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Why I'm Still NOT Buying the World's Cheapest Market

By Kim Iskyan, editor, Global Contrarian
Monday, January 5, 2015

Russian stocks are cheap... but I'm still not buying today.
Last month, my colleague Steve Sjuggerud told you why he was NOT buying Russian stocks... yet. In short, Russia had not quite reached the point of "maximum pessimism"... the point when an investment becomes so cheap and hated that it can only go up.
And that's still true today. Let me explain...
As I told my Global Contrarian readers last month, the Russian economy is likely to shrink by at least 4% this year... Russia's ruble was the world's worst-performing currency last year... And Russia's stock market was down 45% in 2014.
Around a quarter of Russia's economic output is connected to the energy sector. So the decline in the price of oil in recent months has hurt the economy. Sanctions imposed by the U.S. and the European Union on Russia over the conflict in Ukraine have also squeezed Russia's economy. And the perception of higher political risk in Russia is discouraging investment.
Now, the country's banking sector is also in the early stages of what could become a big crisis.
Two weeks ago, Russia's central bank had to step in with around $540 million to support Russia's 32nd largest bank, Trust Bank.
With the ruble depreciating so fast, the bank experienced a sharp increase in withdrawals... and the central bank had to step in to prevent the institution's bankruptcy.
Five days later, the size of the bailout was increased more than four times. That means things were looking very dark... for Trust Bank and for Russia's banking sector in general.
You see, after one bank fails, the risk increases that others will too. When banks stop trusting each other, the interbank lending system – where banks extend short-term financing to each other – freezes. The interbank lending system is like the oil of the engine of the entire banking sector. So when it breaks down, it sparks more defaults.
Then the central bank has to step in with more money to ward off a total meltdown of the banking system. This is what happened during the last two big financial crises in Russia in 1998 and in 2008-2009. I was living in Moscow during those times... and what's happening to the banking sector right now is all too familiar.
Despite the bad news coming out of its banking sector, the Russian stock market bounced 31% in dollar terms a couple weeks ago – though it's still down 17% from early December levels.
Markets usually lead the economy. Share prices move based on anticipation of what will happen and not on what is actually happening. So a market recovery usually happens well before an economic recovery.
That's why we're still not investing in Russia today. Things could get a lot worse before they get better.
As I told my readers last month, I'll be waiting for a few signs to tell us we've reached the point of maximum pessimism – a big corporate default or a large government bailout to prevent default and when foreign investors are no longer interested in Russia.
Today, I'm adding another one. A big banking failure or a systematic collapse of Russia's banking sector will also be a sign that we're seeing the point of maximum pessimism.
As Steve told you last month, investors will be able to make triple-digit profits once the Russian market bottoms. But it's still too early. We'll be keeping an eye on the situation and let you know when it's time to invest.
Kim Iskyan

Further Reading:

Although Steve isn't buying Russia yet, he does think the bull market in U.S. stocks is far from over. "Don't let fear or emotions push you out of U.S. stocks," he writes. "You want to own them in 2015." Find out why right here.
Dan Ferris recently told DailyWealth readers about one cheap and hated sector that he IS buying today. "This could be the beginning of the five- and 10-bagger returns I expect to see in a lot of small resource stocks over the next few years." Get all the details here.

Market Notes

Allstate (ALL)... insurance
Wells Fargo (WFC)… America's largest bank
Bank of America (BAC)… bank
SunTrust Banks (STI)… bank
Morgan Stanley (MS)… financial services
T. Rowe Price (TROW)… mutual funds
Southwest Airlines (LUV)… airline
JetBlue (JBLU)… airline
Delta Air Lines (DAL)… airline
Disney (DIS)… entertainment
Wyndham Worldwide (WYN)… hotels
Home Depot (HD)… home improvement
Lowe's (LOW)… home improvement
Sherwin-Williams (SHW)… paint
Express Scripts (ESRX)… pharmacy benefit manager
Dollar Tree (DLTR)… dollar stores
Comcast (CMCSA)… cable television
Consolidated Edison (ED)… utility
Exelon (EXC)… utility
Macy's (M)… department stores
Nordstrom (JWN)… department stores
Target (TGT)… department stores
AutoZone (AZO)… car parts
Office Depot (ODP)… office supplies
Staples (SPLS)… office supplies
WD-40 (WDFC)… grease

Not many... It's a bull market!

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