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How to lock in profits - Rivkin

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12
DECEMBER 2009
www.minesuppliersonline.com.au
FINANCE NEWS
How to lock in profits
SHANNON RIVKIN
COMMENT
WE ARE often presented with arbitrage
opportunities, which in many cases have
proven very lucrative.
Capital raisings have been the trend
of the past 12 months, with companies
such as National Australia Bank (NAB),
Asciano Group (AIO), Graincorp (GNC)
and Amcor (AMC) all conducting capital
raisings.
More recently, we were presented
with an opportunity to take part in the
Brickworks (BKW) share purchase plan.
After shareholders were able to get on
the share register at $16, they were then
offered a maximum of $15,000 worth of
new stock at $12.40.
Well, the timing of the correction
we are seeing could not have come at a
worse time for BKW arbitrageurs, with
the stock seeing pressure up until the
Share Purchase Plan (SPP) closing date
as shareholders sold stock to take up the
new shares, and now we are seeing more
selling with the rest of the market.
We have now found out that all BKW
applications have been accepted without
scale back, but considering the stock
is down to $12.50, the profit has been
largely eroded.
Our decision as to what to do now has
been made difficult in that the original
reason for the investment was an
arbitrage, which suggests that we should
sell the stock.
A way to protect ourselves against a
falling share price is through the use of
CFDs. This is a simple, low risk way of
hedging a trade to lock in profits while
the share price is going down.
CFD stands for contracts for difference.
But for this conversation, let us say that
they offer an opportunity to take views
on the price of stocks, commodities,
currencies, indices etc, using leverage.
CFDs have been demonised a little
in the press in recent years due to the
leverage they offer, and for the careless
trader they can be a little dangerous, but
used as a hedging tool they are a low-risk
way to lock in profits in certain cases.
The reason using CFDs makes such
sense in cases such as BKW is because
CFD providers will allow you to short a
stock, which means you sell before you
buy.
With BKW, one could have bought
the stock at $16 to get on the share
register and be eligible for the SPP, then
subsequently short sold an amount of
shares they anticipated they would get
through the SPP.
Our assumption was always that there
would be a limited scale back, so being
conservative, we could have short sold
half (roughly 600 shares), thus locking
in a profit on that amount of shares (the
difference between $16 and $12.40, which
is the issue price through the SPP).
Then on the day of issue, one would
sell the shares they got through the SPP
and at the same time buy back the BKW
CFDs they short sold at $16.
The profit you make on the CFDs will
offset the reduced profit on the SPP stock
on account of the falling share price.
This could have been done on Elders
(ELD), Toro Energy (TOE), Graincorp
(GNC) etc. Likewise, CFDs could be used
to hedge the currency exposure in our
Peplin (PLI) recommendation.
By using this platform, once an
announcement has been made as to how
many shares you’ve been allocated, you
can take any risk out of the situation
and lock in your profits before they begin
trading.
Shannon Rivkin, director, The
Rivkin Report
Under the mentorship of his father
Rene Rivkin, Shannon Rivkin developed a
passion for equity markets and joined The
Rivkin Report Investment Team in 2002.
He is now a director of The Rivkin Report,
overseeing the analysis and production
associated with the weekly Report and
related products.
www.rivkin.com.au
Business confidence
in Australia surges
despite GFC
THE MOST recent National
Australia Bank Monthly Business
Survey & Economic Outlook has
found an increase in business
confidence in Australia.
Business confidence increased
by 2 to +16 points in October.
The survey said that after
the surge from early 2009, the
ongoing strength of confidence was
remarkable.
Strength was mainly found in
the construction, transport, and
personal and recreational services
sectors.
“While confidence has surged in
recent times, business conditions
had remained significantly below
long term averages,” the survey
said. “That has now changed. The
actual business conditions index
reading of +12 is now substantially
above the long run average reading
of +3 index points.
“It is also worth noting that
confidence levels seem to have
consolidated their recent highs –
again a remarkable outcome.”
The strength of the survey –
especially for business conditions
– has seen the bank revise up its
2009 and 2010 growth forecasts.
It said the economy was
performing better than expected
and growth was now forecast to be
around 3 to 4 per cent in the second
half of 2009, while the previous
outlook was for flat growth.
YOUR GUIDE TO WORLD RESOURCE MARKETS
ASX Metals and Mining Index Commodity Prices
Aluminium
London
US$/tonne
Nov 12
1938
Wednesday November 11
4203.30
Copper
London
US$/tonne
Nov 12
6595
Tuesday November 10
4158.30
Gold
New York
US$/ounce
spot
Nov 12
1116.8
Lead
London
US$/tonne
Nov 12
2312
Monday November 9
4077.60
Nickel
London
US$/tonne
Nov 12
17,025
Platinum
New York
US$/ounce
Nov 12
1370
Silver
New York
US$/ounce
Nov 12
17.57
Tin
London
US$/tonne
Nov 12
14,940
Uranium
New York
$US/pound
Nov 9
45.5
Zinc
London
US$/tonne
Nov 12
2155
Friday November 6
Thursday November 5
4021.90
3922.50
Wednesday November 4
3971.90
Tuesday November 3
3930.40
Monday November 2
3912.20
Friday October 30
3985.50
Thursday October 29
3916.70
Wednesday October 28
4066.80
LME Metal Stocks (tonnes, as at November 11)
Aluminium
4,543,075
Copper
397,325
Lead
131,800
Nickel
131,640
Tin
26,850
Zinc
424,725
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