The week saw interesting developments on the cryptography and cryptocurrency fronts.  A massive international sting operation was revealed in which U.S. and Australian law enforcement had marketed compromised smartphones to sophisticated criminal users through an informant on the Dark Web, advertising them as cryptographically secure for communications.  The allegedly secure operating system, AT0M, secretly sent data back to the FBI, resulting in some 800 organized crime arrests. 

Notable also — and perhaps related — was the successful recapture of some of the bitcoin (BTC) ransom paid to the hackers who compromised Colonial Pipeline.  The FBI tracked the Btc Ransom through the blockchain to its destination at an ultimate address… to which they happened to possess the private keys, allowing them to recover the funds.  Had they acquired those keys through human intelligence, or perhaps through the AT0M exploit? 

The full story may make a fun summer movie blockbuster someday, but in the meantime, global criminals were certainly put on notice that neither cryptographic communication, nor cryptocurrencies, possess the security they had assumed.  So, perhaps, did everyone else, which may explain BTC’s recent poor price action in the face of otherwise strong market performance.  We recall that when Osama Bin Laden was a fugitive, he did not rely on encryption, but simply shunned all electronic communication.  That is a good strategy for hiding, but not an effective one for conducting active criminal enterprises. 

To us, the whole event served to indicate once again that the government’s capacity to monitor and seize cryptos is much more robust than most people think — even clever criminals.  We have heard anecdotally that even dedicated privacy coins such as Monero [XMR] have been cracked by state intelligence services and are traceable.  Since much of the enthusiasm for crypto revolves around its erroneously perceived status as invulnerable to government action, these events will surely be a headwind for crypto generally.

The U.S. stock market is currently not cheap.  There are pockets of overvaluation. There are also pockets of undervaluation.  To us, the undervalued areas of the market include growing companies which are selling at a P/E ratio no higher than their annual earnings growth rate — a so-called PEG (price-to-earnings-to growth) ratio of one.

We favor: (1) growth stocks at a reasonable price that have a high probability of growing for a few years into the future; (2) commodities, especially food (Russia is the latest to announce exports curbs to keep inflation under control), as well as base metals and precious metals as mentioned above; (3) suppliers to the mining and farming industries; and (4) new technologies, assuming that they can be found near a PEG ratio of one. 

Generally we suggest avoiding SPACs, cryptos, and high P/E new issues that cannot guarantee that the massive growth they currently enjoy can continue for the next three years.

Thanks for listening; we welcome your calls and questions.