David Cai
david@maucapital.com
August 19, 2008
Earlier this month, the Russian stock exchange index plummeted with the news that Putin has elected an ex-KGB officer with no prior mining experience as CEO for the Russian nickel mining giant Norilsk (it has since continued to slide). Such events explain the recent weaknesses among Russian stocks and ADRs trading on the NYSE. Coincidentally, it occurs while the Freddie Mac and Fannie Mae debacle is still fresh on investors' minds. With major news headlines commenting about various Freddie and Fannie matters, one statistic that jumps right out but is seeing no comment is that out of $947 billion of Freddie and Fannie papers being held in foreign exchange reserves, $100 billion is held by Russia. The foreign reserve is Russia's most prestigious component but Putin's willingness to expose such large sums of reserve to such risk to gain a few basis points in yield is unthinkable.
As GSEs, Freddie and Fannie present the notion of being too big to fail, and their papers are traded like Treasuries with a few extra basis points in yield. Though not guaranteed by the U.S. government, most foreign wealth funds are brazenly acting as if they are. Putin's reasoning behind in buying such papers and not Treasuries is anyone's guess. Let's hope that the answer is that some less bright FOREX traders purchased those papers simply for the extra yield and risk, and nothing else.
With Paulson's July 13th announcement of the bailout, the U.S. debt level suddenly jumped from $9.5 trillion to $14.8 trillion. Paulson explicitly stated that there will be no recriminations made on the Freddie and Fannie management-no villains. But they are the ones who walked away with gigantic bonuses due to phantom earnings generated by manipulated financial statements. These entities should be delisted from the exchange due to their inability to file financial results.
Over in Pakistan, it's found that the country's nuclear technologies are being exported to
countries like North Korea and Iran. This is a messy situation because with the involvement of Iran and it's directly influencing the oil market. This, in turn, increases the uncertainty and volatility of the stock market.
Overall, with all these global issues on hand, the total global risk has increased for investors. Investors can shelter themselves in alternative investments such as commodities and gold. Assets that have the least opacity to the global risk are favorable, assets like owning commodities and metals themselves, and commodities- and metals-producing companies.
Regarding the issue of off-shore drilling: it is largely favored by American voters and so will most likely be approved down the line. In my recent article, I stated that the value of the US dollar will move opposite to the price of oil, so there's every reason to believe that a continually weak dollar will energize the argument to drill. A recent statistic from an international oil company executive states that adding all the production from the top 7 largest oil producing companies including BP, Shell, Exxon, Chevron, Total, Petro China, and Petro Brazil, we are seeing the 4th straight quarter of declining oil production. On top of this, approximately 600,000 boe/d is lost due to partnership sharing agreements, which these companies have been failing to disclose.
The current oil price helps these companies to generate a higher top line to compensate for the higher bottom line due to cost-inflationary pressure. In retrospective, a lower crude price could actually alleviate some of the cost pressure off these companies.
We've got to assume that something big is going to occur, and oil is a solid sector for the futures Bull, which means you need to start looking at the potential winners, and XOM, SU and PTR are some of the better-positioned companies. The point is that (i) you have to pick sound companies, and (ii) buy and sell their shares at attractive prices so that your dividends-to-basis is always rising. However, only a change in oil industry policy will trigger the event. Don't expect that to occur in this election year, but be prepared for it in 2009.
On food issues, constraint in the global food supply is spreading like wildfire and food companies will be in more demanded situations, exemplified by Russia's decision to form a state trading exchange for half of the country's cereal export. The European Union points out that Russia is using food futures as bargaining power like they are doing now with oil and gas in the global market. All these came when the Doha round collapsed, where countries are not ready to change their agriculture policy even when they can agree on many other issues. In the end, Food kills the Doha round.
eMail Article
