This Week in Barrons – 3-18-2018:
Marketing by Exclusion OR “How I landed my husband on the web” … https://youtu.be/d6wG_sAdP0U
Most young businesses practice marketing by focus and exclusion, and I think there is a better way. Many small businesses think they know the problem that they’re solving, and proceed full-bore into picking the right sectors and prospects to attack. After all, who knows you better than you – right? Wrong. Stephen Hawking said it best: “The greatest enemy of knowledge … is the illusion of knowledge.” Your CUSTOMERs define what you are, and what you’re NOT. Your customer understands: (a) all of your abilities, (b) the timing, (c) the competition, and (d) their own tolerance for ‘early adoption’.
JT introduced me to the above video (https://youtu.be/d6wG_sAdP0U) that shows how Amy Webb adopted a ‘big data’ philosophy for finding a husband on-line. She was able to narrow her eligible prospects in Philadelphia from 1.5m down to 35 in a matter of seconds. After all, in a city as big as Philadelphia (1.5m people) there are 50% men = 750k prospects. Of those men, only 4% were in her targeted age bracket (30 to 36) = 30k. Of those, only 2.3% were Jewish = 690, and only 10% of those would be attracted to her versus the competition = 69. Finally, she eliminated another 50% because they liked sports – leaving her only 35 husband-worthy men in the entire city of Philadelphia. If you believe those numbers, you should immediately start trying to connect with those specific 35 men, make appointments, and begin to ‘close’ on some sort of relationship. Unfortunately, Amy (along with many small businesses) fail to realize that the smallest error in any of the original assumptions will lead to a very large error in the final pool of eligible prospects.
By combining the possibility of an original assumption error with the failure to correctly understand your own competitive advantage(s) – should cause you to think more openly about your prospects. A young company needs to more heavily emphasize sectors where early adoption, timing, and ‘the numbers’ immediately give them a competitive advantage. Based upon those results, grab the ‘low-hanging-fruit’ and begin to fill your sales pipeline until finding the appropriate ‘flag waver’ to take you forward. In terms of Amy, rather than searching for those 35 specific gentlemen in Philadelphia, I would recommend she spend time where 30 to 40 year old Jewish guys hang out, and begin to build her relationship grid accordingly.
For another example, lets discuss our aging workforce. We know that only 50% of households have enough savings to get them through 1 missed pay-period. We also know that 80% of older households do not have enough savings to retire. Now you could start a business that ‘focuses’ on increasing education, training, and disciplined investing to this group. You would quickly find that getting our government (or anyone) to pay for yet another educator, trainer, or investment advisor is next to impossible. And then you would end up walking away with little to show for it except an additional pain, blues and agony merit badge. OR, you could ‘widen your net’ and include the government and corporations into the problem. At which point the problem morphs into our U.S. labor force growth rate stagnating by 2020. Because GDP is still growing, older workers will be given a competitive advantage. A recent Bain and Co. report emphasized that companies looking to innovate and scale will find employee retention to be a ‘front burner’ item by 2020. This is good news to Baby Boomers and Gen Xers. With older workers in shorter supply, employers will need to hang on to the ones they have, and entice others to rejoin the workforce. This war for talent means companies will be making ‘innovative’ offers to workers that emphasize more flexible workforce and workplace arrangements. Companies will begin to actively ‘poach’ from other employers, and will engage in a custom blend of compensation, benefits, and hours. Age discrimination will morph to include more part-time and contract arrangements. The well-educated could end up working into their 70s if need be. The high-school educated will have a much tougher time of it. After all, automation will eliminate 40m jobs – 20 to 25% of the current job market and especially targeting the $30 to $60k worker. The beneficiaries of automation will be managers that show professional expertise, and can use technology to increase productivity.
Startups: rather than reducing the niches where your business belongs – participate in more conversations where prospects think your business is wanted. Work from a bottom-up customer point-of-view to gain acceptance and support. Don’t be surprised to find that your original target market was too confining due to one of your early assumptions being too restrictive. As JB once told me: “People write business plans because then (and only then) do we know one way that the business will NOT grow – and that is according to the plan.”
- There’s gold in them thar hills: A Yakutsk gold rush ensued after $368m in gold and silver tumbled from a AN-12 cargo plane over the coldest region in Russia. Over 9 tons of Russian gold and silver, along with an undisclosed amount of diamonds and platinum have been reported missing. All of the flights to Yakutsk are booked as people have stopped mining for crypto and started mining for gold.
- Poor Geoffrey the Giraffe: With Toys “R” Us being a sad chapter in our memory, I wonder how the company’s mascot will pay his bills. Gigi (Geoffrey’s better half) has already moved on, but Baby Gee still lives at home. We’re all wondering whether it was Amazon, Target, and Wal-Mart who brought them down, or whether it was the debt saddled on to their spotted backs by KKR, Bain, and Vornado?
- Bye Bye American Pi: RIP Stephen Hawking (1942-2018). The world-famous physicist and bestselling author died last week in England. He was known for his deep dives into black holes and coming out with them not being entirely black – but rather particle radiators. His major breakthrough came as a result of combining quantum mechanics with Albert Einstein's theory of relativity. He did most of his research while suffering from Lou Gehrig's disease (aka ALS). Upon his death his family shared his thoughts: "It would not be much of a universe if it wasn't home to the people you love. Look up at the stars and not down at your feet. Try to make sense of what you see, and wonder about what makes the universe exist. Be curious.”
- It’s official – Google banned crypto ads: Starting in June of 2018, cryptocurrency ads will take an indefinite hiatus from Google. Facebook and Reddit were the first major platforms to curb ICO advertisements, and now Google. Will this cause cryptocurrencies to fall off of people’s radar? While adoption may not come to a halt, it will definitely be harder for the public to stumble across cryptocurrencies during a random web search.
- Fake trading volumes … maybe? Crypto-exchanges came under fire last week for allegedly faking their trading volume. Sylvian Ribes concluded this while analyzing how far prices moved when selling $50k of each cryptocurrency on each of the top exchanges. Ribes’ calculations found that over 80% of the OKEx trading volume was fake, along with 70% of Binance’s trading volume. Responding to that accusation the Binance CEO said: “We like liquidity.”
- You’re Fired. Early last week D. Trump sacked Secretary of State Rex Tillerson. On Friday, Attorney General Jeff Sessions fired former FBI Deputy Director Andrew McCabe. He was fired just 26 hours before his formal retirement – which could cost him his federal pension.
- As Playboy prepares to release a new crypto wallet: I’m betting that D. Trump wishes he’d paid Stormy Daniels in Bitcoin, Monero, or Zcash about now – instead of by bank check.
- Central Banks now own 44% of the worlds GDP. Shortly, the U.S. will be $25T in debt. Low interest rates have caused U.S. business to take on trillions in debt to fund record corporate stock buy-backs. Trump's tax overhaul and cash repatriation package are funding the stock market’s move higher. This has come at the expense of investment in facilities, R&D, wage increases and bonuses. This will hamper long-term growth.
The value of corporate stock buyback programs announced in February surged to $153.7B – eclipsing April, 2015’s previous monthly record of $133B. J.P. Morgan (JPM) estimates that S&P 500 companies will buy back a record $800B of their own shares in 2018, far exceeding the current high of $530B that was recorded in 2017. Companies opt to buy back shares instead of using those funds to make long-term investments in things like facilities or R&D because it bolsters the corporate stock price. Buybacks are good for shareholders, and senior executives – who tend to be big owners of their companies’ stock.
According to JPM, nearly half the stock purchases this year will be funded with the windfall from the Trump administration's tax-reform plan. The other half will be financed by strong corporate earnings and the repatriation of the cash held overseas. That notion has completely upended the view that the big U.S. corporations would pass along benefits of the Trump tax plan to their workers in the form of increased wages and/or bonuses. Democrats point to increased stock buybacks as proof the Republican tax plan largely benefits corporations, corporate executives, and wealthy shareholders – instead of employees and average citizens. As said by Senate Minority Leader Charles Schumer: “Share buybacks inflate the value of a company’s stock, which primarily benefits corporate executives who are compensated with corporate stock, not the workers who are paid by wages and benefits.”
The recent surge in share repurchases will give the 9-year bull market a boost at a time when many investors are concerned about how much longer it will last. According to the FED’s flow of funds data, corporate share buybacks have been the main buyers of U.S. shares since the 2009 market low (see chart).
Recent analysis by Credit Suisse revealed that corporate stock buy-backs have repurchased a net $3.3T worth of U.S. equities (18% of the total market cap) over the past 9 years. All the while mutual funds and ETFs bought a net $1.6T, and households and institutions (insurers and pension funds) SOLD a net $672B and $1.2T respectively. What this means is that since the 2008-09 financial crisis, there has been only one buyer of stock in the U.S. – the corporations themselves. This demand for equities from largely price-indiscriminate corporations has had the knock-on effect of crushing equity volatility. Mr. Cole reported: “Share buybacks are a major contributor to low volatility because a largely price insensitive buyer is always ready to purchase on weakness. It’s like a snake eating its own tail. Only the market cannot rely on share buybacks to nourish the illusion of growth forever. Rising corporate debt levels and higher interest rates are catalysts for slowing down annual share buybacks that are artificially supporting the markets and suppressing volatility."
Last week U.S. stocks took a hit as talks and fears about a potential global trade war continued. President Trump wants to bring down our country’s huge trade deficit with China via the imposition of tariffs. For the week, the DOW fell 1.5%, the S&P lost 1.2%, and the tech-heavy NASDAQ slid by 1.0%. On the economic front, housing starts fell by 7% in February, industrial production increased by 1.1% (the fastest pace in 4 months), and consumer sentiment soared to a 14-year high.
This week the government put the clamps on any potential Qualcomm / Broadcom merger, but Qualcomm remains in the government’s crosshairs. If Trump plans on reducing the trade deficit with China by $100B – he’s going to target where Qualcomm lives – the technology and telecommunications sectors. If a trade war between the two countries erupts, the San Diego-based chipmaker will need to walk a tightrope. China is Qualcomm’s most lucrative market due to patent and licensing fees earned from smartphone vendors such as Apple, Samsung, and Xiaomi. Any trade dispute with China could have a heavy impact on Qualcomm’s business dealings and sales pipeline.
Lately, Bitcoin (BTC) has been on a swift decline from the record highs it reached last December. Losses are mounting so quickly that technical analysts are saying the most popular crypto is nearing the so-called ‘death cross’. This term is a bearish indicator and is brought on by a short-term moving average falling below a longer-term moving average. Earlier this week, Goldman Sachs (GS) warned that Bitcoin is at risk of taking out its February lows. The group’s forecast aligned with a technical indicator for Bitcoin to potentially hit a low of $5,922. Bitcoin bulls however find it too early to call a bottom as they see a corrective rally coming off of this week’s low. Bitcoin’s impending death cross may give the technically-inclined investor reason to push the price even lower.
Next week the main event will be the FED’s monetary-policy meeting, and on Wednesday the FED will announce its interest rate decision. An increase in short-term interest rates is likely, but investors will await the Fed’s press release concerning the number of rate hikes they can expect for the remainder of 2018.
This sideways market movement has gone on for over 2 weeks now – trapped in ‘no-man’s-land’ within the following cone:
Shortly, one of those blue lines will give way to either a break-out or a break-down. A break-out may indeed come, but I’m witnessing some ‘not so bullish’ trading as well. For instance, you can make the case that the smart money has sold into the morning pops – leaving the retail guy to buy the afternoon drops. You can also see that volumes have been lagging. No one wants to hear that the great bull run is over, but as the cone continues to narrow – it will be forced to violate one of those trend lines. When it does, thousands of algo-bots are primed to buy or sell the breakout and push it hard.
I think that the chances are better for this to be resolved to the upside, but only because of what I consider to be criminal behavior. It would be too easy for the big 3 Central Banks whip up another $3B and use it to buy stocks. We would go higher but not on: earnings, GDP, or infrastructure – just on CB printing and corporate buy-backs. Both are horrendous reasons for a market to rise, but they have been the only reason for the past 10 years. Will it do so in the face of some not-so-hot economic news? After all, 2 months ago the Atlanta FED predicted 2018 GDP at 5% – and last week they lowered their estimate to 1.9%.
You could try and play both sides of the fence by buying call and put options on one of the ETF proxies such as the DIA or SPY. But I would recommend you wait and see which way the trend line is broken, and then load up. One of these lines is going to break, and probably fairly soon. When it does, the move up or down will be substantial.
Top Equity Recommendations:
"Be fearful when others are greedy. Be greedy when others are fearful." - Warren Buffett
Currently, I’m not finding any buy setups in the cryptocurrency space. If the price of Bitcoin falls any further, miners will start to lose money, and that may force some miners to stop their operations.
Marijuana stocks (HODL):
- Aurora (ACBFF) – is thinking of listing on the NASDAQ, along with its current Toronto exchange listing,
- Cannabis Wheaton (CBWTF), and
- Canntrust Holdings (CNTTF).
Options (I LIKE):
- Micron Technology (MU) – long into March 23rd earnings,
- LuLuLemon (LULU) – long into March 29th,
- J.P. Morgan (JPM) – long into March 29th,
- Nvidia (NVDA) – long into March 29th,
- Microsoft (MSFT) – long into March 29th,
- Raytheon (RTN) – long into April 20th,
- Sketchers (SKX) – long into April 20th, and
- Steel Dynamics (STLD) – long into April 20th.
Top Crypto Recommendations:
- Bitcoin (BTC),
- Ethereum (ETH),
- Nano (NANO), and
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Please be safe out there!
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