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Oil Whipsaws… And More News
It’s been a wild week in the commodity markets, from nickel short squeezes to whipsawing oil prices. A protracted war now looks increasingly likely, with InvestorPlace CEO Brian Hunt saying he wouldn’t be surprised to see oil hit $150… $200… even $250 if sanctions tighten further.
And in a perhaps surprising display of patriotism, Americans have largely swallowed the bitter pill of higher gas prices in order to levy sanctions against Russian oil & gas companies (The House’s bipartisan passage of a $1.5 trillion spending bill on Wednesday was equally stunning).
Now here’s a look at 5 stock market surprises this week that astonished even yours truly.
The Five Moonshot Surprises of the Week: 1. 5-Cent Nickels Become Worth 16 Cents
On Tuesday, the London Metal Exchange suspended trading in nickel metal after prices surged to $100,000 per ton. A ban on Russian commodity exports had triggered “the mother of all short squeezes,” explained Craig Erlam, a senior market analyst at OANDA.
The root cause? A massive short position by a single Chinese company. The firm in question, Tsingshan Holding Group, had reportedly sold 100,000 tons of nickel short and incurred $8 billion in paper losses along the way, according to people familiar with the company.
So consider the American nickel. Since the average 5-cent coin is composed of 1.25 grams of nickel and 3.75 grams of copper, Tuesday’s prices would have valued each nickel coin at approximately 16 cents of raw material.
2. Yellen Accidentally Publishes Biden’s Crypto Plans Early
The same day, Secretary of the Treasury Janet Yellen leaked Biden’s crypto plans, proving that even former Fed Chairs can accidentally hit “send” on the wrong file.
“President Biden’s historic executive order calls for a coordinated and comprehensive approach to digital asset policy,” the now-deleted press release said in part. “Under the executive order, Treasury will partner with interagency colleagues to produce a report on the future of money and payment systems.”
Bitcoin (BTC-USD) prices immediately jumped 8%, rising above $41,000. So much for federal agencies taking a “unified approach” to crypto.
3. Redditors Fall In Love with Nuclear
“Hopefully, it is now extremely obvious that Europe should restart dormant nuclear power stations and increase power output of existing ones.”
With that single tweet, Tesla (NASDAQ:TSLA) CEO Elon Musk once again set the internet ablaze.
“Elon will you ever make a Tesla that runs on nuclear power,” one social media user asked on Twitter. “$UUUU Here we go!” said another on stock messaging platform StockTwits. Overnight, uranium plays became a top trending investment idea on social media.
Not everyone was so happy. U.S. preacher Jim Osman took to Twitter to warn about nuclear waste storage. And the pushback was enough to make Mr. Musk send some clarifying statements about his position:
“For those who (mistakenly) think this is a radiation risk, pick what you think is the worst location. I will travel there & eat locally grown food on TV.”
Mr. Musk certainly has a point. Well-built nuclear reactors and storage facilities pose minimal risks. But this is Elon Musk. Don’t be surprised if he tweets a postcard from atop the Chernobyl sarcophagus someday.
4. GameStop’s Ryan Cohen Buys Stake in Bed Bath & Beyond
On Sunday, Ryan Cohen’s RC Ventures sent an open letter to the members of the Bed Bath & Beyond (NASDAQ:BBBY) board.
“While we like Bed Bath’s brand and capital allocation policy, we have concerns about leadership’s compensation relative to performance and its strategy for reigniting meaningful growth,” the letter stated.
The letter likely sent BBBY’s board panicking. Mr. Cohen sent a similar letter to Gamestop’s (NYSE:GME) board in 2020; eight months later, every GME director had been shown the door.
Today, Mr. Cohen’s rationale for a BBBY purchase is straightforward. The retailer has underperformed the broader SPDR S&P Retail ETF (NYSEARCA:XRT) index by a wide margin, and its valuation on a price-to-sales basis now puts it in the bottom 5% of large U.S. companies. In other words, it’s hard for things to get much worse.
Mr. Cohen has breathed new life into a dying mall retailer before. With BBBY shares rising by 41% the day of the announcement, Redditors are clearly hoping he can do it again.
5. A Hedge Fund Loses Big On Russian Ruble Bet
Finally, if you missed out on oil’s big gains this week, don’t worry. At least you weren’t Vincent Chailley, chief investment officer of hedge fund H2O.
In the past three weeks, the controversial fund has lost 40% on its Russian Ruble bets. Its flagship Multibonds fund had derivatives exposure to the Russian currency equal to 48% of its 1.9 billion EUR in assets, according to Financial Times. As of press time, that comes out to just over $1 billion USD.
Yet Mr. Chailley has actually doubled down. In a video address to investors, the investment boss said his company had “no plans to exit its bet because it expects the currency to rebound,” as reported by FT. A letter to investors claimed that selling would be a “gift” to buyers including “the Russian government” (The firm later walked back the word “gift”).
H2O’s bet still might pay off. Russian President Vladimir Putin could turn his tanks around, or a change in circumstances on the ground could yield a similar result.
But history has been cruel to those betting on ruble recovery. This week, Fitch Ratings downgraded Russia’s debt to a “C,” the final notch above default. And given that nearly half of countries default within a year of receiving the rating, I wouldn’t park 48% of my assets in that particular basket.
How to Navigate Russia’s War in Ukraine?
As the Russo-Ukrainian war enters its fourth week, political and economic pundits are belatedly revising their predictions. Absent a change in the Russian leadership, most experts now anticipate a protracted path to ending the bloodshed.
In its place, they forecast a drawn-out conflict with echoes of the Vietnam War (where Russia supplied weapons to local resistance) and the Russian-Afghan War (where the U.S. did the same thing).
It’s not clear this protracted scenario will happen. In the worst case, a miscalculation could escalate the conflict into nuclear war; a happier ending would involve the Russian elites or the Chinese government forcing Putin to resolve the conflict.
But given that a longer conflict is now the likeliest outcome, we need to prepare for the prospect.
- Energy. OPEC+ countries were already struggling to meet production quotas in the months leading up to the war. Oil prices will likely remain high for longer than people currently expect.
- Wheat. More than a quarter of the world’s wheat exports come from Russia and Ukraine. Cutting these exports will raise food prices and cause political instability in certain countries, straining oil and commodity production even further.
- Stocks. Rising inflation will force central banks to raise interest rates faster than expected, hitting high-growth stocks the hardest. A global recession is now in the cards.
In the medium-term, that will send energy Moonshots like Summit Midstream Partners (NYSE:SMLP) and agricultural ones Arianne Phosphate (OTCMKTS:DDRSF) soaring and longer-term bets like Matterport (NASDAQ:MTTR) spiraling. No “high duration” bet is immune from rising interest rates.
But in the long run, the top high-tech bets will still come out ahead. Renewed interest in green energy and localized supply chains today should help companies like 3-D printing firm Desktop Metal (NYSE:DM) succeed.
Bottom line: because a recession could be in the cards, long-term investors need to protect their investments today while keeping an eye on what comes next.
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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.