’s market timing has been shockingly bad. He typically enters the market when it is already at high levels and makes his departure when it is then depressed. The academics explanation for this is called the positive feedback effect. In effect, collective emotions dictate that no one wants to miss the perceived gains as the market rises ever higher. This results in more and more investors being attracted into it – the positive feedback loop. At such times, when everybody appears to be making money out of equity investments, the perceived risk is low. If equities have been rising for years, it is tough for the average investor to realise that the risk of loss is actually rising. Human emotions being what they are, they put much more weight on the three, four, five year rally (or whatever length it is) than on that likely probability of a fall in prices.
36 | www.financial-spread-betting.com | October 2014
The day of reckoning for equities continues to be postponed‌
October 2014
| www.financial-spread-betting.com | 37
The day of reckoning for equities continues to be postponed…
During prolonged bullish periods investors lose their ability to correctly balance risk and reward. In recent years, this positive feedback loop has been exacerbated through the actions of central banks injecting ever more money into the system, cheapening credit to create a clear incentive for not holding money and so pushing investors further up the risk curve. Of course, what many investors do not realise is that towards the end of this cycle, this is actually the wrong time to go all in on equities as they swing further to the right on the greed fear pendulum. They thus deviate further and further from their intrinsic value.
It is like a giant Ponzi scheme gets created whereby it is the first-comers who benefit from it, but the system per se is limited and condemned to failure at a later date, which means that at some point the masses will take the losses. In the equity markets it has been shown that it is the retail investor who is the one left holding the bag.
“As the bull market has been in play for a long time, again, typically many believe it is still in motion and so another rise takes place, but generally only to or just below the previous high. This is the second and generally last chance to get out.” What has been perplexing about the latter stages of the current equity rally in the US is that this has been taking place against a backdrop without accompanying GDP and real earnings growth (as opposed to the accounting manipulation of share buy backs). When credit conditions tighten, which is now happening with the tapering of QE ending in the US this month, reality will begin to reassert itself.
At some point the whole edifice reaches what is called the “Minsky moment” – a realisation that prices have moved far from their fundamental value, and a precipitous drop ensues. Almost all bull markets end violently at first as a stampede for the exit breaks out. As the bull market has been in play for a long time, again, typically many believe it is still in motion and so another rise takes place, but generally only to or just below the previous high. This is the second and generally last chance to get out. It is from this point that the drawn-out bear market begins in earnest… This story, which begins with excess optimism, excess credit, asset price increases and a bubble formation, ends with the inevitable price crash. It has been repeating time after time, over and over again for centuries. Sadly, it seems that collectively we never learn from history and every time investors observe a large price rise with credit being cheap they commit the same error of thinking “this time will be different”.
As Kindleberger notes in his fantastic book about financial crises, Manias, Panics, and Crashes (now in its sixth edition since 1978 due to the never ending nature of such crises), the expansion of the money supply is almost always at the centre of financial crashes. A bubble can only start due to the expansion of credit, and it usually ends with the tightening of the same. We would be mad not to pay heed to this point with the credit cycle in the US now passing through its nadir. The dynamics behind the ending of the credit cycle are very straightforward. At some point in time there is a positive shock in the economy. It can be, for example, an improved economic outlook. As a consequence of such an event, confidence rises and banks start expanding credit. As they become ever more confident, conditions regarding the quality of the borrowers to whom credit is expanded is relaxed. That happened during the formation of the last housing bubble.
38 | www.financial-spread-betting.com | October 2014
The day of reckoning for equities continues to be postponed…
In summary, when confidence rises, credit is readily available and so seduces borrowers, leading to increased leverage and to more and more investment in real and/or financial assets. As asset prices rise, more and more investors are lured in (momentum investors) and some are even willing to quit their day jobs as the “gains” being generated from their investments are higher than the salaries they receive. But this excess speculation is merely generating a silent bubble.
Everyone becomes part of the bubble, from naive investors to the most professional of them. Our friends the “analysts” create ever more buy recommendations and push price targets higher, brokers are eager to earn trading fees, investment bankers enjoy the underwriting opportunities created by IPOs, and so on and so on... The savvy investors recognise this, however, and become more cautious. Examples of such luminaries who have become much more cautious in recent years include Seth Klarman, George Soros, Jim Rogers and no doubt many others that have not been publicised. When this cautious state spreads, banks then tighten their credit conditions. Companies that were used to rolling over their loans and using new lines of credit to service existing debt are not allowed to do so anymore. Debt distress is likely to occur, and the higher the leverage, the stronger the crash in financial and real assets as everybody tries to sell at the same time. With NYSE margin debt at new all-time highs as the chart below relays, the omens this time are not good…
GEORGE SOROS
October 2014
| www.financial-spread-betting.com | 39
The day of reckoning for equities continues to be postponed…
While it is difficult to know when the crash will occur, there are some early signals that should be taken into consideration. When Alan Greenspan identified the “irrational exuberance” that was leading equities higher and higher in the late 90s, it was still too soon, with prices continuing to rise for an additional two years. But waiting too long and becoming greedy can result in severe pain, as was the case with the tech investors of the Nasdaq bubble who saw many of their investments decimated, if not completely wiped out. Nearly 15 years after the crash, many of those shares are still at much lower prices than at their peak. A few good indicators of market exhaustion have been previously mentioned in the academic literature and identified by many savvy investors. One of the most important is investor sentiment. The idea behind investor sentiment is that when it rises above a certain level, investors are too confident and so the likely line of least resistance is down.
Rather than being a buying indicator, when such sentiment has been elevated for a while it is a sign that investors be cautious at the very least to committing new capital. In recent weeks, this signal has been flashing brightly at us from the AAII survey. Additionally, the Investor’s Intelligence bulls/bulls + bears indicator is one of the most well regarded sentiment indicators there is. The gauge is currently at very high levels. One version of this indicator, as tweaked by Marty Zweig, is currently showing a reading of 17, which is the highest value since the crash of 1987. Another good indicator is the Rydex Bull Funds/ Rydex Bull + Bear Funds. This indicator is a good proxy for the aggregate level of speculation and which, at the moment, is also too high as the chart below displays.
40 | www.financial-spread-betting.com | October 2014
The day of reckoning for equities continues to be postponed…
“The gauge is currently at very high levels. One version of this indicator, as tweaked by Marty Zweig, is currently showing a reading of 17, which is the highest value since the crash of 1987.” Going on, we can also look at the proportion of financial assets households hold in relation to disposable income. When the financial assets proportion rises materially, there is excess confidence. In the chart below, we can see both the disposable income and the financial assets measures held by households.
The indicators are scaled to 100 as of January 1, 2000 and, as you can see, total financial assets grew at a faster pace than disposable income between 2003 and 2007.
October 2014
| www.financial-spread-betting.com | 41
The day of reckoning for equities continues to be postponed‌
“In summing everything up, we believe here at Titan, and have for most of 2014, that the medium term picture for equities, certainly State-side, is very bearish.� In terms of valuation, we can use a simple indicator such as the Shiller P/E ratio to gain an overall idea about relative market value. On average, this indicator shows a reading of 16.55, but it is currently trading at 26.43.
This is very high by historical standards and unjustified in our opinion under the current scenario of muted GDP growth. In summary, this is a sign of an impending disaster.
Finally, take a look at the chart opposite of the S&P 500 relative to bond yields. We can see that these are largely correlated. In effect, as bond yields fall due to reduced economic growth, the equity market tends to fall and valuations diminish. These last four years, as QE has been implemented, have shown a major disconnect here.
Both cannot be right. When QE ends and rates start rising, we would expect to see a reversion to mean here. 2015 is likely to be a very tricky year for investors blindly positioned long.
42 | www.financial-spread-betting.com | October 2014
The day of reckoning for equities continues to be postponed…
In summing everything up, we believe here at Titan, and have for most of 2014, that the medium term picture for equities, certainly State-side, is very bearish. Irrational exuberance is here again, and when the music stops due to tightened credit conditions the bubble we see in equities will likely burst. For now we can’t say the market will crash tomorrow, but we would posit than one should be ever more careful with long positions.
Even if we don’t have the tools to guess the exact turning point, we at least have the tools that give us the early warning signals…
You should not take this piece as an advocation to trade in any of the instruments mentioned and should always By James Faulkner of t1ps.com take professional advice in relation to your own personal circumstances.
October 2014
| www.financial-spread-betting.com | 43
Titan Investment Partners - Global Macro Fund +88.83% Flagship Global Macro Returns
+26.02% Flagship Global Macro Returns
+15.01% MSCI World Index (in constant $’s)
+4.12%
MSCI World Index (in constant $’s)
2013 Return*
2014 YTD Return #
These figures are gross returns and have not been adjusted for Titan’s fees. Past performance is not necessarily a guide to the future. * Returns from 1 July 2013 (fund inception). # Returns from 1 Jan 2014 to 12 Sept 2014. • A diversified portfolio of Global Macro themes
• Leverage capped at 2.5 times on stock positions
• Long/short flexibility
• Directors OWN capital invested within the fund
• Minimum investment of only £10,000
• 90% of gross dividend credit on
• All returns completely free of CGT*
stock positions
CLICK HERE FOR MORE INFORMATION 0203 021 9100 www.titanip.co.uk Risk Disclaimer Titan’s funds use a spread betting or CFD account and are leveraged products that involve a higher level of risk than conventional non-leveraged funds. Ensure that you fully understand the risks and seek independent advice if necessary. *Spread betting in the UK is currently tax free but this may change in the future. Authorised and regulated by the FCA. Registration No - 590782 44 | www.financial-spread-betting.com | October 2014
Alpesh on the Markets
ALPESH ON THE MARKETS
The new language of trading As I sit here at home, quietly looking out of the window at the trees, the markets are skyrocketing. So much for a quiet summer! If like me you enjoy walking among the trees with your spouse and children, rather than being in front of a computer screen, then you’ll love the raft of new innovations which help to make trading easier than ever.
October 2014
| www.financial-spread-betting.com | 45
Alpesh on the Markets
Although trading has got a lot simpler, so you can do it on your phone or your iPad, and place a trade so you know exactly how much you’ll make for every point move, it is still time consuming unless you have the knowhow to translate your view into the language of orders. Here are six ways you can use the new language of trading to help you be in the minority of traders that consistently profit from the markets.
Beginner level trades Use this one when you think there will be a short-term move, but don’t know when it will happen. You don’t need to be stuck in front of the screen if you use a limit order – i.e. a take profit order. Place it near the present price – and walk away. You should have a limit order further than your stop loss i.e. a reward greater than risk. If it doesn’t look like that will be likely to succeed then don’t place the trade. A move from entry to limit should be more likely than entry to stop loss. That usually means trading with the direction of momentum – for instance because the longer term trend or breakout/ momentum indicators point that way. If your position is in profit, but you don’t know when it may turn, again you don’t need to be stuck in front of the screen. Place a trailing stop at a distance not likely to be hit unless there is a genuine reversal. That way your profit will be pocketed while you’re doing something else.
“In summing everything up, we believe here at Titan, and have for most of 2014, that the medium term picture for equities, certainly State-side, is very bearish.” Intermediate level trades If the market is moving sideways, then look at an ‘OCO’ order. This “one cancel’s other” order says, ‘buy if the market moves up to x or sell if the market moves down to y and then cancel the other order’. This is good if you know the market will move, and want to trade and profit from that direction and momentum, but don’t know which direction that will be. Take it to another level by ensuring that entry levels are above resistance levels and below supports – to be absolutely sure of momentum and breakout. Average into your trades. This means that if you think markets will eventually fall, as I think the Dow and FTSE will fall by 200-300 points over the next month, but don’t know how much they will rise before that, then you should sell short a little at a time every time the market rises through entry orders. Nowadays brokers let you bet as little as 6p per point the market moves! That means if it moves 200 points against you – that’s still only a £12 loss!
Advanced level trades If you think that, although the market is rising sharply, there will be a pullback and then another rise up, place a trailing entry order. Again, you don’t need to stay in front of your screen. This trails the current price and if the market falls, it buys. The idea is that you will buy into a fall. Of course you have to be sure of the following upward rise and trend up.
46 | www.financial-spread-betting.com | October 2014
Alpesh on the Markets
You can also combine trades. For instance, I think GBP/USD will move sharply but don’t know in which direction. So I will place an OCO with a short limit for profit and a trailing stop so I don’t enter a trade and end up with a big loss. I trade with http://etx.tradermind.com Some brokers tell us that 80% of retail clients believe the market will fall in the coming weeks and months. That is why it keeps rising. You see, the stock market always works by trying to get the most people possible off it. And retail customers tend to be wrong most of the time. With these order types you will be better placed to win.
“Some brokers tell us that 80% of retail clients believe the market will fall in the coming weeks and months.”
Alpesh B Patel Alpesh is a hedge fund manager who set up his asset management company in 2004. His Sharescope Special Edition has outperformed every UK company’s fund manager over the past decade, as well as Warren Buffett. He has written over 200 columns for the Financial Times and presented his own investment show on Bloomberg TV for three years. He is a former Visiting Fellow in Business & Industry at Oxford University and the author of 18 books on investing. Find out more at http://www.investingbetter.com and http://www.inter.tradermind.com
October 2014
| www.financial-spread-betting.com | 47
48 | www.financial-spread-betting.com | October 2014
Mellon on the markets
MELLON ON THE MARKETS
THE BEARS AND BULLS BATTLE IT OUT Entrepreneur and financier Jim Mellon is a regular in the Sunday Times Rich List, with an estimated fortune of ÂŁ850 million in 2014. With a substantial international property portfolio and interests in a variety of companies, particularly in the alternative energy and biotech sectors, Jim is a highly experienced and successful investor.
October 2014
| www.financial-spread-betting.com | 49
Mellon on the markets
Well, it’s an interesting one. The question that we are all asking ourselves, that is. We are at that particular confluence where the bears and bulls battle it out on the flowing river of the markets. Big investment banks remain generally bullish – but they would wouldn’t they!? And yet the Eliot Wave theorists and bunker mountain men are profoundly bearish. Who is right? Well in my last letter I suggested we were seeing signs of market exhaustion - narrower breadth - and that rubbish, or at least highly priced and “less than high quality paper” was coming to market, and that as a result readers should be cautious. I think that remains the case. The markets – despite Alibaba and the magic circle thieves who got all the IPO shares – look like they can’t break upwards at the moment. And the fundamentals (remember, we are not playing a game of pass the parcel here) look none too good. Sure, the US is growing, but as I have said before I think that the bulk of US earnings growth comes from dangerous buybacks, and valuations are stretched. The only good thing going for Europe is that my too long standing prediction of euro/dollar falls is coming true, which is doing some of Mr Draghi’s work for him.
Australia looks awful in China’s choppy wake, (keep selling AUD) and while it isn’t roses in Japan, the forces of reflation are really kicking in, and I see its market outperforming every other major one this year, including the US. That prediction seems to be coming good. Funnily enough, because Japan is such a big importer of commodities, and its exports are not particularly price elastic, a dramatically weak yen is not good for it. That is why we are seeing the powers that be try and talk the yen into a sort of stable 108 level to the US dollar, and that is why I wouldn’t join the herd in shorting yen, but rather would be a cautious buyer. Although the world seems to be joining in my short euro trade, I still think it has merit and look for 1.20 against the dollar by the year end. Back home, Sterling hums and haws according to the political wind, but fundamentally, at its currently quite high level, it can’t resist the tide of US dollar advance, and I would be a seller. And as for the Footsie, well if the US does have the decline I think it will - and I mean a minimum of 10% - then it won’t hold up either.
Trades of the month So what to do? Well one thing is to look at bonds. I have been playing in and out of these, and I think the currently good trades are sell Bunds at 149.20 and above and cover in the mid 148s, and go for a flattening bias trade in USTs – i.e. short the 10 yrs. and buy the short end 2 yrs. bond. In a rising interest rate environment, you always get a flattening of the curve. Thanks to Gavekal for that idea. Let’s face it, the bond bubble is just that. See what happened to Phones 4u bonds for a foretaste of things to come. Now what about gold and silver? Well I do confess to being long both of them, and sitting on losses. I still think that we are going to have some sort of monumental crisis, somewhere, sometime soon, and in those circumstances they will do very well, as will the US dollar.
Overseas Over in Asia, China is going to continue to disappoint, and XI’s prediction of 7.5% growth is not far off being of Canute-like levels of delusion. China has been a major motor to the world economy and its slowing growth – and disastrous credit state – is looking ominous.
People have asked me what crisis that may be, and all I can say is that if I had a crystal ball I wouldn’t be tapping away writing this in the Isle of Man! But rarely has the world - away from the safe, predictable world of shopping malls and daily routine in the West – been more combustible. It just takes one flame to set a lot of the world alight, and that’s why you need precious metals.
50 | www.financial-spread-betting.com | October 2014
Mellon on the markets
Stocks On that subject Condor Gold recently completed a placement to carry its exploration forward. I am a director and shareholder, I like its management and I like its prospects. Plethora Solutions, of which much has been written recently, also completed a $30 million placement, some of it to really savvy US biotech investors, and I remain bullish, especially after the deal with Recordati, which is now in the public domain
Tesco has fallen on hard times recently, and I know it’s a bit like catching a falling knife, but I would really be looking at buying it. Guess what – it would be a great private equity buy!! In smaller cap companies, Critical Elements listed in Canada remains a favourite, as it has a ready to go lithium project. And I like lithium. See the new book for why!
And finally... I will shortly be sending out news of Fast Forward, the new book from Al Chalabi and I. We are publishing it through Fruitful Publications, closely related to my eponymous fruit, and it will be out hopefully by the end of October. It is in final design stages and I am glad some of you have said you are looking forward to it.
The Diabetic Boot Company is grinding ahead with capital raising options, of which we will no doubt hear more later. In big caps, I would be a buyer of the UK banks. My friend James Fergusson sees signs of them being fully on the mend, and the key picks are Lloyds and HSBC.
And Master Investor in April 2015 is going to be something else. We have a really big surprise for attendees. I hope you get your ticket requests in (free to readers) as it’s going to be packed! All the best in your investing Jim Mellon
October 2014
| www.financial-spread-betting.com | 51
52 | www.financial-spread-betting.com | October 2014
October 2014
| www.financial-spread-betting.com | 53
54 | www.financial-spread-betting.com | October 2014
New Crowd - old Rules
NEW CROWD - OLD RULES
THE GROWTH OF EqUITY CROWDFUNDING BY DONALD GILLIES, BUSINESS DEVELOPMENT DIRECTOR AT FIREFLOCK.COM
Fireflock.com is a premium crowdfunding platform designed to match high net worth and sophisticated investors with start-up, early stage and developed companies looking to raise capital. Fireflock is based at Level 39, Canada Square in London’s Canary Wharf, and is Europe’s largest accelerator for FinTech companies.
October 2014
| www.financial-spread-betting.com | 55
New Crowd - Old Rules
Equity crowdfunding is not a new concept. To claim otherwise is as misguided as it is disingenuous. As far back as the 17th century companies have endeavoured to realise their growth ambitions by raising capital from the crowd. Indeed the successful equity crowdfunding campaign conducted by the Dutch East India Company in 1602 influenced much of European history and the development of financial markets for centuries to follow. Whilst few companies can hope to catalyse the same degree of change, the recent re-characterisation and explosive growth of equity crowdfunding as an industry serves to show that now, as then, the crowd can play a vital part in building a thriving, diverse global economy.
Fundamentally, the process of raising growth capital from the crowd has not changed. It is the coming together of ambitious entrepreneurs capital-starved but full of innovative ideas – with investors who are willing to invest their capital in those ideas in the hope of a stellar financial reward. What has changed, and in doing so given rise to the equity crowdfunding industry, is the role that technology and the internet are playing in the optimisation of social networks and lowering of transaction costs.
“As far back as the 17th century companies have endeavoured to realise their growth ambitions by raising capital from the crowd.” 1 (Wiltbank, 2009) 2 (Collins, Swart, & Zhang, 2013) 3 (Collins, Swart, & Zhang, 2013)
These two powerful changes have opened up traditional and new industries alike to relentless innovation. From the rise of disruptive platforms like AirBnb and Uber in the travel and transport space, to the growing omnipresence of experienced players like Google in our digital lives, it’s clear to see that technology fundamentally changes market characteristics – growth capital markets will be no different. In this regard, the economic argument supporting the birth of the equity crowdfunding model is simple. The formation of an online network of engaged, financially -savvy and skilled investors will, in conjunction with a professional and regulated framework, attract the highest calibre of entrepreneurs seeking to raise growth capital in the market. Entrepreneurs’ chances of successfully closing their funding round are increased by the existence of that same network. It follows therefore that investors should be incentivised to form such a network so as to maximise the quantity of profitable opportunities available to them. Moving beyond the dated, opaque, and much smaller personal angel networks of old is crucial to ensure that the transparency, opportunity and scale afforded by equity crowdfunding platforms are fully leveraged. Couple the soundness of the above economic case with the lasting legacy of the Great Recession and it is clear to see why the equity crowdfunding model is today bringing growth capital markets into the 21st century. Following the global financial crisis of 2007/08 we saw the world’s largest constriction in lending to, and investment in, SMEs for generations. Traditional financial institutions hoarded capital amid market liquidity concerns (even after unprecedented quantitative easing programmes) in turn starving SMEs of the capital needed to create jobs and drive economic growth. Indeed, the UK alone saw bank debt rejection rates for term loans to SMEs climb from a base of 6% in the period 2005/07 to 23% in 2011/12 . Growing political pressure meant regulatory reform followed and more stringent capital requirements were introduced for traditional lenders in the form of Basel III regulation across the EU. In response, entrepreneurs have sought alternate routes to finance and the UK alternative finance market has grown to £939 million in 2013, up 91% from £492 million in 2012 . With the majority of alternative finance models now validated the UK market is set to grow by a further 70% this year to £1.6 billion3.
56 | www.financial-spread-betting.com | October 2014
New NewCrowd Crowd--Old OldRules Rules
Well, initial findings drawn from more developed markets, such as Australia, are encouraging. Indeed, whilst the Australian Small Scale Offerings Board (ASSOB) market displays structural differences from the UK, it nonetheless shares the fundamental characteristics of equity crowdfunding models being implemented within the UK. Data reported by Paul Niederer, CEO of ASSOB, shows that over the past seven years of equity crowdfunding in Australia, 83%of funded firms are still in operation, significantly outperforming SMEs financed by traditional means. This makes intuitive sense and is perhaps where the ‘wisdom of the crowd’ concept is most apt. Active and experienced investors who choose to back firms through equity crowdfunding platforms are often experienced in the relevant industry themselves and upon investment then have a vested interest in the future success of those firms which they back. Equity crowdfunding is a model in which a symbiotic relationship between investor and investee is enabled by technology and serves to greatly admonish the risk of failure. A similar level of success in the UK would be a phenomenal source of political capital for a government battling austerity, affording private capital a greater role in creating jobs and revitalising the economy. Indeed in the UK it is estimated that between 2001 and 2008 the overall return to business angel investment was 2.2 times the total invested capital4.
“over the past 7 years of equity crowdfunding in Australia, 83%of funded firms are still in operation, significantly outperforming SMEs financed by traditional means.” Given the average holding period of an investment over this time was just under four years this is approximately a 22% gross Internal Rate of Return. Of course there is a significant degree of variation around this figure but that is often where the attraction lies for investors who are effectively able to manage risk – over the same period mentioned, 9% of these investments in SMEs generated a return of over 10 times the original capital invested. The UK has taken a leading role in implementing public policy to stimulate the SME space and offers extremely attractive tax incentives to early-stage investors in the form of the Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS).
October 2014
| www.financial-spread-betting.com | 57
New Crowd - Old Rules
Both offer immediate income tax relief (50 and 30% respectively) effectively reducing the ‘at risk capital’ of early stage investors and in doing so greatly reduce the downside liability of any investment.
The average investment size in the angel investment space between 2001 and 2008 was £42,0005 - the following three possible scenarios show clearly the value of the SEIS scheme to such an investor:
Scenario 1 – Money multiple after three years is 0x (business fails completely)
Scenario 2 – Money multiple after three years is 1x (business value unchanged)
Scenario 3 – Money multiple after three years is 2x (business value doubles)
58 | www.financial-spread-betting.com | October 2014
New NewCrowd Crowd--Old OldRules Rules
It is clear to see that such policies can offer significant protection to investors in the downside ensuring that those who manage their risk and SEIS/ EIS allowances sensibly have the opportunity to enhance the performance of their investment portfolios. Indeed investors when surveyed said that 24%6 of their investments would not have been made without utilisation of these tax incentives – a fact that will make it difficult for any UK government or tax authority to argue over the effectiveness of current legislation. It is clear that equity crowdfunding has and will continue to catalyse change within the SME investment space, the microeconomic, macroeconomic and political factors are supportive. All that is needed now is for investors and entrepreneurs to realise the potential of the opportunity that now exists and act accordingly. With the industry’s early traction now translating into significant growth, perhaps it is time all sophisticated investors out there thought about becoming part of this new crowd?
“It is clear that equity crowdfunding has and will continue to catalyse change within the SME investment space.”
4 (Wiltbank, 2009) 5 (Wiltbank, 2009) 6 (Wiltbank, 2009) Works Cited Collins, L., Swart, R., & Zhang, B. (2013). The Rise of Future Finance. NESTA; University of California Berkeley and University of Cambridge. Wiltbank, R. E. (2009). Siding with the Angels. NESTA and British Business Angels Association.
October 2014
| www.financial-spread-betting.com | 59
Three small cap energy focussed stocks
THREE SMALL CAP ENERGY FOCUSED STOCKS By James Faulkner of t1ps.com
60 | www.financial-spread-betting.com | October 2014
Three small cap energy focussed stocks
October 2014
| www.financial-spread-betting.com | 61
Three small cap energy focused stocks
SeaEnergy (SEA) The growth of offshore wind power offers a compelling growth opportunity for energy services company SeaEnergy. According to research conducted by Reportstack, the global offshore wind power market is expected to increase more than fivefold from 7.1 gigawatts (GW) in 2013 to 39.9 GW by 2020, representing a Compound Annual Growth Rate (CAGR) of 28%. Offshore wind is now expected to become one of the largest renewable power market segments by 2020. The UK is expected to contribute significantly towards this growth, thanks to a number of projects currently in the planning and construction stages.
The core R2S service in the oil & gas sector involves taking spherical photographs of offshore oil and gas installations as well as creating virtual three-dimensional models of these sites into which maintenance and performance data can be embedded, indexed and managed. This service allows strong control of, and access to, critical data without requiring the time and cost of physically visiting the offshore installations. Underlining the business’s growing presence in the industry is the fact that in recent years the typical “large” project size for R2S has grown from £50,000 to £500,000. R2S is currently working on developing new products and services requested by clients, while also considering how best to deploy R2S in other industries, such as nuclear power generation, thermal power generation, refineries, gas terminals and even cruise liners and commercial shipping.
In June 2011 SeaEnergy sold its 80.13% interest in its offshore wind unit (Serl) to Spanish oil giant Repsol, leaving it with an embryonic offshore renewable marine services business – and the cash to grow it. The initial focus was on its “Walk to Work” system, which involves a new design of vessel system, one which combines a stable hull design with an active roll-suppression system and a motion-compensating gangway system, enabling safe and reliable access for technicians. The firm continues to market its purpose-built Service Operations Vessel concept, and 2013 saw “an increasing and encouraging level of interest” in its vessel designs. However, it has had more success in growing its ship management activities, where it now has three vessels under management via a joint venture with Singaporean firm Go Offshore. Meanwhile, a further joint venture between SeaEnergy and GO is tendering for the provision of walk-to-work Service Operations Vessels (SOVs) into the offshore wind market, where demand is said to be emerging in the UK North Sea and elsewhere. While the firm’s ship management business is a key growth area for the group, the main driver of the business is currently R2S (or Return to Scene, as it is otherwise known), which it acquired in August 2012. R2S’s business is dominated by photographic capture and model building, services for which there is an increasing international demand.
Over time, SeaEnergy has the potential to grow into a valuable business, against a backdrop of structural growth in its end markets. In 2013, demand for offshore maintenance, modifications and operations services totalled $112bn for the world’s nearly nine thousand offshore platforms, according to data from Research & Markets. Over the period 2014 to 2018 spend of $672bn is forecast, representing 31% growth on the previous five-year period. Although the firm is currently in the red, losses narrowed to just £0.2m in the first half of 2014 and the firm expects to reach profitability “in the near term”. We note that SeaEnergy isn’t being covered by any brokers at present – but this situation could change when the firm starts to post some solid numbers.
62 | www.financial-spread-betting.com | October 2014
Three small cap energy focused stocks
“Underlining the business’s growing presence in the industry is the fact that in recent years the typical “large” project size for R2S has grown from £50,000 to £500,000.”
SEAENERGY CHART
October 2014
| www.financial-spread-betting.com | 63
Three small cap energy focused stocks
Alkane Energy (ALK) UK energy regulator Ofgem recently warned that the risk of 1970s-style mass power cuts has doubled because the UK doesn’t have enough energy production capacity. In fact, the regulator believes the UK’s spare production capacity could drop to 2% by 2015, down from 14% in 2012, which means the National Grid won’t have much leeway if demand suddenly rises. According to Ofgem, the closure of dozens of ageing coal-fired power stations has combined with the financial crisis, tough emissions targets and our increasing reliance on gas imports to create the conditions for a perfect storm.
Power response sites are connected to mains gas and produce electricity at times of high electrical demand or in order to balance the electricity grid. The firm now operates 93MW of power response on mains gas. Although power response is lower margin than CMM (mains gas has to be purchased to power the generators), it brings with it the benefit of stable and predictable revenues, as there is a fee once base load and spare capacity is established (rather like rent) and a further fee once the gas is delivered. In addition to its power generation assets, Alkane has a foothold in the UK’s shale industry through its 18% stake in Egdon Resources, acquired after Alkane transferred rights over its shale interests in 10 licence areas to Egdon in May. Through the deal, Alkane gains exposure to one of the UK’s largest shale gas explorers without being responsible for any of the associated capex requirements. Meanwhile, Alkane retains the rights to develop its own core business in these licence areas and can retain its focus on CMM and power response without any distractions from its shale assets. While the Egdon stake isn’t necessarily the main reason we believe investors should be attracted to the shares, it nevertheless offers some interesting upside potential should the shale story really get underway in the UK.
While the coming energy supply squeeze is yet more bad news for the UK’s hard-pressed consumers and businesses, it plays right into the hands of Alkane Energy, which generates electricity from the methane stored in disused coal mines. In fact, Alkane is now the UK’s largest coal mine methane (CMM) operator, providing predictable base load capacity and a power response business able to supplement the system when demand peaks or intermittent power supply from wind or solar projects is not available. Alkane operates mid-sized “gas to power” electricity plants, providing both predictable and fast response capacity to the grid. With the UK’s leading portfolio of CMM licences, Alkane now has a total of 140MW of installed generating capacity and an electricity grid capacity of 160MW. As CMM declines at any one site, Alkane retains valuable generating capacity and a grid connection which it can move to power response.
“Alkane now has a total of 140MW of installed generating capacity and an electricity grid capacity of 160MW.” We believe investors should approach Alkane with a two to three-year timeframe in mind, given that this is the period over which the capacity squeeze in the UK electricity market could take hold. However, should this squeeze prove particularly acute, then Alkane shareholders could be in a sweet spot.
64 | www.financial-spread-betting.com | October 2014
Three small cap energy focused stocks
ALKANE CHART
October 2014
| www.financial-spread-betting.com | 65
Three small cap energy focused stocks
Utilitywise (UTW) Founded in 2006, Utilitywise (UTW) provides energy procurement and energy management products and services to business customers throughout the UK, designed to assist them in achieving better value from their energy contracts, reducing energy consumption and their carbon footprint. Having established trading relationships with a number of the UK’s largest energy suppliers as a Third Party Intermediary (TPI), the company negotiates rates with suppliers on behalf of business customers, provides an account care service and offers a range of products and services designed to assist customers in managing their energy consumption. The group’s customers are based throughout the UK and Ireland, across a variety of industry sectors and the public sector, and range in size from small single site customers to large multi-site customers.
In a brief trading update in August, Utilitywise confirmed that revenue and adjusted profit before tax for the full year (ended 31st July) is expected to be in line with market expectations. The group’s revenue pipeline, representing revenue secured but yet to be recognised, was £28.2m as at 31st July 2014 compared to £16.6m as at 31st July 2013 (and up from £23.8m as at 31st January 2014). Current trading was said to be strong, and organic growth is underpinned by the planned move to a new facility (on schedule for occupancy to commence in October) which will provide the necessary capacity to grow total headcount to 1,400 over the next two years. The customer base continues to grow across all business units and the group’s new business run rate remains in line with management expectations. Even when excluding international expansion from its model, broker finnCap believes that Utilitywise has the potential to almost double profitability over a two-year period. For the year ended July 2014, the broker forecasts an adjusted pre-tax profit of £13m giving EPS of 12.6p. In 2015 it sees an adjusted profit before tax of £18m, implying adjusted EPS of 18.2p. It also recently introduced a 2016 forecast for the first time to reflect the early benefit of the further scaling, implying a move to an adjusted profit before tax of £25m and EPS of 25.4p.
With the Department for Energy & Climate Change (DECC) estimating that non-domestic gas prices will increase by c.11% and non-domestic electricity prices will increase by c.22% by 2020, Energy procurement and management is becoming an increasingly pressing concern for businesses. The SME market in particular has been identified by the company as an area for significant growth.
On these forecasts, Utilitywise shares trade on a P/E multiple of 22.7 times (year ended July), falling to 15.7 times for FY15 and to 11.3 times for FY16. This is against forecast EPS growth of 48.1%, 44.5% and 39.8% respectively. These metrics continue to look attractive for a highly scalable business growing as quickly as Utilitywise, especially given the opportunity for a further uplift to these numbers from European expansion. The continued growth and evolution of the group into a one-stop-shop for businesses’ utility management and consultancy needs represents a compelling investment proposition.
The company points to a Datamonitor survey into the TPI industry showing that the intermediated business-to-business energy market in the UK is highly fragmented with no clear market leader (among an estimated 3,500 TPIs). The survey also showed that, as a percentage of total contracts, TPIs are more prevalent among major energy users, defined as those organisations that spend over £50,000 per year on energy, where 58% of contracts are through TPIs compared to only 9% of contracts for SMEs.
“The continued growth and evolution of the group into a one-stopshop for businesses’ utility management and consultancy needs represents a compelling investment proposition.”
66 | www.financial-spread-betting.com | October 2014
Three small cap energy focused stocks
UTILITYWISE CHART
October 2014
| www.financial-spread-betting.com | 67
68 | www.financial-spread-betting.com | October 2014
www.t1ps.com
JAMES FAULKNER’S SMALL CAP OF THE MONTH IS ITM POWER The fact that wind farms were paid a record sum of almost £3 million in a single day during August will no doubt play into the hands of those who see them as unreliable, unpredictable and unnecessary. However, ironic episodes like this one could shortly become a thing of the past if hydrogen energy specialist ITM Power has its way.
October 2014
| www.financial-spread-betting.com | 69
www.t1ps.com
The problem lies in the fact that electricity cannot be ‘stored’ as such, but has instead to be converted to something else in order to be available for use in the future.
With renewables accounting for an ever-growing share of the energy mix, the need for grid balancing and energy storage is becoming an ever more pressing issue. National Grid spent £700 million on grid balancing services in the period 2010-2011, rising to £1.1 billion in 2012-2013. By 2020 estimates across the industry vary from £2 billion to as much as £6 billion for grid balancing services.
Sheffield based ITM Power thinks it has the solution in the form of its power-to-gas energy storage technology which utilises rapid response electrolysers to convert electrons (i.e. generated via electricity production) to hydrogen (from water), which can then be mixed with methane and stored in the gas grid. The beauty of this solution is that it requires relatively little outlay, as it merely links existing power and natural gas networks. Power-to-gas therefore offers a cost-effective solution to wind power generation curtailment, while also being a source of clean fuel and additional supply to an already very tight energy market.
70 | www.financial-spread-betting.com | October 2014
ITM Power
Some of the gas used in the UK goes towards power generation, but the bulk of it is used to generate heat. If the hydrogen produced from renewable power were to be injected into the gas grid, this would provide renewable heat on a large scale. While in the UK the limit for hydrogen content in the gas system is currently set at just 0.1%, the fact that Germany is at 10% and most of Europe sits around 5% shows that there is significant scope to grow the role played by ‘green’ mixed gas in the UK. ITM Power has already recommended that the 0.1% limit be lifted to 3%. However, the UK has been relatively slow in addressing this opportunity, and ITM has been forced to look further afield for commercial outlets for its technology. In Germany, ITM has been working closely with the Thüga group of companies, which now operates a HGas plant in Frankfurt with ITM’s proprietary proton exchange membrane (PEM) electrolyser at its heart. In 2013, the plant became the first ever to inject electrolytic generated hydrogen into the German gas grid, which was followed by final acceptance of the plant in March this year, with all milestones met on time. In the longer term, ITM is also looking to tap the nascent market for Hydrogen Fuel Cell Electric Vehicles (FCEVs), which looks set to expand rapidly as the economic and environmental costs of conventional transportation continue to rise. With several large automobile manufacturers including Hyundai, Toyota and Honda having either commenced production or about to enter production shortly, programmes are underway in the developed world to roll out hydrogen refuelling infrastructure necessary to sustain these next-generation vehicles. In this vein, ITM is now involved in the UK, Swiss, US and French hydrogen mobility programmes and is already building five refuelling stations for the UK (two for the Isand Hydrogen project on the Isle of Wight, and three for HyFive project in London). In the UK alone, the H2Mobility programme is looking to install 65 stations over the next few years. Meanwhile, across the pond, ITM Power Inc is a founder member of US Government’s hydrogen mobility initiatives, H2USA and H2First, which has led to the receipt of two orders for hydrogen refuelling stations, courtesy of the $200 million California Energy Commission solicitation process. The US presence is particularly interesting from an investment perspective, as US hydrogen tech firms have seen their share prices soar of late, with Nasdaq-listed PlugPower (PLUG) having jumped c.900% over the past year. The reason?
“In 2013, the plant became the first ever to inject electrolytic generated hydrogen into the German gas grid.” Many of these outfits are finally rolling out commercial programmes with industry, and some are even set to record maiden profits. Thus far, however, UK hydrogen firms have remained in the doldrums.
What’s it worth? Although ITM’s historic financials suggest caution, we note that the firm boasts billionaire Peter Hargreaves (of Hargreaves Lansdown fame) as a 9.2% shareholder and board member. Such a high-profile supporter comes with significant perks, not least of which is the financial clout Hargreaves can bring to the table.
Hargreaves took 4,333,333 shares out of the 33,333,333 shares offered in a £10 million placing in January, which left the firm with a cash balance of just under £9.8 million as of 30th April 2014, versus a cash burn of just under £7.6 million for the financial year. With £5.14 million of projects under contract at year end and a further £3 million in the final stages of negotiation, activity levels are picking up and seem to support CEO Graham Cooley’s assertion (at the time of the January placing) that the firm is in the midst of “a key inflection point”.
October 2014
| www.financial-spread-betting.com | 71
www.t1ps.com
“The US presence is particularly interesting from an investment perspective, as US hydrogen tech firms have seen their share prices soar of late.�
ITM POWER CHART
72 | www.financial-spread-betting.com | October 2014
corespreads.com
BRING YOUR EDGE
Core Spreads is financial spread betting as it should be.
Tight spreads
Fixed spreads
UK100 0.8pt Wall Street 30 1pt Brent Crude 4pts
Trading credit
EUR/USD Gold UK Shares
0.7pt 0.4pt 0.07%
Spreads are fixed during market hours
★★★
Open an account today at corespreads.com and take advantage of our welcome bonus worth up to £10,000* ★★★ Don’t fear risk, understand it: Financial spread bets are leveraged products, which means you could lose more than your initial deposit. If you’re hazy on exactly what that means, you shouldn’t trade. Core Spreads is a trading name of Finsa Europe Ltd (Company No. 07073413) registered address 6th Floor, 110 Fenchurch St, London EC3M 5JT. Finsa Europe Ltd is authorised and regulated by the Financial Conduct Authority (FRN: 525164). A full risk warning notice can be found on www.corespreads.com. *Terms and conditions apply. October 2014
| www.financial-spread-betting.com | 73
Subscribe
Don’t miss out!
74 | www.financial-spread-betting.com | October 2014
Zak Mir’s Monthly Pick
ZAK MIR’S MONTHLY PICK Buy Just Eat (JE.): Above 280p targets as high as 450p Recommendation Summary
Technicals
Although there may be many whispers of IPO fatigue in the UK there are still some companies new to the stock market which could offer those looking for decent upside more than just a stagging opportunity.
Just Eat has an unusual technical position given the shares’ short life on the stock market. The lack of historical data is usually a negative in terms of providing a chartist with sufficient incentive to take the plunge in terms of a big call. But we are helped here by the clarity of the price pattern over the past six months, as well as being aware of the 260p IPO price.
This idea appears to be particularly appropriate in terms of Just Eat as the online restaurant food delivery group looks to be going from strength to strength. This is a two pronged growth play, both on the “couch potato” demographic, which Domino’s Pizza (DOM) made its millions on, as well as the roll out of mobile communications and apps, that 4G and smart phones represent. While we may have been caught out by the Dotcom Bubble at the start of the 2000s, it looks as though online retail has still to fully achieve its potential, with Just Eat one being of the better ways to gain exposure for traders and investors alike.
This was understandably a clear factor in the price action of the stock from the time the shares came to market until mid-August. The higher low above 260p at the start of September should be the starting gun on an extended rally, this being a sign that the slack of weak bulls in the initial post IPO period has finally been taken up. The highlight in the run up to the September breakout was the early August unfilled gap to the upside following two higher lows above the 195p May low of the year. The confirmation that this is a likely positive momentum situation came with an as yet second unfilled gap to the upside on 3rd September. This should be a strong enough signal for most traders, allowing them to assume the most optimistic of scenarios.
October 2014
| www.financial-spread-betting.com | 75
Zak Mir’s Monthly Pick
“the bulls might be expecting such a move to lead to the top of an April price channel drawn towards 450p.” At this point the bulls might be expecting such a move to lead to the top of an April price channel drawn towards 450p – the 2014 resistance line projection. The timeframe on such a move is as soon as the next 1-2 months. The stop loss on the buy argument currently looks to be towards the 280p level, the lower parallel of the 2014 resistance line and towards the last September floor at 277p.
JUST EAT CHART
Recent Significant News 19th September – Just Eat said its Brazilian business RestauranteWeb has merged with Brazilian online restaurant delivery company iFood.com Agencia de Restaurantes Online. The new company will be called IF-JE Participações Ltda and will be a joint venture between Just Eat and iFood’s existing shareholders. As part of the agreement Just Eat also will make an investment of GBP3.5 million in cash into IF-JE for future business expansion.
Following the transaction IF-JE will be 25% owned by Just Eat, 24.98% owned by the iFood founders and 50.02% owned by Movile Internet Movel S.A. When iFood was created, it received an investment from Movile, which develops mobile content and e-commerce platforms in Latin America.
76 | www.financial-spread-betting.com | October 2014
Zak Mir’sPharmaceuticals Monthly Pick Buy Hikma
October 2014
| www.financial-spread-betting.com | 77
Zak Mir’s Monthly Pick
2th August - Just Eat revealed that revenue had grown by 58% on the same period last year to £69.8m, with significantly improved profitability and strong cash conversion. The company said it was accelerating its mobile strategy across all its geographies and in the UK over 56% of orders were already being placed via apps or through a mobile device. The growing network of more than 40,000 restaurant partners combined with 6.9 million active users provides further momentum to fuel its expansion through the remainder of 2014 and beyond. This capped the post IPO period in April and inclusion in the FTSE 250 in June. 6th May - Just Eat’s strong financial performance has continued since 31st December 2013. Trading is slightly ahead of management expectations in part as a result of the unusually wet winter weather in the UK and Northern Europe. Orders in the three months to 31st March 2014 increased by 51% compared to the same period in 2013. The successful launch of an iPad App in the UK helped push orders from mobile devices to over 50% of total UK orders in the first quarter of 2014.Completion of the acquisition of takeaway-specific EPOS technology business Meal 2 Order.com Limited in February 2014. 3rd April - Just Eat, which operates the world’s largest online marketplace for restaurant delivery, announced the successful pricing of its initial public offering at 260 pence per Ordinary Share. The Company will receive £100 million of gross proceeds from the Offer.
Fundamentals While it has been the case that some of the gloss has come off the enthusiasm for online retailers of all shapes and sizes over the course of 2014, with ASOS (ASC) being a leading example, the situation at Just Eat makes it appear we are looking at the exception. It is ironic that the extra focus on the company associated with the run up to and aftermath of the IPO may have worked in its favour. Also helping out were apparently favourable weather conditions over the winter, which encouraged customers to step up their orders. At the same time, even though the concept of an online ordering service is no newer than the Dotcom Bubble – nearly 15 years ago, we are in an era where mobile communications and apps are improving almost by the day. This means the benefits of such technology to companies such as Just Eat are still being felt in an ever more obvious and useful fashion, with saturation still likely to be some way off.
Also helping Just Eat is critical mass, if not the first mover advantage of having already created the world’s largest online marketplace for restaurant delivered food. This will no doubt become more obvious as the FTSE 250 firm presses home its advantage via the type of Brazilian expansion announced in September, and as the smart phone revolution reaches completion over the next few years.
“By August the company could boast that revenues had risen by more than half and that its expanding network of restaurants should underpin growth for the rest of the year.” But looking at the fundamental details, in terms of the updates we have had from Just Eat since the IPO, it is difficult not to take a constructive view on the progress being made. For instance, for the first part of 2014 it was revealed that orders were up by a half, boosted by mobile orders and a new iPad app. This performance was slightly ahead of expectations. By August the company could boast that revenues had risen by more than half and that its expanding network of restaurants should underpin growth for the rest of the year. To conclude, it is difficult not to believe that Just Eat will be able to expand further over the next year, and that the rating of the group, still not too far from the IPO price, could be upgraded in a significant way as the market appreciates the attractions of a relatively low risk, low cost growth story.
78 | www.financial-spread-betting.com | October 2014
October 2014
| www.financial-spread-betting.com | 79
Binary Corner
BINARY CORNER
The dollar bull run – We ain’t seen nothing yet! By Dave Evans of binary.com
The US dollar is enjoying its second best three month period in over two decades and the rally is now starting to attract the interest of FX strategists from major investment banks.
80 | www.financial-spread-betting.com | October 2014
Binary Corner
So should we all get into US dollar index positions and short the major dollar pairs? Quite possibly, but we also need to be aware of the danger of a short term pull back before the trend kicks in again.
US dollar Index weekly chart:
“So should we all get into US dollar index positions and short the major dollar pairs? Quite possibly.” The weekly dollar index chart above needs some explaining. The upper window tracks the price in relation to the Parabolic SAR indicator. This indicator roughly tracks the arch of a trend, rather like hawkeye tracks the bounce of a tennis ball. The indicator in the bottom pane markets the size of the gap between the Parabolic and the price. A high red level indicates a large gap relative to the past that could be a sell signal, while a large green level indicates a large gap that could be a buy signal. The horizontal blue line shows where the spread is at the moment.
As you can see, the current bull run is significantly above the Parabolic SAR, reaching levels that have previously triggered pull backs in the past. Like all indicators, this tool does not pinpoint exact turning points, but is a useful early warning. It’s fairest to say that it signals the start of overbought conditions. In the long-term, the dollar index could well have a sustained rally, especially as US policy makers turn off the QE taps and increase interest rates. However, in the short term anything is game, especially against the euro which found support on following Mario Draghi’s recent press conference.
October 2014
| www.financial-spread-betting.com | 81
Binary Corner
EUR/ USD weekly chart:
82 | www.financial-spread-betting.com | October 2014
Binary Corner
“One currency pair that could benefit from a US dollar pull back is the beleaguered NZD/USD.” Kiwi could have a short flight One currency pair that could benefit from a US dollar pull back is the beleaguered NZD/USD. The Kiwi has been dumped by most traders since the start of the summer and the end of September saw fresh lows as the country’s new PM spoke of 1.6500 as being the Goldilocks level for the exchange rate. There was further pressure as it emerged that the RBNZ had been a net seller of the currency, mounting speculation of further rate cuts. Yet NZD/USD has bounced back into early October, especially on improved economic reports from China and Australia. There is also a significant support level in the 0.7700 level. Politicians have a history of attempting to dabble in FX, but rarely get the outcome they desire.
Disclaimer: This financial market report is intended for educational and information purposes only. It should not be construed as investment or financial advice and you should not rely on any of its content to make or refrain from making any investment decisions. Binary.com accepts no liability whatsoever for any losses incurred by users in their trading. Fixed odds trading may incur losses as well as gains.
October 2014
| www.financial-spread-betting.com | 83
84 | www.financial-spread-betting.com | October 2014
October 2014
| www.financial-spread-betting.com | 85
Sporting Index
October Sports Preview BY PATRICK CALLAGHAN
86 | www.financial-spread-betting.com | October 2014
October Sports Preview
October 2014
| www.financial-spread-betting.com | 87
Sporting Index
Horse Racing Saturday 18th October will see the fourth running of QIPCO British Champions Day at Ascot. This glittering card features the best horses competing for the biggest purses in British racing. Kingman has been this season’s outstanding miler, but the shock news that John Gosden’s star colt has been retired having suffered from a throat infection that has ruled him out of his end of season targets means the Queen Elizabeth II Stakes is now wide open. The son of Invincible Spirit had been beaten just once in eight starts when second in an unsatisfactory renewal of the 2000 Guineas and had since won four straight Group 1 races. It means connections of Guineas winner Night Of Thunder will be confident of taking glory but don’t rule out Australia, who finished third at Newmarket before winning the English and Irish Derbies and the Juddmonte International. He was then worn down late on in the Irish Champion Stakes last time out. What a mouth-watering clash that would be, although one of the richest races of the flat season, the £1.3m Champion Stakes, is still the likely route for Aidan O’Brien’s colt. There he could face off against old rival The Grey Gatsby – the score is 1-1 currently – and don’t dismiss the chances of Free Eagle, who was electric on his belated return to action after injury, when romping home at The Curragh.
There are also markets on winning distances, indices for all the favourites at a meeting and ones that pitch the combined total of all the prices of the winners at a meeting.
Formula One The last four seasons have been all about Sebastian Vettel and his all-conquering Red Bull team, so it’s refreshing to see the German toiling this campaign, with his rookie teammate Daniel Ricciardo the leading light from the Red Bull garage.
In the Champions Sprint, it’s likely to pay to stick with G Force, who looks a sprinter on the up judging by his performance when winning the Haydock Sprint Cup. It’s hard for three-year-old sprinters to beat their elders, but David O’Meara’s charge is unexposed at six furlongs and will be a real force in this division for the next few seasons. Horseracing spread betting is the most exciting way to bet on the sport of kings. The most popular market is the race index. Every runner in the race will be given a spread on where Sporting Index predicts the horse will finish. Generally 50pts are awarded to the winner, 25pts to the runner-up and 10pts for the third. For big-field races and indeed some high-profile contests, traders offer indices all the way down to sixth place. Spread bettors can also punt on match bets between two selected horses, as well as get with or oppose a jockey at a meeting.
88 | www.financial-spread-betting.com | October 2014
Champions League Preview
NFL The fact that NFL teams have played games in England since 2007 to sell-out crowds speaks volumes about how the popularity of the sport has transcended the United States. It is now one of the most-watched sports in the globe, with the season’s showpiece, the Super Bowl, attracting audiences of hundreds of millions.
Lewis Hamilton and Nico Rosberg have fought out a fantastic battle for top-spot and it’s the Englishman who has regained the initiative from his German counterpart. Debby Wong / Shutterstock.com
Back-to-back wins in Italy and Singapore have seen the 2008 world champion take a three-point lead for the first time since May ahead of the Japanese Grand Prix on 5th October. With only five races left and 150 points up for grabs, Hamilton has moved to favourite on Sporting Index’s 60 Championship Index, with a spread of 52-54. Rosberg is next best at 46-49 with surprise package Ricciardo trading at 26-28. Fans of the 25-year-old Australian should consider buying Ricciardo at 28. Bar a series of catastrophes, he looks nailed on for third at worst, and would make up 30 for that. But there’s cause for optimism that he could finish second, making up 40. He’s made the podium in seven of the last ten Grand Prix, winning three of those. Rosberg seems to be feeling the pressure now, having made an error that let Hamilton sweep by him in Monza. That came on the back of a well-publicised crash with his teammate in Belgium, which cost Hamilton all chance, and hampered his own effort too. And then he had to retire in Singapore. Make sure you check out the full range of markets with Sporting Index ahead of the crucial race in Suzuka this upcoming weekend.
The new season is up and running and October sees a number of high-profile clashes. Whether you are betting on one team’s supremacy expressed in points over another, total points, teams with a handicap or total touchdown shirts, there really is something to keep you gripped throughout the action. That’s not to mention performance markets, touchdown yardage, as well as a whole host of markets concerning when in the game something will happen. For example, when the first touchdown will come. Cincinnati Bengals won their opening three fixtures and face a tough test at New England Patriots on 6th October. The Patriots have won four of the last meetings, although the Bengals won the most recent clash. San Francisco 49ers at the Denver Broncos on the 19th October and Seattle Seahawks at the Carolina Panthers on the 26th October are another couple of games that catch the eye. All should provide fantastic entertainment and you would expect to see at least one of these sides in the play-offs come the end of the campaign. Remember, with sports spread betting, losses may exceed your initial deposit or credit limit.
October 2014
| www.financial-spread-betting.com | 89
OU
.COM 90 | www.financial-spread-betting.com | October 2014
*We’ll credit your account with £100 non-withdrawable cash for you to bet with but any losses over this amount are your liability. Full terms and conditions at sportingindex.
SPREAD BET ON ANY SPORT WITH £100 OF* UR MONEY, NOT YOURS
.com. Account opening subject to suitability checks.
GET O T FREE ARTED* ST YOU
Open an account at sportingindex.com/welcome and we’ll give you £100 to get started. No hidden catches, no gimmicks. Keep what you win, we’ll cover what you lose up to £100.* The real markets spring to life when the big sporting events hit our screens, when the heart of the trading action switches from the Square Mile to Sporting Index. And we’ve got every skirmish covered. Whether it’s a spread bet on Touchdown Yardage at Mile High, Winning Distances at Ascot or Total Classified Finishers at Suzuka, there’s no more exciting way to bet on top-class sport. Your winnings (or losses) are on a sliding scale directly linked to what happens out on the turf - or tarmac. Putting you more in tune with the action than any other bet. Volatility is optional, excitement guaranteed. Losses may exceed your initial deposit or credit limit October 2014
| www.financial-spread-betting.com | 91
School Corner
school corner
HOW TO EFFECTIVELY USE STOP LOSS ORDERS By Maria Psarra - Head of Trading at Prime Wealth Group
This is the first in a series of educational articles on the best habits of winning traders and investors, the most common mistakes traders make, and practical ways to avoid them. Having spent the best part of the last decade in the markets, trading for institutional proprietary trading desks, for myself, and over the last four years advising and trading for mainly retail and professional clients, I have come across trading mistakes too many times. I have made them myself, and have watched other traders and investors make each one of them. It is through this experience that I have learnt what separates the winners from the losers, what the “secrets” to profitable trading are, and how to deal with the emotional ’’hiccups’’ that cause one to lose in the markets.
It is exactly this knowledge that I want to share with you through my articles in Spreadbet Magazine, and before we go any further, I want to make you all aware of the fact that any trader or investor that tells you they have never lost money in the markets is just too young, too stupid, too inexperienced, or just lying to you, and most often, they are really a combination of all of the above. I hope that you will enjoy reading my articles, and that they will make you a better investor or trader. I look forward to your feedback, and… ‘’Happy trading’’ everyone!
92 | www.financial-spread-betting.com | October 2014
How to effectively use stop loss orders
“any trader or investor that tells you they have never lost money in the markets is just too young, too stupid, too inexperienced, or just lying to you.�
October 2014
| www.financial-spread-betting.com | 93
School Corner
Rule 1- Using the right stop loss orders Winning traders set their stop losses based on a proven and successful system designed to both protect them, and allow them to select suitable trades and profit from the markets. Losing traders on the other hand, set their stop losses based on randomly selected price levels and arbitrary potential percentage losses and monetary amounts, as well as based on the fear of losing money and the hope that all things in the markets, including this particular trade, will work in their favour. Let’s look into this in more detail. Winning traders always select trades that suit their broader macro view of the markets, their view of a specific security whether this is a stock, an index or a different asset class, their timeframe (time they are willing to stay with a trading position), and their personal risk tolerance.
In order to do so the trader looks for a combination of fundamental and technical characteristics in a stock. Starting with the fundamental side, he wants to buy into a company with a healthy balance sheet and good future profitability prospects. He realises that it is important to know the company’s past, so as to understand why the stock price is at its current levels, and be able to make out whether the company’s future is bound to be profitable or not, so as to decide on whether to buy into this future. So let us assume for our example that the trader has looked into company X, understands the past events that have brought the share price to its current levels, and believes based on his research that the company’s future will be ‘’rosy’’. So from a fundamental viewpoint, he is happy to buy it. Now the trader determines what price they would be willing to buy this stock at. This is where technical analysis comes in. The trader looks at the stock’s chart (I use a daily chart for this purpose) in order to determine support/resistance levels for the stock. Winning traders always buy against a support level, and place their stop loss for the trade accordingly. So let’s assume that the particular stock in our example has a support level at 100p, is currently trading above this, and moving higher.
So how do winning traders really select their stop loss levels in practice? It is easier to illustrate this through an example. Let’s assume that the trader’s macro view of the UK stock market is bullish. In other words the trader expects that UK stock prices will continue rising, and they want to take advantage of this uptrend continuation by buying into individual UK stocks in the FTSE 100 and 250. Now the broader asset universe has been determined, the trader proceeds with selecting the stock/stocks he will buy.
When buying a stock, winning traders want to risk as little as possible, only risk an amount that will not endanger their whole trading account, and what’s more, risk an amount that if lost, will not prevent them from continuing to trade. Winning traders know that in the markets, same as in life, there will be times when they will lose. So they make sure that when this happens, they have the strength and the financial ability to get up and fight another day.
94 | www.financial-spread-betting.com | October 2014
How to effectively use stop loss orders
“Winning traders always buy against a support level, and place their stop loss for the trade accordingly.” So let’s assume that for our example the monetary amount that ticks all of the aforementioned boxes is £1,000. This £1,000 translates into a maximum 10% stop for a £10,000 position in the stock, a 5% stop for a £20,000 position, and so on and so forth. This is the maximum amount the trader is willing to risk, and it is non-negotiable. Now that all of these have been determined, the trader looks at the price the stock is currently trading at, wanting to buy £20,000 worth of shares with a maximum monetary risk of £1,000, which equates to a 5% stop. Winning traders will only buy into the stock if the current price fulfils all of their aforementioned requirements. If they do buy stock X, their stop will be placed at a level (just) below the support level they are buying against, and if triggered will lead to a loss no greater than the maximum £1,000 that they are willing to risk on this trade. If the price is not right in this way, winning traders will do nothing. They will add the stock to their watch list, and wait to buy in when and if the stock price comes to the ‘’right’’ level in the future. They will not just pull the trigger and buy the stock regardless. On the contrary, losing traders will just jump in and buy a randomly selected amount at the current market price, use a randomly selected stop, and hope for the best. As an old market saying goes ‘’There are old traders, and there are bold traders, but there are no old bold traders’’. The markets are not a charitable or ‘’forgiving’’ place. Quite the opposite. Any trader or investor believing that they can make and keep money in the markets over time based on their hope for the best, and as such on pure luck and inadequate risk management, will never see their dream come true. This may sound harsh, but the markets are only going to be as harsh on you, the individual trader/ investor, as you allow them to. On the other side of every trade there is likely to be a winning trader, who among other things, will set their own stops in the way that makes them a winner.
So to summarise, the next time you decide how to set your stop loss order for a trade, start by determining whether this is the right trade for you to begin with. This implies that it is your personal risk tolerance among other things that determines whether a trade is suitable for you, and not your wish to trade a particular security regardless of its suitability for you and your trading system at its current price levels. If the trade is indeed suitable for you, set your stop loss against the support/resistance level you wish to trade against, and just go for it. In any other case, you are much better off going for a walk, and either keeping the money you would risk in this trade for your future investing, or if you find yourself unable to do this, spend your money on something different that is guaranteed to entertain you. We shall continue with my second rule here in Spreadbet Magazine next month. Until then, I welcome your feedback, and Happy Trading! Maria Psarra is Head of Trading at Prime Wealth Group (PMW), supervising a team of experienced brokers, and advising High-Net-Worth Individuals on suitable investment strategies. Maria employs different investment styles in order to construct personalised portfolios best suited to the risk and return preferences of PMW’s clients. Typical portfolios primarily comprise of UK and European Equities and Equity Indices, and to a lesser extent Commodities and Fixed Income exposure.
October 2014
| www.financial-spread-betting.com | 95
Currency Corner
CURRENCY CORNER
Here’s Why I’m Still Long the Dollar/Yen By Samuel Rae
Take one look at a dollar/yen chart and it is impossible for you to miss the sharp upside move we’ve seen over the past month or so. Having traded within a relatively tight range for the last five or six months, USD/JPY has given us what will likely turn out to be one of the sharpest, most volatile moves of the year across any of the majors.
For the non-breakout traders whose strategy failed to signal a long entry around 103, it may feel as if they’ve missed an opportunity. Alas, all is not lost. I believe there may still be considerable upside in the pair as we head into the latter quarter of 2014 and beyond. Here’s what I’m looking at, and why I think we could be trading upwards of 110 before December. In short, it all comes down to what has been a staple of the Japanese economy for the past 20 to 30 years – deflated consumer activity. Japan has lived under the threat of deflation and stagflation for the past two decades, and when Shinzo Abe implemented his three arrows policy back in December 2012 many believed such a threat had been lifted. Indeed, we saw something of a resurgence in many of the key areas of the Japanese economy throughout 2013 and during the first few months of this year. Then, however, Abe made a mistake. The Japanese economy is ageing at a faster rate than the vast majority of the developed nations.
Japanese people are living longer and having fewer children than ever before, and, as a result, there’s been stark concern over the nation’s ability to meet its social security bill in recent years. When Shinzo Abe outlined his aggressive stimulatory policy, he included a sales-tax rate hike to take place on 1st April this year. The assumption being that what was then expected to be a booming economy would absorb such a hike easily. Initially, this looked to be the case.
“Having traded within a relatively tight range for the last five or six months, USD/JPY has given us what will likely turn out to be one of the sharpest, most volatile moves of the year across any of the majors.”
96 | www.financial-spread-betting.com | October 2014
Here’s Why I’m Still Long the Dollar/Yen
New SBM contributor, Samuel Rae, is the author of the best-selling book “Diary of a Currency Trader”. Sam’s personal trading style combines classic candlestick analysis with a simple, logical and risk management driven approach to the financial markets – a strategy that is described and demonstrated in his “Diary of a Currency Trader”.
October 2014
| www.financial-spread-betting.com | 97
Currency Corner
Retail sales increased during the weeks that preceded the rate hike as consumers – naturally – rushed to make purchases that would become 3% more expensive after 1st April and, after the hike, levels in the retail sector looked to have only declined by about 2% from the rush of activity. Analysts and economists alike hailed Shinzo Abe as an economic genius, stating that he had managed to raise government income without having a crippling effect on what was already an economy on the edge. Five months after the hike, however, and it looks as though the aforementioned may not have been so readily achieved. Recent data out of Japan suggested that the Japanese economy contracted by more than 7% during the second quarter of this year, and that the manufacturing sector – a sector on which Japan relies heavily for output revenues – has weakened both in terms of physical production and participant sentiment. So, this explains the recent action in the USD/JPY. But what makes me think we’ve still got a way to go to the upside?
This may seem like a while away, but recent action has drawn attention to the hike and the Japanese government is currently in the process of deciding whether to delay, or abolish entirely, the scheduled hike. Critics suggest that a sales-tax rate of 10% (double the level at which it started this year) would send the Japanese economy spiraling downwards. Advocates – of which many senior members of the Japanese government reported as being – argue that the growing social security bill in Japan will force the Japanese government to redirect revenues from key areas of the economy over the coming few years if the shortfall cannot be met, and that raising the sales-tax rate is the only method of avoiding this. Either way, a decision is expected over the next few weeks. I believe that – sometime before the end of October – Shinzo Abe will announce that the rate hike will remain in place and go ahead as scheduled. At a time when the yen is losing considerable strength versus all of its major counterparts as a direct response to the prior sales-tax rate hike, such an announcement will likely catalyse a sharp bullish break, with 110 a reasonable immediate upside target.
Well, once again referring to his initial drafts of the three arrows policy, Shinzo Abe scheduled a second rate hike for October next year.
98 | www.financial-spread-betting.com | October 2014
Here’s Why I’m Still Long the Dollar/Yen
Obviously, my strategy dictates that I must wait for price action to afford me entry, so I’ll be watching closely for any of my favorite candlestick patterns to give me an excuse to go long.
A nice bullish pin at the trough of a short to medium term correction and I’ll be a happy bull. Let’s see what happens…
“the fact that chIna Is effectIvely drIvIng the australIan property market – to them at least – Is sImply representatIve of the dIsparIty between the returns on property avaIlable In chIna and the returns on property avaIlable In australIa.”
UDS/JPY CHART
To learn more about Sam’s travails in the world of currency trading, click the advert after this piece to receive your FREE book.
October 2014
| www.financial-spread-betting.com | 99
100 | www.financial-spread-betting.com | October 2014
Technology Corner
TECHNOLOGY CORNER
LITTLE ACORNS EQUAL MIGHTY OAKS? By Simon Carter
SBM’s resident technology specialist, Simon Carter, takes a look at what’s hot in the tech world.
October 2014
| www.financial-spread-betting.com | 101
Technology Corner
Can Acorns, a new iPhone app, really convince the twentysomethings of the developed world – so called millennials – that investing is the right thing to do with their cash? Is the shiny new app a gimmick or a gateway to serious trading? Will this tiny acorn spawn an investment revolution? And can you make any serious money from your spare change? It’s a long held financial principle that rounding up is a smart way to manage various aspects of your finances. A mortgage, for instance, will be paid off years earlier, and at a saving of thousands of pounds, if you, say, paid £1,000 per month instead of the prescribed £970 that the bank asks for. Many of us will be no stranger to change jars (or giant whiskey bottles) stuffed with one, two and five pence pieces. And there can’t be a single trader among us who doesn’t count a piggy bank as their first investment.
The good news is, is that Acorns isn’t entirely passive. Users can choose from five portfolios – designed in consultancy with Nobel Prize winner Dr. Harry Markowitz – which range in risk factor from ‘Conservative’ to ‘Aggressive’. You’re also able to fund the account with additional monies at any time, and you can withdraw your funds as and when you need to. Acorns is the brainchild of father and son team, Jeff and Walter Cruttenden. Aged 11, Jeff was given an unusual option of earning his allowance. He was allowed to pick a stock, his father would invest in it, and he could watch his allowance grow. Unfortunately for Jeff, the company he chose went bust, but so began a lifelong passion for investing and one that he took with him into University, where he would spend fruitless hours espousing trading to his peers.
With cash currently in the throes of a drawn out death, spare change is quickly becoming a thing of the past. Without a digital change jar, the little bits of currency that would once be saved are now sitting in current accounts, waiting to be spent on Netflix subscriptions, takeaway pizzas and a myriad of other trivial expenses. Although the ‘spend what you have’ nature of the young is undoubtedly good for the economy, the lack of saving and the general mistrust that millennials harbour for large financial institutions is certainly storing up problems for the future. Which is where Acorns comes in. Currently only available in the US, and for now just on Apple’s iPhone (although an Android version is imminent), Acorns aims to take your spare change, invest in the markets, generate a return, and introduce a whole generation to the joys of trading. The app is linked to the user’s bank account and tracks each purchase, rounding the cost of that purchase up to the next dollar and taking the spare change.
“Although the ‘spend what you have’ nature of the young is undoubtedly good for the economy, the lack of saving and the general mistrust that millennials harbour for large financial institutions is certainly storing up problems for the future.”
Why were they fruitless hours? You may recall your first, tentative steps into the industry. The bewildering array of options, the head-spinning pace of change, the complicated (at first) journey from start point to end point. For some, it’s intoxicating, but for others it’s intimidating. Not only that, but with limited funds, many couldn’t afford the high buy-in prices of most managed funds. Almost ten years later, and with $9m of funding behind him, Cruttenden may now have finally found a way to get through to those he couldn’t reach in his college days. As noted above, there are only five options to choose from, and finance isn’t an issue as there’s no minimum buy-in.
102 | www.financial-spread-betting.com | October 2014
Technology Corner
“cruttenden says that users can expect returns of between 4-9%. not spectacular, but certaInly better than any savIngs account.” So what does it cost? The app, as you would expect, is free and how much you contribute to your fund depends on how often you use your debit card. Reports vary, but in testing (which lasted two years) the typical user added around $7 per day to their account. This equates to over $200 a month – unappealing to the cash strapped – so it’s no surprise to read that recent promo material has put the figure closer to $2 a day. There is a flat monthly management fee of $1 and Acorns will take between 0.25% and 0.5% annually on returns. Crucially, in these early days, there are no available figures to report on returns – and ultimately, of course, this is what Acorns will live and die by – but Cruttenden says that users can expect returns of between 4-9%. Not spectacular, but certainly better than any savings account. Or a change jar. As a gateway to investing, Acorns is undoubtedly an interesting prospect, and even moderate success should convince users to ramp up their investment strategy. And with the ‘recession generation’, for whom micro-investment is the only option, the Cruttendens may be about to grow that mighty oak.
October 2014
| www.financial-spread-betting.com | 103
Markets In Focus
MARKETS IN FOCUS SEPT 2014
104 | www.financial-spread-betting.com | October 2014
Markets In Focus
October 2014
| www.financial-spread-betting.com | 105
Thank you for reading. We wish you a profitable October!
106 | www.financial-spread-betting.com | October 2014