This Week in Barrons – 12-3-2017:
“Education is our only political safety.” … Horace Mann
Thoughts:
Last week:
-
Apple
launched an app that will let it study users' heart rates via the Apple Watch. They are hoping this will help detect
irregularities, and let users know if they could be suffering from a heart
condition.
-
GM
is innovating again, and announced that it plans to roll out a driverless car
service – starting in major cities by 2019.
-
The
Dallas FED President, Citadel’s Ken Griffin, and the chief economist at the Vanguard
Group all came out saying that stocks were overbought. This late year ‘melt up’ is almost classic in
scope, and unique since 1998 -1999 when nothing mattered then either.
-
A lot
of fund managers are chasing yearend performance bonuses – which could mean that
this year there will be no ‘January effect’? Often the new year
brings in new money, and January turns out to be a very good month. With an interest rate hike in December and so
many fundies trying to look good on paper – the ‘January effect’ could be on
hold.
The market entered ‘melt up’ mode this week,
but this time things are much worse. Back
in 1999 it was really only the techs that were in the bubble, and the rest of
the market just sort of went along for the ride. This time around – everything is on fire. In 1999, everyone knew how it was going to
end. This time around, it's not just fund managers piling into stocks
based upon some new-fangled invention – it’s coordinated injections of
trillions of dollars by the world’s Central banks. If the Central banks continue, there's no
reason this can't keep going higher for much longer – with the only thing stopping
us being inflation. The current velocity
of money is at record lows – meaning that money isn't really changing hands. But if the velocity increases, then a small
amount of inflation could move to hyper-inflation in a hurry.
Last friday was all about Michael Flynn’s decision
to cop a plea, and cooperate with investigators. The lone charge against him suggests that
prosecutor Robert Mueller believes that there could be someone higher in the
chain of command about whom Flynn (the former National Security Adviser) can
provide critical information. Flynn was always a member of Trump’s inner
circle. When Trump won, Flynn was given
carte blanche in terms of what role he wanted to play in the White House. That is why his guilty plea is different and
more serious than the charges against Trump’s former campaign chairman Paul
Manafort. Flynn sat at the absolute epicenter
of Trump’s world, and could have information that goes to the very core of
Mueller's investigation into Russia's interference in the 2016 election and any
possible collusion between Russia and the Trump campaign. In short, the
knocking that President Trump now hears at the door – is coming from inside his
own house.
The big question is: Who is the real target
of Mueller's investigation? With Flynn’s
guilty plea, everyone is now wondering if the Trump presidency is in peril.
Peril does not necessarily mean that Trump is a goner, but it does mean that
Mueller's Russia investigation almost certainly will get worse for Trump before
it gets better.
I’ve attempted below to outline how all of
this impacted the markets last week. The
bottom chart in the group shows the Russell Small Cap market reaction to Flynn’s
guilty plea – announced on Friday when the markets opened. What the graph shows is panic selling in the
small caps that quickly crashed the index down 3 standard deviations. However, at the same time, the S&P and DOW
moved higher by 2 standard deviations – almost as if they were being
manipulated. I have never before seen
this type of action. The markets remain extremely nervous with the
upper left graph showing the S&P rising, while the upper right graph shows the
NASDAQ falling. Last week investors
rotated out of technology and into energy, financials, and transports – that
moved 5, 6, and 7% higher respectively.
The moves higher were all predicated on the passage of a tax reform bill,
and on the FED raising interest rates. Bonds
and volatility remain elevated, and let’s not forget that the ‘monsters of
tech’ (Facebook, Apple, Microsoft, Google and Amazon) were down 7% on the week.
The way they brought the Russell Small Caps back (see above bottom chart), coupled
with the fact that at 2am on Saturday the Senate passed the tax reform bill –
should signal yet another upcoming rally higher. I think Flynn will be a sacrificial lamb with
no connection to Trump, and the tax bill passage will get everyone thinking
that Main Street USA is going to be healthy again – keeping the ‘melt up’
intact. I’d be remiss if I didn't
mention that markets have a way of setting tops on significant news – remember:
"Buy the rumor, Sell the news.” While I don't think that is what will happen, we
have to at least consider the possibility.
All we can do is take what we can get, and hope that we're all smart
enough to bail out when the ugliness starts.
The Crypto-Markets:
“In skating over thin ice … our safety is our
speed.” Ralph Waldo Emerson
The problem:
-
Real
inflation is running about 9.6%.
-
The
average investor makes 5.5% per year.
-
The
world is a little bit over $200T in debt.
-
And
the 1971 dollar is worth just $0.04 cents today.
This isn’t a pretty picture – so who can
blame someone for being interested in annual gains such as: Bitcoin +1,250%,
Ethereum + 2,750%, Litecoin + 1,100%, and Ripple + 5,500%. Put that together with the CME’s latest
announcement that it will begin offering futures products on Bitcoin as soon as
December 18th – and you could be witness to a crypto feeding
frenzy. In a separate Friday release,
the CBOE said that it has also filed a product certification with the CFTC
(Commodity Futures Trading Commission) to offer bitcoin futures trading. Their launch date "will probably be before the end of the year. We are operationally ready." The NASDAQ also announced plans to launch a
bitcoin futures service as early as the second quarter of 2018. It’s becoming clear that the cryptocurrency market
is not going away. In fact, it’s being embraced
by some of the biggest tech giants of our time:
-
“Bitcoin
is a remarkable cryptographic achievement and the ability to create something
that’s not duplicable in the digital world has enormous value.” - Eric
Schmidt, Former CEO Google.
-
“My
view is quite clear. I believe in crypto currencies. I believe they’re going to
change the world.”- Richard
Brown, Executive Architect of IBM
In January of 2017, $1,000 was the milestone
bitcoin owners were eager to reach. Bitcoin hit it, and increased over ten-fold to
$11,000+. This year has been filled with
good news for digital currencies from another Asian market boom to Bitcoin’s
integration with SQUARE, and from the launching of a regulated futures market
to growing mainstream adoption. Hedge
funds, pension funds, and family offices have shown extraordinary interest in bitcoin
this year. Simon Yu, CEO of StormX
said: “The price of bitcoin is at an all-time high due to institutional
money finally starting to flow into the cryptocurrency market. The general public is starting to realize cryptocurrency
is beginning to be adopted by mainstream markets, and will continue an upward
trend as they see the potential for more corporate use cases.”
Wall Street traders are telling me that the
floodgates are about to open, and that a ‘new narrative’ is emerging. Currently, the main criticism of bitcoin is
that it’s too volatile – and low-volatility portfolio models are what drive
Wall Street. Wall Street makes money by
holding onto and managing your money as long as possible. They try to reduce volatility in order to increase
client security. When valuations swing
too wildly, clients get scared and start to pull their money out. With bitcoin being so volatile, it hasn’t fit
into the Wall Street mold – until now.
Study after study is coming out showing that bitcoin is a true non-correlated
asset. Which means that bitcoin can be purchased to act as a hedge against
other correlated and inversely correlated assets.
Why is that important? One of the elements
Wall Street uses to tame volatility is to build portfolios with inverse
correlations. For example, traditionally
when stocks go down – bond prices usually go up. That’s a major reason most money managers have
you own both stocks and bonds. Wall
Street is starting to realize that bitcoin is an asset that is uncorrelated to
any other. That means the price of
bitcoin is unrelated to the price of gold, stocks, bonds, or commodities.
The Wall Street pitch will be that by adding a 5% allocation of bitcoin and
cryptocurrencies to your portfolio, it will actually bring down the volatility
of your entire portfolio because bitcoin is unaffected by market crashes,
monetary intervention, recessions, or wars.
Any day now we’re going to see an endowment
or pension fund add bitcoin to their portfolio. They will explain that they’re using bitcoin
as a non-correlated hedge to smooth out volatility. When that
happens, Wall Street will grab on to the non-correlated narrative
and run with it. I’ve seen this movie before. Institutions did it with the “Nifty-Fifty” in the ’70s, and with junk
bonds in the ’80s. They did it with
internet stocks in the ’90s, and with credit default swaps in the ’00s.
At first, they’re considered crazy investments. Then a new narrative takes hold, and they
become legitimized when institutions start using them. Before long, everyone on the Street is using
the product. It will be the same for bitcoin.
Along with Ethereum (ETH), I have a short
list of three cryptocurrencies that I believe will explode higher in the coming
months.
#1 Litecoin:
Litecoin (LTC =
$102 – shown in the below – upper left-hand chart) is a peer-to-peer Internet
currency that enables instant, near-zero cost payments to anyone in the world. It’s an open source, global payment network
that is fully decentralized. It is the fifth-largest
cryptocurrency by value, and has technical improvements over Bitcoin. It allows for a greater number of transactions
to be processed by the network in a given time, reducing potential bottlenecks. It plans to produce 84m Litecoins – which is
four times as many currency units as Bitcoin.
Their open source feature gives you the power to modify, run,
distribute, and copy the core software.
#2 Zcash:
Zcash (ZEC =
$339 – shown in the below – upper right-hand chart) is the result of continuous
efforts by developers to create greater levels of privacy. While the bitcoin blockchain contains records
of the participants in every transaction along with the amounts involved -
Zcash’s blockchain shows only that a transaction took place, but not who was
involved or what the amount was. The
payments are published on a public blockchain, but users are able to use an
optional privacy feature to conceal the sender, recipient, and amount being
transacted. Zcash has a fixed total
supply of 21m units and is in the top 10 cryptocurrencies by market cap.
#3 Monero:
Monero (XMR =
$203 – shown in the below – bottom chart) is an open-source cryptocurrency
created in April 2014 that focuses on privacy, decentralization, and
scalability. Unlike other
cryptocurrencies that are derivatives of Bitcoin, Monero is based on the
CryptoNote protocol and possesses significant algorithmic differences relating
to blockchain obfuscation. In early
2017, the privacy of Monero transactions was strengthened by the adoption of a
superior confidential transactions algorithm. This technology helped to provide legitimacy
for Monero at a time when much of the cryptography used in blockchains was new
and had not yet withstood the test of time.
Monero has a circulating supply of 15m units and has gained over 3000%
since it began trading.
Which
begs the question: “Can I still get in on
the ground floor?” In 2014, when Bitcoin hit its first real
mainstream swing with Coinbase and other exchanges upping their user
experience, people started asking: “Is it
too late to get into Bitcoin?” Those questions recur every time
Bitcoin’s price rises another $1,000. However,
since only a half-of-a-percent of the global population uses digital
currency, there is still plenty of time to be an early adopter. Jon Chou,
CEO of Bee Token says: “People often complain that it's too late
to get into Bitcoin. There are
approximately 700,000 Bitcoin addresses, and over 7B people in this world. It’s important to realize how early we are in
the blockchain space. Bitcoiners from 2010 and earlier are just
starting to be vindicated rather than victimized.” And just last week the WSJ announced that the
NASDAQ exchange will begin to offer bitcoin futures as early as June 2018.
Now for the dose of reality. There’s a greater-than-80% chance that
bitcoin will soon start to move downward into ‘correction terriroty’. A recent study titled “Bubbles for Fama” was published earlier this year by the National Bureau
of Economic Research. The researchers
defined a bubble as any sharp price run-up over a two-year period – followed by
at least a 40% drop over the subsequent two years. When the price run-up is 100% or more, they
found the probability of a correction becomes 50%. When the price run-up is greater than 150%,
the probability of a drop becomes 80%. Bitcoin’s
run-up over the past 2 years is over 2,500%.
That’s more than 10 times the threshold the researchers found associated
with a ‘near certain’ subsequent correction.
Unfortunately, the researchers were unable to link the probability of a
correction to any fundamental factors.
Whether a fan or a skeptic, it’s clear that the
upcoming launch of CME’s bitcoin futures is another step in the direction of cryptocurrency
acceptance.
Tips:
Crypto-Pricing:
Bitcoin (BTC = $11,639):
On Nov. 29
bitcoin peaked at $11,420.82, creating a zone between $8,750 and $9,100 as formidable
support. If the bears succeed in
breaking down that support, the 20-day EMA at $8,530 will act as the next level
of support. On the upside, we just this
morning pierced the lifetime high of $11,420.82. I expect the volatility in bitcoin to subside,
but right now the risk to reward ratio in the current environment is not
conducive for trading. Hence, I’m not
recommending any trades in BTC today.
Ethereum (ETH = $476): If Ethereum remains above the
$393 levels, it is likely to rally towards its pattern target of $652. Below $393, and it’s likely to slide to $350.
I prefer to stay on the sidelines and
watch the setup develop over the next two days before initiating any new trades.
Ripple (XRP = $0.254): I had anticipated a rally to $0.3
on Ripple; however, it could not cross the $0.28 mark. From there, it plunged back to the critical
support of $0.22. The $0.22 level held,
and the rebound is facing stiff resistance at $0.25 level – which is the 50%
Fibonacci retracement of the fall from $0.281 to $0.2195. Once above this level, a rally to $0.28 and
thereafter to $0.3 is likely. Contrarily,
if the $0.22 level breaks down, it can sink Ripple to $0.18 levels. Aggressive traders can attempt to go long at
$0.251 and keep a stop loss of $0.218.
Litecoin (LTC = $102): The
$93 resistance level was broken like a hot knife through butter. It will now act as support, and if broken the
next support level would be down at $76.
I will wait for the volatility to subside before recommending any
new trades.
Dash (DASH = $789): I was
looking for a price target of $650 for Dash – which was easily surpassed. Currently, Dash is sitting at the resistance
line of the ascending channel, which is likely to be a difficult level of
cross. I expect a couple of days of
consolidation before the bulls attempt to resume the uptrend. The breakout and close above the ascending
channel gives it a pattern target of $960.
On the other hand, any correction is likely to find support at the trend
line of the ascending channel, around the $680 mark. Currently, I’m not finding any setups on the
charts that offer a good risk to reward trading opportunity.
Over the
next several weeks, I’m looking for moves higher in ZCash (ZEC), Ethereum (ETH),
and Monero (XMR).
Equity Recommendations:
Bullish: (Sell PCS = Sell a Put Credit Spread)
-
Abbott Labs – ABT (55.98) – Sell PCS, Dec 8th: -55 /
+53, $0.26,
-
Aurora – ACBFF (5.92) – Long Stock from $2 / share,
-
Credit Accept - CACC (304.27) – Sell PCS, Dec 15th: -280
/ +270, $2.25,
-
Caterpillar – CAT (141.52) – Sell PCS, Dec 15th: -135 /
+132, $0.51,
-
Gastar Exploration – GST (1.04) – Long Stock from $1 / share,
-
Marathon – MPC (62.84) – Sell PCS, Dec 15th: -61.5 /
+59.5, $0.35,
- UnitedHealth – UNH (226.78) – Sell PCS – Dec 8th:
-207.5 / +205, $.50,
- Zebra Tech - ZBRA (110.36) – Sell PCS – Dec 15th:
-105 / +100, $0.70,
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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