This Week in Barrons: 5-12-2019

This Week in Barrons: 5-12-2019:

Thoughts:

“I keep running out of time.” … Daniel Hamermesh in his new book: Spending Time. 

   Our incomes keep rising, but our time management skills are not keeping pace.  Time is an increasingly scarce commodity.  That’s especially true for the rich who have a lot more work opportunities, but less time. Daniel Hamermesh’s book Spending Time outlines how the rich work more than the poor because they use their time differently.  The rich spend over an hour a day LESS on screens.  They sleep less.  The rich spend more time on things that cost money, and very little time on things that don’t.  The rich have more opportunities to work than the poor, and it’s these increased opportunities that expand the income gap between both sides.

   When comparing the U.S. with other countries, U.S. workers puts in 8 hrs./wk. more than Germany, 6 hrs./wk. more than France, and 2 hrs./wk. more than Japan.  That’s because we take very short vacations, where other countries average 4 to 6 weeks.

   Technology (although making our lives easier) has not saved us much time. It’s currently just giving us more money to chase the same amount of available hours.  If you keep telling yourself that once you retire you will catch up on your travel and reading – the reality is the average retiree spends his increased time sleeping and watching TV.

   Factually, both men and women produce about the same amount of work product during their lives. Women work about 1 hr./wk. more than men, but are more aware of the time crunch due to their advanced scheduling abilities.  If there is one element more interesting than working – it’s shopping.  Outside of the U.S., it’s hard to find a shop open on a Sunday.  We (on the other hand) have allowed our in-person shopping experience to be available 7-days a week.  We work more at night and on weekends more than anybody else in the world – so our shops need to be open accordingly.

   Finally, what’s left to do with our time – complain.  It seems that we Americans complain more than any other culture.  The rich complain about not having enough time, but they’re the ones choosing to work longer and harder on their various initiatives.  The poor complain about not having enough money, and have very little control over that. Therefore, it’s not just income inequality that is fueling our divide, but also time – and it’s the lack of time that cannot be easily fixed.

The Market:

   Somewhere Uber the Rainbow:  Thx to TT and MJP: Uber’s public filing is very clear: “We aim to reduce driver incentives to improve our financial performance.”  Now, that may sound great for investors, but how far can they reduce pay before they begin to lose drivers?  In Uber’s early days, they spent enormous amounts of money poaching drivers from rival firms.  However in 2017, they slashed their incentives and pay in various ways around the world, including by increasing their cut of each fare – and that is causing some issues.  Although the company plans to give drivers a big bonus when it goes public, Uber’s long-term viability is in question if drivers don’t find it attractive.  A global recession may help Uber, but short of that I’m not sure what else will?
   If you examine the supposed end of car ownership theory, or the advent of driverless cars option – neither of these trends are quite what they’re cracked up to be.  The cost of owning a vehicle is still far below either robo-taxis or human ones.  Cars themselves will probably become fully autonomous much slower than Elon Musk believes, especially taking into account the likelihood of a long hybrid period of remote human supervision.  I think it’s a race between driverless technology, and Uber’s cash reserves on their balance sheet.

   Perhaps the biggest problem for Uber is that the ‘gig economy’ itself may not last much longer.  The company depends on treating its workers as independent contractors (not employees), and its ability to further cut drivers’ pay depends on their willingness to put up with that situation.  In Uber’s filing they say: “We expect driver dissatisfaction will generally increase.”  On occasion, judges have agreed that Uber’s drivers are indeed workers, deserving of a minimum wage and adequate holidays.  And have described Uber’s claim that drivers were contractors as having an “air of contrivance and artificiality”,given that drivers cannot set their own prices like most freelancers.  But even if the ‘gig economy’ continues to be supported by most advanced economies, I tend to believe that Uber-nomics will go the way of the internal combustion engine. 

   Judging from the performance of Uber’s stock on Friday, it seems a lot of people feel this same way – falling 7.6% in its first day of trading. According to DealLogic, investors who purchased the 180m shares offered through the IPO at $45 per share – collectively lost $618m on Friday.  That represents the worst dollar loss for a U.S. IPO going back through 1975.  In terms of the share price drop, Uber’s IPO ranks as the 9^thworst first day performer of all time.

InfoBits:

-      Insider ‘n Chief:  Workhorse Group (WKHS) received a presidential-sized leap after Trump tweeted that between the government, GM, and Workhorse – they will get the Lordstown automobile plant up and running again. Only those 3 know the bottom line on the deal, but I’m betting the taxpayers are on the hook for most of it.

-      Coal is getting phased out:  The UK just went one week without burning any coal for the first time since 1882.  Reminder: coal plays a big role in climate change because it releases a lot of carbon dioxide when it's burned.

-      Tesla Killers?  Mercedes and VW are both throwing more than just their hat in the electric car manufacturer ring.  The Mercedes EQC boasts a 270 mile range and the VW ID.3 comes in at a modest 200 miles.  It’s been a hard month for TSLA stock, but the verdict is still out on whether legacy manufacturers can remove them from their electric car throne.

-      Mark can’t fix it.  Chris Hughes (co-founder of Facebook who left the company in 2007) finished his New York Times Op-Ed piece titled: “It’s Time to Break Up Facebook” with, “Mark Zuckerberg cannot fix Facebook, but our government can.” Chris, our government is still working on fixing the potholes on my street – so I’m not holding my breath.

-      Too soon? Samsung’s $2,000 folding phone is currently in the “the dog ate my homework”phase of launching.  Most tech reviewers who were sent the phone to review inadvertently broke it.  As a result, the company is canceling all pre-orders in case they find they aren’t able to fix the problem by May 31^st.

-      What’s a $B between friends? Lyft reported their first quarterly earnings as a public company after the bell today. It went like this: not great. They reported a loss of $1.1B, which they claimed was mostly due to stock-based compensation and other IPO-related expenses. 

-      "The new Patriots"was Odell Beckham Jr’s description of the new Cleveland Browns.  May we all have this level of optimism in our lives.

-      Over $1B Lost:  That's how much money Donald Trump's businesses lost from 1985 to 1994, according to the New York Times. The newspaper learned the details about a decade’s worth of Trump’s tax records, which indicate that he lost more money than nearly any other individual US taxpayer during that time period.

-      “Enough is Enough”: The Trump administration raised tariffs on $200B worth of Chinese imports.  The tariffs went from 10% to 25%, and China promised that it will retaliate.  One group estimates that the new tariffs will cost a family of four an extra $500 a year.  It seems (by the below graphs) that the tariffs along with the ‘upper income’ tax cut have already cost the American taxpayers about $36B.  

Crypto-Bytes:

-      Binance Hacked (sort of):  More than 7,000 Bitcoin have been stolen from crypto exchange Binance’s hot wallets. The large scale security breach was discovered on May 7, with malicious actors being able to access user API keys, two-factor authentication codes and potentially other information.  The bad actors withdrew $40m in Bitcoin from the exchange.  Binance will cover all losses.

  

-      Where in the world is…  A team from Coinfirm has been watching the erratic movements of the $40m in stolen Bitcoin.  The day after the breach, the hacker moved $7.16m to 2 new personal addresses.  Given the nature of the BTC blockchain, it’s easy to see where each Binance bitcoin is going, but more difficult to know who it’s going to and the creator.  

-      No Demand … Really?  PayPal thinks it’s too soon to get directly involved with crypto and bitcoin, said CFO John Rainey: “We have teams working on blockchain and cryptocurrency, and we want to take part in whatever form that takes in the future.  I just think it’s a little early right now.”

-      Crypto ad reprieve?  Over a year after its outright ban, Facebook has lifted some restrictions on crypto and blockchain-related ads.  In an updated policy announcement, the social media firm said ads involving blockchain technology, industry news, educational content or crypto events will no longer require prior written approval.  Ads for token sales are still prohibited. 

-      All 3 are true:  Americans can now move their money into Bitcoin from thousands of US banks.  A new Crypto ETF has just been filed with the S.E.C.   U.S. Congressman Brad Sherman introduced a bill calling for a ban on crypto.

-      Ether is in your future:  The U.S. Commodity Futures Trading Commission (CFTC) is willing to approve an ether futures contract.  The regulator, which  allowed Bitcoin futures markets to launch back in 2017 “thinks he can get comfortable with an Ethereum derivative being under his jurisdiction.”

-      Fidelity + E*Trade + Robinhood + TD Ameritrade:  are soon to be the brokerages offering cryptocurrency trading to clients.  A study released by Fidelity on May 2 found that almost half of their institutional investors think digital assets are worth investing in.

Last Week:

   Yield Curve Flips Again: The yield curve technically inverted for the first time back in late March, when the yield on the 3-month U.S. Treasury Bill rose above the yield on the 10-year Treasury note.  Interestingly, the 2-year U.S. Treasury still yielded higher than the 10-year, which ‘technically’ made it a little less dangerous.  The same situation occurred last week, with the 3-month drifting above the 10-year Treasury.  One could reasonably argue that what makes this yield curve inversion different from past inversions is the fact that other major global bonds (German 10-year and Japanese 0-year) have negative interest rates.  After all, this is the first time that a U.S. yield curve inversion has occurred when there have been negative interest rates in Europe and Japan.  It’s too fast to pronounce a recession on the horizon, but the warning shots continue to be fired across the bow.

   The China Situation:  I know that I'm supposed to be writing about the elephant in the room: the China trade situation, but I'm not going to dwell on it.  Everyone and their brother is focused on that, and frankly 99% of them are missing the point. Have you noticed how these big trade imbalances weren't all that important to us in years gone by?  That's because China was taking their excess dollars (that they received from those trade account balances) and buying U.S. Treasuries.  Everyone was fine with that situation, and the trade gap was basically a non-issue.  

   So what changed?  China is no longer buying U.S. Treasuries like they used to.  Instead, they are using their trade imbalance dollars to fund: their silk road expansion, create global influences, corner important commodities, invest in Africa, control worldwide shipping ports, and oh yeah – build up their military.  All of a sudden, the trade gap is all the rage, but for the wrong reasons.  Tariffs are trying to make up for the lack of Treasury buying – as evidenced by last weeks’ Treasury auction.  And honestly, it’s the bond / treasury market that we need to keep an eye on going forward.

   On Friday, we kicked the can down the road and did NOT get a China deal done.  The first half of the day saw the market fade. The DOW got down to its 200-day moving average (about 360 points in the red), and then started to climb higher.  It went from being down 360 to being up 114 points at the close.  The S&P shrugged off a 30 point plunge and ended the day +11. Maybe it was: (a) Algorithms reacting to Treasury Sec. Mnuchin’s remarks about how the talks were constructive, (b) the Plunge Patrol Team to the rescue, (c) a Dead Cat bounce, (d) a Technical bounce off the 200-day, or (e) All the above.  I’ll go for the ‘combo platter’, but take your pick. 

Crypto and Weed are on Fire:

  Ari Paul (CIO of BlockTower Capital) in his keynote speech said:“Cryptocurrency – no one owns any and no one uses it. That’s kind of where we are today.”   By no one, he meant relatively few people (35m globally = less than 1% of the world’s population) use or invest in crypto. Among current crypto owners, he believes that fewer than 2m are active users because most are holding for speculative purposes.   Ari went on to say: “Groups are quietly: building infrastructure and institutional-quality trading software, custodializing assets, resolving issues relating to governance, and resolving differing regulations between nations.”  That’s good news to the investment community as crypto has been ‘on fire’ as of late - almost doubling in the last 75 days.

-      Fidelity Investments is soft-launching a bitcoin custody solution.

-      2 new venture capital funds focused on cryptos also have emerged – spinouts from tech VCs Andreessen Horowitz and Sequoia Capital.

-      Pensions, endowments and family offices of high-net worth clans are looking at investing in crypto assets – due to their non-correlated nature.

-      And several groups are trying to build ‘Bloomberg for crypto’, while others are offering ‘Innovation as a service.’

   Factually, Central Banks today continue to make the same mistakes that led them into the 2008 financial crisis.  The average nay-sayer continues to refer to cryptos as currencies used by outlaws or terrorists, but they forget that established financial institutions have caused ‘overwhelmingly’ most of our society’s economic harm.  To quote Albert Wenger (MD at Union Square Ventures): “The exciting thing is that the tourists have left.  What’s particularly exciting is that for the first time, parties can reach consensus on transactions without a central authority. Everyone can see and agree that Jane transferred $100 from her account to Joe’s account – and it required zero bank validation.  That’s a fundamentally new capability.  Financial institutions have reached an inflection point in the wider adoption of crypto assets, and I don’t know any major bank that is not  looking at crypto.  It seems that FOMO works both ways.” 

   Weed is experiencing a very different kind of reality check – earnings.  

-      Canopy Growth(CGC) the world’s largest cannabis company by market capitalization, decided to release its earnings 30 minutes after the extended session closed on Friday.  They chose to file the documents at such a late hour to “minimize the news coverage.” Canopy was up 1.3% in late session trading.

-      Acreage Holdings(ACRGF) – the company Canopy Growth purchased the right to buy pending U.S. marijuana legalization, issued a press release containing “highlights from statements of financial position”but did not release the dozens of pages of documents outlining their underlying assumptions or their details for the figures.  It ended being up 0.6% late on Friday.

-      Aurora Cannabis(ACB) also used the late hours to release some of its financial statements for the June quarter.  Their earnings are set to hit late on Tuesday with the company hosting a conference call before the opening bell on Wednesday.  Investors are expecting Q3 sales of $55m – limited in large part by provincial caps on retail stores around the country.  Aurora also raised $350m via convertible debt in January, brought famed hedge-fund manager Nelson Peltz in as an advisor, and told investors it plans to expand into the U.S.

-      Tilray(TLRY) told investors that going forward they will no longer disclose the exact amount of excise taxes they have paid.  Big alcohol producers such as Molson Coors Brewing (investors in TLRY) follow the same method of reporting.  

   Next week we will have earnings from: Cronos Group (who is backed by tobacco’s Altria Group), GW Pharmaceuticals (which makes a drug from CBD called Epidiolex that treats epilepsy), and Alcanna (a Canadian cannabis and alcohol retailer.)  Thus far, none of the companies have caused headaches for investors, but next week is another adventure.  For Tilray there is the question: How much pot can the company really grow on its own?  Their model was to buy large quantities of third-party product and drive down margins. But on Friday, news hit saying that Tilray was spending tens of millions to increase their cultivation footprint at three sites across Canada.  Some other names set to report earnings next week are: Supreme Cannabis (FIRE) on Monday after the close, and CannTrust Holdings (CTST) on Tuesday before the market opens.  

   It’s never a dull week when crypto and weed get together.  Honestly, what other sectors possess this kind of potential growth – in this investing environment?

Next Week:

   Flip your coin.  Do we go up in May, on the heels of renewed stock buy backs that will be coming shortly, or does the old adage: "Sell in May and go away"kick in?  I don't know how many times I can say that the market does NOT belong at these levels.  One might have thought that raising tariffs from 10% to 25%, and then adding another $300B of products to the tariff list – would have caused the market to truly roll over.  But hey, that might be too logical. Instead, the latest reaction is that ‘someday’ there will be a deal, and until that time comes – let’s enjoy companies buying back their own stock (irrespective of the level of debt that they need to put themselves into to do that).

   I think that we bounce higher for a few days – into Friday’s monthly options expiration.  After that, I doubt that it has staying power because so much of the globe is weakening. I see us entering a pattern of lower highs and lower lows.  Just a couple weeks ago the DOW was at 26,600, and Friday’s low was 25,469.  I can see it bouncing to 26,300 and then rolling over to 25,300. Then another bounce that doesn't make it past 26,000 and it rolls over in a stair step – lower highs and lower lows fashion.  I’m looking for a  ‘controlled demolition’ type of movement rather than an outright 25% plunge. 

   To trade this, watch the ‘gravity points’ on the S&P they are: 2911, 2842, 2811, 2747, 2700, 2682, 2663, 2626, 2600, 2575, 2550, 2525 etc.  Use these gravity points as both support and resistance.  Use them to buy the low and sell the high, and to short the high and buy the low.  Do NOT overshoot long or short – volatility is back in style.

Tips:

Top Equity Recommendations:

   HODL’s:

-      Aurora (ACB = $8.35 / in @ $3.07), 

-      Canntrust Holdings (CTST = $6.00 / in @ $3.12),

-      Canopy Growth Corp (CGC = $47.45 / in @ $22.17),

-      HEXO (HEXO = $7.15 / in @ $6.37),

-      Nova Vax (NVAX = $0.54 / in @ $1.59)

   Crypto:

-      Bitcoin (BTC = $6,900)

-      Ethereum (ETH = $185)

-      Bitcoin Cash (BCH = $345)

   Options:

-      CGC (47.45): Buy May 17, 47.5 / 50 / 52 Call BFly for $0.03 CR

-       SPY (288.48): Buy May 17, (-1) 268 / (+3) 258 / (-1) 256 Put BFly for $0.44 DB

   Thoughts:

-       Toll Brothers (TOL):  Zillow (Z), the site that lets you watch the value of your house go up and down, jumped the equivalent of 3.7 standard deviations last week on earnings.  Z’s main business is real estate brokerage, and those revenues were up.  Potentially that could impact the home builder: Toll Brothers (TOL).  They have earnings on May 28, and have been trading in a range for the past month.  If you think that the rally in Z might bleed over into home builder TOL and are willing to trade through earnings, the option premium is high enough to consider a bullish to neutral strategy.  The jade lizard that’s short the 35 put and short the 40 call and long the 41 call in the June monthly expiration is a bullish/neutral strategy that has no upside risk, a credit of over a dollar, and a 70% probability of making 50% of its max profit.

-      Starbucks (SBUX):  And all this time I thought “Game of Thrones”was just an HBO TV show.  Keen eyed fans of the show spotted a Starbuck’s (SBUX) cup on a table in a scene.  Coffee was ‘invented’ in the 15^th century, which is well after GOT’s medieval time period.  So, it’s not like the paper coffee cup could be excused as a character’s addiction.  Everyone is saying that this is a huge amount of free advertising for SBUX.  But let’s be honest, there can’t be many people watching HBO who don’t already drink SBUX.  Since SBUX has been outperforming the broader market, this might be as good an excuse as any for a bearish trade on it.  If you are bearish on SBUX, the long put vertical that’s short the 75 put and long the 80 put in the monthly June expiration is a bearish strategy with a 58% 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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