This Week in Barrons: 11-3-2019:
Thoughts:
When thinking of changing someone, you only have 2 paths. Either: (1) you change the way they GET what they want, or (2) you change WHAT they want. Jeff Bezos and Bill Gates are two men who changed how people GOT what they already wanted. Nelson Mandela and Steve Jobs changed what people WANTED in the first place. Players within any vertical, need to recognize which path they’re on.
This week, Chinese President Xi Jinping (looking like Mandela and Jobs) when he made his first public remarks about blockchain technology. “We will make the blockchain an important breakthrough for independent innovation. We will clarify its main direction, increase investment, focus in on a number of key core technologies, and accelerate its development.” The general sentiment of Xi’s comments was simple – blockchain technology is really important for China’s future and China plans to be its global leader.
On Friday, China's three state-owned wireless carriers (looking like Bezos and Gates) started offering 5G subscription packages – months ahead of schedule. Their goal is to have 5G service available in at least 50 cities by the end of the year. China will have the world's largest commercial 5G network. China is expected to have about 130,000 5G base stations by the end of the year, vs the U.S.’s 10,000 at best.
The pursuit of Bitcoin, blockchain, and digital asset superiority will become this generation’s Space Race. Its underlying methodology is likely to lay the foundation for the most disruptive innovation since the Internet. There is no putting this genie back into the bottle. Other countries (including the U.S.) have chosen to mostly ignore Bitcoin and blockchain technology, and are even actively working to stifle it.
Over the last few decades, China has transitioned from a country that was reliant on stealing intellectual property – to one that is pushing the pace of innovation across everything from Ai to 5G. The move to become a tech leader was made by combining a superior educational environment with a greater work ethic – where most employees work 14 hours days – 6 days a week.
In contrast, the United States has been overly negative on various aspects of the digital asset industry for a number of years. Our Congress and the Senate have publicly berated one of America’s largest companies over plans to create a digital currency and build the infrastructure surrounding it. The SEC has spent billions of dollars chasing down startups and prosecuting companies that have chosen to embrace blockchain, while refraining from issuing new rules or clarifications surrounding their current regulatory environment. Notes from SEC meetings show that they actively manipulated the price of Bitcoin in 2017-2018 using futures products. The IRS has clarified its position surrounding digital assets to the point that it maximizes tax revenue at the expense of innovation and market participation. This negative message has even been echoed by our President when he said: “Bitcoin, blockchain tech., and digital assets are not a priority for America.”
While unfortunate, this is not unexpected. The U.S. suffers from: Innovator’s Dilemma. It’s a concept popularized by author Clayton Christensen where he lays out an argument for: “How successful, outstanding companies can do everything ‘right’ and yet still lose their market leadership – or even fail – as new, unexpected competitors rise and take over the market.” These unexpected competitors are usually disruptive technologies and the incumbents are caught off guard because what they have done in the past has worked – so they are slow to change their existing ways.
This is exactly what is happening in the U.S. today. We are the world’s most powerful country. We control the global financial system and the U.S. dollar is the world’s reserve currency. We have benefited from controlling the global reserve currency, including the ability to print money and weaponize the dollar against all other currencies. There are two new challengers to King Dollar’s status: (1) Bitcoin, and (2) China’s digital currency (DCEP). We know that China is taking digital currencies seriously. Even on Friday, the Vice Chairman of China’s Center for International Economic Exchanges confirmed specific plans for implementing their national digital currency. It’s clear that China is ready to embrace one of the most important technologies of the future, while the United States is set on regulating and stifling any innovation associated with it.
I personally always thought that innovation, entrepreneurship, and keeping an offensive mindset were in our DNA. Maybe I’m wrong, and we want to transition from a country of wealth creation to one of wealth re-distribution. I thought everybody realized that our future would be global, automated, and largely decentralized. The current U.S. mindset of requiring innovators to ask the government for permission is unlikely to be successful. Innovation requires speed, a sense of urgency, and an iterative process that constantly pushes the envelope. All areas where governments to not excel. The best thing we can do is to get our government out of the way. If we don’t, the next book we will be reading will be titled: “The Innovators Dilemma Part 2 – How America Was Disrupted By Its Own Playbook.” A typical entrepreneurial path asks for forgiveness instead of permission. Entrepreneurship recognizes that ideas are better shared. Generosity and communication regularly replace scarcity and paranoia. History shows that winning corporate cultures thrive on community and caring – while losing one’s spend their efforts constructing walled-gardens. I’m not worried about moving down the wrong path for change; however, I worry a lot that we’re not changing at all.
The period from Nov to April is the best 6-month investing period – dating back to 1950.
The Market:
Sports fans always look at outcomes first – and eventually examine the process. Engineers look at the processes that led up to the result – and then examine the result. Instead of asking, “How did my team do?” - Engineers ask: “Did the system do what it was supposed to do?” Engineers know that you can ‘game’ any process, but eventually the game will catch up with you. For example: yelling at a referee because you didn’t like a call is not nearly as effective as finding a better winning formula / strategy.
This past week was FED week. Just about everyone expected a quarter point rate cut and that's what we got. Chairman Powell went on to say: “We will not raise rates before we see significant inflation.” Trust me, anyone who buys food or pays any medical bills is seeing significant inflation. What he meant to say was: “We will not raise rates before we see significant inflation – the way WE measure inflation.” Chairman Powell went on to say: “Banks will be adding to their current levels of reserves.” Taken together, this means that insanely low rates are here forever, and he’s going to continue adding liquidity to the banks via the REPO highway. A total of 54 central banks (CBs) in both developed and emerging markets have cut their base interest rates this year. We're living through a synchronized global slowdown and every CB is pushing buttons and pulling levers trying to keep their heads above water.
It comes down to a choice between adding more debt, OR fessing up to the economic reality and allowing a recession / depression. That choice is easy. Our CBs know that with rates this low, “What else can you do with your money?” No one wants 1.5% returns, and the only other returns come with a dramatic uptick in risk. Could this economic behavior go on another 5 or 10 years? Logic, common sense, and history all say no. But logic and common sense have been pushed aside for such marvels as negative interest rates, $120B Repos, ‘Pro-forma’ earnings, and other non-fundamental tricks.
Which brings me to the idea that while it seems so "yesterday", I will always hold fast to the premise of accumulating gold and silver. When the day comes that the bubble hits the pin, the answer to the question: "Where are you putting your money" changes quickly. In the here and now, we got the FED cut, and we got an all-time S&P high. If this holds for a couple days, they’re going to try and walk us higher into year end. So, hold your nose and get ready to buy into the madness. How sad!
Info Bits:
- October’s ISM manufacturing index was 48.3… worse-than-expected and contracting. Non-energy related manufacturing isn’t coming back any time soon.
- Perspective: In an open letter to Mark Zuckerberg, Aaron Sorkin criticized Facebook’s practice of posting politically false ads. Mr. Sorkin, the Academy Award-winning screenwriter of “The Social Network,” said, “If I’d known that Mark felt that way, I’d have had the Winklevoss twins invent Facebook.”
- "Profit puppy…" is the part of a company's business that makes huge chunks of profits like Ford's F-150 pickup truck, Lululemon's yoga pants, and Amazon's AWS cloud service.
- "Promo puppy…" is a shiny, cuddly, free perk that attracts customers to sign up. Think: free streaming for a year, free shipping with Amazon Prime, or "60K reward points if you spend $4K in the first 4 months".
- WeWork Survived: WeWork is not publicly traded given it recently canceled its IPO. The injured unicorn (that loses $219,000 every hour) was weeks from running out of cash – when SoftBank bailed it out with $8B of new money. Ex-CEO Adam Neuman walked away with $1.7B, yet their employees' options are basically worthless. All in all: Softbank pumped in $8B more to own 80%, WeWork's valuation fell from $47B to $8B, and it's still alive.
- No rest 'till everyone is Primed... Amazon showed investors it'll do whatever it takes to beat Walmart and Target in the shipping wars – like spending 46% more on shipping so your packages arrive in 1 day instead of 2.
- Bud-pocalypse: Budweiser is experiencing its own apocalypse as it watches its own market share of the U.S. beer market fall to almost 5%.
- It's official… Google is the new owner of Fitbit for $7.35 / share = $2.1B. This is a big win for Fitbit. In August, Fitbit’s shares were trading at $2.81, down from their high in the summer of 2015 of $51.90 per share. The move amps up the wearables race. It's also causing some consternation over Google collecting even more data about us.
- New noise-canceling AirPods: Apple unveiled new $250 AirPods so that you didn’t have to constantly worry about losing one of your $159 AirPods.
- According to Barron’s… only 27% of money managers are bullish on the stock market over the next 12 months – which is the lowest level in 20 years.
- Clients have withdrawn money … for 3 straight years from stock picking hedge funds. That is the longest stretch of net outflows from such funds since 1990. The reason isn’t hard to figure out: hedge funds are no longer very good at picking stocks. It seems the best people in the world, just are not having ‘fun’ picking stocks anymore.
- Samsung teases about a new foldable 'clamshell phone' … after announcing a 56% profit miss.
- Merger: If Fiat / Chrysler and Peugeot agree on a merger, they could create the fourth-largest automaker in the world. Peugeot's board has approved this, they’re just waiting on Chrysler. The question we are really concerned about is will the board dinner be hosted at an Italian or French restaurant?
- China Tariffs: The timing of the "Phase One" deal with China is now up in air with he APEC Summit being cancelled. This adds to my skepticism and confirms my fears that the "skinny deal" is hard to swallow. The only palable deal that I see is one shrouded in: a temporary tariff freeze, investment restrictions, capital controls, supply chain roadblocks, and their own tech war.
- NAFTA 1.1: I can’t see any way that the House (in the midst of an impeachment) will pass the signature trade achievement.
- Potential Government Shutdown: I hear that the budget deal and the debt ceiling is raised until after the election. But the stopgap spending measure that funds the government (CR) runs out on November 21.
- The U.S. Dollar… has been the world’s reserve currency for decades, but that status will come under threat as China, Russia and the European Union make moves to lower the Dollar’s status.
Crypto-Bytes:
- China announces imminent release of Digital Currency targeting SWIFT and the US Dollar.
- Green Shoots? A bitcoin price indicator with a strong track record of predicting big moves has just turned bullish. By year-end, BTC may be set to challenge the 2019 high of $13,880. But, in the short term, a pullback to $8,820 looks likely as short-term charts are reporting buyer exhaustion.
- Loyalty Tracker: Following Xi Jinping’s bombshell speech last week urging his countrymen to “seize the opportunity” created by blockchain, China’s Communist Party released a decentralized app for members to attest their loyalty.
- Bank Approvals: China’s central bank will certify 11 types of financial solutions that are widely used for digital payment and blockchain services under a new verification system called the Certification of Fintech Products.
- Property Tokens: Overstock’s security token platform tZERO has partnered on a project that will tokenize $643m in real estate development. The startups will tokenize portions of properties financed by U.K.-based Alliance Investments.
- Almost Heaven: Canadian investment fund manager 3iQ has received initial approval to launch a closed-end bitcoin fund on either the Toronto Stock Exchange or the TSX Venture Exchange later this quarter.
Last Week: Day by day summary…
- Monday: This market is running for all the wrong reasons. Tell me what has gone so RIGHT that our FED had to inject another $76B into the system last NIGHT. All around the world, nations are trying to work around the Dollar being the global reserve currency and that’s causing a slight FED panic. This is NOT natural or normal. Yes the market is up, but it’s not on economic releases. There's a lot of moving parts out there and NONE of them are very good.
- Tuesday: Our rates are so low, they don't even beat inflation. There's only one game in town, and that’s buying extremely overpriced stocks. No one wants to buy them – hence the meager volume. With the FED printing like a madman and with rate cuts coming – those with strong stomachs are still nibbling. In reality, the FED has injected more dollars into this market this past week – than it used to over 3 months. And the money’s got to go somewhere.
- Wednesday: The only thing that matters to this market is how much money the FED is injecting into the overnight REPO. Our 3rd quarter GDP came in at an annual +1.9% rate. It’s the perfect storm for higher prices and potentially a run into S&P 3100. I’m listening to Powell’s news conference after our FED’s rate cut, and it’s comical how he’s dancing around the real facts.
- Friday: The fear of a trade deal delay was bad, but the Chicago Purchasing Managers Index (PMI) registered it's single biggest drop in 38 years. On the surface the jobs report showed 131k jobs created, BUT the BLS birth/death model injected 274k of those 131k jobs. In reality, we LOST 143,000 JOBS last month! Yes I know that Kudlow announced that "Trump is optimistic about a trade deal with China!" All that pales in comparison to the headline: “N.Y. FED injects $73.1B of securities in Overnight REPO Operations”. So the banksters got another $73B to play with, the Jobs numbers were goosed, Kudlow puts out some "trade hype", and to hell with any economic reality.
Weed:
- In October, the use of CBD - DOUBLED over last year’s total.
- Females between ages 35 to 44… most frequently use CBD products.
- Males over age 45… are consuming more CBD than younger men.
- Top 3 reasons for using CBD are: inflammation, anxiety, and depression.
- The cannabis landscape will grow significantly… as consumers embrace new products including formulations with higher THC concentrations in the CBD:THC ratio – and additional full-spectrum blends (CBN and CGG).
- 66% of Americans favor cannabis legalization.
- Canadian cannabis retail sales grew 18.6% month-over-month.
- MedMen Revenues TRIPLE Year-over-Year: Its California retail run rate surpassed $110m on an annual basis, with 13 stores in operation across the Golden State and losses contracting by 7%.
- Mexico inched closer to adult-use legalization with the outlines of adult-use legislation taking shape in the country’s Senate. Under a draft document, Mexican lawmakers would legalize recreational cannabis sales to consumers 18 yrs. and older for private use, but impose stringent regulation limiting foreign ownership, vertical integration, and the resale of licenses.
- Hall of Fame running back Franco Harris… has joined CBD company DouleuRx as an investor and partner. The Chicago-based company is a vertically integrated manufacturer of THC-free CBD products that include pain relief cream ($90 for 1,200 mg.), tinctures ($80 for 1,000 mg.), and Five Hour Energy style CBD shots ($35 a 12-pack, 10 mg. each).
- Hexo is laying off 200 people in an effort to reduce costs and achieve profitability. Among those leaving are COO Arno Groll and CMO Nick Davies.
- 60% of Americans are familiar with CBD, but 40% believe that it’s just another name for marijuana.
- 66% of Americans believe CBD is safe, and most often used for: pain management (52%), stress or anxiety reduction (50%), and sleep issues (43%).
- 79% of Americans believe that CBD should be regulated at the federal level, and 70% said that they would have more confidence in the safety of CBD if they were regulated.
- USDA announced long-delayed hemp rules, calling for total THC testing:
o Maintaining information on the land where hemp is produced,
o Disposal of plants not meeting necessary requirements,
o Establishing a firm licensing requirements, and
o Establishing a plan for hemp producers in states that do not already have an approved hemp production plan.
- Illinois is set to begin recreational cannabis sales… at the start of the new year – but a lack of retail stores will limit the rollout into a $2.5B market. Many of Illinois’ local governments are banning marijuana businesses – thereby, dramatically limiting customer access to a retail environment. On a per-capita basis, that’s about 10% of the number of adult-use stores in Illinois vs Colorado.
- Binge drinking rates… are dropping in US states where cannabis is legal.
- 18% of Canadians (over 15 years old)… reported using cannabis in Q1 of 2019. A 29% increase over a year earlier.
- Smoking cannabis protects binge drinkers from liver diseases. A recent study suggests that heavy drinkers who smoked marijuana had 'significantly lower odds' of developing serious problems with their liver. Also, there was a 45% drop in fatty liver disease and a 38% drop in cancer of the liver.
Next Week: Lean long, use small positions, and pray.
In the past 2 weeks, our FED has pushed over $650B into our bank’s REPO side, and then (just for grins) they cut rates. The ECB started their own QE program on Nov 1st, and the Bank of Japan said that even they have room for more stimulus. It's a globally coordinated money printing spree of epic proportions. No matter how ugly the economic reports get (the PMI falling at the fastest pace in 38 years) – the market continues to move higher. Honestly, as long as our FED is ‘gifting’ the banks ¾ of a Trillion dollars every 15 days – this market will continue to move higher.
I remember coming into this year with the S&Ps down 20%, and it was my opinion that (after a slight bounce) our economic numbers wouldn't be enough to sustain us and we'd roll over into a hefty sell-off. Obviously I must have been smokin’ Drano because this market does NOT do ‘sell-off’ or ‘roll-over’. This market is the ultimate game of musical chairs. One day something will happen that will scare investors toward the exits, but until that time we are moving in one direction – higher.
It's terribly difficult to buy stocks in this market, knowing that they’re up solely because he market is rigged. Yet what's the choice? Do nothing and watch the market keep going higher without you? You can look for cheaper value stocks, but there are none. You can try using over-priced options to lessen the cost of entry, but then you'll need a complex ‘back-up’ plan to survive.
Obviously, I’m frustrated with this market, and am only playing with small size. After all, we're 10 years into an engineered economic bounce, and they’ve used every trick in the book to get us here. Can this market mover higher for another 10 years? I don't suspect so, but then again I never expected it to hit all-time highs this year. The higher this market goes – the more I like gold and silver. When this bubble meets its pin, gold, silver and Bitcoin may be the only things left standing. Lean long, use small positions, and pray.
Tips:
Top Equity Recommendations:
HODL’s:
- Aurora (ACB = $3.58 / in @ $3.07)
- First Majestic Silver (AG = $10.99 / in @ 10.50)
- Canopy Growth Corp (CGC = $19.71 / in @ $22.17),
- DRD Gold (DGD = $4.99 / in @ $4.20),
- GBTC Bitcoin (GBTC = $11.20 / in @ $10.01),
- Pan American Silver (PAAS = $17.06 / in @ 18.00)
Crypto:
- Bitcoin (BTC = $9,300)
- Ethereum (ETH = $185)
- Bitcoin Cash (BCH = $300)
Options:
- RIOT ($1.57):
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:
- Volatility Index (VIX) The S&P 500 hit a new all-time high again, and why shouldn’t it? The SPX’s rally has pushed the spot VIX into its lower zone, but that doesn’t mean that everyone is buying the perma-bull story. Both the Nov and Dec /VX futures are trading at a relatively steep contango to the VIX – suggesting that the market fears some drama toward the end of 2019. There’s no guarantee that the market will sell off and push the VIX higher, but a contrarian might see an opportunity in a bullish VIX trade. If you are bullish on the VIX, the long call vertical that’s long the $15 Call and short the $18 Call in the December expiration is a bullish strategy that has a 52% probability of profit.
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
Until next week – be safe.
R.F. Culbertson
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