This Week in Barrons – 2-11-2018:
"You can lead a man to Congress,
but you can't make him think." ― Milton Berle
Dear Mr. Powell:
Mr. Jerome Powell please accept my sincere congratulations for
becoming the new head of our Federal Reserve.
As you were being sworn in, the DOW was down over 1,600 points – and I
became curious about a couple things:
-
Interest
rates on the 10-year note have risen substantially as of late. Are you worried that by reducing QE along
with the FED’s balance sheet you’ll be a ‘net seller’ into the note market – thereby
driving rates even higher?
-
Given
the 10-year note is pushing 3%, are you worried about: (a) money flowing out of
stocks into bonds, and/or (b) corporations stopping their buy-back programs –
in both cases putting downward pressure on stocks?
-
The
Senate just passed a ‘doozy’ of a budget.
Are you worried that the borrowing costs just to pay for this ‘deficit’
budget will be astronomical?
-
Because
mortgages and other borrowing costs are driven by the 10-year note, are you
worried that higher rates will put pressure on housing and consumer demand?
-
With
trade wars come increased prices, and reduced demand. Are you worried about higher unemployment
associated with us pulling out of NAFTA and/or our trade skirmish with China?
-
As the
dollar falls, won’t more and more countries continue to sell the dollar –
causing it to fall further – because who wants to hold a depreciating asset?
-
Won’t
all of the above cause a hit to consumer confidence, VC’s to stop investing in
innovation, and people begin to use the ‘R’ word when referring to the economy?
This week, as the fiat U.S. Dollar continues to fall, cryptocurrencies
turned it around. I think that they
offer you a unique perspective on our depreciating fiat currency along with
‘blockchain’ technology that could dramatically improve our lives. Mr. Ciancarlo’s comments to Congress on the
topic of Bitcoin were refreshing: “It strikes me that we owe it to this new
generation to respect their enthusiasm about virtual currencies with a
thoughtful and balanced response, not a dismissive one.” And
I thought Virginia Senator Mark Warner was especially on point when he said: “I
think we may be on top of something that’s transformational, and I don’t think
you can separate the underlying, distributed-ledger blockchain from some of
these crypto assets,” Even Congress
penciled in another blockchain hearing for February 14th (Valentine’s
Day) entitled: “Beyond Bitcoin: Emerging Applications For Blockchain
Technology” with Walmart and IBM expected to attend.
This week we discovered that the top 100 Bitcoin addresses were buying
more Bitcoin. ‘Whales’ are accumulating
while newbee crypto-investors are selling – nothing new there. Forbes, long known for its ‘Billionaires List’,
lately published a list of the richest people in cryptocurrency. Their
goal was to provide a moment of transparency for these visionary
individuals. The crypto-list is broken into five
categories: idealists, builders, opportunists, infrastructure players, and
established investors. In order to make
the list, you must have accrued over $350m in crypto. The list contains 19 people. The
average age of the crypto-rich was 42, vs 67 on the billionaires list. And the top 3 holdings of the crypto-rich
were: Bitcoin, Ethereum and Ripple – versus Apple, Proctor & Gamble, and
gold for the billionaires. A picture of
the list follows, but among those left off of the crypto-list due to a lack of
confirmed information were: Litecoin founder Charlie Lee, Bitcoin investor
Roger Ver, and crypto pioneer Nick Szabo.
Mr. Powell, this past week several elite, U.S. universities such as: Carnegie
Mellon, Cornell, Duke, M.I.T. and others have added cryptocurrency courses to
their graduate level offerings. This highlights
public interest in the technology, along with the belief that it will outlast
the current speculative price bubble. For his class, Dr. Yermack (a
business and law professor at NYU) originally booked a lecture hall that could
fit 180 students, but he had to move the course to the largest lecture hall at
N.Y.U. to accommodate the student interest.
At Berkeley business school professor Greg La Blanc told his students: “Developments in the field are moving so
fast, please forgive us if we get things wrong on occasion. We aren’t waiting until we perfect the
course. Don’t compare it to the perfect
blockchain course, but rather compare this to having no blockchain course at
all.”
Mr. Powell, I wonder if Central Banks have ‘juiced’
our markets so excessively because you know that with everything pinned to a
rising market – if you were to pull money out, all heck would break loose? After all, you’re almost in a box where if you
keep printing money and pushing it into the market – you’re just blowing a
bigger monster bubble. But if you pull
money out, then the markets will fall like a rock, and all of those cross party
swaps, all of those derivatives, all of those loans that used stocks as
collateral are going to implode. Not to mention the pension funds that
are so underwater they need every ounce of help they can get. So what are you to do? The only way out of this is to keep the
markets up and sacrifice the US Dollar, but even that can’t go on forever. If rates do rise (and you’re hinting that they
will), then that will put quite a damper on things. At this point the only thing that you can
truly say is that a correction was long overdue, we're in one, and it isn't
clear what's next. It’s somewhat of a ‘Perfect
Storm’ Mr. Chairman – and potentially the only way out is via cryptocurrencies.
The
Markets:
“You find out who’s swimming naked - when
the tide goes out” … Warren Buffet
More ‘talking heads’ are saying that this is a bottoming process and
once we shake out the weak hands, we'll go back to our winning ways. I can easily see Central Banks caving in to
economic weakness and putting on more QE. They know that the only way they saved us over
the last few years was to keep the pump primed and stocks soaring. So many billions of loans have been made using
equities as collateral, that if the market was to seriously decline – things would
really blow up. The real thriller is whether they continue to hike rates
and pare down their balance sheet – then it's a whole new dynamic. But if we start hearing them talk about ending
their balance sheet reduction plans, then we know that they’ve folded their
hands and have succumbed to pushing the market higher.
After all, the S&P 500 went 94 days without a +/-1% change and then
had 5 in the past 8 days. Since the big plunge and bounce on Monday,
we've seen the market travel up and down over 1000 points per day. After years of having very little volatility,
the big trade on the street became ‘shorting’ volatility. In fact there were so many shorts that when
volatility went crazy, it blew up the ETN's. It's not every day when
something drops over $100 / share. XIV
was trading at $130 six sessions ago – and now it's $6.
What caused the shake-out? That
depends upon who you ask. Some are
absolutely convinced it's the Central Banks pulling the rug on the market so
that Trump takes the fall for a market crash. Some think that it's the fear of rising
interest rates, and a new Fed head that wants them higher. Some think it was the budget debate and debt
levels required to keep the Government open. For the past several years, this market has ignored everything
from a possible nuclear war with North Korea to all of the border skirmishes
with Russia during the Syrian situation. This market has risen to nosebleed levels, and
NOT organically. It got there due to massive
injections of Central bank liquidity. Sure
all that seemed necessary back in 2008 when the global markets were hours away
from a total melt down, but as the above graph shows – their injections didn't
stop. We’ll never know why the CBs didn’t take their foot off the
accelerator, and work off some of that froth once the danger had passed.
So now we have a nosebleed market, fueled by umpteen trillions of
Central Bank dollars, and it doesn't take a rocket scientist to realize that
‘someday’ something will break. It’s currently indecision time in market
land. Some are betting the party is over
and they're selling. Others are thinking
that this is the closest thing to a correction we're going to get and are
piling in. That's why we have these wild
gyrations. I think we're in a period where
we chop sideways. For the first time in
a long time, it's time to get really cautious. In the real near term, I'm thinking we see a
bit more down, before we see any meaningful up.
To change gears for a second, remember the concept of compound interest:
the idea that you could earn interest on principal + interest – and have that
occur regularly going forward. Well, back
on July 17th, 2017, John McAfee made a bet that one single Bitcoin
would be worth $500,000 in three years. As
the Daily Bit (https://www.thedailybit.news)
calculated, Bitcoin needs to grow at a rate of 0.48% / day for that to happen. The red line on the chart below is that
rate. As long as the blue line is above
the red line, we are on target, and John McAfee will not have to make good on
his side of the bet. A growth rate of .48%
/ day may not sound like much, but that’s because lately we’ve been exposed to exponential
growth. Due to the magic of compounding,
at 0.48% per day, a single $8k investment today will indeed become $500k in 3
years. This ‘buy-n-hodl’ strategy is
exactly what Warren Buffet has been doing for years. Both crypto and ‘weed’ are two of the biggest
opportunities to grow wealth over the next 5 to 10 years – but let’s not forget
that they require strict investment management.
Above
graph courtesy of: https://www.thedailybit.news
Tips:
“Feel the fear.” … Don Kaufmann of TheoTrade.
For the past 8 years the FED has had our
back, and now they are in our face. The
expected move for the S&Ps next week ($94) is TRIPLE what is was just 2
weeks ago, and is the largest S&P expected move in history. Currently, this market is a lesson in controlling
risk in an inefficient marketplace. We
have had 5 SPX breaches of expected moves in the past 6 weeks, and I think we will
continue to see an expansion of volatility.
When the implied volatility exceeds the actual price movement – that
provides an incredible opportunity for selling option premium. Firms are running scared. The pros are hedging like crazy. So, I don’t see volatility coming out of this
market any time soon. Specifically, the
indexes are only down to last November 2017 levels; therefore:
-
Boeing (BA) could drop to $260.
-
The XLU (the Utility ETF with a 4.5% dividend) is a buying
opportunity around $45.
-
And the XLE (the Energy ETF with a 2.5% dividend) is a buying opportunity
around $60.
The bounces that we may see on Monday /
Tuesday are shortable. This is a STR
(short-the-rip) strategy rather than a BTD (buy-the-dip) situation. The only reason a market rips higher in these
types of situations is because people are ‘covering their shorts’ and re-loading
for the next move lower.
Top
Equity Recommendations:
-
Marijuana stocks (buy-n-hodl):
o Aurora
(ACBFF = $8.99)
o GW
Pharmaceuticals (GWPH = $126),
o Canntrust
Holdings (CNTTF = $6.41),
o Cannabis
Wheaton (CBWTF = $1.40)
Top
Crypto Recommendations:
-
Ethereum (ETH),
-
Bitcoin Cash (BCH),
-
Zcash (ZEC),
-
Bitcoin (BTC),
-
DASH, and
-
Lisk (LSK).
ETH/USD ($809): Ethereum plunged
from $1,265 to $565.54 within 9 days. If
Ethereum can remain above its February 6th lows, I’m seeing daily,
downward momentum slow as we find a bottom.
It’s still below its 21-day EMA, but the next levels of resistance
moving higher will be at $890, and $1,000 above that.
BCH/USD ($1,223): Bitcoin Cash is making some strong moves higher as of
late, and breaking above $1,400 would be a resistance level to target. It’s still below its 21-day EMA and needs to
regain that in order to get serious investors involved again.
ZEC/USD ($423): Zcash touched my $480 target and fell back. If it is able to clear that level (and
momentum has turned from red to green), it should have a nice path to $565.
BTC/USD ($8,057): Bitcoin
momentum is strengthening, and if it can remain above its February 6th
$6k low – its next resistance will be around $8,200 and then $8,900 and $9,700
after that.
DASH/USD ($572): Dash is
working on clearing resistance at the $675 level, and after that still needs to
clear the 21-day EMA at $731. It is
gaining momentum and therefore the target is in its sights.
LSK/USD ($24.5): Lisk
has cleared its 21-day and 8-day EMAs and the momentum bars have already turned
from red to green. I’m looking for a
short-term target of $34 with potential all-time highs after that.
XRP/USD ($0.94): Ripple has
caused a lot of heartburn over the past several weeks. It is still down about 67% from its peak, but
is starting to ‘wake-up’. If it can
break above its 21-day EMA ($1.18), I would expect it to attract further
buying, and work towards the overhead resistance at $1.74. Safe money will wait for the break-out above
$1.18 before becoming involved.
XLM/USD ($0.38): Stellar has become range bound for the past three
days. It’s now facing resistance at its 21-day EMA ($0.41). A break above $0.41 will open the gates to $0.62.
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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