Below is our Asian Inflation Chart (Korea, Thailand, and Indonesia) using the July reports that have been issued in the last week.
Alpha is cool. Do not get greedy when you can realize it's gains. Friday's Chinese PMI report was alarming, as was this morning's killing of 16 policemen in Xinjiang.
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I'll refer you to the Asian tab on the portal for the "why's"? I think the most important “why” was the 1st contraction we've seen in the Chinese PMI survey since 2005. This happening before the Olympics definitely caught me by surprise, considering in most cases that China has the ability to make some of these number up.
The worst week however, in context, for this currency is a -0.34% move. So let's not get all hyped up about this. Re-flating the US Dollar, and deflating the Chinese Yuan is going to be a long term process.
The Yuan is currently trading at 6.84 per US Dollar, and is still up +6.7% year over year relative to it.
Many companies assist the analysts by providing Adjusted EPS. My analysis shows that in most cases Adjusted EPS just excludes bad stuff. Looking back at the last 6 quarters in my universe, gaming companies are clearly the most egregious offenders while leisure companies tend to shy away from the adjustment game. Lodgers fall somewhere in the middle. Gaming companies provided Adjusted EPS that was higher than GAAP EPS an astonishing 80% of the time. Contrast this with the leisure group at only 7%. Within the gaming sector, BYD, LVS, and PNK are perfect with their Adjusted EPS batting average exceeding GAAP, and WYNN is not far behind. We at Research Edge are not big fans of EPS to measure valuation and this is just one more reason why.
The weekend has ended, unfortunately. Welcome back to the grind. This morning reminds us all that it is “global this time”, indeed.
Asia woke me up early with signs of geo-political tail risk that no one wanted to see come to fruition - terrorist related risk into the Olympics. A border patrol station was attacked in Xinjiang, China overnight, and 16 policemen were killed. Local reports, as usual, we’re lacking details, but this set off selling in both Hong Kong and Chinese stock markets. They closed down -1.5% and -2.2%, respectively, leading Asian trading to the downside.
Indonesian inflation was released for July at a 22-year-high of +11.9%, alongside ramping South Korean and Thai inflation reports that surprised me to the upside late last week. Considering that inflation continues to accelerate as Asian economic growth continues to decelerate gave me plenty of reason to sell my “long China” trading position, and stay short Japan. I issued these notes intraday on Friday in our portal.
Japan’s economy is stagflating, and the Nikkei is finally starting to reflect the last few weeks of economic data that have outlined as much. The Nikkei lost another -1.2% overnight, closing at 12,933, and has lost a sharp -5% since the last week of July. I remain short Japan via the EWJ exchange traded fund. On a breakdown through 12,754, I see a test of the March lows of 11,787 as likely.
Pre-market open news flow in the US doesn’t smell any better than Friday’s left over pot of coffee. Over the weekend we saw number 8 on the US bank failure chart come to bear with First Priority Bank going under. Assets were insured by the FDIC, but one has to seriously wonder what Main Street America’s “First Priority” will be if and when this bankruptcy cycle trend continues. Our call has been to get yourself into cash – cash is king – and no one knows that better than Americans.
The ‘Challenger’ jobs report that came out this morning is equally as concerning as the belly up cycle, and in many regards is a function of it. Challenger is reporting that planned job cuts in the United States of America shot up +26% on a month over month basis in July!
After the worst month for commodities in 28 years, the “I” (inflation) factor in our “RIPTE” consumer spending model has clearly toned down, but the “E” (employment) factor continues to flash amber lights. What’s more important to US investors, negative real economic growth or an inflation trade that lost its “positive momentum”? I can tell you what the “Fast Money” community of “buy high, and sell higher” thinks about the answer to that question. Run.
Commodities look like the last leveraged asset “bet” to be imploding. We have basically gone across all 5 asset classes that I care about (Stocks, Bonds, Real Estate, Cash, and Commodities), and crushed them systematically. Commodities were the holdout, and Bernanke can put a quiver into the back of levered long inflation trades if he appropriately steps up and takes a stand at tomorrow’s FOMC meeting. Being in cash remains the best way to participate in the long term healing process that this country will need to fix this mess. Bottoms are processes, not points, and we need to ensure that bottoming processes in the US Dollar, US Housing, and US Equity portfolios is in motion.
As we patiently await Ben Bernanke’s accountability session this week, the world has their Chinese Olympic ‘You Tubes’ on. It is “global this time”, indeed - and everyone is watching.
Have a great week,
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