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

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issue 18 - July 2013

Bitcoins Just another fad or are digital currencies here to stay?





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

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

Zak Mir Zak Mir is one of the UK’s pioneers in modern charting methods since the early 1990s, joining Shares Magazine as its first Technical Analysis Editor in 2000. Zak founded, the first pure TA website, in 2001 and which flourishes to this day. In addition, he has written for the Investor’s Chronicle, appeared on Bloomberg and CNBC as well as being the author of ‘101 Charts For Trading Success’.

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

Tom Winnifrith Tom founded the t1ps website in 2000 and over 12 years his average gain per tip was 42.7% on 241 share tips. He now writes for a range of US and UK financial and political websites and all his content can be accessed via - you can get alerts on everything Tom writes by following him on Twitter @tomwinnifrith or

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Editorial List Editor Richard Jennings Sub editor Simon Carter Design Copywriter Sebastian Greenfield Editorial contributors Tom Houggard Thierry Laduguie Filipe R Costa Andrew Sillitoe

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

Foreword Welcome to this 18th edition of Spreadbet Magazine! A helluva lot of work has gone into this publication over the last year and a half by everyone involved — our contributors (for which I am proud to have such an esteemed line up), our design and copywriting staff and, of course, yours truly! I am pleased to say that the magazine continues to grow its readership numbers and there is an ever increasing recognition of the calibre of the product that we put out each month and that is completely free to all readers — a pretty unique proposition in the marketplace I am sure you will agree. Watch this space for some major news which I hope to unveil next month as a consequence of our collective efforts and that should enhance even further your SBM experience... I hope you have all been making use of our new bulletin board ( too which is pretty unique within the marketplace — allowing you to post your own sentiment view on a stock as well as view multiple board posts, and that shortly will also have stock research at the side of popular companies too. As ever, it’s completely free! So, what do we have in store for you this month? We ask are all trading systems a waste of money and the purveyors of these charlatans and failed traders? Simple answer, largely yes! As we say in the article, if you can trade, you don’t ask people to pay you £100 a month and spend all your time looking for new fodder, you just trade, which is far more satisfying. We also take a look at the recent phenomena of digital currencies, in particular Bitcoins, in asking what all the fuss is about and whether there is room for such a product in the marketplace. “Goldbugs” are well catered for once again with a piece on “Peak Gold” that is both informative and thought provoking. With the yellow metal continuing to decline in the last few weeks, yet physical demand for it remaining at record levels, it is an interesting dynamic that is presently at play that should, ultimately, result in a resumption of the long uptrend. Catch up also with how the Trading Academy winner John Walsh is doing trading and now closing his first six months of being on his own. I’m sure many readers will relate to his emotions and experiences over this period. The first few years of trading on your own are the hardest and, I can safely say that after nearly 20 years now of trading, that you never stop learning. And so, I sign off once more and hope you enjoy the content package we have put together for you this month. Next month it’s the dreaded big 40 for me and so the mag will be out a little later as I celebrate and take it a little easy now I’m no longer officially classed as “young”!


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Bitcoins Explained SBM takes an in-depth look at the rise of digital currencies and asks are they here to stay?

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Commodity Corner - Silver in Focus SBM makes the Buy case for the precious metal

Dominic Picarda’s Technical Take Our resident technician Dom has a special piece on how to beat the S&P 500 through tactical asset allocation

Technology Corner SBM’s tech specialist Simon Carter writes a special piece on three tech goliaths and asks what they need to do to evolve and regain their mantles

Tom Winnifrith Conviction trade for July The always controversial Tom Winnifrith offers up online dating group Cupid as his short play for the next month

NEW Small Cap Corner SBM unveils a brand new contributor - small cap specialist Paul Scott who kicks off with his inaugural piece explaining his methodology for picking small cap winners


Tom Houggard’s Big Call


Currency Corner Duo Update


Tom sets out his views on the major markets over the remainder of the year

We update with our views on our major currency pair picks of the last few months long GBPAUD and long USDYEN

Zak Mir Interviews - Louise Cooper Zak gets to grips with former Goldman’s executive and financial commentator Louise Cooper

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Zak Mir’s Monthly Pick

Peak gold

The one and only Zak Mir picks out online video software specialist Blinkx as his trade for July

With the yellow metal remaining under pressure we take a look at the fundamentals and arguments of ‘peak’ gold



Are all Trading Systems a waste of money?


In the inimitable SBM style, we take aim at the trading systems industry and ask are they all charlatans?

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Alpesh on Markets Alpesh explains the statistics behind trading for a living

School Corner Thierry Laduguie of E-yield explains his methodology in using Elliot Wave Analysis in his trading and his proprietary sentiment indicator

When No Trade is The Best Trade The Market Sniper Francis Hunt provides a thought provoking piece on ‘getting flat’ and clearing your mind periodically when trading

FTSE Daytrader - How i started Trading How I started trading. Nick Hilsden of FTSE Daytrader reveals how we started trading the FTSE and his experiences since then

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

Markets in Focus A comprehensive markets round-up of under and out performers during the month of June

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Special Feature

BITCOINS A FAD OR A NEW ALTERNATE CURRENCY? A few years ago a project to create a complete new way of making payments was developed. The idea was not new in essence, as there have been several attempts previously to create digital currencies, but its attempt to eliminate the need for financial intermediation and to transfer the control of the money supply from a single entity to each and every user made it a revolutionary project.

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Bitcoins - A fad or a new alternate currency?

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Special Feature

Bitcoin, as it is named, was created to be a digital currency and whose purpose is to take market share from fiat, paper currency. At a time when the U.S. Federal Reserve has been ever expanding its balance sheet to record levels, printing money with abandon and experimenting with unconventional policy measures, it is perhaps not surprising that free marketeers are unveiling new methods of exchange. Unlike with traditional paper currency, the money supply for Bitcoin grows at a known and actually decreasing rate until reaching a pre-determined limit, clearly highlighting its creators’ concerns with the negative effects deriving from an unrestricted growth of the money supply. Bitcoin was created in order to avoid inflation and in line with the Austrian School of Economics thinking. Since its creation in 2008, the Bitcoin project has been through several difficulties and displayed a few technical vulnerabilities, and which have been undermining its future. While paper money suffers from counterfeiting, digital money suffers from hacking, and in that field Bitcoin has been particularly exposed. But no matter what happens in the future, Bitcoin is a case study and a particularly strong one at bringing into discussion pertinent issues that have been ignored since the gold standard was dismissed in 1971.

“Bitcoin was created in order to avoid Inflation and in line with the Austrian School of Economics thinking.” The monopoly power given to central banks has been the main reason for the creation of frequently recurring asset bubbles and for a blind redistribution of wealth — something which Bitcoin is designed to avoid. At the same time, the attempt at eliminating third-party intermediation and political intervention (through taxes and managed money supply) shows a libertarian political philosophy, while dismissing two important agents each with its share of blame in the current crisis — financiers and politicians.

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What Is a Bitcoin? Bitcoin was born from a paper written by a near fabled character called Satoshi Nakamoto, and which was first published to a network of cryptographic programmers in 2008. In the paper Nakamoto describes in detail the functioning of the system and establishes the basis for the creation of a new digital currency. A currency devised to partially substitute for your dollars and pounds. Unlike traditional currencies, instead of being controlled by any government, Bitcoin is expected to run on a peer-to-peer network and so in this way being completely decentralised. The money supply is not managed by the FED or the ECB, but rather by its network of users who can create Bitcoins themselves, but always at a known and decreasing pace over the years until reaching an absolute maximum in 2140. Instead of having a central clearing house, Bitcoin distributes the ledger to its network of users who, using their computer power, are responsible for keeping their money safe, checking for double spending and maintaining a public register. Transactions are free or incur very small costs. Certainly inspired by the great financial crisis of 2007-09 and with cost minimisation in mind in designing the system this way, Nakamoto avoids third-party involvement, preventing future exposure to the unsound decisions that led to the collapse of the financial system in the first place.

“The money supply is not managed by the FED or the ECB, but rather by its network of users which can create Bitcoins themselves, but always at a known and decreasing pace over the years until reaching an absolute maximum in 2140.”

Bitcoins - A fad or a new alternate currency? SATOSHI NAKAMOTO

“No one exists with the name Satoshi Nakamoto, at least no one who could be the Bitcoin creator, so it is almost certainly a pseudonym.” The Mysterious Satoshi Nakamoto

Bitcoin Trading - A 114,000% Rise

Who is Satoshi Nakamoto then? The creator of the Bitcoin world has always been a mystery right from the very beginning. The whole project evolved from a paper that he wrote and published to a small network of programmers. He has also posted several times in online forums but when someone tries to obtain additional information about him, results are always frustrating. No one exists with the name Satoshi Nakamoto, at least no one who could be the Bitcoin creator, so it is almost certainly a pseudonym. The name suggests a Japanese person, but as he writes in faultless English with a British slant, many believe he may come from the UK. At the same time, he uses an email coming from GMX, a German free provider. The plot thickens...

Since its creation in 2008 and right up until 2010, Bitcoin was nothing more than a theoretical exercise, popular among computer geeks but with no actual exchange value. In April 2010 the situation changed forever as the Bitcoin actually started trading in an exchange market. At first it was valued at 10 cents and stayed near that value until October of that year. Then, as the project became more widely known, Bitcoin gained some traction and its value against the dollar rose to 30 cents by the end of 2010. With more and more people willing to take a share of a rising market, demand grew while the Bitcoin supply, exactly as per its model that it was set up to do, experienced a limited rise. With the FED expanding its money supply as never before, the value of a Bitcoin rose substantially, achieving parity against the dollar in February 2011. With the help of articles featuring Bitcoin on Slashdot, Forbes and other authoritative sources, the price exploded to $8 in May, and to $29 in June.

Someone suggested that in Japanese Satoshi means wise, and someone else even speculated that Nakamoto may be the result of a puzzle involving the name of four companies: SAmsung, TOSHIba, NAKAmichi, and MOTOrola. Given that the design of the Bitcoin system as depicted in his paper is very refined and quite complex, many believe that Sakamoto may in fact be a group of people instead of a single person. Other possibilities have been advanced including speculation that he may work for a government, a central bank or even the CIA, but five years after Satoshi Nakamoto first appeared, one thing is clear — he/she remains unknown and the mystique grows. To add to the intrigue, near the end of 2010, Nakamoto stopped contributing to forums and then completely vanished without trail.

“With the FED expanding its money supply as never before, the value of a Bitcoin rose substantially, achieving parity against the dollar in February 2011.”

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Special Feature

BITCOIN CHART When the $29 price was hit, a period followed that can be properly coined (‘scuse the pun!) as a Bitcoin rush — similar to the California gold rush of the 19th century, but this time using computers and CPU power to dig for the valuable digital metal. Of course this also attracted the attention of speculators looking for new opportunities; thieves, trying to hack digital wallets; and the Feds, looking for ways to dismantle the business as they saw it as a potential threat. Bitcoin actually suffered its first stumble in value when in 2011 it fell from near $30 in June to just $4.60 by the year end. It then stabilised in the first half of 2012 and started rising again during the second half to close the year out at $13.50. It is in the current year however, that the value of Bitcoin absolutely exploded, reaching more than $200 in early February and currently trading at around $115. Any earlier adopter would be laughing barrels of apples after enjoying a stunning 114,900% price rise. Two pizzas, exchanged by 10,000 Bitcoins in the early years, would now be worth more than $1 million! On the reverse side of the Bitcoin phenomena is volatility. It has also been picking up exponentially, making its price unstable and, ironically, distorting the main function imparted upon it by its creator — a stable means of payment.

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This volatility seems to be mostly related to the elevated number of scandals surrounding it and that have been occurring with increasing frequency with many Bitcoin exchanges being run from unknown or obscure places, and in certain instances being part of criminal rings with the sole purpose being to steal real money from people.

A Rising Crackdown on Bitcoin As the Bitcoin became more valuable a crackdown began by the authorities. In 2011, someone known as Allinvain reported that 25,000 Bitcoins, worth more than $500 million, were stolen from his computer. A week later Mt. Gox, the largest Bitcoin exchange, was attacked by a hacker who drove the price of Bitcoin to near zero and withdrew tens of thousands of other people’s Bitcoins. The Poland-based Bitomat, the third-largest exchange at that time, reported it had accidentally overwritten its entire wallet meaning it could no longer identify the Bitcoin owners! Then MyBitcoin, the oldest wallet service, was shut down and its owner disappeared with everyone’s money. These episodes have stressed the necessity of creating rules to regulate the trading of Bitcoins and to allow only for this trading on organised exchanges.

Bitcoins - A fad or a new alternate currency?

“A week later Mt. Gox, the largest Bitcoin exchange, was attacked by a hacker who drove the price of Bitcoin to near zero and withdrew tens of thousands of other people’s Bitcoins.” Just recently, Mt. Gox, the largest Bitcoin exchange, has been under heavy government scrutiny and the U.S. Department of Homeland Security seized a processing account belonging to the company. The Department has been claiming that these service operations lack authorisation to process money exchanges involving the US dollar which, in statute, require an authorisation given by the Treasury Department and tight rules applied with regards to money laundering matters. It has also been speculated in the press that the Commodity and Futures Trading Commission (CFTC) is willing to get involved in the Bitcoin world by regulating derivatives that are currently traded on the digital currency. This route may open the gate for a serious organised market in which traders could trade without fear, but is likely to take some time before it is implemented.

Trading Bitcoin So how do you actually trade Bitcoins? To manage your Bitcoins you need to download wallet software which you can find at the official Bitcoin website. To actually trade the Bitcoin value you have at least two main options: using exchanges or through spread betting.

In our view, you should avoid exchanges at all costs. Most of them disappear from night to day and even the largest like Mt. Gox are at odds with the Feds and may see their assets seized at any time. In terms of spread betting, the story is somewhat different as you are betting on the Bitcoin price and not exactly holding the asset. Currently we are aware of two providers offering trading on Bitcoin: Spreadex and IG Index. Spreadex offers a market allowing you rolling daily bets while IG just offers binaries on the Bitcoin price. Spreadex allows you to go either long or short, for a minimum stake of 50p, a spread of 2.5% and requiring a 50% margin. The margin rates are so high due to the volatility the currency has been experiencing and contrasts with traditional FX pairs where margins are less than 1% and spreads can be as low as 0.1%. SBM is of the opinion that Bitcoin is in its early years and in the midst of an intense fight which will end with it either being a widely accepted, and perhaps the world’s first regulated digital currency, or just marginalised into an obscure world where true values are hard to ascertain. At this point, any trading conducted in the instrument is, to us, more gambling than investment and for such a purpose you may be better off simply going into a casino.

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Editorial Contributor

ZAk MiR’S MoNTHLy PiCk FoR JuLy Buy BLiNkx (BLNx): TARgET 160P. SToP LoSS 105P RECoMMENDATioN SuMMARy If there is a Gold Rush specific to the early 21st-century, the technology space has to be it. The dot-com bubble of the early 2000s was the early forerunner, albeit of completely manic proportions, to what we are now witnessing in the 2010s. Many commentators think that investors collectively are jumping the gun once more in terms of what the various technologies are likely to achieve. It would appear however, certainly to me, just over a decade after the bubble burst, that things are finally starting to take shape in a revolutionary way. One of the best examples in terms of AIM companies around at the moment to take advantage of many aspects of the online boom is Blinkx. While it may sound like a clichÊ, this company appears to be doing the right thing at the right time and in fact addressing one of the initial conundrums of the web all those years ago: how to make money from it? Soaring profits in the wake of the Olympics and the US presidential election last year not only boosted the shares, but also highlighted what the potential for this company will be over the medium-term.

RECENT SigNiFiCANT NEWS May 13th 2013 - Blinkx posted full-year results ahead of its own $26 million guidance and market forecasts as core earnings more than doubled to $30.2 million. Revenue rose by 73% to a better-than-expected $198 million. Citi upgraded their 2013 estimates of revenue and operating profit to $220.1 million and $33.8 million from $216.8 million and $33.7 million respectively. April 24th 2013 - Blinkx raised its full-year outlook as it expects adjusted EBITDA to be approximately $26 million and revenues for the year around $196 million, ahead of the previously upgraded range. February 11th 2013 - Blinkx said trading during the third quarter continued to be strong, boosted by recent acquisitions and the effects of the US elections and London Olympics.

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Editorial Contributor

The company expects to be ahead of targets, with revenue for the full year in the range of $180m to $185m. Blinkx said that recent acquisitions have significantly expanded the scale and scope of the Blinkx engine and the integrations are being implemented extremely effectively.

Fundamental Argument Of all the AIM stocks in my new 2H book, and that includes even the giants such as Xcite Energy and Gulf Keystone, it has to be said that it is difficult not to have Blinkx as a personal favourite. This is because, on the face of it, the company’s business model is relatively easy to understand. It is right at the zeitgeist of technology — at the intersection of what most investors will be familiar with, but which they can still be impressed by as it relates to broadband/4G and smart phones and, perhaps most of all, as a product that most of us might actually enjoy using on a regular basis. It is also a little ironic that the only blip in the recent past has been the association with former star tech company Autonomy from which it was spun out of, coming on the heels of Hewlett-Packard crying foul over its purchase of the UK knowledge management software giant. That was, in hindsight of course, the dip to buy into around the 60p zone in the autumn and the shares have more than doubled since. As the company itself has been able to boast, preview advertising is the fastest-growing of all the subsectors of online advertising and therefore you would expect a company at the heart of this to have soaring earnings. Indeed, in May the group revealed that annual profits were up eight fold to $17.7 million with revenues up by nearly three quarters to $198 million. Perhaps a more serious concern was that there was a chance, at least in the near-term, that the boost in advertising associated with both the Olympics and the US presidential election would be only a short term boost to profits. In fact, such doubts can be cast aside given the way that while these two key events of 2012 flattered revenue by around 10%, it would appear to be that it is the ongoing growth of the sector and the company’s organic growth that will power future profits onwards.

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In addition, there is also the impact of recent acquisitions to take up the slack of any post 2012 hangover. For instance, January witnessed a tie-up with Dailymotion in order to beef up the video offering, and further deals involving Taunton Press, Penske Media Corp and XOS Digital. This should be enough to ensure that the fundamental momentum here at Blinkx remains in place, as well as the perhaps distant possibility that at some point soon its attractions will prove too tempting to larger rivals such as Yahoo and Google where, even after the substantial recent gains in the share price, the stock still trades at a lower price to revenues ratio than its peers, something that broker Canaccord has been keen to point out.

Technical Analysis snapshot What is interesting about Blinkx’s chart since early 2011 is the way that you can split the daily chart right down the middle from almost exactly a year ago. At this point, the shares were languishing around the 40p mark and seemed primed to deliver a fresh leg to the downside after an autumn 2012 bull trap through £1.60 and then a January failure just above former 2011 summer support in the low 80s. However, the bulls have been treated to a U-shaped reversal centred around the early summer of 2012. A characteristic of this rebound is that it has been as violent on the way up, in terms of the ragged progress we have seen, as it was on the way down. Especially noticeable is the way that over the past couple of months the shares shot up from below 80p to £1.40 in a near vertical fashion, an almost mirror reversal of the case from November 2011 when the stock fell from £1.60 down to below 60p. But, before the vertical spike seen in the spring of this year, there was something of a journey in the sense that the shares were determined to flush out the bulls below the 200 day moving average —then around the 55p level during both October and November 2012. The big buy signal there came with a higher low above the 200 day moving average in early December, in the wake of the scare over Blinkx’s relationship with Autonomy/Hewlett-Packard. I am happy to say that I spotted this as a buy signal, even though, as is often the case, the bulletin boards were not on side with this, at the time, seemingly crackpot idea.

Zak Mir’s Monthly Pick For July

Admittedly, this was in the aftermath of a bull trap through 80p, but such signals above the 200 day line are very often powerful ones. However, arguably one of the strongest signals in the book came after the unfilled gap to the upside in February as it was only partially closed in June and April. Such gap fill failures can lead to spectacular rallies in stocks and markets and this was certainly the case with Blinkx. While it has to be admitted that the rally is now somewhat long in the tooth, it does appear that there is enough momentum remaining behind the stock to lead it up to the logical two-year resistance and one-year price channel top of ÂŁ1.60 before any significant consolidation is seen.


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Special Feature

ARE ALL TRADiNg SySTEMS A WASTE oF MoNEy? We get asked regularly here at SBM if there is any trading system that is really worth the money. As our more frequent readers will know, i’m a great believer in the saying “Them’s that can trade, do; them’s that can’t, sell systems!” (apologies for the yorkshire twang slant!). Having traded personally in the markets now for nearly 20 years, what I can say is that I have not come across one single, solitary paid-for system that consistently generates profits. Sure, a particular system may do well at a certain point in the cycle, but the market evolves. Think how different it is trading today under the centrally planned QE environment on Messer Bernanke’s watch relative to the late 90s on the approach to the dotcom blow-off.

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Trading conditions at any one time can be suited to a value biased stock system, a growth orientated one, trend following or a range/swing trading one etc. etc. it is actually impossible for one particular system to outperform constantly given how the conditions in a market environment evolve. This doesn’t mean it isn’t possible for a particular strategy to do well for a period of time, however, but it does render it near impossible to perform and generate profits all the time.

Are all trading systems a waste of money?

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Special Feature

“Well, this is a billion and a half pound company with some of the brightest brains from around the globe working on their ‘quants’ desk trying to figure out how to outperform the market.” Let’s look at one particular popular type of strategy — the trend following one. Take a glance at the share price of Man Group below. Not pretty reading. The reason for this fall? Well, this is a billion and a half pound company with some of the brightest brains from around the globe working on their ‘quants’ desk trying to figure out how to outperform the market. No prizes for guessing that for the last 3 years they have not been able to.


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Think about that for a moment — prize winning PHDs with all the computing capability in the world at their finger tips have not been able to find a consistent holy grail to generate consistent returns. They did exceptionally well from 2003-08, but in recent years their flagship AHL Diversified fund, from which they rely on for the generation of a good proportion of their profitability, has not been able to produce decent positive returns or get back above its ‘high watermark’ (the level above which it can start charging performance fees).

Are all trading systems a waste of money?

If Man Group cannot create an all-terrain system to beat the markets, what chance do you think “Mr Ginn” from ‘SystemsRus’ flogging his signals for a few quid each month has? My primary question to many of these vendors over the months that I have been running this magazine is simply “If your system is so good, why do you not trade it?!” I won’t bore you with the no end of excuses that have come back, from “Why would I not leverage my profits through selling the signals?” to “I’d like to give something back to the investing community”. Purrlease... It is extremely simple — if you can make money trading the markets, you trade them. You accept that there will be drawdowns, that some trades will go right and some will go wrong. But over the long haul you trade and you profit. What you don’t do is send out shoddy emails to mass email lists offering to deliver them to the sunny uplands for £50, £100 or whatever it is per month! Here’s a couple of reasons why a trend following system will inevitably fail: firstly, when it gets you into the trend, likely a good proportion of the gains have been had. When a stock, index or currency changes they generally do so violently, and quickly, and so the trend following system will, inevitably, get you in at a point where a retracement is due. Secondly, there is the problem as to where to place one’s stop — too close and you’ll be taken out, and too far away and you risk giving back a lot of your profits. I’ve seen countless occasions where there is in fact a steady uptrend in place, but the magnitude of a snap back (long or short) is around 10-20%. How many trend following systems would have remained in there with such a volatile move? This actually is one of the inherent difficulties of any trading — what is the price move that prompts you to cut and run and/or do you remain with your conviction if such a dislocation occurs? What I also know is that those really successful investors and traders do not hide behind “hypothetical results” disclaimers. If you see such a disclaimer then double delete the email! The simple fact is, as our esteemed contributor Tom Houggard relayed two editions ago in relation to the worth of so called “trading seminars”, pretty much all the trading systems out there are really technical analysis based signal generators. With a good charting package you can likely generate your own trading signals algorithm, and when you back test it I dare say that it would be profitable on paper. Hey, you could even go out and then look to charge people for this!

“What I also know is that those really successful investors and traders do not hide behind “hypothetical results” disclaimers.” So, if 99.9% of systems are a waste of money and what is taught at seminars you can learn from a lot of free material out there on the net including our own Trading Guides page, then how do you outperform the market I hear you ask? The answer is simple — there is no guarantee with any fund manager, or indeed if you stick to your own strategy, and at certain points in the market cycle you will underperform. But, if you put in the time in doing both the required fundamental and technical analysis — I don’t think either can be used exclusively — position size correctly, and apply relatively basic money management principles re maximum give-backs that you are prepared to endure, you’ll have half a chance the more experienced you become and, best of all, you’ll save yourself hundreds if not thousands of pounds on seminars and all singing and dancing paid-for systems!!

The other alternate of course is to find a good fund manager and accept that there will be periods of underperformance. In fact, given that most managers specialise in particular asset classes/sectors, this is an inevitability as that particular area be out of favour at a point in time. I have found over the years that asset allocating into undervalued areas AND, in the case of stocks, choosing the best companies in that area and holding through the cycle, is the only way that gives you the best odds of not only outperforming but generating a positive return over the medium term. If you think about it, and in looking at the market cycle below which is based on how human nature works, this should actually work as you buy assets at a low point and look to sell at a high (or higher) point.

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Special Feature

MARKET CYCLES CHART These cycles generally take three to four years to play out, although, with all the QE recently, this has stretched and distorted the cycle. We are busy hoovering-up undervalued mining assets at present at Titan and, if you’d like to join us investing our OWN money and where we only get paid if we perform, click the image below to register your interest to invest in our first three funds.

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Commodity Corner

Commodity Corner Silver focus Time to go all in? By Ben Turney

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Silver focus – Time to go all in?

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Commodity Corner

Making money in markets should be one of the easiest paths to riches around. Buy in bull markets, sell in bear markets and retire early to your own private island. In the words of Sergey the Meerkat, ‘Simples!’ The reality, of course, is somewhat different. Even identifying the market you should be in can be fraught with difficulty. For many investors in silver this lesson is likely to have been extremely painful in the last two years. To many, the bull market in precious metals, which started in November 2008, should not have broken as it has in recent months. Inflation should have rocketed, as the world’s central banks engage in a continuing race to the bottom with each other’s currencies whilst simultaneously engaging in an unprecedented expansion of the monetary base. Society’s faith in fiat money should have been shattered and there should have been a much more widespread transfer of wealth into physical assets (specifically gold and silver).

“Society’s faith in fiat money should have been shattered and there should have been a much more widespread transfer of wealth into physical assets (specifically gold and silver).” Instead, we have experienced a savage bear market and the price of silver has in fact fallen 55% from its April 2011 record close of $48.37/oz. What were quite well grounded bullish expectations have been completely confounded, with many likely nursing sizeable losses. There is still a lot of confusion as to why this has all happened. Following a price decline of 55%, it is safe to say this is one of silver’s more severe retracements in recent years. However, as I will explain below, I think the precious metal is on the cusp of a new leg up.

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What I personally use is something called the MIDAS Method. Developed by Paul Levine in the mid-Nineties, the MIDAS Method plots price against On Balance Volume (“OBV”). The MIDAS Charts differ from standard charts as the length of each month is determined by the OBV figure. This is immediately is more useful as higher volume months stand out from lower volume months, giving an impression of the strength of the trend. Within the charts, Paul Levine developed an algorithm to calculate support and resistance lines to help traders and investors determine relatively low risk entry points based on the prevailing direction of the market. Above all, MIDAS users seek charts with strong historical conformance, and silver has been a particularly good example of this. To the right is the 10-year MIDAS Chart for silver. Note that there are two levels of support, JUN2003 (pink) and NOV2008 (purple). The interaction of the price of silver with these two support levels over the last five years helps explain a great deal about the situation this market now finds itself in. The Nov 2008 support line clearly acted as primary support during silver’s last bull market. It originated in NOV2008, just below the JUN2003 support line (which I will come back to), and was validated three times within the first 16 months of silver’s initial recovery. Each of these proved to be excellent trading opportunities, the last one in particular. Thereafter the Nov 2008 support was tested twice more (in December 2011 and between June and July 2012) and again these were superb entry points (all trading points are circled in red). More recently, in early April this year, the price of silver again stopped at NOV2008 support. However, this time it quickly broke and plummeted 25% in just over a month (marked in blue on the diagram). According to the MIDAS Method, such a sharp decline at any support level invalidates the support line. Once a support line becomes invalid, then this is the signal that the market trend it has been supporting is over.

Silver focus – Time to go all in?

10 YEAR MIDAS CHART FOR SILVER For precious metal investors, the loss of NOV2008 in April this year marks a clear watershed, but what happened next is intriguing to say the least... The price of silver fell almost exactly back to the JUN2003 support and has since held this level (circled in red below).


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Commodity Corner

“oNE oF THE FASCiNATiNg ASPECTS oF THE MiDAS METHoD iS HoW PRiCES CAN BEHAvE AT LoNg-TERM, CRiTiCAL LEvELS oF SuPPoRT AND RESiSTANCE. SiLvER PRoviDES A PERFECT CASE iN PoiNT AT THE MoMENT.” Coincidence? Perhaps, but there are plenty of people out there who want to believe in the random walk. This is fine if it works for them, but the evidence that price movements conform to historical patterns is surely overwhelming. One of the fascinating aspects of the MIDAS Method is how prices can behave at long-term, critical levels of support and resistance. Silver provides a perfect case in point at the moment. The chart below is a six month, daily standard chart of silver.


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Silver focus – Time to go all in

Since April 26th silver has made a series of lower highs and higher lows. This symmetrical triangle pattern (drawn on the chart) is a widely recognised indicator for a directionless market. It is easy to spot and strongly suggests that neither the bulls nor bears are winning the tussle for dominance. On its own, a symmetrical triangle is usually not a good indicator for buying or selling.

“Unsurprisingly symmetrical triangles can often occur at potential market tops and market bottoms. I say “potential” because the pattern reflects the market’s indecision.”

That said, if you have a particular view that a tide is about to turn, then a symmetrical triangle can be one key indicator to watch out for. The fact that silver’s current symmetrical triangle is occurring at MIDAS’s Jun 2003 support looks highly significant to me. If the price breaks lower from here, the next likely level of support is probably at around $19/oz (which served as resistance from November 2009 to August 2010). However, if silver is consolidating and is about to start a new upwards trajectory, this could be an ideal entry point to take on a leveraged, tightly managed long position. The previous confirmation of JUN2003 support in November 2008, at the start of the last major bull market, and the halt of silver’s recent collapse at this level both add weight to the case for buying. Symmetrical triangles cannot last forever. The market will soon have to make its mind up and our money’s on a fresh up-leg that will take us back towards $30 before the year is out.

Unsurprisingly, symmetrical triangles can often occur at potential market tops and market bottoms. I say “potential” because the pattern reflects the market’s indecision. Just because a symmetrical triangle occurs, this doesn’t necessarily mean a reversal of the trend will follow however.

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Editorial Contributor

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

DoMiNiC PiCARDA’S TECHNICAL TAKE SPECiAL HoW To BEAT THE S&P500 THRougH TACTiCAL ASSET ALLoCATioN you can’t beat the stock market over time — the textbooks are adamant about that. And, if you bother trying, you’ll just end up with lower returns and rack up higher costs to boot. Real life seems to back this theory up: some ninety percent of professional money-managers fail to beat the S&P 500 index over a ten-year horizon. The solution: give up trying to outsmart the market, buy a low-cost tracker fund and sit on it. Since you’re reading this magazine, you almost certainly disagree strongly with the previous paragraph. As a spread bettor, you believe you can do better than the average, and are willing to put your hard earned money where your mouth is. And despite what a lot of the theory claims, there is hard evidence that it is possible to do better than buy-and-hold, whether you’re investing tactically or swing-trading. You might think that beating the S&P 500 index would demand access to the world’s finest research or intensive trading. In fact, a simple and totally objective trend-following approach is all that’s needed. And, this doesn’t require you to be constantly buying and selling either. on average, the market-beating strategy in question would have involved less than one trade per year over time.

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Dominic Picarda’s Technical Take




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Editorial Contributor

So, how does it work? The idea is simple: catch as much of bull markets as possible and dodge the worst of big bear markets. Most people rely on a combination of fundamental valuation and gut-feeling to determine the outlook. My alternative is to follow the trend, buying when the market first makes an end-of-month close above its 10-month exponential moving average, and selling when it does the opposite.

To ensure you get in as early as possible during a new uptrend, this approach also goes long when the S&P’s monthly relative strength index turns up from below 30 per cent, which is an extremely oversold reading. And, to make sure that one’s money isn’t idle when the system is out of the market, all cash should be invested in short-term government securities or instant-access savings accounts during those periods.



“THAT SiNgLE PERCENTAgE PoiNT MAy NoT SouND LikE MuCH, BuT iT MAkES AN ENoRMouS DiFFERENCE To A PoRTFoLio ovER TiME.” The results of this system are strikingly good over time. Going all the way back to 1871, the S&P has returned 6.5% a year after inflation and assuming the reinvestment of dividends. Tactically switching in and out of stocks and risk-free Treasury Bills would have earned 7.6% a year, by contrast. That single percentage point may not sound like much, but it makes an enormous difference to a portfolio over time.

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Not only has this approach earned a higher return, but it has done so by taking less risk. The annual volatility from buying and holding the S&P 500 has been around 18.7%. The volatility of the tactical switching strategy was only 15.8%. This goes against everything the textbooks tell us about earning higher returns. In order to get more bang for your buck, the academics say you have to take on more risks, not fewer.

Dominic Picarda’s Technical Take


“Still, this isn’t to say this strategy is a free lunch. It requires patience and discipline. Just over half of all its trades over time have lost money.” Still, this isn’t to say this strategy is a free lunch. It requires patience and discipline. Just over half of all its trades over time have lost money. Occasionally, there have been as many as five losers on the trot. In terms of annual performance, the strategy has only outperformed buy-and-hold in around one-third of all years. All these things can make it quite psychologically difficult to stick to this approach. How best to put a tactical switching strategy such as this into practice? Given that the average trade lasts ten months, and that reinvested dividends are an important part of the strategy, the most obvious way would be to buy an exchange-traded fund or other tracking product. Doing it within an Individual Savings Account (ISA) or Sipp would mean that you wouldn’t have to worry about capital gains tax bills as you sold each time.

For pure spread betting purposes, I’ve found a short-term trading strategy using similar principles that would have achieved decent results. Buying the S&P 500 the day after it crosses above its 91-day EMA and then selling the day after it crosses below its 64-day EMA would have produced 1292 points of profit since 1993, compared to 1164 points by buying and holding. And, although it produced only 35 winning trades versus 51 losers, the reward-to-risk ratio was 4.39. Those of a trading mindset could therefore use the tactical switching strategy as an alternative to buy-and-hold for their longer-term investment account, while also doing the daily version in their spread betting account.

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Technology Corner

How Do You Solve a Problem Like Motorola? BY Simon Carter

Simon Carter investigates how the sleeping tech giants of yesteryear can reawaken their fortunes and why Yahoo might be an unlikely source of inspiration. We never had this problem twenty years ago, the question of whether it was right to feel nostalgic for big old tech companies. Back then, there were no big old tech companies, there were just shiny new ones, changing our lives with fancy gadgets, eventually convincing us to throw away our Filofaxes and trust our lives to microchips. But now, in the cold light of 2013, it’s possible to get a warm glow simply by casting the mind towards the day you first received an AOL CD-ROM and dialled up to the internet for the very first time. Or the moment you first flicked open your Motorola V3 to the envy of all around. Hell, it’s even possible to get that itchy ache of nostalgia from the memory of your first game of Wii Tennis on Nintendo’s wildly popular console. It was like magic. It was all magic. But magic fades. Three former market leaders: AOL, Motorola and Nintendo (and make no mistake about it, they were giants) are on the verge of falling off the mountain their success built and into a pit of obscurity, and many within the industry say the time is now for these companies to decide whether they want to be another Sega, or whether they want to be another Apple. Or even another Yahoo.

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Whilst the riches to rags story of the Sega Corporation and the rags to riches to rags back to riches story of Apple are both well documented, the current mini renaissance that is happening at Yahoo, under the sometimes controversial but possibly visionary hand of Marissa Mayer, could be the guiding light that our three (not so wise) friends are looking for. MARISSA MAYER

How Do You Solve a Problem Like Motorola?

“Three former market leaders: AOL, Motorola and Nintendo (and make no mistake about it, they were giants) are on the verge of falling off the mountain their success built and into a pit of obscurity.�

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Special Feature

Though only in her role for a relatively short time span, Mayer has overseen the acquisition of more than 10 companies (the most noteworthy being the $1.1bn purchase of social blogging website Tumblr). Not all of the acquisitions are headline news: Ghostbird Software, Rondee, Stamped and Jybe may all be new names to most people but, in the words of Mayer, each procurement “align[s] well overall with our businesses.” In short, Yahoo are in the process of reinventing themselves from an ‘also-ran’ search engine to a web portal / hub to give users the all in one experience that AOL used to provide. Respectively, the companies listed above were: an iOS photo app, a conference calling provider, an app for finding recommended social activities and a service to find and recommend places to eat. This is clever shopping from Yahoo. But, there is more to Mayer’s plan than shopping for services and products that will strengthen Yahoo. Part of the reason for picking up so many companies so quickly is to capture the creative and technical skills behind them. Indeed, one of Mayer’s first moves was to ban working from home. The idea was initially ridiculed and derided as a policy from a bygone age, but who can fail to be excited by the culture dish of talent being created at Yahoo HQ? How does this help the likes of AOL, Motorola and Nintendo though? After all, if Yahoo are sniffing out and acquiring the cream of technological talent, not to mention Google and Facebook hoovering up every promising graduate they can lay their hands on, what’s left for them? Just how can they fight against the dying of the light?

Well it’s not so much what Yahoo are doing that should provide inspiration, it’s why they are doing it. Forget the specifics of the shopping spree for a moment and you’ll see that Mayer has given in and realised that going toe-to-toe with Google and Microsoft in the search wars is never going to end well. She also knows there’s no benefit to throwing a huge hat into social networking. So, Yahoo are thinking about what users want from the web, and are doing everything they can to provide that experience. This is where AOL can learn.

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Despite rebranding itself recently as an online video advertising provider, and enjoying its first quarterly growth in eight years, AOL are still struggling not to fade away in the world of web. In fact, search online for AOL and you’re more likely to find puff pieces about the three million dial-up customers still scratching around America than anything in the way of relevance. Acquisitions have not gone well for AOL in the past, think the Bebo disaster, so they should concentrate on what they are good at. Even though they have been, in the past, criticised for their ‘walled garden’ approach to the internet, the fact that they still have so many loyal dial-up customers shows that this is something desirable to many people. If AOL were to create a similar offering in broadband, then they would have millions of potential customers to aid in the switch from dial-up to broadband as well as tempting back some of the 25 million subscribers who have deserted them over the years. Think this is a backward move? Consider that the revenue AOL receive from internet still dwarfs the revenue they receive from all other services combined. So how about Motorola? Throughout the 1990s and the middle part of the last decade, the Illinois based company were never out of the top three selling mobile phones.

How Do You Solve a Problem Like Motorola?

“What do Candy Crush, Angry Birds, Cut the Rope and Fruit Ninja all have in common? They are all hugely popular mobile games based on a very simple idea.” Now, they offer only three handsets after splitting the once successful company into two divisions following losses of $4.3 billion between 2007 and 2009. Following the Yahoo model of acquisition is impossible (even Apple buy hardware from Samsung) so if Motorola want to be big in mobile again they need to focus on what they were always good at: design. The RAZR V3 was the ‘iPhone’ of 2004 – it was so fashionable that Paris Hilton even had a jewel-encrusted V3 – and with Apple coming under fire for a lack of innovation, the iron could be hot for Motorola. The software is taken care of, Motorolas now run on Android, so instead of tiny design upgrades (see the minor tweaks that differentiate the new RAZR with the RAZR HD) the rumoured new ‘X’ Phone had better be beautiful. And what of Nintendo, the legendary gaming giant who are withering under attack from Microsoft and Sony in the console wars and the huge threat of mobile gaming? Always the kings of innovation, the Japanese company rocked the world in 2006 when they launched the Wii. Millions were sold, it seemed that every home had one, and then it stopped. The Wii U, launched last year, has certainly not caught fire, and with profits on the slide (or gone completely), times are tough in Tokyo.

Do Nintendo once again have the next big thing up their sleeve? The Wii U and DS 3D would suggest not. So, what to do? What do Candy Crush, Angry Birds, Cut the Rope and Fruit Ninja all have in common? They are all hugely popular mobile games based on a very simple idea. Basically, they are Nintendo’s Tetris updated for the 21st Century. In a market where a tiny start up (or sometimes, just one person) can become huge with one light bulb moment, Nintendo could do worse than put significant efforts and resources into the smartphone gaming market. Following Yahoo’s method of acquisitions, a few smart purchases could see the Nintendo logo lighting up every iPhone and Samsung Galaxy across the world. Forget consoles, Nintendo. Let others build the devices, you make the games. Of course, if it were that easy to turn companies around Marissa Mayer wouldn’t be on $23.4 million a year at Yahoo, but with a few tactical tweaks it really is possible for the sleeping tech giants of yesterday to wake up.

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Editorial Contributor

Tom Winnifrith’s Conviction trade of the month Sell Cupid at 75p Once again I go into battle with my old friend the great (if semi-literate) chartist Zak Mir. He reckons that AIM listed online dating agency Cupid is a buy and is heading for 94p. I reckon that it is largely worthless and is heading to c10p a share or less. I suppose that it all depends on timescale. As Keynes noted, in the long run we are all dead. With Cupid it is just a matter of how long the long run is.

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Editorial Contributor

The shares have certainly sprinted ahead in recent weeks which is odd as Cupid ended May with a pretty dramatic profits warning. The reason for the re-rating could be that folks are terrified of betting against Zak. Or, more plausibly, it is that a fund called Toscafund has been aggressively buying stock — it now owns 11% of Cupid.

“The reason for the re-rating could be that folks are terrified of betting against Zak. Or, more plausibly, it is that a fund called Toscafund has been aggressively buying stock — it now owns 11% of Cupid.” There are some folks out there who reckon that if a fund is buying that aggressively it has to be a strong signal to follow. Hmmm... Toscafund specialises in buying large stakes in stocks that have tanked as recovery plays. And it is an activist investor. But it is not infallible. I note, for instance, that it bought out Healthcare Locums at just 0.75p a share earlier this year. That may or may not turn out to be a bargain. But Toscafund had, less than 12 months beforehand, essentially underwritten a large rescue funding at 10p a share. You see we all get it wrong now and again and I think that on Cupid, Tosca it has got it badly wrong. The fundamental flaw with Cupid is, I believe, that its business model does not work. It runs a variety of websites which are largely not for those seeking romance, love, stable long term relationships and a wife to berate you, but for those seeking a no-strings bunk up — casual sex. Oddly enough most of its customers are men. The reason for this is that if you are a woman seeking random encounters you are unlikely to spend money putting your photo or any details on the internet — in most cultures we still apply different standards to how we view men and women who “put out.” Men are macho studs. Women are sluts. If you are a good-looking woman seeking random no strings encounters you could either pop along and see me at my restaurant or, if I am busy, there are numerous bars where your needs can be sated.

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That is how most folks get casual sex (don’t ask me how I know!). If you are determined to stick your photo on the internet, use a free site (an advertising driven model) where there is a critical mass of punters wanting the same thing. So why the heck sign up with Cupid? Indeed. And hence that means that most Cupid customers are men. And it seems that most are very disappointed by what they get for their cash. The average Cupid customer lasts for less than 3.5 months (and falling). Now, given that Cupid persuades customers to sign up for either one month, three months (a far “cheaper” option) or a year, one wonders what the actual renewal percentage is? Oddly in a company that gives out KPIs (management speak — Key Performance Indicators) ad nauseam this is one KPI that is not given out to investors. But my money is on the renewal rate being de minimis. There have been allegations that Cupid has lured punters (i.e. desperate men) into signing up by showering them with fake emails from gorgeous young women with an apparently insatiable lust for carnal pleasures with men — any man will do as long as he can breathe. Cupid denies this and promises an independent review of the allegations by June 30th. Oddly enough, it appears that this review had not — as of a couple of weeks ago — involved speaking to the undercover reporter in the Ukraine who claimed to have been offered a job by Cupid pretending to be one such woman. So while the review can hardly be viewed as credible, no doubt Cupid has nothing to hide and has done nothing wrong... But, ahem, research undertaken by an associate made it clear that while he was pondering taking up a Cupid membership (he did not), he was indeed swamped with birds who seemed to want to copulate with him. No doubt this is all a coincidence. But the point is that whatever the expectations of customers of Cupid, the dire renewal patterns indicate that those expectations are just not being met. With no specific reference to Cupid at all, but in a general sense, if your customers think your service is crap, you have a fundamental problem. There are only two ways around this. One is to spend vast amounts on marketing so that you always have “fresh meat for the mincer.” And the other is as a quoted company to use your equity to buy other businesses meaning that your poor organic metrics can be masked with bought in growth. Oddly enough Cupid spends a vast amount on marketing and has also used its (once highly rated) paper to make a number of acquisitions.

Editorial Contributor

But in the end, the wheels will always come off a business that is not satisfying the needs of its customers. And that brings me to the most recent RNS statements. I refer to three. There was a March 25th trading statement, a May 29th profits warning and a June 4th RNS prompted by an article wot I wrote. To June 4th first. I had run my proposed copy past Cupid and published. Cupid then responded with an RNS which said that my article was misleading blah, blah, blah, but demonstrated this by correcting things that I had not said at all. So while I discussed cash minus trade payables on July 3rd 2013, the company discussed cash on June 30th in its RNS. In other words, Cupid inferred via an RNS that I had stated things that I patently had not. That is not the action of a company that I would personally be backing. On March 25th Cupid stated that sales growth so far in 2013 was more than 20% and that it was on track to hit forecasts. Analysts thus expected H1 EBITDA of c£6.5 million (up from £5.9 million).

Step forward to May 29th and we were told that sales growth in H1 would be 13% but on a LFL basis (excluding acquisitions) that was MINUS 1% and that EBITDA would be £2.5 million. Clearly in Q2 sales growth from the acquisitions has slowed big time and from core businesses sales must be falling fast. Given my comments above about renewal rates and meat for the mincer that is not good at all. What kills businesses in the end is cash or lack of it. Cupid says that by June 30th it will have cash of at least £10 million and no debt. But it is likely to have net trade payables of at least £3.5 million, its dividend is payable on July 2nd which is £2.5 million and there is a deferred consideration due in July of £1.4 million. If your metrics are falling off a cliff, a cash position (minus net trade payables) of £2.6 million is not a good place to be. Cupid is my conviction sell of the month at 75p.


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Don’t miss out!

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Editorial Contributor

PAuL SCoTT’S SMALL CAP CoRNER This month we introduce a new contributor. A chap with a “name” in the small cap arena, built up over a number of years and with a large following. Paul Scott. He has been a professional small caps investor since 2002. He trained as a chartered accountant in the early ‘90s, then spent eight years as the Head of Finance for a rapidly growing ladieswear retail chain (we grew from 16 to 150 shops). Paul says: In 2002, I gave up wage slavery for good, and concentrated my efforts full time on small caps investing. Overall I’ve made a very good living from the markets in the last 11 years, and continue to do so. Although I don’t want to gloss over the fact that I had a pretty rough patch in 2007-8, as indeed did many other people and companies. So, a lot of important lessons have been learned along the way, sometimes the hard way! He writes a weekday column on small caps at Stockopedia.

Why focus on small caps? Generally I’ve found far more pricing anomalies amongst small caps than in mid to large caps. Also there are a number of features of the small caps market which are inherently attractive to investors, such as: 1. Little to no analyst coverage, so bargains can remain undiscovered and unpublicised for a good while. 2. Most institutions cannot invest below a certain threshold, e.g. sub £100m market cap, as such investments would be immaterial and hence pointless to a large fund, so we private investors have the field, in many cases, to ourselves.

3. Small cap companies and their accounts are usually not overly complex and thus easy to understand. 4. Access to Directors is easier, by attending AGMs, telephoning companies and getting straight through to CEOs and FDs, etc. 5. Illiquidity in the shares can lead to large and irrational price movements, which creates many good buying (and selling) opportunities. 6. If you catch a good growth company early, the rewards can be spectacularly good. Set against that, one also has to consider that small caps are inherently more risky because they tend to be more heavily reliant on a few customers and a few products/services so the chance of something going wrong is greater.

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Editorial Contributor

“Bear in mind that everyone is talking their own book, and be sceptical! It is always vital to DYOR. Over time you learn who the genuine people are, and who are not.” How to find stock ideas?

My stock picking approach

I’ve found that there is no substitute for putting in the time and effort to find under-priced shares. My main methods of finding bargain shares are:

It’s difficult to explain exactly how I pick shares, as I don’t use a set formula. However, it goes something like this:

1. Getting up at 7 a.m. Mon-Fri and reading RNS statements — results and trading statements. This will give you the most up-to-date picture of how companies are performing, and the early bird will quite often catch the worm — I’ve made some excellent profits from diving in at 7:58 a.m. and grabbing shares in a small cap that has just announced a positive trading statement or results. However, you really do have to know what you’re doing to get it right.

1. Eliminate certain sectors — one person can’t cover the entire market, and different approaches and knowledge are needed for some sectors so I just ignore sectors where I have no competitive edge or experience, or are too risky. For me, this rules out certain sectors such as the resources sector, aviation and financials (banks, insurance cos, etc). I’m a believer in Warren Buffett’s key rule — only invest in what you understand.

2. Meeting management — again this involves time and effort, but greatly increases your understanding of a company. I probably meet the management of 30-40 companies per year, and the odd one will turn out to be a very successful investment. It also sometimes helps you avoid bad situations! 3. Networking — sharing ideas with other investors can be valuable, interesting, and fun. Bulletin boards, Twitter and face-to-face meetings with like-minded investors are great ways to swap your best share ideas. Bear in mind that everyone is talking their own book, and be sceptical! It is always vital to DYOR. Over time you learn who the genuine people are, and who are not. 4. Stock screening — I use Stockopedia to filter the market for shares with attractive valuation metrics, such as a low PER, a good dividend yield and a sound balance sheet. This is a great way of producing a manageable shortlist of shares to research, and to find new opportunities. 5. Magazines/Internet — It’s worth having a quick skim of magazines such as Shares, MoneyWeek and Investor’s Chronicle, which occasionally throw up some interesting companies. [Editor intetrject — and of course SBM!]

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2. Eliminate micro caps — personally I set the cut-off point at about £10m market cap. Below that level, liquidity can become non-existent, and the risk of a de-listing is high (which usually means an instant 50%+ loss when it’s announced). 3. Eliminate companies with weak balance sheets — my golden rule is to avoid 100% losses from companies going bust. This is achieved by a fairly quick review of the balance sheet, taken in context with the P&L and cashflow statements. If there is even a slim risk of a company going bust, I deploy my bargepole. 4. Conduct desktop due diligence on the company’s accounts, its most recent annual report (I read the whole thing, but focus mainly on the figures and all the notes to the accounts, less so on the marketing blurb at the front!). I also do a Google search on the company, review its own website and review bulletin boards for the company (tip — the quieter, the better, as that means other investors haven’t spotted the value!). This all takes time and hard work. Lots of share ideas are abandoned at some stage of the above process, but a few survive to a point where they stand out as being a bargain.

Paul Scott’s Small Cap Corner

What is a bargain share?

Avoiding investing fads

Well, that’s the key question! It will vary from one investor to another, but for me it is obvious when I find a bargain. After crunching all the figures, I’ll literally get a warm tingle about having found something that simply looks too cheap given the company’s likely performance in the next year or two. It will look cheap based on even gloomy assessments of their future performance, and the upside will be thrown in for free.

Every bull market produces a wave of traders who make good money by chasing up fashionable shares to increasingly irrationally exuberant levels. These are often loss-making ‘story’ stocks.

Historic financial performance only tells half the picture. When we buy shares, we are effectively placing a bet on the company performing better than the market has factored into the current share price. Broker notes can help in this regard, but their forecasts are often wildly inaccurate because it is difficult to forecast profits given that profit is the sliver that is left after unknown sales, partially known gross margins and largely known costs are netted off. Hence small variations in sales can trigger large variations in profit due to operational gearing. So one of the key things I look for is an up-to-date positive trading statement. It will sometimes take the market several days, or even weeks, to digest a trading statement and its impact on profitability. You can get a real advantage as an investor by already understanding the company well and being able to quickly and accurately interpret their latest trading statement. A recent example of this was Pilat Media (PGB). I flagged up how cheap the shares were in my Stockopedia morning report on 16 April 2013, when the shares were 37p. At the time Pilat held net cash of almost half its own market cap and had recently announced excellent annual results, and a strong outlook. Adjusted for net cash and amortisation, the earnings multiple was only around five or six. It was, in my opinion, just the wrong price! So, obviously I bought some stock myself, as well as flagging it to my readers for their own research, and we’ve made a tidy 52% gain already in just two months. Finding situations like that won’t happen every day of course, but it’s surprising how often they do crop up. Usually you have to be more patient though, as an irrationally low (or high) price can continue for long periods sometimes. However, for the patient investor, a fundamentally good company generating decent and sustainable cashflows and priced cheaply relative to the rest of the market should eventually re-rate upwards.

Such bubbles are as old as the financial markets themselves and there are some excellent books which remind us that human nature (and hence the markets) does not actually change even though technology does — such as the absolute classic “Reminiscences of a Stock Operator” or “A Short History of Financial Euphoria” by Galbraith. Personally I don’t completely rule out riding a speculative wave providing you keep your eye very closely on the exit, and treat it for what it is — essentially gambling. The big danger is when you become a believer in a hyped up share and refuse to sell once the bubble has burst. I’ve been there and done it, hence having learned the hard way to be very careful or completely avoid story stocks. However, if a ‘story’ stock is priced reasonably and has adequate financing to continue for the next couple of years, then it might be worth considering. My favourite story stock at the moment, in which I hold a small position, is Clean Air Power (CAP). It has a product already in production, namely equipment which allows diesel-engined HGVs to run largely on natural gas. If sales really shoot up, as they possibly might, then the £14m market cap could rise to multiples of that. Or it might not; it’s a bit of a punt. So, on a risk/reward basis in my view there is a, say, 10% chance of hitting a seriously big multi-bagger with that share, a 30% chance of getting a doubling or tripling share price, a 40% chance of it staying about the same for a few years as they try to commercialise it, and a say 20% chance of it flopping in the next year or two. Totting that up, at £14m market cap I think the chances of me making a profit on the shares at their current 8p are reasonably good. But, looking at another company in the same sector, take Torotrak (TRK), which has been trying to commercialise its revolutionary gearboxes for many years, and not really getting terribly far in terms of financial results, their £46m market cap looks a lousy risk/reward balance to me, so I am avoiding those. So, generally I will look at story stocks if they are cheap and the risk/reward looks good. However, these will only ever be a small side line in my portfolio of good solid companies on a cheap multiple of future cashflows.

July 2013

| | 47

Editorial Contributor

Over-looked and unloved shares This is where the real bargains can be found, and it is my favourite hunting ground. Value shares that everyone hates, and assumes are awful, can occasionally provide spectacularly good investments. However, they can also be dangerous value traps too — I was nearly caught on Game Group a while ago, but exited at a profit when it began to emerge that suppliers were stopping supplies — fatal for any business. So it’s not easy. My biggest winner last year was Trinity Mirror (TNI), which I wrote about in detail on my blog when the shares had crashed to only 25p. This put the company, amazingly, on a PER of just one! Yes, one! How could this be? It was partly because the company had considerable net debt, although I worked out that the net debt would be fully repaid from cashflows in about three years.


48 | | July 2013

It was also because the market assumed newspapers would quickly die out, whereas in reality Trinity Mirror is still producing a remarkably high operating profit margin, and is matching falling sales with reducing costs. Finally, their pension deficit, whilst large, was fully covered by freehold property. So arguably the two simply net off. The shares are now more than four times the price than when I wrote about them this time last year. I sold too early, but more than doubled my money on them and so I was happy. Again, it all boiled down to a lot of hard work researching the numbers in great depth, going to the AGM and, above all, being prepared to take a contrarian stance on a share which it seemed everyone deemed to be a catastrophe. In fact, it was an outstanding bargain at 25p, as I discovered and publicised at the time.

Paul Scott’s Small Cap Corner

What do I like currently?

Small Cap Fund

It’s more difficult to find bargains right now, given that we’ve had a strongly rising market in the last year, so I’m taking a cautious approach at the moment. However, shares which I believe to be under-valued and unloved include:

I hope the above gives you a flavour for my stock-picking approach. I don’t claim to be a guru, but over the years I’ve got a lot more share ideas right than wrong. I was recently asked by Titan Investment Partners if I would like to help them set up a small caps fund using an innovative spread betting wrapper.

Norcros (NXR) at 15.5p – on an irrationally low forward PER of about 7.5 and paying a reasonable 3% dividend yield. Pension deficit seems under control and does not worry me unduly. New River Retail (NRR) at 222p – a very interesting secondary retail property REIT which is yielding 8% and has good long-term upside on its NAV from development work. I met management recently and am highly impressed with their experience and strategy. Clean Air Power (CAP) at 8p – as mentioned above, this is a speculative pick, but everyone likes a little bit of fun in their portfolio alongside the more sensible stuff! NB. Please be aware that these are ABSOLUTELY NOT tips or recommendations, they are simply shares that I personally like and personally hold in all three cases. So please, as always, do your own research and take professional advice where appropriate.

We’ve been working together to set up a structure that manages the risk in a conservative way, and I shall be seeding the Fund with my own money. Therefore it’s a project that I’m both excited about and committed to. I will be the main stock picker for the Fund, operating within a strict set of rules that we believe will minimise risk and maximise returns, including limits on gearing — adopting a counter-cyclical approach to the use of it (our model portfolio is currently not using any gearing at all, but is 42% in cash!). I will give more details of the Fund next month and shortly our inaugural first month performance figures! To register your interest in our Titan Small Cap Fund email ‘smallcap’ to :

July 2013

| | 49

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Editorial Contributor


Big Call Last night I gave in to peer pressure and reluctantly plumped my posterior down into a comfortable sofa for a couple of hours of easy viewing of a Hollywood blockbuster which was interrupted every 15 minutes by five minutes of adverts. How annoying! I don’t have a TV myself. I find it a waste of time, but every now and then I can digest a good movie. One advert however kept coming up. A company called which was essentially offering their cost comparison services on anything between heaven and earth! I thought to myself why don’t we have a for stock market forecasting? I would subscribe! I am — as the advert states — And yet, day after day I am supposedly surrounded by experts. Hell, I am supposed to be an expert myself! I subscribe to expert newsletters, but it seems they are confused too. Elliott Wave analysts proclaiming bull markets and bear markets in the same instrument — how is that even possible?

My training says that I should trade what I see. So what do I see? Well, I see a bull market in equities. I think the Dow Jones is going to hit 16200 within the next four months. The problem with that little neat forecast is that it only takes one Fed chairman to utter something about QE3, QE4EVA or whatever QE they are now on, and my forecast goes out of the window... The forecast itself goes against my cyclical view of market behaviour too — you shouldn’t have strong rallies in equities during the summer months. The chart however suggests otherwise.

July 2013

| | 51

Editorial Contributor


“To me, oil is once more in a bull market. I look at the chart and I think it has $180-200 written all over it.” To me, oil is once more in a bull market. I look at the chart and I think it has $180-200 written all over it. I don’t know how it would get there. Perhaps Syria, Iran, Russia? We chartists don’t worry too much about the fundamental picture, quite simply just is it going to get there. I don’t even know how long it will take for it to get there but still, that’s what I see and so I am trading what I see.

52 | | July 2013

Onto the Eurodollar pair which looks like it wants to drop to $1.15. I am currently building a short position here and I intend to add to my shorts every couple of hundred points that it moves in my favour. This way I ensure I only add to a winning position as opposed to losing ones that many rookie traders do. When technical levels are hit along the way I will close the add-on positions but keep the core position which I hope to establish with an average around $1.35.

Tom Houggard’s Big Call

EURODOLLAR CHART The commodity of the moment — gold — looks like the Lehman Brothers chart unless it can regain $1550. I read forecasts of gold up at $2000 and also of gold at $800. This is a tough call, but my money’s on the short side whilst the technical’s still stink. Remember, I zone out the fundamentals and trade purely what I see...

You have a nation of retirees who are getting nothing for their savings. We are in a world where money managers are forced to search for yields and this explains rising equity prices. However, I detect signs of the market beginning to overwhelm the QE buying with yields the world over rising quite sharply in recent months. This is a big trend to watch.

The big unknown is interest rates. The central banks can set short term interest rates, but the market can price long term yields themselves, or they could until QE starting meddling with things.

July 2013

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Editorial Contributor


Bottom line is that the politicians hold the fate of many markets in their hands. I am thinking of buying a TV, just so I can keep an eye on what those ECB and FED guys are talking about, but I will hold off for the time being and just trade what I see — not what I think. It has worked well so far for me. Tom

54 | | July 2013


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• A diversified selection of commodity related stocks • Long/short flexibility

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

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• 90% of gross dividend credit on stock positions

CLICK HERE TO REGISTER YOUR INTEREST OR EMAIL: INFO@TITANIP.CO.UK QUOTING NATURAL RESOURCES Risk Disclaimer Spread betting involves the use of leverage or gearing. As such, investments in Titan funds is riskier than investment in conventional non-leveraged funds. Leverage increases losses and gains and you should only invest capital where you are prepared to accept a high level of risk to its security. Margin calls may be made at some point in the future and should you be unable to meet the margin call then you may be forced to crystallise a loss at that point. *Spread betting in the UK is currently tax free but this may change in the future. No tax is payable on any gain you make, however, should losses be incurred these are not allowable for either income or capital gains tax. July 2013 | | 55

Currency Corner Update


a special duo - “Dollaryen” and “sterling oz” revisited One thing that makes us different here at SBM is that, aside from being largely written by real bona fide traders who actually get in there in the market with their own capital and so understand other traders (as opposed to financial journalists that frankly largely couldn’t trade their way out of a paper bag), we only write about a subject/company/sector that we really believe in — be it bullish or bearish. Our two primary currency calls over the last six months have been long dollaryen and long GBPAUD. Dollaryen was covered in the November 2012 edition (SBM 10) of our magazine (page 79) in which we suggested getting long this pair. Below is a chart of how this call performed over the last seven months. It’s fair to say it was one of our best calls, as was our continued bullish overtures towards the Japanese equity market just before the market took off by nearly 100%. Question is, with the pair recently nosing over 100 and touching a high of around 103.5, where next for dollaryen?

56 | | July 2013

Top 3 oil picks for 2013 A special duo – “Dollaryen” and “Sterlingoz” revisited


“Well, another of our mantras here at this publication is that if we are unsure about something, then it is best to simply do nothing. Unnecessary trading activity is another direct route to the poor house that we have seen with many traders over the years...” Well, another of our mantras here at this publication is that if we are unsure about something, then it is best to simply do nothing. Unnecessary trading activity is another direct route to the poor house that we have seen with many traders over the years... For those readers that did follow our lead in this pair, at the current rate just shy of 99 (at time of writing) our suggestion is to take the money to the profit bank and move on.

Short term there could be more downside back to the 94 level and at that level it would be tempting to get long once again when looking at the weekly chart below. The 94 level is where the 19 and 38 exponential weekly moving averages are centred and we can see on the 20 year chart that these have proven to be exceptional trend directives over multi-year periods, i.e. when the pair has risen above both averages and the averages are rising, the trend persists for a number of years (and vice versa to the downside).

July 2013

| | 57

Currency Corner Update


“However, in taking a look at the chart below, we can see that the pair is the most overbought it has been for some years now — the weekly RSI reading is over 70 — typically a measure that can, at the very least, presage a pause and, quite often, exhaustion of the initial thrust.” The chart also shows just how overbought the pair had become in recent weeks, with the RSI the most overbought it has been for over 20 years (touching almost 90 in fact — a very rare occurrence). With the sharp shakedown the pair has seen in recent weeks taking the RSI back towards the early 60s, the excessive over-bought-ness is now steadily being unwound. A natural target should the pair come back to the mid 90s would then be an extension of the up move to around 108-110. A good stop level if going long again would be a weekly close back below 91 — a good risk/reward ratio of three big figures downside vs 14-16 big figures upside. However, as we relayed in the prior paragraph, at current levels, given the cracking profits achieved, there’s no need to be a hero and hang around. Exit and wait for the next move is our stance.

58 | | July 2013

Moving on to GBPAUD, and this has also been a “sterling” call of ours (‘scuse the pun once more!). We recommended that readers look to get long on the pair around the $1.51 with a target of $1.75 by year end in our February edition (page 76). At the time of writing the pair is trading around $1.65 and so this has also delivered exceptional profits to those that have remained with the trend. This was in fact one of our high conviction trades, so dislocated had the value of the pound become vs the “Aussie”, and we remain of the belief that there is more to come here by the year end. However, in taking a look at the chart below, we can see that the pair is the most overbought it has been for some years now — the weekly RSI reading is over 70 — typically a measure that can, at the very least, presage a pause and, quite often, exhaustion of the initial thrust.

Top 3 oil picks for 2013 A special duo – “Dollaryen” and “Sterlingoz” revisited

GBPAUD CHART I would not be surprised, as with USDYEN, to see this pair retrace some of its 20 big figure gains back towards the late 1.50s and remain there for several weeks whilst the short term overbought situation is shaken off. The move from 1.45 to the highs just shy of 1.67 (at time of writing) is typical of a reversal from a long term bottom. Violent thrusts are seen that stretch the RSI as the short positioning and trend following systems capitulate in stages and then the “Johnny come latelys” jump on board after a decisive move.

As ever, the market looks to bamboozle this with a counter trend move, and only when they are flushed out can the move continue. Any move in the pair back towards 1.55 - 1.57 — site of our favourite exponential moving averages (the 19 and 38 week) — would be our cue to get long again, particularly when married with an RSI in the mid 50s.

July 2013

| | 59

Special Feature

Peak Gold Myth or Fact?

60 | | July 2013

Top 3 oil picks or forFact? 2013 Peak Gold – Myth

July 2013

| | 61

Special Feature


Central banks own gold “because it’s tradition” said Ben Bernanke infamously at one of his regular appearances at Congress when grilled by the pugnacious senator Barney Frank. “Gold isn’t money… it’s an asset as treasury securities are [and it is often demanded] as a protection against tail risk”, ‘Helicopter’ Ben testified. But it seems that many of us quite simply don’t believe him and prefer to hold gold as opposed to paper currency; essentially as if it were money.

There’s no doubt that central banks traditionally owned gold as ‘reserves’ — similar to holding foreign currencies — but it would be naive to think they hold the yellow metal just because it is tradition. What leads the FED to hold around $366 billion in gold, the Bundesbank around $152 billion and the top 10 central banks around the globe more than $1 trillion is certainly something more than pure tradition. There is a solid economic rationale behind it. Central banks hold gold because it is a guarantee against a nation’s obligations and issued currency. People hold gold because it is a protection against inflation, a protection against fiat currency and perhaps the only real true means of universal exchange. Paper currency has no value other than the legal recourse given to it by the backing government. If that government is bust (like Zimbabwe was in the mid-noughties and certain Latin American countries regularly are) then the saying “It isn’t worth the paper it’s written on” takes on a whole new meaning. Fiat currency is controlled by a central bank or government which may change its value as it wishes, particularly where the currency is free floating. Gold in contrast isn’t controlled by any one single central source (not even JP Morgan!), but rather is subject to universal supply and demand rules, and without carrying a flag or having any national allegiance.

Unlike what many people think actually, paper currency isn’t really wealth. Wealth is measured by the hard assets we own and currency is just a means of obtaining those assets. Paper currency is valuable in terms of its purchasing power only, but it may drastically change from one period to another, particularly if governments allow inflation to take hold. Because gold is rare, resistant, has a stable supply and isn’t manipulated (over the long haul anyway!) by anyone, it is infinitely better as a reserve currency than the world’s only true current reserve currency — the US dollar. Even though gold is now seen as a commodity, throughout the 19th and 20th centuries it was a real currency as the major economies including the US & Britain subscribed to the gold standard. While the US dollar, the British pound and the French franc circulated as the official means of exchange in their own countries, the yellow metal was behind each of them in order to give them the credibility and the assurance demanded by those parties taking the legal tender as currency. During that period anyone wishing to exchange US dollars for gold could do so at a predetermined rate. The gold standard guaranteed a period of low inflation as we touched upon in the last edition of our magazine, quite simply because central banks weren’t able to print money as they so desired.

“Central banks hold gold because it is a guarantee against a nation’s obligations and issued currency.” 62 | | July 2013

Top 3 oil picks or forFact? 2013 Peak Gold – Myth

“The gold standard enforced a prudent tight monetary policy and so sound money.” They would need to actually have enough gold reserves before expanding their domestic money supply otherwise people would perceive gold as more valuable than the official rate seemed to indicate and — no prizes for guessing how they would act — yes, a rational person would exchange his currency for gold anticipating a rise in its value. This would effectively led to a reduction of the money supply and thus frustrate the initial attempt to expand it. The gold standard enforced a prudent tight monetary policy and so sound money. But, say Mr Bernanke and his ilk, why spend $20 when we could spend $20,000 by printing money? That’s right! The cost of printing money is relatively low and by putting the printers at work we can finance wars, the welfare state and become really rich! If only it were that simple... In recent years they have gone one step further and central banks have played a complicit game of helping the government raise money through the issuance (in the US’s case) of treasury bills and the central bank then buys them with freshly minted notes to keep yields acceptably low. That is a great plan! Until the chickens come home to roost, usually in the form of late stage inflation. During the American Civil War and World War I, the US government put the full convertibility between the dollar and gold on pause in order to be able to print money to finance the war bill.

In 1971, the standard was finally abandoned and off course; this came at a cost - inflation. Inflation that took around 10 years to really ravage the US economy and that required Paul Volcker to jack up interest rates aggressively to tame it. Something that those investors prepared to receive 2% on US bond yields presently should reflect back on and dust off their economic history books. Whilst the US inflation rate averaged 1.36% during the gold standard era, it has since averaged 4.36% during the period from 1971 until today. It doesn’t sound much of a difference, but when compounded over 40 years it is a phenomenal knock to the purchasing power of a dollar note. Gold prices exploded after being stable for more than 100 years. During the last 41 years, gold prices have risen by 3725%, a huge amount and almost triple the returns from equities and where prices rose 467% over the same period.

When adjusting for inflation, an investment in gold yielded 575% during the period while the S&P 500 yielded 146%.

July 2013

| | 63



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• A diversified selection of commodity related stocks • Long/short flexibility

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

Titan's fund managers believe that absolute returns can only be produced through running a concentrated portfolio of best picks derived from thorough fundamental analysis, deploying leverage at appropriate points in the market cycle and patience. • Minimum investment of only £5,000 • All returns completely tax free*

• 90% of gross dividend credit on stock positions

CLICK HERE TO REGISTER YOUR INTEREST OR EMAIL: INFO@TITANIP.CO.UK QUOTING NATURAL RESOURCES Risk Disclaimer Spread betting involves the use of leverage or gearing. As such, investments in Titan funds is riskier than investment in conventional non-leveraged funds. Leverage increases losses and gains and you should only invest capital where you are prepared to accept a high level of risk to its security. Margin calls may be made at some point in the future and should you be unable to meet the margin call then you may be forced to crystallise a loss at that point. *Spread betting in the UK is currently tax free but this may change in the future. No tax is payable on any gain you make, however, should losses be incurred these are not allowable for either or capital gains tax. 64 | | July income 2013

Top 3 oil picks or forFact? 2013 Peak Gold – Myth


“the adjustment will, in accordance with elementary economics, have to be made through a substantial price increase.” With fiat currency being printed aggressively, demand for gold will only likely increase as people finally cotton on in a wider sense just how much their currency is being debased. With the gold supply not expected to rise substantially and with the current pull back in the price likely to result in even less supply over the next two to three years as mine plans get mothballed, the adjustment will, in accordance with elementary economics, have to be made through a substantial price increase. During the last few decades, there have been no major gold discoveries. Gold has become rarer and rarer and, in a little known statistic, only 1 in 6,300 gold projects effectively go into production. It is also becoming harder to find, the ore-grades are declining and production costs continue to increase. In 1993, total exploration costs amounted to $1.2 billion and 55 million ounces of gold were produced. Ten years later, in 2003, exploration costs rose to $1.5 billion while gold produced shrank to 25 million. In 2010, exploration costs were out of control amounting to $5.7 billion and production still shrunk to just 20 million. With those supply side stats it doesn’t take a genius to work out what will happen to the price again...

To us here at SBM, with the gold price now down nearly 30% from its peak, sentiment very depressed, actual net shorts in the gold futures arena and yet physical demand reaching new records, the fundamentals to buy gold and gold mining companies have never been better than they are today. In the case of the gold miners, you can buy assets trading at less than $10 EV/reserves in a variety of global jurisdictions, price to cash flow multiples of under two times and discounts to book value of almost 80% — it is like being a kiddie in the sweet shop, so attractive are the bargains. What with currency devaluations, declining gold supply and rising national debts, the only currency with a proven value store historically and in the future will be gold. Gold reserves in the US amount to $366 billion with gold valued at $1,400 per ounce, while government debt is shortly to surpass $17 trillion and the currency circulating amounts to $1.2 trillion. That’s something to think about for the longer term. If you’d like to invest with our sister company Titan in our precious metals fund then visit and register your interest.

July 2013

| | 65


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Editorial Contributor

Zak Mir Interviews Financial Media commentator Louise Cooper Louise Cooper is a qualified Chartered Financial Analyst (CFA). She started her career in 1992 at Goldman Sachs in London as an equity research salesperson advising fund managers on their portfolios. After that she moved on to become a business and financial broadcast journalist, mostly on air with the BBC World Service. More recently she was a markets analyst at BGC Partners and has now set up her own blogging business at She regularly appears in the media commenting on the financial events of the day.


Welcome to the SBM “grilling” Louise! Let’s get straight down to business: Recession, Depression, or the New Normal, where are we in the economic cycle?

LC: I think we are actually recovering in the UK.

In fact, I have just written a piece entitled The UK Economy Has Just Reached A Turning Point, Unless It Has Already Turned! Predicting the actual inflection point of an economy is always incredibly difficult, no one gets it right. Famously Lord Lamont, the then Chancellor in 1991, got it right, but he got slammed for his “green shoots” by the media and the electorate who were still feeling recessionary pain. This is because most of the commentary and analysis at the time of the inflection point is still very negative.


So that is great, Norman Lamont called the greatest 15 year boom in history?

LC: The point I would make from that is whether

that was just guesswork or skill? Still, he said it at the right time and virtually nobody ever does.


But rather than Sinatra singing Norman Lamont, we have the stock market as a guide with the general rule being that it is normally 12-18 months ahead of a recovery. That is why we have had the FTSE 100 hitting multi year highs.

“The outgoing Bank of England Governor Mervyn King has been his most optimistic regarding the economy in seven years — we have increased GDP and reduced inflation.” lC:

The outgoing Bank of England Governor Mervyn King has been his most optimistic regarding the economy in seven years — we have increased GDP and reduced inflation. He has not spoken so confidently since the start of the crisis. If you look at the book ‘This Time Is Different’, normally peak to trough GDP in a financial crisis is two years.

July 2013

| | 67

Editorial Contributor

In a normal recession it is less than a year. But, for a true comparison to our current one it is better to look at the 1929 Depression as this crisis was a global one and then the peak to trough period then was four years. The UK had its peak Q1 in 2008 and so, in fact, this is proving to be a longer lived crisis than even then. There was also no triple dip back in this recession, it actually being a double dip and in contrast to all the newspaper headlines that have been shouting doom and gloom. That was actually wrong…

ZM: What would / should be the catalyst for

proper economic growth, not just the dancing around the flat line we are still seeing — GDP figures margin of error notwithstanding?

lC: A more confident consumer. As well as this,

businesses have not spent cash for years, they are hoarding cash, but as soon as they get any sign that things are improving there is going to be a stampede to spend. The reason why profit margins are so high is simply because they have not been spending.


Does this mean that the macro strategy has been correct to get us where we are now — bailing out the banks / QE / interest rates down to zero? Or are we in fact here despite the intervention, not because of it? Isn’t it the case that without all the misguided Keynsian meddling we could have been where we are now three years ago, i.e. on the cusp of recovery?

lC: I disagree with that absolutely. The banks had to be bailed out, and more capital still has to be put into them.


Was that to save depositors or the credibility of the banking sector?

lC: It was to save the economy, to avoid a Credit Crunch.

ZM: But we had a Credit Crunch. lC: We had a proper Credit Crunch post Lehman Brothers but central bankers reacted quickly. Without this the fall out would have been much worse.

68 | | July 2013


But if you ask small companies, they will tell you that they still have a Credit Crunch!

lC: Yes, but If you look at the Great Depression in the U.S., credit contracted for years and for everyone. We have not had that magnitude of a contraction.

ZM: So everything has been done right? lC: No, not everything, but the banks had to be bailed out. My concern is that they have not been bailed out enough and that the UK still does not have a strong banking industry. In fact, what they have done is reduce competition in an already uncompetitive industry. Politicians love to do this kind of thing, but it just creates a mess like the Co-Op issue we are seeing now. So what happens is that strong banks take over the weak, and the weak pull down the strong.


But the result of the intervention is that we have had a rip-off situation for the consumer for five years: base rates at 0.5% and mortgages of 4% APR, it is a joke. You have the bonuses and the scandals to boot.

lC: There was no choice; the economy would have gone to hell if they had not bailed out the banks.


So there was no way of allowing say Alliance & Leicester to go bust, compensating depositors and ending the story that way.

lC: It is not the depositors that worry me. It is the credit in the economy.


But how can you be sure that we are not in a Japan situation where we just see false dawn followed by false dawn for 20 years?

lC: The thing about Japan is that they did not

do very much on the QE front for years, and also they allowed deflation to take hold. Japanese asset bubbles in property and equities were significantly worse. For instance, it was said that Japanese stocks on a 100 p/e was quite normal at the time. Madness! It is also a relatively closed economy — they don’t hire women, it protects its industries etc. So no, I don’t think we are Japan.

Zak Mir Interviews - Louise Cooper


Are we going to break the cycle of boom and bust?

LC: No, not at all! ZM: What about gold as a hedge against the bad


LC: I find gold odd as an investment, with

paper gold via ETFs even more peculiar given that one of the attractions of the metal is that there is a fixed amount of it which is why it is preferable to paper currencies. There is not enough gold around to back the ETFs and that is a potential scandal waiting to happen. Even more intriguing is the way that the gold of most countries does not lie in the countries it belongs to. Basically, in my opinion, you would only buy gold if you thought the world was going to hell, which I don’t think it is.


Moving onto your career in the City, you have worked at the “Vampire Squid” Goldman Sachs and other leading houses. Has the City changed in a positive way since you started 20 years ago? Have the increasing regulations improved it and the internet delivered a level playing field for private investors? Is there a positive message, or is it the same slimy place it always was?

LC: I didn’t think that Goldman Sachs was slimy; I thought and still think it is a high quality outfit.


Even though it doesn’t have a great image as far as the ordinary person in the street?

“I find that very odd, compared to other still very dirty places in the City. Over the years I think profits have corrupted, a little like with professional football players.” LC: I find that very odd, compared to other still

very dirty places in the City. Over the years I think profits have corrupted, a little like with professional football players. When I started, it was a lucrative profession, but not indecently so. I think the Credit Bubble meant it became an insanely profitable place for individuals and that corrupted a lot of morality in the City. This was combined with bad regulation — the regulator lacks the abilities and resources to do the job properly, in my opinion.


But isn’t the real problem that it is the idea of regulating itself which is a joke? It is just a bad idea, it would be best to have nothing at all and just rely on the Civil Courts.

LC: I think you need regulation. But the light touch regulation approach was a joke, especially in the middle of a Credit Bubble. All of a sudden traders were given millions to play around with because money was so cheap.


Because the markets change so quickly and because it is such a complex area regulation is always going to be one step behind, is that what you are saying?

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Editorial Contributor

“With inflation at 4-5% and 0.5% on deposit, savers are getting hit with the Cypriot savings tax without realising it.” lC: What the regulators need to do is hire really smart people. If you look at the wage scales at the FSA you will realise that is not going to happen. If you are going to have a regulator you are going to need well informed, smart, well paid people.


Yes, but those people want to work in the City; they don’t want to work for a regulator.

lC: Not necessarily, but you need to pay people

well, and in fact you need to pay for information, like the SEC does in the U.S. If a company gets fined as a result of the information you provided to the SEC, you get a percentage of the fine. Brilliant! By whistle blowing here you likely destroy your career and therefore there has to be an incentive. Why bother?


At the moment we appear to have too much of the ‘wrong’ regulation and not enough of the right type.

lC: I agree with that. To me the complexity within

the current banking regulation with the distinction between “casino” and “investment” banking and retail banking is wrong. Retail banking is actually more dangerous, it can bring a bank down. A property bubble will bring a bank down far quicker than a bunch of derivatives traders.


At what point in the economic cycle is banking a decent business? They seemingly never lend at the bottom and they lend too much at the top.

lC: If you look at banking p/e ratios they have only

ever traded on sub market ratings. When I joined the City they were on p/e’s of 8 to 10 when the market was on 15. They also don’t trade on much of a premium to asset value as the stock market does not regard the earnings as being of sustainable quality.

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So shouldn’t we have just building societies and hedge funds?!

lC: Building societies are dangerous too, just look at Nationwide’s balance sheet: £8bn of regulatory capital and £154bn of loans to customers. How many of those loans need to go bust to wipe out the £8bn?


If building societies and gold do not appeal, where would you put your money?

lC: That is the problem because inflation is highly

tempting for indebted Governments and acts as an invisible tax that people do not know they are experiencing. With inflation at 4-5% and 0.5% on deposit, savers are getting hit with the Cypriot savings tax without realising it. My own fear is inflation and that there will be a tolerance of inflation to deflate the deficit, and I think that is going to be everywhere. Equities are a partial inflation hedge and perhaps the best choice given the alternatives of bonds and, say, London real estate which is already in a bubble.


You have been in the City for a long time now, what is the next move for Louise Cooper?

LC: I have my CooperCity blog. I think that some

of the quality of the analysis out there for the retail investor is not high. Clearly, my background is advising the professional institutional investor and thanks to my journalism background I think I have the ability to explain highly complicated subjects in an understandable, professional way. I also love my independence and I can say what I think because I work for myself.

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Editorial Contributor

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

Patel on Markets As I write this for SBM readers, I am presently in Luxembourg speaking on ‘where to invest now’ for the Rothschild Private Bank. And, in the face of all the anecdotal evidence with regards to the number of successful traders (90% blow up rate within a year where leverage is concerned, particularly in the futures arena is an accepted, if shocking, figure!), I am hearing from a lot of people that they want to take up trading full time. So, let me give you some advice... If you need £30,000 per annum to live on, and think you are nearly as good as Warren Buffett and so should make 20% per annum in profits, then you need to have £150,000 cash to trade with. We’ll ignore tax for now. Of course, some years you will not make 20% and you will have to go a whole year without food and water. To make life easier you may try to achieve 10% on £300,000. But most don’t have £300,000 speculative money hanging around.

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Then we come back to the “90%” of private investors who lose money trading the markets. Still, you reckon you are in the top 10%. Next comes time. How are you going to generate that return? You could spend every second trading. Maybe 10 trades a day. Maybe they cost you £10 each. That’s £100 in commissions or other costs. That is £500 a week, or £2000 per month, or £24,000 a year. So now you need actually to make not 20% on £150,000, but actually closer to 40% on £150,000. Or, you may say that you want to reduce those costs by trading less frequently, but still look to make 15% say. This is more realistic. You would look to pick a basket of stocks expecting a 15% rise over 12 months. That seems to put less strain on your time and limited skills and experience.

Patel On Markets

“To make life easier you may try to achieve 10% on £300,000. But most don’t have £300,000 speculative money hanging around. Then we come back to the “90%” of private investors who lose money trading the markets. Still, you reckon you are in the top 10%.” But how many stocks? Which ones? The number should be manageable. So let’s say 15. Any fewer, and if one does poorly, it will have a heavy impact on your whole portfolio. Any more, and if one does very well, it won’t have enough of a positive impact. Of course they should not all be in the same sector, or even geographical region, otherwise it’s really one stock disguised as 15... But which ones? What moves? What does undervalued mean and where do you find it? Online websites? Magazines? The pub? You can start with magazines like this one. Look for the reasoning of the commentator. Stories told by stock commentators can be seductive and attractive and alluring — about prospects of discovery. Remember not to be greedy and lured into such fantasies. Go for solid analysis, not hope. Learn what price-earnings ratios are and why they are important.

But what when you don’t have that kind of capital and need greater returns? This is why spread betting is popular. You use leverage, based on a notional sum, and trade more frequently and avoid tax (you hear G8 – tax dodging spread betters!). But know, that more leverage, less time, for more return equals more risk. Do not kid yourself. Just know the numbers. If all else fails then look for a managed service with a good investment thesis and returns record and let the professionals do the job for you. I for one will be intrigued to see how performs over the next year and that, uniquely, uses a spread betting wrapper to attempt to generate tax free returns. Alpesh Patel

Do all of the above, aim with a portfolio of 15 stocks aiming for 15% (once they hit your target decide whether another 15% is likely over another year) and if they drop 25% sell them no matter what excuses, and you might, just might, get out alive.

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School Corner

school corner Using Elliot Wave Theory in Trading

by Thierry Laduguie of e-yield I have been using Elliott wave analysis for years to forecast the stock market. I remember the first time I came across Elliott wave analysis was in 1997, after reading a book called “Technical Analysis of the Futures Markets�. As I began to count the waves, I quickly became a devoted Elliott wave analyst.

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Using Elliot Wave Theory in Trading

“Elliott wave theory was discovered by Ralph Nelson Elliott in the 1930s, he was an accountant–turned-stock-market-analyst who noticed that the stock market followed a recurring and predictable pattern; he called this pattern the wave theory.” Elliott wave theory was discovered by Ralph Nelson Elliott in the 1930s, he was an accountant–turnedstock-market-analyst who noticed that the stock market followed a recurring and predictable pattern; he called this pattern the wave theory. In the financial markets, these patterns take various shapes, the most common being a cycle occurring in eight waves, consisting of five waves up and three waves down.

The signals that work for me are triggered when my sentiment indicator and the Elliott wave confirm each other. This is how it works:

The most important aspect of Elliott wave theory is that it works well with investor sentiment. In general the end of a five-wave pattern coincides with an extreme in sentiment. For example, at the top of a five-wave sequence sentiment will be extremely bullish and at the bottom, sentiment will be extremely bearish. This makes sense if you think about it, the more a market rallies the more it makes investors feel “safe” and the more investors join the rally. This explains why bullish sentiment increases as the rally progresses.

Declining BTI = bearish sentiment = short term trend is down

But as we know, rallies don’t go on forever as we have seen recently - I am referring to this year’s stock market rally that ended on the 22nd May. On that date, and during the previous week’s leading upto the peak, bullish sentiment reached an extreme on various measures. Ironically it’s when there are too many bulls that the rally ends. Bullish sentiment is healthy for the stock market as it enables the rally to continue but too much of it is never a good thing. In fact, excessive bullish sentiment is a sell signal. This led me to develop my own sentiment indicator a few years ago, the Bullish Trend Indicator (BTI). I was looking for a way to measure excessive sentiment. The BTI does the job. Today, my primary tool to forecast the stock market is Sentiment Analysis, and when combined with Elliott wave analysis it can be a powerfully accurate trading indicator. I trade mainly UK stocks and the FTSE 100 index. My secondary tools are technical analysis indicators like the relative strength momentum and the MACD.

There are two indicators to measure sentiment - BTI and 34-day BTI. Rising BTI = bullish sentiment = short term trend is up

To reduce the number of false signals the 34-day BTI is used as a filter Sentiment becomes bearish when the daily change in the BTI turns from up to down AND the 34-day BTI is declining. After a bearish signal has been triggered, both the BTI and 34-day BTI will continue to decline. This combination of declining indicators indicates that sentiment is bearish. During this period most stocks will perform poorly, the FTSE 100 is likely to go down. Sentiment will turn bullish when the daily change in the BTI turns from down to up AND the 34-day BTI is rising. As long as both the BTI and 34-day BTI continue to rise I assume that sentiment is bullish. During this period most shares will outperform the broader market and the FTSE 100 is likely to rise. Statistics show that when sentiment is bullish, the FTSE 100 goes up by an average 1.5% and when sentiment is bearish, the FTSE 100 goes down by an average 0.6% in the following month. My sentiment indicator gives me the direction of the FTSE 100, for example, when it is bullish, I assume that the trend is up. This helps me interpret the Elliott wave count on the chart. The trend remains in place until sentiment reaches an extreme. On 22 May, the 34-day BTI reached an extreme above 400 (extreme in bullish sentiment), that was signalling an imminent trend reversal. The FTSE 100 did turn down on that day and lost 8% in the following three weeks.

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School Corner

During the decline sentiment turned bearish on 5th Jun. As I write sentiment is till bearish but this time the FTSE 100 has fallen too fast and bearish sentiment has reached an extreme on my indicator - see chart below.

BTI SENTIMENT CHART This, to me, means that we will see a big bounce. The main support area is around the 200-day moving average near 6150. Whether or not the FTSE 100 declines to that level remains to be seen, but I do expect a bounce to 6500 in the short term to relieve the oversold condition. I will then monitor my sentiment indicator, if it stays bearish during the oncoming bounce it will be another signal to prepare for the next leg down.

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Special Feature

When the Best Trade is No Trade by the Market Sniper

In the past, when approached for a view on a market by my students or other traders, I felt a degree of discomfort when expressing, especially repeatedly across various markets, that I had no strong overriding opinion or trade. The feeling was always one of, if being a lecturer or trader with extensive experience, it was almost my duty to have a view on all markets, otherwise what was my purpose? I no longer feel this degree of discomfort in expressing this view. In attaining this level of comfort, I had also subsequently differentiated between: 1. Market Commentary/Commentators – Most of this type of opinion appears to have a very ‘after the fact’ tone, and is usually in the form of post event analysis for the news wires.

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2. Basic rudimentary opinion – This may have an expression of mild directional bias only, with a few supporting technical observations. 3. Justifications for a trade – These vary per trader, but my feeling is that the better trader you are, the more detailed and specific these will be. By definition this type of opinion proposition is pretty rare.

When the ‘Best Trade’ is ‘No Trade’ by the Market Sniper

Some examples of what I seek in a trade before it is taken are: (a) An explicit high probability assessment of an anticipated directional move. (b) The nature of the anticipated move is impulsive and brisk. (c) A volatility constriction which permits a tight entry-to-loss stop set up and a fast move to a high reward-to-risk ratio and realised losses. What I don’t want is the long ‘bleeder type trades’ that sap you emotionally over an extended period as you watch it move against you/go nowhere. Additional trade overlays include those where I perceive a substantial imbalance in supply or demand for a certain period that supports the dominant and brisk market re-adjustment and, importantly, a trade idea where pending orders may be used and the entire trade idea may be expressed in advance of being triggered, including loss stop placement and targets. As a trading technical analyst, where every piece of analysis should contribute some detail to the questions ‘Is there a trade?’ or ‘What is the trade?’, I have observed with my own students that most new and intermediate traders have insufficient distinct and separate justifications for a trade plan. I don’t care for item one above, certainly not before a new trade; at best market commentary is interesting in a historical sense for the ‘story’ of why or what commentators believed was the reason why. But that, sadly, is about it. What I want to know is what’s going to happen?! Basic rudimentary opinion as described in item one is just that, non-committal and luke-warm in nature. It does not inspire me to detail an elaborate ’if and but’ response where multiple price behaviour permutations still remain possible, and for those reasons I avoid reading these too.

The advantage retail traders have over institutions Your average “Joe retail trader” fails to realise that they actually have major advantages over the institutions, brokers and market makers. Number one on that list is the right to say ‘No Trade’.

“Remember, many institutions or market makers are obliged to offer a spread on many underlying instruments all the time.” Remember, many institutions or market makers are obliged to offer a spread on many underlying instruments all the time. This even applies when uncertain of their view, or just before possible market moving events. If they get it wrong, many traders observing and then acting will be piling up substantial winning positions at their expense. Imagine the mental and psychological burden of having to open shop every day and every rival and client is watching and waiting for you to slip up on a pricing of a market so that they can all wade in and clear you out. Some of these market makers must make a market on the most lightly traded small cap shares with high Betas and massive potential swings. There are not many sympathisers out there for the dreaded “market maker” but, I have to admit, I am one of them! I have noted too that relatively novice traders feel what I can only describe as ‘compulsion to trade’. It is difficult to go to work, supposedly to trade, and to do what is seemingly on the surface ‘nothing’. It doesn’t feel like trading to just observe, analyse and plan trades. We want to place some ‘skin in the game’, a view(s) expressed! But real trading is about sitting and waiting in the lair for the good risk:reward set up, having the capital to back and then pulling the trigger. My own experience is one of far fewer trades open at one time than when I first began trading: usually none open at all 35% of the time (over a period of a year), one trade idea open 30% of the time, two trades open 25% of the time and three trades open 10% of the time, never more. This is what works for me; whilst hardly a bench mark of good form, major deviations from this over the course of a year would raise concerns of over trading or lack of selectivity in my opinion. Even in benign non-directional markets, we will look for signs as to the future direction and generally jump in early.

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Special Feature

“There is a lot to be said for the empowering position of ‘getting square’, namely being entirely flat on all open positions. It allows a market neutral mentality without any legacy biases that may once have had justification, but now fails to hold.” We are taught to trade with the trend and to the range highs and lows when ranging or chopping. I suspect this is encouraged by brokers who ‘earn on the churn’; their line being that there is a ‘strategy’ for every market. In short there are no circumstances or market conditions where we shouldn’t be all in! We know better. Aside from a strongly trending market like that seen on USDYEN recently, and where we should have wide stops and remain with it as long as possible, many of the other timescales in the market cycle we should not be in the market at all.

In short, sometimes it pays to just sit and wait for the high probability trade that meets multiple & specific criteria, and to not generate losses in between these events.

Other manifestations of this ‘rookie error’ that shows a lack of appreciation for the ‘No trade’ advantage is a full suite of open trades on their market blotter. There is no broad ‘portfolio of trades’ theory, especially when leverage is involved. Each idea must stand up on its own. I suspect this tendency of many traders is in the hope that if enough trades are placed, one will be a home run — a form of asymmetrical optimism bias. ‘Keep the number of stocks you own to a controllable number. Every once in a while you must go to cash, take a break, take a vacation. Don’t try to play the market all the time. It can’t be done, too tough on the emotions.’ – Jesse Livermore Jesse Livermore was a “bucket shop” punter who made and lost a fortune on no less than seven occasions in 1920s New York, I believe, and his book ‘Reminiscences of a Stock Operator’ is, in my opinion, the best trading book there is out there. Here’s another classic (and true) quote: ‘There is also the Wall Street fool, who thinks he must trade all the time. No man can have adequate reasons for buying or selling stocks daily or sufficient knowledge to make his play an intelligent play.’

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There is a lot to be said for the empowering position of ‘getting square’, namely being entirely flat on all open positions. It allows a market neutral mentality without any legacy biases that may once have had justification, but now fails to hold. Think about this statement for a moment all those of you that have been cut out of loss making positions — the common comment from many traders at this point, even if it means they have taken a loss, is that they “feel relieved”. Well imagine cutting yourself out instead of it being done for you if a trade(s) is not going your way. Take some time away and then reassess — you’ll be amazed how, in many instances, you probably wouldn’t get back into the trade. Institutions and market makers can’t do this. They have to be there. This is the major advantage you have as a retail trader and it is an advantage you should be aware of and not squander.

When the ‘Best Trade’ is ‘No Trade’ by the Market Sniper

Here are some guide points for controlling over entering trades, “revenge” trading and other compulsive responses:




Reduce the number of trades. Take the number of trades taken in a week (or month), an average of the last 10 weeks (or month), then allow yourself just 60% of your average. Cross them off on a piece of paper as you use your new maximum allowable amount; you will become more selective with what you trade. Do full, detailed pre-calculation position sizing and risk-to-reward analysis before entering, it will force you to think about your stops and accept where you are wrong. It also increases discipline. Each week review your full personal Profit and Loss statement performance and assess all records to show you are within limits, and reward yourself for sticking to the rules even if it is a week of controlled losses.


Trading is a game of increment, not home runs (one big hit outside of the park). Remember that.


Cease all trading for the week after three within limit losing days. you haven’t got the right view on the market — less is more so switch the computer off. To spend five days in a row reducing balance is confidence destroying and emotionally destabilising. Put this in as a commandment. Good luck.

Francis Hunt is the founder of The Market Sniper and the Hunt volatility Funnel set up trading technique. His next three month Trading Metamorphosis Program commences 6th/7th July with a theory weekend. you can email or call 07833096952.

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Special Feature



I started spread betting in 2007. The hours were long and the returns were, to be blunt, rubbish. I in fact blew my entire account up twice, but as I started with small stakes was able to dust myself down and start again. It was only in 2010 that I turned the corner and, I am pleased to say, have been successfully trading the FTSE ever since. Spread betting is great — it’s hard work, but it’s also highly rewarding. Unfortunately, too many people fail as they start off somewhat gung-ho thinking it’s easy and, in an open industry secret, very quickly blow their accounts with no chance of then coming back... They say 90% fail — that’s probably light, and the sad fact is that the smaller your account the less likely it is that you will make money. I feel fortunate that I remain in that 10% (or less). Whilst trading for myself pretty much full time, I needed to learn about a product called WordPress, which is a website creation software. It was always my plan to set up a website with a topic that interested me and it made sense therefore to do a trading site, which can be found at There are hundreds of sites out there of course, but as my main aim was initially to just learn to use the software; I initially planned to simply write about what I had learnt and what I was thinking vis-a-vis what the FTSE was going to do next. From this small acorn and effective self-imposed “checks and balances” on my trading, to my amazement, my website traffic grew.

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I then wrote an ebook on my strategy and, to my continued surprise, it actually sold via the site. Spread betting is hard — whether it’s stock, indices, forex or anything else. After all, if it was easy, everyone would do it, right? However, get it sussed, stay emotionally detached, be technical, be savvy, be calm, be sensible — basically the opposite of every emotion you will feel when you trade — and generally you will do OK.

What I have learnt? I am a great believer in the KISS principle —Keep it Simple Stupid — and apply that principle to all my charts. Too many indicators just lead to you ending up like a rabbit in the headlights. I use pivot points, support and resistance and trend channels on a daily timeframe for my analysis and this has served me well, even in a market that is supposedly QE and sentiment driven! I’ll also let you into a secret — do the opposite of whatever they say on the BBC news about shares and the FTSE — if they say the market is tanking and get their big red arrow charts out (an appearance from Robert Peston is even better) — BUY shares and the FTSE — a stance again I know that the editor of this mag agrees with. – My story

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Special Feature

If the headline says the FTSE is rocketing and is on its way to... oh, let’s take the other week’s 7000 level that they mentioned, get SELLING! (FTSE was at 6800 at that point; it subsequently fell to 6300, a 500 point drop in two weeks).

Raff Channels Of course, it’s not just that simple (if only!) and one needs a local and global view of everything going around one, the internet is your friend for this! One of my favourite indicators are Raff channels and I plot these on the daily chart over 10 days and 20 days creating a nice two line channel that often marks price extremes.


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They can of course be plotted over any time frame, but I find doing the last 10 and 20 daily sessions pretty reliable. Trading at the extremes of these channels has also been very beneficial in recent months. You won’t get trades every day, but, generally, the handful that you do trade should do well. Below is an example of a recent FTSE Raff chart. – My story

“Trailing stops are a good way to lock in profit and remove the emotion from a trade, which is one of the hardest things to overcome.” My other favourite common sense trading tip is when you are in a trade and (hopefully) in profit, get stops to breakeven as soon as possible. Trailing stops are a good way to lock in profit and remove the emotion from a trade, which is one of the hardest things to overcome.

Outlook Everyone is aware of the “Sell in May” mantra now (as was covered extensively by this magazine last month) so I expect that we will probably see some more bullishness for a little while just to try and wrong foot as many as possible (as the market is wont to do!), probably towards mid/end June time.

We have recovered from the “QE being tapered” rumour-driven drop to 6300 and whilst the trends are down currently it feels like there might just be one last push higher. The FTSE didn’t make any record highs whilst other markets like the DAX & Dow and S&P did. I certainly feel that a test of possibly 6830 is possible in the next two to three weeks (time of writing 10 June).

If you would like to learn more about me and my strategies, please visit the website

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Editorial Contributor


John Walsh’s monthly trading record What a month! It’s the only way I can start to describe what has taken place since my last article. For those of you that read my monthly piece, you will know that I mainly day trade indices (DAX, FTSE and DOW) and I also like to trade with a little more of a long term outlook when it comes to equities. As you are aware, we recently hit new highs with the DOW and were very close to touching the all time high for the FTSE, but we have since seen a pretty sharp retracement, certainly in the UK. But, for me, it has been a great trading month for many reasons. It was in fact brought to my attention a few days back that I have now been trading my account with my own money for fully six months since winning the Trading Academy competition (I won at the end of November and took December off and started full time in January) and, not surprisingly, a lot of fellow traders seem to be interested in how I have done in that time, wondering whether the win was a fluke, or if indeed I had the necessary ‘mettle’ as a trader to survive.

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As I have stated previously, February was my worst month ever. In the very short space of time that I have been trading on my own, I lost almost 60% of my account in a single morning during that dire month. Shocking I know, and which was down to me doing everything I was taught not to do if you want to succeed at trading: averaging down, letting emotions dictate your strategy, chasing losses and increasing my trade size to levels well outside my comfort zone. You name it I did it, which made a bad situation a lot worse (as these things tend to do). Net result was that emotionally I was unable to trade indices from then as I felt I had lost some of the confidence that is needed when doing battle in the markets and which helped me do well in the past.

John Walsh’s Monthly Trading Record

“I now treat trading as a business instead of just a hobby or past time which I may have been a little guilty off in the past.” And so I decided to just trade equities again with somewhat more of a longer term outlook instead of going after the fast money with the indices. That worked out fine and so I then decided I was ready to start trading indices again (sucker for punishment, eh?) and, so far, things have gone very well. I have managed to recover all the losses on my account and am actually up 15%. Not surprisingly I’m very pleased with this and of course hope to build on it. What have I been doing differently since I started trading equities again? I now treat trading as a business instead of just a hobby or past time which I may have been a little guilty of in the past. As in any business, the key to success is hard work and tenacity. Trading is no different. Another element that I have brought to my trading is to set myself short term goals such that I now aim for 10 points a day whether that be from one trade or 10, and once I have achieved that I close down for the day so that by the end of the week I have made 50 points which I look to just keep building on. The most important lesson I have re-learned, and which I have tried to live by in the past but sometimes failed to do so (particularly during Feb!) is to trade what I see not what I or my ego thinks. I now never try to call the highs or lows and I wait for confirmation before entering the trade, be it on the Long or Short side.

Moving forward, I plan on sticking to what I have learned so far and to keep on learning (you never stop learning in the markets, I hear) through talking to other traders and reading lots of the stuff out there to help us, be it books or online (some of the guides given away here by SBM are really informative and written by seasoned traders. Best of all, they cost you nada!). I also plan to increase my trading of equities (my true trading passion) and to add US equities to my portfolio (the research has already begun). Anyhow, that’s enough from me for this month, I hope you enjoy reading this as much as I like to write it and I look forward to returning next month to keep everyone up to date with how I’m doing with my trading journey. Please continue to follow me on Twitter @_JohnWalsh_ where I try to keep everyone up to date with my trades as they happen. Remember, you control the trade; the trade does not control you. John

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A new special feature


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Markets In Focus

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

Issue 19 - August 2013

in next month’s edition...

AiM oil & gas revisited



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

See you next month!

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Spread Betting Magazine v18