Are You Ready for $250 Oil?

This morning, I received a text from a very smart colleague who has substantial investments and expertise in the oil and gas industry. And when this man alerts me to something he thinks I should know, I pay attention. In the text, there was a link to the following CNBC story with this ominous headline: “How oil could spike to $150, even $250 if Israel-Hamas war escalates, according to Bank of America”.

Now, one doesn’t even need to read any further to get a bit of a chill down the spine at the prospect of an oil spike of such magnitude.

Of course, if you are long oil stocks, E&P (exploration and production) stocks or crude oil ETFs/futures contracts, that chill down the spine was more likely felt as the tingling adrenaline surge of potentially big gains.

The thesis here with respect to these big oil price spike predictions is that, if the conflict between Israel and Hamas escalates into a wider conflict in the Middle East, that would likely cause big supply disruptions. According to analysts at Bank of America, any escalation involving Iran could trigger a jump in crude prices from $120 to $130 per barrel.

While that high a cost of oil per barrel would be ugly for the global economy, it would look like a teenage beauty queen in comparison to the extremely ugly scenario of oil prices spiking to some $250 per barrel.

The theory here is that if Iran gets more involved in the conflict (it already supports Hamas, militants in Syria and the Lebanese militant group Hezbollah — all three of which have fired rockets into Israel since early October), that would trigger a retaliatory strike on Iran by Israel and her allies, i.e., the United States.

Here’s the money quote from the CNBC article that’s downright frightening:

“Bank of America warned that any retaliation against Tehran could risk the passage of vessels through the Strait of Hormuz, a vital channel for the world’s crude. If the strait is closed, oil prices can spike above $250 per barrel, the bank said.”

Bank of America’s concerns continued, saying, “While keeping the Strait of Hormuz open is key to oil market stability because 17 million barrels cross it every day and prices could spike above $250/bbl if it shuts down for an extended period of time, there are plenty of other energy choke points.”

Now, I am not sure I even need to point out to you the gravity of this situation for the broader equity markets, but I will do so here for the sake of clarity and unambiguity.

A spike in oil prices of this magnitude would certainly send stocks into a protracted bear market, and the surge would easily wipe away all of the year-to-date gains in the major domestic industries.

The silver lining to this scenario would be the aforementioned move higher in oil stocks, E&P stocks and oil futures. The other silver lining would be a constriction of economic activity that would cause the Federal Reserve to reverse course on monetary policy despite the inflationary (or in this case, stagflationary) influence of Mt. Everest-altitude oil prices.

The way I see it, if you want to be ready to deal with whatever the craziness in the oil patch brings to the equity markets, and the economy at large, you are going to have to have a plan in place that keeps you in stocks when things are trending materially higher, and that gets you out of stocks when the material trend is lower.

Fortunately, our flagship newsletter advisory service Successful Investing is just such a plan — and it’s been helping investors expertly navigate wars, oil spikes, bear markets, political unrest and all sorts of unknowns for more than 40 years!

So, if you want to sleep well at night even in the face of $250 oil, then you need to get on the plan today with Successful Investing.

***************************************************************

ETF Talk: Getting High (Profits) off of MJ?

Marijuana. It’s known by many nicknames: “pot,” “weed,” “grass” and, of course, “Mary Jane,” or “MJ” for short.

Regardless of what you call it, the legality of the substance has been a contentious issue in the United States for years. That reality has made investing in the drug profitably rather difficult.

Legislation to change the federal classification of marijuana has been introduced several times over the last decade, but ultimately lacked bipartisan support to move forward. That may be changing due to the introduction of a new bill known as the Secure and Fair Enforcement Regulation (SAFER) Banking Act.

This bill was introduced by a bipartisan group from the Senate Banking Committee to provide legal protection to banks and other institutions that offer services to state-legal marijuana businesses. The goal is to improve public safety by removing the all-cash and potential criminal element in these financial transactions. Secondarily, it will also facilitate access to resources that cannabis businesses operating in the United States have sorely lacked. It would ultimately take away power from money laundering and organized crime that allegedly is rampant throughout the retail segment of this industry.

The SAFER Banking Act is the first of its kind to gain broad support in the Senate and has industry experts watching how close the passage of this legislation will ultimately be. Several key changes were recently introduced to gain support from Republicans on this issue and allow for a federal rollout of banking protections.

Naturally, this could be a positive catalyst for ETFs centered around the cannabis industry, resulting in rising interest in a different kind of “MJ.”

The ETFMG Alternative Harvest ETF (MJ) is the first cannabis-focused ETF to trade in the United States. It tracks the Prime Alternative Harvest Index, a collection of global firms that derive more than half their revenue from the legal cultivation, production, marketing or distribution of cannabis products for either medical or nonmedical purposes.

MJ also holds stocks of companies that trade or produce tobacco products, fertilizers, plant foods, pesticides and equipment for cannabis or tobacco. Weightings are determined through a proprietary methodology, either by market cap or equally, depending on a company’s engagement to cannabis. The index is reconstituted and rebalanced quarterly.

At present, MJ has an accumulated market value of $217.16 million, and an expense ratio of 0.75%. Its current top holdings include SNDL Inc. (SNDL), Cronos Group Inc, Inc. (CRON), Tilray Brands, Inc. (TLRY), the Canopy Growth Corporation (CGC) and Aurora Cannabis Inc. (ACB).

Courtesy of www.stockcharts.com

As of Oct. 23, the fund is down 21.69% in the past month, 2.21% in the past three months and 29.30% year to date. Despite the sustained pullback, I suspect that if the SAFER Banking Act is passed into law, it could give MJ investors who hunger for an upturn what they crave.

Before anyone indulges in MJ, it’s important to remember that not every investment will have you soaring sky-high. Remember to always consider your personal financial situation and goals before making any investment. Investors are always encouraged to do their due diligence before adding any stock or exchange-traded fund (ETF) to their portfolios.

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.

*****************************************************************

In case you missed it…

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 last 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!

*****************************************************************

Don’t Let the Hero Perish

“Do not let the hero in your soul perish in lonely frustration for the life you deserved and have never been able to reach. The world you desire can be won. It exists… it is real… it is possible… it’s yours.”

–Ayn Rand, “Atlas Shrugged”

During times of personal, professional and societal tumult (i.e., the usual state of nature), it’s rather easy to succumb to feelings of loneliness, frustration and to feel less-than heroic. But DO NOT allow yourself to descend into those feelings. Yes, the world is a dragon, but it’s a dragon we can tame — if we employ the requisite knowledge, discipline and courage needed to prevail.

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