Two Ways to Profit from Putin’s Bellicosity

In the iconic 1987 film “Wall Street,” the ruthless corporate raider Gordon Gecko is described as someone who was so uncaring and so heartless that 15 minutes after the Space Shuttle Challenger blew up, he was on the phone shorting NASA stock.

Now, there are some problems with this idea, as the film is actually set in the year 1985, and the Challenger tragedy didn’t happen until January 1986. Another problem here is that NASA is a government agency, not a public company, so you can’t buy and sell NASA stock.

Still, the point here is well made, as it illustrates the public perception that if one profits from tragedy, one is as black-hearted as The Beast. 

Well, I disagree with this public perception, as I think investors can and should do whatever is necessary to make money in the markets as long as it is legal and ethical. And buying into certain sectors (either long or short) is both legal and ethical. Moreover, one should never apologize for taking advantage of circumstances or making a profit. 

So, with this Gordon-Gecko-esque attitude in place, I want to share with you something my “market insider” and I wrote in today’s issue of the daily morning briefing, the “Eagle Eye Opener.” 

Here, we outline two ways to profit from the bellicose bullying by Russia’s thuggish leader, Vladimir Putin. But before we get into ways to profit from Putin’s aggression, I must say that I find it both appalliing and dangerous that some politicians and political pundits that are generally on the “conservative” side of the political aisle now are praising Putin for his actions in Ukraine. 

Perhaps these politicians and pundits should read the history of the Cold War and the millions of lives extinguished by the Communist ideology of the Soviet Union/Russia, including the murderous actions of its current ideological and political torchbearer Vladimir Putin. Okay, back to the issue at hand, and the excerpt from today’s “Eagle Eye Opener” (and if you still don’t subscribe, then why not?).

As of this writing, the Russia/Ukraine saga has evolved into what is looking like a situation with a binary outcome: Either Russia will continue to further invade Ukraine, or it’ll stop at Donetsk and Luhansk and the crisis will slowly abate. We continue to be of the opinion that the more likely outcome is the latter, namely that Russia stops the incursion into Ukraine in, generally speaking, the Donetsk and Luhansk regions.  

There are numerous reasons we have this opinion. First, it remains unclear to us what benefit Russia will receive from invading Ukraine. It will be very expensive, not just domestically, but also internationally as boycotts and intense sanctions will be applied to Russia, and for what tangible benefit remains unclear. Second, so far Russia has, essentially, done nothing new.

Yes, troops moved into parts of Donbas, but some Russian troops have been there since 2014. Now there are just more of them. And as of this writing, Russian forces have not grossly violated a “ceasefire” line that was agreed to during the Minsk peace agreement. Finally, the West is offering Putin a diplomatic “off ramp.” The sanctions announced yesterday were measured, although negatively, the scheduled meeting Thursday between Secretary of State Antony Blinken and Russian Foreign Minister Sergey Lavrov was called off. Yet the facts still imply that a full-on invasion of Ukraine is not yet a foregone conclusion.  

That said, it’s clearly a real risk, and to ignore it would not be prudent. And obviously this is hitting markets not just from a macro headline perspective, but also from a tangible standpoint. Commodity prices are surging, and that will only increase inflation pain on the U.S. consumer, increasing the chances of a slowdown in growth later this year amidst Federal Reserve monetary tightening.  

For now, however, we still do not see Russia/Ukraine as a bearish gamechanger, and we remain comfortable with that opinion as long as a Russia/NATO conflict doesn’t become more likely. And we’re not changing our investment strategy because of the headlines on Russia/Ukraine, at least not yet.

But we do understand that some investors will demand some sort of change in portfolios to either 1) Address risks from Russia/Ukraine or 2) Take a contrarian view and buy on the decline. So, we wanted to provide two ideas designed to tactically and specifically address the binary risks regarding Russia/Ukraine.

If Russia Truly Invades Ukraine: Hedge via PDBC and DBA. Commodities are the clear winner from a further escalation of the conflict, and don’t let the gains so far fool you — there’s a lot more upside in these commodities if Russia fully invades Ukraine. Obviously, energy commodities (oil, natural gas) will move higher, as the West may outright ban Russian energy exports. But even if that does not happen, the chances of energy infrastructure in Russia or Ukraine being damaged by fighting is high, and at a minimum, we can expect a reduction in supplies from that region that will only further exacerbate the tight global energy supply.  

But energy is not the only major commodity exported from Russia or Ukraine. Russia is the world’s largest wheat exporter, while Ukraine is ranked fifth. Together, they export more than 30% of global wheat supplies. Again, even if there is not a ban on buying Russian commodities, it’s entirely likely export infrastructure will be damaged in Ukraine as part of the fighting, again reducing supply.

Bottom line, physical commodities will continue to move higher (potentially much higher) if the Russia/Ukraine situation continues to escalate, and the Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF (PDBC) combined with the Invesco DB Agriculture Fund (DBA) gives investors targeted exposure to commodities futures more broadly, but with overweights on energy and grain commodities.  

If The Situation De-Escalates: VanEck Vectors Russia ETF (RSX). This ETF would obviously only be for investors who are deeply contrarian, have high risk tolerance and enjoy deep value. But the bottom line is that RSX dropped nearly 9% Tuesday and is down 21.2% year to date, and now sports a yield of nearly 6%. 

The ETFs provides exposure to large, profitable companies in Russia and more than 85% of the ETF is allocated to energy, materials and financials. Top holdings contain some well-known names such as Gazprom, Lukoil, Rosneft and Novatek, among others. Again, in the event of a de-escalation, these companies should bounce back hard, as the underlying fundamentals of the energy industry globally remain strong.  

Bottom line, the Russia/Ukraine saga will continue to drive markets in the short term, so to a point we’re all exposed to this crisis. But for investors who want to directly address this in their portfolios, either via adding some hedges to a broader conflict or positioning for a de-escalation, we think commodities ETFs (PDBC/DBA) or the VanEck Vectors Russia ETF (RSX) are two more targeted ways to play this ongoing geopolitical drama.    

Publisher’s Note: Hi, Roger Michalski here. Most of Jim’s The Deep Woods readers aren’t aware he has just launched a new trading service — one that has produced gains of 128%… 67%… 70% — all in a matter of weeks. It’s called High Velocity Options, and it’s designed to grab big gains no matter what’s happening in the markets… up or down! So far, the response has been even better than we expected, and members have been quick to point out how easy it is to follow Jim’s trades. Right now we have an opening for a small number of new traders to try it out, so CLICK HERE to learn more about Jim Woods’ High Velocity Options.  

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ETF Talk: This ETF Provides Stability Overseas

International investing has not been the hottest investing theme in recent years. However, markets are well known for working in cycles. In all likelihood, there will come another moment for international companies to shine. One way to take advantage of some of the best non-U.S. equities out there is through iShares MSCI International Quality Factor ETF (IQLT).

This fund invests in large- and mid-cap stocks outside the United States. It chooses its holdings based on a measurement of quality, and also weights its holdings on the same basis. What is meant by “quality” in this fund’s case is a combination of three metrics — return on equity (ROE), debt/equity ratio and earnings variability. So, in essence, these companies tend to have strong balance sheets and fundamentals.

Over the course of the last year, IQLT is up just over 2.5%. This is part of the reason this investment vehicle could be viewed as a contrarian play in the current market environment. Year to date, it is down 6.4%. A longer-term view shows annualized results averaging a gain of about 10%. The fund pays a dividend of 2.39% and has an expense ratio of 0.30%. The fund is highly rated on long-term resiliency and environmental, social and governance (ESG) factors.

Chart courtesy of www.StockCharts.com

Top holdings for this fund include ASML Holding NV, 3.92%; Roche Holding Ltd., 3.83%; Nestle SA, 3.43%; LVMH Moet Hennessy Louis Vuitton SE, 3.28%; and Novo Nordisk A/S, 2.64%.

The most represented countries in IQLT’s holdings are the United Kingdom, Switzerland and Japan. France, Canada, the Netherlands, Australia and Hong Kong also make up substantial portions of its investments.

For investors interested in high-quality international companies, whether as a speculation or to balance an existing domestic portfolio, iShares MSCI International Quality Factor ETF (IQLT) may provide an opportunity.

Of course, geopolitical risks are always a factor to consider when investing in stocks regardless of their country of origin, and that factor to consider can be magnified in the case of international companies. The Ukraine-Russia conflict is an obvious and immediate example of an issue that may cause market shakeups right now and should be considered in a diligent investor’s strategy.

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

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The ‘Red Pill’ of Real Estate featuring Dutch Mendenhall 

What happens when you put two entrepreneurial Renaissance Men together in a recording studio? 

You get a wide-ranging podcast that includes topics such as real estate investing, healthy eating habits, Chinese politics, technology, sensory deprivation tanks, capitalizing on history, gun rights, the psychology of foreclosures and a peek inside the unique RAD Diversified REIT.

Jim Woods and Dutch Mendenhall discuss real estate investing, capitalizing on history, and sensory deprivation tanks. 

In this episode, I discuss all these topics and much more with the very interesting Dutch Mendenhall, president of RAD Diversified.

You can read all about RAD Diversified and the company that Dutch built, and the investment opportunities in their unique real estate investment trust (REIT), in my new special report, “The Ultimate ‘Fixer Upper’ for Your Portfolio.”

If you want to get to know more about the man behind the RAD Diversified REIT, then this podcast is for you. 

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In case you missed it…

Lessons Learned at 168 MPH

Some people play golf. Some people play tennis.

And while I certainly understand the appeal of these great activities, I prefer to engage in recreational activities that are, shall we say, a little more extreme.

Another way to describe my proclivities is the way many of my friends and family do, and that is to just say that “Well, Jim’s just a little bit crazy.”

Now, I know what my friends and family mean when they say I’m a little crazy. And I know that they don’t mean that in the clinical sense. What they do mean is that the recreational activities I engage in are usually relatively high-risk, and often come with an intensity factor that’s a little bit high on the extreme scale.

Tactical marksmanship, Brazilian jujitsu and high-intensity training to build muscular size and strength are some of these activities. Yet there are even more extreme arrows in my recreational quiver.

I bring this up, because some of the greatest insights I’ve gleaned about myself, including insights on risk taking, risk management — even the meaning of life itself — have come to me while engaged in extreme pursuits.

Moreover, these insights have helped me become a more skillful writer, entrepreneur, investor… and just a more well-rounded Renaissance Man.

Perhaps most importantly, I suspect some of these insights can help you do the same.

For many years, I was really into motorcycles, and not just riding motorcycles around on the weekends exploring the country. My motorcycle pursuits involved sport bikes and, in particular, road racing bikes. These are the bikes that go really, really fast, and the bikes that require you to lean off of them and drag your knee on the ground to go really fast around turns.

In other words, they are the kind of motorcycles that can get you into a lot of trouble, if you don’t know what you’re doing.

So, when I decided to buy my first road racing bike in the mid-2000s, I didn’t just go to the dealership, jump on the prettiest model and ride off the lot with abandon. Instead, I did my research on what was the best model of road race bike for riders just getting into the sport.

Then, I researched which training facilities were considered the most effective, and the ones that stressed safety first. I also made sure I researched the right safety equipment, including which brands offered the best protection in the event of the inevitable crash.

It was only after doing this due diligence on what the sport requires to be able to excel, stay relatively safe and really enjoy the experience that I actually embarked on the motorcycle road race journey.

It is this kind of thorough due diligence that I bring to the rest of my personal life, and to my professional life as an investment newsletter writer.

Yet, aside from the lesson of proper due diligence, I think the real lessons one learns in life are those garnered under heavy stress. You see, it’s the presence of stress — literally life-threatening stress — that teaches us a lot about ourselves, our resolve and our ability to focus our minds on a singular task.

That’s the lesson I learned after participating in several motorcycle road racing “track days.” This is where you go out with a group of riders of similar experience and try to do your best lap times around a professional racetrack.

The track where I really learned a lot was the Auto Club Speedway in Southern California. This track has one of the longest straightaways in road racing, and experienced riders regularly reach speeds north of 170 mph.

Your editor tackling the turns at the racetrack.

After several “timid” laps around the track reaching top speeds of 130, then 140 and then 150 mph, I finally felt comfortable enough to open up my machine to see what she could really do. Yet this decision came toward the end of the day, and my brakes weren’t working as well as they had been early in the session.

I found this out quickly, as I spun up the engine on the Honda CBR 1000, hitting an exhilarating 168 mph on the front straight before applying the front brake — only to find that I was getting little response.

Moreover, as I looked ahead, there was a pack of riders in front of me who were slowing down for the next turn, a task I should have already done seconds before. I decided there were only a couple of things I could do. I could apply both the front and rear brakes as hard as I could, hoping the bike would slow enough for me to pull off the racing line, or I could dump the bike while going about 160 mph and risk severe injury (but still manage to avoid my fellow riders).

My decision had to be split second, and as you can imagine, it was under extreme duress. I opted to trust my equipment, and my training, by pumping the lever that controls the front brake, downshifting into a lower gear to slow the bike down and gently but steadily applying the rear brake to help slow the bike and steady the chassis. The maneuver worked, and I was able to guide the bike — and myself — back into pit lane safely.

That day, I learned to A) Trust my equipment, B) Trust my training and C) Trust my judgment under stress.

If I had panicked and opted to get off the bike, the consequences could have been disastrous.

So, the next time you’re faced with a situation where a potential calamity quickly approaches, trust your due diligence, trust your training (i.e., your accumulated knowledge) and, above all, trust your judgment and wisdom.

It is the knowledge of self and confidence in your own decisions that will carry you through times of acute stress.

Whether that stress is manufactured by your “crazy” choice to ride a motorcycle really, really fast, or whether that stress is created by an investment you’ve made in the equity markets, in a business, or anywhere in your personal life, what will get you through is a clear mind, good preparation… and trust in your good judgment.

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Life Is for Gamblers 

Life’s a game and men the gamblers. They’ll stake their whole pile on the one chance in a thousand. Take away that one chance, and – they won’t play.

— Jack London

The great American novelist wrote with passion, expression and a raw intensity reflected brilliantly in his most famous work, “The Call of the Wild.” In this quote, London burrows into the essence of why humans take risks. You see, the odds are stacked against us from the birth. But if we are willing to attack life and take chances — your money, our relationships and our very flesh and bones — then regardless of the outcome, I think we will have been victorious.

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.