Summary: Upon news of an IT Outage BOC Portfolio substantially exited the market prior to its open at 8:30 am CST on 7/19/2024, avoiding a 1% drop by market close 7/19/2024. Out of an abundance of caution, the BOC Portfolio Newsletter Director Methodology substantially recommends an asset allocation change into BlackRock Ultra Short-Term Bond ETF (symbol ICSH) for all Model Portfolios. ICSH has no P/E ratio and a 30-day SEC yield of 5.42% as of 7/17/2024 per Blackrock in the section labeled “Fund Facts > Portfolio Characteristics.” .
IT Outage
According to Bloomberg on 7/19/2024 a “massive IT failure by CrowdStrike Holdings Inc. on Friday, July 19 grounded flights, upended markets and disrupted corporations around the world.” CrowdStrike CEO George Kurtz announced that the problem had been found and “a fix has been deployed”, but any Windows-based computer affected by the faulty code will need to be manually updated and rebooted. This problem impacted a wide range of industries ranging from airlines (FlightAware estimated more than 21,000 delayed flights) to banks to freight.
Microsoft had its own issues with popular software suite Microsoft 365 and cloud computing system Azure before the CrowdStrike outage according to Barron’s on 7/19/2024. “This is as big of a negative IT event that we’ve seen globally in some time – if not ever,” said Adam Borg, Managing Director for Investment Bank Stifel, in an interview.
Cybersecurity and legal experts agree that CrowdStrike is almost certain to face lawsuits, financial costs, and penalties as described by Bloomberg on 7/19/2024. Michael Henry, co-founder and chairman of cybersecurity services firm Accelerynt said that one customer, a large US-based retailer, had its entire IT staff working round the clock to update 6,000 affected computers by-hand, expecting that it might take as long as three weeks to bring all systems fully back online.
The magnitude of the IT outage is estimated to affect “29,000 organizations around the world, so the outage likely affected millions of computers that could take weeks or longer to bring back online because they must be repaired manually…”
“Some online commentators have described CrowdStrike’s flawed update as the “malware of the year,” owing to the level of destruction it has wrought. The jokey comparison to hacker attack code has some grounding in reality. The recovery time for affected organizations could be weeks or longer, roughly similar to the amount of time it takes a large organization to rebuild its network after a ransomware attack, cybersecurity experts said.”
- On 7/21/2024 Secret Bank Ratings Show US Regulator’s Concern on Handling Risk according to Bloomberg the article covered an assessment from the Office of Comptroller of Currency (“OCC”). “The agency calls operational risk the “broadest component” of its supervisory framework, and it functions as something of a catch-all as the technology banks rely on develops. In a report last month, the OCC said that aspect is ‘elevated’ as the industry responds to ‘an evolving and increasingly complex operating environment.’”
- Additional risk may come from Biden’s announcement that he would no longer seek re-election according to an article titled Traders Game Plan What Biden’s Exit Spells for Global Markets by Bloomberg on 7/21/2024. “There is now more uncertainty. We just don’t have a lot of precedence for a situation with a candidate who did not go through the normal primary process. So we are once again continuing our very long-term love affair with unprecedented times. And while we might feel like we are getting used to everything but business as usual, this is still a very large spoonful of uncertainty to be swallowing.” For example Biden is a lame duck President. Enemies may strike from global hostilities including retaliatory strikes by Iran on Israel backed by a US coalition including Britain and others who already have publicly declared support for Israel.
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According to Bloomberg 8/2/2024 in an article titledIsrael Working With US, UK as Retaliatory Strike From Iran Looms said: “Austin, who earlier this week reiterated that the US “certainly will help defend Israel” if attacked, spoke with Gallant and is weighing moves to reinforce America’s presence in the region, the Pentagon said Friday. White House spokesman John Kirby said earlier in a CNN interview that the Pentagon is ensuring it has “the right resources and capabilities” in the region, including both equipment and personnel.” And according to Bloomberg in an article 8/4/24 said: “The killing of Haniyeh in Tehran has sparked concerns of a new escalation in the Israel-Hamas war. Already, the U.S. military says it will move a fighter jet squadron to the Middle East and keep an aircraft carrier in the region. The USS Abraham Lincoln aircraft carrier strike group will enter the Middle East to replace the USS Theodore Roosevelt carrier strike group, which is in the Gulf of Oman. Other ships are in the Mediterranean Sea with a Marine detachment if regional evacuations become necessary. Meanwhile Saturday (8/3/24), the U.S. military’s Central Command said its forces destroyed a Houthi missile and launcher in Yemen.”
The very large IT companies, all with high P/E ratios, may suffer a loss based on rotation into small cap and other lower P/E securities. However, according to Bessembinder research, most stock market gains come from such high P/E growth technology companies. Nonetheless, a degree of caution may be warranted by stepping aside at this time.
For some time the BOC Portfolio Director has been uneasy about valuations of securities as a result of a Spend Agenda out of control. Spend Agenda is a phrase coined by Business Owners Charter, Inc. (“BOC”) for recurring deficit spending threatening systemic risk. Since 2001 the US government has deficit spent with more expenses than revenue. Overspending as a way to get elected inflates all asset classes stimulating hidden forces driving all markets higher, a political fixation that corrupts fundamental free market principles. For example the BOC Portfolio Director wrote about a recent confluence of domestic and global factors including crowding in short-duration US Treasury markets, destabilizing Spend Agenda, persistent inflation, and conflict in the Middle East if negatively escalating which may permit a correlated collapse of all major asset classes. For details see blog A Confluence of Triggers: Correlating a Collapse of All Major Asset Classes.
Make No Mistake.
Our goal is to beat the benchmark SP500 (symbol SPY) for BOCX moderate-aggressive-suitable portfolio. For our latest pivot near term vs long term subscribe to our Newsletter. Year to date BOCX returns thru 8/2/24 close of markets are:
For complete returns click here.
8/17/24 Update
- What changes to BOC Portfolio are recommended now? Read on.
- Between now and the end of the year, what are the odds qqq will fall below this point? 80%? 100%? Unknown but high.
- Say annual inflation is 3%, how much return should Bocx have received year to date? A normal return is 10%. A good economy may be 15%. Year to date through 8/17/24 BOC Portfolio has had a 20% return.
- Given: Deficit spending since 2001 will never go down as long as politicians can spend their way to get votes. A collapse of the fiat money system is highly correlated to this juggernaut Spend Agenda. What will the great unwind look like from the eyes of Mr. Market? Specifically Increased or decreased volatility? The BOC Portfolio Newsletter Director Methodology believes a money system collapse will occur with significantly increased volatility.
- What volatility have we got now?
BOC Portfolio returns have avoided extreme recent volatility as measured by the CBOE Volatility Index (symbol VIX), which reached an intraday high of 65.73 on 8/5/2024:
For reference, the last time the VIX reached levels above 60 was between 3/9/2020 and 4/1/2020 during the COVID crisis. According to Barron’s on 8/15/2024, the drop in the VIX over the next eight trading days was the largest eight-day decline on record.
BOC Portfolio returns through market close on Friday 8/16/2024 are shown below:
For complete returns click here.
Conclusion
The full macro economic impacts are currently unknown. Out of an abundance of caution, the BOC Portfolio Newsletter Director Methodology substantially recommends an asset allocation change into BlackRock Ultra Short-Term Bond ETF (symbol ICSH) for all Model Portfolios.
End of Special Report
Our BOC Portfolio Newsletter Special Reports cover matters that superior investing returns may require. For example, a 2008 Special Report thesis stated: “With respect to the 2008 bailout) the money to fund $1.4tn (trillion) dollars won’t be there, much less $9tn to $16tn dollars. If the money isn’t there and the government still wants its stimulus, the government has no choice except to print currency.”
And as predicted the money really wasn’t there. Printing fiat currency to fund the bailout was present, and was given the name Quantitative Easing.
Whether you are an Outsourced Chief Investment Officer (OCIO), Registered Investment Advisor CEO, Franchise Owner, a provider of a separately managed account (SMA), or other type of Financial Professional, we are an investment methodology fiduciary to investment firms like yours serving all risk tolerances. Call Dan at 708-825-7301 or email Dan@BusinessOwnersCharter.com.