This Week in Barrons: 1-20-2019:
This world just keeps getting weirder. Blue Apron (a company that provides meal kits) rocketed higher this week by 38% after it released a report saying that it would be profitable – if it used non-GAAP accounting and IGNORED losses and falling sales. Unfortunately,if it used generally accepted accounting principles (GAAP) their results were dismal. The company lost $34m this quarter on revenues of $150m (down 33% YOY). Costco (a major distribution outlet) cancelled their partnership with them, and told Blue Apron that they saw the company’s business model as being completely unsustainable. The company is hoping to redefine “profitability” to eliminate (among other things) share-based compensation expenses. It seems that Blue Apron would no longer like to include employee stock compensation in its profitability calculation. I view it as just another ‘pump-n-dump’ scheme being played out in front of J.Q. Public – before the company goes belly-up.
Let’s apply this thinking in a broader context. Rules (like those of GAAP) are here for a reason, and when you stray too far from them – that should be cause for alarm. For example, this week the market spiked on a headline that read: “China plans to eliminate the U.S. trade imbalance.” It seems that China is now willing to buy a lot more U.S. stuff. Traders started to buy Chinese stocks in celebration of the trade war ending. Unfortunately, the trade imbalance is not the issue, but rather how badly China is stealing U.S. technology and using it against us. That ‘gap’ has no resolution in sight.
Another example was a bullish headline that read: “The stock market is off to its best start in the past 32 years.” Obviously they constructed the headline as a potential, bullish momentum buying opportunity. Unfortunately, if you never dove into the details – you would have missed the information ‘gap’ that told you: historically what accompanies runups these are steep drops – potentially 23% in a single day. In fact, according to Andrew Lapthorne (a quant analyst for Société Générale): “U.S. small caps have been taking on a massive amounts of leverage (debt) over the past few years, and with the FED continuing to normalize rates – would advise particular caution in this sector and in the market in general.”
There remains a GAAP in banks as they still report their numbers as ‘mark to model’ versus ‘mark to market.’ That means that banks are able to report their real-estate assets per their own financial model(s) rather than reporting them at market prices. So if their financial model says that a particular property is worth $1m – then it’s reported as being worth $1m and potentially not its $100k open market price. This allows banks a tremendous amount of flexibility in their reporting.
Then I wondered how many times in my own life, have I NOT complied with GAAP. When my father was alive I remember asking him: “Dad, you're always in a pretty good mood, yet we're not rich. Doesn't it bother you not to have more money to buy more stuff?” He told me how his father raised the 4 of them through the Great Depression. He said: "Times were pretty tough, but then WW2 broke out and I joined the Navy. In my life, I've been frozen to the bone, scared, shot, hungry, and exhausted. Now I have a home, a job, food, a great family, a car, and two decent kids. I'm as rich as I need to be." Wow. I never thought about it like that. Maybe there’s a ‘gap’ between being as rich as you ‘need to be’ versus as rich as you may ‘want to be’. Maybe rich is really being heathy and having the things you need – more than the things you want.
Fast forward 50 years and a meme crossed my desk last week: "Happiness is enjoying what you have, not what you think you might want." Now I’ll be the first one to say that 2019 (in a lot of ways) is the most bizarre time I’ve ever lived through. Our ‘gaps’ are larger than I’ve ever seen. We live in a country:
- Where ‘monetary wealth’ is abundant, but 60% of the people cannot find $400 to cover an emergency,
- Where 78% of the people live paycheck to paycheck,
- Where opioids have surpassed auto accidents as our #1 killer, and
- Where we are currently drowning in more debt than the last 200 years combined.
Maybe it’s time to close the ‘gap’. I’m talking about investing the bare minimum in yourself to get through a rough patch. It may be the best return on investment you’ll ever get.
The Market:
Pittsburgh’s own billionaire investor Stanley Druckenmiller could very well be the greatest investor alive today. His track record is astonishing. Between 1980 and 2010, his funds averaged a 30% return per year. That means if you had invested $10,000 in 1980 – in 2010 you would have had $26.2m. He’s never had a losing year. Currently he is “long disruptors and short the disrupted”. Disruptors are not ordinary stocks, and often hand investors gains that are far beyond benchmark indexes. Currently, Mr. Druckenmiller likes ‘the Cloud’ because it gives businesses cheap access to powerful computing power. His top 5 ‘cloud’ businesses include: Microsoft (MSFT), Amazon (AMZN), ServiceNow (NOW), Salesforce.com (CRM), and Workday (WDAY). He views them as being recession-proof because: “If we get in a mild recession, demand goes up because it’s a way to cut costs.”
Info-Bits:
- That ‘Long and Winding’ Road: Tesla just cut 7% of its workforce, and Elon Musk sees a ‘long and very difficult’ road ahead. Tesla discontinued the cheapest versions of its sedan and SUV models this week, and ditched its customer referral program.
- Go TEAM: TEAM, the creators of Jira (project mgmt. software), is one of the best stocks in the market. It IPO’d at $25, and now trades near $100.
- Are you feeling lucky? You can gamble on the outcome of the trade war with China. Chinese government data revealed that China’s overall December exports fell by 4.4% and imports sank by 7.6% YOY. Per SF, the value of Chinese exports to the U.S. has dropped over 30% YOY. If you feel like gambling, here’s a list of Chinese stocks that should react with a trade deal:
o YY Inc. (YY) +19% YTD
o Alibaba (BABA) +14% YTD
o JD.com (JD) +6% YTD
o Sina (SINA) +11% YTD
o Baidu (BIDU) +6% YTD and
o Netease (NTES) +7% YTD.
- Foxconn: just cut 50,000 jobs due to depressed iPhone sales.
- “I now pronounce you…”: Newmont Mining (NEM) purchased Goldcorp (GG) for $10B. That makes NEM the largest gold miner in the world.
- The Netflix Bump: Netflix just announced its largest price increase since the streaming service launched 12 years ago.
- Who done it? Grab your magnifying glass because China’s Huawei is getting investigated for allegedly stealing U.S. trade secrets – including tech used by T-Mobile to test smartphones.
- Oh Snap! SNAP is down 80% since its IPO and having some issues. Tim Stone (the CFO) is leaving after 8 months, and trying to get more money behind the CEO’s back. I can’t wait to hear what he has to say on the Feb 5thearnings call.
- The flip phone – it’s BACK! I remember it like it was yesterday. Lenovo (owner of Motorola) is partnering with Verizon to resurrect ‘The Razr’ as a smartphone with a foldable screen. Let’s bring back ‘Big Band’ music next.
- Finally – smart shoe laces? Nike has eliminated the tying of shoes. They just revealed smart sneakers – that sense your foot and close the sneaker around it.
Crypto-Bytes:
- Reserve Bank of South Africa: says that cryptos could "materially impact” the traditional financial sector.
- Coinstar kiosks: will now sell Bitcoin.
- Gov’t Shutdown Pt. 1: is delaying the planned launch of Bakkt as the Commodity Futures Trading Commission must first approve their plan.
- Gov’t Shutdown Pt. 2: A long-awaited bitcoin ETF is likewise in limbo, as the SEC cannot review the proposal during the shutdown.
- Constanti-NOPE-le was delayed: Ethereum’s system-wide Constantinople upgrade was postponed after an audit firm found a flaw that would have allowed people to withdraw funds from the same wallet forever.
- EOS, ETC and ADA: were the big winners last week while LTC, ETH and BCH took it on the chin. ETH continued its slide, and is now 23% off its January high – while BTC was relatively flat and its dominance remained steady at 52.4%.
Last Week:
For several days the buzz was that the Commodity Trading Advisors (CTAs) probably had their programs set to cover any of their own shorts between S&P 2600 and 2640. A Commodity Trading Advisor (CTA) is a U.S. financial regulatory term for an individual or organization who is retained by a fund or individual client to provide advice and services related to trading in futures contracts, commodity options, and/or swaps. They are often responsible for trading within managed futures accounts. What happens is that proprietary trading institutions run algorithms to determine what CTAs have in their accounts. It's a huge undertaking, and allows the institutions to determine where the bulk of the CTAs would have to cover shorts (and/or go long) to protect their positions. It's not an exact science. But in this instance, somewhere between S&P 2600 and 2640 is where the bulk of the short side money movers would have to cover their shorts so they don't start losing money. They all didn't go short the same day, nor will they all cover on the same day. But because it’s a robot driven market, if a handful of them start to cover their short sales – the others will take notice and pile in.
Also, right around 2628 is the 50-day moving average. It would not be uncommon to have the algorithms be programmed to watch 50-day for significant resistance, or support on the way down. My feeling was, if we got through the 50-day, then shorts would cover, markets would romp higher – and that’s what we did. Remember, if you didn't buy the dip a couple weeks ago, you’ve have had a hard time getting into this market because it’s moved so far – so fast. A stall at the 50-day (on the way up or back down) would give others a spot to enter.
On Friday, the market proved that it’s still in a box. It also proved that it's not really the moving average that's going to be the stumbling block, but rather the area of distribution that's clustered around it. Back in October and in December, the 2650’ish area was pretty messy – with a lot of chop. So on one hand we have a market that's been working its way higher on low volume, the FAANG stocks rebounding, and the financials trying to take control. On the other hand we have the Central Banks talking about reducing QE and reducing their balance sheets. We have a lot of earnings that are missing their marks, companies guiding lower, and a lot of overhead resistance. Who wins? Great question. I think we're going to see some push and pull in this area, and I think they're at least going to try and get us higher. I’m showing timing for a high on January 25th, but it is absolutely possible that their push fails and we roll over and give back some of this latest bounce.
Weed & Biotech: Biotech stocks are on a roll since the beginning of 2019. Industry analysts are also predicting that the period of consolidation has arrived. Many firms are announcing positive clinical trials and therefore, M&A activities in the sector are expected to intensify this year. If you’re wary of the sector’s volatile nature, here are two solid biotech picks that can overcome market volatility because the demand for their products will virtually never diminish.
- Incyte (INCY = $76.56 / +20.4% YTD): The biotech firm sells cancer treatments for bone marrow disorder in the U.S. and in partnership with Novartis(NVS) outside of the U.S. Shares of Incyte jumped +7.1% on Tuesday to register a nine-month high. A Goldman Sachs analyst sees acquisition offers to come Incyte’s way given the biotech’s impressive portfolio of cancer treatments. The price forecast is: $111.00 or a +44.98% jump from its current price.
- Alder Biopharmaceuticals (ALDR = $11.65 / better migraine prevention): Alder is currently working on “Epinezumab” which is an intravenous migraine prevention drug. Recent tests indicate that Alder's drug offers more immediate migraine relief, deeper headache prevention, and more durable benefits than rival treatments. Sincepatient volume for these treatments is ever increasing, even with generous discounts by manufacturers – revenue will still be in billions of dollars for this class. Alder will be filing for approval of the drug with the FDA this quarter and a potential launch date is set for 2020. The price forecast is between $22 and $36 – a potential gain of 209% from its current price.
- HEXO and CNTTF in the Cannabis space: Canadian pot growers HEXO (HYYDF) and CannTrust Holdings (CNTTF) have filed the necessary documents to confirm moves to up-list their common stock from the over-the-counter (OTC) exchange to the New York Stock Exchange (NYSE). With two more weed stocks up-listing, the legitimacy of the legal weed industry continues to be reinforced. The NYSE listings demonstrate that HEXO and CannTrust will soon be on institutional investor’s radar. The shares of Hexo are currently trading at $4.67 and are up +36.15% YTD while CannTrust is trading at $6.24 and is up +29.38% YTD.
- Aurora Cannabis (ACB): said Monday it acquired one of the last independent marijuana companies that was originally given the approval to move cannabis genetics from the black market into the legal regime. Aurora said it would pay $132m in stock for Whistler Medical Marijuana – which is known in Canada for its ability to produce high-quality organic cannabis.
Next Week:
This run higher has certainly been impressive. This is what happens when Central banks collude and decide to INCREASE their balance sheets instead of cut them. We have gained 1,700 DOW points in 13 trading days. You can call it: a melt up, short covering, hopium for a deal with China, and/or our FED going dovish. But what you can’t call it is ‘trading on earnings’ – because this earnings season has fallen down miserably. Major companies across all sectors have missed, warned, lowered guidance, and announced layoffs – and yet the market has continued to move higher.
As a refresher, this market moves on liquidity and credit and not on: earnings, analyst upgrades, or fundamentals. Factually: if the Central Banks create excess cash, it WILL get deployed, and find its way into the stock market. As long as companies have the credit to buy back their own shares – this market will move higher. But something very strange is happening. The Central Banks (including our FED) have been telling us how they need to reduce their balance sheets, but the latest data suggests a SURGE in the size of those ledgers. It seems that instead of reducing their balance sheets – they have been expanding them and injecting money back into the markets (imagine that).
This injection effort was coordinated by Sec. Mnuchin and the Plunge Patrol Team. Remember in December, when the market was (for all intents and purposes) heading for a cliff? Well, markets going off cliffs makes Central Banks and Presidents look bad – and we commented that Sec. Mnuchin convened the Plunge Patrol Team to help ‘fix it’. And ‘fix it’ they did. Along with the injection of cash, we magically had the FED go ‘dovish’ and there are hints of a China deal. But this rally is starting to look over done. Next week, I’m expecting more volatility; however, anything could happen right now. I’m showing timing for a high on January 25th, and if you review my options positions below you’ll see some bullish, bearish, and neutral. Most of the positions I have purchased for a ‘credit’, so if they fall apart completely – the positions will remain profitable. After all, the only problem with ‘manipulated markets’ is that unless you’re the one doing the manipulating – you don’t know which direction they will move.
Tips:
Top Equity Recommendations:
HODL’s:
- Aurora (ACB = $6.50 / in @ $3.57),
- Canntrust Holdings (CNTTF = $6.21 / in @ $3.12),
- Canopy Growth Corp (CGC = $43.52 / in @ 22.17),
- HEXO (HYYDF = $5.15 / in @ $5.10),
- NVAX (NVAX = $2.09 / in @ $2.04)
Crypto:
- Bitcoin (BTC = $3,720)
- Ethereum (ETH = 123.00)
- Bitcoin Cash (BCH = 130.00)
Options:
- JNJ (JNJ = 130.69) Bear: Jan 25, Buy +124 / -123 / +121, Put B-Fly for $0.06 CR,
- Microsoft (MSFT = 107.8) Bull: Feb 1, Buy +108 / -110 / +113, Call B-Fly for $0.04 CR,
- NBev (NBEV = 6.40) Bull: Feb 15, Buy +7 / -8 / +10, Call B-Fly for $0.05 CR,
- PayPal (PYPL = 91) Bull: Jan 25, Buy +94 / -95 / +96, Call B-Fly for $0.04 CR,
- Nasdaq (QQQ = $165.30) Bear: Feb 15, Sold the -167 / +171, Call Credit Spread,
- S&P (SPY = 266.56) Bull: Jan 25, Buy +266 / -267.5 / +270, Call B-Fly for $0.06 CR,
- Walmart (WMT = 97.73) Bull: Jan 25, Buy +98 / -99 / +100, Call B-Fly for $0.10 CR,
- XLU (XLU = $53.23) Bull: Jan 25, Buy +55 / -56, Call Debit Spread
- XLY (XLY = 106.81) Neutral: Feb 15, +100 / -102 / -111 / +113, I.C. for $0.56 CR
Thoughts:
- EQT: I remember as a kid looking at snow as dollar-signs – when the driveway and sidewalk shoveling business was exploding. Now, a few inches fall and our nation becomes gripped by blizzard-mania while the kids just sit playing on their smart phones. And if that isn’t enough, UNG (the natural gas ETF) jumped the equivalent of 4.2 standard deviations last week as cold weather caused people to turn up their thermostats. What, they don’t make wool hats anymore? EQT is the largest natural gas producer in the U.S., and predictably it rallied along with UNG. If you think that EQT’s tepid rally won’t last and are willing to take risk going into EQT earnings in the middle of Feb – then the short CALL vertical that’s short the 22 CALL and long the 23 CALL in the Feb expiration with 26 days until expiration is a bearish strategy that collects a credit 1/3 the width of the strikes, and has a 69% probability of expiring worthless.
- SPY: Since bottoming out just before last Christmas, the S&P Index (SPY) has been up 12 of the past 15 days – as the volatility has come back down and New Year’s money has moved into equities. J.Q. Public likes low volatility. But on the institutional side, they are selling the market on rallies to hedge their positive portfolios and buying on dips to hedge their negative portfolios. The recent wide swings in the market suggest institutional activity is pushing it around. Now, there’s no guarantee that will continue, but if you think that the rally in the SPY is starting to stall out and sellers could emerge, you might consider a bearish strategy. The short CALL vertical in SPY that’s short the 268 CALL and long the 270 CALL in the March weekly expiration with 40 days until expiration is a bearish strategy that collects a credit 1/3 the width of the strikes, has a 76% 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
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