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

Issue 21 - October 2013

A Zak Mir Interview Special “Million Dollar Trader” Anton Kreil - no holds barred!


Robbie Burns - back from his summer sojourn!

Dominic Picarda on overvalued US Tech plays

Alpesh Patel Global Markets outlook


Zak Mir Interviews Anton Kriel In an exclusive to Spreadbet Magazine, our very own Zak Mir interviews Mr Million Dollar Trader, Anton Kriel

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Currency Corner In this month’s Currency Corner we assess the likely movements in GBP/CAD and GBP/AUD

Dominic Picarda’s Technical Take US Tech Stocks are starting to look overcooked and in this issue’s Technical Take, Dominic Picarda analyses three of the sector’s heavyweights; Facebook, LinkedIn and Netflix


Robbie Burns’Stock Picks Special


Alpesh On Markets

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Fresh back from his summer sojourn, Robbie Burns returns to give his own inimitable take on AIM (as well as sharing five of his favourite tips!)

It’s that time again, as Alpesh Patel provides us with a run-down of what to expect in the coming quarter, with some suggestions for positioning in currency markets

Small Cap Corner Paul Scott and our very own Richard Jennings offer their thoughts on the current bull market that small cap stocks are experiencing, with an update on previous suggestions FWEB, NXR & CAP

Politics Of Trading The soon to be privatised Royal Mail is an enduring British institution. This month, David Cracknell delves into the background of the IPO and shares his view on what we can expect

End of the Dollar Scenario Could it really happen? Might the Dollar suddenly, one day, lose its reserve status? In this vision of the future, Filipe Costa and Richard Jennings suggest a scenario, which could just happen....

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Zak Mir’s Monthly Pick This month Zak issues a strong sell rec on the NASDAQ100


The Rise of Social Media in Investing With Twitter set to make its debut on the market we take a look at the increasing influence social media has on investing

45 The CFD Magazine Focus on Marc Faber


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Dr Doom, Marc Faber, is one of the loudest contrarian voices around. He is well known for correctly calling every recent major downturn, so what does he make of the current state of markets?

Why hasn’t QE triggered inflation? After central banks around the world have flooded the economy with trillions of dollars, euros, yen and pounds, why hasn’t this triggered much higher inflation? Ben Turney offers us some answers

School Corner The Elliott wave principle is a method most traders are familiar with the name of, but how does it work? Thierry Laduguie explains

John Walsh’s Trading Diary What does a regular trader do in his spare time? Well he becomes a licensed London black cab driver, of course! At least this is John Walsh’s approach to life (oh and he’s developed a new scanning method!)

Commodity Corner Felipe R. Costa shares some insights into the Baltic Dry Index (BDI). Often overlooked by commodity investors, the BDI is one of the purest leading indicators for economic activity around

Technology Corner Mail grooming might not sound like the most exciting topic, but in this month’s humourous Technology Corner Simon Carter shows us the latest in early morning gadgetry

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

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Zak Mir Interviews “Million Dollar Trader” Anton Kreil

Zak Mir Interviews

“Million Dollar Trader” Anton Kreil Anton Kreil started trading on his own account at the age of 16 in 1995. He was recruited into Goldman Sachs at the age of 20 to work on their Pan European Trading Desk. After being headhunted into Lehman Brothers then JP Morgan, Kreil left the city in May 2007 to travel the world, returning in June 2008 to film the BBC documentary Million Dollar Traders in which eight novice traders were given $1m to trade over the subprime crisis. Kreil is now the Managing Partner of the Institute of Trading and Portfolio Management. Zak: I have heard that it is apparently easier for a camel to pass through the eye of a needle than to get a job as a trader at Goldman Sachs. Is this true and, if so, is there even any point even trying unless you have an incredible personal charisma, an IQ of 150 plus, nerves of steel to do the job and a better sense of humour than all the Marx Brothers put together?! AK: HAHA! Great question and well put Zak. You would be right to assume how difficult it is. In 1999, when I was interviewed, there were 3,000 applicants for every trading position. Goldman was rather less known back then and interestingly, given all of the negative press they’ve received over the last five years, sources tell me the ratio is now more like 10,000 applicants for every trading position! It seems all the negative press has actually resulted in Goldman now getting to choose their talent from an even wider pool — and at a lower price. A typical Goldman master stroke! Truth be told, I actually didn’t even apply formally to Goldman Sachs. They turned me down for an internship in 1998.

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My friend had to drag me to the drinks evening at the University in Manchester against my will. I only went for the free food and drink! Then I played my usual tactic of not speaking to anyone until all the students had gone home. When you stand in front of a trader from Goldman Sachs with thirty other people, and that person has been up since 5am and travelled up to Manchester after the market has closed, they will not remember anyone. So, I used to hang back, down a few drinks and wait till they were clearing up the room. Then I would approach the trader and present my track record. This would naturally then lead to discussions about why I put on trades, things I had learnt along the way, discussions about their own positions and our views on the current market outlook. I hit it off with a few of the traders and they invited me to do a telephone interview with the head of the desk the following morning. I’d made a decent amount of money at university trading the tech bubble and they liked what they saw.

Zak Mir Interviews “Million Dollar Trader” Anton Kreil

“What you have to remember is these days 99% of guys in the city earn less than Kerry Katona.”

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Zak Mir Interviews “Million Dollar Trader” Anton Kreil

In terms of pointers for other would-be “Goldman-ites”, I would say this: you DO have to have a top degree to get a front office role at GS or the other investment banks these days. They have shareholders and they have to justify everyone they hire. If that is your objective, then get the pre-requisite academics. However, these days that alone it isn’t good enough. You need to also display money making ability. You will need to trade with your own money. We do this at the Institute of Trading and Portfolio Management and help a lot of students start their careers this way and place them mainly into Hedge Funds. However, there is a caveat here. We place our traders into hedge funds for a reason. When I started out an investment bank, it was a great place to go in order to get paid. These days, I can do half the work and make more than a managing director at an investment bank every year. Working for an investment bank now, in my opinion, is pointless if you are a talented individual. You will make a lot more money trading either on your own account, going to a hedge fund or just doing something else. What you have to remember is these days 99% of guys in the city earn less than Kerry Katona. They are not special anymore. In fact, 99% are just middle- class morons taking the tube or their Barclays Bike into their prison cell every morning so they can keep their head above water each month and pay the mortgage. All the money makers and risk takers have left to do their own thing or join a hedge fund. Zak: Despite only hiring people with superhuman abilities, there would appear to be a certain degree of antagonism towards GS? AK: There is in fact a Goldman phrase and it goes like this: “In life, as in Sports, the boos always come from the cheap seats.” It’s also a historical thing. Before Goldman went public there was an internal policy of never speaking to the press. As a private company, they had the right to run with this policy. It gave them integrity and mystique on the street and was a great way to PR themselves. However, this got ingrained into the culture and carried over to the new breed after the company went public. I’ll give you an example: in 2001 Vodafone bought BT’s assets in Spain and Japan for $5.5bn. I was working on the telecoms book at the time as a junior trader with two other senior traders. We did the deal and raised the money in 24 hours through a Vodafone share placing. We were all called into the office at 4.30am.

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I got into the office, ordered a double espresso, did the 6am conference call, outlined our plan and by 7am we were taking orders to buy up the $5.5bn of stock for our clients globally.

“There is in fact a Goldman phrase and it goes like this:“In life, as in Sports, the boos always come from the cheap seats.” The stock opened at 8am and we were trading hundreds of millions of dollars of stock straight out the gate. We did this all day long and turned over literally billions of dollars; raised the $5.5bn for the company; clients were all happy and we made money trading it too. The deal literally could not have gone better. Especially because at 6am on the conference call with CEO Chris Gent, someone at the joint book builder UBS left their telephone line open, fell asleep on the call and started snoring. They looked like idiots and we were heroes. We had just done one of the largest equity issuances in the history of financial markets in record time. The FT were looking for a comment all day and due to the internal policy of not speaking to the press they never got one. On the front page of the FT the next day was the big headline. Something on the lines of “Vodafone In Record Share Issuance.” The story below had no comment from Goldman Sachs except from the guy that sells coffee on the Goldman Sachs trading floor. An FT reporter must have managed to nab him on the way home outside the office. He said, and I quote: “Yes you could tell something was going on in the office this morning. The Vodafone trader came in at 5am instead of 5.45am and ordered a double espresso instead of a cappuccino.” — They got their scoop and they hated us for it!

Zak Mir Interviews “Million Dollar Trader” Anton Kreil

The press have historically hated Goldman for this very reason. This manifested itself into a populous drubbing over the subprime crisis and in the press ever since. Don’t get me wrong, there were definitely some “wrong-doings” at GS and a free press is absolutely required to report on these things. However, in recent times, they have demonised Goldman in order to sell more newspapers. Financial journalism is now very lazy and low quality when it comes to Goldman Sachs. All you have to do to get hits on a website or sell a newspaper these days is write a non-descript story about what someone had for lunch at Goldman i.e. with no real purpose or conclusion and insert a title on the lines of “Goldman Sachs in Lunchtime Trading Scandal.” People need to read between the lines. Journalists are employed to sell newspapers and get hits on websites. It’s a business. The name Goldman Sachs sells newspapers and generates hits on websites. So the press now LOVE to HATE Goldman Sachs. Also if Goldman Sachs were so “evil”, why do clients still trade with them? For someone who works there it’s pretty obvious. Out of all investment banks over time they make their clients the most money. So their clients continue to do business with them. It’s not rocket science! Zak: The impression I have of you is that you set great store by the “chosen few”, i.e. those who are able to call the markets correctly on a regular basis. In contrast, analysts, particularly those of the technical / charting variety who do not back their ideas with money, are sidelined by you. IS putting your money where your mouth is pre-requisite for your respect, and, in contrast, can “objective” (non positioned) research actually be useful? AK: Quite honestly, and I don’t want people to take this the wrong way, if a guy called me and told me that he thinks an asset is a long or short because there is a line on a chart following another line, and he didn’t have skin in the game himself, I would slam the phone down or send his email to trash! Even as an analyst, you should be running a book. Even if the positions are small. It doesn’t matter. You need skin in the game to win in the game. If you lose, learn from it, take it as an education. Following the line on the chart didn’t work, and it didn’t work for a reason. Play with real money and you can only get better.

“You need skin in the game to win in the game. If you lose, learn from it, take it as an education.”

Zak: As we are all aware, many people would like to give up their day jobs and trade the markets successfully. 90% and more try and fail. Fact. Where do most of them go wrong, and is the idea of winning in the markets any more fanciful than turning up at Centre Court with a tennis racket hoping to beat Andy Murray? AK: From teaching and mentoring retail traders through the Institute, I’ve definitely noticed some very real trends over the last three years as to why most people fail. Firstly, people go about learning how to trade in totally the wrong way. They Google “learn how to trade”, find a free broker seminar, pop along, eat some sandwiches, learn how to use the broker’s platform (not education), learn some technical analysis (one part of trading), open a £1,500 spread betting account, then implement the teachings of the broker in a leveraged trading account and blow-up in one month!

The vendors of these seminars and systems then repeat and rinse every year, only making themselves rich in the process. It usually takes 2-3 trading account blow-ups and 2-3 years for the wannabe trader to start to realise that it doesn’t work. Depending on the size of the blow up — this can be an expensive process... Secondly, and I hate to say it, but most people are quite stupid. They think by turning up to a free broker seminar they are going to be given a rules based system that allows them to take an income from their trading accounts. “Follow the rules and it’s like an ATM”! Unfortunately the person telling you this has one rule and one rule only: i.e. make you believe in their rules so they get paid every four hours on the spread and / or commission you pay to them until you go to zero. Then open another account and pay them again.

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Zak Mir Interviews “Million Dollar Trader” Anton Kreil

Thirdly, most people are lazy. They want the shortcut. Even though they may have spent the last twenty years accumulating no wealth, going to the ATM and it always says zero, failing in every business venture or investment they have ever been involved in, they think they are going to turn up in the financial markets and “coin it.” The evidence is right in front of them. They haven’t achieved anything outside of trading, so why do they think they can conquer the financial markets especially by taking the shortcut? Its desperation and most people are desperate for success to land at their feet. Problem is they are not prepared to work for it. Fourth — Most people are just too nice. Yes you can be presentable and yes you can be professional and courteous to people around you, but you have to be very ruthless in trading and you have to be a person that can flick the angry switch on, roll up your sleeves and just make money. Most people lack this ruthless edge. The cynicism and ruthlessness required in trading leads to a situation of developing a highly tuned “bullshit radar”. You need this just to survive, let alone make money! Trading is, however, a phenomenal vehicle for people to better themselves, and despite everything I have said, I would advise that everyone has to give it a go. You have to plan to succeed and be honest with yourself. If you find yourself always attending free broker seminars, not seeking out a proper trading education, AND you know you are not the sharpest tool in the box (humble), prone to laziness and you are just a really nice person, then you have to have a word with yourself. The market will kill you.

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Start small and learn the game from the ground up. Self-learning is the way forward to begin with then seek out a proper formal trading and investment education from people with the track record to prove it, who have skin in the game AND have no conflict of interest. Zak: You are the Managing Partner at The Institute for Trading And Portfolio Management, ostensibly set up to break the mould in terms of educating / training those wanting to make money from the financial markets. However, there are dozens of training companies around where those running them have no pedigree and which seem to be very successful — at least for the owners of these companies. How would you explain this, and what is the philosophy behind ITPM? Would you say that in some ways you are an altruist or philanthropist in wanting people to achieve their full potential? AK: The success of trading educators that run the training companies is attributable to marketing campaigns and what I personally call the “Generation One” effect of online retail trading. The Generation One effect is basically what I was talking about earlier in my career when the switch from dial-up to broadband began in the early naughties. This is the “low hanging fruit” i.e. the newbies that are not seeking a proper education, are a bit stupid / naïve, lazy and too nice. They will pay for an “education that isn’t even really education”. Unfortunately for those “trading educator” companies, this Generation One effect is now at the beginning of the end.

Zak Mir Interviews “Million Dollar Trader” Anton Kreil

People are, thankfully, finally wising up to the facts, that what these people teach can be bought in a Technical Analysis book for £10 on Amazon! You don’t need to pay these people anything at all to learn what they “teach.” They are marketing companies first, brokers second and never traders themselves. We are slowly but surely now moving into a “Generation Two” effect, which is basically a trickle down of knowledge that was previously owned and protected by a very small minority in the financial markets. The smart people in the market have left corporates and, similar to myself, many have started working for themselves. They have realised they can make a lot more money trading their own accounts and passing on this knowledge for a reasonable fee with no conflict of interest. None of the “Generation One marketing type educators” that chase the “low hanging fruit” have, to my knowledge, ever worked professionally as traders or portfolio managers, so they wouldn’t even know the difference between a real trading strategy and a bad one themselves anyway. They simply don’t have the knowledge themselves. This is exactly why, for the last two years, I regularly get “stooges” from these companies trying to come to my seminars every month in London. They are trying to learn how to trade properly so they can steal the content and try to pass it off as their own. This might help them pay their mortgage for a few months, but they are lazy creatures at heart and lack the professional experience. Even if they know what I teach, they wouldn’t be able to teach it. You have to have skin in the game and do it for real. Do I see myself as a philanthropist? There is a little part of me that likes sticking it to these people by telling the truth and showing the world how to trade properly, however I just see myself as part of a wider and bigger picture situation in which the market would have found this out eventually anyway. I’m just helping it along and trying to lead the way a little, a bit like this magazine that I note, bravely, has told the truth about systems and seminars — that they are all predominantly a con. If I do a good job a lot of people globally will benefit and they currently do so, but I also benefit from it too. So it’s really a two way street. That’s why they call it a market! Zak: You released a course earlier in the summer which you described as the “most comprehensive online Trading Education video series in the world.”

Could you explain the idea behind this and points of difference between this and the webinar / seminar / glossy binder brigade? AK: You are talking about the Professional Trading Masterclass (PTM) Video Series. I can’t go into too much detail here about the course, but essentially what you learn is what you would be expected to know if you had worked for a few years as a trader or portfolio manager at Goldman Sachs or at any decent hedge fund. What I do, however, is teach you how to use this approach, taken by 80% of these professionals, and emulate it in a retail brokerage trading account. If readers would like to see the titles of the 28 videos to get a clue about the approach then the following link will help - http:// I’ve also created a 20% discount code for Spreadbet Magazine (The CFD Magazine) readers interested in taking the PTM Video Series. The code will expire at midnight on October 15 — Just type in “The CFD MagazineOCT2013” Zak: Can you tell if someone is going to be a great trader from the first meeting / conversation? AK: Definitely not. There are all types of personalities that turn out to be great traders. The quiet ones are usually the ones to look out for. They are usually the most objective, the most cynical and most angry. However, you also have to be careful with these quiet ones as most of them lack emotional intelligence. This gets in the way of being long-term profitable. A mix of qualities with, most importantly, the ability to self-learn and self-start are the most important traits to assess in a first meeting. If you have these traits, then it makes my job easier as a teacher, but not impossible if you don’t have them. Zak: Are there situations when you have had to tell a would be trader that it might be best if they considered a different pursuit? AK: Yes a few times. There is no shame in not enjoying it and not being good at it. Trading is but one way of making good money. There are a million other ways. I’d like to see Mark Zuckerberg, the founder of Facebook, trade for a year with a $1bn account. My guess is he would be terrible, but he builds a bloody good website!

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Zak Mir Interviews “Million Dollar Trader” Anton Kreil

Zak: Have you ever thought of setting up an Anton Kreil hedge fund, particularly given your reputation and experience? Surely this would be a logical vehicle for people who do not have the aptitude or time to trade, but who still believed in your approach, to get involved in? AK: People ask me this all the time and I have been offered quite a few situations in the past, involving large amounts of capital, hedge fund structures and opportunities that most people would jump at. I’m at a different point in my life to most. It would certainly be a logical approach if I wanted to work for outside investors, answer to them every day, have no life and give up my four months holiday every year. So really it’s not logical for me. I make more than enough money trading my own account, teaching, mentoring and I really enjoy my life and what I do. I have found my purpose, and it’s not to make other people money while they sit on their ass and do nothing. It’s to show them how to make money themselves. Zak: One of the rewards for those who are successful at ITPM is that they can be referred to hedge funds or fund management companies as a career fast track. Typically, how does this work? AK: We have a nice back door exit situation within the Institute for talented traders. We have a number of contracts with hedge funds and proprietary trading firms globally that allow us to recruit on a consultancy basis to them if we unearth a bright young talent. One of the shareholders in the Institute runs a large funds of funds company in New York and London, and he invests his own and clients’ money into hedge funds. So we have all the contacts and the distribution required. We literally have 600 hedge funds globally on speed dial. If a person comes in and trades their own money, say £25K, and doubles this over a year on a consistent basis, they become interesting to us. They will need the pre-requisite academics i.e. a decent degree from a good school / university. We then organise interviews for them with funds and / or proprietary trading firms that match their objectives and requirements of the fund. Usually the funds will be in a growth stage and need people to fill specific roles. We place them into the funds in year two and get paid a consultancy fee by the fund. We currently have 110 part time retail traders in the Institute and we have placed several in the last year at funds and proprietary trading firms. We aim to place at least one per month as long as there is a natural fit for the person and the demand for that person is there. How many of these “learn how to trade” outfits can do that?!

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However, this is actually only a small part of what we do. Most of our traders don’t have this objective. Most of our traders are working full or part-time in other professions and spend ten hours a week trading and managing their institute account. Their objective is simply to learn how to make money using their own money and bring their trading up to a more formal and professional standard. If someone has the objective to work at a hedge fund, we have the infrastructure to help that person, but it’s the minority of our existence. Zak: You are due to be the first person to trade from Space. Apart from increasing you profile even more, and likely boosting your Twitter following, is there a serious message behind this venture? AK: Like I said earlier. I think everyone should give trading a go. I want to send out a message that anyone, even a guy like me that grew up in a two-up, two-down in Liverpool, can be a trader, trade from anywhere in the world and even “Out of this World!” If I can come from where I have come from using trading as my vehicle and seventeen years later become an astronaut and be trading from space, then anyone can do it. There simply is no excuse to not give it a try! Zak: With many of the interviews in Spreadbet Magazine I have become embroiled in arguments over QE, recession, the Japanese Model and various other macroeconomic quicksand. What are the building blocks of your trading approach in terms of macro? Are there times when it is just all about gut instinct? AK: What is gut instinct in trading? For me, it is simply a multitude of layers of experience acting as inputs to derive an output that gives you an edge and makes you a profit. With macro you have to infer the obvious and then infer the non–obvious. Connecting the dots from the obvious to the non-obvious, then to the expression of your ideas through trade construction, to where the money will be made 6 - 12 months from now. The challenge is always to infer the obvious then find the non-obvious positions / trades that no-one is really considering now but will be leaping on in 6-12 months. I can’t go into specifics here but we are currently living in a very fragile macroeconomic environment; more so than at any other point in the history of western world economics. I’m not saying go out and buy a tin hat and a gun. Just get educated to what’s really going on in the world and get planning for all scenarios. It’s all covered in the Institute’s PTM Video Series. Zak: Thanks for the interview!

Dominic Picarda’s Technical Take

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

Dominic Picarda’s Technical Take Overvalued US Tech Stocks

Say what you want about Twitter, but at least it’s got people into the good habit of being briefer. What began as a bit of a trendy cyber-novelty has now become the media mainstream. Nowadays, news often breaks in Twitter’s 140-character updates long before it hits our TV screens or the newspapers. What’s more, in the last week or so the social networking giant tweeted that it would be joining the likes of Facebook and LinkedIn as a publicly-traded company. If the experience of its new media peers is anything to go by, Twitter could offer some excellent trading opportunities once its stock is floated. Since the start of 2013 alone, Facebook has gone up by almost three-quarters, LinkedIn has more than doubled, while Netflix has more than trebled. By contrast, the technology-laden NASDAQ100 index has risen by a ‘mere’ 20 per cent. Traders wanting to go long of Twitter, as soon as it flashes up on their screens, should think a bit further back, though. Facebook plunged by one-half in the wake of its 2012 listing and LinkedIn shed more than one-third following its debut in 2011. And, despite their massive gains since then, these web-giants are prone to some giant reversals along the way. Big booms – like that of recent months – have reliably been followed by nasty pullbacks.

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Dominic Picarda’s Technical Take

Facebook If price-to-ruined-productivity were a valuation metric, Facebook would be the world’s most valuable company. Office workers the world over while away their bosses’ time updating their profiles and awarding “likes” to pictures of friends’ children and kittens. However, a case for investing in the social media giant can nowadays be made on fundamental grounds too. A real business is fast developing here.


When it last reported, Facebook’s revenues had surged by one-half to $1.8bn over the year. What really caught Wall Street’s attention was a 75 per cent hike in sales from mobile devices to $660m. Trying to fit in adverts on people’s phone screens was thought to be a tall order, but the firm seems to have cracked it. By next year, analysts reckon 60 per cent of its ad revenue may come from this source. The excitement sent the stock gapping higher in August.

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There is clearly quite some conviction behind the buying, going by the heavy traded volumes. The burst upwards has left the stock at overbought levels on the weekly timeframe, the most stretched it has ever been during its short lifetime. At some point, a big snapback of 15 to 20 per cent is likely, but it is important to wait for confirmation this is underway before shorting. I’d at least wait until the 13-day exponential moving average crossed below the 21-day EMA. In the meantime, buying bounces off the first of those lines would make sense.

Dominic Picarda’s Technical Take

LinkedIn In the snide words of one pundit, “LinkedIn is the of the underemployed.” But it would be a mistake to underestimate the growing influence of the professional networking website. Connecting with new professional contacts via LinkedIn is the 21st century equivalent of swapping business cards. It is fast becoming the preferred forum for those looking for job openings or industry gossip.


LinkedIn has clearly taken some virtual pages out of Facebook, since it now offers a much slicker, more polished experience than the rather clunky interface of last year. Much the same is true of the uptrend in its stock price, which since June especially has been a thing of beauty, made up of strong thrusting advances interspersed with fairly gentle pullbacks. As a result of this storming run, LinkedIn sports a monthly relative strength index of 77%, a record extreme. After the last time it was anything like so stretched, the stock went on to suffer a 21% dip before resuming its uptrend.

While it remains rising so strong, the only logical trade is to buy bounces from around the 13-day EMA. But what about when the inevitable pullback comes? My backtesting shows the most profitable strategy to date would have been to short as the 10-day EMA crossed below the 31-day EMA. Covering shorts as the price then closed back through the 11-day EMA would have produce sixwinners and three losers.

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Dominic Picarda’s Technical Take

Netflix The late, great Steve Jobs once mocked the idea that consumers would pay monthly for the same music, rather than just buying it once. But that’s precisely what now happens with Spotify, and in the world of films, with Netflix. People seem more than happy to pay a subscription for ongoing access to an online library of songs and movies, rather than buying to own them forever.


More than 36 million punters around the world have now signed up to Netflix, mostly in the US. While its overall expansion has been impressive, it can be a tough show to keep up all the time, as a failure to beat analyst expectations for new members in July proved. My instinct would be to exploit another such shakeout to build a position trade here.

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A rally off the 13-EMA on the weekly chart has often been a great moment to enter long positions to fresh record highs.

Robbie Burn’s Stock Picks Special


stock picks special So here I am back again after the summer break, did you miss me? No? Never even realised I’d gone I bet..! OK, just shut up rambling Robbie, and give us a few tips. Okay, okay and I also understand 90% of this magazine, like almost every other magazine goes unread. You just skim the long articles to see if there happens to be a good tip or two? Yeah, me too. Especially once the authors start to use long weird words like stochastics. Who needs them?

So, for the three of you who actually read the whole of the articles...

So, off you go, have a quick skim of this article and there are five shares featured; write ‘em down, check ‘em out in your own time. You can thank me later! I’ll ask the editor to highlight the companies in caps or in a different colour to make it easier for you (duly noted Rob!!). Then you can save time and not read anything else I wrote. More time for porn!

Great news for me, I’ve been able to spreadbet lots of AIM shares in the past but when it gets down to some of the smaller ones, the spreadbet firms say “Take a hike”! And who can blame them? After all, it’s hard for them to hedge illiquid shares. But, it’s meant I missed out on big tax free ISA gains that could have been mine. No longer.

Right, job done. Well, not quite – if they paid me, they’d pay me to fill up a couple of pages so let me do that. Otherwise they’d have to use a massive pic of something to fill up the space – how about Scarlet Johansson?

There’s been a huge change, while I’ve been gone, which is that AIM shares are now allowed in tax-free ISAs. And even better from the next tax year there’s no stamp duty either. Whoo hoo!

So I’m going to write about some AIM shares that I have tucked away. If I ran a tipsheet, of course this article would say something like “FIVE AIM SHARES TO EXPLODE!!”or “DOUBLE YOUR MONEY WITH THESE GREAT PICKS!”(But if you want any more great tips then pay me £299 a year) (I can’t make any money out of my own tips so I have to sell them)(Anyone got a dart to stick in the FT?). Thankfully, this publication is completely free and we don’t ask you for a single solitary penny. Additionally, I couldn’t care less if you buy them or not. If you do, well, as ever, buyer beware.

October 2013 | | 15

Robbie Burn’s Stock Picks Special

“THERE’S BEEN A HUGE CHANGE, WHILE I’VE BEEN GONE, WHICH IS THAT AIM SHARES ARE NOW ALLOWED IN TAX-FREE ISAS. AND EVEN BETTER FROM THE NEXT TAX YEAR THERE’S NO STAMP DUTY EITHER. WHOO HOO!” The downside of AIM shares is that they are not so highly regulated. And often their shares aren’t that liquid, so they are hard to buy or sell. Not being highly regulated means there is a greater chance that something could quickly go badly wrong, or quite simply the directors could be toe-rag liars – there’s a lot of them on AIM! Sometimes AIM shares get suspended out of the blue and never return even if everything looked rosy. They can take even experienced investors by surprise. So, main thing is not to put too much in especially if the market cap is under say £50m. And please watch the small AIM oil companies! I know, I know, you can’t resist. Anything with oil in it gets you going.

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Because it will find oil and you will become a millionaire overnight from a small stake. How many other Gulf Keystone’s do you know of in the last five years..? Okay, you might get one winner, but betcha you get five losers along with it. Some tiny oil shares even tell you how dangerous they are by their very name. I mean would you buy something called “Trap Oil”? Even the code of it is “TRAP”!! Lol! How much more could they spell out how risky it was? It launched on the market at 50p and soon went to 10p. A right old trap. There are plenty of others. Don’t put them in your ISA. Go for companies that make or design or sell real things. And here are five of those which I think could do very well.

Robbie Burn’s Stock Picks Special

1 Conviviality This is a clever company which sells bargain booze across the north and this month it’s put in a bid to buy Wine Rack. That will help it move south. The market in home drinking continues to grow (much to the chagrin of the health police and pub groups!). There’s plenty of mark-up, even in knockdown booze – booming profits here should result in a higher share price unless the management knocks away a bit too much of its own product. Hic!

2 Seeing Machines lt looks like it is going places and is winning some decent contracts. This is the kind of share that could easily double and could well do even better than that if its technology pays off. It also has a decent cash pile and an alliance with Caterpillar – it helps with new interaction with machines, such as eye recognition – possibly the company of the future? Definitely worth a punt in my opinion.

3 Litebulb This really is a penny share, indeed well under a penny and I am looking for 50%-100% upside, certainly given the risk. It is valued at only £11m and is a company supplying niche products and marketing to a variety of big clients including Debenhams, BA and Audi. Looks like a well run machine to me and its current rating could be on the cheap side. I had a ‘lightbulb’ moment and bought a million shares. However, of course a million shares only set me back around six grand!!

More contract wins should keep the share price buzzing higher, the chart looks fantastic as do the fundamentals which is why, in the words of the infamous Dragons,“I’m in”.

5 Monitise (MONI) I’ve already trebled my money on Monitise (MONI) in the last couple of years (and in my SIPP), and in spread bets (sorry Mr Revenue). However, now that I can buy them in my ISA I have added a load in there too. Mobile payments is the next big thing to me and Monitise has many decent contracts in place. Granted, on fundamentals it doesn’t look cheap, but the future looks so bright to me that it is worth paying a premium for and this month it announced a deal with IBM. I suspect within the next year or two someone will buy it. It’s very volatile but I think with patience it will pay off big time and I hope to exit at over a quid for another double. Monitise is already a massive company so no worries about illiquidity etc. and with a tiny spread makes it a pretty good spreadbet. There you are then, that’s my welcome back from the loooong summer (it was good wasn’t it?). I hope by sticking these away in the ISA, and being patient, that they will bring big rewards. If you buy any of these and make money you can thank me. If you lose, then simply complain to the editor of this magazine. Definitely his fault! Okay, click the button, you can turn the page over now, see you next month.

4 Cohort Looks a tremendous company to buy into. It’s an independent technology group which was recently awarded an £11m contract by BAE Systems.

October 2013 | | 17

Zak Mir’s Monthly Pick for October

zak mir’S MONTHLY PICK FOR october

Short the

Even before the Federal Reserve surprised markets by not introducing its taper, it looked like bubble trouble was about to make a comeback. The “Zak Mir Theory of Bubbles” maintains that periods of negative/flat growth can actually be more dangerous than periods of “normal” growth, the last of which occurred between 2003 and 2007. This is because, while the good times can provide a general / broad-based growth across different sectors and asset classes, during troubled times the risk there is panic safe-haven buying. This creates bottleneck buying, akin to financial musical chairs, as investors are faced with fewer and fewer“safe”choices. Bonds, gold, London prime real estate and tech stocks currently have all suffered this disease. We have already seen how painful things become when an asset goes “ex-safe haven”. Just look at what has happened to gold and bonds since 2011. My call now is that the next on this list will be tech stocks, especially those in the US. The floatation of micro blogging group Twitter could well prove to be the high water mark for this particular market.

18 | | October 2013

Recommendation Summary Before delivering the NASDAQ 100 sell call, I have to acknowledge that a major drawback of shorting bubbles is that they are typically euphoric. In other words, investors and traders lose their rational minds and these markets have a nasty habit of powering higher, even if the fundamentals are terrible. As Keynes put it, “the market can stay irrational longer than you can stay solvent”. With respect to the NASDAQ, it is possible to compare today’s market to a social media version of the dotcom bubble. However, this could be a costly mistake.

Zak Mir’s Monthly Pick for October

“a major drawback of shorting bubbles is that they are typically euphoric.”

October 2013 | | 19

Zak Mir’s Monthly Pick for October

Technically, the NASDAQ looks like a market which is topping out. I say this in spite of the seemingly irresistible gains of this year which have so far failed to regain the heights of early 2000. The current set up involves severe RSI oscillator divergence. During May, this oscillator peaked at 75, a clear signal the market was very over-bought. Even though the market has since moved on to make new nominal highs, this hasn’t been followed by a similar move in the oscillator. It has not been able to crack through the 75 barrier. Indeed, September’s price high has actually combined with a lower RSI read of 71. The usual rule is to attack such peaks as they eventually bring down a stock market like a house of cards. This is especially true for a market, like today’s NASDAQ, which has just experienced three or new highs. My read of the chart suggests that could be an overshoot/bull trap through 3,300. Barring any sustained price action at this which takes the market through April’s rising channel, this should then give way to a long overdue pullback.

more there level, trend

My primary target over the next one to two months is a test of 2013’s floor of 3,000. After that, only a weekly close below the 200MA, currently at 2,896, would signify the NASDAQ has moved back into a bear market.

Recent Significant News September 20 – Inc. (PCLN) closed above $1,000 a share, exceeding a dot-com bubble high and making this largest U.S. online travel site the ninth member of a club of U.S. companies trading in quadruple digits. During the late 1990s dot-com bubble, Priceline was known for its name-your-own-price option. Between April 1999 and October 2000, a period when many dot-com companies failed, Priceline lost 97 percent of its market value. – Bloomberg September 20 – Twitter has yet to indicate which US exchange it will use, with NASDAQ vying with its great rival, the New York Stock Exchange, for the business. Facebook’s debut was marred by the NASDAQ’s inability to absorb the overwhelming volumes of orders and failure to calculate an opening price for the stock.

20 | | October 2013

In subsequent months, the NASDAQ spent countless hours repairing its relationship with Facebook executives and paid $10m to settle with US regulators over its poor systems and decision-making that day. Internally it made technical changes to the way it runs IPO auctions. Then the exchange suffered a three-hour outage in August. The problem was traced to the exchange’s inability to cope with a NASDAQ-administered industry data feed that distributes all quotes and prices for stocks. – Financial Times

September 20 – The NASDAQ 100 is up a lot this year, but the companies leading the gains may not be the ones you think. During Friday’s trading session, the NASDAQ climbed to a fresh 13-year high. The index is up 21 percent so far in 2013, beating the S&P 500 and Dow, which are up 20 percent and 18 percent respectively. Among the 20 best-performing stocks this year, 14 are nontechnology companies. In fact, eight are consumer discretionary, five are biotech and one belongs to consumer staples. Tech giants such as Apple, Google, Cisco, Intel and Microsoft are nowhere near the top. So, in a new era where innovation is highly correlated to stock performance, will the new kids on the block continue to outperform? – August 25th – Price gains of stocks in the Standard & Poor’s 500 Index (SPX) are outpacing profits by the fastest rate in 14 years, as the bull market extends beyond the average length of rallies since Harry S. Truman was president. The benchmark gauge for U.S. equities has risen 14 percent relative to income over the past 12 months to 16 times earnings, according to data compiled by Bloomberg. Valuations last climbed this fast in the final year of the 1990s technology bubble, just before the index began a 49 percent tumble. The rally that started in March 2009 has now outlasted the average gain since 1946, the data shows – Bloomberg

Zak Mir’s Monthly Pick for October

Fundamental Analysis On the face of it the momentum behind US tech stocks is very strong at the moment, especially in the run-up to the Twitter IPO. Facebook is back above its IPO peak and, even in the aftermath of the latest Apple iPhone launch, it appears somewhat churlish to attempt to get in the way of this runaway locomotive. However, as I have described above on the technicals, there is serious divergence at play. This suggests a near-term peak is in place and, in terms of sentiment, it is difficult to imagine how there could be much more in the way of positive momentum. While few could deny that a lot of transformational change has occurred in the tech space since the start of the decade, my view behind this sell call for the NASDAQ100 is that, at 13 year highs, the good news is already priced in.

Indeed, even those who deny there is any similarity between the NASDAQ of today and that of the turn of the century would have to admit the balance of market prices is now skewed more towards risk than reward. Of course, while it may be that some traders would wish to see further evidence of an impending collapse in this market, my sell recommendation is guided by the likely positive emotional response to Twitter’s IPO. That this is coming so soon after the Fed’s big surprise, suggests to me the market could be susceptible to a significant drop, once the elation of these two events quickly subsides. These are far more powerful forces even than the fact that the NASDAQ’s P/E is now 21, compared with 12, which it was in September 2012. It is quite feasible that we will see this ratio fall to a more rational 17 over the next 12 months, but in the short term this market looks overcooked.


October 2013 | | 21

22 | | October 2013

Patel On Markets

Alpesh Patel Alpesh Patel is the author of 16 investment books, runs his own FSA regulated asset management firm from London, formerly presented his own show on Bloomberg TV for 3 years and has had over 200 columns published in the Financial Times.

Patel on Markets

Q4 Global Markets Update

I write to you having returned from India, Thailand and Laos, but I never took my attention off the US and UK. Longer term With the quiet and kind of dull summer period behind us, markets are picking up momentum as the next few months are packed with significant financial developments that will have substantial impact on global markets. Earlier in September we had the Federal Reserve’s non-decision on whether to initiate tapering its efforts to provide stimulus to the US economy by cutting back on its asset purchase program. The consensus was high that the Fed’s board members would start this process. However, recent economic data led them not to act.

Receding consumer demand and weakening job data were both cited as reasons for this, however my view is that the taper is still likely to happen. Every time the discussion turns towards the taper, the US dollar falls hard. In spite of this, I think it will not be long before the market wakes up to the reality that the US recovery is gathering pace. At this point, I expect investors to drive up the greenback once they realise things are not as bad as some headlines suggest. I treat every dip as an excellent opportunity to buy equities. On the other side of the Pond, Europe’s focus was on the German election, which Merkel won fairly comfortably.

October 2013 | | 23

Patel On Markets

“I expect investors to drive up the greenback once they realise things are not as bad as some headlines suggest.”

At the time of going to press, she was still attempting to form a coalition, but there is little doubt she will achieve this. During the election, Merkel had an easy job persuading Germans she was protecting their interests within the heart of Europe. Now the election is out of the way, I anticipate a resumption of German efforts to safeguard the euro. With mounting problems in Greece and Portugal, there will need to be some action soon. The recent decline in the EUR/GBP led some analysts to imply that the situation in Europe might be worse than recognised, but I think that it’s actually the rising pound that is dragging the currency down. In fact, I think the British currency will rise even more since the UK’s economic prospects are better than feared and financial data keeps beating expectations time after time. On the Japanese yen front, I think made by the BoJ Governor Kuroda weaken the country’s currency are don’t expect any changes in policy months.

that the efforts to stabilize and working and I for the coming

It is clear that the Japanese are giving it their best effort to drag their economy out of recession and to do that the yen needs to decline even more, so exports can pick up momentum. I remain bearish on the yen for now since it still has a long way to go lower. Emerging markets have fallen off, with poorer than expected growth and also a fear that US tapering could mean even lower emerging market growth. Look, it’s simple for India and China and South East Asia — you either hold for 3-5 years or you get in and out on a weekly basis. But a month to 12 month holding is asking for trouble, as things turn around too quickly there, no trends really form. I don’t like gold predictions. Dollar weakness suggested a rise in the price of gold, then war didn’t break out in Syria and gold fell. I don’t like guessing the minds of politicians and that’s what is required to predict the movements in the gold price at the moment — pass. If you’d like my free daily market newsletter with trading ideas, visit Alpesh Patel

24 | | October 2013

Currency Corner

Currency Corner By D Sinden & R Jennings OF Titan Investment Partners

This week has seen some surprising moves in the game of monetary chess being played by central bankers around the globe. On Wednesday morning, the good old Bank of England released the minutes of the last meeting of its Monetary Policy Committee (MPC). The MPC comprises of the “great and good� who decide the bank rate and therefore what interest rates we will all be paying on our mortgages and loans in the future. The minutes showed that the MPC had no intention of deploying further QE to stimulate the economy, suggesting that they believe the recovery of UK PLC is underway and it is strong enough to be self-sustaining.

October 2013 | | 25

Currency Corner

The read through here for the currency market is that if this is true, then rates in the UK are likely to rise, as we experience a stronger recovery, which could see unemployment meet and beat Mark Carney’s 7% threshold for a review of UK base rates. Later that same day, the US Federal Reserve surprised the markets with an about face and said it was not going to trim (taper) its own QE/asset purchase programs from the current US$85 billion a month it’s spending. The alternative read here, however, is that the US economic recovery is seen as too fragile to continue unaided, in which case US interest rates are unlikely to rise in the near future and the greenback weakened accordingly. For Canada, given it shares a border and a free trade agreement with the USA, then inevitably there are consequences from a weaker US dollar policy for its economy. US GDP is roughly eight times that of Canada. Of course, we in the UK have also imported some economic influence from Canada in the shape of our new chief Central Banker Mark Carney, who successfully steered the Canucks through the aftermath of the Credit Crunch, without any major disasters.

The Canadian recession was shallower and shorter lived than in other major western economies. The hope is that Mr Carney can be as successful in steering the UK and sterling. The UK has historically been a major trading partner of Canada, for instance visitors from the UK are one of their largest sources of revenues from tourism and the Canadians in turn have provided significant inward investment into the UK. In 2012, trade between the two countries was worth just shy of C$30 billion. Taking all that into account, it’s interesting to look at the price action in GBP/CAD since Wednesday and think about what’s going to happen next. We can do just that by looking at the three charts set out below. The first chart, which is a monthly CAD over five years, provides some historical perspective. Note the strong band resistance around C$1.6390 (denoted line) that has been in place since the 2010 and through which sterling has recently started to move.

chart of GBP of horizontal by the blue latter part of


26 | | October 2013

Currency Corner


Now let’s turn to our second chart which shows GBP CAD over the last three months.

The rate is testing back through C$1.65 as I type this on Friday morning.

Once again we highlight an area of horizontal resistance, this time it’s at C$1.6435/40.

For our last chart, I thought we should look at how GBP is performing against the other commonwealth commodity currency, the Australian. I overlay this on to the chart of GBPCAD. What I think is interesting here is the divergence seen since the first few days of September as sterling continued to strengthen against the Canadian dollar while the trade against the Aussie lost momentum. That suggests to me that the move against the Canadian is independent and can continue.

I note Wednesday’s bullish candle that saw sterling test up C$1.6526, which was a 45 month high for the pound against the Looney. Moreover, Wednesday’s move appeared to negate a pattern that had all the makings of a triple top, and while Thursday’s candle could hardly be said to confirm the breakout, we did not post a lower low. In fact the range that day was a cent inside (at either end) of that seen on Wednesday.

What we want to see now is consolidation from the pound above C$1.6500. A close above here, to finish the week, would be a healthy start. From there, we can keep watching for a new high above C$1.6526. If we achieve and sustain that, then it’s not unrealistic to think about the highs seen in February 2010 at C$1.7102 and in November 2009 at C$1.7934, which would represent an 8% gain from the current levels.

October 2013 | | 27

Currency Corner

“The Canadian recession was shallower and shorter lived than in other major western economies. The hope is that Mr Carney can be as successful in steering the UK and sterling.”


28 | | October 2013

The CFD Magazine Focus on Marc Faber

The CFD Magazine FO-

By Filipe R. Costa

Marc Faber has one of the more non-conformist, contrarian and sometimes inconvenient voices in the investment industry. A brilliant student of economics, obtaining his PhD at 24, Marc Faber worked for several years in different financial companies until he established himself in the advisory and investment business. He publishes The Gloom, Boom & Doom Report, a now legendary monthly newsletter. In many of his television appearances he has been a very vocal critic of current monetary policy and has repeatedly warned how it is causing all manner of systemic problems. His views on investment are quite simple. He doesn’t believe there are many opportunities worth putting money in, other than certain hard assets, gold in particular.

Early Years Faber was born in 1946 in Zurich, Switzerland. He studied in Geneva, where he raced for the Swiss national ski team, but then was admitted to the University of Zurich to study economics. At the young age of 24 he obtained a PhD degree in economics magna cum laude. During the ‘70s he worked for White, Weld & Company, an asset management and investment advisory business. He worked in several locations including New York, Zurich and Hong Kong, and stayed with the company until it was sold to Merrill Lynch in 1978. Between 1978 and 1990 he was a managing director at Drexel, Burham, Lambert in Hong Kong.

This was a famous Wall Street investment bank whose rise to prominence was due to its involvement in the then growing junk bond market. For some time, Drexel was the largest investment bank in the U.S., something that wasn’t well known by many. Unfortunately for Drexel, it was involved with Michael Milken, whose stellar career ended in ignominy as he was prosecuted for illegal trading (for more, read p.12). In the fallout of Milken’s conviction, Drexel was forced into bankruptcy and Faber started his own business.

“Faber produces The Gloom, Boom & Doom Report, a now legendary monthly newsletter. In many of his television appearances he has been a very vocal critic of current monetary policy.” In 1990, Faber created Marc Faber Limited, a company acting as investment advisor concentrating on value investments with large upside potential. Its primary focus was on contrarian strategies. Today, the company funds for private wealthy clients. Faber is also a personal advisor to several investment funds, specialising in emerging and frontier markets.


October 2013 | | 29

The CFD Magazine Focus on Marc Faber

Birth: 1946 (67 years old) in Zurich, Switzerland Resides: Chiangmai, Thailand Activities: Investment Advisor, Fund Manager

The Rise of Doctor Doom However, it is his non-conformist and contrarian views that Marc Faber is most famous for. In his monthly newsletter The Gloom, Doom & Doom Report, widely read on Wall Street, Faber expresses his latest views on stocks, markets in general and the global economy. He has often accurately predicted market downturns and crashes, which has earned him the nickname Doctor Doom.

Unlike politicians, who tend to be excessively optimistic about them, Faber is a pragmatist who reacts against fast market rises and too much central bank intervention. In 1987, he advised his clients to stay away from the stock market, before that year’s infamous crash. He also predicted the rise of oil, precious metals and emerging markets, in particular China, in a book he wrote (Tomorrow’s Gold: Asia’s Age of Discovery, CSLA Books). In 2002, he warned about the U.S. dollar slide and his current view is there’s not much value investment out there, apart from some farmland and real estate in emerging markets like Russia, Uruguay, and Paraguay. Faber has been a long-term bear about the American economy. In his typically brusque style Faber characterised the problems facing the US economy when we wrote a piece in response to the tax rebate in 2008: “The federal government is sending each of us a $600 rebate. If we spend that money at Wal-Mart, the money goes to China. If we spend it on gasoline it goes to the Arabs. If we buy a computer it will go to India.

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The CFD Magazine Focus on Marc Faber

If we purchase fruit and vegetables it will go to Mexico, Honduras and Guatemala. . If we purchase a good car it will go to Germany. If we purchase useless crap it will go to Taiwan and none of it will help the American economy. The only way to keep that money here at home is to spend it on prostitutes and beer, since these are the only products still produced in US. I’ve been doing my part.”

There Are Still Some Opportunities To Invest In

Since then, he has been one of the most vocal critics of Federal Reserve policy. He believes money printing will inevitably lead to a period of hyperinflation and that the central bank is creating nowhere-to-hide bubbles. When the Federal Reserve prints money, the money doesn’t flow evenly and thus creates bubbles. The NASDAQ bubble and the housing bubble are obvious recent examples of money flowing unevenly. Faber is sure current loose monetary policies can only end one way; a systemic crash.

This is an industry we have been pointing out to our readers for a long time: Gold Mining.

While analysing 2013, Faber has identified several echoes from 1987. His view is that this year is so similar to that fateful year, that he expects the market to drop 20pc by year end. Such a prediction may seem odd, especially when the S&P500 has risen about 19% YTD, but this is what happened in 1987. In fact, by the August of that year, the S&P500 had actually risen by 30%, only suddenly to crash and surrender all those gains and then some.

“Faber has been a long-term bear about the American economy.” Above all, Faber believes the link between financial assets and real assets has currently been broken. The rise in shares has not been combined with a similar rise in earnings, which strongly suggests the market is now overbought. To compound this problem, decreasing interest rates and massive monetization are no longer likely to act as market drivers. The required yield on a 10-year Treasury is above 2.50%, having risen from 1.66% in May. When the Fed eventually starts its taper, things will get worse for financial markets.

Apart from the real estate and farmland opportunities that Faber still sees in Russia and South America, he believes there’s a group of stocks that has been smashed by investors but now presents a massive opportunity.

Gold mining stocks have fallen 43% YTD, while gold is down 22%. The leveraged nature of the sector explains why companies fall and rise faster than the price of gold, but there’s still a mismatch between the prices of these stocks and that of the precious metal. Just look at the table opposite. The SPDR Gold Trust, which tracks gold prices, is up 50% for the last five years, but Gold Miners are down 27% in the same period.

The opportunity in this is the likelihood gold miners will eventually correct to regain a degree of parity with the price of their product. At the same time, if inflation does start to rise, then gold is one of the best assets to be invested in, which could add further upwards momentum to miners’ stocks:

October 2013 | | 31

The CFD Magazine Focus on Marc Faber


If you are looking for specific companies to put your money into, Faber recommends Newmont Mining (NEM), Barrick Gold (ABX) and IamGold (IAG).


When Ben Bernanke appeared before the US Senate and stated, “nobody understands gold prices and I [Ben Bernanke] don’t really pretend to understand them either”, he was at least half right. We agree that Bernanke doesn’t appear to have a clue about the price of gold, but for others, such as Marc Faber, they have made their fortunes with exactly this knowledge. And while the rest of world buys into overvalued markets, we are quietly seizing the opportunity to buy gold and gold mining stocks.

32 | | October 2013

Small Cap Corner

Small Cap Corner BY Paul Scott of Equity Active & Richard Jennings of Titan Investment Partners

Well, we’ve really had a fantastic upwards run in small caps throughout the last year and a bit. Consider this — the FTSE Small Caps Index (SMC) has hit a new all-time high in recent days (currently at 4,241 on 17 Sep 2013). That is up an astonishing 46% since the summer low of 2,901 on Jun 11 2012, i.e. in just 15 months. This rise has been pretty indiscriminate, and makes me very nervous — too many people are making too much money too quickly and easily, and that can lead to valuations becoming stretched. Momentum runs away with itself, and inevitably it all ends with a nasty correction. As Warren Buffett once said: “Be Fearful When Others Are Greedy and Greedy When Others Are Fearful” Therefore, as it is becoming so difficult to find decent value, I am increasingly becoming fearful. What does this mean? I think it means we have to look at every position in our portfolio and decide whether it remains good value or not.

We cannot grab the bargains on a market correction unless we have some cash on the sidelines. It doesn’t matter that cash earns no return in the short term, as a few months earning nothing is a lot better than losing 20% on a sharp market correction. My Value & GARP (Growth At Reasonable Price) approach means that I automatically move into cash when the market is pricey, as once a share is fully priced, it has to go. There are always opportunities in the market, and unless something is compelling value, I’m not interested and am happy to sit and wait for better opportunities. That is why in the Titan Small Caps Fund, which uses an innovative spread betting wrapper to provide tax-free profits, the fund is currently not using any gearing at all. It’s mandate authorises to use gearing for position sizes up to 200% of equity, but it is currently only using 64% of the available equity. The balance of 36% is being held back for when the right opportunities arise at the right price.

If it doesn’t, i.e. if risk/reward is no longer strongly positive, then it’s time to, at the very least, top-slice some positions, or even sell up completely.

October 2013 | | 33

Small Cap Corner

“That is up an astonishing 46% since the summer low of 2,901 on Jun 11 2012, i.e. in just 15 months.” Stock updates 1 Fiberweb (FWEB) We’ve had some excellent results so far since starting the Fund on 1 August 2013. Not even two months into the management, the Fund has had its first takeover bid, for Fiberweb, which we spotted at 76p in early August after good interim results. We can move fast and caught a decent re-rating driven by good results, a positive outlook, strong Balance Sheet, and of course a takeover approach.

The agreed takeover was confirmed at the time of writing at 102p plus the 1.2p interim dividend. The timing may have been lucky for us, but the stock idea was good, and value is value — sooner or later it is re-rated and it was a prime example of the mantras we use in our approach — value will always win out.

CHART - Fiberweb (FWEB)

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Small Cap Corner

2 Norcros (NXR) We mentioned Norcros in my first article for The CFD Magazine in July 2013, saying that at 15.5p it was “on an irrationally low forward PER of about 7.5, and paying a reasonable dividend yield...”

The shares have since re-rated usefully to about 19p, so that’s a gain of about 22% in just a couple of months, and which is really very pleasing. The forward PER is still only 9.3, so we’re sitting tight on that one as a long term core holding.

CHART - norcros (nxr)

3 Clean Air Power (CAP) Another share we mentioned here in July 2013 was Clean Air Power, a rather more speculative situation than normal for us, but it stacked up at the time on an 8p share price and £14m market cap.

So called “story” stocks are fine if they have enough cash on the Balance Sheet, if the story is compelling, and if the valuation is cheap. CAP ticked those boxes for us, so were happy to give it a whirl as a smaller, more speculative position in the portfolio at 8p.

There has been some excitement here, with Roman Abramovich underwriting a £5m fundraising, and with 2014 being the time when their innovative dual-fuel engine management systems will be launched in the USA and later in Russia. It’s starting to get noticed, and we’re pleased to report the shares are up 50% to 12p.

One should top-slice into strength on more speculative shares, in our opinion, and which we have duly done and so are now happy to run the rest with some of the profit already banked — always a good position to be in.

“They say the financial memory is about 15 years, so maybe we are now seeing a new generation of investors who don’t remember the 1998-2000 TMT boom/bust getting carried away with excessive valuations all over again?.”

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Small Cap Corner

CHART - clean air power (cap)

Conclusion We can all appear to be geniuses in a bull market. However, the clever bit is making money in a flat or declining market, something we are positioned for and expect to unfold with this bull market now in its 5th year and increasing in momentum in recent months — this is typical of late stage bull runs. Our key message now is to be careful. Don’t let the stratospheric rises in many small caps over the last year go to your head. There has been a big sector-wide move up in small caps, some of which was deserved, but some of which has got really out of hand. Please be careful with all these “story” stocks, where valuations have detached from reality — we are already seeing some dangerous echoes of the TMT boom & bust of the late 1990s in which they all came crashing down from March 2000. People were paying crazy money for hyped-up story stocks which almost all ended in failure. They say the financial memory is about 15 years, so maybe we are now seeing a new generation of investors who don’t remember the 1998-2000 TMT boom/bust getting carried away with excessive valuations all over again? If so, then we fear for these current “geniuses”, particularly the levered ones...

36 | | October 2013

This is a time to be very selective, to bank some or all profits on shares which are now looking fully priced, and sit on the sidelines with a pot of cash ready to deploy when the next market panic throws some bargains at you! That’s what we’re doing at Titan anyway, although we remain in the market with turnaround and recovery stocks which are still looking good value. Remember that brokers often lag behind reality with their forecasts in an economic recovery, so if you look hard there are still some opportunities out there for companies which are beating broker expectations. Alternatively, you could let us sort the wheat from the chaff for you, and consider outsourcing your small caps to the Titan Small Caps Fund? Finally, for critics who say we always talk our own book, I would simply reply, “Of course we do!” The stocks we think are the best value are the ones we want to talk about, and of course we own some of them! It would be bizarre if we didn’t own stocks we talked about — why would anyone listen to someone who doesn’t put their money where their mouth is?! Clear disclosure: Titan Small Caps Fund and The CFD Magazine editorial staff have long positions in FWEB, NXR, CAP, SAL and VLX.

The Politics Of Trading

the politics of trading

Dragging the Royal Mail into the 21st Century

BY David Cracknell It was nice of the Government to have confirmed my call in the September issue of this fine publication, through an autumn party conference season sell-off of its stake in Lloyds.

October 2013 | | 37

The Politics Of Trading

“It’s a highly complex business, with the burdensome obligation to provide a “universal service” and continue to run outdated but charming village sub post offices.” But when I talked of this Tory generation of cabinet ministers being intent on creating a new swathe of ‘Sids’ (‘Sids 2.0’ as they are known), I hadn’t banked on such a swift announcement of the sale of Royal Mail as well. Of course as soon as news leaked out of the latter on BBC Newsnight (cruelly to coincide with the TUC annual conference), the unions announced “Everybody out!” Let’s hope they don’t send their strike ballot papers in the post, eh?! Or maybe Royal Mail staff will be allowed to vote by Twitter, which coincidentally announced it was flogging itself off around the same time. Honestly, what a business. When I had a parcel delivered recently, it of course arrived just in that perfect slot when I popped out for ten minutes. I got a card through the door which said I couldn’t collect my package for at least 48 hours. I thought to myself: “If the bloke behind the counter refuses me my thermal socks, I swear I will look him in the eye and declare, “Mate, I just can’t wait until you personally are privatised!” When it came to it, I didn’t really say anything, of course; just doffed my grateful cap and put on my socks. I have to say I will celebrate for a different reason when the Royal Mail is finally privatised. I was a young man when I first wrote the ‘scoop’ that the Government was considering the sale. That was in early 1998, when I helped launch Sunday Business and Labour’s Peter Mandelson mooted the idea. I say ‘mooted’, but actually even then it was an old story because Michael Heseltine, under the previous Tory Government, had fought (and lost) the battle to privatise our blessed Post Office.

38 | | October 2013

And who at the time was the architect of the campaign to stop Tarzan in his tracks? None other than my old mate Alan Johnson, then general secretary of the Communication Workers Union, and later to become Labour home secretary. It’s a highly complex business, with the burdensome obligation to provide a “universal service” and continue to run outdated but charming village sub post offices; an offering you might well run a mile from if it wasn’t such a household name. Somehow though, like the NHS, it miraculously limbers on and works like some well-oiled old steam engine, even though no one is left around who knows how to fix it. And, unless your trading strategy timeframe involves 100-year candlesticks, Royal Mail could hardly be described as “an exciting communications and information superhighway start-up not out of place in the social media age” — even by estate agents! Founded in the year 1516, the Royal Mail makes Facebook and Twitter look like mere amoebas spawning on a drawing board (albeit one of those white board electronic ones). And many would say that is exactly their problem: that unlike the delivery of thousands of real parcels for real money, the social media gods have yet to prove themselves commercially.

The Politics Of Trading

“Royal Mail has taken nearly 500 years to reach an estimated value of £3bn.”

Even my septuagenarian mother understands that the concept of simple ‘buy and hold’ in some former state-run monopoly just isn’t going to wash these days. She was wise enough to stay away from trendy IPOs like Facebook, even though she’s got more Twitter followers and tweets to her name than me!

Will you be getting long Royal Mail, I wonder?

And what an ironic contrast when within hours of the Royal Mail announcement, Twitter decided to announce its own sell-off, via a tweet, of course. We don’t and won’t know how Twitter, which has been such a champion of openness and democracy, makes money until the last minute (due to IPO rules on companies with revenues under £1bn being able to file for an IPO confidentially).

Some of you will, no doubt; but I suspect others like me regard these UK government public offerings as a bit of a lucky dip and a lot of hassle you just don’t need in the internet trading age. The form filling, the waiting for your allocation (if at all) and then you have little idea what the business is really worth until the float. Bigger profits can be had from other, more familiar trades. “Why waste time on these dispersals?” one may well ask oneself. Things have changed a lot since the 1980s, when privatisations — and just plain share buying for ordinary people — were new and exciting, especially when they contrasted so well in Thatcherite circles with the seizure of industry, during the highly unionised previous decade. These days, how are we supposed to get excited about buying shares in the Royal Mail when we have thousands of investment opportunities at our fingertips, potentially more lucrative, less risky and just more exciting?

At least with the Royal Mail we can understand how it could be profitable, especially with the hangover from its monopoly days. That said, Royal Mail has taken nearly 500 years to reach an estimated value of £3bn; it has taken Twitter little more than five years to reach well over double that. And, unlike Facebook, which to me is now as lame and outdated as Friends Reunited, except for teenagers, Twitter has become entrenched in providing what one commentator rightly called the “defacto newswire for the planet”. It is impossible to envisage ever living without it again. Plus it’s free to tweet with no advertising — well, yet. Sending a letter or receiving thermal socks via Royal Mail is not; at the moment. #letthepeopledecide

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The Rise of Social Media in Trading

The Rise of Social Media in Trading By Darren Sinden & Richard Jennings of Titan Investment Partners

“Ipsa scientia potestas est: Knowledge itself is power” Francis Bacon (b 22nd January 1561 – d 9th April 1626) Academia, pornography and finance have historically been three of the main sources of innovation, as far as online communications have been concerned. Dramatic changes in the latter were enabled by the introduction of the networked computer and changed the world of investing forever.

The emergence of the electronic crowd The dotcom crash spawned a new generation of tools for web-enabled investors. Execution-only brokers vied for business in this exceptionally competitive sphere, driving commissions ever lower, a plethora of information websites and services exploded across people’s screens, each trying to outdo the other and what would become known as social media made its first tentative steps into peoples’ lives. The first generation of social media services were bulletin boards. These started out as general meeting points for investors. However, they soon assumed identities of their own, as sub groups of members started posting on specific subjects or stocks.

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People posted anonymously using a handle rather than their own names, an innovation which has generally not brought out the best in people! As with so much in cyberspace, bulletin boards were for the most part unregulated. Some may have been moderated after a fashion, but many were not. What started out as a venue for free exchange of information and ideas soon become a forum for people to talk their own book or, worse, one where they would try and talk you into taking on their book, via pump and dump schemes. Over time, in what has become a familiar pattern of development on the internet, structure was brought to the bulletin board scene as corporate websites such as Yahoo! Finance and Interactive Investor sought to channel investor enthusiasm through their services. These days, bulletin boards have become increasingly outmoded, but they remain popular with certain groups of investors. For example Interactive Investors’ bulletin boards have had more than 48,000 posts in the last 30 days from 16/09/12. In spite of their popularity, these bulletin boards should still be treated with a good degree of circumspection, especially those of the micro-cap stocks.

The Rise of Social Media in Trading

Instant messaging a product in search of a purpose After bulletin boards, the next major evolution in social communications and trading came with the emergence of instant messaging systems which were introduced by Microsoft, AOL, Yahoo and others at the end of the 1990s during the Internet Bubble. Theses services offered peer to peer / desktop to desktop messaging that did not rely on a recipient reading their emails. These rapidly gained acceptance in the wider community as groups of individuals sort to associate with each other regardless of geographic location. Initially developed as a possible replacement for email, instant messaging services were seen as something of an interesting curiosity at best, or an irritating distraction at worst by most mainstream businesses.

For the first time, clients and their brokers had a level playing field as far as market access and technology were concerned and they were in instantaneous contact with each other as well. This was a quantum leap forward and was probably the first genuine workable example of social trading, regardless of location. Sadly, this innovative platform fell foul of the collapse of broker Man Financial and has yet to be resurrected, if indeed it ever will be.

A little bird told me that‌ In March 2006 a software developer called Jack Dorsey took the ideas and programs he had developed for the taxi and courier dispatch market and combined those with facets of instant messaging, mobile SMS (texting) and weblogging (or blogging as it came to be known) to create Twitter. The service allowed users to post short text based messages of 140 characters or less and for those messages to be shared among any parties who had registered an interest in reading them. Tweets, as these messages came to be known, were succinct and to the point and offered more immediacy than blogging or email. By July of 2006, Twitter was launched and, although not an immediate success, it would go on to gain a strong following among celebrities and those in the media. In turn, this prompted interest from a wider audience and over seven years Twitter has acquired more than 500 million registered users and has processed some 540 billion tweets. This figure is, of course, growing every day by more than 300 million messages.

Financial information providers such as Bloomberg and Reuters were quick to recognise the opportunity that instant messaging provided. To this day, Bloomberg messenger remains the cornerstone of the Bloomberg business and the principal reason that most professional traders have the Bloomberg system on their desk; although many may not like to admit that, given the cost of the terminal each month.


The other group to identify and exploit instant messaging’s functionality was the futures’ broker GNI, through their Touch platform (a clear example of how technological and financial innovations are often intertwined). The originators of online CFD trading for individuals also offered their customers the ability to participate in daily moderated chat sessions, within which ideas, thoughts and reactions could be exchanged.

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The Rise of Social Media in Trading

42 | | October 2013

The Rise of Social Media in Trading

“Stocktwits itself now has over 230,000 members and is seen as the leading proving ground or nursery for aspiring traders and market commentators.” The immediacy of the Twitter platform made it an ideal forum for comment on events as they happened. These comments were often from people that were directly involved or were close to them. Because of Twitter’s integration with SMS, these messages could be posted from mobile feature phones. With the advent of the smartphone, which added the ability to attach web links, images and video to messages, Twitter became synonymous with major news events. It also created the idea of the citizen journalist. Twitter will, in all likelihood, float in the USA in 2014 with a valuation of around US$7billion to 10billion. As Twitter grew in popularity, the service, its potential and its open source nature was noticed by other interested parties. Notable among these were Howard Lindzon and Soren Macbeth who founded Stocktwits, a parallel but separate service to Twitter dedicated to the stock market. Stocktwits also pioneered the use of the $ sign in a Tweet to prefix and identify a stock ticker in a message in a similar way that users of Twitter had come to use hash tag or # symbol to signify a topic, title or keyword in a post.

Indeed, Twitter adopted the $ prefix for its own service in 2012. Many thousands of active investors and market commentators now post their thoughts, latest trades and strategy throughout the day on Twitter. Stocktwits itself now has over 230,000 members and is seen as the leading proving ground or nursery for aspiring traders and market commentators. As with Twitter, users follow fellow members’ comments and messages and post their own comments as and when they have a contribution to make. The service is divided into individual streams and most listed stocks will have their own page, where comments on that particular ticker symbol are displayed (see the graphic below). Stocks which are attracting the most comments in real time are displayed in a “trending” ticker tape across the top of the screen. Metrics, such as price, message volume and post sentiment, are charted on the right hand side of the page.


October 2013 | | 43

The Rise of Social Media in Trading

Drinking directly from the tap The use of specific identifiers within Tweets and the open source nature of the messaging platform meant that Twitter was not just a communication service in the way that instant messaging, email or text had been. Instead its structured nature, archived history and message meta data make it ideal for data mining. The phrase hosepipe is used to describe the stream of messages emanating from Twitter and over the last few years many bright minds have been thinking about how to extract value and information from that flow. That research has led to the emergence of a number of sentiment indicators and even investment funds which seek to capitalise on the early detection of changes of investor sentiment or the discovery of new and trending topics of discussion.

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Researchers are also looking at levels of brand engagement to establish the popularity of brands, counting, for instance, the number of discreet tweets about the purchase of the new iPhone. This is just the tip of the iceberg for investors as far as applications of social media and its associated intelligence are concerned. If you are not already an active Twitter user, but are active in the market, then now is the time to get to grips with this incredibly powerful investment tool of the 21st century.

Scenario building for a dollar collapse

Scenario building for a dollar collapse -

could it really happen? By filipe r costa & Richard Jennings of Titan Investment Partners

The date is December 10, 2013, one of those grey and cold Tuesdays. Moscow’s snow has already laid its winter blanket over the city. Although it is early in the morning, already there is a lot of hustle and bustle in the streets as the Muscovites prepare for yet another busy day. No one suspects that such a Tuesday will be different from all the others in recent weeks, and yet, events in Moscow are about to change the world... Just one month earlier, an international war had unfolded in Syria. The United States, led by Barack Obama, couldn’t wait anymore for a UN resolution giving them the green light to intervene in Syria. They were seeking to retaliate against the Government of Syria for using chemical weapons on its own people. Egged on by the hawks in the administration, Obama was about to make the same mistake as his predecessor George “Dubya” Bush, in pushing US forces into yet another Middle Eastern powder-keg. Without Britain’s support and against stern Russian and Chinese opposition, the United States decided to go it alone on this one and, using its sophisticated new missiles and the new-generation of stealth bombers, they soon destroyed key Syrian Government points, cutting its armed force into small pieces.

By December the war wasn’t formally over, but most of the harm to Assad’s regime had already been done and a new Government was about to replace the deposed dictator. While the Americans seemed happy with the outcome, the Europeans were a little more apprehensive and hesitant as no widespread agreement was achieved at the UN. The Russians and the Chinese were of course angry at the United States, as their veto power at the UN had been distorted. Once more it seems that Uncle Sam had imposed his political will on others and be damned the consequences. Meanwhile, tired of seeing their GDP exposed to the whims of the Federal Reserve’s monetary policy, Brazil had become very vocal during the last few months.

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Scenario building for a dollar collapse

“Egged on by the hawks in the administration, Obama was about to make the same mistake as his predecessor George “Dubya” Bush, in pulling US forces into yet another Middle Eastern powder-keg.”

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Scenario building for a dollar collapse

On several occasions the Brazilian Finance Minister, Guido Mantega, blamed the United States for using the dollar to improve the US’s trade balances and he had begun to alert the world that a new currency war was about to set in. No one but the four other countries that make up the rest of the BRICS acronym took him seriously however. Everything appeared rosy over the border in the US with the main stock index heading north by some 16pc over the year. That was certainly not the case with Brazil and Russia where stock markets had lost 15pc of their value during 2013.

Two hours into the summit, President Putin felt it was time to move the meeting in the direction of his original intents. He highlighted the role of an international currency, the need for monetary stability, and the strength of BRICS in the commodities market. China is the top importer and also exporter for almost every commodity while Russia is the top natural gas producer with an estimated 18pc share of the world’s total reserves. With the United States committed to managing its huge debt pile through dollar debasement, printing money out of thin air in essence, the summit realised the need to find a real alternative to the dollar in international trade — a new currency backed by a hard asset — gold, and eventually silver. On day two of the summit, Russia broke cover and proposed the creation of a new currency — the WGC (standing for World Gold Currency). A currency which would be created under Swiss law and the new central bank would be headquartered outside the BRICS to give it more credibility, eventually in either Zurich or London.

Many were saying that it was time that someone should do something material once and for all against “Helicopter” Ben Bernanke’s exporting of deflation through pushing the dollar lower. Commencing with bilateral meetings between Brazil and China, the BRICS agreed to bring forward their 6th summit from 2014 to December 10, 2013. Russia and Brazil were about to unleash what could be a nuclear bomb into the global financial system but, crucially, they needed the support of all other BRICS to succeed. While preparing for the summit, Dilma Rousseff and Vladimir Putin had stealthily engaged in some backdoor agreements, in particular beginning to buy ever dwindling gold stocks in the international markets.

“With the United States committed to managing its huge debt pile through dollar debasement, printing money out of thin air in essence, the summit realised the need to find a real alternative to the dollar in international trade — a new currency backed by a hard asset — gold, and eventually silver.” This new WGC would be fully backed by gold, meaning that the monetary supply would be indexed to gold holdings, and in the process so making it impossible to engage in debasement policies. In effect the BRICS nations were looking to create a new gold standard — the ultimate signal to international markets of their ascendancy from “developing” nations to developed.

October 2013 | | 47

Scenario building for a dollar collapse

The real issue was how to enforce the use of WGC? The dollar, the euro, and all other currencies had already legal tender status, but that wouldn’t be the case with WGC. With commodities under the control of the BRICS however — their trump card — it wasn’t difficult for the summit to find a solution to the problem. Russia imposed that natural gas exports be paid in the newly created currency. This would guarantee a strong WGC circulation in Europe. At the same time, China substituted the yuan trade zone with its trading partners with a new WGC trade zone whilst also demanding that other trading partners use the new currency. The formal announcement at the end of the summit shocked the world, with many being incredulous about it. Markets were shell shocked and the dollar dropped over 10% in a single session. Gold trading on COMEX was suspended as the exchange did not have sufficient physical gold to meet delivery demands. The nuclear bomb had been launched, and its implications were just about to be felt around the world... With the heart of Europe (read Germany and ECB) already against further monetary easing “thin-air” currency systems, it wasn’t difficult for hard-nosed German Government to accept the currency after agreeing to some Russian concessions and setting new trade preference agreements with China.

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the and the new

While COMEX tried to impose a variety of restrictions in gold trading, especially through daily price change limits, it was, by now, too late... Gold was already trading in international markets in WGC. International lenders panicked out of Treasury bonds, dollar and linked interest rates shot up, and the Federal Reserve saw the money supply shrink. Gold hit $20,000 per ounce while oil was trading at $500 — of course priced in ever depreciating dollars as its reserve status, overnight, became a distant memory. A period of hyperinflation had been set in motion in the mighty America. With a near $18tn debt liability there seemed to be no limit on what level Treasury yields would rise to as every man, dog, central bank and institution finally woke up to the reality of the US and the dollar “reserve” status — the emperor had no clothes. The collapse of the dollar was assured and it was the US economy this time that was plunged into a deep crisis; a crisis that would take a generation to resolve and for her people to come through. A new era of sound money had begun!

Why hasn’t QE triggered greater inflation?

Why hasn’t QE triggered greater inflation? By Ben Turney

In my previous piece in the last edition of SpreadBet Magazine, I warned of the dangerous path that the worlds major central bankers are currently walking down in deliberately stoking inflation. There is no doubt this is their favoured plan du jour. So, when I submitted my piece, our editor asked me to put into context why rampant inflation hasn’t reared its ugly head. After all, the global financial system has been bombarded with upwards of $13 trillion of Quantitative Easing and yet, US CPI growth is at, or below, 2%. Although this is an incredibly complicated topic, there are some relatively straightforward explanations... The looming spectre of inflation has been an ever-present danger in the minds of many investors since 2008. The unprecedented expansion of the monetary base is behind this. First the Federal Reserve stepped in to avert financial calamity, with its bailouts and initial QE programme. Then the other major central banks quickly followed suit and we all moved into a new era of the centrally-managed financial system. Failure was no longer an option and reform barely an afterthought. Now, no one can say with any certainty how much money has been created in this grand experiment, but we are talking $trillions.

It seemed certain all this “money printing” (note the speech marks) could have only one outcome; the destruction of paper wealth. Conventional wisdom was that the only defence against this policy folly was to own physical and/or productive assets. With good reason, excess inflation has left deep scars on the popular psyche. Even armed with a rudimentary knowledge of history, we know that, if left unchecked, inflation has wrought widespread upheaval on societies, it has inflicted poverty on whole generations, has brought down governments and caused wars. So it was in anticipation of this that gold, unsurprisingly, went on its wild run and seemed destined to break $2,000/oz. Yet it didn’t.

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Why hasn’t QE triggered greater inflation?

50 | | October 2013

Why hasn’t QE triggered greater inflation?

The reality of what has happened since 2008 has been far different from what many were led to expect. As the chart below shows, official inflation has remained stable and has even been below the Fed’s target of 2% for nearly 18 months:


If anything, central planners have been far more fearful of deflationary forces and have responded accordingly. Time will tell if this was the right approach, but for now it helps to understand why QE hasn’t caused the inflation so many in the market predicted and positioned themselves to take advantage of.

This awareness will also help explain why the threat of imminent, excess inflation hasn’t gone away and might possibly be greater today than it has been at any time in the last three decades. The conditions really are that extreme!

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Why hasn’t QE triggered greater inflation?

The background In hindsight, the signs of financial stress became apparent during the second half of 2007. Nearly everybody missed these. Those that didn’t, made fortunes shorting subprime, but for the rest of us things were about to get nasty; very nasty indeed. We all know what happened over the course of 2008, as one stricken financial institution after another went the way of the dodo. This culminated in the Fed initiating the first of its extraordinary monetary measures and ultimately quadrupling the size of its balance sheet, shown below:


Prior to the start of QE1 (can you spot the spike?!), the Federal Reserve had assets of a touch over $800million. Today this figure has passed $3.6trillion. In very simple terms, the Fed has “printed” (again with the speech marks!) nearly $2.8trillion to finance its bond purchasing programmes. The bond purchasing programmes have been the essence of QE. Through these, the Fed sought to save the financial system by providing banks with a limitless supply of liquidity. The Fed provided the liquidity, by making direct purchases of a vast selection of mortgage backed securities (MBSs) and US Government bonds, at market rates. It paid for these purchases by creating money.

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There are far too many questions about the legitimacy of this approach to deal with in an article of this size (not least the fact the Federal Reserve has essentially monetised federal deficit spending), but the results of these efforts have been wide-ranging. Stock markets took off, bond yields have crashed, $100 oil looks here to stay, commodity prices remain elevated, broken zombie financial institutions limp on and, best of all, Wall Street has been able to pay itself ever-increasing record bonuses!

Why hasn’t QE triggered greater inflation?

The basic misunderstanding about QE – fractional reserve banking and the creation of money However, one thing that hasn’t taken off is the official inflation rate. You will no doubt have read, on countless occasions, references to the Federal Reserve “firing up the printing presses” or words to that effect. Although I often use this shorthand description myself, to describe the complex QE operation, it is in fact slightly misleading, if taken at face value. The money that the Fed created isn’t the same as the money you and I are used to in our daily lives. At least, not yet it isn’t. Instead, the money that the Federal Reserve has “created” is in fact best described as “bank reserves”. Now this might sound like much of the same thing, but the distinction between money in circulation and bank reserves is crucial and explains succinctly why official inflation has remained benign, while financial markets have gone into overdrive. Consider the difference between a seed and a plant. Each is distinct, yet one begets the other. So it is with bank reserves and money in circulation. Bank reserves are the seeds from which money in circulation grows.

The fractional reserve banking system is the mechanism through which money enters circulation. The introduction of this coma-inducing term might well encourage you to put this article down, but, as with much of the financial services industry, a fairly simple method is dressed up in an excruciating name. For the system to work, central banks issue commercial banks with reserves. The commercial banks then issue loans to customers, who in turn usually deposit these loans back with the banks, who in turn can then lend against these new deposits. This is called the “multiplier effect”. Central banks seek to control this multiplier effect by regulating the issuance of new loans, by placing capital requirements on the issuing banks. In other words, the issuing banks are only able to lend against a fraction of their reserves. Commercial banks deposit these reserves with central banks, which makes sense as central banks shouldn’t present any sort of counter party risk. However, the reserves still appear on commercial bank balance sheets and nothing warms the hearts of senior bankers than to have plenty of cash floating around, even if they’re not actually using it. The psychological boost these QE-provided reserves has given has been immense and no doubt has been a critical contributory factor in the bull market we are currently in. As is often the case in life, the danger is that too much of a good thing could prove to be ruinous. If you have money in the markets, then the chart to the right is one you really should be keeping an eye on.

October 2013 | | 53

Why hasn’t QE triggered greater inflation?

“the money that the Federal Reserve has “created” is in fact best described as “bank reserves.”


This chart captures the current amount of excess reserves commercial banks currently hold at the Fed. Excess reserves are the reserves held above the capital requirements. What is most telling about these figures is that they provide us with a simple headline for what happened to the QE money. Thanks to the secretive nature of the banking industry and the complexity of derivative markets, there is no way of knowing the true extent of losses incurred by American banks as a result of the collapse of subprime and a weak economy. Additionally, the opaque nature of reporting and complex corporate structures within the sector means that attempting to calculate the impact of new capital requirements is as challenging. However, the figures above are indisputable; they are simple and they are staggering. As of writing, US banks have $1.863trillion in excess reserves. Theoretically this $1.863trillion is just sitting there, waiting to find its way into the real world.

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Look at the chart again and just take a moment to digest this thought. Until the start of QE, excess reserves held at the Fed were the tiniest proportion of what is held today. The horizontal line from the late 1950s to 2009 isn’t a data error; you can just about make out a spike in excess reserves in the recession at the start of the century. No, this chart demonstrates the epic explosion that happened in excess reserves, once the Fed started QE. The presence of these vast excess reserves, both in America and other developed nations, is an unprecedented event in human history. To put this into context, US GDP is roughly $16trillion. This means the equivalent of over 11.5% of US GDP is sitting in the reserve equivalent of liquid cash, currently unused. As unlikely as it is that all of this money will find its way into the real world, thanks to the multiplier effect, only a relatively small amount of it need leak out to start having a pronounced impact.

Why hasn’t QE triggered greater inflation?

The process of money creation and the multiplier effect

First year economics students will be able to tell you all about the velocity of money and how, in the long run, excess inflation is directly attributable to the money supply growing faster than the real economy. While the rules of the fractional reserve banking system remain as they are, our financial fate is in the hands of bankers; the same people who gorged themselves on enormous bonuses while engaging in wildly irresponsible lending practices not so long ago. This time, all that appears to have been holding them back from resuming old habits has been a lack of demand for borrowing.

But that is a story for another day. Follow the blog this month where I will be following up this piece with analysis examining the relative lack of demand for debt among consumers, and exploring what might happen if society rediscovers its appetite for debt-fuelled spending.

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Timing markets with Elliott Wave and DMI

school corner

Timing the markets with Elliott wave and the Directional Movement Index by Thierry Laduguie of e-yield I discussed the Directional Movement Index (DMI) in a previous issue. This indicator, developed by Welles Wilder, helps determine if a security is “trending�. There are various ways to determine the trend, some people use moving averages or trendlines. I like to use Elliott wave and my own e-Yield Sentiment Indicator (ESI), but the DMI is a reliable trend indicator too. In fact, I often combine Elliott wave and the DMI to get more reliable signals. In this example I will use a daily chart to identify the trend.

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Timing markets with Elliott Wave and DMI

“As explained in Elliott wave theory, when the market rallies in five waves the trend is up and when the market declines in five waves the trend is down.� As explained in Elliott wave theory, when the market rallies in five waves the trend is up and when the market declines in five waves the trend is down. This is the basic pattern, when a five-wave pattern is complete, the market will pause or correct in the opposite direction (countertrend) and when this move is over the trend will resume.

The counter trend move generally occurs in three waves. The truth is, it is not always easy to count the waves; by adding another indicator like the DMI to the wave count then the forecast becomes more reliable.

S&P 500 and moving average envelopes

On the daily chart of gold, we have a clear decline in five waves [(1), (2), (3), (4), (5)] over a nine-month period. Wave (3) subdivided into five waves down [1, 2, 3, 4, 5] and wave (4) is sideways (triangle). As you can see, the downtrend in gold since October 2012 consists of a series of five-wave declines, an indication that the trend is down. The decline started in October 2012 and ended on 28th June 2013 [bottom of wave (5)]. The rally since the low on 28th June is a counter trend move and once it is complete, gold should resume its long term decline.

At the bottom of the chart you will see the DMI. The two lines that trigger signals are the red line (-DI) and the green line (+DI). Buy signals are indicated when the +DI rises above the -DI. Sell signals are indicated when the +DI falls below the -DI. When the market is in a downtrend (i.e. a five wave decline), the green line should remain below the red line. This occurred from 10th February through to July.

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Timing markets with Elliott Wave and DMI

“When the market is in a downtrend (i.e. a five wave decline), the green line should remain below the red line.� Put simply, in that situation we sell the rallies and the general rule is to ignore the buy signals (when the green line rises above the red line) until the five-wave decline is complete. If there is a buy signal and the five-wave decline is not complete, I do not go long; instead I reduce my short exposure. When the green line drops again below the red line I increase my short exposure. The rallies we saw in March, April and June occurred when the green line was below the red line. This was confirmation that each rally was a counter trend bounce and not the start of a long term advance.

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At the end of a decline and when the wave count is complete (five waves down) we can look forward to a counter trend rally. From that moment the rules are reversed. I now expect the green line to rise above the red line and when it does I increase my long exposure and buy the dips, as long as the green line remains above the red line. If the green line falls below the red line I reduce my long exposure until the next buy signal occurs, then I increase my long exposure. This process continues until the counter trend rally is complete. On the chart (see the previous page), the buy signal in July was valid as it coincided with the counter trend rally in (a), (b), (c). The counter trend rally ended on 28th August (three waves up), the next valid sell signal occurred on 9th September when the green line crossed below the red line. This time I can assume that the trend is down and the long term decline in gold should resume. If prices rally above the 28th August high [top of wave (c)] it will indicate an extended counter trend rally, possibly a double zigzag. In this case I would ignore the sell signals given by the DMI until the double zigzag is complete.

John Walsh’s Monthly Trading Record


John Walsh’s monthly trading record So another month has been and gone and for me it’s been an interesting experience, to say the least! You may or may not be aware, but for the last four and a half years I have been doing “The Knowledge”, London’s comprehensive test to become a black cab driver. As of last month I successfully completed this course, barring a few formalities, and by the time the next issue is released I should be happily ferrying punters around our great capital. (As an aside, the name “The Black Cabbie Trader” has already been coined, maybe I should trademark it?!) But enough of this! It’s time to talk about my trading. You will probably remember that I decided to stop day trading indices last month. I don’t want to spend my days watching screens (and it’s not exactly conducive to happy passengers). So instead, I have decided to start trading US stocks, with a longer timeframe in mind. This way, I can let my positions breathe and do all the work for me.

To help me with my new style of trading I have taken to scanning daily for stocks which meet certain criteria. This approach is advantageous as it gives me a place to start researching and takes the emotion out of picking stocks which I might be overly familiar with. It also is an excellent way of introducing me to new names I have not heard of before. Overall, I have to say it’s been a case of so far so good. Although I don’t yet want to go into the parameters I use in my scans (it’s too early to do this), what I will say is watch this space.

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John Walsh’s Monthly Trading Record

“You’ll not be surprised to hear then that my departure into swing trading was to be a short lived exercise and so I decided that maybe swing trading indices was not for me.” The fourteen are: Best Buy (BBY), Coca Cola Enterprises (CCE), ConocoPhillips (COP), Dollar Tree (DLTR), Harley Davidson (HOG), Lockheed Martin (LMT), MGM Resorts (MGM), Ross Stores (ROST), Schlumberger (SLB), Starbucks (SBUX), Texas Instruments (TXN), Total System Services (TSS), Whole Foods Market (WFM) and Yelp (YELP). At the moment, these stocks are currently either slightly up or slightly down. Due to the reduced stake size of my new strategy, I am more than happy to let my positions run. Typically I will check on them a few times a day and I might even add new positions if something tasty appears on my scan. I have many reasons for choosing US stocks. First, I just love the way the American market is structured. In America, companies have to report quarterly during earnings’ season, unlike in the UK. When American companies report to the market, they have conference calls which private investors can listen to. I also love the razzamatazz of US markets, as the major hedge fund players, like Carl Icahn, are treated as rock stars. Finally it is very useful that anyone with over $100million under management is required to show their holdings each quarter. Otherwise known as “whale watching”, this can provide many helpful pointers. At the time of writing I currently have 14 trades running, all are long positions and I feel there is still some upside to come. Although I haven’t gone into my method yet, the following list gives you an idea of the type of stocks my scanners reveal.

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Please continue to follow me on Twitter @_JohnWalsh_ where I try to keep everyone up to date with my trades as they happen. Remember, you control the trade; the trade does not control you. John

The Predictive Power of the Baltic Dry Index

The Predictive Power of The Baltic Dry Index By Filipe R. Costa

This month we take a look at one of the most important and powerful indices that many resource investors just ignore: the Baltic Dry Index (“BDI�). At first glance, an index related to sea shipments may not seem too important when evaluating in which direction stock markets are heading. However, when you think about it, what could be more useful than to know the volumes of goods currently being transported?

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The Predictive Power of the Baltic Dry Index

One of the real strengths of the BDI is that this index is calculated based on physical sentiment nor estimates nor any of the other statistical guesswork which can go on indicators. On balance, the BDI has to the most powerful leading indicators for economy.

cargo, not with other be one of the global

Created by the London-based Baltic Exchange in the 1980s, the BDI provides a daily assessment of the volume of goods being transported by sea. Covering 23 of the world’s most used sea lanes, this index is a tracker for world shipping prices. In other words, it represents what customers pay to ship their goods. Shipping companies can often use the index to calculate the fees they charge. The BDI covers Handysize, Supramax, Panamax and Capesize dry bulk carriers. These carriers transport the bulk of raw materials used in global trade from coal to iron ore and steel, from grain to cement and livestock. To calculate the index, a chosen group of international shipbrokers submit their estimates on freight costs, across the different routes, daily to the Baltic Exchange. These estimates are then weighted accordingly to form that day’s reading of the BDI.

The third method is a combination of the first two. Elasticity of supply usually dictates the exact adjustment. In the case of the BDI, given that the supply is inelastic, this means that adjustments to cope with differing levels of demand are made through price changes. Therefore, the more the BDI goes up, the more shippers are paying in fees. This means there is more demand placed on shipping fleets. It is that simple. Since the overwhelming majority of shipped goods are raw materials, the BDI is a superb barometer for the health of global trade. It is classed as a leading indicator because the raw materials are usually required at the start of production processes. Before they can be turned into finished goods, these raw materials usually have to be shipped. Therefore, when the BDI rises, it suggests that global output is about to increase, which should increase GDP and earnings.

Why investors should care about this What makes the BDI so useful to investors is how sensitive it is to shifts in demand. Demand for shipping obviously varies according to the amount of cargo that needs to be moved. The more raw materials that are shipped, the more space this takes up on ships. It’s not exactly rocket science. However, it is on the supply side of the calculation that things get a little more interesting. Put simply, shipping supply is tight and inelastic. Shipping companies cannot create new ships overnight. It can take two years to expand capacity as the process of building ships is a lengthy one. Equally, it can take just as long and be just as expensive decommissioning ships. This means that shipping supply tends to remain constant for long periods of time. According to economic theory, a market adjusts to marginal changes of demand in just three ways. First, supply levels can be altered to catch up with increased demand. Second, prices can fluctuate to accommodate increased or reduced demand.

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What the BDI has to tell us today If the BDI really has the predictive power we suggest above, one would expect it to start rising before GDP goes up and falling before recessions occur. From 2005 to 2008, the index jumped from below 2,000 to over 11,000 just before the financial crisis bit home. The rise in oil price played a significant role in this as fuel costs are a major component of the BDI calculation. Nevertheless, the overall growth of the BDI was a strong indication as to how the global economy was performing prior to the collapse. In 2008, the BDI dropped significantly just before the crisis started. By the end of the year the index had fallen to 670. Moving into 2009, as the S&P recorded its post-crisis lows, the BDI started to increase again, peaking at 4,643 that November. Since then the BDI has generally been falling, with the occasional rally. Today the BDI is a touch under 2000, the best level in two years, but still well short of previous peaks.

The Predictive Power of the Baltic Dry Index

“What makes the BDI so useful to investors is how sensitive it is to shifts in demand.” Below is the chart of the BDI plotted against the S&P500 over the last five years:


Since mid-2011 it is important to note the divergence between these two indices. In fact, looking at this chart you would be well within your rights to question whether or not the BDI has lost it predictive powers. But this would be misguided. The BDI is as pure an indicator as an investor could hope for. It simply tracks the movement of physical goods.

The S&P500, on the other hand, has become a wildly complex beast which is now more a play on loose monetary policy rather than genuine economic performance. Where the BDI is used to calculate real prices, it is anyone’s guess what the true underlying value of the S&P500 is these days. The Federal Reserve’s policies have had such a distortive effect.

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The Predictive Power of the Baltic Dry Index

“Even though the BDI has just spiked higher, the value of the index still urges investors to remain cautious about the prospects of the real global economy.” To confirm the current state of the shipping sector, let’s take a look at the most important companies: Diana Shipping and Dryships;

Diana Shipping Inc. and Dryships Inc. versus the S&P500 over 5 years

The share prices of both companies have been recovering over the year. However, if we look at their performance on a three and five year basis, we can see how much they suffered post-2008. Diana Shipping is still down 65%, while Dryships lost almost its entire value, down 97%. This flies directly in the face of much of the talk of recovery there has been. Even though the BDI has just spiked higher, the value of the index still urges investors to remain cautious about the prospects of the real global economy. It is positive that the index is approaching 2,000, and the higher it goes the better this is for international trade and raw material prices. However, this progress still contrasts poorly with pre-crisis “normal” readings. Given how strongly stocks have rallied since the start of QE Infinity, an alarm bell should be ringing about the chasm that has emerged between financial asset prices and genuine underlying performance. The S&P500, on the other hand, has become a wildly complex beast which is now more a play on loose monetary policy rather than genuine economic performance.

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Grooming Gadgets for the Modern Gentleman

Tech Corner

Grooming Gadgets for the Modern Gentleman By SIMON CARTER

The blessed world in which we live is, and has been for many a year, overflowing with gadgetry and wizardry to get us going in the morning. Whereas our grandfathers will have woken up to the harsh refrain of their analogue alarm clocks, our fathers were coaxed awake by their clock radios, before being soothed by the gentle click of their Teasmaids. The modern gentlemen has a range of options to start his trading day, from iPod docks, TV alarms, automatic coffee machines and smartphones to the much more traditional choice of the sound of screaming, hungry children. The modern man, nay the modern gentleman, has a two pronged problem. Firstly, you obviously want to start each and every day looking your absolute best. Trading is a stressful occupation (you don’t need me to tell you that!) and while your carefully constructed look may fade and deteriorate along with your picks, you certainly want to begin your day looking like the successful, enthusiastic, collected man that you hope to be when the market closes.

The second problem is that grooming is, let’s face it, boring; tedious, monotonous, dreary, dull and boring. From the moment you step into that bathroom to the time you emerge, expertly coiffed, you are trapped in a spiral of un-inspiration. However, that could all be a thing of the past if you welcome a little bit of the 21st century into your morning.

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Grooming Gadgets for the Modern Gentleman

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Grooming Gadgets for the Modern Gentleman

SHOWERING While it may be that one day we’ll all sleep in beds that wash us while we sleep, or have access to a human car wash that soaps, sprays and dries us as we wake up, here in 2013 we have to make do with the humble shower. Mind you, there’s nothing humble about the chrome Showerhead with Wireless Speaker from Kohler (£95, which will connect to any Bluetooth enabled device. If you’re the kind of man who likes to shave in the shower, you should couple your new showerhead with the Fog Free Shower Mirror (£12.99, Amazon. If, however, you prefer not to listen to music or shave in the shower, simply install an in-wall television (£varies, Aquavision) for your morning entertainment.

Oral Hygiene There are many, many excellent electric toothbrush kits out there — the very best probably being the Philips Sonicare Range, especially the DiamondClean (£150) — but for a true dentist experience (minus the sweats, shakes and screams) look out for Waterpik’s Complete Care (£129) package, which couples a sonic toothbrush with an advanced water flosser. The water flosser is especially wonderful, giving you the ability to clean in-between your teeth and in hard to reach places in a fraction of the time that traditional flossing would cost you. Still not hi-tech enough? How about the Beam Brush ($24.99), from America which claims to be the world’s first smartphone enabled toothbrush? Buy the brush, download the app and have your iPhone report back daily on your brushing habits and technique. Like an overbearing dentist in your pocket. Once you leave the bathroom, keep on top of your oral hygiene with a Breath Checker (£26.10, Tanita). Why not?

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Grooming Gadgets for the Modern Gentleman

Shaving The ‘shave or not to shave’ debate is one that many men struggle with daily. But bear in mind that the tired eye and the lazy brain can tell you ‘designer stubble’ when the rest of the world see ‘trainee hobo’. Fortunately Philips have gone all Auric Goldfinger on us and introduced lasers into our mornings with their Style Xpert Beard Trimmer 9000 (£100, Philips), which boasts a, yes, laser guide for symmetrical results. Lasers aside, recent trends have seen shaving return to its more manual roots with safety razors and even cut-throat razors flying off the shelves. For a more traditional gadget (the tech is all in the build) Taylor of Old Bond Street offers both a Moustache Kit (£49.95) and an ultra-stylish Ear and Nose Hair Trimmer (£47.00). Back to the future now and if you’ve arrived at your desk and finally realised that you’ve fallen for the ‘trainee hobo’ trick, you can always clean up with a USB Shaver (£19.99, Lifemax).

hair For those of you with more elaborate hair styles, the advice is comb, dry (with the Ferrari built Babyliss Pro Volare (£85), naturally) and stick with your chosen barber. But if you’re a man of simpler tastes up top, invest in an EasyCut (£48.90, Babyliss). The circular design fits right in the palm of your hand meaning that you can clip your hair simply and quickly on a daily basis. What about elsewhere? Well. you should first ask yourself, ‘If James Bond were to remove body hair, just how would he do it?’, then take a deep breath and shell out £375 on Tria’s Hair Removal Laser 4X. Yes, this unisex gadget does look a little on the feminine side, but, hey, lasers!

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Markets In Focus


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Markets In Focus

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

Issue 22 - November 2013

In next month’s edition...

A Women in Finance Special!

Top Ten Women In INTernational Finance


Disclaimers Material contained within the CFD 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. The CFD 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, The CFDMagazine openly discloses that our contributors may have interests in investments and/or providers of services referred to in this publication.

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The CFD Magazine Oct edition  

Interview with the million dollar trader.