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Awakenings

When the market bull reins, somehow our deeply rooted fears yield to more pragmatic worries, such us how to spot and discard rotten apples and make the best estimate of the crop timing. This time the whole investment world is concerned, beyond any doubts, by raising inflation. New unmistakably strong sings pointing to imminent volcano eruption appear on weekly basis. It’s not even a question of when China would finally hike its refinancing rate rather than jerking poor banking reserve ratio, but rather what type of securities would be the least exposed to the yet changing environment. Learning from the lessons of the past, we see little chance for the broad sector stocks to extend their rallies once the eurodebt problems return to the agenda. With its sustainable double digit yields, Greek bonds, as fairly admitted recently by one of the top investment banks, look as risky as never before. Put it simply: Greece now is virtually barred from borrowing on the open market. Similarly, with average global CPI nearing 5% (largely due to the bulging soft commodities prices), the 3.5…4.5% safe haven yields look less than appealing. Fading appetite to gold investments being contemplated these days may serve as an early indicator of imminent exodus of investors from the yieldless prime debt markets. The only last hope for them to withhold the bathroom sink plug is to conquer their rivals. Whatever brutal this scenario may seem at a glance, for upraise of the US Treasuries there is little option except to dump the European debt market. Recently voiced commitment of China, and, lately, Japan and Russia known for their tangible currency reserves, to prop up the perilous bonds of the EU’s potential outcasts, promises the fight will be fierce and claiming certain victims.

Speaking about local events, it’s hard to leave unnoticed visibly increased companies’ M&A and general corporate activities in response to EPFR’s reported $724 mn cash inflow to Russia last week. The list of companies constantly reappearing in headlines grows like yeast: after BP announced its strategic alliance and planned share swap with Rosneft in conjunction with the Arctic oil exploration accord, every day we saw another local actor starring on the stage. Pharmaceutical bellwether Pharmstandard (PHST:LI) after announcing an acquisition of 55% stake in Biolek (Ukraine), further impressed by its plans to spend hundreds million dollars to purchase medicine production assets abroad in 2011. Russian truck maker KAMAZ (KMAZ:RU) whose stock spiked some 23% on Wednesday, cheered the second tier stock fans by strong sales data and similarly strong guidance for 2011. Russian steel pipe maker ChelPipe (CHEP:RU) announced due diligence period heading for an IPO of up to $1 billion in London and Moscow. New electricity generation gravity center permanently raising its significance and influence in the sector, InterRAO (IRAO:RU) revealed its aggressive plans of reconsolidation of utilities sector assets and search for overseas assets simultaneously mulling a stock offering to a strategic investor to compete globally with companies such as Italy’s Enel SpA and Spain’s Iberdrola SA. Japan’s Mitsui announced on Tuesday it had agreed to buy a 15% stake in Russia's largest instant payment system Qiwi (currently not traded). This list goes on and on. According to Reuters, Russian private issuers could raise up to $30 billion this year given the right market conditions. After two lackluster and perfectly laid-back years, new share issues rebounded in 2010 with local companies raising around $5.5 billion.

Once again, what we need to do is to separate the husk from the grain and stay committed to our selection. If this sounds like bull, looks like bull and acts like bull – then this is most probably the bull that finally entered market. However, we need to learn from the mistakes of the past and avoid companies with big debts on their balance sheets – no matter how convincing their recovery stories and guidance may appear, and keep an eye on the global funds’ flows while downplaying importance of the crude prices, that recently, with funny and unexplainable $7 WTI/Brent spread, became a sort of broken thermometer.