SPREADBETTING The e-magazine created especially for active spreadbetters and CFD traders
N IO IT ED ST GU AU
MAGAZINE
Issue 7 - August 2012
Why do most spreadbetters lose? Lessons & Insights Dominic Picarda Technical Take Special Feature on gold stocks
A Market Wizard Special On Ed Seykota
Special Supercar & luxury travel features All your favourite columns including the chance to win ÂŁ1000 in our Guess the FTSE month end competition.
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Editorial Contributors MAGAZINE
SPREADBETTING 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 4 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.
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.
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Reliance on content 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, spreadbet’s and CFD’s 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.
Foreword Well, here we are again — on the downhill leg to autumn already and it’s looking like we’ve been robbed (again!) of our summer! Aside from the weather, 2012 is shaping up to be another ‘annus horribilus’ for many investors too, particularly in those areas that seem to attract rather more retail investors and spreadbettors — AIM. AIM is becoming a byword, it seems these days, for corporate skulduggery where management enrichment overrides any semblance of shareholder interests and some people are now beginning to take a stand — the “shareholder spring” is meta-morphosing” into a “shareholder summer”... Spreadbetting Magazine ran a hard campaign against the Plus Markets Board just recently and, I am pleased to report, succeeded in galvanising a vote amongst the retail investor base to remove the entire incumbent Board — no mean feat, of that I assure you. It just shows that where there is a will, coupled with co-ordination, the small investor can make a difference. Any investors who have an interesting story to tell, with regards to their investments, please email us at editor@financial-spread-betting.com and we’ll look at the issue with a view to potentially supporting such campaigns too. Crooked management WATCH OUT — we have our eye on you! Anyways, this month we have some new features — a piece on Supercars (for the more successful traders this year!) and a feature on the best smartphones to use for trading as more and more investors use these technological gadgets for their own trading — who’d have thought only 15 years ago when a mobile phone resembled a brick that you’d be able to trade stocks with your phone? We have a number of good stock ideas for you and our feature editorial on “Why do most spreadbettors lose” is a must read — doubtless many of you will relate to the points covered within this piece. Capital Spreads have very kindly supplied a piece on just what instruments their clients have been trading so far this year — interesting reading to see how you compare to this, and our regular contributor Phil Seaton of LS Trader has a cracking piece on one of the most successful traders of all time — Ed Seykota — a chap whose
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.
trading principles their own system is largely based upon. I hope that the onset of autumn, which is typically a more conducive period for stock market investing, lives up to its bannering and provides a “mellow” and “fruitful” (to quote Keates!) environment for our readers and that your trading is a profitable endeavour. Be sure to take advantage of the free e-books we offer in this magazine that are very informative and hopefully useful to you. Until next month! Richard
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Contents
Why do most spreadbettors lose? An insightful overview into the pitfalls and psychology that catch many spreadbettors unawares.
6 16
Phytopharm
27
Is the housebuilding sector a buy?
A potential 10 bagger update.
Trendwatch alerts us to a new uptrend in a number of these stocks.
40
The best smartphones to use for trading
44
A market wizard special on Ed Seykota
A review of the best phones on the market.
LS Trader takes a look at the legendary trader’s methods & strategies.
48
Capital Spreads client trading activity this year
53
Options Corner - straddles and strangles
62
How to profit from the Eurozone break up
Just what have their clients been spreadbetting in?
The optimum time to purchase these strategies.
Some ideas and potential scenarios to position for such an eventuality.
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Apple
SportingBet
Can its rise continue?
Compelling valuation within the Gaming sector
57
30
How to own a Supercar
96
without breaking the bank
70
Robbie Burns’ Trading Diary
78
Emed Mining
86
Dominic Picarda’s Technical Take
90
Square Mile Data short interest section
Robbie regales us with his monthly trading exploits.
A Trading Buy Call on the small cap miner.
A Gold stock technical analysis feature.
Avocet Mining and Rockhopper in focus.
104
School Corner
110
Directors Dealings
Fibonnaci ratios explained.
This month we take a look at Assura.
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Special Feature
Why do most spreadbettors lose? This is a particularly expansive (as well as expensive for the poor punter!) subject with a multitude of potential answers that will be specific to each individual client’s circumstances and personality profile but, nevertheless, it is a very interesting subject that’s for sure, and certain common themes are recurrent, as we will explore in this feature piece. Being aware of these issues will enhance your chance of being successful.
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Why do most spreadbettors lose?
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Special Feature
Let us start with a simple statement of fact; and that is that spreadbetting is, quite simply, trading and trading is hard - we make no bones about this. An open industry secret is that of all novice futures, FX and stock day-traders, less than 10% are successful over the long haul based on anecdotal evidence. Think about that for a moment - less than 10% of traders make money and indeed the vast majority of these wipe themselves out within 12 months.
Our industry associates tell us that there is, however, a general ‘type’ of spreadbetting client account that has a chance of making money in the long haul and which invariably display the following simple traits: (1) The initial funding of their account is of a sufficiently adequate amount to give the client a chance of making money (myth no. 1 explosion - in order to (a) make spreadbetting worthwhile given the effort required and (b) to have sufficient funds to carry a drawdown, which inevitably will occur, you should really not be considering trading with less than £1000 starting funds) and; (2) Those accounts do NOT over-trade; i.e. they don’t over-leverage themselves and so experience big swings in P&L that in turn causes outsized psychological impacts that will likely negatively affect their trading further. Time and again a new client gets the ‘keys’ to their account and then believes that they need to be all over the first thing they see moving. Add the typical leverage factors offered with many instruments into the mix (up to 100 times in the case of FX!) together with inexperience, and they would be rather more well advised to go down the casino with their money as they are basically playing the same type of ‘game’ that is primarily gambling. Spreadbetting can therefore be akin to betting, or it can be akin to a commercial enterprise where you consider the risks as a first base, and then look to let the rewards look after themselves.
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As an active spreadbettor of over 15 years now, I have pretty much seen it all in the markets from 9/11 and its aftermath to the invasion of Iraq, Lehman’s collapse, the Great Financial Crisis of 2008-09 and also the millennium bubble (although, I doubt I’ve seen everything - one thing that I have learnt is that the market always, repeat always, has a new surprise around the corner for you!) and when I cast my mind back over my own losing periods I can put them into 3 distinct camps:
(1) Early stage “learning the ropes” period this generally lasts (sorry to say this) on average around 18 months - 2 years. A punter really needs to see both sides of a bull and bear market in order to understand how markets work. Given that the natural ingrained tendency of most traders, certainly retail (i.e. non-professional) traders, is to go “long” as opposed to going “short”; you truly need to experience how soul destroying, frustrating and wealth depleting a bear market is (unless you’re short of course!) in order to see just how detrimental to your wealth (and wellbeing if you are in over your head!) trading can be. It is worth pointing out that in the small cap, and in particular the AIM arena in the UK at present, that we are most certainly in a bear market (see chart below), and it is very noticeable to me in speaking to many punters in recent months how despondent and dejected they are with the market. Coming on top of a very difficult 2011, many popular sectors, specifically AIM Oil stocks, have had a similarly shocking 2012 so far. Lots of spreadbettors are certainly now familiar with how a bear market feels...
Why do most spreadbettors lose?
AIM ALL SHARE INDEX CHART
During the “learning the ropes� period you will likely deplete a material amount of capital and quite possibly wipe yourself out - in fact you may do this 2 or 3 times (I did!). This is to be accepted as par for the course and underscores the importance of only risking true risk capital (NOT the school fees!). Think back about the 10% success ratio of traders over the long haul - to expect that you can start spreadbetting and either make a living or, even more remotely, a fortune out of it with no prior experience, and in particular if there is not a preparedness to put meaningful amounts of time into the endeavour, is quite simply unrealistic if not outright madness.
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Special Feature
(2) Stubborness An unwillingness to accept that I was wrong has been a major undo-er of me on 2 occasions now. The first instance was in 1999 (and so should arguably be lumped with the learning the ropes issue) when the US technology boom was in full swing. As a Yorkshireman, I am loathe to overpay for anything and so I felt that the US tech market (Nasdaq) was way overvalued and due a fall. Trouble was, I shorted the market at 2800 in September 1999 and to my absolute horror it continued to rise inexorably day after day, taking my hard earned cash with it. To add fuel to the fire that was burning in my pocket, I continued to add to the position as the market ploughed ever onwards as I simply could not believe the valuations.
NASDAQ COMPOSITE CHART
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Finally, the pain was too much too bear as I continually funded margin call after margin call and my pockets were threadbare. I was eventually closed around 3300. This, painful as it was, turned out to be a blessing in disguise as the market continued on to ultimately peak at just under 5000 in April of 2000 as the chart below illustrates.
Why do most spreadbettors lose?
Was I right on the Nasdaq? Yes, it did subsequently fall to around 1000 in 2002 and only now, some 12 years later, is the index just getting back to the point where I put on my short. What was my lesson here? MONEY MANAGEMENT. Money management is your safety valve in the face of stubbornness. You may be right, but like comedy; timing is everything, and if it’s out, then it is better to take an annoying rather than a catastrophic loss, and more importantly be around to fight another day.
The other important lesson that I personally learnt is that no matter how much conviction one has in a position, always only trade a modest amount at the trade inception, i.e. don’t go “all in” right off the bat. This way, I can address the perennial controversial issue of “stops” (which I don’t believe in per se). If I have only risked 3-5% of my trading pot and I really do believe in the underlying position, then a move of 20% against me will (a) not unduly hurt me and (b) gives me the opportunity to add modestly to my position again. If the position goes further against me after adding a second time, then the market is telling me that, although I may be fundamentally correct in my view, the weight of money pressing against me is simply too great, and it’s time to fold my cards rather than continue to swim against the shark infested tide. This, again, links with the simple point of reducing voluntarily the leverage you use on your account - just because it’s there, it doesn’t mean you have to use it.
“Hooks” of 5% margin on the miners by spreadbet and CFD firms just have me rolling my eyes - anybody who trades their account to the max on the basis of these margin rates is just asking for trouble.
To conclude point (2) it is important to “have the courage of your convictions” in the market, i.e. to be able to pull the trigger on a trade, but it is equally important to know when to put up the white flag - trade modestly and with controlled leverage and you can take advantage of being a little bit too early to the trade by averaging in - but only average/scale once - if you are still offside and feel uneasy, then get out quick.
(3) Hubris Perhaps the most annoying losing periods for me have come in later years when I have grown in confidence in my trading and been lucky enough to enjoy an extended profitable run. This may seem counter-intuitive but, when you are making money, it is all too easy to fall into the trap of thinking that you can do no wrong and that you know better than “the market”. I typically follow a pattern of thinking that as my account is well padded with profits that the successful run will continue, and so I personally have a tendency to ‘over-trade’, i.e. place too may trades relative to the account size and also up my size after a good run. I am sure many readers can relate to this experience.
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Special Feature
How do I counter hubris now? Again, it is linked with money management and that is for every 50% increase in my account, I take off the profit capital and so re-base back at the original account funding level. This helps me personally in 3 ways - firstly, psychologically I am in a better place as I am than playing partly (or wholly if a 100% return) with “the markets money”, and never underestimate the importance of psychological wellbeing and the right mindset when trading. Secondly, I am consciously scaling back my size and so also controlling the leverage in my account as I take funds out of the market, and thirdly I am aware that nothing lasts forever and so I am reducing further the impact of when the inevitable drawdown occurs. Looking at individual instruments, the following are generally the major reasons for account failures by clients:
1. Equities trading This is usually due to the lack of homework on the part of punters and, amazingly in more cases than you would image, simply blithely following bulletin board posts on popular stocks du jour. DO NOT follow anyone but yourself and ALWAYS do your homework. When it comes to stocks outside the FTSE 350, my own personal rule of thumb is to margin myself at 50% on the position even if the margin rate with the spreadbet firm is only 20%. I adjust my GNE and so give myself a large cushion should things go wrong. With AIM stocks, 70-80% margin is applied or I simply buy them for cash - there are too many AIM horrors around for anyone to even contemplate trading these with margins of less than 30% - just look at the likes of Gulf Keystone where the stock can move 30% in a day - again, get on the wrong side of that and you are in a world of the brown stuff...
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2. FX trading This is extremely simple - lack of stop loss application coupled with over leverage. 100:1 leverage adverts should be ignored - you DO NOT want to be levered 100% - get yourself on the wrong side of an economic release with this type of margin trading and its lights out before you can say drat! We ran a feature on GNE (Gross Notional Equivalent) calculations you should carry out to ascertain the optimum leverage for you in our April edition, page 18.
3. Indices Trading indices, for me personally anyway, on a daily basis is a zero sum game - some days I’ll win; some days I’ll lose. The way I have made money trading indices is with ‘swing trading’ - looking for the standard deviation moves when a particular index has moved by 2 or 3 standard deviations from trend and it is excessively oversold/overbought; in essence playing corrective moves. Many seasoned traders view day trading on indices as being akin to betting on spider crawling. In fact, if you think about it, why do many spreadbet firms offer 1/2 or zero points spreads? Answer - because punters lose much more than they make. Question 2 - how many millionaire index day traders do you know?
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Special Feature
Some other tips that I would suggest you consider and that certainly work for me are the following:
1. Have a ‘hedge’ or two in the portfolio If you are long equities overall, having done your homework on the stocks you are trading, being aware that the market can take a tumble out of the blue is a good mindset to have; having an inversely correlated position on like a short index play or currency pair that moves in the opposite direction, for example dollar swiss, will allow you to mitigate a draw down.
2. Take a frequent breaks it’s amazing, to me anyway, what a week or two away from the markets can do for your trading when you return. Don’t get yourself into a situation where you “need” to be next to the screen constantly - you are basically feeding an addiction here. If you are comfortable with your positions, entries and account margin situation, then there should be no real need to watch every tick movement.
3. Avoid at all costs ever, ever, ever being on margin this screws with your mind as you (a) have either over traded or (b) the market is telling you that you are wrong (in the short term anyway) - probably a mixture of both. Either ways, you don’t want to be there. Finally, I read a very interesting article recently on perhaps the most well known hedge fund manager of recent years - John Paulson, the man who made $15bn shorting the US housing market in 2008. Here is a quote from him that he made following a halving of his flagship Advantage Plus fund in 2011, and another 12% drop so far in 2012 “Sometimes it’s difficult to interpret the markets, so we’re not going to play a winning hand every day. Our goal is not to outperform all the time - that’s not possible. We want to outperform over time.” If even revered hedge fund managers with ‘more money than God’ accept that it is not possible to make money all the time and also experience drawdowns of the magnitude that Paulson has, that, in itself, should illustrate to spreadbettors & CFD traders that trading is not easy and the first base is always risk control.
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Special Feature
A potential 10 bagger update Following on from our piece last month in which we opined upon 5 stocks that have the potential to be a fabled 10 bagger, we elaborate further this month on PhytoPharm.
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Phytopharm’s investment case basically centres upon the binary event in February 2013 when top-line results are expected from its Confident-PD Phase II trial of Cogane in early-stage Parkinson’s disease. Positive data could allow Phytopharm to secure a development and commercialisation partner for Cogane, milestones that would significantly increase our rNPV of £48m to £83m. Please note, however, that a failure of Cogane in the Confident-PD study could reduce the company’s market value to cash or lower; although encouraging data in amyotrophic lateral sclerosis may offer an alternative route to market.
Confidence required The Confident-PD study has enrolled 408 patients with newly diagnosed, treatment-naive Parkinson’s disease at multiple centres across the US and Europe. Dosing should complete by the end of 2012 and, allowing for a four-week follow-up period, Phytopharm expects to announce top-line results in February 2013. Cogane has the potential to become the first small-molecule, disease-modifying therapy for Parkinson’s, and therefore could attract a lucrative licensing deal.
ALS back-up Positive and confirmatory data from the gold-standard pre-clinical mouse model for amyotrophic lateral sclerosis (ALS) provides Cogane with an important second line of development. Depending on the outcome of Confident-PD, ALS could offer an additional valuation parameter in any licensing discussions or may provide a fall-back avenue of development for Cogane should the drug fail in the Parkinson’s trial.
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Myogane on hold in glaucoma A recent pre-clinical study of Myogane proved inconclusive due to a failure of the animal model of glaucoma to induce sufficient neuronal cell death in both the treatment and control groups. Phytopharm continues to assess next steps, but we assume further development is on hold until the outcome of the Confident-PD study.
Valuation: NPV of £48m with significant uplift potential We have revised our risk-adjusted NPV (rNPV) to £48m (previously £53m) due to removal of Myogane. This compares favourably with Phytopharm’s £8.7m enterprise value based on net cash of £13.3m as of 31 March 2012. Over 50% of our valuation is assigned to Cogane’s potential in Parkinson’s. Ahead of data from the Confident-PD trial, we assign a 25% probability of success - positive results and securing a partner would raise that probability to 50% and therefore our rNPV to £83m.
Phytopharm - A potential 10 bagger update
Valuation Phytopharm’s near-term investment proposition centres on the value uplift that would be expected if the Phase II (Confident-PD) study of Cogane proves successful, and on potential partnering of the project with a pharmaceutical group soon after. Top-line results from Confident-PD are expected in February 2013 and Phytopharm’s current cash runway extends to the end of 2013. Our risk-adjusted NPV methodology, using industry-standard probabilities and a 12.5% cost of capital, indicates a value of £48m which compares favourably with Phytopharm’s enterprise value of £8.7m based on reported net cash of £13.3m at 31 March 2012. Positive Confident-PD data and successful partnering would significantly raise our rNPV to £83m.
Sensitivities The key sensitivity to the investment proposition for Phytopharm is the company’s almost complete reliance on the Phase II study (Confident-PD) of Cogane and, if successful, its ability to secure an economically attractive licensing deal with a major pharmaceutical group. Aside from a complete failure to meet key efficacy and safety endpoints, there is a risk that Confident-PD produces ambiguous or contradictory results which could hinder further development and/ or licensing negotiations.
Failure to secure a development partner for Cogane by the end of 2013 would force Phytopharm into seeking fresh finance, implying a likely dilution for current holders if raised through a new equity issue. Development projects outside those specifically considered in the rNPV model represent upside. Phytopharm has one substantial shareholder in the form of Invesco (56.4% holding).
Financials Phytopharm ended its six months to 31 March 2012 with a balance of cash and equivalents of £13.3m, and no debt, sufficient to last until December 2013. R&D expenses increased significantly to £4.8m (vs £3.6m in fiscal H111) due to the Confident-PD study. We have assumed the same R&D expense run rate for fiscal H212 indicating an annual R&D expense of £9.6m for the year-ended September 2012 which declines to £7.2m in fiscal 2013 with completion of the Confident-PD study.
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Outlook: Date with destiny Phytopharm’s investment case centres on the timely execution and success of its Confident-PD Phase II study of Cogane, its orally active neurodegenerative/ neuroprotective agent for early-stage Parkinson’s disease (PD). The 408-patient study is fully recruited, and should render top-line results in February 2013. Data from Confident-PD, if positive, could provide the basis for securing a corporate partnership to exploit Cogane in PD and potentially various other neurodegenerative conditions which might include amyotrophic lateral sclerosis (ALS) and Alzheimer’s disease. Such a partnership would be expected to generate a significant economic return to Phytopharm in the form of up-front and milestone payments and royalties on sales, and is therefore central to the investment case. Phytopharm has conducted pre-clinical research with Cogane in ALS and now has a solid and encouraging data package following positive results in a SOD-1 mouse model of this disease.
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The structurally related sapogenin molecule, Myogane, has been studied in glaucoma; although a recent pre-clinical study of Myogane was inconclusive due to a failure of the animal model of glaucoma to induce sufficient neuronal cell death in both the treatment and control groups. Phytopharm says it saw indications of a neuroprotective effect after Myogane treatment, but was unable to draw definitive conclusions. Phytopharm continues to analyse the results of the study although in reality further development is on hold until the outcome of Confident-PD. Phytopharm has also previously studied Cogane in Alzheimer’s disease (a Phase IIa study was completed in 2005), and development in this indication could be resumed by a potential future partner. Phytopharm continues to research its P61 programme (PYM60001); a series of molecules with anti-inflammatory/anti-spasmodic/anti-remodelling activities and some modulation of the TRPV1 receptor. The current status of Phytopharm’s R&D programmes are summarised in Exhibit 2.
Phytopharm - A potential 10 bagger update
Cogane also has relatively few competitors as a potential treatment for early-stage Parkinson’s disease. Although Impax/GSK’s IPX066 (an extended-release formulation of carbidopa-levodopa) and Newron’s safinamide have been studied in levodopa-naïve, early-stage PD, the trial patients may also have received prior therapy with a MAO-B inhibitor or dopamine agonist. Only Merck & Co’s preladenant (an A2A antagonist) is undergoing a Phase III trial for early-stage PD patients of a similar profile as the Confident-PD study. The trial will recruit 1,000 patients with a diagnosis of idiopathic PD less than five years prior to screening who must have a UPDRS Part III score of ≥10 with the primary endpoint being the change from baseline in UPDRS Parts II and III scores. Three doses of preladenant will be tested against placebo and an active comparator in rasagiline. The trial started in 2010, recruitment is ongoing and headline results should be available in H213. Results from this study of preladenant in early-stage PD are likely to be significant for Cogane both in terms of helping to define Cogane’s potential competition as well as providing insight into the size and scope of a pivotal trial required for Cogane.
Partnership to be sought in 2013
Precedent deals for Parkinson’s disease or ALS pipeline candidates include: Biogen Idec’s licensing deal for Knopp Neurosciences’ dexpramipexole ($60m in stock, $20m upfront and $265m in milestones plus double-digit royalties on worldwide sales); Actelion’s option agreement to acquire Trophos (€10m upfront and between €125-195m depending on the outcome of the Phase III study of olesoxime for ALS7); and UCB’s licensing of global rights to Synosia’s Parkinson’s disease candidates (tozadenant/SYN115 and SYN-118) in 2010 for $20m upfront and a further $725m in regulatory and commercial milestones.
Amyotrophic lateral sclerosis With the support of the Motor Neurone Disease Association, Phytopharm recently examined Cogane in the gold standard SOD-1 animal model of ALS to establish a second niche indication which offers an alternative path forward should the Confident-PD trial fail to deliver positive results. Cogane has received US and EU orphan drug status for ALS. Phytopharm now has a solid and encouraging data package in ALS; the SOD-1 data confirming positive outcomes from other models of ALS. With Cogane already undergoing a large Phase II study, there is scope for development in ALS to proceed straight into a Phase II or Phase II/III trial.
Phytopharm intends to seek a partnership, most likely a global development and commercialisation deal, with a major pharmaceutical company for Cogane on the back of the Confident-PD data. It is difficult to speculate on the economic terms of any such agreement, but, assuming the Confident-PD data is positive and unambiguous, a deal would be expected to include a substantial upfront fee, development and regulatory milestones and double-digit royalties on sales.
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Orphan drug ALS is a rare condition (incidence well below the 200,000-patient threshold to qualify for orphan drug status). A disease profile and competing development candidates are shown in Exhibit 3. Exhibit 3 : Amyotrophic lateral sclerosis background
Preliminary ALS data positive Phytopharm has reported positive preliminary data with Cogane in the SOD1 mouse model which involves a mutation of the SOD1 gene (a known cause of ALS in humans) and is thus considered to be the gold-standard model of ALS. The trial included groups testing the administration of Cogane and riluzole (the only marketed product for ALS) as well as an untreated control. Among the key findings: (ii) Administering Cogane resulted in an increase in the number of motor units (a measure of the number of functional motor neurons) vs the untreated and riluzole groups. (i) In one muscle type, administering Cogane gave a 30-50% improvement in muscle strength vs the untreated group and vs riluzole alone. In a second muscle type, which was more severely damaged in the model, treatment effects were less clear although the Cogane group showed a numerical improvement in strength vs riluzole.
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(ii) Administering Cogane resulted in an increase in the number of motor units (a measure of the number of functional motor neurons) vs the untreated and riluzole groups. Cogane was previously shown to prevent motor impairment in an environmental mouse neurotoxin model of ALS which provided useful initial validation of Phytopharm’s strategy of targeting ALS with Cogane. Depending on the outcome of Confident-PD and subsequent partnering activities, a Phase II study of Cogane in ALS could be initiated by Phytopharm (subject to funding) or a future partner in 2013.
Glaucoma development on hold Phytopharm had aimed to differentiate Cogane and Myogane by positioning the latter for ophthalmic indications. However, a pre-clinical study aimed to show Myogane’s neuroprotective effect in an established animal model of glaucoma failed because insufficient neuronal cell death was induced in the treatment and control arms.
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July 2012 | www.financial-spread-betting.com | 23
Special Feature
The aim of the model is to raise intraocular pressure to induce neuronal cell loss in the retina (characteristic in glaucoma), and the endpoint was a comparative measurement of neuronal cell loss. Phytopharm says it saw indications of a neuroprotective effect after Myogane treatment, but was unable to draw definitive conclusions because of the limited neurodegeneration in the control arm. Pharmacokinetic evaluation indicated that levels of Myogane in the plasma were broadly in line with that expected from previous studies and that Myogane was present in the retina. Previous in vitro studies demonstrated that Myogane is protective of retinal ganglion cells. Phytopharm is still analysing the data from this study, but in reality further development is on hold until the outcome of the Confident-PD study.
Valuation Our risk-adjusted NPV for Cogane is £48m derived from its potential development for Parkinson’s disease, ALS and Alzheimer’s. This compares favourably with Phytopharm’s enterprise value of £8.7m (based on a reported cash balance of £13.3m as of 31 March 2012). Exhibit 4 : Risk-adjusted NPV valuation paramaters
24 www.financial-spread-betting.com | July 2012
We have removed Myogane (glaucoma) from our valuation model due to uncertainty over further development and have pushed back Cogane’s potential launch date by one year to 2016 (our previous rNPV was £53m). We apply a 12.5% cost of capital, include a base cost of business and make various assumptions of development probabilities, launch date, market share and royalty rate - these are summarised in Exhibit 6. Over 50% of our valuation is currently assigned to Cogane’s potential in Parkinson’s. We estimate a total Parkinson’s disease patient population across North America and Europe of 3.7m of which around 30% are estimated to be less than four years from diagnosis, the early-to-mid stage setting that is Cogane’s initial target. This indicates a potential patient population of 1.1m, of which we have assumed a 10% market share for Cogane, at a base annual price of $5,000. This is comparable with the annual treatment cost for Azilect, a drug also used as an early-stage therapy. Global Azilect sales in 2011 were $393m and, on current run rates and assuming generics do not enter the market, should exceed $500m in 2013.
Phytopharm - A potential 10 bagger update
However, should Cogane succeed in becoming a disease-modifying therapy, a premium price should be achievable (potentially in excess of $10,000) which would significantly raise our peak sale and valuation estimates. In ALS we estimate a total patient population across North America and Europe of 55,000 and assume an orphan drug price of $15,000 per year, and for Cogane to capture 20% of the market.
Given the binary nature of Phytopharm’s investment case, it is worth highlighting the potential upside upon reporting positive, and unambiguous, results from Confident-PD and securing a big pharma partner to take over Phase III development and commercialisation duties. Based on successfully meeting these key milestones, Cogane’s probability of success would increase such that our rNPV could rise to £83m (see Exhibit 5).
Exhibit 5 : rNPV sensitivity analysis
Spreadbetting Magazine overview As can be seen above, and which is based upon Edison Investment research, Phytopharm is not without risk but, should the trials proves successful, the upside is considerable. One should only place a small part of your portfolio in such high risk trades and most certainly not leverage them. What we also find interesting from a trading skew perspective is the fact that the stock has a very tightly held profile with Invesco Perpetual holding over half of the float and another 30% being held by institutions with generally a long term profile. As we touched upon in our last edition, this profile of stock holding is conducive to large ‘squeezes’ IF good news occurs and so even more pronounced moves to the upside. A look again at the chart below shows how the stock rose 5 fold in early 2010 and is indicative of the lack of ready turnover in the stock. Of course, this can work to your disadvantage if you need to sell (hence why you should not leverage yourself in these types of situations).
Another bit of guidance - any seasoned trader will tell you that stocks are prone to bouts of optimistic speculation, generally on the approach to news being released (witness the run up in Borders & Southern just recently), and that there are 3 investment adages applicable - “it is better to travel than arrive”, “buy the rumour sell the fact” and finally “don’t fall in love with a stock” - in a nutshell, if Phytopharm get run up ahead of the results and you can take out your original risk capital - DO IT - yes you will miss out on double the returns, but if it goes wrong, then you have only risked “the market’s money”.
July 2012 | www.financial-spread-betting.com | 25
Special Feature
Phytopharm chart
Disclaimer - The basis of this research has been supplied by Edison Investment Research (EIR). EIR do not advocate buy or sell recommendations and the opinion expressed within this piece is solely that of Spreadbet Magazine.
26 www.financial-spread-betting.com | July 2012
Special Feature
Will “funding for lending” ease the banks’ home-o-phobia? As trend analysts, we naturally watch trends very closely. Last week, we noticed something quite unusual. About eight house-building shares have moved into an uptrend, almost simultaneously. Is the market trying to tell us something? In our view it is, and it’s the sort of signal you ignore at your peril; certainly if you don’t like missing decent investment opportunities.
Persuading the banks to lend has, so far, been a bit like cajoling an elephant to move forward by beating its backside with a wad of cotton wool. The banks naturally claim that it’s not their fault. It’s not a supply problem, they assert. It’s because of lack of demand from British business. They say that, despite copious evidence, businesses are suffocating in droves from a lack of credit.
So why has this happened? We believe that the government’s latest cunning plan for getting the banks to lend- the “funding for lending” scheme - has a lot to do with it. Details of how the scheme will work were released last week. Of course, there have been similar schemes in the past, none of which has been conspicuous by its success. Remember Project Merlin, for example? Or the National Loan Guarantee Scheme? Me neither, except that both scheme fell well short of expectations.
July 2012 | www.financial-spread-betting.com | 27
Special Feature
There’s no guarantee that the same fate won’t befall the “funding for lending” scheme. But the scheme has received a much better press than earlier wheezes. Briefly, the scheme offers cheap funding to banks from the government, but only on condition that the money is lent on to small businesses and individuals. It has the potential to inject around £80 billion of lending into the economy. Some of this new money will go to into mortgage lending which will benefit house-builders. That’s the theory anyway. And that, I believe, is why house-building shares have taken off in tight formation. So will the latest scheme trigger a new housing boom? That’s a bit of a stretch of the imagination given today’s economic woes. And yet… it isn’t generally known that the biggest housing boom in our history occurred in the 1930s, a period most of us associate with the Great Depression - and is thus not so different from the current economic environment. After the Great War of 1914-18, the government realised that something had to be done about housing. Our housing stock was old and dilapidated, there were widespread slums and most people lived in poor quality shared rented accommodation. During the 1920s, the preferred policy was for the government to channel funds to local authorities to build rented housing. The target was to build 500,000 houses. By the end of the 1920s it was apparent that the government was falling far short of its targets, stymied largely by high interest rates. But in the 1930s, there were two game-changers. First, in 1931, Britain came off the gold standard. This led to a rapid fall in interest rates. Second, this was the golden era for building societies; many of whom saw themselves as being in the vanguard of a moral crusade to improve the lot of the working classes. Between 1935 and 1938, private enterprise housing production, financed by the building societies, had soared to around 270,000 units a year, far exceeding the 100,000 then being built by local authorities.
28 www.financial-spread-betting.com | July 2012
By way of comparison, according to figures from the NHBC, the pre-recession high in 2007 was 200,700 homes registered with NHBC (with a far higher UK population now than in the 1930s). Last year, the figure was just 115,020. There is one key similarity between the 1930s and now: interest rates were low in both periods. The key difference is that in the 1930s building societies were keen to lend. Today, the bigger building societies have converted to banks, and some, such as Northern Rock, Bradford & Bingley and HBOS, have failed. And trying to get a mortgage out of a bank is like getting blood out of the proverbial stone. But the demand for new houses would still be strong, if only buyers could get mortgages. Maybe it will get a bit easier now. Interest rates are low. And a new generation of “challenger banks” is springing up, such as Metro Bank, Virgin Money and banks operated by Asda, Sainsbury’s, Tesco, M&S and the Co-operative, not to mention credit unions; their growth driven by dissatisfaction with the big banks. Early days yet but who knows where that might lead? So the seeds for renewed prosperity of the house-building sector have been sown. It may well be that a sprinkling of nutritious “funding for lending” will be enough to trigger the germination of these seeds. Which is why I feel that, even though they’re not that sexy, you should include a quality house-building share in a diversified portfolio of equity trades. I’ve looked in some detail to see if any particular share stands out. Unfortunately, there’s no stand-out share not surprising, given that these companies have a good following from the investment research community, and have therefore been researched to death. Some look cheap on a p/e or PEG basis, yet they trade at a premium to net assets which make them look expensive on that measure. Some have an attractive forecast dividend yield, yet have a less enthusiastic write-up from research analysts.
Will “funding for lending” ease the banks’ home-o-phobia?
So I wouldn’t put you off investing in any of the following shares, all of which have their attractions; all of which are, according to our trend criteria, in the early stages of a new bull phase:
• • • • • •
Barratt Developments (BDEV) Bellway (BWY) Bovis Homes Group (BVS) Persimmon (PSN) Redrow (RDW) Berkeley Group Holdings (BKG)
You’ll have no problem spread betting any of these shares as their market capitalisation ranges from £0.48 billion (Redrow) to £1.95 billion (Persimmon). Just pay attention to those stops, in case those nasty eurozone countries rain on your parade yet again!
For more information on how our trend following system works, visit us at www.trendwatch.co.uk
July 2012 | www.financial-spread-betting.com | 29
Special Feature
30 www.financial-spread-betting.com | July 2012
SportingBet - Compelling valuation within the Gaming sector
Compelling valuation within the Gaming sector.
July 2012 | www.financial-spread-betting.com | 31
Special Feature
Business background Sportingbet is a highly regarded sports-book operator that achieves industry-leading margins and has a strong position in its main markets in both Europe and Australia. Betting on sports accounts for about 75% of revenue, casino and poker provide most of the balance. Historically, Sportingbet’s business was skewed to the Southern European markets of Spain, Greece and Turkey (51% of revenue in FY10). Post the acquisition of Centrebet and sale of the Turkish business to GVC by way of an effective ‘earn out’ structure where a target minimum of €142.5m (£115m) is expected to be received, 45% of revenues come from Australia, and over 90% of profits. About 65% now comes from regulated markets - mainly Australia, Spain, the UK, Denmark, Italy and South Africa.
Overview Spain finally issued gambling licences on 1 June and miuapuesta.es is trading in time for Euro 2012 (after an injunction had forced the temporary closure of the old website). Sportingbet now derives about 65% of its revenues from regulated markets, although it still faces economic uncertainty in Spain and Greece (together accounting for about 22% of its revenues). The Spanish events of the last few months were more damaging in that they highlighted the unpredictability of European markets until licensing regimes are fully implemented. However, Sportingbet also has growth opportunities elsewhere: in fast growing emerging markets, and also potentially with partners in the US which is slowly moving towards allowing some online gaming.
32 www.financial-spread-betting.com | July 2012
Risks: Regulatory and economic A number of Sportingbet’s markets have yet to introduce licences, notably Greece (although a law was passed and taxes are already being paid) and various smaller countries, while the German situation remains confused. This produces many uncertainties (tax rates, products allowed, IT requirements, new competition and enforcement). However, about two-thirds of revenues are already coming from regulated territories. In Australia it took three years for the benefit of 2008 regulation to flow through to profits, once faster market growth offset higher costs and increased competition. With around 22% of revenues (pre-gambling tax) coming from Greece and Spain, economic uncertainties will continue to weigh.
Financials: Australia growing, Europe break-even At this stage, the key to the story is confidence that Sportingbet can hold Europe around break-even while growing in Australia. This is reflected in FY13 numbers, slightly reduced to allow for reinvestment (e.g. marketing) in newly regulated markets (plus we have adjusted for the additional £15m of convertible issued to pay Spanish back-tax). Once European markets regulate and recession passes, and also if Australia allows new products, there is scope for significant profits growth. The balance sheet is sound with about £9m of net cash at 30 April plus £80m of convertible bonds.
SportingBet - Compelling valuation within the Gaming sector
Recent newsflow: Spain, the US, and Australia Spain – licence issued, back tax paid, Miapuesta.es open for business Spain has dominated recent newsflow with Sportingbet and other operators being awarded eGaming licences on 1 June, some months late. This is excellent news since it means that Miapuesta.es is up and running in time for Euro 2012. Sportingbet has historically held a top three position in Spain but was forced to suspend its Miapuesta.com website on 27 March due to an injunction by offline gaming giant Codere. The granting of the licence on 1 June negated part of the injunction and Sportingbet has applied to the court to have the remaining part of it cancelled, hopefully shortly. Spain normally generates about £20m of net gaming revenue (NGR) after tax, so Sportingbet lost about £2m of profit for the two-month closure.
More unhelpfully, it will have lost customers to rival sites and we have assumed that it will cost at least £2m to launch Miapuesta.es with bonus-ing and other marketing initiatives. With major industry players such as bwin.party digital entertainment and Bet365 also active, we expect Spain to be a highly competitive market. However, the Miapuesta brand is strong and, despite economic pressures, our FY13 estimate assumes a return to at least 70% of the FY11 revenue level. Sportingbet has paid Spanish gambling tax (25% of gross win, or roughly £8m a year) since May 2012. However, in May 2012 the Spanish government unexpectedly demanded payment of back-taxes (having dredged up two old laws, from 1966 and 1977, that had not previously been applied to offshore online gaming). The tax cost Sportingbet €17.2m (£13.8m) including interest, which it funded by issuing an additional £15m of 7% convertible bonds (as the cash was required at very short notice).
July 2012 | www.financial-spread-betting.com | 33
Special Feature
USA – final settlement with the DoJ, possible partnerships Sportingbet paid the final US$6.7m (£4.1m) of a US$33m (£21.3m) payment to the DoJ in March 2012 under the terms of the Non-Prosecution Agreement. This formally closes any risk relating to pre-October 2006 activities. In March, management confirmed that it is reviewing various US opportunities and press speculation has suggested that it is in discussions regarding the provision of services to the Foxwoods Resort Casino in Connecticut. We do not expect any news on this for a while, but any deal would be very positive given the growing momentum towards some US licensing of online gaming.
Australia – possible introduction of betting in:play and tournament poker At present, Sportingbet’s Australian licences only permit betting on sports and horses. On 29 May the Australian Government (DBCDE) published its Interim Report into the review of the Interactive Gambling Act 2001, for consultation. It indicates that betting in:play may be permitted (although not ball-by-ball ‘micro’ bets) together with online tournament poker. Given the government’s narrow majority, the timing is uncertain but the hope is that the new law may be introduced by December 2012. This would be enormously positive for Sportingbet. In Europe, betting in:play was only launched in 2006 but has proved enormously popular and now accounts for almost 70% of amounts wagered. Sportingbet generates an industry-leading margin of about 10% on in:play betting due to its sophisticated proprietary software and trading systems.
34 www.financial-spread-betting.com | July 2012
A significant shift in Sportingbet’s profits mix In FY11, Australia contributed £8.9m of profit or 23%. In FY12 we expect this to more than treble to £30.0m, including Centrebet and strong underlying growth (Exhibit 3). These are high-quality earnings from a regulated market. By contrast, European profit has fallen from £29m to zero due to the sale of the Turkey website, new gambling taxes and recession. We are confident that management has sufficient flexibility in the European cost structure to avoid losses although it has said that in the near term any increase in profitability will be reinvested in newly regulated markets. It may take time, but Europe should return to good profitability once new regulated markets settle down and recession eases.
Holding Europe at break-even Up to FY10/11 Sportingbet’s cost base was set up for a high-growth, largely pan-European operation with a significant proportion of profit coming from Turkey. The sale of the Turkish website business, deepening of recession and shift towards a local licensing model (with new taxes and compliance costs) has necessitated a significant cost-cutting programme. Since November 2011 alone, the non-Australian fixed cost base has been reduced by 22% or £15m a year, with cuts across almost all areas of the operation except for trading (Sportingbet continues to achieve industry-leading sports margins). All fat has now been cut from the operation, but there is still a fair amount of cost flexibility, e.g. expensive sponsorship contracts can be replaced by inexpensive online advertising.
SportingBet - Compelling valuation within the Gaming sector
Turkey contributed £10.2m (before costs) to European profits in the first half of FY12, before its sale, i.e. the rest of the Europe/emerging markets division lost £10.6m after central costs to produce a net £0.4m profit (Exhibit 3). So our £1m estimated loss for FY12 already reflects considerable H2 benefits from cost-cutting measures. The Q3 profit of £2.1m was slightly flattered by a currency gain while the seasonally weak Q4 will bear Spanish reactivation costs of about £2m, hopefully partly offset by the benefits of Euro 2012. A full year benefit of cost-cutting underpins our expectation of break-even for FY13 and management has said that it will adjust costs to ensure that this remains the case. Any increase in profitability will be reinvested in newly regulated markets (e.g. more marketing). This would principally be in Spain and Greece but possibly also Germany (where the licensing situation remains confused). Newly regulated markets do require a significant investment: meeting detailed IT, compliance, product and customer-registration requirements is no small matter, particularly when - as in Spain - the small print is only finalised at the last minute. Then there is the issue of land-grab: both new and existing competitors spending heavily on marketing to establish/re-establish brands in what is likely to be a more liberal marketing environment.
In the case of Greece, we assume a return to the drachma would halve sterling revenues (to say £9m) but many costs would also be in drachma (notably the marketing partner’s revenue share) so we believe the impact on profit would be modest. Greece passed an online gambling law in 2011 proposing a licensing regime (with a 30% profits tax), but complaints have been filed with the EU that it unfairly favours the state monopoly, OPAP. Given Greece’s current political and economic worries it is unclear when licences may be issued, but Sportingbet is already accruing and paying gaming taxes.
Turkey website sale: Dilutive, but a much better regulatory profile Selling the Turkish website business was dilutive (estimated profit/net income contribution £20m in FY12 versus £27m in FY11), but significantly improves the group’s risk profile and quality of earnings. Net income from EPC was £3.1m in Q312 (Q2: £2.6m). This is cash received as part of the earn-out (75% of adjusted profit), net of costs (mainly provision of the platform under the Transitional Services Agreement and some content costs).
We assume high rates of marketing expenditure may also restrain FY14 profits, but at this stage the range of possible outcomes is fairly wide and depends in part on the economy.
July 2012 | www.financial-spread-betting.com | 35
Special Feature
A recent update from EPC’s service provider, GVC, indicated that daily revenues in Turkey are running at an annualised €63.5m (£51m), slightly higher than the £49m Sportingbet reported for FY11. We expect about £30m of the £125m target minimum consideration to be received in FY13; against this, costs are still running at about £10m a year. GVC has to take over the platform by November 2014 and could do so earlier, which would be helpful, or be forced to with nine months’ notice on a change of control of Sportingbet.
Emerging markets: growing from a small base The emerging markets result was a little disappointing in the third quarter of FY12, partly reflecting the timing of sports events in the largest market, Brazil. However, prospects for this small division (which operates on the European platform) remain very good. The regulated South Africa business is growing well from a small base now that it has added horseracing products, while a new start-up in Chile is going well.
Australia: strong underlying growth and Centrebet synergies The Australian market has grown very strongly since it was deregulated in 2008, when inter-state advertising was allowed. Sportingbet’s like-for-like NGR growth in the nine months to April 2012 was 42% while the eight-month contribution from Centrebet was £23.8m (37% of the total). The two brand names are being maintained, but at the time of acquisition Sportingbet said that it had identified a net £9.4m of synergies including centralising operations (with about 120 job losses) and migrating Centrebet onto Sportingbet’s IT platform.
36 www.financial-spread-betting.com | July 2012
The integration is going very well and is scheduled to complete at the end of June when Centrebet customers should begin to benefit from a better product offering, particularly in mobile (a very popular product and over 34% of Sportingbet’s NGR in April). We expect Australia to contribute £30m of normalised operating profit in FY12 (a margin of 35%) versus £8.9m (24%) in FY11. Of this we estimate that approximately £6m comes from synergies, £15m from Sportingbet and £9m from Centrebet. Given that FY13 will include a full 12 months of Centrebet and further synergies, our projected 7% growth in operating profit, to £32m, may be rather cautious. However, in April New South Wales changed the ‘Product Fees’ it charges on racing from a revenue to a turnover based fee (of 1.5%) after Betfair lost a court case on the issue. Victoria recently announced that it would follow suit (probably from August). We have allowed for an additional £2m or so of cost in FY13, possibly more if Queensland or Western Australia follow.
Net cash about £9m, with £80m of convertible bonds Sportingbet had cash of £25m at 30 April (net of client liabilities) and debt of about £16m (including £8m of loans in respect of the Danish businesses acquired in December), i.e. net £9m cash. The very short notice demanded by the Spanish government meant that it funded the €17.2m (£13.8m) back-tax payment in May by issuing an extra £15m of 7% convertible bonds, on the same terms as the £65m issued last August on the acquisition of Centrebet. Our balance-sheet estimates allocate £70m of the £80m convertible to the debt portion. We expect net cash to hold fairly steadily in the short term with restructuring costs and costs relating to newly regulating markets offsetting the cash inflows from Turkey although, over time, the group should become much more strongly cash generative.
SportingBet - Compelling valuation within the Gaming sector
Valuation Sum of the parts 42-55p (at least 40% upside) The high-growth regulated Australian business could be worth £275-323m based on an EV/EBITDA of 8.5-10x (a reasonable discount to Paddy Power’s 14x multiple). It seems very cautious to value Sportingbet’s high-quality sports platform and profitable emerging markets business at zero, but we have done this for the ‘low’ case and applied a 4x multiple (just over half the sector average) for the ‘high’ case.
We expect Turkish sale proceeds of €142.5m (£115m) to be received over about four years but, again, we have been cautious in applying a discount and offsetting related costs. Overall our SOTP is 42-55p per share diluted for the convertible (a basic calculation would be marginally higher).
EV/EBITDA and P/E We estimate that the UK gambling sector is currently trading on an FY13 EV/EBITDA of 7x and a P/E of about 11x. Sportingbet trades at a significant discount which seems overly harsh given its Australian business and improving regulatory profile.
Our FY13e EV/EBITDA is 5.9x and P/E of just 6.0x. EBITDA already excludes Turkey; if we also exclude it from EPS and instead ascribe a cautious value to the net proceeds of £80m or 9.3p per diluted share, our EV/EBITDA becomes 4.2x and the P/E is 7.7x.
July 2012 | www.financial-spread-betting.com | 37
Special Feature
Technical Picture The weekly chart below displays a clear 5 elliot wave count (which is numbered on the chart - see last month’s edition of our magazine, page 84 for an explanation of this) down from the highs of 80p in mid 2010 to the recent lows of 25p, and also a double bottom around this level - one in December 2011 and the second one just recently. The stock looks to be in the early stages of a bull market with the RSI rising towards the key 50 level and the downtrending flag formation being probed on the upside. A break of this would presage a 30p move (the height of the flag). First resistance comes in at 40p.
We wouldn’t discount, however, the possibility of a 3rd bottom in the mid 20p’s - it is easy to see a continuing worsening of the situation in Spain as the catalyst for this. A move above 35p would negate this scenario though and send loud signals that the trend had turned (2 years being the typical bear period in any event, and of which we are now complete from a timescale perspective).
SPORTINGBET CHART
Disclaimer - The basis of this research has been supplied by Edison Investment Research (EIR). EIR do not advocate buy or sell recommendations and the opinion expressed within this piece is solely that of Spreadbet Magazine.
38 www.financial-spread-betting.com | July 2012
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July 2012 | www.financial-spread-betting.com | 39
Special Feature
Best Smart Phones to Use For Spreadbetting and Trading
40 www.financial-spread-betting.com | July 2012
Best Smart Phones to Use
Smart phones touch every part of our lives; they are (literally in Apple’s case) our personal assistants who track our contacts and calendars, nag us gently with reminders and help us stay connected with the world around us. The days are long gone when we were giddy that our phone came with an in-built calculator, preferring now instead to send birds flying across our touchscreens into castles full of pigs, but what are the most useful phones for spreadbetting and trading? And how important is the battle between hardware and software?
July 2012 | www.financial-spread-betting.com | 41
Special Feature
Phone: HTC Sensation XE with Beats Audio Operating System: Android v2.3.4 Price: £373.73 (SIM free) Top Apps: City Trading, Forex, Stocks The HTC Sensation XE (the XE stands for eXtended Edition) is the super tuned highly featured version of the wildly successful HTC Sensation. Although the phone is being sold on its remarkable audio capabilities and the eponymous Beats headphones, this smartphone is no slouch when it comes to more traditional and productive fare. Slick hardware is built around a lightning fast 1.5 GHz dual-core processor with 1 GB RAM which delivers a mobile experience that is so quick it feels as though the phone knows what you want before you ask for it.
As with most Android phones, the lockscreen, displayed on a gorgeous 4.3” qHD display, is completely customisable so you check your portfolio without even unlocking your phone. There are better apps than the Stocks, Stock Quote and Stock Watcher trio that are ubiquitous; City Trading, for example, which allows you to check prices, open and close positions and fully manage your orders right from your handset. With speed, looks and a fantastic audio package, this phone looks like a world beater.
Phone: Samsung Galaxy SIII Operating System: Android v4.0 Price: £439.99 (SIM free) Top Apps: GTalk, InterTrader, Finance Each incarnation of the Samsung Galaxy has been touted by its users as the best smartphone of all time and the phone that slayed the Apple iPhone. While some of those claims may be exaggerated (Apple show no sign of leaving the party just yet), there is no doubt that the Galaxy SIII is a remarkable phone.
An immersive 4.8 inch HD Super AMOLED screen which feels twice the size is capable of displaying video in almost any format that you can throw at it. Coupled with an 8 megapixel camera and a camcorder that records in full HD and the package is a visual dream come true.
With Android phones being broadly capable of the same things, built as they are on almost identical operating systems, the market is dominated by those who win the hardware wars. This alone has pushed Samsung to achieve beyond what most would have thought possible five years ago.
For trading and spreadbetting, the phone comes into its own with the Pop up Play feature which makes full use of both the mighty Quad processor and the beautiful screen by allowing multi-tasking within the same screen.
42 www.financial-spread-betting.com | July 2012
Best Smart Phones to Use
Phone: Apple iPhone 5 Operating System: iOS 6 Price: £439.99 (SIM free) Top Apps: Release expected October 2012 So why have we decided to include a phone that hasn’t even been released yet? The simple answer is Apple’s roll-call of excellence leads us to conclude that the new phone will be nothing short of incredible. The iPhone 4S is one of the best smartphones of all time and it’s arguable that there is no better trading and spreadbetting experience than that which you get with the iPad 3. So, what can we expect from the iPhone 5? Well, we’re in the middle of a rumour mill currently and the famously secretive Apple haven’t released any concrete details, other than a new operating system, so all that we have is guess work.
In the main, rumours focus on what the Galaxy has that the iPhone 4S hasn’t, so suggestions abound that Apple will include a much bigger, sharper screen, an improved camera and a full HD camcorder. There are also improbable rumours that the new phone will include an interchangeable camera lens and be made completely from liquid metal. Whatever the case, it is certain that the new iPhone will be a huge success.
Photo Credits: HTC Sensation XE (http://cdn-static.cnet.co.uk/i/product_media/40001609/image3/440x330-htc-sensation-xe-headphones.jpg) Samsung Galaxy SIII (http://1.bp.blogspot.com/-YEB6CzinjAI/T8ivLHAzatI/AAAAAAAAAK8/jqfreSibe80/s1600/Samsung+Galaxy+S3.jpg) iPhone 5 (http://www.theplaymob.com/wp-content/uploads/2012/04/iphone-5-rumour.png
July 2012 | www.financial-spread-betting.com | 43
LS Trader feature
On one of the all time “Market Wizards”Ed Seykota I first heard about legendary trend trader Ed Seykota back in the late 90s (shows how old I’m getting!) whilst reading a copy of Jack Schwager’s classic book “Market Wizards”. For those who have not read the book, it is a great read and in it Schwager expertly interviews a number of the top traders of the time.
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“Market Wizards” - Ed Seykota
For me, the standout interview in the book was with Seykota. Reading this interview alone is enough to set the trader on the right path. Throughout the interview Sekyota gives various jewels of trading advice. I have interspersed this piece with numerous quotes from Seykota. I suggest reading each quote and letting it sink in before reading further. You may gain considerable insight by doing so.
“Win or lose, everybody gets what they want out of the market. Some people seem to like to lose, so they win by losing money” Before we go into Seykota in a bit more detail, let’s just qualify his performance as a trader and money manager. Seykota does not make his records public, but according to what is available Seykota has averaged in excess of 60% per year net of fees since 1974! This, on a returns basis, puts him ahead of anyone else over the same time period and by quite a long way. His model account reportedly turned $5,000 into approximately $15,000,000 in 12 years for a return of approximately 250,000%! This return has been adjusted for capital withdrawals so in theory it is considerably higher! Jack Schwager, the author of Market Wizards, states, “I know of no trader who has matched this track record over the same length of time.”
“The trend is your friend until the end when it bends”
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LS Trader feature
The reason why Seykota is not a household name is that, for the most part, he keeps himself to himself and does not manage the substantial sums that other less capable money managers do. Not because he can’t attract the investment, simply that he chooses not to for his own reasons. He also trades by himself from an office in his home in Lake Tahoe, and has had few, if any, staff over the years to assist him. Considering that he has achieved the aforementioned returns by using a purely mechanical approach, it is very much worthwhile exploring and understanding what he has to say. This is something I did over a decade ago; finding out everything I possibly could about his trading principles and trading style. Doing this enabled me to drastically speed up the learning process.
“The elements of good trading are: 1. Cutting losses, 2. Cutting losses, 3. Cutting losses. If you can follow these three rules you may have a chance.” Seykota cites his early influence in trading to Richard Donchian, known as the father of trend following. Seykota came across Donchian in a newsletter where Donchian stated that a purely mechanical system could beat the market. Seykota decided to test this concept and prove to himself that Donchian’s assertion was true; that mechanical systems could beat the markets. From there Seykota became an ardent tester of trading systems and concluded that a mechanical trend following approach, with good money management, was the optimum approach; an approach that he has been using himself to beat the markets consistently for almost 4 decades. Think about that for a moment; 4 decades - that’s some advocation for trend following systems. One of the key things that I personally took from Seykota’s musings, and that has been a huge influence on my trading approach ever since, is the importance of testing everything.
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Whilst it is true that back-testing does not ensur successful future performance, you can pretty much guarantee that if something does not work in back-testing it certainly will not work in real life. This approach of testing everything is central to Seykota’s approach, and even after all these years he continues to test and refine his approach; a strategy that we have modelled at LS Trader where we are constantly carrying out testing and further research to ensure our approach remains at the cutting edge of trend following - consider that this year we are up almost 60% against a largely flat market. Seykota is, to me, the trading equivalent of the Star Wars character “Yoda” who, you will recall, has a very advanced intellect; Seykota similarly perceives the market in a unique way. He has even formed his own style of communicating; speaking and writing almost exclusively in the present tense. He rarely makes references to the past or the future. He follows a purely mechanical trend following approach to trading the markets combined with robust risk management rules. He is totally unconcerned with fundamentals; stating that they are all but useless for the trader, and in fact calls them “funny-mentals” taking all the information he needs to trade from the chart and the price. He is similarly unconcerned with trying to predict the future, an exercise he considers pointless. Compare this approach to the many “talking heads” you see on various financial news services and judge the two approaches by their respective records..!
“I don’t predict a non-existing future.” He eschews day trading and states that it is virtually impossible to day trade profitably due to the transaction costs incurred by frequently entering and exiting trades, and is very much in favour of a longer-term low frequency trend trading approach. My research definitely concurs on both points. “In order of importance for me are: a. the long-term trends, b. the current chart pattern and c, picking a good spot to buy or sell”.
Some of his trading rules are: a) b) c) d) e)
cut losses ride winners keep bets small follow the rules without question know when to break the rules
Below I have included a few other quotes from Seykota that give an insight in to his thinking process and approach to trading:
“If you can’t take a small loss, sooner or later you will take the mother of all losses” “There are old traders, there are bold traders, but there are very few old, bold traders” “It can be very expensive to try to convince the markets you are right” “To avoid whipsaw losses, stop trading” “If you want to know everything about the market, go to the beach. Push and pull your hands with the waves. Some are bigger waves, some are smaller. But if you try to push the wave out when it’s coming in, it’ll never happen. The market is always right.”
“Risk no more than you can afford to lose and also risk enough so that a win is meaningful.” “Fundamentalists and anticipators may have difficulties with risk control because a trade keeps looking ‘better’ the more it goes against them.” Gaining access to Seykota is not easy and due to his success as a money manager he is fairly selective about accepting clients’ funds, putting various barriers of entry in front of them. These barriers include certain capital requirements as well as interviewing each prospective client several times to ensure that their thinking and objectives are aligned with his. He states that clients, whose thinking is aligned with his, tend to improve his performance whereas those who are not compatible tend to hinder his performance. For most, gaining access will not be possible; leaving them to either follow in his footsteps and do decades of trading research to develop their own trading system or take advantage of someone else’s. One system that is very similar to Seykota’s mechanical trend following approach is our LS Trader system: a system that incorporates all of the rules mentioned in this article. In fact, much of Seykota’s conclusions have been verified by our own research and testing that we have been undertaking at LS Trader for well over a decade.
If you’re interested in trying out a mechanical trend following system but don’t have the time or inclination to research and build your own, you can take the LS Trader system for a 30-day free trial by visiting the following link: www.LSTrader.co.uk/spreadbetmag Good trading, Phil Seaton
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Special Feature
Where have Capital Spreads clients been placing their trades in H1 of 2012?
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Capital Spreads
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Special Feature
Angus Campbell, Chief market analyst at London Capital Group, provides Spreadbet Magazine readers with an interesting take on just what their clients have been trading this year - were you in the majority or minority? The first half of 2012 has certainly had its ups and downs and it has been interesting to observe just how our clients have reacted to those trends. When speaking to a fund manager friend of mine just recently, he was proud to relay that he had managed to eke out a gain of 7% for the first half of this year, but that it felt like he’d been subject to 12 rounds with a heavyweight boxer in order to achieve this! It would be hard to say the same for clients who, on the whole, would have experienced a half of two very different quarters. In Q1 it can be said that the trading conditions were definitely very conducive to clients’ trading habits, whereas in Q2 the boxing got a little more ferocious...
FTSE 100 CHART
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In what was almost a carbon copy of 2011, we commenced the year slowly grinding higher as investors remained optimistic that the eurozone would muddle through, but then it soon became apparent that Greece was teetering on the edge and close to exiting altogether. Then we were off to the races as volatility suddenly picked up and a so called “Grexit” looked increasingly likely. For now, however, the country has survived and yet we can’t ignore the fact that the serious issue of Greece’s debt burden and the impact of austerity on her much maligned population could re-emerge at any time as expectations within the markets are still rife that the country will, ultimately, have to leave the eurozone at some point.
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Special Feature
The FTSE 100 remains one of our most popular traded markets and as can be easily deciphered from the graph above, in particular during January and March of Q1, the index ground higher and remained in a very narrow trading range, much like many of the other global markets.
As mentioned, this provided good trading conditions for clients, however, as can be seen from the chart below which illustrates actual client activity; the lack of volatility and ‘excitement’ put off many people who migrated over to currencies to presumably try and find a little more action.
Client activity
This trend then reversed from March onwards when things in the eurozone started to kick off and which subsequently led to the Greek default yet still managing somehow to remain within the single currency. The resultant volatility in indices attracted many punters back to the likes of the FTSE and Dow with the number of trades in this asset class peaking in May at which point both volatility and fear was at its highest, and that also coincided with the FTSE’s low for the year - an occurrence which typically goes hand in hand, we have observed.
As the markets rebounded towards the end of Q2 and volatility fell away, we saw an almost instant change in client behaviour as they migrated back away from trading the indices into FX once again. It will be interesting to see just what shape client activity takes for the remainder of the year; in particular with the Olympics about start in earnest and the Great British summer now in full swing (what summer I hear you cry!) as volumes are expected to quieten.
While LCG attempts to ensure that the information herein is accurate at the date the information was produced, however, LCG does not guarantee the accuracy, timeliness, completeness, performance or fitness for a particular purpose of any of the information provided herein and under no circumstances are they to be considered an offer, solicitation to invest or be construed as giving investment advice.
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Options Corner
Options Corner The optimum time to consider Purchasing Straddles & Strangles Last month in Options Corner we covered how selling Straddles (an at-the-money Put & Call option combination) and Strangles (an out-of-the-money Put & Call option combination) could potentially be avenues to make money in largely range bound or trendless markets - akin to what we have been experiencing so far during 2012. This month, we take a look at how Straddles and Strangles can be useful in certain environments and finish up with a trade recommendation for implementing such a strategy.
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Options Corner
Straddle Recall that a straddle is the inception of a simultaneous position in both a Call & Put option (a ‘short’ Straddle being the sale of both options and a ‘long’ Straddle being a purchase of both options) - both being ‘at-the-money’. You should look to implement a long Straddle under the following environment: (i) when you are expecting a sharp move on the underlying instrument, but are unsure which way this move will be and, (ii) ideally, when volatility (“implied”) is relatively low - remember you are now paying for volatility as opposed to ‘selling’ it per last month’s piece. What type of scenario is this applicable to? Well, a simple example is the publication of the once a month market moving statistic that is the non-farm payrolls figure - global markets, more often than not, move sharply on this number - sometimes by 2 or 3%. A long straddle, providing you do not pay too much for the premium, is the perfect way to play such an event.
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Let’s look at a possible example: A few days before the non-farm payrolls figure the FTSE is trading at 5600 and the following month expiring Call options are trading at 57 and the Puts at 68. If you were to initiate a £10 per point position in the 5600 Straddle, the net cost to you would be £1250 (68 + 57 x £10). Now, your breakeven point is 5725 or 5475 being the respective strike prices +/- the combined cost (the breakeven level excludes the residual time value which, in practice, will make this narrower the further away from expiry you are). If the market falls to say 5400 on a bad set of figures, then your profit would be 75pts x £10 = £750. All the while, of course, you know what your fixed risk is - £1250 (again, due to the residual time value, until expiry you could, of course, sell the options at any time and recoup the residual premium). Below is a diagram of a Long Straddle.
Purchasing Straddles & Strangles
Strangle A Strangle is very similar to the Straddle except the Call and Put options that you purchase are both ‘out-of-the-money’. The net effect is that the cost of the strategy is lower but, as with anything in investment, the lower the cost, the lower the probability of a return. With a Strangle you are basically paying purely for time value and you require a larger move to occur in order to make a profit. Let’s look at the FTSE example above again, but this time using the 5500 & 5700 Put and Call strikes respectively. The 5500 Puts would trade for say 33 and the Calls for say 29. Net cost of £10 per point = £620 (33 + 29). Your breakeven levels are now 5438 & 5762 (5500 strike - 62 premium & 5700 strike + 62
Tip - when trading Straddles and Strangles from the long side, similar to the suggestion in last month’s piece when you are short this strategy, if you get into a situation where you can take out your initial straddle cost, you should do this and then leave the balance position on - you will greatly extend the life of your option account by following this money management rule. In the Straddle example above you would sell £5 per point if the combined value of the position was 124 (124 x £5 = £620), and so taking your original stake out. You can then carry the position for free. As you will see throughout the entirety of this magazine, there is a common vein of ‘trading psychology’ - essentially putting your mind in a good place through the judicious application of money management parameters and also leverage control - apply these and you will feel exponentially more comfortable with your spreadbetting.
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Options Corner
Taking the current market backdrop and linking in with one of our previous Conviction Buy recommendations (which has not played out well so far, it has to be said) an ideal candidate for a Strangle play is Research in Motion. Research in Motion’s outcome is now very binary - either they will burn through their cash over the next 2 years and die a slow death or they will be bought. This type of scenario is a classic Strangle play and so you could construct a combined January 2013 (and so plenty of time to run) $10 Call & a Jan $5 Put strategy for a net cost of $1.
If Research in Motion get taken out, they are likely to go for towards the $15-20 price range, and if they continue lower, then the end game will be sub $5. A $1 cost with break-evens of $4 & $11 looks a decent trade to us and also hedges a long stock position. An upside move on a bid could yield 4 - 9 times your money. Below is a chart of RIM with the expected Strangle range underlying this recommendation.
Research in Motion weekly chart
Next month we will take a look at “ratio spreads” and how you can construct a strategy that has almost no risk if you enter it wisely and then results in a potentially explosive pay-off!
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A ContrarianUK piece
A Contrarian Investor UK piece on
Apple facts and figures & the enigmatic Steve Jobs Before Apple co-founder Steve Jobs sadly died in October 2011 at the relatively young age of 56, he collaborated with Walter Isaacson to write a book about his life. Isaacson later followed up the book with an article in the Harvard Business Review that gave reasons for the incredible success story behind Apple and his key management principles. From the time in 1997 that Jobs returned to an almost broken company after previously being forced out, under his stewardship, the last 15 years have made the company an incredible investment for those holders of the stock. After an unprecedented period of unbroken growth it now sits at the top of the most valuable companies in the world with a $566 billion market capitalisation company - the very definition of capitalist success.
Job’s mantras were absolutely key in turning Apple from a dog of the Nasdaq in the mid 1990’s into one of the most respected corporations in the world. These lessons are key for success in technology where the focus is all too often on short term gimmicks (remember Motorola?) or unsustainable business models (remember the dot.com crash?).
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A ContrarianUK piece
Here are his mantra’s 1) Focus
7) Don’t Be a Slave To consumer Focus Groups
Deciding what not to do is as important as deciding what to do, “That’s true for companies, and it’s true for products.”
“Because customers don’t know what they want until we’ve shown them.” Remember Henry Ford’s line “If I’d asked customers what they wanted, they would have told me, ‘A faster horse!’” Intuition is key.
2) Simplify
8) Bend Reality
“Simplicity is the ultimate sophistication,” “It takes a lot of hard work,” he said, “to make something simple, to truly understand the underlying challenges and come up with elegant solutions.”
“You did the impossible because you didn’t realize it was impossible.”
3) Take Responsibility End to End
People form an opinion about a product or a company on the basis of how it is presented and packaged.
Do not look to shirk your responsibilities and delegate appropriately.
10) Push for Perfection
4) Create a consumer Eco system
Second best and compromise are not to be tolerated.
“People are busy,” he said. “They have other things to do than think about how to integrate their computers and devices.”
11) Tolerate Only “A” Players
5) When Behind, Leapfrog The mark of an innovative company is not only that it comes up with new ideas first. It also knows how to leapfrog when it finds itself behind.
6) Put Products Before Profits “Don’t compromise.” “When the sales guys run the company, the product guys don’t matter so much, and a lot of them just turn off”, “my passion has been to build an enduring company where people were motivated to make great products. Everything else was secondary. Sure, it was great to make a profit, because that was what allowed you to make great products. But the products, not the profits, were the motivation.”
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9) Impute
Avoid “the bozo explosion” in which managers are so polite that mediocre people feel comfortable sticking around. “I’ve learned over the years that when you have really good people, you don’t have to baby them,” “By expecting them to do great things, you can get them to do great things. “
Apple facts and figures & the enigmatic Steve Jobs
12) Engage Face-to-Face Jobs hated formal presentations: “I hate the way people use slide presentations instead of thinking,” “People who know what they’re talking about don’t need PowerPoint.”
13) Know Both the Big Picture and the Details Detail is everything and an awareness of how they fit into the bigger picture smoothes the process of product creation.
14) Combine the Humanities with the Sciences Consumers want to feel the emotion behind products, not just rational features.
15) Stay Hungry, Stay Foolish Jobs believed that no matter how successful you were, you should keep the desire burning and not be afraid to push the envelope.
Apple weekly chart
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A ContrarianUK piece
Financials At a stock price of $614, Apple has a market capitalisation of $566 billion. 2011 revenue were $109 billion with revenue per employee of $2.2 million - a phenomenal sum that pays testimony to the creative genius of Apple. In July 2002 the company’s shares were $9. Someone investing $100 in 2002 would now have an investment worth $6820 in 2012! The company spends nearly $2.5 billion on research and development. Net income was $26 billion in 2011 compared with $3.5 billion in 2007, a seven and a half fold increase. In 2011 cash and short term investments totalled $26 billion with no debt. Estimates for the year October to September 2012 are for earnings of $46-47 and so a modest price/earnings of just over 13 times. For 2012/13 average estimates are for $54 in earnings. The 52 week high is $644 and low is $349, opening 2012 at $356. The company is so large that it now accounts for 12% of the Nasdaq Composite and 4.5% of the S&P 500. In March 2012 Apple has said it will use its cash pile to start paying a dividend to shareholders and to buy back some of its shares. It will pay a quarterly dividend of $2.65 per share from July and buy back $10 billion of its shares starting in the company’s next financial year which begins on 30 September 2012. The dividend and buy back will cost an estimated $45 billion over the next three years. The last time the company paid a dividend was 1995; two years before Jobs came back to the company in a state of disarray.
The future The question is what the future holds for Apple? Will it be like the last 15 years, or are things getting tougher for the success story above all other success stories? Is Tim Cook up to the task and can he step into the very large shoes that Jobs left behind...?
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It is hard to imagine now, but Microsoft helped bail out the company with a $150 million investment in 1997. Its shares had collapsed under the leadership of Gil Amelio and John Sculley who took the helm from Jobs after he was ousted from the company and left to found NeXT (a new computer company) and buy animation studio Pixar - from which he went on to make over a billion dollars. Apple continues to throw out exciting new products from its R&D department. It recently launched a well received new ultra thin Mac Book Pro computer with a super high resolution retina display which followed the iPad 3 in March this year. Apple will report earnings for its third fiscal quarter on Tuesday, July 24 (its fiscal year is between October and September). Investors will be looking at the performance of the iPhone and eagerly await news of the next generation iPhone 5 due out this autumn. There are rumours of a mini iPad to compete with the Samsung Galaxy Tablet range and possibly the much anticipated Apple TV set - in short, an exciting array of products for the Apple acolytes, and that should continue to keep the coffers of the company overflowing... The consensus forecast for the next quarter in terms of revenues is $37.5 billion or $10.4 per share compared with $12.39 for the last quarter, but given the anticipated launch of IPhone 5 this figure could well be under pressure as consumers put off upgrading their phones and avoid the current iPhone 4S model. iPhone shipments are expected to be 27-28 million in the quarter. Analysts are expecting iPad sales to come in around the 15-20 million mark compared with 9.25 million in the same quarter in 2011. If Apple can generate the expected earnings of $47 for the year ending September 2012, that puts it on a forward p/e of around 13. If it can increase earnings to $53 with the launch of iPhone 5 and Apple TV set in late 2012/13 then it puts the company on a very undemanding p/e of 11 times. Compare that with Facebook at a p/e of 63 at its current $30 price!
Apple facts and figures & the enigmatic Steve Jobs
Assuming that Apple can continue to innovate at the pace it has done in the past, and enter the TV market in a revolutionary way which takes share from the established players like Samsung, Sony and others, then there seems to be no reason why $53 of earnings in 2012 are impossible. Apple is an incredibly well run company which is a great example to many of the underperforming CEO’s out there (I can think of Research and Motion and Nokia in tech) of how to stay right at the top in the technology space for years on end.
Competition is increasing of course. Samsung is doing a great job pushing the Android phone platform developed by Google, and Microsoft is due to enter the tablet market with the Surface which might heat things up for iPad. But consumer loyalty to Apple compared with Microsoft, Dell and others can’t be underestimated. The company has managed to emotionally tie consumers to its products like no other: meaning that once you are using a Mac computer or an iPhone, it is difficult to go back to a PC or a Nokia. Apple is an incredibly well run company which is a great example to many of the underperforming CEO’s out there (I can think of Research and Motion and Nokia in tech) of how to stay right at the top in the technology space for years on end.
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A ContrarianUK piece
Spreadbetting on a Eurozone Breakup Over the last few years, especially following Ireland’s bailout, many voices have been heard, many debates have been made and many newspapers have been sold; all centred on the Eurozone’s problems and trying to explore the potential consequences of a possible breakup.
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How to profit from the Eurozone breakup
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Special Feature
The Eurozone, as a group of seventeen, is in serious danger as many see it shrinking. If everything occurs in an orderly manner, the Eurozone may lose one member or maybe two or three in one year’s time, but still keep going. If things go terribly wrong, the Eurozone may consolidate into a core of strong Northern nations anchored by France, Germany and the Benelux and a 2-tier continent similar to the old days before the ERM will likely emerge. The austerity measures imposed on Portugal, Ireland, Italy, Greece and Spain (the so called PIIGS) have been so rigid that these governments are now facing huge costs as a consequence of the implementation of these measures, and that are translating into galloping unemployment rates and abrupt contractions in the respective countries economic output. Living conditions are deteriorating quickly and social upheaval is arising. The Greeks had to renegotiate debt terms last year to avoid a default and a number of Spanish banks also had to receive a bailout a few days ago to avoid bankruptcy. Similarly, Cyprus is now part of the ignominious club of bailed out countries, and uncertainty about the future for these nations continues to rise. In order to avoid being caught off-guard in the middle of a political and economic chaos, spread bettors need to understand all the options and possibilities they face.
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narios. The effects that would reverberate from a partial or total breakup extend to all markets and asset classes, and the potential gains or losses may be gigantic - get these right and your year is made; get them wrong and you’ll be crying into your cornflakes! Let’s take a look into the most likely scenarios.
Three Scenarios We Must Consider Between a partial and a full breakup there are so many variations that it would be impossible to consider them all, but there are at least three scenarios that are worth being highlighted: a total breakup, a split into two euro areas, and a shrunken euro area. The last scenario is, in our opinion, the most likely to happen at this point, but we will briefly look at all options.
Total Breakup A total breakup is something that is very unlikely to suddenly occur quite simply because of the vested political capital and interest of the major European leaders who will try everything they possibly can to keep the Euro alive. Only after failing completely they will put such an option on the table. A total breakup is more likely to occur as a consequence of a partial breakup that went really wrong. At that point, the worst would have likely come to pass and a total breakup would be a mere formality.
How to profit from the Eurozone breakup
Split Into Two Euro Areas This is another option with, in our opinion, a low probability of occurring, but has been put on the table several times not only now but also before the creation of the Eurozone. Since there is a distinction between the PIIGS and the rest of the Eurozone or, more simply, between the northern and southern countries, some economists think Germany could try to create a restricted euro area with countries like Austria and the Netherlands that have more of a tradition of imposing tight controls on budget deficits and let the other countries form a second Eurozone. Since France would hardly accept German leadership, it would probably prefer to join this second Eurozone as the leading country. But one of the reasons that led to the creation of the EU in 1957 was to join Germany and France in the same area. A split into two euro areas would undermine the original objectives of the EU creation. If France were to opt out of such a ‘first’ Eurozone group, then every other country would see the second group as a sort of championship league for the relegated teams. The idea of Europe running at two speeds has previously been abandoned and we doubt it can be adopted now.
Partial Breakup This is the most likely scenario, and the one spread bettors should be prepared for. At some point in time, one or more Eurozone countries can decide to exit (or maybe not actually being left with any other option).
The effects deriving from such a decision would vary widely from country to country and depending on how suddenly it occurs and also how mutually agreed-upon the exit is. The bigger the surprise; the uglier the financial consequences. The most discussed possibility has been that of a Greek exit. Germany, and especially Finland, are giving out increasingly more apparent signs of an unwillingness to supply much more in the way of funds or, indeed, to give any extension on adopted measures for the bailed out countries. With Greece’s GDP representing just 1.7% of the EU total output as the chart above illustrates, they may be tempted to cut the oxygen. No doubt preparations for such an outcome have been scenario tested and the major banks would survive it. The exit would occur in an orderly manner and, aside from an initial knee-jerk reaction, equities around the world wouldn’t suffer much from it. The Greek’s would, of course, suffer the most with unemployment rising, output being slashed and their international trade initially falling. The Drachma would be re-introduced - with a probable immediate halving of its value relative to its Euro entry level. The gains in competitiveness would be outpaced by inflation in the short term and the economy further throttled by rises in interest rates. It seems that either route, inside or outside the euro, the Greeks will continue to see their economy shrink. Should Greece be ejected from the Eurozone, a trade to consider would be to buy the exporters and those tourism exposed plays on a sharp sell off.
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Special Feature
Unfortunately, financial and economic linkages are strong in this era of Globalisation and, if Greece is pushed out, investors would start to fear the same fate for the other PIIGS, and will require higher yields to buy Sovereign debt from these troubled countries. No matter the efforts to accomplish all troika goals, Portugal, Italy, Ireland, and Spain would face prohibitive borrowing costs in public debt markets. That may trigger the need for a bailout in the giant of the pack - Italy or the need for further austerity in others. Downgrades from ratings agencies would follow, share values would suffer in those countries and the Euro will become more volatile. The problem of a simple, orderly exit by only Greece would likely turn into the problem of an exit question hanging over several other countries. If more than one country exits, or if one of the exiting countries is Italy or Spain, things would be uglier, much uglier... Italy and Spain are the fourth and fifth largest EU economies representing 12.5% and 8.5% respectively of the Union’s GDP.
Italian & Spanish equities weekly chart
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If one of those is pushed out of the Eurozone, the negative effects would spread very quickly. First of all, the exit of one of those countries would almost certainly lead to the inevitable exit of all the other PIIGS. As a whole, they represent one quarter of EU GDP, not a negligible portion like Greece. The Euro would most likely suffer huge losses against the US Dollar, the Yen and the Pound as investors run for the exit from Sovereign bonds. Banks all over Europe own too many assets from these countries and their balance sheets simply wouldn’t be able to absorb the losses and many would fail. Credit conditions would tighten all over Europe and recession couldn’t be avoided. Italy and Spain are key to this problem and spread bettors should concentrate on how their specific situations develop. The Ibex 35 and the FTSE MIB have plunged more than 30% since 2011 and short positions continue to be favoured. Short positions on the large German and UK banks would be fertile profit hunting ground too.
How to profit from the Eurozone breakup
What May Happen In The UK? The disruption of the Eurozone, or at least of part of it, has important potential effects on the British economy. The pound has been acting as a safe heaven in recent months, in stark contrast to the severe depreciation of recent years. Investors and citizens of troubled countries are looking for places to put their money and the pound is presently near the top of their list of choices. The coalition government welcomes this influx of capital (if not the BoE) as it provides them the ability to raise debt at a very low cost. A 10-year Gilt is currently yielding just 1.55%, near generational record-lows and, if trouble continues to mount in the Eurozone, this yield is expected to decrease potentially even more.
Spread bettors may defensively add some Gilts to their portfolios and benefit from such a situation. Shorting the EUR/GBP cross is also a valid option as the extra demand for pounds may continue to push up the price of the Pound relative to Europe. The pair is quickly approaching the low observed on October 2008 at 0.7691 and if a breakup of the Eurozone does materialise the range trading observed during 2005 and 2007 between 0.65 and 0.71 could very easily be reached again.
Euro / GBP weekly chart
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Special Feature
The Swiss Franc Peg Won’t Hold The Eurozone problems have resulted in such an increased demand for the Swiss Franc that the Swiss National Bank (SNB) were forced to implement a ‘peg’ to the Euro at a rate of 1.20, after exhausting all other traditional measures to curb its strength. The SNB cut its key interest rate to zero but that didn’t prevent money from entering the country and denting economic growth.
And so, in a desperate move, the SNB pegged the currency to the Euro. Can this peg hold in the event that there is a significant euro area exit? It’s hard to believe. People looking for safe places to put money will target the Swiss Franc and will frustrate the SNB efforts. Being short on EUR/CHF is a potential low risk bet with significant profit potential - what is called a positive risk: reward skew.
Euro / CHF daily chart
Germany Will Be In Trouble The German economy is an export driven one. Half the €2.57 trillion the country registered as output last year came from exports and the EU is the main destination representing 59% of the country’s total market.
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In the event of a major disruption in the Euro, a new Deutsche Mark would likely appreciate so dramatically, and the contraction amongst European countries would be so acute that Germany would inevitably suffer a deep recession.
How to profit from the Eurozone breakup
China, US And The Rest Of The World The US and Japan may be countries that have some degree of firewall protection, but they won’t be in a safe position in the medium term. China is a major concern. The country has already been cooling as detailed in the latest GDP data, and its main import and export partner is of course the EU. Should the Eurozone end or shrink, or even if the EU economies simply continue retreating, international trade will be affected and Chinese policy makers will not be able to avoid a hard landing for the economy. Conclusion: Any break away by a member country of the Euro, even if only a partial break up, would result in a severe drag on most global economies, and would be a serious drawback for the European project; representing a retreat of decades of vested political interest - this will not be given up easily. Any recession would be deep and long lasting.
As a spreadbettor, if you are in the camp that we will muddle through, then a risk long position in Italian and Spanish equities could pay handsome dividends, as with a short Gold and long Euro position. If you want to position yourself for a break up, then a look at Eurusd Put options, Treasury bond Call options and FTSE Put options will likely provide materially profitable pay offs should the worst come to pass. Will a breakup really happen? No one knows for sure, but I don’t doubt that Angela Merkel, against what many think, will try to avoid it at all costs. An export-driven economy, with 60% of its exports being absorbed by the EU, would only be a big loser with the end of the single currency. Place your bets!
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Editorial Contributor
Robbie Burns’
aka The Naked Trader August Diary I dunno, these editors! Last month he said let’s have something different, how about the top ten tips for surviving the current volatile market? This month it was “do you want to revert to your diary/ trading record over the last month Robbie”? I think he means: “Hey, it’s holiday time, I’ll make it easy for you pal.” Alternatively he’s in holiday mode... Anyhow, I decided not to be lazy and not tell you what I spreadbetted this month, no, instead here is something I thought of myself. Take you through one specific trade, indeed the very last spreadbet I made before this mag “went to press” or whatever it’s called in our whizzo electronic age.
So here was my spreadbet trade idea. And here was my thought process. I see a company called Playtech (Ptec) is getting a main market listing and moving from AIM, so it’s serious. I note profits are rising nicely, it has tons of cash and is in a growing business supplying systems so that mug punters can play online poker, bingo and ountless other ways to lose their money. So the price is around 325. Peaked at 400 in the middle of May and has obvious support at 300 with my extremely basic reading of a chart. So here is how I feel the trade can be played, and indeed how I intend to play it. I bought at 325 targetting somewhere near 400 where it’s very likely to peter out. That’s because it peaked there before. I bet £20 a point which would make me around £1,500 if the trade plays out.
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Robbie Burns’ Trading Diary
But... on a bad day it is possible Ptec could head back to support at 300. So, I need to place a stop to get out of the trade quickly if it goes wrong. But where? I can’t set it at 320 where I would like, max loss £100 because I noticed at 8am it opened at 320-333. The stop has to be set away from an early spike out. 315 should take care of that. Max loss £150. If the stop gets hit, I can try the trade again, but this time somewhere near the 300 support area. And, most importantly, I haven’t lost much.
So I could set a trailing stop of 15p, or manually raise the stop from time to time as it goes up. If it hits 350 and falls to 335, I’ll be out with a £200 profit. However if my trade plan works out, and it gets to the 390-400 area, I can sell and take my £1,500 profit. I’ve used a rolling daily spreadbet so there is a small daily cost. But peanuts. And there is an extra possible bit to the plan. It gets to 400 but level 2 looks strong, there are plenty of buyers, maybe it will break out.
I can also use Level 2 just before the market opens to judge the likely opening price and check that the 315 level won’t be hit.
So I could sell half the bet, banking £750 and let the rest run if it should break through 400 and do another 50 points to the upside. I am still in the game running a profit and adding another £500 potential profit.
Okay, so now what happens if the share rises? Well, I can gradually raise the stop up under the price, but remember the spread early doors can be 13p.
And all this set up is a bit of common sense, a bit of looking at the order book, a bit of looking at a basic chart, and a bit of tea and a bit of toast! Could anything go seriously wrong? Well, yes.. it’s not a guaranteed stop, so if Ptec issued a warning overnight I could get caned. However it’s unlikely and this trade has I think a good risk-reward ratio. Indeed I can go off on holiday now and let the trade run. May it lose me £150 or win me £1,500 or somewhere in between? Deal or No Deal? Tune in next time, folks and see what happened... Robbie
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Travel Feature
5 Star Indian Ocean Resorts The beautiful, calming waters of the Indian Ocean are adorned with idyllic islands and luxury retreats that serve as perfect holiday destinations where, after working hard throughout the year, you can relax and rejuvenate in style. This dream-like collection of islands features an abundance of natural beauty, coral marine life, scintillating seascapes and, of course, some superb Indian Ocean hotels. From the charm of the Seychelles to the vast, untouched beaches of Mauritius, the undiscovered coves of the Maldives and the surprising greenery and rolling plains of Sri Lanka, there is something for everyone here with a number of world renowned luxury hotels and resorts to choose from.
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5 star Indian Ocean resorts
The Seychelles The archipelago of the Seychelles comprises of 115 individual islands, each with their own personality and topography. As the chosen honeymoon destination of no less than Wills & Kate, the Seychelles is an area of understated and natural beauty where you can swim with turtles, go island hopping or try diving in the scintillating underwater corals.
The beaches in Mauritius are truly outstanding. Ile aux Cerfs is possibly the most beautiful beach on Mauritius located on a small private island just off the main coast. Its picturesque location, water sports facilities and local restaurants and cafés make it very popular. With many other beaches to choose from, such as Flic en Flac beach and Belle Mare beach, you won’t be stuck for choice, whether you prefer quiet romance or exciting water-sports.
Resorts here such as the Banyan Tree Seychelles and Constance Ephelia are simply amazing. At the Banyan Tree the contemporary colonial décor and striking villas are indeed fit for royalty! The hillside and pool villas have spectacular views and include private plunge-pools, sun-loungers and sun decks along with impressive interior furnishings.
For adventure lovers, Desroches Island features a bounty of water sports and land activities including deep sea diving, big game fishing, guided snorkelling and two complimentary bicycles with each room, allowing you to explore the local scenery. The resort is also all-inclusive offering you all meals, drinks and non-motorised land and water based activities as part of your holiday package.
Mauritius Around 1000 miles south of the Seychelles, and just off the coast of the Republic of Madagascar, is the volcanic island of Mauritius. With stunning beaches, lush greenery and striking underwater coral reefs, Mauritius is yet another dynamic holiday paradise.
Most five star resorts in Mauritius also enjoy beach-front locations giving guests priority access to beautiful beaches and glistening waters. Angsana Balaclava resort stands along the glorious white sands of Baie aux Tortues in the north west of the island and enjoys views over Turtle Bay. Their destination dining service can make any holiday extra special with guests having the option of enjoying a private dinner on the beach or on the jetty under the tropical stars of the Indian Ocean. If you prefer a round of golf over an afternoon on the beach, Mauritius’ golf courses are second to none. One of the best on the island is at Heritage Le Telfair Golf & Spa Resort where the 18-hole championship golf course is located between the towering mountains and pristine lagoon of the South Coast. Similarly, the Beachcomber resorts of Dinarobin Hotel & Golf Spa and Paradis Hotel & Golf Club hold incredible reputations for their golf facilities as well as their indulgent Clarins spas and diverse excursions - another illustration of there being something for everyone in the Indian Ocean.
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Travel Feature
Sri Lanka Many people often forget about Sri Lanka when planning a holiday to the Indian Ocean. Nevertheless, it is a country that has widespread appeal because of its spectacular landscape, buzzing bird-life and hospitable locals.
From the minute you arrive, a Maldives holiday can be magical. Choose a seaplane transfer from Male to your chosen resort and enjoy spectacular views of the Maldivian Islands from the sky.
The exclusive hotels in Sri Lanka, such as The Fortress and Casa Colombo, are quite special and offer something very different for holidaymakers. Casa Colombo is a grand 200 year old boutique all-suite hideaway oozing sophistication and glamour. With one-of-a-kind creations, including glass sun-loungers and a pink-tiled swimming pool, the hotel has a startling yet impressive aura. Top of many Maldives’ visitors’ wish-lists is the Soneva Fushi by Six Senses Resort, a favourite of Madonna with an unbelievably romantic setting. It’s not hard to see why celebrities choose to retreat here on their holidays; the resort’s philosophy of ‘no news, no shoes’ just about says it all. Guests can envelope themselves in a luxury escape that retains a true Maldivian feel.
The Sri-Lankan towns of Galle and Kalutara are good spots to explore while Bentota Beach offers a serene area for relaxation, depending on what type of holiday you prefer.
The Maldives Last but not least, a Maldives holiday is, unsurprisingly, a dramatically beautiful experience. Coined as one of the best destinations for honeymooners, the Maldives does have more than an air of romance about it. Couples can enjoy the delicate sandy beaches, ocean visages and dream-like accommodation whether enjoying an exotic honeymoon or just a mesmerising holiday.
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The brand new Niyama resort offers the very best in contemporary chic with a modern Maldivian twist; bright colours, cool lines and views to die for are the order of the day here! A fabulous array of eating and drinking options, including the Maldives’ first underwater nightclub and private ‘Destination Dining’, make this one of the most exciting resorts in the Maldives. It’s no surprise that this is valued as a five star deluxe resort by many tour operators in the UK including Destinology. So, if you require luxury, relaxation, style and natural beauty from a holiday, the Indian Ocean is a must. The standard of each resort is spectacular as are the facilities they provide, and for hardworking, tired souls a holiday here is the perfect remedy.
Indian Ocean Holidays are like no other – with dreamlike islands, enchanting coral marine life, impressive landscapes and superb hotels and resorts the Indian Ocean is the best place for magical, memorable holidays.
0808 202 1849
www.destinology.co.uk
Our experienced travel team can help you find your perfect Indian Ocean getaway. Whether it be the Maldives or Mauritius, the Seychelles or Sri Lanka, they can provide a tailor-made service that meets all your holiday needs.
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Emed Mining
Spreadbet Magazine Trading Buy recommendation EMED Mining owns 100% of the Rio Tinto copper mine in southern Spain. In Slovakia, EMED is developing 1.1m oz of gold deposits. The company also holds a 16% stake in AIM listed KEFI Minerals.
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SBM Trading buyrecommendation
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Emed Mining
Following the Company’s announcement of 9 July 2012, EMED is now confident of triggering the restart of the Rio Tinto copper mine, that has been dogged by political delays, by the end of 2012 and commissioning production by the end of 2013. This is underpinned by the major Andalucían political parties announcing policies for the permitting of the Rio Tinto mine by Q312 and subsequent copper off-take sales and loan financing arrangements with Yanggu Xiangguang Copper Co (XGC), and the Goldman Sachs International detailed engineering and project restart permitting. These off-take and finance packages will fund the capital required for the restart of the Rio Tinto mine in return for copper pre-sale agreements.
Rio Tinto restart
Valuation case
Andalucían regional elections were recently held with all major political parties announcing policies for the full permitting of the Rio Tinto mine for Q312 and its subsequent restart. The key permits requiring approval are environmental, project and Administrative Standing which would trigger access to adjacent project lands not already owned by EMED. A sale and purchase agreement with Rumbo 5-Cero, S.L. means EMED has now acquired land covering part of the tailings dams at the project.
On a sum-of-the-parts basis Edison suggest a total valuation of 25.7p/share.
International financing arrangements EMED recently entered into an arrangement with Goldman Sachs whereby Goldman Sachs is to provide US$175m in loan financing repayable via the delivery of c 7% of the Rio Tinto mine’s current copper reserves (as Cu concentrate). EMED has also reached terms with XGC for US$30m in financing. This comprises US$15m for a private placement of 10% of the fully diluted share capital (105,378,519 ordinary shares at 9p/share) of EMED alongside a US$15m cost overrun support facility in return for the obligation to off-take up to the equivalent of 25% of the Rio Tinto mine’s current reported copper reserves.
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Edison have previously valued EMED using a long-term copper price of US$2.75/lb. This has since been updated to US$2.96/lb based on their curren oil/copper regression analysis and reflecting a long-term oil price assumption of US$80/bbl. Furthermore, EMED have supplied updated production plans that would have the current copper reserves at Rio Tinto mined over FY14-28 (previously FY12-26). Full production levels once ramped up over an initial three years would amount to 9Mt per year being mined from beyond FY17. C1 cash costs per pound of copper produced are estimated at US$1.37/ lb. Given the copper price has traded between US$3.05/lb and US$4.25/lb over the last 12 months, this would see EMED earning a gross margin per pound of copper of US$1.68 to US$2.88. Edison also incorporated the Goldman Sachs copper pre-purchase financing arrangement of US$175m using assumptions on a life-of-mine long-term copper price of US$2.96/lb, and an exchange rate of US$1.22/€. Under the terms of the agreement EMED would deliver an amount of copper equivalent to US$175m over a seven-year period including a two-year holiday in which interest is capitalised plus five years of copper delivery thereafter. Edison’s model also assumes the satisfaction of the land acquisition from Rumbo and the allotment of approximately 48.5m new ordinary shares by 28 September 2012.
SBM Buy recommendation
Silver credits received under terms at the smelter are valued at a long-term silver price of US$25/oz. On the above assumptions Edison estimate the value of the theoretical stream of potential dividends to shareholders for FY12-28 (discounted at 10% per year to reflect general equity risk) to be 20.6p/share as depicted in Exhibit 3.
We estimate that the fully diluted discounted dividend from Rio Tinto production rises to 31p/share (€39c) in FY19.
We ascribe value to the remaining NI43-101 resource at the Rio Tinto project based on the updated production plans that would have the current copper reserves at Rio Tinto mined over FY14-28. A summary of our valuation of EMED’s Rio Tinto project’s copper resources is presented in Exhibit 5. To the remaining post-mined reserves resource, we apply a resource multiple of US$29.10 per total tonne of NI 43-101 compliant contained copper.
This we calculate from a comparison of several listed, small-to mid-cap copper explorers (Exhibit 4). Although by no means identical to the Rio Tinto project, they nevertheless serve as a useful proxy and means of comparative valuation.
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Emed Mining
Applying a multiple of US$29.10/t, we value the remaining copper resource potential at Rio Tinto at US$9.5m or 0.59p/ share.
Slovakian value We have also valued the current NI43-101 compliant resource at the Detva gold deposit in Biely Vrch, Slovakia. We calculate differentiated market average values for inferred and indicated resources listed in London of US$39.40 and US$106.78 respectively.
Applying these values to Biely Vrch’s resource suggests a valuation of the additional 1,057,000oz of £45.9m or 4.4p/ share on an attributable basis. EMED’s 16% stake in KEFI Minerals amounts to 0.15p/share which would suggest a total valuation for EMED of 25.7p/share.
Valuation upside If EMED converts c 28.2% of the remaining indicated resources to probable reserves using a conversion rate of 72% (calculated as the average of the current measured resources to proven reserves, 82.9%, and the indicated resource to probable reserves, 60.7%), then we would expect this to add c 2p/share to the value of the theoretical stream of potential dividends to shareholders for FY12-30 (discounted at 10% per year to reflect general equity risk) for the Rio Tinto project. This would equate to 22.5p/share.
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Exhibit 7 shows the possibility of extending the proposed pit at a shallow depth and to the north (right hand side of diagram) so as to increase this mineable reserve. It should be noted, though, that any increase in mineable reserve and copper production would negate the base case valuation of the remaining copper resource potential of US$9.5m or 0.59p/share thereby raising the sum-of-the-parts valuation to 27p/share versus a base case sum-of-the-parts valuation of 25.7p/share.
SBM Buy recommendation
Balance sheet
Funding requirements
As of 31 December 2011, EMED had £7.8m in cash on the balance sheet, and subsequently raised c £13.2m (US$20m) as part of the arrangements with XGC; allowing the company to continue with care and maintenance costs, permitting, detailed engineering, other professional services and site security costs. Should approval of the restart be received (environmental, project and Administrative Standing), EMED would be able to trigger project financing. It intends to trigger the project at that stage and to commence further exploratory drilling and resource delineation at the various deposits at the Rio Tinto mine with a view to expansion beyond the initial base case 9Mtpa ore throughput for 37,000tpa copper-in-concentrate.
On the basis of the Goldman Sachs funding arrangement and the company’s estimates of planned capital expenditure and working capital requirements of US$200m (€160m) over FY13 as well as annual corporate overheads similar to FY11, we estimate the company will have a maximum funding requirement of c €186m in FY13. Should the funding arrangement be contractually agreed, EMED will be fully funded to commence mining operations once restart approval is granted. At the current price of 11p, EMED’s shares are therefore trading at almost a 60% discount to this valuation unwarranted in our opinion.
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Emed Mining
Technical Picture As you can see from the weekly chart below, the stock has traded between a high of 30p in 2008 and a low of 3.5p in early 2009. In the process, the company has been tracing out a very large triangle formation and now sits just on the downtrend line of this chart pattern structure. If the stock can break through here and taking the typical charting theory with regards to a flag and triangle formation of measuring the height of the pattern and projecting forward, then a long term case could be made for a 25p move to the upside and so a target of 35p - in line with the fundamental picture above.
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What I find particularly constructive about the chart is the RSI that is above the 50 centre line and that there looks to be the making of a golden cross formation (10 week through the 40 week moving average). Any move back up through 13p will be very positive from a technical basis.
SBM Buy recommendation
Emed Mining weekly chart
Disclaimer - The basis of this research has been supplied by Edison Investment Research (EIR). EIR do not advocate buy or sell recommendations and the opinion expressed within this piece is solely that of Spreadbet Magazine.
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Editorial Contributor
Dominic Picarda is a Chartered Market Technician and has been responsible for the co-ordination of the Investor’s Chronicle’s charting coverage for 4 years. He is also an Associate Editor of the FT and frequently speaks at seminars and other trading events. Dominic holds an MSc in Economic History from the LSE & Political Science.
Dominic Picarda’s Technical Take Special Gold stock feature I am a big bull on the outlook for gold. The powers-that-be have decided that the way out of the debt crisis is by deliberately creating inflation, whilst keeping interest rates nailed to the ground. This is the perfect environment for gold to rise, even though it is currently experiencing a major correction. I am also very positive on the long-term outlook for gold miners. Over the long run, the world gold mining sector has delivered better returns than developed world equities as a whole. And, when gold price is rising strongly, gold miners often enjoy even more powerful gains. The flipside of this is that they can come down to earth with a very hard bump during the times of weakness for the yellow metal, such as those at present.
Rangold An uprising in Mali – where it has three mines – sent Randgold’s share price into a violent downtrend earlier this year. From its all-time high in February to its May trough, it shed some 42% of its value. Production declines at its Tongon mine in Côte d’lvoire have not helped matters either. Still, the share price has staged a spirited comeback in the last couple of months surging from £44.80 to £61.33.
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Dominic Picarda’s Technical Take
Rangold Chart
The big sell-off in Randgold was not entirely unhealthy from a technical viewpoint. The price did not fall below its March 2011 lows, thereby keeping the long-term uptrend intact. Randgold had also become somewhat stretched on its weekly and monthly momentu indicators, a problem that has been eliminated through its plunge. Ideally, I would now like to see Randgold overcome its 55-week exponential moving £59.80 average, a line below which it has been trapped for more than six weeks. Assuming it can do so, I would like to buy into the ongoing uptrend every time the price pulls back to its 13-day EMA and then rallies anew. A return to the highs at £74.87 would make an obvious medium-term objective.
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Editorial Contributor
Centamin As with Randgold, African instability has taken a heavy toll on Centamin’s share price. The revolution in Egypt last year – where Centamin’s Sukari mine is located – has led to fears that the new government might nationalise its operations or redraw the terms on which it does business. Egypt is reliant on foreign investment, so the authorities may tread carefully. But radical and inexperienced administrations can, and often do, spring nasty surprises.
Centamin Chart Day-to-day operations at Centamin have also caused some concern lately, albeit on a much lesser scale. Dearer fuel-costs in Egypt have bitten into profitability, along with a shift in production towards low-grade areas while access to the higher-grade areas is developed. Still, the company is on course to meet its target of producing 250,000 ounces this year.
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Since making a low of 59p in early May, Centamin’s price has rallied to as high at 77p. However, it has done so in choppy fashion. Choppiness is typically the hallmark of a counter-trend move. It also makes trading difficult. For now, I would see a drop to 59p and 53p as the likeliest outcome. Drops through the 21-day EMA would be my ideal shorting opportunities.
Dominic Picarda’s Technical Take
Stratex International AIM-listed tiddler Stratex is at a much earlier stage of its business-life than Randgold and Centamin. The company is prospecting for gold in Turkey and East and West Africa. It is hoping to begin mining at its Turkish site outside the city of Konya in the first half of 2013.
Stratex Chart
Small stocks such as this are not ideal for the purposes of technical analysis. Because they are illiquid, the trends and formations on the charts can be much less reliable. However, the liquidity of Stratex’s price has improved over the last couple of years.
The next targets for Stratex lie down at 4.8p, 4.4p and 4.2p. My preferred strategy would be to open short positions on further unsuccessful rallies to and slightly above the 21-day EMA.
Since hitting 11.5p back in February, it has entered a very strong downtrend, shedding more than half its value. As such, it has now reached oversold levels on its weekly chart, with a relative strength reading of just 30%. However, there is no immediate clue that its descent may be coming to an end.
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Square Mile Data
Square Mile Data takes a look at Rockhopper and Avocet Mining this month for potential clues on reading the stock on loan data. Opportunities in trading come along every day of the week so why rush into any particular one that does not look to be a great risk:reward trade-off? At Square Mile Data, we have clients who regularly watch stock on loan activity and then pounce at the most opportune time instead of blithely rushing in. For example, we were recently contacted by a client who had gone short on Avocet Mining (AVM) the night before the recent large drop in price because they had detected a continuing uptrend in stock on loan activity (a potential precursor to bad news as the ‘close to the fire’ funds and traders position themselves) but with the stock price, at that point, unaffected.
Combined with other technical analysis and a good understanding of the company’s fundamentals he went short and, as the graph below pays testimony to, made a rather large sum of money (I’m guessing he’s looking at the Supercar feature in this magazine!). The stock on loan had been increasing from April of this year as you can see below.
Figure 1 - Avocet Mining - Recent Large Drop In Share price
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Rockhopper and Avocet Mining
We were particularly interested in this at Square Mile because we had detected a similar pattern in other stocks, and this is something we will be developing a pattern recognition scan for. One we would have not caught, because stock on loan data is always delivered 3 days in arrears, is Rockhopper (RKH), but it is interesting for very different reasons.
RKH experienced an absolute 2% increase in stock on loan which is significant, on 11th July. This increase was not supported by the volume of stock traded so I suspect that someone was keeping their gunpowder dry. They were then ‘lucky’ (cough, cough!) enough to be able to, presumably, short the stock on 12th July to quite dramatic effect, as can be seen below. We will find out more next week when the stock on loan figures catch up (and perhaps the FSA with them)...
Figure 2 - RKH - Large Increase in Stock On Loan Prior to Large Price Drop Usually there is more time to act on the signals. For example, take a look at 888 - an on-line gambling company. I have followed the share for several years from the share price lows to the business turnaround in recent months, and traded in and out of it quite successfully. Just recently, I noticed several interesting things - earlier in the month, on low volume, there had been two identical trades which I picked up on Level 2; both on two successive days and which made up a significant portion of the day’s volume traded totalling some 1.3M shares.
Continuing decreases in stock on loan caught my attention and I was long. A subsequent positive announcement by the company stating there would be a material and significant improvement in profits for the year was the catalyst to drive up share price. I am still long. Whoever made the 1.3M share trades is considerably richer! Some traders have impeccable timing (again, cough, cough!)
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Square Mile Data
Figure 3 - 888 chart
For me, the point about stock on loan data is that you can use it for many things especially in conjunction with other technical indicators or a deep knowledge of the company’s fundamental’s - this is in fact the best way to use it - as part of the overall jigsaw - the more information that you have at your disposal when making an investment decision, the better. If I see a price crash, I check out stock on loan immediately because it can possibly tell me if there has been an overreaction. For example, if there is a large amount of stock on loan, any share price bounce can be accentuated to the upside.
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A recent example of this is SuperGroup that had been in the doldrums and, following stabilising results on the 12th July and a decent amount of stock on loan, created a 20% uplift on the day - another example of how knowing how to read stock on loan data can be very useful. I also always watch the top 20 stock on loan figures which are available daily to registered members of our www.squaremiledata.com website because there is usually a good trading opportunity there to be had. It is no wonder that some of our most searched stocks are YELL, FXPO and - yes you guessed it - Oil Exploration and mining companies.
Special Feature
A Spreadbet Magazine
Oil Explorers Dream Portfolio Update Such was the response from many of our readers to our feature piece last month on a “dream oil explorers� portfolio, with an intended 18 months timescale and similarly our conviction in these trade recommendations so high, that we are going to update each month with news on each of the stocks within that portfolio.
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Special Feature
Separately, we have created with a partner company - Titan Investment Partners, an actual portfolio within a managed spreadbetting account that includes these stocks, and that is managed according to a specific mandate that adheres to our own trading philosophy of controlled leverage, diversification and risk management. Any readers interested in this portfolio, email us at editor@financial-spread-betting.com quoting OIL. Heritage Oil and Xcite Energy are the 2 stocks with news this month; below is a brief overview of these:
Heritage Oil Heritage announced an $850m acquisition of Nigerian oil fields known as OML 30, the vendors being Shell. Hoil will own a 45% share in the newly created vehicle - Shoreline which is being financed by way of a $550m ‘bridge’ loan and a $370m fully underwritten rights issue. Hoil are paying just over $2.70 per boe - a valuation that seems exceptional value given the $6 per boe being paid in the region by other operators. We await terms of the rights issue but the expectation is that once the shares re-list that a significant re-rating is on the cards. We caught up with Paul Atherton after the deal announcement and who was in bullish mood with regards to the acquisition the Group has made. The cash-flow profile of the Group will be transformed and the rights issue will be likely the last capital raising required by the Group to complete the exploration projects in Tanzania, Russia and Malta, as well as develop out the Miran fields. He emphasised the faith that the underwriting of the rights issue by JPM & Canaccord (without any firm price being decided yet) illustrates in the deal.
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We raised the issue of the buy-back of stock over the last 12 months which was, in hindsight, ill judged given the capital raising requirement now. Atherton retorted that although one could construe this in such a manner, management’s belief in the value of the stock at prices over 2 times the current valuation remained intact. The problem is for those parties that cannot afford to take up the rights issue who will suffer by way of the dilution that will occur; although if the net effect is to raise the valuation of the company materially, then I suppose this offsets this. We will update once the rights issue terms are revealed.
Oil Explorers Dream Portfolio
Xcite Energy At the end of June, Xcite signed a $155 million 5 year reserves based loan (RBL) facility for the phase 1b stage development of the North Sea Bentley field with Royal Bank of Scotland, Societe Generale Corporate & Investment Bank, GE unit GE Energy Financial Services, Nedbank Limited and Britannic Strategies Limited (a subsidiary of BP plc). The RBL deal follows a $50 million deal for unsecured Loan Notes with West Face Capital Inc., a Canada-based investment management firm and private placement of 30,000,000 units (shares plus warrants) with Global Resource Funding Partners LLC, based in Boston Massachusetts. In addition, an agreement was announced in mid June with BP Oil International to provide $5 million of financing and reduce working capital requirements for the diluent products to be used in the blending-in-field operations. At current oil prices, this working capital support is estimated to be in the range of US$20 million to US$40 million.
The Company also announced last week that that the pre-production flow test on the Bentley 9/3b-7 well using the Rowan Norway rig was progressing without any hiccups, with the planned shut-in period and pressure build-up test having been commenced on 11 July following the initial, successful, clean-up and first oil flow on 9 July. This planned shut-in period and pressure build-up test is designed to obtain key information about the Bentley reservoir and the mobility of its fluids for use in interpreting the subsequent flow data and for planning the next step of the Bentley field development. Following this build-up test, the flow test will continue as planned. The Scott Spirit tanker is currently hooked up to the Rowan Norway rig with a view to collecting at least 45,000 barrels of oil during the extended well test. Further updates from Bentley on the well test are expected through July and August.
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Special Feature
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How to own a Supercar without breaking the bank
How to own a Supercar without breaking the bank Every successful trader thinks about what they are going to spend their hard earned income on. Often the very first thought that comes to mind is a new toy. Courtesy of P1 International Supercar Club, if your toy of choice is a supercar? Welcome to “God’s Toybox”.
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Special Feature
Put two or more guys together and introduce the classic pub question about the best car in the world and the conversation might go on all night. Through P1International, their members have tried them all and the following is their verdict:
Ferrari 458 Italia Coupe The king of the fleet. This car has it all. It has a presence and attracts attention like no other. Our car is in classic Ferrari Rosso and is set up as most purists would want - a powerful 4.5 ltr V8 in the rear, two seats and pin-sharp handling. This has been augmented by an aggressive contemporary design, a lightening fast 7 speed F1 style gearbox and the sum of these parts is the best car in the world. In town it is comfortable and easy to drive in auto mode, it does not struggle with ground clearance and the suspension is surprisingly comfortable for a car that can reach over 200 mph. However, when you can cut loose on a good country road then it really comes into it’s own and you are introduced to my favourite feature - the engine note.
Then you pull on the right paddle, change up and the LEDs momentarily disappear, and as you slow down the exhaust burbles and pops in what has to be the greatest noise on earth! It doesn’t matter if I am driving a country road in the UK or even nipping out for a loaf of bread in the high street - the Ferrari 458 is always an experience and is 100% pure driving pleasure. The Ferrari 458 Spider will be added to P1’s fleet in Nov 2012 and promises to be even better...
McLaren MP4-12C This supercar, from the legendary McLaren factory, was eagerly anticipated by our members and when it arrived it certainly lived up to it’s billing - it is the fastest car on the fleet. The manufacturer claims it can do 0-60mph in 3.3 seconds and, although it is pretty much impossible to prove for an individual on a road, it certainly feels the fastest on a fleet that includes Ferrari, Lamborghini and the rest. Apart from blistering speed, it also offers incredible handling due to its brake steer technology that reduces understeer and is taken directly from the F1 series cars.
As the LED lights on the steering wheel light-up to tell you where you are in the revs your ears are telling you that the engine is bursting into life, your pupils dilate in order to take in more of the world flashing past you and your back is pushed into the seat.
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As expected from any car by McLaren, the MP4-12C is quite simply incredible and technically advanced beyond anything else we have driven. The car does, however, have some negatives: it is, for example, uncompromising with a high sill that, whilst offering structure to the car, does make it difficult for the driver to access the interior. Also, it has to be said that perhaps this precision and technology steal some of the joy from the car...
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Special Feature
The chassis is based around a one-piece F1 style carbon fibre tub that only weighs 80kg. It is incredibly strong and ideal for a performance car; the problem is that if you bump into a car park pillar, the whole thing could shatter and would cost a second fortune to repair! Not necessarily the best option for an everyday car!
The four wheel drive system makes this car sure footed and precise and it would be a fantastic driver’s car if only I could develop the knack of breaking my pelvis and driving with my upper body pointing in one direction and my hips comfortable pointing in another. The huge wheel arches means that the pedals are offset in this car and it really does detract from the driving pleasure. This also leads to the Lamborghini having incredibly narrow pedals that are too close together. A driver has to concentrate on planting their left foot on the footrest so as not to inadvertently touch the brakes.
It is, however, a joy to drive and currently the ultimate head turner. About 40% of our members consider it better than the Ferrari 458 - high praise indeed! The McLaren 12C Spider will be added to fleet in Q3 2013.
Lamborghini LP560-4 Spyder The ultimate attention grabber! This car is not for the faint hearted or the shy and retiring. It screams “look at me!” as loud as its 560 hp V10 engine will permit. It is also a great car to drive and if it wasn’t for the driving position it would be a serious contender for the ultimate supercar. P1’s car is bright orange with black wheels and orange callipers - definitely not for wallflowers, but then again when was the typical trader a wallflower??!! In “sport” mode the engine thunders and the world stops to look and listen. Not everyone, it has to be said, will give you warm and fuzzy looks of admiration as people become jealous and critical. However, does it really matter? You are in the Lamborghini and they aren’t!
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However, this is a Lamborghini not a suburban supermini (no offence to mini drivers)! It is meant for the purist driver who concentrates on the job at hand and not as an everyday car. It is something to be enjoyed like a fine cognac; it will test your skills as a driver too and get you to where you want to go - fast and in style. If you cannot tame the bull or are indeed intimidated by it, then the Lambo is really not aimed at you!
Commodities Corner
Commodities Corner Oil bull trend about to resume?
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Commodities Corner
Let’s take a look at the Oil price this month given the continued interest in this instrument by many spreadbettors. Below is a chart on the front month Nymex oil contract over the last 5 years and which shows a very large and clear pennant formation that has been in the making during this period.
It can be seen that the front month oil contract is now sat just below the support line from early 2009. If this is a true trend line break, then the height of the pennant is some $40 - projecting this down would result in a potential medium term price projection of $40.
Nymex Light crude daily chart From hitting a recent low of $77 a barrel 2 weeks ago, a nice reversal pattern was put in place on the weekly chart after a 2nd revisit of the $77 price level and then a close towards the highs for that week (w/e 13 July).
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This tempers any bearish stance in the short term and in particular when combining this with the stochastics set up (circled) that has had a good record of predicting up moves during the last 5 years - certainly when the slow line is below the 20 line and begins rising from this point, as it is now.
Oil bull trend about to resume?
Let’s look at the daily chart below for those inclined to take a chance on the long side around here for possible near term targets. $93 and $98 look to be realistic resistance levels being the area of the 10 and 40 week moving averages, further, we think that $100 on the Nymex (not Brent) will likely prove a relatively difficult psychological hurdle to crack.
As for an optimum entry point, just above the 7 day moving average (green line) looks to be a good level for a continuation swing long with a break back below $82 likely signalling further weakness and a breach of the recent lows and so a potential cue to get short remember in bear markets, instruments stay oversold for much longer than you would believe and the roll over of the 10 and 40 week moving averages are certainly worrying.
Nymex Light crude weekly chart Another interesting situation to us is the current premium of Brent Crude over the Nymex contract currently sitting at around a $16 per barrel premium and which is towards the upper end of the scale over the last 2 years. For many years Brent actually traded at an average $2 - $3 discount to Nymex and many wonder if this will revert at some point. I personally played this ‘spread’ around 18 months ago and took a tub thumping loss as it was ‘squeezed’ (manipulated, it turns out, through revelations some months later; the finger being pointed at the Vampire Squid - Goldmans) from around this level to $24 at the peaks - the largest in history.
The spread has come out again in recent weeks and, for those of a more risk measured leaning, a partial hedge through selling perhaps 50% of an outright long position in Nymex v Brent is a good way to mitigate this risk.
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School Corner
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Fibbonaci rations explained
School Corner Fibbonaci ratios explained by Thierry Laduguie of E-yield
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School Corner
The Fibonacci sequence of numbers was discovered by Leonardo Fibonacci da Pisa, a thirteenth century mathematician. The numbers are 0,1,2,3,5,8,13,21,34,55,89,144…and so on through to infinity. The first two numbers in the Fibonacci sequence are 0 and 1, and each subsequent number is the sum of the previous two. After the first several numbers in the sequence, the ratio of any number to the next higher is approximately 0.618 to 1 and to the next lower number approximately 1.618 to 1. The further along the sequence, the closer the ratio approaches phi which is an irrational number, 0.618034.... Between alternate numbers in the sequence, the difference between 1 and 0.618 is 0.382, this is another Fibonacci ratio. These ratios can be expressed in percentages, 61.8% and 38.2% respectively. 1.618 (or 0.618) is known as the Golden Ratio or Golden Mean. Its proportions are pleasing to the eye and an important phenomenon in music, art, architecture and biology. William Hoffer, writing for the December 1975 Smithsonian Magazine, said: “...the proportion of 0.618034 to 1 is the mathematical basis for the shape of playing cards and the Parthenon, sunflowers and snail shells, Greek vases and the spiral galaxies of outer space. The Greeks based much of their art and architecture upon this proportion. They called it “the golden mean.” The architects of the Giza pyramid in Egypt, used the Golden Ratio in its construction nearly 5000 years ago. Egyptian engineers consciously incorporated the Golden Ratio in the Great Pyramid by giving its faces a slope height equal to 1.618 times half its base, so that the vertical height of the pyramid is at the same time the square root of 1.618 times half its base.
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The continual occurrence of Fibonacci numbers and the golden ratio in nature explains precisely why the proportion of 0.618034 to 1 is so important in the stock market. Early stock market analysts like Ralph Elliott referred specifically to the Fibonacci sequence as the mathematical basis for the Wave Principle. Fibonacci ratios are applied to the stock market and are useful when used with Elliott wave analysis. When studying the stock market one will notice that some stock market moves are related to each other by the Fibonacci ratios.
Fibonacci ratios and the market In a triangle pattern Triangles are in five waves and represent a pause in the trend. This is how Elliott Wave International explains this relationship: “Now compare the formations shown in Figures 3-14 and 3-15. Each illustrates the natural law of the inwardly directed Golden Spiral and is governed by the Fibonacci ratio. Each wave relates to the previous wave by 0.618. In fact, the distances in terms of the Dow points themselves reflect Fibonacci mathematics. In Figure 3-14, showing the 1930-1942 sequence, the market swings cover approximately 260, 160, 100, 60, and 38 points respectively, closely resembling the declining list of Fibonacci ratios: 2.618, 1.618, 1.00, 0.618 and 0.382.”
Fibbonaci rations explained
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School Corner
Retracement in a bear trend When the trend is down, rallies will end near the 61.8% retracement of the previous decline. In the following example (FTSE 100) the rally during June-July found resistance just above the 61.8% retracement of the March-June decline. The FTSE 100 rallied above the key level (5698) on July 5, the following days the FTSE 100 was trading back below the key level indicating selling pressure near the Golden Ratio.
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Fibbonaci rations explained
In a fourth wave The stock market moves up in five waves, so when we see three waves up the next move will be the fourth wave down as shown on the following chart:
 A fourth wave tends to end on the Fibonacci ratio 0.382 or 38.2% retracement of the third wave. In the above example the S&P 500 correction during January-February 2010 ended on the 38.2% retracement of wave 3.
To learn more about e-yield click here
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Directors Dealings
Directors Dealings It is fair to say that as with many property orientated companies, Assura has struggled in recent years through the sale and leaseback activities that they undertake with many residential care homeowners. The company, in a mirror image of the troubles at Mitchells & Butler, entered into what became very onerous interest swap arrangements where they did not anticipate interest rates falling so low and remaining at this level for so long. Net effect was a liability on the balance sheet of some £69m that was recently cleared by way of a rights issue and sale of the Pharmacy & LIFT consultancy businesses.
This month we have a potentially interesting situation in Assura Group - one of the leading healthcare property companies in the UK which partners with GPs to deliver high quality patient care in the community - an area of the marketplace that offers a demographically underpinned investment story. The structure of the Group is changing to that of a REIT (real estate investment trust) as there are considerable tax advantages for companies with this status.
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The rights issue raised some £33.5m by way of a 2 for 7 offer at 30p per share. The rights issue was partially taken up by the Board of Directors (the notable non-contributor was then CEO Nigel Rawlings) but more interestingly, since the rights issue, there has been a slew of further share purchases by Non-Executive Directors - Mr Simon Laffin, the company’s Chairman in particular. Moore Capital - a highly respected investment/hedge fund did support the capital raising too and they are no fools. What was not encouraging, however, was the fact that the rights issue was not fully taken up by shareholders and some 20m shares were left with the underwriters - Cenkos & Investec which we will touch upon below.
Oil bull trend about to resume?
Simon Laffin has been the most prolific post rights purchaser, opening his cheque book no fewer than 6 occasions since being made Non-Exec Chairman in August 2011. He has built up from nothing a stake of 1.2m shares at an average price of just over 30p - a net injection of approximately ÂŁ360k - no small sum and one worth considering in the bigger picture. The other notable Directors purchases were a ÂŁ50k investment by David Richardson at 29.5p in January 2012 and a large purchase of 1.5m shares by Graham Roberts at 30p - a ÂŁ450k ticket and who replaced Nigel Rawlings as CEO at the end of March this year.
The only concerning element of the Assura story is the overhang of the rump 20m shares from the rights issue - a look at the chart below does not display the volume that would indicate they have been absorbed by the market - this could be either due to the underwriters being happy to hold the stock or there has not been sufficient institutional demand there to unload. If the latter is the reason, then any further price appreciation in the stock is likely to be capped as Cenkos & Investec look to release back capital.
Assura Group weekly chart
A look at the weekly chart above displays a constructive picture with a double bottom in place at 27p, a downtrend line break in recent weeks and the 10 week moving average turning up. In short, in unison with an underpinned NAV, the plethora of meaningful Directors purchasing of late and, of not insignificant sums, the stock looks to be an interesting medium term play to us.
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MAGAZINE
SPREADBETTING The e-magazine created especially for active spreadbetters and CFD traders
In next months’ edition...
Hedgefund managers who blew up DMA Trading A school corner special what is it and how could it help you with your trading?
Options Special Limited cost, explosive pay off strategies
Dominic Picarda’s Technical Take Retail stock special
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Issue 8 - September 2012
MAGAZINE
SPREADBETTING www.financial-spread-betting.com
Thank you for reading, we hope your trading is profitable during the forthcoming month. See you next month!
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