This Week in Barrons: 11-25-2018:
Thoughts:
Doesn’t anybody Do Their Homework anymore? I was sitting in a meeting recently where someone had to actually ask the question: “Does this technology even work? And does it save me enough money that I’d want to buy it?” And from the looks on everyone’s faces – you would have thought that someone had just insulted their first born. “How dare we question the validity of the technology” – and “We’re still working through the business model”are the typical responses. Believe me when I tell you, nobody wants entrepreneurship to turn around and thrive more than I do. The fact that small business formation and small business success rates are at historic lows is deplorable, and says as much about the educational process, the advisors, and the funding community as it does about the individual entrepreneurs. I mention funding community because in our current entrepreneurial climate – people gauge entrepreneurial success upon the amount of money raised rather than the business model or even number of customers acquired. Therefore we need to look no further than the ‘money people’ to gauge entrepreneurial direction and timing. Theranos (a pseudo-blood testing technology) was the ‘poster child’ for everyone NOT doing their homework. Theranos was a company (and Elizabeth Holmes its founder and CEO) who convinced seasoned investors to overlook basic flaws in the company’s technology and business model in order to allow a female and her technology to succeed at this level. Theranos was one of the largest examples of scientific fraud and engineering oversight of our time. Ms. Holmes managed to secure funding from powerful backers such as billionaires Larry Ellison, Rupert Murdoch, and the U.S. government. Ms. Holmes was touted by many as ‘the next Steve Jobs’, and an example of how female entrepreneurs could also make a major impact in Silicon Valley. However, when you look up: ‘sizzle without steak’ and ‘success without substance’ – yep – there is a picture of Ms. Holmes. I’m forever puzzled as to where was the investor due diligence? Where were the professors shouting from the rooftops that her blood-testing technology had never been tested or even published in any peer-reviewed journal? Where was the ‘proof-of-work’, the benchmarks and the investment milestones prior to her receiving almost $1B in investment capital? With 20/20 hindsight, it’s easy to point fingers at Theranos’ massive fraud and scandalous behavior in concealing the effectiveness surrounding its blood testing system. I’m concerned because this lack of business accountability, ‘pump-n-dump’ and flipping behavior – often proceeds a sharp downturn and re-evaluation of entrepreneurial investment. Such a change in behavior would come as quite a shock to our current ‘banker driven’ entrepreneurship model – but would fall right in line with a market downturn and a re-shaping of our collegiate mentality (see below).
I hope everyone had a Happy Thanksgiving holiday.
The Market:
“When Genius Failed” was the title of a book by Robert Lowenstein in the year 2000. It chronicled the rise and fall of Long Term Capital Management (LTCM). LTCM was an elite hedge fund that believed it could ‘rearrange’ risk in order to create wealth. The flaw that took them down was simple, obvious, and avoidable. It always amazes me how history repeats itself. You see, size matters. Their strategies worked perfectly when trading small and often. But pairing a lot of inexperienced money managers with overzealous investors – simply exposed the technology’s flaws and lack of scalability. Throw in an ‘off-the-charts’ greed factor on both sides (ridiculous advisor fees coupled with over-promised expectations) and you get exponential stupidity. That is the backdrop of this current market. We’ve had 9 years of nothing but going up. Many of our money managers have never experienced a down market, and now are seeing:
- 1. Apple drift Lower:
There are stories of Apple's sales slowing. Chart specialists are saying: “It’s all over but the crying” for the iPhone maker's stock, and this stock won’t bottom until the analysts start downgrading it.
- 2. Facebook is a Disaster:
Management has turned this social media giant into a college experiment. CEO Mark Zuckerberg is making Elon Musk look like the Dalai Lama. This company needs adult supervision, and I can’t find any reason to catch this falling knife.
- 3. Technology is in ‘Sell 1st’ mode:
In the world of ETFs, high quality companies get sold along with the rest when the ETF is dumped by the wayside. There’s no real evidence that anything is wrong. But this type of selling ends only when valuations make sense, and we're not there yet.
- 4. Sell the Rally vs (BTFD):
This is the first time since the financial crisis that people are ‘selling the rally’ (STFR) rather than ‘buying the dip’ (BTFD). Everyone believes 2019 will be a down year, and they’re getting ahead of the curve. It’s tough to refute that without more clarity on 2019.
- 5. China is driving the bus:
After Vice President Pence’s remarks at the Asia-Pacific Economic Forum, China is weighing heavily on this market. As long as we believe we can shut-down China by placing limits on trade, this market will react accordingly. I think it's extreme, but try telling that to sellers.
- 6. Our FED is stuck:
Between weaker housing data and strong employment numbers. Our FED requires concrete evidence of people being thrown out of work before they become less hawkish.
- 7. Confusion promotes more selling.
- 8. Technicals don’t lie:
On a technical basis, this market will be hard-pressed to find a bottom with key support levels failing right and left.
- 9. Retailers on Black Friday:
Those who think retail and this economy can handle multiple interest rate hikes are fooling themselves. The market is telling all retailers to be concerned. I’m just not sure who’s listening.
- 10. Holders are hoping for a bounce – to sell into:
There is still too much hope out there. People are still believing that a bounce is coming and it will make things right. The good news is, if we keep falling at this pace – we will quickly reach the point where all hope is extinguished, and we can bounce.
The above issues are shared by a lot of marketeers. They continue to get more accurate with time, which is why I think we are headed lower, even if we get a snapback rally from an oversold position.
Info-Bits:
- Due to Stock Buy-Backs: companies are carrying a $9T debt load. This poses a potential threat should interest rates continue to rise and the economy weaken. Most bond experts think the issue is contained for the next 12 months, but the main worry is over companies teetering between low investment grade and junk.
- Goldman Sachs says “Raise Cash”: and ‘look out below’ if more tariffs happen. GS says that the S&P will rise 5% in 2019 to 3,000 – after closing 2018 at 2,850.
- Smart People are going to Europe: Whether you want to develop new skills, or fancy surrounding yourself with inspiring colleagues, you should cast your eye to Europe. A new report found that European countries do a better job of attracting and developing talented employees than most any other region in the world. For the fifth year running, Switzerland secured the top spot in the world talent ranking followed by: Denmark, Norway, Austria, and the Netherlands. Canada (ranked 6th) was the only non-European nation to make the top 10. It was joined by Finland, Sweden, Luxembourg and Germany. The U.S. ranked 12th, Australia 14thand the U.K. 23rdon their ability to attract, develop, and retain talent.
- JP Morgan sees a slowdown comin’: with the U.S. growing at 1.9% in 2019. That will be quite a shock from the 3.1% pace set in 2018. They point to reduced stimulus from fiscal and monetary policy and negative drag from trade policy. They expect the FED to raise interest rates 4 times, and inflation to run at 2.3%.
- Photo-Op and a Mock Deal is coming from the Trump-Xi meeting: but no long-term truce. Technicians see a temporary bounce coming from the much-touted meeting between President Trump and his Chinese counterpart Xi Jinping at the G-20 in Buenos Aires. However, trade tensions will continue to escalate.
Last Week:
Trading finished early on Friday with U.S. stocks closing lower. Falling oil prices exerted pressure on the markets where all three main benchmarks incurred weekly losses of at least 3.5%. Crude oil is in a bear market, and the slide in oil prices weighed heavily on the energy sector. U.S. oil output is growing, but President Trump continues to appeal to key producers to keep oil prices low. With the DOW tumbling 4.4% last week and the Nasdaq and S&P falling 4.3% and 3.8% respectfully, the performance of all three major U.S. benchmarks was their worst Thanksgiving week since 2011. A reason for that low could be WTI crude shedding 7.7% to settle at $50.42 a barrel – marking the lowest finish since Oct. 9 of 2017. Crude finished decidedly lower due to:
- Light holiday trading volume,
- Oversupply – with U.S. oil production topping 11m barrels/day and major producers Russia and Saudi Arabia also producing at record levels,
- Margin calls intensified due to price speculation,
- China’s demand for oil and gasoline dropped to its lowest level in 13 months – offering more evidence of trade issues affecting the world economy,
- Trump calling for lower oil prices to offset the steadily falling markets,
- Saudi Arabia feeling compelled to comply with Trump’s lower oil price request – in order to preserve their defense-sector deals,
- And a rising dollar also helped to create a headwind for oil.
This week is ‘Black Friday’, and the National Retail Federation is forecasting combined in-store and online spending of $14B and the overall servicing of 164m consumers from Thanksgiving through Cyber Monday. They are also predicting that 43% of the those numbers will be accomplished online. After all, shoppers are looking to benefit from deep discounts while investors are hoping for a change in direction for retail. This past week was rough for retail stocks, but early indications point to a strong start of this holiday season.
Last week:
- The expected move for the S&Ps was $47, but we actually moved $104 lower. That is a sign of an inefficient market. Next week the expected move is $62. With 22% historical volatility and 20% current implied volatility, do NOT sell any short duration premium.
- The financials (XLF) closed at $26 – decidedly under their $26.50 bearish line. Anytime we have been under this level, it has been bearish for the entire S&P.
- With oil selling off, there are thousands of firms issuing loans for drillers and explorers that could be in trouble moving forward. The junk bond index (HYG) is showing signs of being dangerously close to breaking, and this puts me on ‘credit watch’ especially for oil and gas firms and for companies like Tesla.
- The DOW is in trouble because of its largest component – Boeing (BA). In the last 3 weeks, Boeing has fallen from $370 to $290.
Weed:
Now that the sale of cannabis is legal in Canada and becoming legal in many parts of America, market experts see the industry’s potential materializing. If estimates hold, the industry will begin to generate $5B in total annual revenue. New developments are emerging that point to heavy gains in the months ahead.
Canopy Growth (CGC) ($33.56 / +41.86% YTD) is beginning to demonstrate that it is the leader in the cannabis sector. CGC continues to outperform the market despite the noise from the falling oil prices, trade wars, and interest rate hikes. The price forecast for CGC has a median target of $45.35 and a high estimate of $75.58 (+126.4%). Be cautious because the industry is very immature and therefore subject to significant ‘mood swings’. While Canopy Growth is 2ndto rival Aurora Cannabis (ACB) in terms of total production output, the company has done an excellent job of positioning itself to benefit from the wide spectrum of emerging opportunities not only in Canada but in the rest of the world as well. Its primary focus is on medical marijuana patients and a variety of potential health-focused applications. CGC has 84,000 registered patients and a host of clinical studies that are underway – further valuing their patents and product developments. However, don’t take your eyes off Aurora Cannabis (ACB). It is the largest producer in Canada (700,000 kilograms / yr.) and a force to be reckoned with going forward.
Next Week:
“If we pierce 2575 on the SPX, it could get nasty in a hurry” … Don Kaufmann
The holiday season has officially started, and retail sales will be an important barometer for growth. The retail consumer appears to be in great shape. The unemployment rate low, wages are rising, inflation is contained, oil prices are falling, and tax-stimulus dollars have streamed into paychecks. However, the pace may be slower this holiday shopping season. Although economic fundamentals are strong-ish and somewhat supportive of rising share prices – the bull market seems to be getting ‘long in the tooth’. Investors are being urged to raise some cash, as more and more major economic forecasts show a decline, downturn, even a recession right around the corner. Next week, home prices and consumer confidence will be reported on Tuesday, U.S. GDP and new home sales on Wednesday, and personal income and spending on Thursday. FED Chairman Powell will be speaking before the Economic Club of New York on Wednesday, and the 2-day G20 summit will get underway on Friday. The common thinking is that we will see some form of deal with China over tariffs. Also, there is a lot of chatter about the FED changing their tune with their December release. The thinking now is that following their December increase, they may announce a more gradual pace of rate hikes and that dovishness could also fire up a rally.
Again, the FED meets on December 18thand 19thand there is no question about their rate increase; however, the content of their statement released following their meeting is the focus of speculation. If there's the slightest hint that they're willing to pause on rate hikes, or if they suggest that there won't be as many in 2019 as first thought – the market will enjoy that. I think that the market has topped, but there are a few things (behind the curtain) that could spark that ‘one last hurrah’ rally. That rally (if it comes) could be wicked because a few weeks ago we gained 2,000 DOW points in just 8 sessions on virtually no news. If we get a pause in rate hikes AND a China deal – I have to believe that we'll get a wicked spike higher that could challenge all-time highs.
Right now the common thinking is that the market can't mount a meaningful bounce, because we haven't seen a high volume flush. I have a different idea. The market can't make a meaningful run, because there's no reason for it. The reasons include: a) it’s oversold, b) it’s technical and due, c) it’s triggered by news, or d) it’s a ‘dead-cat’ bounce after a dramatic sell off. The G20 meeting may trigger a multi-day bounce that could be stunning in its speed and distance. The flip side is that if we get to December 2ndand there's no deal – then there’s nothing to drive this market higher other than historical stories and technical patterns. Between now and then, we're in a no-man’s land of pure chop. Some short term trading thoughts:
- For the next few days, SELL into any rally.
- Currently the healthcare sector (XLV) is outperforming the S&Ps. Think about shorting XLV, Aetna (AET), and United Healthcare (UNH) on any rally (see graph below). Shorting UNH also coincides with the slide in the DOW – because the DOW’s second largest component is United Healthcare. Therefore, if the DOW is falling, then Boeing and UNH are coming down with it.
As we enter December, look for: a) better retail sales figures, b) a hint of a pausing in interest rate hikes, and/or c) a play-date between the U.S. and China that could ignite a more meaningful rally.
Tips:
The above combination of graphs show a convergence of sectors. Meaning that the strongest sectors are being sold and the weakest sectors are being bought. When combining this with a potential daily resolution to the downside – it’s pointing toward yet another nasty week ahead.
Top Equity Recommendations:
HODL’s:
- Aurora(ACBFF = $6.07 / in @ $3.57),
- American Express (AXP = $105.74 / in @ $108.31),
- Canntrust Holdings(CNTTF = $6.41 / in @ $3.12),
- Canopy Growth Corp(CGC = $33.56 / in @ 22.17), and
- Ceco Environmental(CECE = $8.13 / in @ $6.95)
Thoughts:
- UNH (short)
Crypto:
- Bitcoin(BTC = $3,750)
Options:
- Canopy Growth(CGC): Bullish: Dec 18, -40 / +35 Put Credit Spread
- Walmart(WMT): Bullish: Dec. 7, +96 / -99 / +101 Call BFly
Thoughts:
- For Volatility:
o QQQ – Bearish: Nov 30, Buy the +145 / -157 / +165 PUT BFly
o QQQ – Bearish: Dec 7, Buy $171 PUT and Sell the $168 PUT
o QQQ – Bullish: Nov 30, Buy the +163 / -166 / +175 Call BFly
o QQQ – Bullish: Dec 7, Buy the +163 / -166 / +175 Call BFly
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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