This Week in Barrons: 12-2-2018:
Thoughts:
I consider Dr. Richard Florida a friend, and one of the world’s foremost researchers and scholars on entrepreneurship. When he and his team assemble and analyze data – the world listens. Recently his team analyzed more than 100,000 venture deals, across 300-plus global metro areas, spanning 60 countries – between 2005 and 2017. They discovered 4 transformational shifts in startups and venture capital:
1. A Great Expansion in globally invested venture capital. The NUMBER of venture capital deals expanded by 10% per year from 2010 2017, but the AMOUNT of capital invested in those deals surged by over 200% each year.
2. VC Globalization: 20 years ago the U.S. captured more than 95% of all global venture invested capital. Now we only attract 50%. The world is now our equal in so far as entrepreneurship is concerned.
3. Urbanization: Previously, ‘nerds with ideas’ went to Silicon Valley, Boston’s Rt. 128, and / or Austin. Now the 10 largest cities on the globe account for over 70% of the venture capital investments – with San Jose (Silicon Valley) coming in at #10. FYI – 8 of the other 9 cities are outside the U.S.
4. Winner-Take-All Geography: Just like startups, venture capital investments are geographically concentrated. Globally, the top 5 cities account for over 50% of all investments – with the leading cities (especially the ones outside the U.S.) continuing to pull away.
These entrepreneurial trends are being driven by:
1. Technology: High-speed Internet, mobile devices, and cloud computing have made it possible to start and scale a digitally-enabled businesses at a fraction of the cost.
2. Emerging Market Economies: Outside of the U.S., the world has gone through the largest global expansion of the middle class in history. This has given global tech entrepreneurs more local markets to sell into.
3. Politics: Globally we are improving our educational systems. Other countries are bending over backwards to attract highly skilled talent. The U.S. (on the other hand) is sliding backwards on all of these fronts, and is content to watch its dominance in entrepreneurship slip away.
What does all of that mean?
1. For Entrepreneurs: Find the global, high-growth areas and go there. The San Francisco Bay Area will be fine, but put Singapore, Tel Aviv, Toronto, Vancouver, and London on your list immediately.
2. For Investors: You can no longer just look in your own backyard for startups and the talent to power them. Venture capitalists really need to begin to think, look, and act globally.
3. For Managers: If you have grown accustomed to strong local sources of innovation – then begin to take longer plane flights. The next competitive threat and source of innovation will come from a global area that may not currently on your radar.
4. For Politicians: Global high-tech entrepreneurship and venture capital means greater competition for talent. For U.S. policymakers, [spoiler alert] China is nipping at your heels and gaining ground quickly – so either change your ‘nationalistic’ thinking or learn to say: “Would you like fries with that?”
How did it get this way?
We robbed our children of their childhood. Author and NYU professor Jonathan Haidt talks in his book: “The Coddling of the American Mind”how parenting changed (for the worse) in the 1990s. In his research, he asked parents: “At what age did you allow your kids to go out and play without supervision?” Parents over 45 answered: between 5 and 8 years old – while those under 45 said: between the ages of 13 and 16. Haidt contends that such overprotective measures stunted a generation of children’s growth, and kept them from practicing independence at a crucial stage. Haidt said: “Those same parents encouraged their children to ‘find themselves’ in college (where discovery costs a lot of money). And instead of learning how to discover, their first words became: ’Protect me from this, and Punish them for saying that.’” The overprotection produced a generation or two that spends a lot more time interacting with devices than: dating, going out with friends, and / or working.
How does that apply to entrepreneurship? Every VC will tell you that they really don’t want that ‘good student idea’ as much as they want the well thought out opportunity from the professor / researcher. VCs want the thoughts and actions of 45 year-olds, and not those of the twenty somethings – because they don’t want to pay for yet another learning curve. Virtually all of the success stories coming out of entrepreneurship are from CEOs & founders that are over 40 years old. VCs would like entrepreneurs to:
1. Grow up faster. VCs coined the phrases: ‘Act like you’ve been there before’. ‘Do your homework’. ‘Discovery is expensive’. They expect entrepreneurs to learn from history and avoid its many mistakes – not repeat them.
2. Do the Time – Put in the 10,000 hours. An old college girlfriend of mine was the daughter of the reigning Canadian amateur golf champion. After confirming that I golfed, she thought it would be nice if her father and I played together. Before leaving the driveway he asked me: “When did you hit your millionth golf ball?” I thought about it, and said that I had not hit that many. He immediately drove back up the driveway, wished me luck dating his daughter, and returned into his home to do more work. It was an expensive but memorable lesson.
3. Sales is PERSONAL – KYC. VCs expect you to sell, and if you’re TELLIN’ – you ain’t SELLIN’. Believe me when I tell you: It’s NOT about YOU this time.
4. Want some WHINE with that cheese? VCs understand that everybody has a story to tell, and the only story that you need to care about is the prospect’s (not your own). VCs normally excuse themselves from conversations when the entrepreneur starts talking about how ‘hard’ or ‘how many hours’ they work.
Yes Virginia there is a Santa Claus, and Yes Dr. Florida you hit the nail on the head. Entrepreneurship in the U.S. is moving in the wrong direction, and we’re doing little to fix it. But like an alcoholic, in order to turn it around – we’re first going to have to admit failure. I don’t see that happening any time soon.
The Market:
“GM slashes 14,700 jobs and closes 5 plants.” Because of this move, GMexpects to save $6B a year by 2020 and is now focused on self-driving and electric cars. Pres. Trump did not like the news, and is pressuring GM’s CEO to cut production in China, and keep things going in the US. Unfortunately reality sucks. Clayton Christensen’s book "The Innovator's Dilemma" said it best: “You must disrupt yourself, before somebody disrupts you.” Sorry Pres., it’s not about you or politics, but rather survival. GM can see the light at the end of the tunnel, and recognizes it as an on-coming train. Soon, self-driving autos will show up when you need them – and we’ll need a whole lot less of them. Mary Barra (CEO of GM) is doubling-down on EVs and driverless cars in order to win the long game. Ms. Barra knows that business declines slowly at first, and then suddenly. The President is angry, and in many respects that’s a good thing. I’m old enough to remember a world with $20 CDs and Napster – but that’s just not today.
To paraphrase BL’s narrative: The business model for car dealers has been the same for a hundred years. They manage big box stores in the priciest locations. Tesla has shown that the model is vulnerable. The dealership model had barely enough profit margin to support itself 20 years ago – and has been eroding ever since. Prices are transparent to the buyer – so selling mass market doesn't work economically and won’t work psychologically for people under 40. Cars are changing faster than at any time in their history. EVs have changed the paradigm, and self-driving cars will do it again. Without a universal charging protocol, buying an EV involves making an infrastructure bet. Even if you bet right, you're buying tech – so there's always something better coming right around the corner (like inductive road charging). Overlay those realities onto the millennial mindset, and you can see why people are moving away from car ownership. Auto manufacturers are reinventing themselves as suppliers of mobility services, but where does that leave the car dealer? The dealership will need to pivot to survive, but that will be hard to do when your biggest asset is real estate. Tesla has shown that the car dealer is clearly a vulnerable species. I think you will begin to see the manufacturers act quickly because there are hundreds of well-funded EV startups in China without any internal combustion engine legacy costs. So I'm not looking at the GM news as a defining statement on tariffs, but rather as a necessary business model for survival.
In market news, last week’s market ended higher on Friday pushing the main U.S. benchmarks green for the year. For the week, the DOW climbed +5.2%, the Nasdaq gained +5.6% and the S&Ps posted their best week in 7 years by gaining +4.9%.
Info-Bits:
- October Pending Home Sales dropped 2.6% - 10thstraight monthly decline.
- Dallas FED Manufacturing Index declined to 17.6 vs an estimated 29.4.
- CNN reported: "$400,000 was found in a man's washing machine. He was arrested on suspicion of money laundering."
- Mall Store Closures are on the rise: Bon-Ton, Sears, Toys R Us, GAP, Victoria Secret, and even Walmart. Retail is looking at a tepid 2019.
- Bayer announced 12,000 job cuts around the world and potentially selling Coppertone and Dr. Scholl’s.
- Digital publisher Mic (after raising $60m) is laying off most of its staff because it has had a hard time coming up with a sustainable business model.
Crypto-Bytes:
- Fidelity Digital Asset Services is planning on including the top 5 to 7 cryptocurrencies in their new product release. Fidelity is awaiting regulatory clarity before looking at tokens labeled as securities.
- The SEC has settled charges with Floyd Mayweather and D.J. Khaled after they promoted an initial coin offering without disclosing that they were paid to do so. The move marks the SEC’s first crackdown on celebrity endorsements. Mayweather will pay more than $600k and Khaled more than $150k in fines, and each will be banned from promoting any securities products for years to come.
- Between 600,000 and 800,000 bitcoin miners have been shut down since mid-November due to the decline in price of Bitcoin.
- Ripple is rolling out a new version of xCurrent – which is more closely integrated with its other offering – xRapid. The product uses their cryptocurrency XRP to provide ‘on-demand liquidity’ in cross-border transactions.
- Crypto Futures are being enhanced via a partnership between the Nasdaq and VanEck. According to VanEck, an initial release of the first several products will happen early in 2019 and can be thought of as an ‘upgrade’ to many of the products currently available.
- When SEC Chairman Jay Clayton speaks: (a) He’s bullish on blockchain and sees its ability to significantly lower financial transaction costs. (b) His advice for organizations that have conducted ICOs in the past and those planning to do so in the future was an unequivocal "get your act together". (c) He reiterated that it is the SEC's position that Bitcoin is a currency and not a security. And (d) for those hoping for a Bitcoin ETF approval by the end of the year, he did not offer much hope saying that investors had the right to expect that the trading in financial instruments like an ETF "should make sense and be free from risk or manipulation." Equally, "we have seen thefts around digital assets that make you scratch your head." Clayton said he had no particular solution path in mind but that these issues needed "to be addressed before I would be comfortable to proceed."
Weed:
Two marijuana stocks that I haven't discussed before are: Cronos Group (CRON) and Innovative Industrial Properties (IIPR).
- CRON: Like most of the cannabis stocks, the performance of Cronos Group has been erratic for much of the year. By 2019, the problems besetting the industry should be resolved and be smoothly moving forward. Cronos’ competitive advantage is its exclusive, royalty-free partnership with Gingko Bioworks. The partnership gives the company access to Ginkgo's platform to create custom microorganisms for biosynthesizing cannabinoids at commercial scale.
- IIPR: is a real estate investment trust specializing in developing production facilities and extending leases for medical marijuana. The stock is up almost 53% YTD. IITR is attractive primarily because of the uniqueness of its business model. Many clients are entering the industry looking for the ideal space to meet business objectives. The San Diego-based company is capitalizing on the growing number of states where medical marijuana is legal. They partner with investors and shareholders and then collaborate with marijuana producers to find real estate assets that will meet their needs. Last quarter the dividend yield on IIPR was 2.7%. IIPR has 10 facilities in 8 different states – all fully operational, occupied with average lease terms of 15 years. IIPR offers a ‘less volatile’ approach to investing in the cannabis sector.
Last Week:
FED Chairman Jerome Powell took to the air waves this past week – in order to explain his future stance on interest rates hikes. He said that the FED will raise or lower interest rates going forward as a way to keep the economy growing. Chairman Powell defended his rate hikes – and implied that future rate increases will be data dependent. It took me a few reads to try to understand what Fed Chair Powell meant by saying: “Rates are just below the level that would be considered neutral for the economy, and there’s no set path for rate increases.” Apparently, Chairman Powell gets paid a salary and NOT by the word so he never bothered to define ‘neutral’ or any bench-marks for that matter. Despite what appears to be a dovish tone, Fed Funds futures increased their probability of a rate hike at the Dec 19 FOMC meeting. Of course, the market didn’t care about that subtlety, and surged higher. It also pulled XHB, the homebuilder ETF, higher, too, despite new home sales falling almost 9% in October and the possibility that higher rates could make it even harder to buy a new house. Chairman Powell’s softened tone resulted in the bonds rallying, the U.S. 10-year Treasury yield falling back down near 3% (its lowest level in more than 10 weeks), and the U.S. dollar weakening. Oil (meanwhile) had its worst monthly decline since October 2008. We saw the largest weekly gain by U.S. stocks in a long time. The strong Black Friday and Cyber Monday sales showed robust U.S. consumer spending. But the main catalyst that changed the mood and boosted investor confidence was FED Chairman Jerome Powell's comment that “Interest rates are just below the level that would be neutral for the economy.”
Next Week:
The week ahead will be a busy one with important economic data being released. The PMI manufacturing index along with auto sales are set to be reported on Monday, with the ISM non-manufacturing index coming on Wednesday, and the November Jobs Report being displayed on Friday. Fed Chairman Powell is scheduled to testify before the Joint Economic Committee on Wednesday – while the OPEC meeting will start this coming Thursday.
This bear market is far from over. This weekend the U.S. and China are talking and there will be good news released from their get-together. I believe that most of the news is already priced into the market. After all, last week we rallied over 2 standard deviations ($127 SPY points). And even though the move was to the upside – there is still a lot of volatility and inefficiency built into this market. Volatility causes inexperienced traders to feel that whatever they’re doing – is happening at exactly the wrong time. The expected move for just Monday is $47. The line of resistance in the S&Ps sits at 2811. Depending upon how the ‘combo platter’ of news looks coming out of the G20, I think we rally for 1.5 to 2 days and then fall potentially thru 2731 and maybe as low as 2682 – as we return to the rolling bear market.
Now what is more troubling, is that this is the 2ndweek in a row that we’ve moved dramatically past the expected move. That’s telling me that the handicappers are having a tough time getting a handle on this market’s risk, and as a result efficiency is suffering. The bond market is equally confused as they’re being bought (driving rates lower). Maybe the bond market is pricing in a slowing economy? After all, the bonds have been rising (rates falling) for a month now. Continue to watch the financial ETF (XLF). If it dips below $26.50, have a ‘duck and cover’ strategy ready. Where is the opportunity?
1. Do NOT SELL options or spreads until this market become more efficient.
2. United Healthcare (UNH) and the Healthcare Sector (XLV) have had an explosive move to the upside. They have been virtually unscathed by the downturn and are being temporarily used as a risk mitigation strategy. I’m:
a. UNH: Buying the Jan 4 – +282.50 / -280.00 Put Debit Spread for $1.15
b. XLV: Buying the Jan18 - +101 PUT for $4.65
Again, I’m looking for next week’s bounce to challenge the double-top set around 2811 in the S&Ps (see below) before beginning to chop and drift lower.
Tips:
Top Equity Recommendations:
HODL’s:
- Aurora(ACBFF = $5.72 / in @ $3.57),
- Canntrust Holdings(CNTTF = $6.12 / in @ $3.12),
- Canopy Growth Corp(CGC = $33.71 / in @ 22.17), and
- Ceco Environmental(CECE = $8.31 / in @ $6.95)
Thoughts:
- UNH short
- XLV short
Crypto:
- Bitcoin(BTC = $4,200)
Options:
- Canopy Growth(CGC): Bullish: Dec 18, -40 / +35 Put Credit Spread
Thoughts:
- SPY: Bullish: Dec 3, Buy the +145 / -157 / +165 CALL BFly
- UNH: Bearish: Jan 4, Buy the +282.50 / -280 Put Debit Spread for $1.15
- XLV:Bearish: Jan 18, Buy the +101 PUT for $4.65
- X: U.S. Steel (X) isn’t getting any love lately. Tariffs on Chinese steel boosted domestic steel prices, but now economies are starting to slow and demand is dropping. X is now at its lowest level in almost 18 months, and the uncertainty of X’s fortunes has pushed its implied volatility higher. Given X’s low $23 price and its high implied volatility, if you think X might not drop much further – then shorting the $20 January PUT with 49 days left is a bullish strategy with an 88% probability of making 50% of its max profit before expiration.
- EWW: Mexican iShares(EWW) are at their lowest level in over 8 years. The border drama has put their implied volatility higher. If you’re a contrarian bull and think that EWW might bounce back, then shorting the $35 January PUT with 38 days until expiration is a bullish strategy with an 86% probability of making 50% of its max profit before expiration.
- XHB: All of the housing indicators are negative. If you’re a contrarian bear on this spike in equities, and on XHB in particular, the long put vertical that’s short the January $35 PUT and long the $37 PUT with 50 days until expiration is a bearish strategy with a 67% probability of making 50% of its max profit before expiration.
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Please be safe out there!
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R.F. Culbertson
Until next week – be safe.
R.F. Culbertson
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