Berko: 'Da' or 'Nyet' to Russian ETF?
Friday, October 25, 2013 7:00 AM
Dear Mr. Berko:
My broker has told me to buy 300 shares of Market Vectors Russia, a Russian exchange-traded fund that traded in the high $50s five years ago, before the U.S. economy collapsed. He says this company, which now trades at $29, can run back to the $50s because the Russian economy continues to get stronger. It gets stronger because the Russian socialist system and its politicians are not in gridlock like the U.S. capitalist system and American politicians. This feature of a socialist government gives Russia an edge in the world market. And according to my broker, the Russian ETF should be a good investment. I don’t need your opinion on which is the best system. I only need to know whether you think it makes sense to buy this stock.
A.D., Waterloo, Iowa
In a capitalist society, man exploits man, whereas in a socialist society, it’s the other way around. Basically, the difference between the two is just a matter of degree. Russian politicians, with the approval of the government, rip off state-owned businesses and become millionaires or billionaires. In the process, the Russian citizen gets screwed. In the U.S., JPMorgan Chase, Enron, Countrywide Financial, the United Auto Workers, the Teamsters, MCI WorldCom, Goldman Sachs and Bank of America rip off the consumer, and in the process, the politicians become wealthy and the American public gets screwed.
I think your broker either needs a lobotomy or should have his medications updated. Russia, where everything is corruptible, is a country with 145 million people, nine time zones and an economy that is discovering the art of implosion. Today, the shaky Russian economy is standing on one leg and tiptoe, while Economic Development Minister Alexey Ulyukaev, in a rare admission, expressed serious concern and fear for the years ahead. His ministry is proposing a 16 percent rise in taxes on mineral extractions (think oil, gas, iron ore, copper, lead, etc.), plus excise duties on alcohol and tobacco. He is also proposing a huge increase in government borrowing, combined with significant spending cuts, to plug holes in the federal budget. (Sound familiar?) Then he wants state-owned and -controlled businesses to pay the government 35 percent of their profits to make up for the tax shortfall so the government can fund important spending promises. But unlike the U.S., Russia is reliant on high oil prices, which account for 50 percent of budget revenues. And demand for oil seems to be on a slow decline.
Market Vectors Russia (RSX-$29.59) pays an 80-cent dividend yielding 2.7 percent and trades about 2 points from its 52-week high, and I suspect that the stock price has gone about as far as it can go. Ulyukaev’s higher tax mandate tells us that RSX’s portfolio should decline, that the dividend may then be reduced and that its market value may fall. More than 41 percent of RSX’s portfolio is composed of oil and gas stocks, such as Gazprom, Lukoil, Rosneft, Tatneft and Surgutneftegaz. Meanwhile, Russian mining companies, which account for 14 percent of the world’s mineral extraction, make up 24 percent of the RSX portfolio, including large publicly traded companies such as Norilsk Nickel and Novatek. Of course, RSX also owns several huge Russian banks, several retailing giants, some tech firms and some mobile phone companies. However, their balance sheets and income statements don’t conform to the generally accepted accounting principles. I’m familiar with the published numbers, but they give me the willies.
RSX may be a Russian ETF, but it’s basically a play on the world demand and the world market for copper, nickel, gas, oil, aluminum, iron ore, phosphate, platinum, oil, etc. Frankly, I can’t imagine a worse time to buy RSX. However, there’s an old Wall Street adage that the best time to buy something is when nobody else wants it. I’ve discussed RSX with four analysts, three of whom work for major wire houses, and not one of them cares a whit for the stock; and neither do I. So some might suggest that this solid negative consensus signals that RSX is a solid buy. But I wouldn’t touch this thing with a vodka-sterilized dipstick.