LUKOIL
I have held shares of LUKOIL in portfolios—on and off (mostly on)—for over a decade. The company has been a shareholder friendly, superior dividend payer the whole time and some of the earliest positions probably received the entire original principal amount back in dividends. In the last oil & gas bear market from 2014 to 2020, the stock outperformed similar U.S. integrated major oil & gas companies by a significant margin—all the while paying a higher dividend yield which is not reflected in the following monthly chart that shows this historical outperformance (LUKOIL = Red; Exxon Mobil = Blue; Chevron = Green):
LUKOIL is a private Russian company and former Chief Executive Officer, Vagit Alekperov, actually spoke out against the war earlier this year before resigning.
I reduced positions in LUKOIL prior to the war when Russian troops were on the border of Ukraine. When the war started and shares of LUKOIL subsequently fell significantly, I bought some. I did not expect Western sanctions to go as far as they did, mainly because it will have devastating results for the European economy and to a lesser extent, the U.S. economy. Devastating your own economy is also a poor military strategy. That said, there are questions about how much teeth these sanctions actually have and some of this may be for political optics.
The issue at hand is that shares of LUKOIL collapsed and are currently not trading. I am not sure what will happen with this but I have essentially written it off mentally. The stock is worth more than 20 times its last quoted price in a “normal” geopolitical environment with the current oil & gas prices. If possible, I will just continue to hold the shares because I’m not going to just give away the most valuable company in Russia for nothing. It will have to be stolen from us and that might happen. Conversely, it remains a lottery ticket on a peaceful return to normal, which frankly, I do not expect given the disastrous political leadership in the West.
The good news about this debacle is that I quickly took decisive action to buy various investments that I thought would benefit from the impact of these sanctions on the global economy. This worked out very well and made up for the loss.
Performance
Portfolios are down roughly 6% to 11% this year, depending upon how aggressive I have you invested, but most of this decline came in just the last few trading days. Comparatively, “conservative” bond funds are down more than my Aggressive strategy this year and this is especially solid compared to the 23% decline in the U.S. stock market. Portfolios were in the green just a couple of weeks ago. We are going through some turbulence but I still expect to finish the year with solid results.
Actually, It Will Be This Generation
I have a hard message for the Baby Boomer generation but hopefully not my Baby Boomer clients …
In discussions concerning the U.S. fiscal situation, there is a common refrain that we are piling the debt on the next generation and they will bear the injustice of it. This is repeated like doctrinal fact.
Now, I (1) have 3 children age 7, 9, and 11, (2) understand economics and markets, and (3) know how to pray (I know Him and He listens to me). A while ago this started to bother me and I said enough is enough and I started to take this new found burden to the Lord in prayer. I am here to tell you that I believe that this generation—the generation that perpetuated the injustice—will fall into its own pit. It appears to already be under way.
The debt is being inflated away in a rather aggressive fashion. The younger generation will be left with less debt in real (inflation adjusted) terms while the savings of the Baby Boomer generation that is not invested in tangible assets will be worth significantly less in real terms. Inflation is a hidden tax and one that is rising rapidly. There is no free lunch.
Prepared For Global Conflict
I have portfolios mostly prepared for global conflict because I expect the fault lines of the current war in Eastern Europe to expand into other geographies. In a global war, it will be good to own U.S. dollar cash, energy, stocks that benefit from strategic industries, and strategic metals. This is sort of the portfolio that has been outperforming this year which may be an early indication of where things are headed.
We could also see a dramatic rise in the U.S. stock market—totally taking almost everyone by surprise—as investment capital flees Europe and Asia for the relative safety of the U.S.
Final Thoughts
We are in for some wild market times ahead. There will be no permanent place to hide, no easy road. It requires strategic preparation, diversification, risk management, and flexible thinking. The investment approaches that have worked well in recent years, really decades, have met their match and will perform poorly.
Dr. Chuck Missler was a great Bible teacher and one of just a handful who actually impacted my Christian development. When he taught on the most difficult topics, such as persecution, he would sometimes finish with the following sincere and sober refrain: “heavy stuff.” I am calling the intermediate term market situation like I see it and it is heavy stuff.
There are opportunities in the melee—places to make money—and that is where I am focused. I appreciate your business and welcome your referrals.
Joshua Hall, ChFC