Asociación Española de Marina Civil - Caricatures in Greece and Russia…and yet the money flows

Caricatures in Greece and Russia…and yet the money flows

Details: Category: General; Published on Wednesday, 25 February 2015 09:30; Written by Administrator2; Hits: 1297

Market realist

Strong equity performance – more of an issue of money flow than underlying fundamental improvement

Global equity performance has been strong over the last week. It carried over into yesterday’s trade—even though oil prices resumed their longer-term down trend as hopes from an OPEC (Organization of the Petroleum Exporting Countries) intervention faded.

The theme over the last week continued. Riskier economies outperformed the S&P 500. Some exuberance is being observed in the recent Eurozone stock performance. Markets are starting to chase returns. They’re getting wind of hedge funds starting to play the “bottom fishing” game.

From a longer-term perspective, many of the underlying issues that plagued economies—like the EU (European Union), Brazil, and more specifically Greece—haven’t been solved. Recently, the trajectory towards solving them permeated headlines. However, a deeper drill down into the deeply fragmented personalities of the characters handling these multibillion-dollar decisions shows more risk than reward ahead.

The Greek finance minister is creating a caricature

The seeds of potential failure, for the recently applauded bailout extension and path to reform, have already been visible in the meetings that led to the extension. It was triumphantly announced on Friday. Germany and Greece are at constant odds.

The Greek finance minister seems to have a brash and disrespectful personality. The press conference that he held after the announcement was a sight for sore eyes. There were misplaced attempts at humor at a time when these matters affect global investors—something he and the powers in Greece don’t seem to understand or more importantly care about.

For instance, assessing the performance of a stock is more than a quantitative “on paper” exercise. It’s also an assessment of management skill and character. My estimation is that the recent performance of the Greek stock market and Europe is premature in the least. These risks will surface again. This is the definition of “kicking the can down the road.”

Crack spread widens – good for refiners

Oil and distillate prices had some interesting performances over the last week. It widened what’s known as the “crack spread.” For simplicity’s sake, the wider the crack spread is, the higher the refineries’ margins are that process crude. In fact, we’ve seen downstream energy companies outperforming upstream crude producers for over a month now.

Numerous relative value opportunities are presenting themselves within these sectors. What’s interesting to note is that economies that rely on energy—like Brazil and Russia—saw their equity markets surge lately. Their recent run up almost exclusively coincided with oil futures reverting upward. However, their performance and crude’s performance diverged yesterday.

Russia is up over 20% YTD and Brazil is off its lows….but why?

If the only reason these economies are up is because of oil price reversion—that can still fall and fall hard—then the selling decision should be an easy one, if for no other reason than oil prices can be hedged out of these positions easily. Again, it’s all about the underlying economic dynamics at play. There has been little to no resolution on it.

The Brazilian real has been on a perpetual five-year downtrend versus the dollar. Lately, the pace got quicker. This doesn’t alleviate the concerns about rampant inflation, an economy with weak growth, a weak currency, and the lack of performance from President Dilma Rousseff. Rousseff ran on fighting inflation. So, by that measure, she’s failing.

The citizens don’t expect much from the economy. In January, business and consumer confidence fell to the lowest level in more than ten years. If the citizens aren’t comfortable and in a risk-taking mood, then the economy simply can’t grow. Its sovereign debt has a credit rating close to junk. So, the recent performance from their stocks and index trackers—like the iShares MSCI Brazil Index (EWZ)—has been puzzling.

It seems that recent oscillation in long-term down-trending economies or a downright reversal of trend, like in Russia’s markets—tracked by the Market Vector Russia ETF Trust (RSX)—has been an overly optimistic representation of money chasing returns in economies overly exposed to commodity prices. Money flow, rather than the slow churning, is the almost excruciating trend that exists in countries that have underlying fundamental progress.

Putin thinks the West is one big Neville Chamberlain

On Friday, Moody’s downgraded Russia’s foreign currency sovereign credit rating. Moody’s placed it out of the investment grade tier and into junk status. Moody’s cited low oil prices, ruble depreciation, and the war in Ukraine as its inputs into the credit model. None of this was surprising. Russia entered stagflation territory. It’s plagued by negative GDP (gross domestic product) growth. Also, inflation is skyrocketing.

What Moody’s didn’t cite was how Vladimir Putin replaced his image as an economist, with one who ferments nationalism with his “strongman” presence. Moody’s needs to also cite that the real reason its credit is actually worse than junk is that it isn’t worth the paper it’s written on. Power corrupts. Absolute power corrupts absolutely.

Did you notice that Russia’s national anthem is played to the exact same music as the Soviet Union’s national anthem? It just has different lyrics. Putin has always played to the same underlying music, but with different lyrics. He knows the West craves the right rhetoric.