This Week in Barrons: 7-7-2019:
Rule #1: If you are a successful Entrepreneur – you WILL get fired:
This past week Bruce Linton, one of Canopy Growth’s co-CEOs, was un-ceremoniously fired by the BOD effective immediately. Bruce was the public facing CEO of Canopy Growth. His departure came 8 months and 2 days after Constellation Brands (STZ) took over four of Canopy's seven board seats. In an interview, Bruce acknowledged that he had discussed the very risk of being ousted from the company he helped found, but determined that the $4B Constellation investment was too valuable to pass up. "It went from a board of all independents to a board which was 4 Constellation folks, and 3 that were not,"Bruce said. "The new governance group created some interesting dynamics, but nobody other than Constellation was writing large checks, and that moved them into the driver's seat."
Bruce then said what every successful entrepreneur knows and has experienced: "It's hurtful to be ejected from the company you created. It's an evolution I didn't welcome." Constellation gave the appropriate verbiage associated with the termination: "In entrepreneurship, the role of the entrepreneur is often seen as starting and scaling the business to a point where a transition to a manager more suited to growing and managing a mature business happens." Daniel Sax, chief executive of Sensi Properties said: "It's clear that Constellation thought they could no longer wait for that transition to take place naturally, especially given the recent heat over earnings. It is not an indictment of Bruce's leadership, but rather a harsh reality of entrepreneurship and bringing in a large investor such as [Constellation] with an institutional mind-set." Others began to chime in:
- Korey Bauer of Cannabis Growth said: "Bruce has been a pioneer in the industry and it will be tough to see him go."
- Matt Hawkins, managing partner with Cresco Capital said: “Bruce was instrumental in developing the innovative, forward-thinking deal he crafted with Acreage, one of Cresco Capital's early portfolio companies. We applaud Bruce for leading Canopy to become the largest publicly traded cannabis company."
The news comes just weeks after Canopy's fiscal fourth-quarter earnings disappointed investors. It honestly gave Constellation Brands all the ammo it needed to go in and clean house with their CEO saying: "While we remain happy with our investment in the cannabis space and its long-term potential, we were not pleased with Canopy's recent reported year-end results." Even the Jefferies analyst Ryan Tomkins said:"With Constellation employees occupying 4 of Canopy's 7 board seats, there became a growing frustration with Constellation's investment diminishing and losses widening." Cowen analyst Vivien Azer said, "The magnitude of losses for Canopy has expanded far more than we had expected, and we believe new leadership will be a welcome change. The success of Canopy and all cannabis companies will come down to brands,"he said. "Short-term this may be a negative but we already have seen the largest CBD company in the U.S. (Charlotte's Web) name Adrienne Elsner as CEO." Elsner is the former president of the U.S. snacks division at Kellogg Co.
Even with cannabis companies, financial delivery is increasing in importance to support their stratospheric valuations. Canopy Growth was founded by Linton in 2013 and quickly grew to become the first cannabis company listed on the NYSE, and the first one reaching a $1B valuation. Canopy is now the largest cannabis company in the world, and after receiving a $4B investment by Constellation – has seen its share price rise almost 2,000% over the past 5 years. But when the world’s investment community changes – it often changes quickly. And now it’s important for cannabis companies to show a route to profitability. When Canopy announced on the latest earnings call that they would NOT be EBITDA-positive for the foreseeable future, and their closest competitor (Aurora) said that they WILL be EBITDA-positive next quarter – the writing was on the wall.
Unfortunately, this is the natural evolution of the successful entrepreneur. Coupled with large monetary success – there is often huge, personal heartache. Every successful entrepreneur I know did it for the same reason: to change the world / to make a difference / to do something the right way. But the behavior exhibited by Constellation Brands is a reminder as to why small business formation is down over the past 20 years. The model changed from the entrepreneur proving themselves via: sweat, blues and agony – to being graded based upon how much money they raised. The young entrepreneur forgets that the more money they raise – the less control they have over their own and their company’s destiny – and the sooner they themselves are out of a job. I’ve wondered for over a decade now when the entrepreneurial pendulum will start to swing back other way. My VC friends continue to recite the same old line: “Money talks and BS walks” – like they know what truly building a business feels like. My heart goes out to Bruce. He built a magnificent company, and all I can suggest is for him to get back up on the horse and do it again – just because he can.
The Market:
I hope everyone had a great Fourth of July. We’re about halfway through the trading year, so let’s take a look at some year-to-date ETF performance stats that are nothing but strangely ‘out of this world’:
- SPY (S&P) = +19.6 % YTD,
- QQQ (Nasdaq) = +24.1% YTD,
- IWM (small-caps) = +16.7% YTD,
- TLT (bonds) = +10.5% YTD, and
- VIX (volatility) = -50.6% YTD
Those are some impressive gains for equities, which had tanked back at the end of 2018 to set up 2019’s returns. The VIX (volatility index) was high at the start of the year, and it reverted back to a more traditional range in the mid-teens.
The top 5 crypto gainers are a completely different story and are as follows:
- LINK = +1,106% YTD,
- BNB (Binance) = +457% YTD,
- LTC (Litecoin) = +292% YTD,
- BTC (Bitcoin) = +215% YTD, and
- BCH (Bitcoin Cash) = +127% YTD.
Looking forward, is the equity market’s rally due for a break? Will bonds collapse? Will crypto remain on a tear? It’s anyone’s guess, but probabilities never lie. So, we can look at some projected ranges of those same ETFs for the rest of 2019 – all having a 68% probability of landing between:
- SPY ($xxx) = between $272 and $325,
- QQQ ($xxx) = between $170 and $214,
- IWM ($xxx) = between $139 and $174,
- TLT ($xxx) = between $124 and $144, and
- VIX ($xx) = landing above $11.
Switching gears, Friday’s Jobs Report showed a headline number of 224k jobs created in June. In May we only created 72k jobs, so this large of a number was an upside surprise. But let’s first dissect the number:
- Their vaunted birth/death model injected 102K fake jobs into the report. After subtracting those jobs – we’re down to 122k jobs created in June.
- Next up is the second and third job phenomena. It seems in June we had over +60k people that had to get a second or even third job to pay their bills. So although these were +60k new jobs – they were taken by people that already had a job.
- So, once again we’re back to around 60k or fewer new employment opportunities available for the month. That is not enough to sustain a market expansion.
The markets pouted on Friday because with such a good number, investors began thinking that the FED may very well put a hold on their lowering of interest rates. Or maybe the FED will only cut by 25 basis points at their upcoming July meeting (rather than the 50bp they were hoping). Does that mean that the rally is over? Well, if you thought that the S&P might get to the 3000 level, and stall out – we did pretty much exactly that. But Wall Street KNOWS that 70% of all the companies that have made mention of their earnings, said things are going to be worse than last quarter. In other words, this earnings season is going to show NO earnings growth. Wall Street for years has told us that the market really only goes higher because of increased earnings. And if earnings are going to stink – they need a rate cut and/or monetary stimulus to give us another reason to takes asset prices higher.
Everybody knows that the world is in trouble. The amount of money sitting in accounts drawing negative returns has ballooned to over $13.4T. Everything’s falling: interest rates, factory orders, non-manufacturing ISM, and even other industrialized countries like Germany. I personally can’t believe that we’re using negative interest rates to keep people from saving money, and forcing them into spending it on stocks. I did very little last week asgoing short has been a recipe for disaster for a long time, and unless some great news hits about trade or the FED – there’s nothing but bad earnings coming our way.
Everybody knows that the world is in trouble. The amount of money sitting in accounts drawing negative returns has ballooned to over $13.4T. Everything’s falling: interest rates, factory orders, non-manufacturing ISM, and even other industrialized countries like Germany. I personally can’t believe that we’re using negative interest rates to keep people from saving money, and forcing them into spending it on stocks. I did very little last week asgoing short has been a recipe for disaster for a long time, and unless some great news hits about trade or the FED – there’s nothing but bad earnings coming our way.
InfoBits:
- Luis Alvarez – may he R.I.P: a former NYC police detective and 9/11 early-responder, died last Saturday at age 53. Weeks ago he was testifying in DC (alongside Jon Stewart) calling for Congress to extend health benefits to 9/11 emergency workers. He had spent 3 months at ground zero – and died of complications from colorectal cancer after being diagnosed in 2016.
- Amazon Shipping: The percentage of packages it ships itself has grown from 17% just 2.5 years ago to 48% today. And it continues to take business away from UPS, FedEx, and the US Postal Service since it ships faster: Amazon delivers in 3.2 days vs. the competition's 6 days (on average).
- Bitcoin rally part 2: With all the attention being paid to Bitcoin’s price jump to nearly $14K last week, AMD’s been along for the ride. AMD did unveil fresh new products and services for Bitcoin miners and blockchain enthusiasts. If Bitcoin’s latest jump feels like a gold rush, then AMD is selling picks ‘n shovels.
- Lack of Earnings Season a’Comin: With earnings season looming, 77% of companies issuing pre-announcements say their profit picture will be worse than Wall Street is expecting. That’s the second-worst quarter on record going back to 2006, according to FactSet. Two tariff-sensitive sectors, tech and health care, have seen the highest amounts of negative announcements.
- “Danger Will Robinson – Danger” - the 10 year T-bill fell below 2.0.
- What I read regularly: Fred Wilson/ Brad Feld/ Seth Godin/ TechMeme/ The Profile / Abnormal Returns / Semil Shah / Bill Bishop / Benedict Evans / Off The Chain / Multicoin Capital / MG Siegler / Strictly VC / Alex Taussig / and Jason Hirschhorn
Crypto-Bytes:
Whether or not Libra succeeds, it confirms the inescapable reality that international money movements in the digital era will be based on blockchain-like solutions that disintermediate the existing pathways and challenge the existing bank-esque dominated model. It also underscores how we are moving into an age of digital assets. Bitcoin is not described as “digital gold” for nothing, and offers a level of censorship resistance and isolation from the politicization of money that the corporate-driven Libra project cannot. We’ll be riding a spectrum of J.P. Morgan’s JPM Coin and the new Swift blockchain project on one end, to Libra and more open-standard crypto stablecoin projects such as Centre’s USDC on the other. But as those grow in usage, the demand for bitcoin as the digital asset hedge of choice will also grow. So, regardless of whether or not there is a causal relationship, the Libra announcement offers important context for the continued, accelerating demand for bitcoin.
This transition in the world’s way of thinking about money adds a new dynamic to what may be a serious global economic downturn. A new round of global economic uncertainty is occurring at the same time that cryptocurrency and blockchains are establishing themselves as key elements in the world. In the financial crisis of 2008, nobody other than a small number of names had any idea that this alternative model for global finance existed. Now cryptocurrencies and blockchain are front of mind among banks, global companies and regulators – with Libra, as I mentioned, playing no small role in elevating the technology’s profit.
This transition in the world’s way of thinking about money adds a new dynamic to what may be a serious global economic downturn. A new round of global economic uncertainty is occurring at the same time that cryptocurrency and blockchains are establishing themselves as key elements in the world. In the financial crisis of 2008, nobody other than a small number of names had any idea that this alternative model for global finance existed. Now cryptocurrencies and blockchain are front of mind among banks, global companies and regulators – with Libra, as I mentioned, playing no small role in elevating the technology’s profit.
Most recently, yesterday the US House of Representatives sent a letter to The Zuck and his associates calling for Facebook to halt the development of Libra. The letter, amongst other things states:“It is imperative that Facebook and its partners immediately cease implementation plans until regulators and Congress have an opportunity to examine these issues and take action. During this moratorium, we intend to hold public hearings on the risks and benefits of concurrency-based activities and explore legislative solutions. Failure to cease implementation (of Libra) before we can do so, risks a new financial system that is too big to fail.”
In a nutshell, anyone in the world will soon be able to store (digital) Libra on their phone or in an online wallet, and use it instantly from anywhere. You’ll be able to send Libra to your friends via WhatsApp and Messenger and use it in stores. Those in the third world without a bank will suddenly have access to a financial system to store money for a rainy day (or, a hot one). With billions of people that don’t have banks, but increasingly get phones and internet, this is a huge opportunity. And don’t forget, Facebook is ‘more often than not’ the organization providing the unbanked with their Internet – for free. When Libra is successful, it will make Facebook and all of the involved companies (see chart) incredibly powerful. When Libra is successful, it will make sense for countries to hold Libra in its reserves – instead of U.S. dollars. When Libra is successful, it will have an insane amount of bargaining power against governments across the world – and may cause a shift in the macroeconomic balance.
Libra has the ability to cause a substantial disruption in the way money works, and may have severe consequences for the U.S. dollar. It could make the corporations in the Libra association too big to fail, all while not even being regulated. Even when you set aside Libra’s ability to obtain insane amounts of financial data, it makes total sense for politicians and regulators to start asking questions. It only makes sense to try and figure out how to regulate privately-issued money – governed by a cartel of the most powerful companies in the world.
Sure, lawmakers ‘rhetorically’ asked for Facebook to stop the development of Libra completely. However, they can’t actually order Libra to ‘cease and desist’. My larger question is whether anyone in Washington D.C. has the capacity of understanding the elements that Libra is going to deliver – once they sit across the table from them. If you’re asking me to put my faith in our elected officials to do the right thing when it comes to dynamically evaluating global monetary policy – honestly Monty – I think I’ll take what’s behind Door #2.
Last Week:
Yawn, another all-time high. They’re so common now, no one even cares any more. It certainly wasn’t because of the fundamentals. Factory orders fell to 2016 low levels. The ISM fell to 2017 levels. In 1985, that would have ding’d the market. But today – heck no – it’s fuel for it to hit all-time highs. My guess is that they want S&P 3000, and we’re only 5 points from achieving that. For all I know, we might blast past that and see 3250. No matter what, one thing is for certain. The market has lost all sensibility.
We’ve never seen what we’re seeing right now. Yes there was the tech run up of the late 90’s. Yes there was the housing mindless runup of 2007. But this particular madness wasn’t because they think tech is going to the moon because of this “Internet” thing, or that real estate never goes down. Nope. This one is designed for corporate buybacks, and central banks buying stocks and taking rates negative. So, it’s really different this time. If ANYONE tells you they know how and where this ends – they’re blowing smoke.
I understood the 2000 collapse and ‘got’ the 2007 top, but I’m the first to admit that this time I’m clueless. Consider for one second, there’s currently over $13.4T in negative interest rate bonds around the world. What are U.S. bond holders going to do when U.S. rates go negative? Some of them are going to move into stocks, looking for any kind of return. If you expand that idea, you could easily see DOW 40,000.
Imagine how insane that is. We are currently IN a recession. It hasn’t gotten deep yet, but it will. What kind of perversion will it be to see the markets at all-time highs, when we’re mired in recession? All you can do is hold your nose and take the ride. It feels wrong. It feels ugly. But they’re going to pull every manipulation trick known to man to keep the wheels on this mess.
How it all ends is anyone’s guess. My feeling for a while was that this would end via some form of external ‘black swan’ event. War, or an ebola breakout from a Congolese immigrant crossing the border – are always possibilities. Or maybe a real clash with China over something in the South China Sea, or Hong Kong? But until the FEDs can find something they can blame a stock market crash on – welcome to our new normal.
Next Week:
There’s a song out there by Ava Max titled: “Oh she’s sweet but a psycho”, and that is how I would best describe this market. It’s like waiting for the 2ndshoe to drop. Waiting for the 2ndof a 2-Goose handicap. Consider: (a) the 10-year just dipped below 2%, (b) yield curves are inverted around the globe, (c) France, Sweden and Australia are all having their 10-year bonds yield BELOW 0% for the first time in history – and (d) we’re touching all-time-highs. This is truly strange, psycho, out-of-control – whatever metric you wish to put on it.
Factually, I haven’t done any meaningful trades in the equity markets in about 2 weeks. I’ve been concentrating my efforts in crypto – because for the first time in a long time I believe that they represent something closer to reality.
When looking at the numbers, one can easily make the argument that we just lived through the best ten-year period ever for U.S. stocks. Can this extended bull market continue? Yes, of course, but it’s already gone on longer than many people thought it would – myself included. But is it likely to be as strong going forward as it was over the last ten years? No, almost certainly not. If there are any iron-clad laws we can learn from studying the past, it’s that the good times don’t last forever. I’m not saying we’re about to enter a lost decade, but I’m very confident that the next ten years won’t be as smooth as the last ten.
Tips:
Top Equity Recommendations:
HODL’s:
- Aurora (ACB = $7.54 / in @ $3.07),
- Canntrust Holdings (CTST = $4.94 / in @ $3.12),
- Canopy Growth Corp (CGC = $40.16 / in @ $22.17),
- GBTC (GBTC = $14.67 / in @ $10.01),
- Hexo (HEXO = $5.20 / in @ $6.37),
Crypto:
- Bitcoin (BTC = $11,400)
- Ethereum (ETH = $292)
- Bitcoin Cash (BCH = $413)
Options:
- RIOT ($2.80):
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 Riskless Trade = can only lose money if RIOT falls below $0.80.
Thoughts:
- (FXI = $42.63) Yesterday, FXI ended the week up the equivalent of 1 standard deviations from its previous Friday close just on the warm and fuzzies coming out of Trump’s trip to Asia. The President agreed to resume trade talks with China and hold off on tariffs, and FXI (the China ETF) surged. Maybe it was the multitude of protesters in Hong Kong, or maybe it was suspicion that Trump was giving Xi a head fake and that the trade war would resume. Either way, FXI’s pitifully low IV rank suggests long debit spreads as the speculative trade of choice. If you think that FXI might drop back down and are bearish on it, the long Put vertical that’s short the 42 Put and long the 44 put in the August monthly expiration has a 62% probability of making 50% of its max profit before expiring.
- Amazon (AMZN = $1,943) With AMZN’s Prime Day coming up in only days, Jeff Bezos is sending a message to potential losers: you cost me money, you pay. Well, maybe not in those exact words, but Bezos will be charging its grocery vendors whose products lose money a fee to make up for the “profitability gap”. Sounds serious. But I guess it’s about time for AMZN to act like a regular store, and carry products that have positive profit margins. AMZN has had a nice rally over the past 3 weeks, but is still under that $1 trillion market cap. Earnings are coming up on July 25, and that could add some volatility to AMZN’s price movements, as well as indicate how much more money AMZN might be raking in. If you think AMZN’s hardball might help it continue its profits and keep its rally going, you might consider a bullish strategy that’s long the 1940 Call and short the 1945 Call in the August monthly expiration that has a 62% 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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