When the White House starts dishing out advice about investing in the global equity markets, apparently short-sellers don't listen. And why should they?
On March 18, press secretary Jay Carney said that the only investments worth making in Russian equities are wagers that the market will decline.
Anyone paying attention wisely wasn't really paying attention. The Russian equity market, as measured by the Market Vectors Russia ETF (RSX), the largest U.S. exchange traded fund tracking the Russian market, was down 8.7% since the start of the Crimean crisis in late February but since Mr. Carney's vague and somewhat confusing statement, it's up 2.4%.
In fact, some are even calling the “blood on the streets” of Russia's stock market a buying opportunity.
The Market Vectors Russia Small-Cap ETF (RSXJ) has fallen by 15.7% since Russia started its advance on Crimea, but has gained back 1.7% since Mr. Carney said investors should avoid the Russian market.
Over those same periods, the S&P 500 Index has been essentially flat.
To be fair, it was never clear whether Mr. Carney was suggesting that investors help the U.S. government punish Russia by dumping and/or shorting Russian stocks, or whether he was giving investors a friendly heads-up that U.S. and European sanctions could eventually hurt the Russian economy and, ultimately, its equity markets.
Whatever, it's clear that the short-sellers didn't take the bait.
According to Bloomberg, the percentage of shares of RSX borrowed for shorting has fallen to 14% of the total stock, which is down from 17% the day Mr. Carney spoke, and a record 21% on March 3.
“I don't believe whether a U.S. investor invests in Russia will have any impact on the Russian stock market, but telling people to get out of the stock market is manipulative,” said Bill Mann, portfolio manager at Motley Fool Asset Management.
Mr. Mann pointed out that in addition to being manipulative, such statements also expose a certain level of ignorance regarding the way equity markets work.
“Selling a stock is a derivative and largely neutral response, because the only way out of a stock is to sell it to somebody else who wants to buy it,” he said.
Mr. Mann generally avoids allocating to Russian equities in the two funds he manages because he isn't comfortable with the way a third of the country's public companies are owned by the government and another third are owned by Russian oligarchs.
But even if he liked specific Russian stocks, Mr. Mann said. he wouldn't avoid them based on a White House effort to whip up some populist campaign to punish Russia.
“The stock market ultimately follows the performance of the businesses, and a stock price at any point is just an equilibrium,” Mr. Mann said. “If you can impact the performance of those businesses, you will deeply impact the stock, and if that's what the White House meant to say, maybe that's what should have been said.”
If what we're seeing is the start of regular theme of investment advice coming from White House spokespeople, maybe it's time for a new market barometer to basically do the opposite of what's being advised.
But, at the very least, it opens a new can of challenges for the White House.
“What are they going to do when things start to improve, tell short-sellers to cover their positions?” said Joseph Witthohn, vice president of product development at Emerald Asset Management.
“The White House should not ever be in the advice business on something this serious,” Mr. Witthohn added. “They shouldn't be looking for U.S. investors' help in manipulating the economies of other nations.”