This Week in Barrons: 9-8-2019:
Going from being“None of the Above” to “#1 of the Above”:
In entrepreneurship, the easiest way to win is to split the other voters among many similar competitors. Often an entrepreneur’s job is to discuss the unique ‘green field’ part of their service, and to construct a ‘barrier to entry’ around that offering. Not everybody will need what the entrepreneur is selling, but the prospects that do – the entrepreneur would like that business in particular. For example, a while back I would have said: “You might not want to play reggae at your party, but if you do – you need to play Bob Marley”. So, in order to be “#1 of the Above”you have to begin by being willing to be “None of the Above.” You need to be able to ‘zig’ with intent and purpose – when the market is telling you to ‘zag’. But first, in order to even have a shot at being “#1 of the Above”– you need to be on the jukebox / ballot. That means your innovation (while different) still has to qualify for consideration – and therein lies the magic of playing between ‘amazing’ and ‘too weird’.
In order to truly understand those boundaries, the entrepreneur needs to shift into dispassionate observer mode. The inventor will have a sense of what the market wants, of what’s likely to work, and what quality level is required – but will constantly be faced with shaving, bending, and ignoring the truth. Every criticism will seem like a personal attack – when in fact it’s nothing of the sort. No one (other than the customer) has been able to predict the success or failure of an innovative effort. But entrepreneurs most often ignore the unintended consequences of their actions, and those could be the success criteria.
For example, two weeks ago – the capital markets were beside themselves over the latest flare up in the U.S.-China trade war. President Trump had raised tariffs yet again in retaliation to China’s latest tariff raise. He had called Fed Chairman Powell an “enemy”, the DOW had plummeted 623 points, and the trade war was here at least until after the 2020 election. It seemed like we were ‘up against it’ and somewhat at China’s mercy. Now, trade deal optimism is back on the table, formal talks have been announced, and high-level Chinese sources are suggesting a breakthrough. What did the U.S. do over the past 2 weeks that completely reversed the course of the trade war? Nothing really. An unintended consequence happened called: Decoupling.
The decoupling push focuses on reducing America’s reliance on Chinese manufacturing. Even if China’s economy wasn’t so closed off to most American goods and services, a strong argument can be made that the U.S. needs to diversify its import sources. So what was the specific event that changed everyone’s mind? Google. Five days after that trade war flare up, Google announced that it was shifting this year’s Pixel smartphone production from China to Vietnam, and looking to shift some of its smart home speaker assembly to Thailand. Google was not the first U.S.-based company to announce some shift away from China (as over 50 other big names have moved out or scaled back) but it was the proverbial straw that broke the camel’s back.
For China, decoupling is a terrifying scenario. The U.S. remains the world’s number one consumer market, and now we are clearly ‘looking around’ as to where we do our manufacturing. Beijing needs to come up with some kind of offer to slow this trend either at the trade negotiating table or in an arrangement with the U.S. manufacturers that are still in China. The benefits of American trade diversification and continued U.S. economic strength have given the administration the gift of time. This is a quite different proposition than the U.S. needing to “win” a trade war by getting major Chinese protectionist barriers removed.
The idea of being “None of the Above”before you are “#1 of the Above”comes with the ability to view your competitive advantages for what they really are. In the case of a trade war, we thought that our advantage was our consumption ability, when in fact it was our production and manufacturing decisions that turned the tide. It’s often the ‘unintended consequences’ that will be overlooked because they are often not directly controllable. After all, in this case corporations make their own decisions and their ‘bucks’ clearly stop with their own bottom lines and not with a political agenda. CEOs (like entrepreneurs) are held accountable for their actions. They’re getting paid for their value not for their time – with the ‘cherry on top’ being making a difference that they’re proud of. Entrepreneurs, look around and discover your ‘unintended consequences’. It could take you from being “None of the Above”to“#1 of the Above” as well.
The Market: What are the indicators telling us?
1. Bonds: The most talked about recession indicator is the inverted yield curve. To explain: in a healthy market, long-term bonds carry a higher interest rate than short-term bonds, and when the reverse is true – we have an inverted yield curve. It has been a signal of a recession 100% of the time – with the recession occurring (according to Credit Suisse) 22 months after an inversion.
2. Our GDP: is slowing. The economy expanded by 2% in the second quarter. Two percent is the lowest growth rate since the fourth quarter of 2018 and down from 3% growth in the first three months of this year. The Atlanta Fed just pared their U.S. 3rdquarter GDP outlook down to 1.7% from 2%.
3. Our Profit Growth: has come down drastically this year. In December, analysts estimated annual earnings growth to be 7.6%. That number is now around 2.3%. Goldman and Citi recently reduced 2019 and 2020 earnings even further citing a slowing economy, trade war, and currency devaluations.
4. Manufacturing is Contracting: which means we’re laying off manufacturing workers. That hasn’t happened since September 2009.
5. The Class Freight Index is declining: Shipments fell 5.9% in July, following a 5.3% decline in June, and a 6% drop in May. It went from warning of a potential slowdown to signaling an economic contraction.
6. Copper: is a barometer of economic health because of its use in homebuilding and commercial construction. Copper is down over 13% in the last 6 months, and it broke key support in August which makes it a ‘must watch’.
7. Gold: prices have soared more than 20% since May. Similar to government bonds, gold is known as a safe haven in times of economic uncertainty.
8. The Global Economic Policy Uncertainty Index: (which is designed to measure policy-related worries around the world) – hit an all-time-high recently. The more dissent and disagreements around the globe – the higher the index.
9. Business spending tumbled by 5.5% to its worst level since 2015 – telling us that businesses are hesitant to invest in future initiatives due to uncertainty.
Info Bits:
- WMT = Therapy in Aisle 6... Walmart’s making it happen. The chain subtly updated its website last week to include hearing, vision, dentistry, and mental health services for $59 to $99. The pilot starts on September 13th at a couple locations to test the concept. With 140m visitors every week and 1.5m employees, it could actually democratize doctor access like it did tube socks.
- “Designed by Apple in California - Assembled in China” With over $300B of Chines tariffs, big questions are lining-up for Apple. Where and how will the new iPhones be made? What will the impact of tariffs be on Apple’s finances? The tag line emblazoned on the back of every Apple device – now looks tenuous. Will it survive or will Apple’s next iPhones be built in Brazil, India or in the US of A?
- Panera Bread has 100% worker turnover. So, if it hired 100 sandwich crafters in January – it would lose all 100 by the end of the year. Promotions cost money, but losing workers costs more – somebody should tell Panera.
- Pucker up Smucker’s because sales dropped 6% YoY. The 122-year-old master of jelly, Jif, and UnCrustables claims grocers face 2 problems: price pressure from Walmart & Amazon, and our constantly changing taste buds.
- Attention Walmart Shopper: Per MJP: The Walmart robots are coming. It would be prudent to have an introductory meet-n-greet for shoppers with the Walmart robots. Introduce and address them by name. Next up: Robot HR.
- Where you live - determines your lifespan: says the National Center for Health Statistics. The 5 states with the lowest death rates are: California, Connecticut, Hawaii, Minnesota and New York. The states with a highest (50% higher) death rates are: Alabama, Kentucky, Mississippi, Oklahoma and West Virginia. The leading causes of death are the same: heart disease, cancer, chronic lower respiratory diseases, unintentional injuries, and stroke.
- Return of the Nokia flip phone: Finland HMD has spent the last couple of years re-releasing Nokia classics. Friday it unveiled the 2720, a flip phone that comes with modern apps and 4G.
- The 10-Year Bond ETF (TLT): and the Real Estate ETF (IYR) recently hit new all-time highs.
- See no evil: AI can now easily (in 8 seconds) change the identity of someone in a film or video. Multiple services can now scan a few hours of someone’s voice and then fake any sentence in that person’s voice. That means that there’s no way to easily verify the source of what you see and hear. That scares me.
- 2019 IPOs: Top 3: Beyond Meat (BYND) +571%, Zoom (ZM) +155%, and Crowdstrike (CRWD) +139%. Worst 2: Uber (UBER) -28% and Lyft (LYFT) -32%
Crypto-Bytes:
- Litecoin Woes Litecoin continues to face headwinds as news emerged last week of pay cuts for the Litecoin Foundation. LTC is ranked 5th in overall crypto-market cap at just over $4.4B, has seen an 8% price decline over the last 7 days.
- Crypto Rap: “I myself hold bitcoin,”said LinkedIn co-founder Reid Hoffman. “I am a pro-government and well-run society guy, yet I believe a small handful of global cryptocurrencies will arise, inevitably, because they will enable things the world wants and needs.”
- Jack Dorey’s Plan: As cryptocurrency becomes more widely used, Square will begin to provide a broader range of “internet services” rather than just financial technology, co-founder Jack Dorsey said. Dorsey detailed how he believes crypto will shape his company’s development. “In the long term, crypto will help us be more and more like an internet company where we can launch a product … and the whole world can use it, instead of having to go from market to market, from bank to bank, and from regulatory body to regulatory body.”
- Trump Fallout: As the Chinese yuan falls, there are signs that locals are increasingly moving funds into bitcoin. The negative correlation between the yuan and bitcoin has fallen to a record low in the last seven days. In fact, bitcoin prices on Chinese exchanges are trading at a premium.
- Beating Facebook: China's central bank has a new digital currency chief who says its upcoming digital yuan has features not even offered by Facebook's Libra. It will allow users to transfer tokens between phones without a network.
Last Week: Our economic reality isn’t matching the hype – sorry.
- The ISM manufacturing index: was supposed to show expansion at +52. Instead it came in showing contraction at 49.1. New Export Orders had their lowest reading since April 2009. Oureconomic reality isn’t matching the hype.
- The latest Jobs Report: The numbers say we added 130k new jobs last month. They also say wages rose 11 cents per hr., and the unemployment rate was 3.7%. They revised June lower by 5k jobs, and July lower by 15k jobs. The BLS "birth/death"model added 93K phantom jobs to the overall report. The government was responsible for 25K jobs – as they have been hiring for the Census next year. Taking all of that into account – We lost 8k jobs in August.
- WeWork did a Two Fer: by slashing its valuation in half. As its IPO nears, more people are expressing their concern about the valuation.
WeWork’s claims of “elevating the world’s consciousness” was always a bit of a head scratcher to me. The company has never made a profit, pitches itself as a tech firm (despite being in the business of renting out desk space), and has an ‘unconventional’ CEO. Every year since it was founded in 2010, the company has become worth more. In January, investors valued WeWork at an astonishing $47B – double its previous valuation. So for those who have struggled to fathom the company’s rise, last week’s valuation news finally made sense. Fears of a US recession, along with the disappointing performance of other highly-valued targets such as Uber and Lyft potentially contributed to the move. Hopefully, investors simply took a fresh look at the company’s numbers and decided they didn’t add up. WeWork is nothing like a tech company, and should not be valued as one. Despite cutting its value in half, many will still argue that $20B is too much for a company that hast lost $900m so far this year. One thing that is for certain: the spell the company seems to have had over investors has finally been broken.
Weed: CBD revenue is up 700% YoY … it’s getting too big to ignore!
- Boston Beer Company announced that they are looking to enter the cannabis market following success in the hard seltzer business. As the cannabis market is emerging, several beverage brands have started to dabble in the space.
- Green Thumb Industries reported second quarter revenues being up 60% from the first quarter and rising 228% year-over-year. The company now operates in 12 states.
- Origin House, the Canadian based cultivator and distributor acquired by Chicago-based Cresco Labs, reported revenue up 91% from the first quarter. Growth was driven in California through Origin House’s new distribution platform Continuum, which began handling Cresco’s brands in June.
- Curaleaf reported record revenues up 38% in the first quarter. The company has one of the largest footprints in the U.S. market (19 states), with last month’s acquisition of Chicago-based Grassroots. Given the restrictions on interstate cannabis transportation, that presence opens major possibilities moving forward.
- The Napa Valley Cannabis Association has withdrawn a ballot initiative to allow commercial cannabis cultivation in Napa County.
- Ontario-based 48North Cannabis has acquired Quill, a vaporizer brand with a presence in Washington and Oregon. The acquisition marks 48North’s entry into the U.S. cannabis market. This year Quill will launch a full-spectrum hemp CBD vape pen, which will allow for interstate distribution.
- Tilray has reached a definitive agreement to fully acquire Four20, a cannabis retailer headquartered in Calgary. Tilray plans to leverage Four20’s knowledge and brand to expand into other Canadian provinces.
- Washington State’s Liquor and Cannabis Board has drawn up legislation that would allow small growers to deliver cannabis directly to consumers.
Next Week:
I have no idea when and how this ‘slight-of-hand’ market magic eventually ends, but it will. The last few months I have been pulling back, but it seems like nobody else is. The NYSE advance-decline line enters September (a notoriously crummy month) at an all-time-high – at the same time a massive flight to safety is underway in Gold, Bonds, Treasuries, Yen and Utility stocks. The Economic Uncertainty Index below may explain the weirdness:
This chart says that people have been more confused about economic policy than at any time in our history. Keep this in mind when you see 100 talking heads yapping with complete confidence on subjects like Bitcoin, Gold, Bonds, Stocks and China. The truth is, nobody knows, but a resolution to this confusion bubble is coming. The bigger question for investors is whether the inevitable trade-war compromise is going to save the jobs of the current policy makers. History says probably not. It’s normal to think that ‘trade wars are bad’ and ‘foreign policy will wreck us’ – but in fact neither is true.
The trade slowdown, has caused China to devalue its currency 3 times, bail out more of their banks, and have the leadership impose new rules concerning how money can leave their country. Prior to the trade war, the U.S. transferred so much of our manufacturing to China that 75% of all Walmart merchandise was made in China.
As for our FED, on September 18ththey will have another interest rate decision. My thoughts are that they cut rates by 25 basis points, and confirm that this is NOT the start of a rate cut cycle. The market will grumble about it, but give it a pass. Then we move into end of quarter window dressing, which is always a bit bullish. If we do get the outline of a true trade deal in October, this market is going to set more all-time highs. Tons of plans that had been shelved over the uncertainty, will start to be put in motion – resulting in a burst of economic activity. In my view, this market moves higher.
Now, we shouldn’t be moving higher. Trucking is still down. Global shipping is so weak that they shut down an entire maritime shipping route from Europe to Asia. Air freight is still in the pits. Stocks are expensive, and the only justification for owning them is because they yield more than Treasuries. $17T of sovereign debt yields negative returns. But, as I've said too many times, so many things are tied to a flat to rising market, that they just keep finding ways to justify this market making new highs 10 years into a bull run. On the flip side, if we get NO rate cut and NO sign of a deal in October – our markets are going much lower. We have a lot to think about over the next few weeks. Play it small and safe. Go Steelers!
Tips:
1. IHI – Medical Device ETF is at an all-time-high, and could be on a 20-year run.
2. Take a look at Diamond Offshore (DO). This was once a $90 stock, and it's trading at $7. There's a gap that needs to be filled.
3. Watch Nvidia (NVDA) over $179.50.
4. Watch Caterpillar (CAT) – with lower rates and a good whiff of a trade deal – it could easily add $20.
Top Equity Recommendations:
HODL’s:
- Aurora (ACB = $6.08 / in @ $3.07)
- First Majestic Silver (AG = $9.87 / in @ 10.50)
- Canopy Growth Corp (CGC = $27.66 / in @ $22.17),
- DRD Gold (DGD = $4.07 / in @ $4.20),
- GBTC (GBTC = $13.65 / in @ $10.01),
- GameStop (GME = $4.31 / in @ 4.00),
- Pan American Silver (PAAS = $17.75 / in @ 18.00)
Crypto:
- Bitcoin (BTC = $10,500)
- Ethereum (ETH = $180)
- Bitcoin Cash (BCH = $300)
Options:
- RIOT ($2.04):
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:
- Walmart (WMT = $114.73) Since its earnings numbers two weeks ago, WMT has rallied 9% to hit an all-time high. That’s not a big number statistically, but it’s outperforming most other retailers (XRT) and Amazon in particular, but not Target (TGT). WMT and TGT both share relatively high dividend yields, and that seems to be pulling in buyers who might be skittish about just buying the SPY. But how long can dividend chasers keep a stock up? And if the broader market is weaker, a dividend provides scant protection. That’s why a contrarian might consider a bearish trade on WMT. With an 18% implied volatility rank, debit spreads are the strategy of choice. If you are bearish on WMT, the long put vertical that’s short the 115 put and long the 120 put in the Oct monthly expiration is a bearish strategy that has a 64% 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
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