Speculative Long- Russia

Today we are intitiating a Speculative Long position on Russia via the Market Vectors Russia ETF (RSX).

We believe that a compelling investment argument is short, so we will get to the point.

Everyone knows the risks:

1) greater government control,

2)Russian Oligarchs going cap in hand to the Kremlin for loans,

3) debt burdened companies,

4) a stock market that gets closed for days at a time,

5) geopolitical risks,

6) plumetting energy prices,

7) a sinking Ruble

We know this, so we will highlight that the Russian RTS index, which is USD denominated is 80% off its high! If we use this 80% decline as a yard stick, the total market cap of Russian stocks is far below GDP. Historically this has poven to be a very good time to buy a country's equities. Dresdner Kleinwort estimates that the RTS had a market cap of $1.1 trillion USD at the end of 2007. If we estimate a peak 10% gain before the plunge in 2008, we attach a $1.2 trillion USD peak market cap.

An 80% decline leaves equities at $240b in market cap versus an economy of $1.7 trillion (nominal) per the CIA factbook. We cannot ignore a country whose equity market is about 15% of GDP.

To be conservative we will assign zero GDP growth and knock off 1/3 of the CIA Fact Book's GDP estimate for currency depreciation, which still leaves us with a better than $1.1 USD economy. By this rough calcuation, the RTS index is still only 21% of GDP.

Also, we do not think the Kremlin will allow the major Russian firms to go bust, but rather, will support them. We also regard this as a play on emerging markets and commodities.

Further risks include a blowing out of minority shareholders by the gov or an even greater plunge in the Ruble.

We are also initiating a purchase of the T Rowe Price Emerging Europe and Meditteranean fund (TREMX). It is about 60% Russia, with equally destroyed Kazakh and Egyptian equities, along with some Turkey.

Positioning is up to the individual. This is not for the weak of heart, but we believe that potential returns are anywhere from 50% precent plus. We would prefer to see an even weaker Ruble before we buy. This is a risky trade and we may be wrong due to the currency.

As always we are not making recommendations for anyone, but outlining our personal investment decisions. We are not registered investments advisors and do not give investment advice.


http://finance.yahoo.com/echarts?s=RSX#symbol=RSX;range=2y

http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nominal)

http://www.dresdnerkleinwort.com/eng/documents/dresdner-kleinwort-equity-issuance-russia-article.pdf