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Friday Email: 12 December 2014

Every Friday morning our lead analyst Mark Riding sends out his weekly run-down and upcoming events in the investor calendar, like this one:

The FTSE 100 has fallen every day this week and many stocks in the commodities space have reached levels that were unthinkable at the start of the year. A trader friend of mine draws the analogy of an elastic band being streched and streched until it suddenly goes ping. This, he refers to on upside as well as downside movements. The elastic band is reaching full strech in the commodities space, but has not pinged yet and it will probably need a trigger to do so. The same guy was telling me just the other day that all OPEC needed to do was cut by half a million barrels per day and that would have triggered a rally. They chose not to and so we are still streching the elastic. Some of their members must be furious as they have developed a dependence on high oil prices. We still have overcapacity and all economists know that when supply exceeds demand, price falls. Simple. That said, we know that so many of the producers are currently producing oil at a loss or very little profit. The market is scouring for those companies that are not hedged and punishing them ruthlessly.

It strikes me that potentially, we could have another mini financial crisis. So much money has gone into exploring for and producing oil when it was well north of $100. Who has financed all of this? The other day, we mentioned that Aftren had hedged 4.9 million barrels at between $90 and $95. Who is on the other side of that trade and surely most of the oil producers have these big hedges? When the price of the worlds most important input, plunges so far, so fast, there will be much pain.

Another big worry at the moment is the fear of deflation in Europe. There is the impression that the ECB have been far too slow to act, probably due to the influence of Germany who have a huge fear of infation. For those two reasons at the moment the market feels very bad indeed. If the evidence from the financial crisis is anything to go by, we will not face armagedon and now is a good time to pick up bargains. Beneficiaries of the falling oil price seem the most obvious place to look, but in general, consumers will have more money in their pockets and so there is a broad choice of beneficiaries from falling oil and fuel prices. I particularly like the housebuilders, especially lower end, who will benefit greatly from the recent reductions in stamp duty.

The past week flies in the face of current market conditions as everybody that reported produced profit and dividend increases with a particularly impressive rise from Ashtead. This has been the case for most companies this year.

The week ahead has a small number of companies reporting including one of our picks for this year, Imagination Technologies. We do not expect fireworks from these numbers but we are looking for a very positive outlook for 2015 and beyond.

 

This email was originally sent on Friday 12 December 2014

The Friday email is delivered to over 20,000 subscriber’s every week, and remains a widely read run-down of recent events and what investors can expect in the week ahead written by our chief analyst Mark Riding.

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