Wednesday, August 27, 2008

Hurricane Rallies in Oil and Random Thoughts on China....

I'm still a believer in the downward trend in oil, but it's hard to fight the tape when there is a hurricane headed for the Gulf of Mexico. I had a near term target of $110 in oil with a 12 mth target of $90, but the oil traders are back and they are feasting on the hurricane hysteria so it's best to go to the sidelines until Gustav is out of the picture. I think the new range for oil is probably $115 to $125 until Hurricane season ends. Of course, Georgia/Russia, an October surprise in Iran or any other factor could blow these forecasts out of the water.



I'm no longer short oil and I'll look for an opportunity to get short again if oil reaches the mid $120's.

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China's Olympic experience was wonderfully choreographed and far exceeded my expectations. Having said that, China may not be the all powerful engine of economic growth that we fear. Consider the following:



1) China is considering an economic stimulus package despite having reported GDP growth in excess of 10%.

"China is considering a 370 bln yuan package of fiscal expenditures and tax cuts to stimulate the economy, the Economic Observer reported, citing a source close to the matter. The report said the plan includes 220 bln yuan in government spending and 150 bln worth of tax cuts."

Maybe they are not really growing as fast as reported? Would a country that obsesses over controlling the message so much that they would make a 9 yr-old girl lip sync at the Olympics actually put out misleading economic data? Food for thought.



2) China's growth is literally killing it's people.

Despite the respite from pollution during the Olympics, the air quality in China is so bad that our children may not have to worry about competing with their children 20 years from now. The health issues that are going to crop up in China over the next 20 years are going to be a monumental issue for them to overcome. The Guardian put together some rather disturbing slides of the pollution in China.






3) The quality of Chinese made products continues to decline, not improve

The great promise of Chinese manufacturing is that by incorporating western manufacturing techniques with their massive labor force, you will get a superior product for half the cost. To date, it has been purely anecdotal evidence (the a/c unit that breaks after 2 years, the water cooler that breaks after 3 years, the printer that stops working after 18 mths, the bike tubes that burst upon inflating), but the quality of Chinese made products is so poor that it is creating an opportunity for a US manufacturer to regain market share.

If I were a consultant, I'd encourage a major consumer product company to fight the outsourcing trend and bring manufacturing of major consumer products back to the US (or another industrialized nation). I think consumers would gladly pay a 25% premium for goods that were deemed to be superior in quality and performance to those manufactured in China.

I have some final thoughts on the lack of free thought and how that limits innovation but I'll save that for another post.

Cheers!

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