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DE ED C IT 14 IO N The e-magazine created especially for active spread bettors and CFD traders

Issue 35 - December 2014

The Rise of the Dollar Profit from the US currency’s fight back! www.financial-spread-betting.com

THE UK’S ONLY FREE ONLINE FINANCIAL MAGAZINE! JIM MELLON ON THE MARKETS

ZAK MIR INTERVIEWS DAVID CRACKNELL

ROBBIE BURNS ON HOW TO PLAY THE SANTA RALLY

MARIA PSARRA OF PRIME WEALTH GROUP ON MASTERING POSITION SIZING

AND MUCH, MUCH MORE - PACKED FULL OF TRADING IDEAS FROM ALL OUR CONTRIBUTORS!


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

James Faulkner A true stockmarket anorak, James Faulkner began investing in the stock market in his early teens. James is a devotee of the PEG-based growth investing model pioneered by Jim Slater in his seminal book, The Zulu Principle, while also being t1ps.com’s resident economic ‘guru’. James is an Associate of the Chartered Institute for Securities & Investment and holds the CISI Certificate in Investment Management.

Jim Mellon Entrepreneur and former fund manager, Jim Mellon, is worth an estimated £850m according to the Sunday Times Rich list. With a substantial international property portfolio and interests in a variety of companies Jim is a highly experienced and successful investor.

Samuel Rae Having completed his Economics BSc Degree in Manchester, Samuel Rae quickly discovered that the retail Forex industry was for him. His personal trading style combines classic candlestick analysis with a simple, logical and risk management driven approach to the financial markets - a strategy that is described and demonstrated in his best selling book, Diary of a Currency Trader.

Richard Gill SBM Editorial Director Richard Gill, CFA, is a smaller companies specialist with an investment philosophy focussed on cheap growth companies operating in booming sectors. He was a judge at the 2013 and 2014 Small Cap Awards.

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Editorial List EDITORIAL DIRECTOR Richard Gill

Foreword Although we may not strictly be past the finishing line, it can be said that many of the big threats in 2014 simply did not happen. I am sure that most will be deferred by the “smart money” to 2015, but I think that if I rattle through them readers will get something of an idea of what I am angling at.

EDITOR Zak Mir CREATIVE DESIGN Lee Akers www.cfdmedia.co.uk COPYWRITER Seb Greenfield EDITORIAL CONTRIBUTORS Robbie Burns Filipe R Costa Simon Carter James Faulkner Samuel Rae Dave Evans Andre Minassian Paul Wynter Jim Mellon Maria Psarra

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.

For instance, yet again, there has been no Eurozone implosion – for the third year in a row. This is despite the fall of Espirito Santo and the allegedly precarious position of Italy. In terms of price action, there was also no stock market crash – despite serious attempts at staging this in January, August and October, and of course no recovery for precious metals and mining stocks. It is now over three years since the bubble burst in this asset space, and unless or until we see inflation this ain’t going to happen either. Closer to home and London real estate may not be rising any more, hurt by mansion tax fears and stamp duty realities, but so far no great unwinding either, with the FTSE 100 starting near 6,750 for 2014 and likely to finish close to this level as well. This is despite the fact that there has been no interest rate rise, even in the face of confused forward guidance from Bank of England Governor Mark Carney. But at least he was immortalised by being described as an “unreliable boyfriend” this year. Nevertheless, one would not want to be complacent over the events during 2014 and what may happen next year. The geopolitical situation may not have taken points off indices in the way that was expected, but it is difficult to see how Putin / Ukraine can be solved without our 21st Century Napoleon saving face and trying to save the Rouble by initiating a fully fledged conflict. ISIS may not have the shock value it had during the summer, however, its activities are an ever present danger to stability in the Middle East and beyond. That is not to say that there were no surprises for 2014. While it was anticipated by some that the fracking phenomenon could be a negative force for the oil price, the Saudis/OPEC taking on the threat by maintaining production and causing a price collapse was a curve ball. It is also deflationary and will surely be a growth booster as well, when competitive currency devaluation and near zero interest rates really have not worked. What may be working in this respect is the Japanese attempt to bring inflation into its economy by weakening the yen. However, we may need to get to this time next year in order to ascertain whether the Three Arrows policy was really enough to end a 25 year post bubble state of flux. Finally, 2014 has been a year of changes for Spreadbet Magazine, with most of them being positive. We hope you continue to enjoy what is regarded as one of the best financial publications around in the New Year. In particular, I thank the Editorial Director Richard Gill for all his good work, and patience. A Happy Christmas and Prosperous New Year to all our Spreadbet Magazine readers. Happy Trading. Zak

December 2014 | www.financial-spread-betting.com | 5


Contents

Three Small Cap US Dollar Plays James Faulkner of t1ps.com looks at three small cap stocks set to benefit from the strength of the US dollar.

40 Currency Corner

61

14 18 25 30 53 56

Samuel Rae, author of the best selling book “Diary of a Currency Trader”, on why he doesn’t trust the US dollar.

The Best of the Evil Diaries Highlights of what infamous short seller Simon Cawkwell (aka Evil Knievil) has been trading and gambling on in recent weeks.

Fund Manager in Focus Filipe R. Costa examines why Andrew John Hall, the oil market king, has been so successful.

Mellon on Markets Read the latest thoughts and trading ideas of multi-millionaire investor and entrepreneur Jim Mellon.

Should You Follow Analysts’ Consensus Recommendations? Filipe R. Costa examines an unconventional way of using analyst expectations in order to beat the market.

Something About the Markets Andre Minassian, CEO at www.clevergamesuk.com, asks how far the bull market will go.

Robbie Burns The “Naked Trader” Robbie Burns gives advice on how to play the “Santa Rally”.

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The Return of King Dollar

Zak Mir’s Monthly Pick

James Faulkner of t1ps.com on how the US dollar has come back with a vengeance!

SBM editor Zak Mir takes a technical and fundamental look at US property search firm Zillow.

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48 08

Zak Mir Interviews David Cracknell David Cracknell, former Political Editor of the Sunday Times, is Zak’s interviewee this month.

58 64 70 74

School Corner - Position Sizing Maria Psarra, Head of Trading at Prime Wealth Group, explains why size does matter, in the third of her trading education articles.

Binary corner Dave Evans of binary.com examines trading opportunities in the US dollar.

Paul Wynter on Art In a new feature on the alternative side of investing, Paul Wynter of Londonart.co.uk takes a look at some of the new faces to hit the art scene.

Technology Corner SBM’s resident technology specialist, Simon Carter, takes a look at the hot gadgets to blow your bonus on over the Christmas period.

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Book Review: The UK Stock Market Almanac 2015

84

Markets In Focus

SBM’s Editorial Director, Richard Gill, CFA, reviews an ideal Christmas stocking filler.

The major markets movements in November.

December 2014

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Zak Mir Interviews

ZAK MIR INTERVIEWS

DAVID CRACKNELL

This month Zak interviews David Cracknell, former Political Editor of The Sunday Times, who is currently head of his own public relations firm, Big Tent Communications. Zak: According to your Wikipedia entry you were one of the founder editors on Sunday Business with Jeff Randall in 1998. This was just before the Dotcom Bubble and the explosion of online sources of information such as Bulletin Boards. Is the rationale behind Sunday Business actually still valid, or are we actually mired in an era of information overload regarding the financial markets? David: I guess the fact that Sunday Business went out of business says it all really! But, seriously, the rationale behind it was simple: great scoop-getting journalism combined with the kind of interesting – as opposed to worthy but dull – features that business people wanted to read on a Sunday. It was a brilliant product and perfect for its time, but also ahead of its time. The FT Weekend/ ‘How to Spend It’ didn’t exist then in its current form and we had started all those luxury market features way back then. Yes, we had pieces on, say, the best home humidor, or ‘best wines under £3,000’ or whatever; but on the front pages we broke big stories. Randall came from the Sunday Times Business Section and everyone on that paper had an entrepreneurial spirit - and took a risk to join SB - and we all went on to be city, business or political editors elsewhere.

If SB was around now still I am sure it would have adapted to the times; it would have had its austerity period like every other paper and would have given bankers a hard time where they deserved it. But it also would have taken an intelligent detailed approach; it wouldn’t have defended any wrong doing. Indeed it would have probably been leading the way in exposing excess, ridiculous lending and dodgy dealings. We were always big on whistle-blowing scoops from City insiders. Zak: You were political editor of the Sunday Times during the Blair / Brown years, which crowned your journalistic career (until you became a columnist at Spreadbet Magazine). Did getting so close to the corridors of power change your perception of the world of politics? Are you more or less of a cynic regarding the alleged sleaze in Westminster? David: Of course, but just like the City, politics is full of individuals so it is hard to generalise accurately. My main concern was being a good journalist, not being partisan, and getting the story. I wanted to be Woodward and Bernstein.

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David Cracknell

There had been the cash for questions story in the 1990s when I was a cub reporter - although that was confined to just a few people – so I didn’t turn up at the Palace of Westminster on my first day and expect the standards of a convent. I was always more interested in the psychology of politics more than policy or scandal: how people operated in politics to get up the greasy pole, what alliances were being formed behind the scenes, the egos, how people stabbed each other in the back, how some individuals hated their party or cabinet colleagues more than their political opponents. The Blair-Brown years were fantastic for that, I loved it. At one point I was getting all these high-level cabinet documents leaked to me – because one camp wanted to discredit the ideas of another camp. They even had a cabinet meeting to discuss who was leaking all this stuff to the Sunday Times. Great fun. These days these insights into how politicians and journalists think and operate is highly useful of course in my current role as a PR and reputation management consultant. Zak: An event in which the world of politics and finance collided in a very explosive way was at the time of the financial crisis as the banks were bailed out.

The irony now over 5 years later is that the High Street is peppered with so called “challenger” banks who appear to simply have joined a cosy cartel. Was the bailout an expensive mistake / panic measure? Or was there an ulterior motive? After all, most MPs are from a legal background, and the banks are the best paymasters to the legal profession. It is almost impossible to successfully sue a bank even now – hence all the PPI and many other scandals. David: They did let some institutions fall, but the failures were so widespread and the culture of irresponsible lending endemic it did feel like the world was about to end. Remember the queues outside Northern Rock? One of my first consultancy roles was advising Ron Sandler at Northern Rock where he had been appointed by the Treasury to turn it back around. I saw the figures; it didn’t take a rocket scientist to work out there was too much lending, ridiculous risk and not enough in the savings accounts. I certainly don’t believe in any conspiracy that MPs got together with their lawyer and banker mates. Critics always say MPs are out of touch and irrelevant; no more so than to the City.

December 2014

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Zak Mir Interviews

Things may have changed now, the bankers have to pay attention to what Parliament is saying; but six or seven years ago it seemed to me that while financial clients may have paid for financial PR or CSR engagement consultants, a lot of them wouldn’t pay for government relations advice. That has certainly changed now! Zak: Since 2010 we have been governed by a Conservative-led coalition government, propped up by the Lib Dems. When they came to power the economy was still reeling from the aftermath of the financial crisis. Since then the UK has become one of the strongest economies in G7. Despite wobbles on Austerity and tax policy could it be argued that the past four years have actually been a great example of political partnership? Since then the UK has become one of the strongest economies in G7. Despite wobbles on Austerity and tax policy could it be argued that the past four years have actually been a great example of political partnership?

David: My client was actually Stuart Wheeler, the founder of modern spread betting in the UK and IG Index. He became a supporter of UKIP when it was more or less solely a party campaigning for a referendum on EU membership, which seemed such a pipe dream only a couple of years ago. Stuart asked me purely as a ‘hired gun’ to help Nigel with some media training and message discipline during the 2009 European elections when UKIP came second. I did it for the challenge and it was good fun. I’m not a UKIP supporter nor have I ever voted for them. But I like Farage and I don’t think he is a bad person. He is actually liked by a lot of journalists and I remember we took Peter Oborne for a drink and turned him into a bit of Nigel fan. The criticism of UKIP of course at the time was that they were a ‘one policy party’, a ‘pressure group’; I guess whatever you think of their politics that can’t be levelled at them now. They have become a lot more professional at communications for sure, and that has been helped by the hiring of Express journalist Patrick O’Flynn.

David: Well there would be a few people in No.10 who would agree with that! Both the Conservatives and Lib Dems have claimed their share of the credit. Success, as they say, has many fathers etcetera. But you only have to look at the Red Book and the details of the recent Autumn Statement to see that that it is equally arguable that the Osborne budgets have been putting skinny jeans on a generously flanked gentleman, whose middle-aged spread will continue to spill over the top and it is difficult to see how we can avoid further years of pain. We are getting the economic growth but the tax receipts are weak so until we get some significant wage increases it’s hard to see how we can avoid more government cuts. As a political partnership the Coalition has been relatively workable, although there have been consequences for both parties – aside from the rise of UKIP – in that the parliamentary Conservative party has lost its cohesion and discipline, and the Lib Dems have haemorrhaged public support. I suspect we will see more coalition after May and for another five years at least. Zak: After The Sunday Times you founded Big Tent Communications, a PR and reputation management company, making you one of the most powerful people in your profession. Amongst the CEOs, presidents and prime ministers you have advised in your prestigious career, I believe one of your clients was a certain Nigel Farage. How much of the rise of UKIP and Nigel Farage can be attributed to Big Tent?

Zak: As we have seen from the examples of the banking bailouts, immigration policy, the EU and the City, politics and finance are closely intertwined. It may be the case that for the General Election in 2015 we shall be treated to an explosive mix both of parties, policies and outcome. For instance, the vagaries of the first past the post system could lead to combination of Labour / SNP, Conservative / UKIP, or indeed an unfathomable combination of all parties. We could have an early EU exit, a freeze on immigration, a Mansion Tax, higher NHS spending or a random assortment of all of these and many more contradictory policies. How much of an economic influence do you think the Election could have on UK stocks, the housing market and business sentiment?

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David Cracknell

David: I always find that a difficult question. It’s like those market reports that say nothing helpful like ‘The FTSE cautious as the Chancellor gets to his feet’. I mean, apart from the big calendar announcements, I don’t believe traders study the political pages much. But I can’t blame them; most political journalists aren’t interested in the City or business and don’t want to really understand it. That said, the markets and the City hate instability so the first thing they will want to see after May 7th if no one wins an overall parliamentary majority is a quick – or at least professional and credible – start to coalition talks. We have already seen how Osborne has manipulated the housing market, with help for first time buyers and cutting stamp duty. As to stocks, it will depend how much emphasis there is from the winning party or parties on saving; but of course what really matters for the markets is not so much who is in No.10 as what (the unelected) Mark Carney says about interest rates. Zak: Sticking your neck out, what is your favoured outcome for the 2015 General Election, or do you just go with the bookies?

I think it’s sad when you see a lot of people at these free ‘get rich quick’ Fx seminars who have blown their accounts several times already, heading into the markets without any risk management, trading plan or even a stop loss. Very sensible and successful people get into trades like this too. Get rich slowly, is my motto. Trade well, and everything else will follow.

“critics always say mps are out of touch and irrelevant; no more so than to the city. thinGs may have chanGed now.”

David: More of the same. Tory-led Coalition. I can’t see Ed Miliband in No.10. I think UKIP will do very well, but the trouble for them is their support is diluted so it will be hard to turn into winning actual seats in Parliament at the general election. Zak: Since leaving the Sunday Times you have entered the world of stock trading and have developed your own way of supplementing your income and “enjoying” yourself with shares. Do you think that there have been advantages to entering this arena later in life than many in the market who begin in their teens and 20s? David: It just seems obvious to me that day trading, or let’s say short timeframe trading, is not the thing to do when you first start out. I always say it’s like trying to play the violin at grade 8 level, why would you try to do that from the off? Why not start by learning a few chords on the guitar, a few Beatles numbers say, and then progress to harder markets. A lot of equities are not nearly as volatile as currencies and you can have fun discovering new small AIM companies and making them your favourites.

I’m actually writing a beginner’s book called ‘Middle Aged Spreads’ with a brilliant technical analyst chap called Zak Mir, you may have heard of him? Zak: (laughs) ha, ha, who?

December 2014

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The Best of the Evil Diaries

THE BEST OF THE

Evil Diaries

The man the Daily Mail dubbed “The King of the Short Sellers”, Evil Knievil (aka Simon Cawkwell) is Britain’s most feared bear-raider. He mostly famously exposed the fiction that were the accounts of Robert Maxwell’s Communication Corporation, an event which helped to earn his pen name.

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The Best of the Evil Diaries

A big man with a bigger reputation, Evil Knievil famously made £1 million by short selling shares in Northern Rock during its collapse. He also uses his knowledge and experience to buy shares, often resulting in the same devastating effect. Three times a week Evil provides his thoughts and musings on the markets only at theevildiaries.com. He doesn’t just deliberate about the financial markets on The Evil Diaries, but also comments on politics, current affairs, which horses/sports bets are his latest favourites, with the occasional film and book review thrown in for good measure. Here we take a look back on the highlights of Evil’s diaries in the month of November.

3rd November 2014 I bought Flow Group (FLOW) at 40p since I was told to. One has to believe that their domestic heating technology works (look it up) but if it does and there is a competitive advantage this share price has much further upwards to go. I last week had a session with a residential property developer who is centred on South East England. He’s got lots to move and has appointed Foxtons (FOXT) to do the necessary. I remarked that Foxtons’ modus operandi is at best ill-mannered. He replied that that did not bother him since they are better at moving stock than other agents. Well, I cannot argue with that. Still, the quieter agency times in which we now live must surely take the share price down from the current 160p. Even if Foxtons suddenly caught a dose of good manners.

7th November 2014 About four weeks ago I bet against Ed Miliband being the next prime minister and, minded to press this bet, yesterday got hold of a political journalist who, much to my surprise, confirmed that it might be possible to ditch Miliband before the next election and/or find a Labour win in May 2015 leading to a prime minister determined by coalition considerations and where the result is not Miliband. So who follows? My correspondent asserted the runner to watch is Yvette Cooper who has cleverly positioned herself somewhere dead central in the Labour Party. However, he said that there is the little problem of the fraudulently financed wedding ceremony that she and Ed Balls had in 1998 in a hotel in Eastbourne. The night porter originated this story and the manager confirmed it: basically guests were charged £100 for the night instead of the probable going rate of £35. The surplus was applied to the cost of the reception. Had guests known that they were paying for the ceremony through a deception they might have had a different attitude towards attending. I presume that it was Balls who arranged this since he has shown himself devoted to deception when in government and subsequently. But it sticks to his wife.

5th November 2014 All right-thinking citizens are on tenterhooks awaiting Nu-Skin (NYSE:NUS)’s announcement of results before the New York opening this afternoon. This colossal scam closed at around $50 last night. The management can of course try it on again by way of concealment. But they can’t do it forever. Perhaps today is collapso day.

off with his ‘ed?

10th November 2014 Governor Carney has again warned on interest rates. This is not because he wishes to promote a philosophical abstract but because he thinks it is going to happen. This is contrary to the views of some (who regard such rises as far into the future). So it’s coming. To suppose that it will necessarily come after the general election is without historical support since the forces that compel a rise can’t understand dates such as May 2015.

December 2014

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The Best of the Evil Diaries

Over the weekend I caught up with the state of play surrounding Alibaba, lately floated as BABA on NYSE. Investors are not holding shares in this venture but in effect rights to profits. This means that they cannot vote to change the conduct of the management who are, in any event, held under the thumb of the Chinese government, the most manipulative behind-the-scenes operators by far in the entire world. All this makes Alibaba a high risk investment. However, it is a brave bunny who stands in the way at current levels - now around $115.

14th November 2014 I had paid 24p for GCM Resources (GCM) on Tuesday simply on the longish term argument that they may prove ridiculously cheap. Therefore the results that came late on Wednesday and which merely reflect the fruitless pursuit of the licensing deal that matters have little or no bearing on matters. When I reminded readers of Cazenove’s £10+ target price for GCM from some ten years ago I did not deceive myself or readers into thinking that any such figure now applies. Further, and in the light of the fact that GCM has to go on spending money just to keep the show on the road, there has to be some dilution when a funding placing is completed. However, I am still persuaded that, one day, the Bangladesh government will license GCM to develop Phulbari. 24p will then be seen to be ridiculously cheap. In a sense I feel a bit of a Charlie in declaring that interest rate rises can come sooner than we expect only to be trumped in spades by Governor Carney that there will be none until next October. Well, he may be very confident but I ask how he can possibly know.

19th November 2014

But I tipped Ladbrokes (LAD) on the long tack. This business has lost its way and should be put out of its misery ere long. Now 122p. Incidentally, The Commander, 47 Hereford Road W2 offers terrific catering nowadays. It is The Debonair One what owns this joint.

21st November 2014 African Minerals (AMI) has been, not particularly surprisingly, suspended. Some will hope for a miraculous reconstruction. But it looks like an almost certain goodbye GCM Resources (GCM) yesterday jumped on an RNS advising that GCM had almost entirely been approved by an OECD examination. Well, if one reads the RNS, it is clear that, on all material points, GCM is completely in the clear. That all noted, I sold out my position acquired perhaps ten days ago since I would be surprised if there were any more news in the near future. But, long term, things are looking up for GCM. Or so it seems to me. I caught up with my pal who works in seriously expensive London property and he assures me that prices are continuing to crater. So I am staying short of Foxtons (FOXT). They are bull market operators and a bull market is what they are not going to get for a long long time.

28th November 2014 Finally, I shorted 2.5m Thomas Cook (TCG) about two years ago at around 15p and got a touch of the retreats such that I closed at 25p. Given that Thomas Cook subsequently got to near on 190p I had a lucky escape: it was simply that my self-preservation urge kicked in. However, Wednesday’s figures support the view that my original approach was correct. In rough terms, Thomas Cook is now valued at £1.7bn in contrast to tangible net asset value of minus £2.7bn. That gap of £4.4bn is enormous and relies upon the banks’ support on a very accommodating basis. Perhaps they will stand by their debtor. And then again they might not. Thomas Cook now stands at 120p. That is high risk. Further, the departed CEO, Harriet Green, knows which side her bread is buttered.

The Debonair One (aka Jim Mellon) hosted the Titec lunch yesterday. I am honour bound not to reveal anything of what was said and am unbribable probably through lack of imagination on my part or offers to break this undertaking.

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December 2014

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Fund Manager In Focus

fund manager in focus

Andrew John Hall The Oil Market King

Given the explosion in volatility in the oil market in recent months and the severe routing the oil price complex has endured, this month’s Fund Manager in Focus is Andrew John Hall – a legend in the oil markets.

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Andrew John Hall

Hall is perhaps the most successful trader in the oil arena and one who has made billions in profits for the firms he has worked for. Wall Street calls him “the God of crude oil trading” and some simply call him “God”, as he has been on a hot streak for over 30 years. What is the secret of his success? Well, that’s a tough question, but if we needed to summarise his style in just a few words, then Philip Verleger’s (an energy consultant) description is very instructive: “As one of my clients [Andrew Hall] once told me, he has three gears: long, longer and really long!”

On the one hand you need conviction to pull the trigger, but on the other hand this very conviction can keep you in a losing position for too long. Others believe that this is just a cold streak and that Hall needs time for his views to, once more, come to fruition.

Buying, buying and buying even more has been a killer strategy for the past 30 years. Hall believes oil demand is growing at a much greater pace than its supply, and when that happens prices can only go north. Such a simple rule, taken from any basic economics textbook, has yielded him enviable profits and a reputation that is almost untouchable. However, with such a reputation always comes detractors, there’s always someone waiting for you to slip… And, of course, as with any trader, Hall is no exception. Nobody is infallible.

“Buying, buying and buying even more has been a killer strategy for the past 30 years. Hall believes oil demand is growing at a much greater pace than its supply, and when that happens prices can only go north.” It is fair to say that with oil prices on the slide, the last few years led him and his investors into some deep losses. Some believe this is the end of a legendary trader, a man who was not able to perceive a changing reality in the oil market and was wedded to his view – a common trait amongst almost all fund managers.

A stunning start Hall is actually a native UK citizen, being born in Bristol, the son of a former British Airways pilot instructor. He studied Chemistry at Oxford and soon started working in the oil industry. In 1969 he landed a job at British Petroleum. The early 70s were busy times in the industry as the Arab oil embargo changed the supply forces completely, giving price power to OPEC. This environment provided a major learning opportunity for Hall and sharpened his interest in the financial dynamics behind oil prices. Hall further progressed his studies, heading towards one of the best business schools in the world, INSEAD, in France, where he earned an MBA. It was after INSEAD that, in 1981, Hall travelled to New York to run BP’s trading operations. His work was so well recognised that Tom O’Malley (chairman of refiner PBF Energy Inc.) made him an irrefutable offer to work at Phibro to trade in the oil market. The team Hall headed traded a few, very large long positions in oil and was, to put it bluntly, very successful. More than 30 years later, O’Malley and Hall are still partners. While Phibro was successful, the company changed hands several times.

December 2014

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Fund Manager In Focus

In 1981 the venerable trading house Salomon Brothers acquired it. Then, in 1997, Travellers Group acquired Salomon and became the ultimate owners of Phibro. Later, US banking giant Citigroup were to become the owners of the profitable trading unit. However, with the onset of the GFC in 2008, Citi was forced to turn to the US government for a bailout due to the $28bn in losses accumulated in the subprime arena. The US government bailout changed everything and Phibro changed hands once more, this time being absorbed into the commodity-trading unit of Occidental Petroleum. It has been reported by Bloomberg that between 1997 and 2008, Phibro accumulated more than $4bn in profits, being profitable in every single year and in more than 80% of the quarters. That is a stunning record for Hall.

A controversial style One of the hallmarks of Andrew Hall’s success is a thread common to many hugely successful fund managers, that of going against the crowd.

Indeed many investors used to say that anyone who disagrees with him is just plain wrong, so knowledgeable is he about the oil market. He anticipated the run up in oil prices to 2008 and, perhaps more importantly, its subsequent crash, grabbing a bonus of $100m in both 2008 and 2009, when the Street was just sinking – no mean feat! But, as with all real life stories, nothing lasts forever. Prolonged hot streaks almost inevitably turn into a cold one. In the last couple of years Hall has been unable to make a profit, principally as he failed to anticipate the major revolution that is going on in shale oil drilling. This new technology has resulted in the US achieving the highest oil output in almost 30 years and to be recognised as one of the countries with the largest reserves of oil in the world – a stunning turnaround from just a few years ago when shale oil drilling was unheard of. Many analysts believe the US will, amazingly, become oil self-sufficient in just a matter of years, indeed already producing 84% of its domestic consumption during the last year.

OIL PRODUCTION CHART

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Andrew John Hall

“It has been reported by Bloomberg that between 1997 and 2008, Phibro accumulated more than $4bn in profits, being profitable in every single year and in more than 80% of the quarters. That is a stunning record for Hall.” As with the tech revolution, the new technology in shale drilling is going to change the paradigm, and so called “peak oil”, many people believe. With the US Federal Reserve boosting the money supply now for more than five years, Hall predicted that global demand would pick up again, and with it the demand for oil would also increase, pressing prices towards $200/barrel. But, five years after the synchronised global downturn, the US economy is still growing just mildly, while Europe is not growing at all. At the same time, investors are concerned with China and other emerging markets. This international macroeconomic scenario has not been favourable to Hall’s long positions in oil. But, the real problem for him is the development in the fracking technology applied to shale drilling, which allowed for a huge expansion of oil production. Until just a few years ago, exploring shale oil was unfeasible. It was known that the US had large reserves of this type of oil, but the costs to drill it were so high that production was commercially unprofitable at the then oil prices. With the advent of a new technology known as fracking, which consists of a hydraulic fracturing of the rocks where the oil resides, the costs for this unconventional way of drilling oil declined to make it economic at prices around $100/barrel. This of course led to a rapid increase in oil production. The more optimistic studies not only predict the US to attain self-sufficiency in oil consumption, but also to become a net exporter. Many analysts believe that oil prices are likely to decline over the next few years. The rationale behind this is very simple: with what was once unreachable oil now being drilled, its supply is increasing and in sync with a slowing economy, thereby pressing oil prices down. Hall’s own fund management company Astenbeck Capital Management (with O’Malley being his partner) has seen assets under management decline from $4.8bn at the beginning of 2013 to $3.4bn in May of this year (as reported by Bloomberg).

Even after the shale revolution, Hall has kept his bold long bet on oil, going against everybody else, and mocking those who believe the shale revolution will change the paradigm forever and lead to cheap and abundant oil and gas. While many analysts predict oil prices to be near $75 over the next five years, he insists in oil being at greater prices, as high as $150. Hall believes that shale drilling still faces many political, environmental and technical challenges across the globe which will delay its development. He has thus gone all in against the shale revolution and has been buying long-date future contracts on oil to be delivered in 2019. While it pays to be a contrarian under certain conditions, the introduction of new technology may change the dynamics of the oil market, as happened with the technology revolution during the 90s. As always, people tend to mock those who stick to conservative ideas, as they believe they just don’t understand what is going on. To many, Hall is now a dinosaur, one who used to be an avid hunter, but is now fast becoming out-dated.

The other side of the coin… While Hall may seem bold in his actions, remaining resolutely long in the face of current price action, there are some important issues that may, ultimately, have him win out in the end again. The technology revolution initiated in the 1990s allowed for material changes to many industries – travel, media etc., and which increased productivity and changed the way consumers behave, but the final profits for many of these dot-com companies are non-existent. It seems that Hall is applying this same reasoning to shale drilling. He points out that the shale production is a contingent one, meaning that it depends on one important factor and that is, of course, the oil price.

December 2014

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Fund Manager In Focus

“A reduction in oil prices makes fracking unfeasible, which leads to a reduction in shale production and a return to a tighter supply and higher prices. It is a vicious cycle.” While fracking made it feasible to drill the oil from the rocks, it is still a costly process. The same argument that analysts state in favour of a decline in oil prices actually goes against the shale oil production increase. A reduction in oil prices makes fracking unfeasible, which leads to a reduction in shale production and a return to a tighter supply and higher prices. It is a vicious cycle. In fact, the latest data on shale production may be in Hall’s favour as it points out that the peak in production may already be behind us.

Recent ructions in the oil market at the time of writing has resulted in numerous headlines that many shale oil producers are likely to go out of business soon. If the FED gooses markets again as a consequence of declining equity markets, then the supply/demand dynamics of the oil market are likely to change dramatically and once more set prices on a tear.

S&P V OIL CHART

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Andrew John Hall

Hall further adds that, while Russia and Saudi Arabia have huge oil reserves, the costs to drill the oil there are continuing to increase. Proof of this situation is the fact that the major oil companies have seen their capital spending triple in a matter of only a few years while production has slightly decreased. Perhaps Hall’s perpetual long bet is grounded in solid fundamentals and it is only his timing that is out.

Final comments The complexities behind oil production and supply are huge and if someone is able to comprehend this then it is certainly Hall. With over 30 years’ of experience, he has seen both booms and crashes in oil markets and has been able to deliver profits year after year.

With a track record of that calibre it is a bold individual who deems him “out-dated” and having lost his trading capacities. But, while we understand Hall’s arguments against the shale revolution, we still see various problems occurring on the oil landscape, and not just in the supply side. While the longer term may be bright for demand, there are increasing doubts for the near future as global growth continues to turn down. Oil prices generally have a high correlation with this and if deflation really does come to pass, we could see oil prices back in the $50-$60 price band. That could be devastating for Hall and would be a sad end to what has been a stellar career.

December 2014

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Mellon on the markets

MELLON ON THE MARKETS

FAST FORWARD NIKKEI TO 20,000! Entrepreneur and financier Jim Mellon is a regular in the Sunday Times Rich List, with an estimated fortune of ÂŁ850m in 2014. With a substantial international property portfolio and interests in a variety of companies, particularly in the alternative energy and biotech sectors, Jim is a highly experienced and successful investor.

December 2014

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Mellon on the Markets

It’s been a hectic few weeks, what with launching my new book Fast Forward, which covers new technology, as well as addressing the august body of the Isle of Man Funds Association on the medium-term outlook for the markets. As I told them, anyone (i.e. me) who can call their dog ISIS, two weeks before another ISIS hit the news, may not be the most reliable of forecasters. But the good news is that the euro continues to perform to plan, as does the Nikkei. These, along with Gilead Sciences, were the big calls at Master Investor 2014 (Master Investor in 2015 is registering now and filling up fast!). On that front, I still like the two macro trades, but I think Gilead has risen enough for now.

In a world that is remarkably uncertain and beholden to the competing whims of central bankers, the surest bets I can see are against the euro, and for the Japanese market. The euro is an each-way – if Draghi gets his way and there really is a trillion euro QE bazooka, then the single currency goes down, but at least the economy has a chance of revival. If he doesn’t, then the euro goes down, along with the whole ship. But let’s be clear: nothing goes down in a straight line, and I feel that the euro could have a short-term bounce. The best way of playing this might be selling puts at the 1.29 or 1.30 level versus the dollar. Look to May 2015 as a target to get maximum premia for the trade.

EUR/USD 1 year chart. Source xe.com

United Kingdom On the subject of currencies, the reality of the huge UK trade deficit, coupled with the fact that austerity has been nothing of the kind, is beginning to impact on sterling. Cameron and Osborne are softening us all up to a lower growth trajectory, which is not surprising considering Euroland’s woes. So, sterling goes lower, but probably not by much. The UK stock market is cheaper than most, and its banks are not nearly as capital deficient as those on the continent, where most of the peripheral banks are effectively bust.

So I am not desperately gloomy on the FTSE, though it will probably take its cue from the US. There the market looks stretched, with breadth narrower, and small caps (as in the UK) taking a beating. What with margin debt hovering at all time highs, earnings being largely sustained by buybacks, and the strong dollar likely to affect international earnings, I would be cautious.

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Mellon on the Markets

Back to the UK, there is an election coming up next year and it won’t be the normal type. UKIP is making big headway, and could well hold, along with the unlikely bed partner of the SNP, the balance of power. Nigel Farage is speaking at Master Investor 2015 two weeks before the vote, which is another reason to book early – see below for tickets. If I had to guess, I would say that Ed Miliband goes before the election, and that Clegg gets wiped out, possibly down to 10 MPs.

Geopolitical flashpoints, like the poor, are always with us, but there are a particular abundance of them about at the moment. And though everyone hates gold and silver, it might be the time to up that insurance policy. Silver, in particular, looks very cheap, and I would be a buyer up to US $18 an ounce, for possibly $22 by year end 2015. The miners are also beginning to look attractive, and Condor Gold, of which I am a director, is attractive. The IFC has recently invested in the company. In terms of emerging markets, I would be generally cautious. A strong US dollar is not good for them, as so many have large dollar liabilities, way above the levels of 2008. In addition, many are commodity producers, hurt badly by falling iron ore and oil prices (e.g. Brazil). There are better things to invest in at the moment.

Stocks... No Eds are better than one

Macro... Japan remains my favourite big market. I think the Nikkei has 20,000 written all over it, perhaps even by end January. And having been a bear of the yen, I am not so sure now. Japan’s exports are not hugely price elastic, though exporters’ earnings benefit from a weaker yen. And if the yen weakens too much, fuel prices in yen may just start going up, hurting business. After all, since Fukushima, Japan is totally dependent on energy imports.

Fast Forward has a section on what to invest in, but here are a couple of stocks that might whet the palate for the book. Hewlett Packard, an old dinosaur, might just have something in its new push in memritsors, a type of resistor that allows for flash like memory to be almost exponential. Imagine a smartphone that can record every moment of your life and still have room to spare! In addition, I like Hitachi in Japan. A big, liquid stock, it is a leader in new transport systems and is a geared play on the Japanese market. Happy hunting! Jim Mellon

As the price of oil has been falling, it is creating a seriously wounded bear out of Russia. Even with the rouble’s fall, and the apparently low PE ratio of the Russian stock market, I still think it’s one to avoid, but watch this space as there will probably be a time to buy. Maybe when the tanks roll into Kiev?!

Jim Mellon will be headlining the Master Investor 2015 show, to be held on Saturday 25th April in Islington, London.

December 2014

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Should You Follow Analysts’ Consensus Recommendations?

Should You Follow Analysts’ Consensus Recommendations? By Filipe R. Costa Before trading any financial asset, an investor should carefully examine its prospects in order to understand how it is currently being valued by the market. In the particular case of equities, we need to evaluate a company’s future prospects and come up with a single number that summarises the underlying fundamentals – the price. But sometimes it is not easy to ascertain value, either because we don’t possess the financial knowledge to come to a final figure (I hope that’s not the case) or because we don’t have the resources and tools to get all the information we need. That is the point at which financial analysts can make a difference. Analysts can fill the gap between what a trader/investor thinks an equity is worth, and what an equity is really worth. They are expected to add value by providing a service that involves conducting a thorough analysis on the companies they follow and by issuing trading recommendations. They are also supposed to be objective and form unbiased beliefs about equity prices, thus contributing to driving market efficient outcomes. Along with rational arbitrageurs, analysts help to steer prices towards fundamental values and ensure that any deviations away from them are just temporary. At least that is what last year’s Nobel Prize winner Eugene Fama hopes. It is also argued that, in contrast to “rational” professionals, individual investors are more likely to be affected by sentiment. When sentiment is high, private traders tend to ignore the risk profile of equities and buy them as if they had less risk than they actually do. This helps to push prices above fundamental values (and helps to create bubbles).

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Should You Follow Analysts’ Consensus Recommendations?

December 2014

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Should You Follow Analysts’ Consensus Recommendations?

But, it could be argued, while individual investors get excited by emotions, other professionals operating in the market, such as analysts, professional traders and in particular rational arbitrageurs, who are able to spot mis-pricing in advance, are the opposing force who guarantee prices, (almost) always reflecting their fundamentals. This means that there should be no such thing as a bubble, because arbitrageurs would take huge short positions against the market and help drive prices back to fundamentals, right? Yes, it should be the case. But unfortunately / fortunately it doesn’t happen. Arbitrageurs and other professionals know that “markets can remain irrational longer than you can remain solvent”, as was well pointed out by John Maynard Keynes. Like you, these professionals are risk averse, and they don’t have a clue how long investor sentiment will remain high. They know that prices will have to come back down to earth, but they don’t know when that is going to happen. Before catching up with fundamentals, prices can just jump from the Moon to Mars or even to Jupiter, which means more money would be needed to keep short positions open until the irrationality vanishes. So, the efficient market hypothesis based on the idea that there must be someone counter-balancing the irrational individual is disproved. That invisible hand simply doesn’t exist!

According to the academic research, that is not the case either. While there are a fair amount of studies relating to sentiment and analyst recommendations, I came across one interesting study which not only relates the two but also gives some important practical strategies that can be used by SBM readers to make market-beating returns. In the study Corredor, Ferrer and Santamaria (2013) it was found that analysts are just as influenced by sentiment when issuing their buy and buy/sell recommendations as private investors are. Despite being professionals, analysts also become more optimistic when sentiment rises, just like individual investors do. The researchers also found that the optimism effect is greater for those equities that are more exposed to sentiment – those more difficult to value (small companies, non-dividend paying, with a lack of financial history, lack of earnings, lack of analyst coverage, low book-to-market-equity etc.) As a result of the above, the analyst optimism bias, which can be measured as the ratio of positive (or buy) recommendations to negative (sell) recommendations, increases with investor sentiment. How can investors make money from this?

“THE EFFICIENT MARKET HYPOTHESIS BASED ON THE IDEA THAT THERE MUST BE SOMEONE COUNTERBALANCING THE IRRATIONAL INDIVIDUAL IS DISPROVED.”

Taking all of this into consideration, we have found that: 1) markets are not as rational as some think 2) arbitrageurs don’t really drive prices to their fundamental value as their resources are limited, and 3) analysts can be just as influenced by sentiment bias as non-professionals. What is missing here is 4) how can we profit from it?

But what about analysts, do they provide valuable recommendations?

The researchers found that if you follow the analysts’ consensus recommendations when investing and then tweak them just a little bit, you could beat both the analysts as well as the market. All you have to do is to buy the equities with positive analyst recommendations that have less sensitivity to sentiment, and sell the equities with negative analyst recommendations that are more sensitive to sentiment. By accounting for the sentiment effect in analysts’ recommendations, you increase your profits. Behind all this is the fact that positive sentiment distorts prices, elevating share prices away from fundamental value.

One could argue that analysts contribute to filling the valuation gap by providing additional information about equities and issuing unbiased recommendations. Financial analysts should help us all take the right trading decisions by providing the insights on value which we lack. Unlike the individual investor who is influenced by sentiment – buying when sentiment is high and selling when it is low, contributing to the formation of bubbles – analysts are unbiased and objective in their valuations, right?

According to the above study, there are some strategies that are able to drive excess profits, that is, after adjusting for risk, they drive profits above those that you could obtain by buying the market. Put simply, it means there are some strategies that will help you beat the market.

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Should You Follow Analysts’ Consensus Recommendations?

“the more volatile an equity price is, the more sensitive it is eXpected to Be to sentiment.” But how do we measure sentiment sensitivity? There are several proxies for the sensitivity of an equity to sentiment, with the easiest of them being volatility. The more volatile an equity price is, the more sensitive it is expected to be to sentiment. So you can sort equities using price volatility, which is a measure relatively easy to compute.

The third strategy is much better than the above two and consists of shorting equities that analysts recommend to short – but only those more exposed to sentiment – and going long stocks recommended as a buy but which are less exposed to sentiment. In the four markets analysed, this strategy excelled. The beauty of all this is that you just have to tweak the analysts’ consensus in order to beat them!

The table below shows the excess returns (those above the market) for different strategies (in annualised monthly percentage). The benchmark strategy involves just building a portfolio, buying and selling what analysts recommend. The second strategy consists of shorting all equities with negative recommendations.

December 2014

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Zak Mir’s Monthly Pick

ZAK MIR’S MONTHLY PICK Buy Zillow (NASDAQ: Z): Above $100 Targets As High As $160 Recommendation Summary

Technicals

The last time I appeared on CNBC was a couple of years back. The recommendation I served up at the time (November 2012) was to buy Zillow shares under $30. From memory the target was towards $100. So given how the company – which can be regarded as the US equivalent of Rightmove (RMV) – currently trades at $118 a share, the idea was spot on.

Shares of Zillow have been displaying typical bull run tendencies for much of the past couple of years, especially since the November 2012 gap down towards the $20 level. Indeed, it was a gap fill reversal which turned the shares around from the start of 2013, after which the stock managed to remain above its 200 day moving average from that time until early October this year. The loss of the 200 day line was not too much of a surprise considering the way that, in the wake of the sharp July spike through $160, the post summer decline led to a brief move below $100 over the course of October and November.

The view now is that after a retracement from above $160 in July this year, it may be worth assuming the uptrend will resume from the $100 -$110 zone again. A recent comment from a fund manager, that the stock could hit a market cap of $50bn versus $5bn now, can only help the bulls in the near term.

However, it does look as though the November bear trap rebound from below the October floor at $98.15 and the subsequent higher low above $100 could deliver a new bullish phase. This is especially the case considering the way that the 200 day line is still rising at $113.65.

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Buy Zillow (NASDAQ)

“Shares of Zillow have been displaying typical bull run tendencies for much of the past couple of years.�

December 2014

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Zak Mir’s Monthly Pick

The typical scenario in such circumstances is that one could expect to see a near term gyration either side of this feature as further consolidation is required after the decline from 2014 highs. However, the expectation is that while the psychologically important $100 level is held, especially the $101.55 higher November low, the recovery argument is very much in the ascendance. A partial or even full retest of $160 plus 2014 resistance is expected well before the end of Q1 2015.

ZILLOW CHART

Recent Significant News 4th November (The Motley Fool) Zillow has already told investors revenue should be in the range of $87m to $88m, the midpoint of which represents 64% growth over last year. Meanwhile, Zillow’s adjusted earnings before interest, taxes, depreciation, and amortisation should be $14 to $15m, excluding around $7m to $10m in expected costs from to its pending acquisition of Trulia (NYSE: TRLA). Wall Street, for its part, will be looking for earnings of $0.08 per share on revenue of $88m. 5th November (Globenewswire) Zillow announced what it describes as an excellent third quarter with record revenue, traffic, mobile usage and Premier Agent advertiser revenue in what it said was turning out to be a transformative year. Spencer Rascoff, Zillow CEO, said:

“We continue to solidly execute on our strategic priorities for the year, and are experiencing positive momentum throughout all of our home-related marketplaces. We plan to continue to invest heavily in our brand, business and products to fuel our long-term growth and strengthen our leadership position.”

“Revenue increased 66% to a record $88.6m from $53.3m in the third quarter of 2013.”500,000.”

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Buy Zillow (NASDAQ)

Third Quarter 2014 Financial Highlights Revenue increased 66% to a record $88.6m from $53.3m in the third quarter of 2013. Marketplace Revenue increased 77% to a record $72.7m from $41.0m in the third quarter of 2013. Real Estate Revenue grew 86% to a record $65.6m from $35.3m in the third quarter of 2013. Premier Agent advertisers spent 87% more in the quarter compared to the same quarter one year ago. Mortgages Revenue grew 24% to $7.1m from $5.7m in the third quarter of 2013. Display Revenue increased 30% to $16.0m from $12.3m in the third quarter of 2013. 17th November (TheStreet.com) Zillow announced it would shut down its Agentfolio service two years after acquiring it. Agentfolio allowed home shoppers to share listings with specific parties such as friends or real estate agents and then allowed those parties to directly talk about the listings. Zillow will shut down the service on March 2, 2015, and will not accept new agent customers. “While there are hundreds of agents using the product daily, our customer base is unfortunately not large enough to continue supporting our loyal users,” the company wrote in a memo to clients. 19th November (Benzinga.com) Zillow shares gained more than six percent Wednesday after a hedge fund manager said the online real estate company could hit a value of $50bn. Michael Messara, senior portfolio manager Caledonia Investments Pty Ltd, made the comment reported by Reuters Wednesday at a conference in London. Zillow, with a current market capitalization of $5bn, expects to merge next month with competitor Trulia which has a market cap of $2.03bn. Caledonia, as of September 30, owned about 6.79m of Zillow’s 34.44m shares outstanding, according to its latest 13F filing. That’s up from about 6.5m on June 30. Caledonia also held 10.16m of Trulia’s 37.8m shares outstanding as of September 30. Zillow expects to acquire Trulia for about $3.5bn in a deal set for shareholder approval December 18.

Fundamentals In the post summer period there has not been a dull moment in terms of the newsflow at Zillow, as the company moves to consolidate its special position in the market. The reason for the intense focus here is, of course, the backdrop of a mooted $3.5bn merger with competitor Trulia, which should go to create a combined entity worth some $7bn. Interest going into the completion of this deal has been heightened by the backing of hedge fund manager Michael Messara, who has suggested that rather than the present $5bn market cap, Zillow could be worth as much as $50bn. This is an outstanding call, one which one might expect from a private investor talking their own book, but not from an entity rather higher up the financial markets food chain. That said, what we have seen from Zillow over the past couple of years and more is that the stock price and the fundamentals have certainly delivered the goods – as per my bull call on CNBC from below $30. This point was underlined in the aftermath of the Q3 update at the beginning of November where most of the key metrics were delivering either good or very good numbers. In particular, it can be noted that Premier Agent advertisers spent 87% more in the quarter compared to the same quarter one year ago. Such a jump really does back the idea that 2014 will prove to be a transformational year for Zillow, something which the tie up with Trulia can only improve on for 2015 as it gives Zillow both critical mass and synergies benefits. The message is, therefore, that while it may feel like the $50bn value call is a little ambitious over the near term, it could very well be that on a 3-5 year timeframe the idea is less pie in the sky than it currently appears. However, it is difficult to argue that when such big targets are placed on stocks, they do inspire sentiment and can in the best of situations become something of a self fulfilling prophecy. While the jury may be out on the best of expectations regarding Zillow, until we have visibility on the outcome of the Trulia integration, buying into the stock after a 50% plus retracement from the best levels of 2014 does not appear to be a risky proposition.

December 2014

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Three Small Cap Us Dollar Plays

THREE SMALL CAP US DOLLAR PLAYS By James Faulkner of t1ps.com

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Three Small Cap Us Dollar Plays

December 2014

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Three Small Cap Us Dollar Plays

Avon Rubber (AVON) Having transformed itself from a plain old tyre manufacturer, Avon Rubber is now a global market leader in chemical, biological, radiological and nuclear respiratory protection systems, and has been making military gas masks for more than 80 years.

In recent years the business has demonstrated through the launch of its ImpulseAir liner, which improves farm efficiency and animal health, with the firm’s proprietary product now enjoying a 21% market share in the US, up from 19% in 2013. OEM sales as a share of revenue are falling as the Milkrite brand builds traction, pointing to a favourable outlook for margins.

This expansion seems to have paid off, as the margins achieved on the firm’s niche products are well above anything it could have made selling tyres. Avon’s world leading dairy business and its Milkrite brand have a global market presence, and its unique designs and innovative technology have been described by one customer as “the biggest advance in the milking process in a generation”. As an innovative firm operating in a market with clear barriers to entry, Avon shares look like a good long-term bet. The Business Although the wider defence market has suffered several well documented setbacks of late, and Avon has seen the procedural process of doing business with the US government slow down, the prospects for the defence business remain strong. Avon’s Protection & Defence division, which accounts for c.74% of revenues, does the majority of its business in the US, where its long-term (ten year) M50 mask contract with the Department of Defense is in its seventh year. Whilst Avon is confident that mask system volumes will continue at “good levels” for the foreseeable future, it is nevertheless taking care to diversify itself away from its reliance on the Department of Defense. In this vein, the firm is making inroads with US law enforcement and the fire market, where its expertise in respiratory systems sets it in good stead to capture significant market share. As well as the attractions of the firm’s competitive niche in protection and defence, there is the structural growth attractions of the Dairy division, which produces rubber products used in milking cows. As the world’s population continues to grow and becomes increasingly wealthy, its demand for dairy products should continue to increase.

“as an innovative firm operatinG in a market with clear Barriers to entry, avon shares look like a Good lonG-term Bet.” Numbers Although revenue was flat in the year to September 2014, we note that it actually rose by 5% on a constant currency basis. With the pound having weakened in recent months, and the dollar apparently on the cusp of a long-term rally, the shares should enjoy a forex headwind in FY15. Research house Edison sees the firm achieving a pre-tax profit of £17.7m in FY15 on revenues of £132.3m, generating EPS of 46.6p. At the current price of 730p, that suggests a current rating of 15.7 times. It is also worth noting that this is based on current contracts and does not factor in further upside opportunities that Edison believes could still add some £7.1m of profit to FY16 forecasts if they were all delivered on.

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Three Small Cap Us Dollar Plays

AVON CHART

December 2014

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Three Small Cap Us Dollar Plays

Optos (OPTS) Optos was founded in 1992 by Douglas Anderson after his five-year-old son went blind in one eye when a retinal detachment was detected too late. The difficulty in conducting a complete eye exam, especially for a child, meant that the problem went undetected, despite the fact that his son was undergoing regular check-ups. Conventional techniques only allowed optometrists to view the central part of the retina, so problems around the edges often went undetected, and while equipment available in specialist eye clinics could provide a greater scope of observation, this could only be achieved through the use of eye drops to dilate the pupil. Putting to use his background as an industrial designer and engineer, Anderson set to work developing a device for detecting early stage eye problems, eventually patenting a scanning laser opthalmoscope that enabled practitioners to capture an ultra wide field image of the retina in a single capture. Anderson’s device was a huge improvement on conventional examination techniques, boasting a scanning range of approximately 82% of the retina, and variations of it are now used in over 3,500 locations internationally and have performed over 27 million eye examinations to date.

The Business Optos now has a range of medical devices that support different customer segments and patient levels. The P200 and 200Dx devices are concentrated on wellness screening carried out by optometrists and ophthalmologists in primary care; the P200C and 200Rx devices are designed to meet the need for more exacting clinical imaging capabilities and standards in secondary care within the ophthalmology market and at optometric practices that are clinically managing a patient base with advanced ocular disease; and the P200MA and 200Tx devices support ophthalmologists and retinal specialists in the medical care market. Optos’s product range has recently been expanded to include the AccuPen, PachPen and B-Scan handheld devices for glaucoma and tumour management.

Meanwhile, the acquisition of Opto Global, completed in December 2010, brought additional devices for both optometrist and ophthalmologist practices, and expanded the firm’s geographic reach outside its core North American and European markets. However, the most important milestone of late has been the development of the low-cost Daytona device, a desk-top ‘plug and play’ version of its ultra-widefield retinal imaging scanning laser ophthalmoscope (SLO). Daytona is targeted at the firm’s principal customer base of clinical optometrists and is intended to increase access to the technology both in the US and other developing markets, building on Optos’s current 17% US optometry market penetration. The product has now been approved for sale in both the US and the EU and is available for shipping to customers in the US and in selected European territories. In addition, the firm has also unveiled a low-cost device for ophthalmologists (California), which is expected to begin generating sales from the first half of FY15.

Numbers The year to 30th September 2014 saw adjusted profit before tax double to $18.5m, on revenue up 7% at $170.6m. At the end of FY14 the installed customer base increased by 24% to 7376 with 1640 Daytona’s installed. Geographically the US remains the key market, with a c.72% share of revenues, growth of 11% and installed base growth of 19% in FY14. At a constant currency operating margin would have been $1.4m higher in FY14, mainly due to increased overhead costs resulting from the USD to GBP movement. Looking ahead, the group continues to move towards newer more convenient and better instruments, which should enable the company to deliver greater market share, particularly in the ophthalmology field.

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Three Small Cap Us Dollar Plays

OPTOS CHART

“Optos now has a range of medical devices that support different customer segments and patient levels.�

December 2014

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Three Small Cap Us Dollar Plays

Sagentia (SAG) Sagentia focuses on providing world-class R&D consulting services to external organisations across three vertical segments: medical devices, consumer markets and industrial products. The company works with clients to add value and technology innovation at any stage of the product development cycle – from needs and market analysis, through to product design and transfer to manufacture. An established business with more than 25 years’ operating experience behind it, Sagentia is part of the “Cambridge Phenomenon” of high-tech businesses clustered around that city, but also operates out of Cambridge, USA, thus giving it an international reach. Its clients range from start-ups to multinational blue-chips, including Vodafone, Johnson & Johnson, PepsiCo and AstraZeneca.

The Business The Medical division is the largest of the firm’s operating units and accounted for approximately 45% of group core business revenue in H1 2014. Within this, the Diagnostics and Surgical sub-sectors typically undertake large instrumentation development projects for corporate or well financed start-up organisations, and accounted for the group’s top four customers by revenue. The Patient Care sub-sector was created by combining the Critical Care and Drug Delivery business units, two less established activities, into a single sub-sector in order to increase the scale of these operations. The global medical market continues to be dominated by North American companies and in 2013 approximately 82% of the revenue derived from Sagentia’s Medical customers was sourced from North America. Numbers One of the key attractions of Sagentia is its strong and conservatively managed balance sheet. As at 30th June 2014, shareholders’ funds stood at £32.5m, equivalent to 87 pence per share. Of this, net cash and equivalents accounted for £13.5m.

There is also a freehold property at Harston, which was recently valued by Savills as part of a refinancing. Under the assumptions used, including tenant covenant strength and market rents, the latest indicative valuation range for the building was between £12.9m based on occupational tenancies, and £18m under a sale and leaseback scenario. It is therefore worth bearing in mind that cash and freehold property account for between £26.4m (57.6%) and £31.5m (68.8%) of the current market capitalisation of £45.8m. It is also worth noting that the company made no alterations to the carrying value of the property on the balance sheet following this review.

“One of the key attractions of Sagentia is its strong and conservatively managed balance sheet.” In order to gain a better understanding of how the underlying business is being valued, we can subtract the value of the freehold property at Harston based on the lower end of Savills’ valuation estimate (£12.9m, or 34p per share). In addition to this, we also need to subtract net cash (£13.5m, or 36p per share) to reveal an implied market value of £19.4m, or 52p per share. On this basis, the operating business is trading on an earnings multiple of just 8.5 times for the current year, falling to 8.2 times for FY15. What’s more, broker Numis forecasts net cash to rise to £16m (43p per share) by the end of 2014, and then to £20.3m (54p per share) by FY15. Factoring these numbers into our valuation, we can see that the underlying business is being potentially valued at just five times earnings for FY14, falling to just 3.7 for FY15 – and this is before any potential increases in the value of Harston (which has in any case been included at a conservative valuation). With a currency headwind looking set to turn into a tailwind in FY15, the shares appear good value.

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Three Small Cap Us Dollar Plays

SAGENTIA CHART

“the operating business is trading on an earnings multiple of just 8.5 times for the current year.�

December 2014

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The Return of King Dollar

THE RETURN OF KING DOLLAR BY JAMES FAULKNER OF T1PS.COM

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The Return of King Dollar

The years following the Financial Crisis of 2007-09 were characterised by talk of a “race to the bottom”, in which central bankers competed with one another to “debase” their respective currencies faster than their neighbours, in a bid to bolster exports, among other goals. The US dollar, despite having risen during the crisis, was particularly at risk, as the United States was tackling one of the largest budget deficits in the developed world. On top of this, an aggressive programme of quantitative easing (more colloquially known as ‘money printing’) was flooding the market with newly minted cash. In August 2011, it seemed to many that the long period of dollar hegemony, which stretched all the way back to the end of the First World War, was coming to an ignominious end, as the US saw its credit rating downgraded by S&P for the first time in history.

So why such a marked resurgence for a currency some commentators had been writing off as a basket case?

However, like the budget crisis engineered by belligerent lawmakers on Capitol Hill, the ‘crisis’ of the US dollar now appears to have been illusory: King Dollar is back with a vengeance! The US dollar has climbed 9% on a trade-weighted basis since July 2014. And it’s not just similarly “debased” developed currencies that the world’s premier reserve currency is rising against. The dollar also recently reached seven-month highs against Brazil’s real and Mexico’s peso, and a near six-month high against India’s rupee.

At the same time, the developing world seems to be slowing down, which makes the returns on offer in the US look all the more attractive in relative terms, especially given the lower risk nature of investing in the country. What’s more, this outperformance looks set to continue. In October, the IMF said it expects 2014 economic growth to be 0.5 percentage points stronger in the United States and 0.3 percentage points weaker in the countries using the euro.

It is no surprise that investors flock to where economic prospects look brightest, and the US is certainly a beacon of light at the moment, amidst what is otherwise a rather dull-looking world economy. The US economy advanced an annualised 3.5% in the third quarter of 2014, albeit slowing from a 4.6% increase in the previous quarter. Although the current growth rate of the US is by no means outstanding from a historical perspective, it contrasts markedly with the stagnating economies of much of the rest of the developed world (with a few exceptions such as the United Kingdom, for example).

December 2014

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The Return of King Dollar

However, the relative strength of the US versus the other developed economies has been evident for some time now. With this in mind, it appears the most important near-term catalyst for the dollar renaissance has been the winding down of QE at the Federal Reserve, which holds out the prospect of higher interest rates in the US in the future. This stands in stark contrast to the actions of policymakers in the Eurozone and Japan, with the latter stepping-up its QE programme, and the former expected by many to initiate QE in the not-so-distant future. This should hold back the performance of two of the dollar’s three main reserve currency rivals, the euro and the yen, for some time to come. As for the wider implications of the dollar revival, there are two opposing arguments in play here. The positive stance is that a strong dollar, being the reflection of a strong US economy, is good for the world economy. The US remains the world’s largest consumer, so a stronger dollar should help boost demand for overseas products in the US, thereby delivering a much-needed stimulus to the world economy. While some will point out that a stronger dollar would hurt US exports at a time when the US has actually made some progress at rebalancing, it is worth noting that the US is in fact a relatively closed economy in the sense that it does not rely on exports to drive GDP growth. In any case, dollar movements have a fairly small impact on import prices and export activity, and there is a much more elastic relationship between global growth and exports than the relative value of the dollar.

“it appears the most important near-term catalyst for the dollar renaissance has been the winding down of QE at the Federal Reserve.” A rather more pessimistic view is that the strong dollar is merely a symptom of a wider malaise in the world economy. If the US and its currency become the only game in town, capital outflows from emerging markets could intensify and put policymakers in those jurisdictions to respond with capital controls and rate rises at a time when developing economies are already looking fragile. Meanwhile, inflows of capital looking for a home might be tempted to seek out the US stock market, which some believe is already looking overvalued. In this sense, we may be laying the foundations for the next bear market, and it is alarming to think that the last time the US dollar rose sharply and the oil price collapsed was the start of the Financial Crisis and ensuing recession.

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The Return of King Dollar

“the last time the US dollar rose sharply and the oil price collapsed was the start of the Financial Crisis and ensuing recession.� A rather more pessimistic view is that the strong dollar is merely a symptom of a wider malaise in the world economy. If the US and its currency become the only game in town, capital outflows from emerging markets could intensify and put policymakers in those jurisdictions to respond with capital controls and rate rises at a time when developing economies are already looking fragile. Meanwhile, inflows of capital looking for a home might be tempted to seek out the US stock market, which some believe is already looking overvalued. In this sense, we may be laying the foundations for the next bear market, and it is alarming to think that the last time the US dollar rose sharply and the oil price collapsed was the start of the Financial Crisis and ensuing recession.

There is one observation that may lead us to gravitate towards a more positive appraisal of the strong dollar. Whatever your views on QE, it is hard to ignore the fact that the US and the UK economies, both of which have been subject to large QE programmes, are now the bright spots of the developed world. The Bank of Japan is now getting serious with its own QE programme, while the European Central Bank seems to be edging ever closer to QE, despite the misgivings of the German government. Should this lead to a wider improvement in global economic activity, it would seem that a stronger dollar will be viewed as a price worth paying.

December 2014

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Andre Minassian - Something About the Markets

ANDRE MINASSIAN ON THE MARKETS How far will the bull market go?

Andre Minassian is CEO at www.clevergamesuk.com, which provides a serious alternative view of trading in the stock markets.

December 2014

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Andre Minassian - Something About the Markets

There have been many discussions and speculations about how far the current bull market will go, although these have mainly come from the US given the FTSE’s ups and downs in 2014. Some say that the ongoing rise seen in US indices is a bull trap. What about all the geo-political uncertainties? What about being over-valued? What about this and what about that? I have said since the beginning of 2014 that the bull market has a long way to go and that once we passed 17,000 on the Dow Jones we are only entering another phase of the current bull trend. That psychological level being passed was not the end of the trend in my view.

I think the final bull phase will kind of end when the S&P reaches around 2,200 and the Dow passes 20,000. I have a hunch that we will not see a serious pull back on the Dow until it hits 22,000. That is when we will reach a bubble situation. But are the markets going to build another bubble knowing full well what history has taught us? The answer, in my opinion, is a big yes! We are going to build another bubble.

DOW JONES CHART

Closer to home, what about the FTSE?

Never is a big word, and yet I insist that the banks will never recover to levels seen before the financial crisis in the short, medium or long-term.

The FTSE is about 20% behind in value compared to the USA. The reason is that a large percentage of the index’s constituents are oil and banking stocks. Oil is down and banking stocks will never recover in any substantial way in my view.

And why is that? Since the banking crash of 2008, the banks have not been allowed to recover. There has been and there still is a deliberate policy to prevent them from recovering.

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Andre Minassian - Something About the Markets

The entire banking scene will change beyond recognition in the years to come, with the power to lend becoming more and more centralised. The central banks have always called the shots and this is their new game plan, and there is nothing anyone can do about it. Finally, my hunch is that the Dow Jones will pass 18,000 on or before January 2015 and the FTSE 100 will cross 7,000 at around the same time. I feel once the Dow gets to 18,300 we will see a pull back before we resume to 20,000. The moral of the story is, stay long and you do not need to do much trading. I am opposed to day trading in general and have a medium to long term view as always. You will make more money that way. Before I go, my one stock tip is National Grid, on which I have a short-term target of £11.30, implying around 20% upside from the current price.

“My hunch is that the Dow Jones will pass 18,000 on or before January 2015 and the FTSE 100 will cross 7,000 at around the same time.” Register for free email updates on my website for market views and stock tips – we will not try to sell you anything or sell your details. These are all games folks... Clever Games. FOR MORE DETAILS ON ANDRE’S OFFERINGS VISIT www.clevergamesuk.com

December 2014

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Robbie Burns’ Monthly Trading Diary

ROBBIE BURNS’ MONTHLY TRADING DIARY The one topic that always lands in my inbox in December is: “How do you play the Christmas rally?” The Santa Rally always becomes a hot topic with share punters in December. It’s well known that this month is one of the best in the year for share price performance. While it’s cold outside, the December markets are hot! The statistics support my argument. Historically, the strongest week of the year for the market is the 51st, and the second strongest? The 52nd! Using historic data, the probability of positive returns for December as a whole is high at 69%. In fact, the market has only had one significant fall in the month since 1981. Both mid and large-cap stocks perform equally well. So why are the markets so good at the most wonderful time of the year? I suspect it’s down to something as simple as human psychology. We all feel good with the approach of Christmas, then there are New Year’s hopes and dreams. And fund managers probably want to end the year on a good note. But by the end of January we tend to be left with a bit of a hangover and that’s why February isn’t so good. Also, as markets often fall somewhat in October and November, investors begin to come in and buy what they perceive as bargains.

The period between Christmas and New Year often sees stocks squeezing higher on thin volumes. While I might well be tucking into mince pies, I’m also at my trading desk watching for opportunities to make money. Another opportunity comes from the fact that often no one is selling and institutions are shut. This can have a good effect on stocks at the smaller end of the market.

“in my view the Best way of playinG the end of year rise is via a lonG spreadBet on the ftse or the dow.” Of course, I am making it all sound too easy. It’s never going to work out every year. But the use of tight stop losses should ensure that when you meet a year without a Santa rally, your losses will be minimal.

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Robbie Burns’ Monthly Trading Diary

So how can traders play the Santa rally? In my view the best way of playing the end of year rise is via a long spreadbet on the FTSE or the Dow – just a rolling one as we’re only looking at making money in the short-term. A trailing stop loss of say 100 points (to ensure no sudden spike out) might work out.

“i find decemBer is also a Good time to have a look at some of the smaller, tiddler stocks in the market.” First (and I do this most years), I buy the FTSE 100 index in early/mid-December and I sell in early January to take advantage of the fact that the FTSE usually rises in this period. I usually just make a simple ‘long’ FTSE 100 spread bet, with the stop loss in place just in case it’s the occasional year when the festive uplift doesn’t happen. This simple strategy worked out nicely in 2013 when I bought just before Christmas at 6,445 and the market had a lovely festive jump. Then in January it went to near 6,800, bagging me a tremendous profit! But do remember that the market can never be totally predicted, so beware, maybe this is the year it won’t happen.

I find December is also a good time to have a look at some of the smaller, tiddler stocks in the market and sometimes have a bit of a gamble on a few stocking-filler shares. But only a little gamble, mind. Let’s not be idiots. Looking at specific days, would you believe that the short half-day on Christmas Eve is the strongest market day of the year, with the 23rd being the second strongest day? Which suggests buying stuff on the 22nd might work very well indeed! But watch out! The first week in January is the weakest market week. You can imagine this is when people look at their credit card spending in December and reality hits. Also on the downside, one thing to watch out for is companies sneaking out bad news between Christmas and New Year. It’s the same as political parties burying bad news on a day when a big story emerges elsewhere. With so many people away, the companies hope the stinker will go unnoticed. So it’s worth keeping an eye on news that’s related to your stocks. I get out quick if any kind of bad company news is released on one of my shares at this time. So, to sum up, long the FTSE usually works from mid-December, but by the time we hit January a switch to a short might pay. If you’re going to play the Christmas game, good luck, and I hope a big present of cash arrives in your spreadbetting account. Happy trading! Robbie

Before you go, why not get the latest copy of my book the naked trader, which has just been published! You can get the naked trader 4 only from my website and also from Amazon. The book updates the naked trader 3 which I wrote in 2011 – a lot has happened in the market since then and I cover all the changes. There are tons of ideas, trader stories, psychology, biggest trading mistakes and 20 trading strategies to make money. It’s only £14.99 and the first 500 who order it get a free pack of Naked Trader T bags made from only the best tea! To get The naked trader 4, click the link at my website www.nakedtrader.co.uk

December 2014

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School Corner

school corner

POSITION SIZING By Maria Psarra - Head of Trading at Prime Wealth Group

This is the third in a series of educational articles on the best habits of winning traders and investors, the most common mistakes traders make, and practical ways to avoid them. Now ladies and gents, the time has come to talk about size. In the markets size DOES matter. What does this mean? It means that it is not enough to find the right trade, the right stop loss and profit targets. You also need to determine the right position size for any particular trade. So let’s get to the point, and similarly to my previous articles, illustrate this through an example.

At this point, most traders and investors will take the quick and easy road of arbitrarily choosing a position size that is either too big or too small given the total size of their trading account. As a consequence of this, the two following alternative scenarios could unfold.

Sizing your position You have done your research and have identified stock X, which appears to be a fantastic “buy” according to your trading system’s fundamental and technical selection criteria. What’s more, the stock is currently trading just above its 52-week support level and you have easily determined both your acceptable stop loss and first profit target levels. ‘’Hurray!’’, you shout. ‘’Trading comes so easily to me these days!’’. All that’s left to decide is one more minor detail and you can jump in.

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Protecting School Profits Corner

“most traders and investors will take the quick and easy road of arbitrarily choosing a position size that is either too big or too small given the total size of their trading account.�

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School Corner

Scenario 1. The stock soon rallies, thanks to unexpected good news, turning stock X into your most successful trade ever. That is, the most successful in percentage terms, but, and here is the catch, due to a small position being taken, it is sadly nowhere near ‘’interesting’’ enough in monetary terms. Scenario 2. The stock soon ‘’sinks’’ due to unexpected bad news. As any experienced trader/ investor knows, such things do happen in the markets, and are hardly the end of the world. That is unless you have a large position in this stock. Large in the sense that if your stock does fall, it will have an extremely adverse impact on the value of your total trading account, your freedom to maintain your other existing positions, and even your overall ability to continue in the markets.

In other words, winning traders ensure that their winning trades reward them well. They can always afford to best plan and execute this because they forbid their unsuccessful trades from causing any real harm to their account. Winning traders realise that their success in the markets does not depend on any single trade, and as such do not over-expose themselves by taking unsuitably large positions. On the flip side of this, they do not waste their time and effort by taking unsuitably small positions because they are afraid or unsure of the outcome. In summary, winning traders realise that no single trade should be allowed to make them or break them, and position size accordingly.

In either case, the result is far from great, and certainly not one that you or any market participant should aim for. Obviously, less dramatic scenarios can occur as well, but for our example, I chose the two opposite ends of the spectrum in order to illustrate and amplify my point.

What do winning traders and investors do differently? It is simple. They choose the right position size for their trades. How? Above all, they select a trade size that best matches the size of their personal trading account/investment portfolio. This is a size that, if the trade is proved successful, will produce a sufficient return to justify the risk taken, and boost their trading account. On the other hand, if the trade turns bad, the position value will cause no irreparable damage. Additional factors taken into account when determining trade size include personal attitude to risk, broader trading strategy, preferred investment time horizon, number and size of existing open positions in the portfolio, and in the case of fully invested leveraged portfolios, the ability to add additional funds to the account should adverse market movements deem it necessary.

“winning traders ensure that their winning trades reward them well.” I hope that after reading my article, you realise and accept this too. So next time you decide on the position size for your trades, remember to pick a size that is both worth your while if it succeeds, and allows you to fight another day if it does fail. I hope you enjoyed reading my article, and as always welcome your feedback. Until next month, Happy Trading everyone!

Maria Psarra is Head of Trading at Prime Wealth Group (PMW), supervising a team of experienced brokers, and advising High-Net-Worth Individuals on suitable investment strategies. Maria employs different investment styles in order to construct personalised portfolios best suited to the risk and return preferences of PMW’s clients. Typical portfolios primarily comprise of UK and European Equities and Equity Indices, and to a lesser extent Commodities and Fixed Income exposure.

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Currency Corner

CURRENCY CORNER

Why I Don’t Trust the US Dollar By Samuel Rae

December 2014

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Currency Corner

In 2008, Ben Bernanke initiated a quantitative easing programme of unprecedented scale. Fast forward six years, and the US – and indeed the majority of other global economies – have managed to avert the deep depression that may have followed the recession in the absence of such extreme monetary policy measures.

The aforementioned theory being that once the economy had recovered, the Fed would be able to sell its bonds, and absorb some of the capital it had introduced back out of circulation. This seems sound, but what has occurred is far from what was theorised.

When asked about the efficacy of quantitative easing, many market analysts would have a positive tone to their response. There is, however, one fly in the ointment. This proverbial fly is inflation. While stock markets and real estate are booming, inflation remains well below the Federal Reserve’s target. At a time when we should be starting to think about a potential near-term interest rate hike in order to maintain sustainable growth and avoid the pitfalls of an overheated property market, the fact that inflation is so low means we are probably not set for a hike before mid-2015. For me – and I am sure many others – the fact that inflation remains so weak is a real warning sign of what may lie ahead for both the US economy and its dollar.

“the fact that inflation remains so weak is a real warning sign of what may lie ahead for both the US economy and its dollar.” So, why is inflation so low? Surely, with huge levels of capital injected into the US economy over the last six years and a rampant equities market, people should be spending more? Well, not necessarily. When Ben Bernanke initiated his quantitative easing programme, he had to figure out how he was going to introduce the capital. He had a range of options – but he decided to go with buying the bonds from member banks (simplified). The argument behind this method as opposed to simply mailing envelopes stuffed with dollar bills to US residents was that – in theory at least – it enabled the Fed to introduce capital on a temporary basis.

To explain, we need to look at it from two different angles. The first explains why inflation is so low. The second explains why the Fed cannot pull the funds it has created out of circulation – not any time soon at least. So, angle one. Put simply, the Fed had far too much faith in the banking system when it decided that it would rely on it to distribute the capital being created. Ben Bernanke was not just able to go straight to the US government and buy bonds – he had to buy them through member banks, many of which are household name investment banks – Merrill Lynch, Goldman Sachs etc. What did these institutions do with the money? Redirect it straight into the equities markets. Now in theory, this is introducing it into the general population as companies can use the equity investments to fund expansion, capital asset purchases etc. However, this does not seem to have taken place. In reality, all that has happened is the paper value of the companies in question has inflated. Some of you may point out here that if the paper value of an individual’s stock portfolio increases, the socalled wealth effect could kick-in and stimulate retail activity that may not have otherwise taken place. But when you think about it, at times when markets are making record highs nearly every day, where is the average investor likely to allocate capital? Luxury item purchases or the equities market (where he or she expects to turn a short term profit)? In short, a large amount of the capital created during the quantitative easing programme has not reached ground level, and – in turn – has not impacted retail activity. This is why inflation is low.

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Currency Corner

Now, angle two.

Cue panic selling and that which follows.

Why can’t the Fed simply control sell bonds back to the member banks and absorb some of its created capital? Well, in order to make the bonds attractive to institutions the Fed would have to offer great terms on the sale. These institutions would have no problem with this, nor would anybody being offered assets with great returns promised. However, this is not the problem.

With all this in mind, I’ve been trying to figure out how the US can get out of its predicament.

The problem is where the money would come from to fund the purchase of these bonds – it would come from the equities markets. We would get a large reallocation of capital from the equities markets to fund the purchase of the Fed’s bonds, and the wave of selling would initiate a sharp and considerable contraction in US markets.

Rates need to increase in order to avoid overheating of the property market. However, this cannot happen because inflation remains low and an increase in rates could jeopardise recovery. Further, the Fed is stuck with a hugely inflated balance sheet, none of which it can redistribute for fear of triggering an equities market correction. I have not been able to come up with an answer – only a personal solution: that while we may see further strength in the US dollar over the coming few months, I will be extremely cautious about my capital allocation as we head into the beginning of 2015.

S&P 500 CHART

New SBM contributor, Samuel Rae, is the author of the best-selling book “Diary of a Currency Trader”. Sam’s personal trading style combines classic candlestick analysis with a simple, logical and risk management driven approach to the financial markets – a strategy that is described and demonstrated in his “Diary of a Currency Trader”.

December 2014

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Binary Corner

BINARY CORNER

Oil Weakness Strengthens Dollar’s Hand By Dave Evans of binary.com

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Binary Corner

“November and December have both historically averaged oil price declines of around 2% since 1983.� Oil prices (West Texas Intermediary) have slumped to a four year low after OPEC opted to keep oil production steady instead of cutting it, as the body has often done at previous meetings during times of pricing pressure. Oil Prices Daily (WTI)

The move caps a sustained period of selling pressure over the autumn. The world economy has hardly been booming during this period and, for once, it seems that professional commercial buyers have not stepped up to the plate. We could have further to fall, as November and December have both historically averaged oil price declines of around 2% since 1983.

As with most commodities listed against the US dollar, there has been a strong inverse correlation between prices and the US currency. Correlation does not equal causation, but the US dollar’s rally has been helped by a lack of pull in the other direction from commodities, while commodities have been pressured by the pervasive strength of the dollar.

Oil is not alone in the commodity market for feeling the pressure.

December 2014

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Binary Corner

US dollar index

The dollar index advance has paused somewhat as we near the end of November, but so far the uptrend seen since the beginning of June has shown no serious signs of reversal to date. Oil and its correlation with the GBP USD and the USD/JPY

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Binary Corner

The chart above shows the weekly chart of oil with the correlation with the GBP/USD (Purple) and the USD/JPY (red). We can see that oil has had a strong positive correlation with the GBP/USD (and indeed most dollars) and a strong negative correlation with the USD/JPY. This implies that a down move is currently corresponding with a down move in the likes of the GBP/USD. At the same time, an up move in the USD/JPY is corresponding in a down move in the price of oil. Once again, this correlation does not equal causation, but it does underline the centrality of the US dollar to the major market trends of the moment.

With the US dollar showing no signs of a serious reversal and the Japanese yen unlikely to gain real strength until after the elections, we could see yet more upside from here for the USD/JPY.

Until the US dollar significantly reverses, we’re unlikely to see a corresponding rise in oil prices, the GBP/USD or a fall in the USD/JPY. Yen Troubles Not Over Yet The USD/JPY lifted higher again at the end of November after a short period of respite for the yen against the dollar. This was until the latest blow for ‘Abenomics’ landed, with Japanese core inflation falling below 1% last month. This comes ahead of snap elections as Japanese PM Shinzo Abe aims to garner support for delaying a scheduled tax rise. USD/JPY Daily Chart

A good way to play this is a HIGHER trade predicting that the USD/JPY will rise and close above 118.50 in seven days time for a potential return (as I write) of 132% if successful. Or put another way, betting that the USD/JPY will push higher and close above 118.50 could return £23.05 for every £10 put at risk.

Disclaimer: This financial market report is intended for educational and information purposes only. It should not be construed as investment or financial advice and you should not rely on any of its content to make or refrain from making any investment decisions. Binary.com accepts no liability whatsoever for any losses incurred by users in their trading. Fixed odds trading may incur losses as well as gains.

December 2014

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Paul Wynter on Art

Monthly Review of Up-AndComing Artists by Paul Wynter of Londonart.co.uk

In a new feature on the alternative side of investing, Paul Wynter of Londonart.co.uk takes a look at some of the new faces to hit the art scene. “Beauty is in the eye of the beholder” or so thought the Greeks back in 3rd century BC. How else to account for the popularity of two of Londonart’s best-selling artists, Sue Blandford and Carl Chapple? Both have distinguished credentials in terms of their art school provenance. Having trained at Norwich School of Art, Sue Blandford, now living in South London, has most definitely been influenced by the low lying East Anglian landscape, with its flat expanses and endless horizons. Carl Chapple, on the other hand, trained in London at Central Saint Martins’ and is one of Londonart’s finest figurative artists. So how to account for Blandford’s strong reputation throughout the artistic community and her commendable portfolio? The answer surely lies in the remarkable variety and accomplished technicality of her work. Whether she is painting the simple graphics and inverted proportions of her bee house series or the glow of meaningful objects against tastefully muted backgrounds, she captures the essence of the world around her in a creative and imaginative way.

With a deft hand and an appreciation of the language of colour, this artist constructs her paintings upon the notion of complex relationships. She says, “I am interested in poetic juxtapositions of objects, which are imbued with both practical use and symbolic evocation. I am concerned with paradoxes of light and dark, peace and unease; relationships between man-made objects or interventions in natural situations… the magic in the seemingly mundane.” Blandford’s quest is to capture the creepy depths of still, black water or the play of weak light on wintry objects. In her portraits she seeks to evoke the miracle of creation or the undeniable oddness of the human form. Rooms are painted as cages containing dreams and conversations, while shadows heighten the appearance of light.

“Blandford’s quest is to capture the creepy depths of still, black water or the play of weak light on wintry objects.”

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Paul Wynter on Art

Fisherman’s Hut – Sue Blandford But it is always interesting to discover exactly how an artist achieves such other-worldly effects. The key to Blandford’s technique is the juxtaposition of objects to invoke paradox, painstakingly imbuing them with a deeper meaning to create conflict and interest for the viewer. She uses deep tones of blue to produce surreal images, splitting canvases with striking blocks of colour. The eerie nothingness of light on glass is depicted as ghostly translucent, creating wonderful, illusionary horizons. Her crisp, focused lines and thickly applied borders in an Expressionist manner enable her to achieve her unique style, which embodies her memories of the English East Coast.

You Read to me There – Sue Blandford (right) A sense of place is often what motivates an artist, providing inspiration and food for thought. Carl Chapple’s work too, although consisting primarily of nude studies, carries the traces of his travels. During his student summers he travelled extensively in Greece and Turkey. In subsequent years he visited Prague and then Florence, making studies of Classical and Renaissance paintings, drawings and sculpture. After returning to the UK, he joined various South London life-drawing groups, one of which bestowed a privileged opportunity to paint with another cherished Londonart artist, Reg Eldridge.

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Paul Wynter on Art

Chapple reflects fondly on his time spent in South London: “Reg was very generous with his encouragement and advice, and occasionally would put down his brushes, embrace the scene, and say something like, “Look at this! Look at the light! Look at the model! Isn’t this wonderful!” and remind everyone of how lucky we were to be in that moment.” Interestingly, Chapple has made the reverse journey to Blandford and has moved from the capital to the provinces; having now set up a studio in Barry, South Wales where he continues to paint prolifically from life.

Alfredo 3 – Carl Chapple (left) Chapple is a serious, self-disciplined and scholarly artist. Speaking of his practice he says, “It’s something I absolutely have to do, and I feel wretched if a weekend passes without anything half-decent to show for it.” Presumably his time at St. Martins drilled into him a strict sense of restraint and self-motivation. Chapple paints exclusively from life, a pursuit that challenges artists unlike any other painting technique. He seems to absorb all the information before him and then channel those feelings from head to hand, re-creating the vision in paints on paper and capturing the essence of human form. As such, Chapple creates a new artistic language, diverging from the beaten track of nineteenth century modern art and twentieth century postmodernism. Few artists today have the courage to reject modernist ideas such as Realism and Primitivism, as well as the ensuing Abstraction, Surrealism, Pop and Conceptual Art. Chapple’s oeuvre embodies an attitude that tries to reverse such contemporary processes by tightening boundaries that make art more recognizable to the viewer.

Becky 2 – Carl Chapple (right) A figurative artist specialising in oils, Carl Chapple spends a great deal of his painting time in the Life Room. His experienced and mature approach to painting the human condition is clearly reflected in all of his works. “I decided in the late 90s to set myself some rules - I only painted on 7” x 9” hardboard panels, limited my palette to four pigments, used only hog hair brushes, made no preliminary charcoal drawing, and set a time limit of no more than 45 minutes per picture. This was an effort to force some spontaneity and immediacy into my work, and find a new way of painting.” It is the human figure that most inspires and enthuses his creativity. He describes it as “… the only subject matter that completely grabs me – partly because it’s often beautiful, which is inspiring; partly because there’s very little room for ‘error’, in terms of proportions etc, to a degree which just doesn’t apply to any other subject; partly because it’s readily loaded with meaning that everyone can relate to; and partly because having a person modelling for you gives the whole business a sense of urgency that you just don’t have with a bowl of fruit. Also, painting is a lonely business without someone else there.”

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Paul Wynter on Art

Perhaps now it is clear to see where the beauty in these two artists’ work lies and how it came to be. Chapple has been studying the human form directly from life for many years and his matured and dedicated painting practice has naturally reinforced his painting skills and technique. Whilst it is the sensitivity that Blandford has accrued in her poetic, rhythmic paintings that enable her to capture the low white sun of winter, where forms reflect against the darkness and shimmering water shows the world back to itself. Sue Blandford has exhibited across the UK and has participated in a number of Artist Residencies. Her work is in private collections across the UK. Carl Chapple has exhibited extensively in London and throughout Wales.

For more information visit http://www.londonart.co.uk

“A figurative artist specialising in oils, Carl Chapple spends a great deal of his painting time in the Life Room.”

December 2014

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Technology Corner

TECHNOLOGY CORNER

Blow Your Bonus, Purge Your Profits! SBM’s resident technology specialist, Simon Carter, takes a look at what hot technology you can blow your Christmas bonus on this year.

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Technology Corner

December 2014

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Technology Corner

As we trundle towards the last days of 2014, it’s natural to reflect on the past 12 months, take stock and, hopefully, count your winnings. It’s also Christmas, a time to indulge, be generous, splash the cash a little. Hell, there’s no need for all this justification – you’ve been successful, you want to treat yourself. Well here’s how!

3Doodler - £99.99 Regular readers will know that we here at SBM are committed fans of 3D printing and the many exciting opportunities – both from a technological and financial perspective – that are just over the horizon. So what’s this? The 3Doodler is the world’s first 3D printing pen, allowing you to draw physical creations in thin air. There are a range of accessory packs to suit all requirements, so get doodling!

“The 3Doodler is the world’s first 3D printing pen.”

Breathometer - £59.99 If you think you may have overdone it with The Perfect Drink, or if you’re worried that you still may be over the limit the morning after the night before, then this device could come in handy. Plug it into the headphone jack of your smartphone, launch the Breathometer app and blow onto the gadget. Within seconds the app will tell you not only how much alcohol you have in your system, but when you can expect to be sober enough to drive. Of course, Drink Smart, the makers of the device run a disclaimer saying that it shouldn’t be used to determine whether or not you should drive, but we all know that’s what it’s for…

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Technology Corner

The Perfect Drink - £59.99 Now we’re talking! Zippo Hand warmers and 3D printers are all well and good, but it’s Christmas! And wow, does this gadget know it. Ostensibly a set of scales, an accompanying app will turn you into a cocktail guru. Select your cocktail, place your glass or cocktail shaker on the scales and start to pour. On screen a virtual glass will fill up in real time, telling you exactly when to stop with one ingredient and move onto the next. If you over pour, the app will automatically recalculate the proportions required. The future of drinking is here!

Sphero Ollie - £79.95 If you’re feeling especially flush, why not just go all out and buy yourself a robot. OK, so it’s not exactly the robot butler we’re all waiting for, or even one of those little robotic vacuum cleaners, but it is a hell of a lot more fun. You won’t be at all surprised to read that you can control Ollie with your smartphone or tablet as you race and rave him in the park, in the street, in your front room. Like the most insane RC car you have ever seen, Ollie will flip, drift, spin and do just about anything else you can imagine a foot long cylinder robot doing.

“If you’re feeling especially flush, why not just go all out and buy yourself a robot.”

December 2014

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Technology Corner

PS4 - £329 or Xbox One - £318 It’s been over a year now since Sony and Microsoft released their next generation offerings, and while it might be taking a little longer than expected for a line-up of truly great games, it’s hard to deny that both are impressive machines. Whether you’re playing ports of games such as GTA V or exclusive titles, the speed, graphical capability and playability of both the PS4 and xbox One are undoubtedly impressive. And with both coming in under £350 for the console, you’ll still have something left for a new TV...

“the speed, Graphical capaBility and playaBility of Both the ps4 and XBoX one are undouBtedly impressive.”

Samsung 55-inch 4K TV - £999 If it is a new TV you’re after, then you’ve got to be in the market for an Ultra HD, 4K offering. OK, so 4K content is severely limited, but there’s no harm in getting ahead of the curve, and Samsung’s UE55HU6900 beauty also offers UHD upscaling so that even old episodes of Dad’s Army will look absolutely stunning.

Mech Warrior Phone Stand £49.95 Soldered together bits and bobs found in a junkyard may not sound like the most impressive home for your smartphone, but each unique Mech Warrior Phone Stand is the perfect throne on which to stand your new iPhone, Samsung or HTC.

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Technology Corner

December 2014

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The UK Stock Market Almanac 2015

BOOK REVIEW

The uk Stock Market Almanac 2015

Seasonality analysis and studies of market anomalies to give you an edge in the year ahead by Stephen Eckett by Richard Gill, cfa

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The UK Stock Market Almanac 2015

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The UK Stock Market Almanac 2015

With another year soon upon us, the Stock Market Almanac, just like Lady Gaga, returns with an updated annual look. Part diary, part strategy bible, the almanac is also a detailed reference guide, packed with predictions and advice on how investors can take advantage of the markets in 2015. The book’s editor, Stephen Eckett, began his career on the Japanese equities and warrants desk at Baring Securities, and after gaining significant experience in the Asian markets founded Numa Financial Systems, a training and systems consultancy company specialising in derivatives.

Core text… As ever, the Stock Market Almanac attempts to provide investors with a detailed preview of the upcoming year in the financial markets. The weekly goings on in the investment world, such as important economic events, expected company announcements and detailed month-by-month statistics are all covered in a well laid out diary style format. While the diary part of the book looks to the future, the majority of the rest looks to the past, analysing how the financial markets, certain stocks and indices show trends and potential anomalies at different times of the year and when a range of events occur. Alongside each weekly diary page is an accompanying piece of stock market analysis, providing strategies on how to take advantage of a range of seasonal patterns which have cropped up through history. For example, investors reading this review during December 2014 should note that the month continues be the strongest performing of the year, with the FTSE 100 having risen 87% of the time in December since the index was created in 1984.

The FTSE has only lost value in December once in the past 19 years (2002) and a repeat of the average 2.5% monthly gain in 2014 would see the index close the year just short of its record highs. See Robbie Burns’s article on page 56 for some hot tips on how to play the “Santa Rally”. Complementing the more serious and data-heavy research, Eckett covers a few more light hearted and perhaps surprising stock market observations. For example, did you know that Friday the 13th is not necessarily an unlucky day for UK investors, with the average return on the FTSE All-Share having been 0.06% in the 74 such trading days since 1970 double the average return for all trading days over that time. Eckett suggests it might also be lucrative to invest in women. An analysis of the ten FTSE 100 companies with the highest proportion of women on their boards shows a 37% return from the start of 2011 to July 2014 - compared to just an 11% return from the index itself.

“did you know that Friday the 13th is not necessarily an unlucky day for UK investors.” 2015, election year and Chinese year of the goat... Of particular interest to investors next year will be the author’s analysis of how the domestic markets perform around UK general elections. Historically, UK election days have been strong performers, with the FTSE All-Share having risen by an average 0.67% on the past 11 election days and rising on nine out of the 11. There only seems to be a short-term effect however, with the month following an election generally having negative returns. In terms of the influence of different victorious parties, and perhaps unsurprisingly, Labour victories since 1970 have seen a 1.9% average market fall.

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The UK Stock Market Almanac 2015

Conversely, there has been a 1.9% average gain following a Conservative victory. But with no clear poll leader at present, Nigel Farage expected to snap up a handful of seats, and another coalition government looking likely, this analysis may not be of much use to investors for the 2015 poll. Other events in 2015 suggest that we may be in for a good year however, with the Chinese year of the goat (starting on 19th February) having seen an average market return of 17.9% since 1950! It is also noteworthy that years ending in a 5 have seen an average rise in the FTSE All-Share of 9.2% going all the way back to 1805.

However, using this as a trading strategy did not prove to be quite so successful in the glorious 2013 promotion year, with the FTSE only gaining 0.4% from the day of promotion in May to the end of the year. The reason? Because, of course, the results of a minor football team have no effect on a global, trillion dollar stock market with billions of factors at play.

“it is worthy of inclusion in the Christmas stocking of any investor.” Nevertheless, results on the field can have an effect on individual football teams, as Eckett (perhaps having read my review) explains in an analysis of game results on the prices of quoted clubs. While there aren’t many quoted football clubs left on the London markets, the author points to a number of studies which suggest that positive results can deliver significant abnormal share price returns. Vice versa, losses on the pitch can result in negative returns - which brings images of the more financial literate and victorious football supporter chanting to the opposition (to the tune of Three Lions), “your shares are going down...”

Shares go(at)ing up in 2015?

Previous winning tactics may not always work... While many examples of so called stock market “anomalies” are given in the book, the reader should always remember the old adage that “correlation does not imply causation”. In my review of the 2014 Stock Market Almanac, I took to the example of analysing stock market returns surrounding the performance of my football team, Bradford City, in order to demonstrate how data mining can find effects which aren’t really there.

Conclusion… As ever, the latest Stock Market Almanac is an entertaining, informative and useful book. Often delving into the fantastical and then back to detailed academic studies, it is worthy of inclusion in the Christmas stocking of any investor.

My analysis found that in the years 1985, 1996 and 1999 (those in which Bradford won promotion) the FTSE 100 gained an average 8.7% between the day of promotion and the year end.

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Markets In Focus

MARKETS IN FOCUS NOV 2014

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Markets In Focus

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Thank you for reading. We wish you a profitable December!

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Spreadbetting Magazine v35  

The e-magazine created especially for active spread bettors and CFD traders. This month's premium features includes: Jim Mellon on the Mark...

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