Oil: We now have a four handle

We discussed Oil on our morning call today. Our view have been consistently negative on the fundamentals of Oil due to the demand picture globally, we have also been of the belief that Oil should be set up for a bounce due to its oversold condition. While we have traded Oil successfully on the long side for some small gains this year, the trend is and continues to be down.

Oil as of today dipped below $50 per barrel (West Texas Intermediate), which is a three and half year low and more than 60% decline from the June 2008 “It’s Global This Time” easy money highs. In hindsight, which has become increasingly apparent, Oil, just like any commodity, will always retrace back to its marginal cost. The commodity has now fallen below its marginal cost, which was previously thought to be in the $60/65 range, due to shuttering of higher cost projects and a decline in services costs.

The culprit for the dramatic decline in the price of oil is both a massive deleveraging as large pools of capitals are forced to sell their commodity assets (the Harvard Endowment is one such example we have been hearing about) and weaker demand trends become reality. It seems that bullish news for the price of oil has no impact, as we noted in our last notes after OPEC announced production cuts. Earlier this week a group of Somali pirates (“Arggghh”) captured a Saudi Arabian supertanker and threatened a major transport lane and the market completely shrugged off the risk.


Hot on the heels of US inflation data, Japanese customs data shows that exports declined there by the fastest pace since 2001 as global demand dropped sharply for Japanese products. The speculation by local policy watchers is that deflation is back and that the BOJ will start taking action. We have all seen this movie before, deflation hammers the Japanese economy and the BOJ responds by slashing rates creating stagnation. Governor Shirakawa would have to cut the basic discount rate from 0.3%, actually 5 basis points higher than the starting point that his predecessor Hayami had to work with in 2001 but the outcome of any cutting from here lease to the same destination -next stop zero.

We are short the Japanese equity market and the yen via the EWJ & FXY.

Andrew Barber

Putin’s Puppet Medvedev

President Dmitry Medvedev and Prime Minster Vladimir Putin of Russia’s United Russia party met before congress today to promise Russia would emerge stronger from a world economic crisis, one Putin purported was triggered by U.S. recklessness. Putin’s 45-minute speech, which trumped Medvedev’s much shorter opening remarks, provides further evidence that a return of Putin to the presidential “thrown” is highly probably.

Speculation about a possible Putin comeback first hit the wires on November 5th when Medvedev proposed extending presidential terms (not including his own current one) from four to six years, which Parliament approved on the second of three readings Wednesday. With the current constitutional limits of two consecutive terms, this recent reform will be used to justify holding early elections to return Putin back to his seat.

Tensions have escalated in recent months between Washington and Moscow over U.S. proposed instillation of 10 interceptor missiles in Poland to counter the likes of Iran. Further, the relative lack of response from US and EU officials to negotiate the remove of Russian troops following their invasion of Georgia in early August signals an increased inability of the international community to deal with dictatorial Russia.

Medvedev’s pledge of $200 billion in loans, tax cuts, and other measures might make a small dent in an economy that is expected to slow to 3% growth next year, but it won’t shore up the financial trouble of an economy levered to oil, which just touched a three and a half year low of $51.12. Putin, who stepped down in May, may use the current vacuum of both economic and political leadership to return to power sooner than anyone expects.

Daryl Jones
Managing Director

Matthew Hedrick

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The initial claims this morning came in at the highest level since 1992. Despite the fact that a significant increase was heavily anticipated by the market, the reality still has had a shock effect sending stocks down and compressing yields.

If you have been reading our work for any length of time you know that we have expected unemployment to reach 6 to 7% by year end as the pain continues to work through the system. With financial and auto sector layoffs picking up steam we face the real possibility that we will hit the uppedr edge of our range. If we get more signals in coming weeks that the job loss cycle is gaining momentum we may revise and recalibrate our models, but for now we continue to keep our eye on the tape and stick with our process.

Andrew Barber


Keith called in from the airplane while sitting on the Tarmac before takeoff with these levels. Our models indicate a broad buy/cover zone this morning between 790 and 818.

As always we remind anyone who is trading these levels intraday to keep stop losses in place in order to keep a trade a trade to stay in the game.

Andrew Barber


"There have been some changes in terms of the central government's attitude toward Macau. We don't think it's necessarily all that prudent to put more money in until we see how that attitude works its way out." - Bill Weidner, President and COO of LVS

"The fact that the economy and the development and expansion of Macau occurred at such a rapid rate has created a great deal of stress on the community. The central government and the Macau government putting ... a slowdown in visitation was an attempt to give the community a chance to absorb the stuff that had been built." - Steve Wynn as quoted by AP

Bill Weidner may have been correct in his analysis that Beijing is to blame for Macau’s recent woes. However, attacking the government publicly has proven to be counterproductive in the past. Wynn, by contrast, continues to praise the efforts of the Macanese and Central governments going so far to say that the government has “handled practically everything beautifully” (AP quote).

Not only does Wynn build and run the best product, he is also a master politician. He has thrived for 30 years in one of the most regulated businesses out there and his prowess in cultivating and maintaining government relations shows, even overseas. LVS should’ve learned his lesson by now.

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