Evil Knievil’s how to short stocks Binaries Heritage Oil

N
IO
IT
ED
AY
M
The e-magazine created especially for active spreadbetters and CFD traders
Issue 4 - May 2012
Evil Knievil’s how to
short stocks
Continued - Part 2
Binaries
All your favourite
columns including...
Directors dealings and Guess the FTSE
end month value to win £1000
What are they and
how do you use them?
Heritage Oil
Special stock focus
Editorial
Contributors
Simon Cawkwell aka Evil Knievil
Simon Cawkwell aka Evil Knievil lives in West London and has successfully
navigated the markets for nearly 45 years. Although he started working life as
a chartered accountant, he came to prominence with the collapse of the
infamous Robert Maxwell’s affairs where he cleared £250,000 profit some
twenty years ago - no small sum back then. His specialisation is short-selling
and he is a self confessed inveterate gambler. One thing’s for sure he doesn’t
pull punches and tells it as it is!
Dominic Picarda
Dominic Picarda is a Chartered Market Technician and has been
responsible for the co-ordination of the Investor’s Chronicle’s charting
coverage for 4 years. He is also an Associate Editor of the FT and frequently
speaks at seminars and other trading events. Dominic holds an MSc in
Economic History from the LSE & Political Science.
Robbie Burns aka The Naked Trader
Robbie Burns - The Naked Trader has been a full-time trader since 2001 and
has made in excess of a million pounds trading the markets. He’s also
written three editions of his book “Naked Trader” and the “Naked Trader
Guide to Spreadbetting” and runs day seminars using live markets to explain
how he makes money. Robbie hates jargon and loves simplicity.
Reliance on content
disclaimer
Material contained within the Spreadbet
Magazine and its website is for general
information purposes only and is not
intended to be relied upon by individual
readers in making (or refraining from
making) any specific investment decision.
Spreadbet Magazine Ltd does not accept
any liability for any loss suffered by any
user as a result of any such decision.
Please note that the prices of shares,
spreadbet’s and CFD’s can rise and fall
sharply and you may not get back the
money you originally invested,
particularly where these investments
are leveraged.
In comparing the investments described
in this publication and website, you should
bear in mind that the nature of such
investments and of the returns, risks and
charges, differ from one investment to
another. Smaller companies with a short
track record tend to be more risky than
larger, well established companies. The
investments and services mentioned in
this publication will not be suitable for
all readers.
You should assess the suitability of the
recommendations (implicit or otherwise),
investments and services mentioned in
this magazine, and the related website, to
your own circumstances. If you have any
doubts about the suitability of any
investment or service, you should take
appropriate professional advice.
The views and recommendations in this
publication are based on information
from a variety of sources. Although these
are believed to be reliable, we cannot
guarantee the accuracy or completeness
of the information herein.
As a matter of policy, Spreadbet
Magazine openly discloses that our
contributors may have interests in
investments and/or providers of
services referred to in this publication.
Foreword
Welcome to the fourth edition of Spreadbet Magazine.
Well, it’s certainly been an interesting month, to say the least, what with the collapse
of Worldspreads and a re-ignition of debt fears in the Eurozone, this time with Spain in
the crosshairs making for difficult market conditions again.
In the wake of the Worldspreads collapse, we have written a special piece this month
on just what you need to know as a client with regards to your personal classification.
After the collapse into administration of now 3 companies in recent years - Global
Trader, MF Global and Worldspreads, we think that our readers should be made
aware, as much as possible, of their client statuses and the implications of these.
Starting from next month, we are pleased to report that we will be enhancing our
offering to Spreadbet and CFD traders through a daily blog on our
www.spreadbetmagazine.com website, and which will feature topical updates on
breaking news stories with, of course, our own specific ‘take’ on these items. This will
also be free to all readers. If there are any other suggestions as to what you’d like to
see on our website (and in the mag), as ever, please email me at
[email protected] We particularly encourage letters/emails from our
readers, and for each one printed we will send a bottle of (decent!) French red another subject close to my heart!
This month we conclude our special 2 part Evil Knievil piece on shorting stocks and
also re-visit some of our stories on certain companies that we have written about so
far this year including JJB, Groupon and Xcite Energy. I am also pleased to introduce
another new contributor to you - Precogz, who have a unique way of analysing the
markets. I’d recommend you visit their site - www.precogz.com - to see what they are
all about.
Our main article attempts to take a view on where we are in the never ending bull:
bear market cycle. We, of all people, know that trading the markets is not easy, and so
hopefully a true spreadbettor’s take on where we currently are will at least provoke
thought amongst our readers, and maybe concentrate your views and help you with
your strategy.
I sign off with a few words to reflect on - leverage - it’s like alcohol - there to be
enjoyed, but remember to control it!
Profitable trading to you all.
Richard
May 2012 | www.spreadbetmagazine.com | 3
Contents
Bull market
continuation or
impending bear
market?
School Corner
Binaries explained
A traders
guide
To successful
spreadbetting
20
14
Heritage Oil
26
Unloved, forgotten and
materially undervalued
6
36
Large cap focus - HSBC
41
Worldspreads collapse
44
Research in Motion
46
Options Corner
49
Commodities Corner
52
Robbie Burns aka The Naked Trader
54
Evil Knievil’s guide to successfully shorting stocks
A FatProphets feature on the banking giant.
What you need to know and questions to be asked.
A Conviction Buy recommendation on the eponymous Blackberry maker.
This month we take a look at how to use calendar and ratio spreads.
InterTrader’s Dafni Sedari covers silver this month.
Our regular feature writer regales us with some trading wisdom.
Part 2 of our special feature by the Uk’s most feared bear raider.
4 | www.spreadbetmagazine.com | May 2012
60
Xcite Energy
64
Groupon update
66
Directors dealings
70
Dominic Picarda’s Technical Take
73
Small cap feature
74
Precogz
76
Competition - Guess the FTSE 100 month end level
Contrarian UK’s 2012 outlook.
A fresh look at the online coupon company.
One noteworthy sale and two interesting purchases.
Our special contributor Dominic Picarda covers the Dow Jones, S&P 500 and the FTSE 100.
JJB Sports update.
Range Resources, Rocket Science and just who are Precogz?
Don’t miss your chance to win £1000
May 2012 | www.spreadbetmagazine.com | 5
Special Feature
Bull market
continuation or
impending bear
market?
The beauty of spreadbetting and CFD trading is that it presents the
opportunity for active traders to position themselves either long or
short on a multitude of financial instruments.
6 | www.spreadbetmagazine.com | May 2012
Bull market vs bear market
This flexibility gives you an edge over typical long only
share traders and, as regular readers will now no
doubt be becoming acutely aware of from our
educational posts that continually hammer this point
home, as long as you control your leverage then the
ability to switch from bull to bear at the click of a mouse
is a powerful trading tool.
My own investment ideas have proved to be somewhat
thinner on the ground as latent value began to disappear
from the stock market the last few months. Coupled with
a reduction in Directors’ buying and indeed an increase
in selling on their part in recent weeks and months, the
warning signs from a fundamental perspective were
becoming ever more apparent.
2012 has so far proven to be quite profitable (at least
the first 2 months were anyway!) for many
spreadbetters. My sources at certain spreadbet firms
tell me that clients ‘en bloc’ made money during Jan &
Feb but that the buffers have been hit in recent weeks.
As Eurozone debt worries have resurfaced and the
bull run from September last year has become
somewhat exhausted from a pure technical position,
simply sitting on the long side has not delivered in
recent weeks.
From a technical perspective, one of the proprietary
indicators that we use that gives us a measure of
market sentiment (click here if you would like more
details about this) and that is analysed from a
contrarian perspective has been flashing warning
signals for several weeks now. A key component of our
indicator is the so called “Put:Call ratio” that is based
on the level of activity in the US indices as reflected in the
options market.
May 2012 | www.spreadbetmagazine.com | 7
Special Feature
Bull market vs bear market
If you are minded to the bull side, then I would suggest
averaging into positions over a period of a couple of
weeks on any weak days that take us back towards the
5500/5600 level. The RSI that is moving back towards
the 50 level is also adding weight to the case that a nice
set-up for a long swing trade is in the making.
In the charts below and to the right, you will see how this
seems to have an uncanny record of alerting its
followers to bottoms in the market in particular.
Whenever it exceeds the 1 level (i.e. 1 put being
purchased for every 1 call) - albeit with a typical 4 - 6
weeks lead time - the market seems to rise strongly
over ensuing months (circled on the chart). With the
ratio now down at the 0.6 level, we are definitely back in
the bottom of its range (and which has historically been
a neutral sign at least and in a number of instances an
outright danger signal). This is definitely worth keeping
a close eye on.
On the S&P 500, the MACD lines have begun to roll over
and the index recently pierced the 20 day moving
average to the downside. Having not touched the 50 day
since December of last year, a case for further
consolidation with a probable downwards bias can
certainly be made. A move down towards the 1350 level
would represent around a one third retracement of the
move from December 2011 - markets have a habit of
retracing previous moves by typically one third or one
half, and this can be expected with a reasonable degree
of conviction in the next few weeks.
Back in the UK, for home biased traders, the weakness
that we have seen over the last 5 weeks that has taken
the FTSE 100 index down from just under the 6000 level
to 5600 (at time of writing) - a move of approximately 5%
- is likely to have been influenced to a fair degree by end
of tax year selling, certainly within the mid and smaller
cap area of the marketplace anyway.
Conversely, for those of a bearish tendency, a decisive
break back below the key 5500 level will likely presage
a difficult summer, and a re-test of last year’s 4800 level
cannot be ruled out. The weekly chart shows a
potentially worrying roll over in the MACD and again
illustrates just how critical the 5600 level is - particularly
on a weekly closing basis.
It is in this area that I am now seeing renewed value
opportunities present themselves once again in stocks
like CWC, Blnx and many of the sub £250m oil explorers
like BLVN & XEL. It is Spreadbet Magazine’s view that
2012 is likely to be a stock picker’s market from here-on
out, and that simply buying an index and remaining long is
not the best strategy.
With the FTSE 100, as you can see from the chart to the
right, strong support is centred around the 5550/5600
level and any penetration of this price-band on heavy
volume that ends with a strong rise on the day back over
5600 is likely to signal that the re-tracement
consolidation we are currently seeing is likely coming
to an end.
One thing that I personally find useful is to construct a list of positives and
negatives for the markets, to produce a kind of scorecard of bull and bear
ndicators. This generally serves me well as a guide to the likely medium-term
direction. We can thus construct the following check-list:
8 | www.spreadbetmagazine.com | May 2012
May 2012 | www.spreadbetmagazine.com | 9
Bull market vs bear market
Bull Points
1
Underweight retail positioning
Retail investors (unfortunately the perpetual ultimate contrarian indicator) in the UK continue to remain underweight
equities and their participation in the stock market in recent years has been much reduced. This is, of course, a
potential source of future buying power and therefore a bullish point.
2
Equities remain cheap v Bonds & Cash
The primary argument for the bulls is that alternate asset classes - basically cash and bonds remain very unattractive
relative to equities. You can still buy quality blue chip stocks with well covered dividend yields (and that are likely to
rise in coming years - outpacing inflation) of around 4-5%. With cash rates at 0.5% and bond rates around 2%, this is a
powerful incentive for equity investment - an incentive that has not yet been taken up by the retail investor mainstream.
3
ISA & new tax year sales season generally a bullish time
The ISA sales season and new tax year has just begun - this is a seasonally positive time for equities, particularly when
coming off a period of recent price weakness and where new buying opportunities are becoming more evident.
4
Media coverage
As with the point about retail investors seemingly constantly buying at tops and selling at bottoms, when the media is
positive about an asset class this is typically because the commentator finds comfort in the majority - in essence they
will be bullish on what has gone up and bearish on what has gone down - another indicator that the trend is becoming
exhausted. How many times have you seen scaremongering economic stories and TV news headlines (late last
summer, in particular, springs to mind) precede price rises in equity markets? At present, the media is certainly not
bullish on equities and this is therefore a contrarian bull sign.
10 | www.spreadbetmagazine.com | May 2012
May 2012 | www.spreadbetmagazine.com | 11
Special Feature
Bear Points
1
Large outstanding margin position in the US
In the US stock market, in particular, there is presently a large margin debt situation - historically a signal that has also
preceded price weakness. The US has sharply outpaced the UK this year with the FTSE up just over 2%, yet the S&P
up a whopping 11% year to date (at time of writing). Remember the old investment adage - “when the US sneezes the
rest of the world catches a cold” - if the US should continue to grind lower and the excess margin get squeezed out of
the system, it will likely prove difficult for the UK market to make headway against this backdrop - another re-iteration
of our view that stock-picking will be key to generating good returns this year.
2
No more QE
Additional QE (Quantitative Easing) looks to be off the table for now following remarks from the FOMC at their last
meeting in early April and also given increasing signs of a strengthening labour market. With no new injection of
incremental, cheap liquidity (there is, however, already a large amount of liquidity washing around the global financial
system that will tend to support asset prices), then this is likely to at least reduce one of the tailwinds behind the recent
price strength in equities.
3
Fixed FX spreads.
(No change there then.)
Waning directors stock buying across all markets
As has been flagged in the last 2 issues of our magazine, directors’ participation in the market through purchases of
their own stocks has been neutral at best, with a steady reduction in the volume of purchases and in fact net selling in
recent months. As we are now in a new tax year, it will be interesting to see just how this group of influential investors
react over the early part of summer, and following recent price weakness in the market.
The one market that Spreadbet Magazine does
remain particularly bullish on is Japan, as flagged at
the start of the year in our inaugural issue that
included our “10 Contrarian bets for 2012.” The
Nikkei 225 index has been the star global performer
this year - up a whopping 24% YTD at the peak in
mid-March, with an almost unbroken run of weekly
rises from just over 8000 to 10250. With the yen
weaker against its major trading pairs and thus
providing a bullish backdrop for Japanese
exporters (a large component of their index) and the
Nikkei breaking its 4 year downtrend decisively, we
remain resolutely long here and continue to
recommend bull positions in the 9300/9500 index
range - the 50% retracement level.
To conclude, we believe that the battle between bulls
and bears is likely to continue on in the near term with
no meaningful victor. In the UK, the 5550/5600 level on
the FTSE 100 is likely to be a good point to look to get
long, and we expect Japan is likely to continue to show
strength this year relative to most other markets, indeed,
we strongly suspect that this market is in the very early
stages of a multi-year bull run.
If you are struggling with your own trading in this difficult
environment and particularly on indices and
commodities, then we’d definitely suggest that you take a
look at LS Traders trading system that is a medium term
trend following system and that has delivered fantastic
returns over the last 5 years.
Click here www.lstrader.co.uk/spreadbetmag for a free 1 months trial that is being offered
exclusively to our readers.
12 | www.spreadbetmagazine.com | May 2012
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May 2012 | www.spreadbetmagazine.com | 13
Special Feature
A traders guide
to successful
Spreadbetting A tried and tested way to put
the odds back in your favour
and begin to spreadbet
profitably.
A Traders guide
My name is Phil Seaton and I am the system creator and owner of our proprietary
trading system - lstrader.
In this brief article I am going to explain just what the LS Trader system is,
how it works and the philosophy behind it.
Firstly, I have been trading since the late 90s, and my
focus for much of the past decade has been almost
exclusively on spread betting, although I do have a
background in futures trading prior to that. When I
initially began trading I made all the mistakes that
novices make, but I learned from them quickly. I
realized that to try to figure the markets out single
handedly was an ominous task so I did the obvious
thing; find traders that are successful and learn from
them and copy what they do.
Longevity and results = confidence
This led to my reading virtually every book on trading
that I could get my hands on and exposed me to
literally hundreds of ideas and concepts, many of which
were contradictory! The question was then, how do I
sort the wheat from the chaff? How do I find out what
really works and is really profitable in the long run? It
seemed obvious to me that I had to start with a clean
canvas, and test every concept and theory, so this is
what I did.
The first question to answer was, which main approach
was I going to take? Trading essentially falls into one of
two categories, or a mixture of both: fundamental
trading or technical trading. I realized very quickly
that very few individuals will ever succeed trading on
fundamentals. There are many reasons for this, but in
short, it is simply impossible to stay on top of all the
information and news that is available for all the
markets that I wanted to trade and, even if I could do
that, there is no way that I could gain an edge when I
am effectively going up against all the numerous major
funds with their seemingly unlimited resources and
research staff. This is simply not an approach that will
work for the typical stay at home trader and I stand by
that view today. Very, very few individuals will ever
succeed using a fundamental approach to trading.
14 | www.spreadbetmagazine.com | May 2012
Therefore, I knew I had to be technical in order to
succeed and still have some time left over in order to
lead a normal life! Over the next few years I
researched and tested out every kind of indicator
that you can name, from moving averages to
Bollinger Bands to Stochastics. The list could go on,
but essentially you name the indicator and I have
tested it rigorously against real market data that
spans many different markets. In fact, I used an
exhaustive 20-year data history. I therefore gained
an edge as to what works and what does not work in
the markets, and from that knowledge I built what is
now known as the LS Trader system.
The original system research was completed in 2002
and the system has remained pretty much as it
originally was with only a few minor tweaks and
occasional changes to the portfolio of markets that it
trades. This is possible only because the
philosophy that the system is built upon is so sound
and the system itself so robust that it will very likely
continue to work well indefinitely without much in
the way of further revision.
What my research did conclusively reveal is that
there are 4 principles that must be incorporated into
any successful trading system and these 4 key points
form the basis of the LS Trader system. These 4 key
concepts are:
1.
2.
3.
4.
Trade with the trend
Let winning trades run
Cut losing trades short
Manage risk
If a system incorporates the above
4 rules, it is very likely that it will be
profitable in the long run if
followed consistently.
May 2012 | www.spreadbetmagazine.com | 15
Successful spreadbetting
Let’s just take a very brief look at each of these 4 points:
1
Trade with the trend
You will likely have heard the phrase, “an object in motion tends to stay in motion”. This means in market terms that
the most likely outcome at any time is that the market will continue to move in the direction that it is currently heading.
Therefore by following the trend instead of trying to fight it, you are taking advantage of the laws of physics and
momentum. It is no accident that the vast majority of long term successful money managers use systems that are
based on trend following, and it still remains the most profitable approach to trading the markets almost a century
after it was first pioneered.
2
LS TRADER
www.lstrader.co.uk
SPECIAL
1 MONTH TRIAL
FOR
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LS Trader system v FTSE 100
Benefits of the LS Trader system
Let winning trades run
Low Frequency trading system - 5 trades
per week on average.
Easy to use and can be followed in less
than 1 hour per week.
No matter how good a system or a trader is, he is always likely to have more losing trades than winning trades. This is a
fact, in spite of what many others may tell you with bogus claims of 80% plus win ratios. If you analyze the track record
of the most successful traders, their win ratio is often between 30-40%. In order for them to be profitable, it is obvious,
then, that the winners must be larger than the losing trades on average. This can only be accomplished by allowing
winning trades to run, in order to give them a chance to grow into large outsized winning trades and observing rule 3.
3
Of paramount importance to successful long term
trading is cutting losses short
One must always allocate a small amount of capital and have a set worst-case scenario exit point before entering a
trade, and only relatively small bets must be placed. One should never take a large destabilizing loss. Furthermore,
once one has set a stop loss it should never be moved away from the market in order to give a trade more room. Stops
should only ever be moved closer to the market, initially to reduce risk and subsequently to lock in profits as the trend
progresses.
4
Manage risk
The worst thing that can happen to a trader is that he loses all his money. This is akin to the roulette player who loses
all his chips. Once the chips are gone, you can no longer play. This is known as the risk of ruin, and ensuring that one
never approaches that state should be at the forefront of every trader’s thinking. If a trader has a system that has a
positive edge or expectancy, such as the LS Trader system, then one needs to ensure that one stays in the game to get
into what I call “the long run.” In doing so, the odds or success are so highly stacked in the trader’s favour that success
becomes exponentially more likely.
It is a weekly system which is largely
unaffected by “noise” in the markets.
Very sound money management rules
incorporated into the system.
Medium to long term time frame.
About the LS Trader System
The LS Trader system is a complete financial spread betting
information service which covers everything you need to trade the
world’s financial markets. The system trades 40 different financial
markets including stocks, commodities and forex. Within the
members area you will find custom built position sizing software,
market updates and extensive trading manuals which cover all
aspects of financial spread betting as well as the all important
weekly trade sheet.
Trade alert emails are also sent during the week as part of the service.
The LS Trader system is based on very sound trading principles that have
stood the test of time. It draws on the trading philosophies and trading
rules that the world’s most successful traders use and all of these
principles and trading rules have been vigorously tested.
FTSE 100 YTD return of +3.55%
LS Trader YTD return +17.73%
5 year CAGR of LS Trader +69.68%*
Don’t take our word for it. Click here to learn more about how our system could
help you and take advantage of a 1 month free trial #
To sign up, simply go to : www.lstrader.co.uk/spreadbetmag to get started today
LS TRADER
16 | www.spreadbetmagazine.com | May 2012
READERS
"I have no hesitation in recommending LS Trader to
others. Especially those that are looking for longer
term trading success and not overnight riches"
Tony Silva, subscriber.
* Disclaimer - LS Trader results reflect the weekly trades updates from 2007 to end of 2011. Since not all trades were necessarily taken then the results should be seen as
hypothetical. Hypothetical performance results have inherent limitations including the fact that they are generally prepared with the benefit of hindsight. In fact, there are
frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular trading system . No representation is being
made that any account will or is likely to achieve profits or losses similar to those shown. Future results may be higher or lower than past results.
May 2012 | www.spreadbetmagazine.com | 17
# Free one month trial. Subscription costs apply thereafter.
Successful spreadbetting
All systems will have lean times and losing periods
and that is a fact of the markets. The markets
simply do not trend all the time and often have
periods of directionless, choppy markets where it is
very hard to make money. During these times the
trend trader will often get whipsawed out of
numerous trades shortly after he has entered. It is
necessary, therefore, to be able to sustain a series of
losses so that the trader is still around to take
advantage of good trading conditions when they
return, and they always eventually do. This can only
be accomplished by taking small bets, so that when
trading conditions are not favourable, the minimum
amount of damage is done to account equity and the
majority of trading capital remains intact following a
losing period to capitalize on new trends.
The LS Trader system incorporates all of the above
4 rules and has rules to ensure that these principles
are consistently applied. This takes all of the guesswork out of trading as there is a rule for everything
such as where to get in, where to get out and how
much to stake depending on account size.
Extensive support and guidance
Subscribers to LS Trader receive everything that they
need in order to spreadbet successfully. This
includes an extensive manual that covers all of the
key concepts required, but most importantly includes
our trade updates. This is a summary of the 40
markets that we trade, including stock indexes,
commodities and forex. This summary, that we call
the weekly trades sheet, lists all 40 markets that we
trade, whether we have a position in each market or
not, the entry price and date as well as the current
stop loss for each market. We also include a list of
entry stops for all markets for the week ahead with
the associated exit stops.
Daily blog
In addition, we send out a weekly email with updates
on what has happened during the previous week as
well as our thoughts on what may happen in the week
ahead, as well as key technical levels to look out for in
the coming week. We also send out a market
commentary email that covers all of the market
sectors that we trade. Additionally, we send out
mid-week email notifications if and when any of the
entry stops – the trigger to trade - have been hit.
Since we launched the LS Trader system into the
marketplace in 2007 andin spite of coinciding with
perhaps the most volatile few years in recent market
history, the results have been extremely impressive,
with a CAGR of 75.64%*. The back-tested results
going back to the start of our data (1982) are even
more impressive and bring in a CAGR well in excess
of 100%* per year. These sort of returns coupled with
our rigorous risk processes are absolutely perfect for
spreadbettors. We have many profitable subscribers
who have been using us for years.
As an exclusive to Spreadbet Magazine readers we
are offering readers a free 30 day trial to see just how
our system works and hopefully help generate some
profits for you too!
Starting
next
month
A new daily blog
exclusively on
www.spreadbetmagazine.com
Visit www.lstrader.co.uk/spreadbetmag to take
advantage of this offer.
Next month we’ll look at some of our trades that we
have undertaken this year and talk through the
mechanics of this.
SUBSCRIBE
Good luck with your trading this month.
Phil Seaton, LS Trader
Be sure to visit each
day for topical and
thought provoking
articles and features.
*Disclaimer: Results are the outcome of back-testing and should be viewed as hypothetical since not all trades were taken. Future
performance may be higher or lower than past performance.
18 | www.spreadbetmagazine.com | May 2012
May 2012 | www.spreadbetmagazine.com | 19
School Corner
Binaries explained
School CornerBinaries
explained and
how to use
them.
Binary options are quite simply a
form of option that offers one
of two outcomes and hence the
name ‘binary’ which typically
describes an outcome of either
0 or 1.
20 | www.spreadbetmagazine.com | May 2012
May 2012 | www.spreadbetmagazine.com | 21
School Corner
In spreadbetting, binaries are available on a wide
variety of instruments for example the FTSE 100,
S&P500, currencies, European indices, gold etc.
You can also bet on a binary outcome with as little
as 10 mins to the expiry - this is more akin to true
gambling, however, than typical spreadtrading. The
price range of a binary in spreadbetting is zero 100. Zero representing the 100% probability of the
outcome NOT occurring, and 100 representing the
100% probability of the outcome occurring.
Let us look at how one works using the FTSE 100:
The FTSE 100 may be trading at say 5600 at the
open of business on a particular day. If you were to
play a daily binary bet on the probability of the FTSE
closing UP on that day, it might be priced at say 50.
What this means is there is a 50% chance at the
time of the bet purchase of the FTSE closing either
up or down. Let’s say that as the day progresses the
FTSE actually falls and the index is trading down 50
points at midday. The probability of the index closing
up, particularly taking account of the time
remaining that day (4 1/2 hrs), has therefore
diminished materially now and so is likely to be
somewhat less than 50% at that point. Thus, in this
instance, the binary is likely to be priced at say 20,
i.e. there is now only a 20% chance of the FTSE 100
closing up on the day.
There are 2 ways you can play a binary - you can
either buy the binary, or you can either sell the
binary. In the example above, you might think to
yourself that the 20% probability of the FTSE
closing up on the day is mispriced and that
historically, when the FTSE is trading down over 50
points and with only around 4 1/2 hours to the close,
that less than 10% of the time would the FTSE stage
a rally of that magnitude and close up. Thus, you
would sell the binary at 20. If, however, the FTSE did
close up on the day, your loss would be 80 (100 - 20)
x your stake.
22 | www.spreadbetmagazine.com | May 2012
Binaries explained
Here’s a list of some of the types of binaries that you
can play:
1
A Straight closure/
expiry binary
This is the same as the example used above. There
is a fixed expiry point and the binary is a bet on the
probability of the underlying instrument closing up
(or down if a bet on an instrument closing down) at
that particular binary’s expiry point. This is the
simplest type of binary to understand and is the most
popular, and is generally available on a wide variety
of instruments.
2
One touch binary
This is also a relatively straightforward type of binary
that is, as the name says, a bet on the probability of
the underlying instrument on which the binary is
based touching a particular price point during the life
of the binary bet, and which could be anything from
10 mins to 1 week. For example, you could enter a
binary bet on the GBPUSD which is trading at say
$1.5960 touching $1.60 during the next 30 mins. The
price might be say 55 which means there is, at face
value, a deemed 55% probability of GBPUSD
touching the $1.60 level. With the ‘one touch bet’ you
are basically stripping out the necessity of the binary
actually expiring over (or under) the trigger level.
3
These binary bets are suited to volatile markets
where there is a higher probability of the particular
instrument gyrating around the two trigger points
- they are likely to be more successful in markets
that are in the latter stages of a deep sell off where
the downside is invariably lower than you always
expect, but where sharp reversals can occur.
If the underlying instrument only touches one of the
price points, the binary still expires at zero.
4
Either-or touch
binary
This type of binary is very similar to the double touch
binary except that it only requires the underlying
instrument to touch ONE of the 2 trigger points. If it
touches either of the trigger points, then it makes up
at 100.
5
Ladder binary
At its heart, a ladder bet is quite simply akin to an
‘accumulator’ bet that one would place on the
horses. A trader on a ladder bet is looking for the
underlying instrument to trade through a number
of particular price levels at pre-determined time
points. The price levels are arranged just like the
rungs of a ladder, hence the name. For the trade to
be successful, the asset has to have “climbed the
steps” at certain times in order for the trade to
expire with a profit.
Let us look at an example to see how this would work
and we’ll use the FTSE again. The index level may be
say 5600. You could have a ladder with trigger points
of 5630, 5650 & 5670 - expiry in this instance being
16:30 close of business. The ‘payout’ ratios ascribed
to each of these trigger points may be for example
20% at 5630, 30% at 5650 and 50% at 5670. If the
FTSE trades over 5630 at the expiry, you will receive
a 20% payout and 30% at 5650 and 50% at 5670. It is
basically a succession of one touch binaries.
Two/Double touch
binary
This type of binary involves the underlying
instrument touching TWO price levels - one that is
above the current price and one that is below the
current price. For example, the S&P 500 might be
trading at say 1350 and you enter a weekly binary
on the S&P 500 that requires it to touch both 1330
& 1370 (the wider apart the two touch levels are and
the shorter the timescale, the cheaper these
binaries of course are).
May 2012 | www.spreadbetmagazine.com | 23
School Corner
Binaries explained
How to use binaries
Below is a list of how we, at Spreadbet Magazine, would suggest that you use
binaries to the best effect:
1
Hedging use
Say you are in a medium term trade where you are
long the FTSE 100 at 5600 and you have profit on side
with the index rising to 5700 (we’ll use a bet size of
£10 per point for this illustration). On a particular day
you might think that the FTSE is prone to a fall, but
you do not want to exit your long bet which has, as we
established, a medium term timescale to you.
What you could consider here is buying a binary for
the FTSE to close down on that day. If, for example,
it is 1pm and there’s just under 3 hours to go and the
FTSE is up perhaps 20 points, then the binary might
be priced around 25. You could thus buy a
binary equivalent to say half your long spreadbet
(£5) costing you therefore £125 (£5 x 25), and so if the
FTSE did fall back and closed down on the day, then
you would re-coup £500 (5 x 100 - the binary make
up level). Your profit is therefore £375 (£500 - £125
cost). Remember though, your long bet of £10 per
point would have lost £200+ (20 points + fall back x
£10) and so you have mitigated your loss somewhat
here.
2
Maximum Leverage
This type of trading is where you have a high
conviction in a particular bet but you still do not
want to expose yourself to a large potential equity
drawdown should you be wrong.
For example, you might believe that the DAX is
oversold at the 6500 level, but you are fearful of
further volatility and the possibility of more sharp
falls and so you are reluctant to open an outright
long bet. You could, therefore, use binaries at this
point to take a position on the Dax rising on
successive days, safe in the knowledge that your
downside is fixed at the cost of the binary (i.e. if
your bet size is £20 & the binary costs 30 the cost to
you is - 600).
24 | www.spreadbetmagazine.com | May 2012
Should the market continue to fall and your
conviction grow further then, assuming you have not
exhausted too much equity buying the market down
via the binaries, you would progressively increase
your binary bet size thus maximising your profit
making potential when the upswing does come.
3
Catalyst trades
I particularly like these types of trade opportunities.
Basically you are looking to take a contrarian view on
a particular news feature, for example the
non-farm payrolls figure. If the market is
expecting a low jobs creation number and there has
been a degree of weakness in the market in the
preceding days leading up to its release and with the
market being down going into the release of the
figures, then this is the type of set up I like on the bull
side. I would typically play this by entering the
countertrend outright long (or short) spreadbet in
stages, and if the market continues to move away
from me, then I would use the binaries as fixed cost
ways to average in.
To conclude, binaries are really orientated to the
more quick-fire short term type of trading or traders
- it really is skirting the boundaries of typical
spreadbet position taking and outright gambling. We
would suggest that you allocate no more than 10%
of your account value to this type of trading and that
they be used in the scenarios highlighted above,
particularly the deep oversold markets where the
probability of a ‘swing’ trade back in your favour is
high.
We would also caution against selling any binary
below a price of 20 - no matter how likely the
probability of the binary expiring at zero seems to
you. The unexpected generally happens in the
markets much more frequently than you would
expect and if you’ve sold a binary at 20 you have
basically laid odds of 5 to 1 against - do this
frequently and have a run of bad luck and you’ll be
staring down some pretty chunky losses quickly.
Similarly, I would also caution against buying a binary
below 20 just because you think it is ‘cheap’. The old
saying “you get what you pay for” springs to mind - the
chances of a binary that is priced below 20 ultimately
making up at 100 is very slim. There is a time to buy
these bets and that is as highlighted above with
regards to high probability swing trades.
Finally, one thing I would say is that you can, of course,
trade out of a binary at any time before the expiry - you
do not need to run it right to the wire. If, for example,
you bought a binary at 45 and let’s say it rises to 75,
think about selling half or one third of your
position - this way you are locking a good profit on a
very high risk bet instrument. You will greatly extend
the life of your binary account this way as it is plain and
simple good risk management - the cornerstone of
ALL successful traders.
The Dow might be trading around 11900 (down say
40 points) and so you look at a “one touch bet” at
12000 - in a lot of cases you get very sharp knee jerk
reactions on important statistics and so, assuming
the binary is priced appropriately (less than 30 is
what I would look for here), this is the type of classic
catalyst/contrarian trade you can play.
4
High Probability
swing trades
This type of trade is where there has been a long run
of successive rises or falls (history tells us 9 days
down in a row and 8 days up without a reversal of
either is a good point to look to take a countertrend
trade) and the market is ripe for a corrective so
called ‘swing’ trade.
May 2012 | www.spreadbetmagazine.com | 25
Heritage Oil
Unloved, forgotten and materially undervalued
Heritage Oil Unloved, forgotten
and materially
undervalued
26 | www.spreadbetmagazine.com | May 2012
May 2012 | www.spreadbetmagazine.com | 27
Heritage Oil
For holders of Heritage Oil, the last 12 - 15 months
have been painful, to say the least, with the shares
falling from over 300p in Feb 2011 to plumb the
recent lowly depths of 130p. The reasons put forth
by numerous commentators and analysts for the
collapse in value range from questions over the
company’s management and strategic direction, to
disappointment in the finding of gas as opposed to
oil in their key Miran prospect in Kurdistan, to
continued worries over when the $405m currently
held up in arbitration proceedings through their
dispute with Tullow Oil and the Ugandan
government will be ultimately returned, through to
wider concerns with the general global economic
environment.
Spreadbet Magazine believes that, as is always the
way, the stock market has over reacted and, quite
extensively so to the issues surrounding Heritage.
In fact the depletion of value has been so great
that within the entire mid cap Oil & Gas exploration
sphere we believe they now offer the most
compelling value on a risk to reward basis. At the
current price of 135p (time of writing) the company
has a market capitalisation of £361m and sits with
cash reserves of approximately £200m. This puts a
value of just £161m on the following asset base and
which we will attempt to find a realistic value for
each of them ((i) The prime Kurdistan asset - 75% share in the
Miran block, running to over 1,015 sq/km
(ii) Producing Russian fields
(iii) The Tanzanian assets covering over 25,000
sq/km
(iv) High-impact exploration in Malta
(v) Mali field prospects
(vi) Pakistan fields
(vii) A 51% equity interest and control of Sahara Oil
Services Holdings Limited which has the necessary
long term permits and licences to provide onshore
and offshore oil field services in Libya as well as the
rights to own and operate oil and gas licences.
(viii) Approximately 34 million Heritage shares held
in Treasury
(ix) Just over 15% of Petro Frontier, owning c.9.75m
shares
28 | www.spreadbetmagazine.com | May 2012
Unloved, forgotten and undervalued
(x) The ‘option’ value of the return of $405m from
the Tullow/Ugandan dispute.
Let us look at each asset in turn -
Miran
The market seems to think that a find of up to 9.1
trillion cubic feet of gas (gross in place P50
estimate) has no value whatsoever. This is the only
way one can rationalise the current share price. The
company however believes that monetisation of this
asset will commence in 2013 - not too far away now
and sufficiently close in timescale that any large
time value discount is not warranted.
The early production will run in parallel to full field
development and the export of gas to Turkey and/
or Europe with the full production of blended oil and
condensate. Independent gas marketing studies
have highlighted increasing gas demand in
Kurdistan, Turkey and Europe that can potentially
provide valuable markets for the gas volumes. In
April 2011, Turkey’s energy regulatory
authority ran a licensing process for importation of
gas from Northern Iraq and Kurdistan, with first gas
to be imported in 2014 starting at 700 mmcm/yr and
plateauing at 3 Bcm/yr up to 2033, demonstrating
real demand for the gas and in a market on the door
step of the Miran Field. There is an existing
transmission pipeline system in place in Turkey with
only a 330 km pipeline needing to be built in
Kurdistan to the Turkish border. We believe this will
be a transformative event for Heritage as the
market will then have to ascribe a value to the gas
as it finds a natural export path. See diagram to the
top right showing the existing transmission system
in Turkey.
Full field valuation models for the Miran Block
constructed by various independent analysts anchor
around the $3.5 boe (barrel of oil equivalent) range.
This equates to circa £1.22bn if the Kurdistan
Regional Government backs in and reduces
Heritage’s share of the resources to an estimated
558m boe. It is worth taking a look at the table
below which produces a value graph of what is
called EV/2P reserves - basically this is a company’s
Enterprise Value (market cap + debt) to so called
‘proven and probable’ reserves.
You can see just how lowly valued Heritage is relative to the
entire sector. Even if one assumes an unheard of $1 boe
value then this equates to £350m based on 558 mmboe,
add in the cash of circa £200m and you get the equivalent
of £2.13 per share. Remember this excludes any value at
all for any of the company’s other assets. More realistic
estimates of the discounted value of the Miran Field are
between 200 & 300p per share. Some analysts estimates in
fact go up to and over £4 per share.
May 2012 | www.spreadbetmagazine.com | 29
Heritage Oil
Below is a cross section of the Miran East and
West structures which illustrate the hydrocarbon
potential. It is by no means certain that within the
East structure, where drilling commenced in March
2012, that Heritage will find hydrocarbons due to
the nature of an exploration well, however, the
structure is contiguous to the very large
hydrocarbon bearing West structure.
Unloved, forgotten and undervalued
The company is also continuing to drill down past 3,000
metres on their Miran West-3 Well following the
update in early March and again as can be seen from
the section below this area is where the company is
appraising the gas discovered in the previous well.
Russia
Heritage’s Russian assets are currently the only oil
producing component of the company located in the
West Siberian province of Khanty-Mansiysk. The
last independent industry valuation resulted in an
estimate of circa 61m barrels of oil and a net
present value valuation at that point of around
£186m - approx 74p per share. Analysts typically
value this asset at a conservative 43p per share.
Tanzania
The Tanzanian onshore acreage awarded to
Heritage in Q4 2011 and Q1 2012 appears to
display a similar profile to the Albert Basin in
Uganda and which of course Heritage ultimately
sold for $1.45bn (of which a portion is subject to the
tax dispute with the Ugandan Government). The
company is currently in the process of acquiring 2D
seismic data and should they find oil here, given the
sheer size of the block, this would be another
transformative event for the company. On an
unrisked (potential attributable value if success in
exploration is achieved) basis Tanzania is widely
valued around 87p per share equivalent with a boe
assumption of circa $3.50.
Mali
It is worth also reflecting on the recent arrival of
Exxon Mobil into Kurdistan too as an illustration
of the political de-risking of this area. The world’s
largest oil company signed a deal for six exploration
blocks with the Kurdistan Regional Government
(KRG) last November and thus firming up
Western oil majors’ perceptions of this potentially
very important region.
30 | www.spreadbetmagazine.com | May 2012
Genel Energy plc, formerly Vallares (the ex BP CEO
Tony Hayward’s vehicle), holds the balance 25% of
the Miran licence following their merger with Genel
Enerji and, in Spreadbet Magazines opinion, once the
route to monetisation of the large gas find becomes
clearer, we wouldn’t rule out the possibility of Tony
Buckingham selling the controlling stake in this asset
to them, after all Tony Buckingham’s history is to
explore, establish value and then sell on the
development prospects of those assets.
The 2 blocks in Mali look, at this point, to be not
material to the company. Heritage has a 75%
working interest here having been farmed into the
prospect in exchange for carrying out the seismic
mapping on the acreage and also drilling one
exploration well. Unrisked values go up to 65p per
share, although the recent coup will most likely lead
to delays in the work programme.
Pakistan
Any discovered hydrocarbons could be very
easily connected to the existing infrastructure in this
region as one of the main pipelines actually runs
through the Zamzama acreage. We ascribe a nominal
10p valuation here for the moment.
Sahara Oil Services
Holdings Limited (SOSH)
It is too early to attach any real attributable value to
the 51% controlling interest in this company but make
no mistake, the potential value of these licences could
be considerable. The company’s purpose behind their
purchase was to play a significant role in the future
development of the oil & gas industry in Libya
including participating in future licensing rounds. In
fact, we believe that part of the reason for this
investment was also to give them leverage in the
boundary dispute with Malta and assist Heritage with
the drilling programme there.
Treasury Stock
At time of writing the company held approximately 34
million shares in Treasury giving a current
market value of £46 million.
Option value of Ugandan tax dispute
One can debate the merits of Heritage’s case against
the Ugandan Government & Tullow until the proverbial
cows come home but ultimately, only the outcome of
the arbitration process will determine who is right and
wrong here. Applying simple mathematics of a 50%
probability of the return of the monies at some point in
mid 2013 and applying a further 5% NPV discount gives
an option value of around 46p per share. Of course if
they are successful in the arbitration then they would
receive back approx £1 per share.
The two Pakistan blocks in which Heritage holds a
54% and 48% interest respectively, are the
Sanjawi and Zamzama North blocks.
May 2012 | www.spreadbetmagazine.com | 31
Heritage Oil
Unloved, forgotten and Undervalued
Furthermore, many commentators and analysts
consider there will be considerable M&A and so
consolidation of existing licence holders in Kurdistan
which is another way to monetise an asset.
Cumulative
valuation
possibilities
A. The Company has many competitive strengths
including:
Q. What do you say to those shareholders that believe
the purchase of the Heritage shares by the company
has been a monumental waste of money?
Taking the figures above we
result in the following
as a potential upside value to
Heritage (in p) -
• a strong balance sheet;
• a proven management team;
• strong and established technical expertise with
a history of finding oil and gas;
• a geographically diversified portfolio of high
impact exploration plays; and
• well-established connections in all areas in
which we operate.
A. We are focused on building long term shareholder
value. This can take some time, but the management
team has a track record of delivering success and is
very much aligned with other shareholders as we own
over one third of the company. We have personally not
sold one share and Heritage has undertaken a
significant share buy back programme as we consider
the company to be materially undervalued.
Q. What are the main catalysts that you see on the
horizon for value realisation?
Q. Do you have a message for shareholders?
I was able to catch up with Paul Atherton, Heritage’s
Finance Director and posed the following questions
to him Q. What distinguishes Heritage from its peers?
A. 2012 will continue to be a very interesting year for
Heritage as we have a diversified drilling
programme and the financial flexibility to
accelerate programme execution in several of our
core areas. In the near-term the main priorities
for the Group are to continue to drive our current
portfolio forward with exploration or development
and drilling programmes in Kurdistan, Tanzania
and Malta. We currently have two rigs drilling in
Kurdistan and are reviewing results from seismic
campaigns that could provide future growth in the
portfolio. We are looking to further develop the
existing portfolio and continue to look for value
generating opportunities within our core areas.
Q. What options are open to you for the
monetisation of your Miran Field?
A. We consider the Miran Gas Field to be of such a
size that it is a commercial discovery and
independent engineering studies have confirmed
the potential for a fast-tracked, phased
development of the field, with local gas sales in
2013 and full field development through export
of the gas to Turkey in 2015.
A. The Company has an excellent track record built
over many years, one that we continue to live up to,
having found in excess of 2 billion barrels of oil in Africa
and one of the largest gas fields in Iraq. Management is
very aligned with existing shareholders and is focused
on rebuilding shareholder value through the existing
portfolio and diversification by acquiring assets in our
core areas of Africa and the Middle East.
Given recent security issues in Mali and Pakistan we have assumed only nominal value for
these licences. Drilling delays in Malta mean that we have only included 50% of the
Potential value for the Malta licences too.
Technical Picture
Looking at the short term chart we can see the stock
is beginning to probe the downtrend from early
February - this comes in around the 150-155p level.
A close above here targets next resistance around
the 160p level.
A number of consecutive daily closes above 150p
will be the confirmation signal I am looking for
that the stock has broken the intense downtrend
in recent weeks.
Catalysts
The potential catalysts for value realisation are
multi-fold and could include any or all of the following a) Success in drilling the balance of Miran West and
Miran East with the presence of oil and gas
b) An accelerated path to market for the major gas
find in Miran including access to the lucrative gas
market in Turkey
c) News on the Tanzanian, Maltese, Pakistan and Mali
exploration programmes
d) Potential corporate activity - sale of Miran, farm in
of the Malta prospect or indeed a bid for the
company or a transformational acquisition
e) A positive outcome in the arbitration process.
32 | www.spreadbetmagazine.com | May 2012
May 2012 | www.spreadbetmagazine.com | 33
Heritage Oil
A move beyond 165p will likely take us back towards 200p in short order and, as can be seen from the longer term
chart will be a decisive break of the longer term down trend from early 2011.
Rock-like.
Not rocky.
(%)
Conclusion
As can be seen from Heritage’s individual prospects
breakdown above, news flow this year into 2013
will be thick and fast and any number of positive
outcomes from a sale of the Miran Block through
to drilling success in Malta in particular could come
to pass. The Company has indicated that it has been
searching for material transactions and so could
one of these transformational deals be completed?
At the current price of 135p (time of writing) and
with cash and stock assets of almost 100p, we
struggle to see any downside whatsoever from
here.
The upside is considerable and this is our second
Conviction Buy in this issue. Regular readers will know
my usual caveat however and that is - be careful on your
leverage (do not gear yourself more than 3 times
current surplus cash on your account) and so give
yourself headroom for further market volatility.
In the interests of clear disclosure, I declare myself
presently long the shares in this company.
AIM listed. Debt free. Segregated client accounts.
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34 | www.spreadbetmagazine.com | May 2012
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May 2012 | www.spreadbetmagazine.com | 35
Large cap focus
FatProphets - HSBC
HSBC
Among UK listed banks HSBC is one of the last men left standing. It is
distinguished by exposure to emerging markets and is viewed as
relatively conservatively run. A re-focusing of the group to improve
returns and an attractive dividend ensure we rate the stock a buy.
Few banks come out of the global financial crisis smelling of roses and
HSBC is no exception. However, the strong diversification of the
business helped it to weather the storm and it now looks to be well
positioned versus competitors.
This can be seen by looking at the market leading position HSBC now has
in some areas of UK banking. Although 80% of HSBC revenues do come
from outside the UK the fact that the group is able to grow lending here
shows that it is not capital constrained.
In the near term support is located at the technically important 200 day moving average at 537.83p.
We would expect the downside to be limited to this level. A sustained break above the 50 day moving
average would signal a continuation of the uptrend targeting an initial retest of the 587.2p highs.
In the UK mortgage market, for example, HSBC had a market share
of 2.5% in 2007 but lending since then has grown by three-quarters to
£13.2bn in 2011 giving a 9.6% market share. A cursory glance at the UK
mortgage tables shows why with HSBC having market leading rates.
Meanwhile in the UK commercial lending market HSBC made record
loans of £49.4bn in 2011. With competitors having retrenched loan
margins have widened and loan conditions tightened. This ensures
that HSBC’s lending growth looks to be profitable.
In the UK HSBC’s 2011 profits rose 17% to £1.5bn with top-line income
flat at £5.6bn looks to have been due to a 35% reduction in impairments
to £796m.
Meanwhile in the context of the UK ISA deposit accounts marketed by the
banks the stock of HSBC stands out for its superior dividend yield. The
shares offer a 5% yield in the current year with this payment covered
more than twice by earnings.
The yield is the highest among UK bank stocks while prospects for the
international bank look solid. This is as the shares weakened on the
European Sovereign debt crisis which took hold from Q3 2011.
36 | www.spreadbetmagazine.com | May 2012
May 2012 | www.spreadbetmagazine.com | 37
Large cap focus
With reference to the weekly chart, prices have
respected the 61.8% Fibonacci retracement at the 460p
region. This is bullish, and we would target an eventual
test of the 200 week moving average at 615.95p over
the coming months.
HSBC 2011 results by region
Independant daily
advice provided by our
qualified CFA’s on what
and when to trade.
A new strategy for the business was announced in May
11 by CEO Stuart Gulliver who was appointed in
January 2011. This will see the business strive to
improve returns by becoming more focused,
streamlined and centralised.
The financial results for 2011 for the business as a
whole showed some progress but it is clearly going to
be a long-haul for the group. In the meantime growth
from emerging markets and a return to dividend
growth supports the stock.
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HSBC profile
HSBC defines itself as “one of the few truly
international banks” with retail banking in Hong Kong
and the UK. By contrast other banking groups are more
localised with the US banks generally sticking to North
America for example.
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Magazine readers
In 2011 49% of revenues came from faster growing
economies which compares to 44% the year before.
The group expects economies considered as emerging
now to increase five-fold in size by 2050.
The position in both developing and developed
economies allows the group to sustain a crisis in either
relatively well. This is illustrated by the recent financial
crisis in the West and also by the 1997-8 Asian financial
crisis.
CEO Stuart Gulliver is keen to retain this balance and
also points out that it offers benefits to the group by
allowing it to support trade and capital flows between
the developed and emerging world. Turning to 2011’s
financial results and the benefits of this diversification
are clear.
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The above graphic shows that strength in Asia
Pacific, MENA region (Middle East and North
Africa) and Latin America helped to offset some of the
weakness in Europe and North America. Thus profit
before tax on an underlying basis for the
group was down just 6% to US$17.7bn.
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to secure
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Key markets seeing strength in terms of profits
growth were China (236% growth) the United Arab
Emirates (73% growth) and India (22% growth). One of
the biggest countries for HSBC in terms of profits was
Brazil which produced USD$1.2bn profit before tax
after growth of 13%.
38 | www.spreadbetmagazine.com | May 2012
May 2012 | www.spreadbetmagazine.com | 39
Fat Prophets - HSBC
HSBC is also diversified by business divisions with
weakness in investment banking (global banking and
markets) offset by retail and commercial banking. A
notable success was commercial banking which saw
record revenues in 2011 and a “leadership” position in
global trade.
HSBC results by division
Progress wasn’t seen here in 2011 with the figure
coming in at 57.5% having increased due to
restructuring costs, customer redress programmes
and a UK bank levy. However, there was also the
effect of wage inflation and higher staff numbers.
Progress was seen on returns on average equity
which came in at 10.9% in 2011. However this was
outside the target figure of 12-15% but it was up
1.4% on 2010.
In January 2011 Stuart Gulliver took over as CEO and
he outlined a new strategic direction for the company
in May 2011. This centred around making the business
more focused, setting financial targets, reducing costs
and centralising control.
Underlining HSBC’s strength its core tier 1 capital
ratio was up on 2007 at 10.1%. This is the ratio of the
capital measure to average risk-weighted assets
(RWA’s). The figure did increase on 2010 due to an
increase in assets.
Given HSBC’s history this approach looks appropriate
as the business is currently decentralised which has
meant incoherence, higher costs, duplication and an
unclear strategy across the business. In 2011 16
disposals or closures were announced with three more
in 2012.
Summary and Valuation
These included 195 retail branches, mainly in New
York, the US Card and Retail services business, the
business in Costa Rica, Honduras and El Salvador. No
meaningful acquisitions were made in 2011.
The medium term will focus on lowering costs and
re-focusing the business. The longer-term will see
the group take advantage of emerging market growth
and a re-positioning in developed markets.
Gulliver’s targets
The group’s dividend was cut in 2008 and 2009 but
since then has been increasing year-on-year. It will
be supported by the return to earnings growth and in
any event is covered twice over.
Key targets set to Stuart Gulliver are for cost efficiency
in the range of 48% to 52%. This is the operating
expenses divided by net operating income before loan
impairment and other credit provisions.
40 | www.spreadbetmagazine.com | May 2012
Worldspreads
collapse what you
need to know
Some investors are sceptical towards HSBC, viewing
the company’s financial targets that have been set
as not likely to be met. In our view, targets should be
difficult to achieve in order to obtain results.
Accordingly, we recommend HSBC as a buy.
May 2012 | www.spreadbetmagazine.com | 41
Worldspreads collapse
What you need to know
The sudden collapse into Special Administration on Friday 16th March 2012 of the
quoted mid-tier spreadbetting company Worldspreads was a shock to many - both
industry participants and clients alike. At its heart is the shocking fact that client
funds, which are supposed to be completely segregated from company funds, were
used by Worldspreads for purposes yet to be made clear. The shortfall runs to
approximately £14m - no small sum and almost half of the then client funds.
There are two types of client classification in the UK spreadbetting and CFD marketplace and these are either
Retail or Professional designation. Below is a description of these two statuses and what each infers for such a
client.
1
Retail clients
Retail clients funds (defined as cash and
unrealised profits) are required by FSA regulations
to be kept in a completely separate bank account to
the company’s own funds, and further that they are
ring-fenced from any creditor claims. Should the
underlying bank itself that holds the funds go into
liquidation then each client would be covered up to
the £85,000 FSCS deposit taker limit as an additional safeguard.
If a regulated spreadbet/CFD firm goes into
liquidation then you are protected, irrespective
of Professional or Retail status, up to the £50,000
FSCS compensation scheme limit.
As a Retail client you also have the right of recourse
to the Financial Ombudsman Service (FOS) - a
service that provides an alternate complaints
resolution procedure to the Courts and that is
entirely cost free on the client’s part. If a complaint
is necessary against a firm and you are unable to
resolve the issue(s) direct with the Compliance
department, then the FOS is a particularly
useful service that you can turn to and for this
reason alone one should be very careful of
relinquishing Retail Status.
2
Professional client
The requirements on a firm to classify a client as a
Professional are quite onerous as all individuals are
deemed initially to be Retail and the following items
must be fulfilled in order for the firm to be able to
re-classify them as such:
(a) The client itself must effectively ‘elect’ to be
reclassified and the firm must give written notice of
the protections that the client will lose, namely the
loss of ‘segregated’ status and the right of recourse
to the FOS. This ‘election’ can be either generally or
in relation to particular services or transactions. The
process goes one stage further in that the
client must state ‘in writing’ that they are aware of
the consequences of losing such protections.
(b) The firm must undertake a quite extensive
assessment of the client’s experience,
understanding and knowledge of the transactions
and services they expect to use and the risks
inherent, and have reasonable assurance that the
client fulfils this criterion.
(c) At least 2 of the following ‘qualitative’ criteria
must be additionally satisfied too:
(iii) The client works or has worked in the financial
sector for at least one year in a professional
position, which requires knowledge of the
transactions or services envisaged
A Professional Client can request to be re-classified
as a Retail client at any point and, similarly, where
a firm becomes aware that a client no longer fulfils
the requirements to be classified as a Professional
Client then the firm must re-classify - in practice
this is likely to be a reduction in the Clients portfolio
value below 500,000 Euro’s.
It can be seen, therefore, that the number of clients
who would fit the quite extensive requirements to be
classified as a Professional is very limited.
In reality no client would ever ‘elect’ to be
professional, but the unfortunate fact is that some
clients (or groups of clients) are simply bigger than
the company that is transacting their business. If a
client has a large sum with a company and then takes
out positions requiring a similar sum as margin,
then the platform provider must use its own funds
as collateral with the exchange/broker. As you can
imagine, a handful of high net worth clients would
soon use up all the cash resources of the company
involved. For this reason providers may then take
the route of saying to the client - either agree to be
professional, or we are unable to transact your
business.
Spreadbet Magazine joins a growing chorus of other
commentators who are calling on the FSA to tighten
the procedures and reporting requirements by all
investment firms (not just Spreadbetting and CFD
firms) in relation to segregated client funds. As the
Worldspreads scandal has shown, and also
following the MF Global collapse, rules and
regulations are all well and good, but if there is a
determined desire by a particular firms staff to
ignore these regulations there is, in practice, very
little that can be done. This is why draconian legal
repercussions should be brought to bear on those
parties that do breach these rules and regulations.
We pride ourselves on our independence at this
magazine, but one firm that currently treats all
clients as Retail and so ensures the maximum level
of protection is Capital Spreads. In conversation with
the company this is a consequence of their very strict
risk control systems that require cash on
client accounts (as opposed to credit) to fund their
actual trading, and also their policy of insisting on
stop loss orders for all open positions. The
consequence of this is that the ‘whales’ (the only
clients who, by failure to honour their debts, are
generally the biggest risk to companies offering
CFDs/spreadbetting services) do not trade with
Capital Spreads and go to their competitors. These
‘whales’ can of course bring down a firm as in the
case of Global Trader - sometimes it pays to know
who you are ‘swimming’ with.
Further measures you can take is to split your
accounts into 2 separate ones if you are married
for example, and thus you would have two potential
FSCS £50,000 payout safeguards. Of course, the
ultimate safeguard is not to have more than £50,000
invested with any one spreadbetting firm.
www.capitalspreads.com
(i) The client has carried out transactions, in
significant size, on the relevant market at an
average frequency of 10 per quarter over the
previous four quarters
42 | www.spreadbetmagazine.com | May 2012
May 2012 | www.spreadbetmagazine.com | 43
Special US Feature
Research in motion
Research in Motion
Conviction Buy recommendation.
Current Price - $13. Price Target -$20
Conviction Buy? That’s a punchy call on what
is currently one of the most hated stocks in the
marketplace. What makes Spreadbet Magazine so
confident of a rising share price in the much derided
Blackberry maker? The answer is simple everything has its price and RIMM’s current price is
now too cheap.
We flagged RIMM as a potential takeover candidate
in our New Year “10 contrarian bets for 2012”
feature, and as the year has progressed our
confidence in some type of corporate activity has
grown. At the current price (at time of writing) of
$12.70 the stocks market capitalisation is a
little over $6.5bn. It is entirely debt free, trades on a
prospective PE ratio of just 7 times for 2012, a price
to tangible book of just under 1, price to sales of 0.3
and price to cash flow of an almost unbelievable
2.3 times. In short, the stock is not just cheap it’s
ludicrously cheap.
The stock has been hated for almost 18 months
now and there seems no shortage of analysts
prepared to bet on its continued demise - perfect
potential contrarian hunting territory for the value
biased buyer. The announcement on the 6 April
from newly minted CEO Thorstein Heins that the
company was looking at “strategic options” codeword for potential sale of the company, is the
catalyst we have been looking for. RIMM
actually has various options open to it to unlock
value including licensing its software to other
manufactures, entering into JV’s with perhaps the
likes of Samsung or re-focusing its efforts on purely
the business sector and abandoning the consumer
sector, where it is plainly fighting a losing battle and
is the primary source of its woes.
The Blackberry’s primary asset as a handset is its
keyboard feature - as a personal user of the Blackberry and shortly due an upgrade, it is the ease
of typing on the keyboard that will prompt me to
renew my subscription to the Blackberry
service. As more affluent users now have 2
personal phones, one for business and one for
personal use, RIMM would be well advised to
concentrate on the business aspect and this is an
avenue that it seems management have taken on
board, and indeed are now to focus upon.
The most obvious potential acquirer of RIMM and
also the most appropriate commercial fit is of
course Microsoft. With Google and Apple continuing
to encroach on Microsoft’s once seemingly
unassailable entrenched PC software retail position
of their Windows product, a concentration on the
business sector seems a likely medium-term
direction for Microsoft. With a cash pile of some
$50bn, RIMM is an almost morsel sized acquisition
to them. Microsoft probably wouldn’t even need to
pay in cash, as the company trades on a higher PE
than RIMM. A stock acquisition (in whole or part)
pitched around $20 would likely have RIMM
shareholders biting their hands off - certainly
Jaguar Financial that has been pressing for a sale of
the company from the mid $20’s and is now
likely heavily under water.
From a technical perspective, I am getting
particularly hot and bothered under the collar.
Looking at the monthly chart (bottom left) the stock
has re-traced all the gains from 2006 that took it
from around $15 up to nearly $150 - a shocking
90% drop and, I can count 5 clear waves per Elliot
Wave theory that typifies the end of a trend. On the
daily chart we look to be probing out a classic triple
bottom too. All the monthly, weekly and daily
stochastics show an oversold situation, and each
time we touch the $12/13 level volume increases
dramatically - technically, for bottom fishers, this is
about as good as it gets.
For those readers who are inclined to agree with
our analysis and are looking to trade RIMM on the
long side we would suggest, as ever, that you
ensure your account can carry at least a further
15% downside without causing you sleepless nights
by way of a margin call.
(%)
44 | www.spreadbetmagazine.com | May 2012
May 2012 | www.spreadbetmagazine.com | 45
Calendar & Ratio Spreads
Options Corner
Options Corner Calendar & Ratio Spreads
Hopefully readers who have previously not been too familiar with options and their
potential uses are now becoming a little more educated as to how they can be
incorporated into their trading strategies. The beauty of options, certainly paid for
premium (as opposed to writing options), is that you know exactly what your downside
is - you pay (X) p for an option and that is your fixed risk. Sleeping easy is an important
element of any spreadbettors life!
Last month we looked at how simple Bull Call &
Bear Put Spreads could be used as part of a traders
armoury to lower the cost of an option when taking
a view on a particular stock or index. This month
we take that one stage further and see how spread
strategies can be further evolved depending on your
view on how a particular situation may play out.
Let us look at how a Calendar Spread works using,
in this example, a Bull Call spread on the FTSE. At
the time of writing the FTSE is trading around 5600.
A trader may have looked at the historical monthly
distribution of returns and barring major
disruptive events such as 9/11, Lehman’s etc, the
monthly distribution of returns appear to be
typically around 2% with the maximum move to the
upside being around 12% over the last 10 years.
With this data in the background, a trader might be
minded that the FTSE is relatively oversold having
fallen over 400 points in recent weeks and that a
rally to 5700-5750 is likely in the next week.
46 | www.spreadbetmagazine.com | May 2012
Bull Call Calendar Spread
The trader can thus construct what is called a Bull
Call Calendar Spread through, for example,
purchasing the April 5650 FTSE Call at around 35.
Now, he may look at the historic monthly
distribution of returns and think to himself, what is
the chance in the next 6 weeks of the market rising
above 6000? If he believes this is slim then he can
sell the May 6000 FTSE call against his purchase for
around 12.
The breakeven level of the strategy is the Long Call
strike price (5650) + the NET premium cost (35 - 12
= 23) = 5673. If he purchased say £50 per point, the
net cost to him in premium is therefore £50 x 23
= £1,150 - his maximum initial loss. His potential
profit profile is the difference between the strikes
(6000 - 5650) less the cost of the option = 327 x £50 =
£16,350 - in this instance, over a 15 times potential
return. Please note - this excludes movement in so
called volatility and the residual theta (time value)
on the short call side.
Let’s say that the FTSE expires in April at 5800 thus
making the traders 5650 Calls worth 150. At £50 a
point his bet his therefore value at £7500 - not a bad
return on £1,150.
However, before we retire to the pub with our
profits, we must not forget about the May 6000 Call
- this will still have some time value and may, in this
instance be valued around 30 at the end of April and
with a FTSE level of around 5800.
As the trader is still short of this he then has the
choice of either buying this back to neutralise his
exposure at a cost of £1500 (30 x £50) and thus
reducing his profit by this amount or alternately,
taking the risk of leaving it to run towards expiry as
time decay will begin to set in - see chart below that
shows how time decay affects an option in the last
30 days of its life.
If the trader remains short this option then he will
still have the risk of the FTSE rising above 6000 and
thus accruing losses at a rate of £50 per point. As
stated earlier however, if he has a long portfolio of
stocks correlated with the FTSE then he may be
happy to see the FTSE rise all the while knowing
that time decay is working in his favour. Similarly,
he could choose to simply buy back half the
exposure (£25) thus cutting his risk. The beauty of
options is that there are so many ways you can play
out your view.
Another reason a trader may wish to do this is if he
is already long the market through a selection of
stocks and he is happy to see the FTSE rise towards
6000 as it will take his stock portfolio up in price. In
essence he is purchasing a fixed price (thus known
risk) long exposure on the FTSE for the
remainder of the period until the April expiry with a
short position on the May 6000 Call (and therefore
hedge against his long portfolio) for the remainder
of that month.
May 2012 | www.spreadbetmagazine.com | 47
Options Corner
The Advantages Of Bull Calendar
Spread are 1. A trader is able to profit even if the underlying
asset stays stagnant.
2. A trader is able to offset losses if the underlying
asset drops in value.
3. Initial losses are limited to the net debit.
Disadvantages Of a Bull Calendar
Spread are 1. Profits are limited even if the underlying asset
rallies.
2. Losses can be sustained if the short call options
are assigned when the underlying asset rallies.
Ratio Bear Put Spread
Let us now look at the simple concept of a ratio
spread and, in this example, look at a so called
Ratio Bear Put Spread and explain just why a trader
may wish to construct this. Let’s take HSBC where
a trader currently holds a long position of perhaps
£100 per point in this stock. At the current price
of 540p with the recent flare up of worries over
Spain’s debt profile he might reason that there is a
fair chance that the stock could fall to 500p over the
next few months. However, if the stock did fall to
say 460p he would be happy to buy more of HSBC.
A trader could therefore buy a May 520 Put for say 6
and sell an August 460 Put for twice the amount for
say 5. The net effect is that he has paid out 6 yet
received in 10 thus creating a net credit of 4.
Assuming this is done for £100 per point on the
purchased side & £200 his short put sale side then
his account has received a cash credit of £400 (6 x
£100 cost = £600 & 5 x £200 receipt = £1000).
48 | www.spreadbetmagazine.com | May 2012
Commodities Corner
Let us look at what scenarios could occur. If
during May HSBC falls to 500p then his May 520
Puts would be worth 20 (520 - 500p). His profit on
this would thus 14 (20 - 6 cost). This will go some
way to offsetting his notional loss on his long stock
bet. Of course, as in the example above, we must
not forget the Puts that do not expire until August
that he is still short. As with the Bull Call Calendar
spread, the option could be bought back either in
whole or part or, alternately, run towards the expiry
if the trader is prepared to buy HSBC around the
460p level (the exercise price).
Advantages Of Ratio Bear Put
Spread are 1. A profit can be made even if the underlying stock
rises if a net credit is received.
2. A much higher profit can be made than a simple
non ratio Bear Put Spread when the underlying
stock closes at the strike price of the short put
options at expiry.
Disadvantages Of Ratio Bear Put
Spread are 1. Margin is required. 2. The trader is more exposed to a rise in volatility
through his short puts being sold in a greater
quantity than the purchased ones.
Dafni Serdari
Is a black swan
coming for
silver?
Silver started off 2012 with remarkable gains. After
rising 19.15% in January, the precious metal added
another 6.49% to its value during February, reaching
the dizzy highs of $37 per ounce - a level not seen since
September 2011. In March, the precious metal entered
a downtrend channel and has been trading within a
sideways range since the 14th March. As the risk-off
attitude came back into the markets on Monday 24 April,
silver broke below support level at $31.28 consolidating
above the key $30 level.
Considering the downtrend movement of the US Dollar
index in April, the bearish pressure in the silver market
could be explained by the negative effect of a possible
lack of industrial demand on the prices but it also leaves
room for ample speculation that the silver market could
be currently manipulated.
If we look back to 2007/08, gold and silver rallied
significantly while the S&P 500 was crashing and it looks
like the conditions in the financial markets are quite
similar which makes for the potential of an imminent
spike in the price of silver.
From a technical viewpoint, despite the breaking of the
$31 level, support extends all the way down to the
$30 mark. With the MACD signal line poised to cross
above the zero line and the RSI hovering around the 50
level since mid-January on the weekly chart, the bulls
could step back in and move prices upwards again. The
picture on the daily chart remains indecisive with the
bearish failure to break below key support at $30 also
suggesting that the bears could be running out of steam.
Spreadbet Magazine is to produce a
special Guide to Option Spreadbetting
during the next few months. If you would
like to receive a FREE copy of this then
please click here.
May 2012 | www.spreadbetmagazine.com | 49
Commodities Corner
The first targets for the bulls to watch sit at $34.29 and
$38.21, the 38.2% and 50% Fibonacci retracements
respectively from the April 2011 high to the October
2011 low. If triggered, this could set the stage for a run
towards August highs above $43. At $30.86 at time of
writing and with the next key support sitting at $27.90,
the ratio of the upside potential to the downside risk is
around 1 to 4. The market would begin to look very weak
on a break below $27.90, but unless this level gives
away, we could expect a spike soon.
A long call is our option in the silver market but taking
into consideration the denomination factor it is clear
that the price of silver is not only subject to the laws of
supply and demand, but it can also be heavily affected by
the forex market. To eliminate the base currency factor,
a long position in the US Dollar Index could be used as a
hedge in this case.
By eliminating the potential forex effect, we are
actually removing the base currency factor from the
equation and trading silver in absolute numbers.
Should the price of silver spike all the way up to
September 2011 highs around $43, the US Dollar
index would likely fall back to test key support
at 78.80.
In case the US dollar gains in value either due to the
recovery of the US economy or due to the weakness
of the Euro, a long position in the US Dollar index
could offset the losses in the long position in silver.
Dafni Serdari
Market Analyst
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50 | www.spreadbetmagazine.com | May 2012
Spread betting and CFD trading carries a high level of risk and you can lose more than your initial deposit.
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May 2012 | www.spreadbetmagazine.com | 51
Robbie Burns’ Trading Diary
Editorial Contributor
Robbie Burns,
aka The Naked Trader
offers some words of wisdom
this month...
There are many advantages to spreadbetting, but one
of the best ones must remain bagging a quick profit
with hardly any costs involved.
When a share puts out some kind of warning, these
days the knee-jerk reaction is to overdo it on the downside.
So when a share should have been marked down say
ten percent, sometimes that markdown can be 30%.
Why? Well, aswell as initial fear taking hold, of course
all the stop loss orders get hit and tons of shares have
to be unloaded onto the market because of that.
But that knee-jerk reaction is something that can be
taken advantage of.
Using a rolling daily bet for a day pretty much costs
nothing - over a few days still not much and in any
event cheaper than paying typical commission and
stamp duty if the shares were purchased instead of
a spreadbet - oh, and no tax on profits!
A recent example is APR - this was knocked down
to the low 800s from 1100 - nearly 25% on delayed
results, yet the figures looked OK, certainly not
worth a 25% markdown, perhaps 10% maybe.
So a quick rolling spreadbet was used; in at around
850 for a tenner a point and lo and behold it soon
rises back to a tenner! Half the spreadbet can then
be sensibly cut and taken as profit, leaving the rest
to run for a bit. Costs minimal, profits large!
In APR’s case it opened up on the day of the delayed
results statement at about 950. This is interesting
because this is what the market thinks is about the right
price before the panic sellers come in and stops are
activated flooding the market with shares etc. APR’s
shares duly went a lot lower into the mid 800s which
was a perfect point to buy and the shares worked their
way back up to 950 in a few days.
Another example is Supergroup - opened up at 415
after a profits warning. Then it sank down to the 320
area where it was easy to spot the turn and grab a
rolling daily up bet. The hope here is it will shortly rise
to the 400-415 area at which point profit can be taken
again with minimal costs given tight rolling spreads,
and the small overnight cost of carry.
If bets like these don’t work out and the shares sink
further, of course it is best to get out with a small loss
just in case.
Of course one has to judge the company concerned and
check it’s not going bust! I would be a bit more careful
about using this strategy perhaps with an oil company.
One way, once the share is going back up, of protecting
the bet is simply to gradually raise any stop as the price
starts to rise, though making sure to keep a decent
distance away from the current price to avoid getting
spiked out.
And one thing that a reader quite rightly pointed out to
me recently and I mention in my books: when it comes
to stop losses don’t forget ex dividend dates (usually
Wednesdays).
Say your share has a 30p dividend due and so it opens
up 30p lower, you really don’t want to be out of it just
because of the dividend!
So a good lesson is - it is worth checking your stops and
doing your homework on the dividend payments! And I
reckon that for this edition, this is a good place to... stop!
See you next month.
Robbie
Here’s a really good rule of thumb I am now using to
judge whether a share price might rise after an
initial overdone fall - make a note of the
opening price.
52 | www.spreadbetmagazine.com | May 2012
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Special Feature
How to set
about
successfully
shorting
stocks (part 2)
In our special 2 part feature we
continue Evil Knievil’s - perhaps the
UK’s most prominent bear raider piece on what to look for when shorting
stocks, and the pitfalls that you should
look to avoid when trading short.
54 | www.spreadbetmagazine.com | May 2012
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56 | www.spreadbetmagazine.com | May 2012
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Special Feature
1
Have the courage of your convictions and be comfortable
in the minority
Bearing in mind my observations in points (1) & (2)
above regarding the most fertile backdrop to look for
in taking a short, and assuming one has done one’s
homework and that you are short, the trick is to control
the emotional side of the trade.
One can be caught out by an out of the blue bid.
Thankfully, this is a rare occurrence, but nevertheless
there is an amazing amount of hubris and stupidity
displayed by company directors, and the lure of a
bargain can tempt a move on an ailing business. In this
instance, depending on your spreadbetting firm and
their offers of ‘Guaranteed Stops’, it pays to use a
guaranteed stop to lock profits on the way down and
protect yourself from the possibility of a 30-40% gap
up. The ‘guarantee’ is generally set at a minimum of
10% from the current share price and is typically only
offered on the top 350 stocks.
2
How to successfully set about shorting stocks
If you are on the right side of a short position, the short
tack should hopefully be a relatively lonely existence. The
more there are loud voices on the bulletin boards and in
the press proclaiming what a cracking buying opportunity
this stock is, the better. Experienced traders have time
and again witnessed what happens in the early stages
of a bear market; the media and investors in general, so
conditioned by the recent rise in prices, believe that the
first pull back is yet another buying opportunity. This
buying into the decline generally continues.
That this buying is contrary to experience is evidenced
by the fact that the 1,3 & 12 months’ biggest risers’ and
fallers’ lists, which you can find in publications like the
FT, disclose that the biggest fallers generally display a
continuing theme in that they persistently feature in all
three lists. This bears out the adage that “the trend is
your friend”.
Be aware of borrowing restrictions, particularly when a
company is in its death throes
This is an important technical point that can catch out
the novice shorter. To understand the development of
the problem, it is important to appreciate what
happens when you short a stock.
Your spreadbet firm will sell the actual stock in the
market. On the other side of this, there will be a buyer,
who will need delivery of stock. Therefore the
spreadbet firm has to borrow stock from an
institutional lender.
58 | www.spreadbetmagazine.com | May 2012
Incidentally, the institutions which lend out their stock
receive a borrowing fee in exchange for this that than can
vary from less than 1% per annum to double digits,
depending on how much the stock is in demand to be
borrowed.
In the UK it is quite difficult to get accurate ‘stock on
loan’ data. Therefore you are more at risk of a sudden
call from your spreadbet firm asking you to cover your
position than might be the case in overseas markets. In
the US there are a number of websites that show stock
on loan data such as here http://www.nasdaq.com/symbol/amsc/short-interest.
I caution against going short of minnows, i.e. stocks less
than £10m in market capitalisation. Aside from the fact
that you’d be hard pressed to find a spreadbet firm that
would take on this trade, price spikes can be material. It
is best to leave these alone unless you have a profound
indifference to adverse fluctuations.
Another lesson here is that, if you have made 80-90% of
the potential fall, do not be a stubborn theorist.
Instead, do look to take spoils off the table, i.e. if you
have shorted at 100p, say, and the stock is presently
priced at 20p, don’t be hero and look to take the last
scraps and expose yourself to a short squeeze.
3
Covering your shorts
And so we come to the all important short covering
element. Basically, there will be 3 primary buy back
reasons. They are:
(i) you are stopped out by way of a price rise that has
triggered your own personal money management
parameters (hopefully with a stop loss guarantee in
place).
(iii) Finally, in the immortal words of John Maynard
Keynes, “when the facts change, I change my mind. What
do you do sir?” If the reasoning for the short changes, and
leaves the argument to be short in doubt, close the short.
Be warned that most investors are indecisive when
confronted with this problem.
(ii) the stock no longer offers an attractive risk/reward
profile. A banked profit feels much nicer than a paper
profit.
The institution that has lent out the stock may, at some
point, wish to actually ‘call the stock back in’. This means
that your spreadbet firm, in the absence of being able to
find a new borrowing avenue, will very likely require you
to close your short, i.e. buy back the shares in the market
so that these can be delivered back to the lender. If there
are no ready sellers of stock for whatever reason, there
can be a mad scramble for stock. What can now occur is
the dreaded ‘short squeeze’.
May 2012 | www.spreadbetmagazine.com | 59
Special Feature
Xcite Energy
Xcite Energy
2012 outlook
60 | www.spreadbetmagazine.com | May 2012
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Special Feature
Xcite Energy
Technical picture
Xcite Energy gears up to kick off crucial
Extended Well Test
Following the Reserves Assessment Report (RAR)
written by oil and gas auditors, TRACS, on 30th April 2011
which gave Xcite Energy’s Bentley field 2P (proven and
probable) reserves of 116 million barrels, the company
is pursuing the next stage of its journey towards being one
of the North Sea’s largest independent oil companies, or
readying itself for a takeover by a major oil company.
Chief executive Richard Smith said in an interview
with the Scotsman in February that the company is not
aiming to maximise the flow from the wells it plans to
drill this year. Instead, it will be focused on resolving
technical issues about how the water table under the
oil behaves, which is key to extracting as much of the
reserves as possible in the long term.
The 9/3b-7 well is currently being drilled with the Rowan
Norway rig following a spudding on 18th March 2012. The
Phase 1A work programme is planned to be undertaken
within the 240 days initial term under the rig contract
which started in early March.
That knowledge will allow the company to book proven
reserves for the core area of the field which, it hopes,
will be at least 116 million barrels. It will also help it to
finalise a field development plan that is eagerly awaited
by investors. Smith said: “It’s important that the market
understands that what we are seeking to get out of this
well is not necessarily what they are hoping to get out
of it.”
Phase 1A of the development programme will see Xcite
drill two development wells and carry out an extended
production test, which is expected to last 90 days in
total. The objective of Phase 1A is to provide Xcite with
additional reservoir and longer term performance data,
to confirm and calibrate the existing reservoir model.
DECC stated in a letter to Xcite in December 2011 that the
“...reservoir geology and future reservoir performance
as currently predicted, I am broadly satisfied with your
approach to the proposed phased development of the
Bentley field from a resource recovery perspective. We
do however consider there to be remaining
uncertainties in future reservoir performance, and we
note that you plan to drill a further appraisal well and
conduct an Extended Well Test this Spring, which we
understand is intended to resolve the majority of these
uncertainties. As a consequence and as discussed with
you, following the EWT, we will need to review the results
to confirm that the proposed phased development plan
as described in your FDP dated 25 November 2011
remains appropriate.”
Looking at the medium term and short term charts
below, you will see that Xcite is currently positioned right
at a critical resistance level. The stock is just probing the
top of a large wedge formation, and it sits underneath the
20, 50 & 200 day moving averages. A move up through
135-140p on large volume is our trigger to buy. The RSI
crossing back up towards the 50 line is a positive sign
too. Basically, the overbought status of mid-February
has been well and truly shaken off as the stock recently
tested support around the 100p mark - the area of
resistance that capped the stock during Dec and Jan - the
move back up from here is a positive technical sign.
The medium term chart also shows the down trend line
from the highs of almost 400p at the beginning of last
year. A decisive move through 150p would be a very
bullish move.
Looking at what could go wrong on the bear side - any
move back down towards 100p and a number of
consecutive closes below this, particularly if coupled
with strong volume - will give us advance notice that
all is not well.
The Field Development Plan for the Bentley Field,
Phase 1B and Phase 2, was originally submitted for
approval to the Department of Energy and Climate
Change (DECC) at the end of 2011. The FDP will be
updated with the information obtained from Phase 1A,
resubmitted to and reviewed by DECC to seek
confirmation that the phased development plan
described in the FDP remains appropriate.
With the well likely to be complete by the end of April,
Xcite are likely to have the results from the 90 day flow
test by the end of July or August, giving time to
potentially appraise an unexplored area of the
Bentley field using the Rowan Norway rig allowing the
2p reserves of 116 million barrels to be upgraded. The
rig is handed on in November 2012. The second half
of 2012 is, therefore, looking very interesting for Xcite
investors, and will hopefully coincide with a rerating of
the company to a higher level than its currently woeful
$3-3.5 a barrel valuation.
(%)
XCITE ENERGY
110
263
394 - 72
The company undertook a flow test on the Bentley field
in December 2010 producing a headline figure of 2900
barrels a day under constrained conditions. This flow test
was enough for TRACS to assign the 1p and 2p reserves.
Therefore, it is very important for investors in Xcite to
understand that the current well programme is a
technical test, not a headline flow rate test.
62 | www.spreadbetmagazine.com | May 2012
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Groupon
Special Feature
Update
Following on from our Feb edition feature on Groupon
in which we stated, “Groupon’s shares are a trader’s
dream, with the stock being one of the most volatile on
the US stock market, regularly moving over 10% in a
day. At the current market capitalisation the company
is worth as much as the combined market values of The
New York Times Co, Abercrombie & Fitch Co, Hasbro and
Weight Watchers International! With analysts projecting
losses into 2012 and a net negative book value, it will be
interesting to see how the Groupon story plays out during
2012...”
Groupon has provided traders with a cracking short
opportunity during the first few months of the year as the
stock hovered in the early - mid $20’s range and indeed,
this paid off handsomely on April 2nd with a profits
warning that resulted in a sharp fall of almost 20% on the
day from just under $20 to $16. At the time of writing, the
shares trade around the $14 mark.
64 | www.spreadbetmagazine.com | May 2012
It seems that the increasing requests for Groupon
customer refunds were the ‘excuse’ management used
as to the revenue and profits miss. For those readers
who have been studying Simon Cawkwell’s “Guide to
Successfully Shorting Stocks” feature in this months
and last months edition, you will note that Groupon
seems to fit the bill of many of the stated requirements
for a good short candidate - flimsy balance sheet,
cash-flow issues, possible requirement to raise new
finance and the all-important greed/fear pendulum
consideration. Spreadbet Magazine’s conviction in a
long-term short position on Groupon has now increased
materially and we expect the shares to lag the market
on any overall rise, and be in the vanguard of any
serious market weakness.
With many of the company’s former Wall Street
cheerleaders now growing cautious on the stock and
wider questions already being whispered with regards
to the company’s financial controls, considering the
market capitalisation is still around $10bn the shares
could have a lot further to fall. With the stock short term
oversold, any rise back towards the $16 level could
prove an opportune point to open a long-term short
position.
(%)
May 2012 | www.spreadbetmagazine.com | 65
Directors Dealings
3 interesting trades
Directors Dealings
We have 3 interesting Directors trades for you this month - one being
noteworthy on the sale side and two on the purchasing side.
Melrose - Current price 429p
Let us look at Melrose the engineering company first.
As detailed in our Feb/March edition of Spreadbet
Magazine, within which I explained what to look for
with regards to true potential warning signs in
relation to Directors selling; where there are sales in
meaningful monetary amounts by a collective
number of Board members this usually makes me sit
up. Where the FD in particular sells then that is
generally noteworthy.
With Melrose, the Executive Chairman, CEO & COO
were each awarded shares under a Company incentive
plan. The haul was worth around £30m to each of them
and £19m to the FD Geoff Martin - not bad work if you
can get it, eh? The group sold in total just under 17m
shares worth £71m on the 12 April - such a massive
outlier from a monetary value perspective on the
Directors dealing chart that we felt it was worth
investigating further. The stock was sold by way of what
is called an institutional placing at a price of 400p
(basically an auction type process that attempts to
obtain the optimum price for the seller and buyer) a discount of around 5% to the then prevailing
market price.
Now, given that largely the same Board members were
purchasing shares (approx £3.5m worth) in just October
last year around the 290p mark, this illustrates to me
that at the 400p+ level the Directors do not perceive too
much more in the way of outperformance, particularly
given the re-gathering of darkening economic clouds...
The stock currently trades on nearly 15 times earning
too - a premium to the market of around 20% - for a
cyclical stock this is a pretty punchy rating.
Looking at the chart below we can see just how much
the shares have increased in value over the last 3 years
and how much of a deviation has opened up with its 200
day moving average (positioned down at 220p) - this
usually will, at the very least, put a ‘brake’ on a stock if
not being a precursor to an outright decline. I have also
circled each time the RSI reached the 80 level during the
last 3 years and you will see that consolidation occurred.
The stock has held up remarkably well following this
placing (and which in itself is a positive sign),
illustrating the strength of institutional demand for the
company, and we think it is worthwhile continuing to
watch for any further extension in the stock as a
potentially interesting point to open a short. I would,
however, caution that the chart shows no sign of
breaking down yet, and so if a short is opened - work a
stop and stick to it (readers will know I prefer 2
staggered ones so that if ‘sods law’ asserts itself and
you get stopped out on half your position that you still
have to suffer a second ‘poke by Sod’ to take you out the
other half!). A possible early downside target could be
the old resistance at 380p.
(%)
66 | www.spreadbetmagazine.com | May 2012
May 2012 | www.spreadbetmagazine.com | 67
3 interesting trades
Directors Dealings
Breedon Aggregates - Current Price 21p
On the potentially interesting Purchase side is
Breedon Aggregates, the building materials
business. A clean sweep of the Board participated in
the placing of 15m shares at 18p - the proceeds of
which are to be used for potential further acquisitions
or the de-gearing of the balance sheet through a
reduction in the company’s debt. In fact, within the
placing announcement the company stated that it
was currently in discussions with a number of
“potential vendors” (companies to be acquired).
The Executive Board largely held their own in the
placing and so preserved their stake with the biggest
purchase in monetary terms being by Peter Tom, the
Company’s Executive Chairman, who dipped into his
pocket to the tune of just under £300,000. What’s
interesting is that during the late summer of last year
there were a couple of other Director purchases by
Peter Tom and Mrs Susie Farnon - the latter who
increased her holding by one fifth at that point.
Bumi - current price 500p
The purchase prices were around the 19p mark too.
This sends the message to me that the Board sees value
at this point and, importantly in the lower market cap
spectrum of the market place where shady and amoral
Directors appear all too commonplace, are prepared to
back their strategy with their own money.
Looking at the technical’s, the chart displays an almost
classic bullish set up with the shares just recently
taking out prior resistance at the 20p level and a ‘golden
cross’ (a crossing of the 50 & 200 day moving averages)
forming some weeks ago (circled). The RSI returned
back towards the 50 line and is also beginning to rise
again now. A long spreadbet or CFD position in Breedon
seems to have the ingredients in place for a steady rise
in ensuing months.
The second interesting stock from a potential
purchase perspective is Bumi - the Indonesian Coal
miner that is majority owned by the Bakrie family and
that was listed recently by Nat Rothschild - scion of
the revered Rothschild family.
The Indonesian focused group has been at the centre
of a corporate governance spat between Nat
Rothschild and Mr Hari Hudaya, CEO of Bumi, and
that resulted in a formal letter of criticism being
made public. It is actually rather surprising that the
Boardroom spat has spilled out into the public arena
as one of the primary reasons for Nat Rothschild in
getting involved in Bumi was to enhance the
company’s corporate governance through listing in
London, and so adding an overlay of acceptability to
the Indonesian Group. All has been quiet in
recent weeks...
The shares have fallen from just over £12 when listed
only last June to a new low of 543p (at time of writing) - a
drop of 50%. What piqued my interest was the
purchase of just over £3m worth of stock by Nat
Rothschild at 617p in early April. This comes on top of
a slew of modest purchases last year in mid November
around the 900p level.
Looking at the chart below I have circled the RSI and that
shows the last time the stock was trading with an RSI
in the late teens (an exceptionally low figure that more
often than not precedes a sharp counter-trend rally). A
rally back up towards the 660-670p level to meet the old
support line and touch the area where the 20 & 50 day
moving averages are centred looks probable in the near
term, and so the set up here makes for an interest
potential long ‘swing’ trade around this level (500p).
(%)
(%)
68 | www.spreadbetmagazine.com | May 2012
May 2012 | www.spreadbetmagazine.com | 69
Editorial Contributor
Dominic Picarda’s Technical Take
Dominic Picarda’s
Technical Take
Dominic Picarda is a Chartered
Market Technician and has been
responsible for the
co-ordination of the Investor’s
Chronicle’s charting
coverage for 4 years. He is also
an Associate Editor of the FT and
frequently speaks at seminars
and other trading events.
Dominic holds an MSc in
Economic History from the LSE
& Political Science.
Click here to watch
my webcast
70 | www.spreadbetmagazine.com | May 2012
Rather than a game of two halves, the stock market has been a
‘game of three thirds’ for the last couple of years. Equities got
off to a cracking start both in 2010 and 2011. From around late
spring, however, they suffered either a serious correction – or an
outright bear market in some countries. Finally, they came
roaring back towards the end of both years. Are we in for a
hat-trick performance in 2012?
Despite my reservations about the economic outlook at the start
of this year, I have consistently recommended taking long
positions in stock indices these past four months, especially the
US indices. And I am not about to change my bullish outlook for
now. There are few signs on the charts that a major top is
imminent. Even allowing for a bit of customary seasonal
weakness between May and September, I continue to look to
buy the dips for now.
Dow Jones Industrials
The US indices have led the way higher for much of this year. I had
thought the US would enter a recession in 2012, but that is now
looking much less likely than it did at the end of last year. Leading
indicators of economic activity have generally improved, although
employment growth hasn’t been particularly hot lately. As long
as money remains cheap and the economy avoids contraction,
the components are in place for further gains.
Ahead of a major top, breadth – which measures the number of
shares in an index that are participating in the market’s gains –
typically starts to tail off. That hasn’t happened for the US yet.
Also, the Dow typically records an overbought reading of more
than 70 per cent on its weekly relative strength index, something
it has not yet done during the bull-run since October 2011. While
it is possible for a peak to occur without these two things
happening, it is worth mentioning that this is very rare indeed.
As such, I am looking for the Dow to push higher still. One of my
more modest objective lies at 13700 and thereafter 13929. But
I think there’s also a decent chance that this index will at least
match its all-time high of 14198 in 2012. The next significant top is
more likely to come next year than this, in my view. I would seek
to enter long positions when the price retreats to its 21-day
exponential moving average (EMA) - which is where it currently
is, and then rallies anew.
FTSE 100
Despite my bullishness on equities, I have generally steered clear
of buying the FTSE in 2012. As a trader, I like to get involved where
the action really is, which has been the US. The UK large-cap
index has faltered, by contrast, just as it did in early 2011.
Having reached 5960 in late February, the FTSE failed to make
any significant progress, and has more recently suffered
its deepest pullback since November last year.
May 2012 | www.spreadbetmagazine.com | 71
Editorial Contributor
I have looked back at previous episodes where the FTSE
has lagged behind the US markets by the same degree,
or more as it has done this year. It is not a negative omen.
Generally, it has happened during strong bull markets,
such as I believe us to be in now. The most likely outcome
is for the UK index to rejoin the American markets in due
course. Once it finally breaks above 6000, there is another
big barrier at 6100. The FTSE could reach 6400 this year,
although I will not try and buy until it regains the territory
above its 55-day EMA.
Nikkei 225
Although I was not convinced that the Nikkei’s two-decades
long bear market was over, I said in January that the index
might head higher to 9139, a target that it easily achieved.
Japan has disappointed repeatedly since 1989, relapsing
every time it appears to have turned the corner.
Small Cap feature
While the authorities are now acting more
aggressively to end the deflation that has dogged
the country since the mid-1990s, I am not getting
overly excited about the longer-term outlook
for now.
That said, the Nikkei’s recent good run has the
potential to continue for now. If it can remain above
its 55-week EMA (9318) and then pierce through
the 200-day week EMA (10235), the picture will
brighten further. So long as the index is above that
first line, my strategy would be to buy on rebounds
off the 21-day EMA. A really important target lies
at 10891.
JJB Sports
Update
Current price - 14p.
The surprise news in early March of Dicks Sporting
Goods investment in JJB at a stroke essentially
safeguards the company’s future for the next 24
months, in particular with Bank of Scotland renewing
their facilities right through to 2015. The additional
support by Adidas illustrates just how important they
deem a strong alternate to Sports Direct is for the
sports retail sector. Much to the chagrin of their arch
nemesis Mike Ashley of Sports Direct, it looks JJB just
won’t lie down!
The impending Olympic Games is an extremely
important period for JJB, and we believe this was likely
a critical element of the attraction to Dicks. With early
signs of a brightening economic outlook and the legacy
stock clearance that has depressed margins now
behind JJB, it is not out of the question to expect JJB
to actually post a modest profit for the full year ended
2012 - something the market has yet to begin to
consider.
With a still not insubstantial short position floating
around, the new equity going into secure hands, and the
important requirement of the Directors to actually buy
stock in the market in order to trigger their ability to
participate in the Equity Incentive Scheme (EIS) coupled
with the still very limited free-float; these particular
dynamics are likely to act as a strong foundation for the
shares to rise further.
It is Spreadbet Magazine’s opinion that the still dominant
bearish sentiment and deep seated scepticism towards
the stock is the ideal fertile ground in which stock bull
runs are born, and that the investment being made by
Dicks is a precursor to ultimately absorb the entire
residual equity - quite possibly in the next 18 months. It is
interesting to note that applying a market cap to saleable
square foot comparison to JD Sports results, on a fully
diluted basis (adjusted for the potential conversion of the
loan capital tranches), in a price of around 40-45p.
The first initial equity tranche issuance of just under
90m shares provides an immediate injection of
working capital to JJB whilst the convertible loan
amounts of up to £40m will underpin the company’s
working capital requirements and continued store
refurbishments over the next 12 months. What is
important to bear in mind is that if Dick’s do convert
their Loan stock into equity, then they will (unless a
Takeover Panel waiver is granted) trigger an automatic
bid for the company.
(%)
72 | www.spreadbetmagazine.com | May 2012
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Special Feature
Precogz
Range Resources,
Rocket Science and
just who are
Precogz?
In an attempt to make the readers eyes glaze over
(!), we shall explain a bit about who Precogz are. Our
“thing” is Linear Acceleration and Deviation. The nice
folk who work with Rocket Nozzles or even the
Particle Accelerators at CERN in Switzerland use the
same formulaic method. Our success rates, thankfully,
are higher than theirs as our particles already exist.
You will know our particles as Shares, Forex, Precious
Metals and Commodities.
We target where the price action is going next by using
a blend of logic and with many years of trend
experience. Sometimes, the results can be quite
spectacular.
The one thing missing from our mumbo jumbo is
technical indicators! We don’t entirely ignore them, but
it’s no accident MacD graffiti or RSI nonsense is
missing from our published charts. None of these
indicators suggest what the future price of an
instrument will be so they’re less than useful from our
viewpoint. Technical indicators do have a use though.
They let us know how humans are liable to react when
a share is both popular and volatile.
74 | www.spreadbetmagazine.com | May 2012
We’ve computed a trigger level on this stock at just
16.1p. Once RRL successfully closes above this level
– and the IMPORTANT word is CLOSES – we’d regard
it as in recovery mode but until then, it’s floundering
around. Only once the price closes above the trigger
level will we regard RRL as safe for a long term
position.
Of course not, is the answer. It’s a share and it is
currently suffering from its own popularity. You can see
the chart shows the price closing in on our 9.5p target.
Once that’s achieved, would it really be so unbelievable
for the price to attack the longer term support level
shown in black? I would suspect not… It looks to be
presenting itself as a viable short to us, with a stop at
11.35 currently.
So, is it doomed?
And finally, are we going to reveal how our target levels
are computed?
Maybe next time…
At Precogz, we’ve actually caused irritation amongst
AIM players by referring to Range as ‘not a proper
share.’ Our frustration emanates from the way it has
been shamelessly manipulated at the expense of the
private investor who naively thinks the stock market is
honest and fair. Its fall from grace commenced in April
2011 and was finally arrested at the end of 2011. Since
then, it’s shown a little recovery, but nothing
particularly inspiring as there’s a heck of a lot of
damage that needs undoing and the chances of price
rises sticking are being weakened due to the sheer
number of folks whose savings have been trapped.
From a chart perspective, this isn’t going up until
sufficient private investors have been scared silly and
bailed at break-even (at best) or at a loss.
Take a look at our marked chart that gives various
targets for this stock. There’s actually a number above
24.64p, but it’s not shown and to do so would be
irresponsible as there’s zero chance of it happening
anytime soon.
May 2012 | www.spreadbetmagazine.com | 75
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4. Entries must be made to the nearest 1 decimal point, ie 5456.8.
May 2012 | www.spreadbetmagazine.com | 77
Technical analysis v
fundamentals which suits you best?
The e-magazine created especially for active spreadbetters and CFD traders
Issue 6 - June 2012
In next months’ edition...
Interview
with a
spreadbet
dealer
Myths exploded &
secrets revealed
How to spreadbet profitably continued
5 Pairs trading ideas
78 | www.spreadbetmagazine.com | May 2012
Robbie Burns, Dominic Picarda’s
Technical Take & much more!
May 2012 | www.spreadbetmagazine.com | 79
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80 | www.spreadbetmagazine.com | May 2012
May 2012 | www.spreadbetmagazine.com | 81