Russia as a Lehman/LTCM Moment today.

[compscidude]

Summary of some news:

Russian central bank assets frozen (640bn). Other Russian banks blocked from swift.

Ruble has just dropped 43% so far against the dollar Monday morning (37% vs euro).

Russian central bank has raised rates from 9.5% to 20% this morning.

Russian market dropped 45.5% intraday last Thursday.

Russia has just banned foreign people/organisations from selling Russian assets 'to prevent a fire sale'.

Rumours of queues at banks/ATMs in Russia / bank run.

BP instant writedown of 25 billion on Rosneft (and I suspect further writedowns on individual joint field projects).

Norway Pension Fund bailing out of all Russian investments as of today.

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compscidude thoughts, 07:58am Monday.

1) I think this is likely a Lehman Brothers / LTCM type moment (i.e. 15/8/2008, 08/1998) but with a former superpower instead of a bank. Suddenly no one knows what everyone else is exposed to, how risky it will be to lend to them, what will be paid back, if it will ever be paid back. There's a chance of a 2008 rerun at high speed.

2) I would expect the central banks will want to flood the market with liquidity to try to prevent point (1) before it happens. Unfortunately coinciding with Quantatitive Tightening and rate rises in the opposite direction already scheduled and urgently needed with inflation at 8% vs rates <1%. This could be quite the shitshow. Central bank policy 2021-2022 is going to look totally bizarre and insane in hindsight.

3) The shortages of gas/oil/minerals/food etc that result from the war are going to drive inflation up a few more % globally. Ukraine produces 90% of semiconductor grade neon, about 15% of wheat, oats, barley for example, and lots of natural gas. Russia - minerals, oil, gas, rare earths used in chips.

4) A flood of money will also potentially drive up inflation even faster.

5) Re: the BP writedown. They are fools for not doing a firesale last week when they were being urged by UK politicians. I would expect similar writedowns like BP's to be seen from UK mining firms, TotalEnergies SSE, etc. during the day / rest of the week.

6) I would not be shocked to see massive drops in UK banks in the next 30 minutes after open due to banking panic globally, plus I would assume they are up to their waists in Russian dealings.

7) Coincidentally, mentioning LTCM. They collapsed suddenly in 1998 *specifically* because of out-of-model movements in Russian debt / debt default.

8) Meanwhile, the Chinese mega bond crisis e.g. Evergrande continues to rumble slowly along in the background....

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[1] https://www.investopedia.com/terms/l/lo ... apital.asp

[2] https://en.wikipedia.org/wiki/Bankruptc ... n_Brothers

[compscidude]

BP will be in the news a lot today but TotalEnergies is also interesting.

I checked last week into TotalEnergies, to guess at their Russia exposure roughly on the back of an envelope; I think they may have about $12-15bn in Russian LNG/company investment vs their $140bn market capitalisation. Some large LNG field investments (e.g. Yamal) plus a 20% stake in Novatek.

Of course these numbers were literally changing even as I looked last week, due to rapid stockmarket movements, oil/LNG price movements and devaluation of the Ruble. For practical purposes the value of the stake might well be $0bn already since it can't be sold (as of today) and the Russian government are talking about nationalisation of foreign assets (at the weekend).

I leave my total guess open to correction by anyone competent at valuing oil/LNG assets.

[jackdaww]

.

banks down about 3% today. ftse100 down about 1%.

[Dod101]

compscidude thoughts, 07:58am Monday.


6) I would not be shocked to see massive drops in UK banks in the next 30 minutes after open due to banking panic globally, plus I would assume they are up to their waists in Russian dealings.

You may therefore be disappointed. It is of course much too early to say what may happen as the day progresses. Soothsaying is difficult.

Dod

[compscidude]

'Soothsaying': keep in mind, "I would not be shocked to see" is not quite the same as "I predict" or "I expect".

On a normal day, I would be shocked to see a massive drop in banks at open. Today, I would not be.

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Anyway let's see how it went, it's 8.45am, Barclays is currently down -4.6%, Natwest -4.5%, HSBC -5.35%, STAN -4.8%.

Not the biggest downwards movements in bank prices I've ever seen, nor was it exactly that far down at 8.30am precisely either, but....

as far as 'what I think we might see in 30 minutes time' guesses go, it's not the worst guess ever.

comp

[NotSure]

The main casualties this morning are Russian. Sberbank (SBER), Lukoil (LKOD), Rosneft Oil (ROSN), Gazprom Neft (GAZ) and PhosAgro (PHOR). Down about 75% in SBER's case.

[Arborbridge]

compscidude thoughts, 07:58am Monday.


6) I would not be shocked to see massive drops in UK banks in the next 30 minutes after open due to banking panic globally, plus I would assume they are up to their waists in Russian dealings.

You may therefore be disappointed. It is of course much too early to say what may happen as the day progresses. Soothsaying is difficult.

Dod

Define "massive"! Each to his own: I would say the drops in our banks are "significant".

Arb.

[Dod101]

compscidude thoughts, 07:58am Monday.


6) I would not be shocked to see massive drops in UK banks in the next 30 minutes after open due to banking panic globally, plus I would assume they are up to their waists in Russian dealings.

You may therefore be disappointed. It is of course much too early to say what may happen as the day progresses. Soothsaying is difficult.

Dod

Define "massive"! Each to his own: I would say the drops in our banks are "significant".

Arb.

I too think they are significant but not so far as bad as I had feared. Glad though that I do not hold BP. I do not know what their holding in Rosneft is valued at in their balance Sheet but its total profits for 2021 was $2,720 million and BP received $464 million as a dividend for the first 6 months of 2021. Even for BP that is surely significant.

Dod

[88V8]

There are some great buying opportunities today.
Dragged down by the general panic, but no actual exposure.
I just wish I knew what they were
Looking.....

V8

[compscidude]

I checked last week into TotalEnergies, to guess at their Russia exposure roughly on the back of an envelope; I think they may have about $12-15bn in Russian LNG/company investment vs their $140bn market capitalisation. Some large LNG field investments (e.g. Yamal) plus a 20% stake in Novatek.

12/140 is about 8.5%

TotalEnergies is currently down 7.78% in NYSE premarket trading.

In EU/LSE trading it was around 46.70-47.00 Euro for the first 15 minutes of trading, around 1-2% down. Now down 6.82% in euro terms at 45 euros.

Close enough.

I always find it interesting when there's a chance to escape trouble like that (today, banks & oil) for about 15 minutes after trading opens, which extends after the opening auction into normal trading. An interesting example of market inefficiency. We all had the same information waiting to be read (or known a priori), so anyone could have looked this up last week or at the weekend if they felt nervous seeing BP all over the headlines and wondered if it affected their other oil holdings.

[Arborbridge]

compscidude thoughts, 07:58am Monday.


6) I would not be shocked to see massive drops in UK banks in the next 30 minutes after open due to banking panic globally, plus I would assume they are up to their waists in Russian dealings.

You may therefore be disappointed. It is of course much too early to say what may happen as the day progresses. Soothsaying is difficult.

Dod

Define "massive"! Each to his own: I would say the drops in our banks are "significant".

Arb.

I too think they are significant but not so far as bad as I had feared. Glad though that I do not hold BP. I do not know what their holding in Rosneft is valued at in their balance Sheet but its total profits for 2021 was $2,720 million and BP received $464 million as a dividend for the first 6 months of 2021. Even for BP that is surely significant.

Dod

I think the stake was "worth" 25 billion dollars. No longer! Its all a bit strange really, BP announcing they will get out of their stake isn't quite like you or I selling out of a share. They haven't sold their share, but written them off to nil, I think. In the normal course of events they would be sold in the market, but no one is going to want them except the Russian state or one of Putin's friends - and they won't pay for them, they will just be seized and gifted. So BP has lost the income, and handed the shares on a plate to Putin (give or take a fruitless legal wrangle).

Looked at that way, I'm not quite sure what has been achieved except the longer term enrichment of Putin at our expense. Although, as others have said, if you buy into Russia you must always consider it a lost cause since the State has a habit of seizing things went it suits it. That's why Oligarchs end up in the UK.

Arb.

[NotSure]

There are some great buying opportunities today.
Dragged down by the general panic, but no actual exposure.
I just wish I knew what they were
Looking.....

V8

I would have thought the biggest risk is from rising energy costs -> rising cost of living -> increased pay demands -> higher interest rates etc. I would have thought that everything is exposed to some degree, but a finessed assessment of exposure may reveal some bargains perhaps?

[compscidude]

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

[Dod101]

There are some great buying opportunities today.
Dragged down by the general panic, but no actual exposure.
I just wish I knew what they were
Looking.....

V8

I would have thought the biggest risk is from rising energy costs -> rising cost of living -> increased pay demands -> higher interest rates etc. I would have thought that everything is exposed to some degree, but a finessed assessment of exposure may reveal some bargains perhaps?

At the weekend I checked my oil level (I am off grid for gas) and suddenly need oil. Cost 70.5p per litre, the highest I have ever paid in the last 15 years. The previous high was in March 2013 when I paid 62.9p. It just shows how cheap oil has been. The Shell share price is down this morning.

Dod

[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

[compscidude]

Regarding BP.

Writing down 25bn. This has an interesting effect because by writing it down immediately, they are able to manage down their tax payments while oil income is at a cyclical high point. Should the Rosneft stake regain some value later, and they sell it, that will be a nice way to smooth out earnings and tax over time.

What's interesting to me is that the writedown is only 25bn and they have apparently only written down existing the stake of Rosneft? Consider, in addition to their equity stake in Rosneft they also have further investments in ownership of particular oil/gas fields in Russia.

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.

Worse still: This is completely ignoring any additional impact that might come via e.g. loss of income from Russian oil assets / field ownership that are separate to the primary Rosneft stake. In other words I'm 'presuming' that the Rosneft line in the earnings implicitly includes all forms of Russia-related earnings. I do not have sufficient interest to figure out if that is actually the case, or if things are indeed worse due to losses on those other assets. Anyone whose life savings are at stake may want to determine this urgently.

I have no stake in BP either long or short.

Good luck & best wishes to all BP holders.

https://www.bp.com/content/dam/bp/busin ... esults.pdf (Page 4)

[Dod101]

Regarding BP.

Writing down 25bn. This has an interesting effect because by writing it down immediately, they are able to manage down their tax payments while oil income is at a cyclical high point. Should the Rosneft stake regain some value later, and they sell it, that will be a nice way to smooth out earnings and tax over time.

What's interesting to me is that the writedown is only 25bn and they have apparently only written down existing the stake of Rosneft? Consider, in addition to their equity stake in Rosneft they also have further investments in ownership of particular oil/gas fields in Russia.

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.

Worse still: This is completely ignoring any additional impact that might come via e.g. loss of income from Russian oil assets / field ownership that are separate to the primary Rosneft stake. In other words I'm 'presuming' that the Rosneft line in the earnings implicitly includes all forms of Russia-related earnings. I do not have sufficient interest to figure out if that is actually the case, or if things are indeed worse due to losses on those other assets. Anyone whose life savings are at stake may want to determine this urgently.

I have no stake in BP either long or short.

Good luck & best wishes to all BP holders.

https://www.bp.com/content/dam/bp/busin ... esults.pdf (Page 4)

Ricky Fulton used to do a skit as the Rev I M Jolly on Scottish TV on New Year's Eve. Maybe compscidude is auditioning for his replacement?

Dod

[compscidude]

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

Counterpoint: when a 70-year old warmonger is credibly threatening to nuke the planet on his way out, and practicing his launches, while pandemic still rages the lands, while financial markets shudder from a mighty blow across the banking and energy sectors, as an entire major economy is stripped from the global system instantly ... while inflation hits 30-40 year highs, but rates needed to control it still sit at 300 year lows ... all of this while still sitting at one of the highest levels of market overvaluation ever on record (by almost any metric you choose)... I think a reminder of the reality of how the world stands is useful!


I mean, look at this! https://www.multpl.com/shiller-pe

Or this! https://www.multpl.com/s-p-500-price-to-book

Or this! https://www.gurufocus.com/economic_indi ... 0-over-gnp



Good lord. There's a whole lot of air under our feet!

Besides this is the Macro Board, not the Hugs and Emotional Support board.

(I regret to add that my post over on the Hugs and Emotional Support board later today will unfortunately be even more bearish.)

comp

[Arborbridge]

Falling markets generate a lot of hot air. [Deletion.]

In every crisis someone pops up with predictions or armageddon. If it happens, it happens and our lives will be shattered beyond worrying about some share losses. [Deletion.]

Moderator Message:
Bits removed to make the points less personal. Chris

Arb.

[csearle]

Moderator Message:
Some posts deleted. Please try to address the arguments rather than comment on other posters. Thanks. - Chris