Thanks to Mebane Faber for getting me looking at Cyclically Adjusted P/E ratios by country again. The one country that caught my eye was Russia:
The beauty of CAPE is that it smooths out earnings so you do not get to caught up in a short term focus. There are many arguments against it, but I believe it gets close to what a long-term investor should be looking at. For Russia, it has been the geopolitical stress and constant news stories that have kept their stocks in the “cheap” zone. In addition, many investors were once bitten by the 98 Russian default and not eager to relive that experience. If you look at the historical volatility of the MICEX index you might feel like caution is a wise choice:
Only 50 stocks and a volatile environment leave everyone fearful of the MICEX index
There are a few things to take a look at before going headfirst towards the Red investment. One item to keep in mind is currency depreciation. If the Russian Ruble is losing value then investing in a Russian ETF denominated in dollars will be hurt by the depreciation of the Ruble.
There has been fairly significant depreciation in the value of the Ruble versus the dollar since 2011 (upward move) but it looks as if the trend might reverse
The second item that is helpful is the credit worthiness of the Russian government. Given that there was a default in 1998, you would think that investors would be extremely cautious in lending money to Russia. But most investment sins are forgiven in about 15 years…
Fear (credit spread) spiked in 2014 but has quickly come back to normalcy
Lastly we could look at what easy ETF options exist to allow us to buy into the Russian story. RSX, ERUS, RBL, RSXJ (small cap) and RUSL (3x Bull!).
For liquidity I will stick to RSX – Market Vectors Russia ETF:
Looks as if RSX has broken above its 200 day moving average
You will never feel 100% comfortable buying into a market that has sold off while everything else has rallied. At the same time, you probably shouldn’t feel comfortable buying into a market that just continues to rally at odds with its own CAPE ratio…
Posted in Economics, Markets, Trading Ideas.
– June 10, 2014
The S&P 500 tried to pull back yesterday, but as usual the late day trading pushed the loss to just 65 bps. This has become the normal market. In 2012, volatility puttered at 12.77%. In 2013 it fizzled down to 11.07%. YTD we have crept up to 11.73%. These metrics tell you to expect daily gains and losses to be +/- .75%. Very Exciting.
What does this market remind me of? I would say the nearest example is 2004-2006 when volatility cycled between 10-11%. What do these two periods in time have in common? Extremely easy monetary policy provided by the Fed.
The most powerful chart to show you the impact of Fed provided liquidity plots realized volatility against the steepness of the yield curve as measured by the spread between the 10y and 2y treasury rates. As the fed keeps the front part of the curve low through the Fed Funds rate, the steepness is held high. A steep yield curve induces investors to borrow at cheap shorter rates and buy riskier assets to earn a spread. Party on while the Fed provides the punch bowl.
The current steepness of the yield curve is a great indicator for future market volatility
The red line above is the steepness inverted, so higher numbers represent the curve flattening or the Fed taking punch away from the party. Low numbers say party on. The blue is the trailing 90 day realized volatility of the S&P 500. When the Fed says to party, the volatility stays abnormally low.
Key point to make in this chart is that the red line is two years behind the blue line so the red line starts at 1/31/1977 while the blue line starts in ’79. This implies that the tightening of monetary conditions or reduction in market liquidity takes about 2 years time in order for volatility to pick up. If the curve can remain steep for another two years, then how large will the volatility dislocation become when the Fed does ease off the gas pedal? Most punch bowls are provided for 2 years or less. Right now we are in the 6th year of zero interest rate policy with a strong indication that they will maintain it well into 2015. Maybe this time the volatility will come even before the Fed eases off the pedal?
Posted in Markets, Politics.
– May 21, 2014