They’d rather buy Facebook at 80 times earnings than DOW Chemical Company at 13 times earnings. The simple fact is, where financial markets are concerned, most people couldn’t recognize a good deal if it hit them square in the face. If something’s selling for 80 percent off its peak price they won’t even consider it.
Of course, you can’t go by price alone. A certain stock may be beaten down because its business is failing. What appears to be a bargain price may not be such a good deal after all if shares eventually fall to zero.
Warren Buffett, the world’s most successful investor, noted that “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” He also clarified “…that a business or stock is [not] an intelligent purchase simply because it is unpopular; a contrarian approach is just as foolish as a follow-the-crowd strategy. What’s required is thinking rather than polling.”
These are certainly good reminders of the risks and pitfalls of trying to buy deep value. You could end up owning pure trash. Nonetheless, the contrarian bug in our ear is always eager for a gut wrenching contrarian play…one that borders on astutely shrewd to insanely suicidal. Here’s what we mean…
One Man’s Opinion On Russian Debt
“Why It’s Time to Buy Russian Debt,” teased an article headline published by Bloomberg over the weekend. Naturally, this immediately sparked out interest. Why would anyone buy Russian Debt at the moment…or ever?
“Standard & Poor’s downgrade of Russia to one notch above junk grade makes sense as a reaction to political news from Ukraine, not as an economic judgment,” explains Leonid Bershidsky. “In reality, dollar-denominated Russian debt is probably a better buy today than it has been in years.”
According to Bershidsky, S&P’s rationale for the downgrade, which was based on the sudden rise of capital flight from Russia, is not a meaningful number for determining Russia’s creditworthiness. He believes it is a one-time event that will quickly reverse when tensions in Ukraine abate.
“The only numbers worth considering when making investment decisions on Russian debt are solid ones such as current debt levels, foreign reserves and the fiscal position,” says Bershidsky. “Russia, now rated by S&P on a par with Brazil, has a government debt of 7.9 percent GDP, compared to Brazil’s 59.2 percent; S&P predicts that the Russian government’s interest payments will not exceed 2.3 percent of revenues by 2017; and it has the third biggest foreign reserves in the world, at $482 billion, covering 20 months of imports.”
“Given all this, ranking Russia’s debt just above junk level is a matter of faith and political prescience, or lack thereof, rather than economics. The fact that Russian five-year, dollar-denominated bonds yield 4.1 percent, compared to 2.7 percent for Brazilian ones, is a signal to buy underpriced Russian debt while the weight of political guesswork is pulling it down.”
No doubt, Bershidsky raises some good points. But we also must apply Buffett’s advice with respect to a business or a stock, to a country. Just because Russia is unpopular doesn’t make its debt an intelligent purchase.
What if tensions in Ukraine don’t decrease? What if they escalate? What would Putin do if backed into a corner?
Yesterday, the U.S. announced it would be issuing further sanctions against Russia. “The Department of the Treasury is imposing sanctions on seven Russian government officials, including two members of President Putin’s inner circle, who will be subject to an asset freeze and a U.S. visa ban, and 17 companies linked to Putin’s inner circle, which will be subject to an asset freeze,” said the Whitehouse in a statement.
If you recall, last month Sergei Glazyev, an adviser to Russian President Vladimir Putin, threatened to use Russia’s U.S. government debt holdings as an economic weapon…
“We hold a decent amount of Treasury bonds — more than $200 billion — and if the United States dares to freeze accounts of Russian businesses and citizens, we can no longer view America as a reliable partner,” said Glazyev. “We will encourage everybody to dump U.S. Treasury bonds, get rid of dollars as an unreliable currency, and leave the U.S. market.”
Who knows if Glazyev’s plan would actually crash the dollar? But given Putin’s past actions, he may just give it a try and see if he can exact some economic revenge. It’s Putin’s turn…standby for his next move.
Fortunately, new technology and good ole American ingenuity have converged to strike a blow to Putin’s energy stranglehold on Europe. Discover how you can help and prosper today.
for Economic Prism