This Week in Barrons – 4-8-2018:
Thoughts:
I’m Not Lovin’ It – is what was the major record labels (Sony, Universal, and Warner) were all saying last week when Spotify had its first day of trading on the New York Stock Exchange. The music-streaming service is now worth over $26.5B – more than all of the three labels combined. That's a big deal because Spotify skipped over the traditional path toward an Initial Public Offering (IPO). Typically when a company goes public, it hires an investment bank to handle all the complicated stuff, but Spotify did a ‘direct listing’. Which means: (a) No banks were underwriting Spotify, (b) No share price was set before the debut, and (c) No new stock was issued – because Spotify employees and investors were selling some of their existing shares. I wonder if Uber and Airbnb will adopt this plan going forward?
Even more impressive than the Spotify debut, is the Spotify plan. Currently we are in the ‘sweet spot’ of on-demand streaming, and Spotify is close to owning the space. It’s trying to do to music distribution what Google did to search, Amazon did to retail, and Facebook did to social networking. Streaming has caused recorded music revenues to spike by double digits, and that doesn’t include the value of the customer data that Spotify is gathering. Their plan is to eliminate the power of the middleman (the major record labels) and spread that wealth back to the artists and itself. Normally distributors don’t compete with their own suppliers – especially when the legacy assets are worth so much. But right now the legacy artists are angry at the labels because their royalty rates are virtually nothing. Major labels exchange up-front cash for low royalty rates because they can survive on their catalog of hits – and thus far no one's come up with a better business model. Spotify now has a war chest of cash to attack the major labels, and to prove to the artists that you don’t need a ‘ton of streams’ to equal the current label’s up-front cash amount. And if you have a ‘ton of streams’, you've got people who want to see you for concert dates and merchandise opportunities. Spotify has more power than the major labels (who license them the content) because they control the distribution pipeline.
I’m Not Lovin’ It when London’s homicide rate surpasses that of New York City. For February and March of 2018, London has tallied slightly more homicides than New York City – according to murder rate statistics provided by the London and New York Police Departments. In London, the homicide rate has increased due to a rise in knife-related crimes – while the New York City murder rate has steadily dropped for almost three decades. In the British capital, there were 134 murders in 2017 (excluding terrorist attacks) – a 40% increase over the last three years. That is in spite of the British Parliament banning all handguns for decades, and instituting a mandatory 5-year jail sentence for possession. London can’t be lovin’ its newly found murder trophy – that’s for sure.
I’m not Lovin’ It when (according to Forbes) banks expense $1B per year on data security services, and nearly $70 each time an employee forgets their password. IBM and the Sovrin Network are on a mission to curb the number of data breaches and secure your personal info with blockchain technology. Their goal is to build ‘self-sovereign’, personal, digital identities for everyone. Users can then retain sole ownership and control of their private information and data.
I’m not Lovin’ It when my friends want to open up a new bridal registry at Saks. It seems Saks Fifth Avenue and Lord & Taylor were recently hacked and the hackers stole more than 5m credit and debit card identities. They pulled it off by installing software inside the cash registers themselves. It only affected those that bought in store – not online. But don't worry, it's not like it's been happening for almost a full year. Oh wait – it has!
I’m not Lovin’ Tesla’s April 1stpublic relations prank that said: “Despite intense efforts to raise money, including a last-ditch mass sale of Easter Eggs, we are sad to report that Tesla has gone completely and totally bankrupt. So bankrupt, you can't believe it. - @elonmusk It would have been funnier if Moody’s hadn’t downgraded Tesla to a B3 rating at the same time as the release.
I’m not Lovin’ the fact that Sergio Garcia – the reigning Masters golf tournament champion – forgot how to play golf this week. But I’m Lovin’ Tony Finau – who followed his hole-in-one by: (a) celebrating and dislocating his ankle, (b) re-setting his dislocated ankle himself, and (c) still managing to be near the top of the current leaderboard. Tee-riffic!
The Markets:
Crypto Bytes:
- Crypto Aware said that ‘bad actors’ stole $670m in crypto-currency in Q1 of 2018. Although digital currencies are regarded as viable additions to investment portfolios, people need to retain control of their private keys.
- Q1 Crypto market caps have fallen by almost 70% to $267B.
- Stratospheric ICO raises continue with 158 ICOs raising $4.9B thus far in 2018. Q1 raises have eclipsed all of 2017’s raises by over $1B.
- Bitcoin ATMs are now in 15 states – giving access to 85m Americans.
- Crypto-regulatorsare catching up with everything from exchanges to regulation to taxation. Investors shouldn’t worry as Q1 has historically been a down quarter, with Q2 and Q4 being significantly more bullish.
- Georgia’s Senate Bill 464didn’t make the cut. If passed, it would have allowed citizens to pay their taxes in digital currencies. Don’t worry, lawmakers in Arizona and Illinois are looking to beat Georgia to the punch.
- Mt. Gox just won’t go away: Mark Karpeles (the former CEO of Mt. Gox) apologized this week for his management of the exchange leading up to its bankruptcy. Interestingly, it seems that once all of the Mt. Gox creditors are ‘made whole’ in 2014 dollars, the remaining $1B in Mt. Gox assets (under Japanese law) is set to return to Mark. Imagine that!
- Coin liquidity: Bitcoin accounts for 38.2% of the $13B in daily trade volume listed on Coinmarketcap, with Tether at 12.7% and Ethereum at 9.4%. The reason is easy: trading pairs. The majority of altcoins are exclusively paired with Bitcoin – meaning that you need to purchase Bitcoin in order to take a position in other coins.
On the equity side, this week brought on more U.S. and China bickering about evoking steep tariffs on each other’s imports. Correspondingly, Wall Street trading sessions have been effected with some big names declining by more than 20% and producing signs of a bear market. Some weekly highlights are:
- The Chinese finance ministry matched the U.S. tariffs by imposing their own on 120 products – especially pork, cars, soybeans and whiskey. The implementation of the tariffs will not immediately take effect as American companies will have until May 22 to raise their objections, and public hearings are scheduled to begin on May 15.
- Investor fears were heighted when Trump instructed the U.S. Trade Rep. to think about adding an additional $100B in Chinese tariffs.
- The latest U.S. Jobs Report showed a worse-than-expected 103k jobs added, and showed the tightest U.S. labor market in nearly 20 years.
- Wall Street ended the week deeply in the red, but the semiconductor sector continues to attract investor confidence. The horizon for the chipmakers has never been brighter given the rapidly increasing demand for Artificial Intelligence (Ai) tools, Augmented/Virtual (AR/VR) reality devices, and memory chips used in cloud-based platforms. However, investors are beginning to avoid stocks with large sales volumes in China such as: Qualcomm (QCOM), Broadcom (AVGO), Micron (MU), and Advanced Micro Devices (AMD).
In terms of crypto-currencies, Bitcoin has recently rebounded to $7k after falling to $6,513.10 on Friday. Crypto-trading activity has been subdued this week and according to Justin Wu of Coincircle.com, “The crypto market is in full wait-and-see mode – due to multiple factors ranging from heavy regulations to the roll out of a new ASIC ETH miner." Others think that themain roadblock for crypto investors is the uncertainty surrounding governmental regulation of digital exchanges.
The outlook for Bitcoin (BTC) and the cryptocurrency market in general is improving. Bitcoin suffered a major pullback from $20k due to rising ‘too much too fast.’ Once greater regulatory clarity is achieved, the general adoption of digital currencies should follow. Adoption is currently dominated by Asian markets, which makes sense given that countries such as South Korea drove much of the 2017 volume. As brick-and-mortar shops open their gates to digital currencies, the crop of potential investors will grow and increase the likelihood of a stronger recovery.
In terms of what to expect from next week, that word is CHOP – but it doesn’t tell the whole story. When daily markets trade up and down 400 to 700 points – that’s not chop but rather ‘robots gone wild’. This isn’t just about tariffs. There’s fears of: (a) a flattening yield curve, (b) $20T in debt, (c) 48% of the U.S. doesn’t have $400 for an emergency, (d) sub-prime credit accelerating, (e) overpriced homes, and the list goes on. On the other side we’ve had 8 years of a coordinated move by the Central Banks (CBs) to keep all the things I just mentioned from crashing the markets. The CBs know that there are trillions of dollars of derivatives written against stable to rising stock prices – and that an extended downtrend will paralyze the entire world. For years, all the CBs did was spend like never before. But like heroin, the CBs had to keep increasing the dosage each time – just to get the same level of high.
Last week (for example), the ECB doubled its corporate bond buying in an attempt to calm the interest rate blow out. Not to be outdone, the Bank of Japan spent a record $7.8B (printed out of thin air) to buy Japanese ETFs. Actions like these are why we’re seeing 500 point drops turn into 200 point gains in minutes.
There's an old market adage: “The trend is your friend until it ends.” Below is the chart of the DOW:
The blue line paints a downward trend line of ‘lower highs’. In a real panic situation, you would see a clear picture of ‘lower lows’ as well – but it would be a stretch to suggest that just yet. Make no mistake this market is butt ugly, and if it were not for the CB interventions – we would be seeing ‘lower lows’ for sure.
If China and the U.S. were to ‘kiss and make-up’, this market would be up 2,000 points in two days. So, while the trend appears to be for a lower market – danger lurks. On the other hand, continued trade war news will prolong our market’s downward slide. Unless you have the ability to day-trade this market, it may be a good time to sit on your hands. In terms of ‘buy and hold’, if you think that earnings are going to propel this market higher, then of course you'd be silly to move your holdings to cash. But, if you are starting to smell the end of the 9-year bull market, you might start thinking about the idea of protection such as picking up some precious metals. Things are pretty nasty out there, I suggest we all find a place to hide and see about weathering the storm.
Trading Volatile Markets requires the use of shorter timeframes & smaller size.
The above 5-minute day-trading chart and following scheme have proven to be quite effective:
- Place the SPX or SPY on a 5 or 10-minute chart,
- Wait for a Direction Indicator to fire (see the RED downward arrow or the GREEN upward arrow on the above chart),
- Validate the RED move using: (a) the Awesome Oscillator going from green to red, (b) the True Strength Indicator moving below the line, and (c) the Momentum Squeeze Indicator triggering to the downside.
- After confirming the downward move…
- BUY the Delta 10, out of the money PUT option – expiring the closest day to Monday, Wednesday or Friday,
- Then SELL the next lowest PUT option for 10 cents more than you paid for the original PUT that you purchased.
- This ‘legs’ you into a long put debit spread that GUARANTEES a profitable trade with a huge upside.
- The only thing remaining is to close the trade at a GUARANTEED profit.
Top Equity Recommendations:
Marijuana stocks (HODL):
- Aurora (ACBFF),
- Cannabis Wheaton (CBWTF), and
- Canntrust Holdings (CNTTF).
Options:
- SPY and SPX into April 9th, April 11th, or April 13th,
- Northrup Grummon (NOC) – long into April 26th(earnings), and
- Raytheon (RTN) – long into April 26thearnings.
Top Crypto Recommendations:
- Bitcoin (BTC), and
- Cash.
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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