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.    

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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.