This Week in Barrons: 10-28-2018:
Thoughts:
The Dumbing Down of America… Part 2
The 3 R’s = Reading, wRiting, and aRithmetic. Remember when your parents used to read to you? It turns out (30 years later) that associating sounds with different letter combinations IS absolutely the correct way to become a better reader. Who knew? Answer: my 4thgrade teacher knew. But the scary part is that most current reading programs are NOT being taught that way. Not because people don’t know that it’s the correct way, but because it would not lead to an increase in the number of jobs for teachers. This is a problem that has been hiding in plain sight for decades. The Teacher’s Union has become so powerful that it must be consulted with on virtually every school change. It doesn’t matter that over 60% of 4thgraders can’t read at grade level, and that over 33% of our high school grads can’t read at a basic-life level.
It’s not that our kids are failing in our schools – it’s that our schools are FAILING our kids. It used to be that: “working hard in school lead to a successful life.” That assumed that the school was focused on you (the student) more than it was on creating additional employment opportunities for teachers. A study from The New Teacher Project (TNTP) takes square aim at the Teacher’s Union being the issue – as students are graduating high school with high marks, and finding themselves poorly prepared for any path they choose. Students and parents are being lead to believe that doing the work and meeting their teachers’ expectations will prepare them for what’s next. The study found to the contrary. According to TNTP, what is standing in the way of the student excelling is specifically the Teacher’s Union.
40% of U.S. students who enroll in college (including 66% of black students and 53% of Hispanic students) end up having to take a remedial course – which places them behind in their degrees and adds costs onto an already steep tuition payment. Also, students who take a remedial course are now 74% more likely to drop out. Employers are even reporting that new high school hires are lacking in basic job skills. This is not because students are not trying hard enough, but instead due to teachers giving ‘low quality’ assignments that increase their own chances of being rewarded bonus pay. It seems if your class shows improvement (higher grades) then you (the teacher) will receive a bonus. Therefore, the easy solution is to give simpler exams. The only ‘fly in the ointment’ is the Standardized Test – because it’s the only constant national measure on which high school students and their teachers can be measured.
Students are saying that by teachers giving low-quality assignments – they are never allowed to deeply think about something, and therefore never rewarded for doing the type of work they’re going to need to do in order to succeed. Only 17% of the time did the average U.S. student demonstrate ‘grade-level’ competency, and often it was due to the teacher not assigning that level of work – but rather students doing it on their own. Students spend more than 500 hours per school year on assignments that are BELOW their grade level and with instruction that did NOT challenge them. That’s the equivalent of 6 months of wasted class time in each core subject.
In contrast, classrooms filled with predominantly higher-income students spent twice as much time on grade-appropriate assignments as classrooms with predominantly lower-income students. The report finds teachers guilty of depriving lower-income level families of their ability to reach their goals – because they were rarely being taught the correct elements that would give them a real chance to win.
Why would teachers intentionally give students work that is not challenging? Two reasons: a) It was found that teachers have extremely low expectations for their kids (less than half surveyed believe their students could work at grade level), and b) Assigning ‘stretch’ work doesn’t equate to higher grades – and without higher grades – the teacher will not receive any salary bonus.
How do schools begin to create a different kind of environment? The good news is that it will not cost the school district one additional penny. The bad news is that it will force the teacher to teach – and put away the videos, the word puzzles, and all the other ‘busy work’ that lead to a student’s under-performance. Teachers will need to re-engage with their students for the ENTIRE classroom time. TNTP has partnered with over 40 education-system professionals and organizations, including: Success Academy, IDEA Public Schools, Tennessee SCORE, and Greater MN Schools, to pledge to take action in response to their findings.
These actions will include a shifting of focus toward: classroom behavior, decision-making skills, and practice. We need to move toward ‘applied learning’ programs that help students acquire real-world skills. These types of programs allow school children to dip into expressive topics as well as more industry-focused areas like computers, robotics, and electronics. We also need to rework the guidance portion of our educational system in order to focus more on the individual realities of where a child is going and not just what will make the teacher or school district look good.
This is necessary because the skills we need to perform at work are changing quickly. The World Economic Forum's Future of Jobs Report 2018 suggests that employees will see an average shift of 42% in workplace skills between now and 3 years from now. Soft skill elements such as: critical thinking, leadership and complex problem-solving will become increasingly important. The report warns that just to keep up, we will all require an average of 101 days of upskilling over the next 3 years. To quote JR: “The model for education in general is completely broken. We have a shortage of welders, plumbers and truck drivers – but we have plenty of women’s studies, sociology, fashion design, art history, and general studies majors with a mountain of debt. What’s wrong with this picture?”
[On a personal note: I’ve lived in Pittsburgh for over 30 years. Yesterday, the deadliest attack on the Jewish community in the history of the U.S. and the most unthinkable act of anti-Semitism – occurred a couple miles from my house. I don’t know what to think – because you never think that this type of event will happen to you – until it does. I do know that my heart, prayers and sympathies go out to the families of the victims. I do know that all my friends who lived much closer than I – are safe. I do know that Pittsburghers are the most compassionate group of souls I’ve ever met, and we will come out the other side. I do know that I agree with Barak Obama: “All of us need to fight the rise of anti-Semitism against those who look, love, or pray differently.”]
The Market:
Can’t Fix It - Re-Define It: Our government knows that J. Q. Public’s payment abilities are becoming over-extended. Therefore, they’re changing the way credit scores are calculated so that J. Q. Public can continue buying more stuff. FICO (the gold-standard in consumer lending decisions) is about to get a major overhaul. Fair Isaac (FICO’s creator) plans to shortly unveil a new system that also takes into consideration how prospective borrowers manage their cash. That new information should increase approvals for credit cards and personal loans. The new elements are designed to give people with dings on their credit histories a process to have their banking activity erase those dings and increase their score.
Also in the Can’t Fix – Re-Define category – is the definition of success and failure. It seems that (according to the graphic below) over the past year we’ve hit a new low in small businesses existence. We’re also finding that 20-somethings are 40% less likely to create a small business than their baby-boomer predecessors. We need to keep those numbers ‘under wraps’ – otherwise academia, nonprofits, Kauffman Foundation, and incubators everywhere will have to admit FAILURE. Can you imagine trying to explain to President Trump how you have succeeded in lowering the number of small businesses in existence to its lowest level in the last 30+ years. Make no mistake, the business of Teaching Entrepreneurship is big money. I’m fully prepared for our federal, state, and local governments to redefine small business success and failure over the next several weeks – in order to maintain their funding grants. Personally, I think that the business of giving out meaningless trophies to successfulbusinesses that are going ‘out-of-business’ will be a marvelous opportunity going forward. NOT.
And if you wondered how we got ourselves into this position, the answer is: leadership and bad decision-making. Just last week the local President and CEO of the Pittsburgh Technology Council was quoted as saying: “The focus for new companies is too often on return on investment when it should be on corporate culture.” The last time I checked, paying a landlord in ‘at-a-boys’ didn’t fly. And the last time I talked to co-workers, they weren’t too keen on accepting ‘hugs’ instead of paychecks. But then again – with leadership like the above – it totally explains the numbers below.
Info-Bits:
- Facebook: Another one Bites the Dust: Last week, Oculus co-founder Brendan Iribe announced that he was leaving Facebook. Previously (all within a year) Instagram co-founders and WhatsApp co-founders announced their departure. It seems like the Book is having a bit of a retention problem. Next up on Mark Zuckerberg's Kindle: 'How to Make Friends and Not Influence Elections.'
- Is the FED going crazy? Recent remarks by President Trump make one thing clear: he is not a big fan of higher interest rates. In an impromptu press conference, the President remarked that the "Fed has gone crazy,"adding that he believed it was a mistake to tighten monetary policy, i.e., to raise interest rates. The rationale for not liking higher interest rates is obvious - higher rates can choke off lending and borrowing, thereby stifling economic growth. Since Presidents are almost always judged by economic performance, tighter monetary policy can have political consequences. The reality is that the FED is simply doing its job, and FED Chairman Powell has been making data-dependent monetary policy decisions that make sense. Higher rates make sense when: the economy is strong, labor markets are tight, wages are growing, and inflation has firmed.
- What’s another 1,000 DOW points anyway? It’s really a classic case of the FAANG stocks no longer supporting an over-extended market. Last week the usual tech suspects fell substantially: with Netflix plummeting 9.4% and Amazon, Google, Facebook, and Microsoft all falling at least 5%. Volatility is normal and naturally occurring. The ‘hopium’ drinkers would like you to believe that this is a classic market correction. I’m here to say that it’s also the classic changing of the trend from a 10-year bull market to … dare I say … a bear market.
- Bye-Bye to Google Execs: Last week Google released a report confirming that it had protected three execs accused of sexual misconduct over the past decade. Including Andy Rubin – the creator and "Father of Android." Google asked Rubin to resign, gave him a big goodbye hug, and $90m on his way out. Google's CEO responded to the report by sending an email to employees, saying the company is serious about having a safe workplace. 48 people had been fired in the last two years over sexual harassment – including 13 senior managers. No one (other than Andy Rubin) received an exit package.
Crypto-Bytes:
- The EXODUS is here! HTC’s long-awaited blockchain phone is officially in the early-access phase. Developers and other members of the broader blockchain community can now pre-order the EXODUS 1 – notably paying only with Bitcoin and Ethereum. It aims to be the first smartphone designed specifically to hold cryptocurrencies. At launch, the phone will offer a secure storage system for a user’s private cryptocurrency keys – kept isolated from the Android operating system.
- Where do you get trustworthy Crypto News? Well, here are 12 crypto portals that are "willing to publish paid content without disclosing it as such". So I can tell you NOT to trust the following sites: CryptoNinjas, Cointelligence, Coinspeaker, CryptoPotato, Blokt, BTCManager, Coinidol, AMB Crypto, Globalcoinreport, Cryptovest, Bitcoinist, and NewsBTC. And here are 7 sites that answered ‘NO’ to that same question (the good guys): BraveNewCoin, CoinJournal, CryptosRus, CCN, Mineable, Oracle Times, The Daily Bit, and ZyCrypto.
Last Week:
Always remember that ‘cash’ is a position. It took the market from July 10thto October 3rdto gain 2,000 DOW points. Since October 3, it only took 17 trading sessions to LOSE 2,300 points. Three months to gain it – and 15 days to lose it. The old adage on Wall Street is that the market takes the stairs up, and the elevator down. However, it has been a death sentence since 2008 to go short and hold onto any trade for longer than 2 weeks – simply because they've rigged the market to go up in the face of all comers. So I understand any recent reluctance to trying to play the ‘short’ game.
In 2008, it was fairly obviously to see that a melt-down was coming. We had people:
- Working at McDonalds buying $650,000 homes,
- Quitting good stable jobs, to become mortgage originators,
- Fighting and outbidding each other on the front lawns of homes, and
- Buying swamp land that could never be built on – hoping it would soar in value.
It was a bubble. That bubble popped. And the way to play it was through shorts, puts, and inverse ETFs. This time things are not so easy. Back then, we: a) Didn't have a coordinated global central bank printing tens of trillions of dollars, and (b) Didn't have Central Banks buying individual equities. This time, we did. Since 2009, the role of the Central Banks has been to move the market(s) higher and keep them there in the face of virtually anything. That can't last forever, and now signs are pointing to some real market troubles. On September 13thI recommended shorting the home builders when TOL was $36 and PHM was $25. They were down to $28 and $21 respectively on Monday.
If you were convinced that the bull market was over, and we were in for a protracted period of falling – What would you do? You could: a) ‘sell short’ some stock, b) buy PUT options on the indices, and c) buy ‘inverse’ ETFs (that go up when the underlying assets go down). Last week, I didn't think the market would do anything too drastic ahead of the midterms. I felt that it would wobble sideways, but not get too far one way or the other. I was wrong. When the S&P fell down to its 200-day moving average on October 11th, it didn't even pause – it sliced through it. That raised a lot of eyebrows, but the next day it recovered. Then it spent several days using the 200-day as support. Monday it lost the 200-day again. Considering how hard they've been defending this market, it was easy to think that it would retake that milestone again. But it didn’t and on Tuesday it fell even further, and Wednesday was worse yet. Did I expect that? No.
Next Week: There's a lot of things you can blame this on: a)the number of large companies missing earnings, b) the realization that earnings have peaked, c) the understanding that rising rates really do hurt stocks, d) the rising U.S. dollar making it more expense for others to buy our stuff, e) jitters over Italy's banks – and estimating how far the ‘ripple’ will run when they fail, f) global tariffs, g) our FED removing $50B / month from our monetary pool, and/or h) questionable corporate back-backs.
So, Is it time to go short from here? Remember, in September the U.S. placed a 10% tariff on $200B worth of Chinese imports. In January that goes to 25%. My thinking is this:
- November and December are usually seasonally strong, and that carries into the New Year as the "January Effect".
- If the Republicans keep both houses, the market doesn't have to worry about any of the things Trump has done being reversed. And if the U.S. and China can come to an agreement before the big tariffs go into effect in January – we should get one last 15% push higher from here. If we got that, I would consider it a top.
- But if the houses get split, there's no China deal and the tariffs kick in – I have absolutely no reason to think we'll ever see the highs again. We're long in the tooth, rates are up, dollars are getting sucked up by the FEDs, currency is expensive, earnings have peaked, and a slowdown is in the cards. And that is when I am going to be looking at puts, inverse ETF's and outright short sales.
Right now, things are becoming a bit more dicey. Could it be that this market is going to continue lower, and to heck with the Mid-terms, China, and everything else? It is certainly possible. Thus far we have not seen panic. Thus far it is the algo-bots taking cues from the news and technical levels. We may sink some at Monday’s open and then see a reversal ‘Vee’ bounce higher. We're short term oversold, and they'll need to give some of that back. It's after a nice fat bounce that we have to wonder whether to short into it or lean higher. Don't forget, this market is very high and could easily fall 5,000 more DOW points and we'd basically still have a 20K market. In other words, you didn't miss the big money if a bear market evolves. Brush up on your short side techniques. They've been dusty since it has been suicide to go short over the last 8 years. It’s time to sharpen those tools. Because I suspect we're going sideways and down over the long term. In fact, I expect the market to be lower a year from now.
Tips:
Top Equity Recommendations:
HODL’s:
- Aurora(ACBFF = $7.04 / in @ $3.57),
- Amarin(AMRN = $21.96 / in @ $2.90),
- Canntrust Holdings(CNTTF = $7.58 / in @ $3.12),
- Canopy Growth Corp(CGC = $38.70 / in @ 22.17),
- Ceco Environmental(CECE = $7.22 / in @ $6.95),
- Correvio Pharma(CORV = $3.64 / in @ $4.79),
- Cytokinetics(CYTK = $6.00 / in @ $7.25),
- Eyepoint Pharma(EYPT = $2.22 / in @ $3.25),
- Geron Pharma(GERN = $1.52 / in @ $3.75),
Crypto:
- Bitcoin(BTC = $6,500) – “$10,000 by end of year is a no-brainer” M. Novogratz (really Mike … really?)
Options:
- Canopy Growth(CGC): Bullish: Nov 19, -50 / +47.5 Put Credit Spread,
- Russell Small(IWM): Bullish: Nov 16, +170 / -175 Call Debit Spread, and
Thoughts:
- OIH: Over the past three weeks, crude oil has dropped the equivalent of 2 standard deviations as Saudi Arabia turned on the faucet when oil hit a 4-year high in early Oct. Falling equity prices haven’t helped, as oil rarely likes a skittish market. Both of those things have impacted OIH (the oil services ETF) which is comprised of stocks that provide equipment and various services to the oil producers. OIH has dropped the equivalent of 3 standard deviations over the past 12 days, which has pushed its IV rank over 70%. Those numbers can make interesting short premium strategies. If you think OIH might not drop much more and might even rally, the short $20 PUT in the Nov 30thweekly expiration with 33 days until expiration is a bullish strategy with an 82% probability of making 50% of its max profit before expiration.
- MCD:McDonalds has rallied the equivalent of 3 standard deviations in the past days after earnings, and any further rallying may not be deserved. If you think MCD’s rally might stall out and the stock might drop like a cold McMuffin, the long PUT vertical that’s short the $175 PUT and long the $180 PUT in the Dec 21stexpiration with 54 days until expiration is a bearish strategy that has a 66% probability of making 50% of its max profit before expiration.
- DIA: 89 years ago the often imitated but never duplicated Crash of 1929 began and wouldn’t end until after the DOW had lost over 1/3 of its value. It would take about 25 years for the market to get that value back. Ah, the good old days, when “buying the dip”would have referred to chewing tobacco rather than shoveling money into any and every stock with a down tick. If you think that the DIA (the ETF for the DOW) may not rally back and in fact may fall a little further – then a short CALL vertical that’s short the $259 CALL and long the $261 CALL in the Nov 30thweekly with 33 days until expiration is a bearish strategy that collects 1/3 the width of the strikes, has a 77% probability of making 50% of its max profit before expiration.
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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