Israel may soon attack Iran to inhibit or stop its nuclear capabilities. The compassionate person recoils at an investment discussion now, but the steely and rational investor safeguards the financial future for loved ones. Man or woman up. Do what needs to be done.
No one knows what lies behind doors No. 1, 2, or 3, but here's how to prepare for the short-, medium-, and long-term probabilities of an attack and its aftermath. In every case, fear will rule and market volatility will go nuts. The main rule is to own or buy with a margin of safety for the uncertain future. That way, you're good if we have the best of all possible worlds, but also protected in at least some of your stocks for the paper losses others will face.
One stock no matter what
There is one stock for any scenario that is deeply underpriced relative to intrinsic value. Military and commercial contractor L-3 Communications
Short term: Oil
Off the bat, the fear will be that Iran will close the Strait of Hormuz, passageway for 20% of the world's oil and 35% of that which moves by sea. Oil prices will explode upward -- emotion will rule before any careful examination of supply and demand. That will raise fears of recessions among oil importers. In short, the stock market will plummet broadly -- except for oil producers.
Whatever you think of oil prices today and the prospects of stocks you may own, today you can buy oil companies that offer a margin of safety should oil prices decline -- no attack, war, recessions, or deflation (how's that for a list?) -- and upside if oil supplies are threatened and prices rise.
Among the majors, the best-priced today is ConocoPhillips
Medium term: Retaliation
Currently, both sides are fighting a war covertly, almost certainly picking off important players here and there through black ops. A military response would be next. To retaliate by bombing Jerusalem appears impossible because it would destroy a historic, sacred place to the Palestinians, and Iran would lose some support. Tel Aviv? Israeli ports? It's horrible and impossible to figure. But also remember that Israel would be -- certainly is -- prepared. It won't be napping. Nevertheless, broad worldwide market sell-offs would be inevitable. This would include stocks of publicly held companies with large operations in Israel. (Again, this is rationality, not politics talking.)
Cue Austin Powers: "Or would it?" It's impossible that an Israeli-based company of any size lacks a back-up plan for war, including both foreign facilities and double-secret-redundant data facilities in cloud servers around the world. That doesn't mean their stocks wouldn't be hurt -- perhaps for years. But the long-term business operations would likely continue. It may be time (c'mon, Tom, man up!) to buy them.
Shares of tip-top generic-drug producer Teva Pharmaceutical
Longer term: War and U.S. entry
Listening to the administration's pronouncements, the U.S. has almost no choice but to get involved if there's a war involving Israel. If this happens, the U.S. would have to once again up its military budget, though to what extent would be impossible to predict. This would lead to the kind of decisions made in the Iraq and Afghanistan wars -- more budget deficits without compensating cuts. The only possible solution this time will be inflation.
I repeat: All the debates about inflation will be off the table. There is no room left. Money will be printed and spent. Velocity -- the moving around of money that gives it a multiplier effect and is the sine qua non of inflation -- will no longer be held back, as today, but will increase.
Sure, in the shorter term, money would flow to U.S. Treasuries in a torrent that would make recent years look like a trickle from a leaky faucet and borrowing rates might actually fall -- is this possible where they are almost all negative in real terms? -- and keep government deficit funding cheap. But the odds of higher inflation would greatly increase, where today low monetary velocity has kept it from exploding.
Let's hope not one of these events comes to pass and that diplomacy is the victor. But also, let's carry water in the trunk -- these three and potentially four stocks -- for being stranded on a highway in Death Valley and hope we don't have to use it.