This Week in Barrons – 4-9-2017:
“It just doesn’t matter” … Bill Murray … Meatballs (movie)
Tesla is showing the world that the Barclays SELL rating - “Just doesn’t matter.” Last week, Barclays put a SELL rating on the stock, with an estimated price target of $165 (roughly half its existing price) – and the stock continued to climb to all-time-highs anyway. Barclays thinks: “Q1 earnings won’t matter. Model 3 hype is baked in, and the stock could have yet another leg higher.” After all, year-to-date Tesla shares have gained 40% - compared to gains of 5.4% for the S&P 500 index. But Barclays really believes: (a) Tesla had a significant cost advantage in battery packs – but that advantage is narrowing quickly. (b) Tesla had a significant lead in autonomous driving – but the quality of their systems is in question, and they lack industrial testing, rigor, and scale. (c) Because there is no shortage of electric-vehicle competitors, Tesla’s ramp-up manufacturing inefficiencies along with their huge cash burn rate will prevent them from building upon any lead. (d) And Barclays believes that Tesla will have a tough time replicating the dealer and repair networks that the other competitors can offer. In fact, the competition is already offering usage-based plans that Tesla has only begun to talk about.
The U.S. retail industry is showing that the entire industry “Just doesn’t matter” by shedding jobs at a recessionary pace (60,000 lost in February and March). Retail will lose many more jobs as they continue to shrink their physical footprint in response to the consumer shifting away from bricks-n-mortar stores and malls toward e-commerce. J.C. Penney, Target, Sears, Macy’s, and Ralph Lauren have announced over 3,500 store closures for 2017. Bankruptcies and liquidations have also picked up, with Payless just announcing a nearly 400 store closure. Wet Seal, Aeropostale, Sports Authority, and HHGregg are among the many other retailers that have recently either filed for bankruptcy or liquidated. According to Cowen & Company, the U.S. is will see another 2,000 store closures before the year ends. “We expect online penetration of apparel to double, yielding closures of 20% more stores, and over 240 entire malls in the US. alone this year.”
Where millennials are moving “Just doesn’t matter”, because property taxes hold the key to how America is changing. Younger people are flocking to cities in the Northeast and Midwest - but it’s not enough to offset the exodus of retirees and those in search of lower property taxes. Americans paid nearly $300B in property taxes in 2016, but as with everything in real estate – it’s all about location. Property taxes don’t just tell a story about local and regional housing markets - they also show how the country is changing. Americans are fleeing areas with higher property taxes, making those housing markets and local finances more stagnant. And even an influx of younger people to those urban areas (like the Northeast and Midwest) isn’t enough to offset the exodus to low-tax areas like the Southeast and West.
A report out this week from Atom Data illustrates the stark difference between the highest tax burdens and the lowest. Effective tax rates range from 0.32% in Hawaii to 2.31% in New Jersey. This means that an average annual 2016 property tax bill in South Carolina of $776 – equates to an ADDITIONAL $8,000 of annual spend just to live in New Jersey. According to Daren Blomquist, vice president with Atom Data, “States with higher property taxes have also lagged behind others in the housing recovery. Nationwide home prices have risen about 45% in the past five years, but in high-tax states (like New Jersey) prices have only gained 5%. Meanwhile, low-tax Arizona has seen prices soar 83% in that time. Add to the fact that the Northeast and the Rust Belt have built out as much as they can, and are stuck paying municipal legacy costs accumulated over decades – creates a vicious cycle.”
If we add other countries to the mix, owning a home appears to be more attainable in Mexico and China than in the U.S. A recent report from HSBC found that over 70% of millennials own homes in China, over 46% in Mexico, and over 41% in France – versus 35% in the U.S., and 28% in Australia. So, the American Dream could be becoming localized to our lowest property taxed states along with several foreign countries.
“Only those who attempt the absurd can achieve the impossible”… Albert Einstein
On Friday, Dr. Ron Paul said: “There’s no way Assad did this. He’d have to be the single most brain damaged human on earth.” I’m with Ron Paul on this one. After all, 10 days ago our administration gave Assad the approval to let the Syrian people decide their own fate. The Assad military (+ Russia) had been defeating ISIS and the rebels to the point where victory was near. So, on the eve of all of that, it doesn’t make sense that Assad would use chemical weapons on his own people. Remember 2013, when everyone claimed Assad gassed his own people? The UN inspectors eventually admitted that the rebels did that, and that it was made to look like Assad.
So, what happens now? Least not forget, Chinese President Xi was visiting the U.S., and certainly was briefed on what we were going to do. Did we (the U.S.) set up the false flag chemical attack and the Syrian missile response – to show President Xi and N. Korea that we mean business?
Speaking of N. Korea, over the past 3 days I have read no less than a dozen articles on why N. Korea wants to attack us by the end of summer. Then there was NBC news anchor Lester Holt doing his reporting from S. Korea this week. When Lester was interviewing Thae Yong Ho (one of the highest-ranking N. Korean diplomats before defecting) something caught my eye. In Thae’s discussions he said: (a) that Kim Jong Un is growing his nuclear miniaturization ability, and (b) that the U.S. had moved their THAAD missile defense system into South Korea. Those are both big deals. According to Thae, Kim Jong Un is obsessed with ‘nukes’ because he has seen what has happened to Iraq's Saddam Hussein and Libya's Moammar Gadhafi, both of whom abandoned their country's nuclear weapons of mass destruction programs – and then were overthrown by U.S.-backed forces. Thae went on to say (and most analysts agree): “Because of that, Kim Jong Un strongly believes that only a nuclear arsenal can guarantee his rule."
So, Kim is paranoid after watching the U.S., Libya, and Iraq – and figures that the only way to remain in power is to stock-pile nuclear weapons. In and of itself, that’s not a big deal. But what has recently changed is that N. Korea has discovered a way to miniaturize a nuclear warhead enough to give their missiles a 2,000-mile range. This caused Rex Tillerson (U.S. Sec. of State) to say: "I think it's important to recognize that the political and diplomatic efforts of the past 20 years to bring North Korea to the point of denuclearization have failed. The time for chatting is over."
On Monday, “The Hill” website displayed an article written by James Woolsey (former CIA Director) and by Dr. Peter Vincent Pry (Executive Director of the EMP Task Force on National and Homeland Security) titled: “How North Korea could kill 90% of all Americans.” It went on to say: “North Korean dictator Kim Jong-Un has been photographed posing with what appears to be a genuine miniaturized nuclear warhead for ballistic missiles. In any case, North Korea could always deliver an atomic bomb hidden on a freighter sailing under a false flag into a U.S. port, or hire their terrorist allies to fly a nuclear 9/11 suicide mission across the unprotected border with Mexico. In this scenario, populous port cities like New York, New Orleans, Los Angeles, and San Francisco, or big cities nearest the Mexican border, like San Diego, Phoenix, Austin, and Santa Fe, would be most at risk. And according to the Congressional EMP Commission, a single warhead could blackout the U.S.’s national electric grid and other life-sustaining critical infrastructures for over a year – killing 9 of 10 Americans by starvation and societal collapse.” http://thehill.com/blogs/pundits-blog/defense/326094-how-north-korea-could-kill-up-to-90-percent-of-americans-at-any
We’ve seen this movie before. If Kim doesn't back down, and start to dismantle his program – we’re going to go in and shut it down. Syria was simply the warning to N. Korea. But there are other anomalies occurring that are reflected in the stock market:
- Tesla has a larger market cap than both Ford and GM. Tesla makes less than 1/30th the inventory, bleeds money like a wounded pig (losses of over $1B), and if it were not for Government tax breaks – their buyers would completely disappear.
- Auto sales for March were well below estimates, with almost 30% of all sales now going to subprime borrowers – where payment delinquencies are already out of control. Automobile off-lease and used-vehicle prices are expected to fall sharply – as much as 25 to 50 percent according to Ally Financial. Brad Lamensdorf (co-manager of the AdvisorShares Ranger Equity Bear ETF) said: “The need to move inventory has translated into reckless lending. It’s not fraudulent, but people are up to their neck in debt. And coming default rates are going to be much more significant.”
- Just so we know how criminal things are at the top, FED-head Richard Lacker resigned this week because he ‘inadvertently’ leaked the FOMC’s decision-plans to an analyst. Not ‘any’ analyst mind you, but to the analyst that is the ONE that tells the ‘Too Big To Fail’ banks what they should be doing. So, chances are those banks made billions on this information.
- And this week J.P. Morgan Chase’s (JPM) CEO Jamie Dimon told his company’s shareholders: “Something is wrong with America.” He complained about the debt loads of corporations and individuals, but seemed to omit how these low-interest debt loads are ‘greasing the wheels’ of big banks like JPM. Naturally Mr. Dimon is NOT going to be pointing a finger at himself, but those fee-heavy, debt-based products that JPM offers are something he could change tomorrow if he wanted to.
On Friday, we had the Non-Farm Payrolls report, and it wasn’t pretty. Estimates were for a rise of 178K jobs, but we only received an increase of 98K – along with an unemployment rate that FELL to 4.5%. Between that poor jobs number and the mess in the Middle East – we should have been down 500 points on Friday. But the poor jobs number was explained away by the blizzards in the North East, and the plunge protection team offset the Syrian nightmare and kept markets relatively stable.
Politically, even if Assad didn't do it, I think Trump (as long as we don’t do anything else) comes out looking good. The Russians have already dissolved the agreement they had with the U.S. to not shoot down missiles, planes, and drones over Syria. Which means if we do another attack, Russia's S400 batteries will shoot the attack down – and then we’re at war with Russia. But assuming we do nothing else – Sec. Tillerson will meet with Putin next week, and chances are good that tensions will de-escalate.
That’s a lot of elements that need to mesh perfectly, and the market will take all that into account. This coming week we also have a ‘pit-bull low’ occurring on Wednesday and Thursday. Therefore, I’m looking for a downward sloping week in the market indexes. Right now, the world is in a dangerous place and I’m hoping that we can keep the mistakes to a minimum.
We have seen quite the rally in Gold since the Mid-March 1200 lows. Recently gold has moved through its 200-day moving average, and into levels not seen since the November election. Gold needs a close above $1265 to turn the longer-term price trend higher. Gold will likely see resistance at $1275, which corresponds to congestion back in October. If we can clear resistance at $1275, then a run to $1320 is not out of the question. If our economic data continues to come in below expectations, or has any hint of not being ‘stellar’ – you could continue to see a build in gold. On the downside, $1250 has become support, with $1225 becoming the next level of support beneath that. Previously I discussed the potential for silver to trade north of $18.50 per ounce. For now, unless we get a rally above $18.50, I’m looking for silver to trade sideways until breaching that level. However, I view any weakness in silver as a buying opportunity. The mid $17.50 range should provide good support – with a close above $18.50 igniting price action to the upside.
If you believe that marijuana sales are the way to go, the Horizons Medical Marijuana ETF (HHMJ) started trading April 5th on the Toronto Stock Exchange. This index tracks the average performance of a select group of U.S. and Canadian-based companies that work in the medical marijuana sector including: Aurora Cannabis (ACB), Scotts Miracle-Gro (SMG), Canopy Growth (CGC), and Insys Therapeutics (INSY).
This past week, volatility has moved substantially higher from a 12+ to a 14+ indicator on the VIX. This tells me that risk is imminent. This increased risk has been caused by two things: (a) missiles being fired over in Syria, and (b) a poor Non-Farm Payrolls report. With this increased risk, comes the bond market (/ZB) continuing to test the 152 level. If the bond market continues its rise above 152 – the financials will be forced to turn lower, and that will likely take down the S&Ps along with the rest of the market.
- The Nasdaq (QQQ) is trading at 131.99, has formidable resistance at 133.12 – and is showing a slightly bullish tendency.
- The Russell (IWM) is trading at 135.21 (below its 21-day moving average), has resistance at 136.52 – and is showing a neutral to downward bias.
- The S&P (SPY) is trading at 235.15, has resistance at 236.93 – and is showing a neutral tendency.
In this type of market, selling a Delta 70 PUT and buying a Delta 30 PUT as protection is often the best strategy as you make money even if the market remains sideways. For example:
- Ulta Beauty (ULTA) – SELL the April 21, Put Credit Spread -285 / +275,
- Amazon (AMZN) – SELL the April 21, Put Credit Spread -895 / +890,
- Microsoft (MSFT) – SELL the April 21, Put Credit Spread -65 / +63.
To follow me on Twitter.com and on StockTwits.com to get my daily thoughts and trades – my handle is: taylorpamm.
Please be safe out there!
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