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The sheriff of AIM strikes again

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After last night’s documentary on the BBC Inside Out London which you can watch here , Investors are left with one question. Has David Lenigas & Steve Sanderson ramp up shares in UK Oil & Gas (UKOG) with unjustifiable claims about Horse Hill ? 

If we go back to April Shares in exploration company UK Oil and Gas (UKOG) exploded after the discovery of up to 100bn barrels in its oil field in Sussex. The question everyone is asking  is where did the press get the 100bn barrels figure from? Rising 164 per cent on the 9th April 2015. Why did neither David Lenigas or Steve Sanderson go out of their way to correct the media about the extortionate number being quoted all over the news?

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UKOG claim they have no idea where this number came from but Inside out London clearly shows Steve Sanderson clearly stating 100bn Barrels. So what has happened ? clearly the claims have been exaggerated.

This is where the Sherriff of Aim Tom Winnifrith comes in. As anyone who follows Tom on Shareprophets would know , Tom is notorious for investigating companies who are not being truthful the their shareholders or Investors . Currently receiving on average four lawyers letters a week and a death threat every couple of months he considers himself the sheriff of Aim and the man on the investor’s side. 

As Tom Winnifrith and David Lenigas continue their wage of war on twitter 

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Investors are left with one question – What returns are we actually likely to expect from our shares in UKOG ?

We ask the one and only Sheriff of Aim his thoughts

‘You will make a lot less than David Lenigas will. He is now a proven ramper. I ask simple questions of him but instead of answering he posts silly tweets attacking me. I answer this from Bristol where I live 10 months of the year as he knows well. The man is talking cock and anyone owning shares in UK Oil & Gas can look forward to a life of poverty.’ Tom Winnifrith

 

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UK’s over 50’s turn to the stock market to secure their financial futures

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For those fast approaching the age of retirement, money can be a concern. Knowing that your finances are arranged so that you can do more than just survive, and in fact thrive during your golden years can be a big weight off your mind. With savings accounts providing little more than a pittance of a return, many UK over 50’s are trying their hand at the stock market to help grow their nest egg.

A fit financial future

The majority of over 50’s in the UK today will have already amassed a reasonable pension pot, certainly enough to see them through later life with food on the table. But older people are also starting to realise that retirement is about more than just gardening and daytime TV. Retirees are now living longer, and enjoying better health than ever before, with many setting off to explore the world, indulging in luxury holidays or taking up new hobbies to fill up all their extra time.

With the prospect of many years of pleasure ahead of them, over 50’s realise that they need more financial vehicles behind them than just a simple pension pot. Traditionally they may have held other savings accounts, such as ISA’s, in order to bolster their basic income in retirement. But with the lowest ever rates on investments and little sign of improvement in the near future, many are starting to think outside of the box when it comes to making their money work for them.

Silver shareholders

According to research conducted by Saga, more and more mature people are turning to the stock market to grow their savings and fund their retirement. Their recent survey showed that:

  • 50 per cent of the over 50’s own shares in a company, although one in six has either inherited them from a relative or been given them by an employer
  • One in three of these shareholders say they are hoping to use the potential returns to boost their income and capital once they stop working
  • 21 per cent say they regularly buy and sell shares to supplement their current income
  • Two thirds of shareholders say that they strongly believe that they will get a better return on their investment in shares than if they put their cash into a traditional savings account
  • Not all mature shareholders are in it for the money, as 7 per cent said they enjoy checking the FTSE as a hobby, and others say it keeps them mentally active

Saga estimates that there are around 11 million over 50’s in the UK right now who own shares in at least one company. There is a slight bias towards men, with 75 per cent saying they have bought shares compared to 60 per cent of women.

A good investment?

There is no doubting that, right now, investments going into savings accounts are not going to be generating much of a return. However, buying shares is not without its risk too. Many of these over 50’s are enjoying a much better return on their investment than they had hoped for, but for every success story there is also another side to the coin.

Shares are notoriously volatile, and can change value dramatically in a very short space of time. For most investors, well placed shares offer a great opportunity to grow their capital, but for the unfortunate few who don’t make the right choice, everything could be lost. If you’re thinking of making an investment on the stock market, be sure to take educated advice before making any decisions.

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TRADING THE BREAKOUT IN FOREX

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As a forex trader, one phenomenon that you will come in contact with almost every week is the breakout. The breakout trade is the basis of many forex trades that have made some good money for those who know how to use it, but it has also been an albatross for those who do not know how to recognize it or who neglect to make use of it in their trading decisions.

Not all orders placed in forex will be market orders. Sometimes a trader will need the price action to move into favourable territory before execution. The breakout is therefore a good tool which can help make such a determination.

This brings us to the question: what constitutes a breakout in forex? A breakout occurs when the price of the asset (which has otherwise been contained within a specified range by key levels of support/resistance) receives a momentum that causes it to push through these key levels to move either higher or lower than the initial range in which it was contained. The breakout is usually accompanied by heavier trade volume.

The critical factors in deciding how to trade a breakout are the key levels of support and resistance. Support and resistance in forex can be determined in the following ways:

  1. Using the daily pivot points (R1,R2,R3, central pivot, S1, S2 and S3) .
  2. Using previous price action which detailes areas where price did not go above (support) and areas where price did not go below (support).
  3. Psychological support/resistance levels, which are seen when the price forms round numbers (e.g. 1.7000, 1.6800, etc).

Three events could possibly occur when the price action reaches these key levels of support or resistance:

  • The price action may bounce off the key levels after striking them repeatedly without breaching them. These are simply “tests of support” or “tests of resistance”.
  • The price may breach these key levels, but do not close above the resistance or below the support levels when the candlestick closes. Some call this a fake breakout or “the fakeout”.
  • The price may close above the resistance, or close below the support. This is a true breakout.

Many traders cannot distinguish between a fake breakout/fakeout and a true breakout, which is why many traders end up mistaking the second scenario for a breakout and end up being faked out. The currency pair being kept in view MUST actually close above the resistance or closes below the support to constitute a breakout.

 

TRADING THE BREAKOUT

When price breaks through a level of support, the broken support turns into a new resistance. In the same vein, a break of resistance converts that level into a new support. These two scenarios are the basis of the breakout trade.

Here are the steps to trading a breakout in forex.

Step 1

The trader must distinguish between a true breakout and a fakeout. The only way to do this is to allow the candlestick in view to close, and then note its closing price in relation to the resistance or support level. For a breakout, the closing price must be above the resistance or below the support. Anything else is not a true break and should not be traded.

The reason why traders get faked out is because they take their decisions based on the price action merely breaching the key levels without closing above the resistance or below the support. It is very important that the trader has the patience to allow the candle to close.

Step 2

From my personal experience, I have found that 2/3rds of the time, the price action tries to go back to where it came from after a breakout. It then gets rejected at the level just broken and then resumes the movement in the breakout direction. It is therefore better to allow the candlestick breakout to occur, then wait for the next candle to open and try to force the asset back to where it was coming from (in the direction opposite the breakout). This causes the candle to halt at the old support now turned resistance, or the old resistance now turned the new support.

Once this happens, you can use a MARKET BUY order to trade the resistance breakout if you are close to your computer when this is happening. If you will not be close to your computer, use a BUY LIMIT order with the entry price set at the level of the broken resistance.

If trading a downside break of support, you either wait for the next candle to force its way back up to the support-now-turned-resistance and sell the asset at market price, or use a SELL LIMIT at that key level if you will not be close to your PC.

This setup has a good degree of accuracy. You can see the charts below for examples:

Example 1: Upside breakout

Here, we see the price of the asset resisted by the resistance line (the black circled points), and we also see two fakeout candles which breached the resistance but closed below it. To the right, we now see a true breakout candle, and the next candle which retreated to the old resistance/new support, before continuing the move higher.

 

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Example 2: Downside breakout

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Here we see prices bouncing on the support, with a number of fakeouts. We eventually had a true breakout, and the candles tried to drag prices upwards but the support now turned resistance was too strong. It is at this point that the trader should either place a SELL at market price, or if the trader is unsure of being at the computer to place the trade as it occurs, a SELL LIMIT order using the new resistance as entry price can be used.

 

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The case for investing in the student property market sector

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The UK’s student housing market is on the up, with over £4.2 billion having been invested into developments over the first half of 2015.

The levels of investment into purpose-built student accommodation are a staggering 40% higher than their 2012 peak, and these figures only look set to rise. There are a number of reasons why this particular market is attractive to investors both in the UK and overseas…

It’s a robust market

Throughout the economic recession, the student housing sector consistently provided positive rental growth year-upon-year. Investment even continued in Q1 2015, despite the General Election, a time when other residential markets such as the luxury sector stagnated substantially.

Supply and demand

This has become notoriously strained across the UK in recent years. In core student markets such as Edinburgh, Nottingham, Liverpool, Leeds and London, there is a significant lack of purpose-built student housing, meaning universities in these areas are structurally ill-equipped when it comes to accommodation.

What’s more, the UK’s student population could be set to rise considerably in the coming years, which could place further strain on supply. The number of international students in higher education is projected to rise by 15%-20% in next five years, meaning there is likely to be a sharp uptick in the number of students arriving in the UK to study – and therefore seek accommodation around their chosen universities.

Performance

This market has also been the highest performing property asset class since 2011, (Knight Frank reported annual returns of 7.8% in 2013), and is poised to continue on an upward trajectory as investment into developments continues. For savvy investors keen to enjoy strong rental income coupled with high price growth, there is a strong case to be made for examining the student sector.

How to invest in student accommodation

When it comes to making a smart investment, there are some things to consider, such as the fact that the student accommodation market is largely a cash market.

This means skipping the bank altogether, good news considering it’s an increasingly liquid market. To capitalise on this, investors should look for an opportunity that has high resale value and the potential for an easy sale, and the easiest place to start is looking for something with close proximity to campuses and facilities. Property further from the university may be cheaper, but investors can have a harder time filling it and getting their asking rent as a result, not to mention these properties are less appealing to buyers when it comes time to sell.

One strategy involves looking for opportunities in purpose-built developments. There are millions of pounds being invested in building complexes that not only include student housing, but also desirable amenities such as cafes, restaurants, entertainment facilities, bookstores, and grocery shops.

When buying existing student housing, investors often face the headache of inheriting rundown and abused properties, and these require significant time and capital outlay to restore them to state that will fetch a decent rental return. With new developments, none of these issues are encountered, enabling investors to buy a turnkey flat that cash flows straight away. A number of these new buildings are being erected mere yards from universities too, rendering them in high-demand for students, which means higher gains for investors.

Trading and Investment News personally recommends Emerging Property as on of our favourite student property investment companies to invest with.

Some final thoughts:

  • Look for properties that have rental guarantees. Be conscious of shorter rental guarantees however, because often the rental income is built into the profit, and once the guarantee period has passed, some developments can simply lie vacant.
  • Examine opportunities that enable you to invest directly with the developer. This can mean you get real title in the property, unlike with pier-to-business lending, which can lower your risk significantly.

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Glencore insists no solvency issues, shares spike higher

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Commodities group Glencore insisted Tuesday it’s not facing solvency issues, a day after its shares fell by nearly a third amid concerns over its ability to service sky-high debts at a time when many commodity prices are at multi-year lows.

Its defense helped the company’s stock recover 17 percent to close at 80 pence. That means it has recouped around a half of the losses suffered Monday, when Investec Securities warned that the company faces acute financial difficulties in light of a slide in commodity prices.

Responding to Investec’s analysis that the company could end up “solely working to repay debt obligations” if commodity prices don’t recover, Glencore said it has taken “proactive steps” to be able to withstand the weak commodity market and that the business as a whole is “operationally and financially robust.”

“We have positive cash flow, good liquidity and absolutely no solvency issues,” it said in a statement. “Glencore has no debt covenants and continues to retain strong lines of credit and secure access to funding thanks to long term relationships we have with the banks.”

Earlier, Glencore found support from analysts at Citigroup, which recently helped the company raise cash through a placing of shares with new and existing shareholders. They said the fall in Glencore’s share price — about 80 percent from its high in May to this week’s low — has been overdone and suggested the company could raise more money from the sale of investments than the $2 billion it has penciled in.

The sales were part of a suite of measures Glencore announced this month, which also included the suspension of dividend payments, to reduce debt by up to $10.2 billion.

Even if its debt reduction plan plays out as expected, Glencore will be left with a debt mountain of around $20 billion — more than its current market value of around $16 billion.

China’s economic downturn is at the heart of Glencore’s difficulties. Mining and commodities companies sought to take advantage of the country’s booming growth at the turn of the decade, when many of the world’s leading economies were struggling to emerge from the global financial crisis and ensuing recession.

Glencore said it remains “confident the medium and long-term fundamentals of the commodities we produce and market remain strong into the future.”

Citi’s analysts said Glencore’s management should consider taking the company private “in the event the equity market continues to express its unwillingness to value the business fairly.” Doing so, they added, would allow the management to undertake restructuring measures “easily and quickly” and to prepare for an eventual float of the industrial business.

Sentiment toward Glencore PLC, which is based in Switzerland but listed in London, has been fragile for months as investors worried over the impact of falling commodity prices.

Glencore, which was founded in 1974 by the late commodities trader Marc Rich, floated in 2011 at a share price of 530 pence, a listing that valued the company at a little less than 40 billion pounds ($60 billion) and made several of the company’s executives, including CEO Ivan Glasenberg, billionaires.

 

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The Crude Oil Market: Yesterday, Today and Tomorrow

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Over the last forty years, the crude oil market has endured a topsy-turvy ride. From the days of the Yom Kippur War of 1973 when crude prices spiked to $70 a barrel, to the lean days of the early 1980s when crude oil fell to $10 a barrel, and moving forward to the boom of the first Gulf War, with subsequent price drops all the way to $9 a barrel in 1998, and down to modern times when the price of crude oil has moved from two-digit to three-digit and back to two-digit figures, it has really been a roller coaster ride.

After going above $140 a barrel at the height of the Libyan Civil War of 2011, the price of crude oil has dropped systematically ever since by more than 60%. As at Wednesday August 19, 2015, the price of crude oil fell to 6-year lows of just about $40 a barrel. Many industry watchers and indeed the global population are asking: what next?

An understanding of the complex interplay of factors affecting the crude oil market as well as a historical look at trends in the market, will paint a picture as to what the future holds in this market for market players. Crude oil has always had its peaks and troughs, with various factors responsible for the swings in prices. Some of these factors have remained relevant, other factors have paled in significance and new fundamentals have emerged.

There was a time when the member countries of the Organization of Petroleum Exporting Countries (OPEC) were the kings of the market. Whenever they sneezed, the world caught a cold. Things began to change when the first barrels of crude oil were discovered and drilled from the North Sea, bringing countries like Norway and Russia into focus as dominant world players in the market. The discovery of the second largest crude oil reserves in the world in Canada’s oil sands added to the mix. But perhaps, the greatest changes to the crude oil market were triggered by the Gulf War of 1991, which led to record prices at the time and also led to Iraq being kicked off the global market for several years. At the same time, China began to emerge as a global production powerhouse, guzzling millions of barrels of crude oil to feed its thirsty industries. Global demand soared, prices shot up and oil producing nations were awash with cash. Unfortunately, some of the countries that benefitted from the oil windfall of the early and mid 90s put the money to nefarious use. Leaders like Muammar Ghaddafi simply found more money to sponsor terror groups and rebel insurrections in Liberia and Sierra Leone. Iran and Qatar began to assert regional influence by surreptitiously funding groups like Hamas and Hezbollah, which were classified as terror groups by the United States.

The Global Financial crisis of 2008 led to a drop in demand as cash-starved economies began to scale back on spending, causing crude prices to fall to as low as $39 per barrel in 2009. The drop in prices was short-lived. Within two years, the Arab Spring kicked off in Tunisia and spread across the Middle East, as citizens of oil rich countries who did not enjoy the dividends of the fat years rose up against their leaders. The Libyan civil war, which kicked off in February 2011, drove oil prices to as high as $146 per barrel. High prices were maintained when Iran was sanctioned for failing to comply with calls to scrap its uranium enrichment program.

THE BUBBLE BURSTS

For countries like the US where domestic prices at the pump are immediately adjusted to the global crude oil prices, it was time to change consumption patterns. The United States, which had for a long time borne the brunt of swings in oil prices, decided it was time to secure its supplies by stepping up local production with new technologies and cutting down its dependence on external oil supplies. This led to the development of shale oil technology which effectively ramped up production in the US to a high of 9 million barrels per day.

China, which had contributed to higher crude prices as a result of its rapid industrialization, has sort of slowed down on its consumption as the central government is now advocating for a slower and more sustainable growth pattern, cutting its GDP estimates to a modest 7% for 2015. Recent data suggest that this estimate may be too optimistic.

Increased global supplies helped by the new US shale production and the reduction in global demand caused crude prices to slump by 60% in 18 months to just under $50 a barrel. Prices retraced upwards briefly, only for a deal to be struck between the United States and Iran over the latter’s nuclear program in July 2015, paving the way for the flow of Iran’s oil into the markets once more. Crude prices have responded to this renewed increase in supply by falling to as low as $40 a barrel, hitting 6 year lows.

What makes the new price situation a bit tricky is the fact that some of the fundamental influences that have driven down prices are not transient. US shale oil production is here to stay. Iran has been given a reprieve to sell oil with the nuclear deal, which will add to global supply. China’s economy is not expanding anytime soon going by recent data. Many countries are looking at alternative energy sources with renewed zeal.

So the big question is: what is the future of oil prices in the immediate future, and how can crude oil traders and those who trade commodity currencies trade this commodity heading into 2016?

THE VARIOUS PLAYS

Traders can decide to:

  1. Trade crude oil itself
  2. Trade stocks of companies in the oil industry

Crude Oil

If we follow historical price movements of crude oil, such as price movements between 2009 and 2011, then we can say that crude oil is going to go back to between $65 and $70 a barrel. This level seems to be the sweet spot for stakeholders in the industry and many have agreed with this call. Another factor which lends credence to this call is that shale oil production is actually more expensive than conventional methods of drilling that have been in use for decades. What this means is that if prices fall too low, profit margins on oil made using shale technology will be eroded and shale producers in the US may have to halt production until prices go back up to levels at which their operations can become profitable once more.

However, there are some who believe it will get a bit worse before it starts to get better. Citigroup is predicting that crude prices will get all the way down to $32 a barrel. So we may see prices going a bit lower before they rise. A crucial factor in the equation is what Saudi Arabia will do about its production quota. At the last major OPEC meeting to decide on whether member states should cut back on production, Saudi Arabia blatantly refused to support a cut in production quotas. At US$672.1 billion, Saudi Arabia has plenty of foreign exchange reserves to cushion any shortfalls in prices, and they used this as leverage in the negotiations. They effectively outmuscled countries like Nigeria (with just $28 billion) and other members of OPEC who have foreign reserves that have dwindled massively and were hoping that the cartel would order cuts to shore up oil prices; a move which would help them to balance their budgets. So Saudi Arabia holds the trump card in OPEC. If the Saudis favour cuts in future, this would definitely shore up prices.

Oil Companies

Increased oil prices would not automatically help oil companies. We have been at an era when companies made profits with $20 per barrel, and also seen a time when crude prices were much higher but companies made less money as a result of bludgeoning costs. Going forward, companies would be forced to restructure operations, cut operation and overhead costs and probably merge to form bigger companies. Traders who are trading oil stocks would be more concerned with some of these fundamentals rather than trading simply on rise or fall of oil prices.

Disclaimer

It is important to seek the advice of your professional trade advisor before performing any trades in the market. The information in the article is for informational purposes only and should not be used as a recommendation to trade crude oil, oil stocks or any other associated assets.

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How Not to Get Caught Out by Big Central Bank Moves

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On January 15, 2015, the Swiss National Bank (SNB) officially abandoned its EURCHF minimum peg policy which had been in place since September 6, 2011. At that time, the SNB, worried about the increasing strength of the Swiss Franc and the negative impact this would have on Swiss exports (including tourism), had placed a minimum peg of 1.2000 on the EURCHF. The SNB had promised then to defend the peg vigorously. When that decision was made, the CHF currency pairs in the market saw significant movements in a space of 15 minutes, with generalized weakening of the CHF. The snapshot below shows the movement on the EURCHF on September 6, 2011 when the decision was announced.

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When the minimum peg was abandoned, it caused a great upheaval in the forex market, with traders and brokers affected by the outcome of the decision.

Traders: Many traders had banked on the fact that the EURCHF peg would continue to be defended at the 1.2000 level. Despite the fact that there was heavy pressure at that level for several weeks leading up to the peg abandonment, many traders had long orders at or around that price level, with very tight stops set just below that peg. There had been occasions in the past when rumours of a further tightening of the peg or some news item that led to Euro strengthening, had caused the EURCHF to go as high as the 1.2472 mark. Knowing that this 250-pip band had been achieved in the past, many traders were as it were, “all in”, with very little attention paid to risk management. Many of these traders were also operating with very high leverage and little of their own margin, and sustained huge losses which exceeded their account capital as a result of the slippage which occurred and the inability of brokers to cover the stops on those trades. Some brokers are now trying to recover the negative balances from their traders.

Brokers: Many retail brokers have always offered their clients very high leverage to the order of 500:1, effectively allowing their traders to trade with as much as 500 times their own committed capital. This led to a situation where many brokers which were not very well capitalized, over-extended themselves with the leverage capacity. When the peg was abandoned, the bottom literally fell out from under the bucket. Massive slippage occurred with the EURCHF tanking by almost 3,500 pips. This sent many trading accounts into debit as their stops could not be covered by the brokers.

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The ability of brokers to curtail trading losses via issuance of margin calls to affected accounts also led to significant losses on broker accounts. Presently, Alpari UK and Excel Markets have been declared insolvent while several other brokers have taken steep losses. Only a few brokers who saw the writing on the wall and cut their leverage provision on CHF pairs to 10:1 were spared.

Many of these losses would have been avoided if traders and brokers alike had fully understood the market fundamentals that led to this move.

Why the SNB Abandoned the EURCHF Peg

How did the SNB get to the point where it was forced to eat its words after promising to defend the minimum peg aggressively?

Maintaining the peg involved the SNB having to sell hundreds of billions of Swiss Francs, and buying the Euro in exchange. In other words, the SNB would flood the markets with Swiss Francs, leading to an oversupply situation, while acting as a Euro buyer of last resort. The supply pull on the CHF would also extend to other CHF pairs as well, causing a generalized weakening of the Swiss Franc.

The essence of this move was clear: to make the Swiss Franc cheaper relative to other currencies and promote Swiss exports. Tourism for instance, is a major income earner for the Swiss economy. During winter, many tourists hit the ski resorts and tourist centres for holidays. A cheaper Swiss Franc would mean that tourists from Europe and the US can exchange their Euros and US Dollars for more Swiss Francs than they would have been able to, allowing them greater spending power while in Switzerland and other Helvetica territories.

However, a number of market fundamentals began to challenge the peg heavily in 2013/2014. One of the challenges to the peg was the seemingly unending Eurozone sovereign debt crisis. The anti-austerity Syriza party came to power in Greece and threatened to completely unwind all actions and agreements entered into as part of the Greek bailout package. Faced with continued pressure on the Euro, the European Central Bank was forced to announce a quantitative easing package which would see a very massive bond buying program that would further depress the value of the Euro. These factors made the cost of defending the EURCHF peg increasingly unsustainable for the Swiss National Bank, leading the bank to finally jettison the peg in January 2015.

Some market analysts had seen this coming as far back as October 2014. Dukascopy, a Swiss-based forex brokerage, had predicted the abandonment of this floor in an October 2014 article on its website, taking a proactive move to reduce the leverage on CHF pairs to 10:1, thus reducing the exposure of its clients and its own exposure as well. Gain Capital, Saxo Bank, RoboForex and Admiral Markets also reduced their leverage on CHF pairs before the SNB decision.

Going Forward

It is now evident that the words of central bankers are not set in stone and that the only thing that is constant in the forex market is change. Change in policy and changes in market fundamentals can happen at any time in the market and can lead to very adverse consequences on traders and brokers alike. The fallout from the SNB tsunami underscores the importance of risk management as a tool for capital preservation and survival in the market.

It is very likely that we will see situations where risk management teams of brokerages will get a lot more proactive in the application of leverage. The Commodities and Futures Trading Commission (CFTC) had already mandated US brokers to set leverage of forex and options positions to 50:1 and 20:1 respectively as far back as 2010. While other brokers may not be as strict with their leverage and margin requirements, it is likely that brokers will no longer shy away from reducing leverage on currency pairs which are deemed to pose a slippage and negative balance risk to traders and brokers by extension.

Traders should also realize that they are their own first line of defence when it comes to slippage risk. Losses due to slippage can be minimized by proper position sizing and by use of manageable leverage amounts. It is hoped that all concerned can learn the right lessons from the SNB event of January 15, 2015.

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Market Upheavals: The Chinese Connection

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The selloffs in the major global stock exchanges as well as the collapse of commodity prices like copper and oil have continued into the second straight week. The fact that all this can be linked to one country, China, is beginning to make many market observers and indeed the general populace wonder: are we back to the 2008 scenario all over again?

The similarities are too striking to ignore. In 2008, the trigger for the global financial crisis was the collapse of the subprime mortgage market in the United States. Banks such as Bear Stearns and Lehman Brothers, which were heavily exposed to the toxic credit default swaps and other CDO instruments tied to this market, ultimately collapsed one after the other, triggering a massive global selloff as sheer panic seized the markets. Were it not for the intervention of the US government in the form of the Toxic Assets Relief Program (TARP) as well as various stimulus packages put in place by central banks across the globe, many more companies would have been forced to close down and the entire global financial system would have completely collapsed.

Fast forward to 2015. The world’s markets had been on a massive bullish run for close to three years and 2008 seemed a very distant past. Then the warning signs began to show in China. Just like many governments and businesses from all over the world were exposed to the US subprime mortgage market either via direct investment into the properties whose prices peaked and began to drop, or indirectly to the credit default assets based on these real estate assets, so also are many countries heavily exposed to China. China has massive investments in Africa. China accounts for 40% of the world’s production and requires the importation of large amounts of copper, gold, crude oil and other raw materials to feed its industries. So many countries have found themselves heavily dependent on China to drive their economies and sustain the value of their currencies. The 2008 experience which saw a localized problem in the US take on global dimensions, seems to have reared its head once more with a localized problem in China also assuming global significance.

The Chinese Connection

How did China start to impact the global markets negatively in recent times? One explanation is the consumption pattern of the products of the Chinese industrial revolution. China has a population of about 1.5billion people, but most of the products of Chinese industries are shipped abroad and do not serve this large local market. The dangers are obvious. When demand from the foreign markets starts to drop off for any reason, the Chinese economy also suffers. This has been the case for the last three years. Chinese GDP had hit a high of 14.2% in 2007, but over the last three years has drifted between 7.7% and 7.4%. This year, the central government in China identified as one of its development goals, the attainment of a GDP driven by a sustainable growth model, with an increase in local consumption of the output from Chinese industries. In pursuance of these goals, a GDP target of 7% was set in pursuance of these goals. However, a number of issues have cropped up within the Chinese economy which have not only made this GDP target seem at best too optimistic, but have also begun to threaten the global market as well.

  1. By the middle of the year, the Chinese stock market, which had on a two-year bullish run, began to show signs of a market bubble as uninformed investors among the general public poured into the market in droves. Despite the warnings by regulators, the influx of retail money into the stock market continued until the market corrections started. At a point, the Shanghai stock exchange plunged 11% in a single trading session, sending jitters around the financial markets. The central government tried a number of moves to support the market; getting listed companies to suspend trading in their shares and buybacks of stocks of companies, but nothing has worked. It now seems the authorities in China have thrown in the towel and are letting market forces fully determine the value of the Chinese stock market.
  2. Manufacturing has taken a big hit in China. The Flash PMI data which was released in the second week of August 2015 has shown that the Chinese economy is not just contracting, but may actually be on track to missing the 7% GDP target. This is bad news for commodity exporters to China such as Zambia, which makes 70% of its revenue from copper. Australia, which supplies a large chunk of raw materials and commodities used by Chinese industries, has also taken a hit and this has impacted the Australian Dollar negatively. This has sent commodity prices of commodities reeling.
  3. Faced with the scenario of not being able to meet GDP targets, the People’s Bank of China devalued the Chinese Yuan between August 11 and August 13, 2015 in a knee-jerk attempt to cheapen Chinese exports and drive export sales upwards. Whatever the intention, global markets reacted negatively to the news with Asian currencies plunging and stock markets across the world experiencing steep losses.
  4. The shale production in the US has already created a massive glut in the market, with latest data showing that there are roughly 2 million barrels per day more than market demand. With sanctions now lifted on Iran, the market is also bracing up for the addition of more oil to the market, which will further dampen prices. Oil is now trading at six-year lows.

The negative impact of exposure to China is now beginning to show in all asset classes.

  • Stocks

Stock markets across the world have been falling systematically. On Monday August 24, 2015, the Indian stock exchange fell by the most it has fallen in seven years, the Dow closed 588 points lower to mark its worst day of 2015, and European markets fell by about 5%. This is in addition to the steep losses sustained the week before.

  • Currencies

Hardest hit in all this are the emerging market currencies. These have been under pressure from the possible interest rate hike which the markets are expecting from the US Federal Reserve before the end of the year. The South African Rand plunged to is lowest level ever against the greenback, hitting 14.000 on Monday August 24, 2015. The Rand has been under pressure all year from the US rate hike expectation as well as several monetary policy decisions by the South African Reserve Bank.

Several Asian currencies have also been affected. The Kazakh Tenge plunged 22% on Thursday August 20, 2015 as the Kazakhstan Central Bank abandoned futile attempts at defending the currency. The Vietnam Dong, Turkish Lira and Brazilian Real have also lost ground against major currencies. The Malaysian Ringgit, Zambian Kwacha and Nigerian Naira have also suffered depreciation as a result of falling commodity prices and the Chinese Yuan devaluation which has made Asian economies in unable to compete favourably with China in certain trade sectors such as the textile industry.

  • Commodities

The slowdown of the Chinese manufacturing sector has hit countries that export raw materials feeding the Chinese industries particularly hard. Copper and oil prices have fallen steeply since the last year, and gold prices have also not been spared.

 

Conclusion

The volatility in global markets will no doubt provide good trading opportunities for informed investors. As the world watches the unravelling of markets, the question is: have we all learned any lessons from 2008? After now, will the world transit from overdependence or overexposure to one economy, or will changes be put in place? The world waits.

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Penny Stocks: Are They Right For You?

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Many people know that the stock market is a good way to invest, and increase, their money. However, playing the stock market is always a risk, and it certainly helps to know what you’re doing. For those wishing to make a small initial investment, the term “penny stocks” may come up, more than once. You may have heard that penny stocks are a great way to start small, and work your way up to being big. But how do you know they’re right for you? How do you know if you want to invest your money in these penny stocks?

Just because someone suggests you buy penny stocks, it doesn’t mean you have to take their advice. In fact, before you invest in anything it’s always a good idea to get some information on your own, first. Find out about the type of stock that’s being suggested, and then look more closely at the specific company that you’re considering investing in. Do your own research instead of just following someone else’s advice. After all, it’s your money – not theirs. Your money means more to you than to anyone else, so it’s only a good idea to look into your own investments instead of just letting someone else do all the work.

How do you know if they’re right for you, if you want to invest in penny stocks? The first step is in finding out more about what penny stocks are. Some brokers make penny stocks sound very safe, as if they always bring in large returns, as if they’re totally great. Perhaps none of this is true. Penny stocks are high-risk investments, and there is some potential for investors to enjoy large returns, but there is also some potential for losing one’s entire investment. That’s what a “high-risk” investment is – a risk. You could lose it all, but you could gain as well.

Because penny stocks are not traded through the large stock exchanges, many don’t know even about the existence of penny stocks. Penny stocks are shares in small companies and are not as “liquid” as other stocks, meaning that fewer shares are traded. Penny stocks are traded infrequently, and this is why some investors fear getting “stuck” with penny stocks that can’t be sold.

How do you know if penny stocks are right for you? Do your homework, do your research. Look closely at the penny stocks you want to buy, and learn more about buying and selling this type of stock. Your broker is required to give you certain paperwork and information on penny stocks, before you ever put your money into them. Look over this information carefully before making your decision. If you like the risk, if you like the gamble, if you like the potential, then penny stocks may be the right investment for you. Find out all you can about penny stocks, or any investment, before you throw any money that way. When you make an informed and educated decision, there is a smaller chance that you’ll regret your decision later on.

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Introduction to Penny stocks

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Introduction to Penny stocks: Penny stocks are low priced speculative stocks and these stocks are traded in over the counter (OTC) market. As per SEC (The Securities and Exchange Commission of United States) the maximum price of the penny stocks is fixed at $5.0 per share and in actual the price of these stocks are well below and sometimes a mare one cent. Although the penny stocks are commonly traded in the over the counter market, however these can also be traded at NYSE or NASDAQ.

How to start trading penny stocks: Although it is a common belief that the penny stocks are risky but at the same time as the share prices are generally low, the risk associated with penny stocks is also minimum. Many people see investing in penny stocks as an opportunity to learn share-trading techniques and at the same time not all penny stocks are risky. Although the investment in penny stocks may not substantially improve your financial condition, but the selected penny stocks may give you some profit.

If you have made your mind to invest a small amount of money in penny stocks, you will have to approach a trader or dealer for getting started. As per SEC (Securities and Exchange Commission of United States) guidelines you have to give a written request to the broker and after approval you may buy the stock from the broker. You should consult the trader and should invest carefully. Your broker will tell you the rate of the stock and brokerage.

Before investing in penny stocks contact to the Securities division of your state and get information about the broker. The history of broker provides important information about the license and disciplinary actions taken against the broker.

Once you have decided to deal with a broker, get all the information regarding the penny stocks, brokerage and other terms and conditions in writing from the broker. You should also keep the records of all the written documents provided to you by your broker. You should ask your broker to provide you the written documents mentioning the recommendation for buying or selling of any penny stocks. You should also take an independent opinion about the penny stocks from another broker and decide judiciously before making any investment. Your broker should also provide you a monthly statement mentioning the penny stocks held by you in your account and the rates of the penny stocks.

SIPC Coverage: Brokerage firms dealing in penny stocks will generally have SIPC (Securities Investor Protection Corporation) coverage. If the brokerage firm is unable to pay you your dues due to bankruptcy, the SIPC ensures that the customer owned penny stocks held by the brokerage firms are paid. SIPC insures the entire customer owned securities held by the brokerage firm, however in case of fraud, the insurer is not liable to pay the amount.

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