This Week in Barrons: 2-24-2019:
“Hey dad – are we there yet?”
“Shhh – can’t you see your dad is taking a nap …” Tesla family on 12.31.2020
Elon Musk is no stranger to making bold predictions, and the one he made last week was directed toward those self-driving tech doubters. The Tesla CEO said that the electric car maker’s full self-driving feature-set will be completed by the end of 2019. And by the end of 2020, he added, you’ll be able to snooze in the driver’s seat while it takes you from your parking lot to wherever you’re going. “I think we will be feature-complete on full self-driving mode this year, meaning the car will be able to find you in a parking lot, pick you up, and take you all the way to your destination without an intervention this year,” Elon said. Today, Tesla’s technology can “guide a car from a highway’s on-ramp to off-ramp, including suggesting and making lane changes, navigating highway interchanges, and taking exits,”said Musk and the driver’s manual.
Currently, Tesla’s vehicles can’t drive themselves on service roads, parking lots, or in cities. Tesla has said that every car produced since October 2016 has all the hardware needed to drive itself. In January 2017, Elon said elements of that feature would start rolling out in 3 to 6 months. That didn’t happen. Elon has repeatedly underestimated the time it would take to complete and adequately test ambitious projects. Last week Mr. Musk cautioned that it will take Tesla another year to get to the point where their cars can completely drive themselves. “People sometimes extrapolate ‘feature-complete’ to mean that full self-driving now works with 100% certainty - requiring no observation,” he told his audience. “This is not the case.” Elon said that Tesla drivers would be able to fall asleep and wake up at their destinations using full self-drive by the end of 2020. Until then, drivers will have to continue to monitor the technology and be ready to take control of the wheel if something goes wrong.
As Elon continues to make aggressive predictions for Tesla's self-driving technology, most of his autonomous vehicle competitors are moving their go-live dates further out in time and tempering their aggressive timelines for full self-driving car roll-outs. Waymo downplayed the launch of their driverless taxi service in Phoenix last year, revealing that a safety driver would remain behind the wheel at all times. Meanwhile, General Motors’ Cruise has said it will roll out its own AV taxi service this year, but it has stayed mum on when and where that might happen. Uber’s plans are in flux as it recovers from last year’s testing crash that killed a woman. And companies like Nuro and Aurora are taking the slow and steady approach, telling reporters and investors that they’re building their tech with caution and without fanfare. Elon also said that Tesla’s Autopilot team, which launched the feature to handle highway driving, has now turned to handling intersections. “On a development level, there is no problem recognizing stop signs and traffic lights, but you do get ambiguity in some complex intersections with multiple traffic lights. Even if you’re a person, it’s not always clear.”
It makes sense that Tesla began its self-driving project with a highway driving feature. Autonomous industry experts have long said highway driving is easier – the roads are generally uniform and don’t also play host to pedestrians and cyclists. But high-speed, highway crashes are more dangerous. Tesla hasn’t shown off any other element of its full self-driving feature since October 2016, when the company published a promotional video showing a Model S driving through a Northern California neighborhood without its driver’s hands on the wheel. Musk said last week that Tesla’s Autopilot AI computer “is about to roll into production.” He said the company’s technology will be a 2,000% improvement over its current technology. So telling your car: “take me home”could soon become a reality.
Our Manipulated Market:
It’s all about Boeing:
- Boeing is the most important company in the U.S. equity markets.
- Boeing is up +30.7% year-to-date – making it the best-performing DOW stock.
- Boeing comprises 10.9% of the Dow Jones Industrial Average.
- Boeing is 240% more market-influential than Apple, 390% more market-critical than Microsoft, and neither Amazon or Google are even in the running.
- Boeing’s has directly contributed 776 points of the DOW’s 2019 rise.
- Boeing has contributed more DOW points than the next 4 names combined: (Goldman Sachs (225), IBM (177), United Tech (157), and Home Depot (133)).
- And those 5 names are responsible for over half (56%) of the DOW’s gains YTD.
Why is Boeing is the single most important stock in the marketplace today? Because it alone can move an index, and therefore control order-flow in the equity markets. It controls the DOW, and the DOW (in turn) can move the S&P and the Nasdaq. The term for that is ‘statistical arbitrage’. Large trading firms have figured this out, and are beginning to game the system. After all, from the beginning of the year, outflows have exceeded inflows yet markets continue to rise.
When a single stock can drive order-flow, that means that our markets are not in a good place. When a $400 product that is trading less than 4m shares a day can drive a marketplace – that stinks of a NO LIQUIDITY market. The liquidity issues in this marketplace are real, fragile, and paramount. Firms have learned how to game the system by turning their buying algorithms toward one individual stock, which in turn drives an index and other market behavior. And who is currently the largest buyer of Boeing stock – well Boeing of course via its own stock buyback program.
Info-Bits:
- FED Meeting Notes: “Almost all participants thought that it would be desirable to announce a plan to stop reducing the Federal Reserve’s asset holdings.” In order words, they are preparing for another round of QE.
- Over in Europe: Manufacturing slipped into contraction with its lowest reading in 6 years. Germany’s economy stagnated at the end of 2018, trailing most of its peers – narrowly avoiding recession.
- Honda vs Brexit: Honda (due to Brexit) is closing their only plant in England, and Nissan also moved SUV manufacturing from England to Japan.
- Just Fold-it: Is what Samsung said when they introduced the latest reboot of the flip phone that can open up be a tablet. It costs $2,000, and it’s unclear what the phone case situation will look like.
- Nike blew the presentation: Nike’s stock dropped after Duke’s star basketball player Zion Williamson's sneaker burst open during a game – injuring Zion.
- Tesla took a dive: After Consumer Reports said that it could no longer recommend the Model 3 due to reliability concerns. Tesla's general counsel also said goodbye after only 2 months on the job. The departure is said to be due to "a poor cultural fit." Guess he didn’t like the flame throwers?
- The ‘Zon is out-smarting the Gov’t: Amazon paid $0 in federal taxes last year, but made $11B in profit. They did that because they get: (a) research and development tax deductions, (b) a 100% tax deduction for investment in equipment, and most importantly, (c) a tax deduction for stock-based compensation. This means even though profits went up, so did their stock, and so did the value of their tax deductions. Congrats to the ‘Zon.
- The Lyft Roadshow: Lyft is going on an IPO roadshow during the week of March 18th. This gives them a head start over Uber, and will likely value them between $20B and $25B.
- AI-Powered Trading: Humans are fragile, flawed creatures. That's why Alpha Vertex uses Artificial Intelligence to power their actionable trade ideas.
- Payless will close 2,100 stores: Its e-commerce operations are also shutting down. These are the most store closings by a single chain in 2019, and will surely double the number of retail stores set to close this year vs last.
- U.S. economy ain’t lookin’ good: (a) Our manufacturing PMI tumbled to 17 month lows, (b) the world’s largest shipping company warned that the Global Economic Outlook for 2019 is worse than 2018, (c) business spending suffered its longest contraction since 2015, and (d) the Philly FED just recorded its largest index tumble since the 2011 U.S. ratings downgrade.
- Has Gold Bottomed? See below.
- Tech Smackdowns: U.K. lawmakers are calling Facebook a “digital gangster. There's evidence that Facebook knowingly violated U.K. privacy and competition laws. They lied about not knowing the breadth of the Cambridge Analytica scandal. And lied about the scale of Russian ads on their platform.
- Buybacks are not specific to U.S. companies: Japanese corporate buybacks have hit a record this fiscal year and are set to maintain their growth as cash-rich companies bow to governmental and investor pressure to boost returns and improve governance. Recently SoftBank, Sony, and Itochu have announced plans to buy back shares. That brought the total value of Japanese buy backs in the past 52 weeks to over $59B – the most for any fiscal year since 2003.
Crypto-Bytes:
- Bankcoins: One of the world’s largest banks, J.P. Morgan Chase moves more than $6T internationally – on a daily basis. It’s (sort of) launching its own cryptocurrency. They announced JPM Coin, as an internal distributed ledger-based settlement system – that could potentially replace wire transfers for international payments by large corporate clients, cut settlement times from days to seconds, and provide instant settlement for securities issuance. JPM Coin could also replace U.S. dollars held overseas by major firms using JPM’s treasury services. This would ensure that a subsidiary could represent cash on the balance sheet without having to actually wire it to the unit. But not everyone is impressed. Signature Bank, a small-fry compared to JPM in terms of asset size, is already running a private Ethereum-based stablecoin network – doing tens of millions of dollars in settlements for hundreds of clients. Could someone let Jamie Dimon know that his 1stever banking cryptocurrency coin – is a fraud.
- Knocking On 4K's Door: Bitcoin is breaking above $4k, and about to secure its first positive month since July 2018. Also, Ethereum volume surpassed Bitcoin recently – leading to a market rally and pointing to ETH being undervalued.
- Crypto Flagship: Samsung’s latest flagship cellphone will include a dedicated secure storage function designed for cryptocurrency private keys. The new S10 joins a growing line of smartphones designed with cryptocurrencies in mind. Samsung is the largest phone manufacturer to unveil a blockchain feature in a phone, and will see the widest distribution.
Last Week (we learned):
The U.S. stock market has rallied from the December lows in what is an almost straight line higher. Those types of moves do not often end well. While it was expected that the S&P Index would drop to 2,300, and correspondingly bounce back into the 2,800 region – most analysts never expected the veracity of the move. So the market may be telling us that it has other intentions, and this coming week will likely either confirm or invalidate them. Last week, the market had a strong move through 2,725 and is giving strong indications of moving into 2,900 – which would be a ‘FOMO’ (fear of missing out) type of behavior. I am targeting the 2,800 to 2,820 region before the next pullback / consolidation could take shape. As you can see from the above chart, if we move through the 2,820’ish area, it should signal a larger than anticipated corrective rally. It’s in this 2,820’ish region that the 2,770 support becomes extremely important. Once we get over 2,820, any sustained breakdown below 2,770 will be an indication that the rally has run out of steam, and we are turning downward. But, as long as we hold over that 2,770 support level, the pattern continues to point higher with a target of 2,867 and above. Downside action below 2,770 could be very strong and almost ‘crash-like’ in behavior. So the market is indeed looking at a dangerous structure. In summary, as long as the S&P remains over 2,770, I am looking for a challenge of the 2,820’ish arena. Alternatively, should the market break below the 2,740 – 2,730 region – then we’re moving back to 2,600 and potentially lower.
3 Potentially Explosive Companies:
- Kandi Technologies: Chinese automaker Kandi Technologies (KNDI) is one of those names that could be on the verge of a massive breakout. Kandi's core business has long centered around electric vehicles. The Chinese EV boom never transpired and Kandi has in fact seen its share of policy changes around government subsidies – that have caused demand for several EV models to dry up. Revenue and price per share are down sharply from their 2015 peak, but Kandi was just approved to import its EVs into the U.S. The stock surged last week to an $8/share high. As Tesla showed, bold investors can really make some ‘dough’ if they’re early to a trend like this.
- Diebold Nixdorf: A company with an interesting past, Diebold Nixdorf (DBD) was built on old-school banking technology from vaults to ATMs. However, the past decade has been challenging as consumers have moved away from cash and traditional banks – and Diebold was mired in executive scandals and SEC accounting fraud. Due to these and other factors, shares are down 80% from 5 years ago. However, progress along with upbeat earnings and revenue growth have caused shares to wake-up. Diebold Nixdorf shares have more than doubled to $8.50 this year as a sign of increasing optimism. Now may be a good time to give this cheap stock a look as the turnaround gains momentum.
- Avon Products: Another embattled company experiencing an uptrend is Avon Products (AVP). This 130-year-old beauty-products brand has struggled to remain relevant as new brands have connected better with consumers, while e-commerce options make it easier for someone to shop for products online. Revenue peaked in 2011 at $11.3B and finished fiscal 2018 less than half of that. Things are projected to be ugly again for Avon in 2019 from a revenue stand point, but Avon stock seems to have stabilized. Investment in digital tools and distribution as well as having an army of representatives has sparked optimism on Wall Street. Avon is launching a new Expira product line with a health and wellness focus. Throw in a plan to create a leaner, more profitable business and you can see why some investors are optimistic. Avon may never return to its former $30 share price, but given its current $3 share price (doubling in 2019 already) could be signs of better days to come.
Next Week:
Based upon:
- China and Europe both kicking their ‘tariffs and Brexit’ down the road,
- The financial ETF (XLF) stabilizing (last week and this week closing at 26.47’ish),
- Both implied and historical volatility contracting this week,
- The bond market moving in lock-step with the equity market (normally moving in opposite directions),
- The FOMC exhibiting confusion and putting everything on pause –
- I’m still cautiously leaning long.
Back in October, November, and December the S&Ps hit their head on 2820 and were rejected. Now that we're just a couple points away from challenging that region again – what’s going to happen? Every piece of logic tells me that we don't have the earnings to support us remaining at this level. Our economic growth is so weak that the FED had to capitulate on hikes, and our volumes don't equate to the excitement necessary to break above resistance. But nothing about this market is running on logic or fundamentals. All it took to erase the most damaging drop in many years was the FED tossing in the towel. Now that the FED is squarely in the "We ain't doin’ nuttin’ camp”, could this be the time we break over 2820 and roar back to the old highs? It's surely possible, but not logical. At this point, it's completely rational to just sit tight and watch what happens at the 2800 to 2820 level. If we punch through and exceed 2820 for more than one day, it's almost a given that we're going to see them challenge 2900. But if 2820 holds as resistance, I could easily see the market give back half the gains it's made since the December lows – moving down to the 2650 level. So, it's something of a decision point here. Unfortunately, logic and fundamentals say that it doesn’t break through 2820, but a frightened FED suggests they just might pull it off. I’m going to lean long into this market, but keep my fingers near the sell button.
I'm on record saying that some form of China – U.S. deal will get done. But what happens to the market when we get that deal – is up for debate. Some think we just start a whole new leg higher. I think they run the market hard for a short period, and then take profits. In other words, I watching for a "blow off top" and move to the downside.
Tips:
Top Equity Recommendations:
HODL’s:
- Aurora (ACB = $6.96 / in @ $3.57) – & covered write,
- Canntrust Holdings (CNTTF = $9.63 / in @ $3.12),
- Canopy Growth Corp (CGC = $44.54 / in @ 22.17),
- HEXO (HEXO = $5.90 / in @ $5.12),
- Nova Vax (NVAX = $1.927 / in @ $2.19) – & $0.65 covered write,
Crypto:
- Bitcoin (BTC = $4,148)
- Ethereum (ETH = 163.29)
- Bitcoin Cash (BCH = 153.64)
Options:
- Gold Miners (GDXJ = 33.86) Mar 1, -34.5 / +36, CCS for $0.48 CR
Thoughts:
- IWMhas been chugging along like: “The Little Engine that Could”, rising almost 17% in 2019. It’s been down only 8 out of the 33 trading days this year, which might make you think that the boxcars IWM is pulling are filled with loaded dice. IWM’s volume has been slowing down, suggesting a reduced appetite for the small cap sector. And that could mean that it’s reached the top of the mountain – at least for now. With IWM’s IV low, debit spreads are more attractive trades. If you think IWM might be headed for a downhill side, the long put vertical that’s short the $155 PUT and long the $158 PUT in the March 29th expiration is a bearish strategy that has a 64% probability of making 50% of its max profit before expiration.
- LUV- Who ticked off the ghost of Herb Kelleher? Southwest Airlines dropped over 5% last week – the equivalent of 4 standard deviations. Flight cancellations, delays in the new Hawaii routes, and a rising concern about safety drove it lower. Given that any of this news isn’t really new, it’s likely that the ghost of LUV’s recently deceased founder spooked the market. LUV’s implied volatility jumped as the stock fell, but is still relatively low, and suggests that the market may not be as scared of LUV as you might think. If you think LUV might bounce from this sell off, the long call vertical that’s long the $53 CALL and short the $55 CALL in the March 29thexpiration is a bullish strategy that has a 60% probability of making 50% of its max profit before expiring.
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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
