Prepare Your Portfolio For Iraq War Three: The Death Of ISIS

The recent terrorist attacks in Paris make two things abundantly clear. One, the West is still under assault from radical Islamic elements. Secondly, it’s time to rethink our current strategy to better combat such elements. Indeed, as ISIS has created a safe haven in Northern Iraq, Syria and now Libya from which to launch strikes against innocent people and fuel their recruiting efforts, the United States and our allies have relied on limited tactics to defeat them, including drone strikes, air raids and forming alliances with groups in the region who have very different – and often competing – agendas.

This approach is not working. To destroy ISIS, we must destroy their safe haven, and that means deploying ground troops and another war in the Middle East. What’s more, it’s very likely the U.S. military will be forced to keep an established, permanent presence in the Middle East to help keep the peace once and for all – somewhat like what occurred in Japan and Germany post World War II.

France won’t be able to do this on its own, nor will international organizations such as the United Nations or NATO, especially if recent history is any guide. It will have to be an American led effort. For investors the question becomes how will another Mid-East war change the investment landscape and who will benefit. Consider the following:

The defense industry: We wrote about this possibility last October, well before the attacks in Paris. Very little has changed since then: Companies such as Lockheed Martin, General Dynamics GD, Northrup Grumman and Raytheon all remain well-positioned going forward. A few years ago, military spending plummeted after sequestration cuts slashed the Pentagon’s budget. While the most recent budget deal included extra money for defense this upcoming year, expect a flood of new outlays if the fight against terrorism includes another ground war in Iraq. Not to mention the need for large military investments from Europe and our Mid East allies.

Oil: Middle East unrest has always disrupted oil supplies and led to higher prices. That’s especially important now as Brent crude has dipped below $45 in recent days. With seemingly unending supply, an easy way to boost prices would be to destabilize the oil market. There are too many players that benefit from higher prices to rule out an attack on oil installations. A rebound in oil would boost countless oil producing companies around the world, along with the firms that service them. A safer way to play oil is to invest in a domestic pipeline company like Energy Transfer Partners. It has a diverse set of assets, including a vast set of natural gas, pipeline and transportation holdings, which makes it somewhat more immune to energy price pressures. Most importantly, however, not only does it pay a consistent dividend with a current yield of over 11% but a very serious case could be made that it’s significantly undervalued, having been bludgeoned much of this year. For aggressive investors, now could be the time to pounce.

Russia: In the weeks leading up to the attacks in Paris, a Russian airliner was brought down over Egypt by what authorities now believe was an ISIS bomb. In a classic case of the enemy of my enemy is my friend, this may pull Vladimir Putin and the West closer together. That theory, of course, will be tested after Turkey, a Western ally (supposedly), recently shot down a Russian military bomber flying along its border with Syria, ramping up tensions between the two countries. With Russia taking the lead in finding a solution for Syria and with its pull with countries like Iran, Russia is in a great position to cozy up with the west again. If we can resolve our disputes with Russia, some of the sanctions that have decimated Russia’s economy in recent years could get lifted, making beaten down Russian equities more attractive. The Market Vectors Russia ETF (RSX) is a pure high-risk, high-return play – even more so if there is a parallel bounce in oil, since it is heavily weighted with energy companies. A safer option, is the mobile phone company, Mobile Telesystems-MBT. Either way these are very high risk opportunities. If sanctions are lifted in 6 months and oil rebounds, Russian stocks could move up substantially.

Going to war in Iraq for the third time in roughly 15 years (following the initial invasion in the wake of 9/11 and the so-called ‘surge’) will surely get some push back from a war weary public. But as unpopular as this approach may be in certain circles, it’s what needs to happen to ultimately root out ISIS and make the world a safer place. The last thing the U.S. needs is another 9/11 style terrorist attack. It’s imperative that we stop ISIS where they live before they attack us here. Investors should adjust their portfolios in anticipation of this increasingly likely scenario.

By Ross Gerber

Ross Gerber is CEO and president of Santa Monica, Calif-based Gerber Kawasaki, an investment advisory with approximately $420 million in assets under advisement. Gerber Kawasaki clients and employees may own positions in various companies mentioned in the article, but readers shouldn’t buy anything without doing their own research.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which course of action may be appropriate for you, consult your financial advisor. No strategy assures success or protects against loss.

Gerber Kawasaki, 2716 Ocean Park Blvd. #2022 Santa Monica, CA 90405. Contact us at (310) 441-9393.

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