Russia's RTS Index futures - liquid tradable instrument.

Morning Comment - 06.07.2010.

Good morning! 2 things here – one technical, one regarding sentiment.

1. A “death cross” is on the way. A “death cross” is when the 50-day moving average crosses below the 200-day moving average. This juicy buzzword which sounds like it was concocted in the times of Edward I and Eleanor of Castile :) is viewed to be a deadly technical signal by many. It may, and probably will occur soon on the S&P 500’s chart. Let us re-visit the history though. The “death cross” formation historically has resulted in a 0.4% drop in the S&P the month after, but the market traditionally gains nearly 5% in the ensuing six months! A 5% gain in six months is hardly “deadly”. Brightest example – 2004 when the “death cross” on S&P was followed by a 3-year long bull market!

2. More importantly – funny thing is that at this juncture it is nearly impossible to find a bull among the growing sloth of bears. Which is a good indicator markets will reverse northbound. It will be easy for them to do so given massive “intrinsic” liquidity in the market (seasonal “summer” value removed).

Important milestone in this summer-dead market will be next week when European banks will reveal how well they passed (or otherwise) the stress-test. They are NOT obliged to do so, however chances are noone will be hiding – just for the sake of not BEING SEEN hiding! :)

RUSSIA: Yesterday we had extremely low volumes due to closed US market, most liquid shares traded flat. No surprise that activity in small cap names was almost zero - we had only sellers in DIXY, buyers in BANP prefs, some buyers in TGKs, sellers in discos.
Morning Comment - 07.07.2010.

Good morning! The question we are REALLY asking ourselves is whether all the bad news is already priced into the market. From the technical point of view, I have rarely seen such a clear-chiseled and ill-ominous Head & Shoulders Pattern hanging over all major indices. Obviously, we can hardly blame some wizard doodling on the screens for those technical patterns – they are just manifestations of price-volume dynamics unfolding in the markets – and those manifestations are hardly any good now.

What I found interesting when “the rally in the valley” :) was sweeping the European floors yesterday was that risk-sensitive stocks - such as banks and commodities - were the primary drivers behind the FTSE's partial revival, with BP also proving popular with bargain-hunting purchasers (we all remember that these days BP is a highly risk-sensitive stock!). Money (which as we have been mentioning all along, is abundant on the sidelines) seems to start coming out of its hiding, targeting risky issues. Which – in my humble opinion – makes me think that we may indeed be close to full price-in of bad news into current price tags.

RUSSIA: market was buoyant all day yesterday – and across the board. We had good buying orders in SBER, VTBR, TRNFP and CHMF. Activity in 2nd tiers was feeble though, people are pretty much still playing old worn-out stories if you ask me.

Good trading to you!
Morning Comment - 08.07.2010. PIK LI - strong sales, cash to hand.

Good morning! Tempting to drum up the fact that FTSE and Wall Street regained 5K and 10K marks respectively, but that is none of my merit :) Plus we all know that :)

What I think is important though is that as we have been mentioning for some time now – no matter how gloomy the indices might look technically – there are 2 very important positive things in the markets:

1. Loads of cash sitting round – aka liquidity; and (partly as a direct result):
2. Industry getting good order tickets for products that you’d hardly spend your last twoppny bit :) on – e.g. chips and gadgets of Apple variety.

In this environment it comes as little surprise that banks were able to report good performance at the beginning of corporate-earnings season. Barclays’ ability to sells EU1.5 Billion 6% Bonds Due 2021 came to the market at the right time – mending the MAIN NEGATIVE ISSUE in current markets – lack of confidence in the backbone of the global economy.

RUSSIA: This will sound a bit contrary to my upbeat tone above. Collapse of MezhPromBank note (something unheard of since late 1990-ies) means one nasty thing – corporates in Russia will NOT be able to borrow monies at any remotely good terms in the near future – at least.

On a separate note, we all know that developers are just HIGH BETA RECOVERY BET. PIK Group’s numbers (see note attached) mean that the company is indeed sitting on a pile of cash now. And with the price mauled over the past 2 months, PIK starts looking dirt cheap. We’ll re-visit PIK in more detail separately.

Yesterday all day long the market traded flat; right before the closing bell we saw big bargain-hunters in blue chips and telecoms.


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Morning Comment - 09.07.2010.

Good morning! I will hardly deliver breaking news here saying that IMF’s upgrade of global growth prospects boosted sentiment, while UK prospects were downgraded. The mere fact of FTSE joining the flying league shows how much liquidity there is in the market – and what wonders it can work.

There will be much window dressing in the dying days of July. Cameron’s show on the 20th, hopefully BP’s – on the 27th. We all remember Winston Churchill for many things, one of them being the History of English-Speaking People. Fantastic book if you ask me. We’ll see how the English-Speaking people deliver in the last decade of July. In thin summer markets, if there is more confidence coming our way, we will probably fly.

RUSSIA: Yesterday we had another day in a row of a very low activity, although more trades came from small caps sector...and we turned sellers in blue chips close to the bell. We kept on selling electricity distribution shares, had buyers in wholesale & territorial generation; kept on buying regional telecoms.
Morning Comment - 12.07.2010.

Good morning! Something I will take no credit for – but so rightly pointed out. Computer and software shares have slumped to the lowest valuations in two decades, a sign they will rebound as Standard & Poor’s 500 Index companies start spending their RECORD CASH. “Record cash” (aka liquidity) is key here. We have been pointing out somewhat relentlessly :) that liquidity is there sitting on the sidelines waiting for the summer lull to finish to get put into action. Corporate cash rose six straight quarters through March, boosting speculation executives will upgrade computers after reducing investments for THREE (!) years. A good hint comes from the S&P 500 Information Technology Index which rose 5.6 percent last week, the BIGGEST gain in a year!

As a lad who graduated into sales-trading in 1999 and formed as a trader in the bear mauling of NASDAQ and UK TechMark between 2000 and 2003, I’d be the last one to preach on techie stocks :) However, what I am seeing here is that falling valuations and a rebound in spending may lift shares EVEN if U.S. growth slows.

It may sound absurd but this market (and this amount of cash in the market) may make our beloved ECO numbers coming out of the US irrelevant. Q2 earnings season starts today with Alcoa to be the first to report (after market close), but attention mostly will be paid towards JP Morgan, Citi, Bank of America & GE reporting end of week. Surprises are welcome to trigger the indices determine a direction. For S&P 500 index ~ 1,5% left to breach a major resistance line and here earnings reports might be a trigger.


1. X5 Retail Group (FIVE LI) 2Q10 retail sales: traffic likes low prices. NEUTRAL Discounters remain on the uptrend. Last Friday, X5 Retail Group disclosed its 2Q10 and 1H10 trading update, which showed that company’s pricing policy (price discounts on target assortment), aimed at increasing consumer traffic, still works, though at the cost of average basket. In 2Q10 X5`s net retail sales increased by 18% y-o-y in ruble terms (vs. 20% y-o-y growth in 1Q10), which consists of 4% y-o-y growth in LFL sales, 11% y-o-y growth from organic selling space expansion and 3% y-o-y sales growth contributed by Paterson stores (acquired in 3Q09 and already fully integrated). FY10 guidance confirmed; store openings comply with full-year target. Earlier X5 said its plans to spend this year RUR18 bn (about $582 mn) for opening of 7-10 hypermarkets, 15 supermarkets and 200-250 discounters and reach at least 20% y-o-y growth in sales (in ruble terms). X5 Retail Group plans to disclose its 1H10 financials on 26 August. Investors would pay much attention to the management comments which are expected to follow the results disclosure. We maintain our BUY recommendation on the stock with end-2010 target price at $50 per GDR. A reason for concern – CFO leaves the company. Also on Friday, X5 reported that its CFO, Evgeny Kornilov, would leave the company in October, 2010 to join another company senior management position. Evgeny Kornilov has worked for X5 since 2006 and is regarded as the true professional in the industry. X5 has started executive search process. Though we see this as a point of investors’ concern, we believe the company will manage to find the best successor.

2. RusHydro’s (HYDR) shareholders bought under the pre-emptive right 42% of additional share issue for RUR9.2 bn. NEUTRAL. RusHydro’s shareholders bought under the pre-emptive right 42% of additionally issued shares worth RUR9.18 bn, according to the company’s press release. The shareholders acquired 7.982 bn from 19 bn shares (par value of RUR1). The placement price is RUR1.15 per share. RusHydro last closing share price stood at RUR1.545. The state bought 23.67% of the total additional share issue. RusHydro started the placement of its additional share issue on 12 December, 2009, pre-emptive rights expired on 2 July. Taking into account the purchase of shares under the pre-emptive rights there are 11 bn shares left. Earlier, the company reported that it accepted offers from market participants to buy the shares of this issue until 12 July inclusive. However, RusHydro stated that it plans to exercise its right not to comply with the offer. In this case, RusHydro can independently buy its own securities, by increasing the number of treasury shares. Given the fact that the company already has 1.78% treasury shares, with the full redemption of the balance of the additional issue, their number could grow to 5.6%. RusHydro expects the state registration of additional issue to be held in November, 2010. Transactions with the additionally issued shares on the stock exchanges will be possible following the state registration. Additionally issued shares will be consolidated with the shares in outstanding in three from the date of the state registration. Transactions with depositary receipts (GDR), which were placed for shareholders – the owners of depositary receipts, which have implemented pre-emptive rights, will be available starting from July, 2010. We believe RusHydro share placement is a good investment opportunity, and recommend taking advantage of it.

3. Novatek’s (NVTK) gas production on the rise. NEUTRAL Novatek increases gas production by 15% YTD. Novatek reported 1H10 operating results. The company’s natural gas production rose 15.4% y-o-y to 18.39 bcm and liquid hydrocarbon – up by 18.5% to 1.747 mn tn. Novatek is on track of achieving its full-year production target of 37 bcm (up by 13% y-o-y). At the end of the year the company plans to launch a third phrase of Yurkharovskoye field that will bring its aggregate capacity to 55 bcm p.a.

Strategy 2H2010: Score twice before you cut once. July 12, 2010

I am glad to be in a position to send you our latest Strategy note for 2H2010 that just came out. Pls find both Russian and English versions attached. You will find there both usual suspects (Gazprom – fundamentally undervalued, RosNeft – ruined by tax changes but still dirt cheap etc…) and, equally, unusual suspects (Raspadskaya – where all risks seem to be already priced in; SeverStal – the most attaractive play in steel sector; GlobalTrans – lucrative infrastructure play etc…) along with some compelling dividend stories of TNK-BP variety.

A big piece of research which I am hoping you will find useful. Pls fire away any questions or comments that you may have.

Here it is:

Strategy 2H2010

Score twice before you cut once

Choose Dollar over Ruble

Bearing in mind the existing risks, we bet on less risky US dollar, which may take the leading position among investment assets in 2H10, while ruble as well as other EM currencies will be under pressure. Our view on ruble may change, function of the oil price dynamics.

Choose Eurobonds over Ruble Bonds

The risks of ruble devaluation diminish attractiveness of the ruble-denominated bonds, which rallied over the last 12 months. We recommend choosing short- and medium-term Eurobonds of high-quality issuers. Investors who need to have ruble assets in their portfolio would be better off by choosing new placements with floating coupon rates.

Choose Gold over Oil

In 1H10, a period of high volatility, gold was a safe haven. Going forward the demand for gold should be supported by inflation risks. Oil remains sensitive to the market trend that determines higher volatility and uncertainty.

Choose Soya and Corn over Sugar

Lower than expected crops, as well as growing demand from China, should support soya and corn prices. We expect sugar price to continue the downward trend.

Choose Return over Risks

Excessive liquidity on the market will continue to support equities, but investors have learnt to see the risks and now should choose safe plays. We recommend betting on attractive fundamental value stories, avoiding risky stocks.

Choose Play on recovery over Highly regulated industries

We recommend choosing sectors which are best positioned to capitalize on the economic recovery, growing consumption and long-term investment demand. Meanwhile, we expect sectors with high degree of government involvement to be under pressure due to uncertainty in regulation.

Choose Banks, Retail, Infrastructure over Oil and Utilities

Among the Russian stocks we recommend banking, retail and infrastructure plays, which offer 30-50% upside potential driven by economic recovery and domestic demand. We expect weaker returns in oil and gas and utilities names on the back of uncertainty in regulation (possible tax hikes and tariff changes as well as delays in RAB schedule).

Enjoy! :)


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Morning Comment - 14.07.2010.

Good morning! We mentioned a couple of days ago (see below) that “Computer and software shares have slumped to the lowest valuations in two decades, a sign they will rebound as Standard & Poor’s 500 Index companies start spending their RECORD CASH. “Record cash” (aka liquidity) is key here. We have been pointing out somewhat relentlessly :) that liquidity is there sitting on the sidelines waiting for the summer lull to finish to get put into action…… It may sound absurd but this market (and this amount of cash in the market) may make our beloved ECO numbers coming out of the US irrelevant.”

“Spoto ono” as they say in certain parts of London :) It is not just the mere fact that US closed at HOD yesterday and US futures are out of the gate already this morning. What is even more important is that once a commodity player’s earnings topped estimates and the company forecast growing global demand all 10 industries in the S&P 500 advanced – the shopping spree is across the board! Intel and Texas Instruments just confirm our belief that chip and gadget makers may be the biggest beneficiaries in this RECORD CASH LIQUIDITY SEA :)

Commodity producing EMs will be another big beneficiary and countries like Russia or Brasil will provide a high beta play for international money in this leg northbound.

RUSSIA: Yesterday our desk traded mostly in less liquids (our USUAL trading activity in electricity, telecoms + consumers, machinery), although in the last trading hour we had good buy tickets in blue chips mostly on MICEX - SBER, ROSN, GAZP, CMST.

Good trading to you!
Morning Comment - 15.07.2010.

Good morning! When we mentioned a few days ago that “Computer and software shares have slumped to the lowest valuations in two decades, a sign they will rebound as Standard & Poor’s 500 Index companies start spending their RECORD CASH. “Record cash” (aka liquidity) is key here” – I was asked almost straight away why I look so much at chip and gadget makers – of which there are none in Russia. The lad giggled if I was looking at fur coat makers when I lived in Brasil :)

The importance of companies of Intel, AMD and Apple variety is that 1) they have reach over both consumer and investment spending, and also have reach throughout the world; and 2) they are hardly targeting “bare necessity” spending, meaning you are unlikely to spend your last coin on their products. Therefore they are perhaps the best gauge of “intrinsic” liquidity in the market. Currently this gauge is clearly pointing north.

Yet – yesterday we saw a rather peculiar market’s reaction on Intel’s extremely positive report – having opened with a gap of 4%, the stock slid by 2,5% from it’s opening price on heavy volumes. Well, someones :) were obviously waiting for positive momentum to off-load. If we continue to see such reaction on better than expected US corporate reports, it may put a lid on any IMMEDIATE trading upside – even though you cannot blame those someones :) for taking a bit of profit.

Another interesting snippet is bullish sentiment. If you believe newsletter writers survey :) the level of bullish sentiment about U.S. stock market fell below the level of bearishness for the first time since April 2009! I vividly remember such overly-increased pessimism at important market reversals – biggest ones of course being March 2003 and March 2009 – and to me personally this sign is also pointing north.

RUSSIA: Moscow heat erodes client’s flows on local markets and there was no interesting activity yesterday. Volumes are still low and we had mostly sellers in liquid stocks since the very opening, clients tend to wait for positive sentiment to enter the market and all attention is now towards US corporate reports. Russia is cheap by no means, but with summer activity subdued we will hardly see the market immediately rushing out of the gate here.

Good trading to you!
Morning Comment - 16.07.2010.

Good morning! An interesting observation that we made some time ago is that in a market liquidity set-up best described as “high tide floats all boats”, our dear ECO numbers coming out of the US become much less important than removal of individual “dark clouds” hanging over the market and impeding that liquidity. Last hour of US going was classic in that respect.

First, hint at a “significant announcement” to be made by SEC regarding Goldmans;

Second, BP claiming it stopped the flow oil at its leaking Gulf of Mexico well for the first time since April.

Voila. 15 points up on S&P within half an hour.

Overall – without dissecting into intraday time frames – clear sideways. Loads of “intrinsic” liquidity, which is likely to stay dormant into the summer holiday period.

Yesterday most of our trading activity came from utilities sector - we traded distribution names, TGKs, would buy Rostov Helicopter (RTVL RU)!; at the end of the day had sellers in blue chips (no surprise!)

Good trading to you!
Loving the commentary, russia is one of the most recent markets that i have just started paying attention too. Funny thing also i noticed i am in the same building as your london office, small world.

I am just curious would you say there are any particular reasons why someone should trade the rts index over the other large european indexes such as the dax or eurostoxx ?
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Morning Comment - 19.07.2010.

Good morning! Yep, S&P fell 30 points plus on Friday – but let us take a closer look:

1) A typical quarter, going back through 1994, according to Reuters, would have 62% beating estimates, 18% matching and 20% missing. So far, of the 48 S&P 500 companies that have reported, 75% topped analysts' expectations and 13% reported results inline with projections and 13% reported results beneath estimates. We are hardly in our worst quarter reporting – again, so far.

2) What attributed to the market scare on Friday was major banks seeing lower trading revenues because of the stock market’s plunge this spring – and we are talking Citi, BofA joining JPMorgan Chase & Co. in this chore. However they were also quite unanimous reporting higher earnings in the second quarter this week as loan losses fell.

Last bit is actually quite important in my opinion. Those bad loans have a knack of denting market confidence and spoofing bouts of sell-offs. Hate repeating myself, but that coupled with liquidity in the market (less summer-holiday component) is a bullish thing on my books. However, it thin those thin summer markets, yo-yo swings should not be treated as a particularly odd thing. The economy is improving but not at a breakneck pace, and those investors still in their offices veering between hope and despair cannot be blamed for such swings.

RUSSIA: On Friday gap up at the opening was treated by traders in blue chips as a chance to close short term longs, more sellers came around after US opening and accelerated after University of Michigan confidence came out. During the day we had mostly flows in liquid stocks; had 2-way flows in electricity distribution companies; sellers in several names in regional telecoms (due to heavy redemptions of a local pension account).

Good week to you!


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Loving the commentary, russia is one of the most recent markets that i have just started paying attention too. Funny thing also i noticed i am in the same building as your london office, small world.

I am just curious would you say there are any particular reasons why someone should trade the rts index over the other large european indexes such as the dax or eurostoxx ?

Small world indeed! :D I suggest we meet up next time I am in London which should be by the end of this week!

When you trade EMs you trade extra risk for an extra premium. No wonder EMs - NORMALLY - have 1) higher BETA against mature markets and 2) higher volatility. Higer BETA ensures your profits are amplifies if you are in the right boat; higher vol means there are more shorter-scale time frames where you can scalp the market. I am attaching 2 charts for 30-day historical volatility for DAX and Russia's RTS Index - in a "quiet" period now vol on DAX is 20 while on RTS it is 28. The gap normally widens on a big move; e.g. on the latest move down DAX vol topped at 32, while RTS's at 50!

If you play that higher volatility indices you normally need to be a more experienced trader - and FOR SURE a very disciplined one with your stop losses. Too wide - and you lose too much if you are wrong; too tight - and your get buffed out no matter if you are long or short.

Higher BETA on the other hand means you can sit back and enjoy higher returns on big moves - once you are in the right boat (y) You pay a risk premium for that though, EM CDSs trade much higher than any of G7's.

LAST THING YOU WANT TO HAVE BITING YOU when you trade EMs is lack of liquidity, when you cannot quickly unwind your positions in a more volatile market. Therefore I strongly suggest palying ONLY liquid EM indices and stocks - first and foremost, Russia's RTS Index, OGZD LI, ROSN LI, SBER RU etc.... and Brasil's Bovespa Index and the likes of petrobras and Companhia Vale.


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Morning Comment - 20.07.2010.

Good morning! I, for one, think that IBM results provide a good example of what the markets are and where they are heading. Yup, IBM reported revenue that fell short of expectations, however what I think is important is that IBM did issue an upbeat forecast for its 2010 earnings.

I’d much rather hear that than the other way around – which would be good revenue now and a gloomy projection for year earnings :)

I will probably be repeating our last couple of morning comments – but the companies have money to spend, and the economy has the money to absorb increased production going forward – whatever you think of the economy’s sorry state. Summer market is and will be thin until mid-August at least, with any order of meaningful size capable of rocking the boat – either way. In that climate the high-frequency-traders and momentum boys will remain in charge - it could be a long bumpy summer.

Good trading to you!
Morning Comment - 21.07.2010.

Good morning! Yesterday’s state of markets is best described as “ahead of the stress test results due on Friday and after results from Goldmans.” Mixed at best. But - add to the mix a strong result from a gadgeteer Apple – chip and gadget producers gauge the real liquidity in the market because they have not only reach into both consumer and industrial spending, but also because that reach is global, including EMs - and you will be in a somewhat good mood going into Bernarke’s speech amid speculation that the Federal Reserve will take steps to spur the economy.

If you ask me to name one important figure from yesterday, it will be the premium investors demand to buy Spanish government bonds rather than benchmark German Bunds - which fell to its lowest level in almost two months in the wake of the successful Treasury bill sale. That in my view is more important to market confidence than all building permits massed up together :) It is only the dented confidence that is stopping the “intrinsic” liquidity in the market to propel it.

RUSSIA: Yesterday right after the opening we had good orders to buy TRNFP, SBER, were size sellers of FEES; we continue to have careful buyers in GAZP who keep on loading with the stock scaling down each day. Still have buyer in electricity distribution names, though selective one – we can bid for a size in MRKU; have sellers in MRKY, Z, S, V. Were sellers of TGK-1.
Morning Comment - 22.07.2010.

Good morning! A lovely set-up for a guy who is bullish to write his morning comment, you’d perhaps agree :)

However, yesterday’s price action just added ammo to my bullish stance as a matter of fact. 1) I’ve been round for some time now – about a decade :) – and from what I’ve seen on the days of Fed comments that market journalists call “negative” 14 points south is really nothing, ESPECIALLY given it is a thin summer market that can be easily “swung”; 2) I cannot but like to trade the market where central bankers “remain prepared” to act as needed to aid growth; and 3) it is the “unusually uncertain” outlooks whence the biggest oaks grow :)

Of course it’d help if Bernarke elaborated how exactly the central bankers “remain prepared”, and it’d help even more even more if he announced concrete plans to stimulate US economy. But again, at a closer look I can’t but think such summer-market dips are just providing better entry points going into the Fall.

What’s more important for Russia is inventories and oil price tanking on the back of that. However if you just look at CL1 on say a 10-day horizon, we are firmly in an ascending channel. If you ask me – so far it is a non-event.

RUSSIA: We continue to see extremely low volumes in blue chips, but after many observations of this summer-market swings one could easily benefit playing against the market after such attempts of a rebound that we saw yesterday in Gazprom and other chips. As we wrote yesterday, SBER becomes very predictable to trade for intraday traders – yesterday we saw the same scenario – slow take off after opening and profit taking closer to the bell; Lukoil is strong due to absence of serious sellers; yesterday we saw buyers in SNGS / sellers in SNGSp. Having traded more or less flat (in a wide range) for several weeks now, we view the Russian market as stable. However, we think that metallurgy and utility companies could be the first in the line for reduction in many portfolios. Yesterday we had sellers in VSMO, buyers in NLMK; in utilities we had sellers in IRAO, FEES, HYDR, VRAO, MSNG, TGKA, TGKD, at the same time were still buyers in a couple of TGKs, IRGZ; we also had good 2-way flows in NNSI, URSI.

Good trading to you!
Morning Comment - 23.07.2010.

Good morning! Just a snippet today on the back of our yesterday’s morning comment – see previous post.

A bit of positive sentiment that we got yesterday spreads around the world. That of course is a good momentum support for us – emerging markets - with crude oil staying at $79 level. But let us wait for stress-tests results. And here we go… The first news I got this morning on the wires was – ‘SEVERAL SPANISH SAVINGS BANKS FAIL STRESS-TESTS’. Wow!… we thought to pass those tests a bank should have a license and a handful of clients’ deposits…. Did they really start to monitor the system??? Would there be an unexpected cold shower for the markets??? The success of the EU bank stress tests hinges on how much detail regulators provide about the basis for their conclusions, not on the number of lenders that fail – let us not forget that the assessors haven’t even provided full details of their criteria so far!

Anyway, on a “pan-European” :) stress-test results day you can of course expect anything, but the general direction is quite clear in my opinion – it is a northbound train into the Fall. As a bit of a “fashion victim” :) what I like loads is that both Burberry Group Plc and Marks & Spencer are in for higher retail sales – meaning that both up- and downmarkets in consumer spending are indeed spending :) There is money in this market and I can’t see how it can fail to “float the boat”.

RUSSIA: Yesterday we had mostly buyers in a thin market, had buy-discretion orders during the day in blue-chips, but were asked to be more aggressive after US data: kept on buying a couple of electricity distribution stocks, though we were 2-way here; had buyers in RAO-UES substitutes HYDR & IRAO; in TGKs had several bidders for the same names, but no serious supply could be found recently even on negative days; were sellers in a handful of telecoms.

Good Friday trading to you! :)


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Morning Comment - 28.07.2010.

Good morning! My apologies for dropping off the radars for a couple of days – joys of looking after some good potential IPOs in transport/infrastructure department :) Fantastic sector if you ask me – but obviously well outside the scope of this morning comment.

Back in the saddle now – and what did I miss? :whistling FTSE closed yesterday at exactly the level of last Friday when I had to hop on the plane to London, identical story with S&P, Russian RTS looking better, up marginally from Friday’s close. I can’t see much changing until the missing “summer-time” liquidity component is back to the game really…. The only thing that I will mention here is that again – same as after last Bernarke’s speech – on a bad durables orders number, in thin summer market, you could expect a bigger swing south. Which tells you a thing or two :cool:

RUSSIA: Bulls tried rushing out of the gate at yesterday’s open but quickly returned to their quarters. Fertilisers – buoyed by planned consolidation from Mr Kerimov – held out well with URKA and SILV clocking up 2.5% ish each. LUKs shined closing the blue chip star of the day on the back of Conaco stake. PIK looked good – hard not to – the way they sell up the storm in Russia housing market – see our most recent flashnote on PIK attached. OGK-5 shareholders were also cheered up by the company’s results. All that could not stop broad market to follow the dynamics of big Western boys.

Good trading to you!


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Morning Comment - 02.08.2010.

Good morning! I hooked up with one of “me old china” back in the day over the weekend, who makes a living intraday-trading S&P and FTSE – I know him well enough to attest to him doing that without bigging himself up out of proportion :) He cracked a witty snippet – “in this summer jibbering about – why being a bull or bear, when you can just run with a pack of wolves?” He is spot-on – this market is perfect for scalpers, swingers etc…. – ‘em lot who do not even try to form a bullish a bearish bias going into the next session, leave alone next month.

We however, do want to have a think how it is all gonna pan out when the missing “summer liquidity” is back in the market – not just the dribs’n’drabs we are having now. I spoke much before about “intrinsic” liquidity which has all the potential to “float any boat”. However, one can easily try to slap me with a wet trout :) saying – look, one can have loads of dosh in his pockets but just sit and wait without investing it, in which case markets will fall over, right? 2 important counters to that thought here:

1. Chip and gadget makers are strong – and they are pivotal in gauging “willingness to spend” as they reach out to a) both commercial and individual comsumers; and b) to consumers globally.

2. Look at confidence index – it is the lowest in 5 months, falling to about 50, far below its 20-year average of about 94. However, one wise man :) has recently analysed the correlation between the Dow and the confidence index. Counter-intuitive perhaps – but not surprising to market fossils I am sure :) - when confidence is high (above 113) the Dow gained an average of only 0.2 percent over the next 12 months. When confidence is moderate (between 66 and 113) the index gained 5.9 percent. BUT - the biggest gains came when confidence was low (66 or less), then the Dow plowed ahead by an average of 13.1 percent!

I, for one, loved Bernarke’s definition of present market as “unusually uncertain”. It is from that uncertainty that unusually big oaks grow! :) When markets are certain – it is always time to ship it out!

RUSSIA: On Friday Russian equity market traded under pressure all day long due to weak world markets and absence of any positive news. We didn’t notice any serious demand for blue chips, at the same time natural sellers were not big at all – several guys were just profit-taking really. At the end of the day some oversold high liquid names started to show signs of recovery. One could see locals and ADRs of Lukoil being sold most actively, shares of TRNFP were traded on extremely high volumes and we do believe the stock will show more strength this week – it has a great potential! We still remain sellers of wholesale electricity generating names, a couple of telecoms, buyers in several less liquid utility names like KRSG.

Good trading week to you!
Morning Comment - 03.08.2010.

Good morning! Having a view and being wrong on the day makes one think, what I hate about being right on the day (and quite an impressive day up!) is that one tends to let complacency grow :)

HSBC and BNP were the shining stars yesterday. It is very re-assuring to the markets as a major confidence concern is removed by such upbeat results from 2 flagships of the banking sector. Bears would snap at this saying that it is hard for a major bank which is good operationally (!) not to shine in present market conditions when 1) money is uber cheap; and 2) M&A activity is far from being subdued and growing. Read back the last line – and you will see exactly my answer to those bears :) – in such environment markets SHOULD fly – UNLESS confidence issues keep them locked behind the gate.

Many I speak to share my opinion that it is a northbound train going into the end of the year BUT tend to think there should be a pit stop somewhere 7-10% south. However, it is normally expectations of such a pit stop that stops it from pitting :) Remember 2H2004 and 2005? I remember 4000 pit stop called every quarter on FTSE, and the more it was called, the more FTSE plowed ahead.

BUT – I will mention one thing that scares me – and very much so. Russian brokers started to give more cash that has not been used yet for margin operations of retail clients, who are always late to catch chips at the take off. People do indeed learn little from past scalds :(

RUSSIA: Yesterday we saw some liquidity starting to be injected into the market (but as written above, we think that is partly dosh aggressively spent by retail accounts); shorts were being covered across the board; our ‘beloved’ Gazprom was shining all day long (we had big buyers in the name, local and international), while in Lukoil clients were better sellers; after strong rally in TRNFP we had sellers as well, though we DO strongly believe the stock will trade at new highs in the mid-term; URKA, RASP were in buy lists of many brokers (an obvious play); at the same time activity in 2nd tiers was not outstanding – we had local buyers in TGKA,D,G, MRKU; 2-way flows in HYDR, MRKH; had strong interest for helicopter producers.

A couple of trading ideas:

1. Speculative BUY for Ulan Ude Avia (UUAZ, TP $1.8, upside 39%) vs. Kazan Helicopter (KHEL, TP $2.2, upside 20%)
Today KHEL and UUAZ posted financials for 2Q10 net income q-o-q changes:

- Thus, UUAZ posted net income of RUR2.1bn for 2Q10, which implies 4 times increase q-o-q;

- KHEL posted net income of RUR352 mn for 2Q10 – a 3 times decrease q-o-q.

Companies’ 1H10 net income look strong especially vs. 2009 figures:

- Thus UUAZ’s net income for January-June 2010 is already 4% higher than for whole 2009;

- As for KHEL it is already 91% of the company’s net income for 2009.

At the end of last week shares of KHEL rallied by 10%, while UUAZ shares advanced less 5%. Taking into account reported companies’ net income for 2Q10 we see UUAZ shares to outperform KHEL in short-term.

2. Playing spread convergence:

Over the past two weeks, LSR Group (LSRG LI) GDRs added 28%. As a result, local shares discount to GDRs increased from 23% to 38%. We recommend playing on the spread reduction between local and foreign stock exchanges and BUY local shares of LSR Group (LSRG RU). Our end-2010 target price is $11.4 per GDR and $57 per local share suggesting 97% upside from current levels.

Good trading to you!
Morning Comment - 04.08.2010.

Good morning! A couple of thoughts here:

1. Even a grizzly bear :) would perhaps agree that we are still on a path to recovery, but it’s going to be a very slow-growth recovery. Equities, especially riskier ones such as technologies and EMs tend to run faster than macro recovery gauges. The scenario I see as most likely is another leg up in equities, full price-in of future recovery at some point (if not overshoot) – well ahead of real economy, and pretty much a wash-out down to “base” recovery curve. Mini-bubble if you like. Same old, same old.

2. Yup, company’s earnings and valuations may or may not disappoint. But as one wise man said yesterday, and I will just quote him – so good is his snippet: “on the whole you have to be very encouraged. When you factor in valuations down in the 12-to-13-times range in a low-inflation, low-interest-rate environment, it makes equities look very attractive” (courtesy of Henry B Smith)

All boils down to LOADS of money in the market, more importantly, loads of CHEAP money in the market. This may actually pan out as an exponential bubble – that scares me most as the following wash-out back to “base” recovery curve may then be brutal.

RUSSIA: We had a quiet day yesterday: trading activity was mostly in liquid stocks (sellers prevailed and turned more active at the end of the day); utilities played the bigger part of our flows in 2nd tiers; we had sellers in infrastructure, construction and a couple of developers.

NOTE: We initiated coverage of Globaltrans (GLTR) with the 12 months target price of $18.8 and a BUY recommendation – see attached. We consider Globaltrans shares as a perfect theme to invest into transportation segment and FOR NOW (!) the only opportunity to buy liquid stocks of a public Russian rail company. Our DCF valuation implies 12 months fair value at $18.8 per GDR that means a 23% upside potential from the current market price.

Good trading to you!


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