This Week in Barrons: 9-30-2018:
Bubbles vs Opportunities:
Lately, I’ve seen the emergence of both crypto and cannabis as similar trading opportunities. Despite their different paths, the crypto and cannabis communities are unmistakable siblings. According to TD Ameritrade, the profile of the retail trader in pot stocks and in cryptocurrencies is almost identical: a millennial-aged male. The good news is that a similar behavior pattern emerged in the dot-com era of the late 1990s. I tend view that time period as more of an optimism bubble than anything else. It was an era when everything was going right. We believed peace was about to break out in the Middle East, and that China’s entry into the World Trade Organization would begin its inevitable transition toward freedom and democracy. The Segway was going to revolutionize how people moved around cities.
In contrast, crypto and cannabis were NOT born out of optimism and dreams of a Lambo in every driveway, but rather out of pessimism and mistrust. Crypto sprang to life a decade ago during the financial crisis. Since then, Bitcoin has taken a route toward respectability that started with online drug dealers, to angry anti-Fed types, and finally to Wall Street. Wall Street was one of the last to the party, and in fact Bitcoin peaked when futures contracts were launched last December, 2017.
Crypto (like all disruptive technologies) has taken a haircut – with believers convinced that it’s simply putting on a new suit and rejoining the party. But crypto is built on a foundation of reconfiguring our entire financial community. After all, bitcoin is about Person A sending Person B money without Person C having any knowledge of the transaction. Banks make their entire living off being Person C – hence the rub.
Then there’s cannabis, which has always been associated with a counterculture mentality. Although its path to mainstream respectability was slightly different, it feels like a switch was suddenly flipped – potentially due to tax revenues. All I know is, one day pot dealers were being arrested on the street, and the next day they were being listed on the Nasdaq.
Peter Atwater (President of Financial Insyghts) said: “Both crypto and cannabis contain equal amounts of fear, greed and anti-establishment.” A recent report argues that support for marijuana legalization has soared since the financial crisis.
So you have two disruptors (with a lot in common) arriving back to back. Why now?
- (a) Both have fantastic stories. One is turning the financial community and big tech upside down, while the other offers the rapid legalization of a gigantic global market.
- (b) Both have a relatively small supply of legitimate investable assets (creating a mis-match and FOMO). I almost feel sorry for (the former) Long Island Iced Tea – the beverage company that bizarrely pivoted to blockchain at the very peak of the crypto hype last December. If it had only waited a few months, it could have announced a CBD-infused tea that would have made a ton of business sense.
- (c ) Both attack a trader’s dormant urge to gamble. When traders were asked why they trade cannabis stocks, the number one answer was: “Volatility.” If you’re a disciplined investor, volatility is a threat – because it plays with your emotions and tempts you to make bad decisions. If you’re a disciplined trader – volatility is an asset that has been in scarce supply since 2017.
Finally, both crypto and cannabis have the same story about getting back at the corrupt elites as they ‘stick it to’: the ineffective medical suppliers, the central banksters who degraded the dollar, and the banksters who bailed out their buddies – at taxpayer expense. Given the current regulatory black hole, there’s an interesting opportunity to get in now and make Wall Street the last bag holder. Psychologically, crypto and cannabis make for some perfect trades in a post-financial crisis era.
The Market:
Last week brought us a FED meeting and a predictable quarter-point rate hike. But it’s what FED Chairperson Powell did not say that was key. The word "accommodative" was removed from their statement. That got everyone wondering if the FED thought that they had reached normalcy, or (even worse) if the FED was moving toward a ‘restrictive’ policy to head off inflation? Factually, corporate insiders are selling at a furious pace, and aren’t corporate insiders the folks who know best about how things are going? After all, we have rising rates, lousy housing sales, higher oil prices, and then there’s inflation. Yet this market is driven by things that aren't fundamental – stock buybacks and our Central Banks buying stocks.
One of the things that is starting to chew on me a bit is the midterm elections. The desperation by the Democrats is so palpable and enormous, that I'm beginning to wonder if they’re going to try to derail the market just so that it is falling as we approach November. People have short memories. If their portfolio was down 10% as they were heading to the polls, it might allow them to think badly of voting Republican. And how would they feel if the market was down 20%? Is it possible that the Democrats could cause a major pull down? It's possible. With housing stalling, interest rates are indeed going to start weighing on credit card debt, and student and auto loans. And then there’s that tariff situation.
Info-Bits:
- Tesla’s self-driving shareholders away: The SEC sued Tesla CEO Elon Musk for fraud. It seems when Musk tweeted that he had the "funding secured" to take the company private at $420 per share – it wasn't true. He had (a) only discussed the idea with an investor, and (b) the price they talked about was $419. The suit was recently settled for a $20m fine to both Musk and Tesla, and Elon Musk retaining his CEO position – but forfeiting his chairmanship.
- To quote Uber: “Take my money… please.” Uber agreed to pay $148m to settle allegations over its 2016 data breach – where 57m users had their names, email addresses, and phone numbers exposed. #ThanksUber. Uber didn't say anything about it for a year, and paid hackers $100,000 to destroy the data and keep the breach hush hush. Now Uber is saying: “My bad. I can change.”
- Walmart vs Whole Foods. Walmart is attacking Amazon’s Whole Foods in the ‘safe to eat’ zone – by enlisting IBM’s food safety blockchain technology. Walmart will require food suppliers (by Sept. 2019) to upload their food info onto a blockchain. That will make it quicker and easier to check if farms have any issues (like E. coli or salmonella). Checking food safety (and freshness) at Whole Foods will take 7 days, but only 2.2 seconds at Walmart. Now that’s a competitive advantage.
- SiriusXM is ‘in a Relationship’. Sirius XM announced that it is buying Pandora for $3.5B. The deal will create the world's largest audio entertainment company.
- America’s FICO score = 704: I know that Americans owe over $1T in credit card debt. Obviously I’m wrong in thinking that the more you borrow – the lower your credit score. Maybe banks think that we’re paying off our credit cards with our stock portfolios, or maybe credit scores are gamed to boost demand for borrowing. I think it’s the second one. Either way, spending that was riding this wave of borrowing will be coming to a halt as tariffs on Chinese goods begin to hit the semi-durable consumer goods that people buy in places like Target.
- In observance of National Coffee Day, coffee helps you:(a) focus – making everyone you work with more appealing, (b) stay healthy – extending your lifespan if you drink over 4 cups a day, (c ) lose weight as caffeine increases your metabolic rate by as much as 11%, (d) reduce memory loss – especially if you drink it black, and (e) fend off diseases such as colon cancer, type 2 diabetes, and heart disease.
Crypto-Bytes:
- The average Bitcoin transaction is over $1,000: The average VISA transaction is about $100. So while Bitcoin is a single order of magnitude away from Visa’s transaction size, people are using BTC to settle large amounts rather than casual payments. In fact, Bitcoin’s annual settlement volume ($657B) exceeded that of gold last year ($446B).
- Pension Funds should be getting into BTC: But not just yet. Currently, bitcoin isn’t worth the risk. The reason comes down to the business model. Money managers make their fees by beating the S&P 500. Risking it all for a custodial solution that isn’t completely solid – isn’t part of their current playbook. Until there’s a safe way for money managers to store digital assets, risking everything for potential upside swings isn’t worth the gamble.
- Coinbase is opening its doors: To including more coins on its exchange. However, Coinbase will not add any new coins without regulatory consent (whatever that means). This process bears a slight resemblance to Nick Saban’s recruiting style at Alabama. Nobody REALLY knows what he promises behind closed doors, but he always seems to attract the best talent.
- ConsenSys Singapore –recapping:
o Binance announced plans to open 10 new fiat/crypto exchanges, and is eyeing smaller countries where local authorities are easier to work with.
o Project forks are likely to slow down considerably in the future.
o Large exchanges are moving into crypto derivatives, so regulators will start taking the space more seriously.
o Damien Pang, head of the Monetary Authority of Singapore (MAS) has divided tokens into 3 categories: utility tokens, payment tokens, and securities tokens. "MAS does not intend to regulate utility tokens."
Last Week: The quarterly gains of the S&P were the largest since the 4thquarter of 2013. Both the DOW and the S&P have risen in 11 out of the past 12 quarters – while the Nasdaq registered its ninth straight quarterly increase. This 3rdquarter included the debut of the Communications Services Sector. It’s a new sector that was compiled by shifting some major companies around, and eliminating the Telecommunications Group. It includes not only telecom stocks, but also Facebook (FB) and Alphabet (GOOGL) that had previously belonged to the technology sector. Others like Netflix (NFLX) and Walt Disney (DIS) have also been moved into this group.
The shocking part about last week is the following chart:
The above chart shows that the S&Ps were slightly up – while the financials were down over 1%, and the ‘Monsters of Tech’ (Google, Amazon, Facebook, Apple, Netflix, etc.) were down about half of a percent. I didn’t think it was possible for money managers to move quickly OUT of the two largest, and most influential sectors – into anything else that would prop up the S&P. That kind of behavior shows that money managers – going into the end of the year – are desperate for yield.
Weed:
Aurora Cannabis (ACBFF) is coming to Wall Street in October. The 2ndlargest marijuana producer surprised investors on Tuesday with their remarkable financial results. Aurora’s revenue tripled, and interestingly most of their profits came from investments in other marijuana companies. Aurora (the Canadian-based pot producer) is quickly becoming the Berkshire Hathaway of Cannabis due to the manner in which it has been investing heavily in other weed businesses.
Interest in Aurora is also being fueled by the reported ongoing talks with beverage giant Coca-Cola (KO) – to produce CBD-infused beverages. But the biggest story is the confirmation that Aurora Cannabis is going to be listed on the U.S. stock exchange beginning in October, 2018. Aurora CCO Cameron Battley said: “In about 3 weeks, a significant increase in demand will initially come from the Canadian legal consumer use market. We’ve been building inventory in anticipation of that market, and have supply arrangements with every province and territory in Canada to supply a broad range of dry flower and higher margin products such as pre-rolls, oils, and capsules.” By listing on a senior U.S. exchange, Aurora hopes to make its own stock more investible for Americans. Also, the listing on Wall Street is a reflection of Aurora’s level of corporate and business maturity along with its high-paced execution.
Stock Buy Backs:
There is a misconception out there that companies are not able to buy back their own stock within the traditional earnings blackout period (2 weeks prior and 2 days after an earnings announcement). That is not true. The ONLY stock buyback rules are:
1. Firms can NOT do stock buybacks during the last 10 minutes of a trading day.
2. Firms must use a single broker / brokerage house to make the trades.
3. Firms must buy back shares at the prevailing market price, and can’t be more than 25% of the average trading volume over the previous 4 weeks.
Under a separate SEC ruling (Rule 10b5-1), companies are allowed to do share repurchase programs even during blackout periods. Rule 10b5-1 permits trading during the blackout period providing the company has setup a plan to buy back stock on a regular, pre-defined basis. In other words a company and its executives can buy back shares during a blackout period, providing they are doing so in accordance with a predefined plan. The SEC does NOT force companies to disclose when they are using this rule – so it’s virtually impossible to enforce or determine who is doing what – when.
The top 5 Stock Buybacks in Q2 2018 were: (a) Apple (AAPL) = $21.9B, (b) AbbVie (ABBV) = $7.5B, (c) Cisco (CSCO) = $6.1B, (d) Union Pacific (UNP) = $5.5B, and (e) Broadcom (AVGO) = $5.4B. Goldman Sachs estimates that over $1T in U.S. stock buy backs will be done this year. That will break the previous record set before the financial crisis of 2007. S&P companies have bought back $4.4T worth of stock over the past decade – including Apple’s record breaking stock buyback of $226.6B.
Next Week:
As Wall Street enters the last quarter of 2018, there are two key takeaways: (a) even though the FED raised interest rates, they still remain more friend than foe – and (b) the 3rdquarter was one of strength. For the latest 3-month period, U.S. stocks posted a 7.2% gain. Strong earnings continue to support wage growth and consumer confidence. Next week, on Monday we will see the Manufacturing Purchasing Managers’ Index and Construction Spending report. The Services Purchasing Managers’ Index and Vehicle Sales reports will be on Wednesday. And the September Jobs Report is due out on Friday.
What sticks in my throat are the insider sales. No one knows more about how well or poorly a company is doing than the people at the top of that company. And yes, it is a scam that insiders have been borrowing money to buy back company stock, so that they can sell into the price rise. But if insiders really thought that the stock price was going considerably higher, wouldn't they hold on to their stock? I think the insiders are saying: "We might have a little more left, but I'm going to start taking mine out now – before it becomes an avalanche of selling and prices really drop.”
On a sad note, Sears fell under $1 on Friday for the first time. It was once the most prestigious department and catalog store. I remember fondly waiting for the Christmas "Wish Book" to come – because I always had a lot of wishes.
Tips:
Top Equity Recommendations:
HODL’s:
- Aurora(ACBFF = $9.73 / in @ $3.57),
- Amarin(AMRN = $16.91 / in @ $2.90),
- Canntrust Holdings (CNTTF = $9.84 / in @ $3.12),
- Canopy Growth Corp(CGC = $48.81 / in @ 22.17),
- Ceco Environmental (CECE = $7.88 / in @ $6.95),
- Correvio Pharma (CORV = $4.02 / in @ $4.79),
- Cytokinetics (CYTK = $9.85 / in @ $7.25),
- Eyepoint Pharma (EYPT = $3.57 / in @ $3.25),
- Geron Pharma (GERN = $1.75 / in @ $3.75), and
- Managers Alt Harvest (MJ = $40.05 / in @ $38.02).
Crypto:
- Bitcoin (BTC = $6,680) – “$10,000 by end of year is a no-brainer” M. Novogratz.
Options:
- Apple (AAPL): Bullish: Oct 5, -220 / +217.5 Put Credit Spread,
- Canopy Growth(CGC): Bullish: Oct 12, -50 / +47.5 Put Credit Spread,
o Bullish: Oct 19, +50 / -55 Call Debit Spread,
- Lowes (LOW): Bearish: Nov 19, $135 Puts,
- Russell Small (IWM): Bullish: Nov 16, +170 / -175 Call Debit Spread, and
- Retail ETF (XRT): Bearish: Nov 19, $54 Puts.
Thoughts:
- Apple (AAPL): Now that Apple is comfortably worth over $1T, asset managers may very well chase this into earnings. If you are willing to trade it into earnings on Nov. 1, and are bullish on AAPL – the long CALL vertical that’s long the +$217.5 CALL and short the $222.5 CALL in the Nov. 2ndweekly series (expiring 1 day after earnings) is a bullish strategy with a 60% probability of making 50% of its max profit before expiration.
- Target (TGT): I’m thinking that Target may drop because: (a) the credit card itch will implode, (b) China will stick it to us with trade, or a weaker market will pull it down – then the long PUT vertical that’s short the $86.5 PUT and long the $88.5 PUT in the Nov. 2ndweekly expiration is a bearish strategy that has a 60% probability of making 50% of its max profit before expiration.
- Into November: I’m looking for selling: (a) in the retail sector (XRT) – and would recommend buying the November (monthly) $54 PUTS, and (b) in Lowes (LOW) – I would recommend buying the November (monthly) $135 PUTS.
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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Until next week – be safe.
R.F. Culbertson
