the cfd magazine august edition

AUGUSTEDITION

Issue 19 - August 2013The e-magazine created especially for active spread bettors and CFD traders

FEATURE PACKED AS EVER WITH TRADING IDEAS

AIM Oil & GasRevisitedWe take a fresh look at ourdreamportfoliopicks

ZAK MIR INTERVIEWS“MAN OF THEMOMENT” UKIPlEADER NIGElFARAGE

NEW - FUND MANAGER IN FOCUS - JEFF VINIK

NEW - THEPOlITICS OFTRADING byDAVIDCRACKNEll

DIRECTOR’SDEAlING - WHATTO REAlly lOOK OUT FOR

www.thecfdmagazine.com

THE

2 | www.thecfdmagazine.com | August 2013

AIM Oil & Gas revisited

Small Cap Corner

8

23

UK Small Cap Analyst of the year nominee Paul Scott continues with his newmonthly column.

53

56

37

Zak Mir’s Monthly PickZak looks into his runes and offers up his top pick for August.

41

Contents

49

Alpesh On Markets

Commodity Cornerben Turney takes a look at the Gold-Oil ratio and asks is it warning of an impending fall in oil?

58

66The Politics of Trading

Zak Mir Interviews Nigel Farage“Man of the moment”, former commodities trader and UKIP leader Nigel Farage is given a grilling by Zak.

Travel Corner - Hidden lake Como A special piece on some of the hidden gems and under the radar hostelries in thisstunning corner of Europe.

In a brand new column, former Sunday Times PoliticalEditor David Cracknell opens with his inaugural piece on just how politics can influence markets.

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.

Alpesh looks at the current QE policies and their implications for the currency wars.

Currency CornerThe FX cross known as “cable” - GbPUSD is under the spotlight this month.

August 2013 | www.thecfdmagazine.com | 3

John Paulson’sGolden Headache

28 39

32

70School Corner

78

84John Walsh’s Trading DiaryTrading Academy winner John Walsh runs us through his experiences this past month.

62

With “Mr Sub-prime” John Paulson’s Gold fund now down almost two thirds, we ask, has he lost his midas touch?

Nick Hilsden continues his explanation as to how he day trades the FTSE.74

86Markets In FocusA comprehensive markets round-up of under and out performers during themonth of July.

FTSE Daytrader

Director’s Dealing

Thierry laduguie of E-yield explains the Put Call ratio and how it can be used in your trading.

What signals you should really be looking out for.

TechnologyCornerSomebody’s watchingyou - PRISM explained.

SbM Focus on Jeff Viniklegendary former Fidelity Magellan fund manager Jeff Vinik is profiled in this new SbM section.

Dominic Picarda’s Technical TakeDom investigates emerging markets this months and looks for conditions that lead to their outperformance.

www.spreadbetmagazine.com


Special Feature

SbM DREAM OIl & GAS PORTFOlIO UPDATE


SbM Dream Oil & Gas Portfolio Update



Special Feature

last year, in the July edition of The CFD Magazine, 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%.

Our gains came from Xcite Energy (+30.6%),Heritage Oil (+25.6%) and bowleven (+8.3%), but were insufficient to counterbalance thelosses incurred in Falkland Oil & Gas (-71.6%),Northern Petroleum (-55.0%), and GulfsandsPetroleum (-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 ofour six picks...

CHART - FTSE AIM UK 50 V AIM All SHARE OIl AND GAS INDEX



Recommendation SummaryWe 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 anyrevenues from their Syrian fields. With sharestrading below book value, holding £68m in cash and having a market cap of just £100m, thecompany 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 Chinesecompany Sinochem, is in what is called “forcemajeure” as a result of the EU sanctions against Syria. This asset was the most important one within theGulfsands 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 toproduce 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 acapital raising to fund further development too.

GUlFSANDS PETROlEUMRecommended @ 90pCurrently Trading @ 68pPerformance: -22p (24.4%)

PORTFOlIO TAblE



Special Feature

Its business in Morocco is actually nowadvancing at quite a pace. The company is carrying out seismic studies to start a five-welldrilling 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. Seismicstudies will start here next year

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.

Make no mistake that IF the situation in Syriaeventually 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 probablereserves) which include Syria go from over £4 toanywhere up to £9 per share on a risked basis whenincorporating some of their other geographicprospects.

Recent News

July 11 - Gulfsands Petroleum Chairman Andrew West announces he is to Step down later this yearJuly 10 - Gulfsands Petroleum focuses on Rharb drilling program successApril 9 - Gulfsands Posts $27.0M loss, expects improved performance in 2013

CHART - GUlFSANDS PETROlEUM


“IN OUR VIEW, THE MARKET WASN’TATTRIbUTING ANy VAlUEWHATSOEVER TO THE MASSIVE GASRESERVES THE COMPANy HAD INKURDISTAN EVEN THOUGH ITS MIRAN FIElD AlONE WAS VAlUED bETWEEN 150P AND 300P by INDEPENDENT ANAlySTS.”

Recommendation SummaryAt the time of our Heritage Oil recommendation, the company was sitting with the second lowestvaluation 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, themarket wasn’t attributing any value whatsoever to the massive gas reserves the company had inKurdistan even though its Miran Field alone was valued between 150p and 300p byindependent analysts. At the same time, thecompany 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 weresettled 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 thisdecision. We would not hold out much hope of this $400 and odd million being returned to thecompany.

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 anonshore oil-producing block called OMl-30 from Shell, Total and ENI.

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 ongoingexploration activities in Tanzania and wheremanagement 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.


HERITAGE OIlRecommended @ 130p | Currently Trading @ 163.25pPerformance: +33.25p, +25.6%



Recent News

July 2 - Nigerian unit refinances bridge loan June 14 - Tullow Oil wins $313 million Ugandan tax case against HeritageJune 12 - Gross Production from OMl 30 returns to 35,000 bpd

“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 THEPROCEEDS IN INVESTING IN NIGERIA.”

CHART - HERITAGE OIl

Special Feature



bOWlEVEN OIl & GASRecommended @ 60p | Currently Trading @ 65p | Performance: +5p, +8.3%

Recommendation Summarylast 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 thebottom 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 ourrecommendation, 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 duediligence and so there were no “funnies” in theiraccounts. 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.

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 companyraising equity and diluting existing shareholders’ positions.

Until now, the company has been successful infinding partners to co-finance its projects. Itentered into an agreement with Petrofac inNovember 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. Inexchange, bowleven will share its future cash flows.

bowleven has also invested in East Africa in order to drill oil. The company has already found astrategic 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 necessarydecisions 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.



Special Feature

Recent News

July 4 - bowleven sells 30% of East African unit to First OilJune 26 - bowleven appoints David Clarkson as Operations DirectorApril 19 - Results of second test at IM-5 well surpasses expectations

CHART - bOWlEVEN

“lAST yEAR, WHEN WE MADE bOWlEVEN ACONVICTION 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.”


XCITE ENERGyRecommended @ 80p | Currently Trading @ 104.5p | Performance: +24.5p, +30.6%

Recommendation SummaryUnlike others in our portfolio, Xcite Energyoperates in the less politically risky area of the North Sea rather than Africa or the Gulf. Itsfundamentals 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.

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 arenewed ascent on the 100p level (and holding it) in recent months.

The company is primarily focused on thedevelopment 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 significantindependent 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.

Even though our investment has already rendered a 29.4% appreciation, we will stick with thiscompany 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.

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 backtowards 200p where many analysts price targets are centred.

Recent News

June 21 - Xcite Awards 9,850,000 options to purchase ordinary shares of the company to the board of DirectorsJune 12 - Xcite Signs MoU with AMEC for its bentley fieldMay 31 - Xcite Energy Unitcancels option for jack updrilling unit




CHART - XCITE ENERGy

“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 ARENEWED ASCENT ON THE 100P lEVEl (AND HOlDING IT) IN RECENT MONTHS.”

Special Feature



FAlKlAND OIl & GASRecommended @ 97pCurrently Trading @ 27.5pPerformance: -69.5p (71.6%)

Recommendation SummaryFalkland Oil & Gas (FOGl) is a pure play on oilexploration 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 ofhydrocarbons and the locating of them on the drill by borders was deemed to de-risk the thenimpending 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 fromdreadful 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 interestingasymmetric 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 tradingopportunity.

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 completedApril 16 - 3D seismic survey over Diomedea Fan completed



CHART - FAlKlAND OIl & GAS

“All IS NOT lOST HOWEVER AS THEy STIll HAVE ANOTHER FEW DRIllS TO COME AND THE COMPANy HAS bEENDE-RISKING ITS DRIllING PROGRAM by bRINGING INlARGER PARTNERS, SUCH AS NOblE ENERGy, ON A FARM OUT bASIS. OF COURSE, THIS WIll RESUlT IN THECOMPANy GIVING UP SOME UPSIDE TOO SHOUlD A DRIll PROVE SUCCESSFUl.”

Special Feature



NORTHERN PETROlEUMRecommended @ 70pCurrently Trading @ 38.5pPerformance: -31.5p (55%)

Recommendation SummaryWhen 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. Inaddition, 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 oilexploration. 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 fallingproduction 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 Netherlandassets and that it has received numerousexpressions of interest over the last 12 months and is close to signatory of a “letter of intent” - aprecursor 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 detailedprogram within the Alberta region of Canada and also two further wells in Guyana - both offering tangible exploration upside.

On the Canadian front, Northern is initiallytargeting 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, thecompany is seeking to start small-scale operations with a three-to five-well programme during the summer / autumn of 2013 around areas withall-season access.

In Italy, the company has been eyeing up thepotential for deep-water turbidite fan systems in the Southern Adriatic for many years and thecompany already has 53mmbbls of 2P reserves booked against its Rovesti and Giove prospects in the region. Northern’s Cygnus prospect ispotentially 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.

“EDISON HAVE NAVUPSIDE TARGETS OF 62 - 179P AND WHICH THEy HAVE ON WATCH FOR FURTHER UPGRADES SHOUlD THE COMPANy bE SUCCESSFUl INEXECUTING ON ITSPlANS THIS yEAR.”



Recent News

June 10 - Northern Petroleum names Keith bush Managing DirectorMay 29 - Northern Petroleum to receive Shale Oil licenseMay 15 - Northern Petroleum swings to 2012 loss, revenue halves to EUR12.41M

CHART - NORTHERN PETROlEUM

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.

Special Feature


RECOMMENDATIONSUMMARyIt is not too much of a coincidence that I am writing this month’s top pick piece the day afterinterviewing 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”, thesingle 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.

bUy EURO / DOllAR: TARGET $1.34INITIAlly STOP lOSS $1.2900

ZAK MIR’SMONTHly PICK FORAUGUST

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 Eurozonecrisis 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 onweakness – 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.

Editorial Contributor



“HOWEVER, FROM A TRADING POINT OF VIEW, EVEN IF yOU DISAGREE ON THEPOlITICAl FRONT, THE CHAllENGE HERE IS TO bE AblE GAUGE WHETHER, ATCURRENT lEVElS, THE EURO CROSSES HAVE FACTORED IN THE FUNDAMENTAlS FAIRly.”



Zak Mir’s Monthly Pick for August

TECHNICAl ANAlySIS SNAPSHOT: One of the “secrets” of technical analysis is not only to use it to identify classic buy and sellsignals such as rebounds off key support andresistance 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/).

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 anarrow bear trap below the former Junesupport 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 2012support 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 keypsychological $1.30 by some distance.

The explanation for this is that the price action has reverted to a rising trend channel in place since July 2012.

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 thatfollowing 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.

The likelihood is that at the current rate ofprogress 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. Thetarget initially, maybe as soon as the end ofAugust, would be the June resistance zonetowards $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.

CHART - EURO/USD


http://www.spreadbetmagazine.com/zak

http://www.spreadbetmagazine.com/zak


Commodity Corner

RECENT SIGNIFICANT NEWS: July 19th Portugal’s Prime minister and theleader of the Socialists met with the President after a week of talks between the rulingcoalition 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 the78-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 thepolitical uncertainty.

July 18th Federal Reserve Chairman benbernanke said the central bank’s monthly bond purchases were not on a “pre-set course”, with no set timetable for slowing US monetarystimulus. The Fed currently buys $85 billion a month in government and mortgage bonds.

July 12th Portuguese yields climbed afterlisbon delayed its creditors’ next review of the country’s bailout due to a political crisis in the run up to international lenders were due tobegin a review of the bailout.

The opposition Socialists demanded arenegotiation of Portugal’s bailout terms, threatening the cross-party pact the President says is needed to end the country’sdependence on bailout cash.

July 11th Federal Reserve Chairman benbernanke 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 themarkets following the publication of theFederal Reserve minutes with some members in favour of continuation of bond buyingprogram and others pushing for a reduction instimulus 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%.

“THE lIKElIHOOD IS THAT AT THE CURRENT RATE OF PROGRESS, WE SHAll bE TREATED TO THIS GOlDEN CROSS bUy SIGNAlbETWEEN THE TWO MOVING AVERAGES OVER THE COURSE OFAUGUST. TyPICAlly, THE SWEET SPOT IN A RAlly IS IN THE RUN UP TO AND THE IMMEDIATE AFTERMATH OF SUCH SIGNAlS.”


Zak Mir’s Monthly Pick for August

FUNDAMENTAlARGUMENT: 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 manyoccasions. The problem is that without thecorrect 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 perhapsexplains why the euro currency keepsconfounding the pundits forecasting itsimminent 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 adepreciation of anywhere between 30% - 50%.

While we do have the uncertainty of theGerman 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 aparty - metaphorically speaking.

If they were not, then they would have adopted a Euro bond at the same time the euro wasintroduced, or soon after, and which arguably would have prevented the shooting galleryeffect 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, acombination of too much information at adelicate 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 themarkets 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 thefundamental logic behind a euro / dollar buyrecommendation 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…



Special Feature

JOHNPAUlSON’S

GOlDEN HEADACHE

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.

by FIlIPE R. COSTA & RICHARD JENNINGS


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% SMACKINGCOMING 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 whichsupposedly 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 yearalthough it’s fair to say that these had two verydifficult 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.

Perhaps inevitably, after achieving such stellarreturns, and then also correctly positioning himself for the sharp rebound in the US markets in 2009-10, primarily via US banking stocks that postedexceptional returns during this period, Paulson’s star began to wane. Not just his gold funds but his flagship Advantage funds also stumbledspectacularly 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 newinvestors 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’sassets 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 CDSoptions 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 Paulsonoperated 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 toworsening 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 USeconomic recovery has gained momentum and meanwhile the EU has, thus far, been able to contain its own crisis.

The idea of the gold price rising has a strongrationale 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 thingsbeing equal, the value of “real” assets should rise in nominal currency terms.

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 bycorrectly 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 wasexceptionally 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.

PAOlO PEllEGRINI



The problem was that at the beginning of 2012 the value of gold had overshot what we saw as thecorrelation 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.spread-betmagazine.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 dramaticallyunder-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 theprocess, given Paulson a strong golden headache.

Special Feature

TAblE - PAUlSON’S TOP 10 HOlDINGS

http://www.spreadbetmagazine.com/gold

http://www.spreadbetmagazine.com/gold


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 hiscapital 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 ispretty 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 tocontinue 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.

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 thedownside.

The problem of these “bet the ranch” style bets isalways the same. When everything goes asexpected, 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 massivedislocation relative to the precious metal. Question is - was Paulson’s rationalization wrong or was he simply too early and then too dogmatic in hisunwillingness 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 havestructured 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 nowtrading 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.

“THE lAST TWO yEARS HAVE IllUSTRATED VERy STARKly TO PAUlSON THE RISK IN THISCONTINUED 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.

TAblE - GOlD ASSETS PERFORMANCE



JEFFREyVINIK

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 [email protected] with your ideas.

by RICHARD JENNINGS & FIlIPE R. COSTA

SbM FOCUS ON…

SbM Focus

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 theinvestment 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 abachelor’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 startedbuilding a name for himself in the investmentindustry, starting work initially as a securitiesanalyst 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.

His performance as manager of the FidelityContra-fund was notable and brought him to wider attention that resulted in him taking up the mantle from the revered fund manager Peter lynch tomanage 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 theindustry’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 histenure, he produced an 83.70% cumulative return and outperformed the S&P500 return by acollective 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 apromising 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.

“UNDER VINIK’SMANAGEMENT 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%.”

mailto:[email protected]


SbM Focus on Jeffrey Vinik

birth: March 22, 1959 (54 years old) In New Jersey, USAResides: Tampa, Florida, USAActivities: Hedge Fund Manager, Sports Team Owner,Philanthropist



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 hisexposure 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.

“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 bEllSINSIDE VINIK’S MIND AND SO HE DECIDED TODRAMATICAlly REDUCE HIS EXPOSURE TO SHARES AND MOVE INTO TREASURIES - A bOlD ASSET AllOCATION CAll.”

The accommodative monetary policies that were being deployed by Alan Greenspan at the timeencouraged 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.

but that was too late for Vinik... He became yetanother example of how, even when spotting amarket 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 fundunderperfomed its peers for the first time in itshistory. Interestingly, however, during the seven years ending March 2003 following Vinik’sdeparture, on a total return basis, 10-yearTreasuries returned 78 percent, AAA corporate bonds returned 46 percent, and, with dividendsreinvested, 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 managementindustry 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 reputationtarnished. but, it led to him entering the hedge fund business, creating his own company - Vinik Asset management llC. Using his well honed stockpicking, 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 - absolutelyexceptional 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 postFidelity. He went on to make a monumental bet. In just a few months, he increased his equityportfolio by 600%, buying more than $4 billion worth of stocks and placing $1.6 billion in thevolatile 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.

AlAN GREENSPAN

SbM Focus


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 adirector 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 fundmanagers’ mindsets!) have the patience for. Vinik can be forgiven for not wanting to experience this again, certainly after his mid-90s experience atFidelity...

It is in fact from July last year that his funds have struggled, intriguingly coinciding with therestructuring of his company in which Vinik’s role in fund management changed from primary stock picking to a more softer oversight role. He alsorelocated 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 withanother 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 soldassets that he saw as being overvalued.

With the stock market now into the fifth year of its bull run, he could be forgiven for coming to thisconclusion.

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 adecent 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 losscorresponding to 5.4%, whilst the S&P hascontinued to rise.

SbM Focus on Jeffrey Vinik

GREG COFFEy



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”.

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 societalchallenges in engineering and related areas, inenergy, global health, brain sciences andenvironmentally-related matters.

SbM Focus

TAblE - TOP 10 VINIK HOlDINGS IN 2Q 2013

VINIK’S 2Q 2013 PERFORMANCE

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.

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 richeither - 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 theleverage appropriately so that you can remain in the trade. This is precisely what we do in oursister 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

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 theFinancial Conduct Authority and its oldincarnations – the FSA and SFA. Would you agree that since “big bang” in 1986, successiveregulators have been painfully unfit and undereducated/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 SectorCollapse?

NF: Far from being under-resourced theregulators 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 beingprocessed 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 acertain amount of regulation helps to fosterconfidence and certainty, however, the EU takes this to extremes and over regulates to the point ofsuffocating business and distracting people from the important things - trust and confidence.

ZAK MIRINTERVIEWS

“HOWEVER, THE EU TAKES THIS TO EXTREMES AND OVER REGUlATES TO THE POINT OF SUFFOCATING bUSINESS ANDDISTRACTING PEOPlE FROM THE IMPORTANT THINGS - TRUST ANDCONFIDENCE.”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 anunderstanding 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?



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 toregulate indexes as well, it’s just an excuse for state control. If, instead, there was sufficienttransparency the system would tend to regulateitself.

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 avoidbailing them out if they go bust again?

NF: It was a grave error for Gordon brown toremove 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 ofregulation between the bank of England, the FSA and the Treasury was always going to createtensions between the bureaucracies, as well asregulatory “blind spots”.

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 was born in Herne, Kent, on 3 April 1964. He was educated at Dulwich College. In 1982 he joined the American commodity brokerage firmDrexelburnham 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 theEuropean Parliament in 1999 andre-elected in 2004 and 2009.

Farage is presently the leader of thethirteen-member UKIP contingent in the European Parliament, and co-leader of the multinational Eurosceptic group,Europe of Freedom and Democracy.

Zak Mir Interviews


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 andpurposes, here, albeit ailing, would you admit that it has cushioned the blow against the worstDepression since the 1930s for PIIGS nations? Or, on the other hand, has it actually contributed to the Depression happening and is it keeping itgoing? 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?

NF: The Euro is definitely part of the problem, at some point an economic shock was alwaysgoing 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 highunemployment. 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?

NF: Slash taxes? Welcome to the UKIP Manifesto!

ZM: before politics you were involved in themarkets as a commodities trader in the City. Were you ever tempted to risk the family fortune onpunting 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 thanpoliticians for lunch.

“IF I HAD A SySTEM TO DO THAT I’D HAVE MADE My MONEy bEFOREbREAKFAST TODAy, GONE FISHING, lANDED ACOUPlE 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.

Nigel Farage



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 theperiphery of the Eurozone will be stuck inpurgatory until all hope is lost, at which pointpoliticians will find they have lost control of the situation entirely and events, dear boy, events, will force us to confront the difficult choices.

ZM: If you were PM what would you do tokickstart the UK economy?

NF: I’d combine cuts in both spending andtaxes with supply-side reforms and free tradeagreements - but to do any of those things we must first leave the EU.

Zak Mir Interviews


Technology Corner

SOMEbODy’S WATCHING yOUOnline 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?

by SIMON CARTER

TECH CORNER

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 30,000employees, 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 wasperhaps 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 slightlyparanoid 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 viaAmerican infrastructure.

EDWARDSNOWDEN



Why? because although this requires sending data thousands of miles (which only takes a fewseconds), 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.

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 inpossession 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 anAmerican citizen. What’s more, according to the leaked documentation, almost every search does end up including data passed by Americans, toother Americans, in America. A sort of electronic collateral damage if you will.

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 havecommunicated 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 theelectronic 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).

back to good old blighty, there was more news from the PRISM exposé to get those stiff upper lipsquivering in the shape of Tempora, an electronicsurveillance program run by the GovernmentCommunications Headquarters (GCHQ) in london, which has been granted access to PRISM’s data since summer 2010. (Hello if you’re reading this GCHQ!)

In amongst all of the surprised fury directedtowards 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’sdocuments made no mention of successful terror prevention or foiled plots.

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 majorterrorist 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 SheremetyevoInternational Airport in Moscow, where he currently resides while seeking political asylum. Herowhistleblower or traitor? It’s tricky to say, but what is certain is that Edward Snowden has opened one giant can of worms...

Technology Corner



“ONE SUCHCONTRACTOR WAS THAT MAN EDWARD SNOWDEN, AND IT IS SNOWDEN’S ACTIONS THAT HAVE FORCED MANy INTERNET USERS TO RETHINKEVERyTHING THEy THOUGHT THEy KNEW AbOUT ONlINE PRIVACy.”

Somebody’s Watching you



Feature Contributor

GARPEXPlAINED

by PAUl SCOTT

SMAll CAP CORNER

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 myfavourite 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:

• Where the investing idea came from.

• What research I did.

• Key factors that influenced my decision to buy.

VAlUATION METRICS COURTESy OF STOCKOPEDIA

• Why it’s good value.

• Timescales, and how things might pan out for this share.

The share I’ve chosen to highlight is calledSpaceAndPeople (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 hoursevery weekday morning, from 7-11 a.m. poring over the morning’s small cap results and tradingannouncements, and publishing my analysis free, and in real time.

On 25 March 2013 I commented in my morningreport on impressive results from SpaceAndPeople, saying:

Next, I’ve been looking at the results fromSpaceandpeople (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 operatekiosk and general space in shopping malls - hosting the space for traders selling sweets, jewellery, etc. in the wide open spaces within shopping centres.

They Group said that “the first quarter of 2013 has started very positively and we look forward toanother year of success”. I can’t see anything wrong with the accounts, all looks nice and clean.

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 internationalroll-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:


Stockopedia.co.uk


So, Spaceandpeople (lON:SAl) very much looks like a classic Growth At Reasonable Price (“GARP”) play to me. The shares look excellent value at amultiple 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 gotbehind the company, and made their shares more liquid. This has narrowed the quoted spreadsomewhat, 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 withEquity Development to put together a group ofinvestors, 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 ofSpaceAndPeople, and a secondary Placing wasexpertly brokered by Cantors and EquityDevelopment 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 ProcessThere 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 latestAnnual 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, reviewoutstanding share options and Directors remuneration, etc.).

• Googling the company to see what third partyinformation 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 detailedfeedback 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.

“THERE SIMPly IS NO SUbSTITUTE FOR DETAIlEDRESEARCH ON A COMPANy. THANKFUlly, SMAll CAPS TEND TO bE A FAIRly STRAIGHTFORWARD bUSINESSES, WITH ACCOUNTS THAT ARE QUICK AND EASy TOUNDERSTAND.”

Feature Contributor

Stockopedia.co.uk


• Above all, working out what I consider to be a fair price for the shares, given the company’s likelyprospects over the next 2-5 years, and how that compares with the current share price. I’m onlyinterested 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 aregenuine, and the ones that are painting anexcessively rosy picture.

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 notesafterwards, as it’s surprising the detail that somepeople 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 mydecision 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, nichebusiness at my entry price of 86p per share.

looking at the business model, SAl effectively created their own niche when the company was formed byexisting management, led by Matthew bending, in 2000. He was working as a marketing manager for Standard life’s shopping centre division, and herealised 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 havingprovided some services to 88 of the top 100 UKshopping 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 tomatter, 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.

“lIKE ANyTHING, THE MORE yOU DO IT, THEbETTER 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 ROSyPICTURE.”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 processsometimes.

Small Cap Corner



I favour companies which are based outside the South East of England, as you tend to find thatmanagement of companies in the North of England, and Scotland (SAl is based in Glasgow) are often more dedicated, have considerably lowerremuneration, and in my experience often havebetter morals than some london-based companies!

Why It’s Good ValueSAl 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 twocommissioned research companies. This looksrealistic to me, and the business model lookscapable 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 reallyattractive to me.

Secondly, the dividend is good, and growing. As this is not a capital intensive business, profit is verysimilar to cashflow generated, so it can pay out adecent dividend. The dividend was 3.5p last year(over twice covered), and we’re probably movingtowards 4p this year and close to 5p next year. That is a very attractive investment proposition in my opinion.

Thirdly, the balance Sheet is sound, with no net debt, and indeed a small net cash position. There are nonasties in the accounts that I can see, so this is asimple good value situation.

All I’m looking for is good companies at attractiveprices. That’s it!

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 thedividends keep flowing and growing. Or, until theinvestment 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 andprudent portfolio management.

In my opinion, SAl have many opportunities tocontinue 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 aconsiderably larger business in the future, and along the way shareholders should receive generous and growing dividends.

Feature Contributor


IS THE GOlD/OIl RATIO WARNING

OF ANIMPENDINGFAll IN OIl?

COMMODITy CORNER

by bEN TURNEy

Feature Contributor



The Gold/WTI ratio as a guide

Out of all the commodity classes this summer, being long on crude has been anexcellent trade to be in. Civil unrest in Egypt and the associated fears of aninterruption 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 acombination 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/WTIratio 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 hasemphasised how useful this ratio can be. Inmid-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.

Feature Contributor

106.50/bbl

81.75/bbl


Commodity Corner

Depending on your risk profile, there was aperfectly acceptable opportunity to attempt anarbitrage 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/WTIratio 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 acombination of gold rising and oil falling. One commodity will probably move more sharply and one commodity will likely overcorrect. bothcommodities could even move in the oppositedirection to begin with, but the basic principle will be maintained. If the Gold/WTI ratio falls anyfurther then the odds of an imminent return to the mean are simply increased.

The question is which commodity is likely to move more sharply?

Oil looks stretchedReaders of the blog will be well aware thatThe CFD Magazine’s view of gold is, at current prices, une-quivocally to get long. However, using the Gold/WTI ratio as a guide there could be an equally compelling trading opportu-nity developing in oil.

As with all commodities, the price of WTI has clearly been significantly affected by the American Quantitative Easing programs and US dollarweakness. you only need take a casual look at the chart below to see this.

“USING THE lONG TERM AVERAGE OF THE GOlD/WTIRATIO 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.”

CHART - CRUDE OIl PRICE


86.48/bbl

86.48/bbl


Feature Contributor

The rally over the last four years, while theFederal printing operation was in full swing, isobvious. 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 arepeat 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.

The second set of fears relating to the Egyptiansituation 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 currentsituation 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.

This is not to say that things cannot get worse in the Middle East and cause disruption to oilsupplies, but using this as a basis for staying long looks increasingly risky at this stage.

Moving next to Hurricane season, it is of courseimpossible 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.

Finally, much has been made of the sizeable recent drop in US stockpiles of crude. There isspeculation that inventories could fall further over the summer. This could happen, but what thisanalysis fails to take into account is the longstanding American policy to reduce stockpilepurchases as the price of oil rises, especially above $100/bbl. So although the stockpiles might befalling, the market also has to contend with theremoval of a significant buyer.

looking for a trigger to tradeOverall 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 theopposite effect.

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.

“THIS IS NOT TO SAy THAT THINGS CANNOT GET WORSE IN THEMIDDlE EAST AND CAUSE DISRUPTION TO OIl SUPPlIES, bUTUSING THIS AS AbASIS FOR STAyING lONG lOOKSINCREASINGly RISKy AT THIS STAGE.”


Currency Corner

WHAT NEXTFOR CAblE?

CURRENCy CORNER

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.



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 givenCarney one main remit – get growth going in the ailing UK economy. This has given rise to theexpectation that Carney may employ loosermonetary 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”.

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.

On the 9th of July, the IMF raised its growthforecast 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 UKforecast from 0.6% to 1.1%. Additionally, there have also been signs that the jobs market is picking up, with fewer people claiming unemploymentbenefits – 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 UKeconomy though, in effect, factories areproducing 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 thedoldrums 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.

The week commencing the 15th of July was aninteresting week for both the bOE and the FED. Firstly, we had the minutes from the bOE – this was eagerly anticipated in seeing just how Carneyvoted. The voting was unanimous 9-0 to keepasset 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 stimulusmeasures to keeping things on hold.

“GEORGE OSbORNE, THE UK CHANCEllOR, HAS GIVEN CARNEy ONE MAIN REMIT – GET GROWTH GOING IN THE AIlING UKECONOMy.”

Currency Corner

MARK CARNEy


What next for Cable?

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.

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 haltedcompletely. The US economy is currently growing at a rate of only around 1.8%, lower than theforecast 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 samefundamental and technical rationale is beingapplied here too.

Take a look at the five year chart below and you will see that cable made a slightly lower low inearly July relative to the beginning of the year when the UK suffered the ignominy of a sovereign debt downgrade (and at which point we alsoadvocated a buy, completely in the face ofconsensus, of cable that delivered nearly eight big figures of profit in the next several weeks). Additionally, the RSI did not make a lowermeasure and so this should be seen as a bullish development.

5 yEAR GbP/USD CHART




PATEl ONMARKETS 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 bere-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, anultimately futile race to cheapen their exports inorder 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?

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 200columns published in the Financial Times.

QE: EQUITIES 1 – CURRENCIES 0


PATEl ONMARKETS

The US dollar of course – their largest tradingpartner.

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 policyintention 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 anincreasing 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 twindeficits, 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 tomaterialise. 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 transactionsinvolve the dollar, and when you are the world’slargest 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 theexpected actually happen when least expected, when we feel the financial crisis is over, that US and global growth is resuming?

In other words, as we no longer expect aweakening 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 asWashington 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 whyrumours of the euro’s demise have beenunfounded 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, likeCalifornia it has been on the brink of financialcollapse 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 Patelwww.alpeshpatel.com

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?.”

Republic


www.alpeshpatel.com


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 thoseopportunities that have been missed by the wider market, we thought we’d bring to your attention the “Hidden Como” - places that are not in thebrochures but that are frequented by the localcognoscenti 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 andbeyond), 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 lateafternoon dip.

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 idealintersect for accessing Switzerland, Austria and France with the Swiss city of lugano less than half an hour away (from the Western shore) and theinternationally 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.

The lake was in fact created from melting glaciers millions of years ago and what is left is jawdropping mountain scenery whose peaks areactually 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://w w w. i l c a m i n e t t o o n l i n e . c o m / l e z i o n i _ e . h t m l ) 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.

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 howenjoyable the food is (and charming the service too).

Travel Feature

http://www.ilcaminettoonline.com/lezioni_e.html

http://www.ilcaminettoonline.com/lezioni_e.html

http://www.lafagurida.it


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 alsooffering quality accommodation is the Al Veluu suites (http://www.alveluu.com) which isoperated by lucca and his English wife Cheryl. The view from the two suites and the restaurant’soutdoor veranda simply has to be seen to bebelieved. 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.

Our final restaurant suggestion is Darsenna diloppia (http://www.ristorantedarsenediloppia.com/), nestled in the beautiful Como village ofbellagio. 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 ofprosecco for less than four euros. Perhapsunderstandably, with the lake lapping at therestaurants 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!

Hidden lake Como

GEORGE ClOONEy


http://www.alveluu.com

http://www.ristorantedarsenediloppia.com

http://www.ristorantedarsenediloppia.com



DOMINICPICARDA’STECHNICAlTAKE Dominic Picarda is a

Chartered Market Technician and has been responsible for the co-ordination of theInvestor’s Chronicle’scharting coverage for four years. He is also an Associate Editor of the FT andfrequently speaks atseminars and other trading events. Dominic holds an MSc in Economic History from the lSE & Political Science.

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 developedcountries like the US, UK and Japan have been soaring this year, the MSCI Emerging Marketsindex – 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 tradingopportunity 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 whatdeveloped 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 in2008-09 that the turnaround is most likely once a massive stimulus is unveiled or the economy begins to pick up. Neither is animmediate prospect for now.

EMERGING MARKETS

http://www.spreadbetmagazine.com/webcasts/

http://www.spreadbetmagazine.com/webcasts/


MSI EMERGING MARKETS INDEX CHART

“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.”

Dominic Picarda’s Technical Take




US DOllAR INDEX V EMERGING MARKETS RElATIVE TO DEVElOPED MARKETS INDEX

Dollar up, EMs struggle

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 theybecome screamingly cheap. lately, theprice-to-earnings ratio for the MSCI EM index was around 11.4. In the past, a valuation like this hastypically led to annualised returns of around 10% over the next two years.

This makes EMs reasonably good value from amedium-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 givesautomatic 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 returnbefore dividends of 14.2%, against just 9.7% forbuy-and-hold. However, it suffered only around two-thirds of the volatility of buy-and-hold – more return for less risk.

“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 FROMbUyING INTO MATURE MARKETS lIKE THE S&P 500 OR GERMANy’S DAX.”


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.

That said, my research shows that buy-signals that flash up when the leading indicators of economic activity are at low levels have been especiallysuccessful. Specifically, those occurring when the OECD’s leading indicator for the G7 nations is at 99.2 or below have all been followed by fatdouble-digit returns. Currently, though, theindicator is at mildly positive levels, which is notespecially helpful.

My preferred method for acting on these signals would be with an exchange-traded product.However, there are also possibilities here forshorter-term speculation. The MSCI EM index is available to trade through spread bets, whichprovide 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.

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 bewilling to enter so long as the 21-fourhourlyexponential 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.



The Politics of Trading

THE POlITICSOF TRADING

by DAVID CRACKNEll

NEW MONTHly FEATURE

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 myre-election hinges on the Federal Reserve and a bunch of f******* bond

traders?!” The assumption in the City sometimes seems to be that themarkets drive everything, including what goes on in the White House

and Downing Street.




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!

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 oftagging 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-daymomentum 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.

bIll ClINTON


For example May Gurney (lSE:MAyG) has done well out of the austerity policy of contracting outroadworks 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!

I spent 15 years in the Westminster bubble covering politics for various papers - Sunday business(remember that?!), The Sunday Telegraph, andlatterly 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.

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 theChancellor’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 ishousing.

The Chancellor has introduced the “Help to buy” scheme and signs are that the housing market isstirring 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 onlyencourage 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 USeconomy 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 QEtapering 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 spherescollide there are big trades to be had.

“MUCH OF My TIME WAS SPENT PREDICTING WHAT THE lIKES OF DAVIDCAMERON, GEORGEOSbORNE, MERVyN KING AND GORDON bROWN (REMEMbER HIM?!) WERE GOING TO DO NEXT.”

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.

GEORGE OSbOURNE

The Politics of Trading



School Corner

by THIERRy lADUGUIE OF E-yIElD

SCHOOlCORNERTHE PUT/CAllRATIOEXPlAINEDIn this piece, I’ll explain how using the Put/Call ratio,published daily onwww.cboe.com, can be used in your trading to help you time a long or short position.

www.cboe.com


School Corner

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 thissituation 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 theopposite situation, traders are too bearish and this is a buy signal.

There are different ways to construct a Put/Callratio, 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 theweekly total of the volumes of puts and calls ofequity 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.

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).

Statistics in the options market show that equityoptions traders are not the most successfultraders. On balance, option buyers lose about 90% of the time - pretty much the same as futurestrading. 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.

CbOE EQUITy PUT/CAll MEASURE RElATIVE TO S&P 500 INDEX


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.

The extreme levels are 80% (0.8) or higher (buysignal) 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 inNovember-December last year following a major correction. The Put/Call ratio rose above 0.8 on 8th November, 15th November and 4th December 2012.

CHART - S&P 500

The Put/ Call Ratio Explained




FTSEDAyTRADER.COMMy STORy

Following my first article in this magazine of last monthhighlighting 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.

by NICK HIlSDEN

FTSEDayTrader.coM

lessons I’ve learnt trading the FTSE

Certainly we are in a decisively bullish period atpresent, and ben bernanke in his latest speech has indicated that QE is likely to continue for theremainder of this year (of course 2014 is a whole new ball game), it may in fact be increased (ortapered) 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 firmlyheading up.

It’s a steep learning curve and one that hopefully leads to the success we all dream of. However, itcertainly 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 whenlearning. This very approach has been advocated many times in this magazine.

Anyway, I mentioned in my last article that I wasbullish 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

August 2013 | www.spreadbetmagazine.com | 69



There are usually three support and three resistance levels calculated for any given day and they can be found within charting packages or on variouswebsites. I use the livecharts website for the daily pivot and can be seen hereh t t p : / / w w w. l i ve c h a r t s . co. u k / M e m b e r s / d i s p l ay _stock_pivots.php.

The bottom line is that predicting the future ismostly 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 amwriting this (17th Jul), based on yesterday’s high, low, open and close prices.

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!

So, what can you use to help you “predict”, nay guess, the future? In conjunction with the Raffchannels 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).

TAblE - FTSE 100 RAFF CHANNEl SUPPORT AND RESISTANCE lEVElS

Pre market open the FTSE price was 6570 so Iexpected 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 - simplyspeaking. There is a little bit more to it but that’sthe general idea.

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 thesupport and resistance levels for that day for my en-try points.

I can therefore have fairly tight stops as if arecognised support / resistance level is broken then it will usually get to the next level.

For example, say support level 1 is 6575, andsupport 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 DrAlexander Elder.

http://www.livecharts.co.uk/Members/display_stock_pivots.php

http://www.livecharts.co.uk/Members/display_stock_pivots.php


lessons I’ve learnt trading the FTSE

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 seebelow), we can set our stop at 6595 now.

CHART - FTSE SAFE ZONE EXAMPlE

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 notwedded 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.

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 mywebsite at www.ftsedaytrader.com where I post my thoughts every day.

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.


http://www.ftsedaytrader.com/safezone

http://www.ftsedaytrader.com/safezone

www.ftsedaytrader.com


Director’s Dealings

5 THINGS THAT yOU SHOUlD

CONSIDERbEFORE

TRADING

DIRECTOR DEAlINGS

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, andperhaps what the view is of senior figures within the company of their

prospects.


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. Recentdirector 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 benumerous reasons for a director making atransaction. 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 beinguseful, and of course you can find information inInvestors 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. “Sacrificial lamb” is the mostappropriate 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 “InsiderDealing” – 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 theirstewardship 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? Manydirectors are given shares when they join acompany, 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 anindication of future direction, this is just a nobrainer for the director as they crystallise thedifference 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 – itindicates a collective belief in the company.

“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 ANINDICATION OFCONVICTION IN THEIR bUSINESS AND PERHAPS TO HElP bOOST SHARE PRICE FOR AFORTHCOMING PlACING FOR EXAMPlE.”

www.directordealings.com



Also, look for activity just before the “Closed Period” (the period that no directors / employees can maketransactions) and after this time also. Purchasing in clumps close to a closed period, particularly where a stock has had a large fall is usually particularlynoteworthy.

5). Don’t allow your own convictions to cloud your judgement. We have all done it. you do someresearch 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.

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 theinterpretation of these trades is all part of your analysis jigsaw.

Perhaps it may be worth considering a fewexamples of recent director dealings. We will then monitor these stocks over the coming months to see whether our interpretation is correct!

“PURCHASING IN ClUMPS ClOSE TO A ClOSEDPERIOD, PARTICUlARly WHERE A STOCK HAS HAD A lARGE FAll IS USUAlly PARTICUlARly NOTEWORTHy.”




Treatt Group

On Friday, 12th July, Treatt Group, the makers of flavours and fragrance, Finance Director Richard Hopepurchased 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.

The CFD Magazine’S VIEW:

We interpret this positively, and think Treatt will perform over the coming months.

CHART - TREATT GROUP


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 thecompany, 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.

The CFD Magazine’S VIEW:

After such a pummelling, the shares do look cheap. Avanti has huge potential, but the magnitude ofpurchasing is pretty small. Mr Williams and bestwick are founders of the company and so, one couldargue, 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.

CHART - AVANTI COMMUNICATIONS





JOHN WAlSH’SMONTHly TRADINGRECORD

We have recently seen some good strong anddecisive moves to the upside across all the mainindices 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 TradingAcademy 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 beengoing well, money has been made and yet morelessons learned. During the trading day I speak to many different traders who trade a wide variety ofasset classes through a variety of ways madepossible by the opportunities presented with social media (Twitter for instance), chat rooms or, indeed, just people’s comments regarding an article thatsomeone else has written - some of the bestcommentary, I think, in the UK today is actually on this magazine’s blog – the main difference is that it iswritten with a trading angle relative to a lot ofother sites.

So another month has been and passed since my last article and to be fair, it’s been a pretty decent one.

TRADING ACADEMy WINNER


“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”.

John Walsh’s Monthly Trading Record

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 biastowards an index, I stick to it regardless of whatothers 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 toconclusion 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.

Strangely, the less I do the better I do. This mayresult 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.

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 littleexperiment in that I’m going to give trading US Stocks a go, and using rather a longer timeframe than I’mnormally 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



A new special feature

MARKETS INFOCUS JUly 2013


Markets In Focus

MARKETS INFOCUS JUly 2013



Enhanced security whendealing withyourbroker

In next month’s edition...

The e-magazine created especially for active spread bettors and CFD traders Issue 20 - September 2013

PAOlO PEllEGRINIIN FOCUS - THEREAl bRAINSbEHIND THEPAUlSON SUbPRIME TRADE?

RObbIEbURNS - bACK WITHA bANG!

ZAK MIRINTERVIEWS“MIllIONDOllARTRADER”ANTON KREIl

THE


ZAK MIRINTERVIEWS“MIllIONDOllARTRADER”ANTON KREIl

Disclaimers

Material contained within the CFD Magazine and its website is for general information purposes only and is not intended to be relied upon by individual readers in making (or refraining frommaking) any specific investment decision.

The CFD Magazine ltd. does notaccept any liability for any loss suffered by any user as a result of any suchdecision. Please note that the prices of shares, spreadbets and CFDs canrise and fall sharply and you may not get back the money you originallyinvested, particularly where these investments are leveraged.

In comparing the investmentsdescribed in this publication and website, you should bear in mind thatthe nature of such investments and of the returns, risks and charges,differ from one investment to another. Smaller companies with a shorttrack record tend to be more risky than larger, well established companies.The investments and services mentioned in this publication will not besuitable for all readers.

you should assess the suitability of the recommendations (implicit orotherwise), investments and services mentioned in this magazine, andthe related website, to your own circumstances. If you have any doubtsabout the suitability of any investment or service, you should takeappropriate professional advice.

The views and recommendations in this publication are based on informationfrom a variety of sources. Although these are believed to be reliable, we cannotguarantee the accuracy or completeness of the information herein.As a matter of policy, The CFDMagazine openly discloses that our contributorsmay have interests in investments and/or providers of servicesreferred to in this publication.


www.thecfdmagazine.com

Thank you for reading, we hope your trading is profitable during the forthcoming month.

See you next month!

THE

THE

the cfd magazine august edition

Documents

oil price

goldoil ratio

oil explorers dream

special piece

special focus piece

sbm focus

special featurelast

emerging markets