This Week in Barrons – 7-30-2017:
“Creativity is thinking up new things – Innovation is doing them.” Theodore Levitt
Maybe I should write about:
- August 1st being the most important date in crypto-currency history, that I can remember. People often analogize Bitcoin to the ‘Dutch tulip mania’, but I can remember them saying those same things about the Internet. With over 800 crypto-currencies and block chain innovations, I believe where there’s smoke – there’s fire.
- Or the California farmers that are abiding by President Trump’s new immigration and minimum wage policies by firing their human workers, and replacing them with robots that can pick fruit 4 times as fast.
- Or the White House signaling its frustration over their inability to pass any major legislation by firing Sean Spicer and hiring Anthony Scaramucci.
- Or Japan announcing that it’s thinking of releasing thousands of tons of radioactive water from the Fukoshima power plant into the Pacific Ocean and letting the ocean neutralize it.
- Or Washington State that just passed a law allowing ‘big brother’ to watch and ‘ticket’ all automobile drivers caught grooming or eating while driving.
- Or maybe it’s the announcement and delivery of the most affordable Tesla to date – the Model 3.
In the U.S., we believe in our people, or what I often refer to as the WHO part of the equation. Sure, we like our technology, and our devices are cute. But what really ignites us and gets us going in the morning are our people – the individuals behind the development. Tesla is the vision of Elon Musk who risked his entire PayPal fortune on its success. Make no mistake, Elon has his detractors, especially on the political right and in the Wall Street Journal – who can’t stop talking about subsidies and economics. But to quote BL: “Those are the people cleaning up after the elephants in the now defunct and forgotten circus.” Elon positioned Tesla on the bleeding edge, convinced others of the possibilities, and DELIVERED. He was able to: (a) start a car company from scratch (which is no small feat), (b) change the way automobiles are sold and serviced (at malls not auto dealerships), and (c) change the way the world views the internal combustion engine (causing nations to outlaw its existence past the next 3 to 20 years).
The original Tesla Model S was a proof of concept showing that it was possible to make a long-range, reliable electric vehicle. The Model X showed that an electric SUV was also possible. But neither was affordable to the masses. Although the Chevy Bolt has shown that 238 miles of electric range is possible for less than $40,000, their volume aspirations are modest and their attention to detail lacking. Tesla’s Model 3 starts at $35,000 (but looks like a ‘million bucks’), goes 0 to 60 mph in 5 seconds, and will ramp production to a half-million per year within a few years. I would encourage you to read Motor Trend’s Model 3 review: http://www.motortrend.com/cars/tesla/model-3/2018/exclusive-tesla-model-3-first-drive-review/. There's commerce, and then there’s revolution. Steve Jobs revolutionized the phone (iPhone), and Tim Cook commercialized it. I believe in both of the revolutions surrounding the Model 3 and Bitcoin.
“Watch out for ‘fake’ earnings data.”
We’re in the middle of earnings season, and no one cares that the earnings reported are all ‘adjusted’. The analysts and CFOs give out earnings estimates, and then CFOs play their fuzzy math accounting in order to find a way to beat those same estimates. For the longest time the joke was about the ‘penny’. Over and over again, giant corporations doing billions of transactions and employing thousands around the globe – would announce their earnings and ‘coincidentally’ beat them by a penny. Which lead everyone to believe that the CFOs and analysts were ‘so good’ that they could figure out millions of payments, insurances, employee options, currency fluctuations, etc. – in order to put out a number and months later exceed that same number by a single penny. Wow (wink-wink). It became so common that traders would joke about it. Now, they have transformed their estimates into more believable numbers, but in doing so attached the ‘non-GAAP (Generally Accepted Accounting Principles)’ moniker to it. I know that sounds a bit snarky, but for example: this week on CNBC, Phil Lebou (their car guy) was raving about GM's incredible earnings. Factually, GM’s ‘non-GAAP’ earnings per share were $1.85 – up 6% year-over-year, while their ‘GAAP’ earnings per share were $1.09 – DOWN 40% year-over-year. See the dramatic difference that ‘fake’ data can make?
The bottom line is, if a company beats its earnings per share estimates and does it on revenues that are LESS than last year's quarter – they did it by cost cutting and creative accounting. Maybe they laid off employees or unscrewed every other light bulb – but it’s sales that tell the truth. Either sales are up, or the company didn't grow and had to get ‘non-GAAP’ creative. With GM, their revenues ($37B) were DOWN 1.1% year-over-year. So, let revenues be your guide, and just because a company beats on the bottom line doesn't mean they did it by growing organically.
This past week the FED said: “We will start taking down the balance sheet relatively soon, and a gradual increase in rates is called for.” This means that we can look forward to September to see what they’re going to sell and how often, and they will bump rates again in December. For now, no one’s paying attention because our FED has become the boy that cried wolf, and we’ve heard it all before.
If we look at Friday’s European action, despite Draghi saying that QE is still in force, the German DAX lost over 200 points. Someone, it seems, doesn't believe that QE is going to be extended forever. I think the Central bankersters will ‘jawbone’ that they're going to back the economies, to keep markets from panicking – all the while actually beginning to unwind things. I could be all wet and they continue to drive this market to DOW 30K – but ask yourself: “Who does that help?” It continues to help the 1%, and helps the 5% with stock holdings, but that still leaves 94% of the world getting nothing out of the deal. In fact, it does nothing for the entire economy. In the strangest twist of fate, it isn't a ‘crash’ that would hurt the economy the worst, it would be a market that continues to soar forever. Why? Because with interest rates at 0 - 1%, savers, insurance and pension funds can't make any money – so they need to buy stocks. But because stocks are so expensive, the average person can only buy a few shares. And the higher the markets go, the less corporate CEOs are going to use that buying power to do much more than enrich themselves. So, I think that we're going to hear about asset reduction at the FED, and QE reduction in the ECB sooner rather than later. It will be small talk at first, and surely padded with niceties, but silent actions will begin to follow.
Like usual, we have the same old question: What next? I don't think it's a secret that I believe the market is way overbought, stretched and is as unrealistic as it gets. But I also know that if Central banks keep printing, the lions share winds up NOT in the little hands, but in the stock market. That's just a fact. So, while we SHOULD head lower, the market can't unless the Central Banks allow it. Logic says that we roll over; however, momentum and QE say that we go higher – which means we will most likely continue higher. Logic loses to money printed out of thin air every time.
Last week the broader market held up well with the main indices even setting new record highs. The S&P 500 ended the week flat but it managed to post a new record high of 2,477.83. The NASDAQ Composite Index reached new heights of 6,422.75, and the DOW moved higher each trading day reaching an end of week level of 21,806.88. The barometer of stock market volatility (the VIX) fell to an all-time low last week. The drop may be attributed to the expanding domestic and global economic growth, increasing corporate earnings, and favorable interest rates. The FED elected to keep short-term interest rates unchanged after the latest Federal Open Market Committee meeting last week. The FED also provided more information on the winding down of its balance sheet, and is expected to hike interest rates one time this year plus two more times next year.
Positive fundamentals are preventing a bear market, but short-term swings can’t be discounted. A handful of stocks are driving the marketplace higher: Microsoft, Facebook, Apple, Google & Amazon. After their earnings announcements, Google, Microsoft and Amazon all sold off. Facebook held its own, and it’s up to Apple (with earnings on Tuesday) to take the NASDAQ higher. A Thursday note by a J.P. Morgan analyst that mentioned market correlations breaking down created some short-term volatility, and reminded me how powerful this next Apple report is going to be – Tuesday after the close. Also I’m watching the transports (IYT) this week, as they dropped over 200 points in a day – going from 9,500 to under 9,200 (7%) in the last 2 weeks. Does this cast a short-term downward shadow on the markets? It may. Also, someone placed a $265m dollar bet this week that the volatility index (VIX) is going to be significantly higher by the 3rd week in October. If the VIX were to move higher, the market (most certainly) would move lower. Does this ‘someone’ know something's coming – other than the debt ceiling? Along with the VVIX volatility options (UVIX) rising significantly over the past 2 weeks, if Apple comes out and disappoints – I fear that the market will absolutely ‘clobber’ the NASDAQ and in specific the technology sector.
As of late I’m beginning to see sizable action in some of the trailblazing marijuana stocks. Over the past 12 months, the average marijuana stock with a market cap over $200m was up by a phenomenal 332%. My short list of trailblazing marijuana stocks include:
- Axim Biotechnologies (AXIM) – up 2,363% to $8.16 / share,
- Aurora cannabis (ACBFF) – up 465% to $2.16 / share,
- Aphria (APHQF) – up 209% to $5.23 / share, and
- Canopy Growth Corp (TWMJF) – up 191% to $7.32 / share.
Aurora Cannabis is a Canadian medical marijuana group and the ONLY medical cannabis company to have recorded a profit in its most recent quarter. Aurora hasn't been as fast to generate profits like rivals Aphria with straight quarterly profits, and Canopy Growth (positive in three of its past four quarters) but in its latest quarter, the company has been spending handsomely on its massive Aurora Sky project. Upon completion of the project, Aurora will have the most advanced and automated commercial grow farm on the planet. ACBFF continues its stride above the $2.00 level ending Friday around $2.16 per share.
Aphria is also another Canadian-based medical-cannabis producer and retailer that saw its market value decrease by 24% in just two weeks. The company lost $2 million for the quarter after an unprecedented streak of 5 consecutive quarterly profits. Aphria justified the losses by announcing they have been spending heavily on its capacity expansion with the expectation that recreational marijuana may soon be legal in Canada. The stock is now hovering over the $5.00 level – and hit $5.23 on Friday.
- UVXY (VIX futures) – Sold August 4, +26 / -27.5 Put Credit Spread,
- Aurora (ACBFF) – Long stock @ $2.16 / share,
- Aphria (APHQF) – Long stock @ 5.04 / share,
- Activision (ATVI) – Earnings Run (Bullish) / Sold Aug 4, +61 / -62 PCS,
- Alibaba (BABA) – Earnings Run (Bullish) / Sold Aug 11, +52.5 / -55 PCS,
- Nvidia (NVDA) – Earnings Run (Bullish) / Sold Aug 18, +160 / -165 PCS,
- Regeneron (REGN) – Earnings Run (Bullish) / Buy Aug 4, 505 / Calendar,
- Shopify (SHOP) – Earnings Run (Bullish) / Buy Aug 18, +90 / -100 CDS,
- Bio-Tech Index (XBI) – Earnings Run (Bullish) / Sold +77 / -79 PCS.
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Please be safe out there!
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