t uson uG ti A di E
MAGAZINE
SPREADBETTING the e-magazine created especially for active spread bettors and CFd traders
issue 19 - August 2013
AiM oil & Gas Revisited we take a fresh look at our dream portfolio picks
www.financial-spread-betting.com
FEAtuRE pACkEd As EVER witH tRAdinG idEAs ZAk MiR intERViEws “MAn oF tHE MoMEnt” ukip LEAdER niGEL FARAGE
nEw - Fund MAnAGER in FoCus - JEFF Vinik
nEw - tHE poLitiCs oF tRAdinG by dAVid CRACknELL
diRECtoR’s dEALinG - wHAt to REALLy Look out FoR
Feature Contributors Robbie burns aka the naked trader Robbie Burns - The Naked Trader has been a full-time trader since 2001 and has made in excess of a million pounds trading the markets. He’s also written three editions of his book, “Naked Trader” and the “Naked Trader Guide to Spreadbetting” and runs day seminars using live markets to explain how he makes money. Robbie hates jargon and loves simplicity.
dominic picarda Dominic Picarda is a Chartered Market Technician and has been responsible for the co-ordination of the Investor’s Chronicle’s charting coverage for four years. He is also an Associate Editor of the FT and frequently speaks at seminars and other trading events. Dominic holds an MSc in Economic History from the LSE & Political Science.
Zak Mir Zak Mir has been one of the UK’s pioneers in modern charting methods since the early 1990s, joining Shares Magazine as its first Technical Analysis Editor in 2000. Zak founded www.Zaks-TA.com, the first pure TA website, in 2001 and which flourishes to this day. In addition, he has written for the Investor’s Chronicle, appeared on Bloomberg and CNBC as well as being the author of ‘101 Charts For Trading Success’.
Alpesh patel Alpesh Patel is the author of 16 investment books, runs his own FSA regulated asset management firm from London, formerly presented his own show on Bloomberg TV for three years and has had over 200 columns published in the Financial Times. He provides free online trading education on www.alpeshpatel.com.
david Cracknell David Cracknell is the former Political Editor of The Sunday Times, and also wrote for the Sunday Telegraph and Sunday Business. He now runs his own successful media relations business and is a profitable retail trader and spread bettor. His book on trading, “Middle Aged Spreads” will be out next year.
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Editorial List editoRIAL DIRECTOR Richard Jennings Editor Zak Mir CREATIVE DIRECTOR Lee Akers www.coyotecreative.co.uk Copywriter Simon Carter Editorial contributors Thierry Laduguie Filipe R Costa Ben Turney Nick Hilsden Simon Carter
Disclaimer Material contained within the Spreadbet Magazine and its website is for general information purposes only and is not intended to be relied upon by individual readers in making (or refraining from making) any specific investment decision. Spreadbet Magazine Ltd. does not accept any liability for any loss suffered by any user as a result of any such decision. Please note that the prices of shares, spreadbets and CFDs can rise and fall sharply and you may not get back the money you originally invested, particularly where these investments are leveraged. In comparing the investments described in this publication and website, you should bear in mind that the nature of such investments and of the returns, risks and charges, differ from one investment to another. Smaller companies with a short track record tend to be more risky than larger, well established companies. The investments and services mentioned in this publication will not be suitable for all readers. You should assess the suitability of the recommendations (implicit or otherwise), investments and services mentioned in this magazine, and the related website, to your own circumstances. If you have any doubts about the suitability of any investment or service, you should take appropriate professional advice. The views and recommendations in this publication are based on information from a variety of sources. Although these are believed to be reliable, we cannot guarantee the accuracy or completeness of the information herein. As a matter of policy, Spreadbet Magazine openly discloses that our contributors may have interests in investments and/or providers of services referred to in this publication.
Foreword Well, I came out the “other side”. No, not in that way! The big 4-0 celebrations! A stunning week was had in the Lake Como region of Italy with Mrs SBM (see the special piece in the mag on page 74 for some cracking places to eat and stay), and it was a chance to reflect back on the “first half” (hopefully!) of my life. I teased you of course with some news to reveal in the last edition’s foreword, and it is with great pleasure that I announce this month that the “technical analyst” extraordinaire that is Zak Mir, a man with his own inimitable style, now takes over from me as editor of this publication. I feel sure that it is in capable hands and that Zak will add his own stamp to what has been created this last 19 months (can you believe it?) and power it forward in his own unique way. I am sort of coming full circle I suppose, returning to my fund management roots with Titan Investment Partners. Taking the best elements of what spread betting offers, nearly 20 years experience in the markets, and all the discipline and fundamental research that I was trained in as a fund manager in this completely new offering to the marketplace. I will still continue to contribute to the magazine and our renowned blog, giving readers my view on the markets and being prepared to say it as it is. I am immensely proud of our no nonsense, cut through the guff approach to writing, and feel that we are providing a valuable service to the wider retail investing public. I’m sure many of you will follow our progress at Titan Investment Partners and I look forward to reporting our first quarterly returns at the end of September. And so onto this month’s content. We have something of a coup with UKIP leader Nigel Farage under Zak’s microscope - a man who actually cut his teeth in the City, working as a commodities trader. All the usual favourites are here of course including Dominic, Alpesh and Trading Academy winner John Walsh. We are also pleased to welcome on board the respected former Sunday Times political editor David Cracknell who writes a new column for us - “the Politics of Trading” in which he gives us his own spin on political issues that affect the market and that we can perhaps take advantage of and turn a profit on (it would be nice to make something out of the politicians eh?!). We also revisit the AIM Oilies whom we featured a year ago to assess the current landscape what with oil prices continuing to power onto elevated levels whilst many of the explorers remain in the doldrums. I hope you find it interesting, as it was pretty thought provoking whilst we were writing it. And so, as the “second half” now calls, I hand over to Zak and wish all our readers, as ever, a profitable trading month.
Richard
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Contents
AIM Oil & Gas revisited In this special focus piece we revisit our picks from 12 months ago to see just how they fared and also what the outlook is for each of these stocks.
8 78
24 39 48 56
The Politics of Trading In a brand new column, former Sunday Times Political Editor David Cracknell opens with his inaugural piece on just how politics can influence markets.
Zak Mir’s Monthly Pick Zak looks into his runes and offers up his top pick for August.
Zak Mir Interviews Nigel Farage “Man of the moment”, former commodities trader and UKIP leader Nigel Farage is given a grilling by Zak.
Small Cap Corner UK Small Cap Analyst of the Year nominee Paul Scott continues with his new monthly column.
Commodity Corner Ben Turney takes a look at the Gold-Oil ratio and asks is it warning of an impending fall in oil?
61
Currency Corner
66
Alpesh On Markets
70
The FX cross known as “cable” - GBPUSD is under the spotlight this month.
Alpesh looks at the current QE policies and their implications for the currency wars.
Travel Corner - Hidden Lake Como A special piece on some of the hidden gems and under the radar hostelries in this stunning corner of Europe.
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John Paulson’s Golden Headache
Technology Corner
With “Mr Sub-prime” John Paulson’s Gold fund now down almost two thirds, we ask, has he lost his midas touch?
Somebody’s watching you - PRISM explained.
30
44
SBM Focus on Jeff Vinik
34
Legendary former Fidelity Magellan fund manager Jeff Vinik is profiled in this new SBM section.
74 84
Dominic Picarda’s Technical Take Dom investigates emerging markets this months and looks for conditions that lead to their outperformance.
School Corner Thierry Laduguie of E-yield explains the Put Call ratio and how it can be used in your trading.
88
FTSE Daytrader
94
Director’s Dealing
100 102
Nick Hilsden continues his explanation as to how he day trades the FTSE.
What signals you should really be looking out for.
John Walsh’s Trading Diary Trading Academy winner John Walsh runs us through his experiences this past month.
Markets In Focus A comprehensive markets round-up of under and out performers during the month of July.
August 2013
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Special Feature
SBM Dream Oil & Gas Portfolio Update By Filipe R. Costa & Richard Jennings
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SBM Dream Oil & Gas Portfolio Update
Last year, in the July edition of SBM (http://issuu.com/spreadbetmagazine/docs/spreadbet-magazine-v6_generic page 48), we presented our readers with what we termed the Oil Explorer’s Dream Portfolio, consisting of six top picks we thought were undervalued at the time and that had the potential to deliver above average returns. One year later, and with the oil price continuing to remain buoyant, it is time to look at our picks to see how they have fared and whether any changes should be made to the portfolio. Unfortunately, our portfolio delivered a negative return of around 14.4% (equal weighted average). Despite the performance on the portfolio being negative in absolute terms, it has been positive in relative terms. While our portfolio declined 14.4%, the FTSE AIM Oil & Gas index sank 20%.
CHART - FTSE AIM UK 50 V AIM ALL SHARE OIL AND GAS INDEX Our gains came from Xcite Energy (+30.6%), Heritage Oil (+25.6%) and BowLeven (+8.3%), but were insufficient to counterbalance the losses incurred in Falkland Oil & Gas (-71.6%), Northern Petroleum (-55.0%), and Gulfsands Petroleum (-24.4%). But, as we stated very clearly at the time, these picks were high risk / high reward plays, able to deliver threefold returns or to be a drag on a portfolio. Additionally, we cautioned, as ever on over leveraging oneself.
Companies like Falklands Oil & Gas are cash burners with no revenues. They’re explorers. If they do find oil or gas that can be commercially produced, returns on such stocks skyrocket but of course, such returns are rare. The question now is, is it worthwhile holding onto or even adding to some of these plays?
So, let us take a look at each of our six picks...
August 2013
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Special Feature
PORTFOLIO TABLE
GuLFsAnds pEtRoLEuM Recommended @ 90p Currently Trading @ 68p Performance: -22p (24.4%)
Recommendation summary We recommended Gulfsands Petroleum as a buy last July believing that the company was one of the most undervalued within the sector following the drubbing the shares took with the onset of civil war in Syria and the effective inability to receive any revenues from their Syrian fields. With shares trading below book value, holding £68m in cash and having a market cap of just £100m, the company was being valued as if it would be better to close the business and sell its assets rather than continue as a going concern. The truth is that Gulfsands’ primary asset was, and still is, its Syrian fields and as the war has dragged on, investors have stopped believing in a solution to it in the near term. Net effect is that the shares have been hugely penalised.
The situation in Syria hasn’t improved much since last year. Block 26 in which Gulfsands holds a 50pc share, with the other part being owned by the Chinese company Sinochem, is in what is called “force majeure” as a result of the EU sanctions against Syria. This asset was the most important one within the Gulfsands portfolio, producing most recently over £50m in revenues. With the deterioration experienced over the last few years, and its other assets, including some within Tunisia and Morocco, yet to produce and still in the exploration stage, Gulfsands expected turnover is, in the immediate term, in the single digit millions - quite a difference. What with its ongoing exploration commitments, the market is now actually beginning to consider the potential of a capital raising to fund further development too.
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SBM Dream Oil & Gas Portfolio Update
Its business in Morocco is actually now advancing at quite a pace. The company is carrying out seismic studies to start a five-well drilling program in September in the so-called Rharb basin and it will start drilling another four wells next year. The group also has another permit in the country which is known as Fes. Seismic studies will start here next year
Make no mistake that IF the situation in Syria eventually gets resolved and the company is able to assert its commercial interest once more over Block 26, that the upside is multiples of the share price. Valuations based on 2P (proven and probable reserves) which include Syria go from over £4 to anywhere up to £9 per share on a risked basis when incorporating some of their other geographic prospects.
At the current price of 60p (at the time of writing), its market cap is just over £70m against net cash of £56m. Its price to book is a little over 0.6 times.
CHART - GULFSANDS PETROLEUM
Recent news July 11 - Gulfsands Petroleum Chairman Andrew West announces he is to Step down later this Year July 10 - Gulfsands Petroleum focuses on Rharb drilling program success April 9 - Gulfsands Posts $27.0M loss, expects improved performance in 2013
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Special Feature
“in ouR ViEw, tHE MARkEt wAsn’t AttRibutinG Any VALuE wHAtsoEVER to tHE MAssiVE GAs REsERVEs tHE CoMpAny HAd in kuRdistAn EVEn tHouGH its MiRAn FiELd ALonE wAs VALuEd bEtwEEn 150p And 300p by indEpEndEnt AnALysts.” HERitAGE oiL Recommended @ 130p | Currently Trading @ 163.25p Performance: +33.25p, +25.6%
Recommendation summary At the time of our Heritage Oil recommendation, the company was sitting with the second lowest valuation relative to risked NAV within the mid-cap Oil & Gas exploration sector. Enterprise value was just £110m, and cash reserves were a substantial part of the company’s assets. In our view, the market wasn’t attributing any value whatsoever to the massive gas reserves the company had in Kurdistan even though its Miran Field alone was valued between 150p and 300p by independent analysts. At the same time, the company was embroiled in a dispute with both the Ugandan Tax Authority and Tullow Oil regarding the sale of assets which could have resulted in as much as £1 per share returned in cash to the company. One year on, and the shares rose by almost 23% to the current 159.5p price but, in our opinion, they are still undervalued. Unfortunately, the disputes with the Ugandan Tax Authority and Tullow Oil were settled against the company. The company has however said that it plans to appeal and that it disagreed strongly with the verdict. As the market was discounting the worst in any event, Heritage’s shares have been largely unaffected by this decision. We would not hold out much hope of this $400 and odd million being returned to the company. The transformer for the shares that took the stock back over 200p last year was the sale of its Miran field to Genel Energy and the use of the proceeds in investing in Nigeria, buying a 45pc stake in an onshore oil-producing block called OML-30 from Shell, Total and ENI.
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This move boosted the company’s oil production in one fell swoop from 605bpd to 11,500bpd and it is believed maximum production can go as high as to 55,000bpd in the relatively near term. At the same time, this acquisition increased the 2P (proven and probable) oil reserves more than threefold to 278M barrels.
We think the company is well positioned for the future, troubles in Nigeria with strikes notwithstanding, and with oil prices improving while the global economy recovers, the company still has good upside potential as an actual producer. There is additional potential upside from its ongoing exploration activities in Tanzania and where management believes the seismology is very similar to the Ugandan basin that was extremely profitable for Heritage and that yielded a profit of over $1bn to them.
SBM Dream Oil & Gas Portfolio Update
CHART - HERITAGE OIL
“tHE tRAnsFoRMER FoR tHE sHAREs tHAt took tHE stoCk bACk oVER 200p LAst yEAR wAs tHE sALE oF its MiRAn FiELd to GEnEL EnERGy And tHE usE oF tHE pRoCEEds in inVEstinG in niGERiA.” Recent news July 2 - Nigerian unit refinances bridge loan June 14 - Tullow Oil wins $313 million Ugandan tax case against Heritage June 12 - Gross Production from OML 30 returns to 35,000 bpd
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Special Feature
bowLEVEn oiL & GAs Recommended @ 60p | Currently Trading @ 65p | Performance: +5p, +8.3%
Recommendation summary Last year, when we made Bowleven a Conviction Buy, the stock was trading at 60p. One year later, there’s no doubt our purchase was near the bottom but it has been quite a year for the shares, as they took off from the lows rising to 100p but then retreated again in the last 2-3 months to the current price around 65p. We still believe it is worth holding it in our Oil & Gas portfolio and this is a good opportunity to re-establish a long position. Bowleven shares actually traded from a low of 20p in 2009 to a high of 400p early in 2011 on hopes that its acreage could be the next Tullow Oil but a series of disappointments on its Sapele well drills hit the stock hard. In 2012, just before our recommendation, Dragon Oil approached the company with takeover intentions but the plans were very quickly dropped, for reasons to this day still unknown, although the company did state that Dragon Oil did not in fact carry out any due diligence and so there were no “funnies” in their accounts. One thing’s for sure, analysts, following the approach, believed that fair value for the shares was around the 150-200p level. At the time we issued our recommendation, Bowleven was focused on West Africa, specifically in Cameroon, where the company was spending a large part of its resources in order to drill its Etinde Permit.
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The main challenges the company was facing were in terms of financing. It would take a huge effort to find the funds needed and investors were, understandably, concerned with the company raising equity and diluting existing shareholders’ positions. Until now, the company has been successful in finding partners to co-finance its projects. It entered into an agreement with Petrofac in November that secured an investment of £313m from the blue chip company to help develop the Bowleven’s acreage off Cameroon, and with the aim of starting gas production in 2016. In exchange, Bowleven will share its future cash flows. Bowleven has also invested in East Africa in order to drill oil. The company has already found a strategic partner for its new ventures - First Oil. At the current price, Bowleven is trading at 0.51x its book value which, to us, seems a large discount to fair value. Management, led by Kevin Hart, have so far proved capable of taking the necessary decisions in order to gain the financing required to maximise the success of its projects. At this price, we’rekeeping our holding and are in fact likely to add on any further weakness.
SBM Dream Oil & Gas Portfolio Update
“LAst yEAR, wHEn wE MAdE bowLEVEn A ConViCtion buy, tHE stoCk wAs tRAdinG At 60p. onE yEAR LAtER, tHERE’s no doubt ouR puRCHAsE wAs nEAR tHE bottoM but it HAs bEEn quitE A yEAR FoR tHE sHAREs As tHEy took oFF FRoM tHE Lows, RisinG to 100p, but tHEn REtREAtEd AGAin in tHE LAst 2-3 MontHs to tHE CuRREnt pRiCE ARound 65p.”
CHART - BOWLEVEN
Recent news July 4 - Bowleven sells 30% of East African unit to First Oil June 26 - Bowleven appoints David Clarkson as Operations Director April 19 - Results of second test at IM-5 well surpasses expectations
August 2013
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Special Feature
xCitE EnERGy Recommended @ 80p | Currently Trading @ 104.5p | Performance: +24.5p, +30.6%
Recommendation summary Unlike others in our portfolio, Xcite Energy operates in the less politically risky area of the North Sea rather than Africa or the Gulf. Its fundamentals aren’t therefore seen as prone to production / licensing risks and so the valuation on an EV/2P basis is not as discounted as with the other oilers given that the uncertainty surrounding its business is less pronounced.
Even though our investment has already rendered a 29.4% appreciation, we will stick with this company as it still trades at a big discount to peer group 2P averages, and there is potential for both additional reserves upgrades and, what we feel is also likely along with other analysts, a takeover of the group by another player with Statoil’s name frequently in the frame.
We have reiterated our positive stance on Xcite Energy on numerous occasions on our blog sub 100p following our Conviction Buy call last year. At the time of our magazine article, the company was trading around 80p - a level which has proved, so far, to be a bottom with the stock making a renewed ascent on the 100p level (and holding it) in recent months.
As you can see from the chart overleaf, the stock has been tracing out a basing formation, hugging either side of 100p throughout the last year and is mid way through a flag formation. A decisive break of 125/130p should take the stock back towards 200p where many analysts price targets are centred.
The company is primarily focused on the development of previously discovered resources in the UK’s North Sea basin. Management are currently focused on bringing the Bentley oil field on Block 9/3b into production, and which would leverage the company into a significant independent UK oil producer. In April, the company upgraded its 1P, 2P, and 3P oil reserves in the Bentley fields to 198 MMstb, 250 MMstb, and 312 MMstb respectively, based on an initial 35-year production period.
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Recent news June 21 - Xcite Awards 9,850,000 options to purchase ordinary shares of the company to the Board of Directors June 12 - Xcite Signs MoU with AMEC for its Bentley field May 31 - Xcite Energy Unit cancels option for jack up drilling unit
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Special Feature
“wE HAVE REitERAtEd ouR positiVE stAnCE on xCitE EnERGy on nuMERous oCCAsions on ouR bLoG (sub 100p) FoLLowinG ouR ConViCtion buy CALL LAst yEAR. At tHE tiME oF ouR MAGAZinE ARtiCLE, tHE CoMpAny wAs tRAdinG ARound 80p - A LEVEL wHiCH HAs pRoVEd, so FAR, to bE A bottoM witH tHE stoCk MAkinG A REnEwEd AsCEnt on tHE 100p LEVEL (And HoLdinG it) in RECEnt MontHs.”
CHART - XCITE ENERGY
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SBM Dream Oil & Gas Portfolio Update
FALkLAnd oiL & GAs Recommended @ 97p Currently Trading @ 27.5p Performance: -69.5p (71.6%)
Recommendation summary Falkland Oil & Gas (FOGL) is a pure play on oil exploration in the risky and deep waters of the South Falkland Islands basin. With no cash flows coming from production it always has been an “all or nothing” risky bet. This was illustrated of course starkly last year with the drill at Loligo - the area considered a “monster” if oil was found but which, sadly for FOGL shares, turned up uncommercial quantities of gas and not oil. All is not lost however as they still have another few drills to come and the company has been de-risking its drilling program by bringing in larger partners, such as Noble Energy, on a farm out basis. Of course, this will result in the company giving up some upside too should a drill prove successful. FOGL is focused on exploring the South and East of the Falklands and has licenses to explore a vast area corresponding to the equivalent of a third of the North Sea. In April of last year the stock rose from a low at 41.75p to 100p due to the gas find by regional explorer and block neighbour - Borders & Southern. Even though this was a disappointment to Borders’ shareholders, the presence of hydrocarbons and the locating of them on the drill by Borders was deemed to de-risk the then impending drill by FOGL and thus was good news for investors. The problem was that later in the year, FOGL found a substantial amount of uncommercial gas at its Scotia well, and which led to a plunge in the stock price. In a single session shares of FOGL sank by 48% to 32.75p. The downtrend is still intact, and the shares are currently trading at 27.5p.
Although the results from the Scotia drill were disappointing, the presence of hydrocarbons in the geology within FOGL’s license area are, in general, good news. There appears to be certainly oil in the area, as evidenced by the hydrocarbon funds, but these waters are some of the deepest and most difficult to drill in the world and suffer from dreadful weather conditions for a good portion of the year. In short, a find needs to be a “monster” to make the effort and cost viable. Of course, there is also the ever present political risk with Argentina to consider too. Investors are presently pricing the company on the basis that they will not prove successful in ultimately bringing the fields to production as evidenced by the market cap which is now £88w whilst last stated cash amounted to £114m. This, however, now gives the stock an interesting asymmetric risk / reward profile and worthy of remaining, albeit with a relatively small weighting, within our portfolio. Should, on the outside chance, the company prove successful the shares could motor significantly. Drilling recommences in this second half of 2013 and so the usual speculation could drive the stock up on the approach to the results as well and provide a decent trading opportunity. We will re-iterate our comments last year however: “make no mistake, that is a higher risk prospect with a relatively binary outcome - a successful drill and returns in the 100%’s are likely or, in the alternate, a duster with both drills, and a Desire Petroleum type outcome. Don’t bet the house on this one!”
Recent news June 24 - Falkland Oil and Gas says 1H ‘Hugely Productive’ June 6 - 3D seismic survey over the cretaceous fault blocks completed April 16 - 3D seismic survey over Diomedea Fan completed
August 2013
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Special Feature
CHART - FALKLAND OIL & GAS
“ALL is not Lost HowEVER As tHEy stiLL HAVE AnotHER FEw dRiLLs to CoME And tHE CoMpAny HAs bEEn dE-RiskinG its dRiLLinG pRoGRAM by bRinGinG in LARGER pARtnERs, suCH As nobLE EnERGy, on A FARM out bAsis. oF CouRsE, tHis wiLL REsuLt in tHE CoMpAny GiVinG up soME upsidE too sHouLd A dRiLL pRoVE suCCEssFuL.”
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SBM Dream Oil & Gas Portfolio Update
noRtHERn pEtRoLEuM Recommended @ 70p Currently Trading @ 38.5p Performance: -31.5p (55%)
Recommendation summary When we recommended Northern Petroleum (NOP), the company was trading at a premium of just £35m over its cash reserves of £25m. We felt the valuation was too depressed for a company that was actually producing oil rather than being a pure and risky exploration. NOP’s operations are concentrated mostly in the Netherlands region and its operations here provide the bedrock of its revenues. Northern continues to offer investors upside via its 1.25% interest in the Guyane Maritime Permit with two further wells to be drilled in 2013 on the back of the 2011 breakthrough Zaedyus discovery. In addition, the company is looking to complete a farm-out deal in 2013 on its c 400mmbbl Cygnus property in the Southern Adriatic, while a recent acquisition in Australia could lead to shale oil exploration. Edison have NAV upside targets of 62 - 179p and which they have on watch for further upgrades should the company be successful in executing on its plans this year. Unfortunately, things change fast in this business and the last annual report revealed falling production and reserves downgrades in its key Netherlands fields. 2P reserves were reduced from just over 18mboe to 12.2mboe. In fact, the company has announced plans to divest its Netherland assets and that it has received numerous expressions of interest over the last 12 months and is close to signatory of a “letter of intent” - a precursor to a fully consummated sale. This could be a catalyst on the near horizon that closes the heavy discount that NOP currently sits on relative to its book value and unrisked NAV estimates. The company plans to widen out its geographic exploration activities, embarking on a detailed program within the Alberta region of Canada and also two further wells in Guyana - both offering tangible exploration upside.
On the Canadian front, Northern is initially targeting production of 500-1,000bpd from over one million barrels of extra oil recoverable from the original 56 million barrels of oil in place, and of which 11 million barrels has been produced to date. To prove up the redevelopment concept, the company is seeking to start small-scale operations with a three-to five-well programme during the summer / autumn of 2013 around areas with all-season access.
“Edison HAVE nAV upsidE tARGEts oF 62 - 179p And wHiCH tHEy HAVE on wAtCH FoR FuRtHER upGRAdEs sHouLd tHE CoMpAny bE suCCEssFuL in ExECutinG on its pLAns tHis yEAR.” in italy, the company has been eyeing up the potential for deep-water turbidite fan systems in the Southern Adriatic for many years and the company already has 53mmbbls of 2P reserves booked against its Rovesti and Giove prospects in the region. Northern’s Cygnus prospect is potentially an updip continuation of the ENI Aquila field with a common Oil Water Contact (OWC). According to ERC Equipoise, if this were the case it would estimate high case prospective resources for Cygnus of 969mmbbls, of which 790mmbbls would be on Northern’s 100% block. Should this prove correct, then it is very easy to see Edison’s upper case NAV come into sight. At the current price of 32p (time of writing), we feel that NOP now actually offers the best risk / reward profile of all the stocks covered here. The downside to us looks limited whilst the upside is considerable should just one or two of their plans come to pass.
August 2013
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Special Feature
CHART - NORTHERN PETROLEUM
Recent news June 10 - Northern Petroleum names Keith Bush Managing Director May 29 - Northern Petroleum to receive Shale Oil license May 15 - Northern Petroleum swings to 2012 Loss, revenue halves to EUR12.41M Clear disclosure - titan investment partners holds positions in Gulfsands petroleum and northern petroleum in its natural Resources fund and may open positions in other companies mentioned here.
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01732 746617 www.titanip.co.uk
Titan Investment Partners opens up its natural resources focused spread betting fund to the investing public
• A diversified selection of commodity related stocks • Long/short flexibility
• Leverage capped at 2.5 times • Directors own capital invested within the fund
Titan's fund managers believe that absolute returns can only be produced through running a concentrated portfolio of best picks derived from thorough fundamental analysis, deploying leverage at appropriate points in the market cycle and patience. We believe the Natural Resources arena is ripe for this strategy with the current depressed valuation. • Minimum investment of only £5,000 • All returns completely free of CGT*
• 90% of gross dividend credit on stock positions
CLICK HERE FOR OUR LATEST FUND PDF SHEET OR EMAIL: INFO@TITANIP.CO.UK QUOTING NATURAL RESOURCES Risk Disclaimer Titan’s spread betting funds are leveraged products that involve a higher level of risk to your security and can result in losses of some or all of the capital invested. Ensure you fully understand the risks and seek independent advice if necessary. *Spread betting in the UK is currently tax free but this may change in the future. No tax is payable on any gains made, or allowable for either income or capital gains tax against losses incurred. Authorised and regulated by the FCA. Registration No - 590782 August 2013
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Editorial Contributor
ZAk MiR’s MontHLy piCk FoR AuGust
buy EuRo / doLLAR: tARGEt $1.34 initiALLy stop Loss $1.2900 RECoMMEndAtion suMMARy It is not too much of a coincidence that I am writing this month’s top pick piece the day after interviewing the arch Euro sceptic and UKIP leader Nigel Farage. As has become clear over the past couple of years, the European Union project and those who run it are not liked, to put it mildly, by politicians of Farage’s persuasion. This is especially acute for the likes of Farage and his followers given the bureaucracy that many believe the EU ties up the UK economy with and the Euro sceptics would dearly love us to tell the EU where to “shove it” . However, from a trading point of view, even if you disagree on the political front, the challenge here is to be able gauge whether, at current levels, the euro crosses have factored in the fundamentals fairly. For instance, according to some “experts”, the single currency would not survive 2010, 2011 etc. and so on, and on that basis, it could be said that we are looking at a situation where the currency is worth between some 30% and 100% (not sure if they are serious!) more than the U.S. dollar.
Perhaps against all odds however, following events such as the Fiscal Cliff debacle and the latest news that the City of Detroit has gone bust, it may be that the recent strength of the U.S. dollar on QE “tapering” fears is a bit like Rocky - you can put him down, but he just keeps on getting back up.
My own long standing view since the Eurozone crisis began is that in general, traders have been too bearish on this cross, and that the real money has been made when the benefit of the doubt is give to going long the Eurodollar cross long on weakness – for instance last summer when ECB President Mario Draghi suggested he would do “whatever it takes” to save the Euro. The present period in the wake of the political uncertainties both in Portugal and via a scandal in Spain, is just one such moment in my opinion.
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Zak Mir’s Monthly Pick for August
“However, from a trading point of view, even if you disagree on the political front, the challenge here is to be able gauge whether, at current levels, the euro crosses have factored in the fundamentals fairly.�
August 2013
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Commodity Corner
Technical Analysis Snapshot:
The explanation for this is that the price action has reverted to a rising trend channel in place since July 2012.
One of the “secrets” of technical analysis is not only to use it to identify classic buy and sell signals such as rebounds off key support and resistance levels, but also to seek out those times when traders have clearly been wrong footed and then press home your advantage - so called “bull” and “bear” traps and that you can read in my free Technical Analysis Myths Exploded guide here (http://www.spreadbetmagazine. com/zak-mirs-technical-analysis-my/).
The floor of the channel currently runs through $1.30 and was tested on both the 12th and 15th of July – enough to “confirm” the rising trend channel. Helping also to indicate that there could be a new leg to the upside is the way that following the double test of the 2012 support line there were four consecutive days with the price action resting on the 200 day moving average rising at $1.3079, just above the 50 day moving average at $1.3059. In fact a new “golden cross” formation is imminent.
With the Eurodollar pair, in the recent past we have a couple of examples:- the first was back in early July where the cross delivered a narrow bear trap below the former June support of $1.2796. The overshoot down to $1.2755 would have given the impression to bears that a big breakdown was imminent and that a decline back towards summer 2012 support in the low $1.20s was on its way. Instead, what we have seen is a sharp rebound from the July low, completely confounding the bears and trading back over the key psychological $1.30 by some distance.
chart - euro/USD
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The likelihood is that at the current rate of progress we shall be treated to this golden cross buy signal between the two moving averages over the course of August. Typically, the sweet spot in a rally is in the run up to and the immediate aftermath of such signals. The target initially, maybe as soon as the end of August, would be the June resistance zone towards $1.34, although interestingly, above $1.30 – the price channel floor, a viable end of year target on the cross is as great as the 2012 price channel top at $1.40.
Zak Mir’s Monthly Pick for August
“The likelihood is that at the current rate of progress, we shall be treated to this golden cross buy signal between the two moving averages over the course of August. Typically, the sweet spot in a rally is in the run up to and the immediate aftermath of such signals.”
Recent Significant News: July 19th Portugal’s Prime minister and the leader of the Socialists met with the President after a week of talks between the ruling coalition partners and the main opposition party to reach a broad political deal to ensure the EU/ IMF bailout stays on track. A rift in the coalition triggered the crisis at the beginning of July and threatened Portugal’s plans to exit the 78-billion-euro bailout program by next year. President Anibal Cavaco Silva asked Passos Coelho’s Social Democrats, and the Socialists to reach a “national salvation” deal to end the political uncertainty. July 18th Federal Reserve Chairman Ben Bernanke said the central bank’s monthly bond purchases were not on a “pre-set course”, with no set timetable for slowing US monetary stimulus. The Fed currently buys $85 billion a month in government and mortgage bonds.
The opposition Socialists demanded a renegotiation of Portugal’s bailout terms, threatening the cross-party pact the President says is needed to end the country’s dependence on bailout cash. July 11th Federal Reserve Chairman Ben Bernanke commented that central banks needs to “wait and watch” for more favourable labour markets before tapering its asset purchases program. There was some unease in the markets following the publication of the Federal Reserve minutes with some members in favour of continuation of bond buying program and others pushing for a reduction in stimulus package. June 6th ECB Governing Council, President Mario Draghi said that the European economy is now likely to shrink by 0.6% this year, versus the 0.5% it had expected in March. But the ECB raised its forecast for 2014 economic growth to 1.1%, from 1.0%.
July 12th Portuguese yields climbed after Lisbon delayed its creditors’ next review of the country’s bailout due to a political crisis in the run up to international lenders were due to begin a review of the bailout.
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Commodity Corner
Fundamental Argument: The central issue for those who are trading euro / dollar on a regular basis is the battle between price action and politics, and where the two seem to be completely divergent on many occasions. The problem is that without the correct take on this market it is likely you will be swayed by the consensus view that the euro / Eurozone is a disaster area, without taking into consideration just how much of this has been factored in to the price action. Clearly, it is far easier to be sympathetic towards the U.S. dollar at present and this perhaps explains why the euro currency keeps confounding the pundits forecasting its imminent demise. It seems to have more lives than a cat. It is even more surprising given the teutonic propensity for bailing out its financially embarrassed Southern European neighbours, something that one would also expect to drag on the currency’s value. For the likes of Spain and Portugal, the common currency to which they are bound means that any refloat of their domestic currencies would likely result in a depreciation of anywhere between 30% - 50%. While we do have the uncertainty of the German General Elections due in September and perhaps even a chance that Angela Merkel’s Opposition will win on a “Can’t Pay, Won’t Pay” basis (the debts of the PIIGS that is), everyone knows that the even with the Troika bailouts that the largest economy in Europe is having a party - metaphorically speaking.
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If they were not, then they would have adopted a Euro Bond at the same time the euro was introduced, or soon after, and which arguably would have prevented the shooting gallery effect of the PIIGS bailouts. But what about the other side of this cross, the U.S. economy? The first part of July saw three weeks in a row of Ben Bernanke and his friends at the Federal Reserve either providing minutes or testifying on interest rate / QE policy. Unfortunately for the financial markets, a combination of too much information at a delicate time is not necessarily that helpful. Since the hollow promise in autumn 2012 of “eternal QE”, Ben Bernanke has been looking for an opportune time when he could let the markets down gently regarding the monetary punch bowl. But, as most drinkers will know (not that I would - honest!), there is never a good time to do so. Bernanke tried in June, but the effect on the stock market was so negative and looked to turn into a potentially very ugly rout that he had no choice but to backtrack. Therefore the fundamental logic behind a euro / dollar buy recommendation is that the Fed will have to fudge the end of QE for quite some time, or at least until a new Fed Chairman appears at the beginning of next year. We therefore have a window of at least until the German General Election on September 22, or the end of January next year, when “Helicopter” Ben flies off into the sunset. In the meantime we can only wonder how well ECB President Mario Draghi will play his hand of euro cards (certainly not Aces) versus Ben Bernanke with the dollar…
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Special Feature
John Paulson’s Golden Headache By Filipe R. Costa & Richard Jennings
John Paulson, the legendary investment manager profiled in this magazine previously, and who personally made over $4bn anticipating and shorting the US subprime mortgage market, continues to have his reputation tarnished by the yellow metal that is gold. His subprime trade is chronicled in the book “The Greatest Trade Ever” and if you have not read it, we suggest you buy a copy - an exceptional read.
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John Paulson’s Golden Headache
“In his most recent letter to investors, Paulson’s firm reported his gold fund down a tub thumping 65% YTD, with a 23% smacking coming about in the month of June alone.” In his most recent letter to investors, Paulson’s firm reported his gold fund down a tub thumping 65% YTD, with a 23% smacking coming about in the month of June alone. For a hedge fund which supposedly searches out alpha (excess returns over the market due to diligent research and foresight), the continued poor performance of gold is certainly causing some to question his “God-like” status in the hedge fund world, even though the gold fund is actually only a very small part of his funds empire and his other funds - Advantage, merger arbitrage etc., are actually performing quite well this year although it’s fair to say that these had two very difficult years in 2011 and 2012. To make matters worse, the main investor in the gold fund is in fact Paulson himself, and so he is being hit with the double whammy of the glare of unwelcome publicity that is hurting fund flows to his company and yet he is also shouldering most of the losses! The decline in his stock picks has been so dramatic that Paulson’s gold fund now has just $300 million in assets, falling from over $1bn at the start of the year, and perhaps this is why he decided to change the name of the fund to PFR Gold - most likely a futile attempt to deflect immediate attention to the Paulson name and brand. PAOLO PELLEGRINI
Perhaps inevitably, after achieving such stellar returns, and then also correctly positioning himself for the sharp rebound in the US markets in 2009-10, primarily via US banking stocks that posted exceptional returns during this period, Paulson’s star began to wane. Not just his gold funds but his flagship Advantage funds also stumbled spectacularly in 2011 and 2012 - posting declines of over 50% and nearly 20% respectively - one hell of a fall from grace by any measure and one that new investors who did not benefit from his subprime trade were most likely mightily upset about. Unless using the so called mosaic theory (the use of a “network of experts” that skirts insider trading laws) used so effectively by Steve Cohen, and that has put him in hot water recently, when a fund’s assets grows in size, good bets where the capital mass can actually be deployed become tougher to find. Paulson was able to find sellers of the CDS options he purchased in 2007 and also with the large capitalizations of US banking stocks in 2009. Problem is with material billions of assets under management, finding new trades that you can get into and out of nimbly really pushes you further into “macro” territory - FX, commodities and bond plays where the size of the markets is in the trillions and away from stocks - which was where Paulson operated for many years. It was in 2011 and 2012 that Paulson placed his chips on two macro themes - bets on a strong recovery in the US and on the euro’s downfall due to worsening conditions in the PIIGS nations. Those were unfortunately two failed bets on the US as it is only really over the last nine months that US economic recovery has gained momentum and meanwhile the EU has, thus far, been able to contain its own crisis.
It was in 2007 that Paulson really emerged onto the radar of asset managers worldwide, reaping a haul for his investors of a cool $15 billion by correctly forecasting the collapse in US housing. The real beauty of this trade however was that it was a classic asymmetric risk / reward profile in that the cost of putting on the position was exceptionally low relative to the payout if he was proved correct - a trader’s dream that they search for throughout their lifetime and that Paulson and his partner Paolo Pellegrini happened upon and had the patience to see through.
The idea of the gold price rising has a strong rationale behind it and we have covered this subject extensively in this magazine over the last several issues. Simply, central banks have been pumping too much money into the financial system and so, in classic Austrian economics theory, debasing the value of that currency. This means that all things being equal, the value of “real” assets should rise in nominal currency terms.
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Special Feature
The problem was that at the beginning of 2012 the value of gold had overshot what we saw as the correlation trajectory with broad money supply growth - something that had held firm for many years. (Take a look here for our rationale and that had us calling the yellow metal down to $1200/oz long before it got there and every man and his dog jumped on the band wagon - http://www.spreadbetmagazine.com/gold-bear-guide/). Paulson simply stayed at the party too long. The FED’s balance sheet has grown to almost $4 trillion whilst the US central bank tries to keep bond yields low. Such policies do debase a currency and so also make precious metals attractive as hedges against potential inflation.
The problem is that inflation hasn’t picked up to the degree one would have expected so far (although the “official” inflation statistics dramatically under-represent the real figure in our opinion) and the Fed has already threatened to start reducing its asset-buying program as soon as this year. With quite a degree of hot money in gold instruments in particular ETF’s, when the tide turned there was always going to be a rout. This has pushed the price from an all-time record in late 2011 just north of $1,900/oz to the current $1,250/oz and in the process, given Paulson a strong golden headache.
TABLE - PAULSON’S TOP 10 HOLDINGS
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John Paulson’s Golden Headache
We have been tracking Paulson’s portfolio since the beginning of the year. His firm’s total portfolio assets are worth more than $17 billion, and which are spread over a variety of different asset classes. There is, quite interestingly however given his capital mass, an extensive amount of concentration amongst his top 10 holdings and which are valued at around $9 billion - slightly in excess of 50% of the total portfolio. This degree of concentration is pretty punchy for a “mainstream” hedge fund where we would have expected rather more diversity. It is true that in order to generate outsized returns you need to take concentrated bets and of course get more right than wrong, but when you have near $20bn under management and a large part of it your own capital, it seems rather risky to us to continue to pursue this high risk approach. The last two years have illustrated very starkly to Paulson the risk in this continued hubristic, “bet the ranch” strategy.
“The last two years have illustrated very starkly to Paulson the risk in this continued hubristic, “bet the ranch” strategy.” According to our calculations looking at his top 10 holdings and the adjustments made every quarter, Paulson (at the time of writing) has lost almost a cool billion dollars in the SPDR Gold Trust alone and an extra $528 million in Anglogold - a senior gold miner. His top 10 holdings have rendered a collective loss of just over $400 million YTD.
If Paulson had not been betting in gold assets, he would be showing some great alpha and this again bears out exactly the point that given that the gold fund is a small portion of his fund’s collective assets, the losses have been truly outsized and so, quite justifiably, dented his reputation. He forgot the first rule of fund management - look after the downside. The problem of these “bet the ranch” style bets is always the same. When everything goes as expected, one seems like the best manager in the world and, as is human nature, you tend to believe your own publicity but, when things go awry it may mean the end of your trading... Looking at the table below we can see just how badly gold and its related assets have performed over the last two and three years - in fact, in the case of the gold miners, we can see the massive dislocation relative to the precious metal. Question is - was Paulson’s rationalization wrong or was he simply too early and then too dogmatic in his unwillingness to reduce his exposure? There’s an old saying in the markets - “sometimes you’ve got to be wrong to be right” and we think this applies to Paulson and this is why we have structured at our sister company Titan Investment Partners a dedicated Precious Metals fund that has been set up to take advantage of the depressed prices many of the gold mining stocks are now trading at and where we believe the upside now is materially in excess of further downside. If you’d like to learn more about this then click the link on the advert to the right for more details.
TABLE - GOLD ASSETS PERFORMANCE
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SBM Focus
SBM FOCUS ON…
Jeffrey Vinik By Richard Jennings & Filipe R. Costa
In a new and regular monthly piece at SBM, we take a look at some of the best and brightest figures in the trading and asset management industries and focus upon their careers. We hope you like this new feature and welcome any suggestions from readers as to people whom you would like to read about. Drop us a line at editor@spreadbetmagazine.com with your ideas. And so, we start this month with Jeffrey Vinik or, as he is known in the industry, Jeff Vinik - one of the really brilliant minds that has enlivened the investment industry in recent decades and whom we are sadly going to lose in just a few months time. Born in New Jersey and graduating with a bachelor’s degree in civil engineering from Duke University, Vinik departed from his original studies, instead developing an interest and passion for the stock market. He went on to obtain an MBA from Harvard Business School and quickly started building a name for himself in the investment industry, starting work initially as a securities analyst at Value Line and then joining First Boston as a trader before finally finding his main home that put him on the path to investment stardom at the global asset management giant Fidelity.
“Under Vinik’s management from 1992 to 1996, the fund’s assets grew from $20 billion to more than $50 billion and during his tenure, he produced an 83.70% cumulative return and outperformed the S&P500 return by a collective 5.91%.”
His performance as manager of the Fidelity Contra-fund was notable and brought him to wider attention that resulted in him taking up the mantle from the revered fund manager Peter Lynch to manage Fidelity’s flagship US mutual fund (after a brief two year stint by Morris Smith running the fund). At the time, the Magellan Fund was the largest mutual fund in the US - in fact the industry’s poster child. Under Vinik’s management from 1992 to 1996, the fund’s assets grew from $20 billion to more than $50 billion and during his tenure, he produced an 83.70% cumulative return and outperformed the S&P500 return by a collective 5.91%. It was this stint managing the large and unwieldy mutual fund, that Vinik became really well known and he established himself at the heart of the asset management industry. At the time, aged just 37, and after leaving Fidelity, Vinik had a promising future as hedge fund manager, but one that was, as we shall see, to be full of twists and turns... Unfortunately (or fortunately, depending on the view), his performance was derailed during his last few months with Fidelity. During the nineties the stock market was rising, seemingly without limits as the retail masses all jumped on board, pumped up by Alan Greenspan’s easy money policies. Tech stocks were in the spotlight, promising excellent growth prospects and creating huge expectations from investors.
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SBM Focus on Jeffrey Vinik
Birth: March 22, 1959 (54 years old) In New Jersey, USA Resides: Tampa, Florida, USA Activities: Hedge Fund Manager, Sports Team Owner, Philanthropist
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SBM Focus
“What with a seemingly endless bull market, the rally in tech stocks was, however, starting to get out of sync with the real economy as the 90s progressed. This began to ring alarm bells inside Vinik’s mind and so he decided to dramatically reduce his exposure to shares and move into Treasuries - a bold asset allocation call.” In certain cases, it was not unheard of for tech plays to trade at insane price-to-earnings multiples above 200x - certainly anything with a “dotcom” handle achieved almost unheard of valuations. What with a seemingly endless bull market, the rally in tech stocks was, however, starting to get out of sync with the real economy as the 90s progressed. This began to ring alarm bells inside Vinik’s mind and so he decided to dramatically reduce his exposure to shares and move into Treasuries - a bold asset allocation call. Vinik completely dumped tech stocks and invested 20% of the fund’s assets in bonds. Unfortunately for him, the move was ill timed.
alan greenspan The accommodative monetary policies that were being deployed by Alan Greenspan at the time encouraged flows out of Treasuries and into the stock market. This was in fact the base architecture for what in fact did, just two years later, prove to be a bubble that burst spectacularly in 2000.
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But that was too late for Vinik... He became yet another example of how, even when spotting a market dislocation, you also need to get the timing right (refer to our Paulson article this month). Get the timing wrong and it can be just as, if not more painful, than simply being wrong. Vinik left Fidelity in 1996 after the Magellan fund underperfomed its peers for the first time in its history. Interestingly, however, during the seven years ending March 2003 following Vinik’s departure, on a total return basis, 10-year Treasuries returned 78 percent, AAA corporate bonds returned 46 percent, and, with dividends reinvested, the S&P 500 returned 31 percent. Vinik’s call was correct. In addition, Vinik’s strategy would have also largely avoided the dot-com bust. Of course, the fund would have had to endure another four years of subpar and peer returns - something that Fidelity bosses were not prepared to endure at the time and, in our opinion, another prime example of how short-termist the fund management industry is and whose approach hamstrings many good managers with the effectively impossible task of delivering results each quarter. Vinik’s heroic bet led to his downfall at Fidelity and in 1996 he left the company with his reputation tarnished. But, it led to him entering the hedge fund business, creating his own company - Vinik Asset management LLC. Using his well honed stock picking, applying ruthless buy-sell strategies, taking measured risks and applying modest leverage whilst using earnings growth as the first determinant for his stock picks, Vinik doubled his investors’ money during the first year and in fact averaged 50% annual returns over the next three - absolutely exceptional returns. He beat not only the market but also most hedge fund managers and, it is fair to say, that he was certainly missed by Fidelity clients where such abnormal returns were merely a mirage. Vinik was however not satisfied with the exceptional returns he achieved in the early years post Fidelity. He went on to make a monumental bet. In just a few months, he increased his equity portfolio by 600%, buying more than $4 billion worth of stocks and placing $1.6 billion in the volatile semiconductor sector. To place such a huge bet, Vinik had to borrow $2 billion, a gamble that, thankfully for him, his investors and his lender, had a happy ending. At the end of 2000, Vinik was able to return $4.2 billion to outside investors in order to concentrate in his own portfolio.
SBM Focus on Jeffrey Vinik
It is in fact from July last year that his funds have struggled, intriguingly coinciding with the restructuring of his company in which Vinik’s role in fund management changed from primary stock picking to a more softer oversight role. He also relocated from Boston to Tampa. In the summer of last year the fund sold its holdings in the SPDR S&P 500 ETF Trust, the Powershares QQQ Trust (which mimics the Nasdaq’s performance), and on the iShares Russell 2000 index Fund, while adding to some bets on gold (a common theme here with another famous hedge fund manager eh?). With the stock market becoming ever more detached with the real economy, Vinik, it seems, came to the same view that he had whilst at Fidelity and sold assets that he saw as being overvalued.
GREG COFFEY Vinik’s interests don’t end with trading and portfolio management however. He also invested heavily in sports, and is the current owner of the NHL team Tampa Bay Lightning, the AFL team Tampa Bay Storm, a minority shareholder of the baseball team Boston Red Sox and, until recently, also a director of Liverpool FC. Earlier this year however, Vinik stepped down from his role at Liverpool FC with the reasoning being relayed that he wanted to focus on his own investments and activities. He also announced that he is to return all funds to outside investors from Vinik Asset Management. There has been speculation that in unison with many other hedge fund managers - Greg Coffey, Soros, Pellegrini etc., the world of Ben Bernanke’s centrally planned market environment is simply too difficult to make money in as asset dislocations continue for much longer than investors (and fund managers’ mindsets!) have the patience for. Vinik can be forgiven for not wanting to experience this again, certainly after his mid-90s experience at Fidelity...
With the stock market now into the fifth year of its bull run, he could be forgiven for coming to this conclusion. At the same time, Vinik bought gold stocks in the well grounded expectation of the FED’s QE policy ultimately boosting inflation and thus gold prices. Unfortunately for him and many other respected hedge fund managers, the exiting from stocks has proved premature as the FED has been willing to pump ever more money into the bond market, keeping the stock market on the boil whilst inflation has not surged as one would have expected by now. With all major US indexes recording high after high, the more conservative portfolio managed by Vinik has, not surprisingly, been struggling to show a decent profit since last year. SBM has analysed Vinik’s 13-F filings and came to the conclusion that his top holdings have lost $43m during the 2nd quarter of 2013, a loss corresponding to 5.4%, whilst the S&P has continued to rise.
August 2013
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SBM Focus
TABLE - TOP 10 VINIK HOLDINGS IN 2Q 2013 With a total loss of 4.8% (for the whole portfolio) accumulated since July last year - a period when the S&P 500 has risen almost 24%, Vinik announced in his letter to investors that he was closing his fund and returning funds to investors, noting that he was proud of the track record of 17% compound annual returns since 1996 but that he felt it was “time for us to take a break”.
If you have a few million sitting around waiting for an investment opportunity, Vinik Asset management is now no longer a choice for you to put your money in. But, expect Vinik to come back in a few years as he did in the past with fresh trading ideas and likely delivering the elusive alpha that many hedge fund managers will never be able to achieve. For now, the best bet you can make is to probably bet on Tampa Bay Lightning to win a few more games than it did in the current season and who knows, even lift the Stanley Cup for the second time in history. You will probably be able to bet on a Lightning win at favourable odds, north of 50 to 1! Vinik’s past reminds us once more just how difficult it is to time the market and that attempts at doing that often lead to miserable failure.
VINIK’S 2Q 2013 PERFORMANCE Besides investing in the stock market and managing sports teams, Vinik is also a bit of a philanthropist. He donated $1.25 million to endow a professorship at Duke’s engineering school in 1998. He also donated another $5 million the following year towards facilities at the engineering school and in 2012 he donated $10 million to create a challenge fund to endow associates and full professorships dedicated to addressing complex societal challenges in engineering and related areas, in energy, global health, brain sciences and environmentally-related matters.
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That is the main reason why Warren Buffet prefers to buy and hold stocks over time. At the same time however, no matter your investment style, buying with the crowd late stage won’t make you rich either - it merely puts you at the head of the queue for the inevitable correction. A good stock picker and asset allocator is willing to take positions against the crowd after spotting value differences before others do, but the key is to temper the leverage appropriately so that you can remain in the trade. This is precisely what we do in our sister company Titan Investment Partners, with our Global Macro fund positioned in plays where we perceive immense value and in which we deploy modest leverage and are prepared to be patient and wait for the returns to assert themselves.
Zak Mir Interviews
Zak Mir Interviews
An SBM scoop - UKIP leader and “man of the moment” Nigel Farage under the spotlight ZM:
Unaccountable, expensive, bureaucratic, with no real measurable performance criteria and, in the eyes of some, not fit for the purpose. I am not talking about the European Commission, but the Financial Conduct Authority and its old incarnations – the FSA and SFA. Would you agree that since “Big Bang” in 1986, successive regulators have been painfully unfit and under educated/resourced and perhaps even improper regarding their operations? How would you deal with the people who brought us Fred The Shred Goodwin and the Great British Banking Sector Collapse?
NF:
Far from being under-resourced the regulators grew like Topsy, with each new body finding ever more minutiae to busy itself with. I’m sure they were well-educated and well-meaning but the system was set up in such a way that it missed the wood for the trees. The culture was wrong from the start: too much box ticking.
ZM:
Is it true to say that no regulation – say, just the law courts, would be a better approach than than the system of regulation we currently have at the moment?
NF:
The system of regulation that we have at the moment is undergoing dramatic change - there are currently at least 38 major Directives being processed through the EU institutions that will each impact on the City of London - the approach, as with all EU legislation, is very prescriptive. It would be better to rely on the Common Law (and the jury system).
One must accept that for international clients a certain amount of regulation helps to foster confidence and certainty, however, the EU takes this to extremes and over regulates to the point of suffocating business and distracting people from the important things - trust and confidence.
“however, the EU takes this to extremes and over regulates to the point of suffocating business and distracting people from the important things - trust and confidence.” ZM: Is it not also true to say that City matters are so complicated that most juries would not have a clue about the issues involved – even something relatively simple such as short selling? And how do you suggest we address this?
NF:
A jury is better than the alternative: arbitrary decisions from an organ of the state.
ZM:
As an ex City person yourself and with knowledge of how Libor works and an understanding of other such scandals, could you define the difference between “making a market” and rigging a market? Surely, if someone willingly trades the bid / offer that is the end of the matter?
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Zak Mir Interviews
Nigel Farage was born in Herne, Kent, on 3 April 1964. He was educated at Dulwich College. In 1982 he joined the American commodity brokerage firmDrexel Burnham Lambert before moving onto Credit Lyonnais Rouse. He joined Refco in 1994, and then Natexis Metals in 2003/ Farage was a founding member of UKIP in 1993. He was elected to the European Parliament in 1999 and re-elected in 2004 and 2009. Farage is presently the leader of the thirteen-member UKIP contingent in the European Parliament, and co-leader of the multinational Eurosceptic group, Europe of Freedom and Democracy.
nF:
In Brussels they think that the Market Abuse Directive will prevent rigged markets but it is such a complicated piece of legislation that it is far too unwieldy: in a fast moving market decisions have to be made very quickly. The EU now wants to regulate indexes as well, it’s just an excuse for state control. If, instead, there was sufficient transparency the system would tend to regulate itself.
ZM:
I have been on a personal crusade against the banking bailouts ever since the panic moves to save Northern Rock et al six years ago. If nothing else, the moral hazard of propping up failed people / businesses appears to be throwing good money after bad. Knowing what we know now (bonuses, Libor, PPI etc.) now, would you have bailed them out? What lessons can we also learn to avoid bailing them out if they go bust again?
nF: It was a grave error for Gordon Brown to
remove powers from the Bank of England, in the old days the Old Lady would not have let things get out of hand. The tri-partite structure of regulation between the Bank of England, the FSA and the Treasury was always going to create tensions between the bureaucracies, as well as regulatory “blind spots”.
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ZM:
Does it not always inevitably end in tears when Governments intervene in business/markets? How did the Keynesian approach of the last decade come to be delivered – in effect Big Government / Big Brother? Is it something that can and in your opinion, should be reversed?
“it wAs A GRAVE ERRoR FoR GoRdon bRown to REMoVE powERs FRoM tHE bAnk oF EnGLAnd, in tHE oLd dAys tHE oLd LAdy wouLd not HAVE LEt tHinGs GEt out oF HAnd.” nF:
The size of the state must be reduced: there is simply no alternative to that, it will be more painful the longer we leave it.
Nigel Farage
ZM:
You have said that the catalyst that got you into politics in terms of UKIP were the early days of what is now the Euro / Maastricht (the events of 1992) and the attempts to deliver a “United States of Europe”. Now that it is, to all intents and purposes, here, albeit ailing, would you admit that it has cushioned the blow against the worst Depression since the 1930s for PIIGS nations? Or, on the other hand, has it actually contributed to the Depression happening and is it keeping it going? Was it also not that other great Federation, the United States of America that actually started the crisis in the EU via the Sub Prime disaster?
ZM:
Before politics you were involved in the markets as a commodities trader in the City. Were you ever tempted to risk the family fortune on punting Copper, Tin or Gold?!
NF: Frequently and often did: with mixed results ZM:
One of the big conundrums of the moment is whether the Gold “bubble” (if indeed there ever was one) has finally come to any end? Do you have any tricks of the trade as far as knowing when the floor/ ceiling has been reached in a market – especially commodities?
NF:
If I had a system to do that I’d have made my money before breakfast today, gone fishing, landed a couple of bass and be grilling fish rather than politicians for lunch.
NF:
The Euro is definitely part of the problem, at some point an economic shock was always going to expose its fault lines and now that they have been laid bare there is no going back. Any idea that the Euro has in some way softened the impact on Southern Europe of the global financial crisis is risible, akin to telling a junkie that he’ll feel better once he has another hit.
ZM:
Much has been made of the fear that even after so many years of flat lining growth following the meltdown of 2007 – 2008, we may still have many more years of pain to come in the form of Austerity / Sovereign Debt overhand and high unemployment. A Japanese style Lost Decade or two has been mooted. But, rather than QE and ultra low interest rates which keep the “debt fest” going, why not simply slash taxes to boost the economy? Why do Governments prefer to go bust themselves than tax less?
“If I had a system to do that I’d have made my money before breakfast today, gone fishing, landed a couple of bass and be grilling fish rather than politicians for lunch.” ZM: 90% (and more) of short term traders in the
financial markets lose money – which is clearly the reason that HMRC does not bother to tax profits on this particular pursuit in the spread betting arena. Do you think you would have the mindset to be a winner if trading for yourself in this area?
NF: Twenty years ago, certainly. ZM:
Do you think there is any overlap between being a successful politician and a successful trader?
NF:
In the debating chamber you have to think on your feet, know when to buy or sell an idea, and find a way of getting attention: it’s not so different from open outcry trading.
NF: Slash taxes? Welcome to the UKIP Manifesto!
August 2013
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Zak Mir Interviews
ZM:
How do you see the European landscape panning out over the next 5 - 10 years, euro break up or slow grinding economic growth for the Northern Europeans with our PIIGS nations becoming ever more indebted to the Troika and so experiencing falling standards of living?
NF:
The political will to maintain the Euro “project” at all costs is so strong that the periphery of the Eurozone will be stuck in purgatory until all hope is lost, at which point politicians will find they have lost control of the situation entirely and events, dear boy, events, will force us to confront the difficult choices.
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ZM:
If you were PM what would you do to kickstart the UK economy?
NF:
I’d combine cuts in both spending and taxes with supply-side reforms and free trade agreements - but to do any of those things we must first leave the EU.
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Technology Corner
Tech Corner
Somebody’s Watching You By SIMON CARTER
Online security, and more explicitly online privacy, has fast become an issue so hot that a former leading American security bod has felt compelled to claim political asylum in Russia. So who is Edward Snowden? Why have his recent actions caused so much controversy? And what does it all mean for those of us on this side of the pond?
44 | www.financial-spread-betting.com | August 2013
Somebody’s Editorial Contributor Watching You
August 2013
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Technology Corner
“One such contractor was that man Edward Snowden, and it is Snowden’s actions that have forced many internet users to rethink everything they thought they knew about online privacy.”
edward snowden
It all started with something called PRISM. Actually, let’s take it back further than that: it all started with America’s National Security Agency (NSA), a 60 year old organisation tasked with collecting security intelligence with an aim to protecting the USA. The NSA is currently home to more than 30,000 employees, many of whom are contactors. One such contractor was that man Edward Snowden, and it is Snowden’s actions that have forced many internet users to rethink everything they thought they knew about online privacy. Think you’re safe because you don’t use social networks? Wrong. Think that nobody is interested in you because you don’t do your banking online? Think again. Think that your government couldn’t possibly care less about what you do online? You’d be surprised. Early this year, Snowden visited Hong Kong where he spoke to journalists from The Washington Post and The Guardian.
Rather than simply pass the time, Snowden handed over classified documents that revealed startling details about the NSA’s PRISM program. PRISM – which is not a synonym – was laid bare over the course of Word documents, PowerPoint slides and Excel spreadsheets (given Microsoft’s involvement in PRISM, this extensive use of MS Office was perhaps somewhat apt). Where did PRISM come from? The year is 2007, and George W. Bush is still running America in his own unique way. Under the administration, and in the wake of the War on Terror, several acts and laws have been passed with a more than slightly paranoid view to protecting America. One such act was the Protect America Act, ratified in 2007. And it was this act that made PRISM possible. PRISM is an electronic data mining program that operates on a mind-boggling scale. And over the years, it has mandated several of the world’s biggest electronic companies (Microsoft, Yahoo, Google, Facebook, YouTube and Skype – seriously, can you even name another big technology company?) to hand over data in the name of security. Serious stuff. But more serious than that is the revelation that PRISM can intercept any data communications that pass through the United States. While this fact alone should mean that the rest of the world can breathe a collective sigh of relief, the startling truth is that much of the world’s data makes its way via American infrastructure.
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Somebody’s Editorial Contributor Watching You
Why? Because although this requires sending data thousands of miles (which only takes a few seconds), it is far cheaper to direct information that way rather than hosting infrastructure yourself. In short, a conversation between a German Facebook user and an Australian one about a planned trip to South Africa could be fair game for PRISM. As could the email that carried this article to the editor of SBM having travelled from Hotmail to AOL.
Back to good old Blighty, there was more news from the PRISM exposé to get those stiff upper lips quivering in the shape of Tempora, an electronic surveillance program run by the Government Communications Headquarters (GCHQ) in London, which has been granted access to PRISM’s data since summer 2010. (Hello if you’re reading this GCHQ!)
If anything, it should be Americans who breathe that sigh of relief as the NSA can only officially use data transferred domestically if they are in possession of a warrant. But, Americans, hold on to that sigh. When the NSA (or a related agency) want to search either the live or stored data, they need only be “51% certain” that the target is not an American citizen. What’s more, according to the leaked documentation, almost every search does end up including data passed by Americans, to other Americans, in America. A sort of electronic collateral damage if you will.
In amongst all of the surprised fury directed towards these agencies, there have been few voices giving volume to the upside of all this monitoring. Why? Well, because, there doesn’t seem to be one. Although ostensibly there to protect us, neither the NSA, the FBI or the GCHQ have gone public with any ‘wins’ scored by PRISM, and Snowden’s documents made no mention of successful terror prevention or foiled plots.
So is nobody safe from the reach of PRISM? While the facts as we’ve seen them so far seem to deliver a giant ‘no’ to that question, the NSA have recently claimed to work on a ‘two hop’ theory. This means that, by their own rules, they should only ever look at data communicated by people who have communicated with people who are known targets. However, as Chris Inglis, Deputy Director of the NSA, admitted in early July, the NSA actually work on a ‘two or three hop’ basis. But what exactly is being collected and monitored? As well as communications delivered via the electronic giants noted earlier in this piece, and all data passing through American infrastructure, the NSA have also collected call and text data from leading cellular phone companies. The only thing they seem to have not done is listen in on phone calls or physically follow people around (so far).
Should we be outraged? That’s the question that many are asking themselves and while there are those who feel perturbed and uneasy about their government’s easy reach to their private communications, if PRISM stops just one major terrorist plot, then surely it would have all been worthwhile? If nothing else, it’s a decent start point for a debate. And so back to Snowden. On June 10th this year he, unsurprisingly, lost his job with the NSA. On June 14th he was charged with the theft of government property, unauthorised communication of national defence information, and wilful communication of classified intelligence to an unauthorised person. On July 9th he landed at Sheremetyevo International Airport in Moscow, where he currently resides while seeking political asylum. Hero whistleblower or traitor? It’s tricky to say, but what is certain is that Edward Snowden has opened one giant can of worms...
August 2013
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Feature Contributor
SMALL CAP CORNER
GARp ExpLAinEd by pAuL sCott
in my very first piece for this magazine last month, i outlined why, in my opinion, small caps are a good part of the market to find over-looked, and under-priced growth companies, which is my favourite investing strategy - GARp (Growth At Reasonable price). This month I’ll work through an example of a good GARP small cap share to illustrate my methodology, focusing in particular on:
• Why it’s good value. • Timescales, and how things might pan out for this share.
• Where the investing idea came from. • What research I did. • Key factors that influenced my decision to buy.
VALUATION METRICS COURTESY OF STOCKOPEDIA
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The share I’ve chosen to highlight is called spaceAndpeople (ticker: sAL) There are 19.5m shares in issue, and the current mid-price is 103p, giving a market cap of £20m.
Small Cap Corner
where the investing idea came from As readers of my daily Small Cap Value Reports on Stockopedia.co.uk will know, I spend four hours every weekday morning, from 7-11 a.m. poring over the morning’s small cap results and trading announcements, and publishing my analysis free, and in real time. On 25 March 2013 I commented in my morning report on impressive results from SpaceAndPeople, saying: Next, I’ve been looking at the results from spaceandpeople (Lon:sAL), and most impressive they are too. This share has come up on my value screens quite often, and so has been on my radar for some time. They are a niche business that operate kiosk and general space in shopping malls - hosting the space for traders selling sweets, jewellery, etc. in the wide open spaces within shopping centres.
This has never struck me as a terribly exciting area, but reading today’s results I’m changing my mind. They have delivered sparkling results, with basic EPS up a very impressive 39% to 8.5p, and the dividend increased by 21% to 3.5p. The shares have responded well, up 11% to 95p. As usual, the ridiculous Bid/Offer spread of 91p/100p means that I’m not even going to try to buy shares in it, which is a pity because I really do like the look of this company. It now looks like a straightforward international roll-out. They already operate in the UK and Germany, with other countries being targeted, including India. There is a very nice progression in turnover & profit, with no bumps in the road:
They Group said that “the first quarter of 2013 has started very positively and we look forward to another year of success”. I can’t see anything wrong with the accounts, all looks nice and clean.
August 2013
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Feature Contributor
“tHERE siMpLy is no substitutE FoR dEtAiLEd REsEARCH on A CoMpAny. tHAnkFuLLy, sMALL CAps tEnd to bE A FAiRLy stRAiGHtFoRwARd businEssEs, witH ACCounts tHAt ARE quiCk And EAsy to undERstAnd.” So, Spaceandpeople (LON:SAL) very much looks like a classic Growth At Reasonable Price (“GARP”) play to me. The shares look excellent value at a multiple of only 8.7 times this year’s forecast EPS of 10.9p. I like it a lot, so pity there isn’t any room in my portfolio for it. (reproduced with thanks, courtesy of Stockopedia.co.uk) As you can see, at the time, the wide Bid/Offer spread put me off pursuing the idea any further, although, as we shall see, events were shortly to take an interesting turn which solved that problem for me. A new broker, Cantor Fitzgerald, has really got behind the company, and made their shares more liquid. This has narrowed the quoted spread somewhat, and has also narrowed the real spread (i.e. the price you can actually deal at in a reasonable quantity, which you only find out once your broker contacts the Market Makers). Shortly afterwards, an independent research house, Equity Development, asked me if I wanted to meet the company management. I then worked with Equity Development to put together a group of investors, and suggested that we might together bid for some stock at a discount to the market price. To cut a long story short, we had an excellent three hour meeting with the management of SpaceAndPeople, and a secondary Placing was expertly brokered by Cantors and Equity Development whereby myself and some friends were able to buy a line of stock at just 86p, alongside Institutions who took the bulk of the shares that changed hands (see the RNS from 2 May 2013). This was a cracking deal, whereby we not only got into a share we really liked, but we bought them at roughly a 15% discount to the prevailing market price. Moreover, because none of us were “flippers”, rather we were buying for the long term, the share price has held up since, so at 103p we’re currently 20% up on our investment, despite the shares having basically traded sideways for the last four months.
Research process There simply is no substitute for detailed research on a company. Thankfully, small caps tend to be a fairly straightforward businesses, with accounts that are quick and easy to understand. So for me, the initial research is just a quick skim of the last set of results, looking at the long term trends, key statistics and ratios on sites such as Stockopedia and a look at the company’s own website, so I can get an idea of their business model. The purpose of this initial research is just to determine whether the stock idea is worth pursuing. As you can see from my 25 March 2013 report quoted above, my initial research on SpaceAndPeople was very positive, and it looked a great value little growth company. Once it has passed that first step, I really get into the nitty-gritty, and spend a lot more time researching the numbers and the business model. This will include the following: • Reading all significant RNS news for the last couple of years. • Thoroughly reading and understanding the latest Annual Report. • Working through my own bespoke checklist of key factors and potential pitfalls (e.g. look for any pension liabilities, consider the ownership structure, checking there is only one class of shares in issue, review outstanding share options and Directors remuneration, etc.). • Googling the company to see what third party information I can dredge up. • Carefully considering all available broker notes on the company. • Talking to my wider network of shrewd investors about the company, and considering the detailed feedback I get from them. • Mulling over the business model, making sure that I fully understand it, and as far as possible, considering what the risks and rewards are.
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Feature Contributor
• Above all, working out what I consider to be a fair price for the shares, given the company’s likely prospects over the next 2-5 years, and how that compares with the current share price. I’m only interested in situations where I can realistically see a 100% upside on the share price over several years, with limited downside risk. • Thinking carefully about the downside risk. What could go wrong, and how far would the shares fall if the company disappoints on earnings? • There must be a good margin of safety in the share price, so if optimistic assumptions are already baked into the share price, then it’s not for me. • Meeting the management. Opinion is divided over whether investors should meet the management of companies. Personally I’ve made mistakes in the past by doing this, but have learned from those mistakes. The risk is that you get sucked into liking management, and believing everything they say, whereas in fact you should be questioning everything. Like anything, the more you do it, the better you get at it. So I typically meet the management of 20-30 companies each year, and would say that I’ve now got a pretty good nose for the ones that are genuine, and the ones that are painting an excessively rosy picture.
“LikE AnytHinG, tHE MoRE you do it, tHE bEttER you GEt At it. so i typiCALLy MEEt tHE MAnAGEMEnt oF 20-30 CoMpAniEs EACH yEAR, And wouLd sAy tHAt i’VE now Got A pREtty Good nosE FoR tHE onEs tHAt ARE GEnuinE, And tHE onEs tHAt ARE pAintinG An ExCEssiVELy Rosy piCtuRE.” On more than one occasion I’ve avoided, or sold shares after meeting management when something just didn’t feel right. So there is an element of sixth sense helping the decision making process sometimes.
Also, I like to meet company management as part of a group of other experienced investors whose long-term portfolio performance is good, and compare notes afterwards, as it’s surprising the detail that some people pick up on. I don’t like one to one management meetings, as sometimes it’s important just to sit back and observe the body language, and think about how management are answering questions, not just what they are saying, which can be done more easily when you are part of a group of investors. I’m a copious note taker too, which is very useful later, when your memory has faded somewhat...
key factors that influenced my decision to buy Above all, i am attracted to the valuation. it’s all about price. It amazes me how often people describe a company in great detail, but don’t even mention what price it is! And with SpaceAndPeople it was simply an attractive valuation case for a good quality, niche business at my entry price of 86p per share. Looking at the business model, SAL effectively created their own niche when the company was formed by existing management, led by Matthew Bending, in 2000. He was working as a marketing manager for Standard Life’s shopping centre division, and he realised that there was a great opportunity to make better use of the open spaces in shopping centres which were not let to tenants. So SAL was formed, to market, administer, and promote this selling space. It has since come to dominate this niche in the UK, having exclusive promotional and retail rights in 34 of the top 50 shopping centres in the UK, and having provided some services to 88 of the top 100 UK shopping centres during 2012. Usefully for SAL, their only significant competitor recently went bust. From meeting them, and checking the Annual Report, it was clear that SAL has highly entrepreneurial, sensible, but ambitious management. Their interests are perfectly aligned with shareholders, since the two key Directors hold about 18% of the shares. That’s extremely important in my view, enough to matter, but not so much that they could walk all over other shareholders - a fine line has the be tread here as we saw recently with the treatment of minorities at ENRC. Although, from meeting them, I don’t think they would want to walk all over other shareholders anyway. Director remuneration is a key factor for me - it must be fair and reasonable.
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Small Cap Corner
I favour companies which are based outside the South East of England, as you tend to find that management of companies in the North of England, and Scotland (SAL is based in Glasgow) are often more dedicated, have considerably lower remuneration, and in my experience often have better morals than some London-based companies!
timescales, and how things might pan out for this share. This is not a trading idea, it’s a long-term investment idea. So, I have bought the shares with no particular date in mind to sell - my intention is to hold “forever”, as long as the valuation remains attractive, and the dividends keep flowing and growing. Or, until the investment basis changes. If the valuation were to rise above my estimate of fair value, then I would sell. Of course, if good profits accrue along the way I’ll pare back my holding which is really just sensible and prudent portfolio management. In my opinion, SAL have many opportunities to continue growing, both domestically in the UK and overseas (they already operate in Germany, and on a smaller scale in India and Russia). Their opportunity lies not just in shopping centres, but in railway stations, supermarkets, festivals... really anywhere there is good footfall and an opportunity to sell and promote goods or services. Remember also that SAL are a broker for this promotional space, they do not actually operate kiosks themselves. From the research I’ve done, SAL could well be a considerably larger business in the future, and along the way shareholders should receive generous and growing dividends.
why it’s Good Value SAL seems to be on track to deliver about 10p EPS this year (calendar 2013), with about 12-13p in 2014 being forecast by the house broker, and two commissioned research companies. This looks realistic to me, and the business model looks capable of delivering continuing growth. So, to my mind, a PER of about 12 times next year’s earnings seems justified, and would suggest that the share price could justifiably support a price around 150p. That’s not a stretched valuation by any means. Hence the current mid price of 103p looks really attractive to me. Secondly, the dividend is good, and growing. As this is not a capital intensive business, profit is very similar to cashflow generated, so it can pay out a decent dividend. The dividend was 3.5p last year (over twice covered), and we’re probably moving towards 4p this year and close to 5p next year. That is a very attractive investment proposition in my opinion.
titan small Caps Fund Our partners at Titan have now launched their Small Cap fund and for which research is provided exclusively by Equity Active and myself. I have my own capital within the fund as do Titan Directors. We are not going to be chasing the latest investing fads, we will be positioning the Fund in good quality growth companies like SpaceAndPeople, which we hope will allow us to out-perform the market over the long-term, particularly given the ability through the pretty unique wrapper of a spread bet account to gear modestly. if you’d like further details then contact us at www.titanip.co.uk. Clear disclosure - i personally hold shares in spaceandpeople and plan to recommend the opening of a position within the titan small Cap Fund.
Thirdly, the Balance Sheet is sound, with no net debt, and indeed a small net cash position. There are no nasties in the accounts that I can see, so this is a simple good value situation. All I’m looking for is good companies at attractive prices. That’s it!
August 2013
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August 2013
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Feature Contributor
Commodity Corner
Is the Gold/Oil ratio warning of an impending fall in oil? By ben turney
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Commodity Corner
The Gold/WTI ratio as a guide Out of all the commodity classes this summer, being long on crude has been an excellent trade to be in. Civil unrest in Egypt and the associated fears of an interruption to the oil supply through the closure of the Suez Canal have propelled WTI through the psychologically important $100/bbl threshold. As of writing, the price is currently $106.50/bbl and there is little sign that the current bull run is running out of steam. However, there are indications that this market is now overheating and the conditions are setting up for a major correction to the downside. Exogenous shocks notwithstanding, the medium term outlook for crude (as with all commodities) is still decidedly shaky and the price of oil looks increasingly exposed.
To help make any trading decisions about oil and in allowing me a “bigger picture perspective�, I use the Gold/WTI ratio. The Gold/WTI ratio tracks the interrelationship between the price of gold and the price of WTI crude. Over the years, it has provided a useful benchmark to judge whether or not gold or oil is expensive relative to the other. Using historical data, going back to 1946, the long-term average of the Gold/WTI ratio is 14.87. In broad terms, whenever the Gold/WTI ratio has been above the red line indicated, oil has been cheap or gold has been expensive (or a combination of the two). Whenever the Gold/WTI ratio has been below the line, then the reverse has been true.
On a weekly and monthly basis, the Gold/WTI ratio can be prone to pronounced movements as both the underlying markets move. However, using the long term averages can serve as an excellent guide to help traders position themselves. At the moment, the Gold/WTI ratio is falling. If history is anything to go by then if it reaches 10, this strongly suggests that a correction in prices is imminent. The trade in both commodities this year has emphasised how useful this ratio can be. In mid-April, WTI was $81.75/bbl and gold $1,380/oz. The Gold/WTI ratio was 16.88. Since then gold has fallen further, while oil has risen sharply.
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Feature Contributor
“Using the long term average of the Gold/WTI ratio of 14.87, either the price of gold needs to rise to $1,583/oz or oil must fall to $86.48/bbl for the relationship to regain its equilibrium.” Depending on your risk profile, there was a perfectly acceptable opportunity to attempt an arbitrage trade by going long WTI and short gold at this point. Now, however, the Gold/WTI ratio is 12.08, suggesting gold is oversold and oil is overbought. Using the long term average of the Gold/WTI ratio of 14.87, either the price of gold needs to rise to $1,583/oz or oil must fall to $86.48/bbl for the relationship to regain its equilibrium. Of course, the market rarely behaves (if ever) in such a clean cut manner so the likely price action will be a combination of gold rising and oil falling. One commodity will probably move more sharply and one commodity will likely overcorrect. Both commodities could even move in the opposite direction to begin with, but the basic principle will be maintained. If the Gold/WTI ratio falls any further then the odds of an imminent return to the mean are simply increased.
CHART - CRUDE OIL PRICE
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The question is which commodity is likely to move more sharply?
Oil looks stretched Readers of the blog will be well aware that SpreadBet Magazine’s view of gold is, at current prices, unequivocally to get long. However, using the Gold/WTI ratio as a guide there could be an equally compelling trading opportunity developing in oil. As with all commodities, the price of WTI has clearly been significantly affected by the American Quantitative Easing programs and US dollar weakness. You only need take a casual look at the chart below to see this.
Commodity Corner
The rally over the last four years, while the Federal printing operation was in full swing, is obvious. However what is interesting about oil is that while other commodities have been giving up much of the gains since 2009, crude has held onto its gains and, more recently, has even been rising. Something appears amiss. The recent rationale for being long oil has been pretty strong for three main reasons: 1) The trouble in Egypt has prompted fears of a repeat of the Arab Spring. 2) Hurricane season is upon us. Even though it is notoriously unpredictable the disruption caused by hurricanes in recent years has led to massive spikes. 3) US inventories are declining, having recently experienced their largest drop in 30 years. Nevertheless each of these reasons has a limited shelf life. Starting first with the troubles in Egypt, it is true that if the conflict deepens and the Suez Canal is closed this will be a significant problem. Roughly 5.5% of world oil output passes through the Canal each day. Changing shipping lanes would be complicated, but not impossible, so the fears related to this could be overblown.
“This is not to say that things cannot get worse in the Middle East and cause disruption to oil supplies, but using this as a basis for staying long looks increasingly risky at this stage.” Finally, much has been made of the sizeable recent drop in US stockpiles of crude. There is speculation that inventories could fall further over the summer. This could happen, but what this analysis fails to take into account is the long standing American policy to reduce stockpile purchases as the price of oil rises, especially above $100/bbl. So although the stockpiles might be falling, the market also has to contend with the removal of a significant buyer.
The second set of fears relating to the Egyptian situation concern a regional escalation of tensions. This is an ever present problem in the Middle East. The Arab Spring caught most by surprise, but a common mistake in attempting to assess global geo-political events is to expect the current situation to unfold like the last. This time around the circumstances are decidedly different. The Syrian conflict has been raging for two years, Libyan oil supply has already been interrupted as a result of its civil war and the various Gulf States affected last time have established crackdowns on dissent.
Looking for a trigger to trade
This is not to say that things cannot get worse in the Middle East and cause disruption to oil supplies, but using this as a basis for staying long looks increasingly risky at this stage.
Deciding exactly when to go short will require some judgement, but there is one indicator to look out for. In the last few years it has been an excellent contrarian indicator - as soon as the major investment banks start pumping out research notes proclaiming that “oil is heading to $150” or suchlike! So far in the latest move, I haven’t come across any of this type of research, but as soon as I do, I will know we are fast approaching, or at the point of, a market reversal. In unison with the Gold/WTI ratio, this will be as a good a set up as any in my opinion.
Moving next to Hurricane season, it is of course impossible to say whether or not there will be a repeat this year of the destructive hurricanes the US sadly experienced earlier this century. There is always a risk this could happen, but again staying long on this basis is not appealing and is, at best, a short term speculation.
Overall it is probably a little early to start shorting oil outright. Although the basis of the current rally looks limited, there is still plenty of scope for the market to move higher in the short run. Even so, with the outlook for American QE having changed so much and the likelihood of further dollar strength, much that has been recently supportive of the price of oil could well start to have the opposite effect.
August 2013
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60 | www.financial-spread-betting.com | August 2013
Currency Corner
Currency Corner
What next for Cable? And so, the “monetary event” of the year came to pass on the 1st of July with the appointment of Mark Carney, the “rock star” former Canadian central banker taking up the helm at the head of the Bank of England. This was a pretty significant event, as in 319 years of the bank’s history, also known as “The Old Lady”, it is the first time a foreigner has sat at its head.
August 2013
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Currency Corner
Obviously, the landmark signing is being heavily scrutinized by traders, trying to gauge just what actions Carney is likely to take, with an increase in quantitative easing speculated about widely or alternately a change in stance on interest rate policy. Carney has already had an impact on the latter, declaring that rates were unlikely to rise until 2015. If traders can second guess Carney’s moves correctly, then there are big profits to be made in the currency markets and the GBP/USD paid (also known as “cable”) is one of the most widely traded in the world. George Osborne, the UK Chancellor, has given Carney one main remit – get growth going in the ailing UK economy. This has given rise to the expectation that Carney may employ looser monetary policy than his predecessor, Mervyn King. It has also been noted that when Carney was at the Bank of Canada, that they operated in a different fashion to the Bank of England. In Canada, Carney was the sole decision maker. In the UK, we have a committee. Thus it is expected that Carney’s style could be somewhat more “gung ho”.
“George Osborne, the UK Chancellor, has given Carney one main remit – get growth going in the ailing UK economy.” On the 9th of July, the IMF raised its growth forecast for the UK from 0.7% to 0.9%, the first time it has made an upwards revision since April 2012 and therefore pretty significant. This was further backed on the 15th July, when Ernst and Young’s Item Club raised their UK forecast from 0.6% to 1.1%. Additionally, there have also been signs that the jobs market is picking up, with fewer people claiming unemployment benefits – the number fell by 21,000 between May and June. That said, there are some odd quirks. Manufacturing Data from the UK showed that the sector decreased 0.8% for the month of May. Manufacturing makes up only 10% of the UK economy though, in effect, factories are producing 3% less than they did three months ago. The trade deficit actually increased between April and May from £2.1 billion to £2.4 billion, again showing signs that despite a weak sterling, we are not selling enough British goods abroad. Osborne’s dream to export our way of the doldrums is not becoming a reality. This is however a legacy of nearly three decades of manufacturing decline and not a reflection of sterling not being sufficiently weak, as is evidenced by the continued pouring of cash into the London property market by foreigners.
MARK CARNEY Carney has been lucky, so far... Data from the UK economy has been showing signs of improvement recently, and perhaps allowed some deflection of attention on his every move.
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The week commencing the 15th of July was an interesting week for both the BOE and the FED. Firstly, we had the minutes from the BOE – this was eagerly anticipated in seeing just how Carney voted. The voting was unanimous 9-0 to keep asset purchases at £375 billion, and no interest rate change. What was interesting though was two committee members – Paul Fisher and David Miles have changed their vote from more stimulus measures to keeping things on hold.
What next for Cable?
“Osborne’s dream to export our way of the doldrums is not becoming a reality.”
August 2013
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Currency Corner
Ben Bernanke, in testimony to congress, said that the likelihood of the tapering of asset purchases towards the end of the year was dependent upon the performance of the US economy. In part it was a backtracking from his earlier comments that it would commence at the end of this year through to late spring 2014 when it would be halted completely. The US economy is currently growing at a rate of only around 1.8%, lower than the forecast 2.4%. With market expectations of more QE for the UK not coming to pass, growing momentum in the UK economy and Ben Bernanke stuck in a “monetary box”, the stage is being set in SBM’s opinion, and as contrary as ever, for a sharp rally in the cable rate.
We have a two out of two success call with our big currency themes so far - long USD/Yen around the 80 mark and long GBP/AUD at the $1.53 mark at the beginning of the year. The same fundamental and technical rationale is being applied here too. Take a look at the five year chart below and you will see that cable made a slightly lower low in early July relative to the beginning of the year when the UK suffered the ignominy of a sovereign debt downgrade (and at which point we also advocated a buy, completely in the face of consensus, of cable that delivered nearly eight big figures of profit in the next several weeks). Additionally, the RSI did not make a lower measure and so this should be seen as a bullish development.
5 YEAR GBP/USD CHART In essence, we have a large flag formation that is nearly five years in the making now. The upper band breakout is around $1.63 and the lower level at $1.47. A weekly close below $1.47 with a falling RSI will be a sign that we are wrong and it is time to cut and run. We do not see this at present however and believe that the key level to watch is the $1.53 - 1.5350 level - site of the key three week and 19 week moving average. A weekly break and close above here will be bullish in the medium term and likely take us back towards $1.60 as we close on the end of the 3rd quarter of 2013.
64 | www.financial-spread-betting.com | August 2013
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Editorial Contributor
Alpesh Patel Alpesh Patel is the author of 16 investment books, runs his own FSA regulated asset management firm from London, formerly presented his own show on Bloomberg TV for three years and has had over 200 columns published in the Financial Times.
Patel on Markets QE: Equities 1 – Currencies 0
It seem that even the merest hint by Ben Berrnanke of a slowdown in QE is enough to send equity markets tumbling - testimony indeed to just how much QE “froth” there currently is priced into the market. It was only his backtracking and ‘reassurance’ that the drug of monetary stimulus would be re-administered during July that set the patient right once again and allowed it to recover to new highs. It is precisely because QE leads to euphoric highs that it is, to me, a drug. And a drug that the markets are hooked upon. If QE is so good for equities then what harm in the short term does it do? What impact does it have on the so called currency wars? And, when the drug is finally withdrawn, how do you position yourself? We have heard so much talk from Presidents and Prime Ministers of various countries that they would actively devalue their currencies in what is, an ultimately futile race to cheapen their exports in order to fuel growth.
Like a Mexican stand-off you would expect the first one to move would pull it off. From the Brazilian Real and the Mexican Peso to the Australian Dollar and Japanese Yen, they have all thrown their hat into the ring. But against who?
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Patel On Markets
“In other words, as we no longer expect a weakening dollar, is NOW the precise time to start betting heavily on a falling dollar over the long term?.” The US dollar of course – their largest trading partner. So what happened? Have the warriors got wiser and realised that announcing your intentions to the world is not quite the way to do it because traders will simply use that information to confound your plans and then make you pay for it? Or, was it always an empty threat because of the actual cost to a central bank of a devaluation (as the Japanese found out before Shinzo Abe gained power again). Perhaps they have been playing the game of “chicken”, merely announcing a policy intention in the hope that traders en bloc would push their currency lower without spending a dime – literally. Indeed, perhaps what we are seeing is a type of “guerilla” currency war against the Dollar? How do global Dollar moves tally too with an increasing debt burden from QE as the Fed loads its balance sheet ever nearer towards the bloated $4tn level now? Surely the currency is just simply being ever more debased and selling the dollar is a one-way bet? From Warren Buffett to the screaming US twin deficits, a fiscal cliff, Congress in gridlock, and a downgrade of the Sovereign debt status of the US – everything points to a weakening dollar against all major currencies. Precisely the one way bet. But... the precipitous decline continues to fail to materialise. Even the credit crunch saw a flight to safety to US assets – the country that actually gave rise to the crisis in the first place! Does the US win either way? Are deficits irrelevant when you are the de-facto reserve currency of the world, when 80% of all daily forex transactions involve the dollar, and when you are the world’s largest economy? In other words, you can print at will and never find yourself dumped into the “banana republic” category. Or, like most expected trade moves, does the expected actually happen when least expected, when we feel the financial crisis is over, that US and global growth is resuming?
c i l b u Rep In other words, as we no longer expect a weakening dollar, is NOW the precise time to start betting heavily on a falling dollar over the long term? What about the Euro? Is the real story that within the Euro region no one country is truly relevant and so the Euro is always a long bet? The Eurozone is about the size of the US by GDP. Given that Greece has the same GDP as Washington State in the US and no one would care if Washington State needed a bailout from the US Federal Government, then we can see just why rumours of the euro’s demise have been unfounded and fallen on deaf ears... Any further wobbles should, to me, simply be a reason to buy these dips not sell. The Euro is a far more secure currency than we realise. Or, take the crisis around Italy’s debt. Of course, Italy is a far larger economy than Greece, in fact it is about the economic size of California. Yet, like California it has been on the brink of financial collapse many times. Do we worry about the US economy when California skirts default? Our expectations have been too pessimistic surely about the Eurozone – a currency which is held in the reserves of more central banks than any other after the US dollar – and so, I reiterate once more, that it is, to me, the safest of safe bets. Alpesh Patel www.alpeshpatel.com
August 2013
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Travel Feature
SBM TRADER’S R&R TRAVEL FEATURE
Hidden Lake Como... By Richard Jennings
For those of you wondering where to take a week’s (or maybe longer) break this summer / autumn, if you have never visited the Italian lakes before, then the scenic beauty of Lake Como is as good a place as any to put on your hit list. Easily accessible from most major UK airports by flying into any of the three airports (Mapensa, Linate and Bergamo) that serve Milan, Mrs SBM and I took off there for a week in early July to celebrate the, say it quietly, big 40 (horror of horrors!).
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Hidden Lake Como
“the months of late May/early June, and late August through September are, climatically, the best times to visit the area. Clear blue sky days, low humidity and in mid autumn, a still warm lake that positively invites a late afternoon dip.�
August 2013
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Travel Feature
Take a look at most of the Lakes and Mountains brochures and the mainstream travel operators and you’ll be offered the usual 3, 4 and large glitzy 5 star accommodations but, as is typical of our magazine in looking to unearth those opportunities that have been missed by the wider market, we thought we’d bring to your attention the “Hidden Como” - places that are not in the brochures but that are frequented by the local cognoscenti and that give you are real flavour of the best of this stunning environment. It’s fair to say that, aside from the inconvenience of having July as a birthday date (and so by virtue of this, when celebrating a landmark birthday, one has no choice but to travel then!), I would suggest that unless you enjoy serious heat (think 35c and beyond), that the months of late May/early June, and late August through September are, climatically, the best times to visit the area. Clear blue sky days, low humidity and in mid autumn, a still warm lake that positively invites a late afternoon dip.
The lake was in fact created from melting glaciers millions of years ago and what is left is jaw dropping mountain scenery whose peaks are actually snow capped for a number of months of the year. The mountains are perfect hiking territory in the cooler spring and late autumn months. If you are a bit of a gourmand like us, then we can highly recommend the following restaurants. On the Eastern side of the lake - Il Caminetto (http:// www.ilcaminettoonline.com/lezioni_e.html) which offers simple rustic mountain fayre and is run by a charming Italian and his family that have resided in this region for generations. The “orancello” (for those who enjoy Limoncello you can guess what this is!) that is served at the meal’s conclusion is a must (and particularly potent!). The restaurant also offers Italian cooking lessons for the budding Keith Floyds. Como is the largest of the three lakes (Maggiore and the lesser known Iseo being the other two) that make up the Italian lakes and is probably the most dramatic. It is in fact positioned at an ideal intersect for accessing Switzerland, Austria and France with the Swiss city of Lugano less than half an hour away (from the Western shore) and the internationally renowned ski resort of St Moritz also less than two hours away. A little further afield is the millionaires’ playground of Monaco and resorts such as Lech in Austria.
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On the, allegedly, more sophisticated Western shore, home to resorts such as Menaggio, Tremezzo, Cernobbio etc. (as well as one Messr George Clooney who we’ll come back to later...) then La Figurida (http://www.lafagurida.it) is in a similar vein but from the outside terrace offers a cracking view of the lake and a well priced wine list. Over a period of six nights, we visited here on three occasions - that gives you an idea of how enjoyable the food is (and charming the service too).
Hidden Lake Como
Not cheap, but then in this location the price is worth every euro. An extensive wine list and some local specialities make this a “special occasion” must visit. The suites are booked up quite well in advance however - testimony to the popularity of the restaurant.
La Volpe in the hills above Menaggio also has a beautiful view and a similarly well priced wine list. Moving up the price spectrum and also offering quality accommodation is the Al Veluu suites (http://www.alveluu.com) which is operated by Lucca and his English wife Cheryl. The view from the two suites and the restaurant’s outdoor veranda simply has to be seen to be believed. On a balmy summer’s evening, with the tables illuminated by candle light and the gorgeous smell emanating from the outdoor wood burning stove on which much of the meat is cooked, it is impossible for even the most hard hearted trader not to have their inner romantic stirred.
GEORGE CLOONEY
Our final restaurant suggestion is Darsenna di Loppia (http://www.ristorantedarsenediloppia. com/), nestled in the beautiful Como village of Bellagio. Accessed by walking through the classical and stunningly manicured gardens of Villa Melzi, this tucked away little restaurant is a favourite of none other than Como’s most favourite resident George Clooney (told you we’d come back to him). The food is to die for and again, the wine list was surprisingly well priced with large measures of prosecco for less than four euros. Perhaps understandably, with the lake lapping at the restaurants shore, fish is its speciality and we can certainly recommend the local lake fish. The variety of pastas is very extensive too. And so, as Mrs SBM and I dined for lunch under the shady terrace, enjoying a glass of nearby Trentino rose, who other than Mr Clooney and his entourage should turn up in his boat and plonk himself down at the table next to us! I was half tempted to ask if he was a fan of SBM but decided to let the better part of discretion take its course and simply left an SBM business card with the waitress to pass to him. Who knows, we could have the “nespresso” figurehead as a new reader and convert!
August 2013
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Editorial Contributor
Dominic Picarda is a Chartered Market Technician and has been responsible for the co-ordination of the Investor’s Chronicle’s charting coverage for four years. He is also an Associate Editor of the FT and frequently speaks at seminars and other trading events. Dominic holds an MSc in Economic History from the LSE & Political Science.
doMiniC piCARdA’s TECHNICAL TAKE EMERGinG MARkEts in financial markets, today’s ugly mess can often become tomorrow’s great opportunity. Right now, stocks in Emerging Markets (EMs) are something of an ugly mess. while equities in developed countries like the us, uk and Japan have been soaring this year, the MsCi Emerging Markets index – which covers 21 up-and-coming nations – is down 10 per cent since 2013 began. And so, in this piece, we ask is there now a fantastic trading opportunity in the offing?
MsCi EMs in the doldrums EM’s were very much the place to be for much of the last decade. between 2001 and 2011, the MsCi EM index registered annualised total returns of 20.7%. that was almost three times what developed markets managed over the same period. These were ideal conditions both for buy-and-hold investment but also for short-term speculation, particularly around the crisis of 2007-09. Since the mid-year meltdown of 2011, though, they’ve never really rediscovered their form. To determine when EMs might make a comeback, we first need to understand what’s been weighing on them of late. China – the biggest EM of the lot – is in the grip of a nasty economic slowdown and a credit crunch. We know from the West’s experience in 2008-09 that the turnaround is most likely once a massive stimulus is unveiled or the economy begins to pick up. Neither is an immediate prospect for now.
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Dominic Picarda’s Technical Take
“While equities in developed countries like the US, UK and Japan have been soaring this year, the MSCI Emerging Markets index – which covers 21 up-and-coming nations – is down 10 per cent since 2013 began.”
MSI EMERGING MARKETS INDEX CHART
August 2013
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Editorial Contributor
Dollar up, EMs struggle
US DOLLAR INDEX V EMERGING MARKETS RELATIVE TO DEVELOPED MARKETS INDEX
“So, if you reckon that the US dollar index is set to go up further – as I believe it will – then you are likely to do better from buying into mature markets like the S&P 500 or Germany’s DAX.” Another big headache for EMs is the strength of the US dollar. Over time, bull markets in America’s currency have seen EM stocks underperform those from developed markets. So, if you reckon that the US dollar index is set to go up further – as I believe it will – then you are likely to do better from buying into mature markets like the S&P 500 or Germany’s DAX. An obvious time to buy into EMs is when they become screamingly cheap. Lately, the price-to-earnings ratio for the MSCI EM index was around 11.4. In the past, a valuation like this has typically led to annualised returns of around 10% over the next two years.
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This makes EMs reasonably good value from a medium-term investment point of view. But they’re not an absolute bargain yet, to be sure. To help me time my tactical positions in EMs, I’ve built a trend following model that gives automatic buy- and sell -signals. It aims to be long during strong uptrends, but also to buy in as early as possible as the index bounces back after major meltdowns. Since the MSCI EM index was created in 1988, my model earned an annualised return before dividends of 14.2%, against just 9.7% for buy-and-hold. However, it suffered only around two-thirds of the volatility of buy-and-hold – more return for less risk.
Dominic Picarda’s Technical Take
MSCI EMERGING MARKETS INDEX BUY & SELL SIGNALS Of its 27 buy-signals in the last 25 years, sixteen have been profitable. The model has been invested in the market almost exactly two-thirds of the time, with the average position lasting for 32.6 weeks. Having given a “sell” signal on 7 June 2013, it gave a buy-signal on 19 July. I am far from a raging bull here, but having a system is about following all the signals as they arise, rather than cherry picking among them.
My preferred method for acting on these signals would be with an exchange-traded product. However, there are also possibilities here for shorter-term speculation. The MSCI EM index is available to trade through spread bets, which provide significant leverage without any currency risk. The bets are typically quoted on exchange traded fund prices, rather than on the underlying MSCI EM cash index itself.
That said, my research shows that buy-signals that flash up when the leading indicators of economic activity are at low levels have been especially successful. Specifically, those occurring when the OECD’s leading indicator for the G7 nations is at 99.2 or below have all been followed by fat double-digit returns. Currently, though, the indicator is at mildly positive levels, which is not especially helpful.
In the near-term, I reckon that the cash price of the MSCI EM index could rally from its 21 July closing price of 950 to the 1050 or even 1082 level. For the purposes of taking long positions, I would be willing to enter so long as the 21-fourhourly exponential moving average was above its 55-fourhourly EMA. I would then use bounces off the 13-fourhourly EMA in order to buy. And I would exit as the 21-EMA crossed below its 55-EMA.
August 2013
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Editorial Contributor
NEW Monthly Feature
The Politics of Trading BY David Cracknell On being asked to write this column, it brought to mind Bill Clinton’s epiphany nearly 20 years ago, when he turned to an aide and said: “You mean to tell me that the success of the economic program and my re-election hinges on the Federal Reserve and a bunch of f******* bond traders?!” The assumption in the City sometimes seems to be that the markets drive everything, including what goes on in the White House and Downing Street.
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The Politics of Trading
But it is worth reflecting that more often than we think, it is the other way around, with political words, initiatives and investigations actually moving the markets. Take the parliamentary inquiries into hedge funds as an example. And, I have to say, that I felt mightily smug on the day G4S (LSE:GFS) got into another pickle with the Government recently, having had a short order on the firm filled just a couple of days before!
BILL CLINTON
The security company had bungled a contract with the government to tag and monitor prisoners, less than a year after its Olympics debacle, and it emerged that they had been overcharging the Government by tens of millions of pounds, including one case of tagging a dead person. The shares plummeted just as they did last July and some handsome profits were taken.
CHART - G4S The basis of my decision to short a couple of days before had actually been made on my short-term 30-day momentum strategy (technical), plus rumours of contract losses (a bit of fundamentalism); but it just goes to show that politics and the news actually should be part of a traders’ toolbox. And there are hundreds of listed firms out there that rely on Government contracts and largesse. So the overall state of the public finances, particularly local government finances, is key to whether these companies do well.
August 2013
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Editorial Contributor
For example May Gurney (LSE:MAYG) has done well out of the austerity policy of contracting out roadworks to the private sector. It is not just about charts or company accounts, but essentially human nature and the madness of crowds. And it’s the latter where I have some expertise: I used to be a political journalist!
“Much of my time was spent predicting what the likes of David Cameron, George Osborne, Mervyn King and Gordon Brown (remember him?!) were going to do next.” I spent 15 years in the Westminster bubble covering politics for various papers - Sunday Business (remember that?!), The Sunday Telegraph, and latterly as Political Editor of The Sunday Times. Much of my time was spent predicting what the likes of David Cameron, George Osborne, Mervyn King and Gordon Brown (remember him?!) were going to do next. Because I worked on Sunday papers and there is nothing much to report on a Saturday (except sport), we had to give our readers tomorrow’s news today. In other words my job was to predict the future, what politicians would do next in certain situations. GEORGE OSBOURNE
I’ve used this experience and gut feeling technique in my trading. It always pays off to take some time to think about the thought processes, personalities and motivations of our political and financial leaders. Mark Carney, the new Bank of England governor is not a politician. He is not elected, but politicians did appoint him. George Osborne said he was “simply the best” person for the job, he is younger and better paid than his predecessor.
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So far the “Carneybore” has got off to a good start by bringing unity to the monetary policy committee and hinting at an end to QE. He is also said to be in favour of giving more advanced notice of interest rate decisions; when he was the top dog in Canada he calmed the markets by promising to keep interest rates down for a whole year. This stabilising effect may be good for the Chancellor’s sleep and encouraging for the economy ahead of a general election less than two years away, but it doesn’t necessarily help us traders, especially those who thrive on volatile forex markets and those of us who favour equities and have learned to love the QE cycles. The UK’s new Canadian bank chief is bound to be tested over the coming months. One area where Carney could blot his copybook is housing. The Chancellor has introduced the “Help to Buy” scheme and signs are that the housing market is stirring again, at least if the rise of some of the stocks in house builders is anything to go by. Mervyn King was not a fan of the scheme because it encouraged the kind of mortgage guarantees that got the US into trouble. And the new supremo’s dovishness can only encourage more household debt; indeed, while low interest rates helped Canada through the financial crisis, its monetary policies have left the Canadians some of the most indebted people on the planet. One question all this focus on Carney ignores of course is: does it really matter what the Governor of the Bank of England does any way? If you were going to study one political figure in the world as a trader it would be the Chairman of the Federal Reserve. Believe it or not but the US economy is still the biggest in the world so watch what Ben Bernanke says, he’s much more important to traders than what them blokes in Threadneedle Street, No.10 or even the White House does. Try and study what Bernanke has said in the past to help you predict future moves. It was, after all, Bernanke’s utterances on QE tapering that moved the markets so much earlier this summer. It left Europe’s central bankers desperately trying to get the microphones and say “Me too!”. Whether politics influences the markets or vice versa is an impossible chicken and egg style argument, but there is little doubt that when the two spheres collide there are big trades to be had.
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School Corner
school corner
The Put/Call Ratio explained by Thierry Laduguie of e-yield In this piece, I’ll explain how using the Put/Call ratio, published daily on www.cboe.com, can be used in your trading to help you time a long or short position
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The Put/ Call Ratio Explained
Buying a Call option gives an investor the right to purchase a stock or an index at a pre-determined price. Investors who purchase Calls therefore expect stock prices to rise in the coming months. Conversely, buying a Put option gives an investor the right to sell a stock or an index at a pre-determined price. Investors who purchase Puts expect stock prices to decline. Each option is tradable and has an expiry date, a trader can make a profit by selling his / her option before expiry, that is if the market has gone up (Call option) or down (Put option).
The indicator shows the relationship between the number of Puts to Calls traded on the Chicago Board Options Exchange (CBOE). When too many Calls are purchased in relation to Puts it indicates that the majority of traders are bullish. In this situation the Put/Call ratio will be low. When the Put/Call ratio is too low and near an extreme based on historical levels, it is a sell signal. Logically then, when the Put/Call ratio is too high, we have the opposite situation, traders are too bearish and this is a buy signal.
Statistics in the options market show that equity options traders are not the most successful traders. On balance, option buyers lose about 90% of the time - pretty much the same as futures trading. Although there are certainly some traders who do well, on average the majority lose money and therefore it makes sense to analyse the statistics in order to establish who has the upper hand. Since most option traders have a bleak track record, betting against the majority usually pays. The Put/ Call ratio is a contrarian indicator, it tells us what the majority of option traders are doing. This is how it is calculated: it’s simply total Put volume divided by total Call volume.
There are different ways to construct a Put/Call ratio, we can use daily or weekly volume together with a moving average to smooth the data. If we take the total weekly Put/Call ratio, this is the weekly total of the volumes of puts and calls of equity options. We simply take all the puts traded for the previous week and divide by the weekly total of calls traded. I prefer to use the CBOE daily EQUITY ONLY Put/Call ratio and have alighted upon the last nine months to illustrate how this has worked out: This chart shows the daily equity Put/Call ratio at the top and the S&P 500 at the bottom.
CBOE EQUITY PUT/CALL MEASURE RELATIVE TO S&P 500 INDEX
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Â
School Corner
The extreme levels are 80% (0.8) or higher (buy signal) and 50% (0.5) or lower (sell signal). Here are the results:
Sell signals: 17th May 2013: the indicator hit 0.5, on that day the S&P 500 closed at 1667. The S&P 500 pushed slightly higher in the following few days, the high was 1687 on 22nd May then turned down to reach a low of 1560 on 24th June. 30th May 2013: the indicator declined to 0.48, on that day the S&P 500 was trading at 1654 and was in the midst of a decline. The index never rallied, it continued in fact to decline until 24th June.
Buy signals: The indicator flashed a few buy signals in November-December last year following a major correction. The Put/Call ratio rose above 0.8 on 8th November, 15th November and 4th December 2012.
More recent buy signals occurred on 19th April, 11th June and 21st June. The 19th April buy signal was perfect, the S&P 500 rallied immediately 8.4% in the following five weeks. 11th June: The buy signal failed. The S&P 500 began to rally but a sharp sell-off pushed it to a low of 1560 on 24th June. The index then rallied to new highs. 21st June: That was a near perfect buy signal. The S&P 500 was trading at 1592 on that day and made a final low the next day. It then rallied 6% in the next four weeks. And below is a the actual S&P 500 chart with the figures overlaid & including the most recent signal. As you can see, the Put/Call ratio, when used as part of your other trading arsenal is a valuable tool for timing the markets.
CHART - S&P 500
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Editorial Contributor
BY NICK HILSDEN
FTSEDayTrader.coM
My story
Following my first article in this magazine of last month highlighting my own trading journey, I have received many emails from readers who have experienced the exact same path. It seems that for most spread bettors, the old adage of “practice makes perfect� is very true.
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Lessons I’ve learnt trading the FTSE
It’s a steep learning curve and one that hopefully leads to the success we all dream of. However, it certainly isn’t a get rich quick scheme! I look at it now as “get rich slowly, rather than poor quickly” and to keep the leverage low and the stops tight when learning. This very approach has been advocated many times in this magazine. Anyway, I mentioned in my last article that I was bullish still and fully expected 6800 to be seen in the not too distant future. Whilst the trends were down at that point we have rebounded significantly from the 6004 lows seen in June. As I write this article, we are holding just above 6600. I might be so bold as to suggest that the FTSE could see 7000 at some point before the year is out.
EXAMPLE FTSE RAFF CHANNEL CHART
Certainly we are in a decisively bullish period at present, and Ben Bernanke in his latest speech has indicated that QE is likely to continue for the remainder of this year (of course 2014 is a whole new ball game), it may in fact be increased (or tapered) as data permits. I talked about the Raff channels last time I wrote and I find that they are extremely useful – they are shown on the chart below – and as you can see both the 10 day (red) and 20 day (green) are firmly heading up.
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Editorial Contributor
Support & Resistance levels As those of you that read my article last month will know, I like to keep my charts fairly simple, with just a few “indicators”. I have tried using various different ones and to be honest they can no more help you predict the future than the flip of a coin. What they are all great at doing is confirming a move after the event. How useful!
There are usually three support and three resistance levels calculated for any given day and they can be found within charting packages or on various websites. I use the livecharts website for the daily pivot and can be seen here http://www.livecharts.co.uk/Members/display_ stock_pivots.php.
So, what can you use to help you “predict”, nay guess, the future? In conjunction with the Raff channels I also use standard support and resistance areas and the daily pivot, and I find that these are probably the most useful for my style of trading. They don’t always hold of course, however they do give good entry (and exit levels).
The bottom line is that predicting the future is mostly a guess but by using these signals, it helps me to make a more informed decision about what might happen in terms of levels, entries and exits. The image below shows these for the day I am writing this (17th Jul), based on yesterday’s high, low, open and close prices.
TABLE - FTSE 100 RAFF CHANNEL SUPPORT AND RESISTANCE LEVELS
“I have tried using various different ones and to be honest they can no more help you predict the future than the flip of a coin.” Pre market open the FTSE price was 6570 so I expected support at the daily pivot of 6561 and so a long there with a tight stop of 11 points was the trade for me, with take profit points at 6605, 6639 and 6684 being the resistance areas - simply speaking. There is a little bit more to it but that’s the general idea.
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Lessons I’ve learnt trading the FTSE
Stop levels I am often asked where to place stops - there is no definitive answer I find, as it depends on your risk, pot size, and timeframe for a trade. However, in the context of day trading and how I do it, I use the support and resistance levels for that day for my entry points. I can therefore have fairly tight stops as if a recognised support / resistance level is broken then it will usually get to the next level. For example, say support level 1 is 6575, and support level 2 is 6545. I would go long at 6576 with a stop at 6568. If that gets stopped out you can be fairly sure that 6545 will get hit and so it can pay to actually cut and reverse.
Safezone Another way of working out where to put your stops is to use the SafeZone indicator, as devised by Dr Alexander Elder.
I have put the code for this on my website at http:// www.ftsedaytrader.com/safezone and this can be added to your charts (if the facility exists to add custom code). What this does is show on the price panel an appropriate stop level for any given trade. It is most useful in a trending market as it shows you where to set a trailing stop. The image below shows this in context, so for today assuming you are long (in reality we are long here from 6561 which was the pivot level for this day as you can see below), we can set our stop at 6595 now. The SafeZone indicator can also show when prices are bullish or bearish - as it’s below the current price, the FTSE should continue to rise till the next area of resistance, being 6639, as 6605 has broken. If it was above the current price then that would be showing a bearish stance. You can also fine tune that with colour coding, and I use green for bullish and red for bearish.
CHART - FTSE SAFE ZONE EXAMPLE
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Editorial Contributor
outlook For the moment, I am still bullish, fully expecting at least 6720 in the near term and 6800+ in the not too distant future. I was bearish prior to the summer, expecting 5900, however when the drop happened (from 6880) and everyone started calling 5900 I felt it was likely to turn back up sooner, as indeed it did from the 6004 level. this is another important point, if the wind changes then i change too - i am not wedded to a particular trade and am prepared to turn as necessary - i have seen that this is one of the traits of real successful traders.
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For now the trends are up as per the Raff channels above, data is improving, QE is continuing and all is fixed. Or is it‌‌ next month I’ll probably be bearish for another drop! To learn more and to see how I get on visit my website at www.ftsedaytrader.com where I post my thoughts every day.
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Director’s Dealings
DIRECTOR DEALINGS
5 THINGS THAT YOU SHOULD CONSIDER BEFORE TRADING When stock picking, investors have a whole array of indicators they can choose from in search of a ripe stock. Analysing balance sheets and cash flow can give you a snap shot of the profitability and liquidity, plus you can also study charts to gain an insight into the psychology of investors and so forth. These are great tools, but what you really want to know are the perhaps more soft facts: management styles, relationships within the company, and perhaps what the view is of senior figures within the company of their prospects.
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5 things that you should consider before trading
This has led to investors scrutinising closely what trades directors, and senior management in general, are up to with their own companies stock. Recent director buying? It is reasoned that he must think the company has good growth prospects given their preparedness to put their own skin in the game, it is reasoned. Similarly, director selling? Then surely they think the company has a poor outlook, and you would be wise to follow suit, so goes the thought process. To interpret transactions in such a clear-cut manner is perhaps somewhat simplistic. There can be numerous reasons for a director making a transaction. It may be that he is selling to pay school fees, perhaps even a divorce, and so his movements has no read through whatsoever to the company’s situation and prospects. Obtaining information on director dealings is quite easy these days – perhaps one of the best websites around is www.directordealings.com, but you need to subscribe to this service. There is free information out there, with the London South East website being useful, and of course you can find information in Investors Chronicle and Shares Magazine.
“You should be aware also that director dealings can be used as a PR exercise - by purchasing shares, directors may know this will be watched by investors as an indication of conviction in their business and perhaps to help boost share price for a forthcoming placing for example.” You should be aware also that director dealings can be used as a PR exercise - by purchasing shares, directors may know this will be watched by investors as an indication of conviction in their business and perhaps to help boost share price for a forthcoming placing for example. “Sacrificial lamb” is the most appropriate phrase here.
Directors are also bound by quite prescriptive rules in relation to their transactions. They also have to be careful not to be deemed to be “Insider Dealing” – that is dealing on information that is not in the public domain and if this information was known, is price sensitive information. Either way, let’s firstly look at the rules that Spread Bet Magazine believe you should consider when looking at director dealings. We have highlighted five key points that you should consider. 1). How much of a holding does a director have and how much as a proportion has he sold/purchased? In the case of a sale, the director maybe making a sale for a whole host of reasons – perhaps they need to pay a tax bill or just plain need some cash! Concern should be more about the size of the trade – if the director is selling his whole ownership then this should be of concern – it could also mean he is planning to leave the company, again something that should be concerning if under their stewardship the company has been performing well. If a director is purchasing shares, look at the size of the purchase in relation to his salary – this will give you an indication of his conviction. 2). How did the director obtain the shares? Many directors are given shares when they join a company, and thus this is less significant than if they are using their own cold hard cash to purchase . If they are risking their own cash, then you should take note and you should be careful to check just how the share acquisition came about instead of blithely accepting the figures released for example in the Weekend FT. 3). Options. Again, many directors are given options that allows them to purchase shares, so they would only exercise these options if the current market value is above the strike price. This is not an indication of future direction, this is just a no brainer for the director as they crystallise the difference between the option price and current market price. We should be more interested if the director is willing to pay for stock at the same price as ourselves. 4). Look for patterns. If several senior people are all purchasing around the same time, this indicates far more conviction than if just one person is – it indicates a collective belief in the company.
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Director’s Dealings
“puRCHAsinG in CLuMps CLosE to A CLosEd pERiod, pARtiCuLARLy wHERE A stoCk HAs HAd A LARGE FALL is usuALLy pARtiCuLARLy notEwoRtHy.” Also, look for activity just before the “Closed Period” (the period that no directors / employees can make transactions) and after this time also. Purchasing in clumps close to a closed period, particularly where a stock has had a large fall is usually particularly noteworthy. 5). Don’t allow your own convictions to cloud your judgement. We have all done it. You do some research on a cracking little stock and feel that there a few things you want to investigate further. Lo and behold, a director just purchased some shares – a great sign you say! So you wade in. It is called re-affirmation of the biased belief.
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Remember to check the points here regarding the significance of the trade etc. Additionally, if you had reservations but overlooked them when you saw the director dealing, be prepared to reason with yourself and analyse, in a rational manner, the real reason for purchase. A prime example in recent years where people were blindsided on numerous points we relay above was HMV - and look what happened there! Director dealings are certainly worth considering in your analysis. Just beware that, as with most things in life, the devil is in the detail – and that the interpretation of these trades is all part of your analysis jigsaw. Perhaps it may be worth considering a few examples of recent director dealings. We will then monitor these stocks over the coming months to see whether our interpretation is correct!
5 things that you should consider before trading
Treatt Group On Friday, 12th July, Treatt Group, the makers of flavours and fragrance, Finance Director Richard Hope purchased 10,552 shares in the company at a price of 575p. New Chief Executive Daemmon Reeve has now been at the helm of the company, but what was perhaps more significant was the Bovill Family, who had owned a 29% stake in the company, had pretty much all but sold out. Obviously, investors believe that Mr Hope sees this as a positive move and have followed suit – Treatt’s shares are as of the 18th of July stand at 615p.
CHART - TREATT GROUP
SPREADBET MAGAZINE’S VIEW: We interpret this positively, and think Treatt will perform over the coming months.
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Director’s Dealings
Avanti Communications Avanti communications provide Satellite communications. On Tuesday, 9th of July, the share price was 246.75P. Avanti then announced that revenues would be below forecasts, sending the shares into free fall, in fact, falling some 40% to 149p. This led senior management to start buying, first David Williams, the co-founder of the company, and David Bestwick, the technical director, bought 14,200 shares at 176p. Non Exec director Paul Walsh also snapped up 10,000 shares at a price of 161P.
CHART - AVANTI COMMUNICATIONS
SPREADBET MAGAZINE’S VIEW: After such a pummelling, the shares do look cheap. Avanti has huge potential, but the magnitude of purchasing is pretty small. Mr Williams and Bestwick are founders of the company and so, one could argue, have to show belief in their business. This could have been a PR exercise to show investors they are backing themselves. We see this as a mixed signal and will watch from the sidelines as to how this plays out over the next several months.
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Editorial Contributor
TRADING ACADEMY WINNER
John Walsh’s monthly trading record So another month has been and passed since my last article and to be fair, it’s been a pretty decent one. We have recently seen some good strong and decisive moves to the upside across all the main indices these last few weeks (I personally day trade the DAX, FTSE and DOW) with the DOW again posting more fresh all time highs, following the quite sharp sell-off we saw across global markets from the end of May and well into June. To me, there appears to be more strength to come from the markets and I remain positioned accordingly, adhering, textbook like, to the old adage and just as I was taught - “the trend is your friend”. It is now seven months since I began trading ‘full time’ after winning the City Index Trading Academy and time has certainly flown. Trading on your own is a difficult job - there are so many items of information you have to condense and twists and turns that make you question your position - that it is hard sometimes to see the “wood for the trees”.
Having a little distance and zoning out a lot of the “noise” is one thing that has become ever clearer to me. As mentioned, the trading this month has been going well, money has been made and yet more lessons learned. During the trading day I speak to many different traders who trade a wide variety of asset classes through a variety of ways made possible by the opportunities presented with social media (Twitter for instance), chat rooms or, indeed, just people’s comments regarding an article that someone else has written - some of the best commentary, I think, in the UK today is actually on this magazine’s blog – the main difference is that it is written with a trading angle relative to a lot of other sites.
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John Walsh’s Monthly Trading Record
“To me, there appears to be more strength to come from the markets and I remain positioned accordingly, adhering, textbook like, to the old adage and just as I was taught - “the trend is your friend”. There is quite a trading community on Twitter, and I find their opinions to be very wide ranging and interesting but, as relayed above, I have learnt to essentially ignore the noise. When I have bias towards an index, I stick to it regardless of what others have to say on the subject. For example, I have always been bullish regarding global markets this year and I remain so, but I’m also happy to change on a daily basis to take advantage of a short term. I “trade what I see not what I think” (most of the time!), again as taught in the Trading Academy. One other important lesson I have learnt is although I continue to build my account, I have come to conclusion that I should spend some of what I make. After all, why should any of us bother? You can’t spend losses after all, only profits! In the first couple of months of trading for myself I found that it was all I was thinking about and, like many new traders, I probably ended up overtrading which resulted in, on occasions, quite big hits to my account and sometimes a long run of losing trades (I have since made those losses back). Even though I still trade most days and think a lot about the markets, I do try to make a point of not screen watching all the time and try to make the most of each day by doing other things. I guess I have come to realise that it’s all about balance.
As the saying from the great Warren Buffet goes, Rule No.1 – Don’t lose money, Rule No.2 – Don’t forget rule no.1! Next month I’m planning on conducting a little experiment in that I’m going to give trading US Stocks a go, and using rather a longer timeframe than I’m normally used to. I have traded UK stocks a little in the past, and with a little success, but I would like to give US stocks a shot. Those on my watch list keep on going up and up and so I think it time I pulled the trigger. I’ll report back next month but, initially I plan on using a lot smaller trade size than I do for trading indices due to the big swings that can happen daily with these stocks. I will also allow the trades “space” to move around and thus I don’t have to watch every single tick every day. That’s enough from me again for this month, thanks for taking the time to read this, I hope you enjoy reading it as much as I do writing it. Please continue to follow me on Twitter @_JohnWalsh_ where I try to keep everyone up to date with my trades as they happen. Remember, you control the trade; the trade does not control you. John
Strangely, the less I do the better I do. This may result in a few extra points I have missed here and there but, as long as I can show a profit for the week, then I’m more than happy.
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A new special feature
MARKETS IN FOCUS july 2013
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Markets In Focus
August 2013
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MAGAZINE
SPREADBETTING The e-magazine created especially for active spread bettors and CFD traders
Issue 20 - September 2013
in next month’s edition...
Enhanced security when dealing with your broker
pAoLo pELLEGRini in FoCus - tHE REAL bRAins bEHind tHE pAuLson subpRiME tRAdE?
RobbiE buRns bACk witH A bAnG!
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ZAk MiR intERViEws “MiLLion doLLAR tRAdER” Anton kREiL
MAGAZINE
SPREADBETTING Thank you for reading, we hope your trading is profitable during the forthcoming month.
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