Clearly, appetite for risk is returning to global stock markets. Yet, while investors feel good about buying into the Chinese recovery and Asian growth story, as you have through your positions in the iShares MSCI Hong Kong Index (EWH) and iShares MSCI Taiwan Index (EWT), most investors either hate or ignore Russia. That explains why the entire market is trading at a P/E of only 2.33. And if Russia is the market investors love to hate, Mechel is the Russian company investors love to hate the most.
Ironically, Mechel once was a darling of emerging markets racking up huge gains for investors over the past few years — including Global Bull Market Alert subscribers. That was until last summer, when Russia’s Prime Minister Vladimir Putin accused Mechel’s CEO of charging Russians more for the company’s resources than it charged foreign buyers. Putin’s comments — five simple sentences — cost shareholders about $6 billion as its stock plunged 38% the same day. Yet, just days later, Putin also accused Mechel of avoiding taxes by using foreign subsidiaries to sell its products internationally. This time, Mechel tumbled by almost 33% as Putin’s comments raised fears of an attack similar to one made on oil giant Yukos in 2004, which resulted in the dismantling of that company and the jailing of its CEO.
Although Mechel essentially was left for dead by investors, it is now showing signs of life. Yes, Mechel has been hit hard by the global recession as its Q1 coking coal and steel output dropping sharply. But Mechel has been using the recession to snap up distressed assets at bargain-basement prices. It recently acquired a group of U.S. companies based in West Virginia and Kentucky for $436 million in cash, 83.3 million preferred shares, and the assumption of approximately $132 million of net debt. It is also building its war chest through the issuance of 45 billion roubles ($1.35 billion) in bonds.
But here’s the real attraction of Mechel. It is unbelievably cheap. After peaking at $56.33 just about a year ago, it collapsed all the way down to $2.57 on Jan. 20. Although it has tripled since it hit bottom, it still only trades at a P/E of 1.75!
The best way to think of Mechel is as a Russian lottery ticket. With a bit of luck, your small investment could yield a huge return. But be aware that this is an extremely volatile stock. So buy Mechel (MTL) at market today and set the stop price at $3.90. For even bigger gains, try the October $7.50 calls (MTLJU.X).
Portfolio Update
You were stopped out of the CurrencyShares British Pound Sterling Trust (FXB) for a gain of 13.83%.
The iShares MSCI BRIC Index ETF (BKF) rose another 11.86% this week. Brazil, Russia, India and China continue to outperform their developed peers. Raise your stop to $27.00. BKF is a BUY.
The Market Vectors Double Short Euro ETN (DRR) fell sharply, as risk appetite increased in the markets and investors moved out of the U.S. dollar. Although I’m still very bearish on the European economies, with DRR dropping through critical technical support levels, I am moving DRR to a HOLD.
The iShares MSCI Chile Investable Market Index (ECH) rose 8.76%, hitting levels not since late September. Tighten your stop to $34.50. Chile remains a BUY.
The iShares MSCI Hong Kong Index (EWH) got off to a solid start and was up 4.2% in its first week in the portfolio. This bet on a Chinese-led recovery in Asia is a BUY.
The iShares MSCI Taiwan Index (EWT) rose 2.7% last week, as Asian markets continue to strengthen. EWT remains a BUY.
Both the SPDR Gold Shares ETF (GLD) and the PowerShares DB Gold Double Long ETN (DGP) rose 3.48% and 7%, respectively, this past week, as worries about actions involving U.S. Treasuries provided support for the yellow metal. Each position remains a defensive BUY.
Your position in the iShares iBoxx $ High Yield Corporate Bond (HYG) closed at $76.75, its highest level since January. HYG remains a BUY.
The iPath DJ AIG Copper TR Sub-Idx ETN (JJC) ended the week flat, even as it breached the $30 level on Thursday. I am keeping “Dr. Copper” at a BUY.
Your Rydex Inverse Government Long Bond Strategy Inverse (RYJUX) hit $15.08, a level not seen since last Thanksgiving, as the bids for 30 year U.S. Treasuries went poorly. Your bet against U.S. Treasuries remains a BUY.
Sincerely,
