atrader box in this magazine do not constitute investment trading a new investing paradigm experts...

BLACK BOX TRADING

A New Investing Paradigm

Experts Share Their 2014 Predictions

Chris Vermeulen

Interview

AMALGATRADER MAGAZINE | ISSUE 03 | JANUARY 2014

BIG RETURNS USING AN

AUTOMATED SYSTEM

MAGAZINEI NVEST | TRADE | PROF I T

Trailing Stops: TURBOCHARGE YOUR RETURNS

…& MORE

Oil, Gas, Nuclear:WHERE DO WE GO FROM HERE?

AmalgaTrader

AmalgaTrader Magazine | 2

CONTACT INFO: Email: [email protected]

Web: www.amalgatrader.com

DISCLAIMERS: AmalgaTrader Magazine is not an investment or

trading advisory service. The opinions expressed in this magazine do not constitute investment

advice and independent advice should be sought where appropriate.

Trading or investing in any of the markets discussed in this magazine have the potential for

substantial risk of loss and may not be suitable for everyone. AmalgaTrader Magazine strongly

recommends that you seek professional investing and trading education. If you are trading we

suggest you use a demonstration account before you begin trading using your own hard earned

cash. Similarly, we strongly recommend that you obtain professional advice on your

individual requirements before making an investment decision.

We are not tax consultants or tax experts and are not providing tax advice in any way. We

strongly advise that you seek independent advice about any tax position that may arise out of any

strategies discussed in this magazine.

© AmalgaTrader Magazine 2014

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AmalgaTraderMAGAZINE

PUBLISHER: Tony Neumeyer

EDITOR John Aarons

DESIGN AND LAYOUT:Emily Vance

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BLACK BOX TRADING

A New Investing Paradigm

Experts Share Their 2014 Predictions

Chris Vermeulen

Interview

AMALGATRADER MAGAZINE | ISSUE 03 | JANUARY 2014

BIG RETURNS USING AN

AUTOMATED SYSTEM

MAGAZINEI NVEST | TRADE | PROF I T

Trailing Stops: TURBOCHARGE YOUR RETURNS

…& MORE

Oil, Gas, Nuclear:WHERE DO WE GO FROM HERE?

AmalgaTrader


CONTACT INFO: Email: [email protected]

Web: www.amalgatrader.com

DISCLAIMERS: AmalgaTrader Magazine is not an investment or

trading advisory service. The opinions expressed in this magazine do not constitute investment

advice and independent advice should be sought where appropriate.

Trading or investing in any of the markets discussed in this magazine have the potential for

substantial risk of loss and may not be suitable for everyone. AmalgaTrader Magazine strongly

recommends that you seek professional investing and trading education. If you are trading we

suggest you use a demonstration account before you begin trading using your own hard earned

cash. Similarly, we strongly recommend that you obtain professional advice on your

individual requirements before making an investment decision.

We are not tax consultants or tax experts and are not providing tax advice in any way. We

strongly advise that you seek independent advice about any tax position that may arise out of any

strategies discussed in this magazine.

© AmalgaTrader Magazine 2014

CONTACT DETAILS

AMALGATRADER

AmalgaTraderMAGAZINE

PUBLISHER: Tony Neumeyer

EDITOR John Aarons

DESIGN AND LAYOUT:Emily Vance


BLACK BOX TRADING:80% plus returns

A Deep Water Engineer Making a Difference

Where Our Experts See The Markets Heading This Year

Interview: Chris Vermeulen

ENERGY: WHERE DO WE GO FROM HERE?

Interview: Marin Katusa

Big Profits in 2014from Financial Advisors to Algorithmic Trading Systems

PUBLISHER’SNOTE

2014 PREDICTIONS

by Tony Neumeyer

by Chris Vermeulen

UNDER WATER AND LOVING IT!

Interview: Craig Hume

on Every Tradeby Dr. Richard Smith

TABLE OF

CONTENTS

CONTENTS

THE PARADIGM SHIFT

HOW TO LOCK IN PROFITS

BASIC MONEY AND POSITION MANAGEMENTVideo: Chris Vermeulen


CHRIS VERMEULEN

THE PARADIGM SHIFT FROM FINANCIAL ADVISORS TO ALGORITHMIC TRADING SYSTEMS

THE PARADIGM SHIFTfrom Financial Advisors to Algorithmic Trading Systems

Over the past 50 plus years, people have been using the same methods of investing for their future; not much has really changed. The norm

of hiring a financial advisor to put your money into generic mutual funds, RYDEX funds and insurance plans (while tak-ing a two percent annual fee on your life savings) has been good enough for the masses. Because it’s the norm and what everyone has and is doing, we naturally think that it’s the right thing to do with our

money. But is good enough really GOOD ENOUGH for you?

Think about it. You work hard, save mon-ey, plan for your future and hire a financial advisor to guide you through the shark-in-fested waters of investing so you can live your dream. But what really happens? You hand over your money, and you put your trust and future into the hands of some-one who simply follows an old-school way of investing. This method is loaded with front-end fees, back-end fees and annual


PUBLISHER’S NOTE

Happy 2014!

We lcome to Amal-g a Tr a d e r

magazine, where we cut through the clutter to bring you relevant

and actionable insights from profession-als that will elevate your investment and trading strategies to a whole new level.

In this, our third issue, we interview Chris Vermeulen. Some of you may know Chris from TheGoldandOilGuy.com. He’s an ex-tremely accomplished trader and investor who began trading professionally as soon as he was legally able to - not many of us can lay claim to that degree of passion! We talk to Chris about an amazing Black Box trading system that’s showing annual returns of 80%. His system is so impres-sive, that I’ve decided to personally invest $50,000 in an automated account. I’m really looking forward to reporting the re-sults to our readers in each issue, once the system gets started.

With energy prices remaining high and seemingly greater controversy at eve-ry turn (green, fracking, nuclear?) Marin Katusa looks at the reality of the mar-ket today and gives us some insight as to where we might maximize our invest-ing profits in the New Year and beyond. Marin’s track record in picking winners is unprecedented. In our exclusive inter-view, we cover the entire energy spectrum with the latest developments in oil, gas, nuclear and green.

We also have a fascinating interview with Craig Hume, a Subsea Systems and Hardware Engineer, about deep water oil in the Gulf of Mexico, the challenges and opportunities, now and in the future. He shares some interesting and perhaps dif-ferent perspectives about the Deepwater Horizon disaster. And, he talks about ex-traordinary technologies that are trans-forming the deep water oil recovery scene.Did you know that one of the best ways to maximize your investment gains is to use ‘trailing stops’? Our article from Tradestops will enlighten you to the truth of this superficially simple, yet very pow-erful method of managing your risk and increasing your returns.

And lastly, a few of our expert contribu-tors have shared their 2014 predictions for gold, the S&P and other markets. It’s always interesting to try and predict where these markets will be a year from now.

We hope you enjoy and profit from this is-sue of AmalgaTrader Magazine. We have some extraordinary plans for the maga-zine in the coming. So stay in touch, and keep an eye on your Newsstand.

Very best wishes for a healthy and profitable 2014.

CONTACT:

TONY NEUMEYER

PUBLISHER’S NOTE

HOW TOUSE THIS APP


BLACK BOX TRADING:80% plus returns

A Deep Water Engineer Making a Difference

Where Our Experts See The Markets Heading This Year

Interview: Chris Vermeulen


Interview: Marin Katusa

Big Profits in 2014from Financial Advisors to Algorithmic Trading Systems

PUBLISHER’SNOTE

2014 PREDICTIONS

by Tony Neumeyer

by Chris Vermeulen

UNDER WATER AND LOVING IT!

Interview: Craig Hume

on Every Tradeby Dr. Richard Smith

TABLE OF

CONTENTS

CONTENTS

THE PARADIGM SHIFT

HOW TO LOCK IN PROFITS

BASIC MONEY AND POSITION MANAGEMENTVideo: Chris Vermeulen


PUBLISHER’S NOTE

H a p p y 2014!

Welcome to Amal-

gaTrader magazine, where we cut through the clutter to bring

you relevant and actionable insights from professionals that will elevate your invest-ment and trading strategies to a whole new level.

In this, our third issue, we interview Chris Vermeulen. Some of you may know Chris from TheGoldandOilGuy.com. He’s an ex-tremely accomplished trader and investor who began trading professionally as soon as he was legally able to - not many of us can lay claim to that degree of passion! We talk to Chris about an amazing Black Box trading system that’s showing annual returns of 80%. His system is so impres-sive, that I’ve decided to personally invest $50,000 in an automated account. I’m really looking forward to reporting the re-sults to our readers in each issue, once the system gets started.

With energy prices remaining high and seemingly greater controversy at eve-ry turn (green, fracking, nuclear?) Marin Katusa looks at the reality of the mar-ket today and gives us some insight as to where we might maximize our invest-ing profits in the New Year and beyond. Marin’s track record in picking winners is unprecedented. In our exclusive inter-view, we cover the entire energy spectrum

with the latest developments in oil, gas, nuclear and green.

We also have a fascinating interview with Craig Hume, a Subsea Systems and Hardware Engineer, about deep water oil in the Gulf of Mexico, the challenges and opportunities, now and in the future. He shares some interesting and perhaps dif-ferent perspectives about the Deepwater Horizon disaster. And, he talks about ex-traordinary technologies that are trans-forming the deep water oil recovery scene.Did you know that one of the best ways to maximize your investment gains is to use ‘trailing stops’? Our article from Tradestops will enlighten you to the truth of this superficially simple, yet very pow-erful method of managing your risk and increasing your returns.

And lastly, a few of our expert contribu-tors have shared their 2014 predictions for gold, the S&P and other markets. It’s always interesting to try and predict where these markets will be a year from now.

We hope you enjoy and profit from this issue of AmalgaTrader Magazine. We have some extraordinary plans for the magazine in the coming months. So stay in touch, and keep an eye on your News-stand.

Very best wishes for a healthy and profitable 2014.

CONTACT:

TONY NEUMEYER

PUBLISHER’S NOTE


CHRIS VERMEULEN


THE PARADIGM SHIFTfrom Financial Advisors to Algorithmic Trading Systems

O ver the past 50 plus years, people have been using the same methods of in-vesting for their future; not much has really changed.

The norm of hiring a financial advisor to put your money into generic mutual funds, RYDEX funds and insurance plans (while taking a two percent annual fee on your life savings) has been good enough for the masses. Because it’s the norm and what everyone has and is doing, we naturally think that it’s the right thing to do

with our money. But is good enough really GOOD ENOUGH for you?

Think about it. You work hard, save mon-ey, plan for your future and hire a financial advisor to guide you through the shark-in-fested waters of investing so you can live your dream. But what really happens? You hand over your money, and you put your trust and future into the hands of some-one who simply follows an old-school way of investing. This method is loaded with front-end fees, back-end fees and annual


CHRIS VERMEULEN


fees. And in most cases, it does not make you money during market downturns!

Your retirement money isn’t protected in the event of a market crash or multi-year bear market. So what happens? You end up riding the financial roller coaster, which is something you don’t really want to do (or do again for that matter). But you do it because it’s the only way you know and the way everyone else has done it.

The industry average is roughly one per-cent, but fees can range from 0.80 per-cent to two percent in the U.S. and Can-ada. Typically the more assets you have, the lower the fee. While that may not sound like much up front, don’t forget that most of these funds they put your money into also have roughly another one per-cent annual fee. This extra percent you pay makes a big difference to your long-term return.

For example, an investor with a $250,000 portfolio earning seven percent per year would be sitting on $967,000 after 20 years. Had they paid an advisor using mu-tual funds with a two percent fee of their assets during those years, however, their account value would fall to $663,000 - a difference of $304,000.

So, the financial advisor who likely didn’t protect or make you money (although he or she might be a perfectly nice, compe-tent professional with excellent intentions) during the multiple bear markets that you would have encountered, made away with a good chunk of your nest egg. They did this with virtually no downside risk to them; they get paid every year no matter what the financial market does, whether they made you any money or not.

Does that sound like a plan you want to stick with going forward?

It doesn’t to me.

The two most important things you can do to improve the performance of your portfolio is to reduce your trading fees and to have a proven strategy that makes money in a bear market.The old-school way of investing for your future, without downside protection and without a trading strategy for your money during market crashes and bear markets, is just that: old school.

Today, you can do things differently. You can use proven algorithmic trading and investing strategies. This not only allows you to potentially avoid market crashes and multi-year bear markets, but you can actually profit from them handsomely. Al-gorithmic trading systems are starting to gain traction with the average investor because the old way of doing things just doesn’t make sense anymore.

People are finally starting to share more about their financial situation and experi-ences, and they’re realizing that they’ve


CHRIS VERMEULEN


had the exact same financial outcome and ridden the exact same emotional roll-er coaster. This realization has compelled individuals to gain a better understand-ing of what has happened, and to inves-tigate new ways money can and should be managed. In short, they’re having an epiphany. Epiphanies are relatively rare occurrences, and they generally follow a process of significant thought about a problem. They’re often triggered by new information, processes and tools that be-come available.

So what does all this mean?

The investment world is about to have a paradigm shift. It means the old-school model of investing is being challenged with newer, more sophisticated and prov-en rule-based strategies that perform well in all market conditions. These systems also automatically manage posi-tions and risk for maximum benefit and income potential.

In order to truly understand ‘Boom and

Bust Cycles’, you’ll need to review the work of Carlota Perez (especial-ly her book Technological Revolutions and Financial Capital). In this work, you can see how economic paradigms rise and fall.

Perez explains an interesting phenome-non: every 50 years or so, there have been new economic structures that caused the collapse of what came before. Perez identified five economic paradigms (or “Great Surges”) throughout this period:

• Industrial Revolution in Britain (1770-1830)• Age of Steam and Railways (1830-1870)• Age of Steel, Electricity and Heavy Engineering (1870-1920)• Age of Oil, Automobiles and Mass Production (1920-1975)• Age of Information and Telecommunications (1975-20??)• The use of Financial Advisors and Mutual Funds (1970-20??)

Be aware of paradigm paralysis


CHRIS VERMEULEN


Each of these times represents a ma-jor technological breakthrough. These breakthroughs resulted in a fundamental restructuring of how things were done. Each of these periods had its own para-digms for wealth-generation, institutional structures, regulatory environments and desired trajectories for society. The tech-nologies themselves were only one piece of the vital inputs that ultimately defined each era.

Perhaps the greatest barrier to a para-digm shift is the reality of paradigm pa-ralysis. This is the inability or refusal to see beyond the current models of thinking, and is similar to what psychologists call ‘confirmation bias’. A couple of examples would be the rejection of Galileo’s theory of a heliocentric universe and the discov-ery of electrostatic photography. Across

history, there have been many errors in thinking and many traditional processes that were maintained by the crowd sim-ply because there wasn’t yet a better way. Then along came a Henry Ford or some other innovative individual, and one was created. There is a better way to investing, and now is the time to get on the path.

The shift is happening now.

In the year 2010, more than 70 percent of the shares traded on the NYSE and NAS-DAQ were generated from automated trading systems. Today it’s much higher, and it’s continuing to grow. Most of these systems are run by large institutions, but individuals with their own trading systems are a category growing at an incredible rate each year.


Traders and investors can now turn precise entry, exit and money management rules into automated trading systems. This allows computers to execute, monitor and manage positions. The biggest attraction of automated strategies is that it eliminates some of the emotion from trading. Since trades are automatically executed once a spe-cific criterion has been met, emotion is taken out of the equation. This next section will educate and explain some of the advantages and disadvantages, as well as the realities, of automated trad-ing systems.

WHAT IS AN AUTOMATED TRADING SYSTEM?

Automated trading systems - also re-ferred to as mechanical trading systems,

algorithmic trading, automated trading, block-box trading or system trading - al-low traders to create specific sets of rules for both trade entries and exits that, once programmed, can be automatically ex-ecuted via a computer. Each trade rule can be based on simple conditions, such as a moving average crossover, or each trade can be more complicated by using an individual’s proprietary indicator, ratios and data points. Automated trading sys-tems typically require the use of trading software capable of running the trading system’s code and trade execution.

Once the system rules have been estab-lished, the trading platform can monitor the market or a specific investment you intend to trade for entry and exit points based on the trading strategy specifica-tions. In general, when a trade is execut-ed, orders for protective stop losses and

CHRIS VERMEULEN



profit targets will automatically be created and executed. During volatile fast moving markets, automated order entry can mean the difference between a profit and a loss.

ADVANTAGES OF AUTOMATED TRADING SYSTEMS

Ability to Backtest: Backtesting allows us to apply trading rules to historical mar-ket data. This allows us to determine the viability of an idea. When building a sys-tem for automated trading, all rules need to be absolute, with no room for interpre-tation. Computers cannot make guesses and must be told exactly what to do for each and every possible scenario. Care-ful backtesting allows us to evaluate and fine-tune a trading idea. Backtesting also determines the system’s expectancy go-ing forward. Important data points you should track are your average maximum dollar drawdown, your average winning trade amount, your average losing trade amount and your percentage of trades that are winners.

Achieve Consistency: One of the big-gest challenges in trading is to plan the trade and to trade the plan. Even if a trading plan has the potential to be prof-itable, traders who ignore the rules are altering any expectancy the system would have had. Losing trades can be psychologically traumatizing, so a trad-er who has two or three losing trades in a row might decide to skip the next trade. Automated trading systems allow traders to achieve consistency by trading the plan.

Improved Order Entry Speed: Since computers can respond instantly, auto-mated systems are able to trigger orders as soon as a set of trade rules are met.

Getting in or out of a trade a few sec-onds earlier can make a big difference in the trade’s outcome. This is especially true over a long period of time when hun-dreds or even thousands of trades have been taken.

Minimize Emotions: Automated trading systems minimize emotions throughout the trading process. By keeping their emo-tions in check, traders typically have an easier time sticking to the plan. Be-cause trades are executed au-tomatically, you won’t be able to hesitate or question the trade. Those who are either afraid to pull the trigger and those who are more apt to overtrade benefit greatly from an auto-mated system.

Preserve Discipline: With trading rules already established and trade execu-tion performed automatically, discipline is preserved even during volatile market conditions. Discipline in most cases is lost due to the factors of fear and greed. The fear of taking a loss, or the desire to squeeze out a little more profit from a trade, hurts discipline. In addition, pilot error is minimized: an order to buy 500 shares will not be incorrectly entered as an order to buy 5000 shares, for example.

Diversify Trading: Automated trad-ing systems allow us to trade multiple accounts and various strategies at the same time. This has the potential to spread risk over various instruments and timeframes. What would be incredibly dif-ficult for a trader to accomplish can be ef-ficiently executed by a computer in a mat-ter of milliseconds.

CHRIS VERMEULEN



Disadvantages and realities of automated trading systems

Automated trading systems boast many advantages, but there are some downfalls and realties of which you should be aware.

Mechanical Failures: Automated trad-ing in theory seems simple: set up the trading software, program the rules and watch it trade. The reality, however, is that while automated trading is a sophisticat-ed method of trading, it’s not infallible. De-pending on how the system creator has the entire process set up, a trade order could reside on an individual computer and not a server. If this is the case, an or-der might not be sent to the market when an internet connection is lost. There could also be a discrepancy between the “theo-retical trades” generated by the strategy and the order-entry platform component that turns them into real trades.

Individuals new to automated trading should expect a learning curve when building, testing and running their first few systems. It’s generally a good idea to start with small trade sizes while the process is refined.

System Monitoring: Although it would be great to turn on the computer in the morning and walk away for the day, au-tomated trading systems do require monitoring. Because of the potential for mechanical failures, such as internet-con-nectivity issues, power losses, computer crashes or system idiosyncrasies, it’s pos-sible for an automated trading system to experience anomalies. These could result in errant orders, missing orders or dupli-cate orders. If the system is monitored,

these events can be identified and re-solved quickly.

Over-Optimization: Though not specific to automated trading systems, traders who employ backtesting techniques can create systems that look great on paper but perform terribly in a live market.

Over-optimization refers to excessive curve-fitting that produces a trading strat-egy that’s unreliable. It’s easy to create and tweak a strategy that achieves exception-al results on historical data. You must be aware of all the known issues with back-testing to be sure your new plan has been built to work within the backtesting guide-lines for accuracy. If you don’t, you may end up with over optimized systems that look good on paper only.

Server-Based Automated Systems: Traders do have the option to run their automated trading systems with a server-based host. Operating your trading plat-form and system on a dedicated server provides you with a potentially faster and more reliable platform. This minimizes un-

CHRIS VERMEULEN



Chris Vermeulen is an experienced and successful trader, educator and author. Involved in the markets since 1997, he is the author of several financial trading and educational newsletters. He is also the founder of Technical Traders Ltd.As an active trader and investor, Chris soon recognized the huge potential that online investing and algorithmic trading

systems held for individual investors. The development of Chris’ Technical Trading Mastery resulted from his obsession with the market. Through years of research and testing, he created the AlgoTrades Investing system.

Chris has been described as a “gifted technical analyst” who can navigate the financial markets in any market condition. His list of personal and professional relationships approaches 25,000 people with whom he connects and nourishes out of his passion for trading.

Chris has been interviewed, published or written about in Futures Magazine, The Street, Trader Interview, Kitco, Financial Sense, Dick Davis Investment Digest and hundreds of online sites.

BIO

CHRIS VERMEULEN


necessary platform crashes and server failure or loss of internet, and it improves your order execution times.

Being able to leave your trading software running 24/7, not worrying about restart-ing applications, reloading strategies or filling in missing tick data, is a huge ben-efit if you plan to operate your own auto-mated trading system.

How to take advantage of the trading and investing shift

Power lies in the masses. And you and millions of others like you who’ve been using the old-school method of trading and investing (and are reaching their breaking point) should say enough is enough!

With so much information available, it’s just a matter of time before average investors start demanding performance from their advisors. Most advisors are not technical

analysts and cannot read into charts, nor can they provide you with automated trad-ing systems that are both backtested and forward tested. Most do not have multiple trading strategies to profitably trade bull, bear and sideways trending markets.

Automated trading is about to explode, and when it does, the doors will open for investors around the world to allocate portions of their trading accounts or in-vestment capital to specific systems and strategies traded for them in their broker-age accounts. Get ready to do things a better way.

For more information about algorithmic trad-ing systems for traders and investors, click here: www.Algotrades.net

http://www.Algotrades.net


MARIN KATUSA INTERVIEW


AN INTERVIEW WITH MARIN KATUSA OF CASEY RESEARCH

ENERGY: Where Do We Go

From Here?


AT: I’m here today with Marin Katusa. He’s the Senior Energy Ana-lyst at Casey Research. Marin, tell us a little bit about yourself and how you got started as an analyst.

MK: Ihad the luckor thebenefitofbe-ing born in Vancouver, which is the hub of the Junior Resource Sector globally.My background isin advanced mathe-matics,earlyonwasteaching post-sec-ondarycalculus. Inabout 2004, I got involved quite ear-ly insometungstencompaniesofwhichtherewereveryfew,and then latter-ly insomeuraniumcompanies. Around thesametimeIcameacrossCaseyRe-search. By2006,DavidGalland,OlivierGarrett and Doug Casey, with whom Ihadkeptintouchwithformanymonths,wanted me to get involved in their firmandonethingleadtoanother;eightyearslaterandhereIam.

AT: I know you’ve had some great successes. Tell us a little bit about how, as an analyst, you go about find-ing companies that are worth invest-ing in?

MK: DougCaseycameupwithhisnowfamousCasey8Psinspeculation,whichis the foundation of all my investments.‘People’isoneofthose.Ithinkthenum-beronetakeawayforanyinvestorlookingto invest in the resource sector is people, people,people.Itismoreimportantthanthecommodity. It’smore important than

the jurisdiction. It’smore important thanthe project, because great people will cre-ateandfindgreatprojects.

That’swhereIstartwithanyanalysis.Buteven the best people make mistakes so then I go through the rest of theCaseyEightPs:itreallyisafantasticmetricthatguides us through the different types of

hurdles in order to find successful in-vestments. We gothrough those met-rics, conduct site visits, and look at the politics, the jurisdic-tion,andthefinanc-ingabilityoftheproj-ect itself. But first and foremost, we

startwithpeople - it’s very important toinvestinonlythebestpeople.

AT: It does seems that successful people have successful track records for a reason, and they’re often able to repeat that, correct?

MK: Yes, it’sPareto’sLaw. IfyouapplyPareto’s Law again on the first subsetofthetop20,yougetthetop4%ofthepeople in the resource sector who have roughlytwothirdsofthesuccessesinthemarkets. It’snodifferent thananyotherstandarddistribution. Noonecanpos-sibly know every single aspect of everydeal in themarket, but you can quicklyvetthesedealsbylookingatthepeople.Alotofpeopleareunblemishedwithsuc-cess;youwanttoavoidthepeoplewhohaveneverhadanysuccesses. There’sagreatlist,theCaseyExplorers’League,availablefreeonourwebsite.Theseare



PEOPLE, PEOPLE, PEOPLE. IT IS MORE IMPORTANT THAN THE COMMODITY




individuals that have had at least three ma-jorsuccessesundertheirbeltandthey’restillgoing.

But, there is a problem in the resourcesector and that’s demographics. Be-cause the sector went into hibernation in the 1980s, there’s a large gap betweenpeople entering the resource sector and those that were attracted to sectors like technology,theinternet,computers.Theresourcesector isonthevergeofade-mographiccliff,where it’s runningoutofqualifiedpeoplewhoactuallyknowwhatthey’redoing.

This was something that Doug Casey,myselfandRickRulediscussedintense-lyin2010,andbecauseI’magenerationunderRickandDoug,theyinstructedmetogofindthenextbatchofsuperstarsintheresourcesector.TheychallengedmetogooutandfindthenextLukasLundin,RossBeatyorRobertFriedland.

My search resulted in the Casey Next-TenList.Theseareindividualsunder40whohavehadmajorsuccessesalready.These are the type of people that youwanttoinvestin.Theyhaveanother25to30yearsaheadofthemofmakingbigwins. Anyone interested intheresourcesectorneeds to focuson thebestpeo-ple.We’vedonethehomeworkforinves-tors in theCaseyExplorers LeagueandtheNexTenlist,whichisavailableonourwebsiteatwww.caseyresearch.com.

AT: Unlike a brokerage house that’s offering up IPOs and financings to their clients, you’re an independent. How does what you offer as an ana-lyst differ?

MK: Thereisabigdifference.Caseyre-searchis100%independent;weworkforoursubscriberswhopayusforournews-letters. We’re independent researchers.I believe we’re the largest independent




researchfirm in the junior resourcesec-tor.Wenowhaveover50peopleonstaffinvolved in making our junior resource re-searchthebestintheworld.Somewherein the world, there’s a Casey Researchanalystonsite,kickingrocksatalltimes.

Whatwedoistrytoprovideoursubscrib-ers thebest research thatwecan. Wedon’talwaysgetitrightandmakemoney,butwehaveaverystrong track record.We’vebeenaroundforover30years.Myownrecommendations intheCaseyEn-ergyReporthavenotjustbeatentheTSXVentureandtheEnergyIndexeveryyear,

buteveryquarterforthelastsevenyears.I’mquiteproudofthat.Everysinglerec-ommendation and research report I have ever written is also available to subscrib-ersonourwebsite.

AT: That’s certainly a strong track record, for sure. Let’s talk about some different commodities. We’ll start with oil. There was a lot of talk about peak oil a few years ago; the notion that we’re running out of oil. Where do you stand on the concept of peak oil?

MK: We’ve always said peak oil talk isnonsense because it was based on the natural declines of a well and deposit.New technologies have proven that byre-vitalizing oil fields. New technologieswill continue to unlock the oil trapped in

shale deposits. In 2010, the U.S. wasproducing about five million barrels ofoil. In2013, they’ve reachedovereight millionbarrels.That’sjustinthreeyears,and that’s all because of hydraulic fracking.IbelieveinPeakCheapOil,butthat’safundamentallydifferentargumenttoPeakOil.

Thisisn’tjustisolatedtotheU.S.Cana-dahasalsohadgreatsuccess.Thiswilleventuallyextendtoother regions in theworld including Europe. The notion ofpeakoil existspurely becauseHubbert(Marion King), who came up with all this,

didn’t realize that there’d be new futuretechnologies.Horizontaldrillingwasnotsomethingthatevenexistedbackin1956whenpeakoilwashypothesizedHewasusing statistics related to conventional oilwells. When youbring in newmod-erntechnologysuchashydraulicfrackingthatchangesthegame.

Thatsaid,hydraulicfrackingisnotcheapoil.Youdon’tfindgushersintheBakkenortheEagleFordregions.Agusherisanoil well that produces over 10,000 barrels ofoiladay.Thedeclineratesontheseun-conventional wells are also massive: over 50%inthefirstyear.What’simportantisthey’vegottokeepdrillingmorewellstokeep up with the decline rates and that, theycando,but it isexpensiveoil. Un-conventionalshaleoilneedsnorthof$65abarreltobreakeveninNorthAmerica.

THERE’S A CASEY RESEARCH ANALYST ONSITE, KICKING ROCKS

AT ALL TIMES




AT: That isn’t cheap oil then, as you say. Prices overall have gone up and so has the cost of retrieving oil.

MK: It’sthesamesituationasintheCa-nadianOilSands.There’salotofoiloncetheybuildmorepipelinecapacity,whichthey will. The sector finds solutions.Look at the increase of rail tankers, for example:in2007,therewere500tankersshippingoil acrossCanada;now there’sover14,000.That’sa2700%increaseinrailtankers.

Again, there’s a lot of oil trapped in theOilSandsbutitisexpensiveoil.Technol-ogywillunlockthisoil,but it’snotgoingtobringbackthecheapoilwhereyou’redrilling a 10,000 barrel a day gusher inNorth America. Those days are gone.It’sexpensiveoilbutit’sthere.Theques-

tion is: at what price can the economykeep growing with oil? It seems that the global economyhas adjusted to the re-alityofthenewnormaloilprice,whichisnorthofUS$80perbarrel.We’vefoundarangewheretheeconomycanhandleoilpricesbetween$90and$105.That’sthenewreality.

NorthAmerica’sbeenverysuccessfulwithitstechnologyandyou’llseeChinabene-fitfromthattoo.That’sbeenahugeareaforoilservicescompaniesbringingNorth

American technologies toareassuchastheSichuanBasin.Lookwhat’sgoingoninAustralia,NewZealandandEurope.

Movingforward,oneofthegreatareastoinvest in will be the service sector technol-ogies.IthinkthoseIPs(IntellectualProp-erties) are going to be worth more than a lot of the pharmaceutical IPs or evenApple’sorMicrosoftIPs,becausewithoutthesenewtechnologies,wewon’tgettheoilflowing.Withoutthisnewtechnology,EuropeandNorthAmericawillbedepen-dentonRussiaandtheMiddleEast.Eu-rope needs to make a choice: start un-conventional oil and gas production or bedependentonRussianoilandgasim-ports.

AT: That’s very interesting. You’ve bounced around the world and talked about several different countries and you started by mentioning the Cana-dian Oil Sands. So let’s talk about that first. What do you think about the Ca-nadian Oil Sands? Some people have said they’re dirty, they should be shut down. What’s your take on that?

MK: You’ll always have people againstanydevelopment,buttherealityisifyougouptoFortMcMurrayyou’llseethatthereclamation lands look better now than theydidbefore.Theoilcompanieshavedoneafantasticjobcleaningupthedis-turbedareas,numberone.Numbertwo,Canadian oil is much cleaner than some oftheAfricanoilproductionorwhat’sgo-ingoninRussiaandinareasintheMiddleEast.TheCanadiansareproducingoilataveryhighstandard. This iswhat Icallmaple leafoiland it’smuch,muchmoreethically produced than in other partsof theworld likeAfrica, theMiddle East

OIL COMPANIES HAVE

DONE A FANTASTIC

JOB CLEANING UP THE

DIS TURBED AREAS




orRussiawherethatoilisfundingregimesthatarevery,let’ssay,un-NorthAmerican.

Therearea lotofpositivestotheCana-dianOilSandsanditgetsabadrapfromthemedia,buttherealityis,it’sverysafe.IdebatedthefounderofGreenpeacespe-cificallyonthistopicandtherealityisthattheworldneedstheCanadianOilSands;youwillseeapipelinebuilttothesouth.You’ll seeapipelinebuilt to thewest totakeCanadianoiltoChina,Asiaandyouwillseeapipelinebuilttotheeastalso.

Itwillhappen.It’sgoingtohappenslowly,butit’snotgoingtogoawayastheenvi-ronmentalistsmaythink.It’sheretostayandit’sonlygoingtoincrease.

AT: It needs to be done safely. That’s the key, isn’t it?

MK: It is and, let’s face it, whether youwant to build a copper mine or a pipeline Canada or the U.S., you’re always go-ingtohaveprotestors inNorthAmerica, because that’s what protestors do;

they’reinbusinesstoprotest.That’swhytheygetfunded.Buttherealityis,ifthese protestors went anywhere else in theworldthey’drealizehowmuchhigherourstandards are in producing commodities in North America than anywhere else. But thatwould take toomuch effort ontheirpart, so it’seasier tostalldevelop-mentinNorthAmerica,andourgovern-ments have enabled illogical protest to stalldevelopment.

They should really take a different ap-proach: in the same way we’re takingourtechnologytoextractresourceselse-where in the world, we should take our NorthAmericanstandards,ourhigh lev-elsofenvironmentalismandcaretootherpartsoftheworld.IfyougototheNigerDelta,wherethere’smajorOPECoilpro-duction, you’ll seemajor oil spills alongthewater.Who’sgoingtocleanthatup?But,yousee,it’saloteasiertoprotestinNorthAmericathanitisinNigerorRussiaortheMiddleEast.




AT: You’ve mentioned Russia a few times. What’s going on there? What impact are they having to the world?

MK: A lot of people don’t realize thatRussiaisatthecenteroftheenergyma-trixglobally,notjustforoilornaturalgas,butalso foruranium. TheRussiansareverymajorplayersintheresourcesector.They’re the number one producer of oilin theworld. Theirconventionalgas re-servesmakethemoneoftheworld’slarg-est players. 25% of all the natural gasconsumedinEurope’sisfromRussia.

Ifyouincludetheirunconventionalnaturalgas, they’re the largestholderofnaturalgas intheworld. Theyhavewithintheirsphere of influence all the formerUSSRstates.Theyarethelargestholderofura-niumintheworld.Theyhaveabouthalfof the world’s entire uranium resourcesandhalfofitsenrichmentcapacity

Put it thisway:one in every fivehomesinAmericaispoweredbynuclearenergy;20%ofbaseloadelectricityisgeneratedintheU.S.vianuclearenergy.HalfofthatcomesfromRussia.Effectively,10%ofallhomes intheU.S.arepoweredbyRus-siannuclearfuel.Here’sanotherinterest-ingstat:lastyear,in2012,moreuraniumwasproducedonAmericansoilbyaRus-sian company than all the U.S uraniumproduction companies combined. The

Russiansarethelargestproducerofura-niumintheU.S.Shocking,buttrue.

AT: That’s an amazing and surpris-ing statistic. I’d like to talk more about nuclear; let’s just finish off with a couple more questions on oil before we do that. Some people talk about reduced production in the Saudi oil fields. Do you feel that they’re really running out of oil at this point?

MK: No.TheSaudishavehadthebenefitofthegreatGhawaroilfield,whichistheholygrailofoildeposits.ThatonefieldofGhawarproducesmoreoilthananyothermemberofOPEC.This isamassiveoilfieldandtheSaudishavebeenvery,verygoodatreinvestingintotheirfields.

Whilethey’renotnecessarilyrunningoutofoil, the risk there rightnow is thatbypumping so much water back into the reservoir,there’sanengineeringshift.It’sa finebalancebetween howmuch theycan swing the production up and bring itdownbecausethey’realwaystryingtomeet demand. But remember, in all oftheseconventionaldeposits,theywillbeabletobringinmoderntechnologytoun-lockthesourcerock.

So,no,SaudiArabiawillnotbe runningoutofoilanytimesoon.Butthereissig-nificant social risk. The eastern portion

ONE IN EVERY FIVE HOMES IN AMERICA IS POWERED BY

NUCLEAR ENERGY




of Saudi Arabia iswhere all the oil pro-duction comes from. That area is alsowhere themajorityof theShi’aare,andabout50%oftheShi’amalepopulationin thatregionareunemployed.TherestofSaudiArabia ismadeupof themajoritySunni’s,andthetwodon’texactly liveinharmony. Thishasall themakingsof asocialrevolution.

Whatismoreinterestingislookingatar-easliketheNorthSea,VenezuelaorMex-ico:theCantarellFieldforexample,whichwas at one time producing over three mil-lionbarrelsofoiladay.Butbecausegov-ernments tried to fund their social pro-grams, they didn’t take the profits fromtheoilfieldsandreinvestthembackintotheoilfields. They’dratherpayfor theirsocial programs and then those fieldssuffer significant reduction in productionlevels;they’vereallyharmedthereservoirdensityandthereservoiritself.

PlaceslikeCantarellaredownover50%inproduction.EveninAlaska,theNorthSlopeisdownover50%inproduction,asis theNorth Sea in theUK. That’s be-causewiththeseoilfields,youhavetore-investtokeeptheoilgoing.That’ssome-thing that people have to understand with unconventionalshaleoilfieldsintheU.S.-theBakkenorEagleFordortheMarcel-lusshale-you’realwaysreinvestingbackintothefieldtokeepyourproductiongo-ingbecauseoftheratesofdecline.

That’swhy cheapoil is gone, butwe’renotgoingtorunoutofoil.It’sjustgoingtogetmoreexpensivetoproduce.

AT: You were in Iraq not too long ago, correct?

MK: Yes. Iraq is a fascinating place, especiallywithwhat’sgoingon inKurd-istan. They’rebringing inmodern tech-nology tosome recentlydrilledoilwells.ThesearesomeofthebestwellsI’veseeninyears,anywhereintheworld;theyareoilgushers.

AT: That’s amazing and they have quite a bit of oil there, I believe, do they not?

MK: Oh,definitely.AnindependentKurd-istanwouldhaveoneofthetoptenlarg-estoilreservesintheworld.

AT: Did you find anything worth in-vesting in?

MK: Wedid.WejustrecommendeditinthemostrecentCaseyEnergyReportandit’sacompany that’s runbyaverysuc-cessful,verywell-knownexecutivefromamajor international oil company, backedbyoneoftheworld’smostfamousfam-ilies in finance. Theyhavealmostabil-liondollarsincash.They’vehitoneofthebestoilwellsintheworldthatI’veseeninthe last tenyearsandtheyhavea threebilliondollarmarketcap.

AT: That’s worth reading about in the Energy Report, definitely.

MK: Yes.It’sastrongbuyandwe’reupon italready. Iseethatasbeingoneofthehotstoriesof2014and2015.

AT: What about China, India and oth-er emerging markets? Oil availability sounds like it really isn’t a problem except for the cheap stuff. Do you see any sort of squeeze coming that will be affecting price?




MK: ChinabuysmostofitsoilfromRus-sia and secondly from Iran, believe it ornot;ithassomewhatignoredU.S.sanc-tions! They’re investingheavily inAfricaforfutureoilsupplyandthey’vebeenbigbuyersofCanadianoil.They’verecentlyboughtoutsomemajorfirmsinCanada;lookatwhat’sjusthappenedwithNexen.Because they’re backedby the govern-mentofChina,it’sunlikeaninternationaloilcompanysuchasExxon,where theyhave a limited time to show their share-holders that it was a good investment.China takes a multi-decade view

They’remuchmoreaggressiveandmuchmore advanced than India is current-ly. They’re reallyaboutfiveor tenyearsaheadofIndiaontheenergymatrixasfarasdiversifyingthemselves.TheChinesehavebuiltpipelinestogetoilfromRussia.They’redoingLNGdealswithCanadaandAustraliarightnow.They’remajorbuyersofMiddleEasternoil.They’vediversifiedthemselves.Whatthey’redoingisgettingridoftheirhugehoardofU.S.dollarsandbuying tangibleassets that theircountry

needs. China needs oil. China needsgas.Chinaneedscommoditiessuchascopperand iron. Theydon’t needU.S.dollars.Sothey’retradingtheirU.S.dol-larsforhardtangiblecommodities.

AT: Yes, that’s going on definitely and more than with just oil. As you said, all sorts of different commod-ities. What about the effect of new oil discoveries in the U.S.? There’s talk about self-sufficiency in the next three to six years. Is that possible?

MK: Wellagain,atwhatprice?Whatwehavetounderstandisthehighrateofoilfielddecline.It’slikerunningonatread-mill,andasyou’rerunning,theinclinationof your treadmill is rising, and as you’rerunning, you’re getting more and moretired.Soyou’vegottopushharderandharder.Howthattranslatesintotheshalefield is you have to drillmore andmorewells tokeep theproduction increasing.Interestingly,asgashasbecomemoreofabyproductofshaleoilproduction,gasrigs are decreasing significantlywhile oilrigscontinuetogrowinnumber.

The question is, at what price can the growth continue? Bakken, Eagle Ford,Marcellus;theyneedtheequivalentofover$65or$75oiltobreakeven.Thetechnol-ogies are getting to the point where Can-adajustrecentlydrilled52wellsfromthesamepad.Thatwasunheardofjustthreeorfouryearsago.Sothetechnologiesaregettingbetteratextractingthemaximumamountoftheexpectedultimaterecoveryofanoilwell.

But, energy self-sufficiency in the nextfewyears?No.Weactuallypaidfortherecent335pageInternationalEnergyAu-thority (IEA)Report. Weread thewholething and the report actually never said(by 2022) Americawould become ener-gyself-sufficient. What itsaidwas: ifallof these assumptions happen, Americawould become almost energy self-suf-

GAS RIGS ARE DECREASING

SIGNIFICANTLY WHILE OIL RIGS CONTINUE

TO GROW IN NUMBER




ficient. But themedia takes those littleclips,thesummariesofthesereports,andthey’vegottosensationalizeittogettheattentionofthepublic.Theychangetheactualthesisofthereport.

Some of themajor theses of the reportwere,numberone thatelectricitygener-ation from green powerwill triple in thenext tenyears. Well, that’sproven falsebecauseatwhatcostwillyouneedtotri-ple that?

Numbertwo,theyneededallthecarsandvehiclesontheroadtoincreasetheireffi-ciencybyover35%inthenexttenyears.Well,thathasn’thappenedinthelast30years, so that’s a huge estimation, butyouneverknow.

Number threewas they needed all longhaul trucks - those big 18 wheelers -to convert to compressed natural gas.They didn’t even talk about nuclear en-ergy. What about nuclear in the U.S.?Inshort,a lotof theseassumptionsandtimeframes were unrealistic. Moreover,thereportclearlystatedthateveniftheseassumptionsoccur,Americawillbecomealmostenergyself-sufficient.So,thean-swer toyourquestion:self-sufficiency inthreetosixyears,no.

AT: It looks like they’re going to need Canadian oil for a while then.

MK: Exactly.

AT: Let’s talk about the natural gas being found in the United States and Canada. Really, much of this is hap-pening around the world, but you’ve also said that the rig count for gas is down. I expect that’s obviously be-


cause the price of gas is so low. Do you anticipate this continuing?

MK: Wewrote an article five years agotalkingabout theshadowwells inNorthAmerica. There’s tens of thousands ofwellsthathavebeendrilled.They’vebeenfrackedandtheyneedlessthan72hoursto be tied in and completed;what theyneedistherightnaturalgasprice.There’sa lotofsupplypipedinthat’swaitingforthatprice.Thereasonwhytherearefew-er gas rigs is because of new hydraulicfrackingtechnologies.They’regoingfouror five kilometersin horizontal wells, whereas five yearsago, they didn’t do anything likethat. They’re ex-tracting so much more gas per well than they were fivetotenyearsago.

AT: Now, moving forward, how do you play as an investor?

MK: Ithinkifyou’regoingtoinvestingasin North America, you have to be verycarefulbecausewe’retalkingaboutverysmallmarginsonthepuregasplayers.

Ifyou’regoingtoinvestinthegassector,youwant tostickwithwetgasbecausethen you get liquid rich gas and that’sworthalotmorethandrygas.But,Ithinkthere’sabiggerupsideelsewhere in theworld. Look at Europe: they’re payingthreetimesmorefornaturalgasthantheyareinNorthAmerica.

Cuadrilla is a perfect example of bring-ingmodern technology toaprovenfield

andnowit’sanationaltreasure.They’veprovedover200tcf(trillioncubicfeet)intheBowlandShalesintheUK.200tcfinBC,AlbertaortheU.S.wouldbeworthtensofbillionsofdollarstoacompany.Idobe-lieve investorsshould lookelsewhere forthebiggerupside,especiallyifyouspec-ulate in thesmallerexploringcompaniesinNewZealandorEurope.There’salotofupside forunconventionalnaturalgasexploration.IntheU.S.,becauselandisso expensive, acreage in the Marcellusshale is costing north of $15,000. Notmuchroomforerrorwhenyou’repaying

thatcostupfrontforland. I’mverybull-ish on the potential in Europe, and I’vepenned the poten-tial as the Coming European EnergyRenaissance.

AT: And they’re actually doing frack-ing there too. Is that correct?

MK: Correct.Theyare.

AT: A lot of people have said that fracking won’t happen in Europe.

MK: FrackinghasbeenhappeninginEu-ropesincethe1950s.Tensofthousandsoffrackshavehappened.TheRussianshave been drilling horizontal wells and fracking formany,many decades. TheNorthAmericanservicecompanieswerebringinghorizontaland fracking technol-ogiestoRussiainthemid-1990s.LongbeforefrackingwasabuzzwordinNorthAmerica,theRussianswerealreadydoingit. TheRussiansaresounderestimatedgloballyfortheirtechnologiesandabilitiesintheglobalenergyscene.



THERE’S A LOT OF UPSIDE FOR

UNCONVENTIONAL NATURAL GAS EXPLORATION


AT: There’s a lot of controversy in North America and elsewhere about fracking. There have been reports about people being able to light their tap water on fire. Some are blam-ing fracking for this not to mention other safety issues. What are your thoughts?

MK: I’vewrittenaverydetailedscientificargument (on our website) about all the misconceptions and false assertions inGasland.Gaslandisverywellknownforlightingtapwater;astheyturnonthetap,itflaresup.Thatoccursbecauseofnat-urallyoccurringmethane.Itwasaclevermarketingploythatcompletelymisrepre-sentedthefacts.

Whether fracking happened or not, thatwould occur, and methane just evapo-rates intheenvironment.Fromamediastandpoint, it’s no different than when

VicePresidentAlGorecameoutwithAnInconvenient Truth, which, let’s face it,wasmore of an inconvenient lie. Gas-landcertainlygarneredmediaandpublicattention as did doubtless the movie that was supposed to build on the momentum ofGasland,thePromisedLandthatMattDamon did against shale developmentandhydraulic fracking inNorthAmerica.Wewroteanarticleaboutit,“Well,here’sthetruth”,whichpointedoutwhatnobodyelsetalkedabout:itwasactuallyfinancedbyanentitycontrolledbythegovernmentoftheUAE.Similarly,I’mwillingtobetthatGazprom finances NGO activity againstofunconventionalenergydevelopmentintherestofEurope.

Gazprom is thenaturalgascompanyofRussia and the largest producer of nat-uralgasintheworld.SowhywouldtheRussiansandtheUAEfinanceHollywoodmoviesorNGO’s?




Theydon’twantthesenewtechnologiesto spreadbecauseRussia needs to sellitsoilandgastotherestofEurope.Be-cause the Europeans are paying threetimesmoretoRussiafortheirnaturalgasthantheAmericansaresellingitfor.TheRussians get 25%more from the Euro-peans selling their oil than the oil selling in the Bakken. Places in Germany arepaying 100%more for their oil than thecompaniesintheCanadianOilSandsaresellingtheiroiltotheUSfor.

TheRussiansdon’twanttolosethatad-vantageoverEurope.AndtheUAE,whichis amajor oil and gas exporter, doesn’twantAmericaandCanadatogetintotheexportgameforLNG,hencewhythey’refinancingaHollywoodfilm.Soit’salmostlikeareverseNGOagainstdevelopment.It’shighlyironicthatGazpromispushingthe anti-shale fracking story, yet they’vedonethousandsoffracksinRussia.

AT: That’s quite shocking really, isn’t it? I don’t know of any other way to put it. What do you think will happen with U.S. and Canadian gas when it comes to exporting it as LNG?

MK: Rightnow,boththeU.S.andCan-adaareaboutthreetofiveyearsbehindAustralia’s development of exportingLNG. On topof that, if you lookat theglobe,thelargestconsumerofLNGtodayintheworldisnotChina,it’sJapan.WhatpeopleneedtounderstandisbecauseoftheFukushimadisaster in2011and theresultant nuclear meltdown, Japan shutdownall54nuclearreactors. OvernighttheydoubledtheirimportsofLNG.Cur-rently,50%oftheworld’sLNGproductionisexportedtojusttwocountries:38%toJapanand12%toSouthKorea.

Everyone’smakingthismadrushtoLNG,butAustraliaismuchclosertoAsiathanBritish Columbia, on the west coast ofCanada,or theU.S. is. If Japanbringstheir nuclear reactors back online, which I believetheywillslowlyduring2014,withperhapshalfupandrunningbytheendof2015,itwilldecreasetheirLNGdemandby50%.

These massive LNG liquefaction plantsthat export LNGare condensing naturalgasby600timestocompressitintoaliq-uidandshipit.Thesecosttensofbillionsof dollars and takemany years to buildand,moreimportantly,manyyearstoper-mit.Rightnow,intheLNGgame,RussiahastwolargeexportingLNGplants.And,they’vejustsigneddealswithChina.

QatarhasthelargestLNGcapacityintheworldrightnowandthey’reexpandingit.Australiaissigningmajordeals.Yes,thepotential istherefortheU.S.andCana-dabutunfortunately,thecosttoshipLNGfromtheU.S.orCanadaistwiceasmuchasitisfromRussia,Qatar,orAustraliatoAsia.

Itmighthappen,butit’sgoingtobeslowandIthinkinvestorshavetobeverycare-fulbecausemostofthedemandthathasincreased in LNG is because of Koreaand Japan shutting down their nuclear



QATAR HAS THE LARGEST LNG

CAPACITY IN THE WORLD RIGHT NOW


reactors.Whentheydobringbackthosereactorsback,there’llbea lotofexcesssupply and the prices for LNG will godown. I think it’sabubblewaiting forapintoburstit.

AT: Does that mean, if tens of billions of dollars are invested in LNG plants in North America, they could become dinosaurs?

MK: No.Ithinkwhat’sgoingtohappenisbeforeyoubuildyourLNGplant,you’llhaveofftakeagreements.Theprofitsthatpeopleareexpecting today,by the timethese offtake agreements are signed,won’tbeashighaspeopleexpect.

Secondly, the dark horse in the LNGgame is something called FLNG, that’sFloatingLNG. Shell isoneof theworldleadersinLNGhavenowbuiltsomethingcalledFloatingLNGwheretheycanmovearound the world to stranded gas depos-its.TheycouldprobablyproducethegasforlessthanadollarperMcf(1,000cubicfeet). In theU.SandCanada, theyneedabout$3.00perMcF,sothelikesofShellareveryadvancedinthisarea.

WithFLNG, ifanythinghappens,wheth-erpoliticsortaxeschange,yousimplyliftanchor and move to the next strandeddeposit.Becausetheoceancovers70%

oftheglobe,therearemanymorestrand-ed gas deposits in the ocean than there areonland.TheCAPEXofonshoreLNGplantsareinthetensofbillionsofdollars.And,youmayhaveunionorfirstnationis-sues, environmentalists, the government wantingabiggertake;notsowithFLNG-Ithinkit’sgoingtobeabiggame-changerfortheLNGsector.

AT: That’s great insight. We’ll defi-nitely be keeping our eyes open for developments and reading your newsletter. Let’s talk a bit about nu-clear. To a lot of people, it’s a four let-ter word. You mentioned Fukushima and the fact that Korea and Japan have both shut down all of their reac-tors. Is nuclear really a viable option to power the world?

MK: It is, and if you lookat,morepeo-ple have died in coal or natural gas plants than they have in nuclear power plants.However,fromamediastandpoint,it’saneasy target. It’s like hydraulic fracking,right?Whenyouthinkaboutnuclearen-ergy,youthinkoftheJaneFondaproject,TheChinaSyndrome. You thinkofHo-merSimpsonworkingatanuclearfacilityandtheevilMr.Burns.Nuclearmayhaveaveryuglytastetoityet,it’sactuallythecleanestformofenergy.

20%ofAmerica’selectricitycomesfromnuclear energy and that’s not going tochange.SaudiArabia,thesecondlargestproducerofoilintheworld,isplanningtobuild 16 nuclear reactors; theywouldn’tdothatwithoutfaithintheviabilityofnu-clear. UAE is building nuclear reactorsand Kuwait is looking at it. You simplyhavetolookatwhat’sgoingoninChina.



NUCLEAR - IT’S ACTUALLY THE

CLEANEST FORM OF ENERGY


Therealityisthaturaniumissuchanun-lovedcommodityandsectorthatit’swhatIcalltheultimatecontrarianprofitoppor-tunityrightnow.It’sbyfarthecheapestcommodityintheworld.It’sgonedownto the point where producers are losing money at current spot prices. That’swheretheopportunityisbecausethecurefor low prices are low prices; eventuallyyou’ll see a big pop because theworldneedsnuclearenergy.

Forexample,theU.S.isthelargestcon-sumerofuraniumintheworldtoday,yetitimportsover95%oftheuraniumthatitconsumes.HalfofthatcomesfromRus-sia.Canadaisthesecondlargestsuppli-er. In1960, theU.S.producedover35millionpoundsofuranium.Lastyear,theyproducedalittleover3.5millionpounds.That’sahugedecreaseinproduction.

Whenyoubuildanuclearpowerplantthatisthebigcost.Ifnaturalgasdoubled,thecostofelectricitywillprobablygoupby85%,becausethefuelforacoaloranat-uralgasplant isthebiggestcost.Foranuclearpowerplant,however,ifthepriceofuraniumtripled, itwould result in lessthana15%increasetothecostofelec-tricitygeneration.Thebiggestcostforanuclearpowerplantisactuallybuildingthenuclearpowerplantinthefirstplace.Sowhetheruraniumis$50or$200,it’sirrel-evant to the nuclear reactor; to the actual utilitythatiscreatingthegeneration.Thekey is a secure long term supply of theuranium fuel. The Russians have beenthebiggestbuyersofuraniumproducersanddepositsintheworld–they’retryingtocornertheuraniummarketrightnow.

AT: That’s interesting and maybe a little frightening too. I would think

that certain governments would step in to prevent that possibly. But the Russians have a historical agreement with the U.S.: megatons for mega-watts. How’s that working out?

MK: TheHEUAgreementwassigned in1992 and, at that time, Russia was onitsknees.TheUSSRhadjustcollapsed.ThecountrywasgoingbankruptandBillClintonwas theUSPresident. Americawas the strongest country in theworld.Let’sfastforwardtonow,20years later.VladimirPutinisinpowerinRussia;whowouldyou ratherbeton,ObamaorPu-tin?Therealityisthelastshipmentofthe

HEUAgreementhappenedonNovember12th. That’s it. The HEU Agreement isover.Nowthey’reinsomethingcalledaTransitionalAgreementwheretheAmeri-cans are still going to be provided nuclear fuelbytheRussians,buttheydon’tknowat what price. And, they can’t guaran-tee tomeet100%ofdemand,becausethe Russians are also looking at sellingtoChina, Saudi Arabia, Japan and oth-ercountries.Conversely,whentheHEUAgreementwasoriginallysignedin1992,thepricewasfixedalongwiththequantityandanagreementtoonlyselltotheU.S.

Whatpeopleand investors fail tounder-stand is: theRussiansarenotonlybuy-ing uranium deposits, they’re going tocountries(oneintheMiddleEastalready)



THE RUSSIANS HAVE BEEN THE BIGGEST

BUYERS OF URANIUM PRODUCERS AND

DEPOSITS




andbuildingthenuclearreactorforthem,they’vefinanceditforthecountry,they’reoperatingitwiththecountry,andthey’vegiventhecountryalifeofmineguaranteeofuraniumfuelforthatmine.Theyhaveverticallyintegratedthesectorcompletely,whereastheAmericansdon’thavethat.

GEtriestobuildnuclearreactorsbuttheycan’tprovidethefuel. Ifyouseewhat’shappenednowinNigerintheArletBasin,wheretheFrenchArevagotmostoftheirproduction from; remember the Frenchare almost 80%nuclear energy. Asweall know, there are huge problems in Africa. Now the French are lookingfor fuel and they’re looking at the Rus-sians.SoPutincontrolstheuraniumdy-namics in theworld and the US,which unfortunately,hadsuchagooddealwiththeHEUAgreement, theyendedupbe-comingsoambivalentaboutit,theyhav-en’tpreparedforwhat’sgoingtohappenafter. That’swhywethinkuraniumrightnowisthebiggestno-brainerofallintheenergysector.

AT: Well it sounds to me like you’re saying we’re definitely in for some increase in prices. Any thoughts on where they could go from here, con-sidering how low they are?

MK: Ifyoulookatyourlowestcostpro-ducers,rightnowtheydonotmakemon-eyintheuraniummarket.Cameco,isthelargest independent uranium producer in NorthAmerica(onlyKazakhstanproducesmore).TheyhaveamajordepositcalledCigar Lake and it is amassive deposit.It’soneof thehighestgradedeposits intheworld,nexttoMcArthurRiver,whichtheyalsooperate. But they’vebasicallycomeoutandsaid: “We’reputting iton

hold”, and the real reason is, at current prices,theycan’tmakemoney.

In 2007, uranium hit over $135 perpound.Rightnow,it’stradinginthelow$40s.That’sthespotmarket. The lon-gertermmarketistouching$50rightnowandthefuturetradesonitrightnowinthe2020s,ifyouwantdelivery,you’vegottopayover$65forit.Bytheendof2015,you’llprobablysee$60uraniumand,atthatpoint,you’llseeabigincreaseintheuraniumproducers.

AT: That’ll be something to look for-ward to and we definitely want to get into some of those ahead of time. I know I’m in a few myself. So I’m looking forward to that. Let’s talk a little bit about renewables and green energy. Which ones do you like?

MK: Well,let’sfirstsay,weallwanttobe-lieveingreenenergy.It’sagreatconcept,butthenrealitystepsin.Myself,Iwasabiginvestoringeothermal.WewerethelargestshareholdersofAmerica’s largestgeothermalplantbuiltinthelast20years.Unfortunately,theshalegasrevolutionhasreallychangedthegameforgreenenergyand I’ll explainwhy. When you go andbuild a geothermal power plant, and geo-thermalreallyis,onpaper,thebestgreen

PUTIN CONTROLS THE URANIUM DY NAMICS IN THE WORLD




energy because it’s base load power;baseloadpowermeansitruns24/7,it’saconstantsourceofelectricity.Theprob-lemwithawindmilliswhenit’snotwindy,youdon’tgetgeneration.Sothat’ssec-ondarygeneration.That’snotbaseload.The problem with solar is nighttime obvi-ously,that’swhyit’snotbaseloadpower.Sothoseareallsecondary. Run-of-riverisagoodgreenenergy.Unfor-tunately,theriverdoesn’tflowatthesamerateallyearround;youcan’tcapitalizeontheseasonaldifferencessoyou’rerunningitatperhapsathirdofcapacity.There’sanegativetothat.Geothermal,onpaper,issupposedtobethebestgreenenergy.Theproblemiswhenyoubuildthesebigpowerplants,youneedtosigna20yearPPA (Purchase Price Agreement) withthe utility. Because of natural gas pric-es, no utilities want to sign up to the big commitmentoftheexpenseofgreenen-ergy anddrilling these deep geothermalwells. None of the geothermal compa-nies have been able to produce the mega-wattstheengineerssaidthattheywouldbeableto.It’sbeenareallyawfulsectorto invest in; it was a major investment di-sasterformyself.

So green energy without governmentsubsidiesdoesnotworkcurrentlyandin-vesting in a sector based on governments and politicians is a disaster waiting to hap-pen. Theythink ina fouryeartermandall theycareabout ispolitical lipservice.Obamacameinwiththewholegreenen-ergydream.Now,thatwasassuccessfulasObamacareandnowObama’s tryingtotakecreditfortheshalerevolution.Therealityis,thegreenenergysectorhasnotbeentheplacetobe.

AT: Are there promising green technologies that could take over or certainly replace some of the other energies if oil prices go significantly higher?

MK: Thetechnologywillhopefullygettothe pointwhere itwill bemore efficient.Toachievegrowth,efficiencywillhavetoincrease.Solarpanelsaremuchmoreef-ficienttodaythantheyweretenyearsagoand considerably less expensive. Withbetter drilling techniques, geothermal will becomebetterbutallofthatisstillintheimplementation. Oilwillhavetogoover$200 per barrel for themoney to comeinto research and development to make greenenergyeconomic.Untiloilskyrock-etsnorthof$200, Idon’tsee thegreenenergy revolution replacing natural gas,coaloruranium.

AT: That’s a big number that we’re quite a way from today, so we’ll have to wait for that to happen. How do you think 2014 is shaping up from an investment point?

MK: TheMiddleEast riskpremium isn’tgoinganywhere:therewon’tbeapeace-ful solution in 2014; the SyrianWar willcontinue; negotiations between Iran and U.S.willremainshakyatbest.

If anything happened at Ghawar you’dwakeupandthepriceofoilwouldbeup50%.IfGhawarshutdown,oilwouldbe$150overnight. SaudiArabiaproducestenmillionbarrelsofoiladay.Theworldconsumesabout87millionbarrelsaday.Ifthatshutdown,oilwouldinstantlysky-rocket. If the Straits of Hormuz,wherehalfoftheworld’sdemandgoesstraightthrough from the Middle East, were to




shutdown,you’dbe lookingat$150oilovernight.

Movingforward,whataretherisks?Well,iftheU.S.economyblowsupandwehaveanother major meltdown as we did in late 2008,Icouldseeoilperhapsgoingdowntomaybe $50 a barrel short term. Butthat’sonlyagivenifthere’samajorstockmarketcrashandtheeconomyblowsup.

Where I’d say youshouldbe invested ifyou’relookingtoU.S.companies,aretheoil and gas service providers who are go-ing to be drilling more horizontal oil wells, doingmorefracks,drillingtheultra-deepGulfofMexicooilwells; youwant tobeexposed to some of these solid servicecompanies that have absolutely fantas-tictechnologiesandwhoseIPisgoingtocreatemorecashflowwithouttheriskoftheexplorationoftheEMPcompanies.

Bringing North American technologiesto Europe is going to start penetrating in2014andthere’sgoingtobebigwinsthere. They’ve already started. I thinkthat pattern’s going to continue toAus-

tralia and New Zealand, where frackingis juststarting. There’sa lotofpromiseandtherealityis,countriessuchasVen-ezuela and Mexico are decreasing theiroilproduction.Theyareexportinglessoilbecausethey’vehadtoincreasedomes-ticdemand.SameasintheMiddleEast.Thecheapdaysofoilaregoneandit’sagreatsectortobeinvestedin.

AT: Well thanks for that and I know you have numerous recommenda-tions on an ongoing basis in your newsletters. I know one of the good things is you not only tell people when to get in, but you also tell them when to get out, which is a very good way for people to profit. So thank you very much, Marin, for taking the time with us today and hopefully we’ll be able to do this again in the future and look forward to further successes.

MK: Thanksalot,Tony.Allthebest.

For information of the Casey Energy Report click here: http://bit.ly/1epjFn6

Marin Katusa, an accomplished investment analyst, is the senior editor of Casey Energy Dividends, Casey Energy Confidential, and Casey Energy Report. He left a successful teaching career to pursue analyzing and investing in jun-ior resource companies. He is a regular commentator on Canada’s Business News Network and is a member of the

Vancouver Angel Forum where he and his colleagues evaluate early seed investment opportunities. Using advanced mathematical skills, he has created a diagnostic resource market tool that analyzes and compares hundreds of investment variables. Through his own investments, Marin has established a network of relationships with many of the key players in the junior resource sector in Vancouver.

For information of the Casey Energy Report click here: http://bit.ly/1epjFn6

BIO

http://bit.ly/1epjFn6

http://bit.ly/1epjFn6


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2014 PREDICTIONS

2014 PREDICTIONS:WE’VE ASKED A FEW INVESTMENT

AND TRADING PROFESSIONALS THEIR OPINIONS OF HOW 2014

MIGHT UNFOLD.


2014 PREDICTIONS

Black Swan Capital ForecastBy: JR Crooks III, Vice President

John Ross (JR) has notched up seven years researching economics, analyzing capital markets and editing financial news and investment publications. His specialty is in global macroeconomic analysis and his major investment focus is on the commodities market.

JR has written for publications covering commodities, stock indices, and currencies. Those publications centered on his trading recommendations where he used options, ETFs and equities to earn speculative profits. He has a B.S. in finance from Florida State University.

http://www.blackswantrading.com/

Gold: $1600Silver: $30S&P 500: 1800DJIA: 16000TSE: 12500USD index: 86EUR/USD: 1.27USD/CAD: 1.10

OF COURSE, IN THESE VOLATILE TIMES, THERE ARE NO CERTAIN-TIES. HOWEVER, OUR FOLLOWING CONTRIBUTORS - ALL VERY WELL RESPECTED WITH EXCELLENT TRACK RECORDS - HAVE

PROVED TO BE REMARKABLY PERCEPTIVE IN THE PAST.

Goldmoney.comBy James Turk James Turk is the founder of GoldMoney, and co-author of “The Collapse of the Dollar” and “The Money Bubble”.

James Turk has over 40 years’ experience in international banking, finance and investments. He began his career at The Chase Manhattan Bank where he worked on assignments in Thailand, the Phiippines and Hong Kong. In 1983, he was appointed as manager of the Commodity Department of the Abu Dhabi Investment Authority. After leaving that post in 1987, he went on to hold various advisory roles in money management. In 2001 he co-founded GoldMoney and remains a director of the group.

www.goldmoney.com

Gold: US$ 2,000+Silver: at least US$ 50

The2-yearpricecorrectionoftheprecious metals is ending, and both gold and silver will be driven higher in 2014becauseoftheongoingdemandforphysicalmetal.Adetaileddiscussionofthepotentialforgoldandsilverarediscussedinmynewbook,“TheMoneyBubble:WhatToDoBeforeItPops”,whichwillbeavailableonAmazonlaterinDecember.

http://www.blackswantrading.com/

http://www.goldmoney.com


Silver-Investor.com ForecastBy: David Morgan

Seduced by silver at the tender age of 11, David Morgan started investing in the stock market while still a teenager. A precious metals aficionado, armed with degrees in finance and economics as well as engineering, he created the Silver-Investor.com website and originated The Morgan Report, a monthly newsletter that covers economic news, overall financial health of the global economy, currency problems, and the key reasons for investing in precious metals.

David considers himself a big-picture macroeconomist whose main job is education - educating people about

2014 PREDICTIONS

Gold: $1700 Silver: $30 - $34 S&P 500: 1400 DJIA: 13,720 TSE: 15000TSC.V (Venture): 1300USD index: 74-76 2014couldbearebuildingyearforhardassetsandaweakeningoftheUSDthusputtingpressureontheU.S.stockmarket.Alargeeconomiceventcouldtakeplacemoving all markets significantly, but thisisalowtomediumprobability.Silverandgoldwill regainwhat they gave up overthe past year and perhaps somewhatmore, but the overhead resistance is significantunlessthemarketseesagamechangersuchasa‘failtodeliver’notice.Forecastingisalwaysdifficultatbest,butwith so much going on in the geopolitical front,theunforeseeneventismuchmoreofaprobabilitythanadecadeago.

honest money and the benefits of a sound financial system - and his second job is teaching people to be patient and have conviction in their investment holdings.

A dynamic, much-in-demand speaker all over the globe, David’s educational mission also makes him a prolific author having penned “Get the Skinny on Silver Investing” available as an e-book or through Amazon.com.

You can sign up below for his free publication which starts you off with the Ten Rules of Silver Investing where he was published almost a decade ago after being recognized as one of the top authorities in the arena of Silver Investing.

www.silver-investor.com

http://www.silver-investor.com/amember/signup.php





http://www.silver-investor.com


1.QEwillcontinuethroughout2014atapace similar to 2013 ($1 Tillion). Whiletalksabouttaperingwillcontinue,theFedis caught in between a rock and a hard place:lowerpurchaseofTreasurybondsby foreigners and continuing deficits.Yellen will have no choice but to continue or see markets take a hit and long rates risesharply.

2. In spite of a likely and healthy shorttermcorrection, theS&P is likely toendtheyearabove2,000.Wewillcontinuetoseecashmovingoutoffixedincomeintostocksinsearchforyield.

3. While gold is likely to experiencefurtherweaknessoverthecomingmonth,continuing worldwide fiat currency

2014 PREDICTIONS

Casey Research’s Outlook for 2014.By Olivier Garret, CEO

Prior to joining Casey Research in January 2007, Olivier Garret was a principal at

Kemp Management, a management consulting firm focused on merger and acquisition due diligence, restructuring, and turnaround activities for a variety of private equity firms and financial institutions. In this capacity, he led and participated in dozens of merger and acquisition and restructuring deals in a variety of industries. In the 1990’s, Olivier was CEO and general manager of a number of industrial businesses ranging from entrepreneurial start-ups to divisions of a Fortune 500 company. He earned an MBA from the Amos Tuck School of Business Administration at Dartmouth College and a Master’s in Business from

debasement, supply constraints andcontinuedpurchasesbyChinaandotherdeveloping countries will push gold back to$1,600byyearend.

4.Long term interest rateswill continueto rise and the 10 year Treasuries willendtheyearnear4%.WhileQEwillkeepsuppressing short-term yields, marketswillputapremiumonlongertermyields.

5. Housing will continue its recoveryunless longtermratesspike.TheCase-Shillerindexislikelytoriseby8%.

6.GDPwillriseamodest2%.

7. We’re likely to see unemploymentnumbers drop to 6.5% as employerscontinue to create part-time jobs to circumvent Obamacare and moreAmericans drop out of the official laborforce.Themoremeaningfulemployment-to-population ratio will continue to show nosignsofimprovement,demonstratingthattherealeconomyremainsweak

Of course, at some point governmentswill no longer be able to keep our markets andeconomyonlifesupportwithregularinjections of QE and fundamentals willtake over. At that point wewill re-enteranother crisis that is likely to make the2008crisis look like thegood-old-days.It’souropinion that theFed’sandothercentral banks concerted efforts to preptheeconomywillsucceedinpushingthedayofreckoningbeyond2014.Investorsshould remain extremely cautious andapplydefensivestrategiestoprotecttheirinvestedassets.

For more information, check out the year end issue of the Casey Report; you can subscribe risk free at www.caseyresearch.com

http://www.caseyresearch.com


Save 50% by ordering the PDF version or order the paperback today

“Chris breaks down technical trading by analyzing trends and cycles in a clear and concise way. He shows how technical analysis can be applied to long- and short-term time frames without using complicated technical indicators. Traders of all levels will benefit from this book!”

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CHRIS VERMEULEN INTERVIEW

CHRIS VERMEULEN OF TECHNICAL TRADERS

Chris Vermeulen of Technical Traders

INTERVIEW WITH:




AT: We’re here today with Chris Ver-meulen of Technical Traders and he’s going to talk with us about a couple of different aspects of the markets and how we can profit from them. So, be-fore we get into those, Chris, tell us a little bit about yourself and how you got started trading.

CV: I’dbehappyto. When Iwas16, IgothookedonasmallbookletIfoundinmydad’smailbox.ItwasfromLarryWil-liamsonfuturestrading.Ireadthatlittlebookletseveraltimesanditreallygotmehookedontheideaoftradingforaliving;andthatwhenIwasonly16!

Coming froman entrepreneurial family, Iran itbymydad. Isaid:“Let’sopenanaccount;let’strade.”Ofcourse,hesaid:“Noway; I’vegotmyownbusinessanddon’tneed toget intoanyof thatstuff.”Over the following two years, I literallystudied everything and learnt everythingIcould.When I turned18,assoonas Ilegallycould,Iopenedatradingaccountand started trading-I’ve never lookedbacksince.

AT: It’s great to find a passion at such a young age and to be able to turn it into a career. That’s fantastic.

CV: Yes,forsure.

AT: Now you’re a little different from many traders out there in that you trade stocks, options, ETFs and fu-tures. Is that correct?

CV: Yesandno.I’vetradedprettymucheverything. I’m always of the mindsetthat Iwon’t go in onedirection unless Iknowwhat the other direction is. So, Ilearnedthebasicsandintermediatestuffon all those different investment types.I did themall for awhile to try and find

out what fitmy personality, what I likedandwhat I understood. I think it’s real-ly important that every trader should tryallthesedifferentthingsbecauseyoujustneverreallyknowwhat’sgoingtofityourpersonalitytype,youravailabletimeframeandwhatyouenjoytrading. Currently, I

just tradeETFs and futures. I find theyworkbestwithmystrategyandwithmymindset, and I can trade large portions of money without toomuch fear of thedownside.

AT: Is it the ability to manage risk that helps you or pushed you toward ETFs and Futures more than anything?

CV: It is, for sure. I don’t like volatili-ty.WhileI liketoplayvolatility,Iwanttoplaywith investments that are as stableaspossible.WithETFs,beingabasketofassets,youcan’twakeupthenextmorn-ing down 20% or 30% on some news,insidertradingorsomethinglikethat.SoI like to go with something that is broad: alargebasketwithrelativelylowvolatilityin the underlying investments. Thatwayyou can putmoremoney to work and,ofcourse,onceyouhaveastrategythatworkswell in allmarket conditions, youcanjustjackuptheleverage.

AT: You have a daily market com-mentary that you offer to subscrib-

YOU CAN’T WAKE UP THE NEXT

MORN ING DOWN 20% OR 30%


ers plus you have an alert service as well. I’ve seen you in that room, and it sounds to me like you’re also try-ing to teach people to trade for them-selves. Is that correct?

CV: Yes, I have adailymorning routinethatIalwaysdo.IrecorditandIprovide

ittosubscribersofthenewsletteratThe-GoldandOilGuy.com.Itryandmakeitaseducationalaspossible.Ireallyputalotof effort into explaining situations; whatI’mthinkingandwhy.IdrawonthechartsandIdoalotofcalculationswithtechnicalanalysis;Ireallytryto‘paint’everypicturethatI’mtalkingabout,liveeverymorning.I cover a broad market: gold, silver, min-ers,preciousmetals,oil. Ipackageitallup into a morning premarket video so that clientscanfollowitandtryandlearnfromeverythingthatgoeson.Thatbeingsaid,tryingtoteachpeopleonlineisfairlydiffi-cult.

Trading isn’t something you can reallyjust teach over the internet. It requiresseriousdedication,aplan. It requiresalotof time,mentoringandcoachingbe-cause the problem is people have diffi-cultiesfollowingrules.Mostpeoplereallydon’t have verygoodself-disciplineandyoucan’tteachsomebodyself-discipline.That’suptothem.That’swhyit’scalledself-discipline.

You can give them all the tools and walk them through it but when it comes to what they’redoingontheircomputer:aretheypushing thatbutton,are theypulling thetriggerandexecutingorgettingoutwhentheyshould,aretheyplacingtheirstops,havetheydonetheirresearch?Icanonlyhelpsomebodysofar.

AT: Having been a long time trader myself, I know exactly what you mean. Certainly I’ve fallen into, I think, virtually every trap that you can as a trader and learned, hopefully, from them. That said, I want to talk about some-

thing that’s really interesting to me, and that’s the complete opposite of doing it yourself, which is your latest venture AlgoTrades. I’d call it a Black Box trading system; an algorithmic trading system. Tell me a little bit about that. What type of trading is this exactly?

CV: AlgoTrades is a unique automatedinvestingstrategy.Itgeneratestradesonamonthly basis and it focuseson trad-ingprettymucheverymarket condition.Whetherthemarket’sup,down,orside-ways,there’sastrategywithinthesystemthatistryingtotakeadvantageofit.ThesystemtradesbasedofftheS&P500In-dex. That’s my go-to; that’s my breadand butter. That’s the best investmentthat I’ve found to trackand tradeand ittrades either the ES-Mini futures or thethreetimesleveragedETF.

Really,it’ssimplyaswingtradingstrategythat has amomentum strategy blendedinto it. It’s somewhat of a complicated



ALGOTRADES IS A UNIQUE AUTOMATED INVESTING STRATEGY




system because it does actually haveabout12differenttradingstrategiesem-bedded within it. AlgoTrades naturallyflipsfromonestrategytoanotherandasit switches to one strategy, the positionandmoneymanagementsettingsadjust;it’saverycompletehands-offsystem.

I’ve been providing newsletters since2001. Fromthat, I’ve learned thatpeo-plereallyjustneedtogetthemselvesoutoftheequation;theyneedaprovensys-temthatjustrunsanddoeseverythingforthem.That’showmythinkingevolvedintoturningmystrategyintomoreofanauto-matedsystem. Itstarted toevolveovertime,overseveralyears,andnowwe’reatthepointwherewe’vegotallthestrat-egiesbuiltintoonesystem;everythingismanagedcompletelyhands-free formy-selfandtheenduser.

AT: With a lot of these trading sys-tems you have to enter your own rules, you have to back-test them and then create something that is hopefully successful. What you’re saying, if I’m not mistaken, is that a person doesn’t have to do this. This is already done for them.

CV: Yes. It’s more or less a completehands-freesystem. I justfinisheddoingaseriesonmyblog. Itwasa fourpartseries talking about how algorithmic trad-

ingworked itself intomy trading strate-gyandhowIfoundthemajorissuewithtraders isactually the trader! Onceyouremove yourself from a trading strategy,it’s amazing howmuchmore consistentandprofitable a strategycanbe, simplybecauseyou’reeliminatingalltheseminorthings that humans do: we like to cher-ry-pick trades;we like to get out a littleearlyifwe’regettingclosetoatarget;wegetoutalittleearlyjusttobesurewecanlockinsomeprofits.

Allthesefactorshavehugerepercussionsonlongtermperformance.WhatI’vedoneisputallmystrategiestogetherandbuiltthemintoasystemsothateverything isdoneautomatically;theenduserdoesn’thave to struggle with their emotions, wor-ryaboutpullingthetriggerandsoon.Itreallyisatruehands-freesystem.

AT: That’s interesting. Now, you’ve said you’ve got about 12 strategies built into this. Do you mind just giv-ing us a hint of what a couple of them might be?

CV: Well generally the market is goingeither up, down, or sideways. There’smultiplestrategiesforeachofthose.Thesystemworksusinganewtypeofanal-ysisthat I’vecreatedcalled inner-marketanalysis.Mybook,whichisgoingtobepublishedhereinaboutaweekandahalf,goes into in-depth detail. Some mightget it confused with inter-market analy-sis, which is how other markets relate to eachother.ButwhatI’mfocusingonisin-ner-marketanalysis:everythinginsidethatoneinvestmentfromcyclestoouterflowto momentum to standard deviations; all thosethingswithinoneinvestment.

If you can completely fine-tune and un-derstand every moving part within one

I’M FOCUSING ON IN NER-MARKET

ANALYSIS


instrument,youstandanextremelygoodchanceofknowingwhereandhowfarit’sgoing to go next. The system’s strate-gies are all based on inner-market anal-ysis along various time frames for eachdifferent market condition. Whetherit’s up, down or sideways, the system activelyappliesthisinner-marketanalysis.It naturally expands and contracts with themarketsothatit’sconstantlyadjustingasthemarketevolvesfromoneconditiontoanother.

AT: You mentioned that it’s trading the futures of the S&P and the S&P Minis, correct?

CV: Yes,theESMiniiswhatthesystemwas really designed and built for, but italso works on the three times leveraged ETF.That’swhatwe’remakingtheserviceavailablefor,simplybecausealotofpeo-

pledon’twant to touch futures and theETFsareextremelysimpletotrade.Ev-erybodyhasaccesstotradethem,sowefocusonthethreetimesleveragedETFswhichare still poweredby futures. Thesignals,thetiming,isallstillthesame;it’sjusttheunderlyinginvestmentthatyou’retradingisdifferent.

AT: How often does the system trade and how long does it generally hold an asset?

CV: Ittradesabout30to40timesayear.I think the average works out to be about 34timesayear.Asthesystemisrunningdifferentstrategies,sometradesmayonlylastaday,ortheymightlasttwoorthreedays.Ifyouweretoaverageitout,abouttendaysistypicalfromonepositionbeingopenedtoitcompletelybeingclosedout.Isaycompletely,becausethesystemhas




alotofmoneyandpositionmanagementbuiltintoit.It’sscalinginandscalingoutof positions on a regular basis. Some-timesone tradecould last 30,60, even90 days with one contract or a portionfromtheinitiallongtraderunning.

The system will eventually contin-ue to build positions over time. You’llhave these runners involved, which is a very important part in managing risk, meaningthatyou’vegotapositionwiththe major underlying trend always in play.No matter what, if for some reason youdon’tgetanymoretrades,atleastyou’ve gotarunnerinthereandyou’vegotapart of the market and you’re at least catchingsomething.

AT: A lot of auto-trading systems re-quire adjustments as the market ad-justs. How do these occur?

CV: Yes, there’s a lot of problemswithautomated trading systems and peoplehaving problems with them not working over a long period of time. It’s kind ofhardtoexplainbut inreallysimple form,it’ssimplythatpeopleover-optimize.Ev-erybody always talks about: “You can’tover-optimize.Youcan’tover-optimize”.Butit’sreallyhardtoknowwhatover-op-timizingisandalotofsystemsonlyallowyoutoback-testforonlytwoyears.

It’samazinghowmanypeoplearebuild-ingsystemsandtradingthem,andwithinafewmonths,theyjustcompletelycrashanddie.Theyhaven’texperiencedallthedifferentmarketconditionsthatyouhavetobeinandallthedifferentvolatilityandvolume levels; all these different thingsthatcomeintoplay.

Thewaymysystemrunsissimplyonthisinner-market analysis strategy that I’vebuilt, which naturally breathes with themarket. It’s expandingandcontracting.It’s reading all thedifferent cycles in themarketonvarioustimeframes.It’sread-ingthevolatility.It’sdoingallkindsofstuff,managingtheorderflowspouringintoandoutoftheNYSE.That’sthebigboard.Itcarries all the big brand name stocks and youwant toknowwhat themoneyflowinto thosemajor stocks is, because it’sthosemajorstocksthatgiveyouagreatfeelforwhatmarketsentimentis.

Thisstrategy,thewayitnaturallyadjustsonitsown;It’sbreathingwiththemarket,iswhatreallymakesAlgoTradesouniqueandhasmadeitveryconsistentforthesixandahalfyearsthatwe’vehadthestrat-egyupandrunning.

AT: That’s really interesting. What size of account does someone need to utilize your system?

CV: Thesystemrequiresa$35,000ac-count minimum investment and that can be tough, because when it comes to trading,theaveragepersondoesn’thave$35,000. I think thenationalaverage isabout$10,000foratradingaccountand,unfortunately, your trading account sizeplaysahugeroleinifyou’regoingtobeprofitableornotasa trader. Ofcourse,there are other factors such as money



IT’S BREATHING WITH THE MARKET,

IS WHAT REALLY MAKES ALGOTRADE

SO UNIQUE


management. But being under-capital-izedhassomanydisadvantagesandsomuch negative impact on your trading,simply because you almost have to putall yourmoney intoevery trade tomakeenoughmoneytocoveryourcosts.

Thereare lotof feesandexpenseswithtrading. You’ve got commissions, trad-ingplatforms,datafeeds,newslettersub-scriptions,andauto-tradesubscriptions.

People with small accounts usually endupchurningtheiraccountortheyblowitup.Thissystemisreallydesignedforin-vestors, peoplewho have somemoneyandwantittobeproperlymanagedandtraded.That’swhatthissystemdoes.Ithasenoughmoneythatitcantradeprop-erpositionsizes.Itcanscaleinandoutofpositions. Itcantakesomedrawdownsandnotaffectanythingandstillproperlymanagegoingforward.

AT: You just mentioned drawdowns. What sort of drawdowns should I be prepared for?

CV: I think the worst drawdown we’veseen so far is about 27%. It really de-pendswhenyoujointheservice,thesys-tem,becauseeveryyear,there’salwaysasweetspotwherethemarkettakesoff,atrend. Sometimes there’sacouple,butyoucanmakemostofyourmoneywithinamonthorthreeandtherestoftheyear,

youraccountcouldbechoppingaround,goingsidewaysorhavingadrawdown.

The worst case scenario for somebodyusing the systemwho joinedat theulti-mateworstpossiblemoment,justbeforesome of the biggest losses, is around27%.Goingbacktothestats,theaver-agewinrateis81%.Thebiggestlosingstreakwasabout$10,000or$11,000inchains,actually,andthatwasontwolos-ingtradesbacktoback.Thathappenedtobeamarket that flippedand floppedprettyquicklyduringahighlyvolatiletime.Onthepositiveside,ithadawinningstreakof 22 trades and made about $60,000on thatwinning streak. It’s a highwin-ningpercentagesystem.The losersare bigger than the winners but we win so much more than we lose trade-wise that itcompensates.

AT: When you say it had 22 winning trades and made $60,000, are you re-ferring to a $35,000 account?

CV: I am, yes. That’s with the futuressystem.Ofcourse,withfutures,yougetlots of leverage, lots of juice with yourstrategy.Sothat’swhyyoucanhavesomuchupsidepotentialwithfutures.

AT: Okay. What sort of returns on your testing have you had in percent-ages terms?

CV: Overthelastsixandahalfyearssincewe created the strategy, it’s averagedabout80%returnayearona$35,000in-vestment.That’safteryoutakeawaythetradingcommissions.Soit’saprettysolidsystem.Usuallyeveryyearorso,there’saboutathreeorsixmonthwindowwhereyou kind of get chopped around in themarket.Themarketdoesn’tknowwhatit’sdoingorit’sflippingfromanupordown



MADE $60,000, ARE YOU RE FERRING

TO A $35,000 ACCOUNT


trendorsimilar.Notawholelotgoeson;youmightjustbetradingsideways.Itismoreofaninvestingsystem.Thesystemhas to be traded or invested in, I should say,forayearreally.Everythingisbasedoverayear.Youcan’tjustcherry-pickatimeframeandsay:“I’mgoingtotryitforthreemonthsorsixmonths”.Itisanin-vestmentandyouhavetoletthesystemdoitsthing.Andyouhavetogiveittimebecause time ismoney; it’sprettymuchthatsimple.

AT: Who should consider getting in-volved with this system? As an inves-tor, active trader, who do you think this best suits?

CV: I think the ideal clients will be traders whomoreorlesshavebeentryingtotradetheirownmoneyor theirownretirementfundand they’renotmakinganymoneyat it. Or investorswhoare tiredofhav-ing a large nest egg sitting there making apaltry1%ayear.Thosearethepeoplewhoareeithertiredoftradingandtheyjustwant itdone for themor they’re tiredof

theiradvisornotreallydoinganythingforthemandnotmakingtheirmoneywork.I think those are the ones who are going togetoff the fenceandsay:“Youknowwhat,I’mgoingtogoput$35,000ofmycapitaltowork.Theycanleavetherest whereverwhiletheyseehowthat$35,000willperform.

If you have, say, a $250,000 retirementaccountornesteggandyouput$35,000intothissystem,it’saverysmallpercent-ageofyouroverallaccount. But, if youcan make on average $24,000 a yearfrom the system, you’re almost making10%on your entire account. You have$250,000 per year and you’ve only got$35,000atriskintotal.Soit’skindofano-brainer for an investor and someonewho doesn’t really want to be in theretrading. Now, Iknowa lotof traders. Iknowhowtraderswork. Iamone. It’slikeacasino.It’shighlyaddicting.Ilovetotradeandit’snotgoingtobeforthosepeople who want action, who want to be in there and pulling the trigger. It’s notfor those. This is for peoplewhowanttheirmoneymanaged and traded in anaggressivewaywiththe leastamountofdownsidepossible.

AT: Well, I like making money. It doesn’t matter if I’m trading it or a machine’s trading it, as long as I’m making money, I’m a happy camper myself.

CV: Yes,forsure.

AT: Now, do I have to open an ac-count with you or how does that work?

CV: Howitworksisrightnowwe’reget-ting set upwith a fewmorebrokers forvariousclients.There’salotofloopholesthatwehave tokindofgo through,de-pendingifyou’reaCanadianclient,whatprovinceyou’rein,ifyou’reAmericanorifyou’reintheU.K.orAustralia.Sowe’vegot partnerships set up that we can take clients in U.S., Canada, U.K., Australia.Soit’sjustamatterofgettingsetupwiththat brokerage account and then get-ting the systems linked together so our



THIS IS FOR PEOPLE WHO WANT

THEIR MONEY TRADED IN A MORE

AGGRESSIVE WAY




system automatically sends the signalsthroughtoyourbrokerandthenthebro-kerexecutesinyouraccount.Sowenev-erseeyouraccount,wenevertouchyouraccount, we never have access to anymoney. Wesimplyareadigital link thatthebrokerconnectswithandyouhavetosigna littlewaiversayingthebrokercanexecute the trades in your account andthenprettymuchweflicktheswitchandeverythingstartsautomatically trading inyouraccount.

AT: And so when you say the broker is authorized, the broker themselves isn’t actually making the trade. The machine is automated, correct?

CV: Correct,yes.

AT: When will this be live?

CV: We’replanningtoopenthedoorstoclientsattheendofJanuary.Soinaboutamonthandahalffromnow,we’replan-ning on opening the doors and starting to workwithsomenewclients.

AT: It sounds great. You know, Chris, we talked about this prior to this in-terview and I’m so impressed with the idea of the system and what’s taking place and what you’re doing that I’ve decided I’m going to put $50,000 of my own money into an account and trade the system and let AlgoTrades just work its way and I’m going to re-

port on it each issue of AmalgaTrader Magazine as well, so people can fol-low along, see exactly what’s going on with my account, and they’ll be able to see it live each and every is-sue. So I’m pretty excited about that, to bring that to the readers.

CV: Yeah,Ithinkit’sgreat.I’mextremelyexcitedtogetthesystemrunningliveforfellowclientsandfollowers.Itisgreat.It’sasystemItrademyself.Iloveit.Igettowatch it run live. I’mconstantlywatch-ing our server. It is reallymind-blowinghowtechnologyandthingshavechangedfromwhenIstartedtraining.ItstillblowsmymindwhenIsitdowninthemorningand look at the computer screen and what is happening and the process and steps it took to get here. It really is amazingandthesystemismoreorlessmydreammachine.ThisiseverythingthatI’veeverlearned and mastered all bundled into one thingand it tookmeyears toget itprogrammed. I’vegonethroughseveralprogrammers to build various parts and rebuild parts. It’s very exciting. This isit. This is something that I truly believein,Itrade,andI’mlookingforwardtoanamazingfuture.

AT: Congratulations on getting to this stage and wishing you all the best success and definitely want success because my money’s going to be in there too.

CV: Forsure.Thatsoundsgreat,Tony.

AT: Thank you. I appreciate your time, Chris, and we’ll look forward to talking about this again and bringing you back.

CV: Soundsgreat.Talktoyoulater.

THE SYSTEM IS MORE OR LESS

MY DREAM MACHINE


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BY DR. RICHARD SMITH

HOW TO LOCK IN PROFITS ON EVERY TRADE

HOW TO LOCK IN PROFITS On Every Trade

WHICH DO YOU PREFER?Totrulyunderstandthe importanceoftrailingstopsandthe impacttheycanhaveon the successofyourportfolio, Ifirstwanttotalktoyouaboutthedecisionspeoplemake.

Let’sstartoutbylookingatsomehypotheticalbettingscenarios.

BET #1: YOU HAVE A CHOICE OF TWO WAGERS:

A. YOU HAVE AN 80% CHANCE OF WINNING $4000, OR

B. YOU HAVE A 100% CHANCE OF WINNING $3000

Whichwouldyouchoose?Beforewediscussthefirstbetfurther, let’sconsideranother scenario.

BET #2: I NOW PRESENT YOU WITH ANOTHER SET OF WAGERS:

A. YOU HAVE AN 80% CHANCE OF LOSING $4000, OR

B. YOU HAVE A 100% CHANCE OF LOSING $3000

Whichoptionwouldyouchoosethistime?Takenoteofyouranswers,andwe’llcome back to theminamoment.




COMMON OBSTACLES TO SUCCESS

“The investor’s chief problem—and even his worst enemy—is likely to be himself.”Benjamin Graham, mentor of Warren Buffet

“There is one important caveat to the notion that we live in a new economy, and that is human psychology … which appears essentially immutable.”Alan Greenspan

Inotherwords,aninvestor’spsychologyisone of his or her own biggest obstacles.Let’s examine some of the research thatsupportsthisposition.

Terrance Odean and Brad Barber (HaasSchool of Business, UC Berkeley) haveshared with us some enlightening research fromtheirstudiesonhowinvestorsactuallybehave—not how rational man should behave—when faced with choices abouttheir investments. Here are some keyfindings:

• According to their study of 88,000investors,peopleareone-and-a-half timesmore likely to sell a winning stock than alosingstock,andthelosingstockstheydoclingtounderperformthewinnerstheysellbyanaverageof3.5%.Remember—that’sjustanaverage. Imaginewhat3.5%onallof your investments could mean over thelifetimeofyourportfolio.

• A study of 10,000 investors by theUniversity of California’s Graduate SchoolofManagementsimilarlyfindsthatthetwomost common mistakes investors make are thatthey“disproportionatelyholdontotheirlosing investments and sell their winners too early.”

• In November 2006, universities fromaroundtheworldjointlyanalyzedalltradingactivityontheTaiwanStockExchange(TSE)andfoundthatinvestorsareabout“twiceaslikelytosellastockiftheyareholdingthatstockforagainratherthanaloss.” TosummarizeBarberandOdean’ssynopsisoftheirresearch-

Investors in their studies:

• Tradedtooactively;• Were under-diversified;• Clung to their losers; and• Boughtthestocksthathappenedto grabtheirattention.

Moreover, investors were motivated by:

• Overconfidence• The desire to avoid regret• Andthedifficultyofevaluating thousandsofinvestmentalternatives

Thesestudiesapplyto“average”investors,butevenifyou’reanabove-average,these arestillstatisticsandtrendsthatmayapplytoallofus.Thesearetendenciesthatare present ineveryone,andacknowledgingweaknesses is essential in turning them into strengths.

BACK TO THE HYPOTHETICAL QUESTIONNAIRE…

Now,let’sgobackandtalkmoreaboutthehypotheticalbettingoptions Ipresentedtoyou earlier.Torefresh:




Bet #1: Choose one: A. You have an 80% chance of WINNING $4000, or B. You have a 100% chance of WINNING $3000 Ifwemakethesebetsagainandagain,anexpected value emerges. In this situation,the expected value—or average payoff—youwouldexpectwouldbe:

A.$3,200B.$3,000

In this case, Option A has a higherexpectedvalue—abiggerpayoff—makingitthe“rational choice”.However,only20%of individuals presented with this choiceselectedOptionA,whilea full 80% tookthesaferrouteofOptionB.Whenitcomestogains,wewantthebirdinthehand.

Thesecondscenario,asyoushouldrecall,dealswithourpreferencetowardslosses.

Bet #2: Choose one:

A. You have an 80% chance of LOSING $4000, or

B. You have a 100% chance of LOSING $3000

For this scenario, the expected values would be:

A.-$3,200B.-$3,000

Inthiscase,92%ofpeoplepreferthechoiceof taking the chance of a bigger loss inexchange for a small chanceofpreventing

A Prospect Value or Utility FunctionStops Case Study

thelossalltogether,whileonly8%ofpeoplechoose the smaller,butdefinite,loss.Whenitcomestolosses,we’llkeepthetwointhebush.

The resultsshowus that, thevastmajorityof the time, people choose options thatappear safer—butarereallyoflesservalue.Why is there a tendency to do this? Andwhat does this patternofbehaviormeanforus?Let’stakeacloserlook.

Let’stake,forinstance,thischartdesignedbybehavioraleconomistscalledtheValue(Utility)Chart.Gainsincreaseasyoumoveto the right, and losses increase as youmove to the left.Theverticalmeasure isof thevalue,orutility.Sowhatdoes thischart—andthelineitdepicts—mean?Asgainsgetlarger,theimpacttheyhaveonusisless.Aslossesgetbigger,however,theimpactcontinuestoincrease.It’smuchmoredifficulttoletthelossesgo—we’resopreoccupied with them, and want to hold ontothem.Thegains,ontheotherhand,are less important to us—somehow, we actuallyseemtopreferthelosses.




So ifweholdtwostocks—oneawinnerand the other a loser—and we need to sell one, which are we going to hold on to? The loser! We MUST reverse thispattern!Wehaveto learntoclingtoourgainsratherthanclingtoourlosses.

Again, remember: nobody, regardlessof experience, is completely immune tothesemistakes. WHAT IT TAKES TO GET EVEN AFTER A BIG LOSS

Have you ever heard yourself say, “I’mgoing to get out when I get back to even?” Any time you find yourself thinking this,thatshouldbearedalertthatit’stimetosell.AsI’mabouttoshowyou,thefurtherawayyouget fromyourpurchaseprice,themoredifficultitwillbetogetbacktowhereyoustartedfrom.

The table above shows us what it would take to get back to themythical “breakeven”pointaftera loss,usingastartingpointof$100.Howbaddoesitget?From a 10% loss—$90—a 10% gain isonly $99—so we actually need 11% tobreak even. While not unmanageable,that’sstillasignificantclimb.

However, itgetsexponentiallyworse.Ata point of 50% loss, or $50,wewouldneed another $50 to break even—sowe’dneeda100%gain!

As the table shows, some of thesenumbers are very difficult to overcome.Moreover,ournaturalpatternsofbehaviorare working against us; remember, as our losses get bigger, we are more attached tothem,andthey’rehardertoletgoof.Wecanbeourownworstenemies.

THE POWER OF COMPOUNDING INTEREST

Don’t forget about the future earningpotential—in compounding interest—that themoneywegive away couldbeearningforus.UsingOdeanandBarber’s3.5%,takealookatwhat$10,000couldbecome when compounded over 40 years. That$10,000 turns into$40,000over the 40-year period. So whenyou’re considering putting your moneyinto speculative bets, remember that you’re not only risking yourmoney, butyou’re risking your future earnings fromthatmoney. Up to this point, I’ve beendiscussing and emphasizing the impact of what’s called the loss-aversion bias.



However, it’snot theonlycognitivebiasthatbehavioraleconomistshaveidentifiedandthatcaninterferewithsmarttradingdecisions:

The bandwagon effect: “It must bethe right thing to do because everyoneelseisdoingit.”Thisishowbubblesgetstarted, and how tech stocks can have an unbelievable price/earnings ratio, that everyoneoncebelieved.

Loss aversion: We prefer avoidinglossesmorethanmakinggains.

Outcome bias:Judgingadecisionbyitsoutcomeratherthanthequalityofthedecisionatthetimethatitwasmade.

Sunken costs:Money thathasalreadybeenspentismorevaluablethanmoneythatmaybespentinthefuture.TheideathatifIsellataloss,I’mwastingmoneyissimplynottrue.

Recency bias: Weighting recent datamoreheavilythanearlierexperiences

Anchoring:Relyingtooheavilyonreadily-available information when making adecision.HaveyoueverwatchedCNBCandbeentemptingtogobuyastockyouheard about, or read a newsletter and wanted to push the “buy” button rightaway?

Belief in the Law of Small Numbers: Makingmountainsoutofmolehills

Endowment effect: Valuing something more once we own it

Disconfirmation bias: Being critical of

informationwhich contradicts our beliefswhile uncritically accepting informationthat is in line with them—we hear what we wanttohear.

Post-purchase rationalization: If adecision needs to be rationalized afterthefact, it isprobablywrong! Ifyouhearyourselftryingtotalkyourselfintowhyyoumadeagooddecision,it’sawarningsigntotakeanotherlook.

CASE STUDY: GOLDMAN SACHS 2009 EARNINGS

Above are Goldman Sachs’ second-quarterearningsfor2009.Iwanttodrawattentiontoonenumber:theirprofitsfromtrading andprincipal investments for thesinglequarterwere$9,322,000,000.Theydid not have a single losing day in thatquarter—on average they made $100Mperdaytradinginthemarkets.

Houston, we’ve got a problem!

To summarize what we’ve discussed sofar, we have a number of major factorsworking against us:


•We’rebiasedagainstsellingourlosers andholdingourwinners.

•Wehaveothercognitivebiasesaswell. It’sdifficulttorecoverfromlosses.

•Compoundedinterestislookingpretty darngood.

•GoldmanSachsistakingtheotherside ofourtrades.

So what’s the solution? It’s time to talk about trailing stops…

TRAILING STOPS

Trailing stops are the simplest and most intuitive method for reversing thetendency to hold on to your losers andsellyourwinners.Ofcourse, it’snot theonlysolution,byanymeans.However, Ifirmly believe that it is the simplest andmost intuitive solution to the issues I’vediscussedsofar.

TRAILING STOP EXAMPLE—JDS UNIPHASE

Letmebegintoexplaintrailingstopsbystartingwithanexample.Inthecharthere,theblue line representsJDSUniphase’sprice,andthegraylinesarepointswhereitreachedanewhigh.Theredlineisthechartof thetrailingstop.This isastockI invested in back in the 1990s, and I wasn’t alone. In November of 1998,youcouldbuyJDSUniphasefor$53.44Usinga25%trailingstop,thefirststopis$40.08—25%below the initialprice.Asthepricerose,sodidthetrailingstop.InJanuaryof1999,thestockhitanewhigh



priceof $91.12,moving the trailing stoppriceup to$68.34 (25%below thenewprice).Thepricedroppedabitafterwards,butonly15%,sothetrailingstoppointwasnot reached, and the trailing stop price did notchange.As itcontinued to rise, ithit$129.75 in April 1999, with a new stopprice of $97.31. Here, investors wouldhave lockedover $40 in gains—and thegainscanonlygoup.

The trailing stop had protected gains up to this point; we were still in the trade, and stillgivingthestockroomtorun.Thisisasimportantascuttingourlosses.Thepointis,it’snoteasytostayinthesetradesthatmake historic gains—the temptation to sell quickly can be strong. But some ofthemostwildlysuccessfulinvestorsintheworldwill tell you that it’s the fewmajorwinners in their portfolios that make adifference—“irrational profits”.Of course,therewill be losers, too.But if you stickwiththisplan,youcanmakethemostoutofyourwinnersandminimizeyourlosses.

SowhathappenedwithJDSU?Overthenext 15months, itmade it up to a highpointof$1,120inMarchof2000,settinga newstopprice at $840.However, the




stock quickly fell apart, falling nearly inhalfbeforeclimbingslightlybackupandthen crashing all the way back down.Manypeopleclungtothetrade,ridingitall theway down to the point of takinga loss—andunfortunately, Iwasoneofthosepeople.Butifyouhadbeenusinga trailing stop, you would have cashedout in April of 2000 at $637 per share.ByOctoberof2002,thestockwasdownunder $10 per share. Even though thevolatilityofthisstockanditssuddendropblew through the higher stop price of$840,havinga trailingstop inplacestillmade the difference between cashingoutat$637ashare—morethan$580inprofit—and potentially losing everythingbyridingoutthestock’sfall.

To summarize: What is a Trailing Stop? •We’resettingastop-lossatafixed percentagebelowyourinitialpurchase price.Ifyouboughtat$100andyou areusinga25%trailingstop,then yourstopstartsat$75. •Checkeacheveningtoseeifthelatest closeisbelowyourstoporifanew highhasbeenmade. •Ifyourstopwaspenetrated,thenwe closethetradethenextmorning. •Ifanewhighwasmade,thenwe adjustthestop.Ifthenewhighis $102,thenthenewstopisnow25% belowthat:0.75*$102=$76.50.

HOW TRAILING STOPS BEAT PROFESSIONAL JUDGMENT Does it sound like trailingstopsare justtoo simple? Take a look at this studythatIwascommissionedtodo.Amajorcompanycametomeandsaid,“Wewant

toknowhowourflagshipvalueinvestmentnewsletter would have performed if wehadusedtrailingstopsinsteadofrelyingonourmarginofsafety.”

The black line in the chart above represents the performance of the portfoliowithouttrailingstops.Soovertheten-yearperiodfrom2002toearly2011, thisportfolio—if you had invested equally in all 100recommendations—would have made a 140%gain.Over the same time period,theS&P500onlymadea45%gain,sothat’sanimpressiveperformance.

The other lines on the chart show what the portfolio would have done with differentlevels of trailing stops. The 10% trailingstop still beat theS&P500, but did notdo as well as the actual performance.Why?Becausea10%trailingstoppointisgenerallytoosmall—itdoesn’tgiveyourwinners enough room to unfold withoutbeingtakenoutbymarketvolatility.

However, the other trailing stoppoints—20%, 30%, 40% and 50%—all would have handily beaten theperformance of the advisor with notrailingstops.Remember,thisrepresents




the portfolio of someone whose entireprofessional career is spent looking atwhichstockstobuy,readingoverall10-QsandtalkingtoCEOs—morethanmostofuswilleverdotoidentifywhichstockstobuy.Andlookwhathappenswhenyouaddtrailingstopstotheperformance:inthiscase,the20%and30%stopsaddedonnearlyanother100percentagepointstotheoverallgainoftheportfolio.

TO SUMMARIZE: WHY WE LOVE TRAILING STOPS

1. They’re sophisticated enough to dothetrickofcuttinglossesandmaximizinggains.

2.They’resimpleenoughtobeunderstoodby all investors—this understanding iscritical because it gives us confidenceto execute the system in the heat of acrisis.Ifyou’retryingtofollowsomefancyblack box mathematical formula abouttherighttimetogetout,youwon’thavetheconfidencetoknowthatit’sreallytherightthingtodo.

3.World-classinvestorsandtradersusethem.

4.Failuretoplanisaplantofail.You’vegot to have aplan!Unfortunately,manyindividualinvestorsdon’t.

HOW TRADESTOPS.COM WORKS

TradeStops’ Trailing Stops Only serviceallows you to just track percentage-gain trailing stops. It’s set up to be thesimplest possible way to track trailingstopsonstocksthatyouown.Tocreatealerts,simplysetupaportfolio,andenter

apercentagetrailingstopthatyouwantto use; enter the symbol, the purchaseprice,purchasedate,whetheryou’relongorshort,and thenumberofshares thatyouhold.

TRADESTOPS COMPLETE

We also offer TradeStops Complete—itdoes everything the Trailing Stops Onlyservice does, but also includes additional typesofalerts.Forinstance,youcansetupanalertthat letsyouknowwhenthecloseisacertainpercentageaboveyourentry price. You can also set up time-based alerts, such as notifications on aspecific calendar day (like right beforeearnings, perhaps) to remind yourselfto look at your position. There are alsomoving average triggers, moving average crossovers,andalsovolumetriggers—forinstancea100%spike involumeabovetheaverageten-dayvolumetellsmethatI should takea lookandsee ifanythingsignificanthappenedthatday.




TO SUMMARIZE: BENEFITS OF TRADESTOPS.COM

• Tracks your trailing stops for you• Can track other alert types for you

as well• Adjusts your alerts for dividends

and splits• Covers US equities, Canadian equities,

London equities, US Mutual Funds, US indices, foreign indices, and even options

• Alerts never expire—they can be left open indefinitely.

• Stops are never visible to anyone even remotely affiliated with the market-makers.

WHAT ABOUT OTHER ONLINE BROKERS’ TRAILING STOPS?

Key differences:

•Unlikeotherservices,TradeStops doesn’tlookatintra-daymovement andautomaticallyplaceanorder;it looksatcloseonlypricesandalerts youattheendofthedayastowhether youneedtomakeamovethenext day.Whydoesthatmatter?Because intra-daymovementcanbevolatile, andautomaticallysellingmaynotget youtheresultsyouwant.

•TradeStopsalertsareextremelyeasyto setup.

•TradeStopsletsyouleaveanalert activeforaslongasyouarean accountholder.Onlinebrokersmake youcancelthemafter60days.

•TradeStopsautomaticallyadjustalerts fordividendsandsplits.Onlinebrokers cancelalertsaftercorporateactions.

•TradeStopswillneverexecuteanorder foryou—you’renotsubjecttomarket volatilitythewayyouwouldbewithan intra-dayorder.

TradeStops is simple to use, and youalwaysknowwhatyouwillget.

HERE ARE SOME ADDITIONAL NEW FEATURES

One of the main features of the new release is the Portfolio Tracker—it’s not just an alert system, but also allows you to track posi-tions that you might be holding but may not want to put an alert on. You can also tag and organize your positions, searching using filters and status indicators. Different views will provide different information, al-ways giving you the data you want to see.




THE “ALERTS ONLY” VIEW

THE “ALERTS BY POSITION” VIEW

THE “POSITION ONLY” VIEW

• TradeStopsalsoincludesimprovedchartingwithmoreinteractivity,basedonourRightWayChartsproductthatwe’vespentyearsdeveloping.

• Youcanperform“what-if”scenariosinthenewResearchChartssection

THE RESEARCH SECTION

The Research section gives you tools to do analysis on your portfo-lios and calculate key metrics—in-cluding a Position Size Calculator.




The Event History page will allow you to view historical events in your portfolio—alerts triggered, dividends paid, positions opened, positions closed, etc.

TO SUMMARIZE: WHAT WE’VE LEARNED

• Themostimportantkey:Learntocling toyourwinners!

• Useatoolliketrailingstopstohelp youavoidthetendencytoholdlosers andsellwinners.

• StayinginyourwinnersisHUGE. Oftenitisevenmoredifficulttodo thancuttingyourlosses.

• Haveaplanto“navigatethedip”. Thisrefersto“TheDip”,byblogger SethGodin.Thekeytake-awayisthat inallendeavorsinlife,anytimeyouset agoalforyourself,thereisthis invariable”valleyofdeath”—atime when the goal seems to be moving furtherandfurtheraway.Toget throughthis,youmusthaveaplan.

• Those who do have a plan are more likelytogettotheotherside.You musthaveaclearideaofwhatyou’re doing,andthisisespeciallytrue intrading.

• RememberthatYOUarepartofthe equation and must be involved in the managementofyourmoneybecause noonecaresaboutyourmoneymore thanyou.

EVENT HISTORY


QUOTES FROM TRADESSTOPS WE’LL LEAVE YOU WITH

“I can calculate the motion of heavenly bodies but not the madness of people.”Sir Isaac Newton (who lost a lot of money in the South Seas bubble)

“Our sector concentration is predicated on blackjack and investments. Profes-sional blackjack is being played in this trading room from the standpoint of risk management, and that ultimately is a big part of our success.”Bill Gross, conservative bond investor

Dr Richard M. Smith—founder of TradeStops.com

Dr.SmithstudiedmathematicsatU.C.BerkeleyandwentontocompletehisPhDinSystemsScienceattheWatsonSchoolofEngineeringatSUNYBinghamton.SincecompletinghisPhD,Dr.Smithhasappliedhisresearchskillsintheprivatesectortoavarietyofproblems.Thecommonthreadconnectingallofhisworkisprovidingsimplesolutionstocomplexproblems.

Becausehisdissertation wasonmathematicalmeasuresofuncertainty,afterhegraduatedhewasdeemeda“Doctorof Uncertainty”.Thistitle,as itturnsout, isquiteappropriate.Uncertainty isfundamental inour lives,andhowwedealwithuncertaintyhasamajorimpact on the success we realize in our lives—andinthemarket.Dr.Smith’sprofessionalgoalistousethetoolshe’sdevelopedtohelp individual investorsunderstandandaddresstheuncertaintiesthatweall face inthefinancial markets.

Morerecently,Dr.SmithhasbroughthispassionforsimplifyingthecomplextothefinancialmarketsbydevelopingseveralWeb -based services for investors and traders.With his background inmathematical theories of uncertainty, combinedwith his own personalinvestingand tradingexperience,hehasanacutesenseof thecritical roles that riskandmoneymanagementplay insuccessfullynavigatingthefinancialmarkets.

WhenDr.Smithdiscoveredthatmanyoftheworld’stopprivateinvestmentadvisorsandrichesttradershadbeenusingamathematicalformulaforyearstodeterminewhentobuyandsellwithincredibleresults,hedecidedtotryitout.Afterrunningsomenumbersonhisprevioustrades,theresultswereclear:nomatterwhetherthemarketroseorfell,theinvestmentformulawouldhaveearnedhimbiggerandfastergainsonallhistrades.

Applyingthisformulatoanentireinvestmentportfoliobyhandwasdifficult,sohedevelopedaprogramtodothatworkautomatically—andTradeStopswasborn.

BIO

“The game of professional investing is in-tolerably boring and over exacting to any-one who is entirely exempt from the gam-bling instinct; whilst he who has it must pay to this propensity the appropriate toll.”John Maynard Keynes

www.tradestops.com



http://www.tradestops.com


Up. Down. Doesn’t matter.

Make money in forex.


Chris has been featured in this issue of the Magazine so we won’t

go into his bio here. In this ten minute video, Chris talks about entry and exit points as well as how and when to take profits. Click the video above to watch.

BY CHRIS VERMEULEN

VIDEO: BASIC MONEY & POSITION MANAGEMENT


INTERVIEW WITH CRAIG HUME

IN DEEP WATER & LOVING IT! EXTRAORDINARY ADVANCES IN DEEP-WATER DRILLING

EXTRAORDINARY ADVANCES IN DEEP-WATER DRILLING


IN DEEP WATER AND LOVING IT!




AT: Tell us a little bit about yourself.

CH:I’ma33yearoldconsultantSubseaEngineer in the oil and gas upstream production industry. I’m originally fromthe United Kingdom, and now live inHouston,Texas.

I’ve worked in the oil and gas industryfor over 10 years now, after graduatingwithanengineeringmaster’sdegreefromthe University of Newcastle upon Tynein England. Growing up, I was alwaysadventurous and loved the outdoors and travel.Iwasparticularlyinterestedinthemountains and oceans, and had a great interest in natural sciences, in particular oceanographyandgeology. I loved theoceans,andspentmanyadayin,onornearthemenjoyingvariouswatersports.

Whenlookingtowardscareersandwhatto do with my life, I was always tornbetween a love of outdoor sports andadventure, and a career based on mypassion forscience, technologyand thenaturalworld.Irememberhavinganolderfriendwhom Iwouldgoclimbing,hikingandsurfingwith.IwasstillatUniversity,butIrememberheworkedintheoffshoreoil and gas industry and was always infarflungplacesaround theworld;goingto work in helicopters, having a lot ofadventures (both good and bad!) and beingwellpaidforitallatthesametime.That’swhereIguessitallstartedforme–ittickedallmyboxesshallwesay.

AT: How did you end up going to Houston?

CH:Mycareer todatehas takenmeallover the world on short term projects and businesstrips.Istartedoutinmycareer

living in Aberdeen, Scotland. However,bythemid2000’sIwaslivinginLondon,working on a huge subsea project forBP in Azerbaijan. In 2008 the projectphaseIwasworkingonwassuccessfullycompleted and I had some decisions to

makeaboutwhat todonext. Ihad theoption to stay in London and work onfuturephasesofthedevelopmentprojectforBP,orIcouldtakethatopportunitytomoveawayfromLondon;anewadventureshallwesay.

I wanted to move somewhere that would bothappealtomepersonallyandprovidemewithalotofcareeropportunity.

Houstonseemedtobetheobviouschoiceatthetime.IhadseveraluniversityfriendsthatmovedtotheUnitedStatesandIhadalwaysenjoyedbeingintheUS.Houstonis a great hub for exploring both NorthandSouthAmerica,andthecostoflivingwasconsiderablylowerthanLondon.SoinAugust2008, Iwasoffereda jobwithamajorEPIC(Engineering,Procurement,Installation and Construction) companybased inHouston. I finished uponmyfinal FridayatmyexistingcompanyandwasonaplanetoHoustononSunday.

AT: How do you find it in comparison to the UK?

HOUSTON IS A GREAT HUB FOR

EXPLORING BOTH NORTH AND

SOUTH AMERICA




CH:Considerablywarmer!

Ienjoyit.Formycareerithasreallybeenahugecatalyst.Londonisafinancialcityat heart, and although all the major oil and engineering companies have a presence there,itwascertainlyamoredifficultcityto network in. Itwas also considerablymoreexpensive!IpersonallystillconsiderAberdeeninScotlandtobetherealcenterofexcellencetechnicallyfortheUKoilandgasindustry,especiallyfortheharshNorthSea region, but that is slowly migratingsouthtoLondon.

I also think I am representative ofa significant “brain drain” the UK iscurrently experiencing, especially frommygeneration,withmany intelligentandtalented young technical professionalsemigrating, which is a concern given the richengineeringhistory theUKhas. It’scertainly a big factor in the oil and gasindustry.YoujusthavetolookathowmanyBritishoilandgasprofessionalsnowliveinHoustonandaroundtheworld.

AT: Your expertise is in underwater engineering for the oil and gas business, and I expect currently in the Gulf of Mexico mostly?

CH: Houston is certainly where all themajorGulfofMexico (GoM)projectsareexecuted. However, many projects inWestAfrica,BrazilandeventheFarEastand Australia have some involvementfromHouston.Theindustryinthiscityisaglobalcenterofexcellencefortheoffshoreindustry,soit’salmostinevitablethatanymajoroffshoredevelopmentgloballycanhavesomeconnection toHouston in itslifecycle.

OneofthemainreasonsIchosetocometo Houston, however, was to get thatexperienceintheGoM,especiallyindeepand ultra-deep-water engineering, where therearesignificantchallengestobringingadiscovery intoproduction. It’s alsoofhuge importancetotheUnitedStates intermsofdomesticenergyproduction.

AT: Is there much oil to be found in, or more important, to be extracted from the Gulf of Mexico?

CH:Youmakeanintelligentandsignificantdifferentiation in your question there.There is an ever increasing challenge to extracting these resources above andbeyonddiscoveryandevaluation,whichIwillspeaktofurtherlateron.

It’sdifficulttoputnumberstohowmuchoilmayyetbediscoveredintheGoM,butcertainly as an industry, new significantdiscoveriesoccureveryyear. So letmetryandwalkthroughwherewearetodayandwherewe’regoinginthefuture.

Withcontinuouslydevelopingexplorationtechnology, such as advanced seismicimagingtechniques,we’reableto“look”deeper than before, thus investigatedeeper and older geological trends, and alsoto“seethrough”moredifficult

NEW SIGNIFICANT DISCOVERIES

OCCUR EVERY YEAR




geologicalfeatures,suchascomplexsaltcanopies that traditionally could causelarge seismic attenuation, effectivelyhiding potential pay structures beneaththese zones. These salt canopies alsopresented complex drilling challenges

(some of these salt deposits can bethousandsof feet thick)andwithaddeddrilling complexity comes added wellcost, which significantly impacts thecost of exploration and development.However,nowwithadvancedtechniques,experienceandtechnology,manyofthesechallenges have been, and continue to be, overcome. Exploration and drilling hasbecome a very advanced technologicalpartoftheindustry.

Mostofthemajordeep-wateroilandgasproducing facilities in the GoM to-dateare producing from geological regionsknown as the Miocene (~23million yrs.to ~5 million yrs. before present) andPliocene (~5million yrs. to 2 million yrs.before present), collectively known asthe upper Tertiary. With the advancingsub-saltimaginganddrillingtechnologyIdiscussed above, these zones can be split into the Conventional Pliocene/MioceneandSub-SaltPliocene/Miocene.

The Miocene is certainly still the bigproducer for the near term. Openingup the sub-salt Miocene discoveries

generally allows us to utilize existingproduction technology as the pressuresand temperatures are generally withinthe boundaries of today’s standard,qualified subsea production equipment,although some sub-salt discoveries are muchdeeperwhichcreateschallengesI’lldiscusslater.Recentdevelopmentsinthelower Miocene in particular have proved tobegreatproducers,andcertainly stillrepresent big “bang for your buck” fortheoperators,which iswhythesub-saltdiscoveriesaresoimportantintheGoM.

Looking to the future however, asmentioned, we are now able to evaluate geological trends that are older and deeper than the current major hydrocarbonbearing zones in the GoM. Below theMiocene we have the Lower Tertiary orPaleogene(~65millionyrs.to~23millionyrs.beforepresent).Oncethoughttonotcontainanyoilorgas,recentdiscoveries(such as BP’s Tiber) have shown, thereis huge potential – thought to be around $1.5trillionofpotential.

Allofthemajoroperatorsarenowexploringthis trend, and some of the shallowerdiscoveries in the lower tertiary arealreadyproducing (e.g. theRoyalDutchShell operated Perdido developmentwhichstartedupin2010,inover8,000ftofwater).Overthenext15to20years,thiswillbecomethedominantsourceofoilintheGoM. The challenge however is that as we drill the deeper wells, the production pressures and temperatures increase,andgobeyondtheboundaries ofcurrenttechnology.Wearenowdrilling to such extreme reservoir depths(up to 35,000 ft. below the

DEEPER WELLS, THE PRODUCTION

PRESSURES AND TEMPERATURES

INCREASE




seabed,or6.6milesintotheearth’scrust)thatpressuresandtemperaturesexceedthe current maximum rated productionequipmentof15,000poundspersquareinch and 250 degrees Fahrenheit. Sorightnow,ahugeinvestmentisunderwayacrosstheindustrytoqualifyhigherrateddrilling and production equipment that will safelyallowtheindustrytoproducefromthesereservoirs.

It’s an exciting time in the industry,and we’re seeing some fascinatingenablingtechnologydevelopmentbytheequipment vendors and the operators.The lower tertiary plays of theUSGoMarenewfrontiers,bothtechnologicallyandcommercially.They’reveryimportantforthefutureUSdomesticenergyproductionportfolio.So,Idon’tthinkwe’llseeoilandgasproductionceasefromtheUSGoMinourlifetimes.

AT: Which oil companies might benefit most from ‘lower tertiary’ drilling? CH: The short answer: all of them.However, for the most technologicallychallenging discoveries, it will be those committed to the high capital investment for the successful qualification of thenecessary technology to safely, andefficiently, bring these discoveries in toproduction. Evendrillingappraisalwellscan be considerably more expensive, ifnot currently impossible, compared tomore traditional GoM wells due to thegreater depths and complexities of theinterestzoneswithintheearth’scrust. Severalmajoroilcompanies,includingBP,areactivelypursuingthedevelopmentandqualificationofcompletesuitesof20,000psi pressure rated production equipment




toenablethemtoexplore,appraiseanddevelopthesereservessafely.Thatinitselfisahugeandcomplexprojectundertakingthatmaytakeyearsyettocomplete. There is a wealth of information,including technical papers and press releases available in the public domain about individual operators and vendor’sdevelopment efforts to go to deeperdepths, with higher pressures and temperatures. Hopefully, this article willprovideaheadstartonwhatto lookforwhen researching the industry and itsfuture,especiallyindeep-water.

AT: You’ve pointed out some of the enormous challenges when you’re in deep water. Have there been any that you didn’t expect or are most of the situations similar?

CH: Fundamentally no two reservoirs,or subsea development scenarios are identical. Also, every reservoir’s fluidcompositionisslightlydifferentandthishasa fundamental impactontheproductionsystem and operating requirementsneededtoproducethefield,notonlyforyearonebutforthelifeoffield,which could be up to 25-30years.Conditionsalsochangewith time during production, sometimes significantly andyou need to anticipate thatduring the engineering design and selection of equipmentat the frontendof theproject.However,youarealwayslimitedby the data available; so youto make educated assumptions and are mindful of redundancy and contingency in your design, all whilst minimizing projectCAPEX.

The aim as an engineer is to avoid anynasty surprises during operation andminimize OPEX, as any interventionsubsea is hugely expensive. A standardconstruction vessel, with remotelyoperated vehicles (ROVs - underwaterrobotsthatperformthe“hands-on”workin deep-water) will currently run around$250,000to$300,000adayandamobileoffshorefloatingdrillingrigiscurrently$1to$1.5millionaday.Soahugeinvestmentismadeinfrontendengineeringtomakesurewehaveselectedeverythingcorrectly,andoptimizedthedesign.Wealsoneedtoallowforfutureexpansionifpotentiallyanticipatedbyreservoirevaluations.

But engineering time is cheap relativelyspeaking and I don’t think it can everbe underestimated. There needs to besufficient front-end engineering work tomakesurethatwhenyoustarttocutsteeland drill wells, you’re doing it right andsafelythefirsttime.

Someofthebiggestchallengesindeep-water fromaproductionaspectareflowassurancerelated,essentiallymakingsurethattheproducedfluidswillflowfromthe

wellstothetopsidereceivingfacility.Thisisobviouslyveryimportanttotheprojecteconomicsalso.Thesheerweightofthecolumnoffluidatthesewaterdepths

YOU ARE ALWAYS LIMITED BY THE DATA AVAILABLE




places very high back pressures on thewells (thousands of pounds per squareinch)andneeds tobe fullyassessedsothat the reservoir pressures are alwayssufficient to maintain an economicallyviable production flow rate. We ofteninject gas into the flowline risers orwellbore to reduce the fluid density in thevertical column, thus reducing the back pressureonthewells.This isknownasgasliftingthewells.

That is one of the common challengesin operating all deep-water wells, along with phenomena such as gas hydrateblockages, which are ice like blockages that form from natural gas when in thepresence of water, low temperaturesand high pressures (essentially everydeep-water production environment!).Formation can occur rapidly and cancompletely block flowlines and tubingrenderingaproductionsysteminoperable.Thesecanbeverydifficult,and insomecases,impossibletoremediate.

AT: Does Mexico play into the equation in the Gulf?

CH:Interestingtimingforthisquestion,asitcouldbeabouttohaveasignificantparttoplaypotentially.

Historically though, the answer is no asfarastheUSisconcerned,oranyprivateentity for thatmatter, becauseMexico’soil and gas is constitutionally ownedby the state andproducedby the stateoperatedoilcompanyPEMEX.In1938,President Lazaro Cardenas sought toprotectMexican oil and gas reserves intheGoMfromarapidlygrowingAmericanoil exploration boom on the US GoMcontinental shelf by nationalizing the oiland gas sector. Since then every dropofoil discoveredorproduced inMexicohasbeenownedby thestateand therehas been a long standing moratorium ondrilling in thewesternGulfofMexicoaround the disputed offshore trans-boundary region between the US and Mexico. Over the majority of the past75 years thishasworkedout fairlywellforMexico.

However, significant changes could beafoot. Over the last decade, PEMEX’sproductionoutputhasdroppedbyabout25%.Withacomparativelackoftechnicalexperience that has been developed bytheheavily investingoperators intheUSGoM, especially in deep-water, PEMEXare substantially challenged to realizethe deep-water potential that is on their doorstep. PEMEX funds about 33%of the Mexican federal budget, whichsignificantly limits the capital investmentand R&D investment funds availableto develop the necessary technologiesrequired to being these major deep-water discoveriesintoproduction.

By the end of the year however,it’s anticipated that a constitutionalamendmentinMexicowillbecompletedthat allows development partnership agreementswithexternalinvestors.The

OIL DISCOVERED OR PRODUCED IN MEXICO HAS BEEN OWNED BY

THE STATE




detailsofhowanyagreementswouldbestructured still seem a little unclear and I would imagine much due diligence is still requiredbyanypotentialinvestorstofullyunderstandthetermsofanydeal.Buttheprize ispotentiallyhuge forbothMexicoandexternaldevelopmentpartners.

Additionally, in October this year theUS Senate unanimously voted in favorto approve legislation enacting a 2012 accordwithMexicothatexpandsoffshoredrillingdevelopmentbyapproximately1.5millionacresalongthewesternGoMtrans-boundaryregionof thecontinentalshelf.

The deal essentially allows PEMEX andUSleaseholdersto jointlydeveloptrans-boundary reservoirs through unitizationagreements that will need to be reviewed by both governments prior to approval.This should also ensure the necessarysafetyandenvironmental regulationsareadheredto.

Sothefutureispotentiallyexcitinginthisarea.Foroilcompanieswithexperiencein the US GoM it could be attractivedue to an existing understanding of theregionalgeology,drilling,equipmentandinfrastructure requirements, which mayincrease the executional certainty of aproject. Thisdefinitelycouldbeanareatowatch. Also, froman investor’spoint

ofview,thechangesinMexicomayalsobring in to play huge untapped shalereserves onshore; similar to those seen in tightoilandgasplaysliketheEagleFordinSouthTexas.Thosegeologicaltrendsdon’tnecessarilystopattheborder,andtodate therearevery fewshalewells inMexico;socertainly,it’sacaseofwatchthisspace.

AT: You worked on the Deepwater Horizon oil spill in the Gulf. That must have been a difficult and hectic time?

CH: Verymuch so. I remember clearlyhearingabouttheincidentonmywayintotheofficethatmorningasIwasworkingonaBPprojectatthetime.

I remember growing up in the UK andhearingaboutthePiperAlphadisasterintheNorthSeaasayoungster.Thatwasahorrificexplosionandfire thatkilled167offshore workers in 1988, and to dateis still theworst disaster in the industry.Hearing about the Deepwater Horizonthat morning was a very similar feeling. Any incident involving fire and anuncontrolled release of hydrocarbon isalwaysveryserious.

Our initial thoughts and concerns werewith the search and rescue operation. Iobviously wasn’t really involved in that;just watching from afar with everyoneelse. It wasn’t really apparent to mewhat had happened subsea, or what the conditionofthewellwas.ItwasonlyaftertheHorizonsankandinthefollowingdaysthatIfoundoutthattherewasaseriousproblemwiththewell,whichwasprobablyaboutthesametimeeveryoneelseintheworldfoundout.

PEMEX AND US LEASEHOLDERS TO JOINTLY DEVELOP TRANS-BOUNDARY

RESERVOIRS




Those87daysweresomeofthebusiest,longestandmoststressfulI’veeverbeenthrough,butalsosomeof themosteyeopening.IsawanindustrycometogetherandperformsomeofthemostincredibleengineeringI’veeverwitnessed. AT: Why did it take so long to cap the well?

CH: It’sdifficult forme togo in todetailhere, as I wasn’t part of the team thatdirectly worked on the final cappingsolution. But for context, the wholeoperationwasruninlotsofmini-projectswithdedicatedteams,hundredsofteams.Typically, subsea oil and gas projectstake years, even decades, to design,manufactureandinstall.Inthissituation,teamsmanaged to turn around a lot ofincrediblesolutionsinamatterofweeks,

which is testament to the ability of thewhole industry to cooperate and cometogetherunconditionally.

Therewas,ofcourse,adesiretoendthewellflowasquicklyaspossible;however,it was a very complex and dangerousoperation.Itwasverydifficulttoappraisewhat damage had been done to the well bore, and if it could even take thepressuresof rapidly shutting in thewell.Ifithadbeenrushed,andfailed,thenthe

consequences would have been even morecatastrophic.

Thereweretworeliefwelldrillingoperationsunderwaysimultaneouslyatthesitewhichultimatelywouldkillthewellatthereservoiritself.Howeverthedurationtakentodrillthereliefwells(toatotaldepthofaround18,000ft below the seabed) meant thateveryefforthadtobetakentostopflowfromthewellbeforehand.Arealconcernwas what would happen if a tropicalstorm, or worse a hurricane, entered the GoM during the response effort. Therewasalotoffocusonhowtotemporarilyabandon the site and contain flow fromthe well. We were very lucky that nostorms threatened the operations, but we werewell in to hurricane season beforetheflowwasfinallyhalted.

Ultimately,thecappingstacksolution was a success and a huge testament to the abilities of the engineering teamsworking on that equipment.That technology has nowbeen developed and is part of all deep-water operatorsemergency responseequipment, fully maintainedandstoredat nearby shore-

bases,readytogoifever(hopefullynever)neededagain. Thatwasoneofthekeyenhancementstocomeoutoftheincidentfor the deep-water industry; equipmentthat can implement a mechanical shut-in of a deep-water well subject to acatastrophiclossofcontainment.

AT: Will they be able to go back and extract the oil from that field or the well?

IT WAS A VERY COMPLEX AND DANGEROUS OPERATION




CH: It’shardformetosay,as I’mnotareservoirengineer.Theoreticallyyes,I’msure it’s possible, however I’m not sureBPwould.

AT: How was the media coverage in your opinion?

CH:Itwaseyeopeningforme.Itbecamesuchahugestory,andquiterightlyso.Wehad access to all the 24hr media outlets during the incident and it was interesting to see how the commentary developedfromtheoutsidelookingin.

Overall, I personally think BP was verytransparent. It was a bold decision toprovide streaming coverage from theocean floor, via the ROVs, of the wellflowingandinterventionactivities.Ithinktheydideverything theycould to let thepublicseetherealityofthesituationandwhatwasactivelybeingdonetosolvetheproblem at hand 24/7. I’m not sure alloperators would do the same. Lookingback,atthetimeIdidn’treallyappreciatehowbigamediaeventitturnedouttobe.

Thatsaidthough,Iaskmyself,isaccesstosomuchinformationnecessarilyagoodthing? Itgavethemediatheopportunityto commentate freely on what theyinterpretedwasgoingon.Thiswaseyeopening for me, as a lot of statementsandassumptionswerefactuallyincorrect

at the time. I remember thinking how Iwas getting a very transparent view ofhow media networks operate, and also howmuchofapowerful tool it really is;maybe it’smademetakethenewswithabitmoreofagrainofsalt today. As Ibegintodabbleintradingmyself,oneruleI come across that strikes a chord here is “don’t trade the news”. By the timeinformation is in thenews, it’seither toolate,ornotnecessarilyasaccurateasonewouldassume.

My question back to you guys wouldbe: “howmuchdo you think themediacoverage influenced the perception ofBPbythemarkets”?Ican’thelpfeelingthe decline in the stock was somewhat enhancedbythe24hrcoverageforthose87days;BPPLContheNYSEeffectivelylosthalfofitsvalueduringtheincident.

THE DECLINE IN THE STOCK

WAS SOMEWHAT ENHANCED BY THE

24HR COVERAGE


AT: What’s changed since then? Are the waters and people safer now since this happened?

CH: A lot has changed as a result offindings from the Deepwater Horizonincident. There have been significantchangesattheregulatorylevelintheUSwith the splitting of the MMS (MineralsManagement Service) into three newdistinct departments with dedicated roles:

1. The Office of Natural ResourceRevenue; responsible for the collectionanddistributionofrevenuefromoffshoreandonshoreproduction.

2. The Bureau of Ocean EnergyManagement, Regulation andEnforcement(BOEMRE);whichconductsand manages lease sales, reviews and supervisesexplorationplans.

3. The Bureau of Safety andEnvironmental Enforcement (BSEE);which enforces safety regulations and performs regular inspections ofoffshoreoperations. There’sanincreasedfocusonsafetynowpost incident, especially at a regulatorylevel, to the point that the permitting process for drilling applications is nowlonger and more involved, and subject to evengreaterscrutiny.

Therearenewsafetyrulesregardingtheinspection and testing of critical safetyequipment, such as blow-out preventers (BOPs) and the inspection, testing andsign off procedure for cementing jobsperformed on all wells; it’s all now verytransparentwithaddedrigor.

Also, as I mentioned previously, all ofthe operators drilling in the gulf nowhave access to an advanced array ofsubsea equipment developed during the response, such as the capping stack technology,readytobedeployed ifeverrequiredandwithinhoursofanyoffshorelocationintheGoM.

I still firmly believe we are a very safeindustry. The safety record is verygood in comparison to some other heavy industries, especially when youunderstandjusthowmanyoperationsgoondaily around theglobe in theoil andgasproductionbusinesswithoutincident.Thereisagenuinecultureofsafety-bothfor personnel and the environment -throughouttheindustryandthisincidenthascertainlyprovidedsignificantlessonsthatservetomakeitevensafer.

AT: Are there new technologies that will make the extraction of underwater oil easier and less expensive?

CH: I’mnot sure that “easier” and “lessexpensive”arenecessarilytherighttermstousehere.But,technologydevelopmentis critical to the future of oil and gasproduction subsea. New technologytoday is enabling the development ofdiscoveriesmadedecadesago,thatonly

SAFETY RECORD IS VERY GOOD

IN COMPARISON TO SOME OTHER

HEAVY INDUSTRIES




now are viable to produce safely andeconomically,aswellasallowingustogodeeperandproducemoremarginalfields.

I’ve already mentioned the push fornew high pressure, high temperature (HPHT)equipment;upto20,000poundsper square inch (psi) and 350 degreesFahrenheit. To put that into context,that’stheequivalentpressureofbetween5 to 7 family sized cars pressing oneverysquareinchoftheinternalpressurecontainingsurfaceof thatequipment,atatemperatureyoucouldsetyourkitchenovenattobakeachicken.

Thisisahugelycomplexchallenge,costinghundredsofmillionsof dollars to simplyde-riskadesignandqualifyequipmentassafeandreliabletouseinthesekindsofconditions, remotely and over 1.5milesbeneath the ocean surface. The prizehowever is vital, as I discussed beforewiththedeeper,lowertertiarydiscoveriesintheGoM.Theseeffortsarebeingdrivenbyboththemajoroilcompaniesandthemajor equipment vendors in many jointindustrydevelopmentprojects.

Whatreallyinterestsmeistheapplicationof subsea technology that enhances oraccelerates the production from a well.Therearesomereallyinnovativesolutionsthat have been and are being developed now that can significantly enhance theeconomicsofadeep-waterproject.

One of these technology areas is theapplication of subseaboosting in deep-water developments: essentially, theutilizationoflarge,highpoweredelectricalpumpsinstalledontheseabedthatliterallypumptheproducedwellfluidstowardsthesurfaceproductionfacilityandhelpdrawdowntheflowingpressureatthewellhead.This results in lower back pressure on thewellsallowingmoreoiltoflow,whichnot only accelerates recovery from thewells, but also lowers the abandonment pressureofthereservoir(effectivelyleavingless of the resource in place) increasingtheoverallrecoveryfactor.Theeffectofthistechnologyonadeep-waterproject’seconomicscanbesignificant. Someofthesedeeperreservoirshaveaveryshortprimaryproductionlifecycle(i.e.thenaturaldepletion of reservoir pressure) despitehaving very highpeakpressures initially.Sotheapplicationofboostinghashugepotentialtoextendthelifeofthesetypesofreservoirsinthedeep-waterGoM.

The technology is rapidly advancing,and several of the major oil companiesare evaluating and deploying the useof high powered subsea pumps indeep-waterGoM fields. There are onlya handful of manufacturers out there that are experienced in this technology,withothersaggressivelydevelopingtheirown in-house technologies to break into themarket.

HUNDREDS OF MILLIONS OF DOLLARS TO SIMPLY DE-RISK

A DESIGN




So easier, no. But if the application ofa technology can significantly improvelife of field recovery, then a lot ofmarginal discoveries suddenly becomeeconomically viable to develop. Theproof will be in the execution. A lot ofnew technologies are complex, andmay require a higher OPEX to maintainavailability during field life. And, as with

anything 10,000ft below the oceansurface,thereisnocheapfixifsomethingfailsprematurely.

AT: Who are the big players in developing ‘boosting’ technology?

CH: There are really only a handful ofcompanieswho are involved here; it’s ahighly specialized sector. What’s beenhappening with these companies over the lastfewyearsthoughisfascinating.

Themanufacturerwith themostsubseapumps installed today are a Norwegiancompany known, or formerly known, asFramo Engineering established in 1983.Framowereacquiredbytheoilfieldservicesgiant Schlumberger in 2011. In 2012Schlumbergersignedanagreementwiththemajorsubseahardwaremanufacturerand integrator Cameron International to jointly develop products, systems andservicestogether.Thenewjointventure

iscalledOne-SubseaandSchlumbergerhasa40%interestintheventure,whichincludes the Schlumberger subsidiaryFramopumps.Cameronmaintaina60%interestandwillmanagethejointventure.This new organization represents a major playerinthesubseapumpindustry,andisalreadyworkingonseveralprojectsinthedeep-waterGoMformajoroilcompanies.

One of Cameron’s (orOneSubsea’s) maincompetitors, FMCTechnologies, are also heavily developing subseaboosting technologysolutions, themselves having entered in to a long term and exclusive collaborationagreement with the surface

oil and gas industry pump giant SulzerPumps. Sulzer have a huge amount ofexperience in pumping hydrocarbonsall over the world and combined with FMCTechnologiessubseahardwareandsystems integration/solutions business,thisisanotherothermajorplayer.

They are not alone however, and otherlarge subsea equipment companies are rapidlydevelopingtheirowntechnologiesin-house, for example, Aker Solutions.It’llbeinterestingtoseehowthismarketdevelopsinthenext5to10yearsasmoreoperators employ these technologiesin deep-water developments, thus increasingthedemandinarelativelynichemarket.

AT: Where do you see the future of offshore vs. onshore drilling?

CH:SubseaoilandgasproductionisvitaltothefutureofUSdomesticenergy.

SULZER HAVE A HUGE AMOUNT OF EXPERIENCE

IN PUMPING HYDROCARBONS




Become a ContributorAlmagaTrader Magazine is always interested in providing interesting, quality video, audio and print articles from Trading and Investment professionals. If you feel you have something that our readers would benefit from and would like to be consid-ered, please email us with your name, website and idea of what you would like to contribute. Email to: [email protected] or you can visit our web site

at www.amalgatrader.com. We look forward to hearing from you.

Craig Hume is a Subsea Systems and Hardware Engineer. He’s been involved in the engineering side of the oil and gas industry for over ten years, working and consulting for the likes of BP and ExxonMobil, from Aberdeen to Azerbaijan.

He’s a Chartered Engineer (CEng), Chartered Marine Engineer (CMarEng) and a Member of the Institute or Marine Engineering, Science & Technology (MIMarEST).

BIO

Even with the recent surge of onshoreunconventional tight oil and gas developments (shale forexample), theseare still difficult to produce and not tomention contentious in the socio-political environment.

The era of cheap oil, in my opinion, isover. Large scale, complexdeep-waterprojects are seeing breakeven costs as highas$70-$80/barrel. Globaldemandis surging, and the major deep-water finds in theGoM and around theworldin emergingmarkets are the key to thefutureofglobaloilandgassupply.

LookingattheUSGoMtoday,therigcountisbackabovewhereitwasonthedayoftheDeepwaterHorizon incident. All themajor players are investing heavily, andeven smaller operators are branching out intodeeperwater fields that traditionallywouldhavebeenprohibitivelyexpensive

todevelop.Theindustryisincrediblyfastpaced in terms of technology and veryforwardthinking,becausereservoirsthatstartproducingtodayare immediately indecline.Theindustryneverstandsstill;itsimplycan’taffordtoandneithercanweaffordtoallowit.

AT: Thank you Craig for taking the time for this interview. Your insights are very interesting and there’s a lot of food for thought when it comes to investing in offshore oil and gas projects. Thanks again.



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