"Nothing, nothing justifies terrorism." -- Mahmoud Darwish
Negative sentiment. My feeling is that when it comes to terrorism and the risk imposed by the threat of these actions on the marketplace, negative sentiment is the term that comes to mind. I lost my first friend to terrorism on Oct. 23 1983. I didn't know then that this was the start of some kind of trend. I stood in the street below the World Trade Center and ducked for cover as flying debris enveloped the area, and lost way too many friends on that day. I knew that morning, as we made gas masks out of ripped tee-shirts and rubber bands and tried to make our way to someplace where we could at least see daylight, that the world had changed. So it did.
The attack in London over the weekend, as well as the one a few months back, and attacks in Stockholm and Nice have something in common. The perpetrators used vehicles as weapons, and as they did in London in 2013, used blades as their primary form of attack upon dismounting their vehicle. Simple? Yes. Brutal? Certainly. Successful? How do you measure success? Prevention and protection? OK, those might be considered failures in these latest cases. Reaction and pursuit? Eight minutes is pretty good. Still, there were 55 casualties in eight minutes, which leaves us with prevention and sentiment.
The world is now calloused over by terrorism. If British financial markets are any indicator -- and why wouldn't they be? -- the markets are not at all that much risk in the case of "low-tech" terrorism. Security forces, while not yet able to regularly prevent such attacks, have shown remarkable skill in containing them, once an attack is underway. Unless directly impacted, the shock of terror has become a feeling of disgust. "Oh, not again". If not one's own loved one laying on the floor in a pool of blood, then one moves on, people go about their business.
That is both good and bad. While it is a sad statement on the human condition that the brutal mass murder of innocents has lost the ability to shock, it is also a statement in most cases that the terrorists' cause is already a lost cause. You cannot defeat the human spirit by bullying the innocent. The innocent will suffer their wounds, and those wounds will scar. They will harden their hearts, and then you are dealing with tougher people who want to fight back.
Geopolitical risk is certainly a threat to the marketplace. How serious a threat is it? How priced in, is such a threat? Obviously, the threat of a brutal, yet low-tech assault is not the threat to financial markets that it once was, though that could change as the story behind an attack develops. The level and network of conspiracy. The depth of funding. As these things come to light, and the costs to a community come to light, markets adapt.
That said, in the immediate aftermath, these isolated, even if more frequent, attacks have lost their ability to stop people in their tracks. What the regularity of such attacks might do would be to impact policy. An open, free nation could easily turn itself in a more protectionist direction as a response to such consistency. In a nation such as the U.S. this could give rebirth to something like the "Trump agenda" long after some folks had put those thoughts to bed. Oh, and prior to allowing oneself to slip into a personal comfort zone, there are much greater threats to our persons, and to our markets. Much "higher-tech" threats that cannot go ignored.
Nuclear, Biological, Chemical
Got your attention now? Though I might. The geo-political threat to the marketplace never goes away. With a regime in North Korea that always seems to be playing dangerous games, there is almost always the threat that someone on the ground or on the seas gets pushed too far. With a nation like that, the threat of military action is not priced into any market, and the impact that such action goes nuclear is horrific on an unimaginable scale.
How likely is that type of threat? Let's hope not very, but in the case of nuclear aggression, how your portfolio performed in response might not cross your mind for a while, and that's if you're lucky. Then there's the likelihood of a biological or chemical attack. Dangerous, perhaps unstable weapons, that one cannot aim, nor target against a specific person or type of person. That threat remains real, and would certainly establish shock. What it would also provoke would be an outsized military response. The ultimate loss of influence might be the best deterrent in these cases. What kind of terror would be most likely to both happen to someone at some point, and impact the markets?
This is perhaps the single most likely type of terrorist threat to the marketplace in this day and age. Of course, that's just this guy's opinion. Here, in this space, you could witness impact upon market centers, interconnected systems, public and private infrastructures, really, the list of potential targets is nearly endless. Airplanes running into buildings in 2001 were shocking. This is why targets must remain hard. Obviously, in 2001, price discovery at the point of sale was still largely still the function of open outcry -- the old auction market.
Now, in the age of micro-second executions, and directional movements that are decided by algorithms, terrorists will be unable to shut the marketplace for four days ever again through physical means. What does this do? This points us back to the cyber threat. The perpetrators could be motivated not just by ideological or political purpose, but also by greed, or financial purpose. Those perpetrators would also have more control in their level of anonymity, and just how much danger they expose themselves to. The web is a deep dark place, and could provide refuge not just for recruiters representing an evil purpose looking to spread their venom, but also for hackers, and criminals with no allegiance whatsoever.
How priced in is something like this? I dare say that a widespread cyber attack that successfully shuts down markets or infrastructure is not priced in. Period. There are already some of the costs of prevention priced into various firms and their industries, but once the horses have left the barn ... this simply is not worked into any valuation metric that I am aware of. Quite simply, this does not come up in market discussions with anything close to representing a price tag, unless there is an actual news event.
You will have to leave prevention and pursuit to the professionals. Preparation and protection ... well, that's something that you can do to protect your family's standard of living to the best of your ability. First off, there is a reason why we always recommend a percentage of any portfolio be held in gold. Currently my sample allocation is running at 7.5%. We are talking physical gold here. Something you can touch, something you could use as currency in the short term. ETFs and futures are vulnerable to cyber attack in ways that physical gold obviously is not. Then there is portfolio protection. In that case, we are talking about defense stocks and cyber security stocks. This is where you seem to see market impact in uncertain times.
Every time it becomes apparent that a developed economy is put in the position of military response, you will see the likes of Raytheon (RTN - Get Report) , General Dynamics (GD - Get Report) , Lockheed Martin (LMT - Get Report) , Boeing (BA - Get Report) , Nothrop Grumman (NOC) take off and perform well for a bit. Just this year alone, the industrial sector is performing with the broader market, up 8% so far. The aerospace & defense industry within the sector has nearly doubled that performance.
Then there are cyber-security type firms. Names far from being commonplace to the average retail investor. You may want to go hunting for individual stocks, and you will recognize names such as Palo Alto (PANW - Get Report) , CyberArk (CYBR - Get Report) , and FireEye (FEYE - Get Report) . There are others out there, such as Qualys (QLYS - Get Report) and Symantec (SYMC - Get Report) . Although I generally do not like to invest in ETFs, that may be a wise route to go for folks who do not know much about this space and want to expose themselves to some degree. Two well-known ETFs that invest in these names would be the First Trust NASDAQ Cybersecurity ETF (CIBR - Get Report) and The PureFunds ISE Cyber Security ETF (HACK - Get Report) . These funds are different and investment obviously would require everyone to do their own homework.
08:30 - Non-Farm Productivity (Q1-rev): Expecting -0.4%, Flashed -0.6% q/q SAAR.
08:30 - Unit Labor Costs (Q1-rev): Expecting 2.5%, Flashed 3.0% q/q SAAR. These two items are to be revised today by the Bureau of Labor Statistics after being delayed from last week. Expectations are that in both cases productivity and labor costs are to have improved from their initially awful first quarter levels. Still, the numbers are projected to remain lousy in comparison to a half year that looked better on the surface in this space than it had for quite some time prior. A drastic change here could impact the marketplace.
09:45 - Markit Services PMI (May-f): Flashed 54.0. The service sector print will pass quietly, as traders likely to react to this space will simply wait 15 minutes for the much more highly focused upon data from the institute for Supply Management.
10:00 - ISM Non-Manufacturing Index (May): Expecting 57.2, April 57.5. The expectation here is that the U.S. service sector will at least come close to holding its place from April. This headline level of expansion has presented some resistance above 57 to the series, but thankfully at a high level. I don't think too many politicians or economists would complain about a nine-month run at or near the top of an expanding trend.
10:00 - Factory Orders (April): Expecting -0.2%, March +0.2% m/m. This series prints with a serious lag, so market impact will be minimal. That said, this series is important in the grand scheme of things. The series has shown month-over-month growth in eight of the last nine months, and most of those prints were for gains of more than 1%. That's what makes the March release and today's consensus so disappointing. This may just be another data point that illustrates what appears to be a slowing economy as we move through the second quarter.
10:00 Labor Market Conditions Index (May): Expecting 2.9, April 3.5. Today's expectation, if realized, would be the weakest print in four for overall labor market conditions. Now, a print in the high twos really is not all that bad, given what we have gone through, and also given that this series spent almost the entire first half of 2016 in outright contraction. I don't know how many traders watch this release, but I know the Fed does. They created it.
Sarge's Trading Levels
These are my levels to watch today for where I think that the S&P 500, and the Russell 2000 might either pause or turn.
SPX: 2458, 2447, 2440, 2434, 2426, 2417
RUT: 1422, 1416, 1407, 1398, 1392, 1386
Today's Earnings Highlights (Consensus EPS Expectations)
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