This Week in Barrons: 11-4-2018:
Thoughts:
While a bachelor’s degree is largely viewed as a prerequisite for a lucrative career, 43% of college grads accept jobs in careers that do NOT require one (aka underemployed). Thanks to BD who reported that the average salary for a 1styear bachelor’s degree holder is about $46,000. But those with degrees who worked in a career that didn't require one earned $10k to 15k less. Of the college students who are underemployed within their first year of graduating, 66% are stuck in that cycle a decade later – missing a total of $150,000 in earnings. The first way grads can avoid falling into the underemployment trap is to adjust their major. Majors in law enforcement, human sciences, liberal arts, fitness, and firefighting carry a 65% chance of landing a underemployment job. STEM majors (on the other hand) account for just 15% of the underemployed grads. On the other side of the coin, workers with a high school diploma currently hold less than 20% of the jobs paying more than $36k / year.
A couple facts surrounding our student loan debt:
- Student debt has more than TRIPLEDsince 2004, reaching $1.52T. Professor Ben Keys of Wharton said: “Remember the good old days, when kids could earn enough working as a lifeguard in the summer to pay for a semester of college.”
- Currently, 44m graduates hold student debt averaging $37k per debtholder.
- A $1,000 increase in student loan debt lowers the homeownership rate by about 1.5% - equivalent to an average delay of 2.5 months in buying a house.
- 60% of people who start at a 4-year institution – graduate within 6 years.
- A bachelor’s degree holder can expect to make 84% more than a high school diploma – equaling about $2.8m over a lifetime.
- 19% of Americans over the age of 55 are carrying significant student loan debt.
- Over halfof student loan holders say that they would have made a different educational decision had they known the full implications of their loans.
The real problem comes when students take out loans and do NOT graduate from college. Student loans cannot be discharged in bankruptcy, and therefore end in a bad situation for both parties. Others have devised creative ways of handling debt repayment:
- Australia links the repayment of loans with their income tax system.
- Some, force the college to have some ‘skin in the game’. Currently, if a student defaults on their school loan, there is no consequence to the school. A system that penalizes schools turning out students with higher default rates would nudge the system in the right direction. Because, if students can’t pay – it’s the taxpayer who does, and those schools should suffer the consequences.
What will cause school tuition costs to come down to earth? Empty seats! As SF reminded me: “Under Obama and the Affordable Care Act we saw increased employment due to employers avoiding paying mandatory healthcare by moving from 1 full-time worker to 2 part-time workers. Under Trump we are beginning to see legitimate wage growth, and a return to inflation and lay-offs.” With competition, inflation, lay-offs, and a balanced budget returning – we should be in for a rockier road for our colleges going forward.
The Market:
Transportation Electrification:
Talk about an industry that is about ready to be turned upside down. The transports are facing economic and trade headwinds, but are also confronting disruptions posed by mobility services, autonomous vehicles, and electrification. Manufacturers are investing in mobility and autonomy – two areas where there is no timetable for profitability. Electrification eliminates historic barriers to entry such as the amount of investment capital and expertise required to assemble a competitive vehicle. Established brands were protected from new entrants as long as internal combustion engines (ICE) and transmissions dominated the market. After all, ICE and transmissions represent more than a century of accumulated expertise across a range of engineering disciplines. But when it comes to electrification, the investment and design expertise needed are less expensive and easily available to a startup. EVs have fewer parts, and manufacturing all of the critical elements (including the battery) can be outsourced. Tesla’s $14B investment is a pittance compared to what a conventional ICE powered transport would cost to develop and assemble. China is the primary benefactor of electrification as it is the world’s largest electric vehicle market and home to the largest concentration of battery producers and production capacity. China also controls much of the global supply of lithium, cobalt, and other battery cell components. As electrification takes hold, established makers will lose their most differentiating feature – their combo engine / transmission. Recently Herbert Diess (CEO of Volkswagen) said that due to electrification, there was only a 50% chance that the German transport industry would be among the global elites in 2025. Electrification will enable China to achieve production parity while establishing an OPEC-like vise over lithium ion battery capacity.
Info-Bits:
- Seattle’s $15 / hr. minimum wage: is the gift that keeps on giving. In 2014 Seattle increased its minimum wage from $9.47 to $15.45 to benefit low-wage workers. Bottom line: low-wage worker’s hours have been reduced, but new people were NOT hired and experienced workers got all the benefits. None of this should surprise anyone. One can only assume that Seattle’s powers-that-be WANTED more people on the streets looking for work.
- Cha-Ching: Facebook, Amazon, and Google: U.K. Chancellor Philip Hammond wants to slap a special tax on the revenues of big tech companies. He wants 3.9% of Amazon’s global revenues, and 2% of any revenues derived by social media companies (Facebook) and search engines (Google) that facilitate British transactions. The goal is to tax big tech giants without hitting smaller start-ups.
- I’ll wait on that phone upgrade: Americans are waiting almost 50% longer (3 years) to upgrade their phones – compared to about 2 years between upgrades in 2016. Increased prices is one reason – another is reduced carrier subsidies.
- Uber subscription service: Uber’s new Ride Pass allows users to circumvent surge pricing. The service is starting in 5 cities: Los Angeles = $24.99 / mo. and Austin, Orlando, Denver, and Miami = $14.99 / mo.
- IBM bought Red Hat for a serious premium: Red Hat stock went up by 45%, but IBM (unfortunately) had their lowest close since February 11, 2016.
- GDPR cost Facebook 1m users in Europe (General Data Protection Rights).
- GM Check your wallet: GM just offered 18,000 salaried employees buyouts due to lower demand in its main markets (China and the US) because of tariffs. GM is saving its money for ‘Cruise’ – its self-driving technology.
- Wages are up 3% Year-Over-Year: This is the highest bump in 10 years.
- Marijuana Legalization: The latest U.S. survey results for legalizing marijuana show if you were born between:
o 1981 – 1997 … Millennials = 74% pro-legalization,
o 1965 – 1980 … Gen X’ers = 63% pro-legalization, and
o 1946 – 1964 … Baby Boomers = 54% pro-legalization.
Crypto-Bytes:
- Bitcoin’s 10-year Anniversary: 10 years ago a bunch of nerds came together and memed a global currency (Bitcoin) into existence. [It's also the 27-year anniversary of Lord Voldemort killing Lily and James Potter.]
- Coinbase collects: The U.S. based cryptocurrency exchange Coinbase has just announced a new round of $300m in funding. This gives the company a ‘post-money’ valuation of over $8B.
- Latest BoA patents target Private Keys: In June, Bank of America had over 50 live blockchain-related patents. Their latest filing seeks to secure ‘crypto’ keys – suggesting token custody. After all, no one wants to send their clients somewhere else for custodial services.
- Capital inflows into ICOs: Have taken a nose dive since June 2018, and the odds of a resurgence appear slim after September's inflow of $1.7M was followed by October’s scant $650k in total funding.
Last Week:
Another week in what has become an incredibly volatile market. After the Monday meltdown and recovery; Tuesday, Wednesday and Thursday were straight up affairs. By the time we hit an intra-day high on Thursday, we had come some 1,200 DOW points from Monday's low – in just three sessions. But Friday got interesting. After a small pop higher at the open, the indexes rolled over and the S&P and NASDAQ went negative. It looked like we were going lower when IT happened. A tweet put out by Trump, suggested that he and Chinese President Xi were getting closer to a trade deal, and that fired up the algo-bots – sending every sector soaring. Then (all of a sudden) they rolled over – why? It seems that a reporter had asked the Trump administration about the Chinese upcoming agreement and they said: “Honestly, we’re no further along than we were last week and the week before that.” That sent the algo-bots into sell mode. When the dust cleared we had lost 109 DOW points. Another wicked up and down week.
Craig Birk, Chief Investment Officer at Personal Capital summarized the events in October: "The drop in October came out of nowhere. Usually, that's a sign of a correction and not a bear market – as a bear market often rolls more slowly. The earnings story is flip-flopping between being very good and average. There's also some optimism that a breakthrough on trade could happen." And according to Ryan Detrick, senior market strategist at LPL Financial, the situation is not as bad as it seems: “Even though the list of worries has grown in October, it is quite reassuring to know that consensus estimates for 2019 S&P 500 earnings per share actually increased this month. Call me old school, but I still think earnings drive long-term stock gains, and this is a great sign amid all the market volatility."
Many see tech stocks as the ones that have taken the largest ‘beating’ in October, and are beginning to see a sense of stability (if only temporary) at the end of the tunnel. Many ‘old style’ blue-chip tech stocks are among the strongest being recommended. I’m hearing professionals pound the drum for Intel (INTC). It’s on the verge of recapturing its foothold in the semiconductor industry, and is on the offensive against rivals Advanced Micro Devices (AMD) and Nvidia (NVDA). They’re poised to win back market share after their most recent quarterly earnings improved 38% year-over-year.
Next Week:
5 Points Looking Forward:
1. SPX Expected Move is $65 next week – We saw that type of action in 1 day last week (Friday). So premium sellers – consider yourself warned. The index products are moving more than the options market is estimating. I believe after much more chop, we will fall below the 2575 level on the S&Ps.
2. A Good Jobs Number on Friday – tells me that there will be continued rate hikes in December. Good news for the economy equates to bad news for the markets.
3. Short Strong Sectors – and allow the correlations to kick in. After earnings, Apple and Amazon both guided lower into the 4thquarter. Consider shorting some retail stocks such as: Target (TGT), Macy’s (M), and Nordstrom’s (JWN).
4. Volatility has everyone twisted around – The easy part of ‘buy the dip’ is over. When stocks are rallying, think about selling into the rally. Do NOT do this via straight puts or calls, but rather via spreads to mitigate the volatility risk.
5. Weed Stocks – have earnings starting next week so be ready for this wild ride to continue.
I think this is the third week that I'm suggesting the only way this market continues higher is: a) if Republicans keep control of both houses, and b) if we reach a trade deal with China. If we don't get both of those, I cannot see this market setting new all-time highs. Last week’s action surrounding a sniff of the deal even confirmed that suspicion.
But what about the mid-terms? I keep hearing how the Democrats are going to take the House, but what if that’s wrong? Supposedly the market likes a gridlocked Congress. Unfortunately we were NOT at DOW 26k without both houses being under Republican control. If it gets split, I don’t believe that we can move higher.
So, maybe the best play this week is: “Not to play.” The best plan could be to just sit on your hands and wait until after Tuesday. If the Republicans retain both houses, I think we'll pop higher for a bit – but then cool off as long as the China trade situation still lurks. Both China and the U.S. need a trade agreement, and everyone understands that. I think getting a trade deal accomplished prior to the end of the year will give us one last push. But if we split the houses – then we’re headed lower. If we do not get a deal with China – then we are heading lower again. Be safe out there.
Tips:
Top Equity Recommendations:
HODL’s:
- Aurora(ACBFF = $7.18 / in @ $3.57),
- Amarin(AMRN = $22.87 / in @ $2.90),
- Canntrust Holdings(CNTTF = $6.93 / in @ $3.12),
- Canopy Growth Corp(CGC = $37.14 / in @ 22.17),
- Ceco Environmental(CECE = $7.61 / in @ $6.95),
- Correvio Pharma(CORV = $3.38 / in @ $4.79),
- Cytokinetics(CYTK = $7.40 / in @ $7.25),
- Eyepoint Pharma(EYPT = $2.47 / in @ $3.25), and
- Geron Pharma(GERN = $1.65 / in @ $3.75),
Crypto:
- Bitcoin(BTC = $6,350) – “$250,000 by 2022” Tim Draper. Tim believes that by 2022, the market cap. of cryptocurrencies will be $10T. This would value Bitcoin at $4T. According to Tim, digital currency will slowly overthrow our current fiat system: “I’m seeing China fight back after losing all its entrepreneurs and I’m seeing Japan say Bitcoin is a national currency – bring it on.”
Options:
- Canopy Growth(CGC): Bullish: Nov 19, -50 / +47.5 Put Credit Spread
- Russell Small(IWM): Bullish: Nov 19, +170 / -175 Call Debit Spread
Thoughts:
- XBI – The Biotech ETF’s volatility is at the top of its 1-year range, and down 25% from its peak. If you think biotech will rise, selling the $70 PUT in Dec. will get you a $180 credit. If you are feeling slightly more bullish, selling the $78 PUT will bring in over $400.
- IWM - Of the equity indices, the Russell (IWM) has the highest level of historical volatility. If you think that there’s more upside in the IWM, selling an IWM $132 PUT in December (10% below the last sale) brings in approximately $165 worth of premium.
- For Downside Volatility:
o EEM -Buy the $42 PUT and Sell the $40 PUT forDecember 7th,
o QQQ –Buy the $171 PUT and Sell the $168 PUT forDecember 7th, and
o AMZN –Sell the 1705 / +1710 Call Credit Spread for November 16th.
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
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