This Week in Barrons –
5-28-2017:
“It’s the end of the world as we know it…” R.E.M –
circa 1987
Thoughts:
Within the next 5 years, the world as we
know it will end. From
self-checkout, to robot greeters and helpers, to autonomous drivers – the
balance of power will shift. Tony Seba
(RethinkX co-founder and Stanford University Professor and Economist) predicts
that oil demand will peak within the next 3 to 4 years, and will drop 100
million barrels thereafter. That means
in 5 years, the price of oil will be less than HALF of today’s price. Therefore, if an oil company can’t compete at
$25 a barrel, they will be holding worthless inventory. Seba said: "At $25 a barrel, most deep-water and shale-oil fields will be
stranded along with their associated refineries, pipelines, and bank
loans. It all comes down to money. We will substantively switch to self-driving,
electric vehicles – which will become part of a much larger ride-sharing
economy. The day that autonomous
vehicles are approved – the combination of ride-hailing, electric, and
autonomous means that it's going to be ten times cheaper to use a robot taxi as
a service car than it is to own a car."
“Think
of a world with 80% fewer cars. Think of
all of the parking spaces and garages that will be vacant. Within 8 years there will be no more petrol
or diesel cars, buses and trucks sold anywhere in the world, and that also
eliminates the need for car dealers.
Auto insurance rates will drop dramatically because you just removed
human driver element from the equation.
Essentially transportation is going to be so cheap, that it will be
cheaper for Starbucks to drive you to work for free in exchange for you buying
a cup of their coffee." Seba
says: “The amount that households will
save on automobiles will drive higher consumer spending and propel GDP higher
by an additional $1 Trillion.”
But just as powerful as the transformation of
the energy and transportation industries – will be the paradigm shift
associated with our retail environment.
A major study revealed that:
-
Half of our 16m
retail workers are at risk of losing their jobs to a robot within the next 5
years, and 73% of those lost workers will be women.
-
Sales jobs will
be replaced by smart phones, smart tags, smart shelves, and self-checkouts.
-
The shift will
represent a 10% addition to our unemployment rate, and will remove 6% of our
GDP.
In many ways, the retail
situation mirrors the decline of U.S. manufacturing.
-
Mobile devices
enable us to scan a barcode and/or take a picture of a product to access
product information and find other colors and sizes.
-
Self-checkout stations
allow us finalize purchases.
-
Digital kiosks
permit us to view product reviews, and place orders.
-
Proximity
beacons alert us to promotions and provide sales associates with information on
our buying habits.
-
RFID tags enable
enhanced inventory tracking.
-
Smart robots aid
in areas ranging from advising customers on desired products to inventory
management.
-
Smart price tags
can be changed in real time based on demand or other trends.
-
Contactless
checkout allows for automatic scanning of products as the customer exits the
store.
-
And smart
shelves can detect when inventory is low.
Lowe's has been using robots (pictured) for
years. The robots allow people to find
any item simply by letting the machine ‘see it’. Between store closures
and technology, the retail employment landscape in America is changing.
Erika Karp, Cornerstone founder and chief executive officer said: “Retailers
are facing a perfect storm – needing to balance the demand for increased wages
with the negative optics of future job losses. The winners in retail will
be companies that provide retention and training for workers, and innovate with
future store strategies.”
Every Memorial Day I say thanks to my father
and my father-in-law for fighting in WWII.
I tip my hat to anyone brave enough to have ever gone into war, and
their families that have had to suffer the losses. And certainly, my
gratitude goes out to all of those still fighting. Those brave men and women trying to do the right
thing – yet often sent out for the wrong reasons. The VA did a study last June, and found that
22 veterans per day commit suicide – and that’s probably a low number. I pray that our veterans (when they make it
home) can shed themselves of the memories, and enjoy a wonderful life. After all, “These times – they are a changin” – Bob Dylan – circa 1964.
The Markets:
“Between China and Bitcoin – they’re changing everything”… David Stockton
This week, Moody’s downgraded China over
their slowing economy and growing debt. Moody's
said China's economy-wide debt levels are expected to further increase in the
years ahead (to 40% of GDP by 2018), and likely to slow their growth rate.
Marie Diron, senior vice president for Moody's sovereign rating group said: “It was Moody's first downgrade for the
country since 1989, and our official growth targets are also moving
downward. It's really the size and
trends in debt accumulation along with debt servicing capabilities of the
institutions that have us worried. Slowing
growth points toward slower profitability, and weaker debt servicing capacity.”
This week President Trump released his first
full budget – complete with his proposed funding cuts. At least now we know that those deep funding
cuts will allow him to pay for his drastic increases in defense spending. I’ve highlighted some of the cuts on the
chart below. Over 100 programs would be
eliminated and include the: Corporation for Public Broadcasting, Institute of
Museum and Library Services, National Endowment for the Arts, Rural Economic
Development Program, Minority Business Development Agency, Advanced Research
Projects Agency (DARPA), Agency for Healthcare Research, Community Services,
Low Income Home Energy Assistance, OSHA Training, National Infrastructure
Investments, Energy Star and Climate Programs, and NASA.
Factually this past week:
-
Ford’s CEO made
his worst mistake – he (Mark Fields) focused on the car business rather than on
stock buybacks, increasing debt, and raising the stock price. On Thursday, Mark Fields was abruptly fired,
and James Hackett was put in his place.
James came from the company’s self-driving car division – Ford Smart
Mobility LLC.
-
A bill has been
introduced in Congress that would allow $1 Trillion in college loan debt to be
expunged via bankruptcy.
-
U.S. New Home
Sales showed an April decline of 11%.
When you break down the housing numbers you find that sales of homes
from:
o
$0 to $100k = were down 17%,
o
$100k to $250k = were down 7%,
o
$500k to $750k = were up 10%, and
o
$750k to over
$1m = were up 18%.
o
It’s NOT the
middle class buying houses above $1m.
-
Bank of America
cut its Q2 GDP forecast from 3.1% to 2.6%, and cut its Q1 GDP from 0.7% to 0.5%
on worsening trade deficits and widening inventories.
-
One of the
largest subprime auto lenders - Santander Consumer USA – just revealed that it
only checked the incomes of 8% of its approved applicants. (Subprime refers to loans made to people with
poor credit.) Santander's behavior is
reminiscent of the practices that led to the home loan crisis and last
recession. Current losses on subprime
auto loans in January hit 9.1% - their highest and worst level since 2010.
Coincident with China’s downgrade, Bitcoin
(monthly graph shown above) hit an all-time-high of $2,770 on Wednesday, and
settled at $1,992 on Friday. Both prices
exemplify the amount of speculation that is running rampant in the market right
now. This is clearly one of the most
expensive markets in U.S. history with current P/E (price to earnings) ratios
running around 26 times earnings – where historical norms are 14 times
earnings. This market is making new
highs on:
-
Low trading
volume,
-
Narrow leadership
(FAANG stocks = Facebook, Amazon, Apple, Netflix and Google)
-
Higher earnings
(but from a very low frame of reference),
-
Huge insider
selling,
-
A June interest
rate increase,
-
A FED beginning
to reduce its balance sheet,
-
A September
showdown concerning the debt ceiling, and
-
Pensions being
cut, and/or dissolved completely.
To quote David Stockman (Dir. Of OMB under
President Reagan & Managing Director of Solomon Brothers): “There's
just no other way to say it: the market is insanely overvalued right now. Right
now, the S&P is trading at 24 times trailing earnings, and that is in
history’s nosebleed section. It is
absolutely not justified by fundamental economics. There is
no reason why the market should be even near today's levels if markets were
allowed to function normally. We are at the end of a 20-year
credit bubble that has inflated the world economy beyond any sustainable
level. We have never experienced eight
years of effectively zero money market rates, even during the lowest point of
the Depression in the 1930s. In 20 years, central banks have taken
their balance sheets from about $2 trillion in 1995 to $21 trillion today. And the global economy is now buried under a
$225 trillion mountain of debt. I recently came back from a
10-day trip to China and I can tell you that the world's greatest Ponzi scheme
(the Chinese economy) is about to collapse.
It appears that nearly 150 million sq. feet of retail space will close
during 2017 – setting an all-time record.
On a broader scale, markets are about to collide with reality. The
S&P could easily drop 40% or more to 1,600 or 1,300 once the Trump fiscal
stimulus fantasy ends. The stimulus is not going to happen.
Congress can't pass a tax cut that large without a budget resolution that
incorporates $10 trillion or $15 trillion in debt over the next decade. I think the ‘Trump Trade’ is the greatest
sucker's rally we have ever seen. The markets are unsustainable. I don't believe there's any credible reason
to own stock at this point. They may
squeak out another two or three percent on the upside, but stocks are facing a
30% or 40% downward correction. The
bottom line is that all this is coming to a halt. The
Fed has finally run out of dry powder.
It's stopping bond buying, and initiating the shrinkage of its balance
sheet. There isn't going to be any more
money printing, and that is the harsh reality the markets must face.”
I don't know how many of you were investors
during the 1995 - 2000 tech bubble. It
was a ‘ton-o-fun’ going up, but when it was over - no one believed it. The majority didn’t sell. In fact, they bought more on the way down
because they had been trained to ‘buy-the-dip’.
Over and over they bought the dip, until one day they realized the
bounce wasn't coming, and they sold.
Please make sure you inject a bit of logic into your investment
thinking. For example: three days ago,
CNBC had a billionaire on one of their segments and he said: “The President’s
Working Group on Financial Markets (the Plunge Patrol Team) is the only thing
supporting this market.” Naturally that
caused a ton of eye rolling and mocking from the talking heads on the panel.
Unfortunately for the other panelists, Dr. Pippa Malmgren (a previous member of
the President’s Working Group on Financial Markets) confirmed the gentleman’s
suspicions and said: “As long as our Government continues to impose its price
on the market, there is no longer price discovery. And without price discovery, there is no free
market.”
In the near term (Tuesday), I wouldn't be
surprised to see the market pull back a bit.
We did a lot of heavy lifting last week – on really low volume. When traders come back from their 3-day
holiday, they might not be in such a festive mood. But in the long term, this market is destined
to go sideways and up – until the Central Banksters decide to pull the
plug. Play accordingly.
Tips:
“What’s left to buy?” … Breaking Bad
Stocks have seen an excellent rebound off
the lows, but buying every new high isn't easy.
That has me asking: What’s left to buy?
The big picture trend for many months has been ‘trade sideways for a
couple months and blast higher’. Back on
March 1st we put in an all-time high on the S&P, and spent
almost 3 months trading sideways. Now
we've put in another all-time high – but where did all of the buying volume
go? On the Wednesday selloff, we traded
172m contracts. When we broke to new
highs we traded a measly 40m contracts.
Where’s the volume and the conviction?
Right now, the performance of the S&P
relies solely on technology (the FAANG stocks) and their ability to outperform. Every other sector is either underperforming
and/or going lower – including the financial and energy sectors. Referring to the chart below, (a) the
technology sector (XLK) has continued to climb and bear the brunt of this
rally, while (b) the financials (XLF) are waning, and while (c) the next
highest performing sector is the utility (XLU) sector (a historically defensive
sector). Within the XLK, the volume
concentrated to the FAANG stocks: Facebook (FB), Amazon (AMZN), Apple (AAPL),
Netflix (NFLX), and Google (GOOGL).
If you’re going to buy
stock, the pros use the following sequence:
-
Sell puts on the
stock you wish to own, at the price you want to pay,
-
If/when the
stock moves lower, get the stock ‘put’ to you at your price,
-
Once you own the
shares, then begin to sell covered calls on the stock,
-
If/when the
stock exceeds the ‘call strike’, the stock is called away, and
-
If you wish to
continue owning the stock – then rinse and repeat.
For this coming week, the
S&P (2,416) is expected to move between 2,398 and 2,434 – an incredibly
tight range. This is the lowest
volatility recorded in the past 20 years.
Most traders and algorithms will be watching the FAANG stocks to drive
this market higher. The main issue is
that any weakness in Google or Amazon will bring out the fragility of this
market in a heartbeat.
I’m watching:
-
WYNN – Bullish,
Sold the June 2: +121 / -124 Put Credit Spread,
-
MSFT – Bullish,
Bought the July 21: $70 Call,
-
AMBA – Bullish,
Bought the June 9: +63 Calls (run into earnings),
-
VRTX – Bullish,
Bought the June 16: +117 Calls (squeeze fired long),
-
AMZN – Bullish,
Buying calls – looking for a target of $1,070/share, and
-
AAPL – Bullish,
Buying calls – looking for new highs above $157/share.
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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