Valuentum Exclusive Analysis for the Discerning Investor

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For, in the final analysis, our most basic common link is that we all inhabit this small planet. We all breathe the same air. We all cherish our children's future. And we are all mortal." -- JFK, 1963

Transcript:

Thank you for joining us today.

It was April 1961, and the U.S. had covertly financed an invasion of Castro’s Cuba to overthrow the government there, a government that had become more opposed to the United States and more friendly with the Soviet Union.

The invasion that came to be known as the Bay of Pigs invasion would go on to fail, but it would become part of the saga that ultimately led to the Cuban Missile Crisis the following year in 1962 when American spy planes uncovered nuclear missile sites being constructed by the Soviet Union in Cuba.

For two weeks in October 1962, the world wondered if we were all on the brink of nuclear war. It didn’t happen. Peace talks and many treaties would follow for decades, ultimately leading to the fall of the Soviet Union after the republic experienced a disaster at the nuclear power plant Chernobyl and failed a war in Afghanistan.

How much we as citizens of the United States and the world might understand why the United States might not have wanted nuclear missiles stationed less than one hundred miles from Florida may help us understand the motivations behind other nations that may act in a similar manner to protect their national interests against localized geopolitical threats.

Distinguished Professor of Political Science at the University of Chicago, Professor John Mearsheimer, who believes the West is principally responsible for the “mess” in Ukraine, has said of the conflict that the West has a foreign policy developed by 21st century people -- what he means by this in my interpretation is that we might say: we’re all civilized, the USSR has fallen, why couldn’t Ukraine just join NATO and be done with it? Why should Russia even care these days, for example?

But much of the world, including China, is still operating under a 19th century mindset, perhaps something along the lines of the U.S.’s Monroe Doctrine, which forbade foreign powers from establishing military bases in the Western Hemisphere. Certainly, we can understand this. After all, it hasn’t been but 60 years since the United States invoked symbolically the Monroe Doctrine during the Cuban Missile Crisis.

After the fall of the Soviet Union in 1991, it is generally accepted that there have been two major pushes by NATO to bring former Soviet countries into the treaty organization, one in 1999 (Poland, Czech Republic, etc.) and another in 2004 (Baltic States, etc.). It wouldn’t be until the Bucharest Summit in 2008, however, when NATO promised the leaders of Ukraine and Georgia entry into NATO one day (large, major states right on the border of Russia).

Today, is it much of a stretch to believe that the Russian Federation is operating in a similar manner – is it possible that NATO may have pushed too far in the Bucharest Summit talking about bringing Ukraine and Georgia into the treaty organization, much like the Soviets may have pushed too far in Cuba with nuclear missiles in the 1960s?

This is for you all to decide, of course. We study stocks and the markets here at Valuentum, but with Eastern Europe now thrust into conflict, political analysis has become impossible to ignore as it impacts the markets.

Though there should be varying opinions, it’s certainly plausible that the summit 14 years ago in Bucharest may have marked the beginning of what many may call Russia’s crisis-equivalent in many ways to America’s Cuban Missile Crisis, absent the nukes of course, but leading Russia directly into wars in both Ukraine and Georgia, the latter falling to Russia just a few months following the Bucharest Summit – and all of this perhaps much like the United States’ Bay of Pigs Invasion and Kennedy’s Cuban Missile Crisis of the 1960s.

Putin’s recent actions have made it clear that Russia will not allow the major bordering states of Ukraine and Georgia into NATO, no more than the U.S. allowed the Soviet Union to establish nuclear missiles a few short miles from the Florida Keys in the 1960s.

It can be argued that by NATO promising Ukraine’s and Georgia’s future membership to the treaty organization in 2008, instead of paving a path into NATO for these countries, NATO actually paved a path of conflict--and unfortunately, NATO has sat by militarily for years while such free democracies, encouraged by NATO to fight on for freedom, are toppling.

Certainly, we cannot blame the good intentions of NATO, but the conflict in Ukraine seems to have been entirely preventable. After all, it should be understandable that most Americans would balk at the idea of a Russia/Chinese military alliance that would also work to bring Canada or Mexico into it--countries right on the U.S. border. This might be our primary concern and arguably what Russia is experiencing today with NATO pressing larger, bordering former Soviet states into the organization.

Whether the U.S. would go to war over such hypothetical alliance of China and Russia and a northern or southern border country to the U.S. may be one thing, but as a nation that acted in such a way to bring peace to the western Hemisphere in the 1960s via Kennedy’s actions with the Cuban Missile Crisis, we might all be able to understand in one way or another why the U.S. might perceive a hypothetical Russia/China/Canada/Mexico military alliance as a big threat to its national security.

It stands to reason similar events on the other side of the world have led to the war in Ukraine today.

Will Putin go further than Ukraine and threaten Eastern Europe, including Poland and NATO member countries? Not likely because NATO and member nations will do all they can to stop him--but he has certainly drawn a hard line. NATO’s “peeling away of Ukraine from the Soviet orbit,” as Professor Mearsheimer puts it, may have had good intentions, but instead of bringing peace, it has brought a conflict.

The 21st century, in the views of many, will be more focused on the goings-on in Asia -- given China emerging as a superpower -- than in a Europe that is increasingly becoming less relevant on the world stage, as many seem to argue. The second half of the 21st century will be defined by what happens in Asia given China’s rise to power, not in Ukraine or even Europe.

From my perspective, we must continue to work for peace in Ukraine, as the time for a massive buildup of intimidating NATO or coalition troops in Poland or another neighboring country to Russia in Reagen-esque fashion to drive Russia to a political stalemate or deter its invasion in Ukraine passed days, if not weeks, ago.

Though perhaps not even their intention given Ukraine’s position, NATO or other Western powers were too slow to intimidate militarily to keep peace in the region, Russia is now committed to its goals in Ukraine, and NATO’s efforts in Eastern Europe, while successful in the early days following the fall of the Soviet Union, may have worked against the Ukrainian and Georgian people.

Putin should not have started this war in Ukraine, but it’s now time for peace, and we all call on Putin to stand down, and I believe he eventually will. It’s my view Putin will halt military operations once Ukraine is occupied, or once again becomes a neutral buffer between NATO and Russia.

Again, however, it’s now time for peace. The numbers simply aren’t favorable for Ukraine at all, and martial law may not change the end game. It may be time to focus on saving lives. Without Western powers’ military involvement, whether its NATO or some other coalition force, the long-term outlook for Ukraine, if not bleak, has definitely been altered.

Now on to the impact on energy and financial markets.

The U.S., the U.K., the E.U., Japan, Australia, New Zealand, and Canada have all recently imposed expansive economic sanctions packages on the Russian economy, state-run enterprises, and various Russian individuals in response to Russia’s invasion of Ukraine. Taiwan has indicated it intends to impose sanctions on the Russian economy as well. The U.S., the U.K., and EU member nations have even sanctioned President Putin.

After annexing Crimea and invading portions of Eastern Ukraine in 2014, Russia was already under Western sanctions, though today’s sanctions packages are far more substantial. Belarus, a key Russian ally, was also already contending with sanctions from Western nations due to the Belarussian regime's response to street protests in the wake of a potentially illegitimate 2020 presidential election--but it, too, has also been hit with additional Western sanctions.

Germany announced it is not going to allow the Nord Stream 2 natural gas pipeline to begin operating even though construction of the pipeline has been completed. The Nord Stream 2 pipeline runs alongside the operational Nord Stream 1 pipeline underneath the Baltic Sea, supplying gas directly from Russia to Germany. This is a significant turn of events given that Germany was previously in favor of the pipeline development.

On Saturday, February 26, Western allies announced they intend to cut select banks in Russia off, in part, from the SWIFT global payments network. Cutting Russia off completely from the global payments network that underpins daily economic transactions would effectively threaten or at the very least hinder the seamless flow of Russian energy exports to Europe. Specifically, the U.S., the U.K., Canada, and the EU announced support for such a move. If implemented, in full, with minimal workarounds, this would have a profound impact on global energy markets.

For one, Russia exports vast amounts of energy to the E.U., and fully replacing those imports from other countries in the near term may not be feasible. Currently, the supply-demand situation for both crude oil and natural gas is quite tight as energy demand is recovering briskly from the worst of the COVID-19 pandemic. In 2020, EU nations met roughly 40% of their natural gas needs via Russian imports according to Eurostat, and it will take time to build up the production and export infrastructure to connect sizable amounts of natural gas supplies in the Eastern Mediterranean region to Europe. We expect energy markets to remain volatile going forward with a continued upside bias to energy resource prices.

Europe does have a sizable amount of LNG regassification capacity, but there is a physical limit to how much it can turn to LNG markets to meet its natural gas needs that go well beyond economic, political, and geopolitical considerations. Natural gas markets in Europe will likely be extremely volatile in the near term, which could create significant volatility in LNG spot prices. How EU member nations and other countries handle Russia getting kicked out of SWIFT remains to be seen, and some are even calling for bank runs in Russia and a potential currency crisis. We continue to monitor the global energy and financial markets closely.

Bigger picture, surging energy prices will likely further exacerbate inflationary pressures being felt around the world. We think the newsletter portfolios are well-positioned for inflationary pressures and believe the areas of large cap growth and big cap tech remain the places to be—names like Alphabet (GOOG), Facebook (FB), Microsoft (MSFT), Apple (AAPL) and the like. Not only are these equities shorter-duration, more defensive areas relative to more speculative tech, but they also are shielded more from geopolitical uncertainty than international exposure, which many managers seek under modern portfolio theory.

We’re also maintaining our bullish view on the energy sector in the near to medium-term. However, please be aware that, while strategically we like the areas of large cap growth and big cap tech because of their moaty business models, attractive valuations, large net cash positions and strong free cash flow generating capacities, we view the overweight “positions” in the energy sector in the simulated newsletter portfolios as tactical short-term decisions given their cyclical nature.

The simulated Best Ideas Newsletter portfolio, after coming off huge years in 2019, 2020, and 2021, is performing about in line with the major indexes so far this year and doing far better than more speculative areas, where many investors found themselves caught like a deer in headlights. We remain bullish on stocks for the long run--and our favorite individual ideas remain in the simulated newsletter portfolios, within our additional options commentary and in the Exclusive publication. Stay diversified.

May we see peace in Ukraine soon.

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Tickerized for RSX, ERUS, RUSL, RSXJ, FLRU, OGZPY, GZPFY, GZPMF, OAOFY, LUKOY, LUKFY, MBT, YNDX, OZON, VEON, SBRCY, AKSJF, NOVKY, UNRIF, MLRYY, QIWI, NOVKY, OPYGY, SGTPY, SGTZY, MGNI, NISQY, POYYF, AUCOY, XLE, UNG, BOIL, KOLD, UNL, UGAZF, DGAZ, FCG, TSM, EWT

Disclosure: Callum Turcan owns shares in FB and XLE and is long call options on FB and XLE. Brian Nelson owns shares in SPY, SCHG, QQQ, DIA, VOT, BITO, and IWM. Valuentum owns SPY, SCHG, QQQ, VOO, and DIA. Brian Nelson's household owns shares in HON, DIS, HAS, NKE. Some of the other securities written about in this article may be included in Valuentum's simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.

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