Russia, Oil and the Global Low

I don’t know whether Goldman Sachs would like to review their BRICs MODEL. Former Bear Stearns CEO Alan “Ace” Greenberg says the investment-banking model he helped pioneer is defunct and that Wall Street is dead. If the Wall Street is dead and so is structured finance, I don’t know how far behind is the BRIC model.
We talked about BRICS first time in DEC 2007 and this is what we said “The performance of the Russian market over the last seven years throws the BRIC emerging growth model out and suggests it was more about the commodity boom. And the very fact that markets have not corrected till now as we head into the cycle turn zone suggests that the corrections should be sharp and not the slow sideways churning that we saw during the start of the cycles.” We also did an issue on LONG MAC, SHORT RUSSIA on 12 Aug. What happened, Russia crashed 80% along with OIL.
Even calling the OIL top did not turn out that tough. The sentiment was extreme even then. This is what we said on May 12, 2008 “Nothing can rise exponentially, even if it is crude Oil. The asset’s exponential rise is more an indication of an ending trend and not vice versa. Oil heading to $200 is an OPEC belief. Does OPEC really know?” Our contrarian view also evoked some tough responses. A forum commentator mentioned “what goes up must come down’ does not add much to the debate.”
Well! what went up did come down. And this coming up and going down is what we call a cycle. Prices may go up for a few generations and then create a generation long depression. Actually prices go up and down cyclically even on smaller time frames, but it’s the larger cycles which get more attention. Oil’s fall to dollar 37 low does give cycles more credit than OPEC, investment bankers and energy investors put together.
From one extreme, the sentiment is shifting to the other now, as both Oil and Russia are now featured negatively. We don’t see many long Russia stories, just like we don’t see any long Oil stories. What we hear are dollar 5 forecasts, and how recession and auto demise have killed the Oil prices. Russia’s main exchange MICEX shut down for two days on Sep 16 after it lost 17% in a few hours. This was just like many freezing markets shut worldwide. Now the conventional reasons we hear are the over leveraged banking sector, painful process of restructuring, falling oil prices, real estate collapse, growth grounding to a halt, Russia’s war with Georgia, spooked foreign investors, capital flight, cascading margin calls. There are even comparisons of the current Russian crisis with the 1998 Rubble crisis. A few even say the gloom is not just for 2009, but also about 2010 and 2011.
Even if the magnitude of this slow down is larger than 1929 or 1998 crash, there are huge opportunities after any historical collapses. And if our Oil dollar 500 forecast has some merit, it will not be long when Russia will look like a missed bargain. 500 billion reserves and the stock ownership limited to 2% of the affluent population do give some positive highlights. Oil, gas, and metals account for some 80% of Russia’s exports. The move up on Oil can trigger not only the Russian market upside, but also stir up global activity on equity and other asset classes. The 1998 analogy with 2008 is no chance coincidence. The decade cycle has happened in many markets around the world (Simplifying BRICs). Panic lows are generally accompanied by huge volatility, also the case here.
The linkage between Russia and Oil can be extended to world economy. Markets may come down together, but they don’t always rise together in sync. The move down is fast and the move up slow. So since markets take more time to go up or create, one can see regional or sectoral leadership. All the global Indices and assets that we track suggest a turn up across the global indices. Some emerging markets are showing leadership while a few markets suggest further downside. The German DAX and American DOW also look ready to bounce from current levels, but with potential retests of previous lows and new lows late Q1 2009. But in any case a large year long turn cannot be ruled out from the respective time window. This means 2009-2010 may not be as negative as market perception. Significance of the 2009 bottom can also be highlighted by the 9-12 year Juglar cycle on DOW. 1998 till 2009 fulfills 11 years making the impending low a 4 year low. One can also see three smaller cycles in DOW in the 11 year time frame. One from 1998 to 2002, the early economic cycle witnessing the technology peak, the middle economic cycle from 2002 to 2006 with the Industrial peak on stocks like 3M and Caterpillar. The mid economic cycle was subdued because of the successive US presidential term (Yale Hirsch US presidential Cycle) and now the 2008 peak marked with the late economic cycle Oil peak and peak on Exxon and Chevron. Call it coincidence, but this is a clear example of three 3.3 year Kitchen cycles making a large business cycle bottom in 2009. The Russian and Oil turn up is a leading trigger confirming this impending bottom before the next 3-4 year up cycle starts.
So get ready for a choppy ride up on DOW, DAX till Mar – Apr 2009, after which both might head for a retest or potential new low in Jun 2009. And even this muted bounce is enough to push DAX till open gaps at 6,000 (up 50%). According to intermarket cycles, French CAC seems better placed compared to DOW and DAX. On the emerging market side, SSEC Shanghai is also witnessing a cycle up. SSEC also had an exaggerated fall (73%) among world indices and could see sizeable up moves for more than a few quarters. India is also not out of the woods yet and suggests further weakness and just muted bounces in the first quarter of 2009. A muted bounce on India is in sync with our Primary preferred 4 wave sideways view. The cycle on Brazil also suggests further downside. This could be explained from the CRB commodity Index cycle, which is still pointing lower for Metals and the other CRB components.
On the currency side Dollar index is still pointing to impending reversals early Jan 2009. Yen suggests a reversal too i.e. a weakness for a few months against dollar. Nikkei suggests a first quarter move up also. Wealth creation is a lot about cycles. And luck is when you are on the right cycle at the right time. We don’t know of anything called sustained genius, for us genius is a part of the creative cycle which may or may not be in sync with a man’s economic cycle. And since our rational mind does not believe in the sun creating economic cycles and patterns ruling us, we can just call it God (now that we believe in him more), who gives us a chance to bring our genius in sync with the market low every 3.3 year. The only catch is, believing in it.