This Week in Barrons: 3-17-2019:
Dear R.F.:
Do Robo-advisors actually work? YES they do really work. Robo-advisors are a hot area of Fintech, and are being offered to customers by many investment companies. Robo-advisors are computer programs that automatically set up, monitor, and rebalance investors’ portfolios based on their goals, risk tolerance, and other needs. They are less costly because they are machines. Amazingly, they improve investment performance. According to research published by Professor’s D’Acunto, Prabhala, and Rossi: Robo-advised portfolios experienced higher returns, were more fully diversified, and experienced less volatility. Robo-advisors mitigate the two most prominent investor behavioral biases: (a) the tendency of rookie investors to sell their winners and hold their losers, and (b) momentum chasing – the art of buying high and selling low.
“That’s a $75 change fee.” I couldn’t make this stuff up. A friend of mine was flying out of Chicago last week – heading toward NYC’s Traders Expo. He breezed through security and was 90 minutes early for his crowded 8am flight. There were two earlier NYC flights, and both had plenty of availability. He went up to the gate agent and volunteered to switch flights – thinking that it would allow the airline to make even more money via re-selling his seat on the crowded 8am flight. The gate agent told him: “We’re going to have to charge you $75 to switch flights, it’s our policy.” He tried to capitalize on his semi-celebrity status and his airline miles – but they wouldn’t waive the fee and he returned to wait. After an hour of doing work, a new gate agent called his name and called him to the counter. There the agent asked him: “Sir, do you mind if we change your seat from 6C to 7D – they are both aisle seats?” Then is when the genius happened – he said: “Sure, but I’ll have to charge you $75. Even though your change is not unreasonable, it’s my wife’s personal policy and I don’t have the authority to waive the fee.” What then ensued was an awkward staring contest, with no smiles – well maybe a smirk on my friend’s part. He returned to wait for his flight and his 6C seat.
“Michelle Obama – come on down.” Last week a friend of mine wrote me with his expectations surrounding the next election process. He thinks that the Democrats will put forth many different candidates to run against Donald Trump in 2020. Those candidates will be a smoke-screen and simply designed to test a lot of wildly different ideologies – to see which resonate with the American people. The Democrats will appear as a party in complete disarray. Then, just as it looks like they can't seem to get behind any one candidate, and the idea of losing to Trump again becomes a reality – Michelle Obama will emerge. She will announce late in the game that she must run on Barack’s platform because the country needs her. If that happens, the fractured Democrats will all come together with a singular focus, and make her the nominee. I responded with: “The odds of a fatal airplane crash are 1 in 11 million. You have a better chance of being struck by lightning, getting hit by a meteor, winning an Oscar, and yes - becoming President. So given there have been 2 Boeing airplane crashes in 2 consecutive years – statistically improbable events certainly do happen, and maybe for a reason.
Our Manipulated Market:
Plenty of pundits have compared the trading action in our current market to the bursting of the dot-com bubble. Longtime bull Richard Bernstein said: “We’re at a point in the technology cycle where investors are starting to become pure momentum traders. They begin to believe that tech is no longer cyclical. It’s something new. It’s something different. And that’s sounding a bit like March of 2000.” To his credit, Mr. Bernstein (in March of 2000) published a report declaring tech stocks as overpriced and that the smart money should be headed toward energy and commodities. Six months later, the tech-heavy Nasdaq Composite was in tatters, and by late 2000, it had shed almost 80% of its value. This time around Bernstein says that he’s not worried about nosebleed valuations creating another massive meltdown, but he does fear that skittish investors have a flawed way of thinking about corporate earnings that could ultimately set them up for disappointment. “As profits decelerate (which is what most people agree is going to happen) tech is generally one of the worst performing sectors. The most important portfolio factors are quality and stability.”
Info Bits:
- The Facebook privacy pivot: FB has faced a lot of criticism due to previous privacy breaches. Last week, FB founder Mark Zuckerberg said that the company would be taking steps to improve its data privacy and protection.
- Adios Facebook: Facebook’s longstanding Chief Product Officer and Head of the Facebook App, Instagram, WhatsApp, and Messenger (Chris Cox) said “No Mas” on Friday. No reason was given for his departure, but privately he disagrees with Mark Zuckerberg’s new focus on privacy, encryption, and FB’s new direction. Chris Daniels, head of WhatsApp, also left the company.
- Legally: The Connecticut Supreme Court ruled that families of the Sandy Hook victims can sue the gun manufacturer behind the AR-15 rifle used in the 2012 school shooting. This could provide a legal opening for other lawsuits against gun manufacturers around the US.
- Uber: “Show me da money”: Uber is going public in April. The company is seeking a $120B valuation. That’s much bigger than Lyft’s $25B valuation and larger than most currently traded companies that are older, profitable, and own real assets. Oh yes, Uber is NOT even close to profitability – so at least they have that going for them.
- Tesla – same shirt / different day: Tesla revealed their Model Y crossover last week – priced between $39k and $69k. It will be available in staggered releases between 2020 and 2021. Analysts were underwhelmed by: the car, the delay in delivery, and the company's track record of overpromising and underdelivering. The stock tanked 4%.
- Tesla – “Just kidding: Instead of closing all of those retail stores, let’s raise prices instead,” said Elon. So the hundreds of employees who were effectively fired with an ‘all stores are closing’ tweet, were just re-hired with a ‘just kidding’ tweet. I’m assuming the Tesla HR department is actively looking for other jobs.
- U.S. beats Saudi Arabia: The U.S. is about to become the world’s leader in exporting oil, natural gas liquids, and petroleum. That's hasn’t happened since the mid 1950’s. This was accomplished by the shale oil and natural gas boom in Texas, North Dakota and Pennsylvania. The U.S. has doubled its oil production over the past decade, and now out-pumps both the Saudis and the Russians.
- Speaking of 5G: Verizon is set to become the first network to publicly unleash 5G tech for U.S. smartphones. Next month, it's rolling out the tech for users in Chicago and Minneapolis, but they'll need new gear and pay an extra $10/mo.
Crypto Bytes:
- The Marshall Islands: are moving toward launching their own national cryptocurrency. They have partnered with Israeli startup Neema to develop their coin, and aim to issue 2.4m to the citizens of the islands – by the 2ndhalf of 2019.
- In Venezuela: Bitcoin volume is the 2ndlargest in the world – after the U.S.
- IBM: is trying to fill twice as many blockchain positions as any other company.
- Ripple (XRP): 19 companies are using XRP to power cross-border payments.
- ICOs and Utility Tokens: Germany will begin to regulate them, but NOT as securities.
- Bitcoin’s Bull Cross: Bitcoin’s 50-day moving average is about to cross over its 100-day for the first time since August 2018. It is just the latest indicator (along with MACD and the money flow index) calling for a BTC move toward $4,236.
- Is FB building a digital currency? Facebook’s digital currency is expected to be integrated into the WhatsApp Messenger and other Facebook-owned services. When that’s the case, users will be able to send and receive money through WhatsApp using the cryptocurrency. They will also be able to transfer money internationally – circumventing the exorbitant fees charged by large banks and financial institutions. However, FB is really launching a stable coin – pegging the token’s worth to a fiat currency such as the U.S. Dollar.
- Who’s going to see the Crypto movie? Yep, a real film called ‘Crypto’ starring Kurt Russel opens in theatres on April 12th . It follows a young law enforcement agent on a trip to his home town in New York, where he encounters the Russian mob and their crypto money-laundering operation.
- WorldWire is coming to a neighborhood near you: IBM is teasing their upcoming solution (WorldWire) that targets cross-border payments using stable-coins. Big Blue is talking to its target clients and banks about the new product – which will provide “fungibility of digital assets for financial institutions.”
- Blockchain on Tap: At SXSW, the GDPR startup Civic showcased 3 vending machines selling beer. They demo’d at Consensus last year – and plans are for them to officially roll out a $15k machine that can verify a user’s age and accept payment via crypto – before delivering an ice-cold beer.
Last Week (we learned):
Economically, there's no good reason (other than corporate buy-backs and the ‘Plunge Patrol Team’) for our markets to be this high. The China trade deal is not coming as quickly as hoped, and even with a deal – their industrial output fell off of a cliff (lower) last week. Then there’s the ‘Brexit’ episode of ‘Deal or No-Deal’ that’s going on over in England. Our latest new home sales numbers FELL 7% vs an estimated 0.2% gain. So things are not looking economically sound at the moment. Factually: 96% of all U.S. stocks generate a LIFE-TIME return that matches a TWO-MONTH return on your CD. The reason why so many mutual funds fail to beat the market is because so many stocks fail to beat the market.
Having said that, this past week investors bought everything and anything. We expected the SPX (S&P Index) to move $44 during the week – and instead it moved $80. That’s the 2nd week in a row that the market moved 2X the expected move. That means the entire options market (with hundreds of billions of dollars at risk) has gotten the expected move dramatically wrong – 2 weeks in a row. Factually: the probability of that occurring is less than 1%.
The utility index (XLU) is normally a defensive sector, but this year is on par with the S&Ps – up 12% YTD. The real estate index (XLRE) is also a defensive sector, but is up 40% more than the S&Ps – up 17% YTD. This marketplace is not normal. When risk-on and risk-off assets both rally, it tells us either: (a) something is about to turn drastically lower, or (b) interest rates are about to go to zero – as in a recession.
The good news is that our thoughts are confirmed by what we’re seeing in treasury – as the 6 month treasury yield is higher than the 2-year treasury yield and on par with the 7-year treasury note. That means that investors are seeing as much risk in the next 6 months – as they do in the next 7 years. That is termed a yield curve inversion. It is a 100% predictor of an on-coming recession, and further explains why professionals are buying defensive sectors like utilities and real estate investment trusts.
Finally, last week we saw marketplace liquidity come into question. On Friday (a triple-witching expiration) the market processed 1.3m contracts on the S&P futures – which is extremely light volume. So not only are markets doing a bad job of looking forward and estimating the size of the expected move, but they’re also inefficient when settling trades due to the lack of liquidity. I will discuss this more under Next Week, but factually: higher probability trades such as selling options premium will not work as well in this market as lower probability, directional trades.
Weed and More Weed:
By now you know my stance on cannabis investing. There are very few growth markets on the planet – cannabis is one of them. Markets always pay-up for growth. Hold your nose and dive into the higher risk end of the pool – the water’s fine.
- Everyone Wins: Last week, Aurora Cannabis (ACB) snagged a new advisor. Not just any advisor mind you – but Nelson Peltz, the billionaire activist investor. ACB got an amazing strategic advisor / Mr. Peltz got options to purchase 20m shares, and ACB’s stock went up over 13%. A real win-win-win.
- The Wine & Spirits Annual Marketing Seminar: Ended with a discussion of the emerging cannabis industry and how it will impact the beverage industry. Bruce Linton, CEO of Canopy Growth (CGC), delivered the much anticipated keynote address. CGC has been among the most-discussed players in cannabis since Constellation Brands took a $4B stake in the company last year. Canopy is now present in 13 countries, and is targeting global growth areas as more governments see the upside to monetizing, regulating, and educating in the category. Canada legalized cannabis after it realized it was ignoring an untaxed cash flow of around $6B. CGC is using Constellation’s massive investment to: “protect their IP, create brands, M&A, and infrastructure.” They recently acquired: a vaporizer company, a hemp operation in NY, and an R&D company. He touted Canopy’s new partnership with Martha Stewart which grew out of her existing relationship with CBD lover & rapper Snoop Dogg. Linton said: “You should view the cannabis plant as a bioreactor. Inside the plant are over 100 active ingredients, only two of which we currently get paid for: THC and CBD. Our job is to grow the plant, extract the ingredients, and put them back together in different ways for different outcomes.”
- Harvest Health & Recreation acquired Verano Holdings for $850m. The combined entity will have 200 facility licenses across 16 states, including 123 retailer dispensary licenses, and 13 cultivation and manufacturing facilities running by the end of the year.
- Aphria received more permits from Health Canada to begin cannabis plant production on an additional 800,000 sq. ft. in Leamington, Ontario. The new space will more than triple production.
- In New Hampshire: 68% of the state’s residents support legal recreational cannabis usage. That’s a 20% increase over the past 5 years. Only one problem, Republican Governor Chris Sununu has vowed to veto any legalization bill despite the widespread support.
- Eaze Solutions (delivery) partnered with Kaleafa (dispensary): to serve the local Portland market. Eaze provides a smartphone app that enables customers to place cannabis delivery orders – which Kaleafa fills. Eaze has expanded its scope to deliver CBD products in 41 states and D.C.
- New Mexico legalized recreational cannabis. But the legislation: (a) Only allows for state-run enterprises, (b) Bans all home growing efforts, and (c) Mandates that consumers keep purchase receipts for cannabis or face criminal charges for possession. Taxes would be eliminated for medical marijuana and set at 17% for recreational sales (emulating Colorado).
- Other legal:
Next Week:
Factually, this marketplace (for the past 2 weeks) has rewarded lower probability trading. I tend to think this behavior will continue, and this marketplace will continue to defy expectations until it doesn’t. Meaning – it will continue to rise – until it senses that it has captured all of the momentum traders – and then it will yank the rug. Look at doing ‘risk twist spreads’ – especially inside of an index like the SPY where there is plenty of liquidity. A ‘risk twist spread’ is a lower probability trade, that risks a minimal amount of capital, bets on a market direction, and if correct – reaps huge rewards. Why even consider such a move, because currently we have: stocks up, bonds up, gold up, dogs ‘n cats living together … everything that could be happening – is happening. Things will adjust (they always do) within the next 60 to 90 days. So, for your option trades – look out into May or June. An example of a sector setting up for a ‘risk twist spread’ would be the home builders – who have come roaring back; however the facts tell us that nobody is buying houses. If you think that the home building sector (XLB) may go lower, you could either: (a) buy an April or May, $41 PUT on the XLB, or (b) do a ‘risk twist spread’ to the downside on the XHB out into May. [For an example of a ‘risk twist spread’ – see my SPY position under Tips.]
In general, the 2,800 to 2,815 level on the S&P had been a sticking point since October. The market had a problem closing over that level – until Friday. On Friday the S&P was rebalanced, all manner of options expired, and the S&P put in its first close over 2,815. So, what happens now? Well, there few ways this could play out.
- 1st, the shorts could get really brave, try their best to pile on, and pound this market back down. If they are successful in moving this market lower – the market would go a lot lower very quickly.
- 2nd, instead of trying to be brave, the shorts could give up on the idea of the market moving lower and start to cover all their short positions. You cover a short position by buying the stock. If enough traders do it, it's called a short squeeze and that can be an awfully powerful momentum trade.
I’m guessing that we are going higher, and the shorts are going to panic. I think we go higher for a while, drag in the last of the people sitting on the sidelines, and when everyone’s in the market and convinced we're going to DOW 30K – they pull the rug and we fall like the proverbial rock. If I’m right, and 2,815 holds and we move higher – then all-time highs are right around the corner. If not, and the 2,815 level doesn’t hold – we will see 2,750 and then 2,700 by the end of March. I do believe that this will be the last leg of any upside – so trade accordingly.
Tips:
Top Equity Recommendations:
HODL’s:
- Aurora (ACB = $9.63 / in @ $3.57) ,
- Canntrust Holdings (CTST = $8.88 / in @ $3.12),
- Canopy Growth Corp (CGC = $45.89 / in @ 22.17),
- HEXO (HEXO = $6.11 / in @ $5.12),
- Nova Vax (NVAX = $0.52 / in @ $1.59)
Crypto:
- Bitcoin (BTC = $4,025)
- Ethereum (ETH = 142.00)
- Bitcoin Cash (BCH = 156.00)
Options:
- ACB(9.63): Buy Mar 22, +(1) 9.5/ -(2) 10/ +(1) 10.5, Call B-Fly for $0.10db,
- JPM(106.35): Buy Mar 22, +(1) 106/ -(2) 108/ +(1) 110, Call B-Fly for $0.55db,
- SPY (281.14): Buy May 17, - (1) 268 / +(3) 258 / -(1) 256, Put B-Fly for $0.86db – to be used as a hedge to the downside
Thoughts:
- SPX: Sic semper tyrannis! Yes, the Ides of March is the time to stick it to the dictators in our lives. But until you actually ‘off a dictator’, you may want to call for the fall of the SPX – the most tyrannical of the indices. Debit spreads are the weapon of choice if you are bearish. The PUT vertical that’s long the $2,820 PUT and short the $2,815 put in the April monthly series is a bearish strategy that has a 62% probability of making 50% of its max profit before expiration.
- GE: One stock that’s been struggling since getting booted out of the DJIA last year is GE, and its 62% implied volatility suggests that could be a place to find some short premium. If you prefer to be bullish on a stock that’s down on its luck rather than one that’s near its all-time highs, you should consider GE. Shorting the $9 PUT and buying the $8 PUT as protection in the monthly April series is a bullish strategy with a 74% probability of expiring worthless.
- ASHR is an ETF that holds a broad basket of Chinese stocks that trade on the mainland (versus FXI who’s stocks are traded in Hong Kong). ASHR has been outperforming FXI, but has an implied volatility 150% higher than FXI. If you don’t have an opinion on the direction of the Chinese economy, and think that it might trade in a wide range – then an Iron Condor could be right up your alley. The short Iron Condor that’s long the $24 PUT, short the $26 PUT, short the $30 CALL and long the $32 CALL in the April weekly expiration with 40 days until expiration is a neutral strategy that has a 75% 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
Until next week – be safe.
R.F. Culbertson
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