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Crude Oil: Where Is the Next Pain Trade?

In the face of the Russians calling off their war planes and China's July oil imports coming in real weak, why isn't crude oil going down anymore?

At Research Edge, we believe the real edge lies in "the question" - who asks the right ones at the right times, consistently, without needing the Street to ask those questions for them.

This morning's Chinese import data (July imports down -7% year over year) is just that, July data – today is August the 12th. Since asset prices are discounting mechanisms of future news, we're going to chalk this July number up as one of the many reasons why crude oil has dropped -23% in less than a month.

I do not have a position in crude oil currently, but I finally see as much short term upside as I do downside (I have not said that in our morning meetings since June) . Call it $6-8/barrel either way. If the US Dollar Index stops going up, I may very well be on the long side of this "Trade".

KM
  • If Oil can hold $104.48, the next pain trade is UP.
(chart courtesy of stockcharts.com)

WYNN: GOOD ENCORE, BAD ENCORE

News of some firings at Wynn Resorts is making the rounds in Macau. Apparently, some top people heading up WYNN’s design and development team in Macau were fired or transferred and replaced by individuals from Las Vegas. It’s been my understanding that Encore Macau is on time so this news is surprising. I’ve been more worried about Encore Las Vegas where the opening is likely to be delayed into 2009, in my opinion, missing the important New Year’s week. Moreover, I believe the total budget may come in higher than the current $2.3bn budget (up from $2.2bn noted in the Q1 10Q). WYNN has a history of escalating budgets as displayed in the chart. While not commenting on the Macau personnel situation or the budgets, management did indicate that both Encore projects were on time. We shall see.

Along with other gaming stocks, WYNN has had quite a run over the past few weeks. Sagging fundamentals and escalating budgets are hitting industry ROI from both sides. Mixing lower returns and a higher cost of capital is not a recipe for continued stock price outperformance.



WYNN has a history of escalating budgets

The Karachi Crunch

After closing down another -2.1% overnight at 9,963, Pakistan's Karachi 100 Index has lost -34% of its value since May. Inflation was reported this morning at fresh 30 year highs of +24.3% year over year growth! This is not good.

What people are missing in Asia right now is that the economic backdrop is very similar to that which Nixon had to deal with here in the US in the 1970's - wage and price spirals in tandem.

On its own, stagflation is plain bad. Combined with the kind of geopolitical risk that Pakistan carries, any investment in this country is plain scary.

KM
  • The Karachi 100 Index Looks horrible
(Chart courtesy of StockCharts.com)

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Setting The Stagflation Sun: Japan Is In Trouble

If there is one chart showing the most pronounced country level stagflation of relevance, it's this one. Japan reported a nosebleed level of producer price inflation this morning - a 27 year high in fact.

At +7.1% year over year reported for the month of July, you can see where this registers on the chart below, particularly relative to Japan's newly realized negative industrial production growth rate.

I realize that Japan is "cheap", but countries with these dire fundamental underpinnings can get a lot cheaper as internally generated levels of cash flow erode.

*Full disclosure: I remain short Japan via the EWJ (etf) in my fund.
KM
Chart by Andrew Barber, Director

The Euro's Decline Is Re-flating UK Inflation

This morning the UK printed a big inflation report with a +4.4% increase in CPI for July. The Euro has dropped almost -7% in less than a month, and its weakness begets strength in imported inflation. Considering that commodities deflated in July, this number came in higher than I expected.

The Bank Of England's "targeted rate" of inflation is 3% - so this is not good. As you'll see from the chart below, this picture definitely does not let the British out of the box. As they dip into a recession, they will not be able to cut interest rates, unless inflation dampens from these highs.

KM
Chart by Andrew Barber, Director

China's CPI Chart: Deflating From It's Highs

The most positive global macro data point from this morning's release schedule was China's CPI coming in lighter than expected at +6.3% for July (year over year).

Looking at the chart below, this is a downtick from the highs China reported earlier in the year, and down again from June's level of +7.1% y/y.

China's wage inflation continues however. We will have our eyes on the incoming data as it is released.
KM
Chart By Andrew Barber, Director

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