The Effects of PRISM on the Market

August 3rd, 2013

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The aftermath of the NSA whistleblowing scandal mushroomed into the kind of story we rarely see outside of a Jason Bourne movie. Given that the implications have spread to a global level, it wouldn’t be sensationalist to say that the controversy could become greater in scale than even Watergate; at the very least, it has put the question of data security and privacy more firmly into the public consciousness than ever before.

As the old adage goes, one man’s freedom fighter is another man’s terrorist. As such, we’ll withhold judgment on the ethics of Snowden’s actions but the case does have some very tangible effects on the contrarian investing climate.

Previously, we covered the increasing necessity for global political analysis when making investment decisions, and rarely has the arena of politics (and the public’s perception thereof) been shaken up so much, with one single act, than the recent controversies dogging the NSA.

Immediate Aftermath

In the week following Edward Snowden stepping forward as the whistleblower, shares of Booz Allen Hamilton Holding Corp. (Snowden’s employers) took a sharp drop of 61 cents down to $17.39.

While not a massive fall over the stock’s year trading range (which has a low of $11.85), a hold rating was put in place and social sentiment towards the consulting firm took a real hit. Shortly afterwards, share prices fell further to $16.85.

But what are the odds of a lasting impact on Booz Allen? Virtually nil, really; while serious, the Snowden problem was a freak anomaly and already dealt with (from the firm’s perspective at least). And although the public and investors are hesitant to touch Booz Allen, the industry is already treating it favourably. Late last week, it won a $25.8m tech support contract for the federal Highway Administration.

A predictable result, on the face of it. In an environment where trust is eroded in data security, it seems intuitive to be wary of companies offering these services (and provides good fodder for contrarian investors to put on their watch list).

Fear: A Contrarian’s Old Friend

On the other side of the coin, scandal of this sort generates fear. In times like these, people historically look towards more security, not less, and an increased interest in companies that handle data is likely to follow as the debate wages on. A case in point: despite Verizon being heavily implicated in the NSA controversy, the telecom firm saw a 3.5% rise in shares immediately following the breaking news, becoming the best performer on the DOW in early June.

Google, Facebook, AOL and a few of the other tech giants also performed similarly well despite also becoming the targets of privacy concerns. In fact, the only major tech company that traded lower around this time was Apple, which incidentally didn’t come under as much heat as the others.

Political Dissent and Distrust

Since details of the scandal are now blown wide open, we’re now seeing increased lobbying for transparency (both from the private tech giants, trade groups and civil liberty organizations). If the requests to disclose interactions with the US Government are acquiesced, we might even see an increased amount of trust in these corporations. Sadly, this is unlikely to do much to patch up the massively eroded trust in the Government itself.

And it’s being felt overseas, too, especially given that the spying isn’t endemic to the US – the EU has also fallen foul of Snowden’s whistleblowing, so political distrust is rife on both sides of the pond. Naturally this will result in a lower confidence in general public investing into any area in which the government has (or even just may have) a finger, but the political dissent could also have an effect on the macro level.

Huawei is a good example of how the NSA has changed the face of trading between the West and East; tension is escalating at an alarming rate between major governments, private industry and consumers, and like tectonic plates screeching against each other, something’s inevitably got to give.

We also can’t ignore the affects on currency investing. Distrust in the US government will have a knock-on effect with trust in the dollar, and the same is likely to occur in Europe. More curious still is the frankly shocking possibility that Bitcoin was created by the National Security Agency. If true, this would be a radical twist in the tale – all signs from Snowden-leaked documents point in that direction, although given that the story originally broke on (notorious for inane conspiracy theories), perhaps that should be taken with a pinch of salt.

Planning for the Month Ahead

Expect to see a lot of panic buying and selling over the course of the next month directly caused by the NSA scandal and the political reactions it provokes, and be sure not to ignore the European markets; data security concerns are as prevalent over there as they are in the US, and coupled with the precarious economic situation in which much of the population rely on payday loans in order to get by, the amount of fear and political distrust throughout the continent is at fever pitch.

As the Snowden narrative plays out, there will be some very interesting ripple effects within the cloud, mobile, telecoms and web service industries. Correctly interpreting these effects, and the outcome this kind of mass (and global) distrust will have on share prices is tricky and there’s often only a small window in which to act, but quite often the outcome goes entirely against the intuitive grain.

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  • John

    Its amusing to see the US-centric reaction to this news.

    Foreign interception programs such as Echelon and Room 641A have been well known to the rest of the world for many many years (thank you William E. Binney ;-).

    In the Australian financial industry it is widely assumed that any phone, fax, email and internet traffic passing through a US communications centre is compromised. I don’t know of any Aussie banks that would put client sensitive data off-shore. (in fact APRA regulate these activities closely).

    The market implications will be very restricted I think in a global sense, as the news is largely “factored in” by the international community. (ie. no-one really trusted Google, Facebook etc before the Edward Snowden disclosures which only seem to be a surprise to Americans)

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