This Week in Barrons: 7-28-2019:
Causation vs Correlation:
Causation indicates that one event is the direct result of another one occurring. Correlation is the ability to predict one event happening based upon the occurrence of a different one. The classic example is that smoking is correlated with alcoholism, but certainly doesn't cause alcoholism. In Rocky’s case, cutting his eye will cause fluid to drain from it and allow him to see, but cutting interest rates may or may not cause a lethargic economy to wake up. Businesses (especially entrepreneurial ones) look for cause andeffect solutions all the time. In fact, it’s becoming clear that our attention-seeking media drive our culture more than they report on it. We continue to look for what is causing our: loss of civility, rise of trolling and bullying, and increased divisive behavior. All the while, reality TV continues to grow.
Here’s the dilemma: imagine two classrooms – each filled with second graders. In the first classroom, the teacher shines a spotlight on the bullies, the troublemakers, and the fighters – going so far as to arrange all the chairs so that the students are watching them and cheering them on all day. In the second classroom, the teacher establishes standards, acts as a damper on selfish outliers, and celebrates the generous and productive kids in the classroom. Which classroom would you watch? In which classroom, would you enroll your child?
Unfortunately, we’re not in elementary school anymore, and the media isn’t our teacher or even our friend. The attention we’re paying to electronic channels is consuming more of our day than Miss Silverman’s 2ndgrade class. That attention is becoming corrosive to us and all around us. The producers of reality TV know this, and seek out more of it. It’s their job to amp-up the reality show that is our culture, but it’s not our job to buy into it. Our first step is to stop taking the bait. Our second step is to say, “follow me” and move in a different direction.
Adapting this to business, direct marketers are looking for ‘reach’. To gain ‘reach’, you need to start small (not big as many would have you believe). Small audiences are your friend. Small audiences are specific, and specifics increase your percentage. You’re always looking for ‘early adopters’ and ‘flag wavers’. You’re looking for those people that are saying: ‘follow me’ because they care. As brands get larger, they tend to forget what it means ‘to care’. The only way to really care is to give caring human beings the ability and authority to reward various activities. Caring can take many forms including: price reductions, personal interactions, electronic posts, and/or surveys.
I can’t tell you the number of surveys I’ve taken that were focused on trying to change a brand’s positioning and/or direction. The problem with these types of ‘open access’ (online) surveys is that they’re inaccurate by design. The group that is taking the time to answer the survey – is often a very different group than your customer base. A good survey is designed to ask questions of a representative group, and then extend those answers across a larger category. The correct representational group is critical, but no less critical than the way you phrase your questions. Asking someone a question on a topic can change the way they feel about that topic (push poll). For example asking: “Did you know that Bob was indicted last year?”– is an influencing statement disguised as a survey question. Factually, even asking a question about someone’s customer satisfaction – increases customer satisfaction across that brand.
The single best way to figure out how people feel about your product is NOT to have them take a focus-group survey. But rather, to watch their actions using a common trigger – across a small representative sample. Watch what they DO – when given the choice to do ‘this or that’. That is the best way to figure out whether your product is Causing a change – or simply Correlatedwith a much larger behavior.
The Market: and a very different investment strategygoing forward.
TheBESTportfolio positioning over the past decade would have been to be 98% in cash, and 2% in Bitcoin (BTC). It would have produced a 20+% annual return, with virtually 0 downside risk (see below). Going forward, I’d recommend a 95% cash / 5% BTC split.
Courtesy of AP (Pomp): We are living in radical times. The stock market has reached record highs, debt levels are in the stratosphere, and investment professionals want everyone to believe that the party can go on forever. The reality of overheated markets is that future returns on those assets will be steadily declining. For example: the S&P from 1997 to 1999 (3 years leading up to the Dot Com bust) – the annual returns were 31%, 26%, and 19% respectively. The performance was then followed by losses of 10%, 13%, and 23% from 2000 to 2002. If the economic data isn’t enough, we are currently seeing: founders take hundreds of millions of dollars off the table, unprofitable companies go public, and fund managers say that this market feels like an “out of body experience”. The market is drunk, and no one wants the party to end.
Unfortunately Ms. Market doesn’t care. Vanguard and others are projecting 10-year annualized returns of 2 to 4% in U.S. equities and 0.5 to 2.5% in U.S. bonds. My question is: “Is the reward of a 2% upside for a decade really worth the risk of holding heavily weighted equity and bond bags when the market draws down 20 to 50% in an economic downturn?” Market highs are always accompanied by slow growth, increased global instability, and central banks who have become addicted to low interest rates and quantitative easing. But what should the average investor do? I won’t bore you with the standard portfolio mumbo-jumbo, but rather propose a radical portfolio that could help you weather the upcoming storm. Fair warning, this will NOT include having large exposure to overvalued markets. So rather than continuing to drink the Kool-Aid – here is a 2-step suggestion:
- Step #1 = Divest all assets into a 100% cash position. This won’t be accomplished overnight. Over the next 6 months, the goal would be to get as close to an all-cash position as possible.
- Step #2 = Purchase Bitcoin with 5% of your available cash. This decentralized digital currency has been the best performing asset for the past decade. As much as we say: “past performance doesn’t indicate future results”– it does. Bitcoin is set up to do very well going forward as interest rates are lowered and more fiat currencies are printed from thin air. Bitcoin continues to be a non-correlated asset, and even an inversely correlated one at times – which makes it the perfect asset to add to a cash-heavy portfolio.
The risk/reward trade-off of 95% cash and 5% Bitcoin is incredible. The risk is quite defined – worst case you lose 5%. While no one wants to lose money, a 5% loss would be a smaller drawdown than the S&P 500 had last year (-6.24%). Secondly, the upside for Bitcoin is quite asymmetric. This means that the asset will either go to the moon in terms of value, or be flat to worthless. This binary outcome, combined with the non-correlated nature of Bitcoin, gives you a great hedge against any/all economic chaos.
When extended over the past 10 years, a 98% cash, 2% Bitcoin portfolio would have delivered approximately 20% annualized returns with minimal downside risk. This new portfolio, caps your downside risk at 5% and exposes your upside to returns in the 20% range. There aren’t many other portfolio constructions that produce this outcome.
With the current economy, the alarm bells are ringing loudly – from inverted yield curves to greedy behavior. Virtually everyone I talk to thinks that they will have the discipline to stop drinking the Kool-Aid and find a chair when the music stops. But there are not enough chairs, and dollar-cost-averaging will not work in a protracted downturn.
The above portfolio also gives you perfect positioning to take advantage of ‘blood in the streets’. By going to 95% cash today, a disciplined investor will have maximum dry powder available when the economic downturn occurs. As Warren Buffett so eloquently says, “Be fearful when others are greedy, and greedy when others are fearful.” The greed we are currently seeing is unsustainable. This Bitcoin / Cash portfolio is one that will navigate the next economic downturn quite nicely. And whether we like it or not, Ms. Market is a ruthless judge who shows no mercy.
Info Bits:
- Tinder is making a move: Tinder is finding a way around the 30% app store tax that Google charges. Currently, to get advanced Tinder features – you need to buy "Tinder Gold" in the Google App store and Google (like Apple) takes 30%. That’s a hefty toll, so Tinder’s encouraging its users to go around the app store and pay Tinder directly. Look out Google – it could be rough sledding ahead.
- Hakuna matata: Disney entertained itself last week with two fresh records: The Lion King's $185M haul in North America was the best opening weekend for a Disney remake, and Avengers:Endgame finally passed Avatar as the top grossing movie ever at $2.8B tickets sold. With another Star Wars coming, Disney's on pace to earn $9B at the box office this year (another record).
- Big banks are the window to your wallet's soul. Citi credit card spending jumped 8% last quarter, while JP Morgan cards popped 11%. Goldman Sachs wants in on that action so badly that it has invested $1.3B in a new credit card partnership with Apple. In a world of volatile markets, interest rate uncertainty, and trade wars – your personal savings, checking, and credit accounts are a banks' security blanket.
- American Runs on Beyond Meat: Starting with Manhattan, Dunkin Donuts will now be serving Beyond Meats sausages on their breakfast sandwiches. They are the first coffee chain to add beyond meat to their menu. Beyond Meat (BYND) is now up over 200% since its May IPO. It reports earnings on Monday – are you a buyer or a seller?
- Equifax: agreed to pay up to $700m over a 2017 data breach that affected nearly 150m people in the US. It was one of the largest data breaches in history. If you're one of the people who had to do damage control after your Social Security or credit card numbers were exposed, you could soon claim up to $20k.
- Tesla – Baby Bye Bye: J.B. Straubel (Tesla’s CTO and co-founder) announced last week that he was leaving. That’s 106 Tesla execs that have left in the past year. On a different note, Tesla said that it needs to do a better job teaching its customers how to TURN ON their cars. It seems that the cars can drive themselves but WE have to figure out the rest.
- It’s Barbie’s world and we’re still just livin’ in it: as Mattel reported that Barbie and Hot Wheels sales increased dramatically last quarter.
- Game, Set – Match: This weekend the Fortnite World Cup is taking over the Arthur Ashe tennis stadium. Drivers, strap on your headsets.
- A nice, hot bath: A recent study showed that a nice hot bath a few hours before bedtime will improve your sleep. My brief experience says that a nice hot bath anytime will improve just about anything.
- Factually:
o Manufacturers are shedding workers at the fastest rate since 2009,
o Service sector job creation is down to its lowest level since April 2017,
o New home sales Fall as reduced mortgage rates fail to bring buyers back,
o U.S. Manufacturing PMI slumped to a new 10-year low,
o The latest Richmond FED reading came in at a MINUS 12 (contracting),
o Facebook will pay a record $5B fine to the FTC,
o Caterpillar sales and earnings completely miss the mark – again,
o Boeing’s revenue missed by over $5B – resulting in a shocking cash burn and quarterly loss, and
o The latest AT&T Q2 wireless & video subscriber losses exceed estimates.
Crypto-Bytes:
- Tron’s CEO shows his true colors: Justin Sun (Tron’s CEO) couldn’t attend his ballyhooed lunch with finance titan Warren Buffett on Thursday due to kidney stones, he said. Of course that didn’t stop him from mingling with influencers at a Tron-organized party on that same Thursday night in San Francisco. The appearance comes a day after Sun penned an apology to the public, media and regulators for “over-marketing” the Buffett lunch. A lunch with Warren Buffett was his prize for winning a charity auction where he bid $4.6m for the privilege. It doesn’t surprise me in the least that other (more controversial) issues are being touted as the root causeof Mr. Sun’s ‘erratic’ behavior.
- Factually:
o Coinbase added 5m users in past 10 months – bulls returning?
o Robinhood raised $323m in a funding round led by DST global.
o Utah is going to offer Blockchain a voting app in their municipal elections.
o Fidelity’s Crypto arm has officially applied to operate in N.Y. as a trust.
o Bulgaria’s Bitcoin holdings surpassed their gold reserves.
o 21% of Bitcoin hasn’t changed ownership for five years – signifying a monumental supply shock.
Last Week: It’s all about the Central Banksters and Corporate Buybacks.
Our own talking heads are telling us that there’s no recession in sight – yes the latest Richmond FED reading came in at a MINUS 12. That's as big a miss as you'll ever see. So, all this talk about the economy being good – is just that – talk. Until they get their war (or whatever they’re going to blame the meltdown on) we're going to continue to see this crap. The talking heads don't care that manufacturing is taking a dump. All they care about is easy money, pushing the market even higher.
Last week Boeing was something for the record books. Expectations were for a profit of $2 a share, but instead they LOST over $5 a share. The grounding of the MAX airplane has rippled through the entire company, and it's ugly.
Last week Boeing was something for the record books. Expectations were for a profit of $2 a share, but instead they LOST over $5 a share. The grounding of the MAX airplane has rippled through the entire company, and it's ugly.
Honestly, the first leg of my triple play plan did not materialize. I had thought that Draghi & the ECB would cut rates, our FED would cut rates, and they would leak good news from the China trade talks – all sending the market soaring on Wednesday of this week. Well, Draghi put a pin in the ECB rate cutting balloon, and at one point on Thursday we were down over 200 DOW points. However, Friday, on the heels of good earnings from Google, McDonalds and others – they poured on the points and we hit all time new highs again. I’m still looking forward to good news coming out of China, and our own FED heads telling us a ‘dovish’ story.
Factually, without buybacks, S&P earnings are DECLINING at 6% year-over-year. And even with buybacks, earnings are still DECLINING 3.7%. Without buybacks, QE, zero rates, and our Central Banksters buying stocks – we’d be in a spiral lower. But, all that gets washed away with the stroke of a digital pen because free money rules.
Weed: Remember: “Buy when there’s Blood in the Streets.” The actions of CannTrust (CTST) have successfully put ‘blood in the street’ – and earnings are right around the corner.
- CannTrust(an Ontario-based licensed producer) fired its chief executive, Peter Aceto, "with cause"amid an ongoing scandal involving unlicensed cannabis cultivation that has enveloped the marijuana industry. The company also demanded, and received, the resignation of its long-time chairman, Eric Paul. Earlier this month, CannTrust's greenhouse facility in Pelham, Ontario, received a "noncompliant"rating after a whistleblower alerted Canada's regulator to five unlicensed cultivation rooms the company had been operating since late 2018. That forced the company to halt all sales pending further investigation.
- Factually:
o Canada announced that cannabis sales are up 14.8% month-over-month.
o The Senate Banking Committee will convene for a hearing on the SAFE Act on July 23. If passed it would open up banking regulations considerably for cannabis related activity.
o In a tweet by the FDA Deputy Commissioner Amy Abernethy, she said the agency is expediting its efforts to develop rules for CBD – and plans to issue a progress report in the coming months.
o Ohio House of Representatives approved a hemp bill that would allow farmers to plant the crop and permit stores to sell hemp-derived CBD.
o In the first half of 2019, Germany imported nearly 2,500 kg of medical cannabis flower for pharmacy dispensing, and is on pace to more than double that for the 2ndconsecutive year.
o Curaleaf (CURA) entered into a definitive agreement to acquire Grassroots for $875m.
o FIRE announced an agreement to acquire Truverra for C$20m.
o Aurora (ACB) won all three bidding lots to supply 400 kg of medical cannabis to Italy over the next 2 years.
o ROMJ received organic certification for its 25,000 square-foot greenhouse facility in Delta, British Columbia.
Next Week: FED meeting and China Trade Talks – we can we roll the dice? Remember, the ECB surprised by staying pat – for the time being.
This coming week we’ll find out what our FED is going to do with interest rates. What we know is that they’re going to cut them, but we don’t know by how much. Secondly, I ‘think’ they will talk about cutting QT (Quantitative Tightening) earlier than expected – potentially now. If they cut rates by 50 basis points, and pull forward the ending of QT – this market will SOAR higher. I'm still siding with the idea they do a 25 basis point cut, because they don’t have a whole lot of room to go lower and the EU held steady on their own rates.
On Friday a group is traveling to China for trade talks. The trip ends next Wednesday – the same day as the FED announcement. So the question becomes, what IF we get a trade deal, a rate cut, and pulling forward of QT? I have to think that the market would have a short term surge that could take your breath away. It's a stretch to think we'll get these, as the China "deal" probably won't evolve. But we could still get two out of three and that should be enough to power us higher.
Remember that the MARKET is very important to the global economy. There's so much tied to the value of stocks right now – even the President has said that a stable market is a matter of national security. But the S&P and Nasdaq are at all-time highs. Sentiment is still rather skeptical. Consumer confidence is high – but I would argue in an era of smartphones it’s easier to keep consumer confidence high. Interest rates are low, unemployment is low, and bank stocks are rallying (despite the low rates). Most of the above are due to corporate stock buybacks that:
- Give Wall Street a valuation story to sell,
- Give corporate management the ability to give stock-based compensation,
- Give the White House and politicians a way to get re-elected,
- Give The FED a grateful and thankful ‘Wall Street’ and White House, and they
- Give J.Q. Public the ability to hold up a card that says “Yeah, capitalism.”
The market is not necessarily telling us to sell stocks right now, but it is pointing out the flaws in the system. Currently EVERY maturity of Swiss Government bonds are being sold with a negative yield. That means that the Swiss Government can borrow money for 50 years and be paid to do so. The chart below of Beyond Meat and Conagra should remind us that we’re on borrowed time.
The markets have something for everyone. I’m looking for a 25 basis point cut on Wednesday, something about ending Quantitative Tightening a bit sooner than scheduled, and a ‘rough outline’ of a China deal. That should keep us moving higher. If any or all of these elements would disappoint, I could see a 1,000 DOW drop in a day. That’s just how ‘manic and manipulated’ this market has become. It’s no wonder that Robinhood has a $7.6B valuation, and CNBC still has an audience.
Tips:
Top Equity Recommendations:
HODL’s:
- Aurora (ACB = $6.41 / in @ $3.07) – ACB has affirmed profitability for this quarter – so this should jump post-earnings,
- Canntrust Holdings (CTST = $2.28 / in @ $3.12) – CEO and Pres. being fired should put a bottom in the stock – assuming earnings are half-way decent.
- Canopy Growth Corp (CGC = $34.82 / in @ $22.17),
- GBTC (GBTC = $12.49 / in @ $10.01),
- Hexo (HEXO = $3.99 / in @ $6.37),
Crypto:
- Bitcoin (BTC = $9,500)
- Ethereum (ETH = $210)
- Bitcoin Cash (BCH = $305)
Options:
- RIOT ($1.97):
o Bot Jan 17, Sold $3 Call / Sold $3 Put / Bot $4 Call for $1.85 CR
o Bot Jan 17, Sold $2 Call / Sold $2 Put / Bot $3 Call for $1.45 CR
o (can only lose money if RIOT falls below $1).
- TLT (131.47) … Back Ratio Spread:
o Sold (1) Oct 18, $131 Put / Bot (2) Oct 18, $128 Puts for $0.07 CR
o (profitable when TLT declines).
Thoughts:
- Russell Small Cap Index (IWM = $157.20) recently rallied to try to keep up with the big cap ETFs. SPY, QQQ and DIE. Most small caps make their money in the U.S., while the bigger caps tend to have more overseas exposure. And it’s really a handful of mega-cap stocks that are dragging the S&P up and down – while the rest are just plodding along. IWM hasn’t been able to sustain these sharp rallies, and while past is not prologue, it might easily sink back down after its Big Cap Challenge. If you’re a contrarian trader thinking that IWM might drop, the long Put vertical that’s short the $156 Put and long the $159 Put in the September expiration is a bearish strategy that has a 63% probability of making 50% of its max profit before expiring.
- Disney (DIS = $144.67) You’d think that with the highest-grossing movie of all time (Avengers : Endgame), Disney would be soaring. Instead, it’s been underperforming the broad equity indices like SPY and DIA over the past couple of weeks. DIS dominates the box office and is becoming a threat in the streaming business thanks to Hulu. Disney’s earnings are coming up on Aug 6. Disney’s 36% implied volatility rank is low enough to use debit spreads for speculative strategies. If you think Disney might catch up with the rest of the market and are bullish on it, the long Call vertical that’s long the $140 Call and short the $142 Call in the Aug expiration is a bullish strategy that has a 62% probability of making 50% of its max profit before expiring.
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Please be safe out there!
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Until next week – be safe.
R.F. Culbertson
