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America Finds Itself in a Bind
On Friday, I wrote about how stock markets were shrugging off war. Retail investors took advantage of Thursday’s sell-off to buy the dip, and the S&P 500 index would ultimately finish the week at 4,384 — precisely where it ended the prior week.
This week will be different.
As the grim realities of the Russian/Ukrainian war emerge, Western governments will find themselves turning to increasingly punitive sanctions to prevent more bloodshed. And unfortunately, I foresee that these measures will have meaningful costs for the West as well.
Sanctioning Russian energy exports (or imposing carbon taxes) will raise prices and worsen near-term inflation. And the financial burden of sending physical supplies to the Ukrainian resistance will look like a rounding error relative to the cost of protecting the West from retaliatory cyberattacks.
Investors focusing on high-quality Moonshots for the long run will still come out ahead. Just don’t expect a smooth ride to the top this time.
What to Expect This Week: 1. The U.S. Shores Up Russian Sanctions
On Saturday, the U.S. and European nations agreed to sever several Russian banks from the global SWIFT network.
The effect was… well… swift (sorry). Social media footage would show hundreds of people lining up at Russian ATMs to withdraw money. And on Sunday, Russian President Vladimir Putin would order nuclear forces on high alert in response to the “aggressive statements” by leading NATO powers.
But banking sanctions are only beginning. As money starts flowing through non-sanctioned banks and crypto, the West will find itself contemplating sanctions against Russia’s central bank.
“This would likely lead to massive bank runs and dollarization, with a sharp sell-off, drain on reserves and, possibly, a full-on collapse of Russia’s financial system,” noted Elina Ribakova, deputy chief economist for the Institute of International Finance.
So for those looking to buy the dip on beaten-down stocks like Sberbank (OTCMKTS:SBRCY) or Gazprom (OTCMKTS:OGZPY) today, I have one word of advice:
2. Canadian Energy Production Ramps Up
As energy prices have risen, one swing producer has emerged as a winner:
In 2014, the marginal production cost for oil Canadian sands was $90 per barrel, compared to $57 for U.S. deep-water drilling and $3 for Saudi Arabia onshore, according to data aggregation site Knoema.
Today, $100-per-barrel oil prices have created a resurgence in Canadian energy production. Rig counts have increased 60% to 224 since the start of the year and share prices of their backers are soaring. And if Russian energy sanctions materialize faster than expected this week, investors should expect the most operationally leveraged ones from MEG Energy (OTCMKTS:MEGEF) to Cenovus Energy (NYSE:CVE) to rise even faster.
3. Electric Vehicle Companies Announce Earnings
Meanwhile, oil-alternative stocks will also make waves this week.
On Monday, Lucid Motors (NASDAQ:LCID) will give investors a financial update after the market close. Expectations vary wildly — analysts are expecting the firm to generate anywhere from $36 million to $83 million in revenues, a nearly $50 million spread.
Lucid has a high “wall of worry” to climb. The carmaker has already announced a 200-vehicle recall, sending shares down more than 5%. And increasing competition in the space — from Porsche’s spinoff to Lamborghini’s electric vehicle ambitions — are raising alarm bells.
Two days later, Arrival (NASDAQ:ARVL) could surprise investors to the upside. Rivals from Workhorse (NASDAQ:WKHS) to Nikola (NASDAQ:NKLA) have stumbled, leaving only Rivian (NASDAQ:RIVN) as its primary competitor. If Arrival shows it’s converting pre-orders into cash, don’t be surprised if the share price takes off.
4. Meme Stocks Publish Results
Meanwhile Reddit investors will be busy with options this week.
AMC Entertainment (NYSE:AMC) is scheduled to announce earnings on Tuesday. Retail investors are expecting a nice earnings surprise, thanks to blockbuster hits like Spider-Man: No Way Home. Options traders will see a lot of money change hands, even if the theater’s long-term prospects are murkier.
Other r/WallStreetBets favorites set to report include electric vehicle charging firms Chargepoint (NYSE:CHPT) and Volta (NYSE:VLTA), vaccine maker Novavax (NASDAQ:NVAX) and sports retailer Big 5 Sporting Goods (NASDAQ:BGFV).
5. National Grammar Day
And finally, Friday marks National Grammar Day, a made-up holiday to “help … students with their grammar in a lively and positive way.”
Most of the internet will obviously ignore the occasion. Sites like Reddit’s r/WallStreetBets were never exactly bastions of eloquence. (Same might be said for 99% of content on the internet).
But editors at InvestorPlace.com might be taking a well-needed break. So if you see a comma splice, misplaced modifier or unfinished sentence… [Editor’s Note: Actually, National Grammar Day means I will be even harder on Tom. Pity the Moonshot Investor who dares leave a dangling participle in his newsletter…]
The Political Calculus of Sanctions
If there’s one truism to conflict, it’s this:
War hurts both sides.
Cut out the world’s No. 2 oil exporter from the world economy? Expect a 5 billion barrel-per-day shortfall and a price hike to match. Remove them from the SWIFT network? A shadow financial system will eventually replace the status quo.
In other words, American sanctions on Russia come with costs.
Certain embargos will hurt less than others. According to the Semiconductor Industry Association (SIA), Russia accounts for only 0.1% of global chip purchases. Banning Russian telecom and IT infrastructure from using Western-designed chips will have a lopsided effect on the country.
So far, targets have been “carefully chosen to maximize the impact on Russia and minimize the effect on EU nations,” according to a U.S. official briefing with Bloomberg News.
But Western governments could eventually run out of easy targets. And if that happens, expect higher inflation — and possibly higher interest rates — to become the talk of the town.
P.S. Do you want to hear more about cryptocurrencies? Penny stocks? Options? Leave me a note at firstname.lastname@example.org or connect with me on LinkedIn and let me know what you’d like to see.
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On the date of publication, Tom Yeung did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tom Yeung, CFA, is a registered investment advisor on a mission to bring simplicity to the world of investing.