A Calloused Market Heart

Calluses are generally a good thing, as they are the body’s response to help shield against pain and breach of the skin. Think of calluses as the tough outer layer that stops the harshness and coldness of the world from hitting your nerve endings. Of course, calluses can also form in the heart, and for the same reason, i.e., to stop the harshness and coldness of the world from burrowing into our souls.

When it comes to financial markets, well, they, too, have calluses.

The latest atrocities in the Middle East tell us just that. You see, despite the fact the Hamas attacks on Israel and the future Israeli response to this conflict have dominated the mainstream and financial news, markets have largely remained callously indifferent.

Yet, the situation is set to potentially escalate in the coming days and weeks, so today, I want to provide a dedicated analysis to explain what this situation means for markets.

The following analysis was sent to subscribers of my Eagle Eye Opener, a publication that’s a collaboration with my “secret market insider” that explains what is going on in markets, what to look for that day and what the key events are that will move stocks, bonds, commodities and currencies. Perhaps most importantly, it’s presented in a quick, 10-minute, plain-English read that dispenses with the noise and tunes into the melody of the market.

From the Eagle Eye Opener…

First, we will not spend time addressing the human aspect of the Israel/Hamas situation other than to say it is a tragedy of epic proportions for all innocent civilians, and our hearts go out to the families that have lost loved ones and whose lives have been torn apart.

Yet, the reason we won’t spend time here on the human aspect of this situation is because it doesn’t matter to the markets.

The market is only focused on the economic impact of the conflict, and that’s why tragedies don’t usually impact markets unless they carry with them economic consequences.

Looking at the Israel/Hamas situation, like most geopolitical crises, the market views it through the lens of impact on energy commodities, and in this situation that means oil. For reference, the Ukraine/Russia war was viewed through the lens of a different commodity, natural gas.

So, for the Israel/Hamas conflict, here are the market truths:

• Anything that occurs that the market thinks might reduce the supply of oil will push oil prices higher and stocks lower.
• If the market does not think the events will impact the supply of oil, then the markets will largely ignore the war, regardless of the human tragedy or geopolitical upheaval that ensues.

Given those truths, here is the worst-case scenario for the market.

First, Israel invades Gaza. This is extremely likely to happen.

Second, Hezbollah attacks Israel in retaliation on their northern border through Lebanon, creating a two-front conflict for Israel.

Third (and this is the key point) Iran attacks Israel to support Hezbollah and Hamas, which prompts the United States to launch an attack on Iran, almost certainly destroying much of its oil infrastructure and removing supply from the market. To underscore this risk, South Carolina Sen. Graham will introduce legislation authorizing the president to destroy Iranian oil infrastructure in the event of an attack on Israel.

That is how this conflict goes from isolated (Israel versus Hamas or Israel versus Hamas/Hezbollah) to regional (Israel and the United States versus Iran, Hamas and Hezbollah). And that’s when this conflict would materially impact markets and send oil prices surging.

Absent this spiraling into a regional conflict (whereby Iran gets involved and the United States threatens to attack its oil infrastructure), then this conflict should not materially impact markets beyond the very short term.

Source: StockCharts.com

Notably, this dynamic is why stocks rallied on Monday. President Biden’s trip to the region was seen as an effort to prevent a broader regional conflict, and as long as diplomatic progress occurs, that will pressure oil and help support markets.

Bottom line, for all the noise that will occur in the coming days/weeks, watch oil prices, because that is the barometer of the market’s worries about a regional conflict. If oil makes a fresh closing high above $87.72 on an Israel/Gaza/Hamas/Hezbollah/Iran headline, that’s a clear indicator the situation is legitimately deteriorating and increasing the risk of a pullback in stocks.

If you would like to get this kind of deep analysis on the economy, stocks, bonds and anything that makes the market move, each trading day 8 a.m. Eastern time, then I invite you to check out my Eagle Eye Opener, right now. I suspect it will be the best decision you make today!

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ETF Talk: ‘It’s Electric!’ The Utility of Nuclear Power

Uranium and nuclear power are still on the menu for investors this week. Clean and green, nuclear power has come back into the global spotlight in recent months as an attractive alternative to fossil fuels and as the Russia-Ukraine conflict has prompted governments to prioritize energy security. This renewed interest in nuclear has increased demand for uranium.

In last week’s ETF Talk on Sprott Uranium Miners ETF (URNM), I mentioned that uranium is the fuel for nuclear fission, the process through which nuclear energy — mostly electricity — is produced. Nuclear is back in vogue for the first time since the 2011 Fukushima disaster that prompted a stall in new production for over a decade. While uranium is not a rare element, government investment in it has been low for years, negatively affecting the number of companies engaged in mining and exploration of the chemical element. But demand is now soaring in this niche industry and nuclear is on the rise.

The market is limited to just a few baskets of stocks from which to choose. Many have been seeing significant growth due to recent geopolitical events and a global focus on green climate policies. Uranium is vital to the green energy transition and increased demand has pushed uranium prices to their highest point since 2011. We’ve recently highlighted two funds in the uranium market, Global X Uranium ETF (URA) and Sprott Uranium Miners ETF (URNM). This week, I want to introduce another (mostly) pure-play nuclear fund.

VanEck Uranium+Nuclear Energy ETF (NYSE: NLR) is an exchange-traded fund (ETF) that targets companies across the uranium and nuclear energy industry. The portfolio focuses on companies expected to generate at least 50% of revenue or assets from mining, building and maintaining nuclear facilities, producing electricity using nuclear sources or providing services to the nuclear power industry. The fund seeks to replicate the price and yield performance of the Nuclear Energy Index, which is intended to track the overall performance of companies involved in uranium mining, the construction and maintenance of nuclear power facilities and related businesses in the production of nuclear power.

VanEck’s NLR is smaller than the other uranium ETFs and employs a different strategy. Unlike URA and URNM, NLR’s portfolio includes a hefty percentage of holdings in utilities. This makes it less of a pure-play option than the others and not quite as promising. Its growth has not matched URA and URNM, but investing so heavily in nuclear power utilities helps to stabilize the portfolio in a highly volatile market. It also provides a modest yield of 1.57%.

NLR fund has 28 positions, and its top 10 holdings account for 59.61% of assets. The fund’s sector weighting favors Energy at 47.64% and Utilities at 40.66% of the portfolio, rounded out by Industrials at 10.04% and Information Technology at 1.59%. Top holdings in the portfolio include Constellation Energy Group (NASDAQ: CEG), Public Service Enterprise Service Inc (NYSE: PEG), Pacific Gas & Electric Corp (NYSE: PCG), Cameco Corp (NYSE: CCJ) and Cez As (PSE: CEZ).

Source: StockCharts.com

The fund is down 2.81% over the past month, up 13.90% over the last three months and jumped 25.21% year to date. NLR has a net asset value of $114.46 million and a net expense ratio of 0.61%.

While the energy sector is growing and the demand for nuclear power is on the rise, be aware that the uranium market is highly volatile and vulnerable on several national and international fronts, including geopolitical risks, regulatory action and competitive risk associated with the prices of other energy sources. As always, investors should do their due diligence before adding any stock, fund or ETF to their portfolio.

I am always happy to answer any of your questions about ETFs, so do not hesitate to send me an email. You may just see your question answered in a future ETF Talk.

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In case you missed it…

A Refreshing Reminder of Capitalism

Over the weekend, the world was smacked with the horrific news that Hamas jihadists had viciously attacked Israel. The reports quickly turned into an orgy of ghastly murder, rape, mayhem, decapitations and the kidnapping of hundreds of Israelis. Then, there was the retaliation by the Israeli Defense Force, a retaliation that showed the technological prowess possessed by the nation and the willingness to destroy the enemies of civilization.

The details of this conflict, along with its historical context, can be found in numerous sources, so there is no need for me to delve into the details here. Moreover, this is The Deep Woods, which means we look at things beyond just historical events and dig much deeper to unveil their philosophic core.

In doing so, we discover that the conflict between the Arab world and Israel is really just a conflict between the forces of mysticism, medieval tribalism, dictatorship and terror (the Arab world) and the forces of reason, individualism, capitalism and civilization (Israel and the Western world). And with those diametrically opposed views in place, can there ever be “peace”?

The answer is, sadly, no.

Speaking of capitalism and civilization; it is in times of global tumult and ugly headlines that we all can use a reminder of the true nature of good, and the true nature and kindness of capitalism and its role in creating a flourishing and rational civilization.

A few years ago, I wrote about this in my article “Try to Be More Kind.”

Today, as an antidote to the chaos of global events, I present this article to you in the spirit of reason, reality and optimism. Because amidst the irrationality of religious violence, there also exists the beauty and kindness of rational actors being good.

Try to Be More Kind

We live, then we die.

That’s a reality we all must grapple with each minute. And the fact that life is finite has implications for everything we do. And no matter what your beliefs are about the existence of an afterlife, there is no doubt that life on earth as we experience it is going to come to an end for us all.

This admittedly morbid, yet eminently liberating, realization is at the spine of nearly all of our decisions, even though many times we fail to realize it. Think about the actions you take each day.

You wake after a night of sleep because your body requires sleep. You consume food because your body requires energy. Then, for most of us, we engage in some form of productive activity that nets us financial compensation so that we can attain the capital required to fund our existence.

If we’re lucky, we have family and friends who we love that we can share our lives with, and that allows us both to provide and to receive mutual support.

The requirements of a finite life also have a profound effect on your decisions about what to do with your money, how to spend that money, how to invest it and how to plan for a time when you may not be able to, or may no longer want to, work. Then there’s your family, and the work involved in making the right decisions to provide for them when you’re no longer here to do so.

Now, much of my newsletter advisory services are aimed at the nuts and bolts of how to put your money to work in the financial markets so that you can maximize this critical aspect of your life. Yet as you likely know, in The Deep Woods I like to peel back the layers of the onion skin so that we can access the principles at the root of the issue.

And when you think about it, what is at the essence of our quest to make sure we are financially secure enough to take care of ourselves and the ones we love?

To me, the answer is simple: It’s a desire to be kind.

Indeed, the desire to be kind, i.e., the quality of being caring, attentive, considerate and otherwise thoughtful of others, is something that we all should strive to be motivated by. I know for me, the action I take out of kindness not only feels good, but it’s always in my rational self-interest to do so.

Acting kind doesn’t mean self-sacrifice. Rather, it means acting and interacting with others so that both parties receive maximum benefit from the interaction.

Extended out to the political realm, the desire for kindness is why I am a passionate advocate for laissez-faire capitalism. You see, capitalism is the only social system where men are free to interact with each other based on the principle of exchanged values.

For example, this morning, I went to my local Starbucks and paid $4.95 for a latte. I wanted the latte more than I wanted the $4.95, and Starbucks wanted the $4.95 more than they wanted the latte. I didn’t exercise physical force to extort the latte from my barista, and she didn’t wrestle me into the store from the street to confiscate my money.

Instead, we engaged in a mutually kind exchange of values that also was mutually beneficial. This kindness is the essence of capitalism, and it’s the opposite of the Marxist idea that capitalism exploits the proletariat.

In my view, a prescription for increasing societal happiness is to increase kindness. Not only in terms of our daily human interactions, but also in the wider sense of people interacting with each other via the kindest of all principles: free exchange.

Finally, I’ll leave you with a powerful quote from philosopher and neuroscientist Sam Harris regarding kindness. As Sam writes: “Consider it: every person you have ever met, every person will suffer the loss of his friends and family. All are going to lose everything they love in this world. Why would one want to be anything but kind to them in the meantime?”

If you want to make yourself and the world a better place, try to be more kind.

For a special audio essay of this article, I invite you to listen here.

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Don’t Be A Bore

“A healthy male adult bore consumes each year one and a half times his own weight in other people’s patience.”

— John Updike

I have never been accused of being boring, and I’m not likely to ever suffer that accusation. The reason why is because I find everything about the world interesting, and people who are interested in the world are never bored.

So, if you don’t want to be accused of being a bore, and thereby consuming one and a half times your own weight in other people’s patience, then cultivate your interest and embrace all the wonder that life has to offer. If you don’t, you’re only depriving yourself of the tremendous beauty, truth and wisdom the world has to offer.

Wisdom about money, investing and life can be found anywhere. If you have a good quote that you’d like me to share with your fellow readers, send it to me, along with any comments, questions and suggestions you have about my newsletters, seminars or anything else. Click here to ask Jim.

In the name of the best within us,

Jim Woods