End of Year Pace Slow but Steady

Daily Analysis - 28/12/2017

Indices strong and Oil moving upward

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The end of the calendar year both in the west and the eastern worlds rarely has anything to write home about. And so too this year. Traders and ordinary investors have more (or less) on their plates to consider than the capital markets. There are a couple of matters worthy of our attention at this traditionally sleepy period: The first is Crude Oil. The second is the world’s stock indices.

Oil rising on infrastructure and political developments


The price of oil touched $60 per barrel briefly yesterday. This price has not been seen on this market since June of 2015 constituting a two and a half year high. News of a ruptured pipeline in Libya which removed a considerable amount of crude from the supply chain. Libya’s National Oil Company said that between 70,000 and 100,000 barrels per day of output would be lost. This is not a devastating amount of crude but hardly a trivial amount either. Remember that the Libyan product sells at the highest premium in the world above the benchmark Brent price because it is the relatively lightest in specific gravity (referred to as being “light”) and among the lowest sulfur content (referred to as being “sweet”) of anything God’s green earth offers up for humans to refine and burn. The premium arises because it is the easiest to refine and therefore the lowest physical impact on the refineries. Early reports suggest that the attack was the work of militants in Libya although this has not been confirmed. Nonetheless, coupled with the cracked pie south of Aberdeen in Scotland landing part of the Brent blend, and we see yet more reasons for price strength. Let us not forget that OPEC extended its production cuts to the end of this year. Keep your eyes on the crude oil inventory report released at the unusual time of 16:00 GMT today, delayed due to Christmas. We are expecting further reductions in inventory thereby contributing to likely higher prices as a result.

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Lloyds Banking Group rising steadily


Analysis in the markets is touting the storied banking group Lloyds as being a good buy right now because it is undervalued. An article sited in today's Yahoo Finance by Jason Fuller, writing in Simply Wall Street, stresses an undervaluation of the stock compared to its current market value. This is fancy talk for the stock being a good bargain. In other words, it has a strong potential for upside continued movement. Simply applying the methods we use her at the shop, we see a hardy trend moving on healthy volume. The Force Index indicator we apply at the bottom of the chart tells us that long positions are justified while short ones are counter indicated. We see too, that for the last two years volume trading has predominantly occurred at the current price. In other words, the majority of trading for the last two full years is distributed closely around the current price. This point, called the Point of Control buy by Peter Steadelmeyer in his book Market Profile indicates that there is indeed room for upside price movement. Watch and buy for this stock in 2018.

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NASDAQ keeps moving up smartly


The NASDAQ index of US stocks keeps rising like the proverbial phoenix. Like the other world stock market indices, this is so largely because of two factors. First is the lousy interest rate environment for parking spare cash to earn. Why on earth would you put your hard earned cash in a bank to earn less than the inflation rate, thereby knowingly eroding the value of your cash? Or for that matter would you buy a bond, only to return MAYBE the prevailing inflation rate, thus merely breaking even? You could buy a high risk (“Junk”) bond to enhance your returns but who needs more risk? Thus the stock markets of the world receive a great deal of investment, as well as the panoply of derivative of those stock and stock markets. There is no other decent alternative, save for cryptocurrencies which are only attracting the early adopters at this stage of their development. The other reason the stocks are strong is that they simply are accumulating more than the Japanese have in their respective vaults. Corporations of the world have been reaping profits strongly since mid-2016 and hoarding their cash. Little new investment in plant, equipment or labor is taking place and so the valuations of the stocks rise. Particularly so given that many corporations are buying their stock shares back from the market which raises their per share value.

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DAX tapering off despite strong annual rises


A dip in the value of the DAX is a good opportunity for the short term. The components of the DAX are similar in their makeup to the NASDAQ or the S&P indices for their overall characteristics of profitability, with few corresponding decent investment alternatives. Let us take note however that only one thing is certain in the capital markets and that is that nothing is certain. Interest rates are on the rise, mostly in the US, though what the US does, eventually other developed markets copy. This means that sooner or later the prices of the stocks comprising these indices will level off and stop rising as steadily as they are. The second phenomenon is the rise of crypto currencies and the block chain world which will begin to replace traditional capital markets as funding sources for the formation of company capital.

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