spread betting magazine v15

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DoMiNiCPiCARDA -A uS TECHFoCuSSPECiAL

issue 15 - April 2013The e-magazine created especially for active spreadbetters and CFD traders

CuRRENCY CoRNER -iS iT TiME To BuY THE PouND?

ZAk MiRiNTERViEWS ViNCESTANZioNE

ToMWiNNiFRiTH’S CoNViCTioN TRADE FoR APRiL

A goldMiningSectorSpecialWe hunt forpotential bargains amongst the rubble

SPREADBETTINGMAGAZINE

www.fi nancial-spread-betting.com

Feature Contributors

2 | www.financial-spread-betting.com | April 2013

Zak Mir is one of the UK’s pioneers in modern charting methods since the early 1990s, joining Shares Magazine as its first Technical Analysis Editor in 2000. Zak founded www.Zaks-TA.com, the first pure TAwebsite, in 2001 and which flourishes to this day. In addition, he has written for the Investor’s Chronicle, appeared on Bloomberg and CNBC as well as being the author of 101 Charts For Trading Success.

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

Robbie Burns - The Naked Trader has been a full-time trader since 2001 and has made in excess of a million pounds trading the markets. He’s also written three editions of his book “Naked Trader” and the “Naked Trader Guide to Spreadbetting” and runs day seminars using livemarkets to explain how he makes money. Robbie hates jargon and loves simplicity.

Zak Mir

Dominic Picarda

Robbie Burns aka The Naked Trader

Tom founded the t1ps website in 2000 and over 12 years his average gain per tip was 42.7% on 241 share tips. He now writes for a range of US and UK financial and political websites and all his content can beaccessed via www.TomWinnifrith.com - you can get alerts on everything Tom writes by following him on Twitter @tomwinnifrith orwww.TomWinnifrith.com

Tom Winnifrith

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. He provides free onlinetrading education on www.alpeshpatel.com

Alpesh Patel

April 2013 | www.financial-spread-betting.com | 3

Two recent examples were a posting we made on our blog site that was a quick snippet relaying that we had gone long on Kazakhmys. As it was simply a notice and a chart, we added this to our disclosure page of completed and open trades — a fact that seemed to escape one Mr “Girish” who accused us of hiding our poor trades. We also have had remarks made against some of our trades that have beenunsuccessful — Phytopharm in particular from our “10 bagger” issue last year. Considering that this publication is entirely free and written in large part by a CFA and ex fund manager as well as a roster of “who’s who” in the spread betting world, to receive these missives really makes me scratch my head... As my grandfather relayed to me as a young child — “There’s nowt no queerer than folk” (before I get the homosexualrighteous parade onto me — “queer” in Yorkshire means odd!). I’dsuggest all those that are here to find slight with the publication that you take your eyes elsewhere!

On to more upbeat matters for true loyal readers... I hope you enjoy the Gold Mining sector special this month — we have chosen what webelieve are the best opportunities in a beaten down sector and, at the very least, perhaps the investment case we present is thoughtprovoking. We also are pleased to welcome on board Tom Houggard as a regular contributor and who takes aim at the “seminar” sector where many unsuspecting individuals pay thousands of pounds to theseproviders in the vain hope of making their millions in the markets. My own take on these firms is — if you are so good, then why not trade yourselves? You can most likely receive most of the material they look to sell for inordinate sums free on the internet including our own guides!

Robbie, Dom and Zak are all here, and an interview with a well known figure in spread betting over the years — Vince Stanzione. Love him or hate him, the interview is a must read for anyone involved in spread betting, however. There’s a small update on London Capital too where we relay our thinking here following the collapse of bid talks with all three bidders.

Finally, your frazzled editor is going away for a much needed holiday to South Africa where I will be completely out of the markets during April. It is good to take a wholesale break sometimes, I find, and come back clear of mind and refreshed, and so the next edition will likely be out a little later in early May.

In the meantime, may you all (ex Mr Girish!) trade profitably, and stay nimble out there!

Richard

ForewordEditorial List

EDiToR

Richard Jennings

SuB EDiToR

Simon Carter

DESigN

Lee Akers

www.coyotecreative.co.uk

CoPYWRiTER

Sebastian Greenfield

EDiToRiAL CoNTRiBuToRS

Thierry Laduguie

Filipe R Costa

John Walsh

Tom Houggard

DisclaimerMaterial contained within the Spreadbet Magazine and its website is for general information purposes only and is not intended to be relied upon by individual readers in making (or refraining frommaking) any specific investment decision.Spreadbet 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 can rise and fall sharply and you may not get back the money you originally invested, particularly where these investments are leveraged.

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

You should assess the suitability of the recommendations (implicit or otherwise), investments and services mentioned in this magazine, and the related website, to your own circumstances. If you have any doubts about the suitability of anyinvestment or service, you should takeappropriate professional advice.

The views and recommendations in this publication are based on information from a variety of sources. Although these arebelieved to be reliable, we cannot guarantee the accuracy or completeness of the information herein.

As a matter of policy, Spreadbet Magazine openly discloses that our contributors may have interests in investments and/or providers of services referred to in thispublication.

i start my usual intro with something that is pressing on my mindtoday. We receive many emails from people relaying what acracking publication it is that we put out, and in particularappreciating the angle that it is written by actual traders as opposed to financial journalists that wouldn’t know the difference between shorting a stock and being short in stature! However, we do get the occasional “ghoul” who lurks in the shadow looking to jump upon a perceived misstep by us...


gold Mining Sector Special

Tom Winnifrith’s Conviction Buy

8

42Tom joins the gold theme this month with a focus on Highland Gold

64

When using Stops is Not AppropriateContrary to popular wisdom, there are occasions when using stop losses can act to your detriment. We explain.

46

56

Contents

60

Zak Mir interviews Vince StanzioneZak gets to grips with the prolific spread bettor Stanzione

Robbie Burns’ Monthly Trading Diary Always entertaining and a must read, Robbie regales as ever with his trading tales

30

London Capital group update With the collapse of bid talks surrounding LCG we update with our current views on the stock

50

68

SBM takes an in depth look at the best value opportunities in the beaten down gold mining sector

Dominic Picarda’s Technical TakeA special US technology stock focus

Alpesh on MarketsAlpesh also joins the gold party in this issue and states the buy case for the yellow metal

School CornerThierry Laduguie of E-yield explains Momentum and ROC (Rate of Change)


26 35

76

92 John Walsh’s Monthly Trading RecordTrading Academy winner John Walsh continues with his trading journey

TechnologyCorner

85

Markets in FocusA comprehensive markets round up of under outperformers during the month of March

71

A special focus on the Yorke Arms

94

gourmet Restaurants in Yorkshire

Zak Mir’s TopPick for April

Simon Carter takes alook at the latest inhome cinemapackages

Zak alights upon ShirePharmaceuticals and lays out his investment case

We unveil the practice of trading ahead of economic data releases and measures taken to curb this.

Real Life “Trading Places”

81

Tom Houggardcontributor specialTom asks just how much value there really is in paid for trading andinvestment seminars

88

Currency CornerFollowing the UK’s AAA sovereign downgrade we ask is it now safe to go back in the water and buy sterling?

Capital Spreads Client Activity Angus Campbell from Capital Spreads reports that currencies are definitely back in focus as indices volatility wanes


Special Feature

SiFTiNg FoRBARgAiNS AMoNgST THE goLD MiNiNg SECToR RuBBLE A new SBMdream portfoliosuggestion


Sifting for bargains amongst the Gold Mining Sector rubble


CHART - US GOLD BUGS INDEX RELATIVE TO GOLD PRICE

Special Feature

Take a look at the chart below which plots the US Gold Bugs index against the gold price over the last five years. Notice the dislocation? Whilst the gold price is up some 60% over this period, the index is down 30% and the correlation between the two (which one would expect) broke down in the early part of 2012 as the gold price traded sideways and the index fell away sharply. One of the two is out of kilter and our guess is that the gold price has a little further to decline towards, worst case, $1200/oz whilst the Gold Bugs index is likely to plateau here or rise as the undervaluation begins to catalyse consolidation moves amongst companies within the sector. Indeed, in recent days management of Archipelago Resources in the UK came out on record to say that it was looking for acquisition opportunities and we suspect that this rhetoric will only increase as the year progresses.

Regular readers of this magazine will know that we have beenbearish on the physical gold price since the autumn of last year — a period in which the yellow metal has actually fallen by around 12% (at time of writing). And so, you may wonder why we have alighted upon the gold mining sector this month as part of our special sector focus? The answer is simple — the sector, in our opinion, now offers a compelling, cycle low valuation opportunity.



“WE CAN SEE FRoM THE CHART To THE LEFT THAT THE iNDEx iS THE MoST oVERSoLD iT HAS BEEN iN 5 YEARS (RSi MEASuRE) AND iS, iN FACT, PRETTY MuCH RigHT BACk To WHERE iT WAS AT THE TRougH oF THE MAJoR BEAR MARkET oF 2008/09.”We can see from the chart to the left that the index is the most oversold it has been in five years (RSi measure) and is, in fact, pretty much right back to where it was at the trough of the major bear market of 2008/09. Coupled with the valuation story we lay out in this feature and the potential sector consolidationbackdrop, then we believe the sector is now poised for a multi month rally of meaningful proportions. We will present our top five plays that offer both cracking value and are ripe for a potential takeover. If we are right, then on this basis we can purchase stock in theknowledge that we have good asset backing andlimited downside, and have the potential spice ofovernight sharp gains should a takeover(s) occur. Oh, and we can sleep easy at night!

First off, it’s worth exploring what are the reasons for the sharp underperformance of the sector these last 24 months (aside from John Paulson’s anti Midas touch of late in going heavily into the sector!)? Gold mining is, inherently, an operationally geared business.

What this means is that its costs of mining are largely fixed, but its sale’s price is variable as the gold price gyrates around.

In fact, all commodity mining businesses are heavily operationally geared and this is why you see theprices of the mining stocks fluctuate so wildly.

As such, one would expect the gold mining sector to rise by a greater degree than the gold price in arising market and vice versa fall by a greater degree in a declining market. In fact, as we saw on the chart, over the last five years even in a rising marketenvironment the miners did not outperform the gold price.

Certainly, individual stocks like Avocet Mining and Petrapavlovsk have their own particular company specific issues, but for the whole sector to haveexperienced such a moribund collectiveperformance is intriguing.

Take a look at the next chart which plots current and one and two year Price to Cash Flow projections for the large North American listed miners. I’ve circled the last time this valuation measure reached the current extremes of just seven times current year’s cash flow and only five times two years out. Both of these occasions were right at the outset of multi-year bull markets that took prices up by 100%+. Similarly, I have drawn a line through this chart that shows the average price to cash flow multiple over the last thirteen years and we can see it’s around 13 times.

CHART - 15 YEAR SECTOR PRICE TO CASH FLOW MULTIPLE RECORD


Special Feature

Here’s another chart that illustrates very starkly how cheap the sector is. The ratio graph at the bottom of itportrays the performance of the gold mining sector relative to the gold price since 1996 — the higher the figure, the more undervalued the sector is. Although the undervaluation is not at the same degree that it was ahead of the 12 year bull run, nevertheless, on this measure, we can see that it has now matched its 2008/09 bear market peak (circled).

CHART - GOLD PRICE V GOLD BUGS INDEX RATIO MEASURE

A bear market follows the following three distinct phases:

1. The first phase is the one where the bear market wipes out the optimism and excitement whichexisted at the preceding bull market’s top.

2. The second phase of a bear market is usually the longest phase. This is the phase where it gradually dawns on stock holders that business is deteriorating and that we are moving into hard times.

3. The third phase of a bear market is the “throw ‘em in” phase where stocks are sold for no other reason than that the sellers need to raise cash.

I would argue that given that the typical bear market duration is just over two years and that this current one started in April 2011 that we are much closer to (3) than (1).

Adding additional weight to the sectoral buy case is also the fact that there have been a number ofdirectors’ purchases amongst a number of thecompanies in recent months and certainly faroutweighing any sellers. The directors of course know the company intimately and although they are aleading indicator, collectively their purchasing involumes has proved historically to be a good market timing signal, if two-six months too early. Recall thesaying, however, that “nobody rings a bell at thebottom” and we can only go on valuations in ourtiming.

One additional note too — the ratio of Strong Buys in the sector from our friends the “anal”ysts is also low and so this adds another comfort factor to us (read last month’s piece on why, as a group, they are always wrong). What it means is that there could be material buying pressure as they react (instead of anticipating which is what they should do) to rising prices.

April 2013 | www.fi nancial-spread-betting.com | 13


given our view that the gold price is likely to decline further, then we are looking for two major elements in our analysis — big discounts to book value and a low cost of production/oz of gold mined. The discount to book value provides the takeover “spice” potential whilst the low cash cost of mining gives us a bigger buffer in the event of a continued decline in the gold price. Low gearing or ideally net cash is the fi nal safety layer for us. of course, if we are wrong on the gold price and “helicopter” Ben Bernanke goes absolutely hog wild with the printing press, then each of the picks should rise exponentially as they are, of course, levered to the gold price.

So, let us look for fi ve stocks with varying market capitalisations that we believe offer meaningful upside, and in this exercise we will widen our universe from the usual UK market place and incorporate one US and one Canadian stock.

1. AVoCET MiNiNg - 18.5P

It will come as no surprise to our regular readers that Avocet Mining tops our list. We would direct those who have not read it to take a look at our piece last month in which we laid out the Buy case.

In short, the discount to adjusted tangible book value of almost 60% (at current prices) and the potential for a takeover are our primary attractions here. Recent noises from the company have indicated that they do not intend to address the hedge issue by way of additional equity and which tells me that management see the current equity value as wrong. Should they address it with debt at a reasonable funding rate, then this much more equity friendly route could prompt a rally back towards the 35-40p level on the news.

CHART - AVOCET MINING

14 | www.fi nancial-spread-betting.com | April 2013

Special Feature

2. AuREuS MiNiNg - 38PAureus is listed in both UK and Canada and is involved in the exploration and production of gold in the Africannations of Liberia and Cameroon. The main investment case is the development of the New Liberty gold projectin Liberia — fi rst production being expected in 2014.

CHART - LIBERIAN MAN CRATON GOLD RICH REGION

The group’s incorporation came about in April 2011 through the splitting of what was formerly known as African Aura into two separate entities — Affero and Aureus Mining. Additionally, a further $35m Canadian dollars was raised one month later at a price of CAD $1.30 (83p sterling equivalent). An additional $80m was raised in November 2012 to ramp updevelopment at Liberty. As you will see from the chart, it has largely been one-way traffi c for Aureus since the listing, in large part due to dilution fears. However, with a balance sheet that sites with around £55m of cash at present (based on the recent burn rate) and with debt facilities in place, we believe that additional dilution issues in the immediate term are slim,

With the current market cap of £84m against cash of £55m, the shares trade at a modest £30m premium to this. £30m for a resource potential of v 1.14m/oz of very high grade gold against cash costs of around $700/oz (one of the lowest of this group — seediagram to the right) against a current gold price of $1600/oz seems mightily mean to us. Given the low cash costs there is a lot of latitude with this company should the gold price fall and so remaining profi table. In fact, even on an assumed worst case gold price of $1200/oz the pay back on the project is just over four years and produces an IRR of around 18% with adiscount rate of 5% used. Taking a different tack and assuming the gold price remains around $1600/oz and you get a pay back in two years and a post tax IRR of around 40%. These fi gures exclude additionaldeposit additions from the three satellite sites detailed to the right.



CHART - CASH MINING COSTS RELATIVE TO PEERS


Special Feature

CHART - WEAJU EXTENSION PROSPECT

CHART - AUREUS KEY EVENTS TIMELINE

As we progress through 2013 into first pour in 2014, we can see the timeline below of the key stages.

The group is also drilling at a satellite site to New Liberty — the Weaju prospect (see diagram below) and results are due in the first half of this year. With similar geology to New Liberty, there is a high probability of the additional discovery of good quality gold reserves here and conservative estimates of over 100k/oz in place seem acceptable amongst analysts and from management guidance. The infrastructure that is being put in place at Liberty will also allow easy mining from Weaju should the drills be successful. Two other prospects — Leopard Rock and Silver Hills — also hold out hope for additional reserves additions and will again feed off the New Liberty infrastructure should they be proved feasible.



CHART - AUREUS MINING

At the current price of 38p, and with a fully funded balance sheet, low cash costs of mining, the potential foradditional reserves to be added to their asset base and production now imminent, coupled with the oversold basis of the shares, we have no hesitation in including Aureus Mining in our Gold Miner’s Dream portfolio.

CHART - AUREUS MINING


Special Feature

3. AFRiCAN BARRiCkgoLD - 241P

African Barrick Gold was spun out of parent Canadian Barrick Gold (CBG) in 2010 at a price of 575p. It has been something of a tumultuous journey for shareholders here too with a takeover approach at the end of 2012 from China National Gold (CNG) who were looking to buy the majority stake of 74% that CBG still hold falling through in the early part of 2013. Since that point, the shares have effectively halved with the market focusing on worries over their Tanzanian production and which has been hit by electricity supply issues and rising production costs as well as theft and pollution problems in their North Mara mine.

CHART - AFRICAN BARRICK OPERATIONS



The takeover by CNG was not consummated,according to industry sources, due to differing price expectations between the two parties. Given that the stock was trading at around 350p before the bid — and this was what attracted the interest of suitor CNG who would have been expecting to pay acontrol premium of typically 25-30% — a reasonable takeout price of 450-470p could have beenexpected. Indeed, looking at the stock price in the run up to the bid deadline, it seems the market felt this a fair level too as the shares traded around the 440p level before the talks collapsed. One can only assume that CBG felt a price of 550-600p was appropriate. And so we have a situation where two industryparticipants who know the landscape well bothvalued the company at a price that is on average around 100% north of where they are currentlytrading.

In their latest earnings report it was revealed that cash costs rose by a worrying 37% y-o-y to just under $950/oz and, as we can see from the tableincluded in the Amara Mining section, this is towards the higher end of the Group’s African peer group. CEO Greg Hawkins has gone to great pains to assure his investors that cost control is their focus and if he is successful in this endeavour, then the shares could look very cheap indeed. Even after the cost rises and problems during 2012 the company still produced a clean EPS of 26c (around 17p at current FX rates) and is paying a dividend of approx 11p in sterling — resulting in a dividend yield of 4.5%.

Management did warn on reduced production for 2013 and so African Barrick’s story is really one of expectation for 2014. If cash costs can be contained around $950/oz, at the current gold price EPS could rebound very sharply — perhaps 40-45p can beproduced.

At current prices this would put the stock on less than 6 times 2014, certainly if it can achieve themanagement’s stated target of 1m ounces ofproduction p.a. from then.

You will recall that one of the two key pillars of ourvaluation exercise in the sector was of course thediscount to NAV.

Another way of looking at the company’s valuation is through the EV:EBITDA method — a traditional measure used when gauging the relative valuebetween stocks in a sector. Typically the producing gold mining sector has a cycle average valuation of around six times — although this is a rough and ready measure that takes no account of an individualcompany’s earnings variability, political risks in the countries within which they operate, liquidity risk etc. — it is, nevertheless, useful to illustrate theundervaluation here. With net cash of approx £270m at current FX prices and a market cap if £1bn the “enterprise value” is £730m. Even on the depressed earnings base of 2012, EBITDA of £220m wasproduced and so the EV:EBITDA measure of 3.3 times is very squarely in the bottom quartile of the sector.

Of course, should the earnings element rebound, then together with the rising cash balance this makes the stock even more geared to a rising gold price. In fact, going forward to 2014 if they get back to the earnings level of 2011, then we could be looking at a forward EV:EBITDA measure of under two times. This is where it gets interesting for minority shareholders as with CBG holding 74% of the equity and patentlybelieving the stock to be worth north of 500pgiven the flotation at that level and the pricedifference with CNG it poses the question as to why they do not take the company private again?


Special Feature

Of course, the 74% holding of CBG is also a major blocking issue regarding another bid approach as any takeover would need to be agreed by CBG and be friendly. This, in fact, is probably one of the issues holding the share price back as the stake is such a blocking one and therefore a discount to its peers is warranted. Question is, is the discount excessive? We believe it is and hence its inclusion in our list here. We target a price approaching 400p as fair value.

CHART - AFRICAN BARRICK GOLD



4. AMARA MiNiNg - 37P

Amara Mining is the second smallest company by market cap in our list. It was previously known as Cluff Gold and its operations are, like most of the companies included in our list, also in Africa. The company is also dual listed in Canada.

CHART - AMARA MINING’S AFRICAN OPERATIONS

Amara’s main resource is in Burkina Faso — similar to Avocet Mining — and its primary cash fl owproducing asset is the Kalsaka mine. The acquisition of the neighbouring Sega project is also expected to add the Group’s production in the fi rst half of this year with management targeting total gold mined in 2013 of around 50-60k ounces.

The company’s other main project that it is aiming to bring to production is the Baomahun mine in Sierra Leone and which is hoped to contribute ameaningful increase of 135k ounces of gold p.a. in 2015 and possibly more depending on the drillingresults. This is a potential major positive catalyst for the stock price as the results are released as we go into 2014. Potential reserves here approach 3mounces of gold. Smaller projects with reserves’upside are the Yaoure project on the Ivory Coast and Mamoudoya in Mali.

One of the primary attractions to us of Amara is that, in complete contrast to Avocet and the diffi culties they have found themselves in with regards to their hedge book, Amara is completely unhedged. With the company’s cash costs averaging around $800/oz in recent years and with the gold price at $1600/oz, they are making very nice margins at present thank you very much, and of course have good P&Lfl exibility should the gold price decline. With net cash of around £19m on the balance sheet, the company is in decent shape to allow management to carry out the development of the Baomahun reserve — themajor driver for the company’s valuation in themedium term.

The vast majority of brokers that follow the stock have a target price in excess of 100p — not surprising given that shares trade on a little over 2.5 times cash fl ow at present — pretty much one of the cheapest ratios in the gold mining universe.


Special Feature

Additional weight is added to the investment story through the signing in 2012 of a strategic partnership agreement with Samsung C&T corporation — ineffect a financially robust partner is on board toassist with the financing of the development of the company’s assets.

Using the EV:EBITDA measure again, we get an EV of £43m against likely EBITDA at the full year stage for 2012 of approx £18m — this is a shade under 2.5 times, although it’s fair to say that the cash figure will drop over the next 18 months as development at their mines continue.

At just US$17.22 per resource ounce, however, its enterprise value is at only a modest premium to the global average cost of discovery.

It is the figures for 2014 that are really interesting though, and if the anticipated production from Baomahun comes to pass and the gold price remains around the current levels, then the stock will look very cheap indeed. The final valuation kicker is the book value discount of almost 50% — this is before the addition of new reserves too. As part of our proposed portfolio here, we believe that Amara Mining offers an exceptional positive skew profile.

CHART - AMARA MINING



5. iAMgoLD - $6.70

Iamgold is our US play and, unlike the other miners in our list, its operations are not exclusively in Africa but also within Canada and South America — as such it has more diversity and so a lower specifi c political risk profi le. The company has approaching 30m of ‘inferred and measured’ reserves across its various sites of which 11.3m are deemed proven and probable. This is the largest reserves base of all the miners listed here and it is refl ected in its market capitalisation of just over $2.5bn.

IAMGOLD’S GLOBAL OPERATIONS

The stock has fallen from almost $24 per share in 2011 to just over $6 recently, and we are in good company (or not as the case may be, given his recent twodisastrous years of investing!) with none other than “Mr SubPrime John Paulson” who has investedheavily in the stock at considerably higher prices. At the current price, IAG is trading on a prospective PE multiple of under seven times for 2014 and a discount of over 30% to its last reported book value. With a yield of approx 4% for income seekers it also hasattractions. Again, our friends the “anal”-ysts have a weighted average target stock price of $11/share.

Management are intending to ramp up theimportance of their Canadian mining operationsrelative to the rest of the company’s portfolio, with a target of 35% of overall production in 2017 (and from 3% currently). This will reduce political and currency risk too.

With net cash and gold holdings of approx $1bn against a market cap of $2.5bn, IAG’s enterprise value is $1.5bn. The company has generated around $700m p.a. in EBITDA for the last two years and so it is trading on an EV:EBITDA basis of just over two times — dirt cheap. In fact, so cheap that some industrycommentators have begun to openly speculate about the possibility of a takeover or even management buyout. A premium of 50% would likely be required in order to entice the major shareholders and the likes of Canadian Barrick could be a viable acquirer. Even with such a premium, an acquisition would be likely earnings enhancing.

With cash costs of production in the lower half of its peer group (around $950/oz), IAG does not enjoy the same latitude as the likes of Aureus in the event of a declining gold price, but given the very healthy cash backing on the balance sheet thiscounterbalances any worries over margin reductions.


Special Feature

We think IAG is a good large-cap bedrock to put into our portfolio and where the downside is limited given the solid fundamentals. There is also the additional potential spice of a takeover for the stock, certainly on any further weakness in the price.

CHART - IAMGOLD

CoNCLuSioNWe have chosen here what we believe to be a good spread of stocks where valuations are as cheap as they have ever been, balance sheets are sound (although there is risk with Avocet Mining) and there are very real prospects of consolidation amongst any and all of the constituents. So confident are we in the opportunity that is present in this sector, that we will be seeding a new gold Mining fund with our managed spread betting fund management company Titan investment Partners and which will apply the same professional trading to the positioninceptions, diversification and prudent portfolio management. Leverage will be contained at three times equity.

if you’d like to invest alongside us in this dedicated gold miners fund,email goLD to [email protected]


Editorial Contributor

ZAk MiR’S ToP PiCk FoR APRiL

I fi rst came across Spreadbet Magazine quite byaccident courtesy of Capitalspreads.com lastsummer who are one of the few fi rms to send out the magazine to their clients. Rather unusually for me, I actually proceeded to read it. Even though it is about the fi nancial markets, and not something properly interesting like Abbey Road by TheBeatles(!), I was determined to be part of theoffering.

The last time I was that keen to contribute was with Shares Magazine in 2000. What has beeninteresting in recent months, both reading and writing for the magazine, is how much I have been forced to learn and what I have learnt — especially from the blogs and the trading process as revealed by the editor Richard Jennings. He does not suffer fools gladly and, as most of you will be aware, nor do the markets.

The best example of this in the recent past has been those stocks in which there has been the greatest amount of short interest even as the stock market has soared — ocado (oCDo) and Home Retail group (HoME). Presumably, recent price action has ensured that there are rather fewer bearslurking here now than previously, especially in the wake of the Ocado / Morrison (MRW) story. If not, then I fear for their solvency... Indeed, Ocado was a reminder of how a “dead cert” bear opportunity — cash burn, no profi ts for a decade, suppliers are the competition etc., etc. — is anything but a “dead cert” and for those remaining short the stock it has now joined the annals of the bear’s graveyard. It was also a prime example of how incorrectlyinterpreting fundamentals and ignoring thetechnicals — in this case an unfi lled November gap higher through 70p, and then another one inJanuary at 90p, and a fi nal gap in March through 145p before Morrisons was in the fundamental picture meant that a “Conviction” short became a short cut to disaster. Presumably, a similar sob story will have been repeated for different reasons by those caught long of Apple (AAPL)… Lesson? No matter how strong a fundamental story is, always be prepared to bend and get out before thedamage is too great.

BUY SHIRE PHARMACEUTICALS


Zak Mir’s Top Pick for April



“THE LAST TiME i WAS THAT kEEN ToCoNTRiBuTE WAS WiTH SHARES MAgAZiNE iN 2000. WHAT HAS BEEN iNTERESTiNg iN RECENT MoNTHS, BoTH READiNg AND WRiTiNg FoR THE MAgAZiNE, iS HoW MuCH i HAVE BEEN FoRCED To LEARN AND WHAT i HAVE LEARNT.”

RECoMMENDATioN SuMMARY

And so, in my top pick choice for April I present Shire Pharmaceuticals (SHP), though I am hoping to dodge the bullets that result from wrongly combining blind faith with fundamentals, technicals or both. Not that an element of belief comes into play here. The “off the cuff” view regarding Shire Pharma (SHP) is that its peculiar blend of treatments for even more peculiar ailments provides the type of specialist niche in the drugs sector which is the perfect blend of beingausterity and competition resistant. Most of the other big name pharmas focus on the “conventional”diseases and this has been Shire’s opportunity.Indeed, Shire has shown that even when it slips on generic issues, there is such diversity in its portfolio that revenues remain consistent.

But perhaps where Shire will always come into its own is as a “replacement pipeline” for a sector rival whose own pipeline of new drugs suddenly suffers a blockage. Chief contender among these in the UK would of course be AstraZeneca (AZN) whose news flow over recent years seems to have been peppered with a trial failure here, a run in with the FDA there...

on the technical front, the price action of Shire is backed by a bullish trinity of a rising trend channel on the daily chart from october based at 2,020p, an unfilled gap higher from 1,978p and a rising 200 day moving average now at 1,918p. While the 200 day line is held, the upside here should be towards the top of the late 2012 price channel top as high as 2,300p. The timeframe is the next one-two months.

RECENT SigNiFiCANT NEWS

September 9th – Shire said that it had settled all pending litigation relating to TWi Pharmaceuticals’ application to produce a generic version of Shire’s INTUNIV treatment for attention deficithyperactivity disorder (ADHD). TWi now has alicence to make generic versions of INTUNIV in the United States from July 1st, 2016. USpharmaceuticals company Anchen has beengranted a licence to sell TWi’s generic versions ofINTUNIV in the US.

october 25th – Shire said Flemming Ornskov willreplace Chief Executive Angus Russell when heretires in 2013. The group continues to be on course to meet double-digit earnings growth for the year as it increased market share during the three months to September 30th 2012. Non-GAAP (Generally Accepted Accounting Principles) dilutedearnings per ADS (American Depositary Share) rose 6% to $1.36 while revenue increased 1% to $1.1bn.

February 14th – Shire’s US GAAP basis its 2012operating income fell 14 per cent after sales of its Adderall XR product had dropped 19 per cent. The company said sales of Adderall has fallen to $429m, primarily due to lower prescription volumesfollowing the approval of a new generic version of the product in the second quarter of 2012. Reported product sales were also affected by theaccounting for the settlement of the ImpaxLaboratories litigation. Operating income, on a US GAAP (generally accepted accounting principles) basis, declined from $1,109m to $949m year-on-year.


CHART - SHIRE PHARMACEUTICALS SIX MONTH CHART

FuNDAMENTAL ARguMENT

On a fundamental basis, and focusing firstly on the key ratios, the highlight to me at Shire is that although trading on 21 times historic earnings for 2012, such is the pace of earning growth expected for the next two years that this is forecast to fall to 13 this year and only 12 for 2014. This should be enough to silence those who regard the group as something of anoverrated prospect. But, while it has to be admitted that even this drugs group has had its tangles as far as the shadow of generic competition is concerned,especially in terms of Adderall, it is the ability of the group to create treatments for the more obscurediseases that is its winning formula as compared to the traditional contenders.

This should be more than enough to underline this monthly pick as one to back.

However, there is more. The recent rise in the overall stock market has thus far been lacking the bigcatalyst of M&A activity, and on this basis it seems inevitable that a company which has periodically been in play even during the dark days of the bear market will once again be in the spotlight should the FTSE 100 start to spike nearer to 7,000.

Zak Mir’s Top Pick for April



DoMiNiCPiCARDA’STECHNiCALTAkE -A uS TECHSToCkFoCuS

Dominic Picarda is aChartered 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. It’s all too easy to get carried away when it comes

to technology companies, especially over theconsumer-facing ones whose products havebecome such a big part of our lives. But while the likes of Facebook and Apple may havetransformed the way we communicate with each other, we should never confuse a great company or product with a great investment or tradingopportunity. For short-term speculationpurposes, therefore, we’re better off focusing on technical analysis than analysing technology.

While Apple’s stock price has been under the cosh lately, the same is not true of many other big names in the world of hi-tech and cyberspace. The torrent of liquidity gushing forth from the Federal Reserve and other central banks in recent months has boosted investors’ appetite for equities in general, but especially for some of the big names of the ‘new economy.’ The danger is that thisprocess has gone too far, too fast – which could open up some near-term short-sellingpossibilities.


Dominic Picarda’s Technical Take

FACEBookFacebook is pretty much all-knowing when it comes to its users. Account holders ethnicity, sexual tastes and political stance can be worked out with a frightening degree of accuracy from the digital clues they leave behind them on the website. However, the social media giant’s omniscience has yet to extend to unlocking the secret of making the sort of serious profi ts that would befi t a company currently valued at $63.2bn.

CHART - FACEBOOK

Facebook’s stock does not come cheap. Having soared from just under $19 to around $26 today, it trades on a multiple of 46.5 times prospective earnings for 2013. It was dearer still not long ago, having reached $32.51 in late January. Since then it has sold off and is in danger of dropping back below its 200-day moving average. My strategy for now would be to sell drops back through the 55-day exponential moving average, targetingdownside weakness to $23.50 and $22.50.



NFLxIt seems weird to recall that not all that long ago hiring a film for the evening involved either schlepping to a video shop or mailing DVDs back and forth. Now that online streaming has really come of age, lickingre-sealable envelopes and getting fines for late returns are fast becoming a quaint memory. Netflix is at theforefront of this watch-by-web revolution, even commissioning its own programming – such as House of Cards – in order to pull the punters to its platform.

The punters have certainly been flocking to Netflix as an investment of late. Having been as low as $53 back in the autumn, it almost reached $200 the other week. It is currently going sideways in a coiling range, something that often foretells a break in the direction of the previous trend, in this case upwards. Given the extremeoverbought basis of the stock, however, I think a pullback needs to occur. Were the stock to retreat to its21-week EMA – currently around $140 - and then bounce, I’d go long targeting new highs above $200.

CHART - NFLX


LiNkEDiNLinkedIn is the Facebook of the business-world. The comparison is an interesting one in many ways. Whereas Facebook’s technology always offers a seamless experience, LinkedIn’s can be a bit clunky at times. At the same time, though, LinkedIn seems better at monetising its product than the social networking giant. The company’s performance beat Wall Street’s expectations throughout 2012, adding members at a rapid clip, but alsofattening profi t margins.

Since its November lows at $94.75, LinkedIn’s stock price has almost doubled. From mid-February, it hasliterally stormed higher, forming a large gap between $127.48 and $140.13 in the process. The effect of this has been to leave it very overbought indeed on its weekly chart, where the relative strength index (RSI) reading recently hit 84 per cent and has only eased back to a still-stretched 79 per cent.

What is more, a warning of potential reversal has fl ashed up in the daily chart. While the price lately hit anall-time high of $184.15, it was not accompanied by a fresh peak in the daily RSI. At the very least, I think the price needs to come together with its 21-week exponential moving average, currently $140. On the way down, I might try and short as it rallied to around its falling 13-day EMA and then turned lower. Once the price has dippedbelow its 21-week EMA, I would then consider buying a strong rally back through it.

CHART - LINKEDIN

Dominic Picarda’s Technical Take


Technology Feature

THE CoMPLETE HoME CiNEMA FoR THESuCCESSFuL SPREAD BETToR

TECHNOLOGY CORNER

BY SiMoN CARTER

if the recent Academy Awards have got you in the mood for movies, but you can’t quite face shelling out over the best part of a tenner at your local multiplex for the pleasure of spending 90 minutes in an uncomfortable chair, being showered with popcorn tossed by local ‘yoofs’ and missing theall-important twist because the lame-brain behind you can’t keep off their mobile phone, then you should seriously think about a home cinema set-up! Hey, you can even pause the film when nature calls.


Technology Feature

THE SCREENThe journey from living room to home cinema begins with a tricky question: TV or projector? And it is a tricky question. On the one hand, investing in a projector will give you that authentic cinema feel, while on the other, a TV is more flexible, easier to set up and perfect for rooms of all sizes.

So, with this in mind we recommend the LG 47LM760T. As is usual with televisions, the name doesn’t give you much of a clue, but this goggle-box is still one of the best in show even 12 months on from its launch. A 3D Smart TV with a frame that seems no weightier than a hair, LG have produced a screen that will draw you in and hold you, even if the movie doesn’t.

What’s more is that this TV is beautiful.

The great news is that the relative age of the TV has led to some awesome discounts and at the time of writing you could pick this up at Curry’s for £999 (discounted from £1,799).

BEST oF THE REST: SAMSuNg uE32F6400 TV (£599); PANASoNiC Tx-L55WT50B TV (£1499); oPToMA HD23 PRoJECToR (£749)


The Complete Home Cinema for the successful spread bettor

THE ViSuALSNow you can have the best screen in the world, but if you haven’t got the right player throwing out the visuals, your copy of Skyfall may as well be on VHS. OK, so that may be exaggerating, but it is a common misconception that all Blu-ray players are identical. Whether it’s digital filters, noise reduction, colour processing or even audio capabilities, you need the right disc spinner or even your kick-ass TV won’t rescue the picture.

The hottest Blu-ray player is so hot that it isn’t even available yet (coming very, very soon), but type Samsung BD-F7500 into Google and you’ll find moviephiles nationwide salivating into their popcorn. Though pricing is to be confirmed, it is widely expected that you’ll be able to pick up the player for under £200.

So why the fuss? Well, aside from future proofing your set-up with 4K up-scaling, the BD-F7500 comes with SmartView (enabling streaming to a compatible smartphone or tablet), dual-core processor for super speed and 7.1 audio capability. There are a plethora of apps available via Samsung’s Smart Hub and, most importantly, picture quality is breathtaking.

BEST oF THE REST: SoNY BDP-S790 (£240); PANASoNiC DMP-BDT330 (£133); SoNY BDPS490B (£100) JECToR (£749)


Technology Feature

THE SouNDYou absolutely can’t beat an actual cinema for that ear-shattering, teeth-wobbling, eyeball-shaking sound, right? Well, perhaps not. Though we’ve all experienced poorly set-up surround sound — where an earful of background music all but strangles the dialogue — the right equipment with the right configuration will mean that Mamma Mia never sounded so good (but seriously, Abba?!).Now if you’re pushed for space or if the thought of wiring up a full speaker system is daunting, there are a range of excellent soundbars available right now which wonderfully, and magically, synthesize pseudo-surround sound. However, for that true cinema experience, it’s got to be speakers.

While most surround sound systems, especially of the 7.1 variety, come bundled with Blu-ray players, if you want to have the flexibility to choose your player, and your speakers, then there are plenty of dedicated speaker systems around.

The Auna YC-5.1 Cinema-B is available for just over £100 anddelivers rich sound through a 100W RMS output while lookingabsolutely fantastic with four towers and a sound bar (which is space friendly as well as stylish). As you would expect, each speaker has fine control volume and, thankfully, the configuration is reassuringly easy.

BEST oF THE REST: gENiuS SW-N5.1 (£35); YAMAHA YAS101BLSouNDBAR (£199); LogiTECH Z506 (£60).


The Complete Home Cinema for the successful spread bettor

THE SNACkSFor the authentic cinema experience you could invest in one of the many popcorn makers out there (although for a truly authentic experience you would have to charge yourself an extortionate price for the pleasure of snacking) with the Andrew James Hot Air Popcorn Maker the most popular choice, and available for under £20.

However, we know that you have a little more style than that so why not treat yourself to an Andrew JamesQuality Electric Crepe Maker. For £30 you get a cool little gadget that will make crepes to rival those doled out on the streets of Paris. OK, so crepes aren’t something you’d expect to find at the local flicks, but, hey, this is your cinema.

BEST oF THE REST: g3FERRARi g10006 PiZZA oVEN (£120); BREViLLE VST025 ToASTED SANDWiCHMAkER (£25);



ToM WiNNiFRiTH’S CoNViCTioN BuY HigHLAND goLD AT 91P

AiM listed gold stocks continue to have fewer fans than Angela Merkel does in downtown Nicosia. if a company delivers on its plans (sadly, all too rare anoccurrence) its shares go down. if it does not deliver (by even the slightest margin), its shares crater. investors in this sector have been beaten up and have quite simply lost interest which makes raising money for capital hungry explorers very tough indeed, which in turn sees share prices whacked again as punters discount massively dilutive fundraisings. Even those with no need for cash have been punished.


But, fundamentals for gold and the gold mining sector stocks look good. As recent events inCyprus illustrate, paper currencies are on the skids, gold will move higher and as such any cashgenerative, well run producer has to be working with the macro winds in its favour. At some stage investor sentiment will change and such stockswill fly.

And that brings me to Highland Gold (HGM) which is listed on AIM and as its name suggests operates in Scotland. Er, no… it operates 100% in the heartlands of the Cypriot sugar daddy, Russia.

I tipped this stock at 91p before Christmas. It has since published a cracking trading update and its shares now trade at…cue drum roll…91p whichvalues Highland at £294 million. Relative to the rest of the sector, that is a stellar Oscar winningperformance, but it is not quite what I was hoping for. I stand by that tip as I do believe that a 200p share price is achievable.

And so what draws me to Highland? I refer you to the trading statement of 14th January. In calendar 2012 there was an 18% increase in group wide production to a record 216,885 ounces of gold and gold equivalents, exceeding guidance estimates of 200,000-215,000 ounces.




The update showed total production comprised 148,493 ounces from the Mnogovershinnoye mine (up 3.2% on 2011 and 10.8% H2 2012 v. H2 2011), 64,438 ounces from the Novoshirokinskoye mine (down 6.5% on 2011, though up 9.1% H2 2012 v. H2 2011) and the residual 3,954 ounces from Belaya Gora — where open-pit mining operations and the accumulation of ore stockpiles continued inadvance of anticipated stand-alone operations. The company ended the year with net cash of $52.6 million.

At the year-end the total JORC compliant resource base had risen to in excess of 13 million ounces and the company guided that “production for the year to 31 December 2013 (MNV, Novo and Belaya Gora) is forecast to be in the range of 225,000 – 240,000 oz of gold and gold equivalents”. This is with the construction of a processing facility at Belaya Gora continuing “to make good progress withcommissioning expected in Q1 2013 andproduction of first gold scheduled for April 2013”.

I sense that right now there is a high degree of investor ennui with companies issuing telephone number JORC resource statements.

That will change, but pro tem, folks are really not interested in jam tomorrow stories. What matters isproduction, cash and cash generation. Humour me for a second as this is a growth story.

There are ample growth avenues down the line — with the company particularly noting it is looking to verify and further increase the knownmineralised prospects near to its current Mnogovershinnoye production, commence ground work and preliminary construction activity at Klen (initial gold production targeted for 2015 with production expected at a rate of 50,000-60,000 ounces per annum), continue project design work at Taseevskoye, proceed with engineering studies in respect of a planned large-scale open-pitoperation at Unkurtash (Kyrgyzstan) and conduct additional exploration at Blagodatnoye “in order to verify and further increase the known mineralised prospects”. And so by 2015 this company should be producing 300,000-400,000 oz of gold perannum (and rising). And it is fully funded to deliver on that growth.

According to broker Fox Davies cashflow per share should increase dramatically during the next few years. The forecasts below covering calendar 2011 to 2014 are based in gold price assumptions which are pretty cautious. Clearly if the gold price moves higher, as I expect, these numbers are low.

“iNVESToRS iN THiS SECToR HAVE BEEN BEATEN uP AND HAVE quiTE SiMPLY LoST iNTEREST WHiCH MAkES RAiSiNg MoNEY FoR CAPiTAL HuNgRYExPLoRERS VERY TougH iNDEED, WHiCH iN TuRN SEES SHARE PRiCES WHACkED AgAiN AS PuNTERS DiSCouNT MASSiVELY DiLuTiVE FuNDRAiSiNgS.”

2011 2012 2013 2014

Cashflow/Share (gBp)

gold Price (uS$/oz)

43.1 44.9 67.8 71.7

1587.51700.01638.6157.1 1587.5 1700.0


The January statement shows that Highland is very much on target to hit its production targets for 2013 which would leave the company generating cashflow per share of 67.8p. Bearing in mind that it will end the year with net cash of at least 10p per share, that implies that the underlying business is now being valued at just 1.2 times 2013 cashflow. That falls to just 1.1 times 2014 cashflow (minus net cash). By 2015, as output cranks up a notch — on a cautious $1587 gold price — the cashflow multiple falls to less than one!

If it were the case that Highland was operating mines with a very short lifespan or that it needed to raise capital, or that its management had a trackrecord of missing targets, you might justunderstand such lousy multiples. But that is not the case for Highland. It is just that this entire sector is so utterly unloved that valuations across the board — even for quality plays like Highland — are, in my opinion, simply wrong.

I am not clever enough to say when sentimenttowards the gold mid-caps will change. You need to be really clever to judge that and also, like my friend Mr Mir, understand technical analysis to do that. But sentiment will change — it always does. It was back in 2003 after the dotcom bubble burst that you could buy shares in profitable tech stocks at a discount to net cash. If you did so when others were simply revolted by all things tech, you made a killing. It took a while, but in the end you won. Ten years later new media (i.e. dotcom v3) stocks without profits trade on loony revenue multiples once again. Sentiment always comes full circle. That’s the nature of the markets and so it will be with gold stocks. If you see value, you buy and wait. And Highland does offer extreme value.

Tom Winnifrith writes for 10 uS and uk websites – links to all of his usually controversial and sometimes prescient articles can be found at www.TomWinnifrith.com

You can follow Tom on twitter @tomwinnifrith And in his spare time Tom manages the Real Manrestaurant in Clerkenwell where if you are man enough you can try to eat the uk’s hottest pizza –the Snaefell Diabola. More details on that can be found at www.therealmanpizzacompany.com

CHART - HIGHLAND GOLD



Special Feature

It seems we were very lucky initially in calling the stock a Conviction Buy at the 39p level on the 11thFebruary, as only the following day the stockannounced that the company had receivedmultiple takeover approaches. Over the ensuing few days the shares proceeded to hit a high of 57p, but in hindsight we were wrong to stick with our bullish call, expecting an actual bid to transpire from one of the three parties and postulating that it would need to be higher than the last placing price of 60p. In fact, we felt that 70-75p was fair value for the business and very likely to be required in order to tempt management to sell and whom between them hold a key stake in excess of the all important 25% — which is a blocking vote that could have stopped a takeover.

On any traditional valuation metric the shares are woefully undervalued — trading at a £5m discount to the company’s own cash resources (net of client funds and broker deposits). That’s right, a discount to net cash and, as we stated in our blogs during the bid period, given that the company made on average approaching 5p of earnings per share over the last fi ve years, if they are able to restoreprofi tability to any semblance of this under the new stewardship of Mark Slade, then the re-rating could be very sharp indeed.

So why did the bidders walk away given the cheap valuation? Unfortunately we were not privy to the negotiations!

But, we can speculate that two issues were a factor — fi rstly the litigation they are involved with inrelation to an FX fund may make a dent in that cash pile. With surplus cash of around £7m over their regulatory capital requirement, should the worst come to pass here and they are required to pay meaningfully more than the £3.6m that has been provided for thus far, then a new capital raising could very well be on the cards barring anexceptional fi rst half.

Secondly, it is industry tittle-tattle that their “white label” model (where they essentially rebrand their Capital Spreads platform for 3rd parties inexchange for the 3rd party taking up all marketing costs and LCG then share a portion of the “spread”) is actually crimping their profi tability as some of the spread share deals that have been struck leave very little meat on the bone for LCG.

With the breakdown in takeover talks at LCg from all the interested parties — gain Capital, City index and Cantor index, we provide an update here as to ourcurrent thinking with the stock price now trading at 28p.


London Capital Group Update

It will be difficult to get out of these contracts too, although if the alternative is continued decimation of the profit base, then their partners will have torenegotiate as it is doubtful they will get better deals elsewhere...

What we are looking for now is a commitment of faith from the new management team — GilesVardey and Mark Slade in particular. If they believe in the opportunity to restore the business’sfortunes, then they should put some proper skin into the game. On the catalyst fronts, if thelitigation does not result in a payout of themagnitude that the market clearly fears, then the shares could rise materially, and if the stock price stays at this level, very likely rekindle industryinterest from a bid perspective as the marketplace requires consolidation to take on the might of IG.

Of course, simply a return to more profitabletrading will also engender confidence that they are back on track, and the recent market environment, with indices rising to five year highs, I hear has not, ironically, in fact been kind to retail clients... This could result in a fillip in profits at the next set of results.

In the event that the litigation and the FOS issue is as the market fears and a payout running to inexcess of £3m results, then a capital raising is all but inevitable — whether this would be via aplacing or a rights issue is open to question, but if the latter, of course you will need to be ashareholder to participate. We judge the downside another 5p and the upside multiples of the stock price. Accordingly we have been adding to ourposition on the recent weakness and remain with our Conviction Buy stance.

LONDON CAPITAL GROUP FIVE YEAR CHART


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School Corner

SCHooLCoRNERMOMENTUM EXPLAINEDBY THiERRY LADuguiE oF E-YiELD


Momentum Explained

MOMENTUM EXPLAINED

Momentum is a rate of change indicator that measures “price velocity”. on most charting platforms, this indicator is plotted as a line at thebottom of the chart. The Momentum line oscillates above and below zero. In periods of rising prices the line will rise and during periods of declining prices the line will fall. Some analysts use the Price Rate of Change (RoC) instead of the Momentum indicator. The ROC is similar to the Momentum indicator, the only difference is that ROC measures price velocity inpercentage. There are four situations to remember:

A rising Momentum accompanied by rising prices: this indicates that the price trend is not onlyrising (velocity increasing), but that it is also accelerating. This can be a bullish signal, in general when a security accelerates on the upside the momentum will continue.

A falling Momentum accompanied by rising prices: this indicates that the price trend is still rising, but that it is decelerating (bearish divergence). It is during this phase that momentum warns that price is ready to fall.

A falling Momentum accompanied by falling prices: this indicates that the price trend is not only falling (velocity increasing in the opposite direction), but that it is also accelerating downwards. This can be a bearish signal as prices accelerate on the downside.

A rising Momentum accompanied by falling prices: this indicates that the price trend is still falling, but that it is decelerating (bullish divergence). It is during this phase that momentum warns that the price is ready to rise.

Market momentum is measured by continually taking price differences for a fixed time interval. To construct a 21-day Momentum line, simply subtract the closing price 21 days ago from the last closing price. The formula for Momentum is:

M = Px – P(x – n) where Px is the latest price and n is the number of periods.

For example if we calculate the 21-day Momentum, Px is the price now and P(x – 21) is the price 21 days ago.

If we use the ROC instead of the Momentum the formula is:

ROC = [M / P(x – n)]*100

1

2

3

4


TREND FoLLoWiNg

School Corner

This method follows the trend. Buy when the indicator bottoms and turns up, and sell when the indicator peaks and turns down. To eliminate noise I recommend using a 20-period moving average of the Momentumindicator (red line above). On the above daily chart of Vodafone the black line at the bottom of the chart is the 21-day Momentum, the red line is the 20-day moving average of the Momentum line. Buy when the red line turns up, sell when it turns down.

Both Momentum and ROC are interpreted in the same way; there are two ways to use the Momentum:


Momentum Explained

TiMiNg iNDiCAToR

using the Momentum indicator as a timing indicator is useful when trading in sideways markets. When the market rallies and we see a bearish divergence we sell.


School Corner

A sell signal is given when the Momentum is above zero AND there is a divergence between the indicator and the price. A divergence at market top occurs when the market makes new highs but the momentum is lower. This happened between June and August last year on the above chart, Vodafone was a sell in August 2012.

Using the same method, a buy signal is given when there is a divergence between the indicator and the price after a decline. The Momentum must be below zero AND the market must be making lower lows whilst theMomentum is making higher lows. This situation happened between November and December last year.Vodafone was a buy at the end of last year.

Looking at the chart now, the latest rally is accompanied by a bearish divergence. The Momentum peaked at the end of January but the price continues to rise. This tells us that Vodafone will probably go down in the next few months.

if you’d like to learn more about using technical analysis in your trading, then visit us as www.e-yield.com to find out more and take a free trial of our service.

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WOULD YOU LIKE TO TRADE THE FTSE 100 & SHARES PROFITABLY?



ZAk MiRiNTERViEWS ViNCESTANZioNE

My experience is those desperate to make money never do, that is why having a second income helps. The majority of my students are over 50 years of age and are already fairly wealthy — I don’t deal with the unemployed or last chance hopers!

ZM: So you are effectively vetting your students before they start. Does this mean that thedemographic they represent have the best chance of winning in the markets? It clearly helps if they have been successful in their life to date, is that what you are saying?

ZM: There are cynics out there (including ourbeloved editor!) who suggest that those who can trade do, and those who can’t “advise”. Do you agree with this and are there any financial markets gurus you follow or respect?

VS: I agree 90% of those who offer seminars, tip services, advising etc. cannot trade or investthemselves and are getting rich off the “how to” bandwagon. It can be argued that I fall into that camp as I wrote my first course on spread betting in 1997. I was however already wealthy at that point, both from other businesses and investing. Most of the people I respect are dead, but Ralph Acampora and David Tepper I follow today.

ZM: Much is said about trading for a living, but is it really worth it given the anecdotal evidence of a failure rate for most people of over 90% and so the risk reward ratio doesn’t stack up? What can those who do, in the face of seemingly insurmountable odds, decide to embark on this pursuit realistically expect to make?

VS: I would never just be a full time trader; my experience is that the more time you spend trading the more you lose. My style is trend trading and so I can be in a trade for weeks, months and even years. It means that I don’t have to watch a screen all day. I trialled a Bloomberg terminal a few years ago and gave it back as it was simply too much information!

This month Zak interviews self proclaimed spread betting guru Vince Stanzione.

“TRADiNg iN ANiNCoRRECT WAY iS VERY SiMiLAR ToSMokiNg. You gET THE BuZZ FRoM THEoCCASioNAL REWARDS, WHiCH kEEPS You HookED oN A PATH WHiCH oTHERWiSE iS DoiNg You LiTTLE oR No FAVouRS.”VS: Yes you are so right, success breeds success, not necessarily that they have trading experience. I will give you an example: I had a lady I taught to trade that ran a successful florist shop.


VS: I do not use one system, I would describe myself as the “Bruce Lee” of trading — I change and adapt, but at heart am a trend trader, although sometimes can be contrarian, and I also pay heed of seasonality and sentiment.

ZM: You may not have just one system for taking positions, but of course what kills many a tradingaccount is not the winners but the losers thatoutpace them. What are your key signs that you were wrong and it is time to get out? Is it just amatter of a certain amount of money, or are there other cues that tell you that the factors that brought you into a trade are no longer valid? Do you find it easy to take a loss — something which “bad traders” have great difficulty doing.

VS: Starting out, I hated taking losses, I would hold on and “hope” that those bad short term trades would reverse, of course they largely became bad long term ones! I would cut the winners far too quickly as we all like instant gratification. As Imatured, I learned to do the opposite. I do have a fairly mechanical exit, so if a trade is not making money and falls below a certain point it is cut and in many cases I reverse a trade from long to short and then back again. I have done that a few times with Netflix (NFLX) the last three years.

ZM: I have over the months interviewed several leading figures in the markets, whether trading for themselves or managing funds, and one thing has stood out which I did not expect. In general, it would appear they are successful at trading (a losing game for most retail traders) because they are exceptional — either in discipline, IQ, knowledge or in most cases all of the above. In other words: just as they arewinners in trading, they would be in business, the academic world or probably in anything they put their minds to. Is there any point getting involved in the market if you know you are not highly gifted?

VS: I am very interested in people and psychology. I made my first million from car phones by watching trends and what the yuppies wanted. I have no real formal qualifications. Yes, exceptional people, be it in sports, business, TV or trading are wireddifferently and in many cases have a differentemotional make up. We don’t really care aboutrejection or being wrong.

ZM: You have been quoted as saying that your main successes in the markets have not come from day trading, but more from what would be called position trading / trend following.

She knew nothing about shares or markets, but she did know about profit margins, buying from the flower market, having too much stock and so on. So really her life experience was helpful whentrading stocks. I did a study on the most successful age groups, see: http://www.express.co.uk/finance/city/350636/Silver-surfer-traders-put-youngsters-in-the-shade

ZM: What would you say that the minimumrequirements are for successful trading — financial, knowledge, mindset, account size?

VS: I think the minimum to open an account these days is £20,000; it can and has been done on less, but really that is what you should be starting with. Knowledge wise, really sometimes less is better than more, my workbook takes the assumption that you have never traded before. Mindset? Really someone that does not get upset when trades don’t work out, losing is part of the business and people that are not in a hurry to see instant results generally are more profitable.

Returns are also not evenly distributed, trading is not a job or pay packet where you earn X a month, some months you will make nothing or lose money, other months you will do very well. Anyone that is self-employed will know it’s not a smooth curve. I think trading is like dating, if you are desperate for a date it shows and women don’t want to date adesperate man! If you are desperate to make money, you overtrade making trades when you should do nothing and normally it ends badly.

ZM: Can you describe to us your trading style/system and why you think it gives you an “edge” over the markets?

“RETuRNS ARE ALSo NoT EVENLYDiSTRiBuTED,TRADiNg iS NoT A JoB oR PAY PACkET WHERE You EARN x A MoNTH, SoME MoNTHS You WiLL MAkE NoTHiNg oR LoSE MoNEY,oTHER MoNTHS You WiLL Do VERY WELL.”

Zak Mir Interviews - Vince Stanzione


Europe is worrying, however, the demographics are very bad — too many older people being supported by less and less youth. Turkey though is the outlier as it has good demographics.

ZM: So you think issues such as the bankingsector, the Eurozone and a possible bubble in China will be resolved successfully? Arguably, the U.S. got us into the financial crisis in the first place via Sub Prime, and has kept us, economically, down with the Fiscal Cliff — an issue which is still bubbling under the surface?

VS: Well if you read certain media, the world isalways ending, so far the world has not (in fact wasn’t it supposed to on Dec 12th last year?!) and if it does then you have nothing to worry about! But seriously, humans are very resourceful and adaptive, that is why we don’t use a typewriter or travel by horse and cart anymore. The times I have read that oil is going to run out, yet truth is we have plenty and cars are far more economical.

ZM: Here in the UK we have the possibility of the Scots leaving and the UK itself leaving the EU in 2017. Would you not be particularly bearishregarding sterling and also the bubble in Central London real estate? This, along with the regulatory issues in the City of London, give the impression that Zone 1 London may no longer be the “Monaco” style safe haven it used to be?

VS: Well a weaker sterling makes Londonproperty look cheaper, especially if you’re fromNorway or Canada. Markets normally overshoot up and down be it property, fine wines, art or classic cars, but then buyers and sellers regroup and prices adjust, basic demand and supply dynamics reassert. It is hard to predict if the UK would leave the EU, but I don’t see the UK turning in to some Third World country. The UK is very respected in many fields such as biotech, fashion & design, television, music & film, tourism to name a few, and these areas can bring a lot of money into the UK.

Are such trades based on technical or fundamental triggers? Is there a typical set up?

VS: Both, it is funny. The so called techniciansoften quote fundamental issues and I think they should be used together. My typical set up is a stock that is either hated or loved and then I start seeing a trend change — Apple both up and now down is a good example.

ZM: The impression given in the media is that you are something of a millionaire recluse who was successful in the business world and then came to trade the markets. Why do you want to actually help others make money — shouldn’t people find out for themselves as you did?

VS: My first business was set up at the age of 12 — selling computer games on tape. My dad was a hairdresser and wanted me to take over thebusiness (looking at my own hair — no way!), and so I got a job in FX as a junior in 1985 after I watched a program on BBC2, it’s here on the net — http://www.youtube.com/watch?v=q9brMMxI1RY. I then got wiped out in the 1987 crash and started the car phone businesses.

Then I decided to have another go at investing in 1990/1991 (when I had money) and bought penny shares such as Next at 11p via an entity then known as Sharelink. I opened my first IG index account in 1990 and I still have the account today (it’s a very short account number!). But I learnt from others such as Jess Livermore, Jim Rogers and NickDarvas, so why not pass my skills on? But you’re right, traders must make their own mistakes, it’s part of growing up in the markets.

ZM: Do you have a macro view on the UK / West-ern Economy, and is it as grim as the 20 year Japa-nese Zombie economic scenario that many people fear? Do you have any strong views on Gold, and especially equities now that they are back at multi year highs?

VS: I believe we are in a glorious time, the US economy will power ahead and the Dow couldeasily hit 20,000 or 30,000+ in the next 10 to 15 years. The new shale energy and biotech/healthcarediscoveries are underestimated. I liked gold and platinum 10 years or so ago, but sold it all a few years ago bar a few Canadian Maple leafs. I don’t own gold now as I think you can make more elsewhere. Also I don’t buy that gold is an inflation hedge, so are stocks — you would have made more in McDonalds the last 20 years than gold. I do still own somepalladium.


“i BELiEVE WE ARE iN A gLoRiouS TiME, THE uS ECoNoMY WiLL PoWER AHEAD AND THE DoW CouLD EASiLY HiT 20,000 oR 30,000+ iN THE NExT 10 To 15 YEARS.”

Capital Spreads is a trading name of London Capital Group Ltd (LCG), which is authorised and regulated by the Financial Services Authority and a member of the London Stock Exchange.

Spread betting carries a high level of risk to your capital and can result in losses that exceed your initial deposit. This advert should not be construed as investment advice.

Focus swings back onto the PIIGS as the euro crisis deepens. Do you:

a) Eat less pork and consider becoming vegetarian

b) Sell the Euro in expectation that the Eurozone will eventually break-up

Can you profi t from your predictions? Apply today at CapitalSpreads.com,great value for Spread Betting and CFDs.

April 2013 | www.financial-spread-betting.com | 59Capital Spreads is a trading name of London Capital Group Ltd (LCG), which is authorised and regulated by the Financial Services Authority and a member of the London Stock Exchange.

Spread betting carries a high level of risk to your capital and can result in losses that exceed your initial deposit. This advert should not be construed as investment advice.

Focus swings back onto the PIIGS as the euro crisis deepens. Do you:

a) Eat less pork and consider becoming vegetarian

b) Sell the Euro in expectation that the Eurozone will eventually break-up

Can you profi t from your predictions? Apply today at CapitalSpreads.com,great value for Spread Betting and CFDs.



PATEL oN MARkETS BE A GOLD MEMBER

Spread betting exists because of gold (it is in fact how ig got started in 1972 and which actually stands for “investors gold”!). So we actually owe the ability to spreadbet to gold!

Alpesh Patel

Alpesh Patel is the author of 16 investment books, runs his own FSA regulated asset management fi rm from London, formerly presented his own show on Bloomberg TV for three years and has had over 200columns published in the Financial Times. He provides free online trading education on www.alpeshpatel.com

Is spread betting on gold any different to other spread bets? Is there more money to be made because of the nature of the trends and underlying fundamentals?

I think the answer is yes to both. Let’s take a look at gold spread bets for anotherreason when it comes to profi ts... A longer term gold bet for me is based on the image below:


PATEL oN MARkETS

Patel On Markets

In my own trading of the yellow metal I am not perturbed by the short term noise and therefore taking a long term bias in my position. The key issue at the moment is that gold has clearly come off the boil. For longer term bulls this should be welcomed as it allows one to purchase at lower prices.

When I look at the longer term chart and MACD momentum indicator it is clear that the uptrend that began in 2002 — the 10 year bull market in gold — is very close to being broken. But, according to my analysis, it has not yet broken and so I believe we are now staring at a clear purchasing opportunity — just look at how the Cyprus crisis again caused prices to rise to give you an idea of the tail risk hedge benefits that gold provides...

GOLD THREE YEAR CHART

I am of course well aware that Soros cut hisholdings in the SPDR Gold Trust - the largestexchange-traded gold product, by 55 percent last quarter. And Goldman Sachs predicts the metal’s 12-year rally will “end as a U.S. economic recovery gathers momentum.” Well, the US experienced strong growth during the earlier part of the last 12 years and gold went in one direction during this period too. And now, we have a lot of rich Indians obsessed with gold for weddings (there are a lot of us Indians looking to marry!) and Chinese reserve additions etc. etc.

So, it’s safe to say that the longer termfundamentals remain intact, but for the moretrigger happy punter, what about the short term? Is gold right to buy now from a short term basis?

I’ve always found that the gold price trendssmoother than with many other spread betproducts and across time frames of five minutes to one day. I certainly have made good money recently trading the range between the $1,600 and $1,800 on the daily chart.


“i AM oF CouRSE WELL AWARE THAT SoRoS CuT HiS HoLDiNgS iN THE SPDR goLD TRuST - THELARgEST ExCHANgE-TRADED goLD PRoDuCT, BY 55 PERCENT LAST quARTER. AND goLDMAN SACHS PREDiCTS THE METAL’S 12-YEAR RALLY WiLL “END AS A u.S. ECoNoMiC RECoVERY gATHERSMoMENTuM.”


SPREAD BETTiNg oN goLD FoR PoRTFoLioDiVERSiFiCATioN

I first traded gold back when I was a Congressional Intern (the same time as Monica Lewinsky actually, although my duties were less onerous — think“cigars”!!). Of course, in 1994, the same time Istumbled across the web, I should have beenbuying Amazon and AOL stock, not trading gold.

Buying gold should actually have less to do with whether you think the price will rise and more to do with the diversification benefits to yourportfolio. Consider that during the recent major stock recessions it is those that have beenholding gold that would have outperformed pure stock investors alone.

For instance, between 1929-1934, 1968-1974 and 2000-2002, the S&P 500 fell around 63%, 34% and 26% respectively. However, the price of gold rose 69%, 347% and 9% respectively. And so it seems that gold actually performs exceptionally wellduring major bear markets.

Indeed, even if you bought the leading-lights like Coca-Cola and Disney in 1972, you would not have seen a positive return until 1985; whereas gold spot prices went from $44 to $341 over the same period.

The value of gold is not its unique metallicproperties or its glimmer in jewellery, but that it is negatively correlated (does not move in tandem) to most other asset classes. The economic forces that determine the price of gold are oftenopposite to forces determining the price of other asset classes. And that is the benefit to both a long and short term portfolio — uncorrelated returns history.

When long term bonds decline (which is verylikely over the next five years), there is a tendency for gold to go up. When equities decline, there is an even greater tendency for gold to go up. indeed gold is more negatively correlated to stocks than any other asset classes that are also deemed to be portfolio diversifiers such as foreign stocks, realestate, bonds, small cap stocks and emergingmarket stocks.

With these asset classes, studies show highercorrelations when markets decline (the so-called ‘contagion-effect’ where markets fall in tandem) implying that the benefit of the safety net ofdiversification is lost when it is needed most. Not so with gold — it retains its diversification benefits even under volatile falling markets.

There is one further unique property of gold if you like continuity — it’s staying power; gold will still be here in 100 years, whereas only one company in the Dow Jones Industrial Average remains in the Dow from one hundred years ago: General Electric. Food for thought...



MARCH TRADING DIARY

RoBBiEBuRNS’

Plenty buy something because it’s gone down a lot. That’s it. They think it will turn, but often don’t bother researching it at all. “Hey, it’s gone down loads,” they cry. “I’ll have some of that.” However, of course, if you don’t look at why it fell or cannot reason why it might recover, it can end up in the continuing falling knifescenario, and that finally guillotines you! Think JJB, HMV, HIBU etc., to name but a few inrecent years. Others buy a stock because a “guru” tipped it or someone on a bulletin board suggested it (yes, you’d be surprised, some people are that stupid). Again, sheer laziness makes them buy. Simple greed also makes them buy loads of small oil or commodity stocks. “I’m going to be a millionaire when they find the oil”. Then,after they bought something they knownothing about, they don’t have a plan of action. When shall I cut my losses? When will I take profits? And where the bloody hell is theremote control? So you may ask, what makes me buy? Well, I always like to buy two things: potential bidtargets, and companies which aretransforming themselves from somethingboring into something more exciting.

So, to make this article more exciting... I know full well as an internet magazine you are likely to read a bit of any article then get bored and push the arrow for the next page — I do this myself even if I am reading my own article... So, farewell to most of you at this point, enjoy the rest of the mag! For the two of you now left reading, finding a bid target is common sense. You need to look for a company that doesn’t look expensive then think who might buy it and why. Which is why I have loaded up with 32 Red (TTR). Bought loads at 40 and more at 45. Why? Well, easy one. It’s a small bookie that runsinternet casinos, poker and bingo. Revenues are up, customers are up and it is expanding. I think it’s a classic takeover candidate in aconsolidating sector. You may have noticed loads of bid action in this market, like thebuyout of Sportingbet? Any number ofgiant bookmakers could snap this up for small change.

i was pondering to myself the other day - well, i have no-one else toponder to - none of my friends are in the slightest bit interested in shares. i was thinking what makes someone buy or spreadbet a share? And why do so many people lose their shirt? or even pants?! Then i thought about the many e-mails i get, horror stories etc...


So, I think it’s likely at some point 32 Red will be bought. In the meantime, results are out on March 21st, a week after I wrote this, so I could look like a total plonker if results are bad! Still, I don’t care, given that at this stage of this article there is probably only one of you left reading. Another way to find a bid target is to find a smaller company in a nice niche sector of a marketplace doing the same kinds of things bigger companies are doing and whombusiness would be complementary to them. Now, talking of companies transformingthemselves from boring to gleaming new… St Ives (SIV) has been a favourite of mine for a while. Bought in the early 90s, more in theearly 100s and more in the 120s. Why?Because only a short time ago it was seen as a boring old fashioned printer. Now it is moving away from that and becoming a more trendy marketing services company and so beginning to attract a higher rating.

I’m after a re-rating to at least 150, maybe even 200 in time.

A previous winner like this for me was Carclo which was a really boring engineer, butgradually changed to become a more tech-like company with touchscreen technology. That paid off with a rise from 80p (boring engineer) to 450 (gleaming technology). How do you find companies like this? Have a look at company reports, see if you can spot a company that talks about new products, new divisions. Another way is to look forcompanies making disposals then acquisitions which is how I spotted St Ives. That’s it; no point me writing anymore, you already pressed next. Ha. New technology means no concentration span, right?

Robbie Burn’s Trading Diary

** Robbie offers Spreadbet Mag readers who have not yet booked a seminar with him a £50 discount on his next seminar on April 26th. Email robbie for details at [email protected] with “SB mag offer” in the subject line. ** The seminars involve spending a whole day with live markets with Robbie and are suitable for beginners and improvers. **


WHEN uSiNg SToPS iS NOT APPRoPRiATE

Special Feature

The primary problem however with stops is the knowing just where to place them — if you place them too close to your entry level then you willlikely be shaken out of a position before you even got started. Place it too far away and it will reduce the capacity for you to get your calls wrong, i.e. 10% stop losses with six trades consecutively wrong (it happens!) will put a decent sized hole in youraccount...

The purpose of this piece is not to suggest at what percentage level a stop should be placed — that of course is up to you and your individual riskparameters and trading style; intraday trading in currencies will, by necessity, require tight stops whereas “swing” trading will allow larger latitude. No, the idea behind this is to illustrate one prime trading strategy where a stop loss can actually be detrimental to your account.

Let me explain. We rewind a few years when Ipersonally made a large sum spread betting in a company called ITM Power. I don’t say this to boast — far from it, as I got clobbered on somesuccessive trades during 2011 (as did many) — but to illustrate precisely how the use of a stop would have changed my account profit profiledramatically over the years.

To simplify what I am about to explain: the basic premise is that when you are “position” building — that is adding to a trade (generally on weakness and ensuring that you do not exceed yourindividual position size limit of course), and most typically in a stock as opposed to an index orcurrency (although there are situations where this does not apply as I will relay below) — the use of a stop, if you have done your research, may notactually be appropriate.

one of the first things a novice trader — whether spread bettor or otherwise — is taught, is that the use of stop losses is paramount. it is deemed to be thenumber one trading rule that you should obey before venturing into themarkets. A rule that is founded upon very serious risk management principles. Prime example — if you let a loss run to 50% of the original purchase price then it requires a return of 100% to break back even — i know, unfair, eh?


When Using Stops is Not appropriate

During the ensuing 12 months into late 2010, the stock gyrated around and returned to the mid teens numerous times and so, on paper, creating a loss of around 25% on my original entry price — a level the trading “masters” would say you should not allow to accrue. Now, my point here is that I (a) had done my homework, (b) was comfortable with my position size and (c) was able to deal with the “draw downs”, and so what sense did it make to sell the stock as a reaction to another party who was selling?

“DuRiNg THiS PERioD, AN Ex DiRECToR WAS APERPETuAL SELLER oF THE SHARES, SEEMiNgLY FoR HiS oWN PERSoNAL REASoNS, ANDCoNTiNuED To HANg oVER THE SHARE PRiCE.”

CHART - ITM POWER

In my own ITM situation, I began purchasing the stock during mid 2009 around the low teens and continued to add to the position right into the low 20s, reasoning that the cash backing (although being depleted) of 20 odd pence per share was a good safety net for me. During this period, an ex director was a perpetual seller of the shares,seemingly for his own personal reasons, andcontinued to hang over the share price. Meanwhile, new management were doing all the right things and putting the company back on a propercommercial footing.

Sometimes, when you are holding an equity position, and particularly on the purchasing side (as opposed to being short) where you are hoping to be in at a major bottom (prime example being certain of the goldmining stocks at the moment), what can happen if using the arbitrary stop level is that you can be forced out of the position only to see the shares then shoot higher — a typical characteristic of a major bottom actually. Of course that is immensely frustrating...


A recent academic study by Cabot Research revealed that where stop loss triggers at 20, 30 or 40% were in place and the proceeds redistributed across other holdings, investors would have done worse than holding onto the stocks. Reason?unrealised short term losses tend to bounce back.

There may also be other reasons entirely detached from the investment basis of the stock that causes somebody to sell. Using a topical example again, there are suspicions at present that “Mr Sub Prime King” John Paulson is shortly going to be forced to sell either some of his gold ETF holding or his weighty positions in many of the mining companies he is invested in due to over exposure andconsequent margin calls it is speculated he is under. If you happen to purchase some of these stocks at the current lowly valuations and a “whale” is forced to liquidate that creates a temporary spike lower, then why on earth should you follow the distressed/forced seller if arguably the valuation story has got even more attractive?

Special Feature

“THE kEY iN THiSSTRATEgY You WiLL No DouBT HAVE REALiSED iS To ENSuRE THAT THEPoSiTioN SiZE WHEN BuYiNg iNTo PERCEiVED MAJoR BoTToMS, iS NoT So LARgE THAT iT CAuSES You A PRoBLEM SHouLD THE SToCk HAVE A FiNAL, TYPiCALLY V SHAPED SHAkEDoWN.”You want to be there on the right side of the V and if you are adequately capitalised then you are sound of emotion — that is my mantra anyway!

As relayed in the introduction to this piece, thisstrategy can actually also apply to indices andcurrencies where the dislocation from fair value has reached material proportions and so the chances of a further sharp drop of a similar magnitude is slim. Although we have hindsight on our side now, the nadirs of 2009 were prime examples — you didn’t want to buy the FTSE at 3800 with a stop at 3700 only to see it rally hundreds of points in days... We also think we are in a similar situation with theBritish pound against the Australian dollar now — after a near 50% depreciation over the last four years, the chances of another fall of this magnitude are, in our opinion, almost non-existent and so building a position with manageable trade sizes is a preferable way to capture the hoped-for upside as opposed to sticking a stop at say 2% away from the current value. Again, subject to appropriate capitalmanagement regarding trade sizing.

I purposely have not mentioned that this strategy be used on the short side, i.e. when selling a stock short that you perceive as being overvalued. If you think about the primary backing of this approach, it is all about the “safety margin” — making sure that the chances of further dramatic falls are slight. With a short position in a stock, currency or index, one thing I have learnt over the years is thatovervaluation can go way, way, way beyond what you would ever believe possible and stops mostdefinitely should be adhered to when short. The Nasdaq bubble of 1999/2000 is where I learnt this the hard way, but that is a story for another day…

I must stress that this strategy is only really suitable for asset backed stocks with low and, ideally, no debt, i.e. where the probability if you are buying at a discount to NAV of around 50-70% of furthermaterial falls is low (absent outright fraud, of course, and which does happen now and gain). In fact, the scenario painted here is precisely what we aredoing at the moment with selected Gold miners such as African Barrick and Avocet Mining where we personally believe the asset backing ismaterially greater than the current stock prices. If the shares fall a little further, then this increases the value to us, not diminishes, and so we reason that arbitrarily selling is a nonsense. Our approach is in fact akin to that which Warren Buffet takes with his investment and has its roots in value basedinvesting.

The key in this strategy, you will no doubt haverealised, is to ensure that the position size when buying into perceived major bottoms is not so large that it causes you a problem should the stock have a final, typically V shaped shakedown.


Special Feature

REAL LiFE“TRADiNg PLACES”PRE-RELEASE OF ECONOMIC DATA AND SUSPECTED INSIDER TRADING

No doubt many of you have seen the infamous move “Trading Places”starring Eddie Murphy and Dan Ackroyd? if not, after you’ve fi nishedreading this piece, go out and rent it - it’s a cracking movie that will not only amuse you but teach you a little about how banks and brokersmanipulate markets!

If you’re a day trader as opposed to a medium term investor, you’ll know that it’s even more important to receive timely information at the same time as all other traders and market participants receive it. In just a few seconds, or even in just a fraction of a second, the Dow Jones, the EUR/USD pair, Gold, or the FTSE 100 index can change materially and,depending on your leverage, swing your account from profi t to loss and vice versa.

Insider trading legislation in the US and UK is actually largely concentrated on equities and, to ourknowledge, there have been no convictions,certainly in the UK anyway, in relation to trading with advance knowledge of sensitive information in relation to economic data (non equities).


Special Feature

If a trader could get hold of a number, such as GDP growth, unemployment rate, consumer confi dence etc. even just a fraction of a second beforeeveryone else, then in the current era of HFT (High Frequency Trading) he has a material edge that he can profi t from at the expense of other investors. It has taken a while for the US regulators to realise this, and so in an attempt to put in place legislation to catch up with this new area of market advantage by certain participants, the US Offi ce ofManagement and Budget (OMB) has released tight rules governing the defi nition, preparation, release and dissemination of statistical products by federal statistics agencies.

And so a player with this information is much more likely to get away with what is effectively “insider trading”. In fact, it would probably be very hard to bring a conviction against a trader who madematerial profi ts in currencies.

In order to foster improved public understanding of the data when released, and to guarantee a high degree of accuracy of any initial commentary about the data from the various news agencies, the OMB now regulates the dissemination of the data.Pre-release access to federal relevant data is notrequired by the OMB, but it is recommended when the data is particularly sensitive or market-moving. Under those circumstances, pre-release access can (and should) be granted. Nevertheless, pre-release access should, as stated in the directive, be“provided only within the confi nes of securephysical facilities with no externalcommunications capability”. Of course this still leaves open the potential for material abuse byunscrupulous types.

THE LoCk-uP PERioDEach of the individual federal agencies in the US are for themselves deciding whether they will, or will not, give pre-release access; who will have suchaccess, and the conditions under which it will be given. There was in fact already a decades-oldtradition in the US of releasing data such as GDP growth, non-farm payrolls, and CPI numbers through a select group of media companies. Historically the department responsible for the release of the data had a special room for that effect where reporters were given access to the data a few minutes before the offi cial release in order that they could prepare their own reports and release them at the offi cial time. During the pre-release access and the offi cial release time, reporters could not release data to anyone outside the room. The data is subject to an embargo in a procedure known as “lock-up”.

What is interesting is that these security provisions do not apply in the UK and, in a prime examplerecently, how even in the US these security measures are largely blunt mechanisms; in the hours leading up to the downgrade of the UK’s AAA rating at the end of February, the pound fell suspiciously innervous trade against many currencies.Coincidence? You be the judge of that.

“iF A TRADER CouLD gET HoLD oF ANuMBER SuCH AS gDP gRoWTH,uNEMPLoYMENT RATE, CoNSuMERCoNFiDENCE ETC, EVEN JuST A FRACTioN oF A SECoND BEFoREEVERYoNE ELSE, THEN iN THE CuRRENT ERA oF HFT (HigH FREquENCY TRADiNg) HE HAS AMATERiAL EDgE THAT HE CAN PRoFiT FRoM AT THE ExPENSE oF oTHER iNVESToRS.”When you’re drinking a coffee at your offi ce,waiting for the employment report and the non-farm payrolls numbers, reporters from Bloomberg and Reuters are now, what is rather startlingly termed, “arrested” inside a tight room with concrete walls (of course!) at the US Department of Labor (DOL).

The actual preparation before such a release is aserious affair in the US these days, given themarket-moving potential of economic stats. If the market has been anticipating a soft labour number and the actual fi gure blows it out of the water, to place an order to buy a few hundred lots of the S&P or a large long dollar trade ahead of this couldeasily be lost given the size of these markets.


Real Life ‘Trading Places’

PREMATuRE RELEASE AND iNSiDER TRADiNgAlthough the need for limited pre-release iswidely accepted as necessary, you can see that it most probably puts the wider market at adisadvantage relative to the privileged insiders. With the advent of super fast modern computers and HFT, a fraction of a second actually makes all the difference, and any leak ofinformation that may not be noticeable to our eye at fi rst sight will make a huge difference for analgorithmic system receiving it immediately before the offi cial release of the data.

The FBI and the SEC have been analyzing trading data and have in fact spotted patternssuggesting that some traders may have had access to data slightly before the release time. Companies like Bloomberg and Reuters, to name a few, have been under close scrutiny.

Thus far, the Government has not fi led chargesbecause they haven’t been able to directly link the trading patterns seen to specifi c actions bymedia companies. The investigators have found fl aws however allowing reporters to sendinformation just before its release.

Even though no charges have been brought against anyone so far, some measures have beenintroduced to improve security. The DOL hasadopted a new policy of no longer allowingreporters to bring bags, outerwear, personalcomputers, electric devices and equipment, writing utensils or calculators into the lock-up room. The DOL provides their own computers and therequisite pencils and paper. They have even gone as far as to provide coats and umbrellas forbroadcasters doing live shots! The lock-up rooms were also rebuilt in order to block wireless signals.

“THE FBi AND THE SEC HAVE BEEN ANALYZiNg TRADiNg DATA AND HAVE iN FACT SPoTTEDPATTERNS SuggESTiNg THAT SoME TRADERS MAY HAVE HAD ACCESS To DATA SLigHTLY BEFoRE THE RELEASE TiME.”


Special Feature

GOLD INTRA-DAY CHART

Until a few minutes before the release, the market was moving calmly, but then suddenly volatility spiked and gold dropped from 1,579.45 to 1,576.45 in just one minute. The drop continued and after three minutes the change amounted to $10.19, a large 1019 points move.

In order to understand how all this translates into a trade, let’s assume that a trader decided to open a short position on gold staking £100 per point move. At 19h01, he would have a profi t of £30,000, and at three minutes past a stunning £101,900.

MARkET-MoViNg iNFoRMATioNIn order for you to understand how important the dissemination of economic data is for a trader and just how much of an advantage it can be to have information prior to its release, we show you the effect of the last FOMC Minutes release on February 20, at 19h00 in the chart here using gold to illustrate this.


Real Life ‘Trading Places’

CHART - GOLD TABLE

It is true that you could have tried to open a position right after the report was offi cially released, but would you have time to read into it and then pull the trigger with the right decisions? Would you be able to get your order fi lled? We doubt it. With thousands of orders going through the system, you would probably miss at least part of the change.

Now think about getting the data a few minutes before it is released and so having the time to think about it, to decide on the best trade, and to place an order just a fraction of a second before everybody else. Itbecomes clear how great an advantage you would have.

CoNCLuSioNThere’s no doubt that pre-releases of information have given unfair advantage to a restricted group ofpeople. Similarly, I am pretty certain that, markets being markets and human nature being what it is, people have made fortunes from the previously quite lax procedures in the US and that the system is continuing to be abused today in the UK and Europe where security of releases is much less. Perhaps it’s time the UKauthorities took their lead from the US in ensuring a fairer marketplace for other instruments than stocks?

“NoW THiNk ABouT gETTiNg THE DATA A FEWMiNuTES BEFoRE iT iS RELEASED AND SoHAViNg THE TiME To THiNk ABouT iT, To DECiDE oN THE BEST TRADE, AND To PLACE AN oRDER JuST A FRACTioN oF A SECoND BEFoREEVERYBoDY ELSE. iT BECoMES CLEAR HoW gREAT AN ADVANTAgE You WouLD HAVE.”


ToM HouggARDARE TRADING COURSES ACTUALLY WORTH THE MONEY?

Every day I receive emails from training companies offering to teach me how to trade — for a fee of course. They usually attempt to appeal to myimagination, tempting me with financial freedom or a trading system that never fails.

I’ve never really had an opportunity to assess the validity of the clams made in the adverts. I taught myself how to trade, had some help along the way from the right people and, as any trader withlongevity will pay testimony to, have certainly had my fair share of ups and downs.

We are pleased this month to host the inaugural piece from respected trader and market commentator Tom Houggard in which he touches upon a topical issue regarding trading and investing seminars andcourses - a particularly engaging piece with warning signals for many readers that you should be aware of before you part with your hard earned cash.

I even run seminars myself, together with mytrading partner, David Paul. However, I have never had an opportunity to see the material that theother seminar providers offered. Then I met Nina.

I was trading live at the London Investor Show. The setting was simple: delegates paid a fee to sit and watch me trade for three hours and hopefully they would learn some valuable lessons. I promised I would buy them all a drink if I made money!



Tom Houggard

After the show, whilst we were having our drinks (!), Nina approached me. Nina was a lady in her 60s who wanted to learn to manage her own finances, and even trade the Forex market to increase herincome. So she had taken a two-day course with a well-known seminar provider, promising her the tools and skills to navigate the global currencymarkets.

We spoke about the course, and I asked her how it was going. Nina told me she was super excited about the prospect of trading from home. She was studying and studying, but she wasn’t sure she was headed in the right direction. She asked if I would help her.

I get asked for help quite often. There is no shortage of people who want a mentor. I wanted a mentor too when I started out. It is natural and it makesperfect sense to have someone guiding you in the right direction. So I agreed to help Nina, provided that she didn’t expect me to spoon feed her. I would direct her and she could ask questions along the way.

She asked me to take a look at the trading manual she had been given at the two-day course. I thought it would be a good idea to have a look at what she had learned so far. Nina told me that she had paid £2500 for the 2-day course and she had signed up for a handful of private lessons, costing her anadditional £700.

It sounded like a lot of money to me, but if thematerial had set Nina on the right path andprovided her with the correct tools, then I had no doubt she would soon be able to make thatinvestment back.

She handed over the manual and I started flicking through the pages. I counted about 400 pages in the manual, a fairly sizeable course manual by any standard.

It looked good, very stylish. Then I looked inside and my heart sank.

The first 15 pages were filled with images and big colourful boxes telling the seminar delegates that they would learn how to make money from this manual. So far so good. I suppose that is a fair start to the course. However, the tone of the manual had been set. It felt style was more important thancontent. Key statements would take up a whole page, with big bold letters.

The next 35 pages described how to trade the trend and attempt to stay away from the counter-trend moves. I don’t suppose there is anything wrong with that advice. I am not sure that it takes 35 pages to explain this, but there were a fair few chartsillustrating the points made. It was somewhatsimplified, but then again I accept that you can quickly confuse the living daylights out of a seminar delegate if you begin to show them a non-trending chart resembling a heart cardiogram.

The next 15 pages made me smile because they went to great lengths explaining to Nina what a Forex price quote looked like. “We are looking for PIPS”. Indeed we are. The statement was backed up by images of shopping carts and mouse clicks.

Let me pause here for a second. I am not looking to ridicule the seminar company or Nina (I am notgoing to mention the name of the seminarcompany, and Nina is not her real name). Nina was a total beginner, but she was sold on the idea that she could take a weekend course and be on her merry way to earning a substantial income from trading. If only life was that simple...

In the free seminar she attended (before she signed up for the two-day course) she was left with no doubt that the purpose of the two-day workshop was to equip her with the ability to make a substantial amount of money from trading.

“i’VE NEVER REALLY HAD AN oPPoRTuNiTY ToASSESS THE VALiDiTY oF THE CLAMS MADE iN THE ADVERTS. i TAugHT MYSELF HoW To TRADE, HAD SoME HELP ALoNg THE WAY FRoM THE RigHT PEoPLE AND, AS ANY TRADER WiTH LoNgEViTY WiLL PAY TESTiMoNY To, HAVE CERTAiNLY HAD MY FAiR SHARE oF uPS AND DoWNS.”



In part, Nina was incredibly naïve. In part, theseminar company is preying on those who think they can make financial freedom a reality through investing in a weekend course, and although they provide a disclaimer to say that their course is only theoretical in nature, Nina was given no reason to believe that she may have unrealistic expectations.

What is a bar chart?

What is a MACD (Moving Average ConvergenceDivergence)?

The candle chart section was so basic, describing only what a Doji was! I smiled to myself because only three months earlier I had worked my way through an 80 page research paper from two PhD students from Berkeley who had tested the Doji chart pattern across 25 years’ worth of stock market data in the US, and had conclusively refuted thecommonly accepted axiom in technical analysis that this pattern holds a predictive power. Yet Nina’s mentor relied heavily on this pattern as part of the teachings.

250 pages into a course manual at a course price of £2500 and Nina had learnt pretty much theabsolute basic material of technical analysis and largely nothing more. She had also been told what website to go to every morning so she could be prepared for news announcements. Really. Let me save you £2500 and suggest you download the technical analysis guides on this magazine’s site — for free — and go to www.uk-wire.co.uk eachmorning to check the co announcements! As I flicked through the remaining pages I had to take my hat off to the seminar company. The first strategy Nina was taught on day two required her to subscribe to a charting package. So the cost of the seminar wasn’t just £2500. Nina also had to pay about £300 a month to subscribe to the charting package so she could use the piece of software the training company had given her for the firststrategy. I have no doubt that the training company would receive a retainer from the charting package company for referring clients.

By the time I reached page 400 Nina had learnt about Pivot points. She had learnt a strategy which allowed her to trade a currency pair which is range trading within a pair of Bollinger bands, and she had been given a program which would tell her when the one minute, the hourly and the four hourly trend was headed in the same direction so she could attempt to jump on board the trend.

She had been given a couple of pages of trading psychology and she had a manual full of charts where the set-up worked time and time again.So it all sounds well and truly like Nina was on her way to financial freedom, huh?

Wrong!

“AND HADCoNCLuSiVELY REFuTED THECoMMoNLYACCEPTED AxioM iN TECHNiCALANALYSiS, THAT THiS PATTERN HoLDS APREDiCTiVE PoWER. YET NiNA’S MENToR RELiED HEAViLY oN THiS PATTERN AS PART oF THETEACHiNgS.”However, as I flicked through the course manual I realised how naive Nina had been. She had been manipulated into thinking that she could make trading her second income, simply by following a weekend course. Let me be clear dear reader. If you think spending £2500 or £25000 on aweekend course is going to turn you into a hot shot FX trader making hundreds of thousands of pounds a year from a capital base of £10k or £20k you will, with almost 100% certainty, be sorely disappointed. Spend the money on roulette instead — you’ve got at least 50% odds there, whereas in FX trading the failure rate is 90%+ over a 12 months period — sort of begs the question what happened to all those guys that went on the seminars, don’t you think?!

By the time I reached page 250 in this coursemanual, I tallied what Nina had learnt:

What is a moving average and why the 200-day MA is gospel?

What is a trendline and how to draw it?

What is a candle chart?


Nina had no clue what the difference between a range bound and a trending market was. She had no idea what I was talking about when I mentioned higher highs and higher lows. She was clueless as to what I meant when I spoke about basic TA terms such as pattern recognition, Range Expansion and Contraction, wedges, pennants, head andshoulders, to name a few. The course manual made a point out of saying that Nina didn’t need to know about these things.

Up until this point I had been oblivious to whatpeople were taught in these weekend courses. Iassumed that they were taught some decentmaterial considering the outrageous price tag. I thought that the other seminar providers like me would teach some of the material they haduncovered as part of their own research. How else can you justify a price tag in the thousands for a course?

Of course, the manual finished off with themandatory page offering the delegate to make them an expert if they attended the follow-onmaster course! “So, what do you think?”, said Nina as I was reading the last page of the course manual offering the course delegates the opportunity toattend a follow-on master course normally priced at £4999, but if you sign up today, you receive a 50% discount.

I think you have been royally screwed Nina, was my response. I didn’t say that, but that was how I felt.

The course manual is fine, but it is so basic and so devoid of anything resembling individual thought from the course guru who promotes it, that it isalmost fraudulent to call it an expert trading manual.

Levi Strauss, the maker of the denim jeans we all know so well, prospered from providing clothing and tent canvas to the gold prospectors during the California Gold Rush in 1845-55. You can’t blame Lewis Strauss for selling clothing to the ones hoping to strike it rich, even if the prospectors rarely found anything of value.

I am not going to be a crusader against charlatans in the trading industry. People have a responsibility to use discretion and common sense before they sign up for expensive courses. The internet is full of testimonials, and if Nina had dug a little deeperbefore signing up for “financial freedom” sheprobably would have thought twice about handing over thousands of pounds.

Bottom line: Nina is responsible for her own path. So can you blame a smart business man fromprospering on the modern day gold rush called trading? I suppose not, but as a trader who has seen his fair share of ups and downs it doesn’t sit well with me that so many newcomers never stand a fighting chance because they are given extremely poor advice and they are paying through the nose for it too.

And this is why I have taken the pen to write this article, and to help people like Nina.

I went on to Amazon.co.uk and I found all the books that I really value, the books that have actually taught me something about trading.

I managed to find 20 trading books which I would recommend to my own child if he was interested in trading. I would say, ‘read these and then we can talk strategies.’

So how much did those 20 books cost? In fact they cost only 13% of what Nina paid for her “expert”Forex course. Yes, that is right. Those 20 books which will teach you a solid foundation of trading and investing cost a grand sum of £349.

“oF CouRSE THE MANuAL FiNiSHED oFF WiTH THEMANDAToRY PAgE, oFFERiNg THEDELEgATE To MAkE THEM AN ExPERT, iF THEY ATTENDED THE FoLLoW-oN MASTER CouRSE!.”

Tom Houggard



i have listed the books below, in noparticular order, but with my comments next to them.

Pit Bull: lessons from Wall Street’s Champion Trader by Marty SchwartzAn outrageous book about an outrageous trader, it’s inspiring and uplifting and although it doesn’t give advice on techniques it gives a great account of what it takes to be a trader.

Market Wizards and New Market WizardsInterviews with traders from the US — great read and you get a good sense of what it takes to make it in this competitive industry.

Hedge Fund Market Wizards by Ed SeykotaI love Ed Seykota because he once taught a trading course over 12 weeks, spending 10 of the 12 weeks teaching the student what to do when they didn’t follow the rules set out in the first two weeks of the course.

Charlie D: The story of the legendary bond traderLike Pit Bull it is a great story about a trulyremarkable individual trading in the pits in Chicago.

7 winning strategies for trading forexIt is a basic but solid book and the strategies are many times better than the one that Nina was taught.

The financial spread betting handbookI put in Malcolm Pryor’s book here for anyone who doesn’t know what spread betting is about.

opening Price PrincipleMy mentor Larry Pesavento wrote this book about the markets’ tendency to move away from the opening price 70% of the time. It is an easy read so it’s worth the £10.

Fibonacci Ratios with Pattern RecognitionTHIS IS A MUST HAVE book even if you are not a fan of technical analysis. Larry goes to great lengths explaining patterns and how they unfold in themarkets. It is one of the more expensive books on the list, but deservedly so.

The Naked Trader: how anyone can make money trading shares. The book turned into a course would have cost Nina £4000 rather than the £9 I paid for it. Enough said.

The Daily Trading Coach: 101 lessons forbecoming your own trading psychologist. (This is my bible — thank you for writing this book Mr Steenbarger)

High Performance Trading by Steve WardA great book by our local London talent and there is even a quote from yours truly in there somewhere, saying that trading is hard work (sorry for stating the obvious again).

Reminiscences of a stock operatorYou want to learn about the markets and what moves them up or down, then you must buy this book. It is really a story about Jesse Livermore, one of the true greats of the last century, butunfortunately with a propensity to yo-yo trading.

Trading in the zone by Mark DouglasThis is a timeless classic on trading psychology, a tough read, but worth it over time.

Technical Analysis of the financial market byMurphyThis was my first TA book and it taught me more about technical analysis than any course ever could.

Japanese Candlestick charting by Steve NisonHere is a piece of math for you: Nina spent £2500 for 400 pages of a course manual. So she paid £6.25 per page. There are 10 pages on candlecharts (a disgrace — to say the least) costing her £62,50. What Nina learnt over those 10 pages at the Forex Expert course, Steve Nison will cover on the first page of his bible on candle charts, and it will only cost you £41.

Trade Your way to financial freedom by TharpA great read, but not for beginners

Trading for a livingThis is a great place to start for a beginner;Alexander Elder does a great job in telling it as it is, and his follow-up book “Come into my trading room” is also worth the money.

So there you have it. My list of books, which if you read just half of them, you won’t suffer the disillu-sion and the aching wallet that Nina did. Once you then have a solid foundation, then you can consider attending courses.

if you have any questions for me, i can becontacted on www.whichwaytoday.com or on email at [email protected]

Tom Hougaard


Currency Corner

CURRENCY CORNERTHE uLTiMATECoNTRARiAN PLAY LoNg gBPuSD? When the uk economy was so ignominiously downgraded by Moody’s late in the day on Friday 22nd Feb, we posted a comment on our blog that, more often than not, it pays to “buy the front page” i.e. do the opposite of expectations...

Headlines from financial journalists the world over were screaming that the pound wasgoing to collapse and that British citizens would be thrust into third world status and no doubt stuck with holidaying in Skegness forever and a day. Now I am sure the good citizens of “Skeggy” would wish that this were true, but, as sure as eggs are eggs, the pound has, thus far, resolutely refused to work to the script and collapse. In fact, as we can see from the chart here that is a broad measure of the pound against a basket ofcurrencies (symbol FXB), it has barely budged.

My fellow contributors and technicians Zak and Dom are both also very bearish the pound and, as I have said many times, it is of course differing views that make a market. i however take anopposing view based on the followingfundamental and technical arguments.

FuNDAMENTAL ViEWHaving just returned from the US, I can relay that for the first time in many years the US actually feels expensive. The cost of a beer and a meal in a non major town is moderately (around 15%) more expensive than the comparable in the UK — this is real anecdotal evidence ofundervaluation of the pound relative to the dollar.

With the US trying to foster self sustainingmomentum in their exports, then should the US dollar rise much further this is likely to crimp these efforts somewhat. As we have seen inrecent years, however, make no mistake that “Helicopter” Ben Bernanke is determined to stave off deflation and be top dog in the “beggar thy neighbour” currency depreciation stakes.


The only “spoke in the works” for him is the newJapanese PM Shinzo Abe who is equallydetermined to push the yen lower. I do not think he will sit idly by and allow 4 years of QE todisappear down the drain in the name of a rising dollar... Should the dollar rally much further, do not therefore be surprised to see Mr Bernanke ratchet up the rhetoric over his “QE infinity”.

There have been dissenting voices within the FOMC in recent months in relation to the QE and ZIRP policies in the face of the increasingly evident strengthening momentum in the US economy.Various regional governors have been looking for the exit on QE and the eventual rundown of the $3tn balance sheet that the Fed has built up since 2009. We have sympathy with the dissenting view as laid out in our Q1 guide, and in fact believe that US rates should already begin to be normalised, but where Mr Bernanke is concerned, we aredealing with anything but a “normal” CentralBanker.

Our very own Governor — Merv “the swerve” King — has, over the last 12 months, attempted to lean into the wind of the depreciation in the pound, but just this last week his tone seemed to change somewhat.

“THE PouND HASACTuALLY FALLEN BY ALMoST 25% oN A TRADE WEigHTEDBASiS oVER THE LAST 5 YEARS AND YET ouR ExPoRTS HAVE goNE NoWWHERE. iT iSACTuALLY DoMESTiC CoNSuMPTioN WE NEED To RiSE, NoT REDuCE (WHiCH iS WHAT HAS BEENHAPPENiNg), giVEN THE SERViCE BASED NATuRE oF ouRECoNoMY.”

He made clear that he felt the pound was now “properly valued” and that the Bank of England was certainly not trying to engineer a furtherdepreciation of the currency. Perhaps he has finally pulled out his economic text book and realised that pushing the pound down further with nodiscernible benefits to the economy given ourdecimated export base is only likely to forceimported inflation up and so squeeze the man on the street further? The pound has actually fallen by almost 25% on a trade weighted basis over the last five years and yet our exports have gone nowhere. It is actually domestic consumption we need to rise, not reduce (which is what has been happening), given the service based nature of our economy. I personally think that Mr King’s policies in recent years have been shocking. To allow inflation to constantly nose over the target of 2% and expound the virtues of the QE programs that have merely helped the major banks and done absolutelynothing for the wider economy will be his legacy; a legacy most certainly not to be proud of.

With the impending arrival of Mark Carney as the new BoE Governor, I also think that, contrary to many people’s expectations of radical newpolicies, upon him taking up his seat at the head of the table, he will not want to preside over a run on the pound that renewed QE and rising inflation would all but guarantee to result in.

In fact, during his time at the Canadian Central Bank, he has seen how a strong currency hasactually helped the Canadian economy through keeping inflation low and so interest rates too. Don’t therefore be surprised to see a repealing of the QE programs in the UK under his stewardship and an earlier move towards normalising UKinterest rates, as the current policy of printingmoney has patently not worked aside from justreflating equities.

The market has not even remotely begun tofactor such a scenario in, and if it does, ameaningful rebound in the pound will be right around the corner.

On a PPP basis, it is said that fair value for the pound is around $1.48. I disagree, I think$1.65-1.70 is more appropriate and looking at the “Big Mac” index below we can see that they also see the pound undervalued by around 10% — this was taken at the start of 2013 and with the pound down a further 6% at the time of writing, this would also fit with our fair value of more like $1.65-1.70.

Currency Corner


The ultimate contrarian play - Long GBPUSD?

“iN FACT, DuRiNg HiS TiME AT THE CANADiANCENTRAL BANk, HE HAS SEEN HoW A STRoNg CuRRENCY HAS ACTuALLY HELPED THE CANADiAN ECoNoMY THRougH kEEPiNg iNFLATioN LoW AND So iNTEREST RATES Too..”

CHART - BIG MAC INDEX

Coupled with the technical position we interpret here, we feel that the ingredients are in place for a sharp rebound for the embattled British currency — almost universal negative sentiment, majordislocation in value against most major currency pairs, potentially misplaced dovish expectations surrounding Mark Carney the new Governor to be, and the lack of follow through selling on the AAA downgrade.

TECHNiCAL ViEWAs we can see from the attached chart, to describe the pound as oversold is something of anunderstatement.

With an RSI measure of 38 on the daily chart and rising in tandem with ascent in recent daysfollowing King’s comments, the stage looks set for a run to the underside of the previous support measures which equates to around $1.54 on the GBPUSD pair.

The MACD cross-over also adds fuel to the bull case and if you look at where I have circled, you will see that meaningful rallies ensued when crossing to the upside from this deep oversold territory.Finally, looking at the stochastic set up, again it is in a heavily oversold region that has previously, when coupled with the MACD measure detailed here, presaged sharp rallies.


Currency Corner

CHART - GBP/USD


Special Feature

CAPiTAL SPREADSCLiENTDEMAND FoRCuRRENCiESRETuRNS ASVoLATiLiTYiN iNDiCES DiVESTo say that the start of the year for global equity markets has been impressive would be something of an understatement.

With the FTSE 100 at multi-year highs, the FTSE 250 forging ahead to record highs and across the pond, the Dow Jones also making it to newrecord highs one would have expected clients to remain resolutely bullish on the indices. Who’d also have thought that not even fi ve years on from the banking crisis, the words “record highs” would be passing our lips,especially given the challenging economic backdrop? Amazing really.

Interestingly, throughout last summer, autumn and into winter with themarkets grinding higher, it wasn’t until the New Year that client behaviour at Capital Spreads really changed.

It was as if they couldn’t handle the breakout to the upside in indices and so migrated back to trade currencies and there’s probably good reason for such a change in behaviour. Clients will more often than not oppose the trend hoping to catch a top or bottom in the market. In the case of theindices, bar the odd little retracement, they’ve just kept on going north and a lot of clients have been swimming against the tide with a few fi ngersbeing burnt in the process...

BY ANguS CAMPBELL

Angus Campbell is Head ofMarket Analysis at Capital Spreads, a trading name ofLondon Capital Group (LCG). He graduated from the University of Exeter with BA Hons inBusiness and Accounting, and began working in the City in 2001. His expertise in all matters to do with the fi nancialmarkets has led to him makingregular appearances ontelevision channels includingBloomberg, CNBC, CNN, BBC and Sky News and he isfrequently quoted in majornewspaper and onlinepublications.


Special Feature

CLiENT ACTiViTY

FTSE 100


Capital Spreads

And so, as the end of the first quarter of 2013approaches, it is time to reflect on what has been a resolutely few months of bullishness and that has taken even the most optimistic of investors bysurprise. Along the way there have been a number of retracements, some more pronounced thanothers, with one due to the unexpected Italianelections and the other due to the messy bailout of Cyprus.

These sell offs have all been rather short lived and proven to be more of a buying opportunity for the bulls. However, certainly for our spread bettingclients, whilst a few have taken outright longpositions in individual stocks, when it comes to the indices, they have, sadly, been largely short all the way up. Their attempts to find a top andsubsequent sell off have, at the time of writing, been in vain. Not surprisingly, they have beenseeking opportunities in other markets.

EuR/uSDFX has been the main beneficiary of our clients’inability to make decent gains from the indices. Not only has the uncertainty surrounding Italy andCyprus made the euro pairs more popular amongst clients, but some of the clear trends such as the Yen’s depreciation have attracted punters back to currency trading too.

The turnaround in the amount of FX trading done by our client base has been significant and may be the start of a wider migration back to currencies, although at this moment in time it’s hard to see it overtake trading in indices as it did in the latter part of 2010 and early 2011. Back then, there was amajor shift into currencies at the expense of indices due to the relatively low volatility in equity markets compares to other assets classes, in particular FX.

It would seem that clients need some more excitement in the indices otherwise this migration back tocurrencies looks set to continue. Perhaps the most recent developments in Cyprus might be the catalyst for clients to look again at the FTSE and Dow?

While LCG attempts to ensure that the information herein is accurate at the date the information was produced, however, LCG does not

guarantee the accuracy, timeliness, completeness, performance or fitness for a particular purpose of any of the information provided herein

and under no circumstances are they to be considered an offer, solicitation to invest or be construed as giving investment advice.


Special Feature

A SPECiAL FoCuS oN THE YoRkE ARMS MICHELIN STARRED GOURMET RESTAURANT

WITH ROOMS IN YORKSHIRE


As a chap born and bred in “God’s very own County” —Yorkshire of course! I thought it would be a nice idea within the mag’s lifestyle feature section to bring to our readers’ (no doubt highly refined!) collective palates a local establishment thatoffers exemplary food in a truly inspiring natural setting — the Yorke Arms.

The Yorke Arms


Special Feature

Taking a much needed break following the usual frenetic couple of weeks that lead up to thewrapping up of the latest edition of our magazine, I took my wife off for a couple of days to Ramsgill in the heart of Nidderdale — real James Herriot country. In an all too fleeting interlude during this season’s cold and grey winter we were treated to a glorious couple of days of late winter sunshine and fresh, still air on our sojourn — the sun really must shine on the righteous!

On the first Thursday in March it almost felt like we had the Dales to ourselves as we embarked upon a bracing six mile walk (which was supposed to a be a small jaunt!) around Gouthwaite reservoir andreturned — aching of limb and panting at the mouth for a drink (surprising even in the cold air how thirsty it is walking six miles!) — to a crackling fire at the Yorke Arms and where we contemplated our dinner for the evening perusing a menucomprising of delectable food largely sourced from local producers.

The restaurant is housed within the main building which was once a hunting lodge (pretty apt for a seasoned trader don’t you think?) and has a homely, as opposed to contemporary feel to it. This is in contrast to a number of the rooms at the hotel that have been refurbished recently and now boast muted neutral linens and also large rainfallshowers — replete with complementary Molton Brown products — just the ticket after a long walk to soak the old muscles! We stayed in one of the rooms in the courtyard area and were verysatisfied with the quality of accommodation and space which also incorporated a separate smallsitting area in addition to the bedroom and lots of natural light.

It obviously goes without saying that with adecorated chef (and proprietor), Frances Atkins at the helm in the kitchen, that the food is exemplary. Indeed, the establishment has held a Michelin star no less since 2003.Depending on the season, game is well represented (well, it is Yorkshire) and herbs and vegetables from their own local garden are used in the dishes. It would be hard for the food to come any fresher...

The wife enjoyed a Whitby cod with samphire which was cooked perfectly and I partook in the quail — delicately cooked and presented as one would ex-pect at a Michelin star restaurant. Our meals were washed down with a nice Californian Pinot Noir — the wine list being very extensive and running the gamut from affordably priced new world wines right through to budget busting French vintages depending on the success of your recent spread betting!

With local market towns like Pateley Bridge,Grassington, Burnsall and Skipton all on yourdoorstep as well as being within striking distance of the beautiful spa town of Harrogate, there’s a great deal to do in this unspoilt and relativelyunknown part of England.

I can wholeheartedly recommend a visit to the Yorke Arms for a bit of R&R, and in particular in late spring/early summer when the Dales are probably at their most glorious what with long days, local gardens open and the daffs on display — oh, and of course the requisite hostelry visit to indulge in a regional guest ale... Just be sure to pack your hiking boots as you’ll need the exercise to work off the fantastic food and build a hearty appetite each day!

We stayed as guests of the Yorke Arms andfurther details can be found on their website: www.yorke-arms.co.uk.



JoHN WALSH’SMoNTHLY TRADiNgRECoRD

The reason for this disastrous day was quite simply down to over trading the FTSE — an index which I have had a little success with in the past but which, sure enough, came back to bite me in theproverbial bum! I made all the mistakes as a trader I know not to make; I averaged down on a number of bad FTSE trades which of course went evenfurther against me, and to make matters even worse I then increased my trade size in an attempt to make back what I had already lost (which I also know not to do). This only served to make a bad situation even worse... For me, the biggest mistake I made was I stopped trading what I saw and traded what I thought — big mistake.

Finally, I came to my senses after about eight losing trades (way too many, I know), but with the damage already done to my account. I finally got back the same old me and took the emotion out of things and closed all my index trades as well as my open equity tradesregardless of them being in a profit or loss, and made the decision that it was probably time that I took alittle break from trading. I can honestly say that was the best thing I did, as all of the world indices of any note that day finished at a loss. I have not opened a new trade since.

This month has been the worst month of my very short trading career with the 21st February being my own personal Black Friday due to losing almost a third of my account in the morning session including the nice gains i had made to my account in the previous couple of months. The gains had been made trading primarily equities, but more recently i ventured into trading indices since. Do not feel too sorry for me however as my losses are very small in comparison to the £100,000 i won during the City index Trading Academy at the end of 2012, and lessons have been learned.

TRADING ACADEMY WINNER


“REgARDiNg MY EquiTY TRADES, iT SEEMS To HAVE BEEN A gooD MoVE To CLoSE THEM AS MY LoNMiN (LMi) LoNg PoSiTioN WouLD HAVE goNE EVEN FuRTHER AgAiNST ME AND HiT MY SToP LoSS WHiCH WouLD HAVE RESuLTED iN MYBiggEST EquiTY TRADE LoSS BY A CouNTRY MiLE.”

John Walsh’s Monthly Trading Academy

Regarding my equity trades, it seems to have been a good move to close them as my Lonmin (LMI) long position would have gone even further against me and hit my stop loss which would have resulted in my biggest equity trade loss by a country mile. Regarding my Barratt Developments (BDEV) long position and my Stobart (STOB) short position, if I had kept them open I would have made a couple of more points profit on both, but I’m still happy,nonetheless, to have closed them at the profit I did. And finally, regarding one of my long term favourites, as well many other retail traders’ favourites, my long position on Gulf Keystone Petroleum (GKP) would be at an even bigger loss now were it not for my closing it for a smaller one.

So where do I go from here? I’m a big believer in always looking forward and never looking back and I’m lucky enough to never let trading losses get to me, so the plan for this month is to go back tobasics and take my time and see what happens with the FTSE as it is currently, at the time ofwriting this, just below the 6500 after recentlynosing above it. Which way will it go? Answers on a postcard please!

“

My main aim this month is to get back to tradingequities on a more long term basis instead of trying to go for the quick easy money with indices — look where that has got me... I have always had a share watch list of some kind even before I actually started trading and will revert to watching it, and, when I think the time is right, I will be making some new trades which I will of course keep everyone updated on my Twitteraccount which can be found @_JohnWalsh_ as well as my monthly article in this great publication.

Thanks again for taking the time to read this, and always look forward to writing about my trading be it good or bad.

Remember: you control the trade, the trade does not control you (as i had to re-learn this month!).

John


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