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RSX: What Happened?

Summary RSX enjoys a rally while oil prices continue to fall. Political developments are the main reason for this. Fundamentally, Russia is under increased pressure due to falling oil. Earlier in October, I wrote an article discussing what worked and what did not work in my initial Market Vectors Russia ETF (NYSEARCA: RSX ) bear thesis. What interested me most was why RSX gained more support than I expected. I arrived to the conclusion that the combination of capital inflow and stronger ruble played a role in RSX’ relative strength. Nevertheless, I remained bearish on RSX. My bearish view on oil played a key role in this thesis. RSX’ top holdings Surgutneftegaz ( OTCPK:SGTPY ), LUKOIL ( OTC:LUKFY ), Tatneft ( OTCPK:OAOFY ) and Rosneft ( OTC:RNFTF ) are directly dependent on oil prices. Banks Sberbank ( OTCPK:SBRCY ) and VTB Bank are dependent on oil indirectly, as weaker oil leads to weaker Russian economy. Polyus Gold ( OTCPK:OPYGY ), Uralkali, Polymetal ( OTCPK:AUCOY ) get hurt by low commodity prices. This list can go on and on… However, as I’m writing this article, RSX gained 6.6% in two days, while oil prices remained under pressure – WTI is trading near $42 per barrel and Brent is trading below $44 per barrel. So, what happened? French tragedy boosted outlook for Russia G-20 leaders met after the horrific terrorist attacks in Paris. The sense of urgency made them turn to Russia, seeking to unite efforts on war with terrorism. The change of tone towards Russia was so dramatic that S&P even stated that new developments could help lift sanctions and boost Russia’s credit rating. In a separate event, Russia proposed Ukraine to pay off its $3 billion of debt by $1 billion per year starting from 2016. Russian also wanted U.S. and E.U. guarantees for Ukraine’s debt. If this deal is executed, it will effectively mean a new emission of Russia’s dollar-denominated debt. Currently, the country is cut from capital markets because of sanctions, so such a development will be a major breakthrough. Russia will become investable again. This was probably what went in the heads of fund managers when they looked at their exposure to Russia (there was little if any, I suppose). So, they just pushed the buy button regardless of oil prices. This is a bet that sanctions will be lifted by mid-2016, boosting the troubled economy. Is it sustainable? In the past few days, I’ve been thinking about whether my own perception of the Russian economy disturbs me from some “real picture”. Perhaps, all the bad news – poor economy, falling oil, various inefficiencies – are already priced in RSX and I’m just stubborn not to admit it. There is such a possibility. However, I don’t think the current rally will be sustainable unless oil prices actually rebound. The first reason for this is the Russian ruble – it became too strong in recent days. After a long and hard debate, Russian government approved the country’s budget for 2016. The main variable in the budget is the price of oil, which is denominated in rubles. The ruble-denominated price that Russia expects to get in 2016 is 3165. As I am writing this article, the ruble-denominated price of Brent oil is 2837 – way too low for the budget. As Russia’s reserve fund could run empty by 2016, according to the Ministry of Finance, the Central Bank may be forced to do something about the ruble if it stays strong. The only viable way is to cut the key rate, which stands at 11%. At the same time, the Fed might finally raise the rate, boosting the dollar and further hurting commodities. The combination of these two possible events will be detrimental to Russian securities. The recent enthusiasm in RSX may be short-lived as investors realize how much of a burden are low oil prices to both Russian oil producers and the economy in general. There’s most likely a long way before sanctions are lifted, and please remember this is politics – you can smile and say one thing and do the opposite. I think there are fundamental reasons to be very concerned about the Russian economy. However, in the light of recent events, anyone interested in shorting RSX should proceed with caution. 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.

Growth Beating The Pants Off Of Value In 2015

2015 has been the year of the “FANGs.” Investors have fixated on just a handful of glamorous tech stocks – Facebook (NASDAQ: FB ), Amazon (NASDAQ: AMZN ), Netflix (NASDAQ: NFLX ) and Google ( GOOG , GOOGL ) (now Alphabet) – that have held the broader market afloat even while earnings this year for American stocks have been mostly disappointing and the “average” stock has actually been falling. For lack of anywhere else to go, the investing public is crowding into a very small handful of recognizable names and hoping for the best. Consider the relative performance of the growth and value segments of the S&P 500. (Standard & Poor’s breaks the S&P 500 into two roughly equal halves, based on valuation, momentum and other factors.) Year to date through November 12, the S&P 500 Growth index – which includes the FANG stocks – was up 3.9%. Its sister, the S&P 500 Value index, was actually down by 5.5%. This is a peculiar market in which cheap stocks are getting cheaper and a handful of extremely expensive names keep getting more expensive. As a case in point, look at the advance-decline line, a simple measure of market breadth. Starting in April, the advance-decline line started to trend downwards and, apart from a brief rally in October, really hasn’t stopped sagging since. This means that fewer and fewer individual stocks are still rising, even while the market grinds slowly higher. In a “healthy” bull market, the advance-decline like rises along with the major stock indexes. So when you see an “unhealthy” market like this, one of two things has to happen. Either investors start to spread their bets across a wider swath of the market and market breadth improves… or they finally throw in the towel and sell the few remaining leaders. So, how on earth are we supposed to invest in a market like this? You really have two options. The first is simply to ride the momentum of some of these glamor names while it lasts. Sure, the FANGs are expensive. But that doesn’t mean they can’t get a lot more expensive in the short term. So, riding the momentum is a perfectly viable strategy so long as you’re ready and willing to sell at the first sign of weakness. The second option – and the one I am following in my Dividend Growth model – is to look for deep values amidst the carnage, or stocks that are already so cheap, you don’t mind if they get cheaper. While the S&P 500 Value index is down only 5.5% this year, there are plenty of stocks that are down 30% or more. Several midstream oil and gas pipeline stocks are currently sitting at multi-year lows and are sporting cash distribution yields I never expected to see again. And of course, there is always the third option: Keep a larger percentage than usual of your nest egg out of the stock market altogether, and simply wait for better prices across the board. My recommendation? Try some combination of the three. Keep your long-term portfolio heavy in cash and deep-value opportunities, but set a portion of your portfolio aside for more aggressive short-term trading. This article first appeared on Sizemore Insights as Growth Beating the Pants off of Value in 2015 . Disclaimer: This article is for informational purposes only and should not be considered specific investment advice or as a solicitation to buy or sell any securities. Sizemore Capital personnel and clients will often have an interest in the securities mentioned. There is risk in any investment in traded securities, and all Sizemore Capital investment strategies have the possibility of loss. Past performance is no guarantee of future results. Original Post

Why Diversification Is An Important Tool Of Managing Risk

Summary Even the famous investors sometimes get it wrong. Pershing Square and Herbalife and Valeant Pharmaceuticals. Greenlight Capital and CONSOL Energy. Casablanca and Cliffs Natural Resources. Icahn Capital and Chesapeake Energy and Transocean. Introduction Diversifying an investment portfolio is more than just buying stocks in unrelated industries. It can also mean portioning a portfolio between multiple asset types such as equities, bonds, real estate, currencies, etc. And then, there is another layer of diversifying within each asset type. Bonds can be diversified many ways: government versus corporate, investment grade versus high yield (otherwise known as junk), Treasuries versus municipals, and domestic versus foreign. On top of that, investors need to consider holding a variety of maturities that will meet income needs today and in the future. Think of laddering the bond portion of a portfolio as a key element to be considered. The point of this article is to encourage investors to consider diversifying to reduce the risk inherent in holding too large a percentage of any on assets. The secondary theme is that every investor needs to do some due diligence on their own to satisfy themselves that each investment made is appropriate for that investor. Some investors like to follow the investing decisions of high-profile investors that have successful track records. But even then, diversifying against risk is important. Even the famous investors sometimes get it wrong Some of the best-known and most knowledgeable investors can be wrong or way too early. Sometimes even the smartest investors outsmart themselves by taking a large position that they believe in and holding onto it well beyond a reasonable period of loss, unwilling to admit a mistake. It can be a matter of pride and ego. Those are terrible reasons to hold onto an investment. Here are a few examples of mistakes made recently by some high-profile investors in the hedge fund arena. Pershing Square ( OTCPK:PSHZF ) and Herbalife (NYSE: HLF ) and Valeant Pharmaceuticals (NYSE: VRX ) Pershing Square is led by Bill Ackman and has recorded some excellent returns in the past. Lately, though, things have not been going Mr. Ackman’s way. I wrote an article about another multi-level marketing (MLM) company and got slammed by some of Ackman’s disciples. Here is an example comment: “Do you even own a passport? BTW they are not but are receptive to good skin care products. MLM is scrutinized in China. Have you ever studied Amway and AVP? When the Ackman atom bomb burns HLF to ashes NUS USANA and the likes will be part of the inferno.” – LeMarJackson. The article was written in May 2014. HLF’s shares have not fully recovered from the public frontal assaults by Ackman, but the shares also have not tumbled. In the end, the Pershing Square hedge fund investors (and Mr. Ackman) have lost money; a lot of money being short in a concentrated bet. Valeant has also been a losing position for Ackman. Thus far, Pershing Square has lost about $2 billion on this one investment alone according to this Wall Street Journal article. That one investment accounted for nearly 20 percent of the fund’s assets at one point, and the stock fell in value by 65 percent. These are just two examples of why we need to keep our emotions out of our investment decision-making process, why we need to diversify our holdings, so that we do not risk losing too much on any one position, and why we all need to do some research to confirm the investment thesis of those whose leads we like to follow. Greenlight Capital (NASDAQ: GLRE ) and CONSOL Energy (NYSE: CNX ) Greenlight Capital is managed by David Einhorn, another admired billionaire hedge fund investor. He has also been right a lot, and made his investors a lot of money (but probably not as much as himself). According to this article from money.cnn.com, Greenlight Capital is down about 12 percent this year, primarily due to investments in energy. One of his large position, CNX, is down about 65 percent this year. Just another reason not to follow blindly and to not concentrate too much into one position. The effects can be devastating. Casablanca and Cliffs Natural Resources (NYSE: CLF ) Another activist investor who had done a lot of homework was Donald Drapkin, a former protégé of Ron Perelman and head of Casablanca. Casablanca purchased about 5.2 percent of CLF’s shares outstanding for an average price of about $25 per share. The plan was to oust senior management and replace the CEO with a veteran who had managed turnarounds before, cut costs and close unprofitable mines to improve margins. CLF’s stock now trades at about $2.34 per share. That is a loss of more than 90 percent so far. I am glad I did not follow Casablanca into this mess. Icahn Capital (NASDAQ: IEP ) and Chesapeake Energy (NYSE: CHK ) and Transocean (NYSE: RIG ) Carl Icahn has a net worth of over $20 billion the last time I checked. So, he must be doing something right. He also has a long enough time horizon and the wherewithal to withstand temporary setbacks. He has made significant investments in the energy sector. He may be right in the end, but so far, some of his large positions in that sector are sucking wind. CHK is down almost 70 percent this year while RIG is down only 21 percent since January 1st, but off more than 43 percent in the last 12 months. IEP is down in value over 24 percent since the beginning of the year. It has made some good investments that partially offset the blunders. This is the case with all of the above investors/funds. They did a lot of homework/analysis before making these investment, and still got it wrong. Conclusion Diversification may have saved the respective bacon of these outstanding investors keeping them alive to fight/invest another day. We may not all be able to avoid making mistakes over our investing lifetimes, but we can take precautions to minimize the risk when we are wrong. For those who might be interested, I published a series on Seeking Alpha recently that explains ” How I Created My Own Portfolio Over A Lifetime ” by that same name. I take a rather unique approach to investing that those who have already stumbled onto the series seemed to really like. Likewise, I also use an approach to hedging that is different but keeps costs low. It is not for everyone, but so far my experience has proven very favorable. I have captured gains of 600 to over 2,700 percent on some positions to help defray the cost and protect my core holding through the recent turbulence. As always, I welcome comments and will try to address any concerns or questions either in the comments section or in a future article as soon as I can. The great thing about Seeking Alpha is that we can agree to disagree and, through respectful discussion, learn from each other’s experience and knowledge.