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Why Russia Flips Wall Street

U.S. corporations have about $1.3 billion invested in Russia - less than the $1.9 billion in investments that American companies have in Hungary and Israel, according to the U.S. Bureau of Economic Analysis.

Yet the travails of the Russian economy sent the Dow Jones down again on Friday after Thursday's sharp drop.

Experts say Wall Street's behavior has less to do with the direct economic impact of Russia and more with politics, Russia's effect on U.S. trading partners and an overall bearish mood in the market.

CBS.MarketWatch.com Chief Economist Irwin Kellner attributed the Dow's drop more to fear than logic.

Banking stocks, for example, have suffered in the latest downturn despite overall financial strength, Kellner said.


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"U.S. banks have been hammered. Yet, take the top five banks, and their total exposure to Russia might be about $1 billion - yet the same banks have $100 billion worth of reserves, so you see how ridiculous this [fear] is," Kellner said.

Kellner and Art Hogan, senior market strategist for Jeffries & Co., both said they've been hearing investors complain about the indirect effects on the United States from the Russian malaise.

Latin America, a crucial region receiving about 20 percent of U.S. exports, trades heavily with Russia and Germany, for example.

Another concern is that Russian hard-liners may reverse the already-slow pace of economic reform with measures ranging from the institution of fixed prices to attempted control of the press.

"Investors are worried because of the geopolitical impact and the indirect economic impact," Hogan said. "Russia may end up selling its weapons to terrorists to raise money. This could be driven by the fact that people don't have enough money to buy food."

The continued perception that stocks are overpriced makes the U.S. markets more volatile in the face of any uncertainty: Japan, Hong Kong or Russia, Kellner said.

"Fair value [in the Dow Jones Industrial Average] is somewhere south of 7000," Kellner said. "There's a good distance to go. At its peak, the Dow in mid-July had grown twice as much as corporate profits. People started casting their eyes at the exits. Now, name your excuse and people are heading for the door. People are saying, 'I want to nail down any profits now.' "

In his current CBS MarketWatch column, Kellner concludes that U.S. investors may be battered in the short run but emerge wiser down the road.

By Steve Gelsi, CBS MarketWatch