This Week in Barrons: 8-4-2019:
First: I grew up in York, Pa. As MJP reminded me last week, we both had parents that drugged us when we were young. It was a different time. One where my parents:
- drug me to church on Sunday mornings and for weddings & funerals,
- drug me to family reunions no matter the weather,
- drug me by my ear when I was disrespectful,
- drug me to the woodshed when I disobeyed, told a lie, brought home a bad report card, did not speak with respect, or if I didn’t put forth my best effort in everything that was asked of me.
- drug me to the kitchen sink to have my mouth washed out with soap if I swore,
- drug me to pull weeds in the garden & mow my neighbor’s lawn – and if I ever took a single dime as a tip – my dad would have drug me back to the woodshed.
The ‘drug problems’ of DOERs are different than those of THINKERs. DOERs influence: (a) the types of people their organizations attract, (b) the management style that is required, and (c) the pace and the level of change that is tolerated.
Second: Our culture allows us to go through life living in a deficit – you: (a) spend a bit more money than you make – so that you’re always in debt, (b) drive a bit faster than the prevailing traffic – so that you push every interaction, and (c) only measure yourself against someone who has more than you do. If this ‘coming from behind’ habit is the fuel you need to do your best work – it’s difficult to argue against that. But consider the possibility of living in surplus – you: (a) spend less than you make – so you’re never worried about paying the rent, (b) you drive with the flow of traffic – because it frees you up to dream, and (c) you measure yourself against no one but yourself. Raise your own standard as often as you can, but not in response to what someone else is doing. Living in surplus allows you to choose because of your own generosity and wonder, not because you’re drowning.
Third: Remember the line: “Just use your best judgment.” As companies grow, they have an increasingly more difficult time delivering this line to their staff. Companies create a seemingly endless series of policies, scripts, rules, and procedures that force people NOT to care. “Use your best judgment” quickly morphs into: “I’m just doing my job”– which is the opposite of: “I see the problem and I’m going to fix it.” Growing companies often increase the number of rules – in order to decrease responsibility. This causes people to no longer trust those they’re working with to: “use their best judgment”. Is that a company you want to work for? Is that a company you want to hire?
The Market: If you had to buy ONE STOCK – what would it be?
I was taken back by something that occurred to Tom Sosnoff last week. He wrote about a situation where he was flying out of Chicago’s O’Hare airport – and ran into someone who recognized him. The young gentleman was a user of his company’s software, and was boarding the same short flight to Maine that he was. The lad was a sophomore at a Big Ten school who loved finance. The dialogue started with a simple enough question from the student to Tom: “I’ve saved a little money this summer to invest. What should I buy? What do you like?” As Tom recounts: “I stumbled badly on this one. I panicked. How is this possible – I live and breathe this stuff 24 hours a day. I made almost 100 trades on Friday, and I couldn’t think of a single stock that I would recommend. Honestly, I was at a complete loss.” Now (for a minute) imagine you’re an unapologetic, robotic, well-dressed, miserable but well-paid money manager working at a financial powerhouse like J.P. Morgan, BNY-Mellon, Citibank, Wells, etc. What do you do with another billion dollars to invest? We’re all watching the same movie. Do you: close your eyes, hold your nose, and sit back and buy: Apple, Amazon, Microsoft and Google? If you do – you’d better pray that they go higher on something other than fundamentals or value. You’d better pray that one of those other financial powerhouses like Bank of America, with another billion to invest, is right behind you buying those same stocks and bidding them higher. Because that’s the ONLY way stocks are going to move higher these days. So how would I answer that same question? I’d say without hesitation: Bitcoin (BTC). If your broker won’t let you buy it – then buy GBTC (a crypto-currency trust) and swallow the fees.
Info Bits: Each week more and more fintech companies are implementing software that replaces decision-making functions previously done by humans.
- Talk about ‘Stranger Things’: Tesla will soon show Netflix and YouTube content on its vehicle screens when the vehicle is parked, or while moving "in full self-driving mode – post approval." Rollout could happen as early as August, but don’t hold your breath on that date-time stamp.
- Talk about ‘Strange Bedfellows’: TheApple / Goldman Sachs credit card is almost here. The Apple Card is slated for an early-to-mid-August launch. iPhone owners will be able to sign up for the card on their iPhone, and it promises no fees, a spending tracker, and a "privacy-centric approach to data."
- The Bank that Jack built: MyBank is the bank that Jack Ma (Alibaba) has built in China. It uses more than 3,000 variables in order to analyze a potential, on-line, real-time lending decision. Ma’s four-year-old bank has lent almost $300B to 16 million small companies – at a loan default rate of an amazing 1%. Borrowers apply with a few taps on a smartphone and receive cash almost instantly if they’re approved. The whole process takes three minutes and involves zero human bankers. The rest of the world is jealous.
- Blockchain-based Home Equity Lines of Credit: is what Mike Cagney and others are issuing on a regular basis. Applicants can receive up to $150,000, and are told whether they are approved within 5 minutes of applying. They have gone from $0 to $85m in monthly loan originations in their first 18 months.
Both Jack Ma’s and Mike Cagney’s financial companies understand the same thing – the automation of legacy financial systems is inevitable. They are currently approaching it differently, but each of them is implementing software to replace functions that were previously done by humans. We forget, 80% of the $50T corporate bond industry is still traded by humans over phones. Yes, you read that correctly. $40T of assets are traded by humans via phone. Digitizing and automating these transactions presents an incredible opportunity.
Factually:
- “Crazy Eddy is just insane” - keeps resonating in my head as a 16-year old from Pennsylvania won the $3m 1stprize in the Fortnite World Cup. Who knew that this was a valid career path?
- Uber is cutting heads: by 400 marketing positions – aka roughly one-third of its global marketing department. It’s pruning costs following a challenging IPO that now has its shareholders questioning their ability to achieve profitability.
- Citigroup is cutting heads: by hundreds of jobs in its global markets, fixed income, and stock-trading operations division as trading revenues fade.
- Gen X’ers are peaking career-wise: but being regularly passed over for promotions – according to new data from Harvard Business Review.
- “If you don’t get a piece of cannabis: cannabis is going to get a piece of you” … CNBC’s Jim Cramer.
- "If Heinz wants to be successful: they have to sell off some brands and invest in cannabis'… CNBC’s Jim Cramer.
- Year-To-Date: in 2019, we’ve sold more adult diapers than baby diapers.
Crypto-Bytes: We could very well be heading for a perfect Bitcoin storm. With all of the fiats printing, economies spiraling downward, and excessive debt levels – interest is rising in the non-correlated asset.
A key reason behind bitcoin’s outperformance in recent months is the strengthening narrative around its value proposition as “digital gold.” The backdrop that’s emerging is a virtual perfect storm for Bitcoin:
1. Sentiment from global central banks has taken on a drastically dovish tone. The Fed, ECB, BOJ, PBOC, and many others are now preparing for more rate cuts and additional stimulus measures as they attempt to keep the current economic expansion going. The effects of such a sharp reversal in policy are already starting to show up across multiple asset classes.
2. Global PMIs, GDP growth forecasts, and inflation expectations are all trending lower – which helps support the case for a looser monetary policy. Increased stimulus measures are likely to get more extreme this time around, given the current low starting point for short-term interest rates. It wouldn’t be a huge surprise, for example, to see the European Central Bank follow in the footsteps of the Bank of Japan – allowing them to purchase equity index vehicles like ETFs.
3. Excessive debt levels weigh on productivity in the United States, where estimates for future economic activity are pointing lower over the next decade. As a result, yields on government debt have plunged across the world. Falling yields have also given a boost to gold prices as the opportunity cost of holding non-income producing assets declines. Declining yields serve as a tailwind for bitcoin.
This increasingly bleak backdrop does not mean markets are doomed, but it does bode well for growth assets (technology stocks, cannabis, and alternative investments) as they tend to outperform during periods of slowing economic activity. Longer-term, I am a strong proponent of the “digital gold” narrative for Bitcoin that continues to gain relevance amid extreme monetary policies and rising geopolitical tensions. However, the relative size of Bitcoin’s market value compared to the investible gold market, for example, also makes it a tempting opportunity for investors starving for assets with above-average growth potential.
There are only a handful of assets that sit outside the purview of any single government, so the demand for such non-sovereign, non-correlated assets could be even greater in the decades to come depending on how the effects of unconventional monetary policy shake out.
However, nothing operates in isolation, and the crypto market is no different. The search for yield will likely push investors further out the risk curve, which could be a strong catalyst for Bitcoin’s (BTC) next bull run. The opportunity cost of not holding at least a small allocation in bitcoin grows by the day, especially as the long-term outlook for conventional asset classes looks more bleak.
Factually:
- Is FB’s Libra doomed? Facebook has acknowledged that the regulatory issues may be an insurmountable barrier to the launch of Libra. In FB’s latest quarterly filings, they said that due to the unclear U.S. ruleset – launching Libra has become somewhat like kicking a field goal with moving goal posts.
- Another one bites the dust: After a year, Coinbase’s vice president of engineering Tim Wagner is leaving. In May, Coinbase lost both CTO Srinivasan and COO Asiff Hirji.
- Over 18 Million Served: Bitcoin passed something of a milestone last week with the news that around 85% (18m) of the total supply of coins has been mined. Bitcoin’s finite supply endows the cryptocurrency with scarcity and value (unlike most fiat currencies we could name – wink-wink.)
- We doubled: Square’s Q2 record Bitcoin revenues virtually doubled estimates.
- The U.S. Dollar handles more illicit transactions than Bitcoin: Blockchain analytics firm Elliptic Inc. collaborated with M.I.T. to determine that only 2% of all Bitcoin transactions were illicit and/or money-laundering. That means, far more illicit & money laundering transactions are done via fiat currencies than via BTC.
Last Week: The economic cracks are beginning to show, and Chairperson Powell did little to assuage our fears than put lipstick on a pig.
By now you know that Chairman Powell and the FED cut the benchmark U.S. rate by 25 basis points / 0.25%. Honestly, our FED had no choice, but to keep feeding the beast. Consider Boeing:
- From 2013 through Q1 2019, Boeing has blown a mind-boggling $43B on share buybacks.
- Spending $43B on share buybacks has caused Boeing to have Total Equity of NEGATIVE $5B. In other words, it has $5B more in liabilities than in assets.
- Did BA spend billions on research and development? Heck no, they farmed that out to off-shore engineering firms at $9/hr. The result of all this is that (a) the company is on the edge of default, (b) the 737 Max is on the ground and could possibly never fly again, and (c) the C-Suite at Boeing has been made gloriously rich via stock option buy backs.
- If the Fed doesn't further cut rates, and allows Boeing to borrow more money at a cheaper price – Boeing and hundreds of companies like it will go belly up.
- That’s the reality.
Last week, the Manufacturing PMI (Purchasing Managers Index) came in at the lowest reading since 2009. Yes you read that correctly – the lowest reading since 2009. If you remember, 2009 was the year the FED went bat-crazy printing money, cutting rates and doing QE – because in 2008 the economy melted down.
Last week’s jobs report showed that we added 164,000 new jobs. However, May was revised lower by 10k jobs and June lower by 30k jobs. And (by the way) the Bureau of Labor Statistics via their ‘birth/death’ model injected 148,000 ‘fake jobs’ into that 164k total. Net – Net, in July we created all of 16,000 new jobs. But wait – it gets better.
The German 30-year yield fell below zero for the first time in history. So you can purchase a German bund, hold it for 30 years, and have it COST you money. Never in the history of this planet has such madness ruled, and now it’s considered to be ‘the new normal’. The jobs report sucked. More people than ever are holding 2 and 3 jobs. If not for the BLS injecting 148k fake jobs – the job creation number would have been negative. It seems like a recipe for a successful economy to me … not.
Weed: Positive momentum is building for cannabis / CBD. All of the Democratic candidates are promoting its legalization. A major cannabis / CBD survey released its results.
Next to crypto-currencies, the overall cannabis marketplace is the most disruptive and disjointed marketplace out there. It’s a market that by all accounts will grow by 700% this year. Legislatively, it is a market that over the next 18 months will influence how billions of healthcare dollars will be spent. The current situation is in stark contrast to just a couple of years ago, showing how far and how quickly marijuana reform has come. Even though broad-sweeping legislative approval is not eminent, short-term efforts continue to set the foundation for major legislative reform. After all, current demand for recreational cannabis is roughly $60B (including black-market demand). It’s not a stretch for state and federal officials to salivate over their tax piece of that ever-growing pie. The current House measure appears to involve a comprehensive bill that would legalize marijuana nationwide. Now its passage is an extreme longshot because of resistance in the Republican-controlled Senate, but the new normal is:
- Cannabis reform garnered milestone congressional hearings this year in both the Democratic-controlled House and the Republican-controlled Senate, and
- The U.S. House committee approved the cannabis banking bill.
A major cannabis / CBD study conducted across a wide swath of individuals revealed that 49% have reduced their OTC painkiller consumption, 52% reduced their prescription drug use, and 37% have reduced their alcohol consumption. The report splits subjects into consumers and acceptors. [Acceptors are those that would consider using cannabis but currently are not.] Within the consumer group, it differentiated between affluent families with children, baby boomers, and frequent shoppers.
- Affluent families (39m U.S. households with incomes > $75,000/yr.) are “Active Cannabis Buyers”. They spend $50 per average retail visit. They consume to manage their stress (48%) and their pain (37%). They are completely dis-loyal.
- Baby Boomers (on the other hand) have a slightly higher ($67) average spend. Their demographic is home to the largest percentage of acceptors (people open to consuming cannabis but currently are not). They consume to manage chronic pain (62%) and temporary pain (40%). They are loyal to the brand and the shop.
- Frequent Shoppers spend $50 per average visit, but visit 3 and 4 times per month. They are mostly millennials (58%) and Gen Xers (35%). They consume to manage stress. And they use promotions and deals to trigger their shopping – as price is their main motivation.
- Acceptors (who aren’t currently using) are 3X more likely to get information from a news website than a doctor. They would use cannabis to manage their pain (63%), and anxiety (46%).
One of the key limiting factors to the growth of the CBD / THC beverage category is the relative pricing of the offerings. A single serve CBD / THC infused beverages in Cali generally retails for $6 to $10 per serving (vs. off-premise alcohol $1-4). In legal adult use states, the average on-premise, CBD / THC price ranges from $12 to $15 per serving. When thinking about expansion, price needs to be a critical consideration.
- Factually:
- House Judiciary Committee Chairperson Jerry Nadler and Senator Kamala Harris introduced legislation to legalize marijuana at the federal level.
- There is strong public support (60%) for legalizing marijuana.
- The Democratic presidential lineup includes unanimity on legalizing marijuana at the federal level.
- Curaleaf (CURA) received a warning letter from the FDA for marketing CBD products with unsubstantiated medical claims on the packaging.
- The Minnesota Dept. of Agriculture last week issued cease and desist notices to all CBD beverage manufacturers.
- Ohio approved the state-wide sale of cbd beverages.
- New York Gov. Andrew Cuomo (D) on Monday signed a bill decriminalizing the use of marijuana in the state and expunge the records of some people convicted on cannabis-related charges.
- Aphria reported a net profit in Q2 as it saw revenues increase 1,000% YoY.
- CannTrust is a growing example of what happens when you allow the inmates to rule the asylum. The company’s founding leadership was allowed to skirt federal rules on cannabis production, and even ship unlicensed marijuana overseas. Currently it’s under investigation by securitiesregulators and the police – and looking for a mercy bid.
- CW Hemp (Charlotte’s Web) announced that their total acreage of planted hemp has almost tripled in 2019 over its 2018 amount.
Next Week:
Jawboning, easy money, buy backs and 0 rates are why we're where we are, and none of those are the right reasons. All of the "all-time highs" were as a result of "rigging"not fundamentals. My only question is whether they will ‘ride out the calvary’ to save things, or are we about to see a protracted pull down? We have already lost 1,000 DOW points and almost the 50-day moving average. On a technical basis, the next spot of any support at all is about 300 points lower. This has turned into a fairly serious ‘buy-the-dip’ (BTFD) decision. If it gets rolling downhill any further, a lot of people are going to be bailing out.
From a fundamentalist standpoint, the ‘triple-play’ turned out to be a ‘NO’ at every front. Draghi did NOT cut rates as they wanted, The China deal had NO good news, in fact it was worse. And Powell only did 25 basis points when the market wanted 50. There are threats of more tariffs, and these past 3 days of selling brought out volumes on the SPY that I haven’t seen in 3 months. People wanted out. But that's been the pattern for quite some time. This market has been rising on low volumes and selling on higher volumes – never a good set up for the bulls.
Will Trump threatening more tariffs on China get the Fed to do another 25 basis point cut? That's the intent, but whether the Fed bites on it is anyone's guess. We have fallen a long way in a short period of time, and a bounce is probably in the cards. But will it have the power to take us back to the highs? Not yet. Yes, the ECB is going to cut rates, and actually buy stocks. Yes, our Fed will cave in and cut rates again. And yes, the Bank of Japan will do any goofy crap the IMF asks them too. But what I’m not seeing is a resolution to this chop.
Allow me to leave you with this thought. Tensions are seriously rising between Hong Kong and communist China. This weekend’s protests will make it the 9thweekend in a row for anti-government protests. What if China says: “Enough of this”and sends in the military to squash the uprising? A response of: "So what, it's their problem"would be naïve. The United States has substantial economic and social ties with Hong Kong. There are over 1,100 U.S. firms, including 881 regional operations (298 headquarters and 593 offices), and about 85,000 American citizens in Hong Kong. The U.S. is one of Hong Kong’s largest investors with exports totaling over $18B, and direct investment of over $38B.
Beijing firmly believes that the US is fanning the flames of this uprising. Last Thursday China's top diplomat, Yang Jiechi, ordered the US to: "Immediately stop interfering in Hong Kong affairs in any form". Last week, Chinese officials said they would consider sending troops to help keep order in Hong Kong if the local government requested it. With our banksters failing to ignite a war in Iran, is it possible that they contribute to the uprising in China and attempt to create a military clash? Absolutely. Nothing would get the world’s eyes off their horrid economies faster than a war. In war, banksters get to say: “Everything was fine until this war, and now the world’s economies are in trouble because of it." Keep an eye on this – as someone wants war in the worst way, and is poking a lot of sticks in a lot of eyes.
Tips:
Top Equity Recommendations:
HODL’s:
- Aurora (ACB = $6.33 / in @ $3.07) – ACB has affirmed profitability for this quarter – so this could jump post-earnings,
- Canopy Growth Corp (CGC = $32.71 / in @ $22.17),
- GBTC (GBTC = $14.18 / in @ $10.01)
Crypto:
- Bitcoin (BTC = $10,900)
- Ethereum (ETH = $225)
- Bitcoin Cash (BCH = $335)
Options:
- RIOT ($2.21):
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:
- Target (TGT = $81.52) If you thought that tariffs were so six months ago, last week’s equity collapse showed us that they could be fall’s hottest fashion item. Maybe Trump’s latest tariff volley on China really did make the market rethink stock valuations, or maybe it was just pent up bearishness latching on to some news blurbs. Either way, retail may have a legitimate complaint. Companies that fill their shelves with “Made in China”products are staring at higher prices just as the back-to-school shopping season kicks in. In an attempt to have consumers spend year round, outfitting children of various ages with only the best to compete in the academic popularity contest, Target and others have made back-to-school the new Christmas. TGT fell the equivalent of 2.6 standard deviations last week – which is big but not unprecedented. It had a similar drop last April, and then it rallied back on May’s earnings. TGT’s next earnings are coming up on Aug 21. If you think TGT’s response to the tariffs is overdone, and that it might rally back again through earnings, the long Call vertical that’s long the $80 Call and short the $85 Call in the September expiration with 48 days until expiration is a bullish strategy that has a 64% 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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Until next week – be safe.
R.F. Culbertson
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