Future safe havens

The past four

weeks have been very volatile, and risk averse traders have been

searching for somewhere to put their capital.

Although the bond markets have been reasonably

stable compared to recent volatiliy, traders

have not sought safety in them as they usually would. Traders have

instead been seeking safe-haven alternatives,

either because bond yields are

historically low, or because they don’t believe that governments have

the capacity to solve their debt issues

in the short-term. As a result, the

assets to which traders are turning as safe havens are

very crowded and appear to be close to fully valued, relative to their fundamentals. The Swiss Franc has hit

all-time highs against the euro and the US dollar, {and, having recently reached

USD1,911 an ounce, gold is approaching it’s all-time inflation-adjusted

high of USD2,400 an ounce, last hit in 1980.

Where is the global market going?

The market downturn was initially

triggered by US growth revisions, which revealed that the 5.1% downturn in the

GFC was larger than initially

estimated. Recovery was also found to be weaker, with both US and European output at September 2007 levels.

Following this, weaker-than-expected global data was

also released, with some traders

worried that the global economy was

heading into a double-dip recession, and that the global

financial system might require large-scale US and

European government intervention. These concerns were sparked by Italy and Spain’s government debt and expectations

that the European Central Bank (ECB) and International Monetary Fund

would need to bail them out. However, the current European

Financial Stability Facility package could not support

either economy, revealing that although these economies

are ‘too big to fail’ they are also ‘too big to bail’.

When the ECB began to

purchase Spanish and Italian debt and forcing

yields down to reduce government borrowing pressures, market

concerns focussed on France and the US. Following

the downgrade of US debt from AAA to AA+, such

downgrades are likely to become a regular feature in the financial

markets as both the UK and France’s net

government debt-to-GDP ratio is forecast to reach 80% in 2015, the same level as that

of the US.

Now traders are being

forced to reconsider their market exposure in an environment where,

not only are stock prices lower,

but there is a high risk that the growth of advanced

economies will be significantly below trend due to the

unwinding of a 25-year leverage and

asset price boom. The rise in leverage

enabled more participants to enter the market, and

the resulting greater demand for existing assets pushed

their prices up. However, consumers

are now cutting their spending and increasing their savings, which will continue to unwind the boom.

Previous deleveraging cycles have been,

on average, half the length of the build-up, and economic growth in former deleveraging

cycles has averaged 1.5% due to slowed government, business and consumer spending. If previous patterns repeat,

the 16-year build-up could take almost nine years to

unwind. In this period the economic growth of advanced countries

may rest at current levels.

Thus, combined Japanese,

European and US growth might remain low, and

this will make reducing government debt less likely.

What does this mean for Australia?

Economies with a strong focus on commodities, such as

Canada, New Zealand and Australia

have been protected from the worst of the downturn because

of to China’s growing commodity demand. China’s

demand is expected to rise,

meaning that the Reserve Bank of Australia probably won’t

cut interest rates just yet and, with climbing inflation, unemployment may have to hit 6per cent for last

year’s rate rises to be

unwound.

That being said, domestic

productivity is currently at a 25-year low, reflecting the lack of productivity-focussed

reforms in six years. The

lack of productivity improvements is creating an

environment where high-risk investors are not rewarded for their

risks, and instead

are rewarded for backing industries with a

proven resilience to global trends, which will

continue to deliver dividend and earnings growth

in difficult times. As a result, large, shareholder-focussed firms with healthy balance sheets are likely to

become the Australian safe havens for investors, while traders

might find profits resulting from large mergers and acquisitions

targets more attractive.

Remember that CFDs and fx are leveraged products and can lead to losses that exceed your 1st deposit. CFD trading may not be appropriate for everybody, so please ensure that you fully understand the risks concerned.     

Future safe havens

August was a very volatile month, and risk averse investors have been

searching for somewhere safe to store their equity.

Despite

bond markets remaining stable in comparison with overall volatiliy, investors

have not sought safety in them as they usually would. Investors have

instead sought alternative safe havens,

either because bond yields are

historically low, or because they don’t believe that governments have

the capacity to solve their debt issues

in the short-term. As a result, the

assets to which traders are turning as safe havens are

very crowded and appear to be close to fully valued, relative to their fundamentals. The Swiss Franc has hit

all-time highs against the euro and the US dollar, {and, having recently reached

USD1,911 an ounce, gold is approaching it’s all-time inflation-adjusted

high of USD2,400 an ounce, last hit in 1980.

Where is the global market going?

The market downturn was initially

triggered by US growth revisions, which revealed that the 5.1% downturn in the

GFC was larger than initially

estimated. Recovery was also found to be weaker, with both US and European output at September 2007 levels.

Following this, weaker-than-expected global data was

also released, with some traders

worried that the global economy was

heading into a double-dip recession, and that the global

financial system might require large-scale US and

European government intervention. These concerns were sparked by Italy and Spain’s government debt and expectations

that the European Central Bank (ECB) and International Monetary Fund

would need to bail them out. However, the current European

Financial Stability Facility package could not support

either economy, revealing that although these economies

are ‘too big to fail’ they are also ‘too big to bail’.

When the ECB began to

purchase Spanish and Italian debt and forcing

yields down to reduce government borrowing pressures, market

concerns focussed on France and the US. Following

the downgrade of US debt from AAA to AA+, such

downgrades are likely to become a regular feature in the financial

markets as both the UK and France’s net

government debt-to-GDP ratio is forecast to reach 80% in 2015, the same level as that

of the US.

Now traders are being

forced to reconsider their market exposure in an environment where,

not only are stock prices lower,

but there is a high risk that the growth of advanced

economies will be significantly below trend due to the

unwinding of a 25-year leverage and

asset price boom. The rise in leverage

enabled more participants to enter the market, and

the resulting greater demand for existing assets pushed

their prices up. However, consumers

are now cutting their spending and increasing their savings, which will continue to unwind the boom.

Previous deleveraging cycles have been,

on average, half the length of the build-up, and economic growth in former deleveraging

cycles has averaged 1.5% due to the

slowdown in consumer, business

and government spending. If history repeats itself,

the 1992-2008 build-up could take nearly nine years to

unwind, during which period the growth

of developed countries may stagnate at current levels.

Therefore, combined US, European and Japanese growth could remain low, which will make reducing government debt more difficult.

Where is

Australia going?

Commodity-focussed economies like Australia

have been insulated from the downturn thanks to China’s demand for raw materials. This demand is likely to increase,

meaning that the RBA is unlikely to

cut interest rates just yet and, with inflation on

the rise, unemployment might have to reach 6% for the last year’s rate hikes to be

reversed.

However, Australian

productivity is currently at a 25-year low, reflecting the lack of productivity-focussed

reforms in six years. The

lack of productivity improvements is creating an

environment where high-risk investors are not rewarded for their

risks, and instead

are rewarded for backing industries with a

proven resilience to global trends, which will

continue to deliver dividend and earnings growth

in difficult times. As a result, large, shareholder-focussed firms with healthy balance sheets are likely to

become the Australian safe havens for investors, while traders

might find profits resulting from large mergers and acquisitions

targets more attractive.

Remember that CFDs and fx are leveraged products and can lead to losses that exceed your 1st deposit. CFD trading may not be appropriate for everybody, so please ensure that you fully understand the risks concerned.     

Indications of impending share price falls

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Knowing

when shares are going to fall can help a investor  either cut his losses before they spiral out of control, or turn

a profit by opening a short CFD position on a specific coproration. Following are

some things to watch out for:

 One. Missing a

reduced prediction

 Publicly traded firms

regularly lower their takings forecasts

when there are macro

issues or when a company-specific issue comes up.

However, if a company sets a new, reduced takings

prediction, it’s important that they

meet it.

 If the company misses this

prediction it can have a negative impact on the

morale of private and/or institutional

shareholders and their power to trust management, leaving

them wondering about future takings potential.

 Also, the economic community is probably going to comment on it and can finish up

criticizing company management or the

firm’s shares due

to the missed prediction. They may then scale back their estimates or perhaps lower their ratings on the shares.

 Two. Insider selling

 It isn’t

uncommon for company insiders to sell shares of their company’s shares,

and many do this for valid reasons. However, there are times when insider selling causes contention

, such as when managers

expediently decide to unload their holdings right before a share price

plunges or when the share price reaches 52-week lows. These

transactions can reveal where a company’s headed.

 Three. Discontinuation of forecasts

A

signal that issues are brewing within a

company is when it discontinues its regular financial forecasts.

This may indicate that a company doesn’t know what its

revenues will be or that macroeconomic or

company-specific events may have such a massive

impact on future revenues that it can’t

forecast what they will be. More

suspect is the company that might be making an

attempt to hide negative news.

 Four. Dividend cuts

As

dividends are a way of sharing

company profits with investors, paying dividends is thought of as

a sign the company is doing well. Consequently,

when a dividend-paying company suspends its dividend, it may indicate that a company is in financial

difficulty, possibly planning asset sales, job cuts or

office closures.

 Also, by discontinuing

the dividend, the company may see a sell-off of its stock and turnover

in its shareholder base as income-oriented investors unload the shares and look

for other opportunities. And, whenever there is a large

sell-off, stock prices drop.

 5. A stop on repurchases

 If a company has been repurchasing stock

and ceases doing so, it could be a signal that the

company is short on funds or that it does not believe the

shares are an attractive investment.

 6. Absence of

diversification

 To continue growing, a

company should introduce fresh products and remain

on the cutting edge, as companies that do

not innovate risk becoming irrelevant if a better technology or product enters the

market. It is also crucial for a company to

broaden its product offerings so not to run right

out of business.

Accordingly,

investors should look out for

companies that aren’t going anywhere.

 7. Industry indicators

Companies

that operate in the same sector frequently trend in the same

direction. If one company in a market is flailing, its competitor

could be struggling also. Traders should

note how a company is performing compared to its

competitors, and if its competitors aren’t experiencing

similar declines it could be a sign that there is a

problem with the company and not the industry.

Conclusion

By

keeping abreast of the developments of the

corporations on which you hold stock, you

might be able to see a crash before it hits. Although the

above signals are not a guarantee of falling stock,

if a number of these signals happen, it could be

a time to sell your shares and cut your losses, or open a short share CFD

position so you can profit on the downfall.     

Remember that CFDs are leveraged products and can result in losses that exceed your first deposit. Trading share CFDs may not be appropriate for everybody, so please make sure you understand the risks concerned.     

Trade CFDs using momentum

Momentum trading is when a trader  identifies trends in movements in prices and waits to see those trends begin

before opening a position that follows the trend. When trading on a margin,

the advantages of momentum trading can be

serious, leading to giant

profits relative to your initial investment.

 But

although it is a simple

concept, choosing the right positions can take time and

they are typically found using a

mix of technical and fundamental analysis.

 

Essentially, a trader would keep up-to-date with industrial

news and other financial news, forecasting

announcements that might impact different

markets. He would make a note of the assets

creating the most noise and, when the market opens,

narrow down his watch list to the ones that are making the most

powerful movements.

 Technically, a

trader would then examine the charts of the assets

on his watch list to find out which ones are likely to break through resistance or support,

or change direction.

 

The first

indicator for the momentum trader is the momentum indicator, which measures the

accumulated net change of an asset’s closing

price over a collection of defined

periods. Positive values indicate a most

likely sustained upward movement, while negative values

denote a potentially sustained downward movement.

 The upward or

downward momentum indicator frequently portrays a breakout

for the asset, meaning that sustained

momentum will push the asset through the resistance or support barrier. As the momentum trader waits for the trend to begin before riding the wave, he will wait for the next

momentum period after the breakout before opening a position.

 Once the investor

enters his position he remains fixed to his screen. He waits for

bidding to slow or thin, indicating that the momentum is losing

its grip. At about that point he will close his position and take his profits, moving onto another asset

or finishing his trading for the day.

 To be a successful

momentum trader, investors must avoid these

errors:

1.      

 Opening a

position too fast. If traders open a

position before momentum is confirmed, they are more likely to

become victims of fake breakouts.

2.      

Closing winning positions

too slowly. If traders close the position too slowly, they can lose some of their profits.

3.      

 Closing a

losing position too slowly. In the event that the asset

makes a fake breakout, it is a good idea to set

a stop loss. This can limit the investor’s risk by closing

the trade before the market moves too far. For a momentum trade, a good place for the stop is between the

previous period’s high and low boundaries

4.      

Not monitoring positions. This results in

traders missing changing trends, reversals or

indicators of news that has taken

the markets by surprise.

5.      

Keeping a position open overnight. Different

assets can be at the mercy of external

factors, which may cause unforeseeable

changes in price, meaning they may

not continue on the previous day’s trends. If a

trader is determined to leave the position open, setting a

trailing stop would be a good idea. Like a stop loss, a

trailing stop automatically closes open positions

when the market moves against the trader. However, it

also follows the market when it moves in his favor, meaning the

trailing stop will remain a certain distance behind the best price of the period; this can limit a

trader’s risk,

blocking him from losing previous profits.

An investor employing a momentum trading strategy

can milk heavy changes in price. By following both fundamental and technical indicators

at the beginning of the trading day, the investor will

often be able to get a feel

for the sectors and companies that

are performing well as a single positive announcement can lift a

complete industry.

 That being said,

momentum trading isn’t a set method with

explicit steps a new investor can follow to

make a profit, but instead a general framework

inside which a trader 

can develop his own system. That is the reason why it is a good idea to practice and

hone your methodology, and CFDs give a

trader  the ideal opportunity to do that with little

minimum contract sizes across a range of markets.     

Learn more about forex and CFD trading strategies. Remember that CFDs and forex are geared products and canresult in losses that exceed your initial deposit. CFD trading might not beappropriate for everyone, so please make sure you understand the risksinvolved.   

Considerations for investment asset allocation

Asset allocation is the technique of dividing your portfolio among various asset sectors to create diversification, thus

reducing risk and inflating

profits.

 As each asset

sector has various levels of risk and

return, each will behave differently over time, rocketing or decreasing over time at different rates. Although some critics say this balance

will result in mediocre performance, most

investors disagree that it’s the best

protection against a major loss in one asset

sector.

Risk / return ratio

 A general rule

of thumb is that the higher the potential return on an asset, the higher the risk.

 Let’s compare trading CFDs to

trading shares. A share CFD is a contract that captures every facet of share trading, but you don’t own the underlying

share, you simply trade on the rise and fall of its

worth. Technically, you are borrowing the share to trade on it.

 As you are only borrowing the

share, and aren’t purchasing it, you simply need

to pay a Five percent deposit to open a position. This means

that, if the value of the shares goes up, your profit can be much

larger in contrast to your original investment than it would’ve

been when trading typical shares.

Nevertheless if the value of the shares drops, you can lose more than your original deposit.

 As is clear, the bigger the potential returns, the bigger the risk, and is the reason why it is

important to have a portfolio that contains

both high-reward and low-risk assets.

 Asset risk rankings

 These assets are listed in order

of risk, the high-risk, high-return assets at the top and the low-risk, low-return assets at the bottom.

 Derivatives : derivatives are

assets that are derived from other assets. For

example, options are derivatives, giving you the right

although not the duty to sell an

underlying asset ( like a share, currency pair or commodity ) at a

fixed price by a certain date. CFDs are another example,

allowing you to profit on the changing values of assets

without owning them.

 Derivatives can be employed both for speculation ( making profit ) and for hedging

( insuring your portfolio against losses ). They are

handy for hedging as they allow investors to

diversify their portfolio as well as insure against

sudden market movements. When it comes to

speculation, some derivatives can be very risky if correct risk

management isn’t performed, though  the

potential returns are far higher than in the equivalent underlying

markets.

 Equities : shares

appreciate with economies, about by 10-12% over a

period. However, they can also fall in

value in erratic markets.

Equities can be employed both

for hopeful purposes and as long term investments to

buy and hold. Equities are riskier as short term investments,

as traders are more exposed to

intermittent price fluctuations.

However, as most equities trend

upward over the course of time as a long

term investment ( 10 years or even more ) they have a far higher average return

than bonds or cash.

 Property :

historically, property has given capital

returns close to those of equities,

and housing prices generally rise with economies. The rate

of ROI properties can be attractive,

though  the interest charges

on mortgages can make a property much costlier than the

sale cost.

 Bonds: a bond is an asset you

buy to be redeemed at a mentioned date, and

in the meantime you earn interest on the

amount paid for the bond. This rate of return is commonly

close to cash.

Cash: if you keep your

cash in a high-interest account or term-deposit,

you may earn interest on

those savings. But interest levels may not be particularly high, dependent on

your country’s base IR, meaning that your

cash may not appreciate compared against

the rate of inflation.

 The more conservative a portfolio,

the bigger its proportion of fixed earnings

instruments like bonds and cash. The more

aggressive a portfolio, the bigger its proportion of

derivatives and equities. Generally more

aggressive portfolios are structured to bring in

bigger returns over a shorter period than conservative

portfolios.

Risk handling

There are a number of

methods to manage your portfolio risks :

Diversify your portfolio

Only having cash could

appear like the risk-free choice, but your cash will fall in value being totally unable to buy as much as inflation climbs. Likewise, just

investing in derivatives could help you make enormous profits

quickly, but you may lose it all just as fast.

 Having a portfolio that

is spread all over derivatives,

securities, property and cash will help shield you

the impact of one market failing ( the proportion that is

allocated to each asset will depend upon your

investment strategy and goals, and is

something that should be debated with an

investment consultant ).

Actively study your

investments

Even if your

cash is being sorted by an investment

executive, nothing can substitute for actively monitoring your

investments. Also monitor the way the markets are doing

generally and find out what you can about

all your assets, as this will help you make

wiser investment choices in the future.

Know your boundaries

Some investments, like CFDs,

allow you to place loss and profit boundaries when you

trade : your loss limit ( or stop loss ) being the amount you are

ready to lose before your trade closes

immediately, and your profit limit ( or limit order )

being the level at which you want your trade to close to seal in your profits, protecting yourself from

the market turning surprisingly.

 Although it is not

possible to set automated boundaries in

some other asset groups, you continue to should

clarify what those boundaries are. What is the

profit objective for your portfolio? And what is the maximum loss

you can sustain?

 Being conscious

of your limits, actively monitoring your investments and

making an investment in a wide-ranging range of

assets will scale back your potential

losses, while bringing in more uniform profits.     

Remember that CFDs and forex are geared products and may result in losses that surpass your initial deposit. CFD trading might not be suitable for everyone, so please make sure that you understand completely the risks involved.     

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