This Week in Barrons – 1-14-2018:
“Do what
you have to do, until you can do what you want to do...” Oprah Winfrey
Last Week we
said:
-
“WOW” when Oprah showed up at the Golden Globe Awards to accept the Cecil B DeMille (lifetime
achievement) Award. Her speech had me wondering if I was watching
a preview of candidate Oprah 2020. As
the first black woman to take home the award, she honored the past, and gave me
hope for the future.
-
“Really?” when President Trump declared
himself a “stable genius”.
-
“I knew it” when JPMorgan Chase CEO
Jamie Dimon declared: “I regret calling
Bitcoin a fraud, and believe in the technology behind it.”
-
“Really?” when Warren Buffet admitted his
ignorance surrounding cryptocurrencies but said: “I can say with almost
certainty that they will come to a bad ending.” It’s uncharacteristic of Mr. Buffet to have
such a negative opinion on something that he admittedly knows very little
about.
-
“We’re in trouble now” because November consumer debt rose by
$28B to over $3.8T – the biggest increase in over 15 years. But hey, J.Q.
Public is just following the lead of our corporate bosses and borrowing money
to buy stuff. Except our corporate bosses are buying their own stock back,
at a lot cheaper interest rate than J.Q. Public is paying.
-
“Really?” When the Chairman of the Federal Bank in
Chicago answered a question on Bitcoin: "It's hard to imagine a
world where the main currency is based on an extremely complex code, understood
by only a few, controlled by even fewer, without accountability, arbitration or
recourse." Uh, didn’t you just describe the Federal Reserve
banking system?
-
“Car guys know how to sell.” This week KBB reported that the average
price of a new car rose almost 2% to a record high of $36,133.
-
“Really – yeah baby” Bonus season will soon be upon us, and Wall
Street banksters will soon be flush with an extra $138k per head in cash. We all know that traders will be running
directly to play the crypto-markets with ‘big bucks – no whammies’.
-
“Numbers don’t lie” As of last week, there were 3,745
Bitcoin meetups organized around the globe.
The total signups are just south of 1m, with the 3 largest Bitcoin
groups being: the Mountain View Hackers and Founders (15,050), Bitcoin of NYC (7,440),
and the Toronto Starts (6,887).
The crypto market moves in cycles, and
understanding these cycles is key to profiting, managing risk and keeping sane. Howard Marks describes two ways to profit
from markets: (1) hold more of the things that rise and less of the things that
fall, and (2) cycle adjustment, or trying to have more risk exposure when
markets rise and less when they fall. The key to cycle adjustment is to
understand where you are in a cycle and calibrate the risks and rewards accordingly. Over the last few months, the market has been
driven by new capital entering the space and a psychological acceptance of
bitcoin. The original crypto-capital entered
via Bitcoin (BTC), and has performed well. From July through December, Bitcoin dominance
increased from 41% to 66%, and BTC’s price increased from $2,492 to almost
$20,000 – driven strictly by capital inflows.
In December, the market became more
retail-dominated and less crypto-educated with Coinbase becoming the proxy for
this phenomenon. Coinbase signups
tripled from November through the end of the year. At that point, larger investors started to
take profits, bitcoin began to falter, and it became time to find the next shiny
object. In the first three weeks of
December, Litecoin (LTC) increased from $100 to $371. LTC also fell from
grace as restless investors moved on with more ‘house money’ to play with. Their attention spans moved from Coinbase to other
exchanges such as: Bittrex, Poloniex and Binance. At that point, the cheaper the asset – the greater
the chance of a return. And when I say
cheap, I'm not referring to market capitalization, but rather its pure, actual
price.
The average crypto-investor tends to think
of them self as analytical, disciplined and contrarian, but the fact of the
matter is that most tend to magnify cyclical moves. The key is that when investor euphoria is
widespread, you should lighten up on those assets which are expensive and be
more aggressive with those that are cheap. The time to be overweight alt coins is at the
beginning and middle of the altcoin cycle – not towards the end. Currently, we're on the precipice of a major
entrance of institutional capital to the crypto-space, and the one place it is
going is BTC. The market in altcoin
terms is getting expensive and in BTC terms it's getting cheaper.
Every crypto-rally has had a common thread: it
was partially driven by new capital, and it becomes enamored by an alternative
asset or market narrative. The cycle is often triggered by a legitimate
change in fundamentals. And then,
subsequently, is taken to the extreme by investor behavior. Earlier in 2017, it was smart contract
functionality and ICOs. Now, as BTC fees
creep up and Ethereum is facing scaling issues, most of the coins that have
increased in price are aiming to be cheaper, faster, and more scalable.
What we're actually seeing is a mini-hype cycle play out around a new market narrative.
New technology captures investor attention. Emotional influences cause investors to follow
the herd and fear of missing out predominates. The cycle gets taken to its extreme until it
can go no further. For example: you will
know that it’s getting interesting when you stop by your neighborhood breakfast
spot, and three kids are in line in front of you buying pastries. To pay their bill the oldest swipes her phone
and leans over to her younger siblings and says: “This cost us half of our
winnings. Next week we need to buy more Litecoin.” When I was their age, I was drinking water
from a backyard hose and trading baseball cards. So, my question is: In 5 years which will be
worth more, one Litecoin or my Barry Bonds rookie card?
The Markets:
“The true
soldier fights not because he hates what is in front of him, but because he
loves what is behind him.” ― G.K. Chesterton
This week we
are seeing a transition in the markets.
-
1. The SKEW on the S&P is collapsing. That means that the premium is coming out of
the ‘out-of-the-money’ puts versus the calls.
Which means that if you think this market will continue higher in the
short-term (through the end of January), but in February will take a pause –
then it is advantageous to buy the short-term weekly calls, along with a couple
February monthly puts – because the puts are ‘on sale’.
-
2. The VIX (a measure of market volatility) is
increasing as the market is exploding higher.
This is rare, and often says that the market is transitioning from a
premium buying opportunity, into a premium ‘selling’ one.
-
3. And lastly, options volume has exploded
higher in the first couple weeks of January.
In 2017 the average options volume was 17m contracts per day, but on
Friday the markets did 27m options contracts – an increase of almost 60%.
Investors are working themselves into a ‘fever
pitch’ kind of stage – hence the increase in options volume. There is no fear to the downside – hence the
SKEW collapsing. And therefore, the
strategy for this type of market is to buy short-term (weekly) in-the-money
calls on the S&Ps, and couple that with buying 1 or 2 month out S&P puts. Because the only way out of these types of
rallies is via: ‘shock-n-awe’ to the downside.
Last week we learned that the Swiss National
Bank made over $55B in profits in 2017 by printing money, and using it to buy
stocks. They have accumulated about $800B
worth of our stocks and because the markets have been roaring higher – they made
more money than Apple, J.P. Morgan Chase, and Berkshire Hathaway – COMBINED.
So, why wouldn’t they print and buy another $900B,
$1T, or $2T? Why would they even think
about stopping when they're raking in those kinds of profits? And what about the world’s $233T worth of
debt – not counting the Quadrillions in derivatives and counter party
swaps? And what happens to the world if
our Central Banksters (including our FED) slow down their printing and
buying? Unfortunately, it’s the junkie
scenario. A junkie cannot maintain, but
rather needs more. The moment money is
injected into the global monetary system, banks will leverage it: 10, 20, 50, or
200 times. That gives a boost to the
underlying economies, but then its effect starts to fade – just like with the
junkie. Central Banks have moved from
being lenders of last resort, to buyers of first resort. We're
mired in a global debt and derivative bomb that is mathematically impossible to
diffuse. Therefore, the introduction of
a multi-national currency (crypto-currency) is potentially the ‘only solution’
to this monetary dilemma.
In terms of last week, all 3 benchmarks finished at all-time highs. The beginning of 2018 has been the best equity
trading start to a year since 2003. The
DOW gained 4.4%, the S&P 500 gained 4.2%, and the Nasdaq witnessed a rise
of 5.2%. We found out that the American
consumer literally ‘shopped until they dropped’ as the Commerce Department
reported that retail sales rose 0.4% last month – after a 0.9% surge in
November. Japanese automakers Toyota and
Mazda announced plans to set up a $1.6B assembly plant in Huntsville, Alabama. Fiat Chrysler announced
that it will shift production of its heavy-duty pickup trucks from Mexico to
Michigan in 2020. Both moves are
intended to lower the risk to the automaker’s profitability should President Donald Trump pull the United States out of the North
American Free Trade Agreement (NAFTA). The week also signaled the start of the fourth
quarter's earnings season.
As PM suggested to me, there is a substantial argument to be made that stocks like
Facebook and Google are still inexpensive because their fundamentals and
consumer demographics are still growing. Stocks like Facebook, Apple,
Google, and Microsoft could be the consumer staples of the 21st
century that even a recession won't sidetrack. After all, do you spend more timing washing
your clothes and dishes or using your iPhone to check Facebook or email? And would you rather own Facebook's expected revenue
and earnings growth rate of 25%, or Clorox’s of 3.1%? Couple this with
Facebook trading at 23 times one-year forward earnings, while Clorox is trading
at 24 times – and when adjusting for growth, you can easily see how much more
expensive Clorox is over Facebook.
But mark my words, this market is not
normal. Both the market and
crypto-currencies remind me of late 1999 and early 2000. In early 2000, the market topped and immediately
took 70% off the NASDAQ. This time
it is different, because it’s not only the retail folks and the fund managers but
also the Central Banksters doing the manipulation. Technically they could just keep printing new
money and injecting it into stocks forever or until hyper-inflation takes over. In any event, I've been through
bubbles before, and I'll play with this one too. As we enter earnings season, you may want to
consider buying ETFs instead of stocks, or consider using options as well.
Tips:
Top 5 Equity
Recommendations:
-
Marijuana stocks (pick 3):
o Aurora
(ACBFF),
o Cannimed
Therapeutics (CMMDF),
o Canntrust
Holdings (CNTTF), and
o GW
Pharmaceuticals (GWPH),
-
Energy Exploration stocks:
o GAStar
Exploration (GST), and
-
A crypto play, Overstock.com (OSTK)
Top 5 Crypto
Recommendations: I’m looking for the ‘Alt Coin’ market to calm
down for the next week or so:
-
Ethereum (ETH) – Green bars & Propulsion higher,
-
Zcash (ZEC) – Green bars & Propulsion higher,
-
SaiCoin (SC) – Green bars & Propulsion higher,
-
NEO (NEO) – Green bars & Propulsion higher,
-
Bitcoin Cash (BCH) - Blue
Bars & Lost Propulsion, and
-
RaiBlock (XRB)
In terms of some crypto-levels:
BTC
($13,544): Aggressive
traders can buy on a breakout above $14,500 and keep a stop loss of $12,500 –
with a target objective of $16,500. Risk-averse
traders should wait for a reliable setup to form as there is no clear trend. It’s better to wait for a breakout or
breakdown before initiating any positions.
ETH ($1,319): Ethereum has
been strong during the South Korean episode. Buyers jumped in at the 38.2% Fibonacci retracement
level, of the latest rally from $640.43 to $1,382. If the price can break out of the overhead
resistance zone of $1,382 to $1,434, it will signal the start of the next leg
of the up move – which could carry ETH towards $1,814.67. BCH ($2,557): Bitcoin Cash broke
out of its range on Jan. 10; however, it could not rally into $3,249. It faced strong resistance at $2,950 and
turned down from there. On the upside,
$2,950 is the critical resistance and on the downside, $2,291 continues to be a
strong support. Traders should wait for
a breakout above $2950 to initiate long positions. A breakdown below $2,072 could result in a
decline to $1,733. XRP ($1.84): For the past three days, Ripple has
been attempting to hold the uptrend line, and is currently correcting inside a
descending channel. Strong support
exists between $1.77 and $1.40, which are 50% and 61.8% Fibonacci retracement
levels of the recent rally to $3.317. I
am not recommending any trade in XRP right now. LTC ($239): On Jan.11, the bears failed to break Litecoin out of its range. The bulls will
now try to push prices towards the resistance line at $280. This move will gain momentum above $254. Support is all the way down at $215.
XEM ($1.36): NEM is currently in a pullback mentality. Traders bought the dip last week, and XEM could
rally toward $1.57 and $1.69 – which are the 50% and 61.8% Fibonacci
retracement levels of the recent fall from $2.06. Aggressive traders can buy here (at the $1.38
level) and set a stop loss at $1.06. Though the initial risk to reward thinking
is not attractive, buying near the strong support of a trend line is a good
strategy.
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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