This Week in Barrons: 10-14-2018:
“In a sell-off, figure out who your friends are.” … Jim Cramer
Thoughts:
There are 6 causes to the last week’s market sell-off – which started after the FED’s latest rate hike, and forecast of more to come in order to cool-off a strong economy.
1. First, mortgage rates hit 5% - their highest level in years. Housing is depressed. Not a whole lot of homes are being traded, and that means we’re about to see a significant, downward break in prices. In many areas of the country, houses will start to DECLINE in value.
2. Second, PPG and Trinseo (2industrial companies that are barometers for the industrial economy) have signaled declining auto sales.
3. Third, construction lending is slowing.
4. Fourth, packing materials, drywall, and semiconductor chips are all dropping in price – signaling slowing demand.
5. Fifth, the trade dispute with China is starting to weigh on the economy as the U.S. scales up its tariffs on Chinese goods, and the stock market is essentially collateral damage.
6. Sixth, the rise in the U.S. dollar is squeezing earnings forecasts – a bad sign for the multi-national companies moving forward.
What is not helping the cause is retail.
- Sears (SHLD) is on the verge of collapse. It is trading for less than $1 per share, and down 98% over the past 5 years.
- GNC (GNC) in the 1990s was ahead of its time, but competition and cheaper prices on the web have made it ‘tough sledding’. GNC’s share price has fallen from $60 to $4 over the past 5 years, and supporting its ‘brick-n-mortar’ retail structure may not be in the cards for much longer.
- Barnes & Noble (BKS) has been looking in the ‘rear view mirror’ for years. It’s tough to say precisely when this bookstore will go belly up – but the result is inevitable. After briefly touching $19 in 2015 – shares are back under $7.
- Abercrombie & Fitch (ANF) is hoping that the consumer is very forgiving over this holiday season. Shares are down 30% off their recent highs, and down over 70% from 2011. Unfortunately, their store locations are declining as fast as the stock price.
- Bon-Ton (BONTQ) has failed to make a profit since 2010, filed for bankruptcy protection earlier this year, and has a current stock price less than a dime.
Here are 4 potential recovery drivers:
1. First, Fed Chair Jerome Powell could soften his comments about raising interest rates. President Trump isn’t making this easier by putting Powell in a box – only causing Powell to dig in his heels and comment about being ‘too soft’ on inflation.
2. Second, the price of oil needs to fall. With our new sanctions on Iran, we’ve essentially created our own oil shortage – as we don’t have enough crude in this country to make up for the shortfall. If oil doesn't come down, there's no saving our industrials and transports from commodity inflation.
3. Third, transportation costs need to come down. For that to happen, the country needs more truck drivers. Current regulations limit the amount of time a driver can remain behind the wheel; therefore, we a) need to relax those regulations, b) bring autonomous trucks along a lot faster, or c) hire more drivers.
4. Fourth, we need to constructively ‘blink’ in the trade war with China. The market and economy don’t care WHO blinks as long as everyone is assured that things aren't spinning out of control.
Assuming all 4 of the above do not happen, then:
1. Don’t fight the FED, or the tape.
2. Know that when the FED tightens – stocks will move lower. And when the FED tightens aggressively – stocks will move a lot lower – faster.
3. Cash is a position, and it is often worth taking.
4. Sell when you CAN, not when you have to.
5. Stock markets do not give medals for heroism – only for longevity.
The Market:
Info-Bits:
- CVS is dropping some bucks: This week the Justice Department gave its blessing for CVS's $69B marriage to Aetna. Aetna is the US's third-largest health insurance company. CVS is the US's largest drugstore chain. So ‘clink a glass’ for the US's largest health insurance deal – ever.
- Netflix (NFLX) almost owns its 1stproduction studio: The streaming giant is in the final stages of negotiations to buy Albuquerque-based ABQ Studios. Netflix’s purchase will bring $1B in production to New Mexico over the next 10 years while simultaneously creating up to 1,000 jobs annually.
- Google (GOOGL) unveils 3rd edition of its Pixel smartphone: Google’s unveiling of its new Pixel smartphone was a major global event last week.
- Microsoft (MSFT) partners with ride-hailing Grab: A new collaboration on technology projects, including artificial intelligence and big data was revealed when Microsoft invested in Southeast Asian ride-hailing company Grab. Grab will work with Microsoft to explore mobile facial recognition, image recognition, and computer vision technologies – hoping to improve the pick-up experience.
- Apple (AAPL) acquires Dialog Semiconductor: For $600m, Apple expanded its chip operations in Europe, and made the German-listed company an official supplier. Apple first used Dialog’s power-management chips to manage the iPhone’s battery life 10 years ago.
Crypto-Bytes:
- Congrats to Joe Lubin: for being this year’s Keynote Speaker @ SXSW.
- IBM intros ‘Food Trust’: IBM is taking its food-tracking blockchain into production, and (along with Wal-Mart) has signed European supermarket giant Carrefour (12,000 stores). Other food companies signing on to IBM’s Food Trust are: Nestle, Dole, Tyson Foods, Kroger, Unilever – and of course Wal-Mart. IBM said in a statement: "IBM’s Food Trust is the first production blockchain at real scale, and we are super-excited to finally be making the product broadly available.” IBM's next blockchain initiative is it's collaboration with Maersk, dubbed TradeLens – which we will hear more about over the next several months.
- Mr. Roubini goes to Washington: Nouriel Roubini (economist and showman)spent some of last week testifying in front of a senate committee on cryptocurrencies. He was quoted as saying: “Crypto is the most over hyped technology ever, and is nothing better than a glorified spreadsheet or database. 99% of crypto-land is one shitcoin traded for another shitcoin. The average shitcoin lost 90% (or more) of its value last year. So Crypto-Land is Crap-Land, a cesspool of lunatics with severe Freudian scatological obsessions that swim 24/7 in their own stinking shit.” Roubini went on to apologize to manure for the comparison. He also went on to take Vitalik Buterin (co-founder of Ethereum) to task directly by saying: “We are still waiting for a system that is scalable, decentralized, and secure. But we all know that is impossible due to your inconsistent principles.” Finally Roubini went on to proclaim that: “North Korea is more decentralized than crypto, and Buterin is nothing more than a centralized dictator.” Nothing like good economic theatre on a Wednesday afternoon.
- Is GDPR the Silver Bullet for FB and GOOGL: If the U.S. Senate adopts the EU regulatory policy system called the General Data Protection Regulation (GDPR), it could severely hamper Google and Facebook. The ‘purpose limitation’portion of GDPR protects a person’s right to choose to opt-in to whatever particular service they decide, and forbids a company from auto-opting a person IN to all of its services. It would prevent the dominant players (FG & GOOGL) from auto-leveraging personal data across multiple businesses. The kitchen is heating up.
Last Week:
After six days of carnage due to rising bond yields, the main U.S. benchmarks rebounded to close higher on Friday. On the overall, this week represented the worst weekly performance for the three major indices this year. For the week, the DOW was down 4.2%, the Nasdaq fell 3,7%, and the S&P lost 4.1%. The rise in bond yields coincided with the launch of third-quarter earnings season. Analysts are predicting earnings growth of 19% and sales growth of 7% for the quarter. If the forecasted growth figures come out true to form, it would further point to an improving economy. The 2 sectors that appeared unaffected by the downturn and worth watching going forward werethe consumer discretionary sector and the healthcare sector – both up 10.2% YTD.
Biotech & Weed:
On October 17, Canada will make history and become the world’s first industrialized country to legalize recreational marijuana – hence the sudden investor interest. You can certainly ‘seize the day’ and pick your favorites, but the market place has done the picking for you. An investment in either of the following will likely NOT go ‘up in smoke’.
- Canopy Growth (CGC= $50.40 / +105% YTD) – is hard to resist when a favorable buying opportunity presents itself. It’s the largest in: production capacity, cannabis inventory, and supply agreement volume. It’s also the best-capitalized. Its partnership with alcohol giant Constellation Brands (STZ) is in preparation for the creation of a $600m marijuana-infused drink industry. 12-month projections for the stock start @ $77.34 (+61%), and go up from there.
- Aurora Cannabis (ACBFF= $10.52 / +39% YTD) – confirmed last week that it has filed to list its common stock on the NYSE under the ticker symbol "ACB”, and expects it to be trading there before the end of October. Aurora: a) is a horizontality differentiated and vertically integrated global organization, b) has funded production capacity in excess of 500,000 kg / year, c) is selling and operating on 5continents, and d) has a 1,500+ employee workforce. They boast a portfolio of strong consumer brands and have provincial supply arrangements covering nearly 98% of the Canadian population.
In Biotech:
- Xenon Pharmaceuticals (XENE= $10.48 / +271% YTD) – owns and operates a clinical-stage biopharmaceutical company in both Canada and the United States. With an expected earnings growth rate of 22.67% for the current year, analysts are offering a median stock price target of $15.00 (+43.1%) and a high estimate of $16.00 (+52.7%).
- Spero Therapeutics (SPRO = $9.60 / -18.3% YTD) – is engaged in the development of novel treatments for multi-drug resistant bacterial infections. It’s backed by Osage University Partners, and although the expected earnings growth rate is only 4.49% for 2018 – analysts are projecting a median target for the stock of $27 (+181.5%), and a high estimate of $30 (+212.8%).
Next Week:
This week the U.S. stock market was consumed by volatility, worries about rising interest rates, and heightened China trade tensions. Markets are still sitting only 6% below all-time highs; moreover, the U.S. markets still remain in positive territory for 2018. The important economic reports to be released next week are: Retail Sales on Monday, Industrial Production on Tuesday, and Existing Home Sales on Friday. However, the main focus will be on third-quarter earnings as the earnings season officially begins in earnest this week. This level of volatility could easily become more commonplace. Why? Because there’s a war going on between those who benefit the most from a rising market, and those who realize that the economy is not as great as we’re being told. The sell side activity that we saw over the past 4 days was fast, and took no prisoners. On Wednesday we fell 800+ points. On Thursday, we attempted a bounce but it fizzled, and when the market closed the S&P and the DOW were below their 50 and 200-day moving averages. Friday was time for either a bounce, or a capitulation down day. They gave us the bounce, but it wasn’t quite that easy.
On Friday, after opening ‘up’ 400 points, the market gave it ALL back, went red for a couple minutes, and then charged back into the green. The market fell back down to where it closed on Thursday – just to measure the conviction of the buyers. Once it held, buyers came back in and pushed the market higher into the close. That was about as perfect as it gets. We opened with a bunch of fire and brimstone, got nervous and faded all the way down to Thursday's close, and then moved higher into Friday’s close. That type of action all but guarantees a higher market in the beginning of this week – but there’s just one problem. The afternoon buying spree did not push the market over its intra-day highs. If the market would have surpassed those levels, I would be ‘all in’ for more gains Monday. But, by not exceeding those highs, it suggests that not all buyers were on board with the bounce.
So the question on Monday morning remains: “Do we gap higher and go for a run, or was Friday a one-day-wonder and everyone moves quickly to get out with a profit?” This question is further complicated by earnings season. Companies that miss will be punished dearly, and the ones that beat will be rewarded. Combine that with the interest rate debate and the trade tariffs – and each day could bring its own little roller coaster. I think that this market has a date with "lower". Maybe not early next week, but I don’t think that last week’s 2-day selling spree was the end of things. Why? Because there was no panic, but rather a controlled sell. That suggests if we can't get a lot of buying traction early – profit-taking make take over in the short-term. Honestly, the market feels stretched, tired, desperate and dangerous. If you have the time and tools to aggressively trade this – then this market is for you. If you’re a longer term sort of thinker – be careful. A stubborn FED hiking rates is NOT conducive to a market moving higher – no matter what the talking heads tell you.
Tips:
With volatility exploding, this quickly became a trader’s market. In a trader’s market, you need to:
1. Get your ‘risk’ under control.
2. Understand that there is NO Predictability in the midst of Volatility.
3. Expect some wild trading days (contingency orders and stops are everywhere).
4. Gain some perspective. A 10-year ‘all up’ market means that we can fall for a long time until it becomes really painful to early investors.
5. Discover: “Who your friends are.” Fire the financial analyst who says: (a) Don’t worry – you’re investing for the long haul. (b) Don’t worry – that’s why we’re dollar cost averaging. (c) Don’t worry – that’s why we’re diversified. In this type of market, there is no room for: ‘monkeys throwing darts’.
We could we be on the verge of one of the greatest ‘buy the rumor, sell the news’events of all time. We have a robust economy, a strong dollar, low unemployment, and a record stock market. Only the bond market is melting down, and just this week people woke up to that. For the longest time, we thought that all bad news was good news – so we bought the dip (BTFD). Last week all good news started to be bad news. Meaning, that as things improve – the FED will raise rates just that much faster. So we started seeing men become boys, and the Cleveland Browns win football games.
This coming week is all about levels – watch the:
- SPX (the ETF for the S&Ps) @ 2,767
o Above 2,731 and we’re bouncing up to 2,811 / below that and we’re falling to 2,682,
o Below 2,811 and we’re bouncing to 2,731 / above takes us to 2,842, and
o Above 2,682 and we’re bouncing to 2,731 / below takes us to 2,626.
- XLF (the Financial ETF) @ 26.43
o If the XLF remains below 26.5, the general market will not behave well. The financials have earnings this week, and even though JP Morgan (JPM) had fairly good numbers on Friday – the market sold them anyway.
- XLY (the Consumer Discretionary ETF) @ 108.95
o If it breaks below 105, then another 10% lower is in the cards.
o FYI: before last week the XLY was up 18% YTD, and now is up only 8%.
- IWM (the Small Cap ETF) @ 153.69
o The IWM is in the most serious trouble.
o FYI: after being up 13% on the year, it is now ‘flat’.
- XLK (the Technology ETF) @ 70.83 – breaking below 68.50 is not good,
- XLI (the Industrial ETF) @ 73.9 – breaking below 72 is not good,
- XLB (the Materials ETF) @ 53.76 – is the weakest of the sectors, and could collapse at any time,
- XLP (the Consumer Staples ETF) @ 52.38 – a move below 52 is dangerous.
Top Equity Recommendations:
HODL’s:
- Aurora(ACBFF = $10.52 / in @ $3.57),
- Amarin(AMRN = $19.62 / in @ $2.90),
- Canntrust Holdings(CNTTF = $10.64 / in @ $3.12),
- Canopy Growth Corp(CGC = $50.40 / in @ 22.17),
- Ceco Environmental(CECE = $7.37 / in @ $6.95),
- Correvio Pharma(CORV = $3.32 / in @ $4.79),
- Cytokinetics(CYTK = $7.61 / in @ $7.25),
- Eyepoint Pharma(EYPT = $3.23 / in @ $3.25),
- Geron Pharma(GERN = $1.69 / in @ $3.75),
- Managers Alt Harvest(MJ = $39.25 / in @ $38.02), and
- Protalix BioTheraputics(PLX = $0.56 / in @ $0.75)
Crypto:
- Bitcoin(BTC = $6,325) – “$10,000 by end of year is a no-brainer” M. Novogratz.
Options:
- Canopy Growth(CGC): Bullish: Oct 19, -50 / +47.5 Put Credit Spread,
- Russell Small(IWM): Bullish: Nov 16, +170 / -175 Call Debit Spread, and
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
Until next week – be safe.
R.F. Culbertson
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