After much speculation throughout the world if Russia would invade Ukraine, Russian President Vladimir Putin officially declared war on the country and attacked it this morning. This is a human tragedy in Ukraine, and I hope that this war can be resolved quickly.
In the meantime, the S&P 500, Dow Jones Industrial Average and NASDAQ Composite dropped more than 2% as news broke about the Russian invasion, with some of that selling coming from wider exchange-traded fund (ETF) spreads. The reality is ETFs play a large role in the market and can jerk investors around. When ETF spreads widen, they create panic and trigger a market collapse. We saw this in August 2015, and it looks like that may be the case again.
To further discuss today’s market gyrations, I recorded a Special Market Podcast for all of my subscribers. I typically only share these with my subscribers, but I’m making an exception today because I don’t want any folks selling into weakness.
You can listen to the full Special Market Podcast by clicking here or you can read the full transcript below.
Editor’s Note: This Special Market Podcast was recorded this morning, so the market action may have changed since the podcast was released.
This is Louis Navellier. It is Thursday, February 24. Well, before I talk to you about what’s going on in Ukraine with Vladimir Putin ordering the attack on all the Ukrainian military facilities last night, I want to talk to you about market mechanics, okay? So right now, I am on Morningstar.com and I’m looking at ETF spreads, and the ETF spreads on a defensive ETF, it’s called DVY, it’s the iShares Select Dividend ETF.
Right now you can get fleeced as much as 4.46% if you put a market order in for this ETF. Now this is, I think the fourth-largest ETF out there. It’s huge. And obviously the dividend stocks should be an oasis. Interest rates are falling right now because of a flight to quality. Central banks aren’t going to be hiking rates as much as you maybe thought they were because of what’s going on.
But getting fleeced 4.46% to buy a defensive ETF isn’t nice. So, our biggest threat out there to the market is actually the market itself, our widening spreads and fast market conditions. So, I plead with you, if you decide to sell, please sell into strength, do not sell into weakness. But the ETFs are a big part of the market. And if the spreads continue to widen, they’re going to create a panic and the market can collapse. And we’ve seen this before. I saw it in August 2015, this iShares ETF (DVY) was at a 34.95% discount in the morning, stayed there for about 90 minutes.
At the end of the day, it was unchanged. So literally you could have lost 34.95% in one day. So, I’m expecting this ETF spread to tighten up as the day goes on. But right now, as I talk to you at the opening of the market, it’s a 4.46% spread. So that’s your problem with the market, is the mechanics.
All right, let’s talk about what’s going on in Ukraine. Obviously, this is a human tragedy. Obviously, the Ukrainians are fighting, but it’s futile. Millions of people are on the road. They’re fleeing to Poland, other neighboring countries. Europe is going to have to deal with a refugee crisis. And it’ll be interesting if Russia’s going to try to put in a puppet government or make Ukraine part of Russia, but the bottom line is, Vladimir Putin’s a bad guy and he’s doing his thing.
He’s also again threatened NATO. He said any military response from Russia would be immediate. So, this guy wants to do what he wants. Europe is dependent upon his natural gas. I know Germany basically said they want Nord Stream, too. I guess they’ll rely more on LNG from America in the Middle East. But even in America, we’re dependent upon the crude oil in the West Coast because as Alaska dropped off, the U.S. refineries on the West Coast were getting more Russian crude oil.
So, this guy’s got everybody over the barrel and obviously Russia’s going to get more isolated, and Europe and the United States will try to figure out how to operate without Russian crude oil or natural gas, but he’s making money. Just look at crude oil prices. So, what are we going to do?
Well, I’m actually at a MoneyShow in Las Vegas right now. And we have a chart that shows what happened during Crimea and what’s happening now. And basically, Crimea happened very quickly, and then we had a big rally. This is happening a lot slower. This is a bigger deal, but we will be rallying because, what else we going to do? Life goes on, right? So, I expect a big reversal sooner than later.
When’s it going to happen? Well, it could happen today. It could happen next week, but it should happen no later than mid-March. So, in the meantime, obviously energy stocks are an oasis. Obviously, anything that profits from inflation is an oasis.
A good example is, Ukraine is the breadbasket of Europe. It’s a very fertile area. It’ll be interesting how the crops are disrupted. Obviously, they plant crops in the spring. And so basically this invasion of Ukraine is going to probably drive food prices higher, too. It’s not going to affect us in North America, but it’s certainly going to affect Europe.
So fascinating times we’re in, folks. But all I can tell you is that the stock market is an inflation hedge. The companies that can raise their prices will prosper. And our biggest threat right now is just the mechanics of the market. I’m fascinated to watch the Western response. Again, the priority is probably going to be helping all the refugees fleeing to Poland and other border countries, but what a mess. What a mess. And I guess we probably should thank Joe Biden for telling all Americans to get out of Ukraine. And we moved all the diplomats out of there. I think they’re in Poland now.
But it’s going to be fascinating. And the State of the Union next week’s going to be fascinating, too. So, we can get mad at Russia all we want, but this is extremely disruptive to the world economy. But we’ll hit the reset button, we’ll readjust, and then we’ll go forward. And it looks like energy prices will be high for some time because the West is going to try to isolate Russia and that’s that.
And so, with that said, hang in there, folks. I know you don’t like this, but at least we’ve been adding energy stocks, at least we’ve been adding inflation hedges. At least the central banks aren’t going to mess up the markets now because of all the uncertainty. And that was the market’s biggest fear was rising rates. I will note the yield curve’s pretty flat right now. Flat yield curves are what happens when we start to go in recessions. We don’t have a recession risk at this moment, but we’re watching things very, very carefully.
And Wall Street likes to overreact all the time. So, the bottom line is, we’re going to get a reversal. And if and when you decide to sell, please sell on that reversal. Do not sell when spreads are wide and markets are chaotic. Today you want to watch the last 90 minutes of the market to see if there’s a selling panic. If there isn’t, that’s a good sign by the way. But I do expect that the market’s going to oscillate and continue to oscillate until mid-March. But we are going to get a big reversal.
There’s a lot of shorts out there, they’re going to run for cover. And the question is, are the actions today and last night enough for make them to cover their shorts? So, expect a big short covering rally here shortly folks, and hang in there, folks. I know this is very stressful, but we’ll be fine because we have the earnings and we got a better economy. And guess what? The U.S. is an oasis compared to the rest of the world. So that’s it. It’s Louis Navellier. I’ll keep updating the podcast during fast market conditions. Take care everybody.
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