Proprietary Data Insights
Financial Pros Top Stock Searches >$1B Annual Sales in Russia Last Month
Understanding The Commodities Boom
By now you’ve probably heard about prices soaring for oil, natural gas, aluminum, wheat, you name it.
Some of it is a direct result of the war between Ukraine and Russia (wheat).
Others are simply speculative traders pushing prices higher.
Over the last several years, the options market experienced enormous growth from institutions and retail participants.
Options are leveraged contracts with a set expiration date that allow a person to control 100 shares of stock for much less than they would if they wanted to buy those shares outright.
You pick a stock, the expiration date, and a strike price. A call option gives you the right to buy the stock at the strike price up to the expiration. A put option gives you the right to sell the stock at the strike price up to the expiration.
Similar options are available for commodity futures.
The growth in their use has created a cascade effect similar to what we saw when markets cratered back in 2020.
Essentially, when a trader buys a call option on crude oil, the market maker that sells that option has to offset the risk by buying crude oil.
Say I have a call option for crude oil at $120 when crude is currently at $90, The market maker doesn’t have as much risk because I’m not about to buy crude oil for $120 when it’s trading at $90.
But, as crude oil rises, the market maker the risk increases that I will execute that contract. Thus the market maker has to buy more and more crude oil to offset that risk.
If all that is too confusing for you, just know that a lot of people bought call options on commodities. When commodities rose, that forced the option sellers to buy that commodity, sending prices even higher.
It’s similar to what’s known as a short-squeeze.
In this case, we’re seeing everything from oil to aluminum skyrocket beyond reason.
And don’t think for one second that it can’t go further into looney toons territory.
So, how do you know when the party is over?
Quite simply, you wait until the market reverses itself.
If you’ve held long positions in oil and gas companies along the way, then you’ll still make money.
No one needs to pick off the tippy top in the market. The goal is to make a profit.
And if you capture 80% of the move, then you’ve done just fine.
So as many folks ask…when is it time to bail?
When prices flip like a pancake and even the most novice trader knows momentum has shifted.
Not Every Business Cut Ties With Russia
Netflix (NFLX) paused production and acquisition of four Russian projects while cutting streaming service to Russia.
TikTok said it suspended live-streaming and video service in Russia.
Globally, corporations view Russian operations as a liability.
Among them, few sit in a precarious position.
McDonald’s (MCD) & PepsiCo (PEP)
The fast food and consumer staple behemoths continue to operate in Russia, despite immense external pressure.
Along with Kimberly Clark (KMB), Estee Lauder (EL), and several others, politicians and customers penned letters to management asking them to boycott businesses in Russia.
However, it isn’t so easy to halt operations for many of these companies. Along with McDonald’s, Starbucks (SBUX), Yum Brands (YUM), and other popular fast food chains are predominantly run by franchisees.
Last year, Russia accounted for $3.4 billion in sales for PepsiCo, or 4% of its total.
McDonald’s pulls in $2.1 billion in sales, or 9% of its revenues, from some 847 stores in Russia and 108 eateries in Ukraine.
Even Citigroup (C) carries nearly $10 billion in exposure to Russian counterparties from loans to cash deposits. That would be equivalent to 17.5% of Citi’s annual cash flows.
Russia is among the top five global producers of steel, nickel, and aluminum.
As anyone who’s been to the hardware store recently is aware, prices for building materials rose over the last two years, with some more than double their pre-pandemic prices.
While Russian metal shipments haven’t been directly targeted by sanctions, some shippers have refused to transport Russian goods.
That puts pressure on already tight supplies.
European nations, especially Turkey, are major importers of Russian aluminum.
This is good news for India which exports 8.3% ($3.9 billion) of the world’s aluminum.
The Bottom Line: If you own any companies with a global presence such as Nike (NKE), Airbnb (ABNB), or even Visa (V), look into how much of the business comes from Russia and where they currently stand on operations in that country.
You don’t want to be surprised by an announcement the company is pulling out that sends the stock down several percent.
On the flip side, companies with the majority of their sales in the U.S. and Canada are insulated from sanctions. Consequently,market sell-offs driven by ‘Russia’ news can create entry points for some of our favorite stocks including regional banks like Heartland Financial (HTLF), BBQ Holdings (BBQ), and the like.
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