This Week in Barrons: 12-22-2019:
Thoughts:
To quote Stephen A. Smith (a head ESPN commentator): “If I’m asleep – somebody else is awake. If I’m off – somebody else is working. And if those things are happening, they’re thinking that they can take me – which means that at some point in time they’re going to confront me to test and see if I’m ready. And at that point I will annihilate them to show them that they were never really ready at all.”
Stephen – thank you! I truly appreciate someone that practices and preaches: hard-work and homework as their keys to success. I remember you saying: “In my view, every workplace has rules and people have to capitulate to them if you want to work. And if you don’t want to capitulate to those rules, then go find another job. The fairness or equity of those rules does not matter, because we’re big boys and big girls. Those who make the golden rules are those who have the gold. It’s also the boss who determines whether your work is good enough – not you. You do not get to have your hand out for somebody else’s money, and define what the standards of success are. If anybody could define their own success, what kind of world are we living in? You’d have a whole bunch of people who are mediocre at their jobs – spending the company’s money. That’s not how the real world works. I’m sorry if that makes you uncomfortable. But I’m a black man, and I always feel replaceable. No matter what I’ve done, no matter how much I’ve produced, there is always someone that thinks they’ve done more homework than me. They are waiting for me to make a mistake, so they can justify not marrying me. And I’m fine with that.”
Stephen knows that the way he looks at things often rubs people the wrong way. I often wonder: What if today, just for today, we didn’t settle? What if we saw precisely the changes we needed to make, and sacrificed to make them? What if we all set aside everything else, and focused simply on what’s important? What if we ONLY did the work that mattered? I’ve always wondered what would happen.
Maybe, in some companies – that’s what’s happening now. You see, 2019 is on track to be the highest number of CEO departures on record. The previous record was held by 2008 – when the economy was embroiled in the financial crisis. This obviously poses the question: Where the heck are all the CEOs going and why? After all, stocks are at an all-time high. CEO pay is based upon salary plus stock grants. If you thought that your company was going to do well going forward, why on earth would you bail out now? Why wouldn't you ride the wave, be seen as a more successful CEO, and collect even more stock options?
Oh it’s because CEOs have done their homework and see things as they really are: bloated, overdone, unsustainable, and ready to blow. CEOs are bailing on the companies they helped to create before everything comes crashing down. Factually:
- Fund managers galore are seeing 2020 as a recession year.
- Manufacturing, sales, trucking and air freight are all at multi-year lows.
- Real profits peaked in 2015.
- Year over year, profits are down 2% from 2018 - 2019.
- The FED is doing $500B in short term repos just to keep our banks afloat.
- GAAP earnings are non-existent, and corporate debt loads are so large they can't possibly continue to pay the interest.
In 2008, companies didn’t implode because the CEOs left – the CEOs left because they saw their companies about to implode. Corporations fail when they: (a) don’t listen, (b) don’t engage, and (c ) don’t exercise much curiosity or empathy for their customers. All they’re proving right now, is that all the FED money in the world CAN paper over any mistakes. But the ‘really big hitters’ know precisely what’s going on. They’re actively doing their homework, and per Stephen A. Smith – beginning to “annihilate” via M&A the smaller and less fortunate in hopes of withstanding the upcoming war.
The Market:
As Ai has taken over buying and selling in the market place, it will do the same in the area of defense. I recently watched a fascinating documentary: “Killing in the Age of Algorithms.” Over the next 10 years we will have:
- Tanks that drive themselves,
- Drones that pick their own targets, and
- Machine guns with built-in facial recognition software.
The scary part was that now-a-days virtually anyone can buy a kit online and build a gun from parts – without a background check. The business of defense is about to change, and potentially not for the better.
The good news is that the American consumer is as predictable as ever. In an age of ecommerce, 70% of Amazon shoppers never click past the first page of search results. That’s because the platform’s homogenized product listings – title, price, photo, and star rating – are built for search, and not discovery. As a result, sales are more about SEO than about finding new or innovative products. And as for video, the top 3% of video creators accounted for nearly 90% of all total views on YouTube. Even those who broke into that coveted top 3% were still only earning about $16,800 annually. In Asia, there’s a real monetization of short-video happening. On China’s largest ecommerce platform, 42% of product pages include short-videos and live streaming is growing quickly. Thus, it’s no surprise that short video apps are the next frontier for ecommerce in the US, fueled by the rise of native shops and integrations with popular third-party platforms. We’re likely to see more video being incorporated into Amazon’s product pages fairly soon.
Factually, 2019 has seen the LARGEST outflows from U.S. equity mutual funds and ETFs in 28 years. ($248B + $92B = $340B in withdrawals). But the equity market is up 24% this year. The Bloomberg Group reported: "In a year when stocks worldwide have kept hitting records, Stanley Druckenmiller (widely considered the greatest hedge fund manager of his generation) has barely eked out a return." Why is that? It’s because this market is not real. It's not based on earnings or fundamentals. For the past couple of years, if you can't get comfortable with the idea of buying stocks just because the FED will push them higher – you’ve missed out. Mr. Druckenmiller (like David Tepper and most hedge fund managers) can't seem to drink the FED’s Kool-Aid and just go all in. I can't blame him – I can't either.
Info Bits: If your small business is a Unicorn – there’s ONLY 1 place to grow it!
- Better Gift Buying: When buying someone a gift, it’s unlikely that you’ll please them by buying something that’s ‘pretty good’. You’ll do better by overpaying for something in a cheaper category, where it’s obviously the best in the world.
- Robinhood… the stock trading startup known for free trades, announced a cash management service that pays 1.8% on any of your non-invested monies.
- Consumer Discretionary is #1 and Technology is #2: These two sectors serve as representations of the dominant trends of teens. In Technology, software really did eat the world. The ‘cloud’ and the ‘Internet’ have covered everything. Consumer Discretionary reminds us that even after the prior decade, American gluttony has remained resilient.
- That Disney Frozen magic: Frozen 2 just became Disney’s 6th movie this year to take in over $1B. Maybe the new Star Wars could be their 7th before the clock strikes midnight on 2020, and Bob Iger’s enemies turn into pumpkins.
- Barak Obama says things would be better if women were in charge: Hard to disagree there. #thanksObama
- Mariah Carey’s ‘All I Want For Christmas Is You’ … finally made it to #1 with its 602m downloads. That equates to over $60m in royalties, but who’s counting.
- The Sackler family transferred Billions during the opioid crisis: The Purdue Pharma owners withdrew more than $10B from the company from 2008 to 2017 – as scrutiny of the drug maker’s role in the U.S. opioid epidemic intensified.
- Stagnating median wages: After World War II, wages doubled from 1940 to 1948, then doubled again by 1979. But after 1980, payrolls flattened all the while worker productivity skyrocketed.
- Factually: Google is up 35% since June, Apple up 100% in 2019, LULU up over 100%, Nike up 50% YTD, and banks, biotechs & healthcare have all done well.
- Fiat Chrysler-Peugeot Merge: Fiat Chrysler and Peugeot have announced a 50-50 merger deal. The new company becomes the world’s fourth-largest car manufacturer, estimating sales of 8.7m vehicles annually. Their focus will be on autonomous and electric vehicles.
- Haters gonna hate… but will Elon have the last laugh? Tesla closed at all-time highs on Friday. TSLA is up 26% YTD.
- Marc Benioff’s company… Salesforce (San Francisco's largest employer) appears to have paid $0 in federal income tax last year on its $7.8B in gross profit thanks to at least 14 tax havens.
- The FDA is allowing Canadian drugs… to come into the U.S. and be sold by wholesalers and pharmacies. The goal is to lower the costs for patients – a top priority for the Trump administration.
- Ho-Ho-Ho … Fannie Mae… they’re anticipating Q4 housing starts to be up 4.5% and 2020 starts to increase by a whopping 10%. Oh Fannie Mae, home sales in November unfortunately FELL 1.5%. Sorry to burst that balloon.
- Boeing’s 737 Max production stoppage will slow the economy… by about 0.5% of GDP. This comes after both Boeing and the FAA ignored clear signs that the 737 Max planes were dangerous. Still, BA trades above its 2018 lows – at least for now.
- Sweden RAISES interest rates to 0%. The Swedish central bank completed a 5-year experiment with negative interest rates and said: “The era of negative rates in Sweden may well be over.”
- ASN = Apple Sports Network: Apple has held preliminary talks with the Pac-12 Conference and MGM. Apple wants to improve its TV service. Sports is big in the streaming wars and a deal would be a big step forward for the company.
- 50% of the U.S. population will be Obese in 10 years… with 1 in every 4 Americans experiencing severe obesity. The consequences could be deadly, given weight gain is directly associated with diabetes and heart disease.
- Boeing can’t catch a break… as their Starliner spacecraft failed to reach its intended orbit. The trip was designed to bring cargo (eventually humans) back and forth to the International Space Station.
- Merry X-mas: U.S. Steel Corp (X) is laying off workers, cutting dividends, and terminating stock buybacks. The Detroit facility will suspend plant operations on April 1st, 2020 – potentially costing 1,545 manufacturing workers their jobs.
- 2019 was a good year… for IPO’s as activity hit a 5-year high.
Crypto-Bytes:
Most big technology changes don’t come out of nowhere. There are smaller ‘gateway’ technologies that predate and forecast what is to come. As I think about crypto, I look for these gateways. One is certainly the financial speculation and trading around crypto assets. That trading alone has brought millions to the crypto sector, and is potentially the primary reason why people own or have owned crypto assets. Another might be stablecoins that operate on closed or semi-closed networks. Stablecoins may not support the broadest set of applications envisioned by projects like Ethereum and others, but they get hundreds of millions of people around the world owning and transacting with crypto assets. Finally, a new report by Germany’s largest lender, Deutsche Bank, suggests that blockchain-powered digital currencies could replace cash payments within the next decade. The report says that fiat currency may soon give way to new alternatives. Their replacement would be a cryptocurrency that would more align itself with the digital future.
- A Token gesture: Venezuelan public sector workers, retirees and the military personnel will receive a token gesture this Christmas. Venezuelan President Nicolas Maduro announced Friday that these citizens will be airdropped half a petro token ($30) as a holiday bonus this week.
- Old meets New: One of America's oldest banks is testing out the latest technology in a bid to appeal to clients. State Street Corp. is partnering with a cryptocurrency exchange and custodian Gemini Trust on a new pilot aimed to allow investors to consolidate the reporting of digital assets stored on Gemini with traditional assets serviced by State Street.
- Branching Out: Fidelity Investments is setting up a new entity to serve European institutional investors in digital assets. The new business will be provided by Fidelity Digital Asset Services – its limited liability trust company.
- Mailing Coins: Coinbase has been granted a U.S. patent to send Bitcoin through email. The patent details a system for users to make cryptocurrency payments with email addresses linked to corresponding wallet addresses. I can see Coinbase offering bill paying via crypto in the not too distant future.
- A little Christmas cheer: Blockchain-based payments firm Ripple has raised $200 million in a Series-C funding round led by alternative asset investment firm Tetragon, SBI Holdings, and VC firm Route 66 Ventures.
- Bitcoin is on a roll to… end 2019 on a positive note and significantly outperform traditional assets like gold and stocks. Currently trading at $7,125, representing a 93% gain on a year-to-date basis.
Last Week:
- Monday: Mr. Lighthizer, one of our lead negotiators in the Chinese talks said: “The U.S. will keep the 25% tariffs on $250B of Chinese imports, but would reduce tariffs on $120B in products to 7.5%. The tariff reduction will take effect 30 days after the agreement is signed. The Chinese have guaranteed to purchase $200B minimum of our products. By the second year, we will just about double our exports of goods to China, if this agreement is in place." As dangerous as it is up here, I wouldn't be against trying Walmart (WMT) over $121.70, Microsoft (MSFT) over $155.95, Cisco (CSCO) over $46.60, and Morgan Stanley (MS) over $51.20.
- Tuesday: Unilever is one of the largest consumer packaged goods companies in the world. Well, they just warned that they're NOT going to make their sales and earnings numbers for Q4. When you produce the very things necessary for daily living, and you see falling growth, it only means one thing – the consumer is cutting back. I'm not surprised. 78% of ALL full-time workers said they live paycheck to paycheck, up from 75%. 71% of all U.S. workers said they're now in debt, up from 68%. Remain cognizant of the fact that if this market rallies into year end and beyond, it has NOTHING to do with organic growth – it’s the FED.
- Wednesday: We’re basically treading water waiting for impeachment. There's no real reason for anyone to sell now – they’d have to take the tax hit this April. If someone’s going to sell, then sell in the new year and push the taxes into 2021. Financials, chips, tech, and some commodities should continue higher. Names like MSFT, CSCO, NVDA, AAPL, C, AXP, and GS should go.
- Thursday: Our President was impeached yesterday. The market couldn't care less. That is because there's word that the Chinese will be signing Phase I of the trade deal soon. Any positive trade news gets the algorithms fired up. If I was looking for a trade, I like LK to break out of its congestion. I like Twitter (TWTR) if it can get over its 50-day moving average and close an enormous gap down it suffered last earnings season. Target (TGT) is out over its skies but looks like it wants to go higher. I liked Cisco (CSCO) before and still like it here.
- Friday: The FED balance sheet increased by $43B in the last week. That's an annualized pace of $2.2T. Repo purchase agreements have hit new all-time highs of $236B. That's quite the monetary injection wouldn't you say? This morning the DOW is opening higher, and it seems we're going to continue chugging higher probably halfway through January. This morning we got word that the China deal will get signed in early January. Today is quadruple witching Friday. If you need a trade, take a peek at the pattern on MNK. It's flirting with a quad-top at the 4 level. If it ever gets through and holds, it could go nicely.
This constant up-trend has strained the investment landscape. 361 Capital wrote an interesting piece that concluded:
- Beware of long-term risk / reward expectations: It seems that a ‘free lunch’ has been available just by purchasing large mega-cap stocks. Investors have flocked into passive / index-related strategies – not without consequence.
- Valuation distortions surround us… and are normally the result of abnormal (FED-related) asset flows.
- At some point… these valuation imbalances will be corrected by the markets. We hope that the old adage of “markets remaining irrational longer than (active) investors can remain solvent” does not apply in this case. Investing is not easy and the passive trend has made investing cozy and neat for millions of people all these years. When things will get messy is a good question, but they always do.
Weed:
- Ontario is removing the cap… on the number of cannabis shops.
- Marijuana is on the ballot… in New Jersey for 2020.
- 63% of the Kansas population supports… marijuana legalization.
- WAYV / Hypur launched… a digital, compliant payments and ordering solution featuring "credit card like" transactions with next-day wire and ACH payments.
- Cannabis companies must differentiate themselves by: profitability, simple capital structures and through investor communication.
- Chicago mayor floats recreational marijuana idea for minorities Chicago Mayor Lori Lightfoot is pushing a social equity program in which the city would use up to $15m in seed money to grow its own recreational marijuana in a “cooperative cultivation center.”
- New York names Birenbaum as its cannabis czar: Mr. Normal Birenbaum is expected to help New York legalize recreational marijuana in the upcoming legislative session.
- Bud prices in Colorado set record: The median price of a pound of marijuana flower sold to a retail store in Colorado rose to a record $1,316.
- The U.S. Senate has confirmed Dr. Stephen Hahn to lead the FDA: Dr. Hahn hasn’t said how he believes cannabis extracts such as CBD should be regulated, though he said at his confirmation hearing that he wants to see more research.
- Oregon is banning CBD in alcoholic drinks: which is a blow to marijuana and hemp companies planning to enter the growing field.
- Major League Baseball and the MLB Players Association… announced that the league’s drug policy has been updated to allow the use of cannabis by players. Synthetic THC products are still forbidden.
- Massachusetts rolled back… its vape quarantine issued in November.
- The World Health Organization reiterated their opinion… that it finds NO public health risks for CBD – effectively putting the issue of toxicity to rest.
Next Week:
I think my favorite stock chart of 2019 is Tesla and I never traded it. The stock plunged this summer only to close Friday at all-time highs. The only lesson here that I’m aware of is that a lot of smart people that were short the stock have been crushed. It is hard to bet against a cult stock. In market land, the slow grind higher continues. At this point it’s moving on FOMO, and of course half a trillion in push money from the Feds. I expect this to continue through the year end, and at least half way through January, if not to February. They're going to jawbone us with China trade hype, the Feds are accommodative, the Season is correct, and everyone loves a rising market. Given NOBODY KNOWS what will happen next year, let me share a few thoughts:
- The Nasdaq will hit 10,000… at some point in 2020. I think there are a lot of strong software and technology companies to IPO next year and the backdrop for a rising market remains strong with low interest rates and an impeached President who needs a higher market to be re-elected.
- Mega mergers will continue: Energy has spent a decade underperforming; therefore, we should see some consolidation. In the financial services space, TD and Schwab are just the beginning of what will be some giant marriages. In technology, software M&A reached about $170B in 2019, up 25% from $136B in 2018. With SaaS penetration roughly 25%, there’s several hundred billion in market cap to be created in the next few years – so a 15% increase in M&A seems appropriate.
- Shopify will become a $100B company. The company has the right platform and attitude to double once again (assuming the markets play ball).
- As Go the Finnies, so Go the Market ... Last week the financial ETF (XLF) closed above its pre-Global Financial Crisis high for the first time since 2007. This is potentially epic. If the financials breakout, we could be closer to the beginning of a new bull market than the end of one. And if the XLF continues higher, watch the ETF for the chip sector the SMH.
Tips:
Top Equity Recommendations:
HODL’s:
- Aurora (ACB = $2.25 / in @ $3.07),
- First Majestic Silver (AG = $10.36 / in @ 10.50),
- Canopy Growth Corp (CGC = $20.04 / in @ $22.17),
- DRD Gold (DRD = $4.76 / in @ $4.20),
- GBTC Bitcoin (GBTC = $8.88 / in @ $10.01),
- Microsoft (MSFT = $157.41 / in @ $145),
- Pan American Silver (PAAS = $21.60 / in @ 18.00),
Crypto:
- Bitcoin (BTC = $7,200),
- Ethereum (ETH = $130),
- Bitcoin Cash (BCH = $190)
Options:
- RIOT ($1.33):
- Bot Jan 17, Sold $3 Call / Sold $3 Put / Bot $4 Call for $1.85 CR,
- Bot Jan 17, Sold $2 Call / Sold $2 Put / Bot $3 Call for $1.45 CR,
(can only lose money if RIOT falls below $0.70).
Thoughts:
- Twitter (TWTR = $32.13) This is a duplicate of last week with an updated range – because it remains my best thought out there. After dropping the equivalent of 5.8 standard deviations back on October’s earnings miss, TWTR has been trading in a two-point range. But that relative lack of volatility doesn’t seem to match the importance TWTR has in our political and cultural lives. You’d think TWTR would surge with every one of Trump’s tweets during impeachment, or Boris Johnson’s full-steam-ahead news toward Brexit. The upcoming Senate trial along with Brexit news could boost TWTR’s ad revenues and bust it out of its range to the upside. If you’re bullish on it, the long call vertical that’s long the $32 Call and short the $34 Call in the Jan monthly expiration is a bullish strategy that has a 61% 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
Until next week – be safe.
R.F. Culbertson
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