Scalper1 News
Oil continues to trend lower. The Russian ruble is also weak. There has not been more panic in the Russian market yet, but this does not mean that there will be no panic at all when oil drops further. I published my initial bear thesis on the Russian market (NYSE: RSX ) on June 26. Things went as I expected and RSX declined 9% since then. I must admit that RSX held fairly well, as oil prices declined and the economy showed no signs of rebound. However, I think we will see the true downside potential of RSX later. It is obvious that while RSX declined this month, there was no panic. The decline of the Russian market is by no means comparable to the recent performance of the Chinese market , although the state of affairs for the Russian economy is far worse than for the Chinese economy. My explanation for this is the lack of players on the Russian market. Russian market went out of favor after the oil crash of 2008 – 2009 and never really recovered in terms of trading activity. Recent data ( Google translate link ) from the Moscow Stock Exchange confirms this thesis. For example, the volume of stock trading declined by as much as 22% in May 2015 compared to May 2014. In my view, a significant number of investors who wanted to get out of Russia already completed this task. It also turns out that the rebound from December 2014 lows was on low volume, which means that there are less players to panic when things go south. However, this also means that there will be less liquidity on the market in case of negative events. The main risk for the Russian market is the continuing decline in the price of oil. The decline in oil price hurts RSX in two ways. The first one is obvious, as RSX has 43.54% of its portfolio in Russian energy companies. The second blow is the damage that low oil prices do to economy, hurting almost every other company in the portfolio of RSX. There have recently been additional negative news for the retailer Magnit, which accounts for 7.62% of RSX holding. Sergey Galitsky, the founder of Magnit, told ( Google translate link ) the press that the company could work without him. For Magnit, Galitsky is the same that Steve Jobs was for Apple, and his departure could seriously hurt the business, especially in the Russian business reality, where a lot depends on individuals and not on processes. Back to oil. Here and there I read bullish articles on oil. The main bullish argument is that oil prices are too low to stimulate investment, which will ultimately lead to a rebound. If we think about a five or ten year period, then I agree with this statement. If we talk about next few years, this might not be the case. The examples of coal and iron ore markets showed us how long prices could decline despite the fact that producers are losing money. Also, producers with lower costs could try and increase production in order to make some additional money. In severe downturns, costs also go down fast. For my thesis to be valid, oil does not need to be in a severe downtrend for years. In my view, low oil prices until the end of this year will be enough to bring RSX back to the lows of December 2014. So far, everything went according to plan in the RSX trade. I think that there’s more weakness to come, as the decline of oil prices pressures Russian economy and the Russian ruble. Disclosure: I am/we are short RSX. (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. Scalper1 News
Scalper1 News