Tag Archives: russia

RSX: August Review

Summary RSX experienced huge volatility in August, but its share price finished the month only 0.88% lower. Russian GDP decline was bigger than expected and the situation in Ukraine started to deteriorate again. The main catalyst that should be able to push RSX price higher is oil price recovery. The Market Vectors Russia ETF (NYSEARCA: RSX ) declined by 0.88% in August. Although the 0.88% loss may indicated that August was a boring month, nothing is further from truth. Chinese economic woes initiated huge selloffs on global financial markets, Russian share market included. The share market panic was further strengthened by collapsing oil price that reached a new multi-year low at $37/barrel. On August 10, Russia announced that its GDP declined by 4.6% in Q2 2015. The decline was worse than estimated by analysts. The investors confidence was shaken also by news coming from Ukraine that indicated that the semi frozen conflict starts to heat up again. As a result, RSX was 15% lower compared to the July closing price at one moment. But as the situation on global financial markets calmed down and global share indices as well as oil price recovered slightly, RSX managed to erase most of its losses. The 4 biggest holdings in the portfolio of RSX are still shares of Magnit, Gazprom ( OTCPK:OGZPY ), Lukoil ( OTCPK:LUKOY ) and Sberbank ( OTCPK:SBRCY ). Weights of Magnit, Gazprom and Lukoil were over 7%, weight of Sberbank was slightly below 7%. On the 5th position, Norilsk Nickel ( OTCPK:NILSY ) replaced Novatek. The weight of Yandex (NASDAQ: YNDX ) keeps on declining, as shares of the company don’t perform well. If this trend continues, Yandex will slip out of the top 15 in the coming months. (click to enlarge) Source: own processing, using data of vaneck.com Out of the 15 biggest holdings, only 4 companies experienced share price growth in August. The biggest share price growth was experienced by Uralkali. Shares of the major potash producer were supported by its huge share buyback program. The biggest decline was recorded by shares of Yandex. Shares of the Russian search engine provider peaked at $21 in April. After 5 months of declines their current market price is less than $12. Source: own processing, using data of Bloomberg Although the recent months were hard for RSX, it is still up by almost 15% y-t-d. Among the 15 biggest holdings, Micex quoted shares of Surgutneftegas ( OTCPK:SGTPY ) did very well and they are up by almost 37%. Uralkali experienced a great August and as a result its share price is more than 30% up y-t-d. On the other hand shares of Yandex lost more than 1/3 of their value over the last 8 months. The second worst result was achieved by VTB Bank. VTB Bank share price lost almost 10% y-t-d. Source: own processing, using data of Bloomberg RSX remained to be very strongly correlated to the oil price (represented by The United States Oil ETF (NYSEARCA: USO ) in the chart below). The correlation between RSX and USO was stronger than correlation between RSX and S&P 500 for the better part of August. Given the important role that oil production plays in the Russian economy and given the strong position of energy companies in the RSX portfolio, it is hard to expect any meaningful and lasting change anytime soon. Source: own processing, using data of Yahoo Finance RSX share price went crazy in late August. The major share markets experienced a huge increase of volatility and the Russian share market was no exemption. The volatility measured by 10-day moving coefficient of variation was relatively stable from the middle of June to the middle of August. It was range-bounded in the 1%-3% interval. But in late August it increased rapidly and it crossed the 5% level for the third time over the last 8 months. (click to enlarge) Source: own processing, using data of Yahoo Finance Some of the more interesting news: The Russian companies were reporting H1 2015 and/or Q2 2015 financial results. Most of the important news were related to these reports in August. Gazprom announced its H1 2015 financial results. In H1 2015, Gazprom recorded net income of R568 billion which is 25% more compared to H1 2014. However in dollar terms, the income was only approximately $9 billion which is almost 30% lower compared to H1 2014. Norilsk Nickel surprised positively as its H1 2015 net profit remained almost unchanged compared to H1 2014, despite significantly weaker metals prices (nickel and copper prices were significantly lower compared to H1 2014). Norilsk Nickel recorded revenues of $4.9 billion (-14%), EBITDA of $2.7 billion (+8%), net earnings of $1.5 billion and adjusted earnings of $1.9 billion. Sberbank experienced a huge drop in profitability. It recorded net profit of R85.2 billion which is a 50% decline compared to H1 2014. In dollar terms, the decline is whopping 72%. The decline was caused by net provision charge for loan impairment that increased by R81.5 billion y-o-y. Total operating income before impairments remained almost unchanged. Rosneft signed LNG Supply and Purchase Agreement with state-owned Egyptian Natural Gas Company. According to the agreement, Rosneft will deliver LNG to Egypt. Rosneft has also reported its H1 2015 financial results. The company recorded revenues of $46.2 billion (-42.5%), EBITDA of $10.8 billion (-36.1%) and adjusted net income of $3.5 billion (-40.7%). Uralkali announced its intention to buy own shares and GDRs worth $1.32 billion. The company plans to purchase up to 411,042,224 common shares (1 GDR represents 5 common shares), representing 14% of company’s issued and outstanding shares. The purchase price will be $3.2 per share or $16 per GDR. Magnitogorsk Iron and Steel Works , one of the biggest Russian steelmakers, signed an agreement with Yandex Data Factory, an analytical subsidiary of Yandex, to develop a mathematical model and related software for steel making. The aim of the cooperation is to optimize consumption of ferroalloys and other materials during the steel production. Conclusion August was a wild month for RSX share price and it is probable that September won’t be too much calmer. The developments in China, oil prices and FED’s decision whether to raise or not to raise interest rates will affect RSX significantly in September. It is important not to forget about the political risks. Situation in Ukraine seems to be deteriorating once again and there are also rumours that Russia is about to start a direct intervention in Syria to support the government forces in its war with the Islamic State. It is hard to predict whether RSX will grow or decline in September. The only sure thing is that it will be a volatile ride. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

You Hedged Like We Suggested… Now What?

In my last article I said unless we could rally this summer we’d be in for tough times. I cited the sectors our firm was selling. And provided, for your due diligence, a suggestion for hedging with ETFs. Where does that lead us today? In my last article (August 12,) I wrote “Indeed, unless we can mount a rally in the next six to eight weeks, it may be a long cold winter that follows this long hot summer before we can get back to moving forward.” Those words may seem prophetic now but they were really nothing but common sense. When a plant grows bushy and full, it usually means it is healthy. When it grows straight and willowy, it usually indicates a problem of some sort. It’s the same with markets. As long as all sectors are moving along – at different speeds, of course, but still moving in the same direction – then things are likely to continue in that direction. But when some 20% of all stocks in the S&P 500 are down 10% or more, and most others are flat to a little down or a bit up, trouble is brewing. Yes, Apple, Amazon, Google and Netflix were still roaring ahead providing, because of their large market cap, an inaccurate picture of “the markets.” As a result of this dichotomy I wrote, “We’re reallocating our portfolio strategy to reflect what we believe to be the likelihood of a dull market that vacillates between heightened expectations and dashed expectations. That means lightening up on developing markets, energy, industrials, materials, utilities and even some technology firms.” That meant pretty much everything! I advocated buying a couple unique situations as well as “shares of ProShares UltraShort S&P 500 (NYSEARCA: SDS ), which moves inverse to the S&P 500 at double the rate of movement, as well as shares of the iPath S&P 500 VIX (NYSEARCA: VXX ), which is a reflection of the volatility I imagine we’ll be seeing more of in the coming weeks and months.” Via client and subscriber e-mail, we’ve since added shares of AdvisorShares Ranger Equity Bear ETF (NYSEARCA: HDGE ) to this mix. But our best purchase decision of 2 weeks ago was not as a hedge for our long positions but as an outright short on hubris and autocracy, shares of Direxion CSI 300 China A Shares (NYSEARCA: CHAD ). CHAD is an unleveraged short on the 300 largest and most liquid Chinese A Share companies. All of these hedges served their purpose, with VXX up more than 17% on Monday, August 24th, and CHAD up greater than 12% that day. What to do now? I wish I could tell you that we are covering or placing trailing stops under these marvelous hedges, taking our profits, and beginning to reinvest in fine, now cheap, companies. But I cannot. We are in fact using any bounces – and they will come; no market goes straight up or straight down – to sell. We’re doing so even if it means taking small losses on the long side. I simply don’t see a catalyst that will make this week-long crash a distant memory with the market marching inexorably higher. I see such a hope as unsustainable in the real world, the real world consisting of a collapsing Chinese economy (about which we have warned in numerous previous articles;) a Russia unable to sell its only “product” for more than it costs to produce it; an Iran bloated with the gift of tens of billions of dollars with which to foment terror; Brazil; a dithering Fed; Greece; and on and on. If you are thinking of buying something on any bounce, may I suggest that the above VXX, HDGE, SDS and CHAD might be fine choices to serve as a hedge for any long positions you choose to keep. And I do think you should keep some long positions. For us, the washed-out Big Energy firms are now looking very attractive, for instance. I’m not advocating selling everything. Indeed, I have written puts in our family and some client accounts on Apple. If it never gets put to us, we’ll enjoy the free money from those who think it will crash severely. And if it is put to us, I’m OK owning Apple at 10 times trailing, understated, earnings. We’re also adding to our energy exposure during this selloff – Royal Dutch Shell (RDS-B) for 12 times earnings and a 5.5% yield? I’m OK with waiting for it to recover. No fancy algorithms, no Fibonacci technicals, nothing complicated. Just good old-fashioned stock-picking with a very large hedged position, under which we’ll place trailing stops in what I hope will be the not too distant future. And, at this rate (not that I expect it to continue at this rate!) a full-blown bear market of a 20% or greater decline could be on us by mid-September! While we take a certain pride in having advised exiting most long sectors just 12 days ago and instead buying the short hedges above, the market will always make fools of those who rest on their laurels. We remain keenly focused on each day’s market action and look forward to responding to the best of our ability, come what may… _________________ Disclaimer: As Registered Investment Advisors, we believe it is essential to advise that we do not know your personal financial situation, so the information contained in this communiqué represents the opinions of the staff of Stanford Wealth Management, and should not be construed as “personalized” investment advice. Past performance is no guarantee of future results, rather an obvious statement but clearly too often unheeded judging by the number of investors who buy the current #1 mutual fund one year only to watch it plummet the following year. We encourage you to do your own due diligence on issues we discuss to see if they might be of value in your own investing. We take our responsibility to offer intelligent commentary seriously, but it should not be assumed that investing in any securities we are investing in will always be profitable. We do our best to get it right, and we “eat our own cooking,” but we could be wrong, hence our full disclosure as to whether we own or are buying the investments we write about. Disclosure: I am/we are long VXX, CHAD, SDS, HDGE. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

401(k) Fund Spotlight: Templeton Global Bond

Summary Lead manager Michael Hasenstab is a contrarian who is not afraid to take concentrated positions in securities where he has a high degree of conviction. Templeton Global Bond has outperformed 99% of its global bond peers over the last 10 years. The fund is wisely avoiding the most dangerous areas out there for global bond investors – sharply higher yields and sovereign debt of Japan, Western Europe, and Southern Europe. Background I select funds on behalf of my investment advisory clients in many different defined contribution plans , namely 401(k)s and 403(b)s. I have looked at a lot of different funds over the years. 401(k) Spotlight is an article series that focuses on one particular fund at a time that is widely offered to Americans in their 401(k) plans. 401(k)s are now the foundational retirement savings vehicle for many Americans. They should be maximized to the fullest extent. A detailed understanding of fund options is a worthwhile endeavor. To get the most of this article is important to understand my approach to investing in 401(k)s. Here are my key principles: 1. I do not buy ‘index hugging’ active funds if a similar index is available. Index hugging funds are those that are overly diversified and their performance never strays far from the index. Index funds almost always have a lower fee so I prefer to just own the index and let the fee savings provide a performance tailwind over time. Lastly, index hugging active funds are generally managed by people who don’t really know how to invest. This may sound harsh, but it is true. They are institutional herd products. 2. When buying actively managed funds, I look for those who are willing to go against the institutional herd and follow their own independent investment approach. I do not mind the higher fee if they have an established track record and it is not necessary that they always beat the index. Sometimes investment positions take a bit longer to pan out than investors would like to see on their quarterly statements. I take comfort in putting money with a manager(s) who is not afraid to stray from the herd. 3. I do not care what Morningstar says. Templeton Global Bond Fund Templeton Global Bond has five different share classes: A (MUTF: TPINX ), Advisor (MUTF: TGBAX ), C (MUTF: TEGBX ), R (MUTF: FGBRX ), and R6 (MUTF: FBNRX ). The class A shares are often found in 401(k)s with the load waived (i.e., no up front sales charge) and a net expense ratio of .90%. This is a reasonable fee given all that this fund offers. With $65 billion of assets it is one of the largest global bond funds out there (in fact, it was the largest in a screen I ran on Fidelity’s website). Templeton Global Bond is relatively free to roam in the bond world wherever it wants. The fund typically invests the majority of its assets in investment grade government bonds from anywhere in the world. It also regularly invests in various currency instruments and derivatives. The fund tends to focus on sovereign debt and not corporate debt. It may invest up to 25% of its assets in below investment grade debt and all of its assets in developing (or emerging) market debt. The fund’s lead manager, Michael Hasenstab, is well known within the investment industry, appearing regularly in publications such as Barrons . He has gained a reputation as a contrarian with a willingness to take concentrated positions on specific bonds that he has a high degree of conviction in. This has generally worked out well, except for a large position in Ukraine government debt that has cost the fund several billion dollars. (About 2% of the fund is currently invested in Ukraine.) In a January 2013 interview with the Financial Times , he warned that it was time to get out of “safe” government debt. His call was right on. The 10-Year Treasury Yield subsequently soared a few months later during the so-called “taper tantrum,” as shown on the following chart (note: bond prices fall when interest rates rise): ^TNX data by YCharts Excellent Performance Track Record Over the last 3-Year, 5-Year, and 10-Year periods (as of December 31, 2014), Templeton Global Bond has crushed both the benchmark and its peer group. The following table shows this: 3-Year Return 5-Year Return 10-Year Return Templeton Global Bond – Class A (without sales charge) 6.3% 5.8% 7.4% Citigroup World Government Bond Index -1.0% 1.7% 3.1% Lipper International Income Funds Average 2.1% 2.9% 4.0% As far as performance goes, there is little to complain about. The fund has consistently shown is value relative to its peers. Portfolio Positioning The makeup of the current portfolio is always the most important thing I look at when evaluating a fund. Currently, given the dynamics of my forecast , my general view on the global bond market is as follows: Completely avoid the sovereign bonds of Japan and Western Europe denominated in Yen and Euro. Completely avoid local currency emerging market bonds (non-U.S. dollar denominated) except for Russia (I expect oil prices to spike soon). U.S. and Pound Sterling government debt with very short maturities is okay. Selective U.S. dollar denominated emerging market bonds are okay, especially debt of corporations with U.S. dollar revenues and local currency expenses. Duration should be short though. Cash positions should be sizeable to take advantage of potential price dislocations created by a lack of market liquidity. (Fund cash positions should also be high to meet shareholder redemptions without having to sell quality bonds at low prices.) How does Templeton Global Bond stack up in light of my outlook? Notably, as of July 31, 2015, the fund has an average duration of only .07 years and an average weighted maturity of only 2.49 years. With a duration of .07, rates could theoretically rise 300% and the fund would only fall by .21%. (Duration measures the exposure of a fund to interest rate fluctuations.) Hasenstab clearly has the fund positioned exceptionally well for a rising rate environment. However, the trade-off here is a low yield. The fund’s 30-day standardized yield is only 2.18%. The distribution yield is higher at 3.04% (calculated by taking the standard monthly distribution of .03 x 12 divided by the current NAV price). Given the near-term danger of a sharp rate rise, I think the low yield is worth accepting. I like the fact that 79% of the fund’s currency exposure is in the U.S. dollar (as of June 30, 2015), which is more than twice that of the comparable index. I especially like the fact that, through derivative exposure, the fund has a 24% net short position in the Japanese Yen and a 36% net short position in the Euro. I am expecting the Yen to outright crash and this fund is well positioned for it. As of June 30, 2015, the fund’s largest sovereign debt holdings are as follows: South Korea – 14% Mexico – 9% Malaysia – 7% Poland – 7% Hungary – 7% Brazil – 5% Singapore – 4% Indonesia – 4% Currently, the fund also holds some smaller positions in the debt of the Philippines, India, Sri Lanka, Serbia, and Slovenia. These 13 countries are pretty much it. Sovereign wise, there is nothing here that is overly concerning to me given that the duration of the fund is so low. I like the fact that the managers have taken highly concentrated positions in the countries they feel have the strongest economic fundamentals. Hasenstab is clearly an investor and not an index hugger. This fund is by-and-large safe from the disaster awaiting holders of Japanese, Western European, and Southern European government debt. In fact, countries with strong fundamentals could see an influx of capital seeking safety as it flees these developed markets. Lastly, the fund is 28% in cash. This gives it ample room to meet client redemptions during a crisis and the flexibility to pounce on higher yielding debt when rates rise. Conclusion I think now is a good time to hold this fund if it is available in an employer-provided 401(k) plan. The hits to the fund from holding Ukraine government debt are behind it. Most notably, the fund is clearing avoiding the most dangerous risks to global bond investors. When it comes to the potential for a fixed income fund to deliver decent returns in the current market environment, Templeton Global Bond is an oasis in the midst of a desert. Investing Disclosure 401(k) Spotlight articles focus on the specific attributes of mutual funds that are widely available to American’s within employer provided defined contribution plans. Fund recommendations are general in nature and not geared towards any specific reader. Fund positioning should be considered as part of a comprehensive asset allocation strategy, based upon the financial situation, investment objectives, and particular needs of the investor. Readers are encouraged to obtain experienced, professional advice. Important Regulatory Disclosures I am a Registered Investment Advisor in the State of Pennsylvania. I screen electronic communications from prospective clients in other states to ensure that I do not communicate directly with any prospect in another state where I have not met the registration requirements or do not have an applicable exemption. Positive comments made regarding this article should not be construed by readers to be an endorsement of my abilities to act as an investment adviser. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.