One of the wildest weeks in stock market history

People standing in line to receive their purchases at a distribution point of an internet shop in Russia - AP

A catastrophic drop in the Russian rouble, contagion across emerging markets, a ghastly Taleban massacre of Pakistani school children, a dovish signal from the Yellen Fed and epic volatility on Wall Street made this one of the wildest weeks ever in stock market history.

The Dow was up 650 points on Tuesday and Wednesday in the mother of all short covering moves. The S&P 500 index was up 4.5 per cent in only two trading sessions, the best 48-hour performance since November 2011. While there was a decoupling of crude oil and Wall Street on Thursday, I doubt if oil prices bottom any time before next April and interest rates will rise as long as US economic data keeps its current momentum. American equities are not cheap and periodic sell offs are inevitable.

Russia is on the edge of financial Armageddon and it is highly unwise for Dr Yellen to downplay the impact of a Russian nightmare on the global banking village. I remember Alan Greenspan telling us the repeal of Glass Steagall will boost financial stability and Ben Bernanke assured us the subprime crisis will be contained. Yellen is dead wrong on Russia. If Russia goes down, contagion will engulf the emerging markets and Europe.

After two incredible years for US equities, I remain cautious after the most frenzied Santa Claus rally of my life. However, Oracle did not rise 10 per cent due to the Fed but due to its stellar growth in cloud computing (Larry Ellison mentioned Salesforce.com no less than ten times in the earnings conference call. Go Mark!).

However, I would fade this rally and not get caught in the frenzy now that the Volatility Index has fallen by 30 per cent in the past two sessions. Putin’s speech was surreal, “defanged bears without claws” are a danger to world peace. Geopolitical risk in Russia, China, Ukraine, Syria, Iraq, Libya, Pakistan, Venezuela and Yemen will continue to impact financial markets. The US dollar will remain king in 2015.

Energy has been the worst performing sector in the S&P 500 and there is no reason to believe that $58 Brent has marked the bottom of the current oil price cycle. So it only makes sense to invest in energy shares with a unique technology franchise, global brand or a proactive management in restructuring mode. Schlumberger, the world’s leading oil services share, meets all three criteria.

Halliburton’s takeover bid for Baker Hughes makes it certain that Schlumberger will outperform in this oil service down market cycle. Brent will not rise above $75 in 2015, US shale oil and global deepwater E&P spending will fall and oil services, drilling, capex and offshore marine firms will all face slashed EPS estimates. This means it is prudent only to bottom fish in the largest, most diversified global oil service colossus. This means Schlumberger, which I expect to trade in a 80-90 range for now.

US money centre banks fell five per cent early last week as financial markets speculated that Russia’s refinancing risk could culminate in corporate defaults and global contagion across emerging markets, ghastly echoes of the 1994 Mexican and 1997 Thai/Indonesian/South Korean/Russian meltdowns. Citigroup has $7.5 billion in Russian corporate and consumer assets, low in a $2 trillion balance sheet. I am concerned that emerging markets grossly underperformed the Yellen rally in Wall Street, Europe and Japan. This is the reason Wells Fargo has done so much better than Citigroup or JPMorgan.

Several friends in Dubai asked me about Cuba as an investment opportunity. Since my knowledge of Havana cigars is less than encyclopedic, I prefer to focus on American Express and Carnival Cruise Lines. Castro has destroyed the Cuban economy with his Marxist ideologies and secret police control. The obvious “Cuba” play? The Herzfeld Caribbean Basin Fund, up 40 per cent this historic week! Cuba is still too high-risk for me and the embargo will not repealed by a Republican Congress.