I knew the letter from the IRS sitting in my mailbox was bad news just from the color of the paper.

It was not light green, the color of a refund check from the United States Treasury.  Instead, it was white, warning that it contained some sort of demand, audit notice, or threatened legal action.

In fact, it was far worse than that.

In the most stilted, bureaucratic language possible, I was informed that my $100,000 tax refund for 2018 had been already been paid out to someone else.

Another party using my name and social security number, but a different address, had already filed a 2018 return for me.

In order to get my money back, I would have to file a new return and include hard copies of every single piece of supporting documentation. It was in effect a full paper audit. Then I would have to wait 60 days.

This was three months ago.

I informed my accountant immediately. I heard him shout across the room to his partner, “Hey Joe, I’ve got another one.”

He told me that half of his clients had had their refund checks stolen this year, and as a result, the IRS was now demanding automatic audits on all refund requests of $10,000 or more.

It gets worse. Budget cuts at the despised government agency mean that huge delays are occurring in almost all interactions. Even routine requests can sit on a bureaucrat’s desk for two years. The number of standard audits has fallen substantially.

Of the more than 245 million tax returns the IRS processed in 2017, only 1 in 160 individual returns — 0.6 percent — were audited. That marks a sixth consecutive annual decline in audits and amounts to the lowest level in 15 years. About 934,000 returns were audited in 2017, the lowest number since 2003, according to agency data.   

The ones that take place are just a quick pass over, often conducted by mail rather than the in-person, full proctologic examinations of the past.

Furthermore, the government didn’t have the money to pay for the latest upgrade of QuickBooks Pro until 2018.

This means was unable to use the online accounting service’s spreadsheets during audits when the taxpayer’s accountant has upgraded, greatly increasing the time required for each audit while decreasing its effectiveness.

As a result, QuickBooks is seeing the fastest and most widespread adoption of its latest software version in history.

You can’t make this stuff up.

I asked my accountant how long it would really take for me to collect my 2018 refund. “Better count on a year,” he said.

Then the news flash came out that hacker has stolen the tax returns of 100,000 individuals, including their personal information. I was clearly one of those victims.

Not only did the crooks discover my name and social security number, they also knew that my high school team name was the “Apaches,” my first car was a “Volkswagen,” and that I was married in “Tokyo.”

I bet they know my inside leg measurement as well (I’m not telling!).

It all reminds me that it is once again time to revisit Palo Alto Networks (PANW) and FireEye (FEYE). I have been recommending these two cybersecurity names for the past three years, issuing Trade Alerts on each opportunistic dip.

The near-destruction of Sony (SNE) by North Korean hackers has certainly put the fear of God into corporate America.

Apparently, they have no sense of humor whatsoever north of the 38th parallel.

I saw The Interview the other day on a plane, the film making fun of Supreme Leader Kim Jong-un that so pissed them off, and it totally sucked.

As a result, there is a generational upgrade in cybersecurity underway, with many potential targets boosting spending by multiples.

It’s not often that I get a stock recommendation from an army general. That is exactly what happened the other day when I was speaking to a three-star about the long-term implications of the Iran peace deal.

He argued persuasively that the world will probably never again see large-scale armies fielded by major industrial nations. Wars of the future will be fought online, as they have been silently and invisibly over the past 15 years.

All of those trillions of dollars spent on big ticket, heavy metal weapons systems are pure pork designed by politicians to buy voters in marginal swing states.

The money would be far better spent where it is most needed, on the cyber warfare front. Needless to say, my friend shall remain anonymous.

The problem is that when wars become cheaper, you fight more of them, as is the case with online combat. Cyber wars are now happening every day, all the time, 24/7, and everywhere.

You probably don’t know this, but during the Bush administration, the Chinese military downloaded the entire contents of the Pentagon’s mainframe computers at least seven times.

This was a neat trick because these computers were in stand-alone, siloed, electromagnetically shielded facilities not connected to the Internet in any way.

In the process, they obtained the designs of all of our most advanced weapons systems, including our best nukes. What have they done with this top-secret information?

Absolutely nothing.

Like many in senior levels of the US military, the Chinese have concluded that nuclear weapons are a useless waste of valuable resources.

Far better value for money is more hackers, coders, and servers, which the Chinese have pursued with a vengeance.

You have seen this in the substantial tightening up of the Chinese Internet through the deployment of the Great Firewall, which blocks local access to most foreign websites.

Some Mad Hedge Fund Trader subscribers in the Middle Kingdom have told me they can no longer access their US-based online brokerage accounts, which are blocked by mainland “porn” filters.

“Porn” is defined as anything the Chinese government doesn’t agree with.

Try sending an email to someone in the Middle Kingdom with a Gmail address. It is almost impossible. This is why Google (GOOG) closed their offices five years ago.

As a member of the Joint Chiefs of Staff recently told me, “The greatest threat to national defense is wasting money on national defense.”

Although my brass-hatted friend didn’t mention the company by name, the implication is that I need to go out and buy Palo Alto Networks (PANW) right now.

Palo Alto Networks, Inc. is an American network security company based in Santa Clara, California, just across the water from my Bay area office.

The company’s core products are advanced firewalls designed to provide network security, visibility, and granular control of network activity based on application, user, and content identification.

Palo Alto Networks competes in the unified threat management and network security industry against Cisco (CSCO), FireEye (FEYE), Fortinet (FTNT), Check Point (CHKP), Juniper Networks (JNPR), and Cyberoam, among others.

The really interesting thing about this industry is that there are no losers.

That’s because companies are taking a layered approach to cybersecurity, parceling out contracts to many of the leading firms at once, looking to hedge their bets.

To say that top management has no idea what these products really do would be a huge understatement. Therefore, they buy all of them.

This makes a basket approach to the industry more feasible than usual.

You can do this through buying the $70 million capitalized PureFunds ISE Cyber Security ETF (HACK), which boasts Cyberark Software (CYBR), Infoblox (BLOX), and Fireye (FEYE) as its three largest positions. (HACK) has been a hedge fund favorite since the Sony attack.

As for my tax refund, I am still waiting.

 

 

 

Global Market Comments
March 26, 2018
Fiat Lux

Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or THE WEEK THAT WASHINGTON FINALLY MATTERED),
(THE IRS LETTER YOU SHOULD DREAD),
(PANW), (CSCO), (FEYE),
(CYBR), (CHKP), (HACK), (SNE)
(TESTIMONIAL)