Four Smart Plays in an Uncertain Geopolitical World

Four Smart Plays in an Uncertain Geopolitical World

by | published March 13th, 2014

Last time we talked about the pitfalls of the intensifying Ukrainian crisis. Today, I’d like to show you some ways to profit.

But remember, while the Crimean referendum is set to occur this Sunday (March 16), there will likely be additional stages in this unfolding scenario. The expected move of Crimea “out” of Ukraine and “into” the Russian Federation is hardly a final resolution.

So what are the smart plays investors can make in a geopolitical environment like this?

Today, I have four of them for you…

A Bearish Play Up 57.8% for the Month

One is a play I mentioned on Tuesday and it is has been gaining ground ever since.

But as I also warned, it’s an exchange-traded fund (ETF) with a market cap that is still barely $10 million and exceptionally heavy average daily volume.

It’s a contrarian fund called the Direxion Daily Russia Bear 3X Shares (NYSE:RUSS). It’s designed to return a 300% upward move based on any Russian stock market weakness.

This bearish ETF is up 11.2% over the last two days, 23.3% for the week and 57.8% for the month. But it remains a narrow short play on the entire Russian stock market, one that would change very quickly with any recovery.

The other three moves are more traditional and certainly less risky since they have some immediate potential the longer the crisis continues.

The first two involve the primary plays that offset increasing energy concerns in Europe. As Russian natural gas behemoth Gazprom increases the pressure against Ukraine for unpaid gas bills and renews its threats to cut off supply, Europe shudders.

As we have discussed, this is because the bulk of Russian gas moving to Western Europe still passes through Ukraine. A Gazprom supply cutoff to punish Kiev would put renewed pressure further west into the continent.

Yes, Europe is better prepared now than it was five years ago when Gazprom pulled the same stunt. Today, there are more sources, including liquefied natural gas (LNG) from Qatar and North Africa, as well as increasing renewables. This time around the weather is also warming up. Last time the cut occurred during a brutally cold January.

But offsetting the uncertainty about Russian volume is another matter entirely. Even with a changing European energy mix, gas still has an impact. In fact, it has become one of the major pieces on a changing chess board.

The short-term goal here is not to replace the Russian gas, but to cushion its impact if it’s being used as a political weapon by the Kremlin against a European Union (EU) threatening sanctions.

For this there are two immediate moves. They comprise the first of three broad categories of investment plays.

The Return of King Coal

The first of these two moves involves increased U.S. coal imports. Now, these European imports have been underway for some time. Germany, for example, has been compensating for a slower buildup of solar and wind power with American coal imports. Along with the increasing use of nuclear-generated electricity from France, rising American coal consignments have been embarrassing for Berlin to say the least.

However, that makes for an expanded market for coal, making it one of the immediate offsets to counter the impending Gazprom move. Already there has been a viable export market for U.S. metallurgical coal – needed for steel production worldwide. Given the changing geopolitical landscape, thermal and power applications are just the next step.

The second is also an immediate countermove to the crisis. It involves European imports of liquefied petroleum gas (LPG). And once again it will be American companies that provide the expanding consignments of propane and other fuels.

There are even some direct applications of both of these to Ukraine in particular, due to its considerable coal deposits. Unfortunately, the bulk of these resources are in Eastern Ukraine, especially the Donetsk basin.

As with Crimea, the preponderant population here is ethnic Russian, would prefer a merger with its larger neighbor, and has disturbingly indicated over the past week it may not provide full consignments of coal to Kiev and areas further west in the nation.    

Yet both LPG and coal will be delivered into the portion of the Black Sea coast likely to remain under the central government’s control via the ports surrounding Odessa in the south. Additional coal will also likely to be moving east from Poland.

Whether we are considering Ukraine in particular or broader Europe in general, U.S. coal and LPG providers will play a major role. And these are going to make great investment moves for retail investors in the states.

An All-American Revolution in Energy

The second broad category considers the longer-term prospects. Europe will now continue the drive to diversify its energy sources, with the objective of lessening its dependence on Russia in the future.

While these sources are not as immediate, the broadening of the energy spectrum will once again benefit American companies – whose expertise and equipment will be required.

Here we have two primary dimensions.

Countries like Poland and the UK are already moving toward developing domestic shale gas. And even before the current crisis, France also signaled its moratorium on development was ending. The three Baltic states and Sweden are also intensifying their expectations for unconventional gas. Even Western Ukraine happens to have significant shale gas potential with initial development underway.

Of course, environmental concerns remain and political hurdles still need to be overcome. But the Ukrainian situation puts to rest the idea that shale is not an option.

This means that U.S. providers of expertise and technology, some eight years ahead of the rest of the world, are going to find a major new outlet for their services (along with huge advantages to their bottom line).

The second dimension is a major longer-term remedy that is already being phased in. Liquefied natural gas (LNG) trade has already become a major European counter balance to traditional pipelined gas.

A number of import terminals, including the world’s largest at Rotterdam, are open and receiving volume. Local spot markets for gas are emerging as a result of reliable LNG consignments. And these are undercutting the price of Gazprom’s long-term pipeline contracts.

Significant U.S. LNG exports are still over a year away. But the planning for them is not. Major players such as Cheniere Energy Inc. (NYSE MKT:LNG) are going to be primary leaders  in this trade, while the tankers required will be provided by companies led by Golar LNG Ltd. (NasdaqGS:GLNG).  

Here, in addition to the opportunities that will now be phased in quicker because of this latest concern over Gazprom sourcing, the rise in LNG moving to Europe will benefit unconventional gas (and oil) production in the U.S.

Better Prospects Here at Home

That brings me to our third major category…

Quite apart from what is taking place in Europe, the domestic American natural gas market is providing some very attractive moves. The inordinately cold winter has reduced gas storage reserves to their lowest levels in years. This primarily benefits pipeline companies, especially Master Limited Partnerships (MLPs) because these providers benefit whether the gas in being transported or stored (in many locations most pipeline capacity is actually used for storage, not transit).

This segment is a preferred option even without the Ukrainian situation. The current crisis just provides an added impetus to emphasizing these domestic U.S. plays.

One of them is an entirely new investment class with the potential to earn big money, fast. These investments feature regular cash payment, multiple revenue streams, and major tax advantages as well.

For all the details on how (and why) to get in on them, just go here.

By the way, Marina and I are off to Mexico City next week – I’ll have much more on the focus of our trip in Tuesday’s issue. So stay tuned.

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