This Week in Barrons: 8-25-2019:
Thoughts:
I’d be willing to bet that not a single person who has ever written an article on the yield curve – has ever traded it. Common sense suggests that bull markets can’t last forever; however, economists think that if you consistently scream recession – eventually you’ll be right and that will excuse underperformance. After all, as long as you’re not as bad as the other guy – you’re good right? When you work for a big company, it’s difficult to be rewarded for taking risks or thinking differently. In most banks and brokerages, you need to be average and persevere to succeed. In big business, having a battle scar is often a career ending event – in small business it’s a sign of courage and honor.
To that end, successful entrepreneurs create good, long-term habits. These habits become the foundation of who they will become. For example: having a goal of running a marathon in six weeks is bold, but it’s not a habit. You may succeed, but it’s more likely you’ll simply abandon the project. On the other hand, the goal of running to the mailbox (at least) and back for 50 days in a row – is the sort of habit that might stick. The same goes for education. Doing ‘flashcards’ every day is different than cramming for an exam. Those same thoughts are amplified within an entrepreneurial lifestyle. If you can replace a bad habit with a good one, you’ll live with those benefits for decades. The challenge is to set up systems that create habits – not sprints that lead to failures.
Last week I returned to something that was written in 2013 by Paul Graham - co-founder of Y-Combinator and investor in many of today’s most successful startups. If you’re unfamiliar with Y-Combinator - here is a list of the top 100 Y-C companies (by market cap) of all time. His post was titled: Do Things That Don’t Scale– published in July 2013. A couple excerpts from the piece are as follows: “One of the most common types of advice we give at Y-Combinator is to: Do Things that Don’t Scale. A lot of would-be founders believe that startups either take off or don’t. You build something, make it available, and if you’ve made a better mousetrap, people will beat a path to your door as promised. Or they won’t, in which case the market must not exist. Actuallystartups take off because the founders make them take off.” Here are 7 more traits of founders of successful entrepreneurial companies:
1. They are constantly recruitingusers manually. They’re not running FB ads or analyzing marketing budgets. They’re demoing to small groups of people, soliciting feedback, and onboarding users one at a time.
2. Most startup founders are fragile,and that’s one of the elements inexperienced investors get wrong. Today’s people often judge success by the amount of invested capital and/or by the thickness of the marketing plan – rather than by timetables and accountability.
3. Even more important than recruiting initial users – is turning those initial users into disciples and evangelists. Early users should feel that signing up with you was the best choice they ever made, and you (in turn) should be racking your brain thinking of new ways todelightthem.
4. I can’t understate how extreme a young company’s attention to their initial users’ needs to be. Steve Jobs used the phrase: ‘insanely great’ when he referred to keeping that initial excitement alive.
5. Quickly figure out what specific ‘market niche you can own’. Become profitable in that niche, and expand outward. Facebook started with Harvard students and expanded to other universities – long before it ever was introduced to J.Q. Public.
6. When you have a small number of users, you can get away with doing things ‘manually’ that you plan on automating later. This lets you launch and change faster. And when you do finally automate yourself out of the loop, you’ll know exactly what to build because you’ll have muscle memory from doing it yourself.
7. What doesn’t work: the Big Bang Theory. No, the TV show works just fine – it’s when you apply the principles of big name branding with large marketing budgets to young entrepreneurial ventures that doesn’t work. How many successful startup launches do you remember? The goal of an initial launch is to obtain a small core of users. Your success will depend upon how happy you made those core users – more so than on how many users you sign up.
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Paul Graham’s playbook is pretty simple. “Do Things that Don’t Scale.” Just don’t underestimate how hard that playbook is to execute.
The Market:
U.S. consumer sentiment fell in August to its lowest reading in 2019. Businesses across all sectors have curtailed spending amid efforts to counteract the impact of reciprocal U.S. and China tariffs. The dip points to economic uncertainty as consumers navigate wild market swings and a constantly shifting trade environment. As Confucius said: “When the sage points to the moon, the fool looks at the fingers.” In my opinion, traders and investors who are obsessed with the yield-curve inversion – need to look: ‘beyond the fingers.’
- The FAANG stocks: have led this bull market rally, but have underperformed the broader market as of late. They account for 17% of the S&P 500, so without their support the market’s upside is limited. Often with market tops – you will see a ‘hollowing’ from both ends. With the FAANGs and small caps under-performing, maybe the R-word is really in the cards.
- U.S. Dollar: has plateaued lately, as the world looks toward gold and the yen as their favorite risk-off assets. Mark Carney of the Bank of England came out in favor of a virtual, global currency on Friday. So just maybe the days of the U.S. dollar being the world’s reserve currency are (in fact) numbered.
- Volatility: Typically when capital markets crater, there are large spikes in the Volatility Index (VIX). That was not the case last week, as the VIX is still below 20. That means that there’s just not enough fear in the market to call a bottom.
- Outflows: have caused large loan ETFs to trade at a discount to their net asset values. This is often a warning of illiquidity – which will create havoc in unexpected places. ETFs offer intraday redemptions, and will be particularly exposed if the liquidity of the loan market dries up.
- Gold Prices: and long-term treasuries are in a correlated bull market. That means that investors are finally pricing in a prolonged period of financial repression and forced negative interest rates.
Along with all of the above, a potential ‘No-Deal’ Brexit is staring the UK right in the face. A ‘No-Deal’ Brexit will force the UK to experience food, fuel and medical shortages. Between the UK going into a ‘No-Deal’ Brexit and the U.S. ‘shooting from the hip’ on additional tariffs, I wonder where the ‘freak-out’ line is going to be. My analogy goes along the lines of: giving a talk to three people is easy – while giving one to 3,000 will cost you a night’s sleep. Where is that ‘freak-out’ line? If our leaders spent a little more time looking for the line, maybe they would discover ways to quell the fear. After all, the ‘freak-out’ number is often just one more than a number you’re fine with.
Info Bits:
- “This will make 2008 look like a walk in the park”… as negative-yielding corporate debt passes the $1T mark. Investors holding the bonds for price appreciation face significant risk should rates start to rise. Jim Bianco said: “The financial system doesn’t work with negative rates. If economies recover, the losses that investors will take are unlike anything we’ve ever seen.”
- An earnings theme is emerging: Home Depot’s fiscal second-quarter earnings easily surpassed estimates, but total sales came in short of expectations. HD trimmed its full-year outlook, partially due to worries about tariffs.
- Layoffs at USX: will start in the hundreds at its Great Lakes facility in Michigan. In mid-June, the company said it would idle two blast furnaces citing lower steel prices and softening demand.
- The Apple Titanium Card: is now available to all iPhone users in the United States, with a 3% cashback offer for Uber and Uber Eats.
- Apple TV will charge $10 per month: and is spending $6B on original content. That’s a serious amount – even though it’s significantly less than NFLX. TV watchers currently spend 18 min./day looking for things to watch on Netflix.
- You still can’t buy loyalty: Loyalty has always been a priority for companies. Lately, consumers have seemingly endless choices, and it’s brand switching that’s the manufacturer’s and retailer’s #1 enemy.
- The Rate Cut was a mid-cycle adjustment: repeated Chairman Powell on Wednesday and Friday – and what sparked significant moves in the bond market. Most of the yield curves are inverted – causing recession fears and concerns that the Fed will not act aggressively enough to cut rates.
- Jobs & Confidence Crater: Reports show job creation was the weakest since February 2010, and business confidence is currently at an all-time low.
- #thanksTrump = $1T budget deficit in 2020: the CBO reported on Friday. In fact, by 2029 we could reach the highest level of debt since World War II. Send thank you cards to: the Trump tax cuts and the bipartisan budget deal.
- “I resigned because I’m helping the Men in Black”… Is what CEO Patrick Byrne of Overstock.com said last week. He put out a statement referencing law enforcement and his help with investigations into the Clintons and the Russian interference scandal. Mr. Byrne was also romantically linked with a Russian agent (Maria Butina) who was trying to infiltrate various U.S. political groups.
Crypto-Bytes:
- Full Metal Backing… The youngest bitcoin millionaire, Erik Finman, has made an angel investment in the peer-to-peer payments platform Metal Pay. Finman is looking to develop the first “all-in-one”cryptocurrency banking platform, which includes a digital asset exchange, a digital bank, and a payments application with social features similar to Venmo.
- IPO in Crypto-Land… INX Limited (a crypto exchange startup) plans to raise up to $130m through an IPO. It would be the first security token sale registered with the SEC. It would also be one of the very few, full-fledged IPOs in the blockchain industry – and almost certainly the largest.
- It’s an open and revolving door… as Flexa will soon allow any other app to run payments in crypto just like its own SPEDN app has done since May. It will enable other apps to provide payments to merchants without any danger of malicious apps reversing a transaction.
- Who’s your competition… Bank of England governor Mark Carney said a central bank-supported digital currency could replace the U.S. dollar as the global reserve currency. He thanked the U.S. dollar for playing such a dominant role over the past century, but cited recent developments such as globalization and trade disputes facilitating a global reserve digital currency going forward.
- Coinbase(whoo-hoo) … exceeded 100k trades/day in Bitcoin pairs.
- A Swiss private bank… says > 400 new clients are demanding Crypto products.
- September 23rd: Bakkt’s launch. This has been highly anticipated for a long time. Bakkt has finally received all the regulatory approvals necessary to launch its Bitcoin futures platform. This will be the first time physically settled Bitcoin futures will be open to the market.
- October 13th: is when the SEC is expected to make its final decision regarding the Bitwise ETF proposal. The issues in the past have been market manipulation, surveillance and divergence. The other ETF’s will see final decisions too, but Bitwise is first in line.
Last Week:
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- Our FED thinks (as told by Philadelphia Fed President Patrick Harker) that: “The U.S. economy looks solid and interest rates are at the right level. Lowering rates would probably not affect business one bit – as there would be no additional corporate customers. An inverted yield curve is correlated with recessions, but there’s little evidence to suggest that it’s actually causal. To be honest, if you’re sitting in a corporate boardroom today, and you’re about to make a multi-billion-dollar investment – would you do it? I wouldn’t. Not because of rates, but due to the trade situation and those elements are beyond our control.” Harker went on to discuss whether central banks should consider introducing a stablecoin cryptocurrency. “I think there’s a real advantage in having a stablecoin. Central banks around the world, need to seriously start thinking about a stablecoin currency. In my view, it’s inevitable. The technology is evolving, and we’re not going to stop that. The vast majority of money in the world is digital right now. It’s central bank money – so it’s not a big leap.”
- The Swiss National Bank is back at it… and just released their latest 13F report. What it showed was the Swiss National Bank continued their ‘aggressive buying spree’ focused on U.S. stocks. They boosted their holdings by 6.6% last month. They print money out of thin air and buy stocks. Don’t you wish you could do that? Now there’s talk that they may double the amount of stocks they’re allowed to accumulate, from the current 20% to 40% of their assets. If they do that, they will own a significant amount of the entire planet’s equity.
- I’ve whined about the Jobs Report for 18 years… and guess what – they just did a "data revision", and NONE of those 501,000 FAKE JOBS that they added as a result of the ‘birth/death model’ in 2019 showed upon on their report as being real jobs. That proves they’re putting in the FAKE number just to please ‘the Street’ and then removing it 3 months later when no one’s looking. What a perverted mess that is. https://www.bls.gov/web/empsit/cesprelbmk.htm
- “This market needs free money and no-mo-tariffs”… but this past week it received NO free money and alot-mo-tariffs – from our FED, China & the U.S.
Weed:
Cannabis' biggest week of the summer was a major downer for investors. Just as Woodstock celebrated its 50threunion, two of the biggest publicly traded pot companies revealed that it's hard out there for cannabis companies to make money.
- Tilray (DOWN -27% last week): The Canadian cannabis icon sold 5.6K kilos of weed (triple what it did last year), but its losses doubled. It acquired hemp-based food creator Manitoba Harvest and treated itself to a CBD candy company.
- Canopy Growth (DOWN -14% last week): The largest pot producer sold a hefty 9K kilos of weed (revenues almost quadrupling), but its losses also more than quadrupled. Canopy's CEO was fired because he wasn't moving fast enough on CBD-infused drinks for the U.S. market.
- CannTrust shares hit an all-time low after authorities seized more illegally-grown cannabis.
- Sundial Growers recently IPO'd but was caught selling ‘moldy’ pot.
- Last week’s takeaway: pot companies are shifting their strategy to find some wholesome profits. The US opportunity is huge, but currently limited. Canada has a weed over-supply problem and will potentially cure that in October when edibles become legal. Therefore, large pot companies are looking abroad with Tilray building a new facility in Portugal, and Aurora announcing a deal with Italy.
- Peter McDonough & Trait Biosciences: the former Diageo North America chief marketing and innovation officer was recently named CEO of Trait Biosciences. Trait is developing a new, water-soluble cannabinoid aimed at the infused product market. As the CBD market continues to explode in the U.S., Trait’s new water-soluble cannabinoid technology will allow infused cannabis products to have a rapid onset time similar to alcohol.
- Lowell Café is Open for Lunch: One of California’s newest restaurants will have cannabis on the menu. It’s regular menu will be offered alongside a‘flower menu’ of cannabis products that could be smoked, consumed, or used in concentrate form. In lieu of a cocktail menu, the ‘flower menu’ will guide guests through a smoking, eating, and vaping experience. The restaurant will NOT be able to accommodate guests who want alcohol and cannabis at the same table.
- Colorado’s Everything Burger… is pushing the boundaries by offering an everything cannabis lounge – serving only cannabis infused food and beverages.
Next Week:
- Markets are on the verge of getting’ Ugly… The SPX volatility Box currently goes between 2830 and 2940. Because of increased volatility, whichever side we crack could be ‘off to the races’. Last October and November we saw this same movie, and it broke to the downside. The SPX downside levels are: 2911 (upper edge) then 2842, 2811, 2731, 2682 and then look out below.
- Rate cut – What rate cut? The CME Group is showing a 95% probability of the FED cutting interest rates by 0.25% in September, with a 64% probability in October, and a 53% probability in December. But the FED did NOT say anything about cutting rates when it released its statement on Friday.
- Throw a tantrum why don’t cha? The markets did not hear what they wanted on Friday, so I think they will throw a tantrum in order to get their rate cut. Their tantum will take the form of manipulating the S&Ps. After all, they’ve already collapsed the Bond market.
- Financials are under the risk marker: Watch the XLF. When it’s under $26.50 (it’s $26.10 now) – things get ugly. Markets cannot move higher until the XLF gets above $26.50.
- Are you calling me a currency manipulator - again? The markets (on Friday) handled China’s currency ‘fix’ fairly well. What they didn’t handle well was the Twitter flurry that followed. Watch the overnight action over the next 2 to 3 weeks. I think we’re going to see China move its currency again.
- There is heavy selling –but we’re not seeing the fear. The VIX is still below 20. On Friday we had a 2.5% move down in the S&P, and a 3% move down in the Nasdaq, but the VIX is still (meh) under 20. The VVIX (the volatility of the volatility index) is saying: “get under your desk and duck-n-cover” as it’s at the top of its range. If this gets ugly – it could get really ugly in a hurry.
- Correlation Coefficients are sky high right now –there is NO ESCAPE. There is no need to discuss individual stocks – because all are acting in tandem. In times of high volatility, everything moves together, and in this case everything moved and touched their respective expected moves to the downside.
- The SPX has a $70 expected move next week… but we moved $75 on Friday alone. NEVER sell premium when the expected weekly move is less than any daily move.
- Someone could have the case of the Mondays. We could see action as a result of the G7 meeting – where China wasn’t invited. Keep your wits about you and make sure you have purchased some ‘downside’ protection. Gold and cryptocurrencies count as downside protection.
On Friday, the Chinese threatened tariffs on $75B worth of goods from the US. That knocked the stock market for a loop, and for a while there, we were down 750 points – below the 200-day moving average. The PPT (Plunge Patrol Team) couldn't have that and with just 4 minutes to go, brought the DOW back over 120 points – saving the 200-day. If we lose the 200-day moving average for an extended period of time, this market could roll downhill a long way. Just losing it for a day or so means nothing, so don't get trigger happy looking for a ‘wholesale short’ button. On the long side of things, we may bounce higher from the 600 point plunge, but don’t trust it. Quick trades are the name of the game. Strap in, it's going to be quite the ride!
Tips:
Top Equity Recommendations:
HODL’s:
- Aurora (ACB = $5.64 / in @ $3.07)
- Canopy Growth Corp (CGC = $24.89 / in @ $22.17),
- DRD Gold (DGD = $4.47 / in @ $4.20),
- GBTC (GBTC = $13.44 / in @ $10.01),
- Overstock (OSTK = $19.89 / in @ $18)
Crypto:
- Bitcoin (BTC = $10,200)
- Ethereum (ETH = $190)
- Bitcoin Cash (BCH = $310)
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 $0.70).
Thoughts:
- Tesla (TSLA = $211.40)… When do you suppose the Volkswagen CEO decided to squash rumors of buying a stake in TSLA? Was it when a Model S burst into flames in China a couple days ago? Was it WMT’s suit alleging TSLA solar panels did the same thing? Or how about the video from England showing a Model S being easily stolen in less time than it takes to read this? TSLA isn’t getting any love in the news, and the stock has been drifting lower since crashing on earnings last month. Despite all the excitement, TSLA has an IV rank of only 11%, which suggests long option spreads as the strategy of choice. If you think that Elon Musk won’t be able to pull TSLA out of its funk for the next few weeks, you might consider a bearish trade. If you are bearish on TSLA, the long put vertical that’s short the 220 put and long the 225 put in the Sept monthly expiration is a bearish strategy that has a 69% 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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R.F. Culbertson
Until next week – be safe.
R.F. Culbertson
