Russia, Risk Off, And Republic Rules

Today, I spent two hours at the Coconut Creek Spa and Resort in Estero, Florida.

My wife, daughter, and brother-in-law went to Epcot. I had a “Day Off.”

I did “check out”… for a staggering two hours.

New league record…I feel fantastic.

But around 4 p.m., to quote Pearl Jam, “he seemed distracted, and I know just what is gonna happen next…”

I had two thoughts… and they bubbled up. First, I spoke with my friend in Switzerland about the recent events in Russia. He has that “Spidy Sense” regarding Russia's next move, having worked there for years and deeply understanding how their politics operate.

In October 2021, he was nearly 100% confident that Putin would invade Ukraine. Putin did… and we were long Archer Daniels Midland (ADM) before the first missile. Now … with attacks hitting refineries and an attack at a suburban Moscow concert hall, it’s fair to argue that the gloves will hit the floor.

Risk off,” my friend said today, " for a while.”

It is unclear how much this will escalate, but the markets have sought a geopolitical event that could pummel economic expectations. This “Grey Swan” has been the top one on our list for months.

There used to be a time when a madman would shoot a rocket into the sea, and the Dow Jones would fall 4%.

Now, we have a war ravaging Europe – and frat boys can’t wait to buy WingStop (WING) at 150 times earnings or Bowlero (BOWL) – a bowling alley franchiser – at 295 times earnings. That goes until it completely breaks.

I think any Russian escalation could catch markets and diplomats off guard because of America’s continued misunderstanding of Russia.

Many Americans and Western bureaucrats attempt to think logically and strategically about Russia’s next move through a “Western lens.” They wonder how they would address the situation - and then assign that thinking to another nation’s leadership.

That never works. It suggests an arrogance to one’s thinking and a belief that only a specific order can and should exist - because that’s the only rational way to think.

Consider the sport of baseball.

You’d expect the Russian pitcher to want to throw strikes (and strike out your batters) because that’s what your pitchers do.

Instead, the Russian pitcher throws the ball at the head of two batters eight straight times, walks both, and then throws strikes because he wants to try to achieve a “Triple Play” – despite the statistical odds against it. The idea is that a “Triple Play” would devastate the other team’s morale.

The thing is … that pitching strategy - absurd as it seems - is completely legal within the sport of baseball. And in some cases - it might even be rational to try to hurt the opposing batters in pursuit of the ultimate goal.

What happens is that people spend way too much time wondering why actors like Russia don’t “play games” rationally – which leads to unexpected events for which it’s hard to prepare.

It doesn’t make sense to the average American (and even half the people I know who have worked at the State Department.) That’s what makes the situation more dangerous.

And Now A Republic Metaphor

When we first started this idea of Republic Research – it heavily originated from a conversation with my colleague Mark Ford. We concluded:

In the Florida Republic, we will take what the market gives us and opt out of all the nonsense in America. Simply put, we’re not the Banana Republic. We’re the Florida Republic, and we’re going to make money and enjoy our lives.

Now, that makes sense.

But we must be realistic that it’s really hard to ignore everything happening in this nation and abroad - especially when you’re an investor with money on the line.

Today, I walked around this odd resort where few people were checking their phones (there are a lot of Europeans here).

Sure, they’re watching basketball, but they’re also riding the lazy river, throwing their kids in the pool, and remaining detached from the world… for now.

I asked myself a very important question.

Based on the different ways we attack the market, our signals, and the metrics we use… could we actually “check out” of the world for a while? And if so, could we succeed and beat the market based on the specific metrics and signals?

I argue, “Yes.”

Here’s the approach.

First, suppose we only have our Equity Strength Signal and a strong understanding of the MACD and other momentum technicals. In that case, we can measure capital flowing in and out of the Equity markets. So long as I know the signal isn’t Red, we’re not at severe risk of a liquidity event in the next ten days.

What you can predict by following capital flows and basic oscillators is amazing. This is our S&P 500 signal going back to the end of 2021.

 

So long as I have that signal, that’s a very strong starting point.

Second, the same goes for individual sectors. We can measure capital in and out of those sectors and, based on the RSI and MFI indicators, know if and when the sector is overbought or oversold.

Third, if we have favorable conditions, we only need a list of insider buying activity – focusing on CEOs, CFOs, 10% owners, and hedge fund managers. From there, we can (just by knowing if the options chain is liquid and has volume) trade credit spreads with an 80% probability of profit and a targeted 20% return. Or, we can buy Poor Man’s covered calls or LEAPs on those stocks. But again, we need to ensure the sector and index are positive. This is how we ended up at Executive Payouts with an 88% win record and a total return in nine months north of 80%.

Fourth, if we know that companies are capital efficient, have little debt, good management readings, low multiples, and at least two good catalysts, we know there’s likely more upside than downside. Based on Russia’s latest events, we know that refineries largely fit this category. If the energy sector signal is positive, and these stocks fall on our watch list, they’re a BUY or at least worthy of using high-probability options strategies to make money.

Fifth, we know there’s ALWAYS money in the midstream energy sector. We can buy very capital-efficient, low-debt pipeline names. I might scream into the Florida sky if I have to tell people to buy Energy Transfer (ET) one more time (despite the K-1).

Finally, “Follow the Money.”

We don’t need the internet, so long as we have company metrics and an understanding of how business gets done in Washington. Do I need to tell you that you should own a piece of the companies that benefit from the $7 trillion planned spending from Washington, D.C., next year?

Think healthcare, energy, and defense contractors. The more a business is subsidized, the more likely they are to increase their prices (and thus improve their margins.) Never be afraid to consider companies that meet the guidelines above in insider buying, reversion metrics, momentum, and more if they will benefit from more government activism.

Recent names like Arcadium (ALTM) and GEO Group (GEO) top the list thanks to outrageous budget proposals around the Green Transition and migration spending.

After reading this list, someone can go days without reading the news. While qualification is critical to every position, remember that we can always find people to do that. What matters is that we recognize that the power can go out for a week – and so long as our signals remain positive – we’ll still be in great shape.

That’s the Republic way.


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Disclosure: None.

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