Scott Barlow’s Noteworthy: Why a cyberattack on Las Vegas slot machines shouldn’t be ignored by investors

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The Globe and Mail’s market strategist has five thoughts on the research, analysis and ephemera that has crossed his desk this week.

1) BMO economists are adamant that new home construction is only a part of the solution to the housing affordability crisis. In their most recent weekly report, chief economist Doug Porter and senior economist Robert Kavcic argued that “raging demand, including investment demand, has been every bit of a driver of the lack of affordability as a perceived supply shortfall.” Mr. Porter and Mr. Kavcic note that construction is already running flat-out at record levels and there are continuing shortages of tradespeople.

2) Triple-B-rated corporate debt is a focus at BofA Securities. Previously, there were fears that a big chunk of the ocean of triple-B-rated U.S. debt would be downgraded one notch to junk status in the event of an economic slowdown. Many fund managers are restricted to investment-grade debt, and would be forced to sell the downgraded debt, causing significant market upheaval. Instead, as BofA analyst Yuri Seliger reports, there have been US$100-billion in triple-B bonds upgraded to single-A year-to-date. This is the highest amount since at least 2010 and double the recent 2019 high.

3) MGM Resorts International’s Las Vegas operations were the victim of a cyberattack that lasted 10 days until Sept. 20. According to the Las Vegas Review-Journal, MGM management shut down all slot machines to prevent hackers from forcibly paying out all their cash.

Bloomberg cited analysts at Macquarie estimating losses of between US$20-million and US$40-million which will not be a big deal when JMP analyst Jordan Bender estimates that MGM will make US$4.7-billion in earnings before interest, taxation, depreciation, amortization or rent costs this year. Mr. Bender also noted a cyberinsurance policy that may offset all charges.

The cyberattack didn’t get as much media attention as I might have expected – maybe the movie Oceans 11 is too old to be a popular reference point. It’s also possible that major hacks are so common that people don’t pay as much attention. The ubiquity of these events makes cybersecurity stocks like Palo Alto Networks Inc. and Zscaler Inc. more attractive. Pala Alto has generated a three-year average annual return of 41.4 per cent although Zscaler’s is in the low single-digits.

4. Goldman Sachs chief U.S. equity strategist David Kostin believes that the historical trend whereby short-duration stocks outperform long-duration stocks when bond yields are climbing will continue. Short-duration stocks are commonly dividend-paying, low-growth companies that give investors a higher percentage of total returns in the shorter term. Long-duration stocks have higher earnings and stock price growth (and are often higher risk), where annual compounding means investors receive the bulk of returns in the final periods of holding.

5. Scotiabank strategist Hugo Ste-Marie is among the prominent strategists warning of U.S. market weakness below the surface. He notes that the NYSE FANG + Index (which includes Meta, Apple, Amazon.com, Netflix, Alphabet, Alibaba, Baidu and Tesla) is up 66 per cent this year while the S&P 500 Equal Weight Index has barely gained 1 per cent. The S&P 600 index of U.S. small caps is also roughly flat year-to-date.

Mr. Ste-Marie makes the point that since the 1980s, small caps have always outperformed large caps in the first year of a new bull market. This implies we are in a late-cycle market environment that has historically preceded slower economic growth.