This Week in Barrons: 9-29-2019:
Adam Neumann – x-CEO @ WeWork
Thoughts:
Dear Adam:
I think you’re the victim of what I call ‘Participation Trophy’ collateral damage. By declaring everyone a winner, we never really flushed out WeWork’s conflicts in approach vs businesses model vs profitability. By continually singing kumbaya and kicking-the-can down the road we simply allowed accredited investors’ pocket books to dictate whether your company had value. You rightfully maintained control of your company by giving your shares 20X the voting power of others. But another way to maintain control is to simply focus on running a profitable organization, and make sure you never find yourself in a position where you need to beg someone for money.
Don’t get me wrong, I like your concept, and have used your facility. I simply believe that the ‘Participation Trophy’ super highway claimed another victim. In hindsight, this video of you with Ashton Kutcher back in January is rather representative of the mantra. Just listen to all of the philosophical mumbo jumbo and back slapping that’s going on. This should be a must view for every MBA class.
I can only imagine what it felt like to see your ($60m) private Gulfstream jet go on the auction block – the same week that you basically heard the words: “You’re Fired”. And what it will be like to go through life without the ability to: fling tequila at strangers, sing RUN DMC annoyingly, and smoke pot illegally. It must be devastating for sure. You realize that there will be massive layoffs due to your mismanagement – yes? Sources speculate that over half of WeWork’s 15,000 employees (9,000 of whom have been hired within the last 2 years) will be laid off. And SoftBank (your largest investor) stands to lose billions if it doesn’t end up writing off all of their $10B investment.
Participation Trophies allow us to believe that we can fight and win way above our ‘weight class’. They convince us that we can move directly to scale – without first ‘passing Go’ and trying to ‘Collect the $200’. I remember Uber’s original vision. It was a black car service for the elite. But with Softbank’s immediate injection of billions, it was never allowed to finalize a business model – but rather immediately thrown into shark-infested waters with yet another ego-maniacal CEO. Today, Uber’s ambitions stretch into: food couriers, scooters, electric bikes, and truck drivers using its service to find jobs. It even hopes to start testing drone deliveries soon, and electric aircraft within two years. Dara Khosrowshahi, Uber’s CEO, has talked of Uber being the “Amazon of transport”. They’re introducing an app that will: “become the operating system for your daily life” as it incorporates public transport options along with its other features. The reasons for Uber’s shift are no secret. Every last one of Uber’s businesses lost money last quarter – to the tune of losing over $5B. Shares have tumbled, and its main business model is under attack from regulators. Uber’s vision for the future – very much like your own, Adam – has an issue with profitability. Unfortunately, Ford says that autonomous driving will not be here for at least 2 years, and by that time Uber will have run out of cash. Sound familiar?
To coin SG: the key to small business success is to build a ‘Ratchet with Leverage’. Using electricity as the example, once communities gained access to a little electricity, they quickly discover that they needed more of it. The productivity increases due to electricity – created more income and more demand for electricity. It became a one-way ticket to success.
By allowing the ‘Participation Trophy’ mentality to exist, you never received the benefit of learning how to win and how to lose. And now (no doubt) you’re finding it expensive to learn those lessons in the court of public opinion. I believe the failure of WeWork will cause us to question grading our innovations on the amount of money they raise. Instead, it may cause us to revert to viewing them more through a profitability and sustainability lens – which is a good thing. I believe that WeWork has reset the kumbaya landscape forever. Looking back at WeWork constructively, why didn’t you: Raise prices, Improve services, Frame a different story, Serve a different customer and/or segment, Change your downstream effects, Earn more trust, Make different promises, and even Do things that really matter to small businesses?
Thank you Adam and thank you WeWork for being the proverbial straw that broke the camel’s back. Per HL: “When there’s no shame in failure – you get WeWork. When there’s no limit in founder control – you get the Softbank ‘Vision’ Fund.” Fake money + Fake growth = Fake returns. The public markets have produced 30 to 50% declines in some major IPO’s like Slack, Uber, and Lyft. I thank you for changing the game BACK to numbers, timing, and conflict resolution. Once 4 major dominos start to fall the other way (Slack, Uber, Lyft and now WeWork) – conversations start to change toward measurable profitability and multipliers vs ‘fuzzy math’, ‘goodwill’ and ‘community EBITDA’. #thanksWeWork.
The Market:
A couple observations:
- Alibaba (BABA) is trying to break out of a long period of consolidation. The stock has held up really well as the trade war drags on.
- JP Morgan (JPM) is at an all-time high. I wouldn’t buy it, but it’s impressive to see.
- Apple (AAPL) is near an all-time high and the stores are packed with the new iPhones and iWatches. Photos are the new global language, making the camera the ‘killer app’. Apple’s prices are dropping which will create more ‘follow through’ at a time when they are increasing services such as: payments, credit, banking, content (subscription) and gaming (subscription).
- Netflix (NFLX) has been the big FAANG loser in 2019. They have lost pricing power as the world fills up with subscription services. I think they will eventually partner with Tinder and Airbnb instead of competing with them for content.
- Bond buying: has cranked up like there is no tomorrow. Somebody is keeping rates down and pulling out all the stops. Shortly we'll be hearing about another yield inversion. So, there's a lot to keep this market soggy. You don't pour that kind of money into bond land if you think everything is rosy.
In general, if the race is to land on the lowest rung in the ladder – that’s a race that can’t be won. A race for ‘cheap at all cost’ is a fool’s bet. As soon as someone gains the lead, someone else will lower their standards and take a shortcut to get even lower with less quality. After quality suffers – then self-esteem and then trust. I understand market forces as well as anyone, but it’s pretty clear that there is an alternative to bottom-feeding, clickbait, come-ons and trickery. There remain some brands that are committed to working toward the top. I focus my attention on those opportunities to create a product / service for a focused audience – that is so good that people will want to talk about it.
Info Bits:
- ‘The Boss’ turns 70: Bruce ‘The Boss’ Springsteen turned 70 last week. Hard to believe that he’s never had a #1 hit on the pop charts.
- Largest peacetime Repatriation: 600k travelers were stranded around the world when British tour operator Thomas Cook collapsed – cancelling all flights, vacations, and leaving 21,000 without jobs.
- When the Unicorn falls, the rider goes with it: Juul pushed vaporized tobacco into the mainstream – reaching a $38B private valuation last year. Altria purchased 35% of Juul for $12.5B last year and their shares are down 35% YTD. Juul’s mission is: "Improve the lives of the world's one billion adult smokers by eliminating cigarettes." How does that equate to: (a) 20% of all underage, high school kids vaping, and (b) it's not clear vaping is healthier than smoking.
- Because dating wasn't already stressful: Tinder launched "Swipe Night": a make-your-own-adventure interactive show. The 4-episode mini-series starts October 6th within the Tinder app, and each episode expires after 6 hours. Your decisions determine your love destiny.
- Zuck's coming for dinner: Facebook unleashed a $149 Portal TV that’s all about a camera that tracks your movements for “Watching Together”. Ladies and gentlemen, “Privacy has just left the building.”
- “Gimme a break…” The biggest news for KitKat since the introduction of the KitKat Chunky was the launch of its new $17 luxury bar. Perfect for when you're in the mood to pay four times what you usually pay for something.
- “Santa, I’d like Amazon for Christmas…” Amazon is coming out with a ton of new hardware this holiday season that includes: wireless headphones, a smart ring, a smart oven and glasses with microphones so you can chat with Alexa. Yep, remember Google Glass – it’s back!
- Remember 1994: when the average U.S. tech company went public after 4 years – instead of today when they go after 10 years.
- Tesla went higher – whaaat? Tesla shot higher when an e-mail leaked showing Elon Musk saying: “We have a shot at achieving our first 100,000 vehicle delivery quarter, which is an incredibly exciting milestone for our company!” Where do you think Tesla would be if we got to read all of Elon’s e-mails?
- Job Confidence falling: Confidence levels in the job market peaked in mid 2018 and have now fallen over 70% since the high. Confidence in obtaining a good job is at its lowest level since 2013, and since the last recession 2008.
- Consumer Confidence – not so hot: as it took a dive in September with growing economic concerns about trade wars and the economy. The Conference Board’s index fell 7% in August – the largest drop in 9 months.
I can’t believe it – they’re bringing back my Google Glasses. For a brief moment in time, those awkward, camera-toting eyeglasses became a geek’s badge of honor, as well as a potential vision of the future. That Google Glass vision never materialized. Those individuals that used them to record social interactions became known as “Glassholes”, and many wearers found they caused headaches. But worry not, both Amazon and Facebook have revealed their own plans for high-tech glasses – showing that Google was simply ahead of its time. Of the two, Amazon’s Alexa-powered “Echo Frames” are closer to launch. They will respond to voice commands, but don’t have any camera or augmented reality features. Facebook’s plans are more ambitious, as their glasses will include augmented reality that can project virtual objects and digital information over their field of view. Smart glasses are often seen as the next step after the smartphone: “We cannot look at our phones without looking away from the world around us”. Google Glass may be gone, but its hangover lives on.
Crypto-Bytes:
- Really – a Blockchain Bill: The House of Representatives passed legislation calling for the Financial Crimes Enforcement Network to study “innovative technologies” – including blockchain – to improve the bureau’s operations. The “bill makes sure that we are using the best technology we have available to find and stop the money laundering that makes all these crimes not only possible, but financially profitable for cartels, traffickers, and terrorists,” said Representative Anthony Gonzalez (R) Ohio.
- Tokenizing your ‘Hoop’ paycheck: In partnership with crypto firm Paxos, NBA guard Spencer Dinwiddie is looking to raise $13.5m by tokenizing the first year of his three-year, $34.5m contract. Investors in the securities offering will earn interest through Dinwiddie’s bi-monthly paycheck. The Brooklyn Nets guard said that his contract is fully guaranteed, meaning investors do not risk losing their funds if he is injured or otherwise unable to play.
- “Digital currencies are coming…” Dutch bank ING’s chief economist has said that “fully fledged”digital currencies will be developed by central banks in just 2 to 3 years because the FB-led Libra cryptocurrency project is putting pressure on monetary authorities. With Libra slated for launch in 2020, central banks would have to make a move in that timeline.
- “Please make it stop…” Bitcoin remains on the defensive and looks to set records with its largest weekly loss of 2019. The prospects of a sustained bounce look weak, as the cryptocurrency is finding no takers, despite technical indicators reporting extreme oversold conditions. A deeper drop to $7,500 could be in the offing over the weekend.
Why did Bitcoin take a major hit this week, falling 8% on Thursday morning after diving more than 15% on Tuesday? Well, it just so happened that The Intercontinental Exchange (ICE) launched physically settled bitcoin futures trading through its Bakkt platform early in the week. BTC is now trading around $8,000 after weeks of steady trading in the $10,000 to $11,000 range. The drop once again says: if you don’t believe in Bitcoin’s long-term potential – steer clear. Or differently phrased: “Can’t stand the heat – get out the of the kitchen.”
Last Week: It’s all about correlation coefficients.
Last week was all about correlation coefficients. A high correlation coefficient (something close to 1) means that markets are moving together (higher or lower) in tandem. A low correlation coefficient (all the way down to -1) means that on any given day financials (for example) could be up and technology down. The lack of correlation keeps the S&Ps in a tight range. I believe this ‘lack of correlation’ is about to end. The financials are the glue that’s holding this market place together, but they are beholden to what’s going on inside the bond market. And meanwhile, the technology sector is starting to selloff / diverge lower.
Normally, when markets become volatile – everything moves cohesively as if they were one. For example, on large ‘down’ trading days, 93% of all stocks will be moving in the same direction. When markets become highly volatile (to the upside or the downside) – things become tightly correlated. Right now we’re sitting in 50/50 land – and on the verge of those large correlations kicking back in.
Factually last week:
- The Q’s, and the FAANG’s were down 2% for the week,
- Energy was down 3%,
- Consumer Staples were up 1% on the week,
- The SPY was off 1%,
- Utilities were higher by 1.5%, and
- The Financials finished the week flat.
Correlation is a dangerous idea right now. The market is drifting lower even with a 50/50 advance decline line. The non-correlated sectors appear to be coming in line, and should be moving more in lock-step with the rest of the market next week. The VIX (volatility index) is around 18 – so clearly the pros see the upcoming volatility, and the VVIX (the volatility of the volatility index) remains over 100. So we’re sitting on a powder-keg. Even next week’s expected move in the S&P is almost $55, which is 12% higher than last week’s expected move. Let’s get ready to rumble next week.
Weed: What a wild week it was. Politicians were busy…
- Molson’s going all CBD on us: Molson-Coors (citing increased demand for nonalcoholic beverages) has started distributing to over 1,000 locations – 2 brands of nonalcoholic drinks infused with hemp extracts in the Denver area. It’s starting to sell: (a) Colorado's Best Drinks, a line of hemp-infused sodas and flavored drinks; and (b) DRAM Apothecary, a line of hemp-infused sparkling waters combined with other botanical extracts.
- NY Governor wants the region to legalize recreational marijuana: New York’s Gov. Andrew Cuomo is urging neighboring states to work together on future recreational cannabis policies – a move that could potentially create a more level playing field for marijuana businesses in adjoining states, if adult use is approved. “We’re going to have a meeting October 17 where we’ll put together regional partners and try to talk that through,” said Cuomo. States should review issues like taxation, THC content, and volume. “You don’t want people driving distances to buy marijuana products and then driving back,” he said. “My goal is to have a proposal by January that I can make to my N.Y. State legislature.”
- PA Governor calls for legalization of recreational marijuana: Gov. Tom Wolf wants to legalize recreational marijuana for adults in Pennsylvania. "I said in the past that I didn't know if Pennsylvania was ready for this," Wolf said. "I believe Pennsylvania is ready for this. 68% of Pennsylvanians are in favor of legalizing recreational marijuana.” Pennsylvania Attorney General Eugene DePasquale said: "My research shows that regulating and taxing marijuana for adult use could generate up to $581m in new revenue annually."
- U.S. House passed cannabis banking bill with bipartisan support: U.S. House lawmakers approved overwhelmingly by a 321-103 vote legislation that would pave the way for financial institutions and insurance companies to serve state-legal marijuana businesses without fear of federal reprisal. 91 Republicans voted for the measure, in a showing of strong bipartisan support. Neal Levine, CEO of the Cannabis Trade Federation said: “Allowing lawful cannabis companies to access commercial banking services and end their reliance on cash will greatly improve public safety, increase transparency and promote regulatory compliance.”
The Senate is laying down the FDA gauntlet: In its Agriculture appropriations bill it gives the FDA 90 days to provide the committee a report, and 120 days to issue a policy of enforcement discretion with regard to certain products (including ingestibles) containing CBD. Such enforcement discretion shall be in effect until the FDA establishes a process for the use of CBD in products that include safety studies for intended use per product, and makes a determination about such product.
The FDA was already expected to issue a regulatory update on CBD this fall. I believe the agency takes a middle-of-the-road approach to speed the availability of lawful, hemp-derived CBD in food and dietary supplements as described in a July 30 op-ed in the Washington Post by former FDA Commissioner Scott Gottlieb. Gottlieb’s framework would involve a period of enforcement discretion that would immediately allow low-dose CBD in foods and supplements so long as products meet certain conditions (good manufacturing requirements, traceability, safe levels for purity and potency). However, each of the variables in Gottlieb’s outline would need to be defined in the context of CBD, which would likely still take at least another 6 months.
Next Week: On the Verge of Volatility…
Bonds are poised to drive the next equity move. Bonds right now are a binary trade / a coin-flip. Every major institution out there is long bonds, and the only reason that they would sell them would be profit-taking. After all:
- Nobody cares about interest rates anymore – because we already know they’re headed back to zero.
- And our FED has already telegraphed (via the repo-market) that it will turn on quantitative easing when the ‘red light’ goes on.
Since bonds (/ZB) have rallied from $144 to $164 over the past 9 months – any sell-side activity would increase interest rates and ignite the equity market – especially the financials. Honestly, the financials do not perform well in low interest rate environments.
Stocks and ETFs of interest to me:
- Facebook (FB) has had some significant sell-side activity lately. It smashed through last week’s expected move to the downside, and any breakdown next week will take all of the FAANGs + MSFT with it.
- Starbucks (SBUX) = I’m looking for continued selling next week.
- Costco (COST) = similar to SBUX, but it has earnings next week. I would NOT short Costco before earnings – but wait until the dust settles afterward.
- JP Morgan (JPM) = I wouldn’t short in JPM right before earnings, but I want to be short the financials – especially in a low interest rate environment.
- Homebuilders (XHB) = are up 32% on a YTD basis. Given we’re talking recession, shorting is not out of the question.
- Utilities (XLU) = are up 24% YTD and are out-performing the S&P, Amazon, & Google. I would stay long. If you’re not long – get long.
- Altria Group (MO) = with an 8.37% yield, I would be long. I would suggest selling covered calls if you’re purchasing the stock.
- Silver (SLV) = has taken a hit lately but the long side is beneficial in a falling interest rate environment.
- Financials (XLF) = get short.
Tips:
Top Equity Recommendations:
HODL’s:
- Aurora (ACB = $4.62 / in @ $3.07)
- First Majestic Silver (AG = $9.63 / in @ 10.50)
- Canopy Growth Corp (CGC = $23.83 / in @ $22.17),
- DRD Gold (DGD = $4.60 / in @ $4.20),
- GBTC (GBTC = $9.83 / in @ $10.01),
- Pan American Silver (PAAS = $16.15 / in @ 18.00)
Crypto:
- Bitcoin (BTC = $8,100)
- Ethereum (ETH = $160)
- Bitcoin Cash (BCH = $215)
Options:
- RIOT ($1.72):
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:
- Apple (AAPL = $218.82) Even though AAPL is only the 2nd largest company in the world, it still has game. In what will likely be an excuse for Austin traffic to get worse, AAPL will be assembling its new and expensive Mac Pro desktop in the same Austin, TX plant that built the older version – after some tariff waivers convinced the company not to build them in China. AAPL’s had a strong rally for the past 6 weeks – after falling on its earnings last July. That’s pushed its volatility lower, with its IV rank at only 22% and actual IV at 27%. Apple’s next earnings are coming up on Nov 7, which could potentially help maintain AAPL’s rally on speculation of strength on new iPhone sales. AAPL’s dropped a bit over the past couple of days, and that could be an opportunity for an AAPL bull to get long. If you are bullish on AAPL, the long call vertical that’s long the $215 Call and short the $220 Call in the Nov 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
