Investors: Let’s Be Careful Out There

North American markets today, Monday, viewed several hours before opening, look to start mixed. All major indicators are in the red, but the S&P 500 and NASDAQ are both improving at time of writing and it is possible -- though certainly not definite – that either or both could make it into positive territory during the morning.

European markets are open at time of writing and indicators there are firmly in the red and appear likely to continue there for the remainder of the trading day.

The safe havens of gold and silver are all headed up. Currencies are mixed at time of writing with the Canadian dollar down while the British pound sterling is up. That relationship appears safe for the moment according to Jeremy Thomson-Cook, Chief Economist at London-based payments specialist Equals Money. “With news reports over the weekend focusing on the prevalence of the so-called ‘Indian variant’ of Covid-19 in certain parts of the country, the reopening schedule in the (United Kingdom) is once again in focus,” he says. “For now, the data and received wisdom suggests that vaccines are successful in combating this strain but any slowing of the plans to reopen parts of the economy further will be seen as a signal to sell the pound.”

The Euro is also up, amounting to something of a surprise, according to Thomson-Cook. “Such strong U.S. data last week should have definitively weakened the Euro, but its resilience is both unexpected and welcome,” he explains. By comparison, the American greenback has a mixed outlook in the near term. “Despite last week’s surprisingly high inflation reading in the States, the US$ has not driven higher and looks like a currency that still has downside to show us,” Thomson-Cook says. “With inflation running at 4% and a Federal Reserve that is still absolutely committed to looking through price pressures as ‘transitory’’ then the path for the US$ is not one of positivity,” he explains, adding that the dollar’s status as safe haven means that snapbacks cannot be ruled out.

Last week, markets lived up to their reputation for volatility and uncertainty, driven by inflationary fears, disappointing employment results, crypto gyrations, a general nervousness, the hacking of the Colonial Pipeline and several other factors. Still, on Friday they ended higher on hopes of recovery.

As we enter a new trading week, some of these dynamics and some new ones will overhang both the markets, the broader financial sector and the economy.

While the volatility of the market would never be a major surprise, the overall economy has become more volatile than we expected, given commodity price increases, rising labor costs in some areas, recovery expectations and the surprising shortfall between the increasing payrolls at 266,000 compared with the expected increase of about 1 million. These and other factors mean that Federal Reserve Chairman Jerome Powell and Fed executives may understandably have trouble deciding whether to stick to their belief that inflation is ‘transitory’ or revisit their plans to keep interest rates down for two more years. How they resolve those questions will affect both the market and the economy.

Moreover, the continuing concern about ‘Fed watching’ will not likely decrease anytime soon. A fundamental issue here is asset valuation – that is -- the current price of a share and other marketable securities. At the core of the ‘present value’ calculation is the ‘discount rate’ that the analyst applies to anticipated future cash flows, relative to the risk-free rate as indicated by current Treasury Bill yields.

Inflation expectations and the yield-curve are central to arriving at the discount rate. While economists have broader reasons for watching the Fed, the security analyst is very focussed on the Fed’s impact on the discount rate resulting from changes by the position taken by the Fed.

Add to that hopeful buyers of homes and investors in interest-sensitive industries.

We can reasonably conclude that ‘Fed watching’ is here to stay.

The volatility of crypto currencies will likely continue to some extent this week as crypto believers hope that TESLA chieftain Elon musk won’t say anything that will add to last week’s gyrations. Musk watching has become a part of market deliberations.

The hype and price projections of crypto boosters counterpoints directly with the findings in a report by Xangle, a disclosure platform:

Unfortunately, it’s also attracted hundreds — if not thousands — of bad actors who lie, steal, and cheat investors out of their capital. This is common when it comes to emerging technologies. Criminals use the hype and lack of regulatory infrastructure to take advantage of investors

Xangle does not call for a banning of crypto currencies but makes a strong case for global regulatory frameworks.

For those who honestly believe that they must get involved with crypto currency, the only safe solution is what I call the ’bingo money’ concept. Earlier generations of our parents or grandparents would play bingo in the church basement at $0.25 per card and if they didn’t win anything, the $0.25 was affordable and they had some entertainment. Those who feel pulled into crypto investing would ideally restrict their investments to what they can afford to lose.

Currency fluctuations add an extra layer of risk to stocks denominated in currencies other than the country of origin. Fluctuations of currencies are caused both by factors within a country and within the country of comparison. With the Canadian dollar the recent appreciation flows in part from the country’s energy resources. However, the other part of the equation with the American greenback is the increasing debt load of the American government as it attempts to get the country open and running again and spends trillions in the process.

This process started in 2018 when then-American President Donald Trump wanted to reverse the U. S. trade balance and saw a lower dollar as one means of accomplishing that goal and increasing American exports. The decline started and then became aggravated by the pandemic and the huge debt load.

The hacking of the Colonial Pipeline also brings several questions for investors, amongst them whether last week’s reports of the company’s reported decision to pay $5 million in ransom will encourage more hackers. That unfortunate truth could mean investment growth in the cyber security industry, according to Dan Ives, Managing Director of Equity Research at Wedbush Securities in New York. “The attacks are increasing at an eye-popping rate and we ultimately believe this is another broader sector growth catalyst for the cyber security industry over the next 12 to 18 months,” he says.

“We also believe the Biden Administration is laser focused on this troubling trend of cyber-attacks and should catalyze more spending on the federal front which benefits Beltway players such as Telos and Palantir in particular in our opinion,”

Ives adds that cyber security vendors like Fortinet, Sailpoint, Crowdstrike, Tenable, Varonis, Zscaler, and Palo Alto stand to benefit here.

And let’s not forget the Washington scene. Before recent battles in the Middle East between the Israelis and Palestinians broke out, the Democratic Party already had internal dissensions on several economic issues, but the outbreak opened another schism. President Joe Biden’s remarks in which he said that Israel had a right to self-defence drew salvos from Progressive Caucus member Alexandria Ocasio-Cortez and others. AOC tweeted that ‘Blanket statements like this … (with) little context or acknowledgement of what precipitated this cycle of violence imply the U.S. will look the other way at human rights violations. It’s wrong.’

Granted that absolute fealty to a party line is not as strong a prerequisite in the American system as in other countries, it remains to be seen whether strains within the Democratic party will threaten or slow Biden’s re-opening plans.

The solution: Like the grizzled police sergeant said in Hill Street Blues thirty years ago: ‘Let’s be careful out there’.

Disclosure: I do not own any shares in any company mentioned in this column (and no crypto currencies either).

Related: Crypto Investing Can be Like Being in the Wild West

Al Emid is a financial journalist, author and broadcaster.