RF's Financial News: August 2017

Sunday, August 27, 2017

This Week in Barrons – 8-27-2017:

“Just a spoonful of sugar helps the medicine go down”… Mary Poppins

Our no-brainer remark of the week comes from Tom Lee of Fundstrat when he told CNBC that he expected bitcoin to be the best performing asset class through the end of this year. This is after bitcoin tripled in value during the first 7 months of this year, and after knowing institutional demand from the launch of bitcoin derivative products will certainly help drive the digital currency's price higher. I have a couple questions: (a) How will crypto-currencies play on the global stage? And (b) In which digital currencies should the average person invest?

China has been extremely shrewd in dealing with crypto-currencies. A year ago, China controlled over 80% of global bitcoin trading. Recently, China’s trading impact has fallen to just 16%, but they continue to control over 70% of bitcoin creation / mining. Bitcoin mining is essentially a computer task – consuming enormous amounts of electricity. China (thanks to an abundance of hydro-electric power) is one of the world’s lowest-cost producers of electricity, and can therefore produce bitcoin at virtually no cost. If China were to initiate a new crypto-currency backed by gold (which the country has been amassing), you could witness a new monetary system the world would be willing to accept. Couple that with China’s alliance with an oil producing power-house such as Russia, and it could single-handedly bring an end to oil’s ‘petro-dollar’ standard.

A study released this week, showed that 5 of the nation’s worst-performing currencies in 2017 – are actively pursuing efforts in the crypto-currency arena. Those 5 nations are: Venezuela, Argentina, Belarus, the U.K. and Egypt. Data suggests that whether it’s South America, Europe or Africa – interest in crypto-currencies is on the rise. Clement Thibault, a senior analyst at Investing.com, stated: “While developed nations have an abundance of alternate investment opportunities, underdeveloped or politically unstable nations may lack such avenues, and will be more inclined to invest in crypto-currencies as a consequence. To citizens that already distrust their financial institutions, the danger of an unsupervised currency is not only minimized, but it becomes a real advantage and place of refuge." Thibault is reinforcing the popular argument that the value proposition of crypto-currency is highest when the risk posed by holding the local currency rises. Ronnie Moas, founder of Standpoint Research, said it best: “Imagine you live in Venezuela and you're keeping your money under the mattress. Would you rather leave it there in Venezuelan Bolivar, or would you rather put it in bitcoin? It shouldn’t take you very long to make that decision."

In terms of investing, two places come immediately to mind: ETH (Ethereum) and XRP (Ripple) – but a more complete list follows under ‘Tips’. Ethereum has already made investors triple-digit gains this year, but it’s more than just a crypto-currency – it’s a platform that allows developers to create applications. The unique structure of the Ethereum blockchain helps businesses improve security, prevent fraud, and increase efficiency and trust. Ethereum is backed by a 150-member corporate alliance including: Microsoft, Intel, MasterCard and others. Many members are getting ready to launch their own services that have Ethereum at their core. For example, IBM recently launched its first Ethereum-based, business-blockchain service to clients such as: Wal-Mart, Northern Trust, and the Bank of Tokyo-Mitsubishi.

If you agree with Ethereum as an investment, then I would advise buying what major hedge funds are buying when they buy Ethereum. These ‘liked’ technologies will be reflected in correlation data. The chart below shows cross-correlation statistics between various crypto-currencies, and the circled portions show a significant correlation between Ethereum (ETH) and Ripple (XRP). Ripple is a ‘fintech’ platform aimed at increasing the efficiency of international money transfers between banks. So, it would make sense that the major players are investing in both ETH and XRP.

Where and when could all of this actually be applied? As SF remarked, Jack Ma (founder of AliBaba) would like to help Hong Kong become the first cashless society. Mr. Ma remarked: “Being cashless would make Hong Kong more fashionable, modern, and efficient. In the near future, we will begin to get more involved in Hong Kong’s technological and financial development.”

The Markets:

“I’m thinking leaders are made, not born.” BoBo Bear

Factually:

- 78% of full-time U.S. workers live paycheck to paycheck.

- 71% of all U.S. workers are bankrupt (have more debts than assets).

- 59% of workers making over $100,000 / year are ‘in the red.’

- 56% of all U.S. workers save less than $100 per month, and

- 68% of all U.S. workers feel disengaged from their work and blame it on bad management.

According to Gallup’s Larry Emond, “Companies choose the WRONG person for the job – 82% of the time”. Peter Cappelli (a Professor of Management at the Wharton School) says: “We’ve gotten more stupid about figuring out who is going to be a good manager in the right job. Companies have gotten penny-wise and pound-foolish when it comes to investing in training and development of future leaders”. Companies should be looking for character traits such as: extroversion, humility, communication skills, and self-confidence in their leaders. Good leaders also often exhibit conscientiousness – because conscientious people are hard-working, reliable, self-disciplined, meet deadlines, and pay bills on time.

Unfortunately, very few of these leadership traits were on display this week at the FED’s Jackson Hole get-together. Investors and the markets in general, were not buoyed higher by the speeches delivered by FED Chair Janet Yellen and ECB President Mario Draghi. Neither offered hints about their future monetary policy moves. Yellen simply talked about banking regulations and economic improvements in the U.S., while Draghi raised concerns about protectionism. Karl Schamotta, director of global product and market strategy at Cambridge Global Payments, said it best: “Yellen and Draghi only validated Jackson Hole’s well-earned reputation as a currency trader’s graveyard.”

But even though not a whole lot was announced, what I found most interesting was the market's reaction. Friday morning the market leapt out of the gate, and things moved strongly higher in the first half hour of trading. But then the air leaked out of the balloon, and markets had a heck of a time staying green. When the bell rang, we ended up 30 DOW points and 4 S&Ps – but that was a far cry from +120 and +10 we'd seen earlier in the day. In fact, that makes 3 sessions in a row where the S&P has remained below its 50-day moving average. I've been saying for a week now that these markets feel content to ‘stair-step’ lower, and since their August 7^th high, the market has put in lower highs and lower lows.

But calling for a lower market has been a fool’s game for quite some time. At any time, Central banks could step in, buy a ton of stock, and jam our markets higher. In fact, just this week Norway's $970B wealth fund has been ordered to raise its stock holdings from 60% to 70% in an effort to boost returns and safeguard the country's oil riches for future generations. Trond Grande, the fund's deputy chief executive was asked about market prices being high and he responded: “We don’t have any views on whether the markets are priced high or low.” Huh, did I hear that correctly? You don't care whether stocks are expensive or cheap, about P/E's, price to book, or price to sales. I guess when you can print money out of thin air and buy tangible assets with the counterfeit money, why would they care if stocks are expensive or not? I wonder if they care about: Russia vs Syria, North Korea threatening nukes, or trouble in the U.S. White House? Even Mark Grant was on CNBC last week, and when asked about the markets said: “Interest rates would probably fall to 2% and assets will probably keep rising because of Central banks. Central banks have bought $19T in assets, and over $1.5T this year alone. They've created a whole new country worth of buying. As long as they stay intact, rates will fade and equities will probably go up". Bravo Mark, and thanks for saying it.

For next week, the stage is set for Amazon (AMZN) and Whole Foods (WFM) to make big changes after receiving regulatory approval from the U.S. Federal Trade Commission. The kick-off will be a major price-cutting campaign on Monday, August 28, when the online giant’s acquisition of the organic and natural grocer is slated to be complete. The GDP report will be released on Wednesday followed by consumer spending data on Thursday. It will be a busy day on Friday as three major economic reports are on tap: August unemployment report, ISM Manufacturing, and automotive sales.

Elsewhere I’m looking for Gold to consolidate at $1,300, while crude oil drifts slightly higher. The U.S. Dollar Index will continue its weak behavior, while U.S. Treasuries are biased to continue moving higher. The Shanghai Composite looks to continue higher after a big break-out, and Emerging Markets are moving to the upside. Volatility looks to remain low putting the bias back to ‘flat-to-higher’ for the equity indices: SPY, IWM and QQQ.

Until I see the S&P (SPX) get up and over 2,468 – I’m playing cautiously. If the bulls have a shot at keeping things alive, the S&P has to first get over and hold its 50-day moving average, and then has to overcome the 2,468 area. Until then, I’m looking at this market with a skeptical eye. With things like the debt ceiling looming, and with all the noise over happenings in the White house – I think that this chop continues for a while.

My thoughts and prayers go out to the folks in Texas who are dealing with Hurricane Harvey.

Tips:

An ETF firm based in Connecticut is launching a new fund that will invest in bitcoin-based derivatives and other exchange products. REX ETFs, founded in 2014, filed to create the "REX Bitcoin Strategy Fund" on Friday, but instead of investing directly in the crypto-currencies, the fund intends to buy bitcoin futures contracts and exchange-traded notes. REX CEO Greg King stated: “The fund does not expect to invest directly in bitcoin, but rather the fund will invest in financial instruments that provide exposure to the price movements of bitcoin – including futures contracts linked to the price of bitcoin. We believe crypto-currencies are a phenomenal innovation that will impact finance and investing for decades to come." Earlier this month, the CBOE announced plans to launch bitcoin derivatives. Also, US-based money manager VanEck is looking to launch its own bitcoin ETF. Simultaneously, the SEC is looking into reviewing its rejection decision surrounding the crypto-currency ETF proposed by Cameron and Tyler Winklevoss.

Notice from the above chart on Lisk (LSK) there are various technical set-ups that would have allowed you to triple your money in less than 1 week. All 3 of these technical set-ups are perfectly aligned: (a) the RSI breaking through resistance, (b) the MACD crossing over on rising volume, and (c) the Bollinger Bands exploding past their Kelltner Channels. It’s these technicals that also exist within my crypto-currency recommendations below:

Recommendations:

Bearish:

- Amazon (AMZN) – Buy Put Butterfly – Sept 15: +900 / -920 / +940

- Apple (AAPL) – Buy Butterfly – Sept 15: +155 / -160 / +165

- NetFlix (NFLX) – Buy Put Butterfly – Sept 1: +155 / -162.50 / +170

- UVXY – Sell Put Credit Spread – Sept 15: +22 / - 24

Bullish:

- Wynn Resorts (WYNN) – Sell Put Credit Spread – Sept 1: +128 / -130

- Russell Sm-Cap (IWM) – Sell Put Credit Spread – Sept 1: +132.5 / -134.5

- S&P (SPY) – Sell Put Credit Spread – Sept 1: +241.5 / -242

- Kohl’s (KSS) – Sell Put Credit Spread – Sept 1: +36 / -37.5

- Western Digital (WDC) – Sell Put Credit Spread – Sept 1: +85 / -87

- Gold Miners (NUGT) – Sell Put Credit Spread – Sept 1: +30 / -32

- Gold Miners (JNUG) – Sell Put Credit Spread – Sept 1: +16 / -17

- Nasdaq (QQQ) – Sell Put Credit Spread – Sept 1: +138 / -140.

Crypto-Currency Buys:

- Ethereum (ETH), Litecoin (LTC), Dash (DASH), Decred (DCR), Digix (DGD), Lisk (LSK), Monaco (MCO), Pivx (PIVX), Augor (REP), Waves (WAVES), Ripple (XRP), Monero (XMR), and Z-Cash (ZEC).

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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Sunday, August 20, 2017

This Week in Barrons - 8-20-2017

This Week in Barrons – 8-20-2017:

“Toto, I’ve a feeling we’re not in Kansas anymore” … Dorothy – Wizard of Oz.

What if Bitcoin is the next Global Currency?

In the movie The Wizard of Oz, the all-powerful Oz turned out to be just a man behind a curtain, who used smoke and mirrors to accomplish his goals. What if our government is the wizard, and bitcoin is the next global reserve currency? After all, since bitcoin’s inception, the concept of using block-chain technology to digitally track money-flow has exploded. I previously thought a global reset would be accomplished using Special Drawing Rights (SDRs), but what if the SDR is a ‘diversion’ while bitcoin (or any of the over 200 different crypto-currencies) is the real deal. Let me back up.

SDRs were created by the International Monetary Fund (IMF) in 1969 as a supplementary, international bank of reserved assets. Every country participating in the Bretton Woods agreement was required to maintain official reserves of gold and widely accepted assets in order to maintain their own currency exchange rate. But on occasions such as the 2000 Internet bubble and the 2009 financial crisis, SDRs were doled out to provide liquidity and to supplement a member countries' official reserves.

Inside the SDR you have the: U.S. Dollar, British Pound, Japanese Yen, the Euro, and most recently the Chinese Yuan. I originally thought that the U.S. dollar would be replaced as the global reserve currency as part of a ‘global financial reset’ – and the SDR concept would be put in its place. But what if the global financial reset is larger and more complex than originally thought? What if it’s impossible for the IMF to accurately calculate each nation’s net worth? The original concept had task the IMF with calculating the value of a nation by combining their physical assets (lumber, oil, minerals, crops, technology etc.) with their existing worth (citizens and reserves) in order to arrive at a total value for the nation. This ending valuation would then be used to give everyone a percentage of a new global currency. Recently, I've been receiving hints that this valuation can be more accurately arrived at using current crypto-currency & block chain technology. Instead of estimating mineral reserves and guessing at intellectual property (IP) – block chain technology can be used to obtain a more complete digital, map of the money-flow. This could then lead to a more accurate (and dynamic) valuation of a country and its global standing.

A digital project such as this is beginning near Dallas, Texas. A Chinese land developer has purchased 900 acres, and has started to build homes. The digital community has been formed, the $50m ICO (Initial Coin Offering) launched, no U.S. citizens are involved, and all of the residents have agreed to use only the crypto-currency to run their lives. This will allow the community to be valued down to the individual level. The digital tokens have been created – and the process of monitoring transactions, and valuing everyone’s personal property, transactions, and IP has begun. Every transaction will be implemented using the digital currency in order to get a true valuation of each and every individual. If/when they can show meaningful results, then the IMF can come out from behind the curtain and introduce this new digital way of life to the world.

To recap:

- The IMF would like a digital reserve currency that would allow every nation to be dynamically valued.

- At that point, every nation’s value and individual citizen’s worth could be converted into tokens that could be used for trading as well as purchasing goods and services.

Once accomplished, what would be the value of THAT digital currency (call it bitcoin for the time being)? Fundstrat Global Advisors is predicting that a digital currency will hit $6,000/coin by the middle of next year, and $25,000/coin by 2022. They arrived at their valuation using Metcalf’s Law – which values a network according to the square of the number of its users. FundStrat back-tested their model and can accurately explain 94% of bitcoin’s price movement over the past 5 years using this calculation.

Standpoint's Ronnie Moas most recently raised his bitcoin valuation to $7,500/coin by trying not only to account for the number of individuals within a network, but also the extent to which the individuals use the digital currency. His 2027 estimate for bitcoin is $50,000/coin, and says: “You can't look at this as a normal situation. We're in an industry that will grow from $140B to $2T and the individual bitcoin price will move with it. We’re at the same point in the adoption curve as we were in 1995 when we went from 1m to 10m Internet users. The following year the Netscape browser came online, and we went from 10m users to hundreds of millions of users overnight.”

The U.S. Government continues to support the crypto environment by auctioning off hundreds of thousands of bitcoins seized from people breaking the law. The most high-profile example came in October 2013, when the FBI raided the online marketplace Silk Road. Those specific confiscated bitcoins were auctioned off, and some winners of the auctions are:

- Venture Capitalist Tim Draper – who on June 30, 2014 bought 30,000 bitcoins for $647 per coin, and today is looking at a profit of $115m.

- Second Market’s Barry Silbert (who currently runs the Bitcoin Investment Trust) – who on December 9, 2014 purchased 48,000 bitcoins for $378 per coin and today is sitting on a profit of $197m.

The tide is turning toward crypto-currencies and governments could be behind the shift. Japan recently approved bitcoin as a legal payment method. Russia’s largest online retailer (Ulmart) is now accepting bitcoin, even though Russia won’t explore the cryptocurrency until 2018. And in the U.S., there is speculation that the SEC could overturn its rejection of the Winklevoss twins' bitcoin exchange-traded fund.

I realize that I’ve gone on a little long about bitcoin, it’s positioning as a potential SDR, and its continued acceptance. But when comparing it with our manipulated and over-extended stock market – I’d say almost exactly what Dorothy said: “Follow the digital yellow brick road.”

The Markets: Factually this week:- The Russell 2000 Small Cap Index continued its downtrend slide, and for the first time since June 29, 2016 – fell below its 200-day moving average and turned negative for the year.- The relationship between the S&P 500 index (SPX) and Germany’s DAX broke down. Jonathan Krinsky of MKM Partners, points out: “There have only been five other occurrences of this in the last twenty years, and 4 of the 5-preceded medium to large market pullbacks.”- Wall Street’s volatility guide (VIX) moved above its 200-day moving average. This fear indicator is often seen as a measure for near-term market drops.- Gold jumped back above $1,300 per ounce for the first time since the Presidential election. This was influenced by a weaker dollar, diminished expectations for a FED rate hike in 2017, and an indication that investors are hedging their bets against a further slide in equities.- The Dow Jones Transportation average (DJT) continued to trend lower. This is viewed as a sign of overall market weakness because companies that move goods and services should be moving higher along with the broader market. When they don’t, that’s a bearish signal, and one that often previews a broader market fall.- Last week a greater number of stocks hit 52-week lows than 52-week highs – which is something the market hasn’t seen since July 2015. Combine this with down-volume dramatically exceeding up-volume, and it’s a recipe for continued market weakness.- And perhaps the biggest signal that the market may face pressure going forward is the inactivity surrounding the Trump agenda. Not because of the recent rhetoric, but because his infrastructure plan and tax cuts appear to be in jeopardy.

For the S&P index, a combined series of lower highs and lower lows, a break in the downward trend line, and an uptick in volume and breadth – all point to an ominous week ahead of us. This is the first time in a long time (see chart above) that I’ve seen a complete S&P sell-off into the close – with all 100 S&P stocks being down on the day. This is what it looks like when investors want out of their positions – at any cost. The only place to ‘hide’ was in bonds, gold and volatility.

Last week we saw the volatility index (see above) explode above the 110 level once again. Buying volatility (UVXY) is a method of hedging that the pros use, leaving only the retail investor to weather the downward storm.

The financials last week (as characterized by the XLF pictured above) had their most substantial down day in recent memory. Any bounce at this point is going to be sold into. Look for gold to continue its uptrend, the U.S. Dollar to continue moving sideways to down, and U.S. Treasuries to continue climbing higher. Volatility looks to move higher, and off of its abnormally low levels of the spring and early summer. This coming Thursday will be the annual get-together of top central bankers including U.S. Federal Reserve Chair Janet Yellen and European Central Bank Head Mario Draghi in Jackson Hole, Wyoming. Policymakers are expected to deliberate on why the Phillips Curve (the rule that correlates lower unemployment to higher inflation) isn't working as it should.

And finally, buckle up – because the latest rendition of the U.S. Treasury running out of money is about to play out all over again. The curtain goes up on September 29^th, and in the 2017 production – President Trump is playing a lead role with his quote: “The Federal Government needs a good shutdown.” The 2011 production brought down the house – after a nasty showdown led to an unprecedented credit-rating downgrade for U.S. Treasury debt. That curtain-call cost the U.S. taxpayers an extra $1.3B in higher borrowing costs, and coincided with the last 20% stock market correction. With Congress not coming back to work until after Labor Day, that only gives them three weeks to work out a deal and pass a bill. Undoubtedly, Congress and the White House will figure out a way to kick the can further down the road, but the ultimate day of reckoning is fast-approaching.

By the way, in terms of the solar eclipse on the 21^st - please play it safe. If you don't have proper glasses, or at least a #12 welding hood – don’t risk even 30 seconds of looking at the sun. Instead, get a pair of binoculars, and point the big end at the sun, and focus the small ends above a sheet of paper. You'll be able to watch the entire thing on that piece of paper with no ill effects.

Tips:

The DOW put in a high on August 7^th of 22,118, and then fell back about 275 points to 21,843. It then rallied up to 22,024 (a lower high), and fell back to 21,674. If we bounce on Monday and don't make it over 22,024 before falling back again – we would be in a repeating ‘stair step’ lower pattern of lower highs and lower lows. Such a pattern could get us down to 21,500 and potentially 21,200 before finding support on the DOW. I’m looking for a ‘dead cat bounce’ on Monday, and then rolling over and heading lower the remainder of the week.

The financial ETF (XLF) is only up 4.7% year-to-date (YTD), and is losing support by the day. The S&P is still up 7.7%, but is getting its strength from the FAANG stocks that are still up 18% YTD. The Russell Small Cap Index (IWM) is now down 0.4% for the year, and is just shy of entering corrective territory. The retailers (XRT) are in correction mode as they are down 13.79% YTD. The DOW transports (IYT) have come down 8% in the past couple of months and are now flat on the year. If the FAANG stocks begin to drift lower, they could fall quickly and hard – and take the rest of the market with them.

The level on the S&P (SPX) that the bulls need to reclaim is 2,438. If the SPX can’t reclaim 2,438, then we will see 2,411 and 2,400 after that. If we remain between 2,438 and 2,411, the markets will behave themselves. If we go below 2,411, institutions will start to sell hard and fast.

Recommendations:

Bullish Plays:

- Bitcoin Investment Trust (GBTC) – also buy Ethereum & Litecoin

- Paypal (PYPL) – Sell Sept 15^th Put Credit Spread +57.5 / -60

- EOG Resources (EOG) – Sell Aug 25^th Put Credit Spread +80 / -82

- Jr. Miners (JNUG) – Sell Aug 25^th Put Credit Spread +15.5 / -17

- YY Systems (YY) – Sell Aug 25^th Put Credit Spread +69 / -71

- Weibo Corp (WB) – Sell Aug 25^th Put Credit Spread +85 / -87

- Shopify (SHOP) – Sell Aug 25^th Put Credit Spread +90 / -92

Bearish Plays:

- Amazon (AMZN) – Buy Sept 15^th Put B-Fly +940 / -920 / +900

- Netflix (NFLX) – Buy Aug 25^th Put B-Fly +170 / - 165 / +160

- S&P Short Futures (SVXY) – Buying Puts

- Volatility Index (UVXY) – Buying Calls