This Week in Barrons – 12-10-2017:
“Trading bitcoin futures will be more of a headline event – than a bottom-line event” … Rick Santelli (CNBC)
A few years ago, Yahoo and Mozilla shook hands on a deal that made Yahoo the default search engine for Mozilla's Firefox browser – and gave Mozilla a lot of money. Since then, Yahoo has been acquired by Verizon, and Mozilla took that as a cue to drop Yahoo and switch the default search engine to Google. Last week, Yahoo sued Mozilla, saying this was a breach of their agreement. Mozilla fired back saying Yahoo's product stinks, and they haven't been paying what they owe. This is just more bad news for Yahoo, which has been struggling for some time now. You can Google it.
Last week CVS Health agreed to buy insurance company Aetna for $69B. The largest deal this year brings together two of the biggest companies in health insurance and drugstores. This will help CVS compete with online retailers like Amazon that have been eyeing the healthcare space. It also means that when you show up to CVS to buy shampoo – you might also be able to get an eye exam. Phar out.
And just last week, a San Francisco superior court judge ruled in favor of Google, dismissing a lawsuit that accused the tech giant of systematically paying its male employees more than the women employees. Also, a recent study found that users of Amazon’s Echo and its Alexa personal assistant software – bought more stuff. The study showed how profitable it was (to Amazon) for Amazon to be integrated so deeply into your life and home.
But let’s discuss the elephant in the room – bitcoin futures going live at 6pm on Sunday, December 10th. The Chicago Board of Exchange (CBOE) has been approved to release a Bitcoin futures trading product – today. The Chicago Mercantile Exchange (CME) has been approved to release a similar product on December 18th. The CME is the world's leading derivatives exchange, with over 3B contracts annually worth over $1 Quadrillion dollars. Realize that big money won’t get involved in a market unless they can hedge their bets – and this move by the CBOE and CME allows them to do just that.
The CBOE and CME were pushed, poked, prodded and threatened by the big firms to make this happen. You will soon be able to set up your Roth IRA to roll over into Bitcoin. You will soon be able to assign Bitcoin to your investment portfolio – allowing institutional investors to be able to allocate part of their portfolios to Bitcoin. Tens of thousands of investors will have Bitcoin in their portfolio without knowing how it works, without any management nightmares, and without having to keep track of their own wallets and coins. This could potentially bring hundreds of billions of dollars into this market – virtually overnight. You could go to bed one evening and wake up to find Bitcoin up by $5,000.
But on this important day, I can’t help but remember a couple ‘tricks’ that a gambler friend of mine once showed me. He used to gamble on NFL football games every week, and taught me to watch out for logical, investment scams. Most notably was an investor’s (a) failure to appropriately recognize risk and reward, (b) to bet more than they could afford to lose, and (c) pay for ‘hot picks’ from experts that went something like this:
- An expert with ‘a system’ sends out an e-mail to 1,000 known gamblers.
- He sends out his ‘Lock of the Week’ on a particular NFL game, and picks one of the two teams in 500 e-mails, and the other of those 2 teams in the remaining 500 e-mails.
- The second week, he repeats the process with the 500 people who received the winning pick the week before – splitting his pick this time between 250 people.
- The third week, the expert begins to heavily promote his paid service to the 250 people that received the winning pick. He gives out his final ‘Lock of the Week’ – splitting it among 125 people.
- After the third week, 125 gamblers have seen the service accurately pick three straight football games – and they’re hooked on his paid service. A gambler will reason that the odds of accurately picking three straight games are low (under 12.5%), so perhaps this expert indeed has an edge. The appearance of success makes it far more likely that the gambler (investor) will cough up money to get next week's paid picks.
The fallacy here is that the gambler has been presented a selective picture, which leads them to believe that the odds of success are higher than they actually are. They were conned into believing blind luck was a result of skill. This is a common mistake made by investors. Often investors believe they have a clear picture of the data – until a profit warning or a product recall tells them otherwise. In today’s world of ‘fake news’ and incomplete information, do your own homework and form your own decisions – especially about your investments.
The other investment fallacy that I’ve seen is called the ‘bingo’ fallacy. In the game of bingo, you fill out a card based upon a combination of numbers and letters. You win when you are the first person to spell out "B-I-N-G-O." As the game progresses, random combinations are called out, and someone eventually wins. At that point, you will look at your partially-filled card, and see that you were only one letter away from winning. Perhaps you even had two or three combinations that were just one letter away from winning. It’s easy to over-estimate your chances of winning because it looks close. But there were probably others in the room even closer to winning than you. Had the game continued, there could have been 20 other winners before your number was called – even though it looked like you were on the cusp of victory. Investors fool themselves all the time by overestimating their chance of winning in risky situations. Investing is easy to understand – you ONLY make money when you SELL.
Lately, I have seen many people subscribe to ‘hot lists’ and exhibit the ‘bingo’ fallacy when investing in cryptocurrencies. People are kicking themselves for not investing a few dollars in bitcoin 7 years ago. After all, the potential reward from a token investment could have been enormous. In July 2010, the price of one bitcoin was $0.008. For $100, you could have purchased 12,500 bitcoin – worth over $150m today. If you are questioning yourself for missing out on this investment return of a lifetime, you are committing the ‘bingo’ fallacy. Your seeming odds of success are much higher than they actually were. When bitcoin was first introduced, there were a million other highly speculative investment opportunities vying for your dollars. Most of these would have been money down the drain. It is only with the perfect vision of hindsight that it seems like you were ‘this close’ to cashing in on the ‘big one’. Many who are now buying bitcoin don’t necessarily understand the investment risks, and probably don’t have enough information to make an informed investment decision. And ‘experts’ on a winning streak are certainly not indicative of ‘past’ or ‘future’ performance.
My intent here is not to convince you that bitcoin is a bad idea, but rather to have you recognize if you are falling victim to one of the logical scams that I have described above. Having said all of that, the phenomena you’re witnessing is nothing short of earth-shattering. The market cap of bitcoin was:
- $4.3B in 2014,
- $6.8B in 2015,
- $16B in 2016, and
- $330B in 2017.
From 2014 to the end of 2016 the total crypto market capitalization went from $4.3B to $16B – a $12B increase. Now, in the final quarter of 2017 we are at $330B and potentially higher by the end of the year. The growth it took this market to achieve in three years has now been multiplied more than 26 times in the past year. This $314B growth came in large part from retail investors – because the institutional doors will not be opened until today at 6pm.
Those people who think bitcoin is a bubble need to understand that bubbles are made only AFTER institutional money gets in the door. So, from the standpoint of market potential – bitcoin could be right at the beginning of its takeoff phase. When the institutional money gets in, they will make it feasible for the masses to follow. Right now, even if the masses wanted to invest in bitcoin or other cryptocurrencies they likely couldn’t because the infrastructure isn’t quite there. But it’s coming, and coming fast.
On Friday, Rick Santelli (an old currency, gold and floor trader) said:
- Don’t worry about bitcoin being an unregulated currency, because virtually every foreign currency is unregulated. And even with the backing of their respective foreign governments – we’ve seen foreign currencies all too often become volatile and some worthless.
- Don’t worry about an exchange becoming ‘upside/down’ on a trade – because exchanges have the ability to instantly modify margin requirements in order to make things whole again.
- Don’t worry about an unbalanced market – because that is what ‘market makers’ are there for.
- And don’t worry about the gap between the futures price and the underlying, because over time (the next two months) you will see that gap go away.
Heading into the FOMC meeting and December options expiration – the equity markets are showing some life. Lately, I’ve been questioning whether we are seeing the beginning of a ‘blow off top’, or if they were going to just keep driving the market higher. After all, the only thing left to look forward to is an interest rate hike on Wednesday, and the hopes of some form of tax relief. The issue is that the Central banks haven't stopped the liquidity. Mario Draghi and the ECB are still pushing tens of billions a month into the system, and now own over 17% of all European corporate debt. Those billions of liquid euros have to go somewhere, and often the first responders for ‘free money’ are banks. Since they get their money ‘for free’, they have little issue pumping it into risky stocks.
The Bank of International Settlements (BIS) has issued a stock bubble warning. Why would they issue the warning when they're the ones helping to inflate the bubble? Because by putting out these types of press releases, if the market blows up and crashes – they can say: “See, we warned you!" They've done all of that before.
This week I think we’ll see the markets continue to move higher as we have a lot of positives in place:
This week I think we’ll see the markets continue to move higher as we have a lot of positives in place:
- The Central banks are still printing.
- It’s the holiday season, and the markets often make a ‘Santa Claus Rally’ into year end.
- We have tax reform, and simply by delaying taking profits until January, will change the tax payment date from April 2018 to April 2019.
- Markets in motion tend to stay in motion.
- Volatility looks to remain low – keeping the wind at the backs of the equity index ETFs: SPY, IWM and QQQ.
- The SPY and QQQ remain strong on the weekly timeframe with the IWM showing some potential weakness. The SPY is also strong on the daily timeframe while the IWM and QQQ are turning up but still looking for new highs.
On the negative side, we are going to get an interest rate hike this week from the FED. And no matter how much lipstick Wall Street puts on that pig, rising interest rates are bad for stock markets. Secondly, the FED has actually begun to reduce their balance sheet. If you believe (like I do) that a large part of the market’s move higher is due to the FED expanding their balance sheet, then this should mean that the markets will struggle when they reduce it.
My guess is that we abandon the fear, and just keep this party rolling. Markets will absorb the rate hike and the balance sheet reduction, simply by knowing that the effects won't be felt for many months. Thus, they have free reign to run out the year with record high after record high. Of course, valuations are stretched to nose bleed levels, but no one cares right now. The party is in full swing, and the band is playing like it’s 1999.
XBT is the ticker for the Bitcoin futures. Bitcoin is on the cusp of mass adoption, with futures trading starting on the CBOE at 6 p.m. ET on Sunday, and on the CME from December 18. After the buying frenzy of the past few days, the question on everybody's mind is whether the trading in futures will boost prices higher, or whether short sellers will use the opportunity to sink prices lower. I don’t think you will see ‘big volume’ in bitcoin futures right out of the gate. In the first few weeks I expect the volatility in bitcoin to be exacerbated by the bitcoin futures contracts. Because a lot of investment firms will be taking new positions in the futures – which will move the price in the underlying bitcoin higher and/or lower. While traders will use this opportunity to profit from the volatility, it will be a difficult time for investors. Additionally, how will the trading in Bitcoin affect all of the altcoins – is a great question. And one to which we will get the answer next week.
But what if the ‘futures’ announcements were NOT actually the cause of this week’s price spike, as the media tends to believe? What if Bitcoin is actually becoming mainstream enough to survive on its own? If that’s the case, Wall Street and its legacy bankers are going to realize rather quickly that they’d be fools to short Bitcoin. I believe we could see things unfold like this:
1. Wall Street starts shorting Bitcoin on Sunday night
2. J.Q. Public sees this as a buying opportunity, and retail money continues to flow into bitcoin – buying on the dip.
3. #2 repeats on a global scale, causing BTC to raise to a steady $20k by year end.
4. Wall Street gets massive FOMO (fear of missing out) and starts investing in BTC instead of shorting it.
I’m looking for an explosion of interest in Bitcoin over the next 2 weeks unlike anything the financial industry has seen thus far. If that happens, Wall Street will NOT be shorting Bitcoin for long.
Bullish: (Sell PCS = Sell a Put Credit Spread)
- Abbott Labs – ABT (55.98) – Sell Butterfly, Dec 15th: + 53 / -55 / +57,
- Aurora – ACBFF (5.92) – Long Stock from $2 / share,
- Gastar Exploration – GST (1.04) – Long Stock from $1 / share,
- Lyondell Ind. - LYB (107.14) – Sell PCS – Jan 19th: - 105 / +100, $1.30,
- MasterCard – MA (149.89) – Sell PCS – Dec 15th: - 142 / +140, $0.41,
- Micron – MU (43.21) – Sell PCS – Dec 15th: - 45 / + 40, $2.30,
- Netflix – NFLX (188.54) – Sell PCS – Jan 19th: - 180 / + 175, $2.00,
- UnitedHealth – UNH (226.78) – Sell PCS – Dec 15th: -222.5 / +220, $.70,
- Zebra Tech - ZBRA (107.9) – Sell PCS – Dec 15th: -105 / +100, $0.70,
- BTC/USD: The momentum in Bitcoin pierced through the critical Fibonacci resistance levels to the upside. I believe that the first few hours of futures trading are likely to be very volatile. It is difficult to predict, which way the prices will move. We can only keep certain levels in mind and work with them once the volatility subsides. On the downside, support is at $12,734 and $11,344, which are 38.2% and 50% Fibonacci retracement levels. On the upside, if the price breaks out to new highs, its next level of resistance is the Fibonacci extension level of $18,281. Tomorrow, Bitcoin can easily breakout or breakdown, hence, please trade with caution.
- ETH/USD: Ethereum has been consolidating between $390 and $480 since breaking out of the ascending triangle pattern. Last week was the second time that $390 acted as a strong support. If the bulls can break ETH above $480, Ethereum is likely to quickly rally towards its pattern target of $652.
- XRP/USD: On December 06, Ripple found support at $0.20 levels and has bounced back sharply once again. It has formed a large ascending triangle pattern, which will complete on a breakout of $0.3. On the downside, $0.21 is likely to act as a strong support, and a rally to $0.30 should be in the cards. The best place to buy is near $0.21, or on a breakout above $0.30.
- LTC/USD: Litecoin (after bouncing off its 20-day EMA) has been propelled to new highs. The pattern target was $154, and it reached a high of $157.36. I anticipate a couple of days of consolidation after which the bulls will attempt to resume the uptrend once again. It is likely to find support at $140.22 and $129.612, which are 23.6% and 38.2% Fibonacci retracement levels of the current rally.
- DASH/USD: Dash fell back into its 20-day EMA where buying emerged. I expect it to retest the highs at $815 once again. If the bulls manage to break out of this overhead resistance, we might see a rally towards $900. Dash will become negative only on a fall below $640.
To follow me on StockTwits.com to get my daily thoughts and trades – my handle is: taylorpamm.
Please be safe out there!
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