This Week in Barrons: 4-28-2019:
Myth-Busters:
Myth #1 – EVs: When you include the production of the batteries and the additional power-plant energy required to run electric vehicles, it seems that EVs emit between 11% to 28% more CO2 than their diesel counterparts.
Myth #2 – Single-use Plastic: Single-use plastic is being painted as the devil, but reusable cotton bags are ONLY a substitute if you reuse them consistently for over 11.5 years. Anything less won’t offset the fact that making cotton bags creates over 600 TIMES more water pollution as making a plastic bag.
Myth #3 – Uber & Lyft: Both companies were touted as reducing our carbon footprint by bringing down car ownership and rentals. Data shows: a) more people are abandoning mass transit for the ride services, and b) many ride service drivers sit and idle their cars, or roam around empty, waiting for their next ride – increasing emissions.
Myth #4 – Recycling: Waste-management companies are telling towns, cities, and counties that there is no longer a market for their recycling so they can either a) pay much higher rates to get rid of recycling, or b) throw it all away. Most are choosing the latter. Judie Milner, the city manager of Franklin, New Hampshire – for 8 years has offered her residents curbside recycling and the use of green bins to hold: paper, metal, and plastic. Franklin used to SELL her recycling for $6 / ton. Now, she’s being charged $125 / ton to recycle, or $68 / ton to incinerate. With many residents living below the poverty line, she’s putting the recycling program ‘up in smoke’.
Myth #5 – Education: Thx to RL: Colleges have 3 big problems: a) they’re too expensive, b) they don’t teach very much, and c) over 40% of their graduates end-up working in high-school level jobs. Too costly: For the past 40 years the cost of college has gone up 300%, but for the 40 years before that – it only went up 40%. What happened? Since 1978, new federal student financial assistance programs were initiated that provided colleges the ability to raise fees – and they have. They’ve built fancier facilities, and have engaged in employee bloat to the point where they have more bureaucrats than teachers. Given most college students spend less time on studies than the average 8thgrader – the buildings mostly go empty. Too little Learning: Colleges used to be in the knowledge business, but now the literacy rate of college graduates is falling. Seniors in college have marginally better critical reasoning and writing skills than seniors in high-school. And with most colleges being more concerned about making students comfortable than challenging them with different ideas – free speech, problem solving and intellectual debate are increasingly coming under attack. Underemployment: Recent federal data shows that 41.4% of recent college graduates are underemployed – doing jobs previously held by high-school graduates. For example, college graduates holding the profession of taxi driver has risen from 0.5% in 1970 to over 16% today. The same can be said for waitress / coffee shop attendant. The ‘generic’ college graduate is no longer in demand, and the earnings ‘bump’ given to that graduate vs a high-school diploma is rapidly declining. Solution = Information, Incentives and Innovation: Most high-school students are clueless about: school fit, impact of non-graduation, student debt, and the outcome of picking the wrong major. Students don’t study very much because it’s in the college’s best interest (rankings) to give out high grades regardless of achievement. And heaven forbid we incentivize professors to spend more time in classrooms and administrators to keep costs down. I’m assuming we’re insane because the teaching techniques are basically the same ones Socrates used 2,400 years ago – yet we continue to expect a different outcome.
The Market:
Well we did it. We got the Nasdaq over its all-time closing high. The S&P came up slightly shy, but hey let’s not get picky. So what happens now? We could easily stall out here, but I don't think we will. I think Mr. Market has the last laugh by getting us up and over these levels, running a bit, and THEN rolling over.
The Shark TankTeam went all-in with the Manscaped team of aerospace engineers who designed tools specifically for below the waist grooming and hygiene! Over 750,000 men have already purchased the Manscaped Perfect Package 2.0 for their downstairs maintenance. Nothing says ‘Welcome to 2019’ as a beautifully manscaped nether-region.
Social Security flashed its red lights when their annual report announced that by 2035 they will be completely tapped out. That means that by 2035, Social Security will only have enough funds to pay people ¾ of their benefits when they retire. The SSA urged lawmakers to come up with a fix for this looming problem, but Congress has been hesitant to address the issue because it would likely involve cutting benefits, raising payroll taxes, or both. And President Trump has said he won’t touch Social Security.
Greenland is melting so fast that it’s raising sea levels. Its ice loss has increased six-fold over the past 46 years. That's bad news for places like Hawaii's Waikiki Beach – where rising sea levels will put beachfront property underwater inside of 20 years.
Jeopardy’s Jason Holzhauer: Have you seen this guy in action.
He just keeps betting and winning, and word on the street is that he's broken the game. He wagers absurd amounts on the Daily Double. He starts with the expensive clues – jumps all around the board – it’s riveting education. How is it that in nearly 60 years – no one else has done this? Jason’s all about taking risks and doing it differently. Even Ken Jennings’s said: “He’s amazing, and what a class act.” Now the weird thing is – Jeopardy is pre-taped, so people know how this story ends. Can you imagine if this were live? It would then truly be ‘must-see TV’. Jason inspires you to get off the couch, and try to put a dent in the knowledge universe.
Homeschooling: When you look at industries that continue to operate on old, outdated, and highly regulated models: Education, Healthcare, and Banking – come to mind. It’s interesting to look at the numbers of consumers who are opting out of the legacy education model. In K-12 education, many people think of charter schools as being the disruptive force – capturing almost 10% of the US’s 55m K-12 students. But if you really want to look at where disruption exists, you need to look at parents who are moving toward homeschooling. Parents today may not have the time or inclination to homeschool, but all of the tools are out there for everyone to pull this off. It seems if educators won’t change their model, the world will change without them. As JR always said: “Tell me a way to short the educational system, and I’m in.”
InfoBits:
- Cut Us Some Slack: Slack is gearing up for their IPO. They’ll be listing directly on the NYSE with a $17B valuation. Last year they had $400m in revenue, and $139m in losses. Daily active users were over 10m – which is a lot.
- One Day Shipping For All: Is what Amazon is planning for Prime members. This should be even more incentive to purchase due to a tighter turnaround.
- Uber & Lyft are public because: in 1983, 50% of all 16 year-olds had their driver’s license. Today, it’s less than half that number. Ignore the money losses, and focus on the lives Uber and Lyft have saved, and that stat alone may make them priceless. “I doubt the public markets will allow them to run profitless much longer” says HL.
- Railroads vs Tech: FYI: over the past 20 years railroads have crushed the Nasdaq and the S&P by nearly 1,000% in investment performance.
- Who exhibits less Privacy than your Parents – Facebook: During its earnings call Facebook said they were setting aside $5B for future fines associated with their own privacy violations.
- Happiness Survey: Gallup’s annual survey showed that levels of sadness, anger and fear made new highs last year. Chad (a country in Africa) took home the dubious honor of being the world's most unhappy country – while Paraguay was the world's happiest and most positive country.
- Your Drone Is Waiting: Alphabet’s drone delivery startup Wing is the first to get FAA approval for making commercial business drone deliveries.
- Elon Predicts: a) a new microchip will be in every new Tesla car allowing for autonomous driving, b) by mid-2020 Teslas will drive themselves – allowing drivers to avoid paying attention to the road, and c) autonomous Tesla taxis could make their owners $30,000 a year.
- Disney’s CEO Bob Iger recieved $65.6m: In compensation last year. That is too much money according to Abigail Disney, Roy Disney’s granddaughter. She also pointed out that she has no say in how the company operates.
- That Was Fast: Now that they’re not suing each other, Apple and Qualcomm are working to put 5G chips into the 2020 iPhone. This comes when no one in the U.S. has even semi-usable 5G capabilities.
- All aboard the AWS Club: Apple is paying Amazon $30m a month for AWS cloud services. Apple uses AWS to support its iCloud and related services, and will spend close to $1.5B on AWS over 5 years.
- KP – keep saying Yes: PM wrote a great piece titled: ‘How Kleiner Perkins (KP) Fell.’ She mentions how KP said ‘no’ to investing in Robinhood at valuations of: $61m, $250m, $1.3B – and at $5.6B said ‘yes’. PM said ‘yes’ and invested at $8m, $250m & $1.3B – and said ‘no & sold’ at $5.6B. KP – keep sayin’ yes.
Crypto-Bytes:
- Bitcoin: is up 40% in 60 days, and has halted the Altcoin season in its tracks. If Bitcoin can maintain its uptrend, a big move is imminent to around $7k. That’s why crypto-traders are abandoning Altcoins and bullishly buying Bitcoin. By the way, do you know any other asset that has raised $0 from VCs in the past 10 years – and yet is worth over $100B? I don’t.
- Lending crypto? Genesis Global Trading's crypto lending arm continues to grow. Genesis Global Capital wrote $425m of crypto loans in Q1, bringing its total originations since March 2018 to $1.53B. Short sellers now account for only 3% to 5% of Genesis' bitcoin loans, down from 50% in early 2018.
- A Brave new Ad world: Brave’s promise to compensate you for viewing online ads is finally coming true. The privacy-minded web browser is debuting the feature and promising that 70% of its ad income will go back to the users. The rewards will be paid out in Brave’s Basic Attention Token (BAT).
- India and China: Are considering banning ‘cash’. This is when Bitcoin will really click in people’s minds.
- Chase Bank’s Lawsuit: Verdict could hear (for once and for all) a N.Y. Federal judge say: “Crypto is cash.”
- Sovereign Bitcoin: Afghanistan and Tunisia are racing to become the first nations to issue a sovereign bond using Bitcoin.
- We are Secure: Crypto custodian BitGo says it is the first crypto to pass the advanced security review by a “Big Four” firm. BitGo’s chief security officer said. “We did it to further legitimize the industry, and to let people see that we are taking our work seriously.”
- Coinbase is Cutting: Their Chicago office personnel that were dedicated to creating sophisticated electronic market technologies for cryptocurrencies. It will consolidate the work being done with their San Francisco office, and 30 engineers will soon hit Michigan Ave with resumes in-hand.
- Identity matters: It started by selling beer, but age verification could crack open a whole new crypto-industry market for Civic. After this year’s SXSW beer selling demo, Civic announced partnerships with six major automated retail companies that control more than one million internet-connected vending machines.
Last Week:
On Friday, we got a first look at Q1 GDP, and instead of growing at an expected pace of 2.5%, it came out at + 3.2%. That caused economy doubters (like me) to question our thinking – temporarily. Soon the facts started pouring in and to quote David Rosenberg: “This was a low-quality GDP report. All one-offs - lower imports, higher inventories & Pentagon spending. Real private sales grew a puny 1.3% causing adjusted GDP to FALL at a 2% annual rate; the deepest decline in nearly a decade.”
This further shows that like an iceberg – things can look good on the surface, but it’s what you can’t see that will kill you. For example: a) we have supposedly the lowest unemployment – yet we have the highest amount of homelessness. b) equities have been losing investment dollars for 13 out of 14 weeks – yet the market is challenging all-time highs. Goldman even came out and said: "Without company buybacks, demand for shares would fall dramatically." Over the past 5 years, the following groups bought and sold: a) Foreign Investors sold $234B, b) Pension Funds sold $901B, c) Stock Mutual Funds sold $217B, d) Life Insurers bought $61B, and e) Households bought $223B. So ‘net-net’ investors pulled $1.2T out of equities over the last 5 years, but the market went up due to corporations doing $3T in stock buybacks. That does NOT include any Central Bank purchases, or the Swiss National Bank buying 24m shares of Microsoft and recently buying 2m shares of Linde. Who knows what the Bank of Japan or our own FED purchased via proxy?
The GDP report stinks like 3-day old fish. Virtually all of the growth was fueled by $32B of inventory building. The problem is that NOBODY can figure out where these inventories came from. Goods must come from somewhere – either produced by domestic firms or imported from abroad. Unfortunately, according to the same government data – both production (- 0.3%) and imports (- 3.7%) FELL during these first three months of the year. “You can’t stockpile what you don’t import or don’t produce,”said Robert Brusca, chief economist at FAO Economics. Brusca continued: “Spending on consumer durable goods fell 5.3% in Q1, the biggest drop in 10 years. Business spending on equipment was also weak. This GDP report is an absolute mess. Another possibility is that the government tinkered with the report.” Ya think?
Next Week:
My point behind all of this is that: a) the S&P is less than a single percent from its all-time high, b) the Nasdaq has set an all-time high, and c) the DOW is less than 2% from its all-time high. It's obvious that the plan since the December melt down, was to get the market back and probably exceed its September highs. One might have thought that they would have used those ‘wonderful’ GDP numbers to push us up and over all-time highs, but they didn't. So, what are they going to do? After all, next week we have:
- An FOMC meeting that resolves itself on Wednesday.
- A yield curve (as shown above) that is the smallest percentage from inverting again on the 10-Year, and has already inverted on the 7-Year.
- A NO FEAR market place – with a volatility index (VIX) reading of 12.
- Interest rates that continue to fall – showing a disbelief in the 3.2% GDP number.
- The ‘monsters of tech’ (FB, GOOGL, AMZN, AAPL, MSFT) moving the Nasdaq higher – while the chip sector is in pain due to lack of demand.
- The Chinese government (temporarily) stepping away from supporting its own stock market, and the markets (DJSH) fading appropriately.
- South Korea, Japan and Germany all in recession.
- Exxon and Chevron reporting weaker than expected energy numbers.
- Bonds and Financials moving higher – and this is the ‘canary in the coal mine.’
Everyone knows that the bond buyer is the smartest person in the room. So when interest rates are moving lower (bonds moving higher) – it’s a warning that equity financials are in for a ‘rocky road’ ahead. Combine that with the short positions in the VIX (volatility index) being the largest they’ve been in decades – signals a potential violent move to the downside coming shortly, but not tomorrow. My position for the last several months has been that a) we'd get to the all -time highs, b) we'd squeak through them, c) we'd rally a bit longer – sucking in the people afraid of missing a new leg higher and then d) we’d pull the rug and relieve all those investors of their money. I still believe in that position. It’s completely possible that we roll-over from here, but the market had an opportunity to do that with 3M's horrific numbers last week and it did not. I’m still leaning long, but realize that at some point all this ends – and probably ends badly.
Tips:
Top Equity Recommendations:
HODL’s:
- Aurora (ACB = $9.04 / in @ $3.07), Earnings on May 7th
- Canntrust Holdings (CTST = $7.29 / in @ $3.12),
- Canopy Growth Corp (CGC = $49.75 / in @ $22.17),
- HEXO (HEXO = $7.81 / in @ $6.37),
- Nova Vax (NVAX = $0.49 / in @ $1.59), Earnings on May 2nd
Crypto:
- Bitcoin (BTC = $5,335)
- Ethereum (ETH = $160.00)
- Bitcoin Cash (BCH = $267.00)
Options:
- CGC (42.29): Buy May 17, 47.5 / 50 / 55 Call BFly for $0.03 CR
- SPY (290.16): Buy May 17, (-1) 268 / (+3) 258 / (-1) 256 Put BFly for $0.44 DB
Thoughts:
- Small Cap Index (IWM): What’s that creaking sound you hear? It’s just the small cap index (IWM) which rallied the equivalent of 1.4 standard deviations last week, but still failed to keep up with the big boys. While SPY, QQQ and DIA rally to near record highs, IWM has been content to be pretty much flat for the past two months. That means that any plays should be directional in nature – debit spreads. And if this market sells off, IWM is leading the way lower. If you are bearish on IWM, the long put vertical that’s short the $157 PUT and long the $159 PUT in the June monthly expiration period is a bearish strategy that has a 61% 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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