ISIS And Terrorism Risk - Are We Ignorantly Ignoring It?

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Includes: AAXN, ADT, ASEI, BCRX, CAB, GLD, MATW, SDS, SH, SPY, UDN, VXX
by: Markos Kaminis
Summary

The White House & Capitol were cleared yesterday due to terrorism concern. Threats against airlines and other places and events have raised concern often lately.

The Islamic State made a very specific threat to America recently for the next six months.

We can do better for our investing clients and friends than to ignorantly ignore such real risk and shrug our shoulders when it happens.

Specific securities may offer good returns that still do well even if terrorism unfolds.

Investment instruments exist to allow portfolio managers and individuals to hedge against macro risk.

Tuesday a White House press conference was stopped while the Secret Service responded to a bomb threat. Earlier in the same day, part of Capitol Hill was evacuated during a Congressional hearing. The events follow other recent scares, but besides the Boston Marathon bombing nothing really catastrophic has happened. However, a very serious threat has been made against America this year by the Islamic State and it warns of attacks over the next six months. Are we overreacting to these called in threats or are investors ignorantly ignoring it all? Given our porous borders and the malintent of America's organized enemies, maybe we should have some protection in place for portfolios.

Sweeps of the White House and the Capitol turned up nothing after bomb threats were called in for each Tuesday. In late May, an Air France flight from Paris to New York was escorted to its destination by two fighter jets after an anonymous threat was made to the flight. The list goes on and on. Authorities have to respond to these threats out of an abundance of caution, which has perhaps been pronounced because of past security failures in identifying real dangers to the public, most notably on September 11, 2001.

Still, the Islamic State did recently issue a serious, detailed, and ominous, threat against the United States. ISIS says it has people in 15 states ready to go over the next six months, which it says will be "very interesting." Can ISIS follow through with such a threat? It would not take much, as we've seen through the attacks of mentally ill Americans against other Americans. Is ISIS capable of something more serious, on the level of 9/11? That is hard to say, but can we afford to assume they cannot?

How can we prepare then? Well, we can do better than just saying we can't invest around terrorism fear. And we can do better than consoling clients after the fact with words like, "Nobody could have seen that coming." That will not make them feel better about their lost wealth, and neither will comparing their losses to the benchmark index decline.

The first thing we can do is educate investors not to sell in panic around scary events, and to keep some powder dry (cash on the sidelines to buy great stocks at sale prices). We can also hedge against risk by holding specific securities that we expect to do well anyway, and which might do even better if our worst nightmare comes true. You might survey defensive stocks or even ideas in security. I think The ADT Corporation (NYSE: ADT) is one such outfit. Some other possibilities might include BioCryst Pharmaceuticals (NASDAQ: BCRX), TASER International (NASDAQ: TASR), American Science & Engineering (NASDAQ: ASEI), Cabela's (NYSE: CAB), Matthews International (NASDAQ: MATW) and more. Use your imagination when thinking about them, but then do your homework on the fundamentals. The list I just provided offers potential ideas for such a scenario and has not been vetted for fundamentals.

Portfolio managers both large and small can place bets against macro risk by taking stakes in broader market protection from time to time. Securities for such use might include the iPath S&P VIX ST Futures (NYSE: VXX), the PowerShares DB US Dollar Bearish (NYSE: UDN), the SPDR Gold Trust (NYSE: GLD) etc. Investors might even place bets against the S&P 500 (NYSE: SPY) using instruments like the ProShares Short S&P 500 (NYSE: SH) or the ProShares UltraShort S&P 500 (NYSE: SDS). Such investments hedge market risk while investors maintain their portfolio positions, but these ideas obviously work against us who believe in the long-term viability of the market.

Still, awareness, caution and the use of protection could prove useful over the next six months. I like to hedge against such risk especially around important dates, given that terrorists seem fixated to dates and places like July 4th, September 11th, New York City and airplanes. You get my point. We cannot live in fear, but we also do not have to ignorantly ignore serious real threats against us, our nation or our portfolios. I cover the market regularly and am usually less morbid, so you might want to follow my column here at Seeking Alpha.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.