This Week in Barrons: 3-10-2019:
Thoughts on MMT:
One of the themes in this coming election cycle will be a push for acceptance of Modern Monetary Theory (MMT). This is not a new concept, just one that's being given a lot of air time due to the advancement of socialism. The basic premise of MMT is that if you are a nation using a fiat currency – you can never run out of that money because you can always print more of it. Therefore, we in the U.S. should simply print all the money we need to provide all of the services we require such as: free medical care, free education, and free homes to the homeless. What about the debts? MMT theorists contend that our debts don't matter because we simply owe the money to ourselves. When the bills come due – simply print more money to pay them.
Now, before you roll your eyes – this isn't some ‘johnny-come-lately’ concept. Japan has been engaged in a form of MMT for over twenty years. And before it becomes the core of 2020 election speak, we should take a minute to understand why some of the presidential candidates will be proposing the change. To steal an excerpt from the movie Vice: “Modern Monetary Theory is a school of economics that says our panic over gov’t budget deficits is delusional and misguided. Under a fiat currency system, a gov’t can print as much money as it needs – as long as it can mobilize the necessary labor, machinery, and raw materials to provide the appropriate public services. Money is nothing more than what you give the nice lady before she hands you the ice cream cone. The U.S. dollar is not a lump of gold, but rather an IOU from the U.S. Gov’t. It means that the federal government can't run out of cash. It can run out of things money can buy – which will drive up prices and cause inflation – but it can't run out of money. Exactly like Macy’s can’t run out of Macy's gift cards."
This is the platform that AOC, Bernie Sanders and many others are running on. So, is it hogwash or the Holy Grail? Unfortunately, the idea of a nation printing all the money it needs to pay its debts and create economic activity is as old as time – but the name is new. For years, some of the brightest people have said that when a nation’s debt to GDP ratio approaches 100% - it’s pretty much going to implode. Currently, Japan is running at a 235% debt to GDP ratio – and they are very much alive. What happened?
As I've mentioned many times, debts that cannot be paid – won’t be paid. But if you control your Central Bank, then you can simply print all the money you need to cover your debts and continue like nothing is wrong. So, where's the flaw? Well, the MMT crowd will tell you that any unemployment or low quality of living is not a result of too much debt, but rather a result of not enough buyers for the correct products. We don’t have enough of the right people having adequate funds to purchase the correct goods and services. So in a perfect world, we’d give everyone in that group enough cash to go out and buy those specific items and our GDP would rise accordingly.
The problem with the above scenario is that it causes hyper-inflation. If the FED (right now) gave everyone $25,000 they would run out and spend it like madmen. Certain items would ‘sell out’ and their replacements would come at higher prices. People who were working on those elements would demand higher wages, and those increases would also ripple into the price. Without even considering international trade and currency effects, every nation that has ever attempted this – ended up attaining third-world status because they could never exactly target the individualized gifts. From the Weimar Republic in Germany, to Zimbabwe, Argentina, and Venezuela – giving governments the ability to print freely has always guaranteed hyperinflation. Economist Paul Krugman writes: “When people expect inflation, they become reluctant to hold cash, which drives prices up and causes the gov’t to print even more money to extract the same amount of real resources – which means even higher inflation."
It doesn't surprise me that politicians would like to run on: free healthcare, free education, and free housing. History shows that hyperinflation is the cost of printing more money to pay for these new debts. But I am NOT naïve enough to think that our politicians won't try. They must try something, because our normal economic policies are stretched to the limit. Our debts are unpayable, and either must be discharged via a global reset, or washed away by adopting some form of MMT. Japan has managed to stay afloat by using negative interest rates – which has kept interest payments on their debt burden manageable. Japanese business taxes are also very high along with their import duties. Currently, even the most liberal of economists believe that by 2040 – Japan will default on virtually everything.
Over the next 18 months, MMT will become a mainstream talking point. Our options surrounding managing our debt are slim indeed: (a) a global reset, or (b) some form of MMT leading to hyperinflation. As the proponents claim MMT to be our debt savior, just keep asking yourself: “If it didn’t work in Rome, Germany, Zimbabwe, Argentina, and Venezuela – why would it work here and now?” The answer is: it won’t, but it will be an interesting political process.
Our Manipulated Market:
The S&P 500′s price-earnings ratio is suggesting that the market is ignoring all economic reality. At 2,743, the S&P 500 is trading over 16 times its 2019 earnings estimate. On a valuation basis, the market has risen to reflect a mainstreet environment that is more positive than the one we currently have – and that makes me nervous. The S&P’s monster rally has notched the best two-month start to a year since 1991, but seems to be ignoring the economic realities associated with slowing global growth, downward earnings revisions, recession fears, and our own FED’s tightening possibilities. According to Tom Essaye of Stevens Report Research: “Stock valuations are too high – even assuming that the risks would be resolved in a positive fashion.” Our first quarter earnings growth forecasts have turned negative, and consensus GDP growth has also been slashed to below 2%. Some think that the market is running on hopium - regarding a China deal and our FED being patient. I’m more pragmatic and look toward corporate buybacks and the Plunge Patrol Team as our market drivers. Torsten Slok, Deutsche Bank’s Chief International Economist, believes that our markets will decline an additional 10% to come in line with a 15 times S&P multiplier.
On a different note, last week Facebook’s CEO Mark Zuckerberg had a status update for the world. It seems that due to privacy issues, Facebook, Instagram and WhatsApp all had a terrible 2018. Cambridge Analytica used FB to access tens of millions of users' data without their knowledge. FB was the ‘go-to’ site for Russian and Iranian trolls. #DeleteFacebook was trending. There was another data hack, a bug, some phone monitoring, some opposition research drama, and calls for Zuckerberg to testify abroad. This past week ‘the Zuck’ told us that he knows things went off the rails, and his new plan is to revamp the company's products with his customer’s privacy in mind. FB will move away from its public 'sharing is caring'vibe to focus more on private, group chats. He talked about private, secure, deletable, and safe messaging. He used the word 'encryption'a lot. This is a large shift by a huge company. Mark said that it will take a few years to accomplish this feat. Critics are naturally skeptical that the platform that has become synonymous with privacy problems can somehow remake itself as privacy's best friend. To quote ‘For The People’: “We blast pictures online of people we’ve never met. We destroy real people’s reputations with simple keystrokes. We lead lives that are (in one way or another) detached, artificial, and simulated – by using fake money, fake violence, fake love, and fake friends. Sometime we need to accept responsibility for how disconnected and disassociated we’ve become.” 2.7B people use Facebook and its services to communicate. So changes in its platform roughly impact 1/3 of the world’s communicating population. So Zuck, we really need you to put ‘right’ before ‘profitability’ on this one, and I (for one) am not sure that’s even a dream let alone a possibility in your world.
Info Bits:
- Dollar General is closing 380 stores: Signs of a global economic implosion are everywhere. Currently, over 37m credit card users in the US (way over 10%) are over 90 days late on their payments.
- Home Sweet Hotel: Airbnb is acquiring Hotel Tonight for over $463m. With Airbnb going public this year, diversification seems to be in the cards.
- Tesla is cutting more costs: Tesla is asking salaried employees to work from home, and asking hourly employees to go home early and take time off. It’s also rumored that they fired 8% of their workers. Elon recently entered into an agreement with China for a Gigafactory in Shanghai. Tesla will soon be able to manufacture cars in China, minimizing the trade war issues, and allowing them to compete with Nio. There are growing concerns about the exodus of senior executives from the company, and doubts about their ability to ramp up vehicle production. Tesla stock is down 25% since mid-December.
- No Cash – No Service: Philadelphia is now the next major US city to ban cashless stores because politicians think it discriminates against low-income adults that don't have bank accounts. So you want them to pay higher prices?
- Disney opens its vault: saying that its streaming service will feature the entire Disney motion picture library. That announcement came on the heels of Abigail Disney saying: ”If any CEO’s salary is over 500 times that of their median worker - even Jesus Christ himself isn’t worth that.” Mr. Iger’s salary is $45m. The average Disney employee makes $30,000 / yr. – a 1,500 TIMES difference.
- Ze German Cartel: BMW, Volkswagen, and Daimler could face up to $50B in fines as the European Commission investigates whether they conspired as a cartel to cover up their cheating on diesel emissions.
- Bad week for the U.S.: The U.S. trade deficit hit a record high last year of $621B despite frenzied efforts by the Trump White House to bring it in line. The deficit jumped 19% in December – the single biggest monthly gap since October 2008. This the highest deficit since the U.S. posted a $709B one in 2008. Pres. Trump has been trying to close the gap, but it seems his policies (tax cuts and trade war with China) haven't been working as planned.
- Only 20,000 measly jobs: is how many the US economy added in February – which was wayyyyy lower than the 180,000 expected. It was the fewest jobs gained in a month since September 2017. Either the economy is slowing down OR the economy is running out of available workers. Average hourly earnings rose by 3.4% - the largest year-over-year gain since 2009.
- Construction spending: fell in December by 0.6% - estimates were looking for a rise of 0.2%. Guess we’re slowing down more than we thought.
- Goldman goes casual: as suits and ties are now optional for employees. Somehow I have a feeling that some of those GS bankers aren't going to give up their power suits that quickly.
- Content is King: HBO is producing 50% more content than in 2019. This comes at a time when Warner Media is restructuring after losing key executives. Get ready for 10 Game of Thrones spin-offs.
- Music Industry – Rule #1: The music industry brought in $9.8B last year – up over 12% from 2017. 75% of the revenue came from streaming services.
- Peloton picks Goldman Sachs, JPMorgan to lead their IPO: Duh? Goldman and JP Morgan are the only two banks left that can lead an IPO like Peloton. Their board meeting conversation probably went something like:
o CEO: It’s time to go public.
o Board Member: Ok call Goldman.
o CEO: I knew that. They lent us money against our stock months ago. Meeting adjourned.
All that’s left is for the public to decide whether Peloton is Goldman’s next Blue Apron (a Goldman dud) – or not.
Crypto Bytes:
- Bitcoin appreciated: by over 70,000 TIMES over the past decade. Can it move even higher? Keeping to its trajectory, Bitcoin will reach $50,000 by 2022. In the short term, Bitcoin is struggling to move toward $4,400.
- Mike Novogratz: Wall Street’s biggest crypto bull, says Bitcoin will skyrocket once the economic sh*t hits the fan.
- Brian Kelly says: that the Crypto winter is coming to an end as Bitcoin’s fundamentals turn positive.
- Bitcoin transactions: hit their highest level in 13 months.
- Tagomi Co-Founder believes: that the JPMorgan and Facebook crypto-coins could push Crypto further into mainstream USA.
- Helen Zille at Blockchain Africa said: “Ten years from now, Blockchain Technology will be mainstream.”
Last Week (we learned):
Over in Europe: the Manufacturing PMI slid down to 49.3 (contracting), led by Germany and Italy. Even the forward-looking indicators are tilted to the downside. Euro-area factories suffered their biggest drop in orders in almost 6 years in February amid mounting concern over trade tariffs and Brexit. Companies continued to report excess capacity and inflation pressures not seen since 2016. “Euro-area manufacturing has been in its deepest downturn for almost six years,”said Chris Williamson, Chief Business Economist at IHS Markit. “While factories continue to create new jobs, they are likely to be more cautious in hiring and investment, and instead focus on cost control.”
On Friday, the ECB said that it would be keeping interest rates low through 2020 in order to stimulate Europe's economy. The ECB also launched its third iteration of a program of cheap loans – known as targeted long-term refinancing operations, or TLTROs – to eurozone banks. This comes after our FED pumped the brakes on raising our own interest rates, and signals from countries around the world continue to confirm a global economic slowdown. China's economy looks a lot more wobbly as of late with exports plunging 21% in February. That's the weakest performance in 3 years, and it was a lot worse than economists had predicted. The IMF is expecting global economic growth to decline, and the ECB warned of a sizeable reduction in economic expansion.
Unfortunately, Mario Draghi’s accommodative monetary stance couldn’t stimulate any algo-buying last week. In months gone by, a monetary about-face like Draghi did, would have sent the DOW up 300 points. Instead, we went in the other direction on all the major indices – cutting through their respective 200-day moving averages. The plunge (once again) came on above-average volume.
Weed and BioTech:
- Medicines (MDCO): Medicines is a $1.1B bio-pharmaceutical company that provides medication to treat acute and intensive care patients. Despite reporting losses in the 4th quarter, biotech analysts are upbeat about the stock. The company is focused on developing Inclisiran – a lipid-lowering drug designed to reduce LDL-cholesterol in patients with atherosclerotic cardiovascular disease. This promising drug is being produced in collaboration with partner Alnylam (ALNY). Inclisiran is now in several Phase III studies, and if it continues to yield positive results, a new drug application will be filed by Q3 of 2019. The median price target is $47 (+92%) and a high estimate is $85 (+247%). Currently: $24.51 (+28% YTD).
- Axsome Therapeutics, (AXSM) is a clinical-stage bio-pharmaceutical company that is into the development of novel therapies for the management of central nervous system disorders. Last January, the mixing of a common cough suppressant (dextromethorphan) with their bupropion – yielded positive results. The combination is not advised in the medical/pharma field but Axsome is testing its fixed-dose combination as a treatment for major depressive disorder that resists other drugs. The resulting drug called AXS-05 is in a pivotal trial stage and its approval might come earlier than expected. With around 6.7% of American adults suffering a major depressive episode each year, Axsome will have blockbuster sales. The median price target is $17.50 (+97%) and a high estimate is $45 (+407%) – Currently AXSM is $8.86 (+214.18% YTD).
Next Week:
Make sure you understand where I'm at. The market does NOT belong at this level because the fundamentals don't support it. The transports have rolled over from their down-sloping trend line. The Baltic Dry Index of shippers is moving lower along with global markets. Logic says we should be on an escalator down, but Central Bank money and buy backs (not logic) determine this market. So, while we should be falling like a rock, it can only happen if they let it.
1. This week the S&Ps were expected to move $33 either higher or lower, and in reality they moved $60 lower. For next week the expected move has increased to $43 – landing the SPX anywhere between 2,700 and roughly 2,800.
2. The Yield Curve is Inverted!– which is an accurate predictor of a recession. The graph above shows the 1 month to 1-year rate – exceeding the 5-year rate. Also:
a. German factory orders were expected to rise 5%, instead they fell -2.5%.
b. Chinese exports declined over 20%.
c. And a major Chinese brokerage firm came out with a SELL on all Chinese stocks – which means that they got approval to give that recommendation from the Chinese Government itself.
3. The ECB’s Mario Draghi turned the liquidity (capital injection) spigots back on.
4. The Goldilocks Scenario is in play – meaning the worse the economic data gets – the more global Central Banksters will ‘juice’ their respective economies. Sooner or later the marketplace will turn its back on the Central Banks. This week was one of those times when the U.S. showed incredibly bad data in virtually every asset class. The FED stepped in with liquidity, but the financials (the main recipient of the liquidity) were sold hard and fast – closing below 26.50 on the XLF.
5. Bonds have reversed course and are back in rally mode – with the 1, 3, and 6 month bond rates exceeding that of the 5-year.
6. The S&Ps were rejected (again) at the 2800 level, but there is no reason to ‘short it’ down here. My suggestion would be to wait for a rally prior to initiating any shorts.
7. Ideas going forward:
a. Utility ETF (XLU) – Money is flowing into this sector rapidly. When it pulls back next week – join the party.
b. Boeing (BA) – once it rallies next week, short it down into the $300 level.
c. Financial ETF (XLF) – is a continued short below $26.50
i. Goldman Sachs (GS) – short it while the XLF is below $26.50
ii. Wells Fargo (WFC) – short it while the XLF is below $26.50
d. Home Builders ETF (XHB) – short it out into May, and
e. Consumer Discretionary ETF (XLY) – on a move above $110 – short it.
On Monday, if markets don't rescue the 2,750 level, the next steps down are in 50 point intervals. We should be headed lower because the economic news has been horrid. Another 400 retail stores are closing, 3 more retailers declared bankruptcy, Friday’s Jobs Report was dismal – but even that was a fallacy. Inside of those 20,000 jobs created were 135,000 created via the Birth/Death model. So without those fake 135k jobs, our economy actually LOST 117,000 jobs in February. Our markets should be headed lower, but a sniff of a China deal will be met with some buying. Words of QE from our FED will cause buying. Stock buybacks will encourage more buying. So if they want to create a rising market – they can. But they'd probably be okay with a managed fade. After all, in October, November and December, we saw a market hit 2,800 and roll over. And after falling for a couple weeks, it turned around and challenged 2,800 again. The fact that Friday’s Jobs Report did not send us 500 points lower suggests that this market is definitely being managed / manipulated. So, if we rescue the 2,750 level early next week, it is not out of the question that we revisit 2,800 soon – no matter how lousy the economic reports. The market is weak, and the economy is weaker than we're being led to believe. But our politicians desire to make things look good is without equal. I’m not making any big bets either way right now.
Tips:
Top Equity Recommendations:
HODL’s:
- Aurora (ACB = $7.75 / in @ $3.57) – & covered write,
- Canntrust Holdings (CNTTF = $830 / in @ $3.12),
- Canopy Growth Corp (CGC = $45.40 / in @ 22.17),
- HEXO (HEXO = $5.43 / in @ $5.12),
- Nova Vax (NVAX = $0.52 / in @ $1.59)
Crypto:
- Bitcoin (BTC = $3,945)
- Ethereum (ETH = 138.00)
- Bitcoin Cash (BCH = 134.00)
Options:
- PFE (43.5): Buy Mar 15, +44 / -44.5 / +45, Call B-Fly for $0.05 DB,
- From above:
- SPY: Buy Mar 15: +279 / -280 / +282, Call B-Fly for $0.05 DB OR
o Buy Mar 15: +271 / -270 / +268 Put B-Fly for $0.10 CR
- GS: Buy Mar 15: +192.5 / -190 / +185 Put B-Fly for $0.06 DB OR
o Buy Mar 15: +197.5 / -200 / +205 Call B-Fly for $0.15 DB
- WFC: Buy Mar 15: +48 / -49 / 49.5 Put B-Fly for $0.00 OR
o Buy Mar 15: + 49 / -50 / +51 Put B-Fly for $0.22 DB
- XLB: Buy Mar 15: +52 / -53 / +54 Put B-Fly for $0.11 DB
- XLY: Buy Mar 15: +105 / -106 / +107 Put B-Fly for $0.08 DB
Thoughts:
- Starbucks (SBUX): I can say, with 100% certainty that SBUX’s new ‘Cloud Macchiato’will never cross my lips. That just means there will be more for Ariana (Vente) Grande. With coffee futures on a losing streak, SBUX has been reaping the rewards of cheap raw materials. The result is that SBUX is trading near an all-time-high. But, even I have to ask how much higher can it go? Earnings are coming up on April 25, and its implied volatility rank is a mere 16% - debit spread territory. If you’re bearish on SBUX, the long put vertical that’s short the $65 PUT and long the $70 PUT in the April monthly expiration has a 62% probability of making 50% of its max profit before expiration.
- Deutsche Bank (DB) : Ach du lieber! Deutsche Bank (DB) is cutting banker bonuses and considering closing its equity business after it lost $750m last year. Apparently, buying the dips in December didn’t work out so well. But DB’s Equity Division has not been profitable for a few years – so they seem to have trouble trading the rallies as well. It’s even struggling to retain its talent – which may be a good thing. We’ve seen this movie before – remember Lehman? DB is up 12% this year, and this could be the stock’s last hurrah. If you think DB might drop and are bearish, the long put vertical that’s short the $7 PUT and long the $9 PUT in the April monthly expiration has a 62% probability of making 50% of its max profit before expiration.
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Please be safe out there!
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Until next week – be safe.
R.F. Culbertson
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