Trade War

Written in early August.
Let’s make no bones about it; the West is now in a trade war with Russia.  The latest round of EU and US sanctions on Russia, instigated by Washington over the Baltic crisis has triggered a retaliatory response from Russia, which is equally designed to strike at the bottom-line of a number of European companies. While, it may be too early yet to estimate accurately the profit damage caused from the fallout of Russia’s retaliatory rounds of sanctions, nonetheless a number of EU companies have been targeted and are likely to bleed.  

First in Russia’s gun site is the banning of European airlines from flying over Siberia on busy Asian routes. The Russian move to restrict air space to European airlines is currently being mulled over by the foreign and transport ministries, according to  a report from an unnamed source in the  Russian business daily Vedomosti.  Banning European airlines over Siberian airspace would force European airlines to make costly detours adding already to their sky-high fuel costs and put them at a disadvantage to Asian airlines. Trans-Siberian route flights benefited primarily Western airlines, particularly European carriers because it is the shortest distance when travelling from Europe to Asian countries such as China, Japan and South Korea.

Currently, 12 European airlines operate 900 flights each week passing over Russian airspace to reach these three Asian countries. Europe’s main carriers which are likely to be hit the hardest are Air France, British Airways and Lufthansa.

A country’s decision to close its airspace is solely a matter for the country in question, according to the Chicago Convention on International Civil Aviation. Indeed, it’s not the first time that Russian has closed its airspace to western nations, during the cold war there was a total ban on European carriers flying over Russian and Siberian airspace.  The news of Siberian flight ban has weighed down heavily on European airline stocks, all are sharply down.   The Russian carrier, Aeroflot shares also tumbled on the news because it reportedly received approximately 225 million Euros a year in fees paid by foreign airlines for the right to fly over Siberian airspace.

Perhaps shorting airlines stocks might offer a short term opportunity for the adventurous traders.

Russian Oligarchs are also beginning to shift their massive liquid wealth to Hong Kong dollars on sanction concerns, which could also be behind the selloff in European equities in recent days.  Russian billionaire Alisher Usmanov, with a net worth of 18.6 billion USD, according to Forbes, is said to be moving his cash holdings into Hong Kong dollars. This move is also being repeated by the world’s largest Nickel and palladium producer, Norilsk Nickel. Additionally, MegaFon, Russia’s second largest mobile operator has decided to keep about 40 percent of its cash in Hong Kong dollars given the global markets disturbances, Chief Financial Officer Gevork Vermishyan said in a phone interview. The Moscow-based carrier has traditionally kept its foreign cash in U.S. dollars and Euros, according to the company.

The Hong Kong dollar has been pegged to the U.S. dollar since 1983, and its fluctuation from the American currency hasn’t exceeded 1 percentage points since then.“Keeping money in Hong Kong dollars is essentially equivalent to keeping it in U.S. dollars because of the currency peg,” said Vladimir Osakovskiy, chief economist of Bank of America Corp.’s Russian unit. “Still, for Russian companies it’s much safer from the standpoint of sanctions.”

In light of this Russian capital flight to Hong Kong dollars it will be interesting to monitor the trajectory of the currency against the Euro.

Russia will also be banning the import of agricultural goods from countries that have imposed sanctions on Russia. This is likely to hit hardest southern Europe, possibly Spain, which is the largest agriculture producer in Europe. Russian government officials have been instructed to draw up a list of western agricultural products and raw materials that will be banned or restricted for up to one year, according to the Kremlin website. The list would include meat, fruit and vegetables, but not wine or baby food. In recent days Russian food safety authorities have banned the import of Polish fruit and vegetables, while McDonald's cheeseburgers and milkshakes are being investigated by a regional branch of consumer protection agency Rospotrebnadzor.  Russia is Europe's second largest market for food and drink. EU exports of foods to Russia rocketed to 12.2bilion Euros in 2013, following several years of double digit growth in Russia.  So EU food stocks, those more exposed to the Russian market are more likely to be affected by the bans.

The ripples are also being felt as far east as Japan. Under Washington cohesion, Japan is also likely to succumb to more sanctions on Russia. Russian foreign minister, Sergey V. Lavrov is calling on Japanese leaders to show more independence from the United States. Nevertheless, analysts reckon that Japan has no choice but to side with the US.

Within the last 48 hours a massive buildup has been reported on the Ukrainian border. Russian troops in the region have doubled in number . The ultimate rat hole for investors to climb into when things look like they’re about to go pear shaped, gold and silver are beginning to move upwards again.

These tit for tat sanctions do appear reckless and irresponsible, particularly at a time when many EU economies are tinkering on the abyss. Where will all this lead to, a war with Russia? Unlikely, since that would be MAD (Mutually Assured Destruction).  Indeed, in a perverse way through the terror of nuclear annihilation most of Europe enjoyed a prolonged period of peace. Surely, there aren’t enough deranged souls in Washington willing to order a military assault on Russia. That would be a chilling prospect.  I know not with what weapons World War III will be fought, but World War IV will be fought with sticks and stones. ” — Albert Einstein.

Fundamental Vs Technical Analysis

Fundamental and technical analysis are two distinct investment methods used by investors to derive investment decisions. Both methods share the same objective, but the data and tools that they use to determine an investment decision are entirely opposed to each other. Technical analysis uses exclusively charts, while fundamental analysis relies on company reports and financial data. Let’s examine the two investment methods in more detail below; 

Fundamental analysis uses real data to derive a stock’s intrinsic value. This type of investment method analyzes financial data, which is “fundamental” to the future performance of the company and its share price. So an investor who relies on fundamental analysis would be largely basing their investment decisions on several factors. For example, any competitive advantage a company might have compared to its rivals, such as patented technology giving its product a unique selling point. Moreover, a company might be able to take advantage of economies of scale, thereby undercutting its rivals, yet still maintaining the highest profit margin in its sector. 

Another factor that fundamental analysts examine when determining a share’s intrinsic value, includes a company’s earnings growth. Is the business expanding in a profitable way by keeping its costs under control? Revenue growth is also an important factor when determining the viability of a business. If the business is under competitive strain it would show up in its revenue figures, since price is a factor of revenue, thus a fall in price due to competitive pressure would result in a fall in revenue, given no change to sales in a certain period. The company’s market share is also a crucial data for the fundamental analysis when determining the intrinsic value of the stock. The more dominant a company is in its market, the more likely it would be to drive rivals out and manipulate prices to maximize its revenue. 

A company’s financial reserve is another factor fundamental analyst like to peruse over when deriving their investment decisions. In a period of economic downturn turn, when credit is tight, the availability of financial reserves could mean the difference between the company’s survival and failure. 

Product pipe line, the likelihood of future products/services being launched on the market, is also considered by the fundamental analyst. For a company to remain a market leader, or aspire to dominate its market, product innovation and development are essential; this is particularly the case in the tech sector, pharmaceutical sector and frankly any business environment that could benefit from research and development. 

Fundamental analysts also like to eye up the company’s management team, bearing in mind that a company is made up of people and guided by its management. Management track record and their experience are often used to gauge the future performance of the company. 

For the fundamental analysts the Holy Grail lies in the company’s annual/interim reports and financial statements with the aim of finding value stock that the market has mispriced. So when the stock is underpriced they buy, alternatively when the stock is overpriced they do the reverse and sell.

The technical analyst, on the other hand, is a different type of animal. Indeed, a technical analyst doesn’t look at the financial statements of the companies they may wish to invest in, let alone know who runs them. The technical analyst bases their investment decisions on a distinct investigation method by studying historic charts, patterns and trends of publicly quoted companies. This type of analysis employs the use of charts, bar charts, candle stick charts, and trading volume to determine the future trajectory of share prices. Such things as a company’s revenue, market share, product pipeline and financial statements are literally of no concern to the technical analyst. It’s almost as if the technical analyst is entirely oblivious and unconcerned about the entity’s activities. The technical analysis is completely focused on the historic and potential future price movements of the instrument they wish to invest in. They believe that future price movement of a particular financial instrument can be determined by analyzing its price charts. Trend lines can be plotted to determine their trajectory and entry (buy) and exit (sell) points. Technical analysis, as a method of investigation assumes that we are creatures of habit that we behave in a certain predictable way when the price of an instrument breaks through a predetermined threshold point. So the technical analyst type of investor buys when an instrument’s price falls to its price support level, conversely they sell when the price breaches its price resistance level. 

They say if you want to master a game you need to watch meticulously the top players in action. So what do the gods of the investment world do? Apparently, there is no ambiguity when you ask Warren Buffett, Peter Lynch and Benjamin Graham, whether they base their investment decisions on fundamental or technical analysis. "I realized technical analysis didn't work when I turned the charts upside down and didn't get a different answer," famously replied Buffett when asked what he thought of technical analysis as an investment method. 

Meanwhile, Peter Lynch, another billionaire investor who was involved in Fidelity Investments, returning an average of 29 percent between the years 1977-1990, said "Charts are great for predicting the past." Benjamin Graham, famously said, "In the short term the market is a voting machine, but in the long run it is a weighing machine."

So those in the top league share a few things in common, they didn’t rely on trend lines, charts and candlestick charts to amass their fortunes; they relied on fundamental analysis and focused on finding long term value in their investment decisions.

Well and good, but over the past decade the scandals of Enron and more recently the Bank of America, Citi Group, GM and the list goes on of companies cooking the books calls into question the auditor’s report, “that the financial statement gives a true and fair view of the state of affairs of the company.” In a globally connected, highly competitive world, where success is handsomely rewarded and failure punished, the pressure for companies to perform is greater than ever, sometimes, not always, financial statements and reports may be economical with the truth. For this reason, an investor who ignores or dismisses technical analysis as tea leaf reading would do so at their own peril. The fundamental analyst may interpret value in a stock after interpreting its accounts, but they may also be oblivious to high volume trades in the stock due to say, insiders selling. Such a move would blip on the technical analyst’s radar and they would be able to take measures to preserve wealth.

You may not drive your car looking only in the rear mirror, but it certainly helps you avoid an accident by checking regularly what is going on behind you. Perhaps it is for this reason that all large broking houses now employ technical analyst.