This Week in Barrons – 8-13-2017:
“What’s coming is a big, self-driving truck that will run over this economy.” … Antonio Garcia Martinez – former Facebook Exec.
The key is to embrace the right disruption early – after all, you can’t fight innovation. Sounds easy, but the issue is that disruption shows itself in many forms with many false positives. Just the other day I went for a walk through my local mall. As I walked around Macy’s everywhere I looked there were signs saying: "Everything must go…40 - 60% Off." As I made my way around the 100+ unit mall, I saw: closed stores, discount stores, and no people. Don't get me wrong, this place is not an old, dumpy mall. One store that I walked into had just a few lights on and no air conditioning. The icing on the cake was seeing that a plastic-surgery facility had opened up next to the Food Court. Is this the Amazon effect? I don't think so.
E-commerce accounted for 11.7% of total retail sales in 2016 – up 15.6% over 2015. So, if on-line is just 12% of retail, what happened to the mall? I think people simply have less money to spend – which coincides with credit card debit hitting an all-time high last week. Add to that: car sales puking, 3,300 retail stores being closed, malls looking like downtown Detroit, and a stock market closing near its all-time highs – this simply reinforces the fact that the retail buyer is not out there putting their cash to work in the market. It’s our Central Banks printing money, buying stocks, keeping rates technically negative – that have kept this market elevated.
What bothers me is not that our Central Banksters are doing this, or even the rampant fraud and manipulation, what bothers me is that our current financial media personalities are not calling them out on it. Imagine the talking heads saying: “Today’s market is up despite a bad jobs report that showed us creating 395k part-time while losing 54k full time jobs, or despite corporate earnings – which are actually 5% lower than they were in 2015. It’s up because of our Central Banksters and the Swiss National Bank (SNB) that now owns $84.4B of our stock market. In December, the SNB owned $63B in U.S. stocks. In March, they owned $80.3B, and in June $84.4B. The SNB invested $17B in Q1, but only $4B in Q2 – tapering their buying by 80%. Does this ‘tapering’ mean that they won’t continue jamming this market higher? Imagine if the ECB stopped their 103.4B purchasing of corporate bonds?” A narrative like that from our ‘talking heads’ would be insightful. Unfortunately, what we have is simply reminiscent of financial insight from 1999 - remember:
- David Kathman saying: "Just by looking at the financial numbers, you wouldn't think that GeoCities was worth $5B.” http://news.morningstar.com/articlenet/article.aspx?id=1106
- James Glassman & Kevin Hassett writing in Sept. 1999: "Stock prices could double, triple, or even quadruple tomorrow and still not be too high."
- David Kleinbard saying in 2000: “Terra Networks Buys Lycos for $12.5B” http://money.cnn.com/2000/05/16/europe/terra/ AND said again in 2004: “Daum Communications Buys Lycos for Pennies at $95m.”
- And then there were Jim Cramer’s winning picks in Feb. 2000: “You want winners – okay – write ‘em down.” He then proceeded to produce a list completely void of winners – which was tough to do even back then.
o Ariba (ARBA) = now out of business,
o China Herb Group (ISLD) = now out of business,
o Exodus Communications (EXDS) = now out of business,
o 724 Solutions (SVNX) = now out of business,
o Inktomi Corp. (INKT) = now out of business,
o Virtus Investment Partners (VRTS) = now down by 80%,
o Surna (SNRA) = now trading for $0.12,
o Mercury Interactive (MERQ) = now out of business, and
o Inspirit Energy Holdings (INSP) – now trading at $0.16.
As you can see, disruptors are as tough to spot today as they were in 1999. But what’s different this time is that these same experts KNOW what they’re saying is bogus because they’ve seen the movie before. But they just continue to play the same old game. It then becomes our job to (a) recognize disruption (i.e. the Tesla electric / autonomous truck), (b) understand the advantages (less fuel & wages), and (c) figure out the cascading dominos (millions of unemployed drivers & more re-charging stations). You need to take it upon yourself to analyze the situation – because it’s neither their job nor their agenda.
Well, the markets couldn’t pull off 10 consecutive ‘UP’ days. They probably came up short due to the escalating tensions between the U.S. and North Korea. Specifically, President Trump’s words saying that N.K. has to stop their threats, or N.K. will see ‘fire and fury’ like never before. That statement moved gold and bitcoin higher, and stocks lower. The discussion going on in the Pentagon right now is: Do we go in with conventional weapons, take out his nuke's, and his government – or do we leave it all alone, and wait until he’s a true threat to LA?
I think China summed it up best when they said: “Don't go in first". That is to say, if N.K. fires on a U.S. installation such as Guam, China won't get involved. But, if we start something militarily, they will be forced to step in and defend N.K. FYI, one element that hasn't gotten much press is that N.K. has told the U.S. that they are willing to talk about putting their nuclear program on hold, if the U.S. and South Korea stop their joint military actions. We have refused to stop.
I have to think that over this weekend calmer heads will prevail and the U.S. and N.K. will continue talking. With that, our market could be in for a sharp rise on Monday. The first job for the markets will be reclaiming the S&P’s 50-day moving average – with decent volume.
Eric Peters of One River Asset Management sees a major shift coming and writes: “All previous periods of extreme asset valuation required investors to imagine a vastly different tomorrow – a wildly optimistic future. But today, they expect the opposite. Due to unfavorable demographics and over-indebtedness, investors expect yields to remain flat forever, interest rates low into perpetuity, and inflation to be non-existent. They are using these low rates to justify extreme valuations across other asset classes – causing a disconnect with the real economy. Basically, they want tomorrow to look EXACTLY like today. Bond yields can’t rise – despite every major central bank looking to hike interest rates and exit QE. They expect governments to tolerate historically high levels of income inequality – despite their citizens voting for the opposite. And they expect rising global debts will somehow be supported by declining global growth.” Eric sees a historic reversal, and is getting long volatility.
One way to take advantage of increasing volatility is to buy the UVXY, and another is to buy bitcoin. Bitcoin and other crypto currencies have had some of their best rallies when viewed as a flight to quality. This weekend bitcoin (BTC) made another record by smashing through the $4,100 level. Crypto has tripled in value – year-over-year. As MCC said: “You don’t buy bitcoin (BTC) to make 20% or 30%, you’re not hoping to see BTC go to $5k or even $10k, you’re waiting for BTC to make it to $100k or $500k – so that the risk matches the reward.” If we see additional market adoption of bitcoin, you will see prices in the $100k to $500k range. I would recommend you visit www.coinbase.com and open a bitcoin account. Use www.gdax.com to manage that account, and watch https://www.youtube.com/watch?v=lcCIjIAqM-4 to eliminate all BTC fees.
Crypto currencies are seeing user growth continue to outpace government regulation. They are seeing technical and toolkit advancement (charting, buying & selling spreads, and options) continue to outpace user growth. And are looking for validation (maybe a Russian volumetric block chain test) before going mainstream.
MCC goes on to explain that the crypto-community is run by nerds – who’s reputations are built on code releases. Everyone knows (for the most part) who is working on what and when it will be released. Www.coinbase.com and www.gemini.com are the two most reputable exchanges because they adhere to governmental regulations, and operate within similar arenas as Fidelity or Vanguard. Currently, crypto-networks will not support 300m people making daily transactions, and that’s where off-chain vs on-chain scalability arguments take shape.
Investing in crypto reminds me of those early ‘Internet’ years, and requires that you pick the right disruptor. There is a clear separation between money being thrown blindly at a crypto-dartboard, and investors armed with understanding and the ability to ‘get-er-done’. Some crypto products that I’ll be discussing over the next several weeks and months will be: distributed exchanges (idex), cryptographically verifiable hedge funds (iconomi), untraceable transactions with 0-knowledge proofs (zcash), micro-transactions for browser-advertising (bat), verifiable fair gambling (funfair), file storage reduction services (storj), and distributed computing (golem) – to name a few.
When I look at a chart of Bitcoin and see the damage that was done in the market last week, I can only conclude that the world is bullish on bitcoin. A 77% month-over-month growth rate is nothing to sneeze about. And when I look at what’s in front of our markets – North Korea is not the biggest hurdle this market has to climb. After all:
- August is historically the most volatile month, but Sept. and Oct. aren’t great either.
- Margin debt is at historically high levels. If volatility persists, margin calls will begin and selling will beget more selling.
- Market internals are crumbing, with the number of stocks making new lows dwarfing the number making new highs.
- Over th
e past 100 years, a year ending in the number ‘7’ has always had a bad late summer and fall.
- And on August 1st, the DOW Transports began to flash a ‘red’ sell signal.
Global financials (based upon the following chart) are also in a precarious position. Either European junk bonds need to fetch a higher return (which will be difficult given the current negative interest rate climate in Europe), or U.S. Treasuries need to decline in rates (which will be difficult given our FED’s higher interest rate trajectory).
Heading into August options expiration week, the equity markets are showing signs of tiring, especially the small cap index (IWM). Look for Gold and Bitcoin to continue higher while oil consolidates at resistance. Year-to-date the S&P (SPX) is up 8%, the NASDAQ (QQQ) is up 19%, and the Small Caps (IWM) are up 0.7%. The financial sector (XLF) lost 4% last week – leaving it up only 5% for the year. The financials (XLF) and energy (XLE – down 16% for the year) are taking their toll on the overall S&P performance.
Last week we ‘cracked’ outside the expected move on the S&P (SPX) to the downside. This coming week the levels on the SPX are 2483 on the high side, and 2400 on the low side. Consider 2438 as an inflection point. If we begin to move above that level, we should quickly explode to 2450. However, moving below 2438 would lead us very quickly down to 2411 – and cracking below 2400 would cause things get crazy.
If you’re going to sell volatility this coming week, do it in the VVIX or by buying the UVXY. The VVIX options are into their 87th percentile – so that is clearly the place to sell volatility premium. Some other reasons to play a bounce next week:
- #1 The Put / Call ratio is extremely elevated
- #2 We have had 2 closes outside the Bollinger Bands, and that tells me we are due to revert back to the mean.
- #3 The Russell has come down into its 200-day Moving Average – which tells me that this ‘flush’ has found support.
- #4 And the Yen – when reviewing time and price, should begin to fall and correspondingly move our markets higher.
- Apple (AAPL) – Buy the Sept 8th 160 (+1) / 162.5 (-3) / 165 (+2) unbalanced Butterfly for a Credit of $0.76. This has you risking $174 to make $300 with a 73% probability of winning the trade. AND if Apple completely ‘tanks’ – you get to keep the $76 credit.
- Global Bitcoin Fund (GBTC) – Bullish – buy the shares,
- Alibaba (BABA) – Bullish by selling a Put Credit Spread,
- McDonalds (MCD) – Bullish for a run into $165,
- Nvidia (NVDA) – Bullish and looking for support around $150,
- NetFlix (NFLX) – Looking for a Pin around $175,
- Goldman (GS) – Looking for a Pin around $225,
- Simon Prop Gr (SPG) – Looking for a Pin around $160.
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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