Who’d have thought the Russian stock market would be the place to put some of your cash, especially now that Moscow just annexed part of another sovereign country and the threat of wider conflict between Russia and Ukraine may be looming?
Because of the volatility of the situation, Russian investors have begun to flee their own stocks; to date, a falling ruble and other economic problems there have led to a 20 percent reduction in the Russian stock market.
Which is precisely why now might be the time to get in, say U.S. investors.
“[The] sell-off has taken the market to technically extreme oversold levels,” Jacob Nell of Morgan Stanley wrote in an investor’s note March 4, when the crisis was just beginning.
“Valuation multiples have only been cheaper at the depths of the 2008 crisis (when earnings fell by 60%). And oil markets are stable in contrast to sell-offs in Russia historically. Despite the obvious hit to growth expectations implied by the crisis, any sign that tensions are beginning to de-escalate would constitute a buying opportunity.”
Granted, cheap valuations don’t mean that returns will be quick, but you get the idea.
With the Crimea vote for independence and annexation into the Russian federal now past, U.S. market conditions are improving. Wall Street is rising steadily once again after comments by Russian President Vladimir Putin signaled that tensions over Ukraine would likely abate.
“What had been going on in the Ukraine has been weighing on the minds of investors for a while, so it is a relief that we are apparently moving beyond this,” said Joseph Tanious, global market strategist at J.P. Morgan Asset Management in New York.
“While from an economic standpoint the Ukraine doesn’t have a major impact on the global economy, there were worries about more tension between Russia and western powers, and how far this kind of standoff could go.”
Something to think about moving forward as regards your investment portfolio. Virtually all major global events affect markets.
Yet two days ago the White House issued a warning amid U.S. sanctions which froze assets of both Russian and Ukrainian nationals. Today, Russia responded with sanctions of its own against top U.S. officials, barring them from entering the country.
John McCain brushed off the sanctions with a joke, ”I guess this means my spring break in Siberia is off, my Gazprom stock is lost, and my secret bank account in Moscow is frozen.”
However, speculation over Russian ruble and stock markets in Europe and Russia continue. Over the past few days, investors have been eying the ruble and Russian markets which rallied despite the increased tensions and warning issued by White House Spokesman Jay Carney:
REPORTER: The Russian stock market has been soaring the past couple of days. Is this a sign that the sanctions are ineffective if they’re not really paying a cost? And the reality is it’s up about eight-, nine-percent the last couple of days, their main stock exchange.
JAY CARNEY: I think it’s down for the year, and I think the ruble has lost its value, and I think that he long-term effect of actions taken by the Russian government in clear violation of the United Nations charter, in clear violation of its treaty commitments, that are destabilizing and illegal will have an impact on their economy. All by themselves. They will also incur costs because of the sanctions that we and the EU have imposed, and there will be more actions taken under the authorities that exist with the two executive orders that the president has signed. So I wouldn’t — I wouldn’t, if I were you, invest in Russian equities right now… unless you’re going short.
While the White House tends to avoid commenting on shifts in financial markets, Carney said U.S. and European sanctions, compounded by Russia’s aggressive takeover of Crimea, will hurt Russia’s economy.
However, with risk comes opportunity. And “the riskier the stocks the better” says financial columnist and former management consultant Brett Arends.
Arends provides three reasons why he is going to invest in Russia despite the fact that it is a corrupt dictatorship embroiled in international crisis with its leader risking isolation and embargo.
1. The Moscow stock market is just on the cusp of a rare and exclusive club.
The 60% club, reserved for asset classes which have fallen more than 60% from their all-time peak. The Moscow market plunged on Monday in the wake of President Vladimir Putin’s invasion of the Crimea and the potential for a war over the Ukraine. Stocks had already fallen a long way in the preceding few years. This week saw panic.
The Russian market is down 59%, in US dollar terms, from the all-time high seen in the spring of 2008, according to market data firm MSCI.
Even better? Russian small cap stocks nearly entered the 80% club. On Monday, they were down 78% from their peak in December 2007.
These really are rare clubs. Past members of the 60% club include Las Vegas real estate (2011), gold bullion (2000), the Nasdaq Composite index (2002), and the Nikkei 225 (2001).
Cue the Bennett Rule, named for my old friend Peter Bennett, a veteran and highly successful money manager at Walker Crips in London: Always take a wager on a durable asset class (i.e., not, say, Pets.com) when it joins the 60% Club. Over the following five years you will almost always make a handsome profit.
It’s rough and ready, but there is sense to it. When an asset has fallen that far, it’s usually oversold. The market has given up and lost interest. Naturally it doesn’t always work, and things can go down quite a way further before bottoming out. A few very rare assets join the 80% club. One or two join the 90%. But if you hang on, it really doesn’t matter.
2. Everyone else is too afraid to.
Look around. Are you seeing lots of money managers and analysts buying and recommending Russian stocks? Of course not. That’s the point. They’re too afraid.
You didn’t see these people being bullish of, say, gold at $250 an ounce, or Las Vegas real estate in 2011, or Greek stocks in 2012.
The comedian John Cleese once said the typical Englishman’s highest ambition was to go through life without ever being embarrassed. Money managers and Wall Street analysts are in the same boat. Embarrassment is professional death.
And, all other things being equal, when so many people are constrained from being bullish it would tend to make an asset underpriced.
3. They are cheap.
The Russian market trades on just five times forecast earnings, according to estimates. Small company stocks, which have fallen further, seem even cheaper. Of the top holdings in the Market Vectors small cap Russian fund, several are just three times forecast earnings.
The world market trades on 15 times forecast earnings, and United States stocks 17 times, according to estimates.
Yes, there are plenty of risks. But that is a major reason the stocks are already so cheap.
When we buy a share we are just buying a share of a company’s future cash flow. That’s it. And, by definition, the less we pay for each dollar of future cashflow, the better the deal. I don’t think I’ve ever seen a solvent company’s stock trade on three times forecast earnings before.
Remember this is still speculation and you should probably consult your portfolio manager before taking the leap into the Russian market.
Mnuchin: Next Stimulus Coming By End of Month, No More Extra Unemployment Money
Treasury Secretary Steve Mnuchin said the next stimulus bill will be much more targeted than previous bills. He also said the goal is to get the next bill approved between July 20 and the end of this month. That time is when Congress will return from their holiday break and before they leave for August recess.
On Broad Stimulus Measures
It appears the White House will not support the type of broad stimulus measures of the previous bills. Instead, it will focus on direct payments to Americans. In an interview with CNBC yesterday, Mnuchin said “we do support another round” of stimulus checks to individuals. This mirrors the $1,200 payments that the government sent out as part of the $2 trillion rescue legislation passed in March.
Mnuchin didn’t mention whether he supported the idea of a $40,000 income cap to receive a check that has been floated by GOP lawmakers. The income cap for the first stimulus check was $75,000. He did say that he spoke with Senate Majority Leader Mitch McConnell. He also mentioned the “level and criteria” for checks would be discussed when lawmakers return to Washington.
Any new stimulus bill would likely not include proposals from the Democrats that include hazard pay for essential workers. It likely won’t include a longer extension of strengthened unemployment benefits, mortgage and rent relief, and support for state and local governments, too.
Mnuchin reiterated that the White House isn’t in favor of more relief money for states and municipalities to make up for lost revenue. Some state and local governments are considering trimming essential services as costs balloon and revenues drop. He said the administration does not want to “bail out” states that were “mismanaged” before the virus hit.
On Unemployment Benefits
Another critical topic the lawmakers will tackle the end of the enhanced unemployment benefits on July 30. They will do so when they return to Washington D.C.
Mnuchin said the White House has no interest in extending the enhanced benefits any further. Instead, he said it wants to change how they pay benefits. He did not give details. However, he did hint that unemployed workers shouldn’t be able to earn more money compared to full-time employees
“You can assume that it will be no more than 100%” of a worker’s usual pay, Mnuchin said. This echoes many Republicans who argue the additional benefits are preventing some from returning to work. These workers do this so that they make more at home than they would at their jobs.
While Mnuchin says the White House isn’t in favor of extending unemployment benefits, it is extending the Paycheck Protection Program that provides loans for small businesses. Earlier this week the Trump administration released a list of companies that received loans from the government. With that, backlash ensued as numerous businesses tied to wealthy individuals were found to have requested funds. Of the $130 billion remaining in the program, Mnuchin said he wants new relief to be “much, much more targeted” than past rounds of funding.
Kudlow: Economy Doing Great, Second Shutdown ‘Really Big Mistake’
White House Economic Advisor Larry Kudlow says that the country is squarely in the middle of the “v-shaped” recovery that everyone had hoped for, and despite reports of coronavirus hotspots popping up, shutting down the economy for a second time would make the “solution worse than the disease.”
Kudlow spoke on “Fox and Friends” yesterday and said that the White House is monitoring the jump in new coronavirus cases in states like California, Arizona, Texas and Florida, but added that as a country we now know what works to stop the spread, and just need to work together.
“We know the right mitigation, which has worked, and if we use that wholeheartedly and respect each other, I think we’ll get out of this pretty well and it will not stop the V-shaped recovery.”
On A Second Shutdown
He added that a second shut down would be a “really big mistake.”
“Another shutdown, in itself is controversial,” and would “do more harm than good,” said Kudlow before adding, “It would harm everyone. Not just businesses — the V-shaped recovery would give way. It would harm kids, we saw numbers on depression, drinking and so on… that solution would be worse than the disease.”
Kudlow highlighted the job growth in the last two months, and pointed out that jobs are being added back so quickly, workers are now quitting jobs to search for new, higher-paying ones.
He said there existed a “tremendous burst of jobs in May and June” and “tremendous record hiring rates. People are starting to quit their jobs again, which is extraordinary, in order to shop around for better jobs and wages.”
All those workers looking for jobs should bring down the unemployment rate to as low as 7% iby the end of the year, according to St. Louis Federal Reserve President James Bullard.
That would be quite a rollercoaster ride for the job market, which has swung from a 50-year low unemployment rate of 3.5% earlier this year, to a post-WWII high of 14.7% in April.
U.S. Economy Doing “Very Well”
Appearing on “Closing Bell” yesterday, Bullard said “I think we’re tracking very well right now. Seems to me like by the end of the year you can get down certainly to single digits, probably even below 8%, maybe 7% by the end of the year.”
A surge in new cases could slow the re-hiring of workers across the country, but Bullard believes that wearing a mask will become standard and that will help bring back jobs and boost the economy.
“If we get to that situation, we’ll have the disease under control,” he said. “What I like about that scenario is it does not rely on a vaccine coming or a therapeutic coming. We can use simple, easy technology that we have today, get a good situation, get most of the production back to normal.”
Bulls See ‘Once-In-A-Lifetime’ Opportunity, Bears Worried Market Will Drop 10%
The coronavirus continues to be a battleground for stock market bulls and bears. This comes with the bulls pointing to an opportunity and an economy that is slowly recovering. It also comes with the Federal Reserve providing trillions of dollars in stimulus.
One of those bulls in Marc Lasry. He runs a $14-billion Avenue Capital investment firm and co-owns the Milwaukee Bucks NBA team.
He views the coronavirus pandemic as a “once-in-a-lifetime” opportunity to make money.
“I know you’re not supposed to say this, but it’s a once-in-a-lifetime opportunity. You’re not going to see this again: Where you’ve actually got an economy that’s fine, and you’ve got a Fed pumping trillions of dollars in.”
Lasry’s firm specializes in providing funding to distressed businesses. The number of bankruptcies piling up means more business for him. Just today, men’s clothier Brooks Brothers filed for bankruptcy protection.
“You’ve got a lot of companies that are in trouble,” Lasry said, adding that today’s business environment is very similar to what he saw during the Great Recession. “It’s a once-in-a-lifetime, but it happened 10 years ago, also.”
Is the US Better Prepared?
He adds that while the outlook for many forcibly closed businesses as part of the economic shutdown doesn’t look promising, the country as a whole has become better prepared to weather the storm compared to that of the Great Recession.
“Today we all know something,” he said. “We will be fine in two years. People will be back out, there will be a vaccine. The question is: How long will it take to get back to normal?”
If you ask Savita Subramanian, she says she’s not a bear, but does expect the stock market to end the year almost 10% lower than it is today.
Subramanian, the head of equity research at Bank of America, says the economy is facing a litany of headwinds.
“I wouldn’t paint myself as a bear but the risks between here and year end are completely to the downside,” Subramanian said. “We’ve had a reopening frenzy and now we’re seeing payback.”
The Negative Outlook
Unlike Lasry, Subramanian felt “really worried” that the fiscal and monetary stimulus used to boost the economy has pulled forward future growth.
She also points to a historically-expensive stock market. Three things had driven the gains of that market, and all of them might come to a grinding halt soon: globalization, falling interest rates, and tax cuts.
Subramanian says a Democratic victory in November will likely have the effect of reversing those market-friendly policies.
Stocks continue to climb higher despite surges in new coronavirus cases. With this, Subramanian said she doesn’t think the markets are assuming everything will be okay. She notes that “work from home” stocks are still doing very well. Also, she mentions that if investors thought we would be returning to offices and jobs anytime soon, those stocks should suffer.
She advises being overweight consumer staples, industrials, technology, and financial stocks.
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