This Week in Barrons – 4-29-2018:
“Good artists copy, great artists steal”… Pable Picasso
Given many of our current solutions are ‘open source’, competitors are beginning to copy one another’s code much more aggressively, and turning their own platform against them. The pace of copying and stealing is accelerating. The only logical conclusion is that the key to sustainable success is a ‘killer’ go-to-market strategy coupled with relentless execution – because the solution’s competitive advantage will quickly become irrelevant. For most young teams, that is a scary thought. I suspect if you asked every young tech company out there: “Which function is the strongest in your organization: your technology / product or your go-to-market strategy?” Less than 1% would say that their go-to-market strategy is the best thing about their company. Few know that J.K. Scheinberg (an Apple engineer of 21 years) is the sole person responsible for copying and porting the entire Mac operating system from their old PowerPC chip over to Intel. My point is, if one man can be responsible for ‘ripping and replacing’ the metal and the entire instruction set underlying a hugely successful operating system – I suspect an entire team anywhere can steal (I mean copy) anything and call it their own.
Recently a company named Telegram published a 130-page paper proclaiming that they wouldsolve every major technical hurdle in the crypto-universe: from privacy and scalability to distributed computing and incentivized bandwidth routing. Telegram went on to explain that they do not intend to create any of these technologies in-house, but rather will simply steal from the teams that have previously solved the problems. They will then incorporate other people’s open-source technology into their Telegram application (which has over 200m monthly active users) and will accelerate adoption. Now, simply replace ‘Telegram’ in the above sentences with: ‘Facebook’, ‘Snapchat’, ‘Android’ or ‘iOS’ and you’ll understand where I’m going with all of this.
Competing with incumbents who have a massive distribution advantage is incredibly difficult, and is ONLY accomplished with a well thought-out ‘go-to-market’ strategy. As it turns out, solutions don’t bring themselves to market – people do. At the beginning of any technology revolution the winners will be those who were largely ideologically driven. However, the second wave of entrepreneurs and executives will normally NOT be ideologues, but rather experienced operators who know how to bring solutions to market. Jack Welch (the previous Chairman of GE) said it best: “If I had one business element to choose – it would be speed-to-market.”
Over the next few years, we will see many teams get wiped out by competitors who literally stole / copied all of the previous inventor’s technology. It’s going to be brutal, and there is already precedent for it. Rocket Internet’s (https://www.rocket-internet.com) business model is to find teams that achieve a product / market fit in the U.S., and then take their solution into Europe. It works. Due to the open-source nature of many of the technology solutions, it’s easier and cheaper to copy the invention than license it from the corporation. Companies need to prepare to ramp up ‘go-to-market’ functionality aggressively as soon as they’ve achieved product / market fit – because ‘fast-followers’ will use their own techniques to beat them at their own game.
Now if the above doesn’t sound ominous enough, allow me to introduce one last element into the company creation equation – debt. From September 2017 thru March 2018 the U.S. became an additional $1T in debt. Within 10 years, our national debt will exceed the size of our economy.
The above chart shows the widening gap between the cost of living, and the income and credit Americans have at their disposal. Up into the 1980s, disposable income, savings and debt funded our standard of living. Since then, the gap between our current standard of living and what incomes, savings and debt can support has gotten wider – and is moving in the wrong direction. Now, you may ask: “What does this have to do with the ‘go-to-market’ strategy of a young company?” My answer is that debt is shortly about to become expensive. The most expensive part of any endeavor is the creation – the discovery. Copying / stealing someone else’s thinking is over 90% cheaper than doing it yourself. So with funding becoming increasingly more difficult, entrepreneurs being required to be cheaper, faster and better – I think the pace of copying / stealing will accelerate and will only be fueled by the impending debt crisis.
The Markets:
"Blockchain is a bit like teenage sex. Everybody is talking about it, not many are doing it, and those that are - are doing it badly."…Vincent Doueizel
Info Bits:
- Ford will soon stop selling nearly all of its North American cars, and focus solely on trucks and SUVs. It’s only Ford F-105’s from here on out.
- Europe is fading. Apple sales are slowing. Chip suppliers are crying.
- Facebook’s latest earnings report showed a 49% jump in quarterly revenue, and their number of users increased to 185m. Despite the Cambridge Analytica scandal and the mishandling of personal data, it appears Facebook has weathered the storm.
- T-Mobile and Sprint are headed for a merger. The combined company will have more than 127m customers, and could create a more formidable challenger for the #1 and #2 wireless players: Verizon and AT&T.
- As the 10-year Treasury yield hit its highest level in over 4 years, you’d think that would be bullish for financial companies that make their money by lending on those higher rates. But the yield curve is flattening, with short-term rates rallying higher relative to long-term rates. So, that’s not good for a firm like Goldman Sachs that borrows short and lends long.
- Just for grins, I looked to see if Amazon sold any livestock. They didn’t. That saved me from searching for a real black swan to celebrate their earnings – which propelled them to all-time highs last week. It’s an Amazon market, and everybody else is just along for the ride. Unless others start to participate, the SPY may have a hard time moving higher.
Crypto Bytes:
- Barclays suddenly expressed an interest in launching a cryptocurrency trading desk.
- Goldman Sachs just hired Justin Schmidt of the quant firm Seven Eight World Capital as their head of digital asset markets. Goldman is already in the crypto-space through their Circle investment, and hired Mr. Schmidt: “In response to client interest in various digital products.”
- Brian Wirtz (previously part of Credit Suisse’s technology, media and telecommunications group) has left the firm to pursue cryptocurrency advisory work related to security token offerings.
- A Thomson Reuters survey to over 400 clients revealed that 20% were considering an entry into cryptocurrency trading in the next 12 months.
- MarketWatch is incorporating 8 digital currencies (BTC, XRP, BCH, LTC, ETC, XRM, DASH, ZEC) into its tracking tool.
- 40% of institutional investors at last week’s Fundstrat meeting believe that Bitcoin will reach $1 million by 2020.
- Last week the crypto buy side percentage surpassed 90%. The last time buy orders represented that large of a percentage was in March 2017 – when Bitcoin traded above $1,000, and touched off its 2017 bull run.
80% of the S&P companies that have reported earnings – have delivered better-than-expected results. But unlike before, a rally has not been forthcoming. For the week, the Dow Jones average slid 0.6%, the Nasdaq fell 0.4%, and the S&P finished flat. GDP (Gross Domestic Product) grew by a 2.3% annual rate during the first-quarter of 2018. This pace was slower compared to the three earlier quarters, but was above the forecasted 2% rate. On Friday, the historic moment of 2018 happened when Kim Jong Un of North Korea and Moon Jae-in of South Korea met and shook hands on both sides of the DMZ. The two heads of state signed a complete denuclearization declaration, and both men agreed to formally end the Korean War with a peace treaty.
So what’s worrying investors: Interest rates for starters. They’re worried that rising inflation will force the FED to hike interest rates even faster. If higher rates lead to restrictive borrowing costs, it will curb economic growth and usher in a recession. And, the 10-year Treasury did return to the psychological 3% level.
Last week Amazon (the world’s largest retailer) reported that it more than doubled its profits during the first quarter of 2018, and increased quarterly sales by 43% to $51.0B. They also announced that effective May 11, the price for U.S. Amazon Prime will increase 20% from $99 to $119 per year. To Amazon’s credit, 4 years ago they had only 20m products available for two-day free shipping – currently there are over 100m.
In the weed space, GW Pharmaceuticals just scored a big win that could rekindle bullish sentiment on marijuana stocks, both for recreational and medicinal uses. The advisory panel to the U.S. FDA gave a favorable recommendation to the first-ever cannabis-based medicine. GW Pharma’s particular drug is called Epidiolex. The medicine is for the treatment of childhood epilepsy, and has NO psychoactive effects. This latest development could start a reversal of fortune for marijuana stocks, and investors should focus on GW Pharma along with: Aphria (APHQF), Aurora Cannabis (ACBFF), Cannabis Wheaton (CBWTF), Canntrust Holdings (CNTTF), Canopy Growth (TWMJF), Cronos Group (CRON), and MedReleaf (MEDFF).
Lately, bear traps are everywhere – except in crypto. This week Bitcoin (BTC) and the cryptocurrency market in general, went through a mid-week correction. BTC’s price briefly dropped below $9,000, but rebounded on Friday. Bitcoin is currently trading around $9,300, and the crypto-trend is higher since April 12thwhen BTC’s price jumped $1,000 in 30 minutes. The deVere Group is predicting that the price of Ethereum (ETH) will hit $2,500 by the end of 2018. According to Nigel Green (founder and CEO of deVere Group) two major factors will exponentially increase ETH’s price. First is the introduction of cryptocurrency market regulations that he expects to come sooner rather than later. These should result in a more confident market with improved investor protection. Second, more platforms will use ETH for trading. The increased use of smart contracts by ETH and the decentralization of cloud computing will be the drivers.
This week I felt two investment officers made insightful observations about the market. First, James Meyer (chief investment officer at Tower Bridge Advisors) said, “We can say with fair conviction that this earnings season has not served to brighten investor’s moods.” Secondly, Jack de Gan (chief investment officer at Harbor Advisory Corp.) said: “I’m worried there may have been an inflection point when Trump started to talk about trade and tariffs. If we start to see more trade tensions, then the idea of 3% growth goes out the window. Stocks like Amazon continue to post extremely fast growth, and I think the story of the market being led by tech names is still intact. The FAANG (Facebook, Apple, Amazon, Netflix and Google) group will make a recovery and should continue leading the market the remainder of the year.”
Next week will be a busy week with more than 25% of the companies in the S&P 500 scheduled to present their first-quarter results. Along with earnings, Monday brings the Purchasing Manager’s Index, Tuesday delivers New Vehicle Sales, Wednesday we’ll learn the FED’s interest rate decision, and Friday will bring us April’s Jobs Report.
The proxy for the S&P (SPX) continues to bounce between 2575, 2626, and 2682. Whether you’re bullish or bearish – you should be nervous because of the wild reversals we’ve seen around some of the large-capearnings. Between Boeing, Caterpillar, Intel, Microsoft, Google and Amazon, we’ve seen them come out with amazing numbers and then (in some cases) be down on the day. I am not taking on any broader positions, but I like the market to the downside.
This past week we went ‘everywhere’ to get absolutely ‘nowhere’ – basically finishing the week where we started. For next week I would encourage traders to have ‘alligator arms’. This means NO reaching for the stars, but keeping your trades close to the vest. After all, on Friday Amazon was flying at $1,670 per share – and closed (the same day) almost $100 lower. Apple’s earnings are due May 1stafter the bell, and we could be in a pause to downward stance until that release. And even if Apple’s earnings are amazing – we could see it move lower just like Google, Intel, etc.
Top Equity Recommendations:
Marijuana stocks (HODL):
- Aurora (ACBFF),
- Cannabis Wheaton (CBWTF), and
- Canntrust Holdings (CNTTF).
Options:
- COST – looking for a bullish move higher into $300 over next 30 days,
- VIX – 15 is the new ‘low’ and I am bullish over the next 60 days,
- HYG – expecting it lower over the next 30 days,
- XLE (energy sector) – expecting it lower over next 30 days,
- XHB (home builders) – expecting it lower over the next 90 days,
- BA (Boeing) – expecting it lower over the next 90 days,
- CAT (Caterpillar) – expecting it lower over the next 90 days, and
- HDGE – is a great way to play the downside of this market, and if you haven’t reviewed it – take the opportunity on: www.LMTR.com
Top Crypto Recommendations:
Dan Morehead (CEO of cryptocurrency hedge fund Pantera Capital) believes that the total cryptocurrency market capitalization can reach $40T in 10 years. The current market cap is $425B. Morehead reiterated his bullish / ‘screaming buy’ call on Bitcoin at the current levels. A similar opinion was voiced by John Pfeffer who recommended Bitcoin at the Sohn investment conference in New York. According to him, Bitcoin could replace gold or become the new reserve currency of the world. This would result in its price skyrocketing to $700k. On the other end of the spectrum, Bill Harris (the former head of Paypal) believes that Bitcoin is a fraud. He went on to note that average daily trading volumes have fallen 56% from December, 2017 to present. There is a general hope that institutional players will begin to make up for the loss in retail trading volume.
BTC/USD: After breaking below the trendline, Bitcoin found buying support at its 20-day moving average. If the bounce can break to the upside, the bulls will then make another attempt at the $10,000 level. $8,000 is key support to the downside, and if that breaks, a retest of the $6,800 level is possible.
ETH/USD: Ethereum has held its trendline support, and is attempting to move up to overhead resistance at $745. If the bulls succeed in that break-out, ETH should quickly rally to $900. If you get the opportunity, I would initiate a long position just above $745. I’m thinking ETH will consolidate between $600-$745 for a few days with downside support at $500.
BCH/USD: Traders were buying Bitcoin cash at the $1,200 mark. BCH is going to try to break above the $1,600 level. If successful, the up move should extend to the $1,800 and $2,000 levels. If BCH fails to break through overhead resistance, BCH could become range bound between $1,200 and $1,600.
XRP/USD: Ripple broke below the trendline but held its 20-day moving average. It’s attempting to climb above the trendline and move towards $0.94. If successful, the possibility of a rally into $1.08 is probable. If Ripple fails, it could fall all the way to its 50-day moving average.
XLM/USD: Stellar found strong buying support at its 20-day moving average, and has again moved back above the overhead resistance of $0.40. The next target on the upside is a move to $0.45 and then to $0.47. XLM is forming a rounded bottom pattern, which it will complete on a break-out above $0.48. This pattern has a target of $0.78 with minor resistance at $0.63 and $0.66. If prices fail to breakout above the overhead resistance, we may get a small dip – which I would consider to be a buying opportunity.
LTC/USD: I expected Litecoin to race higher upon breaking above $160, but it ran into overhead resistance on April 24 and slumped back. Litecoin is finding buying support at its moving average, and is on the verge of a bullish crossover. If successful, a rally to $180 should be in the cards. But if the cryptocurrency turns down and breaks below $141, it can slump down to $120 once again.
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Please be safe out there!
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