This Week in Barrons: 12.9.2018

This Week in Barrons: 12-9-2018: 

  

"There’s nothing saving this market from going lower.”… Steve Grasso CNBC …Dec.7

Fear (Sell-the-Rally) vs Hope (Buy-the-Dip):

   I watched intently on Friday while Steve Grasso said on CNBC: “There’s NOTHING that can save this market from going lower!” The market is dealing with a lot of fear right now.  And just like hope caused marketeers to ‘Buy-the-Dip’ (BTFD) for 9 years – fear is causing them to ‘Sell-the-Rally’ (STFR).  Who can blame them, after all:

-      The FED’s raising rates.

-      The FED’s pulling $50B+ per month out of the money supply.

-      President Trump calls himself: “Tariff Man”.

-      We made the U.S. / China tariff fight personal with the arrest of the Huawei CFO.  

-      Russia and Saudi did not agree on production cuts – so oil prices continue to fall.

-       Our 3 and 5-year bond yields ‘inverted’ – showing a lack of economic confidence.

-       Job layoffs are causing scholars to think that a shift in educational priorities might be necessary because those with more ‘socially focused degrees’ are having a more difficult time adapting to change. [Translated = Arts and humanities degree holders are the first ones to be fired and the last ones to be hired.]

-       In crypto-land, the value of Bitcoin has plummeted 75% this year, and even ConsenSys (Ethereum) is laying off 13% of its employees.  They will now be  focused on projects with ‘viable business models’ rather than just a ‘cool factor’.

   I’m not saying we’ll see a market crash, but it seems like a lot of bad things (that won’t go away) are converging on the market.  This reminds me of the ending of The Blues Brothers movie.  The part where all the forces chasing Jake and Elwood finally catch them as they pay the orphanage’s tax at the Cook County Assessor’s office – and then the brothers are handcuffed and hauled off to jail.  We are seeing FEAR (Sell-the-Rally) outweigh HOPE (Buy-the-Dip) for the first time in 9 years.  According to Wharton Prof. Barsade, fear causes: a) low self-esteem and performance, b) reduced team cohesiveness, c) increased stress and helplessness, d) decreased creativity, and e) higher rigidity, anger, and work alienation.

   Netflix is often praised for its high level of employee autonomy, decision transparency, yearlong maternity and paternity leaves, unlimited vacation, and general adherence to a philosophy of “freedom and responsibility.”  In an interview with former Chief Talent Officer Patty McCord, “Netflix worked tirelessly to avoid generic company rules and processes.  These ‘best practices’ are what happens to companies when they copy each other.” However, inside Netflix the pressure to perform is high, and is ‘trigger-happy’ toward the firing squad.  Ms. McCord talked of Netflix’s use of the public ritual to fire employees.  Netflix would actively circulate to hundreds of employees (via e-mail and meetings) why a particular individual was terminated – all from the company’s point of view.  According to Ms. McCord: “The Netflix ‘fear’ culture tends to create the best and worst place you’ve ever worked.  When you’re constantly looking over your shoulder wondering, ‘Am I a keeper or not?’ – you always strive to be your best – at the expense of wearing yourself down.”

   Fear can be enormously helpful for spurring change, but is the forerunner to panic. Fear focuses attention to a point that virtually all other opportunities and novel paths for success are ignored. Fear inhibits learning which is often essential for avoiding the very catastrophe in front of the organization. For example: an investor who sells in fear – is virtually certain to be selling at the bottom.  And (as if to add insult to injury), that same investor’s next investment will most certainly be bought near the top.  

   On the other hand, according to Wharton Professor Creary: “Hope breeds happiness, confidence, positive performance and well-being.” Why all of this matters is because of the term ‘wealth effect’.  People feel wealthy when they look at their investments and feel hope – a sense that they’re doing better.  Those same people then go out and purchase extra holiday presents and/or big ticket items.  There’s been a debate for decades as to whether the wealth effect causes increased consumption or whether it is just positively correlated to it.  None-the-less, the two are tightly bound, and for 9 consecutive years hope (Buy-the-Dip) has driven our thinking – and has been the recipient of:

-      0% Interest Rates,

-      Quantitative Easing, 

-      Modified GDP and Inflation calculations,

-      Corporations sponsoring the largest stock buyback programs in history,

-      The Swiss National Bank printing billions and buying U.S. stocks, and 

-      Our own banks continuing use a ‘mark-to-model’ portfolio calculation, rather than a ‘mark-to-market’ reality based one.

   Starting with President Trump’s election, a lot of time and energy has been spent wondering whether he was the reality tv star that was going to put fear back into our lives?  Constitutional scholars wonder whether he is the one that will force us to balance our budget?  Financial educators wonder whether he is the one that will force a global financial reset – given the world can’t possibly repay all of its debts?  People say he pushes the envelope, and everyone who does so – does it too soon.  People say he doesn’t listen.  Warren Buffett once said: “If you’re not listening – you can’t communicate.  And if you can’t communicate, it’s like winking at a girl in the dark — nothing ever happens.” Our nation hasn’t experienced real fear in over a decade.  I think we’re going to need a lot more ‘hand-holding’ in order to effectively navigate this particular crosswalk.

   Talking about communicators, last week the world lost a great one: George Bush.  President Bush was: a WWII hero, two-term congressman, ambassador to the UN, RNC chairman, US envoy to China, CIA director, and VP under President Ronald Reagan.  He won the 1988 presidential election while he was still VP – something only one other president has accomplished.  He spent his life serving his country and helping to shape modern-day politics.  A few years ago, it came out that Pres. Bush had a form of Parkinson's disease, which left him in a wheelchair.  He died less than 8 months after his wife passed away.  Foreign policy was his strong suit.  He was mostly credited for overseeing a smooth transition after the fall of the Soviet Union and liberation of Eastern Europe.  Ultimately, it was the economy that cost him a second term as president.  He broke a famous campaign promise: “Read my lips – No new taxes.”  Then henegotiated a deal to raise taxes as a way to fight the budget deficit – only for our country's recession to continue.  Globally, tributes have mostly used words like: ‘kind’ and ‘heroic’ to describe President Bush.  Those are two words that have not been used to describe a U.S. President in a long time. I always wonder whether any of our current politicians will modify their own behavior in an attempt to better follow in his footsteps.  One can only dream.  I had the opportunity to spend some time with ‘those who served’ the other week.  I asked them: “What was it like regularly putting yourself in Harm’s Way for your country?”  To a man they said the same words: “I’d gladly do it all again – if they asked me.”  I somehow feel that Pres. Bush would have said those very same words.  It’s that ability to absorb the fear – so that we here at home could feel the hope – that has me forever saying thank you.  Sir – you will be missed.

The Market:

  Tuesday created a lot of buzz around the rate inversion that is taking place across the 3-month, 2-year, 3-year, and 5-year notes.  History hasn't been kind to yield curve inversions, giving them a PERFECT record of predicting a recession 8 or 9 months later.  So, the rate inversion certainly was part of all the algorithmic selling that went on.  The other part is that the market is in the middle of a ‘topping’ process.  After all:

-      Rates are rising and the FED’s on the hook to hike again in December. 

-      Car sales and home sales are falling.

-      Hundreds of stores are going out of business. 

-      Apple's having trouble selling phones. 

-      Car manufacturers are laying off thousands. 

-      The China tariff situation is very much alive.

-      And after the market’s 9-year run-up, a lot of investors are moving to the side of bonds where they can earn 3% with no principle risk.  

   Sure, there will be a few companies here and there that will continue with some earnings growth, but overall earnings have peaked.  When you have been told all your investing life that stocks rise because of earnings growth, and earnings stop growing or decline – then stocks should fall. Granted our market is NOT actually based on earnings, but rather on: credit growth, low interest rates, buy backs and Central Bank intervention.  But in principle, no earnings growth equates to no stock growth.

   Turning our attention to the ‘credit growth’ situation for a moment.  Companies have borrowed trillions over the past few years, and most of those loans are going to get repriced early next year.  For those that borrowed at a quarter of a point, paying 3% is going to be quite a headwind for them.  If you add it all up, you come away with the idea that the overall market really has no reason to go much higher.  The only problem is that since 2008, Wall Street has been all about pushing stocks higher.  Entire portfolios have been built and sold, using escalating stock prices as collateral.  For 9 years there was simply no risk – and now there is.

   So why aren’t I shorting this market?  That's a great question.  Every time this market has gone a bit sour over the past 6 years, the ‘powers-that-be’ have found a way to move it higher.  Whether it's via QE, faking calculations, or having other governments buy our U.S. stocks – you really shouldn’t go wholesale short until you're completely convinced.  And honestly, at any given time our FED could just: stop unwinding their balance sheet, cut interest rates, or have the Central Banks buy more of our stock.  Three elements would cause me to aggressively short this market:

1.   I'd like to get past the holiday seasonality because December into January is historically the strongest time of the year. 

2.   I'd like a concrete answer to the tariff issue.  

3.   And I'd like to see the market lose the October 29th intra-day low on the S&P.

   Give me two out of those three, and I'll be camping out on the short side.  But for now, we're still inside the range and we need to either break out of it or break down.  Neither has occurred yet.  Yes a recession is coming.  I can actually make the case that we've been in one – but it’s going to get worse.  Yes I believe that the market is wildly overpriced.  It will come down, but to place that bet right now is a bit premature.  I can still see these criminals manufacturing one more last hurrah run higher.  I'd like nothing more than one last year end run that gets us near the all-time highs, and that’s where I’d open up the shorts.

Info-Bits:

-       S&P – you’re goin’ down by 15%:  if the treasury yield curve fully inverts – aka the 2-year goes above the 10-year.  History has a perfect correlation that once the Treasury yield curve becomes very flat or starts to invert, the stock market struggles over the following couple of years, as the economy weakens.

-       Is the Inverted Yield Curve a self-fulfilling prophecy?   An inverted yield curve, which occurs when short-term interest rates exceed long-term rates, is a sign that people are worried about the economy – aka a good recession predictor.  But it can also act as a self-fulfilling prophecy by helping to create a credit crunch, which can further slow the economy.  Inverted yield curves have preceded every recession going back to the 1960s.  

-      A Self-Driving Taxi Service is here:  The rumor is true.  Waymo's self-driving car service (Waymo One) has launched its first commercial ride hailing offering in the metro Phoenix area.  People can use an app to ask for an autonomous vehicle 24/7 – complete with price estimates and trip reviews.  The service will initially have human drivers ready to take over in the event of a problem.

-      Facebook – can you believe they’re at it again?  UK lawmakers dropped internal docs that show the Book gave certain companies (like Netflix and Airbnb) VIP access to their users' data.  Facebook says the released docs are part of a baseless lawsuit and are misleading without more context.  “More context” like – all of the other ‘weekly’ user data ‘breaches’ that FB has been privy to. Between FB and Wells Fargo – why would anyone use either of them?

-       Will the FED raise rates on Dec 18^th?  YES.  They will hike as planned, but I do think that we’ve seen them do an about face on future rates and the WSJ headline is probably correct – they’re going to "Wait and See"the data.

Crypto-Bytes – When will it go up?

-       January 24^th, 2019:  is the latest date when BAKKT (a real institutional future market) will launch on ICE.  Being a part of the ICE platform means the New York Stock Exchange will also be able to list the BAKKT contracts, giving the new Bitcoin investment vehicle excellent visibility, liquidity opportunities, and needed stability.

-       February 27^th, 2019:  is when the SEC will decide on the next round of ETF decisions.  VanEck and SolidX teamed up with the CBOE earlier this year to propose their ETF – and under the SEC’s rules, they must approve or reject the ETF outright in its next notice as it cannot be delayed any further.  

-      Q1 2019 – Coinbase is Adding 31 new flavors:  Crypto exchange Coinbase is looking at 31 assets to potentially list on its trading platforms. The list includes both independent token projects and ERC-20 tokens.  Over time, they intend to offer access to over 90% of all compliant digital assets by market cap.

-      Q2 2019 – Security Token ecosystem rollout:  The utility token (which was how most ICOs and ERC-20s were built) works as customer incentive / rewards model. They are absolutely NOT equity purchases in the underlying project.  This equity misconception has been compounded by trading on secondary markets with exaggerated price movements.  This is why security tokens have the potential to be 'game changers',essentially becoming the model that the market always intended to interact with.  Compliant security token models will allow institutional (and retail) investors to participate in legally robust decentralized automated ownership models that provide similar rights to shares.  Before STOs, platforms like: tZERO, Securitize, and Polymath need to complete their framework for tokenizing equity.  This will allow virtually any illiquid asset to be digitized such as: real estate, works of art, and intellectual property.  However, if markets are seeking an immediate spark to reignite investment demand and short term crypto liquidity, security tokens attached to the type of 'blockchain centric' projects that emerged in 2017 and 2018 will be the most likely drivers.  The potential of a security token bull trigger is clear, the model is stronger fundamentally and legally with greater transparency and investor rights than were offered with the first wave of utility token ICOs.  Investors should become excited again about investing in security token offerings when their issuance begins to ramp up in Q2 – 2019.

-      Q3 2019 for Conflux Network:  The Singapore registered Conflux Network just raised $35m from: Sequoia China and Baidu Ventures to name a few. Their team includes Andrew Chi-Chih Yao (a Turing award winner) who believes changing how blockchains are ordered can make them more efficient and faster.

-      Q4 2019 – Bill working thru Congress:  U.S. congressmen Darren Soto (Dem.) and Ted Budd (Rep.) have jointly announced legislation that will ultimately make  the U.S. a “leader in the cryptocurrency industry.”  The bills essentially ask the Commodity Futures Trading Commission (CFTC) and other U.S. financial regulators to come up with a roadmap to better regulate cryptocurrencies in order to protect individuals and businesses.

Bio-Tech:

-      AMARIN (AMRN $16.95 / +325% YTD) If you were with me when the recommendation went out to buy AMRN @ $2 – you have had quite a good year.  AMRNis definitely a top pick for 2019 as well.  Amarin previously presented exceptional results for its prescription fish oil pill Vascepa.  The drug produced a 25% risk reduction in terms of major adverse cardiovascular events like heart attack and stroke when taken alongside a statin in patients with persistently high triglyceride levels.  Vascepa's sales are expected to top $2B annually.  Price Forecast: AMRN is projected to climb further by +200.7% to $51 from its current price of $16.95.  

-      NOVAVAX (NVAX $2.03 / +64% YTD) Investors are closely monitoring Novavax - a small-cap clinical-stage vaccine developer. NVAX is set to unveil key trial results for its respiratory syncytial virus (RSV) vaccine candidate, ResVax, in the first quarter of 2019.  The company is also slated to release mid-stage trial data for its experimental flu vaccine, NanoFlu by the first half of next year.  If both these experimental vaccines are approved, industry experts predict Novavax will generate over $1B in annual sales.  Price Forecast: Because of the high-probability of Novavax’s drugs being approved, analysts forecast a +392.6% rise of NVAX to $10.00. 

Last Week:

   Last week was fascinating.  On Tuesday, just around noon time, the market fell like the proverbial rock.  Why – because about $32B worth of stock hit the market – all to the sell side.  By 2 pm, we had the DOW down 740 points and the S&P down 80.  Where did all of that sell side volume come from?  The most likely source are the CTAs – the managed futures houses or Commodity Trading Advisors.  CTAs chase momentum and don't care where it comes from.  Potentially they had their algorithms set at a particular ‘deleverage’ level, and when it hit – the machines sold.  I wasn’t sure of the triggering event, but we all knew more selling was in the cards. Why – because the market is forming a top.

  Tactically, this past week also gave us a: ‘velocity logic event.’  That is when the Chicago Mercantile Exchange turns on their algorithms and slows down trading. This did not occur during the trading day but rather overnight when the S&P Futures moved 75 points in a 3 minute period.

   And then the week really got interesting.  The U.S. got an extradition order carried out, and the CFO of China's #1 phone maker Huawei was arrested in Canada.  The charge was that Huawei had broken Iranian sanctions.  That arrest lit the markets up all around the world.  Everyone was asking the same question: “Why would the U.S. do this after just coming off a successful cease fire meeting with President Xi in Argentina?”  Well, it seems that the CFO was snatched at the very time Trump and Xi were having dinner. China is terribly upset about this, and willing to push back very strongly.  No matter what the outcome, I at least got my answer.  Tuesday’s selloff was NOT organic.  Someone had leaked the news and at least now we know why the market puked.  Now the question is, what happens from here?

Next Week:  

  

   The ‘volatility box’ shown above is part of a market ‘topping’ process that could deliver one last ‘Hail Mary’ type of upside rally.  They've tried to manufacture that rally several times.  First, the FED has taken on a much more Dovish tone – which popped the markets higher for a day.  They produced headlines out of the Trump – Xi meeting that sounded like a truce – and the market went up for another day.  Right now the market is perched in a precarious place.  They've been defending the current level since October 26^th- with the last bounce coming on November 23^rdwhen we ran higher for 6 sessions from 2,632 to 2,800.  So that sort of screaming bounce is not out of the question. 

   There is an extraordinary amount of risk in this marketplace right now.  The ‘volatility box’ ranges from 2,600 to 2,800 – and nobody knows the next direction. In this past week, the DOW had a 1,800 point trading range.  The financials and the Russell have already broken lower.  Apple is down on the year, and Microsoft remains higher by 22% year-to-date. Next week’s expected move in the S&Ps is $82 – substantially higher than last week.  Factually: over the past 3 years, markets have remained inside their expected range 86% of the time.  Unfortunately, in the past 10 weeks – 50% of the time we’ve traveled outside the expected move.  So in the coming week, you have a 50 / 50 shot of staying inside the expected move.

  The important part is to NOT be a hero in this marketplace.  Let this particular market come to you the trader / investor.  Personally, I think if we break through the ‘volatility box’ to the downside – the VIX will explode and this will be a option premium seller’s dream.  But let the market come to you because: 

-       The FED no longer has this market’s back – as it’s pulling money OUT.

-       Corporate buybacks will begin to taper as CFOs are getting nervous with all of this market volatility.

-       The strategy going forward will be a premium selling one.

   My feeling is that on Monday, we might see them take the market below that lower boundary line, scare the heck out of people, and then manufacture a bounce that brings us back up over that level. The FED will raise rates on the 19^th, but will tell us that the next increase is NOT a done deal. Will that be the start of a move higher - maybe.  Word is that Pres. Trump did not know that the CFO of Huawei was being arrested – so could ongoing talks spark a move higher – maybe.  I've simply seen them manufacture ‘saves’ so many times before – I’m skeptical that they're going to let this go without one more attempt at a ‘Hail Mary’.  So I'm thinking we get a red open, followed by a quick flush, and then a ramp back to flat mid-week.  Let's see if I'm even close.

Tips:

Top Equity Recommendations:

   HODL’s:

-      Aurora(ACBFF = $5.73 / in @ $3.57), 

-      Canntrust Holdings(CNTTF = $5.83 / in @ $3.12),

-      Canopy Growth Corp(CGC = $31.40 / in @ 22.17), and

-      Ceco Environmental(CECE = $8.02 / in @ $6.95)

   Thoughts:

-      AMD short

-      AMRN long

-      FB short

-      NVAX long

-      NVDA short

-      XLU long

   Crypto:

-      Bitcoin(BTC = $3,500)

   Options:

-      Canopy (CGC): Bullish: Jan 18, -40 / +35 Put Credit Spread

-      FB:Bearish: Dec 21, Buy the +120 / -130 / +135 Put B-Fly  

-      NVDA:Bullish: Dec 21, Buy the +140 / -147 / +150 Put B-Fly  

-      XLU: Bullish: Dec 14, Buy the +55.50 / -56.50 / +57 Call B-Fly

   Thoughts:

-      IWM:  With volatility this high, now is the time option traders can get paid via selling short call spreads.  If you are bearish on the small-cap index fund (IWM) or at least think it might not rally back, the short call vertical that’s short the 150 call and long the 152 call in the Jan 18 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.

-      XLE:  The volatility associated with the energy sector ETF (XLE) has been high as oil has dropped – even though XLE has traded in a range for the past 6 weeks.  If you think that XLE might continue to trade in a range, the short iron condor that’s long the 59 put, short the 61 put, short the 70 call and long the 72 call in the Jan 18 expiration is a neutral strategy that collects a credit 1/3 the width of the strikes, has a 66% 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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