This Week in Barrons – 5-21-2017:
This Jean-Michel Basquiat painting set a new Sotheby’s record of $110.5m.
WannaCry – the Test
This week WannaCry cured cancer AND found the missing dryer sock by architecting a ransomware attack that quickly became the worst digital disaster to strike the open Internet in years. It crippled global ATMs, transportation, and even hospitals. However, it lacked the follow-through of a ‘Live Free or Die Hard’ remake, and more resembled a cybercrime with mistakes at practically every turn. WannaCry spread with a speed and scale that has never previously been achieved. It used a recently ‘leaked’ NSA Windows vulnerability (called EternalBlue), and set loose the worst epidemic of malicious encryption ever seen. But despite infecting more than 200,000 systems across 150 countries, WannaCry’s ‘finishing move’ limited its scope and profitability.
As a bit of background, ransomware was a concept originally outlined in an NSA e-mail that detailed:
- The exact methodology on how to create a Malware that would encrypt a user’s hard drive,
- Then deliver a message to the infected user asking for ransom in exchange for a decryption key,
- Use one of several cryptocurrencies to accept the ransom payment,
- And finally, deliver the digital decryption key back to the user – allowing them access to their old (unharmed) dataset.
WannaCry’s integration of the NSA / Windows exploit into a virus was pure genius; however, their questionable ‘finishing-move’ decisions included:
- Building in a web-based ‘kill-switch’ that shortened the spread of the Malware,
- Handling bitcoin payments in an unsophisticated fashion that allowed for far easier back-tracing,
- And using a ransom payment function that made it virtually impossible to automatically know who paid the ransom and who didn’t.
A genius attack of this magnitude (that involved so many sophomoric missteps) begs the question: If the cybercriminals had actually gotten the ‘easy parts’ correct – could the results have crippled the world? As Craig Williams (a cybersecurity researcher with Cisco’s Talos team) stated: “WannaCry was a high damage, high publicity, and high law-enforcement visibility crime – with one of the lowest profit margins we’ve seen from any ransomware campaign. This will attract copycats, and the next set of criminals will be far more skilled at fueling the spread of their epidemic and profiting from it.”
WannaCry’s reach caused so much damage that it’s goal may not have been profitability at all. Instead, what if it was a group trying to embarrass the NSA by wreaking havoc with its own ‘leaked’ hacking tools. What if this was just a warning shot – a shot across the bow? Sure, in China, the ATMs went dark. In Britain, hospitals went down, clinics closed, and surgeries were postponed. But several elements just don’t add up: (a) First, the criminals attacked Windows XP – an old operating system, released in August of 2001, that Microsoft had stopped supporting in April of 2014. So, the attack was not on the newest or even on the most widely used equipment. (b) Second, payment was demanded in bitcoin. Bitcoin is a widely-known cryptocurrency (that without some really high end forensic technology sleuthing) masks who is sending or receiving payments. Do you think the CIA, FBI, and 17 other intelligence agencies like the idea of someone being able to be paid without their knowledge?
But what if this widespread cyberattack on an outdated computer operating system demanding bitcoin as payment – wasn’t just some kid’s idea? What if it was a ‘trial balloon’ floated by the ‘major players’. I find it too coincidental that following an amazingly blistering run in bitcoin (going from $1,400 to over $2,000 in under 2 weeks), a worldwide ransomware attack goes out demanding bitcoin for payment. I can see the headlines already: “Bitcoin has to be reined in, because the ‘bad guys’ use it for drugs, firearms, and ransomware.” The press will attack bitcoin for its global ubiquitous footprint, and expose the vulnerability of older technology – further forcing companies to upgrade and buy new.
Don’t shoot the messenger here, but Edward Snowden forewarned us. He told us about manufacturers inserting ‘kill switches’ in virtually all the hardware and software we buy. He talked of dams, trains, airports, cell towers, power stations, electrical grids, and banks coming to a halt. He specifically talked of how the NSA had created a back door into Windows XP that could be exploited. Guess what, if TV’s can spy on people and send information back to Samsung – don’t you think that every router, cable modem, and control box come with manufactured ‘back doors’? What if your next Microsoft ‘Updating’ message displayed ‘Disabled Forever’ instead. WannaCry was just a test that we failed miserably. It was a demonstration of how quickly and pervasively a cyber-attack could cripple our entire civilization. I would ask everyone to arrive at a ‘back-up-plan’ of survival without power, running water and grocery stores. My yardstick in the cybercrime war is: As long as the cybercriminal is paid ten-thousand times more than the cyber-policeman, I know who’s going to win this war.
On Wednesday of last week, the market lost almost 400 DOW points, and over 40 S&P points. The excuse for the fall was that Trump was soon to be impeached over asking Comey to drop the Michael Flynn / Russia investigation. It was a high-volume sell-off that plunged the S&P, the DOW, the Russell Small Cap Index, the Transports, and the Financials well below their respective 50-day moving averages. But we’ve seen these 1-day wonders before. If the market can jump for 300 points on March 1 and spend the next 2 months drifting sideways and lower – doesn’t it stand to reason that it could fall 300+ points and spend the next month inching back higher?
For months, our market has ignored the issues with North Korea, Syria, falling auto sales, fading GDP, and a hundred other things – and continues to hit all-time highs. Now, because the Democrats and the media are fixated on a note that the previous FBI director wrote – THAT is the reason that the market is pulling back? This week alone we saw: (a) the N.Y. Empire State report, which was supposed to be Positive 7 – come in at Negative 1, with new orders crashing, (b) North Korea launch yet another missile, and (c) Chinese manufacturing and retail data badly miss estimates to the downside.
On Thursday, the market ramped up for a 110-point bounce, and on Friday the market shook off any remaining doubts and put in a 141 point up-day – retaking its 50-day moving averages on both the DOW and the S&P. It would be simple to say that we’re going to march right back up and challenge the all-time highs, but I don’t think it’s really that easy. First, the real power for the push higher on Friday came from one of our very own FED heads – James Bullard. Headlines like these kept hitting the wires: (a) “FED's Bullard questions need for June rate hike”, and (b) “FED’s Bullard wants to retain the option to do QE in the future if needed.” Obviously, the market loved hearing that a June rate hike might be put on hold, and the additional QE was just icing on the cake.
The IWM (Russell ETF) and the XLF (ETF for the financial sector) remain below their 50-day moving averages. The DOW, S&P, and the NASDAQ all remain below where they opened on Wednesday of last week. Put all of this together and I think that we might stall out, and see a bit of sideways action in the near future. It's obvious that the Central Banksters are not ready to let this market roll-over and correct, but on the other hand I don't think they have the firepower to make it to new highs either. So, I’m looking for yet another bout of choppy sideways action for this next week.
First and foremost, often a person’s home contributes to being one of their largest investments. SF contributed the following chart showing the location, the median home price, and income requirement (assuming a 10% down payment, associated monthly costs, a 4% mortgage on a 30-year fixed rate loan, and a maximum debt-to-income ratio of 45%). If you wish to own a home, you may want to synch-up your income potential along with location in order to help make your dream a reality.
As you look at the following chart of technology players, evaluate which will outperform as: (a) Concerns over President Trump continue to dominate the headlines, (b) Bets on a FED rate hike continue to recede, (c) Declines in the U.S. Dollar continue to strengthen both gold and oil, and (d) Shifting into a global risk-off mode continues to be the norm and not the exception to the rule. Also in terms of ‘vulnerability’, view these same 5 tech companies along the lines of what vertical niches do they monopolize. For example: Google (Alphabet) controls ‘search’, Amazon controls ‘retail’, Facebook controls ‘advertising’, Microsoft controls the ‘operating system’ – what does Apple control again?
SPX – For every single week in 2017, the S&P Index (SPX) has ended the week within it’s expected move. The expected move for next Friday, May 26th includes a lower end of 2354 to an upper end of 2410. Therefore, selling an Iron Condor surrounding those strikes would be the appropriate move.
Finally, traders seem to be looking at the probability of President Trump either (a) being impeached, or (b) not serving a full term. In terms of options, the market at this point is a bet on Trump vs Washington, DC. If you are a contrarian on the Washington news cycle and are bullish/neutral on Trump and the QQQs, then the ‘jade lizard’ that is: (a) Short the $132 Put, (b) Short the $139 Call, and (c) Long the $140 Call for the June monthly expiration has a 65% probability of making 50% of its max profit before expiring – all the while generating $3.80 in daily positive theta.
To follow me on Twitter.com and on StockTwits.com to get my daily thoughts and trades – my handle is: taylorpamm.
Please be safe out there!
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Until next week – be safe.