This Week in Barrons: 6-2-2019:
Thoughts:
Is Crazy Crypto-mania Back?
Remember back to 2017 when: (a) Game of Thrones was still liked, (b) Despacito was top of the charts, and (c) all anybody could talk about was Bitcoin? Over the course of 2017, the once-obscure digital currency increased in price from $1,000 to almost $20,000. Billionaires were minted, the financial world lost its collective minds, and any company with ‘blockchain’ in its name saw its shares soar.
Well “Hello boys, We’re back” – at least for a little bit. Last week, the price of Bitcoin rose to over $9k – its highest level in a year and a 65% increase in a month. Is the Bitcoin bubble returning? Bitcoin hit a low of just over $3,000 last December, so the recent resurgence is no small feat. When I spoke to experts on the subject yesterday, a few theories surfaced:
Well “Hello boys, We’re back” – at least for a little bit. Last week, the price of Bitcoin rose to over $9k – its highest level in a year and a 65% increase in a month. Is the Bitcoin bubble returning? Bitcoin hit a low of just over $3,000 last December, so the recent resurgence is no small feat. When I spoke to experts on the subject yesterday, a few theories surfaced:
- Some believe that the entry of Facebook into the space (which is pursuing its own cryptocurrency called GlobalCoin) may have lent some legitimacy to the industry. Others argue that Mark Zuckerberg has little legitimacy to lend.
- Another explanation was an upcoming supply squeeze in the Bitcoin network, known as block halving, which could be pushing up its price.
- Others have suggested the recent U.S.-China trade war has reminded people that we need a global currency free of government control.
For those of you still using the anti-privacy social network, ‘GlobalCoin’ is a brilliant move by Facebook. It will be a ‘stablecoin’ having its value tied to a sturdy government currency like the U.S. dollar. Plus, Facebook's ex-(kinda)-founders (the Winklevoss twins) are involved. CEO Mark Zuckerberg made it clear at Facebook's annual conference that he wanted this project to: “Make it as easy to send money to someone as it is to send a photo." Face-workers are meeting with credit card companies, brick and mortar stores, and central bankers to figure it all out. But any way you cut it, you’re going to end up paying Facebook (at least in privacy dollars) for the privilege of dropping your paycheck into a WhatsApp message to send back home, or paying Little Timmy the cost of your Avo Toast + tax + tip in a FB Message. The ‘Network Effect’ is Facebook’s competitive advantage on this one. That’s when a product's value grows as more people use it. Payment rivals like PayPal’s Venmo or Square’s Cash App need you to download the app for them to grow their user bases. With 2.4B installed users, Facebook just needs to ‘show up’ and convince you to give it a try.
Having lived through a few Bitcoin cycles (May 2011 when BTC rose to $8.74), I have decided to stop trying to explain why it goes up or down and just enjoy that “It’s Back.”
The Market:
"Danger Will Robinson Danger!" I've been moaning about the true state of affairs for months. Day after day I drone on about why this market does NOT belong up here and how buy backs and cheap money have been the only driving forces. Here are some tidbits to show why I absolutely believe that we're IN a recession, and it's going to get worse.
- The English, French, and Italian financial markets continue to pancake over slowing global growth.
- Copper, oil and many commodities are down to dangerously low levels.
- The Russell 2000 is down -13.6% from where it peaked in Q3 of 2018.
- The number of wealthy homes for sale suddenly doubled in Palm Beach, South Beach, and East Hampton.
- Tehran is getting ready for the possibility of a war with the U.S.
- Morgan Stanley told its customers that it's too late to prevent the next recession, even if a resolution to the trade war is reached.
- A flurry of Chinese media reports raised the prospect of Beijing cutting exports of the commodities that are critical to the defense, energy, electronics, and automobile sectors. China (the world's largest producer of rare earth metals) may just decide to slow their exports.
Good old CNBC still believes that the central banks will have our backs. If we learned anything this year, it is that central bank negative interest rates are just the most overt attempt yet to take your money. As Jim Grant pointed out in Barron's recently, it takes 32 years for negative 2% interest rates to cut your principal in half. Rather than steal your money quietly through inflation, central banksters can now do it out in plain sight.
My point is that things have not been good for a long time. We’ve been binging on stimulus and manipulation for years. The proverbial ‘fat lady’ is definitely warming up.
My point is that things have not been good for a long time. We’ve been binging on stimulus and manipulation for years. The proverbial ‘fat lady’ is definitely warming up.
InfoBits:
- The Federal Reserve Bank decided to calculate the cost of the U.S. - China trade war for a typical household and thus far it’s $831 per person for 2019.
- I’ll take good news for $1,000 Alex: "Kind of mind-boggling," said Alex Trebek about his cancer being near remission.
- Get up to Speed and Out the Door: Ferrari has rolled out its first-ever hybrid plug-in car and yes, it’s a beauty.
- If we eliminate all 3-day weekends: and move our holidays to the nearest Saturday or Sunday, we would add about $1Trillion to our GDP. That would pretty much solve all of our country’s spending and debt issues.
- Brazil's Natura is buying Avon. Combined, they will be the 4thlargest beauty brand, expected to bring in $10B in annual sales. Both sell goods door-to-door with an army of ‘consultants’ – keeping that direct sales business model safe from ecommerce disruption.
- You Know What’s Cool? How about losing a billion dollars in three months? That's what Uber managed to do in their latest earnings report.
- Dolla Bills Y’all: Dollar General is breathing life back into the retail space after reporting earnings that beat estimates. They also announced that they will be opening 975 new stores, and remodeling 1,000 legacy locations in 2019.
- What’s better than one Tariff War? TWO. Trump wants to slap a 5% tariff on all Mexican imports if they don’t fix illegal immigration by June 10th.
- One toke over the line… On Friday, Illinois became the country’s first state to legalize recreational marijuana through its legislature. This paves the way for the creation of one of the nation’s largest cannabis markets of over $2.5B per year.
- Aurora says ‘Too Slow’: Aurora Cannabis announced an exclusive multi-year, multi-million dollar partnership with the Ultimate Fighting Championship. They will examine the relationship between CBD and athlete recovery – aka: pain management, inflammation, exercise recovery, and mental well-being.
- CBD meet Alcohol: Trait Biosciences is focused on CBD production and they just named Diageo veteran (CMO / CIO) Peter McDonough as their CEO.
- Target is thriving: by embracing disruptors – direct-to-consumer brands such as Casper (mattresses), Harry’s (razors), and Quip (toothbrushes). These companies pioneered business models that cut out the middleman (aka "retailers") by selling via their own websites. Now they sell via Target, too.
Crypto-Bytes:
Crypto analysts are adamant that the rally in Bitcoin is just gettin’ started; however, the bull market is not technically confirmed until Bitcoin’s price breaks above $11,700 – where the bear market began.
- BTC price boosted by Facebook, JP Morgan, and Fidelity: Analysts are saying that big companies will drive the next phase of bitcoin adoption. FB recently announced its ‘Globalcoin’ while JPM revealed its own ‘JPMCoin’ to settle payments. Fidelity has launched their own institutional crypto custody solution. All are getting in the space by either building the infrastructure or providing services.
- Crypto beats the alternative – boring IPOs: Investors are turning to crypto in the wake of disappointing technology IPOs like Lyft and Uber. When IPOs that big – fall that flat, it’s time to look for a different story that’s accessible to all.
- Bitcoin Halving is Coming: In May 2020, the reward for mining bitcoin will be halved. This four-year halving is designed to keep bitcoin’s 21 million hard supply cap intact. Prices often rally in anticipation of diminished supply.
- $30k BTC target – with or without an ETF: There is nothing but speculation out there about the impact of a Bitcoin ETF. Many argue it will ignite the bitcoin price by allowing traders an easy vehicle for crypto exposure, but I’m not holding my breath. I think the next wave of adoption will be driven by major companies. With Fidelity offering institutional custody and trading, and E-Trade and Ameritrade including BTC and ETH in their trading platforms – ETF adoption is at least third on my list of reasons to invest in digital currencies.
- Ethereum is Coming: The rate of adoption and development that Ethereum is doing is astounding. I don’t think ETH is going away, and I also believe that Ripple (XRP) is here to stay as a payment solution for banks.
- Mike’s Back: Galaxy Digital chief and sound-byte extraordinaire Mike Novogratz has forecast that Bitcoin will consolidate between $7k and $10k. “And if I’m wrong on that,” says Mike, “I’ll be wrong to the upside – because there’s enough excitement and momentum out there to fuel a new breakout.”
Last Week:
In the red corner we have: (a) Slowing global growth, (b) 10 year old tired bull market, (c) Pimco saying that this is the riskiest credit market ever, (d) Durable Goods down -2.1%, (e) the Atlanta FED revising GDP downward to 1.7% (from 2.6%), (f) Cap Goods non-defense excluding aircraft: down -0.9%, (g) Goldman cutting Q2 GDP estimates to 1.5%, (h) the U.S. Purchasing Manager’s Index crashing, (i) the Business Confidence Index collapsing to 7 year lows, (j) more negative interest rates, (k) China's retaliation warning, (l) S. Korea chip exports down -32% year-over-year, (m) "Overwhelming Middle-East Military Response Needed":Graham Urges Trump, (n) China suggests cutting rare earth metal shipments to U.S., (o) Indiana corn only 14% planted vs 86% planted normally, and (p) the FED believing that actual GDA for Q2 will likely be below 1%. If so, GDP growth for the 1st half of 2019 will be below 2%. That's not a terribly wonderful number for the ‘greatest economy on earth’.
And in the blue corner we have: (a) Central Bank printing, (b) Corporate stock buy backs, and (c) Manipulations.
Last week President Trump shook up the auto and truck markets by announcing a 5% tariff on Mexico – that will scale up to 25%. Instantly the auto industry, which is already reeling from falling sales – tanked. And Trump, late Friday, announced that he was terminating India's designation as a developing nation. It was their developing nation status that allowed Indian exporters to ship 2,000 products into the U.S. duty free. So India joins Turkey and will now be paying somewhere around $5B in tariffs/duties. And Mexico joins China in having their products taxed for coming into the U.S. How all that's going to be resolved is anyone's guess, but China is certainly not laying down. They're talking about stopping their shipments of rare earth metals to the US, and hinting that maybe they don't need $1.2T worth of our Treasury debt. Strong words for sure.
Anyway, it was a crazy week and the market didn't like it one bit. The idea of "Sell in May and Go Away"very well might be in play here – since we have fallen for 4 straight weeks. The S&P, DOW, IWM (Russell 2000), XLF (financials), and SMH (chips) are all below their 50 AND 200-day moving averages.
In any galaxy with logical people, you'd say: This market is destined to go much lower, and you'd be right. I think we're in the beginning of a stair step lower, and as long as it doesn't get terribly out of hand, I think the Fed will allow it to some extent. But rest assured, they will be quick to cut rates to negative and go full on QE if things get ugly.
Weed:
Friday’s FDA Circus:
On Friday, the FDA listened to all concerns surrounding CBD including: dosage levels, the mode of delivery, extraneous ingredients and the interactions it could have with other substances. The FDA was hoping that the comments would be natural conclusions from data, but unfortunately most were not. And now they need to ensure that any new regulations don’t negatively impact the development of new drugs based on CBD. After all, it was just last year when the agency approved the first CBD drug (Epidiolex) for treating epileptic seizures. The hearing also dove into such mundane topics as manufacturing, product quality standards, and absurd health claims. Potentially one of the best things the FDA could do is to establish proper labeling requirements and accountability standards. A wide range of viewpoints were represented from: academics to farmers, and from manufacturers to retailers. Speakers were broad ranging from healthcare professionals and patient advocates to public safety officials and lawyers. The agency will listen to all comers through July 2.
The main reason for all the attention is because there’s a lot of money at stake. The Brightfield Group predicts that the U.S. hemp CBD market could be worth $22B annually by 2022. Large companies are beginning to move irrespective of the FDA: (a) Canopy Growth is building a hemp production facility in New York, and (b) pharmacy and grocery retailers (CVS, Walgreens, Walmart, etc.) have already started selling CBD creams, edibles and beverages.
I’m not looking for the FDA to move quickly to finalize regulations. After July 2nd, the agency will begin the task of drafting regulations, and that will be followed by a reg. input review – feedback loops – etc. These opening hearings are just one of many steps in clearing the way for a massive CBD market explosion. I’m expecting the final document to be years away – at which time markets will have been conquered, winners declared, and states will have already put in place their legalization solutions – as Illinois did on Friday. [FYI – On Friday, Illinois passed recreational, adult-use cannabis legislation that will open up its entire $2.5B+/year market starting January 1st, 2020. They are the 11thstate overall to legalize recreational marijuana. So by the time the FDA gets its act together – this will be one large moot point.]
Back in December of 2018 – this was all so simple. The 2018 farm bill removed hemp and derivatives like CBD from the controlled substance list, as long as products containing them didn’t have more than 0.3 percent THC. The World Health Organization then came out and said CBD is well tolerated with a good safety profile, and no addictive effects. At Friday’s meeting, the then FDA head Dr. Gottlieb even admitted: “Congress’s expectation was that CBD from hemp would be able to be put into the food supply when they passed the farm bill.” Clearly that was everyone’s intent, but cannabis oversight is complex and crosses 3 federal agency jurisdictions:
- The Federal Drug Enforcement Administration issues registrations for growing and processing marijuana for medical research.
- The Department of Agriculture develops the plans to regulate hemp.
- And the FDA that regulates drugs. It also has the ability to take enforcement action against companies selling food or dietary supplements. With CBD or THC, this has been done only where companies have made outrageous health claims such as claiming to cure cancer, Alzheimer’s disease and other illnesses.
CBD, the nonintoxicating compound is being added to just about everything, including: makeup, tea, pet treats and soft drinks. “Although the law says that the FDA can issue regulations to create new exceptions to these statutory provisions, the FDA has never issued a regulation like that for any substance,” said Interim Commissioner Sharpless. “So, if we were thinking about doing that for a substance like CBD, it would be new terrain for the FDA. And drafting and implementing such a regulation could take years.”
“This is a new gold rush,” said Marc Scheineson, a lawyer with Alston & Bird in Washington, D.C. “This horse is so far out of the corral here that it will be interesting to see what the FDA decides to do, or even can do at this point.”
Some general thoughts pervaded the room:
- Mr. Scheineson suggested the FDA might use its regulation of folic acid as a road map for CBD. Consumers can buy folic acid (a B vitamin) over the counter for some uses, but for higher concentrations must be prescribed by a doctor.
- The agency could also require businesses to submit a safety petition.
- Jonathan Miller (a lawyer for the U.S. Hemp Roundtable, a coalition of dozens of hemp companies) told the FDA that CBD is safe but called on the agency to police the bad players in the industry. Mr. Miller said: “Our enemy is not the FDA, but rather CBD companies that make false claims or sell bad products.”
It’s my opinion that by the time the FDA rolls out its recommendations, the marketplace will have crowned its winners and the people (through their legislature) will have architected their own solutions. Illinois will just be the first of many states to choose increased tax revenues over higher enforcement costs. I also believe that is exactly the way the FDA wants it – per the new Commissioner’s quote: “… [the FDA] drafting and implementing such a [CBD] regulation [would be new terrain and] could take years.”
Next Week:
So, looking at things logically you have to deduce that we're heading lower. I tend to think we will, but not in a straight line. I feel that they'll stair step this market lower, trying to control the demolition. Granted any really big break through with China on trade will cause the DOW to gain 1,000 points in a day. But China's having economic troubles of their own, and any gains there shouldn’t last. In the big picture, what's to keep this market higher other than the 3 things I previously mentioned: Central Banks, Corporate buy backs, and manipulation? Nothing, but remember: the Japanese Central bank owns 75% of their entire stock market, and don't think our FED won't do the same.
We belong lower. The fundamentals, economic reports, and technicals are all screaming for lower. One area to pay attention to is gold. You know I'm a gold bug and nothing makes me smile more than hearing about gold backed currencies. With the trade wars going on, the chance of real war in the Middle East, and other nasty ills – the gold market has perked up lately. This has bled into the gold and silver miners over the past several sessions. This is reminiscent of the two "Vegas plays" from 2011 and 2016. In the first "Vegas play"the miners generated a 40X return, and in the second it was a 12X return. Is something like that about to happen again? Well, (a) The market has set 7 Hindenburg omens in the past couple weeks. There’s never been a significant market meltdown (gold melt-up) without ‘the omen’. And (b) the yield curve is still inverted (aka: paying more interest on a 3-month note than a 10-year note), and that generally spells trouble for markets and sunshine for gold. As long as they keep the S&P below its 200-day moving average, consider going "short" and watch the gold miners – GDX, and junior miners – GDXJ going forward.
Tips:
Top Equity Recommendations:
HODL’s: (Hold On for Dear Life)
- Aurora (ACB = $7.59 / in @ $3.07),
- Canntrust Holdings (CTST = $5.27 / in @ $3.12),
- Canopy Growth Corp (CGC = $40.26 / in @ $22.17),
- HEXO (HEXO = $6.42 / in @ $6.37),
Crypto:
- Bitcoin (BTC = $8,700)
- Ethereum (ETH = $270)
- Bitcoin Cash (BCH = $440)
Options:
- RIOT (3.24):
o Buy Jan 17, Sell $3 Call / Sell $3 Put / Buy $4 Call for $1.85 CR
o Buy Jan 17, Sell $2 Call / Sell $2 Put / Buy $3 Call for $1.45 CR
o (can only lose money if RIOT falls below $1).
Thoughts:
- Gold (GLD), Gold Miners (GDX), Junior Gold Miners (GDXJ): Now that gold has broken through the 1,300 barrier, it’s time to get serious about this shiny object. I normally do not play gold via GLD – but rather by either buying physical gold or via the mining sector. And when I look at the mining sector, I normally like either buying a long Call vertical or selling a short Put spread – depending upon the size of the VIX. If you are bullish on GDX, the shot Put vertical that’s short the $21.5 Put and long the $20.5 Put in the July monthly expiration with 47 days until expiration is a bullish strategy with a 58% probability of making 50% of its max profit before expiration is your way to go.
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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