MAGAZINE
SPREADBETTING The e-magazine created especially for active spread bettors and CFD traders
M ED AY IT 14 IO N Issue 28 - May 2014
Is the bear back? SBM weighs up the evidence…
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THE uk’S ONlY FREE ONlINE FINANCIAl MAgAZINE! FuND MANAgER IN FOCuS – RENAISSANCE TECHNOlOgIES JAMES SIMONS
A DOMINIC PICARDA DOuBlE FEATuRE SPECIAl
ZAk MIR INTERvIEWS ANDY SMITH OF MANN BIO
6 YEARS INTO QE – WHAT HAS IT REAllY ACHIEvED?
AND MuCH, MuCH MORE - PACkED Full OF TRADE IDEAS FROM All OuR CONTRIBuTORS!
Feature Contributors Robbie Burns aka The Naked Trader Robbie Burns - The Naked Trader has been a full-time trader since 2001 and has made in excess of a million pounds trading the markets. He’s also written three editions of his book, “Naked Trader” and the “Naked Trader Guide to Spreadbetting” and runs day seminars using live markets to explain how he makes money. Robbie hates jargon and loves simplicity.
Dominic Picarda Dominic Picarda is a Chartered Market Technician and has been responsible for the co-ordination of the Investor’s Chronicle’s charting coverage for four years. He is also an Associate Editor of the FT and frequently speaks at seminars and other trading events. Dominic holds an MSc in Economic History from the LSE & Political Science.
Tom Hougaard Tom Hougaard was a broker in the City of London until 2009, racking up close to a thousand TV and radio interviews on the likes of CNBC, Bloomberg, CNN, BBC, Sky TV etc. His specialisation now is investor education and he is one of the few commentators who actually puts his money where his mouth is with live trading sessions. Find out more on www.tradertom.com
Alpesh Patel Alpesh Patel is the author of 16 investment books, runs his own FSA regulated asset management firm from London, formerly presented his own show on Bloomberg TV for three years and has had over 200 columns published in the Financial Times. He provides free online trading education on www.alpeshpatel.com.
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Editorial list EDITORIAl DIRECTOR Richard Gill
Foreword It is with great pleasure that I am able to announce that Spreadbet Magazine’s success and unique position in the marketplace has been recognised by fellow industry professionals and, as I write, absorbed into Burnbrae Media Holdings.
EDITOR Zak Mir CREATIvE DESIgN Lee Akers www.cfdmedia.co.uk COPYWRITER Seb Greenfield EDITORIAl CONTRIBuTORS Dominic Picarda Robbie Burns Tom Hougaard Alpesh Patel Richard Jennings Filipe R Costa Simon Carter
Disclaimer Material contained within the Spreadbet Magazine and its website is for general information purposes only and is not intended to be relied upon by individual readers in making (or refraining from making) any specific investment decision. Spreadbet Magazine Ltd. does not accept any liability for any loss suffered by any user as a result of any such decision. Please note that the prices of shares, spreadbets and CFDs can rise and fall sharply and you may not get back the money you originally invested, particularly where these investments are leveraged. In comparing the investments described in this publication and website, you should bear in mind that the nature of such investments and of the returns, risks and charges, differ from one investment to another. Smaller companies with a short track record tend to be more risky than larger, well established companies. The investments and services mentioned in this publication will not be suitable for all readers. You should assess the suitability of the recommendations (implicit or otherwise), investments and services mentioned in this magazine, and the related website, to your own circumstances. If you have any doubts about the suitability of any investment or service, you should take appropriate professional advice. The views and recommendations in this publication are based on information from a variety of sources. Although these are believed to be reliable, we cannot guarantee the accuracy or completeness of the information herein. As a matter of policy, Spreadbet Magazine openly discloses that our contributors may have interests in investments and/or providers of services referred to in this publication.
Burnbrae is the new entity within which the Master Investor Show operation (which has just been held and was another great success) is housed together with the stock market research offering, T1ps.com. The sale of the magazine will offer our readers the opportunity of enjoying an enhanced publication going forward, and also wider distribution – in bringing our particular style of no nonsense, tell it as it is editorial about matters market related – something that we have been looking for, for some months. The sale is also testimony to the immense amount of work that has been put into this publication by founder Richard Jennings who, although continuing to contribute to the magazine and website, will now be focusing almost exclusively on building upon the quite amazing performance he has generated at Titan Investment Partners as they close in on their inaugural one year performance mark (take a look here at their returns: http://www.titanip.co.uk/performance/). Additional thanks goes to all the contributors who have also had a large hand in the success of our offering. The roster of names from the world of trading: Robbie Burns, Alpesh Patel, Tom Hougaard, Dominic Picarda and, if I may so, myself (!) reads like a veritable who’s who of trading personalities. And, best of all, the mag is and will remain free. In this edition we again have a cracking line-up of features. A special highlight is the interview with Mr Andy Smith of Mann Bio where, given the routing seen in the biotech sector in recent weeks, he relays a very objective perspective on this particular asset class. Within the interview there is something that everyone, from the day trader to the long term investor, can learn from. Robbie’s on holiday this month, so Dominic Picarda has given us a double feature special (thanks Dom!), and Tom Hougaard reveals a must-read trading book from a goliath on the floor of the CBOE. Richard Jennings weighs up whether we are indeed in the nascent stages of a bear market, and also questions just what the QE programs in the States have really achieved. And me? Well, I put my neck on the block with my monthly pick and alight upon silver. So, as we enter the “Sell in May and go away” period, I hand over to let you browse through our magazine and hope to continue to supply you with our insightful content for many more months to come as we enter a new and exciting phase at SBM. Enjoy, and good trading! Zak
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Contents
Has the bear come out of hibernation? In this focus piece, Richard Jennings of Titan Investment Partners weighs up the evidence as to whether or not a new bear market in equities has begun…
08 Zak Mir’s Top Monthly Pick
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24 48 50 64 66
Zak alights upon silver this month and explains why he thinks the precious metal is on the cusp of a sharp rally
Zak Mir Interviews Andy Smith of MannBio In this month’s feature interview, our editor Zak Mir asks some topical and searching questions of biotechnology fund manager Andy Smith
Dominic Picarda’s Technical Take In the second of our feature pieces by Dom, he takes a look at the so called “Dow Theory” TA method and explains how it can potentially be used by investors to outperform the market
Fund Manager in Focus – Renaissance Technologies James Simons Maths wizz and multi-billionaire quants specialist James Simons – one of the most successful hedge fund managers of all time - is in focus this month
Tom Hougaard Book Review This month Tom reveals a fantastic trading book that he holds in high regard and is a must read for all serious traders
Options Corner Richard Jennings of Titan Investment Partners offers up a potential option strategy to play a rally in the gold mining sector
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World Cup 2014 Sports Spreadbetting Preview
Six years into QE – What has it really achieved?
As the world awaits the global sporting spectacle that is the World Cup in Brazil this year, Sporting Index offers up some spread betting ideas for our readers
Richard Jennings of Titan Investment Partners looks back over the last six years’ money printing experiment to assess its success or otherwise in creating growth
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72 78 82 84
Dominic Picarda What really works in TA Our TA specialist Dom takes a look at some popular TA methods in analysing whether they actually are worth following
Technology Corner Our resident tech specialist Simon Carter takes a topical look at the recent “heartbleed” virus and asks what is being done to combat cybercrime
Alpesh On Markets Alpesh relays his trading methodologies in a reproduced interview piece
John Walsh’s Monthly Trading Diary Trading Academy winner John reveals just what he looks for in a spread betting firm
Markets In Focus A comprehensive markets round-up of under and out performers during the month of April
May 2014
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Has the bear woken up from his long hibernation?
Has the bear woken up from his long hibernation? By R Jennings CFA, Titan Inv. Partners, & Filipe R Costa
It is no secret within the investment community that here at Titan we have held the view for some months now that US equity markets have become overvalued and over stretched, particularly during the last 3-6 months. Despite our concerns, however, and notwithstanding the bout of weakness at the turn of the New Year, US equity Indices have continued in their headlong rush to new highs, albeit on thinning volumes and decreasing participation/leadership.
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Has the bear woken up from his long hibernation?
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Has the bear woken up from his long hibernation?
One group of stocks that has been pivotal in this relentless ascent has been the Technology sector. Regular readers may recall that we have drawn comparisons between the overheated valuations seen in today’s market with recent flotations on eye popping sales multiples, let alone PEs with those that prevailed immediately prior to the bursting of the internet bubble in 2000/01. The recent round of M&A undertaken by the likes of Facebook in purchasing WhatsApp and Oculus Riff, each for multi-billion dollar price tags without any real idea as to how a profit can be turned, has only served to reinforce that viewpoint.
NASDAQ YTD CHART
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However, during the months of March and April we may have seen something of a sea change in investor sentiment. At the time of writing, the NASDAQ composite index, the broadest based measure of performance of “new economy stocks”, has fallen by nearly 10%, on increasing volume too. Some of the major “momo” names like Twitter are now down by almost 50% from their turn of the year highs.
Has the bear woken up from his long hibernation?
Going into this correction, the composite index had been trading on a PE multiple of around 32 times and with a corresponding Enterprise Value:EBITDA of around 15 times (according to data from the FT) – scary stuff when you consider those figures are effectively an average of an index that contains 3000 plus stocks. Not quite in the bubble territory of 2000 when it reached, incredibly, over 90 times, but still extremely rich when compared to history all the same.
The behaviour of crowds or herds is well documented and it is the same whether on the savannahs of East Africa or in the great mass that is know as “the market place”. We have not seen a full scale stampede as yet, but it’s fair to say that some of the “beasts” are getting decidedly skittish. The bar chart below, which plots the performance of the major US equity sectors over one week and three months (to April 7) respectively, provides an at-a-glance overview of the changing sentiment within US equity markets.
Technology stocks as a whole around the globe have also retreated in sympathy with the NASDAQ sell off, and which seems to have been driven by waning investor confidence with the continuation of the tapering of QE in the States rather than anything more tangible. Of course, one of the conditions required for a bubble to inflate in the first place is a positive (closed) feedback loop within which investors pay more attention to what their fellow bulls are saying and doing (even if that is recycling old information) rather than acknowledge external influences/events. Evidence of this taking place is in this article here –http://www.zerohedge.com/ news/2014-04-06/hedge-fund-slaughter-continues-here-who-unwinding-and-what-stocks-watch – in which it is revealed just how concentrated many of the major hedge funds are in the large cap technology names.
RECENT U.S SECTOR PERFORMANCE
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Has the bear woken up from his long hibernation?
What this is telling us is that the momentum that has propelled technology higher has begun to wane and indeed reverse. Just as buying begot buying, selling is now begetting selling.
Indeed, Bill Gross, the boss at Fund Management giant PIMCO, and who we profiled recently, tweeted “If corporations and the Fed stop their buybacks and QEs, who will be left to buy stocks?”
Not only has the NASDAQ moved lower in recent weeks, but we have also seen a pullback in both the narrowly focused Dow Jones 30 index as well as the much broader S&P 500. It’s difficult to put a finger on exactly what has caused the change in sentiment amongst investors, but perhaps at long last a sense of realism is beginning to emerge about what life might be like in the post-QE world.
One should not underestimate the effect that a contraction in the NASDAQ can have on the wider US equity universe. The US share of global market capitalisation has fallen back from the recent peak of around 37% to a current value of just over 35.5% in just a few weeks – that’s a drop of around 4% in real terms as we can see in the chart below:
WORLD SHARE OF GDP CHART What’s also very interesting to note is that this fall in US percentage of global market cap has happened whilst the percentage share of other equity markets (developed and emerging) have, for the most part, remained broadly unchanged. Much of what happens next will of course depend on the actions taken by the Federal Reserve: recent “dovish” comments by the Chairman Janet Yelland might well suggest that the US Central Bank is itself becoming more concerned about the knock-on effects of the taper (the unwind of QE) and the rise in interest rates that will likely follow this.
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With the seasonally weak late spring/summer period just about upon us, the “Sell in May” market adage may in fact prove prescient this year just like the past two years, as the chart to the right reveals (green boxes) which markets dipped during May and June.
Has the bear woken up from his long hibernation?
S&P 500 2 YEAR WEEKLY CHART Historically, the “Sell in May” effect has been studied extensively, with significant results confirming the bias to weakness during this period. It could be argued, however, that in recent years the effect of this seasonal weakness bias has been muted due to central bank intervention. With the liquidity spigots slowly being turned off, then there is even more weight that this year could be a vintage year for followers of the saying.
During the last five years, July has in fact turned into the best month of the year while September is no longer negative. In a study conducted by Bouman and Jacobson in 2002, they found strong evidence of the seasonality effects.
Over the past 60 years the “Sell in May” effect is particularly evident with the months of May, June, August and September being collectively negative months.
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Has the bear woken up from his long hibernation?
They collected data for several markets (not only US) and built a so called Halloween strategy which consists of buying equities at the end of October and selling them in early May. The name “Halloween strategy” derives from the fact that buying occurs at October 31st – Halloween day, and coincides with the end of the “scary period”. In fact, they found the outperformance over holding for the entire year was substantial, ranging from 1.5% to 8.9%.
“In our view, the fact that QE is continuing to be cut by $10bn per month points to a return to the historical seasonality, and makes for a stronger case for the “Sell in may” approach this year.”
The main idea is that investors can improve performance with a buy-sell strategy by simply following seasonality instead of buying and holding. As the seasonality effect implies that markets are not efficient (something we strongly believe in here at Titan – that being markets are far from efficient), there is a huge debate surrounding these findings. Alternative explanations include attributing the excess returns to the data period chosen, i.e. bias in the period. So, with all this in mind, together with the recent weakness seen in the markets, million dollar question is will seasonality play out this year?
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Over the last five years monetary easing has certainly reduced the effect of seasonality. Returns were broadly scaled up and the negative period has been shorter and less significant, but seasonality is still there as May, June, and August all show negative collective returns over the last five years. The key is to understand to what extent QE will still continue to drive returns. In our view, the fact that QE is continuing to be cut by $10bn per month points to a return to the historical seasonality, and makes for a stronger case for the “Sell in May” approach this year.
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Dominic Picarda’s Technical Take
Dominic Picarda is a Chartered Market Technician and has been responsible for the co-ordination of the Investor’s Chronicle’s charting coverage for four years. He is also an Associate Editor of the FT and frequently speaks at seminars and other trading events. Dominic holds an MSc in Economic History from the LSE & Political Science.
Dominic Picarda’s Technical Take What works in technical analysis
Let’s face facts: technical analysis (TA) has a bad reputation in many quarters. A lot of investment professionals see the study of past price action as a bit of a joke. That’s partly the fault of flawed textbook financial theory, which endlessly preaches that there’s nothing useful to be learnt from previous market moves. A lot of the blame lies with TA itself, however. Too much of what is passed off as TA is nothing more than faith-based pseudo-science, implemented according to the individual analyst’s whim. Amongst the TA chaff there is quite a bit of wheat, however. Proper TA has a logical underpinning, can be shown to have worked in the past and does not call for any judgement on the part of the analyst. Supposedly technical disciplines such as the Elliott Wave Principle, much of Gann Theory and the use of planetary geometry are three obvious examples of methods that fail most or all of these three tests. So, what really works in TA? Overleaf, I run three well known technical methods under the lens.
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What works in technical analysis
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Dominic Picarda’s Technical Take
The Golden Cross When a market’s 50-day moving average crosses above its 200-day moving average, it is known as a “golden cross,” and is supposedly a buy-signal. This indicator has all but entered the investment mainstream – even the Financial Times mentions its occurrences. It has a reasonable basis in logic, being an indication of a market where upwards momentum has been building. It demands no subjectivity whatsoever: we merely buy when it happens and sell when it is reversed. The acid-test is, of course, how it has worked in practice. Looking at three leading equity indices – the FTSE 100, the DAX, and the Nasdaq 100 – the golden cross would clearly have been profitable between 1995 and 2013.
GOLDEN CROSS CHART
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In the case of the DAX, it produced six winning positions and two losers, and much better risk-adjusted returns than buy-and-hold. For the Nasdaq 100, it actually produced better returns than merely buying and holding, even before any interest earned on cash during out-of-the-market periods. Aptly enough, the golden cross has also done well in gold. Since 1995, buying upon golden crosses would have produced 959 points of profit in gold, compared to 818 points for passively holding gold. This would have involved five winning trades and three losing ones, with the former yielding more than three times the profit than the latter incurred losses. There is some merit in the golden cross, therefore.
What works in technical analysis
The Coppock Indicator Edwin Coppock was a Texan pioneer of technical analysis who came up with what he called his “Very Long Term Buying Guide” more than half a century ago. The idea behind it was to confirm when a bear market has ended and a new bull market is underway. The indicator – a 10-month weighted moving average of the sum of a market’s 11 and 14-month rates of change – gives a buy-signal when its reading has fallen below zero and then turns upwards. A silly rumour exists that Coppock chose the period lengths for the calculation based on advice from a clergyman as to how long parishioners took to get over bereavements. I have found no evidence of this in his writings, however.
“A silly rumour exists that Coppock chose the period lengths for the calculation based on advice from a clergyman as to how long parishioners took to get over bereavements.”
THE COPPOCK INDICATOR CHART
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Dominic Picarda’s Technical Take
In truth, the Coppock indicator is nothing more than a smoothed indicator of long-term momentum, which is an academically-proven source of returns. And, it works in real-life too. Buying the S&P 500 every time that Coppock gave a buy-signal and switching into interest-bearing cash every time it went negative would have produced a total return of 10.5% a year between 1871 and 2013, compared to just 8.9% for buy-and-hold.
S&P returns: Coppock vs Buy & hold
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Such a strategy would have beaten Germany’s DAX, Japan’s Topix and our own FTSE All-Share over time. It also worked for the Goldman Sachs Commodity Index, producing more than 1% outperformance of B&H each year, with only two-thirds of the volatility.
What works in technical analysis
The Hanging Man Since their arrival in the West about 25 years ago, Japanese candlesticks have become the most popular way of depicting price action on the charts. They tell us at a glance where a price started and ended a particular period, as well as where it made highs and lows. Some traders believe that certain combinations of candlestick patterns foretell reversals or continuation of a trend. These combinations have weird and wonderful names – adapted from Japanese – that include the “abandoned baby” and “three black crows.”
I must admit I do not make use of candlestick patterns myself. But despite the eccentric names that some of them carry, the logic behind them isn’t daft. It’s easy to see why a market that opens at fresh lows after a long decline and then closes dramatically higher on the same day represents a possible shift in the balance of power from the bears to the bulls, for example.
Recent FTSE hanging man The hanging man pattern happens during an uptrend in the market. It is formed as a result of the price dipping very sharply indeed during the course of a period’s trading, and then closing well above its lows, but also not far from both its opening price and the highs for the day. In the case of the FTSE 100, my algorithm identifies 41 hanging men since 1984. Twenty-five of these offered the opportunity to make a profit of at least two per cent at some point within the next 20 sessions, assuming one shorted at the open the day after the signal and was lucky enough to sell at the lows.
Eye-catchingly, a hanging man was seen ahead of the 1987 crash, a nasty slump in late 1997, as well as shortly before the worst declines of summer 2011. All told, though, only one in five signals was followed by a meaningful fall of five per cent or more. In isolation, therefore, the hanging man was not an especially useful guide for shorting the FTSE. It may be that it works better when combined with other objective tools, but I haven’t found them yet.
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Zak Mir Interviews
ZAk MIR INTERvIEWS A BIOTECHNOLOGY SPECIAL WITH ANDY SMITH OF MANN BIO Zak: How can an investor establish the difference between a “golden age” for an asset class and a bubble? I know people who have been renting in central london since the late 1990s on bubble fears and, clearly, they have missed out one incredible party; which are we in presently in Biopharma?
Secondly, expectations were for prices to increase continuously. Having seen the commercial execution and resultant profitability at the biggest biotech companies such as Gilead Sciences and Biogen Idec (both of which we hold), investors were more attracted to the (supposedly cheaper) IPOs to which they had greater access.
Andy: This is the perennial aspect about a bubble be it tulip bulbs or biotech. Firstly, we need to distinguish between biotech and pharma: biotech has recently had a bubble, pharmaceutical companies have not. Pharmaceutical companies are still emerging from the patent cliff (when the patents on their blockbuster drugs seemed to expire at the same time, and investors blamed them for not flagging sooner and not addressing that issue), whereas the share prices of most biotech companies bubbled-up over the last eighteen months as generalist investors flooded into the sector with the momentum of a herd chasing the latest best-performing investment idea.
The greatest irony of this last biotech bubble is that a new biotech IPO is likely never to have profits like their much bigger cousins, and highly likely to reward their investors with a string of clinical failures – just look at Antisoma, Renovo and British Biotech in the UK. In addition, I’ve long expected that the reason why many generalist investors transient to biotech has nothing to do with anything as prosaic as the probabilities of clinical trial success or even free cash flow, but the anticipation of their biotech company being acquired by a big pharma company. This hasn’t really happened since 2011 when Genzyme was acquired by Sanofi (which we hold) as (another irony) the generalist investor had pushed the prices of biotech companies above levels that price-sensitive pharma companies were prepared to consider. Instead, generalist investors sat there in biotech and had to watch most of the merger and acquisition (M&A) transactions going on in different sectors – generics and specialty pharma, as typified by Actavis’s acquisition of Forest Laboratories (both of which we own).
Three things characterised the recent biotech bubble. Firstly, the weight of money that drives the stock prices is generalist and not specialised in the sector. This is possibly a definition of a momentum investor, but, in this most recent bubble, the generalist investor is not familiar with the risks and fundamentals of drug development, regulation and commercialisation. As such, when something occurs that they are not expecting, like a drug failure, their exit response is quite acute.
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The last aspect of a bubble that academic writers refer to is when investors engage in highly speculative behaviour.
A biotechnology special with Andy Smith of Mann Bio
Andy Smith PhD MBA – has spent 20 years at the top of Biotech, first at Smithkline Beecham from 1994, culminating as its Global Brand Manager by 2000. Since then he has managed the global biotechnology investment fund of SV Life Sciences, Global Equities at Schroders Portfolio Manager for AXA, and the Framlington Biotech Fund from 2008 to 2010. All this adds up to a 10 year demonstrable track record with the VC P&L showing that £11m invested would have returned £24m to date. He joined Mann Bioinvest in November 2012 as its Chief Investment Officer.
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Zak Mir Interviews
There is nothing more speculative than an early-stage loss-making biotech IPO in a new and unproven area of science, and this is the third time I’ve seen gene therapy, stem cells and systems biology companies come to the market, and both times before they’ve disappointed. Zak: You have been quoted as saying that as far as the biopharma party is concerned that “the sirens of the cops” have yet to be heard. Still, hasn’t the music already started to be drowned out by the sky high valuations we see and the IPO boom in recent weeks? Andy: Absolutely, we’re past that point now and the blue lights are flashing outside and the scene is of crime officers now poking around the aftermath inside. Valuations have come off significantly in the last month and the NASDAQ Biotech Index is firmly in negative territory for the year. We started cutting our biotech exposure in February and have moved to underweight biotech with respect to our index after three sets of sales of our biotech holdings. So we left the party sometime ago and I expect biotech to continue to trade off as the generalist investor continues to rotate away to either cash, or the next momentum sector. Why did this happen? It was started by the House of Representatives’ letter to the CEO of Gilead Sciences (which we hold) asking why the price of their new drug for the treatment of hepatitis C virus (HCV) infection was so high.
“You have been quoted as saying that as far as the biopharma party is concerned that “the sirens of the cops” have yet to be heard. Still, hasn’t the music already started to be drowned out by the sky high valuations we see and the IPO boom in recent weeks?”
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Arguably, there are more expensive biotech drugs and I expect that this ‘the emperor has no clothes’ moment to pass, but the damage has already been done and sector rotation is underway. Biotech is always an uncorrelated (to the broad market because of its defensive and growth characteristics), but a high beta sector, so those recent IPOs have seen the biggest falls. Zak: If 2013 was the equivalent of 1999 in so far as the Dotcom Bubble is concerned, does this mean that if we are now at or near a peak in your sector, new investors will likely have to sit it out for years until fresh opportunities are presented at cooler valuations? Additionally, is doing nothing and sitting on your hands sometimes the most difficult thing for an investor of any kind to do? How do you address this issue? Andy: This is what I expect now. Whilst previously we were asking ourselves when the bubble would burst, we’re now asking ourselves how long the sell-off will go on for. My guess is many months yet. Fortunately, we plan to sit out the biotech sector in a significantly underweight position (although not zero since a good earnings’ season is expected, subject to currency translation of sales, amongst the big profitable biotechs), but do not have to do nothing as you suggest, if doing nothing is sitting in cash. Our fund can invest in branded pharma, generic pharma, specialty pharma, medical devices and diagnostics so our investors don’t pay us to sit in cash for long; they pay us to give them life science exposure which we can do even if biotech is in a down-cycle. My first Managing Director at 3i Asset Management told me that investment management is one of the few jobs where you can do nothing in a day, as you put it, by holding your stocks rather than buying others or selling your holdings. There is obviously nothing wrong with holding the right thing, like generic and specialty pharma, but there is if you do nothing and continue to hold a lot of biotech when their world is crashing around them. This is the job that we are paid to do – to be an active manager. Zak: You are clearly a high-flyer in terms of the expertise you have in Biopharma and what you are doing at Mann Bio, but would it be true to say that most people with your background would be happiest wearing a white coat and hanging out with test tubes, rather than exposing themselves to the volatility of the financial markets and the scrutiny of investors. Could you describe your journey to us?
A biotechnology special with Andy Smith of Mann Bio
Andy: Yes, few people with both scientific and commercial pharmaceutical experience make it out into investment management. I can’t read a geological survey and have never worked in an oil refinery so I don’t manage money in the resources sector; I think investors should assess their fund managers’ experience in the sector when they look to give them their money to manage. I made the irrevocable step from R&D when I left SmithKline Beecham (SB) to do an MBA in the 1990s and then returned to the commercial group at SB Pharmaceuticals. The commercial assessment of drugs, the hands on management of a pharmaceutical product and the training in the valuation of new pharmaceutical products are jobs that forced me away from pure R&D to the different world of commercial pharmaceuticals. But those experiences, way of thinking and behaviours were the most valuable for a specialist fund manager and they colour my investment decisions every day. If you’ve only worked in the lab, or worse still came straight into investment management as a graduate trainee, how on earth can you know what you’re investing in?
“The most common rooky mistake is to be attracted to the science in a biotech company alone without any assessment of the regulatory, commercial or clinical prospects.” Andy: The Human Genome Sequencing Project was not an expensive hollow egg, so much, although it was very expensive. Today it costs a few thousands of US dollars to sequence a genome, so it’s not that expensive anymore, but the real issue is what is done with that data. It has taken more than ten years for those sequences to be developed into drugs, but still many aspects like germ line engineering and even gene silencing are still many years from prime-time commercialisation and may never get there. The most common rookie mistake is to be attracted to the science in a biotech company alone without any assessment of the regulatory, commercial or clinical prospects. This is the naivety of most investors that you mentioned, and this is why they need a specialist manager with that experience to manage their life science exposure for them. Zak: Clearly, the USP of any fund manager in any sector has to be the ability to sniff out the best opportunities at whatever part of the cycle we are at. What would you say is the edge Mann Bioinvest has? Is there a risk that this edge only works in the “good times”?
Zak: When I think of Biopharma, I think of the Human Genome Project (an expensive hollow egg?), gene splicing and so a subject matter which is arguably something which makes rocket science look simple! Is it appropriate for most investors in this field of investment to get involved when it is likely that 90% of what they are investing in they could not possibly understand?
Andy: No, there’s no edge that only works in good times because you do different things in good times and bad. Quality portfolios out-perform over the long term, and this is another characteristic that academic writers suggest is the mark of a bull market – where low quality assets out-perform high quality assets (the most risky and tenuous investment propositions that can be exemplified by the recent rash of biotech IPOs). Our edge at Mann is nothing surprising; it’s that hands-on experience of things going wrong within the sector in which we manage funds, so that when we see those mistakes coming in potential investments, we don’t invest.
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Zak Mir Interviews
“From my perspective, having followed the UK stock market on a day-to-day basis for more than 25 years, for many private investors, getting involved in the biotech space in this country has been something with all the allure of a mix between a trip on the Titanic, a journey through the Bermuda Triangle and an Elephants’ Graveyard!” It’s also seeing as many companies as we can, because when you see a good investment prospect it’s obvious and distinct from the hundreds of other non-prospects that you’ve already seen. We also see as many companies as you can because you almost always learn something relevant to one of your investments, or a competitor to one of your investments. So the aspect of sniffing out the good investments works in good and bad times, but the allocation and the risk appetite within a diversified life science portfolio will differ in these two periods. Zak: From my perspective, having followed the UK stock market on a day-to-day basis for more than 25 years, for many private investors, getting involved in the biotech space in this country has been something with all the allure of a mix between a trip on the Titanic, a journey through the Bermuda Triangle and an Elephants’ Graveyard! Why has the experience generally been so bad, and how does Mann Bio address this? Andy: You’re right, and I’ve thought about this Elephants’ Graveyard many times over the years. First off, in the UK we were late to the biotech party compared to the US, so the management at US companies has many more years’ experience of growing small companies to profitability and with M&A than we have in the UK. There is also a broader base of investors in the US who have made good money out of biotech. In the UK, one of our problems in biotech is the management of our companies.
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The archetypal UK biotech CEO has either recently retired from pharma where their most recent experience was of polishing the rubber plant in their office while their reports go on with managing the products. The other error we have in UK biotech management is appointing CEOs or board members who are accountants who can’t recognise when their own company is technically insolvent, when their prime objective is not enhancing shareholder value but increasing the value and duration of their remuneration package. This is why we see so many companies because we need to ask the questions and hear the answers that distinguish the CEO of Renovis from the CEO of Acambis (the former failed and I never held, whilst that latter was acquired by Sanofi and I held). Zak: Jim Mellon has said that investing in biopharma has much in common with investing in mining. While this makes it easy to understand the rewards, could such an analogy put off some investors who might be fearful of getting caught high and dry, so to speak, in a similar Gold Rush? Andy: Yes, investors should be put off from the risk of a mine coming up empty when they invest in biotech stocks directly. They are better served by investing in a fund where the managers have hands-on experience of the sector, of specialist investment management, and run a well-diversified portfolio. Only in this way can you attempt to avoid the losing investments (dry wells) and reduce the effect of the ones that do come up empty. Zak: If there is just one sector of biopharma we should be investing in, what is that? Andy: There is no one sector of biopharma since new breakthrough drugs can come at any time to any therapeutic sector. Saying that, for the rest of this year, we’ve positioned the portfolio to take advantage of cancer immunotherapy, where the first PD1 inhibitor will be approved; lipid lowering, where the PCSK9 inhibitors are in late-stage development; and HCV antivirals. Zak: Is biopharma essentially a play on an ageing population, or is it about finding magic bullets for all the important afflictions such as cancer, diabetes and, of course, male pattern baldness (the latter a subject close to my head!)? Shire Pharma (SHP) seems to have made a niche for itself in “curing” the most obscure diseases, rather than the most common, and does this imply for investors that the most money is to be made following “one trick pony” groups? Cat allergy group Circassia also comes to mind in this respect.
A biotechnology special with Andy Smith of Mann Bio
Andy: Yes, the fundamentals of aging populations in developed and developing markets are very important for biopharma and linked to many of the indications you suggest since the older you are, the greater the chance that you will suffer from those diseases. Shire (which we hold) seems to be undergoing a radical transition under its new CEO with good senior people leaving the company, which is a concern for us. Human resources people talk about employees as a company’s biggest asset, but the wrong employee in a senior position can be the company’s biggest liability. I’m afraid Circassia will be a failure since there are life-saving drugs that should be reimbursed by central healthcare systems, but aren’t because they are too expensive for many European governments. Enter Circassia for a cat allergy vaccine, not a life-saving therapy but a lifestyle therapy which competes with over-the-counter medicines available in chemists or an alternative for just getting rid of the cat. No government will pay for this, and while Viagra was a commercial success, arguably the therapy benefitted more than just the patient, it was an oral tablet. Circassia’s cat vaccine is a series of injections and is destined as a significant out-of-pocket expense. Zak: I have read that the golden age of antibiotics has come to an end, and in some respects we may be going backwards in terms of this particular battle which revolutionised world health from the time of the Second World War. Is this a temporary blip in your opinion, or are we correct to assume that, given enough time, Biopharma will always find an answer – AIDS may be an example – and hence the investor can generally prevail in a positive way?
The trouble is that after fifty years of modern medical discoveries, there are good, cheap (generic) and effective therapies for urinary tract infections, acne, and fungal nail infections so why develop a new one for a tiny number of resistant infections. It’s also harder to get the therapeutic index right since the first anti-infectives were highly active and non-toxic. As you increase the activity, or spectrum of anti-infectives, you run the risk of having a more toxic molecule. So our success in the golden age just raises the bar for future advancements. There will, however, be further product approvals in anti-infectives, just look at HCV which now has direct acting antivirals where a few years ago there were none. It’s just that the post-golden age is harder and will be associated with fewer drug discoveries that have to be balanced with higher toxicities. Zak: Finally, it is difficult to read about Biopharma without reading the “boom/bust” phrase. What proportion of a portfolio should an “average” investor have in this part of the market, in your opinion? Andy: There isn’t an average investor in the same way as there isn’t an average fund manager. In addition, we can’t market time ahead of boom and bust cycles, but just respond to them when we recognise them. Bearing in mind that the biopharma sector has the growth and defensive characteristics that we’ve talked about, I would say that most investors should have some exposure to the sector within a well diversified portfolio that covers the range of asset classes. However, few investors should be as aggressive as me, whose only equity exposure is to the Mann Biopharma Income fund, but, then again, I do know the manager quite well.
Andy: I agree that the first golden age of antibiotics came to an end a few years ago, but the golden age of cancer immunotherapy may be upon us.
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World Cup 2014 Spread Betting Preview
World Cup 2014
Spread Betting Preview
Brazil 2014 will be a fantastic spectacle. England may be the ‘home of football’ but it’s Brazil that has mastered it. The Samba Boys are looking for a sixth World Cup, and with home advantage they are expected to deliver.
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World Cup 2014 Spread Betting Preview
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World Cup 2014 Spread Betting Preview
Sporting Index has Luis Felipe Scolari’s men as favourites on their Outright 100 Index. Unlike fixed-odds bookmakers, Sporting Index offer bettors the chance to predict where a team will finish. 100pts are awarded for winning, 75pts for runner-up, 50pts for semi-finalists, 25pts for quarter-finalists and 10pts for losing a last-16 tie, in addition to separate Group Indices. Brazil are trading at 47-50. That means traders believe the hosts will reach at least the semi-final. Realistically, England (16-19) are hoping to make the quarter-finals, but even that will depend on Roy Hodgson’s tactics. Italy look beatable in the opener, but I fear a cautious approach will see them playing for a draw.
As the competition progresses, each side will see its quote go up or down depending on results. It’s possible you could buy a team at 12 and then cash them out for 32 should they reach the quarter-finals, making a nice profit of 20 times your stake.
“Sporting Index will be providing a Grade A service on all World Cup games featuring the bigger sides. That means you’ll have around 600 markets to choose from in each match.” There are enough reasons to take on Brazil. Firstly, how will they cope with the pressure on home turf? The last time they hosted the tournament in 1950 they were hot favourites but lost to Uruguay in the final in front of a partisan crowd of 174,000. It’s also not a vintage Brazilian side. They were impressive when winning a third successive Confederations Cup last year, but Spain, who they beat in the final, looked tired and it would be wrong to read too much into that 3-0 victory. Much of their squad is unproven in European football, and their star striker Neymar has endured a frustrating first season at Barcelona.
The Three Lions then face classy Uruguay next, and defeat there could leave them needing to score several versus Costa Rica to have any chance of progressing. The best bet regarding England could be to sell their total team goals – they mustered just three four years ago. The Outright 100 Index offers punters great value. Shrewd form students will be looking at teams in easy groups that have the potential to sneak into the latter stages, where they can be cashed out to secure a profit.
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They should top a group containing Croatia, Cameroon and Mexico, but look likely to face Spain or Chile in the next stage and both could cause serious problems. I wouldn’t be confident in selling at 47, but there’s little appeal in buying them at 50. Chile look real dark horses. They play an exciting brand of football and finished third behind Argentina in qualifying, with the second highest goals total. They were poor defensively, but Jorge Sampaoli will be sure to tighten things up ahead of the big one.
World Cup 2014 Spread Betting Preview
They could beat Spain, who look vulnerable in search of an unprecedented fourth straight major title, in their group meeting. No European side has ever won a World Cup in South America, and most of their squad, taken largely from Barcelona and Real Madrid, have had long seasons.
The Argentineans are two-time winners. Conditions will be perfect for them and they have been given a gift of a group with Bosnia-Hercegovina, Iran and Nigeria.
Fellow Group B opponents Netherlands head to Brazil after an almost flawless qualifying campaign. Capable of delivering sublime football, they are equally likely to self-implode if conditions are not in their favour. Topping Group B would be a major bonus for Chile as they would avoid Brazil next and would then have every chance of making the last four, facing one of these likely opponents: Uruguay – who they beat in qualifying – Italy, England or a Colombian side likely to be missing their best player Radamel Falcao. There’s value in buying the Chileans at 12, especially knowing losses will be restricted if they get out of their group.
Their prolific attack should be supported, so get with them in the team total goals market. Messi is likely to be popular on the Golden Boot Index, but Aguero has been sensational this season when not injured, and he could be the one to buy, assuming he arrives fit.
The other team to have onside is Argentina. They have seen support recently and are trading at 44-47. Any team that is going to leave out Carlos Tevez from the squad because of riches up front needs respect. Lionel Messi, Ezequiel Lavezzi, Angel di Maria, Javier Pastore, Sergio Aguero – who needs a defence with that attack?!
Sporting Index will be providing a Grade A service on all World Cup games featuring the bigger sides. That means you’ll have around 600 markets to choose from in each match. Even fixtures with smaller nations will have 250 markets and that’s alongside hundreds of long-term markets which will be constantly updated throughout the competition. There really is something for everyone so sign up today and start enjoying the most exhilarating and wide-ranging World Cup betting experience out there. Open an account, place three bets on any markets risking £20 and you can claim a free £200 total goals bet when you quote SBMAGAZINE.
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Dominic Picarda’s Technical Take
Dominic Picarda is a Chartered Market Technician and has been responsible for the co-ordination of the Investor’s Chronicle’s charting coverage for four years. He is also an Associate Editor of the FT and frequently speaks at seminars and other trading events. Dominic holds an MSc in Economic History from the LSE & Political Science.
Dominic Picarda’s Technical Take bonus You’ve most likely never heard of Jack Schannep, an 80-year-old former Morgan Stanley stockbroker who runs an investment newsletter service from Tucson, Arizona. However, you’ll almost certainly have heard of some of the people whose record of timing the US stock market he’s soundly beaten in recent years. They include Marc Faber, Jeremy Grantham and Jim Cramer. Only the billionaire investor Ken Fisher has consistently ranked higher in a long-running study of Wall Street gurus. So, what’s the secret of Jack’s market-timing success? Actually, it isn’t a secret at all. Jack and his son Bart, with whom he co-authors his monthly report, are the world’s leading authorities on the Dow Theory, a branch of technical analysis that has been around for more than a hundred years. Applying the Dow Theory in the way Jack set out in his book “Dow Theory for the 21st century” would have turned an initial stake of $10,000 in December 1953 into more than $23m by July 2013, a compound annual return of 13.7 per cent. The Dow Theory was thought up in the late nineteenth century by Charles Dow, the father of the Dow Jones indices and founder of the Wall Street Journal.
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Dominic Picarda’s Technical Take
“Applying the Dow Theory in the way Jack set out in his book “Dow Theory for the 21st century” would have turned an initial stake of $10,000 in December 1953 into more than $23m by July 2013, a compound annual return of 13.7 per cent.”
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Dominic Picarda’s Technical Take
He believed that comparing the behaviour of the Dow Jones Industrial Average with that of the Dow Jones Transportation Average gave valuable clues about the state of the direction of the US economy and stocks. Specifically, he thought that the indices should ideally confirm each other’s movements.
As a result, there has traditionally been quite a bit of ambiguity about its methodology, which has often resulted in different Dow theorists drawing contradictory conclusions about where the market was heading. Jack Schannep has solved this by firming up the rules, ridding any need for subjective judgement to be applied.
Unfortunately, Charles Dow never actually wrote a definitive guide to his principles. Instead, his followers inferred his theory posthumously from his many years of editorials in the Wall Street Journal.
Dow Theory Trends
“onE oF jack scHannEp’s grEatEst contrIbutIons Has bEEn to EstablIsH a Hard-and-Fast rulE. to QualIFy as a sEcondary rEactIon, at lEast two oF tHE s&p 500, dow IndustrIals and dow transports must movE at lEast 3% In tHE otHEr dIrEctIon to tHE trEnd.”
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Dominic Picarda’s Technical Take
The Dow Theory works by identifying the current primary trend on Wall Street. The primary trend is a major move in the indices, made up of successive higher highs and lows, always using daily closing prices. During a primary uptrend, investors should obviously be invested in the stock market, but then switch into interest-earning cash when a primary downtrend begins. Buy- and sell-signals happen when the trend shifts from downwards to upwards and vice versa. This begins by way of a “secondary reaction” within the primary trend.
A secondary reaction is what we’d call a pullback in an uptrend or a bounce during a downtrend. Traditionally, the Dow Theory was a bit vague about what this really meant. One of Jack Schannep’s greatest contributions has been to establish a hard-and-fast rule. To qualify as a secondary reaction, at least two of the S&P 500, Dow Industrials and Dow Transports must move at least 3% in the other direction to the trend. What’s more, the move must last at least 10 calendar days on two of the indices, or an average of eight trading days across all three.
Sell Signal 2011
Once a secondary reaction has been confirmed, the indices can either resume trending in the primary direction or change trend altogether. Once again, Jack has set out precise rules for this. In a bull market, for example, one of the three indices must bounce by more than 3% over at least two days following its correction. After this bounce, if the S&P and either one of the Dow indices then falls below its correction-lows, a Dow-theory sell-signal is given.
What does it mean when the Dow Theory gives a sell-signal? In Jack’s research, the Dow Industrials have ended up falling on average by another 10%. And, two-thirds of signals since 1957 have led to US recessions. Clearly, then, not every signal is a winner. In each of the last three years, a Dow-theory sell-signal has happened around the end of a decline. However, since these dud signals were soon reversed, investors would not have lost out significantly over time.
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Dominic Picarda’s Technical Take
Looking for confirmation
chart - ?.
As of mid-April, the primary trend on Wall Street was still upwards. However, the markets have also entered a secondary reaction against that uptrend, with all three indices having dropped by more than 3% from their highs, and all three having then bounced by more than 3%. If all three indices go back above their last highs, the bull market will be “in the clear.” But if the S&P and one of the two Dow indices close below their recent lows, a sell-signal will occur. Jack Schannep’s record of market-timing success with the Dow Theory bears an important lesson for traders and tactical investors: simple is very often better. You don’t need a hedge-fund algorithm or the finest team of fundamental analysts in order to make winning returns over time. Instead, you just need to follow clear, objective rules of when to buy and sell – and do so consistently. The Dow Theory has been a great guide to Wall Street for some 120 years. And, thanks to Jack’s refinements, it’s working out better than ever.
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“Jack Schannep’s record of market-timing success with the Dow Theory bears an important lesson for traders and tactical investors: simple is very often better. You don’t need a hedge-fund algorithm or the finest team of fundamental analysts in order to make winning returns over time.”
Don’t miss out!
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Zak Mir’s Monthly Pick
ZAk MIR’S MONTHlY PICk Buy Silver: Above $19 Targets $26 Recommendation Summary:
Technicals:
Rather interestingly, and my own contribution notwithstanding (!), there would appear to be some first rate research presently doing the rounds regarding silver. Even the recent Goldman Sachs/Vampire Squid “Neutral” call on gold and silver equities may be reluctantly included in this comment. Horror of horrors!
From a charting perspective, it is probably safe to suggest that even the greatest fan of technical analysis and similarly the greatest fan of silver would both concede that there have perhaps been better or easier times to make a bull call here. Indeed, it could very well be that almost any time in the recent past would have been more propitious in this respect.
Perhaps key from the perspective of a technical analyst is not only how we have the fundamentals very much in the ascendency, but that it is very much the most fundamental aspects, namely the supply/demand and costs involved in mining, which are currently coming to the fore. This may unfortunately mean that timing a new move to the upside for the metal may continue to be problematic. However, we have some comfort from the possibility that when the move to the upside begins, we can be all the more confident that it will be more significant given the substantial forces likely to be unleashed on the bears. If you add in the way that silver is much more geared to industrial/economic factors than gold (where we are at the mercy of geopolitical factors that can come and go like the wind) and the metal seems to be positioned towards the floor of a nightmare decline (for the bulls) which many have perhaps suffered unfairly at the hands of, until now; this state of affairs where the bulls are on the back foot does not look as though it can continue for much longer to me given the fundamental, and indeed, technical backdrop. On this basis, the call of a $26 price target may actually be a conservative one, something which for the purposes of this monthly pick, should it come to pass, will serve us well.
Looking at the daily timeframe, it can be seen that the metal is hovering/teetering along a line of support from June last year at $19.24. It does not help that the RSI is at 33, and not yet oversold, or that all the main near-term moving averages – the 10, 20, 50 and 200 day lines – are currently falling. This would suggest to me anyway that would-be bargain hunters have the option of going long towards the 11 month uptrend line, with an end of day close stop loss ideally at the $18.69 December intraday low. Ironically, just about the best aspect here is actually not in the price window – where we are hoping that support will magically emerge towards $19 – but the RSI oscillator window, which is backed by an extended uptrend line which has been multi-tested since April 2013. This is the type of feature which should, but does not necessarily have to, provide the momentum for a significant turnaround. The ideal scenario is that it will not be broken significantly in the near term and lead to a clearance of the late March support at $19.58 as the first sign of recovery here. An April 2013 resistance line retest at $26 would then be the two to three month target.
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Zak Mir’s Monthly Pick
Recent Significant News:
Supply
April 22nd: Goldman Sachs is becoming more constructive on gold and silver equities and as a result is raising their coverage view to Neutral.
During the third quarter of 2013, silver mining costs averaged $21.39 per ounce. This means that at its current price, $19.37, miners are losing money on every ounce they pull out of the ground. Common sense dictates that this is unsustainable, and will lead to a reduction in silver exploration, capital expenditure and likely the insolvency of a number of smaller miners. Such events will inevitably lead to a contraction in the supply of silver.
Analyst Andrew Quail said: “After underperforming the SPX by 21% since September 2013, gold and silver equities now appear more fairly valued, offering an average 7% total upside. We raise our coverage view to Neutral as we believe (1) more responsible capital allocation, (2) successful cost cutting initiatives, (3) a refocus on maximizing free cash flow, and (4) sound strategic portfolio optimization should improve the positioning of our companies offsetting our below-consensus outlook for commodity prices (we forecast $1,200/oz for gold from 2015 onwards).” The firm is upgrading Barrick Gold Corp. (NYSE: ABX) to Buy, while initiating coverage on five others. www.streetinsider.com April 21st: A Silver Reversal Is On The Cards (www.capitaltrustmarkets.com) Key Takeaways: • Silver is approaching key lows • During 2014, demand for silver will increase as the US economy recovers • Concurrently, silver supply will contract as long as silver miners lose money Demand In essence, it all comes down to supply and demand. Unlike that of gold, the vast majority of silver demand derives from industrial production. Silver is used in a huge range of products varying from consumer electronics to medical instruments, and, as such, its value is much more responsive to changing economic conditions than the value of gold. All signs point to an economic recovery in the US. In the past four weeks, inflation, employment, retail sales and output data have beaten expectations, and Fed Chair Janet Yellen has repeatedly hinted at an aggressive tightening of US monetary policy to coincide with economic expansion. While initially this may cause an outflow of capital from the safe-haven metals to the US dollar, increased output in the US will inevitably boost silver demand. With industrial and investor demand at a ratio of three to one, the boost in industrial demand will outweigh any risk-on outflow.
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“During the third quarter of 2013, silver mining costs averaged $21.39 per ounce. This means that at its current price, $19.37, miners are losing money on every ounce they pull out of the ground.” Projections In short, demand for silver is likely to increase over the next six months while supply simultaneously contracts – a scenario with only one outcome: rising silver prices. Fundamentally then, expect 19.096 support to hold and initiate a medium-term correction. A break above an initial upside target at 20.384 would suggest a longer-term upside reversal, and validate 21.31 as a secondary upside target. April 21st: The Dark Side Of The Silver Mining Industry, by Steve St. Angelo (www.marketoracle.co.uk) There is an insidious ‘Dark Side’ to the silver mining industry that goes unnoticed by the majority of investors and analysts. Actually, I haven’t come across one mining analyst who puts out comprehensive data on this very subject. According to my figures for 2013, the top primary silver miners suffered the lowest average silver yield ever. Thus, the top miners shed another half ounce of silver yield... falling 6% in 2013. The top primary silver miners’ average yield declined 41% from 13 oz/t in 2005, to 7.6 oz/t in 2013. Declining ore grades are the ‘Dark Side’ of the mining sector because the industry would rather not advertise its impact on the cost of producing silver.
Zak Mir’s Monthly Pick
Even though the average silver yield only declined 41% since 2005, the amount of processed ore increased 65% from 9.4 million tonnes in 2005 to 15.5 million tonnes in 2013. Not only has the amount of processed tonnage increased to produce less silver in 2013 compared to 2005, the costs of energy, labour and materials have doubled or tripled during the same time period. Using Fresnillo as an example, the company added 1,200 more workers since 2009 to maintain silver production at the same level. In 2008, Fresnillo produced an average of 23,200 ounces of silver from each worker, but by 2013 this figure fell to 12,832... Yes, nearly half. Falling ore grades and yields are impacting all mining companies. It will become more expensive to produce silver in the future as ore grades continue to decline while costs of energy, materials and labour increase. For those analysts who believe the price of silver is heading lower in the future, the falling yields and increased costs will prove otherwise.
Fundamentals: I have to confess, it is usually the fundamentals of gold that provide the greatest stimulation to me among the precious metals, if only on the basis that as well as “home grown” fundamentals in the ground, there is normally a geopolitical element at work. As far as silver is concerned, there can occasionally be some “fright” buying, but usually we are looking at a relatively straightforward market where many of the variables of a predominantly industrial-use metal can be anticipated. What I have found to be standouts in the near term, however, are a couple of articles on silver which appear to make the bull argument even more compelling than at any other time in recent years.
This is from the perspective of a chartist for whom such information/research is usually regarded as being superfluous! The key points to note currently are: how the decline in yields for the key players in the silver industry has been over 40% throughout the 2005-2013 period and how this has been kept quiet. Additionally, we are now at a $2 discount to production costs towards the $19 zone where the metal is slowly drifting to. Clearly something has to give, and one would expect that as soon as one of the parties does snap in terms of pricing, the rest will follow suit. The cliché that this sector is running-to-stand-still has given way to it running-in-order-to-produce-less. Indeed, it could be argued that producers look to have been as badly wrong footed over pricing in the wake of the bubble for gold bursting in 2012 as retail investors were and have been scrambling to regroup ever since. While actions such as cost cutting will have helped, such a process has had plenty of time to reach completion. Therefore, the brave face approach has been to produce more in the hope that the market will turn via some magical catalyst. The only plan that is likely to work is that of raising prices, and this is a scenario which is set to occur within months. The ideal route to this would be that QE Tapering is delayed with an added boost to the US economy, and/ or we see new QE in the EU which means that recent kneejerk marking down of precious metals’ prices proves to be an over-reaction. I am a bull here.
May 2014
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Fund Manager in Focus
SBM FOCUS ON
James Simons of Renaissance Technologies By R Jennings CFA, Titan Inv. Partners, & Filipe R Costa
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James Simons of Renaissance Technologies
James Simons, aka “The Code Breaker”, “The Quant king”, or simply “Jim”, is a man that deserves the attention of SBM readers, not only because of his past performance as a fund manager but also because of his unique fund management methods. Simon’s own approach to money management adhere to the higher standards in investment management and do not seem to have him entangled in so called “expert networks” and their like that have put some of his erstwhile contemporaries in the spotlight in recent years (naming no names!!). He has in fact proven that both theory and practice are not two separate things, and that when correctly mixed, with the appropriate amount of discipline, they make a formidable element of an investor’s armoury.
“wHat HE probably couldn’t EvEn drEam about at tHE tImE was tHat a FEw dEcadEs latEr HE would bE sIttIng In tHE ForbEs world’s bIllIonaIrEs’ lIst at posItIon 87 wItH a nEt wortH oF $12.5bn.”
The math genius that solved several geometry puzzles and “broke the code” at the NSA (National Security Agency) has well and truly positioned himself as the “Quant king” due to his cutting-edge trading models. Having delivered a stunning 35% net annual return to investors over the last 26 years, and in fact, even more impressively, barely showing a negative quarter, the “flagship” fund created by James Simons and given the name “the Medallion fund” certainly deserves its name, given the many honours and accolades this decorated fund manager has received.
An Investment genius While Simons was solving tough geometry puzzles at university, he was probably already thinking about his future and applying these quantitative skills into whole new ventures. What he probably couldn’t even dream about at the time was that a few decades later he would be sitting in the Forbes World’s Billionaires’ list at position 87 with a net worth of $12.5bn. In fact, when we refine the billionaire’s list to just the investment industry, Simons appears in 8th position, just behind the “Subprime King” John Paulson.
Born in 1938 in Massachusetts, Boston, James Simons quickly found his way into science, engaging in a bachelor’s degree in maths at MIT, which he completed at the age of 20. He then proceeded with his studies completing a further PhD in maths, but this time at the University of California, Berkeley. Simons’s capacity with figures was undeniable as he was able to complete his thesis in just two years. It seemed that the world of academia was laid open for him, and so he started teaching at the MIT, although leaving within a year to become an assistant professor of maths at Harvard.
May 2014
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Fund Manager in Focus
While the passion for maths kept him inside academia for a while, the desire to earn real money led him out into the wider commercial world. He was invited to work at the Institute for Defence Analysis (IDA) at the NSA. The job was about deciphering data, a task in which he excelled so much that the nickname “The Code Breaker” was first attached to him. While the job didn’t last for long, Simons in fact being fired over a “dispute” with the President of IDA, it was here that he met several key people who would join him later on in his entry into the world of financial markets. So, as the IDA’s door closed, another was about to open… Stony Brook University was in the process of trying to re-organise its maths department and decided to hire Simons for the task. Jim threw himself into the role, completing outstanding work and in the process creating one of the best and most prestigious geometry groups at that time. But again, it seems that frustration with unsolved math problems and the desire to start his own company led him into a whole new venture.
A few years before, Simons and some friends made an investment in a Colombian factory that paid out the princely sum of $600,000. What was his stroke of real luck, however, was they decided to invest these proceeds with a chap by the name of Charles Freifeld.
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That decision changed Simons’s life, as in just seven months Freifeld returned them $6m – an incredible ten-fold increase on their initial investment due to a bet on sugar futures that played out very nicely indeed thank you very much! With some decent seed money in his pocket, Simons founded a firm called Monemetrics, the predecessor of the hedge fund business that would become Renaissance Technologies. The seeds of an empire were being planted and which would ultimately turn Simons into one of the richest men on the planet and overhaul various aspects of the hedge fund industry…
The Path to Renaissance Technologies Being a man with a maths background, one could be forgiven for not expecting Simons to turn into a macro analyst, and of course he didn’t. In fact, from the very beginning, Simons was concerned with building a new trading model, one able to explore profitable opportunities with purely quantitative methodology. He was looking to create a systematic way of trading the markets, and with that goal Simons hired one Leonard Baum, a code cracker and, surprise, surprise, a former fellow from the IDA who had developed probabilities models that could be applied to several fields. The initial task was to test the system as a way of effectively trading currencies. To pursue this, Simons also added James Ax to his team – another ex-colleague, but this time from the maths department of Stony Brook.
“In fact, from the very beginning, Simons was concerned with building a new trading model, one able to explore profitable opportunities with purely quantitative methodology.”
James Simons of Renaissance Technologies
Initial tests on the systems played out successfully and Ax confirmed the applicability of the model not only to trade currencies but also to trade many other products such as commodities. That moment marked the beginning of what would turn into one of the most successful hedge funds ever – the Medallion fund – which was formally created in 1988 after many investors asked for a fund based on these algorithms and where they could put their money. Unfortunately, and as many traders can attest, the “back testing” did not play out to plan in the real market environment with the trading model delivering a 30% drawdown during 1989, and which put Simons and Ax on a collision course with Ax leaving the company. It was obvious at that time that the model was in need of a major tweak. Again, Simons pushed for another fellow from Stony Brooks to help him overhaul the system. He convinced Elwyn Berlekamp to join his business and Berlekamp worked for almost a year on the Medallion models assuming Baum’s past position. At the end of 1990 Medallion returned to profits and recorded a cracking 56% gain. Berlekamp had completed his mission. We do not know what Berlekamp and Simons implemented (wishful thinking!), but whatever they did, it was certainly the right thing with the Medallion going on from that point to be one of the most successful funds ever.
“In 1994, wHEn most Funds wErE HEadIng soutH aFtEr tHE FEd IncrEasEd Its kEy Funds ratE From 3% to 5.5%, mEdallIon rEcordEd a 71% rEturn.”
While Simons was willing to continue his new foray into finance, Berlekamp seemingly wasn’t happy with his new world and returned to campus stating at the time, “…most people in this business [fund management] are pretty dollar-centric. It makes for a dull life”. He’s probably right! Even without Ax and Berlekamp, however, Medallion skyrocketed into spectacular investment profits. It earned 40% in 1991, 34% in 1992 and 39% in 1993. In 1994, when most funds were heading south after the FED increased its key funds rate from 3% to 5.5%, Medallion recorded a 71% return. This is the true test of a hedge fund – can it make money in a down market, and Simons silenced all critics at this point. In 2000, with the tech bubble bursting, most fund managers were looking for ways to cut on losses, but, yet again, Medallion recorded its best ever performance, pumping out a 98.5% return this time. The impression that Medallion was relatively uncorrelated with the market had been created, and the money began to flow in from institutions keen to reduce their overall risk profile while not sacrificing profits.
May 2014
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Fund Manager in Focus
The focus at Renaissance was always on anticipating and not on reacting, as the very, very vast majority of analysts and fund managers do, and is probably the main reason why Simons built a firm full of scientists and not analysts. He hired staff from the IDA department where he previously worked and also from several universities. The resulting highly skilled team was able to build the most complex models ever created for quantitative trading, and, as Man Group will pay testimony to given the difficulties experienced with their AHL Diversified fund, flexible enough to adapt to the ever-changing financial markets. At Renaissance, the focus is on high-profile research and in building long-term consistency with a meritocratic approach to remuneration where profits are split right across the personnel. Consistent with this long-term focus, and no doubt given the eye popping remuneration, employee turnover has always been very low.
A little More About Renaissance Renaissance currently divides its main operations over two locations: Long Island and Manhattan.
TOP HOLDINGS TABLE
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The core research is conducted from Long Island while the administrative part is located in Manhattan. Among the 275 employees, one-third are PhDs with the focus on quant research. While the company uses many different strategies which are split across several funds, the trading is mostly computerised and securities are, in many instances, held for just a few seconds or minutes – it could be said that RT was one of the forebears of HFT (High Frequency Trading). The flagship fund has a very secretive investment strategy, one that no one has so far been able to crack. The fund can invest in commodities, bonds, equities and futures. It can short sell, borrow funds or follow any other strategy that is deemed profitable by the models. Other funds include the Nova Fund, which is dedicated to trading Nasdaq shares; the Renaissance Institutional Equities Fund, which is tailored for institutional investors; and the Renaissance Return Fund, which invests in other external funds. Currently the company is invested in over 2,000 different securities, but we can see a snapshot at the end of 2013 as to where it’s top 10 holdings were.
James Simons of Renaissance Technologies
With a compound 35% annual return since the end of 1989, $1000 invested in the Medallion fund would have turned into $1.8m at the end of 2013, while the same $1000 invested in the S&P would be worth just $5,135. The alpha that Medallion generates is undeniable!
$1000 INVESTMENT CHART
Philanthropy Besides being a mathematician and a hedge fund manager, Simons is also a philanthropist, having donated hundreds of millions of dollars to several causes. As science is present in all aspects of his life, it comes as no surprise that he has a penchant for donations to the development of science, with a particular emphasis on the improvement in maths education in public schools. Simons also believes that education is deteriorating at public schools as the best teachers are leaving in the direction of the private sector, looking for higher salaries. He donated $25m to Stony Brook University to benefit the mathematics and physics departments in 2006, then another $60m to found the Simons Centre for Geometry and Physics in 2008, and another $150m to build a new medical research centre and to finance important activities at the same university in 2011.
Lately Simons and his wife committed $38m to the research of autism, and they plan to donate another $100m to the cause.
“tHE FlagsHIp Fund Has a vEry sEcrEtIvE InvEstmEnt stratEgy, onE tHat no onE Has so Far bEEn ablE to crack.�
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Fund Manager in Focus
Final Comments James Simons is different from virtually all the other fund managers whom we have reviewed in the past. He is a man of science and has been able to change the traditional myth of the markets that theory and practice are two different animals. In fact, when we look at the longer term we see that, apart from usually a short “golden” period, most fund managers fail to deliver consistent profits over a long time horizon, generally being lucky with their position at a point in time in the asset cycle. True “alpha” generators are few and far between. In building a company with the research dynamics of a university, James Simons was able to provide fresh solutions in an ever-changing environment. With a team of high-profile PhDs, always working on new models and fine-tuning the existing ones, Renaissance has been able to ally the best of the theory with the practical problems that are faced in investment. And it has done it in a systematic way over the longer term. While hedge funds largely invest in human capital, Renaissance invests in computing power and knowledge – the primary difference with all its peers. Almost four years now after retiring, James Simons’s place in the annals of management industry is etched forever. It is fair to say that for many he remains an enigma, never understanding just what he was doing to achieve those 35% net annual profits.
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When Insider Monkey analysed the performance of the Medallion fund between January 1993 and April 2005, they measured the fund’s alpha (excess over the market) as being around 34% per year, which is probably one the best measures over a long timescale ever seen. Using their own words: “Jim Simons’ alpha is even better than was Warren Buffet’s when he was much younger. If Jim Simons started investing 20 years earlier than he did, he would have been the richest man on this planet”.
“Jim Simons’ alpha is even better than was warren Buffet’s when he was much younger. If Jim Simons started investing 20 years earlier than he did, he would have been the richest man on this planet.”
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A look back at the QE program
A look back at the QE program - what has it really achieved? By Filipe R. Costa & R Jennings, Titan investment Partners
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What has it really achieved?
With the ongoing quantitative easing in the States being slowly withdrawn by new Fed “Chairperson” Janet Yellen, it is an opportune time to look back at what effect this controversial policy has had on the wider economy in recent years, and potential aftershocks for the market when (or should that be “if”?) it is finally withdrawn completely. The first bout of QE was the so-called “QE1”, and that was embarked upon in December 2008 before being wrapped up in March 2010. Under this program, the sum total of $600m of MBS (Mortgage Backed Securities) was purchased by the US Central Bank. Then we had what was dubbed “QE2” over the period from November 2010 to June 2011. Again, the program quota was $600bn at a rate of $75bn per month, but this time purchasing longer dated Treasuries.
JANET YELLEN Then we had what became known as “Operation Twist”. The reason for the name being that $400bn of longer dated bonds were purchased (6-30 years) whilst simultaneously selling maturities in the Fed’s portfolio of less than three years’ bonds. One could argue that this was the first real attempt to uncouple the markets from the drug of QE as it was designed to suppress longer term interest rates (and so mortgage rates) whilst not expanding the Fed’s balance sheet further. As we will see in the table overleaf, not unsurprisingly, “Operation Twist” had the least impact on the stock market and so providing us with our first concrete evidence that the Fed’s balance sheet expansion has a high correlation with the stock market. Finally came “QE3” in September 2012, the program that is still ongoing, but now in the process of “tapering”.
This was the most bold of all the packages as although it was “only” for a commitment of $40bn per month, purchasing agency mortgage backed securities, the Fed stated that the exercise would be “ongoing” until such time that the jobs market improved “substantially”. Only three months later in December 2012 the purchase volume was increased by an additional $45bn and once more buying longer dated treasuries. To date almost $3tn of money has been created by the Federal Reserve and injected into the US economy. The question of whether QE has been beneficial to the wider economy is still open to debate and is one that is relatively tricky to answer. Most politicians and the Fed itself would points us to the large stock market gains seen and to the suppression of bond yields. Both of which have, to the policy’s proponents, served to underpin the economy by creating a “wealth effect” and kept, what is for most Americans the largest monthly financial commitment, mortgage costs low, thereby contributing to hailing the program a success. The problem is that financial markets are just a small part of the equation. They exist to supposedly reflect the real economy conditions, with the latter being the ultimate goal of any government policy. For great swathes of the US populace, however, net effects to them in the “real” economy have been negligible, certainly when compared to the top 1% who are largely unencumbered by mortgages and debt and so have enjoyed a disproportionate benefit from rising financial assets. It was at the end of last year, during “King Printer” Mr “Helicopter” Ben Bernanke’s reign, that the FED announced it would start cutting back on its current QE program with the aim of completely ending it by the middle of this year. So far Bernanke’s promises have been followed through by Janet Yellen who has been implementing $10bn bites into the original $85bn program. At the same time, some clues have been given about the potential for interest rates to start rising next year in what would then be a completion of the accommodative policy that has been dominating the last few years and in fact the path back to “normality”. Or so they hope…
May 2014
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A look back at the QE program
Measuring the wider effect of QE is a hard task as it is relatively difficult to understand just how the uS consumer has been helped by this program as well as how much extra growth it has added to gDP, or indeed how many new jobs it has actually created. Those are the real questions that will remain unanswered and no doubt be argued over by economists for many years.
QE’S IMPACT ON THE S&P 500
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But, if we focus solely on the equity market, then it becomes much easier to understand the impact of QE. Take a look at the following tables taken from a research study conducted by Bespoke Investment Group.
What has it really achieved?
“If we now look at the stock market’s returns in the intervals between the QE programs it is clear that performance was awful with the equity market dropping by 9% and 12% respectively between the implementation of QE2 and QE3.” In looking at this data there can be few doubts about the positive effects deriving from QE when looking exclusively at equity markets.
If the economy was favourable, they wouldn’t think twice about investing in CAPEX to improve the firm’s overall competitive position in the long-term.
Upon the unfolding of QE1, the S&P 500 rose 36%. Under QE2 it rose again by 24% and taking 25th March as the cut-off date (from the dataset) by just under 28%, or 24% if we go to the now infamous “tapering” announcement.
Additionally, coming out of such a deep recession, the US economy’s rebound has been distinctly muted compared to prior less shallow recessions. This has been in the face of a very aggressive Fed loosening policy too. Some would say the US economy has now found a new lower-growth trajectory, and with the rise of the tiger economies in Asia, lots of its manufacturing base has been lost. We have sympathy with this view, but we also feel that the real issues in the US economy have simply been masked by the QE programs. Namely that it is a powerhouse now in decline with educational standards slipping, the country “running on empty” from a liabilities perspective (social security and medical costs that are unfunded run into the tens of trillions of dollars) and the dollar’s pre-eminence continuing to erode.
If we now look at the stock market’s returns in the intervals between the QE programs it is clear that performance was awful with the equity market dropping by 9% and 12% respectively between the implementation of QE2 and QE3. So, certainly on this evidence, QE seems to be the key to much of the equity markets’ advance over the last five years. Of course there are many other factors to take into account in assessing the fundamental underpinnings to the stock market’s rise, earning for example, but the empirical evidence reveals a positive and strong correlation between the equity market and QE. The intuition behind it is also simple to grasp. With the FED buying Treasuries and other agency debt, yields are massively depressed across the board. The shift in risk thus forces investors to seek out the extra yield that is not available in the bond market anymore, and so pushing them out the risk curve and into equities. That explains why so much capital found a home not only in the US market but also in emerging markets (and which has been returning to their domestic markets in recent months). Remember, however, that we should not forget what the ultimate goal of QE was, and that isn’t to impart a rise in equities but to boost the real economy. One might think that if equities rise, then companies would be encouraged to invest in CAPEX and so act as a boost to the wider economy. Intriguingly though, this hasn’t happened. In a sign of just how much leverage was entrenched in corporate USA (as well as consumers) going into the GFC, the majority of companies have chosen to repurchase stocks and repair their balance sheets, and finally paying dividends instead of investing in new production. Just look at Apple sitting on a cash pile without any idea with what to do with the money.
The FED has categorically helped equities rise but has created localised equity bubbles in many areas and, worst of all for Main St, without any likely lasting positive effects in the real economy. QE and monetary policy have really been largely ineffective with regards to their main purpose, and so it is right that it should now be withdrawn. There isn’t a link between QE and the real economy that we can see, certainly not with anywhere near the causality seen with financial assets.
May 2014
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A look back at the QE program
The key issue now is that with the withdrawal of QE3 in totality around the corner as we run into the summer, will the recent equity market weakness turn into a real rout and, if so, what is the potential target for the S&P 500? Take a look at the chart of the S&P 500 over the last 15 years below. Notice anything?
I have highlighted the convergence of the prior resistance points and also the 37 month exponential moving average that the market seems to regularly come back and revert to after a period of years below or above it. On a time cycle basis, it is due a reversion to this measure.
S&P 500 CHART The key question is what will the Fed do if the only real “support”/evidence of QE’s effectiveness is lost through a market takedown of 20-30%? If the labor market turns tail again with unemployment breaching the 7 or 8% level, we would hazard a guess that QE4 is wheeled out. At that point, the cat would be out of the bag, however, and the Fed may actually walk into what is called a “liquidity trap”, something that happened in Japan over the last 20 years.
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At this point the best bet is to use fiscal policy as a new means to help the economy. The problem is public finances in the States are not in the best shape, and if the support of artificial bond buying is gone, markets could take fright at the bond market and push yields much higher, thus exacerbating matters in the wider economy. We are at a real risk of experiencing the worst and most prolonged crisis in history, and, more worryingly of all, perhaps the time has come when not even the FED can avoid equities from finally succumbing to the “real” economic reality on the ground.
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Tom Hougaard Book Review
Tom Hougaard Book Review
In memory of Charlie D – the story of the legendary bond trader “I don’t want to be a good loser. I lost 4 days in a row. I haven’t done that in 6 years. I don’t want someone looking at me saying he is a good loser.”
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In memory of Charlie D
So starts one of the best, if not THE best trading book, I have ever read. I decided to write an article about someone else’s trading for this month’s article. This article is about Charlie D or Charles Di Francesca to be precise. Like you no doubt, I have a fair few books about trading on my book shelf. Most of them are about the techniques used to trade the markets. There are a lot of techniques, too numerous to mention in this space, and, you may be surprised to learn irrelevant too. There are very few books about the traders themselves. I have learned more from the trading books that focused on the person behind the trading than books about trading techniques. This has instilled in me that good trading is all about the person and not the technique. It is for this reason I want to write about what some people call the greatest trader ever: Charlie D.
They called him the “Sultan of Scalp,” after another legendary powerhouse, Babe Ruth.
“I have learned more from the trading books that focused on the person behind the trading than books about trading techniques.” He never revealed his trading secrets to any but a few close friends, but reading through the book on more than one occasion, I have learned more about taking a loss than any from any other trading experience. Charlie D taught me how to add to winning trades. The book by financial journalist William Fallon chronicles the remarkable life of a risk taker, a trader who in size would rival any major trading house. It describes his strategies upto his untimely demise through cancer. My favourite chapter is “God Doesn’t Trade Bonds”. Charlie agreed to do seminars at CBOT about trading. This chapter is the transcript from one of these seminars. You can actually listen to the seminar on YouTube, if you search for “Charlie D” – but the sound quality is very poor.
Unlike Jesse Livermore, who many call the greatest private trader ever, Charlie D didn’t kill himself by putting a gun to his temple and pull the trigger in a hotel lobby room, nor did he win and lose fortunes during his career. Instead he did make a fortune, and he didn’t lose it. He lost in the end, but it was to illness. Charlie D occupied the top step of the Treasury bond pit at the Chicago Board of Trade (CBOT). His unrivalled prowess in the pit earned him much more than financial rewards. He was respected for his integrity, revered for his fearless trading style and loved for his support of newcomers to the exchange.
In this two hour seminar Charlie dispenses liberally from his knowledge of pit trading and trading in general. Although a fair bit of the seminar is dedicated to the art of trading within a pit on the CBOT, such as the physical location within the pit, he also goes into great detail about taking a loss, and adding to winning positions. What makes Charlie D different from other trading books? Compare it to for example “Pit Bull” by Marty Schwartz - you have two larger than life traders but the narrative is somewhat different because one is written by a journalist, while “Pit Bull” is written by Marty himself. The book about Charlie D is thus perhaps a little less self-centred. I hasten to add that both books are great, and together with “The Reminiscence of a Stock Operator” they make it into the top five of all the trading books I have read.
May 2014
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Option Corner
Option Corner
How to position for a rally in gold miners using option strategies By Filipe R. Costa & R Jennings, Titan investment Partners
For this month’s edition of Option Corner I am going to revisit the theme that we relayed at the turn of the New Year, that being that we believe there is presently a generational buying opportunity presented in the precious metals mining sector.
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Option Corner
One of the beauties of the US financial markets is their deep liquidity and extensive option product offerings. There are literally tens of thousands of option series available to trade in and so this provides a phenomenal amount of flexibility and strategy types for a trader to implement his particular view on a market or stock. As we are bullish of the mining sector, a classic and relatively simple way to play such a view would be to just purchase calls on the GDX (the Gold Mining ETF that we have covered in previous editions). However, given that the sector appears to be continuing to roll around the bear market nadirs (after a sharp rally at the beginning of the year the sector has retraced a good proportion of the gains in recent weeks as both the physical prices of gold and silver have wound back) with outright option purchasing, the enemy of the trader under a drawn out bottoming process is time value erosion. So how do we address this? One way to address it is if you are long an option and so have the force of “theta” (time decay) working against you right from day one, is through the sale of an option, as by default if a purchaser of option premium has theta working against him, by default selling options would negate this.
“The first signs of the bear market possibly ending is the heavy volume seen at the end of last year in the GDX ETF and into the New Year – a technician would read this as a final transfer from the despondent to the strong accumulation hands.” Take a look at the chart to the right and where we can see that the sector has been well and truly beaten down over the last two and a half years. The first signs of the bear market possibly ending is the heavy volume seen at the end of last year in the GDX ETF and into the New Year – a technician would read this as a final transfer from the despondent to the strong accumulation hands – a typical exhaustion sign at the end of a long bear trend.
Additionally, we can see that the RSI measure is presently looking to make a renewed assault on the key 50 level another positive sign. With sentiment generally being far from bullish on the sector, valuations on the likes of price to book and DCF’s remaining heavily depressed and the early signs of corporate activity through consolidation, the classic ingredients of a bear market bottom are in place in our opinion. The area around $32 - $40 looks a good prospect for a rally over the next 6 – 18 months in the GDX and it will be this area that we will concentrate on in the construction of an option strategy that both captures any upside should the rally come about but also addresses the time erosion issue detailed above. To add even more “spice” to our strategy however, we are going to alight upon the NUGT ETF options which is simply an X3 levered ETF version of the GDX. That is, as the GDX moves, then the NUGT moves three times as much. With options on the NUGT being used, one can safely say that is a turbo boosted way to play such a view. So how do we construct a strategy? The way we would play this is to implement what is called a Bull Call Ratio Spread that is additionally part financed through an outright short put. In such a strategy we are buying a call option at a lower strike and selling a higher volume of calls at a higher price. This addresses the time value erosion factor but also introduces some risk that the instrument could rise above the level of the short calls you have sold. This risk element can be managed through “rolling up” when the instrument approaches the short call level or simply exiting the position should the price reach the short call level – the premium you will pay to buy back the short calls will depend on the volatility measure of the instrument at that time and also the time to expiry too. Through selling a put at a lower strike then you are (a) mitigating the risk detailed above as this will obviously have fallen in value and (b) also further reducing the net cost of the strategy. You must however be prepared to take the instrument on should be put upon.
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Option Corner
GDX CHART Bearing in mind our view and likely target levels for the GDX over the next 6 – 18 months then we would implement the strategy to position for a decent rally in the sector in the following way (prices correct as at close of business in 25 April 2014): Purchase of 1 of the NUGT $45 Jan 2015 @ $9 Calls and sale 2 of the $90 calls @ $3 with an additional sale of 1 of the Jan $25 Puts @ 4.50. Net cost of this strategy is actually a premium receipt of $1.50.
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Breakeven level is thus $43.50 ($45 - $1.50) with losses accruing should the NUGT fall below $23.50 ($25 - $1.50) and rising above $91.50 (as you have sold more calls). One reason we are happy to sell the Put is that we would be prepared to buy the NUGT if “put upon” should the underlying instrument that it is based upon (the GDX) fall back towards $20 and potentially carve out a double bottom.
Option Corner
Maximum profit is achieved at the strike of $90 at expiry ($46.50 being the difference between the call strikes and the premium receipt) but in all probability an active trader would manage the risk on the approach to expiry. Here’s the individual P&L profiles of the Ratio Call Spread and Short Put
RATIO CALL SPREAD
If you like our approach to investment and would like to participate with us where we invest our own funds in the global markets and utilise similar strategies to here and that since inception last July, has handsomely outperformed our benchmarks and peers, click the banner below for more details. You should not take this piece as an advocation to trade in any of the instruments mentioned and should always take professional advice in relation to your own personal circumstances.
SHORT PUT DIAGRAM
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May 2014
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May 2014
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Technology Corner
Technology Corner
Run For Your Life! There’s a Virus on the Loose! By SIMON CARTER
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Run For Your Life! There’s a Virus on the Loose!
May 2014
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Technology Corner
According to Wikipedia, the most recent computer super-virus, ‘Heartbleed’ “is a security bug in the open-source OpenSSL cryptography library, widely used to implement the Internet’s Transport Layer Security (TLS) protocol”. Sure, all makes perfect sense...! This month, SBM looks at what viruses are, how they spread around the world, why they exist in the first place and, most importantly, how you can keep safe. In the same way our bodies are unwitting and unknowing sites for billions of bacteria, happily living and reproducing on our very being (apologies for the imagery!), it’s very possible that the computer, tablet or smartphone you’re reading this on right now could be host to one or more viruses without you knowing it. While unlikely if you have the right anti-virus software – more on that later – not all viruses present themselves in a hard drive melting fanfare, many simply exist just because they can. A virus is defined as malicious software (normally shortened to malware) which is designed to replicate itself numerous times on its host computer, inserting itself into software and operating systems and executing code to make said software and operating system behave in a way that it was not designed to.
“One of the scariest things about viruses is that they can spread so quickly. Once it’s on your device, one of the viruses’ primary functions is often to get itself onto another device at the earliest opportunity.” Sometimes this behaviour can be quite low-key, such as one of the first viruses, ‘Stoned’, which simply popped a message on your screen telling you that “your computer is now stoned”, whereas some viruses, such as ‘The Love Bug’, are designed to delete files, send junk mail from your email account or even log your keystrokes to gather sensitive information such as passwords and bank details. One of the scariest things about viruses is that they can spread so quickly. Once it’s on your device, one of the viruses’ primary functions is often to get itself onto another device at the earliest opportunity. This used to mainly be through surreptitious emails, but now it’s just as likely to be through removable media such as memory sticks. The main way, however, that viruses spread is through websites and downloads. The sensible question at this point would be, if we know so much about what viruses are, how they spread and what they do, why can’t we just eradicate them all? If only! Consider the likes of the common cold, or bird flu.
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Run For Your Life! There’s a Virus on the Loose!
These bugs are so successful because they adapt and mutate themselves constantly, waiting until they reach a form that can attack a vulnerability in your immune system. Now that process is scary enough, but is almost wholly random (as in the common cold doesn’t have a blueprint of your immune system, it just attacks and sees whether it can get in). Imagine a group of very clever people worldwide with access to the same systems and software that you yourself have. Now imagine these clever people searching and searching until they find a vulnerability in the security of that software before setting about creating a virus that can exploit that very vulnerability. So, in short, a lot of the time we don’t even know a virus attack is possible until it happens.
But why do people do it? In the case of key logging viruses and those that take over your email, the motive is obvious, but a lot of the time people create viruses to show off their skills, or for the challenge of being able to do so, to spread a political message or to demonstrate a vulnerability in software. Famously, the ‘Blaster’ virus contained a message to Microsoft’s Bill Gates, berating him and telling him to “Stop making money and fix your software!!” In the example of the ‘Heartbleed’ bug, attackers were able to read 64kb or a device’s memory with every heartbeat (data request) meaning that the primary motive was most often data harvesting.
“tHE sEnsIblE QuEstIon at tHIs poInt would bE, IF wE know so mucH about wHat vIrusEs arE, How tHEy sprEad and wHat tHEy do, wHy can’t wE just EradIcatE tHEm all?”
The good news is that once an exploit is revealed, it is quite often fixed very quickly. Google had a patch ready for the ‘Heartbleed’ exploit within days of it being revealed, and anti-virus software is in a perpetual state of update, looking to protect your device against viruses before they even arrive. More good news is that most of the time it is quite straightforward to keep yourself safe – don’t download illegally cracked software; don’t download illegal films or music (which could come with a virus included in the torrent); don’t open emails that look suspicious; stay away from any website that Google, Bing or Yahoo! warns you against, and most of all, ensure that you have anti-virus software installed on your devices. It’s the computer equivalent of ‘eat right and exercise’. Remember though, viruses are nothing to be afraid of normally – after all, you don’t spend your daily life being worried about getting ill – so don’t worry about using the internet, using your tablet, or using your smartphone. Just don’t open an email promising you “Anna Kournikova Naked”.
May 2014
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TODAY May 2014
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Alpesh On Markets
“You see, the biggest fund managers are not now, nor have they ever been, very good. They are marketing machines. Statistics show they rarely outperform putting your money in a passive index fund.”
Alpesh
on Markets This month we reprint an interview that Alpesh carried out just recently in the AsianVoice in which he relays the tried and tested trading methods that he finds useful in his trading…
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Alpesh On Markets
Q: Hi Alpesh, thanks for taking the time to talk to us about your trading. To begin with, can you tell me what your preferred products and markets for trading are? A: Nowadays it tends to be Forex. But it used to be stocks in the 80s when I was in my teens, moving on to penny shares because of the potential for large rises, and then options trading again due to the large potential gains. Finally I moved onto futures and spreadbetting for tax convenience. Today it is FX and indices because of the leverage (bang for buck) and also ease of trading. The long trading hours and liquidity making my trading strategies easier to deploy and help for insomnia! Q: Do you consider yourself a day trader, swing trader or position trader? A: Definitely swing trader. I use the MACD a lot and it takes time to deploy those moves. Day trading is fine where you hold positions for a few hours, but is time consuming for me so I use my own algorithms to give me buy and sell signals for swing trading. The secret to all success is automation – ever since the industrial revolution. In fact, actually ever since the invention of slavery! Now we use computers as slaves (thankfully!). My algos simply give me the buy and sell signals. Q: Information and reliable trading platforms are key to success for any trader, can you reveal which platforms you use and why? A: I like spreadbetting platforms from big players – after a bad experience using Worldspreads as a whitelabel - I will never, ever, ever use small firms ever again. You just can’t risk it. Q: I´ve read many of your trading books over the years, and understand you started investing in shares as young as twelve years old – what, or who, originally inspired you to start investing at such a young age? A: I lived opposite a Post Office and they had these free brochures which were targeted at OAPs about Government Gilts and so even I could understand at 12!! Anyways, I borrowed GBP100 from my aunt because I wanted to pull my weight in my family who were working so hard, and off we went investing in gilts. Q: Is this why you still devote your own time to teaching others to trade today? A way of giving back... of helping others achieve success too?
“Ive read many of your trading books over the years, and understand you started investing in shares as young as twelve years old – what, or who, originally inspired you to start investing at such a young age?” A: I love education and communication. When I was at school, I would teach other students who would ask me so and so and their parents would be so grateful. Today, people ask why I do it, and I explain that I just love teaching and seeing the lightbulb in others go on, but also because if you know something, and knowledge is Godly, it’s a sin to let others take aeons to stumble on the answer and not teach them. So, I subsidise my free education with some paid for private education – a bit like in Britain we have state schools which are free and also paid education for others. For instance, I charge people for my algos and that pays for all the free education I give in places like AlpeshPatel.com Q: In terms of trading strategies, can you describe your approach to trading? A: Momentum and mean reversion are the two main strategies. With both, I use triple filters to ensure all signals are confirmed before they are executed. The strategies work on basic principles of market insight about how prices move. Q: And what about stop loss settings? This can often be the biggest banana skin for newbie traders to get right – particularly when spread betting. How do you avoid getting ´stopped out´ as it is known? A: Most people don’t realise that volatility based stops are what they need to avoid being too far or too close. I use either a two or three period low, or a multiple of average true range. My position size is volatility based, so in more volatile markets, where the stops would be wider because the market is swinging more wildly, my positions are smaller size and vice versa. That way there is no fear of being stopped out too soon.
May 2014
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Alpesh On Markets
Q: How much is enough for you? When in a winning position how long will you go before taking profits? What are the main signals for you to out? A: Exits are usually based on my algorithms, I let the market take me out, not some arbitrary mental monetary utility. So, for example, with an MACD based exit it will be a two or three period low with a loss of MACD momentum. I then programme this into my algorithms so I don’t have to keep looking for entry and exit conditions. I monitor this across various time frames so that I can have ample signals.
“Start small, read everything, understand trading psychology, be patient, practice load, find a strategy, understand money management and discipline.” Q: Do you add to winning long positions? A: To winning positions yes, never to losing positions. But you have to make sure your holdings don’t get too concentrated. I’ve created free education videos on adding to winning positions. Q: Do you favour any particular technical analysis system to guide you – Bollinger bands, Fibonacci, Elliot Wave or anything else? Or do you have your own rules? A: I use MACD for momentum trading the most, and also average true range for mean reversion. But I use them in my own peculiar way, not the way you see in text books. I then put them in my algorithms for generating buy and sell signals.
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Q: When talking to early stage traders, what is the most important advice you give for becoming a successful trader? A: Start small, read everything, understand trading psychology, be patient, practice load, find a strategy, understand money management and discipline.
Q: The crisis in Syria and the anticipated response by the US has seen oil prices rise sharply recently – do you think this will continue, and what other global themes are you factoring in for your longer term trading strategies? A: I tend to use just technical on indices and FX and so the news actually doesn’t get factored in beyond when it shows up in momentum as buy and sell signals on my algos. I don’t try to work out why, only that I have a signal to enter or exit. That way, life is simple and stress free. Q: And what about currencies... do you foresee any big changes in Forex? A: Well I’m going to India and the rupee is at an all-time low against the dollar now. I think we will be surprised at dollar strength because it is in fact a reserve currency, and despite emerging market strength it will remain strong. Also, the euro will remain strong too because we have been overly pessimistic about the eurozone, and as it starts recovering that will prove exactly how strong the monetary union is. Q: Thank you for your time. Your website www.alpeshpatel.com offers a wide variety of educational material, webinars, books and live training, but will you be making any live appearances later this year where people can meet you? A: Actually mainly through my webinars – not quite live – but I can reach many more people!
May 2014
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John Walsh’s Monthly Trading Diary
john walsh’s Monthly Trading Diary
What I look for in a spreadbet firm So here we are, again… I just don’t know where the time goes between these articles! Must be all the fun I’m having in the markets! Anyways, I hope the markets have been kind to you. If not, just remember it’s not about the individual trade – it’s all about the long run.
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John Walsh’s Monthly Trading Diary
Last month I spoke about how important it is to establish just what kind of trader you are, or want to be, which is, in fact, an overlooked aspect of trading by many participants and yet is probably the most vital aspect of trading for every single trader on the planet. I now know what kind of trader I am. When it comes to trading indices, which I have done a lot of in the past and plan to do more of in the near future, I’m strictly a day trader, trying to scalp a few points from the DAX, FTSE and DOW here and there on both the long and short side. This approach requires a lot of screen time and so trading becomes too much like work – which I never want it to be, it should be fun.
“Every trader knows that having the tightest spread can be the difference between having a profitable trade or a losing one, certainly when day trading in indices.” With stocks, I’m more of a “position trader” and always prefer to go long where I can hold positions for weeks or even months. This approach requires very little maintenance as I set the stops when I open the trade and give them time to move around and check on them maybe just once or twice a day. Less time “watching” stocks I personally find is better for me. But this month I wanted to talk about what I personally look for in a spreadbet firm. Well, for me, and as I’m sure it is for most traders, the most important element is choice. The spreadbet firm must have a wide range of asset classes to trade, be it FX, stocks, indices or any other manner of assets anyone could possibly think of trading these days. Choice is good!
Secondly, almost goes without saying, and without trying to do the poor old spreadbet firm out of profits, is tight spreads. Every trader knows that having the tightest spread can be the difference between having a profitable trade or a losing one, certainly when day trading in indices. Thankfully for us, the competition for the tightest spread amongst the spreadbet firms is fierce. Another couple of important things that I look for in a spreadbet firm which I think in this day and age go hand in hand are 24 hour trading and cutting edge technology. If I or anyone cannot trade when we want (when the markets allow of course) and also where we want through the use of apps and such like, then quite frankly I don’t and won’t trade with those particular spreadbet firms. Regarding my own trading, if I’m honest, I have not done much at all over the past few weeks and, sadly, it’s been pretty much the same as the previous couple of months – getting trades stopped out! My trades previously mentioned in Akamai Technologies (AKAM), Monster Beverage Corp (MNST) and FleetCor Technologies Inc. (FLT) were all closed at a loss after being stopped out which now leaves my account flat. The ‘Rolex Trading Challenge’ as we coined it, remains just that – a challenge! Consequently I’m splashing out on a Casio (lol!) and canning the challenge for now. At one stage I got the account to +50%, and I have, in the process, learned a lot about trading US stocks. Namely, be more proactive on the short side and tighten stops where decent profits are in the bag. I still have two trades open that have been mentioned previously which are current. These are Walgreen Co (WAG) and General Dynamics Corp (GD) and I’ll let everyone know how they do in due course along with any new trades I make, but for now I’m not setting account growth targets, I’m just trading for the love of trading! That’s enough from me for this month, please continue to follow me on Twitter @_JohnWalsh_ where I keep everyone up to date with my trades as I open and close them, be it at a profit or loss, and any thoughts I have regarding trading in general. I’m also happy to talk to other traders anytime. Remember: you control the trade; the trade does not control you. John
May 2014
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Markets In Focus
MARkETS IN FOCuS APRIL 2014
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Markets In Focus
May 2014
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MAGAZINE
SPREADBETTING Thank you for reading. We wish you a profitable May!
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