The Russian occupation of Crimea is taking its toll on the emerging economy: “Moscow stocks have endured the worst bloodbath so far, with a 12 percent plunge on Monday…the rouble has plunged to record lows, forcing the central bank to raise interest rates by 1.5 percentage points.” Furthermore, “losses will escalate if Western nations hit Moscow with economic sanctions. [Secretary of State John Kerry] has named asset freezes, visa bans and trade isolation as possible measures.” (Russian markets are rebounding this morning, however, as Putin appears to be reconsidering violence in Ukraine) Here’s something to consider: the state-owned gas company Gazprom is projecting increased European dependence on Russian gas supplies, but there’s a kicker: most of that supply flows through a Ukrainian pipeline. Mohamed El-Erian says that while Ukraine may not be systemically important to the global economy, it may become a symbolic battleground for the East vs. West geopolitical rift which has been surfacing in other parts of the world as well (e.g. Syria). All this comes at pretty much the worst timing: “Over $2 billion has fled Russian equity funds this year, Morgan Stanley estimates, after 2013 outflows of $4.2 billion.” Here are 5 things (really 3 things: #s 1-3 are just different examples of why asset allocation is a good idea) investors need to know about the Ukraine crisis: 1-3) With proper diversification and asset allocation in your portfolio, you should be prepared for something like this (e.g. holding U.S. Treasuries even after a year like 2013, holding natural resources and gold as “conflict-insurance”), 4) Use selloffs as an opportunity to buy on the cheap (e.g. “the Russian market overall is on just five times forecast per-share earnings”) and 5) U.S. equities could be unaffected by this for several different reasons (how do this affect the taper schedule? Investors usually flee to the $, etc.). Also, in a study of “how U.S. stocks reacted since World War II to anything ranging from wars, near wars, assassinations, assassination attempts, terrorist attacks and financial collapses,” the median % drop in the stock market is about 5, and recovery typically takes about 14 days. That being said, “a U.S. trade boycott of Russia…could do some damage to Washington exporters including Boeing Co. and seafood producers…Russia ranks No. 14 among nations receiving exports from Washington state, importing $1.5 billion in goods in 2003, of which $1.2 billion was aircraft.” Speaking of sanctions, Sergei Glazyev, “who is often used by authorities to stake out a hardline stance but does not make policy, was cited by RIA news agency as saying Moscow could recommend that all holders of U.S. treasuries sell them if Washington freezes the U.S. accounts of Russian businesses and individuals.” Also: Russian companies shouldn’t pay back their U.S. bank loans. Also: he feels pretty good about coming out of this thing with a “big profit to ourselves.” Meanwhile, Putin does care about bond yields; doesn’t care about Western Leaders showing up to his G8 summit.
On The Radar: Municipal Pensions
The City of Philadelphia has reached a $1.86bn deal with UIL Holdings Corporation over the sale of Philadelphia Gas Works (PGW): “If the deal is approved, the city will use the sale money to pay off PGW’s bond obligations and liabilities — including fully funding the PGW pension plan. [Philadelphia Mayor Michael Nutter] said he expects another $424 to $631 million to remain left over. That money would be put towards funding the city employee pension fund, which is currently less than 50 percent funded.” Meanwhile, Detroit’s new number: $85 million. And this one includes casino revenues.
“Regional banks are largely tied to the fortunes of their local prefectures. Aside from Tokyo, Osaka and a few others, the outlook for the working-age population — and thus the prospect for loan demand — is grim…Twenty-three Japanese banks melded into today’s four major banking groups over the tumultuous 15 years of post-bubble economic and financial crisis through 2005. Regional banks, which extend roughly half of Japan’s $4 trillion outstanding bank loans, have largely been spared the knife so far.”
Banamex USA, a Mexican based bank affiliated with Citigroup, is at the root of a $400mn fraud investigation, as well as a separate money-laundering investigation. “Mexico accounts for some 13 percent of Citigroup’s total revenue.”
“As economists blend the standard listing information with other data about sellers, they are vastly improving their predictions for what final sales prices will be. This could potentially help home buyers, real-estate agents and home builders — or anyone betting on housing stocks — get an earlier read on where prices are going.” So we’re trying to make real estate easier to day trade. Also, I think the home price index is called Trulia?
For some reason the Fed would like us to believe that QE is actually pretty conventional, you guys.