Russia as a Lehman/LTCM Moment today.

[scrumpyjack]

Regarding BP.

I see that Rosneft contributed 2.4 billion out of 14.4 billion of BP's 2021 profits before tax. I would expect BP's price drop today to reflect that.

BP closed at 378p on Friday evening last week. I suspect a fair valuation now would be around (378)*(12/14.4) = 315p.

Looking at the market right now the price is 355p. So I think there may be further loss to come with BP later in the day or week.

I suspect that the market was already heavily discounting the value of the Rosneft stake and so that calculation is not really valid. During this crisis the BP share price had already been dropping relative to Shell for that reason.

[TUK020]

The big question is: what next? If today's shocks turn out to be akin to a Lehman's moment, that is.

Let's take a quick look at the aftermath of Lehman's in 2008.

September 15th 2008 - October 5th 2008: the SP500 dropped from 1255 to 899. A drop of 28.4%

September 15th 2008 - March 1st 2009: the SP500 dropped from 1255 to 683. A drop of 45.5%

These numbers are additional to the existing drop from 1562 to 1255 in the year before Lehman's went pop, which was a drop of 20%.

Interestingly, all of these drops took place from a much less ridiculous starting point than the market valuation we have seen in January 2022.

The Shiller CAPE PER for example was 20.4 in September 1st 2008 before Lehman's collapse. Today, it's 36 even despite the recent 10% dip in the market since January. The Shiller CAPE fell to 15.3 in October 2008, and then to 13.3 by March 2009.

To see that drop happen again today (to 15.3, 13.3) you'd be looking at a further drop from here in the SP500 of about 57% (to October 2008) or 63% (to March 2009) respectively. Shiller's measure is inflation adjusted so current high inflation would also account for e.g. an 8% chunk of such a drop over a year. I suppose a drop, starting from here, of about 45-50%, taking place over 1-2 years starting from current price levels would take us to similar valuations as we saw in 2008. This is not a prediction. It's just a 'what-if' or 'what-might-be'.

The SP500 did not achieve new highs even in nominal terms (i.e. ignoring inflation) from September 2007 until April 2013, 6 years later, and even that needed rates to be held around zero for many years.

Which I suppose is rather less painful than the experience of those that waited 13 years from March 2000 to April 2013 to see their SP500 tracker reach the same nominal value again.

(Which in turn is far less painful than anyone who bought the FTSE in 1999 at 7000pts and saw it still sitting quite considerably lower at 4900pts in 2020 - dividends/inflation aside. Time in the market, yada yada...).

Anyway. Just in case anyone is still feeling resolutely cheerful about the market's prospects in spite of all this bearishness, consider that we are practically certain to see new strains of covid later this year, and much of the protection of our vaccines is already rapidly fading away.

comp

I do not think many of us really need this sort of thing at the moment.

Dod

I beg to differ.
This may not be what we want to hear.
But at moments like this, inputs like these are very valuable to consider. One may think about them and then discount the arguments. But considering them is very valuable.
We may not want this sort of thing at the moment, but we do need it.

[Dod101]

The big question is: what next? If today's shocks turn out to be akin to a Lehman's moment, that is.

Let's take a quick look at the aftermath of Lehman's in 2008.

September 15th 2008 - October 5th 2008: the SP500 dropped from 1255 to 899. A drop of 28.4%

September 15th 2008 - March 1st 2009: the SP500 dropped from 1255 to 683. A drop of 45.5%

These numbers are additional to the existing drop from 1562 to 1255 in the year before Lehman's went pop, which was a drop of 20%.

Interestingly, all of these drops took place from a much less ridiculous starting point than the market valuation we have seen in January 2022.

The Shiller CAPE PER for example was 20.4 in September 1st 2008 before Lehman's collapse. Today, it's 36 even despite the recent 10% dip in the market since January. The Shiller CAPE fell to 15.3 in October 2008, and then to 13.3 by March 2009.

To see that drop happen again today (to 15.3, 13.3) you'd be looking at a further drop from here in the SP500 of about 57% (to October 2008) or 63% (to March 2009) respectively. Shiller's measure is inflation adjusted so current high inflation would also account for e.g. an 8% chunk of such a drop over a year. I suppose a drop, starting from here, of about 45-50%, taking place over 1-2 years starting from current price levels would take us to similar valuations as we saw in 2008. This is not a prediction. It's just a 'what-if' or 'what-might-be'.

The SP500 did not achieve new highs even in nominal terms (i.e. ignoring inflation) from September 2007 until April 2013, 6 years later, and even that needed rates to be held around zero for many years.

Which I suppose is rather less painful than the experience of those that waited 13 years from March 2000 to April 2013 to see their SP500 tracker reach the same nominal value again.

(Which in turn is far less painful than anyone who bought the FTSE in 1999 at 7000pts and saw it still sitting quite considerably lower at 4900pts in 2020 - dividends/inflation aside. Time in the market, yada yada...).

Anyway. Just in case anyone is still feeling resolutely cheerful about the market's prospects in spite of all this bearishness, consider that we are practically certain to see new strains of covid later this year, and much of the protection of our vaccines is already rapidly fading away.

comp

I do not think many of us really need this sort of thing at the moment.

Dod

I beg to differ.
This may not be what we want to hear.
But at moments like this, inputs like these are very valuable to consider. One may think about them and then discount the arguments. But considering them is very valuable.
We may not want this sort of thing at the moment, but we do need it.

I lived through it all and these times were quite recent. Many who frequent these Boards undoubtedly did which is why I said that 'not many of us need this sort of thing at the moment'. If you are one who did not or have forgotten you may well find it useful. I hope you do.

Dod

[compscidude]

I suspect that the market was already heavily discounting the value of the Rosneft stake and so that calculation is not really valid. During this crisis the BP share price had already been dropping relative to Shell for that reason.

It's certainly possible. I think to test we'd need to look at the general trend of BP versus a few big companies who don't have Russian assets (to rule out the possibility of "shell doing well" - for example the natgas price spiked very hard, from $2 to $6, which makes up about half of Shell's profit).

And also compare with another company that also has very similar assets facing similar outcomes here, like Total. We should expect to see BP and Total diverging from say Exxon, Equinor, Chevron, Shell.

Total we should perhaps half of BP's divergence if the idea is right since they are about 50% as much affected. And any divergence should begin begin around December or January when it started to seem this was a risk.

I don't believe in the efficient market hypothesis so I suspect we won't see this if we look, my gut says: the Shell share price is just high in isolation and it won't show up among the group of peers. A particular point of evidence in my favour is that BP's top execs spent all of last week arguing hard with UK politicians from the Lib Dems and Plaid Cymru *not* to sell off their Russian fields and investments - then suddenly did a u-turn on Saturday when Putin first mooted seizure of foreign assets as a response to sanctions.

But what you suggest is absolutely a valid hypothesis. I'll have a look later to see if it works out that way.

[compscidude]

If you are one who did not or have forgotten you may well find it useful. I hope you do.

Dod,

I see your point of view.

I lived through it too, but I find my mind (and 'gut') adapts too easily to the mood of the current month, week or day for me to be fully comfortable. Too easily soothed by a calm market in particular. So I have to constantly remind myself of just what is happening and what is possible and how little substance the current market valuation is based upon.

Other people experience this too. Did you know that even Warren Buffett has newspapers lining the wall of his office, front pages with great unexpected market events and crashes - to purposefully remind himself every day of what is possible?

Yet he has lived through all of it, and more vicariously, with more at stake, than any of us.

It may be a quality of your skill as an investor that you keep all of this in mind continually without prompting. If so, congratulations, I'm impressed! It elevates you as an investor, and I'll endeavour to be as good as that one day

but until then I will keep telling stories that set the market in context, for myself and anyone else that is interested to listen. Feel welcome to ignore them if they do nothing for you.

Best wishes

comp

[Dod101]

If you are one who did not or have forgotten you may well find it useful. I hope you do.

Dod,

I see your point of view.

I lived through it too, but I find my mind (and 'gut') adapts too easily to the mood of the current month, week or day for me to be fully comfortable. Too easily soothed by a calm market in particular. So I have to constantly remind myself of just what is happening and what is possible and how little substance the current market valuation is based upon.

Other people experience this too. Did you know that even Warren Buffett has newspapers lining the wall of his office, front pages with great unexpected market events and crashes - to purposefully remind himself every day of what is possible?

Yet he has lived through all of it, and more vicariously, with more at stake, than any of us.

It may be a quality of your skill as an investor that you keep all of this in mind continually without prompting. If so, congratulations, I'm impressed! It elevates you as an investor, and I'll endeavour to be as good as that one day

but until then I will keep telling stories that set the market in context, for myself and anyone else that is interested to listen. Feel welcome to ignore them if they do nothing for you.

Best wishes

comp

I sure do keep it in my mind, but more than that, it is absolutely essential knowledge. It has little to do with any skills I may have as an investor. It is just part of what you need to know, history, if you are to be any good as an investor. I could probably write a book about my views except that they seem to me to be so fundamental as not to need expansion. Over the last 30 years or so since I perforce became a serious investor I have learned a lot. One never ceases to make mistakes but we can modify them, and hopefully ameliorate them, with some experience.

As you say, best probably for me just to ignore your posts.

Dod

[compscidude]

Over the last 30 years or so since I perforce became a serious investor I have learned a lot. One never ceases to make mistakes but we can modify them, and hopefully ameliorate them, with some experience.

I have a little experience myself, approaching my 20th anniversary of fooldom currently. I would expect most people here are approaching a similar anniversary. But I've also found that the more I read on finance & economics, the more different - and often conflicting - views it is possible to take of the market at a given time. Thus, I find it helpful to revisit the ideas that I find most helpful or powerfully predictive, most often.

Again referring to someone with more experience than either of us - I've noticed that Buffett's writing in his annual report is often repetitive of past writing, as are his spoken comments in his annual meetings and interviews. He revisits the same ideas over and over. Perhaps this may indicate what you are judging as a matter of experience - the need to revisit - is more a matter of personal taste or habit. Or perhaps you're naturally better at this part of the game and have fully internalised things that he still feels a need to remind himself of every day upon arrival at the office? It's certainly possible you are naturally good at keeping everything in mind continually and in balance, and I commend you (sincerely, not sarcastically) if it is so.

As you say, best probably for me just to ignore your posts.

Whatever makes you most happy.

Likewise if anyone feels they are not enjoying this thread; or feel that it should not exist; why not simply... not read it & not post on it. Then everyone is happy. Participation in this thread is not mandatory

[compscidude]

https://uk.finance.yahoo.com/news/shell ... 45183.html

It appears Shell is also somewhat affected by the possible nationalisation/confiscation/complications of Russian oil/gas assets.

-----

Shell to sell all stakes in Gazprom joint ventures


"Oil giant Shell has announced plans to sell its stake in all joint ventures with Russian partner Gazprom, calling Russia’s invasion of the country “senseless” and a threat to European security."

"The company said it will sell its 27.5% stake in a Russian liquefied natural gas facility, a 50% stake in an oilfield project in Siberia and an energy joint venture."

"It will also end its involvement in the Nord Stream 2 pipeline between Russia and Germany, which has been put on hold by ministers in Berlin."

[compscidude]

https://www.ft.com/content/b51f1bb3-ddc ... 11d0f820cb

Banks are beginning to calculate their exposure to Russia and potential losses.

-----

Citigroup discloses near-$10bn exposure to Russia as sanctions tighten

"Citigroup said it has almost $10bn worth of exposure to Russia through loans, government debt and other assets, partly held through its Russian retail bank which it has said it wants to sell."

-----

Citigroup is down >5% currently which is in line with the ratio ($10bn exposure / approx $184bn book value ($92/share * 1.98bn shares)).

I note that JPM is also down 4.6% today in addition to recent drops. If it continues dropping I may one day find myself very reluctantly buying some JPM, as I have learned that bank investments almost never go horribly wrong...

[NotSure]

Well, it's Tuesday now, but European stocks doing badly, and what is going on with government debt? German 10-year back in negative (nominal) territory, plus Italian and Spanish yields dropping over 20 basis points in a few hours. I know, just noise, but I've rarely seen such decisive looking moves in yields. Speculation that Putin may do what we don't want to, i.e. cut of gas/oil to Europe?

[Charlottesquare]

Well, it's Tuesday now, but European stocks doing badly, and what is going on with government debt? German 10-year back in negative (nominal) territory, plus Italian and Spanish yields dropping over 20 basis points in a few hours. I know, just noise, but I've rarely seen such decisive looking moves in yields. Speculation that Putin may do what we don't want to, i.e. cut of gas/oil to Europe?

Pretty sure he does not want to either, surely he relies heavily on oil and gas to generate Euros and Dollars, given dodgy state of the rouble cutting of a major part of foreign earnings looks somewhat dangerous for Russia.

[77ss]

Well, it's Tuesday now, but European stocks doing badly, and what is going on with government debt? German 10-year back in negative (nominal) territory, plus Italian and Spanish yields dropping over 20 basis points in a few hours. I know, just noise, but I've rarely seen such decisive looking moves in yields. Speculation that Putin may do what we don't want to, i.e. cut of gas/oil to Europe?

Pretty sure he does not want to either, surely he relies heavily on oil and gas to generate Euros and Dollars, given dodgy state of the rouble cutting of a major part of foreign earnings looks somewhat dangerous for Russia.

Putin may do anything that keeps himself alive (or everyone else dead)! Pull down the walls of the temple? No issue.

A few years back, on holiday, I was chatting to a guy from NATO and for some reason the topic of Putin's retirement/successor came up. No way was the opinion - a death sentence for Putin. Very plausible.

This is the man admired by Trump. One despairs.

[NotSure]

A few years back, on holiday, I was chatting to a guy from NATO and for some reason the topic of Putin's retirement/successor came up. No way was the opinion - a death sentence for Putin. Very plausible.

There are a couple of exceptions, but in general, a 'retired' Russian leader is not really a thing.

https://www.bbc.co.uk/news/world-europe-20171951

[Hallucigenia]

FT journalist reports that NordStream2 has filed for bankruptcy :
https://twitter.com/samgadjones/status/ ... 0788980738

Meanwhile IEA members are releasing 60m barrels of oil from strategic supplies, equivalent to about 12 days of Russian liquid exports and 4% of stockpiles :
https://www.iea.org/news/iea-member-cou ... of-ukraine

[Hallucigenia]

Crikey, even Glencore are having second thoughts :

https://www.glencore.com/media-and-insi ... in-ukraine

We are reviewing all our business activities in the country including our equity stakes in En+ and Rosneft.

[88V8]

Meanwhile IEA members are releasing 60m barrels of oil from strategic supplies, equivalent to about 12 days of Russian liquid exports and 4% of stockpiles

The Ministers resolved today that energy supply should not be used as a means of political coercion nor as a threat to national and international security.

If Russia supplies Europe with 3mio bpd crude, it appears that total IEA reserves are equivalent to 500 days of total stoppage. Which is quite a lot or not much, depending how one looks at it.
China would presumably continue to purchase... could Russia sustain 500 days with a 60% hole in its oil revenue....

V8

[compscidude]

To anyone interested:

https://www.google.com/finance/quote/TT ... &window=1M

This compares BP, Chevron, Exxon, Shell and Total over the last month.

It seems to me that there is no sign of catastrophic loss of assets being priced in early. In fact the most downward-pointing line for most of the month was Exxon, not the Euro majors with huge Russia exposure. We can also see a strong rally in BP, Shell and Total as recently as Friday.

You'd also think that if BP/Shell etc thought there was a real risk of this happening they wouldn't have been buying back their shares furiously recently.

Regarding my estimate of Total's exposure. I was reading today that 24% of Total's proven reserves are in Russia and 17% of oil and gas output.
Source: https://www.reuters.com/article/ukraine ... FL1N2V40JP

I suspect the oil majors are being priced off short-term effects (the high oil price at present) much more than long-term problems (potentially losing 24% of your company's assets overnight).

Did anyone else notice all the oil majors have been buying back their stock at (current relatively high price) rather than late 2020 at (relatively low price). Interesting, that. Buybacks can be very value destructive if you pay more than the company's long term true intrinsic value.

As previously declared: I am no expert when it comes to the oil market and my value compass loses direction except at market extrema.

[Dod101]

To anyone interested:

https://www.google.com/finance/quote/TT ... &window=1M

This compares BP, Chevron, Exxon, Shell and Total over the last month.

It seems to me that there is no sign of catastrophic loss of assets being priced in early. In fact the most downward-pointing line for most of the month was Exxon, not the Euro majors with huge Russia exposure. We can also see a strong rally in BP, Shell and Total as recently as Friday.

You'd also think that if BP/Shell etc thought there was a real risk of this happening they wouldn't have been buying back their shares furiously recently.

Regarding my estimate of Total's exposure. I was reading today that 24% of Total's proven reserves are in Russia and 17% of oil and gas output.
Source: https://www.reuters.com/article/ukraine ... FL1N2V40JP

I suspect the oil majors are being priced off short-term effects (the high oil price at present) much more than long-term problems (potentially losing 24% of your company's assets overnight).

Did anyone else notice all the oil majors have been buying back their stock at (current relatively high price) rather than late 2020 at (relatively low price). Interesting, that. Buybacks can be very value destructive if you pay more than the company's long term true intrinsic value.

As previously declared: I am no expert when it comes to the oil market and my value compass loses direction except at market extrema.

Did the OP not notice that in 2020, oil companies were not exactly rolling in Dollars to buyback their shares? It is true that we for the last week have been in particularly uncertain times, but when decisions are made about share buybacks they are a strategy covering at least the next 12 months not the next week. They have no doubt entered into contracts with their brokers covering at least the next year I imagine.

Doc

[Itsallaguess]

Did you know that even Warren Buffett has newspapers lining the wall of his office, front pages with great unexpected market events and crashes - to purposefully remind himself every day of what is possible?

I have print outs of some people's historical 'everyone better sell up and run for the hills' posts on my wall, to purposefully remind me every day that being spooked out of the market for long periods can also be very, very expensive...

Opportunity cost is something that's almost guaranteed to kill long term returns, and especially when compared to strongly-proposed worst case scenarios that never actually materialise....

Here's one of my favourites from back in 2016 -

December 15th 2016 -

Some people say, 'the best time to buy is now'. These people are wrong, as a moment's glance at any diagram of market history will show you. There are good times and bad times to be buying.

Right now, in my opinion, is almost certainly not a good time to be buying. It is probably a good or good-ish time to be selling to cash and staying there. So I am ringing my 'danger' bell. Here's why.

https://www.lemonfool.co.uk/viewtopic.php?t=1631

In November 2020, I took a detailed look at how things had progressed since the above 2016 post, which readers can see using the following link -

https://www.lemonfool.co.uk/viewtopic.php?f=7&t=1470&start=40#p353949

I won't spend any time updating that market progress from November 2020, other than to say that on a cursory look, the DOW looks to have progressed by around another 10%, and the S&P by around 20%, which when taken into account with the large gains detailed in the above link between 2016 and 2020, hopefully helps me to make the primary point for this post -

A loud and repeated call discussing reasons to stay out of markets will, of course, eventually come true, but even when they inevitably do, long-term results of such repeated calls will need to be taken into context in terms of the long-term opportunity cost of being spooked out of the markets during all those very long periods where such calls were wrong...

Taking the above 2016 'ringing my danger bell' post is a clear example of this very important point...

I ignored the above 2016 post, as I've ignored many other similar posts over the years (all the way back to the Motley Fool days, as it happens...), and looking back at the market returns I've made since, by largely staying fully invested throughout, and riding out the many market-dips we've seen since, many of them very large indeed, I've managed to generate a level of return that could actually *still* be hit by some future market event, and *still* be in credit by a large degree...

That final point is the primary reason for me posting here - level-headed, long term, sensibly-diversified investors should be far less scared of some inevitable market drop in the future than they should be of being spooked out of the markets for very long periods, and looking for yet another reason 'to stay in cash'.

Level-headed, long-term, sensibly-diversified investors are likely to be almost guaranteed to lose more capital in terms of opportunity-cost over many years in that scenario, than they are likely to do by allowing themselves to stay largely invested in sensibly diversified elements, and to continue investing through the quite simply inevitable market downturns.

Cheers,

Itsallaguess

[Charlottesquare]

Well, it's Tuesday now, but European stocks doing badly, and what is going on with government debt? German 10-year back in negative (nominal) territory, plus Italian and Spanish yields dropping over 20 basis points in a few hours. I know, just noise, but I've rarely seen such decisive looking moves in yields. Speculation that Putin may do what we don't want to, i.e. cut of gas/oil to Europe?

Pretty sure he does not want to either, surely he relies heavily on oil and gas to generate Euros and Dollars, given dodgy state of the rouble cutting of a major part of foreign earnings looks somewhat dangerous for Russia.

Putin may do anything that keeps himself alive (or everyone else dead)! Pull down the walls of the temple? No issue.

A few years back, on holiday, I was chatting to a guy from NATO and for some reason the topic of Putin's retirement/successor came up. No way was the opinion - a death sentence for Putin. Very plausible.

This is the man admired by Trump. One despairs.

I concur that he/his family need to retain power for their survival, part of that is how happy is the Russian population and reduced capacity for overseas purchases may well have a bearing on that. (In the long term, I am sure he currently has large sums of overseas currencies so procurement issues may not bite for quite a while)