This Week in Barrons - 2-25-2018

This Week in Barrons – 2-25-2018:

"First they ignore you, then they laugh at you, then they fight you, then you win.” … Mahatma Gandhi

Thoughts:

Info-Bits:

-       As Netflix stock nears all-time highs, CEO Reed Hastings is selling.  Maybe it’s because advanced screenings of his upcoming series ‘Girls Incarcerated’ or ‘Bad Guys: Vile City’ have left him a bit bearish.  Or maybe he had expenses to cover – like buying Madagascar.  But, anytime a CEO sells stock, you have to wonder what he knows.

-       Latvia (on the other hand) is going through a major financial scandal.  Last week the U.S. accused a Latvian bank of money laundering, and violating international sanctions by working with companies with known ties to North Korea.  The ECB froze the bank's accounts, and now the bank is asking for an emergency loan to keep itself afloat.  The bank is one of Latvia's largest taxpayers, and if it collapses – the ripple effects will be felt across the EU.

-       The Korean Accounting Board is preparing to recognize cryptocurrencies as ‘liquid assets’.   This should further solidify cryptos, and improve the government’s ability to obtain taxes resulting from their profits.

-       Venezuela just launched its own cryptocurrency - the Petro.  Venezuela has the world's largest known oil reserves, and has long used oil profits to prop up its socialist system.  Lately, oil prices have tanked and so has its economy.  Its fiat currency is worthless, and Venezuela's president thinks that their own cryptocurrency will turn things around.  The Petro is backed by oil, which the opposition says is illegal.  Like we need more crypto-drama.

-       In the wake of launching the Petro, reports are surfacing that Iran’s Minister of Information will announce the development of an Iranian cryptocurrency.  With Venezuela and Iran facing U.S. sanctions, if both nations can  successfully bypass sanctions using cryptocurrencies – be prepared for some strong steps by crypto-regulators moving forward.

-       Monday is the day that Visa / LitePay will be released in 41 countries.  The world will finally have the ability to seamlessly pay for everyday goods and services with crypto.  It will demonstrate a working crypto-technology product that will actually be: cheaper, faster and better.

-       Did you know that: U.S. Customs Agents have the authority to search your phone for crypto-assets?  Do not have more than $10k undeclared – ok?

-       The World Food Program is expanding their Ethereum-based blockchain payment system because their pilot showed a 98% savings on all bank-transfer fees.  Hopefully more banks will become part of this solution.  

-       California’s representative Ian Calderon introduced a bill that would recognize blockchain signatures on smart contracts as electronic records.

-       A ‘black swan’ event showed itself to Wal-Mart last week.  After reports showed that they were NOT making as much money as anticipated from their online and grocery space – their stock tanked the equivalent of 5.4 standard deviations.  That’s about as ‘black a swan’ as you’re likely to see barring a global meltdown.  Adding insult to injury, Amazon rallied on the news.

-       In 2017, Japan reported 669 potential cryptocurrency money laundering cases.  In contrast, 346,595 were presented from financial institutions, 15,448 from credit card companies, and 13,259 from credit unions.

-       Dropbox could soon be ready for prime time.  The company filed IPO documents with the SEC to go public later this year.  Dropbox made $1.1B in revenue last year.  They added 100m users (of their 500m total) in 2017, but only 11m are paying users.  Their estimated valuation was $10B in 2014.

   Over the next 3 years, I won’t be surprised to see the business models of Apple, Google, Microsoft, Amazon, Facebook come under pressure, and all be changed in ways that could reduce their market value by as much as 50%.  The pace of disruption is accelerating.  Virtually all of the market leaders from the early 2000’s are no longer in those same positions.  In 2018, the cost and speed of technology is becoming commoditized, and brains are always available for the right price.  Scale is the deciding factor, until the trend reverses and then those over-hanging investment declines become unstoppable.  I view Facebook, Google, and Amazon as having the greatest risk in so far as customer security and data privacy are concerned, but Apple and Microsoft are the ones least equipped to turn things around in a downturn.  The best part about this thinking is that nobody else in the universe believes a word of it.

The Market:

When I hear: "ALT-Coin season starts next month," I'm reminded of a sign in an Austin bar: "Free Beer – Tomorrow." … @listendestro … www.thedailybit.news

   The past week played out with Gold finding resistance and falling back, while Crude Oil stumbled early and resumed its path higher later in the week.  The U.S. Dollar bounced but stopped short of a higher high, while Treasuries moved lower but then caught a bid at the end of the week.  Volatility held in a tight range with a slight drift lower, but still notably higher than in January.  The Equity Index ETF’s held in tight ranges on the week, with the SPY and IWM stalling at their 61.8% retracements and their 50-day simple moving averages.  The NASDAQ faired a little better, holding over its 20-day, and at the 78.6% retracement.

   Going into the final days of February, equity markets have recovered much of their downturn and are looking stronger.  I’m looking for Gold to bounce around in a wide range, and Crude Oil to resume its path higher.  The U.S. Dollar Index is pausing in its downtrend while U.S. Treasuries are biased lower with interest rates moving higher.  Volatility looks to continue to drift – potentially easing the pressure on index ETFs.  The NASDAQ is the strongest of the markets, and is looking to resume its long uptrend.  The other markets are still holding under critical levels, and are showing less positive conviction at this point.

   The push-me / pull-you between high stocks and high interest rates probably isn't going to go quietly into this good night anytime soon.  As much as the talking heads are going to try and tell us that stocks can rise along with interest rates – factually that’s a bit of a stretch.  The simple truth is: every significant market crash has been preceded by our Federal Reserve raising rates.  Every one of them.  When the FED says that it’s going to raise interest rates 3 times this coming year – is the stock market really going to ignore that?  I think it can for a while, but there will be a tipping point.

Crypto-Bytes:

-       IBM is working on a blockchain solution with Unilever to simplify Unilever's digital ad supply chain, and to provide more transparency to its consumers.

-       Microsoft is working to scale blockchain for a distributed ID scheme.

-       Ubitquity LLC is using blockchain tech to track property records, deeds, and to transfer property ownership.

-       CryptoBnB is an AirBnB-type of startup that uses blockchain tech to match homeowners with vacation renters.

-       Hill Top Security operates in the blockchain sector, and is focused on finding and eliminating military-grade cyber threats.

-       Two newly launched ETFs that attempt to correlate with blockchain tech are:  Reality Shares NexGen Economy Fund (BLCN) and the Amplify Transformational Data Sharing Fund (BLOK).  Both funds do not directly correlate to cryptocurrency price movements, but are comprised of companies committing material resources to the blockchain environment for their proprietary use.

-       Over 60% of the Sub-Saharan African population is unbanked, and ripe for a micro-loan / mobile blockchain solution.

-       Narendra Modi (the PM of India) declared that: “Technologies such as blockchain will have a profound impact on the way we live and work.”

-       Ethereum Classic is fast approaching its all-time high of $46 in advance of the Callisto airdrop on March 5^th.

-       There are currently over 226 global, cryptocurrency hedge funds.  A year ago there were 37.

-       Charles Noyes of Pantera Capital predicts that by 2020 – Ethereum’s market capitalization will be 10 TIMES greater than that of Bitcoin.  At the moment, most of the projects on Ethereum’s platform are just on paper, but that will change throughout 2018.  He views the projects most positioned for success to be: Augur (REP), 0x (ZRX), and OmiseGo (OMG).

   I thought that Friday would follow the same pattern as the rest of the week, and it started out that way.  But in the afternoon (due to some FED head comments) buyers came in, and we gained 350 DOW points.  So what's going on?  Earlier in the week the minutes of the Fed meeting were released, and they were more hawkish than expected.  They showed potentially more rate hikes than previously anticipated – so the market went through its gyrations trying to deal with that.  But just as the market looked like it might actually start rolling downhill – the ‘powers-that-be’ hatched a plan to save it.  They brought out FED head Bullard (the perennial ‘keep rates at zero’ guy) and he said that he didn't think there would be a need for the FED to do any more than 3 rate hikes.  The market shrugged off that comment.  So they brought out FED heads Dudley and Rosengren.  Dudley said that he sees bond purchases as being a viable tool to return U.S. rates near zero, and Rosengren said it was quite likely that the Fed will need to go back to buying bonds in the future.  Excuse me?  Is this the same FED that's been telling us that it was going to normalize its balance sheet and work off the $4T that’s parked there?  Yes. 

  

   You can see from the above graphs the market’s reaction to the 3pm FED talks.  Basically, they couldn’t buy stocks fast enough.  Here was the FED telling everyone that if things got funky – they’d be restarting QE.  Well isn't that interesting?  So, does that sound the ‘all clear’, and we can just pile into stocks because the FED's got our backs?  Maybe.  It’s certainly interesting that they saw something ugly enough that they figured they'd best get out in front of things and help ‘goose’ it along.

   The S&P, DOW, and Russell indices all have a ways to go before they hit their upper resistance levels.  Therefore, the safe plays this coming week all reside within the S&P, DOW, and Russell (small cap) stocks.  The VIX (volatility index) is ‘flat’ from now until 81 days out – which means there is very little market clarity going forward.  I expect volatility to remain at elevated levels – until Chairman Powell begins to speak, and tells us what his feelings are surrounding interest rate hikes.  Another reason for market instability is that there is no longer a ‘cap’ on volatility.  Previously, there were so many people ‘shorting volatility’ that the trade was suppressing the volatility futures.  Now, that genie is out of the bottle.

   I wasn't born yesterday or in Missouri – so I'm thinking ‘show me’ works here.   That big push on Friday did get the DOW and S&P above their 50-day moving averages, but it also places them right in an area where they failed just 5 sessions earlier.  If the DOW gets to 25,340 and holds the close, and the S&P moves to 2,755 and holds – then I’ll have to guess that they're going to attempt a run back into the old highs.  But if we can't get past those levels, we'll either sink lower, or we'll see more talking FED heads come out in a hurry.

Tips:

Top Equity Recommendations:

Equities (‘HODL’):

-       Aurora (ACBFF),

-       GW Pharmaceuticals (GWPH),

-       McDonalds (MCD), and

-       Lululemon (LULU)

Options Opportunities: 

-       DIA – the volatility in the Index is lower than it’s respective top components: (Boeing, Goldman Sachs, MMM, and United Healthcare).  Therefore, being a ‘premium’ buyer inside the DIA should work out well over the next 30 days.

-       SPX – the expected move over this next week is $43.  Last week’s expected move was $53.  Volatility has contracted, but i believe we will be ‘cracking’ that $43 expected move range this week.

Top Crypto Recommendations:

-       Ethereum (ETH),

-       LiteCoin (LTC),

-       Nano (NANO),

-       Bitcoin (BTC), and  

-       Lisk (LSK)

   Until more trading pairs are introduced for alt coins, Bitcoin remains the market barometer and will impact the performance of the entire altcoin market.  But altcoins with strong fundamentals can still outperform Bitcoin in the long run due to their lower market caps.  In a market where 20% swings are just another day at the office, it’s easy to get lost in the noise and forget what your investment horizon is.  Going forward, I’m looking for a move higher out of NANO.  Over 2 weeks ago the security breach of BitGrail netted the thieves about 17m NANO.  With the active selling that has taken place over the past 2 weeks, the overhang should be absorbed and a move higher in the offing.

   BTC/USD ($9,647):  Bitcoin broke the support line of the ascending channel when it fell to the $9,500 level.  If it bounces higher from here, the first test for the bulls will be the $11,200 mark.  If this level is crossed, the final litmus test will be the $12,200 level.  Above that, Bitcoin will become positive.  The bears will gain strength if they are able to sink Bitcoin below the $9,500 level.

   ETH/USD ($833):  Ethereum’s fall to $787 was unavoidable.  Aggressive traders can use the dips below $850 to initiate long positions, but use a stop loss of $770.  The target objective is $1,000, but watch the price action around $900.  If the ETH struggles to break resistance, just close it and wait for the next setup.

   BCH/USD ($1,172):  Bitcoin Cash also fell below its $1,200 support level – leaving bulls to defend the $1,150 level.  If this level breaks, a fall to $854 is likely.  Resistance to a bounce from here is at $1,400 and $1,680 level.  BCH has underperformed lately, so it may be easier to sit this dance out.

   XRP/USD ($0.94):  Ripple broke below $0.95, and hit a low of $0.85 last week.  The $0.87 level is critical support.  Below this line, we may see a retest of the overall lows, and any bounce will face resistance at the $1.23 level.  It is possible that XRP consolidates within the $0.87 to $1.23 range for a few days.

   XLM/USD ($0.35):  Stellar bulls are currently defending the support zone between $0.30 to $0.35.  If XLM falls below $0.30, it will be a bearish development.  Bullish buying opportunities exist once it breaks above the $0.48 level, but until then – it’s better to remain on the sidelines.

   LTC/USD ($210): LiteCoin is currently one of the strongest cryptocurrencies.  It continues to trade above both the 20-day and 50-day moving averages.  Any fall towards the $200 mark should be used as an opportunity to build a long position with $170 as a stop.  On the upside, if the cryptocurrency breaks above $220, it can easily rally to $240 and then on to $260.

   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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