Tuesday 7th February 2017
This bear can be a real bull….
Markets bucked expectation when Donald Trump was elected president….
They were expected to respond negatively to the uncertainty he personifies….
In the event, markets took Trump’s campaign promises for deeds and rose to new heights….
If that represented euphoria, there were signs last week that the market is regaining its senses….
In his 4th-quarter letter to investors in Elliott Management, the hedge fund he runs, Paul Singer said this:
‘There is a deep underlying complacency which we think permeates global financial markets. The basically-low volatility of the last eight years has led to a widespread assumption that financial market volatility has been bottled and will remain controlled.’
The implication is that volatility is not under control. That, like the tiger you mistakenly believe you’ve tamed, it retains teeth, claws and the ability to savage you….
Ray Dalio at Bridgewater Associates also issued words of caution:
‘Nationalism, protectionism and militarism increase global tensions and the risks of conflict. For these reasons, while we remain open-minded, we are increasingly concerned about the emerging policies of the Trump administration….’
It is dawning on investors that Trump’s ‘America first’ policies could stymie the very growth they are intended to generate….
Of course, this remains to be seen. It will play out in its own time. But it will play out against a specific backdrop – an over-priced US stock-market….
- The CAPE ratio is our preferred valuation tool….
You can analyze markets in many ways. At Money Truths we like to use cyclically adjusted price earnings ratio or CAPE.
Devised by Yale University professor, Robert Shiller, CAPE is sometimes referred to as the Shiller PE ratio…
CAPE is a variant of the price-earnings ratio or PE ratio – the price of a stock or a market divided by its most recent earnings per share.
It can help you decide whether a stock or market is expensive or cheap….
You generally look to buy an individual stock or market when PE ratio is low (cheap). You generally look to sell when PE ratio is high (expensive)….
CAPE differs from PE ratio in that it uses an average of 10-years’ earnings per share and provides a more balanced longer-term picture of earnings….
But the bottom-line objective remains the same: buy low, sell high….
- CAPE says US stocks are expensive….
Right now, the US stock market is flying….
The S&P 500 rides high. The Dow Jones trades close to 20,000.
Some investors believe US stocks will grow to the moon. Relative prices hardly seem to concern them. But they concern me. Right now, I believe US stocks are expensive.
When US markets closed on Friday, the S&P 500 index traded at a CAPE ratio of 25.79.
The S&P 500’s mean CAPE ratio is 15.64.
In other words, S&P 500 stocks are currently 60% more expensive than ‘normal’.
Here at Money Truths we wouldn’t buy a house, a car or a pint of milk at prices 60% more expensive than normal. We doubt you would either….
On that basis, we wouldn’t be a buyer of US stocks either. They are too expensive. Prices are overdue a correction….
- The Bear transforming into a Bull….
CAPE ratios tell us that US stocks are expensive right now – and represent a ‘sell’.
They also tell us that if you’re looking for a cheap stock market with plenty of potential for big future gains, don’t look any further than Russia.
Russian stocks have a CAPE ratio of just 5.9. There is currently no cheaper location in which to buy stocks.
The stock markets of the Czech Republic (8.9), Turkey (9.4) and Brazil (9.8) also have single-figure CAPE ratios – but none are as cheap as Russia.
Russia is typically personified as a bear. Right now, I’d suggest that a bull might be a more appropriate image.
Russian stocks are poised for big gains – maybe not next week or next month. Maybe not even this year.
But at some point, I expect prices to take flight like an old Soyuz satellite….
- It boils down to commodities….
The Russian economy revolves around commodities….
Early last year commodities were trading at their lowest levels in years.
Those low commodity prices hobbled the Russian economy and served to depress stock prices.
But things are looking different at the start of 2017….
The Bloomberg Commodity Index (BCOM) tracks 22 different commodities. It’s up 16.7% across the last 12 months.
Commodity prices are on the rise again. That’s good news for the Russian economy. And potentially very good news for investors prepared to be adventurous and invest in Russian stocks.
The slump in commodity prices depressed Russian stocks. The rebound will revitalize them.
- And international sanctions….
But the slump in commodity prices wasn’t the only factor depressing Russian stock prices….
Sanctions imposed on Russia by the international community after Putin annexed Crimea from Ukraine in 2014 also played a part.
Many of those sanctions remain in place. But Donald Trump’s friendly disposition towards Vladimir Putin could change all that.
Trump has indicated that he wants to work with Putin and to do deals with Russia. He was busy defending Putin’s reputation on US TV over the weekend. And Trump seems impervious to any criticism of his Putin-friendly outlook.
Trump’s sentiments have succeeded in defrosting relations between Russia and America – which reached their lowest point in a long-time under President Obama’s watch. It’s a big change. And a significant one for investors….
Last month, renowned US investor Jim Rogers was saying this to CNBC interviewers:
‘Trump is going to be friendly with Russia. That’s an enormous change. You’re going to see the rest of the world remove sanctions….’
His overall message was this: ‘Forget China, buy Russia….’. We concur.
- The market has risen but it is still cheap to buy….
Russian stocks have been on an upward curve over the last year – tracking commodity prices and getting lift from the positive noises coming from Trump during his election campaign. His subsequent election to president has given that lift an element of glide….
Russia’s MICEX Stock Market Index is close-up to its 10-year highpoint.
Investors might conclude that they’ve missed the boat. But they haven’t. The big gains are yet to come….
As commodity prices continue to rise and as political developments unfold – driven by Trump’s conciliatory stance towards Putin – Russian stocks will gain plenty of additional elevation.
Remember, that single-figure CAPE ratio tells us that Russian stocks remain cheap – compared to stock markets elsewhere in the world.
The downside in Russia is lower than anywhere else right now. And there is still plenty of margin for adventurous investors to farm.
- Head over heart is the key….
Putin is unpopular. His international adventures have won him no friends. Nor has his treatment of journalists who disagree with him….
In Britain, we take exception to him steaming warships up the English Channel and flying fighter jets into our air space.
Putin is a sabre-rattler. A bully. A man who enjoys flexing his muscles when he isn’t busy doing a Rambo impression for the cameras. He has not won our hearts.
But think what you will of Putin, his politics and his methods. Russia represents a great profit opportunity for investors who can bet with their heads. We say no more than that.
That’s how it looks from here….
I’ll be back next Tuesday.
All the best,