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Hedge Fund Manager's Notebook: Blood on the Streets - Buy Russia

by: John Thomas August 21, 2008 | about stocks: MTL / OGZPY.PK / RSX / USO / VIP    

John Thomas

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1) Crude (USO) spiked $10 to $122 when it realized that 1% of the world’s production passes through a pipeline in Georgia where the Russian invasion shows no sign of ending soon. Tropical storm Fay also brought fears of a Gulf hurricane back to the surface. Panic buying spread across a wide range of commodities contracts, from rice to gold to natural gas.

2) The tiny island nation of Singapore, which has never won a medal in the Olympics, has offered to pay $735,000 to anyone who brings home the gold. Malaysia is offering $300,000, Greece $220,000, and the Philippines $200,000. The US pays a relatively chintzy $25,000 to its medal winners. NBC thought it died and went to heaven when it rained during the women’s volleyball gold medal final. Suddenly it became an Olympic wet T-shirt contest.

3) Weekly jobless claims moderated to 432,000, down 13,000. Just noise.

4) Last week the Treasury called Credit Suisse and asked them not to cut off short term credit lines to Lehman (LEH) to head off a run on the bank. The stock tanked down to $12.50, and the stock will soon be trading at a hat size. The Treasury doesn’t do this for companies that are in the pink of health. What do they know? When did they know it? What are they not telling us?

5) You only want to buy when there is blood in the streets, and Russia’s invasion of Georgia is presenting us with an opportunity to do so by the bucket load. Russia’s recent seizure of assets owned by BP (BP) and Royal Dutch Shell (RDS-B) has also sent a shiver down investors’ backs. But the rising Russian middle class story is still alive. The Market Vectors Russia ETF (RSX) is down 36% from its June high of $59. Lukoil (LUKOY), the country’s most independent oil producer, is now selling for five times earnings compared to seven times for ExxonMobile (XOM) and Chevron (CVX) and ten ties for Petrobras (PBR). Companies enjoying government political protection include Gazprom (OGZPY) and savings bank Sberbank (SBRBF). The best non energy play is wireless operator Vimpelcom (VIP). Mechel Steel Group (MTL) is down a gut wrenching 70% on fears of a tax investigation. If you really want to go out on a limb there is JSC Bank of Georgia (BGEO).

6) Rim (RIMM) launched its next generation Blackberry Bold in Canada today. The 3G smart phone designed for high end business users is thinner, faster, carries a two megapixel camera, and can use a wide range of third party financial and market tracking software. Sign me up. The phone will only be available through AT&T in the US.

Full disclosure: no long or short positions in any stocks mentioned.

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This article has 19 comments:

  •  
    Aug 21 04:06 PM
    Barron's was bearish on Russia, arguing that all oil stocks are down and Russia's market is dominated by them:
    seekingalpha.com/artic...

    Thoughts?
    Reply
  •  
    Aug 21 04:57 PM
    One question left out about Treasury's call to Credit Suisse: what was in it for CS? That is, what did the Treasury promise in exchange for CS's forebearance? Or did they just appeal to CS's humanity? Yeah, right.
    Reply
  •  
    Aug 21 06:22 PM
    Russia is between sell and sell short. Current government has strong confiscatory tendencies. War and falling commodities prices is just icing on a cake. Two days of up oil is not a trend, and please take a look at RSX: it's divorced from oil lately.
    Reply
  •  
    Aug 21 07:06 PM
    The thought here is: the current Russian government will slowly try to wrestle the natural resources from the "oligarchs" who, in essence, stole them from the Russian people in the nineties.

    It will be a VERY slow process, but you'd never know who among oligarchs will be next. If you invest in Russia, try to invest in services, construction, food, perhaps utilities, etc., the sectors that do not depend on WHO owns the natural resources. Besides, they will be the ones on the upswing more than the commodities, anyway.

    The good thing - the government there is stable and VERY popular with the electorate (in part for its attempts to sideline the power of the oligarchs). Condi Rice may say Russian gov-t is not as "democratic" as, say, Georgian (Medvedev/Putin never got less than 65% of the vote, Saakashvili in January - 53%) but a smart investor isn't spooked by China's Communist gov-t, right?
    Reply
  •  
    Aug 21 07:10 PM
    Hehe. hedge fund's manager notes ;-) Perhaps one of those beached whales, that went belly up in Russia ! Granted there are opportunities, but not many, with this crew running the government. Heck we need a regime change in the Kremlin !

    Putin is the kind of dinosaur, that has not yet found out that it is dead. Him and McCain, both the rotten fruits of the cold war, they know nothing else, but confrontation. Not that I like O'Bama any more.

    Forget at your peril, that Putin's Potemkin village of an economy is nothing, without the cooperation of Europe, which is being strained.
    Reply
  •  
    Aug 21 07:20 PM
    And Europe is nothing without Russion oil and gas... Europe goes belly up before Russia does.
    Reply
  •  
    Aug 21 09:00 PM
    'And Europe is nothing without Russion oil and gas'

    Wrong. Europe only buys 25% of gas in Russia. And oil can be bought everywhere. But Russia is nothing without Europe buying its gas and oil. It has almost no other export products.
    Reply
  •  
    Aug 21 09:32 PM
    Anyone stupid enough to invest in Russia deserves to lose all their capital. The "buy when there is blood in the streets" rule applies only in countries where there is rule of law. When oil goes down to $30 again, Russia will fall apart. You can't sustain a country spread over eleven time zones on a per capita GDP of $15,000 and a population expected to fall from 140 million to 100 million by 2050. Putin's wet dream of recreating the superpower is a delusion.
    Reply
  •  
    Aug 21 10:31 PM
    Muddling - I like your post - good thoughts. I agree with you.
    Reply
  •  
    Aug 22 01:07 AM
    Russia's oil/gas revenues as percentage of GDP are expected to peak this year at 11.2% and continue decreasing their share by about 1% per year regardless of prices due to their diminishing share of GDP as per the finance minister. Despite that GDP is expected to grow around the current 8% for the foreseeable future.
    Reply
  •  
    Aug 22 03:16 AM
    Muddlling investor: although this is true, the big picture does not help in this case, for 1) oil is depleting in Europe 2) 25% is for the whole of Europe, but some parts are more (50-80-100%) dependent on Russian gas 3) even if you had spare capacity elsewhere, you don't have the infrastructure to get it to where it is needed (especially in the case of gas) 4) and is there spare capacity elsewhere? we are talking about magnnitudes.
    Of course this is a typical example of mutual benefit and dependence - all I am saying that in the short run Europe is more vulnerable.
    Reply
  •  
    Aug 22 03:17 AM
    Sorry, meant to say: 1) gas is depleting
    Reply
  •  
    Aug 22 04:44 AM
    all those bragging about govt intervention in Russia ought to take into account two things: first, under Putins predecessor, a handful of guys accumulated vast empires essentially for free. Look at all those oligarchs, men in their 30s and 40s who NEVER were true entrepreneurs but just were lucky and smart enough. They don't even know the value of their fortunes, thoriwing money around like mad, because they never had to hard-earn it.
    Second, and more important: you will be suprised how much govt intervention you will see over the coming years and decades in the supposedly law-governed U.S.A. Civil liberties already don't mean a damn to Washington. And finances, oil resources etc. will not be safe when push comes to shove in the usa - what it will in due time. And, by the way: there is hardly any country in the world violating international laws and treaties like the USA and invading any country at will - only to cry foul when others reserve the same r'rights' for themselves. Go figure.
    Reply
  •  
    Aug 22 05:57 AM
    Author says buy this and that but declared he has no positions, is he eating his own cooking? Normally buy in when there is blood in the streets but current conditions look like more bloodshed to come?
    Reply
  •  
    Aug 22 08:02 AM
    In Russia "government-prote... translates into "government can change the tax laws and all other regulation affecting this company at any time it wants, diverting value created from shareholders to government or for that matter other actors."
    Reply
  •  
    Aug 22 10:30 AM
    you earned your money & if you want to take a chance on the putin dictatorship you can.somebody ought to figure out how much russia defaulted on monies owed since ww1.of course if you feel you can do better in the communist china dictatorship so be it. i know i can come close elsewhere & feel more secure.a growing middle class means nothing just like here a shrinking one means nothing.
    Reply
  •  
    Aug 23 08:28 PM
    "You only want to buy when there is blood in the streets"

    I think that refers to corporate blood - not human blood.
    Reply
  •  
    Aug 24 09:51 AM
    I hope some of you are young. You will see Russia self implode over the next 40 years. They are losing 700,000 folks every year. The population based studies agree on the fact that Russian population will be only
    100 million in 40 years. We, the good old USA will be at 500 million. As for investing in Russia, if you like investing in a criminal enterprise (Putin and his friends own 50 billion dollars of Russian stocks) you are free to do so. I am married to Russian and have been to Russia 15 times. Outside of Moscow and St, Petersburg this country is in terrible shape.
    Reply
  •  
    Sep 05 03:24 PM
    "somebody ought to figure out how much russia defaulted on monies owed since ww1"
    -Very little. The major default was in 1998, with the help of seven years' worth of yankee "advice" on restructuring their economy. After Putin came to power, the country paid back all debts ahead of schedule in 2003 and is now a net creditor.
    "Russian population will be only
    100 million in 40 years."
    -Population projections indicate that the population will stabilize around 135 million within 5-10 years before starting to grow again.
    "Europe only buys 25% of gas in Russia."
    -No, you're wrong. Europe buys around 25% of oil from Rus and 40% of gas from Rus. Replacing both would be difficult, especially gas, because infrastructure doesn't exist. From what I hear, European customers (e.g. Germany) have good relationships with Russian suppliers. The only problems that crop up are in places where pro-American governments have been installed (Ukraine, Georgia, Poland).
    -If you want to understand the mindset, you first need to understand that it's not business as usual. There's a long term goal over there of modernising and rebuilding the economy. That means that cash cow industries like the energy industry will be used to fund the whole process, preferably without foreign involvement (why would they want foreign companies sending profits out of the country if Russian companies can do the same projects and keep the profits within the country?). I agree with some posters that the mindset is a little strange - perhaps paranoid and oversensitive, and working with Russians can be a bizarre experience. The right approach is patience. The country has huge natural resources, a stable government, a highly educated population, and has made strong advances in IP rights, taxation reform, corporate law, etc. over the last twenty years. Even the CIA Factbook says so. I think much of the negative image in the Anglo-American world has to do biased media reporting, rather than actual events in Russia. I watch news channels from a dozen countries around the world and the only ones that inevitably portray Russia as evil, corrupt, repressive, etc. are CNN, Fox, and Sky. Don't let yourselves be brainwashed.

    Reply
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