The U.S. markets went on a wild ride Tuesday following the decision by the Russian central bank to increase interest rates by 650 basis points to 17%. This was its second rate hike in the past week as it tries to restore confidence in the Russian ruble, which has nearly halved in value against the dollar in the last six months. The ruble has been in decline due to the collapse in oil prices and from Western sanctions. Oil prices fell another 3% early, on the news, but rebounded throughout the day from the lows and the energy sector has seen a bounce (off of very depressed levels).
The velocity of the oil price decline has been fierce -- down 48% from July highs -- and has been the focus of most investors for the last several months. The confusing part has been trying to ascertain the reason for the drop. How much is it excess supply (from the U.S., Libya, Nigeria and OPEC's decision to fight for market share -- and not production cuts) and how much is it demand due to weaker global markets (mainly Europe which is teetering on its third recession in six years)? Markets don't like uncertainty, hence the volatility, especially after reaching all-time highs recently.
The key question is whether Russia's problems will dissipate and if not, will they lead to a global contagion, ultimately affecting the U.S. recovery. While Russia sits on some of the largest foreign exchange reserves in the world because of its oil and gas earnings (totaling around $400 billion -- it spent $80 billion last year alone to defend the ruble), what has to happen is for the country to access international capital, which seems highly unlikely in the near term. Also, Russian President Vladimir Putin's leadership is certainly in question as the economy and currency have been crushed.
It's hard to imagine there won't be some impact felt in neighboring countries and some emerging markets. We know that some Italian and Austrian banks were heavy lenders to Russian companies and eyes remain on vulnerabilities in Turkey, South Africa, Venezuela and Argentina, many of which have already been increasing their rates.
We know Citi (C) also has exposure, but that it is hedged. And we also know that many U.S. multinational companies, such as PepsiCo (PEP), General Motors (GM), McDonald's (MCD) and others, have some exposure that will certainly be marked down. However, in most cases it is manageable exposure.
Bringing it back to the U.S. economy, we've seen improving trends the last few months and have said many times that while lower oil prices could affect the job market to some degree (we estimate that the oil industry has accounted for 5,000 jobs/month, year to date) they are a net positive for the consumer and U.S. companies that use oil/gas as an input cost. The U.S. Energy Information Agency (EIA) estimates that U.S. households will spend $550 less on gasoline in 2015, the lowest amount in years, which is a positive for the consumer, restaurant companies, retailers, airlines, cruise ships, as well as many other consumer-facing companies.
Other beneficiaries should be industrials Honeywell (HON) and 3M (MMM) are two that recently reiterated guidance), truckers, chemical companies, and rails/logistics firms. Other parts of the U.S. economy have also seen improvement. GDP growth in the last two quarters was the strongest for six months since 2003. Job growth has averaged 278,000 over the last three months and been steadily above 200,000 in the last 10 months, with November's growth the highest since 2012. Auto sales are at a new cycle high, and U.S. factory output has been steadily on the rise with strong new order trends.
This is not to say that the news from Russia won't have a market impact in the U.S., but since we are into a recovery, use that as a buying opportunity.
We've positioned the Action Alerts PLUS portfolio with a heavy consumer tilt beginning in September, as we sold off many of our oil holdings. We continue to like the consumer plays -- lululemon athletica (LULU), Dollar General (DG), Walgreen (WAG), Panera Bread (PNRA), McDonald's (MCD) and Lear (LEA).
General Motors also is a consumer play. It's cheap, offers nearly a 4% yield and once the ignition recalls fade, we expect the stock to perform better. We like industrials, technology and financials as well.
Finally, we still want to have some energy exposure for a possible bounce -- even oil price stabilization will likely lead to a rally given the oversold nature of the group. We continue to hold special situational stories in Kinder Morgan (KMI) and Royal Dutch Shell (RDS). Ensco (ESV) is completely oversold (it is pricing in a dividend cut) even though the company has firmed up its balance sheet and has $11 billion in backlog.
We'd rather get more aggressive on oil once we see a few days of stabilization in the commodity, so our shopping list is ready -- especially the best-in-breed names that have been hit really hard, such as Schlumberger (SLB), ConocoPhillips (COP) and Anadarko Petroleum (APC). However, we'll watch for commodity price stabilization before taking action here.