This Week in Barrons - 10-29-2017

This Week in Barrons – 10-29-2017:

“My grandfather and Thomas Edison sold electric cars at the 1900 Paris World’s Fair.” … Al Jardine

Thoughts:

   I remember growing up in York, Pa. with the milkman delivering our milk in an electric truck – so as to not wake-up the neighbors.  Those electric trucks were: reliable, oblivious to outside temperatures, but required a pretty ‘hefty’ battery.  Factually, the sun blankets the earth with enough solar energy in one day, to power everything on the planet for a year.  We simply need a process to harness that energy, and a battery to store it.  After all, a lot of power is required to push 2,000+ pounds of electric vehicle (EV) 200 miles, at highway speeds, with the electronics and HVAC running.  In a perfect world, you would: install 12 solar panels on the roof of your house, capture enough energy in a day to charge your storage batteries, and use those batteries to re-fuel your car overnight.  But we ain’t there yet.  While battery technology has come a long way in the last 100 years, it still: doesn’t hold a charge long enough, gives back the energy unevenly, takes too much time to re-charge, and ‘quits’ after X number of cycles. 

   In 2015, the world purchased 1.26m electric vehicles.  In 2016 sales increased by 58%, and in 2017 sales have increased 86% year-to-date.  Cities are passing laws against fossil fueled vehicles: Oxford (UK) will be all-electric after 2019, Oslo by 2022, and Paris by 2030.  Because of the increased EV demand, manufacturers are trying to incorporate more exotic materials (like lithium, graphene, cobalt, and graphite) into the manufacture of their batteries. 

   If you haven’t tried driving an EV, go to www.turo.com and rent one for a day.  The first thing you’ll notice is how quiet it is.  There is simply no engine noise.  Secondly, you’ll notice the power.  These silent beasts launch themselves effortlessly from a stop, and are nothing short of pure fun.  From there the questions start: (a) How much does it cost? (b) How does it drive? (c) How far will it go on a charge? And (d) Do I need a home charging unit?

   I chose a Nissan Leaf (EV) as a typical, middle-of-the-road example:

The sticker price of this car is:    $35,445

-       Dealer handling fee                +$600

-       Dealer discounts                    (-$4,500)

-       Nissan Finance Discount       (-$6,000)

-       Federal Tax Credit                 (-$7,500)

-       State Tax Credit (varies)        (-$4,653)

   The net cost for this fast, silent, pollution-free, almost free to refuel, carpool-lane eligible, and almost luxury car is an amazing: $13,391.  However, in order to get the $6k financing discount, you must agree to a zero-money-down, 0% loan for 72 months.  This apparently is a combination of negative interest rates in Japan, and the tendency of buyers to spend money on add-ons like service plans and extended warranties (which can be rejected).  It comes with an 8 year, 100,000-mile warranty.  The Leaf felt faster than my current car, and only a couple of notches below the Tesla Model S – which is so fast and fun that it’s dangerous (for me).  The Leaf goes 110 miles on a charge, and refuels overnight when plugged into a normal outlet – or in 30 minutes at a DC charging station.  It gets over 115 miles per gallon – which is 6X my current car’s mpg.

   I’m not a rocket scientist, but: if the demand for electric cars continues to annually double, and if cities continue to ban the internal combustion engine – then more batteries are going to be required and ‘not included’.  And correspondingly the demand for the chemicals that go into these batteries is also going to go through the roof.  The current ‘battery du jour’ is the lithium-ion battery with its high-energy density and specific cathode formulations.  Graphite is the most common material used in the anode, and the electrolyte is most often a type of lithium salt suspended in an organic solvent.

   I wouldn’t recommend jumping on every company that happens to mention graphite and lithium in the same sentence; however, there are a handful of companies that are well positioned in the space.  One of the best is the Albemarle Corporation (ALB), specializing in lithium, bromine, and refining catalysts.  While currently trading at $139/share – they’re expensive, but they are the ‘best-of-breed’.  Right behind them is FMC – also expensive, but well positioned in lithium.  Third in line is SQM.  After those three names, we fracture into some smaller and more interesting companies:

-       LACDF is based out of Vancouver, and has a new project working in Nevada.  If it works, it will turn this $1.60 stock into a $5 or $10 overnight.

-       Mason Graphite (MGPHF) is a $2 stock that also has some interesting new areas coming on line.

-       SYAAF has large graphite reserves.

-       And if you like ETFs, LIT is the lithium based ETF, and REMX is the rare earth and strategic metals ETF.

   Those are my choices for companies that will be providing the chemicals that will help store electricity, and power our cars going forward.  Take a look at them and see if there's anything in there that ‘shocks’ you on this Halloween eve eve.

The Market:

   Friday was more ‘treat than trick’ and a big day for ‘tech’.  Factually:

-       Google is still bringing in the big ad dollars, and its profits are soaring.

-       Amazon is going ‘gang-busters’ – especially with the addition of Whole Foods to its shopping cart.  Unfortunately, no one on the earnings call asked Amazon why their tax rate fell from 46% to 18%.  Also, nobody seemed to care that Amazon’s retail operations still lost $822m last quarter, and the profits from AWS (their cloud operation) were over $1B – aided by one very large, $600m customer – the C.I.A.

-       Twitter shocked the world by saying that ‘might’ be profitable (for the first time) next quarter.

-       Rumors are swirling around Apple that their iPhone 8 sales are under the weather.

-       CVS isn’t taking anything lying down as it announced that it is in talks to buy insurance company AETNA for more than $66B.

-       Chipotle discovered that it needs to hire better ‘financial engineers’.  They allowed their earnings miss to bring down their stock price.  Versus GM, who still LOST $3B, but made a big deal of their operating profits beating estimates – so their stock price rose.

-       GE remains in a heap of trouble.  With their stock being down 30% this year, their new CEO, John Flannery, is slashing costs by delaying building their new Boston HQ, grounding their fleet of corporate jets, and disposing of the company cars for top execs.

-       Economic data propped up Wall Street last week as the U.S. economy expanded at a solid 3% annual pace.

-       The University of Michigan’s consumer confidence survey showed that consumer sentiment in October was the strongest it’s been in 13 years.  Over half of all respondents expect good times next year, and anticipate the expansion to continue uninterrupted for the next 5 years.

   Last week the ECB announced the ‘almost-tapering’ of their QE program.  When you read through their announcement, depending upon what happens – nothing changes.  I mean, currently the ECB prints 60B Euros a month – and uses them to buy corporate debt, bonds, and stocks.  The plan is to cut that to 30B a month starting in January, 2018 – and move the ending date of QE out to September of 2018.  So, they’re planning on doing less – for longer.  But the details revealed that: “if the outlook worsens, the council can opt to increase QE in both size and duration.” So, they’re going to taper unless something looks funky, and then they'll go right back to doing 60B Euros (or more) per month. 

   This week Warren Buffet chimed in (again) on bitcoin – joining those who believe it is in bubble territory.  "You can’t value bitcoin because it’s not a value-producing asset," he said.  In 2014, he also advocated that investors stay away from bitcoin entirely by saying: “It’s a mirage.”  Of course, we all know how bitcoin has rocketed higher by over 1,000% since his Warren’s 2014 remark.  So, if history is our guide, we should all invest in bitcoin and wait for the next 1,000% increase.

   Last week French investment bank Natixis urged investors to prepare for: “The U.S. economy to slow down substantially as early as 2018.  There is a limit to the rise in the participation rate and the employment rate; given real wages are slowing down," wrote analyst Patrick Artus chief economist at Natixis.  "Investors should therefore prepare for the consequences which would include a brief rise in interest rates, a market sell-off, and a depreciating dollar.”

   Analysts from Goldman Sachs (GS) have identified the big winners from Trump's tax plan, and it is the companies that will be re-patriating their overseas cash.  These U.S. companies stand to bring back $250B in foreign profits if the tax legislation is passed.  The biggest beneficiaries of a repatriation tax would be tech companies.  The tech sector accounts for 70% of the total S&P taxable cash stashed abroad.  The top stocks set to benefit are: Apple, Citrix Systems, Cisco Systems, Juniper Networks, Microsoft, NetApp, Oracle, Qualcomm, Verisign, and Western Digital.  Currently, S&P companies have about $2.5T in permanently reinvested overseas earnings, including about $920B of untaxed overseas cash.  Goldman estimates a repatriation tax reduction like the one proposed (an 8.75% tax on cash and 3.5% tax on earnings) would result in $250B gradually returning to the U.S. – while $540B would remain overseas.  The non-tech companies that would reap the most benefits from repatriation are: Abbott Labs, Amgen, Foot Locker, General Electric, Johnson & Johnson, Merck, Priceline, Ralph Lauren, and Waters Corp.

   Heading into the last days of October the equity markets look strong.  I’m looking for gold to move lower in the short run, while crude oil looks for a new 52-week high.  The U.S. Dollar has renewed strength and looks to continue higher, while U.S. Treasuries are biased lower but at long term support.  Watch for emerging markets to move higher as they’re holding right below break out levels.  Volatility looks to remain low – keeping the bias higher for the equity indexes.  The indexes also are looking to move higher on both the short and intermediate timeframes, though the small-cap index (IWM) may need a swift kick-in-the-pants to get out of its consolidation phase.
   The Q3 earnings season is past the halfway mark with results from 54% of the S&P 500 members already out.  Total revenues for the 272 S&P 500 members that have reported are up +6.7% from the same period last year.  However, when this earnings window closes, the next thing that the market is going to be looking for is a December interest rate increase.  Could the end of earnings and another quarter point rate hike, finally be the bell that signals funds to take some profits off the table?  It certainly could be.  Even if you're the biggest bull ever minted, you have to know that this market can't go straight up forever.  Every bubble eventually finds its pin.

   But, we’re in the middle of a ‘melt-up’ period like 1999 – where all bad news is ignored, and all good news is rewarded.  I expect that the early part of the week will include some ‘backing and filling’ after that huge ‘up-day’ on Friday.  The pattern has been to buy-the-dip (BTFD).  So, if you’re looking for some quick action, a market stall on Monday could be your chance.  After all, ‘red’ days are few and far between, and if we get one – it will often be erased the next day.  Lean long, and hope for the best.  This is definitely 1999’s déjà vu all over again.

Tips:

   Research shows that big institutional money is currently staying out of Bitcoin.  But honestly, very few investors saw the beginning potential in Amazon, and some are still calling it a bubble.  Disruptions are not easy to understand, and historical metrics fail when judging new concepts.  Most big names (including Warren Buffet) are in denial, and are praying for a crash to say: ‘I told you so’.

   Bitcoin / BTC ($5,710):  After days of rally, gravity is finally catching up with Bitcoin.  Currently, it is finding it’s 20-day EMA support just above $5,500.  If support at $5,500 breaks, it could easily slide to $4,950.  Also, the RSI is forming a negative divergence.  The previous two negative divergences were followed by a sharp drop in prices.  On the other hand, if the support holds then Bitcoin is likely to remain range-bound between $5,600 and $6,000 – with the next buy zone being triggered by it making new highs.  I don’t have any ‘buy’ set-ups just yet.

   Ethereum / ETH: ($295):  Ethereum’s chart has formed a large equilateral triangle pattern.  It has resistance from $300 to $315, and the first level of support is at $275, where we find both the trend line support and the horizontal support.  If this support level breaks, the next lower support is $250.  I will wait for clear signs of a bottom formation before recommending any trade.  

   Litecoin / LTC: ($54):  Litecoin did not hold my $57 support level and is back into the $44 to $57 range.  It has support at $55 and again at $50, below which it will fall to the lower end of the range at $44.  The first signs of bullishness will be when the digital currency breaks out of the downtrend line and rallies above $58. Until then, all pullbacks are likely to be sold into.

Recommendations:

Bullish: (Sell PCS = Sell a Put Credit Spread)

-       Cirrus Logic - CRUS (122.85) – Sell PCS, Nov 3^rd: +51 / -52, $0.17

-       Financial Bull - FAS (61.02) – Sell PCS, Nov 3^rd: +57.5 / -58.5, $0.20

-       Jr. Gold Miners - JDST (65.09) – Sell PCS, Nov 3^rd: +56.5 / -58, $0.25

-       Marathon Pete - MPC (58.47) – Sell PCS, Nov 3^rd: +54 / -55.5, $0.20

-       Royal Carib - RCL (124.21) – Sell PCS – Nov 3^rd: +119 / -120, $0.37

-       Restoration Hware - RH (86.64) – Sell PCS – Nov 3^rd: +79 / -80, $0.25

-       Short Vix Fut - SVXY (106.27) – PCS – Nov 3^rd: +95 / 96.5, $0.27

My Crypto-Currency Holdings continue to Include:

-       Bitcoin (BTC), Ethereum (ETH), Litecoin (LTC), Dash (DASH), Digix (DGD), MaidSafeCoin (MAID), Metal (MTL), OmiseGo (OMG), PIVX (PIVX), Patientory (PTOY), Steem (STEEM), and NEM (XEM).

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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