From Russia With Love?

Did you feel that? That major shift in market sentiment that started on Wednesday and pushed some of the riskier pieces of sh….equities higher? If your focus is only on what happens with the S&P 500 or one it’s subsectors, you probably didn’t notice the rally in anything Russian or European or its sister movement in the traditional defensive enclaves of Treasuries or the gold miners.

The seismic shift in global sentiment was initiated nearly simultaneously by the new and fragile cease fire in the Ukraine while Mario Draghi proved that the markets still listen to him as he initiated both a rate cut and new asset backed securities and covered bond purchasing scheme. Both helped lift fears that have been suppressing European stocks since last May while their American counterparts moved onto to new highs.

Check out the chart below and you can see the change in sentiment for yourself. Not only did Russia catch a bid but the larger EU nations also moved higher while Eurozone specific EZU outperformer the broader MSCI EAFE etf. Meanwhile at home, TLT sold off and the GDX, well no nice way to say this so “it done got blow’d up.” Probably all the government manipulation to convince you everything is okay but it’s fallen through the sideways continuation pattern it’s been stuck in since July.

EURWEEK@

GDX

And for those looking to play specific countries in Europe or regions compared to the whole, check out this table. The PIIGS or near PIIGS (France) had a great week but more on that later.

EURWEEK

So is it time to buy Russia?

As someone who has ancestral ties to Russia and a fondness for deeply discounted stocks, I’m very intrigued by what’s happening in Russia right now but if you buy here, be ready to buy even more when the prices inevitably fall again. Russia is cheap, there is no denying that and even with the recent rally, RSX has a trailing P/E of 6 and a P/B of .82. Yep, you’re reading that right, you can buy a pool of Russia’s biggest companies for less than the value of their assets. Compare that to the S&P 500 trading at a P/E multiple of 18.5 and P/B of 2.61. In fact, the three year trailing return of RSX is -5.64% ANNUALIZED while the S&P 500 put up 22% each year. WOW…this is the sort of stuff that asset allocation specialists with their dreams of mean reversion and low correlation live for.

That’s not just cheap, but CHEAP and remember, it’s CHEAP for a reason. Mostly because it’s one of the most corrupt and poorly managed countries on Earth where justice (when it’s available) is for sale to the highest bidder, no true political opposition is allowed and alcoholism has drastically shortened the life-span of most men. It’s like if Haiti and China could have a love child and that child was one of those sub-Saharan countries where the leading cause of death is listed as “warlord.” So nowhere to go but up right?

Personally I’m optimistic that the sanctions coming from the U.S. and Eurozone will have their desired effect and show Putin that this isn’t 1938 and that the Ukraine isn’t Czechoslovakia, but it’ll likely take more time for the lesson to sink in. Until then, the U.S./E.U. compact is going to continue targeting Russian financial institutions and as early as this Monday a new series of sanctions targeting oil companies controlled by the state to prevent them from borrowing in European markets could be proposed.

Why does that matter to you when the animal spirits are taking hold of the market? You’re thinking that high volatility=high returns and if it doesn’t, you’ll blow out after a 5% pullback? Well what are Russia’s primary exports? What’s the country famous for…vodka, bears riding motorcycles while drinking vodka and oil.  Hell, they just came out with their first locally produced smartphone last December.  China’s been making copies of the iPhone since Day 1.  Not impressive for a former superpower.   Lot’s of oil and among the few Russia market ETF’s, RSX has the lowest energy weighting at 41% versus 60% for the SPDR Russia ETF. So it’s probably safe to say that if the EU does agree to target Russian energy concerns, RSX could be moving back to new lows.

RSX Weekly
On the plus side, it doesn’t have that much further to go. Take a look at this weekly chart of RSX over the last several years I put together back in 2012 and you can see that we’re not far from long-term support at around $22.50 a share and what’s $2 between friends? Unfortunately, we have a downtrend line capping further movement at around the $26.80 level and forming a nice and VERY long-term descending triangle. It could take more time to play out, but the pattern is typically a bearish one and at the rate it’s forming the conclusion could take place between now and the first half of next year. So like I said, be ready to buy more when Russia becomes even cheaper.

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