A Moment of Reckoning

By December 18, 2020Weekly TGIF

This was another record week. Unfortunately, not all records are worth celebrating. Stocks hit new record highs. This resilient Bull Market keeps forging higher, regardless of what gets in its way. Virus cases are also at record highs. So are deaths from Covid. But the vaccines are now in circulation, providing hope for a sustainable recovery. The Market is clearly looking out past the present.

There is so much going on right now. Some of it gets more attention than others. I want to touch on a number of items we believe are material, from a Market standpoint, which are happening real-time.

The Cybersecurity and Infrastructure Security Agency acknowledged it was aware of foreign adversaries having hacked into Federal and private networks in more ways than previously announced. The agency said the attacks pose a “grave threat” to Federal, State and local agencies as well as private companies. This is no small deal.

The more we learn about this cyber hack, the more concerning it gets. Microsoft called it a “moment of reckoning”. Our sources say it’s been just a matter of time for something like this to occur. Companies can only do so much to protect themselves and their customers. Cybersecurity really needs to be a global solution. International alliances are needed. It’s important to have friends around the world.

Microsoft was hacked as part of this suspected Russian campaign, which has been described as a “net cast around” 18,000 companies and government agencies. Its entry point was a trusted and widely used program from the software company named SolarWinds. That appears to have been the gateway.

Microsoft said they have found no indications that their systems were used to attack others. Their investigations are still ongoing. So far, the hackers are known to have monitored email or data across networks within the U.S. Departments of Defense, State, Treasury, Energy, Homeland Security and Commerce, as well as the National Nuclear Security Administration. National Intelligence suggests the malware didn’t affect national security functions. At least not yet.

This following perspective really resonates with me. It can be applied to most anything today. “As much as anything, this attack provides a moment of reckoning. It requires that we look with clear eyes at the growing threats we face and commit to more effective and collaborative leadership by the government and the Tech sector in the United States to spearhead a strong and coordinated global cybersecurity response.” That quote is from Microsoft President Brad Smith. It sure makes great sense.

A bipartisan group in Congress requested a briefing from the Internal Revenue Service, to learn the extent of potential taxpayer exposure. The IRS is part of the Treasury Department. Treasury was one of the agencies that were hacked. The IRS is an attractive target for bad guys. It holds vital information about all things America. It’s been reported the IRS is the target for over 1 Billion attacks every year. We expect to learn more about this on a daily basis. We all need to be extremely vigilant in network security. This cannot be emphasized enough.

There were some other notable events which took place today that were Market moving:

The Big Banks can buy back their stocks again.

The Federal Reserve loosened its ban on stock buybacks for the Big Banks. These restrictions were put in place earlier this year. The purpose was to ensure the Financial sector had enough capital to continue to function during the pandemic. This decision follows another round of Fed stress tests that show all banks met capital requirements under 2 recessionary scenarios. Bank stocks, which have been left for dead for years, have come back to life of late. They stand to benefit from a sustainable economic recovery from the pandemic. The timing of this announcement is a little interesting, considering the current virus spike. Many Bank stocks jumped even higher after this news broke on Friday, after the Market close. The Market seems to be surprised too.

Options Expiration

Today was a “quadruple witching” day. That occurs 4 times per year when all 4 sets of options expire simultaneously. Electronic trading has mostly made the expectation of volatility during the quad witch largely a thing of the past. The trading algorithms so common today can make calculations Billions or even Trillions of times faster than the human brain. The pricing dislocations that used to be identified and acted on by traders are there and gone in fractions of a second. Volume swelled in the final hour of trading as the Dow and S&P made wide swings. What made this quad witch unique had to do with a certain electric car company.

Tesla enters the S&P.

It’s being called “the mother of all” Stock Market rebalancing events. With a Market value of nearly $600 Billion, Tesla is the largest company to ever join the S&P 500 index. It is now bigger than the rest of the auto companies combined. Tesla is not really a car company though. It’s more a battery or renewable energy company. And it’s not just big. The stock is incredibly volatile and considered excessively over-valued by pretty much every metric. But that’s always been the case. The stock has had a massive run as indexers have been forced to buy it to match the S&P weight. Now that that buying is coming to a close, we shall see if investors need to look out below.

Have a nice weekend. We’ll be back, dark and early on Monday.

Mike

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