This Week in Barrons: 4-21-2019:
Photo of a Black Hole
Talk about a Black Hole (pictured above) – that’s about how the Uber IPO is priced. Uber should be available to trade next month, and regardless of how they debut, they’ll be worth about 5.5 Lyfts. The good news for Uber investors is that year-over-year revenue is still growing. The bad news is that Uber’s growth has slowed from 69% in Q1 of 2018 to 22% in Q4 of 2018. Another ‘red flag’ is that Uber is warning that it “may not be able to achieve or maintain profitability in the near term or at all” in its core business. It mentions risks including government regulation (which Uber has repeatedly flouted) and intense competition – which will require lower rates and greater discounts. They tried to diversify away from that core business by launching: (a) a food delivery service (Uber Eats), (b) a cargo service (Uber Freight) and (c) a bike rental app (Jump). But last year’s revenue was 82% dependent upon traditional taxi service. Uber Eats (the most promising side service) makes a sizeable chunk of its revenue from just 5 cities including: New York, Los Angeles, and London.
But what about Uber’s Advanced Technologies Group (autonomous vehicles) which it says "has a long-term potential to provide safer and more efficient rides and deliveries to consumers"? Uber has spent more than $1B on this group thus far, mostly because its largest expense comes from paying drivers, and paying the legal fees associated with their drivers’ employment status. If Uber can dramatically reduce the number of drivers – it could become profitable. But even Uber admits that the transition to autonomous vehicles will be a long period of hybrid autonomy, and its own chief scientist wonders - What if it takes too long? If Uber is hoping to just keep burning through cash until the autonomous driving robots take over – it may very well run out of roadway. And to add insult to injury, Lyft IPO’d at $72, rose to $89, and is now sitting around $60.
Uber did follow the 3 main caveats of building a small business:
1. It focused on a big, annoying pain that a lot of people have.
2. It built what others called a great ‘feature’ to solve that pain.
3. And it evolved that ‘feature’ into a platform that created a market.
The Market:
Remember when Disney couldn’t get out of its own way? Last week Disney launched its much-heralded streaming service, which it hopes will compete directly with Netflix and Amazon Prime Video. To their credit, they came at it hard. Disney’s pricing their new service at $6.99 a month (almost 50% less than Netflix’s $13 rate). They are promising 25 exclusive original series, and 10 original films in the very first year. Don’t forget that Disney isn’t just singing princesses and magic action figures anymore – it owns the Marvel superhero franchise and the Star Wars universe. That makes for a potent arsenal of content – which is the number one reason any streaming service lives or dies. Disney shot up 11% on the news and hit all-time highs, while Netflix was down 4%. And remember Netflix does have that ‘sharing of logins’ issue to contend with. Heck, even I’m thinking about moving from Netflix to Disney, and maybe giving Myspace and Snapchat another look while I’m at it.
In contrast, I can’t figure out what a Tesla Model 3 costs. Earlier this year, Tesla announced that they would sell a $35,000 version of their Model 3. As of yesterday, you can no longer buy the lower-priced model online; you have to call them or go to a Tesla retail location. Mind you, Tesla closed almost all of their retail stores, only to announce that they’re rethinking that decision. Then Tesla announced that they won’t let you lease cars anymore – and this morning I received a notice about leasing a new Tesla. So, is Tesla in the business of manufacturing and selling cars or confusion? I’m growing even more skeptical of Tesla’s ability to survive when I hear that Panasonic is stopping all investment in Tesla’s Giga-factories – effective immediately due to Tesla’s slowing sales and questionable decision-making. When compare Disney to Tesla, you need to talk about an ‘old has-been’ swapping bodies with a ‘Wall Street darling’. Wow – “Let the fourth be with you.”
InfoBits:
- Rite Aid: stock has been under $1 since December, and it fell 10% to 51 cents on Friday after missing revenue estimates and giving a poor forecast. But at least they have selling CBD products in select states going for them.
- Kim Kardashian West, Esq?: Model – Instagram influencer – and now attorney? Yep, Kim Kardashian West wants to be a lawyer, so she's apprenticing with a law firm to prepare for the California bar exam. I’ll defend myself – thanks.
- Cash makes no enemies: Thanks to pressure from activists, cashless Amazon Go stores will now start accepting (wait for it) … cash.
- 25,536,442 minutes: A man's three-year-old tried to unlock his iPad so many times, that it's now locked until 2067. That's one way of limiting your screen time.
- Could my day get any worse? Lori Loughlin, her husband, and 14 other people are facing new charges in the college admissions scandal. While they were already charged with conspiracy to commit mail and wire fraud, they're now facing money laundering charges. Aunt Becky could be in prison for 40 years.
- Like Netflix, but for Radio: Netflix is launching a full-time comedy radio channel on Sirius-XM. The channel will feature a mix of audio presentations from past Netflix standup specials, original content, and studio shows.
- FB: same shirt – different day: Facebook could be held legally responsible for any violent content on their platforms – under new rules proposed by the UK government. The rules would force tech companies to scrub from their platforms any content that incites violence, encourages suicide, or constitutes cyber-bullying. The government would block access to websites or apps that fail to comply, and senior managers of those companies could face civil fines and criminal liability.
Crypto-Bytes:
- Hit ‘em where it hurts – the pocket book: Cryptocurrency exchange Coinbase has launched a Visa debit card. “The Coinbase Card, will let users spend Bitcoin (BTC), ethereum (ETH), litecoin (LTC), and all other cryptocurrencies supported by the platform as effortlessly as the money in their bank,”Coinbase said. The exchange will instantly convert the cryptocurrency to fiat at time of transaction.
- Make love not war: Money transfer giant Western Union has teamed up with blockchain startup Coins.ph to enable residents of the Philippines to more easily receive cash. The newly inked deal will see both international and domestic payments made via Western Union’s network arrive directly into the digital wallets held by Coins.ph’s users. “There are many overseas Filipino workers who regularly send money back home, and we are always looking for additional remittance options,” said Coins.ph co-founder and CEO Ron Hose.
- You didn’t wanna hedge? Crypto-focused venture fund Polychain has lost nearly 40% of its assets ($400m) since August 2018, and now only has $592m remaining – according to their most recent SEC filing. Their latest filing said: “We give no assurance that digital assets will maintain their long-term value.” Or better phrased: “You guys need to learn how to manage a real fund by putting hedges in place. Because anybody that allows you to manage their money from here on out has their head up their ___.”
- Absolute power corrupts absolutely: The Competitive Enterprise Institute has released a report criticizing the SEC’s stance on cryptocurrencies, saying that: “It threatens innovation in financial transactions and other consumer products.” The report believes that cryptos should be regulated as consumer products, and any extended classification could see the SEC extend their jurisdiction over physical goods sometimes used for investment – such as comic books or baseball cards.
Last Week:
The S&Ps ended the week 15 points higher than it started (yawn). There was a general theme of low volume and over-reaction within the various sectors. The financials saw J.P. Morgan (JPM) knock it out of the park on earnings and be rewarded with a 4.7% move to the upside. Wells Fargo (keeping to form) bombed terribly. The market is assuming that all of the other financials will perform like JPM – as most were up 4% on Friday. So ‘look-out-below’ if either Bank of America, Citi, Morgan Stanley, or Goldman bomb next week. Tech and healthcare were two sectors that were weak on a relative basis.
Last week our market moved higher on stronger than anticipated import/export data in China. One of the ‘tells’ surrounding a docile marketplace that volatility is returning, is that the action on the surface simply masks the behavior beneath. I do not see this docile market continuing much longer. I see continued froth to the upside, and then some downside volatility and excitement.
Ted Siedle addressed Congress last week with a talk entitled: “Too frail to work, and too poor to retire”. It was his view of what will become the new normal for many elderly Americans. “We are on the precipice of the greatest retirement crisis in the history of the world. In the decades to come, we will witness millions of elderly Americans, Baby Boomers and others – slip into poverty.”Ted said. The 2 main issues are the rising cost of healthcare and our underfunded pension programs (including Social Security). Ted also cited the problem with pension oversight boards being: “Frequently staffed with inexperienced portfolio managers. Couple that with inconsistent audits and politically influenced investments (stadiums) – and you have a recipe for disaster.”
Weed:
Greenlane Holdings plans to raise $100m through an initial public offering on the Nasdaq, which would arguably make it the closest thing to a U.S. cannabis company available for trading on a major U.S. exchange. The Boca Raton, Florida, company sells cannabis vape hardware and accessories such as rolling papers and pipes to retail businesses and consumers around the world. But its biggest business is wholesaling vape products from Pax Labs Inc., and its one-time subsidiary Juul – which makes nicotine vape pens. In short, Greenlane (GNLN) supplies smoke shops. So, why is this company likely to be approved?
1. By industry standards, Greenlane doesn’t “touch the plant.” It doesn’t grow, distribute, or sell marijuana – and therefore stays on the right side of federal drug trafficking and racketeering laws. That’s critical because the senior exchanges in the U.S. have refused to allow companies that are involved with U.S. marijuana cultivation, distribution, and sales to list their stock. Companies that are listed such as Tilray (TLRY) and Aurora (ACB) do so because their recreational weed operations are located in Canada – where both adult recreational use and medical pot are allowed under federal law.
2. Greenlane has a small number of suppliers, and thousands of customers. Their products basically come from Pax and Juul. And even Juul (which produces nicotine vape pens) was a unit of Pax until it was spun out in late 2017.
3. And Greenlane’s products are legal – not violating any federal or state statutes.
Next Week:
As you review the yearly chart of the S&Ps above, what you should be thinking is: ‘Wait, then Allocate’:
- Given we’re 30 points away from all-time highs – is this the ideal position for getting more bullish?
- Wouldn’t this be a great position for the market to entice more and more people to join and then flatten them like pancakes?
It’s the forever question: Will we break-out or break-down? And if we do have a break-out to the upside: Wouldn’t that provide us a better opportunity to get ‘short’? After all, the market is already ‘up’ considerably above the averages for the year.
From August to early October of 2018, we traded in and around 2,911 – where we are right now. But unlike back then, we are currently seeing some fairly wild sector rotations. This past week the bonds backed-off – which helped the financials considerably. Currently: financials are up almost 13% YTD, and ‘big tech’ is up almost 20% YTD - but relatively flat to ‘down’ last week.
Watch bank earnings early in next week. If Bank of America, Morgan Stanley and Goldman Sachs can deliver the same over-achieving numbers as JPM – we’ll be off to the races. If however one of them misses a beat, then they will be moving down the same amount they went up last week (4%) – and more. Next week the S&Ps are anticipating one of the smallest moves of the year – plus or minus 27 points. Because of this lower volatility – you should be a net buyer of options in anticipation of an earnings miss and a corresponding move higher in volatility. All it would take is a slight up-tick in bonds along with a miss of earnings by one of the large financials – to see this market move lower. Having said that, I’m looking for us to exceed all-time highs in the short-term, and then (after the markets pull in more money from the sidelines) – move dramatically lower. I’m anticipating volatility coming back into the market because the marketplace is displaying signs of confusion.
Tips:
Top Equity Recommendations:
HODL’s:
- Aurora (ACB = $8.88 / in @ $3.07),
- Canntrust Holdings (CTST = $7.17 / in @ $3.12),
- Canopy Growth Corp (CGC = $42.29 / in @ $22.17),
- HEXO (HEXO = $6.30 / in @ $6.37),
- Nova Vax (NVAX = $0.54 / in @ $1.59)
Crypto:
- Bitcoin (BTC = $5,110)
- Ethereum (ETH = $164.00)
- Bitcoin Cash (BCH = $278.00)
Options:
- CGC (42.29): Buy May 17, 47.5 / 50 / 52 Call BFly for $0.03 CR
- CGC (42.29): Sell May 17, -40 / +37.5 Put Credit Spread for $0.70 CR
- HYG (86.96): Buy Apr 18, +77 Put for $0.03 DB,
- SPY (290.16): Buy May 17, (-1) 268 / (+3) 258 / (-1) 256 Put BFly for $0.44 DB
- XLF (27.14): Buy April 18, 26.5 / 27 / 27.5 Call B-fly for $0.10 DB
Thoughts:
- Boeing (BA): So, you think learning to code means you have a safe job? With Boeing (BA) announcing late Thursday that has successfully tested its 737 MAX with the updated software, you have to wonder how programmers can write code when they’re busy pointing fingers at each other. BA has fallen back this week after a rebound. That’s pushed BA’s implied volatility higher. Earnings are coming up on 4/24. That means if you’re a contrarian trader willing to trade through earnings and think that BA might stop dropping, you might consider a bullish short premium trade. The short put vertical that’s long the 352.5 PUT and short the 355 PUT in the May weekly expiration with 49 days until expiration is a bullish strategy that collects a credit 1/3 the width of the strikes, has a 67% probability of expiring worthless.
- QQQ: Now that we finally have a picture of a real live black hole, we can see an instance where gravity beats everything. Here on Earth, gravity doesn’t seem to work with markets as the QQQ’s are up over 20% on the year – defying Newton’s fundamental force. Maybe it’s our strong nuclear forces combined with good old electromagnetic ones keeping QQQs up. But perhaps gravity has been given new hope with its power displayed in this black hole picture. If you think the QQQs may not sustain their rally (for either terrestrial or stellar reasons), you might consider a bearish strategy. The long put vertical that’s short the 184.5 PUT and long the 186.5 PUT in the May weekly expiration with 43 days until expiration is a bearish strategy with a 61% probability of making 50% of its max profit before expiring.
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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R.F. Culbertson
Until next week – be safe.
R.F. Culbertson
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