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Understanding supply and demand #finance

One concept I have tried to explain in these finance posts is that of discretionary income. Discretionary income is the money we have left over when we have paid for all the essentials like housing, taxation, food and so on. Discretionary income is the money we have left to enjoy life and take holidays. So if we can double that discretionary income either by saving on buying the essentials or finding an additional income from investments then we can double our effective standard of living. The other concept that people find hard to understand is supply and demand and how this affects prices.

supply and demand

Supply and demand

If something is in short supply such as gas or oil the price goes up. If there is a glut, then oil producers cut prices to try to take a bigger cut of the demand for their company. There is currently a glut of oil and a shortage of housing in the UK and so oil prices have dropped and house prices continue to rise. There is another important component to supply and demand. As house prices go up, we have to ask where people are getting the money from to keep outbidding each other when they want to buy a house. The Bank of England constantly increases the money supply but most people aren’t getting the pay rises. Where are they getting the money from? It seems like many people are simply getting deeper and deeper into debt. The Bank of England produces the money and it gets lent out for bigger and bigger mortgages and the banks are so eager to get rid of this never-ending supply of money they will even lend it out interest-free, for a limited time. When consumers have maxed out their credit card, the bank will oblige with a 0% balance-transfer to keep the debt going. It can’t go on forever, can it?

Carillion

Now Carillion has gone I am wondering who is picking up all its business. Carillion was a supplier and now that piece of the supply chain has gone there is less competition and so prices will rise. This is the price of infrastructure contracts and NHS services. It makes you wonder if Carillion was put out of business on purpose.

The market this week

Competition affects supply and demand too. The merger between Tesco and Booker will mean a little less competition in the grocery market and so higher profits for Tesco. The integration of a wholesaler will pave the way for a different type of Tesco, one that competes with Aldi and Lidl so there will be more competition in some areas. Tesco’s share price improved on the news this week. I hope I’ll be able to sell and realise a 20% return soon.

Verona Pharma

Verona Pharma made more progress this week. I paid 3p for the shares before the 50:1 consolidation so that equates to 150 post-consolidation. They are now 147 so I’m close to breaking even. They were at a high of 6 before the consolidation so again that equates to a high of 300 so I won’t sell before I see 300. I think they could go even higher than 300 which is a 100% return. That seems a lot but considering the risk and the research, it isn’t high really.

AIM

The other AIM shares in my portfolio notably Solo Oil and Immupharma offer the promise of big returns too. Immupharma has produced a return of over 100% and Solo Oil is half the price that I paid but they will be delivering some news soon. I just hope they don’t issue more shares unless it is a rights issue.

The AA cut its dividend and I thought that was a good thing despite the share price dropping. The share price has recovered a little and I’m even considering buying more shares. There was a little good news regarding Debenhams as the boss of JD sports increased his holding and came to an agreement to set up a joint venture with Debenhams. I think it is going to be a few years before Debenhams recover but they have a lot of potentials.

Lloyd’s Banking Group is still a way off its high of 88 in 2015  but they are buying back some of their own shares. That will improve their net asset value per share. I expect Lloyd’s to go up to over a pound as soon as the matter of Brexit is settled. Supply and demand will affect Lloyd’s when interest rates rise and demand for their shares improve.

That’s it for this week. I shall be just sitting and waiting for a while but could be selling Tesco this month to reduce my exposure. I mentioned Optibiotix in a previous post. I missed the boat there but I don’t really want another unstable AIM share in my portfolio. I did consider GlaxoSmithKline at under 1300 but again I wasn’t quick enough. I would like to invest in a major insurer. The way the government is running its programme of austerity it is difficult to predict which way the economy will go. Investing in a company like Balfour Beatty as it picks up Carillion’s contracts might seem a good investment but it was government austerity that was at least partly to blame for Carillion’s demise. I quite like the look of Direct Line but I need to do a little more research.

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