This Week in Barrons: 5-19-2019:
“Want to make college really expensive? Make it free.” … Mark Cuban – Shark Tank
“Do you remember what you paid for college tuition?” JR reminded me of a great piece penned byJohn J. Duncan, Jr.– former Tennessee congressman:
In June of 1965, I graduated from high school, left my job at the A&P supermarket, and became a salesman at Sears making $1.25 an hour. I worked full-time during the summer and part-time after starting at the University in late September. I enjoy telling recent university students that tuition was $90/qtr. back then - $270/year. The fact reinforces my theory that costs simply explode on anything the federal government subsidizes. This is because virtually all of the pressures and incentives to hold down costs are removed once the federal government moves in.
I’ve heard both Sen. Elizabeth Warren and Congresswoman Maxine Waters crying crocodile tears about our $1.5T outstanding student loan debt. What they will never admit is that it our own federal government has turned millions of young people into student loan holders. The federal student loan program has been great for college and university administrators and tenured professors, but harmful to most students and their families. Before the government took over the student loan program, college tuition was cheap. House majority leader Steny Hoyer once proclaimed that tuition at the Univ. of Maryland was $87/semester when he started there in the '60s.
A few years ago, the Washington Post proclaimed that college tuition had gone up 450% above the rate of inflation since 1985, and that was also when our educational system was #1 in the world. In other words, tuition would be 450% cheaper and we would be getting a better education – if our government had simply left things alone. Years ago I joked: “Be careful when a politician tells you, 'I am from the government, and I'm here to help.'" Now, that is no joke. When I went to the university and then law school, students could work part-time during the school year, full-time during holidays and summer – and pay all their tuition and fees. No one got out of school in debt, unless they bought a car. Now almost every student starts their career in debt.
For years universities have been saying, "Don't worry about those bills – we’ll just get you another loan.” Someday I hope that the majority of Congress will reset our educational system by voting to phase out the student loan program. Unfortunately, with all the demands on political candidates and brainwashed students to make college FREE – it’s more likely that we’re heading in the opposite direction.
“Anybody priced 100 shares of stock lately?” Simply put, stock prices are too expensive for the average person. To buy 100 shares of any of the most liquid and largest market cap stocks, will cost you between $13k and $190k. With the average account size of $45k, acquiring a truly non-correlated, diversified portfolio is out of the question. Because of that, who is teaching the average investor how to use (and take less risk) with options – virtually no one. After all, what incentive does any brokerage platform have for having you reduce your spend from $1,900 for one share of Amazon (AMZN) to a less risky and just as profitable option spread for $250? Maybe it’s finally time to throw away the old rulebook and allow people in the financial media to actually write about the products they use?
“If you’re not a Billionaire in 10 years – it’s your own fault.” Eric Finman thinks Bitcoin is due for a long uptrend because: (a) Bitcoin recently has broken through some long-term technical levels to the upside. (b) Arecent Fidelity survey shows that nearly half of institutional investors believe digital assets can play a role in their portfolio – while only 22% own a form of digital currency. (c) Sentiment is shifting as Bitcoin, for the first time in a while, is shrugging off bad news. And (d) people could be starting to drop gold as their store of value of last resort and replace it with Bitcoin. On May 1, Grayscale Investments kicked off a provocative ad campaign to promote bitcoin as a better alternative to gold. The campaign, which employed the social-media hashtag #DropGold, promoted Bitcoin as a better store of value, arguing it’s more secure and borderless.
Goldman Sachs said the cost of the tariffs imposed by President Trump against Chinese goods has fallen entirely on the shoulders of American businesses and households, and has had a greater impact on consumer prices than previously expected. Consumer prices are skyrocketing because Chinese exporters are NOT lowering their prices to better compete in the U.S .market. Trump has inaccurately claimed that China will pay for the tariffs imposed by the U.S. The Chinese do NOT pay for the tariffs – but rather the importer pays for them and passes those costs onto the consumer. And in addition, other U.S. manufacturers have opportunistically increased their prices in response the tariffs.
Goldman also said the risk of a final round of tariffs on the $300B of remaining Chinese imports has now risen to 30%. This trade war could result in a negative 0.4% hit to GDP, and if trade tensions instigate another sell-off in the equity market, the growth impact could worsen. “Our baseline expectation is that the U.S. and China will strike a deal later this year. We think this would come in the form of a gradual, staggered reduction in tariffs on a last-in, first-out schedule. There is, however, a risk of further escalation,” said Goldman.
The silver lining in any market pullback is that we can easily see who the real market leaders are – software stocks. In particular, open source software stocks like Mongo DB and Elastic, and enterprise software stocks like Zendesk and Microsoft. These stocks are not affected by the politics because they do not rely on China for parts, people, or growth. Another leadership group are the boring restaurants like: McDonalds, Chipotle and Starbucks. Bitcoin (the ultimate open-source software) may be the new place to hide when ugly geopolitics flare. It is now the best performing asset year-to-date – going from under $4k to just below $8k.
Don't get me wrong, I think our trade tariff situation with China is incredibly lopsided. They control their imports via tariffs more than we do. When they were using their tariff monies to purchase our debt – everyone whined but no one rocked the boat. Now, as we see them backing away from the U.S. dollar and our debt, all of a sudden we think this is bad behavior. Will a deal be made? Absolutely. One particular analyst stated that a deal has already been made – China just didn’t want to actually sign it. They wanted a gentleman's agreement and a handshake – because if it’s not on paper nobody will see it. The main reason China wouldn’t want their population to see it is because it laid out how Chinese sponsorship of technology theft must stop. It’s not a good look for Chinese leadership to put on paper that they've agreed to stop state sponsored espionage and trade theft.
- Happy conference season: Google’sI/O event (Input/Output)revealed a voice assistant to screen robo-calls, and a $399 Pixel smartphone. Unlike Apple, Google doesn't need an ultra-expensive smartphone because it makes its money from directly selling your data and manipulating your behavior.
- My Mother the Car: GM’s Cruise Automation raised $1.2B to push forward with robo-taxis (planned for later this year).
- Anti-surge-pricing: In Uber-style, their IPO broke records: (a) $6B of Uber stock value was erased during the worst opening day loss of any U.S. IPO, and (b) it was the least profitable company ever to go public. Its loss in the past 12 months was twice as big as the 2nd biggest IPO loser - Lyft. It’s currentlyworth about the same as it was three years ago. Unprofitability is the basic worry for Uber and Lyft. Robo-drivers could solve that, but their ETA is TBD.
- Apple v. Pepper: The Supreme Court ruled, 5-4, against Apple last week. The case ruled that Apple’s 30% commission on sales through the Apple Store is an abuse of monopoly power.
- China fired back in the trade war with the U.S., China announced that it was hiking tariffs on $60Bworth of imported American goods. More than 4,000 US goods are targeted, and most of them now carry tariffs of 25% - up from 10% when they were first levied last September.
- More than $2B is what a jury awarded a California couple who say their cancer (in remission) was caused by exposure to the weed-killer Roundup.
- Keeping up with the Jones’s: Part 1: Walmart, the world's largest retailer, started rolling out free next-day delivery – in order to keep up with Amazon. Part 2: Disney reached an agreement with Comcast to take full control of Hulu. Both Disney and Comcast are still currently preparing to launch their own streaming services – trying to keep up with Netflix.
- Google moves into Amazon Marketplace's turf: Google is positioning itself as a direct Amazon Marketplace competitor with a revamped e-commerce offering. Their advantage is having the hundreds of millions of shopping-related searches that people already perform on their platform every day. Shoppers will have a personalized homepage where they can: filter results based upon features and brands, read reviews, and watch videos about products. For example, if a shopper is looking for headphones, they can filter for wireless and a preferred brand. The blue shopping cart on the item shows shoppers they can seamlessly purchase what they want with returns and customer support, backed by a Google guarantee. This new shopping experience will merge select features of the Google Express e-commerce service with the Google Shopping online product search and price comparison platform.
- The most valuable retail brand is: Amazon. The online giant, which also took the top spot in 2018, has a brand value more than double that of China's Alibaba which took the number two spot. McDonald's slipped to third and rounding out the top 5 were Home Depot and Nike.
- Birth rates falling again: A new report found that US birth rates have reached a record low. Last year, the total number of babies born was the lowest in more than 30 years – far below what's needed to maintain a steady population. The only age group that upped their baby-making pace was women in their late 30s and early 40s.
- “I got the moves like:” Just a week after heart surgery, Mick Jagger posted a video of himself dancing in a studio – and he moved like, well, you know.
- Robo-Apocalypse: The Federal Communications Commission is attempting to crack down on robocalls. The FCC chairman, announced that, “the American people are fed up with illegal robocalls. It is the top complaint we receive.”Reports are streaming in of robots being spotted outside unemployment offices.
- All about your Perspective: WeWork wants investors to see losses as “investments”as they reported quarterly losses of over $264m. That should really make their upcoming IPO pop.
- Honorable Mention: Taco Bell is opening a hotel and resort. All those Pot Stock billionaires will now have somewhere to hang out.
- Tell me why: The Backstreet Boys just put out a new 20thanniversary edition of: "I Want It That Way." You know what that means? We're all officially old.
- 'Game' over? More than 300,000 Game of Thronesfans are so ticked off about the way this final season has played out, they've signed a petition demanding a remake. They also need a life.
- eBay says “I do”: accept digital, virtual currency - Bitcoin.
- HTC’s new phone: allows users to run a Bitcoin full node.
- “Come on down, the Price is Right.” Whole Foods, Nordstrom, Bed Bath & Beyond, Lowe’s, Ulta Beauty, and other retailers are now accepting cryptocurrency in their stores. The new payment system comes via a partnership between Flexa, a global cryptocurrency network, and Gemini.
- Emberfund thinks differently: Sometimes when I think about investing in crypto, I imagine purchasing a single product like Bitcoin and then HODLing (Hold On for Dear Life) it for years. Emberfund lets you buy into an index of cryptocurrencies that automatically balances itself over time. The system automatically changes the currency weightings based upon prices and other indicators. Their secret sauce is that they’ve figured out how to do asset management, without ever taking custody of the assets.
- Predictions: BitMEX thinks that the Bitcoin price rally will target between $12k and $22k based upon history. Ethereum will reach $500 by 2020, and Max Keiser says the Fed’s endless printing will launch Bitcoin to $100,000.
- ETH whales: A third of all ether, ethereum’s native cryptocurrency, is owned by just 376 whales. These whales have “no meaningful”impact on the ETH price.
There have always been people trying to rig the system, but never before did we have the technology to synchronize a scam on a global scale. Now, central banks can synchronize their money printing efforts and dictate interest rates on a global scale – so that’s new. And negative Interest rates have never been used in 5,000 years of recorded history – so that’s new. Negative rates are unconventional at best, and an insane monetary tool at worst. As of 2017 according to Fitch, there were $9.5T worth of government debt carrying negative yields. How can anyone in their right mind think that there's nothing wrong with things, when abnormalities such as that exist?
In terms of derivatives, there is only 1.7T dollars (actual Federal Reserve notes) in circulation. And yet there are quadrillions of dollars pledged around the globe in derivatives. Everyone is just praying that no one calls anyone’s bluff, because there's certainly not enough ‘real money’ to go around.
Our markets (by any respectable metric) are over-bloated – sent higher on purpose to make the 1%’ers richer and to keep the global economy from imploding. Corporate buybacks (once illegal) represent over 70% of our market's upside move. Wall Street banks and the N.Y. FED are being used regularly to halt any meaningful market drops.
- Question: If we're the strongest economy ever, with the lowest unemployment ever, then why is it we cannot endure a more normalized interest rate of say 5%?
- Answer: Because the magnitude of our debt load is so large, normal interest rates would kill the economy both here and around the world.
Did you know:
- Auto loan delinquencies have spiked to the 2009 levels,
- 52% of our population lives paycheck to paycheck,
- 49% of our people can’t afford $400 to cover an emergency (without borrowing or selling something),
- Business equipment production has fallen to 2013 levels, and
- Industrial production has fallen to 2016 levels?
None of that adds up to a stock market at all-time highs. Governments need a way out of this and they’re in the process of manufacturing one - WAR. War has been the ‘go-to’ way of warding off recessions for decades. Between now and the election, something ugly is coming our way. I would suggest that is war in the Middle-East. We're in unchartered waters.
CBD is everywhere…
Aurora Cannabis (ACB) is one of the largest cannabis / CBD producers on the planet, and they released earnings last week. They showed:
- A fiscal Q3 net loss of C$158m, compared with the year-ago net loss of C$19m,
- Net revenue increasing to C$65m from C$16m for the same period last year,
- And a target production available for sale in excess of 25,000 kg.
Where else can you see a company quadruple revenues, 8X their losses, and have the stock move higher on the news. Revenues exceed forecasts and were driven by strong demand in adult use products. Adult use dried flower sales were the primary driver – up 46% sequentially, and were partially offset by a shortfall in adult use extract sales. With very few companies in the Canadian cannabis sector generating positive bottom lines, ACB remains on-track to generate positive earnings next quarter. Revenues are expected to grow over 75% sequentially next quarter, and if costs can be contained – an ‘ah-hah’ moment could truly be on the horizon.
Walmart’s earnings increased last quarter, but their revenues fell. They jawboned about comp sales rising, yet if you look closely, it wasn't more people buying more stuff – but rather the same people buying the same stuff that just cost more. That's called inflation, but Uncle Sam says there isn't any of that. And then Walmart said they will have to raise prices on some products thanks to Trump’s tariffs on Chinese goods.
If you digest the numbers that we continue to get, this market should not be moving higher. Single family housing starts have fallen to 2016 levels – and no one cares. Freight shipments have fallen off a cliff – and no one cares. Then we get headlines surrounding a Currency Cartel where the EU fined Barclays, RBS, Citi, JPMorgan, and MUFG $1.2B for running a cartel that coordinated currency trading. Traders were exchanging privileged info and coordinating their activities via chat rooms on Bloomberg terminals. Genius idea guys – but no one cares.
Will this market go up or down? On one side we're going to see a big uptick in buyback activity – which has been the main driver for years, and a FED that flipped from completely hawkish to dovish. On the other side we have all the problems I drone on about every week: failing fundamentals, trade wars, sabre rattling with China, slowing global manufacturing, etc. In terms of technicals, on Monday’s open the S&P (2,860) is below its 50-day moving average (2,872) again. We will probably challenge Friday's low at 2,825, and if that fails, we'll probably see them mount a defense at the 200-day which is at 2,776. The DOW bounced off its 200-day on Friday at the lows. If we lose that level, it could easily pull the techs and S&P down with it. There's a rumor suggesting that they're going to let the market fall, to force the Feds into cutting rates.
Growth is indeed slowing as the stimulus from the White House's $1.5T tax cut fades. President Trump's escalating trade war with China, which triggered a steep U.S. stock market sell-off, is also hurting business confidence and undercutting their spending on equipment. Following the weak reports on Wednesday, the Atlanta FED cut its second-quarter gross domestic product (GDP) growth estimate to a 1.1% annualized rate – down from a 1.6% pace. The economy grew at a 3.2% rate in Q1. The Commerce Department said that retail sales slipped 0.2% last month after surging 1.7% in March, which was the largest increase since September 2017.
The only areas where I see protection from this madness is crypto and energy, both because of the rising tensions in Iran. In the near term, the roll over later in the day Friday, after being ‘up’ sharply to going red, and seeing the S&P lose its 50-day moving average – is proof that this market wants to go DOWN. The question is, how low will they let it fall before Sec. Mnuchin calls the N.Y. Fed and orders the 6 major banks to buy the market back up. Finally, in case you missed it, another batch of ships set sail towards the Middle-East. Something’s coming. I’m watching: Microsoft (MSFT), Johnson and Johnson (JNJ), AT&T (T), Akamai (AKAM), and Exxon Mobile (XOM).
Top Equity Recommendations:
- Aurora (ACB = $8.68 / in @ $3.07),
- Canntrust Holdings (CTST = $5.98 / in @ $3.12),
- Canopy Growth Corp (CGC = $44.61 / in @ $22.17),
- Diamond Offshore Drilling (DO = $9.57 / in @ $9.51),
- HEXO (HEXO = $6.88 / in @ $6.37),
- Bitcoin (BTC = $8,075)
- Ethereum (ETH = $259)
- Bitcoin Cash (BCH = $414)
- RIOT (4.16): Buy Jan 17, Sell $3 Call / Sell $3 Put / Buy $4 Call for $1.85 CR (can only lose money if this falls below $1).
- Halliburton (HAL): Halliburton has fallen the equivalent of 2.7 standard deviations in the past two weeks after earnings. That’s helped push its IV rank higher. Yes, it might keep falling, but with crude oil fairly stable in this market, oilfield services might still be in demand. Plus, HAL doesn’t seem to have much exposure to a US-China trade war. That’s why you might consider a bullish strategy in HAL. The short $25 Put and buy the $22.50 Put in the June monthly expiration series is a neutral to bullish strategy that has an 86% probability of making 50% of its max profit before expiration.
- AMD: Remember when Bitcoin was a thing? When everyone who owned some was living crypto large? And then it wasn’t anymore. Well, Bitcoin’s up about 50% in the last month, propelled lately by the turmoil in the markets as people figure it’s as safe a bet as anything else if the world ends. And that will likely spur more mining farms while bitcoin is still just quadruple digits. Just like the gold rush of old, it’s the people selling the picks and shovels that made more than the miners. In bitcoin’s case, that’s likely AMD, which makes some of the chips useful in the mining process. AMD is unchanged since earnings and is relatively strong compared to the rest of the market. I would suggest a slightly defensive strategy of selling the $27 Put and buying the $25 Put in the June monthly expiration is a neutral to bullish strategy with a 62% probability of making 50% of its max profit before expiration.
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Please be safe out there!
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