This Week in Barrons - 11-12-2017

This Week in Barrons – 11-12-2017:

“Times, they are a changin’…” Bob Dylan - 1964

   In 1998, Kodak had 170,000 employees and sold 85% of all photo paper in the world.  In 2001, Kodak declared bankruptcy.  It only takes an average of 3 years for a company who refuses to re-invent itself – to go out of business.  The next 3 years will bring us a confluence of: Ai, healthy living, autonomous and electric cars, and jobs.  After all:

-       Uber is the largest taxi company in the world, but owns very few cars.

-       Airbnb is the biggest global hotel company, but doesn’t own a property.

-       IBM’s Watson gives legal advice that is 90% accurate, and can diagnose cancer 4 times faster and more accurately than humans.

   In 2020, the auto industry will be completely disrupted.  You won’t want to own a car anymore.  You will call a car with your phone – it will show up and drive you to your destination – without a driver.  You will not need to park it, only pay for the driven distance, and you can be productive while driving. 

-       Cities will see 90% fewer cars, and need 90% fewer parking spaces.

-       Auto accidents will drop by 99% – creating financial trouble for insurance companies.

-       If you can work while you commute, people will migrate to more rural neighborhoods.

-       Home solar power installations will become the norm on new construction.

-       Cheaper electricity will deliver less expensive desalination plants.

   The Tricorder (of Star Trek fame) will be released in 2018.  It will work with your phone – take a retina scan, a blood sample, and a breathalyzer.  It will analyze 54 different bio-markers, and will identify virtually any disease.  This will give everyone access to world class medical diagnosis for one low price.

   But don’t take my word for this.  Bob Lutz is the former vice-chairman and head of product development at GM.  He also held senior positions with Ford, Chrysler, and BMW.  He said: “We are approaching the end of the line for the automobile.  The end state will be the fully autonomous module with no capability for the driver to exercise command.  You will call for it, it will arrive at your location, you'll get in, input your destination, and go.  In a short time, human-driven vehicles will be legislated off the highways, because countries will look at the accident statistics and figure out that human drivers are causing 99.9% of all accidents.  You won’t have to convince individuals to give up their cars, just the major fleets that purchase between 3 and 5m vehicles per year.  Auto performance will be the same across brands, which will be the death knell for companies such as BMW, Mercedes-Benz and Audi.  We will witness the demise of the automotive dealer and automobile advertising as we know it.  I think everybody sees this coming, but no one wants to talk about it.  For a short time, autonomous driving will be focused on the automobile companies – but soon that technology and others like it will become ubiquitous.”

   The real problem going forward will be job creation.  What do you do with the tens of millions of unemployed car and truck drivers, lawyers, insurance agents, and investment advisors?  Be ready for governments to make bad decisions – because they’re going to be asked to re-invent themselves within time-horizons that will be much shorter than they are accustomed.  Yes Mr. Dylan, truer words have never been spoken.

The Market:

"I’m not acting anymore because I sold a tequila company for a billion f***ing dollars"… George Clooney.

Factually:

-       “I’m in debt up to my eyeballs.’  Total consumer credit rose by 6.6% year-over-year.  October hit an all-time high of $1.1T for auto, and almost $1.5T for student loans.  Time will tell if we're brewing another 2007 debt crisis.

-       “Talk about being well endowed.”  It turns out that a lot of universities have been sending their endowment monies overseas to avoid paying taxes.  Friday, it was revealed that over 100 U.S. universities including: Duke, Stanford, Colgate, Columbia, USC, Johns Hopkins, Indiana and Texas Christian admitted to using secret offshore investments to hide away a combined $500B in rewards.  The new Republican tax proposal (if passed) would not tax any of this money.  “Congress is essentially subsidizing nonprofits by allowing them to engage in these transactions,” said Norman I. Silber, a law professor at Hofstra University.  “All the while, they’re raising tuition far in excess of inflation,” said Utah Sen. Orrin Hatch.

-       ‘Baby she was born to run.”  Last weekend, Shalane Flanagan became the 1^st American woman to win the women’s portion of the New York City Marathon in 40 years.

-       “There’s something happenin’ here.”  While TV hasn't been talking about it, something really ugly is going on in the Middle East.  It appears that Israel and Saudi Arabia are tag teaming to start a war against Hezbollah – with Lebanon and Yemen looking to be in the cross hairs.  This market has learned to ignore all the threats of war, but unlike N.K. – if Israel wants war – it will get war.

-       “I’m (not) lovin’ it.”  Grad students are freaking out about the GOP tax plan.  Many Masters’ and Ph.D. programs function as apprenticeships where candidates teach classes and conduct research to gain experience.  In exchange, universities waive their tuition and provide modest annual stipends.  The current system only taxes student stipends.  The proposed tax plan would include tuition waivers as income – and virtually quadruple every grad students’ tax bill.

-       “One toke over the line.”  Cannabis lovers in California awaiting recreational marijuana will be in for a big shock when they see Cali’s newly imposed 15%+ tax.  And local California jurisdictions are encouraged to add their own taxes on top of this.  Medical marijuana is currently priced at around $35/bag ($6/joint).  The additional taxes will drive prices into the $50 - $60 area – keeping the illegal market alive.

   If you’re keen on marijuana stocks:

-       Constallation Brands (STZ) just took a 9.9% stake in Canopy Growth (TWMJF) – telling the market to watch out for the arrival of cannabis-based beverages.

-       Scotts Miracle-Gro (SMG), with its acquisition of Earthgro and General Hydroponics is well-positioned for growth with below-average risk.

-       Cree (CREE) produces indoor and outdoor LED lighting for marijuana growers.  Approximately 1/3 of the marijuana in America is grown indoors, and the electricity consumed is equivalent to the power used by 1.7m homes.  With weed growers switching from the more expensive sodium (HPS) lights to Cree’s LED lights – the future looks bright.

   Last week was the one-year anniversary of the 2016 U.S. presidential election.  Since the election, the S&P has turned in the best performance in the first year of a presidential term since 1989 (George H.W. Bush) – returning 23.7%.  A total of 59 new record highs were set by the market in 2017, reflecting a rise in investor confidence.  Earnings growth through the first three quarters of the year was 9.4%.  The 4 sectors that performed the best since the election are: technology (+41.7%), financials (+33.5%), materials (+26.7%), and industrials (+23.5%).  However, this past week the large-cap indexes broke a streak of eight weekly gains, and resulted in modest losses for the U.S. stocks.  Hopes for tax reform are fading, and this could dramatically impact small-caps.  After all, small cap stocks stand to gain the most from faster U.S. growth and lower tax rates because of their domestic focus.

   As we head into November options expiration next Friday, the equity markets still seem unfazed.  I’m looking for gold to pause its downtrend, and crude oil to slow its uptrend.  The U.S. Dollar Index is looking better to the upside after some consolidation, while U.S. Treasuries are biased lower.  Emerging Markets continue to churn following their break of long term resistance.  Volatility looks to remain at low levels keeping the bias higher for the equity indexes: SPY, IWM and QQQ.  When reviewing their charts, the SPY and QQQ are the strongest, with IWM sitting in a bull flag right above its 50-day moving average.

   My theory has been that we'd be okay for most of November, but then potentially see the first real signs of a downturn in early December.  Why?  With earnings season finishing up this coming week, the only thing left to look forward to is a FED rate hike.  As corrupt as Wall Street is, they know that there are big issues with this economy, and a rate hike is not going to help 90% of those issues.

   On Thursday, the GOP Senators said that they are thinking of delaying the corporate tax rate cut until 2019.  If the tax cuts get pushed off into the future – the markets may decide to end this upside run fairly soon.  I know that sounds almost impossible.  But, IF there is a time to take some meaningful profits, it would appear that early December might be that time.

Tips:

   After months of anger and debate, a group of businesses that provide bitcoin services and many bitcoin mining firms suddenly stopped the bitcoin ‘hardfork’ called Segwit2x.  Out of an ‘invitation-only’ meeting, criticisms of Segwit2x came largely from developers, many of whom didn’t necessarily object to the idea of a larger block size, but to the culture that had sprung up around it.  It didn’t help matters that the Segwit2x software upgrade was behind schedule and (if keeping to the timetable) would potentially be introduced without adequate testing.  There remains a strong sense that bitcoin still needs to scale.  “We'll either bring bigger blocks to people [with bitcoin], or we'll bring the people to bigger blocks [on bitcoin cash],” said developer Peter Rizun.  The news that a block size increase would not be pursued was highly praised by supporters of the Lightning Network, a proposed off-chain micro-transaction network that seeks to move bitcoin transactions off the blockchain itself.  And while this news could position Lightning as a likely solution, the big advances that appear needed to get Lightning off the ground are now likely to come under scrutiny.  Unfortunately, it’s too early for me to report on a two-day bitcoin scaling and security technical conference that was scheduled at Stanford Univ. this weekend.  Some think that businesses will embrace alternative protocols such as bitcoin cash (BCH - which has a larger block size and has tripled in value since Wednesday) or Litecoin (LTC) – as being vehicles for faster merchant payments.

Recommendations:

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

-       Amer. Airlines – AAL (45.82) – Sell PCS, Nov 17^th: +42 / -44, $0.25,

-       Abbv – ABBV (95.43) – Sell PCS, Nov 17^th: +92 / -93.5, $0.25,

-       Boeing – BA (260.85) – Sell PCS, Nov 17^th: +255 / -257.5, $0.35,

-       AliBabba – BABA (186.70) – Sell PCS, Nov 17^th: +175 / -177.5, $0.38,

-       Elec. Arts – EA (112.75) – Sell PCS – Nov 17^th: +109 / -111, $0.42,

-       Home Depot – HD (164.10) – Sell PCS, Nov 17^th: +155 / -157.5, $0.30,

-       Bio-Tech Bull - LABU (73.92) – Sell PCS – Nov 17^th: +69 / 71, $0.45,

-       Red Hat - RHT (124.18) – Sell PCS, Nov 17^th: +118 / -120, $0.25,

-       Ultrapro QQQ – TQQQ (133.75) – Sell PCS, Nov 17^th: +125 / -127, $0.20,

-       Western Digital - WDC (88.92) – Sell PCS – Nov 17^th: +85 / -86.5, $0.28,

-       Biotech Trust - XBI (82.77) – Sell PCS – Nov 17^th: +79 / -81, $0.23,

My Crypto-Currency holdings include:

-       Bitcoin (BTC), Bitcoin Cash (BCH), Ethereum (ETH), Ripple (XRP), Litecoin (LTC), Monero (XMR), Dash (DASH), NEM (XEM), NEO (NEO), Zcash (ZEC), and OmiseGo (OMG).

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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