This Week in Barrons: 12-30-2018:
What does a bear market look like?
A bear market is when stocks see at least a 20% decline from a recent high. Bear markets are also marked by overall Wall Street pessimism. According to Goldman Sachs, bear markets last on average 13 months, and lose 30.4% of the overall market value. It usually takes stocks an average 22 months to recover from a bear market.
The above chart is one of the most important for investors and traders to see before the new year. After 20% declines in almost all of the major indexes, you can definitely make the case that the historic bull market from 2009 through 2018 is over. In 2018, home builder stocks fell by 32%, robotics – down 30%, regional banks – down 22%, energy – destroyed, transports – down 15%, Russell – down 13%, and the list goes on. Barring something bizarre on Monday, this will be the first year in a long time that the S&P, DOW, and Nasdaq all end the year in negative territory.
This is going to bother our leaders because rule #1 is: “You don't mess with someone else’s money.” Social issues are one thing – cash is another. After all, we got into our current situation by leaving globalization and the crash of 2008 behind. Donald Trump is the perfect man for the Internet and social media era. The only problem is – he’s the President of the United States. Trump understands that in an attention based economy, you've got to make news every day. Unfortunately he's no longer just the host of "The Apprentice" – but running the country. How long until the outrage against Trump spreads? Great question, but with a current government shutdown and an incoming Democratic House of Representatives – we may not have to wait very long to find out. If your Presidency is based upon making people wealthy again, what happens if the average person’s net worth actually goes down?
Economist Mohamed El-Erian (of Allianz) recently warned Wall Street that being overly concerned about an economic recession could actually cause one. He said: “We’ve got to be careful because we can talk ourselves into a recession by allowing bad technicals to become bad economics.” El-Erian thinks that to get into a recession: (a) the rest of the world needs to dramatically slow down (which it could), (b) we need to start seeing labor market weakness (GM could be the start), and (c) our FED continues with ‘auto-pilot’ interest rate hikes and balance sheet reductions rather than being data dependent. El-Erian added that there is a lot of uncertainty surrounding the slowing economies in Europe, China, and Japan. After all, both the FED and the ECB are tightening into slowing economies, with larger than expected debt loads, and much more uncertain political futures.
The Market:
Predictions for 2019:
- Kelley Wright (IQ Trends): thinks that we will see a relief rally in January, and finish 2019 up about 8%. He sees no recession over the next two years, thinks the FED will be on ‘pause’ for 2019, and that 2020 will bring in a bull market due to the election year.
- John Putnam: is looking for trouble in the telecom and hospital sectors due to their inability to re-finance their large (stock buyback) debt loads.
- Buckingham: is eyeing opportunities in the semiconductor sector, and specifically Lam Research (LRCX) – which supplies the equipment used to make chips. It’s 50% off its highs, and trades at less than 8 times forward earnings.
- Todd Horwitz (Bubba Trading): predicts that next year is going to be: “Very rough. I think we’re going into a recession, and can see another 15 to 20% drop and a sell-off in the making. We have way too much debt in this country as total corporate debt has swelled to nearly $9.1T. Our banks are over-leveraged and corporate earnings are slowing.”
- Energy: is down over 40% this year, and many stock pickers are looking for a bounce. Some are viewing the energy companies coming out of bankruptcy as being ripe for an upside explosion such as: Halcon Resources (HK), Bonanza Creek Energy (BCEL), and Midstates Petroleum (MPO).
- Online sales: continue to ramp up, and demand for the boxes used for shipping will ramp with it. WestRock (WRK) makes those boxes, and also has a 5% yield.
- Dividend stocks: are ripe for the picking. (a) JPMorgan Chase (JPM) historically bottoms when its yield hits 3.3% - which is where it is now. (b) AbbVie (ABBV) looks cheap when its yield hits 4.5% - and it’s currently over 5%. And (c) Altria (MO) looks ripe when its yield rises to 7% - and currently it’s above 6.5%.
Info-Bits:
With the end of 2018:
- Say “Goodbye”: to Claire’s, GE, Sears, and David’s Bridal – it’s been nice.
- Say “Hello”: to Spotify, Dropbox, and Apple becomingthe first $1T company.
- Say “We’re Back”: as Amazon’s HQ2 found a home in New York and Virginia.
- Say “Just Married”: to Disney & Fox, Comcast & Sky, CVS Health & Aetna, and AT&T & Time Warner.
- Say “I can see clearly now”: as SpaceX launched its first national security location satellite that is 3X times more accurate than current GPS technology.
- Say “It could get ugly out here”: as California sees its tax collections take a hit in December because of its heavy reliance on the wealthy and their exposure to the financial markets. Cali’s top 1% of personal income tax earners generate about 50% of the state’s personal income taxes. A bear market will prove painful, and will potentially force a revision to the state’s budget.
Crypto-Bytes:
- Our Defense Dept.: is using blockchain to improve its disaster relief.
- PwC: predicts greater institutional interest in crypto in 2019.
- Our Nonprofits: are adopting Bitcoin in droves for donations.
- Venezuela: saw their biggest increase in Bitcoin volume in December.
- Africa: conducts over 17,000 Bitcoin trades per day using gift cards.
- Square: (and its support of Bitcoin) was named Yahoo Finance Co. of the Year.
- Our FED: is still not (at all) convinced about cryptocurrencies – oh well.
2018 saw a lot of big players like TD Ameritrade, Fidelity, and Goldman Sachs enter the crypto space. Yale University announced they would invest part of their endowment in a large crypto fund. Intercontinental Exchange’s Bakkt and ErisX will shortly begin to offer crypto risk management products. While it may be a bear market, Bakkt reports that corporations are continuing to commit more resources to cryptocurrency projects. Trading firms are staffing up, exchanges are being started, we’re improving our anti-money laundering & know-your-customer practices, and are developing better solutions surrounding custody. 2019 should bring us fewer hacks on exchanges, minimal illegal security token offerings, and less coin ‘forks’. All-in-all, the industry is growing upward, outward, and continuing to reveal its true value.
Healthcare for 2019:
The health-technology industry is wrapping up a marquee year. Start-ups in the space received record levels of VC funding, with the second half of the year featuring some notable acquisitions – including ResMed’s $225m purchase of Propeller Health. Forecasters are predicting:
- The Apple Watch will start a ‘health feature arms race’ from all the makers of wearables.
- Medicare Advantage Plans will take over as baby boomers age into Medicare. These plans are quickly adopting new technologies because of the way they get paid. They make money on a subscription basis by keeping their members as healthy as possible.
- Amazon (with its most recent PillPack acquisition) will continue its healthcare onslaught. It’s already formed an employer health coalition with J.P. Morgan and Berkshire Hathaway, and it offered a big discount on Prime to low-income Medicaid recipients. Soon, Amazon will make a bold play into the health insurance vertical.
- Big Pharma will continue to hunt for innovation – whether it’s in biotech or artificial intelligence start-ups, or in digital healthcare companies.
- 2019 will bring breakthroughs in how conditions such as depression and anxiety are being tracked and managed.
Last Week:
Last weekend, Treasury secretary Mnuchin asked the CEO's of the 6 biggest banks (Bank of America, Citi, Goldman Sachs, JP Morgan Chase, Morgan Stanley and Wells Fargo) how their loans and liquidity were going. They all replied that things were fine. Just the idea that the Treasury asked these questions, raised red flags everywhere. Do the FEDs see something that we don't? Have the big banks stopped lending money or are their defaults soaring? Then Mnuchin called a meeting with the Plunge Protection Team (PPT). The PPT is real, and is often referred to as: the ‘President's Working Group on Financial Markets’. This is a group (put together in the 80's) that assesses the health of the financial system during times of stress. The group includes officials from the FED as well as the SEC, and was last convened in 2009 during the latter stage of the financial crisis. If they determine that things are getting ugly, they have the ability to make the necessary moves. This group (on the surface) only surveys and makes suggestions to keep things functioning properly – but don't kid yourself. Using various dark money pools they have the ability to do virtually anything from buying stock futures to direct injections of currency.
So the question is, if everything is working properly - Why did Mnuchin call the banks, and Why is he convening the plunge protection team? Because it isn't just the markets that are broken – it’s the economy. Our global economy is grinding to a halt and the market plunge is the most visible piece of that. 9 years of financial monkey business: zero interest rates, governments owning securities, mountains of created derivatives, and a host of other ills have pushed this market to heights it should have never seen. Since Chairman Powell has decided to try and ‘normalize’ rates, there is a lot of creaking and groaning going on. Things are beginning to break. In December alone, the S&P 500 is down nearly 12.5%, while the Nasdaq Composite has slumped 13.6%. The Nasdaq is now in a bear market, having declined nearly 22% from its record high in late August, and the S&P is not far off that level. Corporate credit markets have been under duress, and measures of the investment grade corporate bond market are poised for their worst yearly performance since the 2008 financial crisis. The high-yield bond market (where companies with the weakest credit profiles raise capital) has not seen a deal all month. The last time that happened was in November of 2008.
So the question is, if everything is working properly - Why did Mnuchin call the banks, and Why is he convening the plunge protection team? Because it isn't just the markets that are broken – it’s the economy. Our global economy is grinding to a halt and the market plunge is the most visible piece of that. 9 years of financial monkey business: zero interest rates, governments owning securities, mountains of created derivatives, and a host of other ills have pushed this market to heights it should have never seen. Since Chairman Powell has decided to try and ‘normalize’ rates, there is a lot of creaking and groaning going on. Things are beginning to break. In December alone, the S&P 500 is down nearly 12.5%, while the Nasdaq Composite has slumped 13.6%. The Nasdaq is now in a bear market, having declined nearly 22% from its record high in late August, and the S&P is not far off that level. Corporate credit markets have been under duress, and measures of the investment grade corporate bond market are poised for their worst yearly performance since the 2008 financial crisis. The high-yield bond market (where companies with the weakest credit profiles raise capital) has not seen a deal all month. The last time that happened was in November of 2008.
Next Week:
OMG - we’re crashing! Well – not exactly. I do not think we’re in for a repeat of 2008. This bull market is 10 years old, and is long overdue for a reality check. Political instability can scare the novices and inflict some short term damage to the longs, but this is the market I’ve been expecting and talking about for quite some time. We are finally getting some 2-sided price action, heightened volatility, fearful editors, and clueless financial advisors. We’re finally getting a market that will be creating non-stop opportunities. Additionally, I would not expect a change in market behavior for quite a while. All of this is good news because now we can go old-school. That means we can sell into the rallies and buy into the dips. That means we can potentially trade based upon fundamentals. I don’t believe there has been a time when a government shutdown, an unhinged president, a weakened FED, global uncertainty or threatened impeachment has caused a sustained sell-off. Remember, it’s the ‘no-see-ums’ that kill markets – never the obvious facts.
Last week brought us a 1,000 point rally. Here are 5 reasons not to believe in it:
1. The Volatility Futures are showing us that there is more risk in the next 21 days – than in the next 49 and 83 days. With an inverted volatility structure, a rally will never hold.
2. The rally Correlation Coefficient was 100% – meaning that everything was being bought. The futures were leading the order-flow and there was no discrimination to the buying.
3. The rally volume was minimal – about equal to our (half-day) Christmas Eve volume.
4. The Volatility of the Volatility Index (VVIX) had one of its largest one day drops in history. Although traders were selling their VIX Calls, they were only selling their winnings and reloading.
5. When you look back over the S&Ps for the past 20 years, the dramatic sell side activity that we’ve seen over the past 13 weeks – has normally taken years to accomplish. So the timeframe maps are telling us that there’s more to come – and it’s potentially right around the corner.
In terms of next week, I’m thinking that the S&Ps could drive us higher into 2575 and potentially into 2626.
Tips:
Volatility Survival Guide:
1. Control Your Risk: A market that is volatile – is one that delivers constant opportunity. The buy-and-hold / passive investing psychology – never sees the ‘blood in the streets’ opportunities. We’re nowhere near that environment.
2. Do NOT let Short-Term trades – turn into Long-Term investments. Everybody has some ‘junk’ in their portfolio – don’t be afraid to clean it out.
3. If you’re trading options, use ‘spreads’ whenever possible. A volatility crush will ‘suck’ the premium right out of an option – so protect yourself against that.
4. Nobody can time anything in this market, so you have to strategize around it. Think survival rather than optimization. Think about selling volatility to those out there that want to buy it.
Top Equity Recommendations:
HODL’s:
- Aurora (ACB = $5.21 / in @ $3.57),
- Canntrust Holdings (CNTTF = $5.05 / in @ $3.12),
- Canopy Growth Corp (CGC = $27.35 / in @ 22.17),
- Ceco Environmental (CECE = $6.60 / in @ $6.95), and
- NVAX (NVAX = $1.84 / in @ $2.04)
Crypto:
- Bitcoin (BTC = $3,900)
- Ethereum (ETH = 136.71)
- Bitcoin Cash (BCH = 169.89)
Options:
- Canopy (CGC): Bullish: Jan 18, -40 / +35 Put Credit Spread,
- IWM: (IWM = 132.91) Neutral: Jan 4, Buy the +130 / -132.5 / +135 Call B-Fly,
- VIX: (VIX = 28.34) Bearish: Jan 19, Buy the 25 PUT,
- XLF: (XLF = 23.59) Neutral: Jan 4, Buy the +23 / -23.5 / +24 Call B-Fly,
- XLK: (XLK = 61.40) Neutral: Jan 4, Buy the +61 / -62 / +63 Call B-Fly, and
- XLU: (XLU = 52.83) Neutral: Jan 4, Buy the +55 / -56 Call Debit Spread
Thoughts:
NEM (a gold miner) has been one of the stronger stocks on the board as it’s been following gold higher. NEM’s options show a slight market bias toward the upside, with out-of-the-money CALLS trading a bit richer than equidistant PUTS. I think NEM might stay inside a wide range for the next month or so, and the iron condor that’s long the 30 PUT, short the 32 PUT, short the 38 CALL and long the 40 CALL in the February expiration with 49 days until expiration – is a neutral strategy that collects a credit 1/3 the width of the strikes, has a 70% probability of making 50% of its max profit before expiration.
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
