This Week in Barrons: 1-12-2020:
“Designed by clowns, supervised by monkeys.”
Thoughts:
The Boeing saga just keeps getting better. The New York Times recently published a story on the 737 Max disaster and it is damning. It included internal comments between Boeing employees, with one stating: “This airplane is designed by clowns, supervised by monkeys.” Now, there is a basic investment philosophy and Boeing knows it:
- Investing in education … lasts for decades.
- Investing for the long term (buy and hold) … lasts for years.
- Investing in a quick-fix … lasts for weeks.
Quick-fix investments rarely make a global impact, and that’s what Boeing needs right now. And quick-fix investments rarely mix with educational ones. Unfortunately, the solution to Boeing’s problem will NOT be obvious. The longer a problem goes unsolved – the further away the solution becomes. Why – because it will be in a place that is now: uncomfortable, career risky, and/or impossibly difficult. Equity analysts are already moving Boeing from being a ‘growth’ story into the ‘value’ camp which means: ‘untouchable for the next 12 months.’
The 737 is a 50-year old plane. You can try and fix it, but it has a high probability of ending up like putting airbags on your Valiant. The 737 was designed for a different era, one without jetways - where you walked onto the plane from the tarmac. It was designed for heavily trained pilots, but today, newbie pilots fly these planes – especially overseas. The truth is, the 737 Max should be a trade-in for the 787 Dreamliner. The 737 Max is not cutting edge tech whose quirks need to be ironed out. We are (in real time) putting lipstick on a pig. Sometimes, you need to just start over. Boeing fired CEO Dennis Muilenberg (after giving him $62m). The good news is that air travel has not ground to a halt without the 737 Max. I can see our government rescuing Boeing, but can you imagine the ripple it would send through the manufacturing community if Dennis Muilenberg went to jail. You wouldn’t see anyone cut corners again. Scraping the 737 MAX would be good for America – in more ways than one.
The Market:
- This makes the 111th consecutive month (9+ years) of jobs growth.
- GLD (the Gold ETF) has matched the Dow returns since 1998. But if we want ‘Presidential’ returns - Palladium grew over 175% in the past 3 years.
- Trailing P/E numbers for the indexes are below. They are calculated by dividing the share price by the actual earnings for the prior 12 months. They are outrageous, ridiculously, and incredibly stratospheric = risky.
o S&P = 25.6
o NASDAQ = 28.0
o Russell = 39.0
- The employment rate calculation has changed several times since the 1980's. The Jobs Report that we get handed every month is the U3 report, and it's coming in around 3.5% unemployment. What has been removed from it are the disillusioned and long-term unemployed. Even the U6 reading (which is the broadest reading = 7%) – still doesn't count everyone like we did in the past. If we were measuring unemployment the way we did in the mid-80's, our official unemployment rate would be OVER 18%.
- Also, if we measured inflation the way we did in the mid-80’s it would show us running over 6% annually – not the 2% our FED wants us to believe. In fact, the 1979 methodology would show inflation over 10%. Recently, a team at Chapwood Investments did their own objective measure of inflation. They picked the top 500 items that are used most frequently and found out that from 2015 until now, real inflation has been running between 8.5 - 13% in each of the 50 largest cities in America. So inflation has actually been between 8.5% and 13% for the past 4 years. WOW – that explains a lot.
- 5 themes in FinTech:
1. Mega Mergers are here to stay. We just had the 3 largest payments industry mergers; Fiserv and First Data ($22B), FIS and Worldpay ($34B), and Global Payments and TSYS ($21.5B). These mergers were an attempt to create a competitive advantage that rising FinTech startups like Stripe and Square could not cross.
2. $0 Commissions are now an industry standard. Robinhood offered free stock trading in 2013, and now the rest have joined. Next, banks will pay in ‘credits’ to trade.
3. The Libra debate continues among regulators surrounding clarity of any/all digital currency arrangements. Some regulators reacted swiftly (China’s Central Bank) which is close to releasing its Digital Yuan. Other regulators were dismissive and stuck their collective heads back in the sand. 2020 will continue the divergent fight – with the winner being China, and the ‘Biggest Loser’ being the U.S.
4. BigTech = Big Bank: Google partnered with City to offer checking accounts. Apple joined with Goldman on a credit card. Facebook debuted ‘Facebook Pay’ which consolidated its Payments offerings across WhatsApp, Instagram, Messenger, and Facebook. These efforts sent strong signals to a finance industry that Big Tech wants: (a) to handle their own customers’ finances, (b) additional revenue streams, and (c) the opportunity to embed themselves into their customer’s sensitive data.
5. Checking is now a Commodity: FinTech startups: Acorns, Stash, and Betterment introduced checking accounts along-side their core product offerings. Digital banks like: Chime, Aspiration, N26, and Simple initiated checking accounts. Checking accounts are a bank’s most profitable product because it gives them insight into how people manage and spend their money. 2019 made checking accounts a commodity.
Info Bits:
- Tesla… is at an all-time high which upsets many people. Mostly those over 60 that still believe in P/E’s. If you’re upset over Tesla, the above chart will not be your friend. Tesla opened its Chinese plant this week. Elon Musk was so excited he couldn’t help but strut as he came on stage. It seems the above pics of his 'striptease' during the Tesla China launch were tagged: “come for the tech – stay for the dance.” Tesla’s market capitalization is over $82B, while Ford is valued at $36B, and General Motors at $50B.
- SoftBank is either in deeper financial trouble than many have imagined or it's becoming exceedingly cautious in the wake of the WeWork debacle. In recent months it has walked away from at least 3 startups to which it had presented term sheets. That's a giant no-no in the VC world but also a major shift for the firm, which has been investing with reckless abandon for the last 2 years.
- Zume… the SoftBank-backed maker of robotic pizza trucks has just lost half of its executive team amid laying off 400 employees. The company is without a chief business officer, a chief financial officer, a chief technology officer, and a chief revenue officer. They are struggling to secure additional Softbank funding.
- Getaround… the SoftBank-backed car rental startup announced layoffs this week – making it the latest in a series of SoftBank-backed entities to pare down its workforce. The layoffs are cutting about 25% of the company.
- Lime… the scooter startup, says it is laying off 14% of its staff, and pulling out of a dozen cities in the U.S. and Latin America. CEO Joe Kraus is confident it will become the "first next-generation mobility company to be profitable.”
- Casper… the mattress in a box provider filed its S-1 today to go public. Yet another unicorn that is trying to go public while it’s losing money. Casper lost $92m last year and says: "We have a history of losses and expect to have losses and negative cash flow as we expand our business.” Welcome WeWork (Part 2).
- Walmart cannot fill their low-level positions… even though their minimum wage is now $13 per hour. Per MJP, a significant percentage of their hires leave without notice, don’t show up at all, or fail a drug test. The answer is ROBOTS. Name your robots: Sherry or Shaq – to humanize them. HR should be managing these robots, but let’s not go there just yet.
- One Medical… is filing paperwork to go public. It seems 81% of consumers are dissatisfied with their healthcare situation. Unfortunately, One Medical is trying to create a brand in an industry that ignores brands.
- Fortnite beat ‘em all: FIFA 2019, Pokemon, and Call of Duty all lost to Fortnite in 2019. The 3-year-old game hauled in $1.8B last year to keep its crown as the most lucrative video game on the planet.
- Borden Dairy cries Moooo… as it filed for Chapter 11 bankruptcy protection. They employ over 3,200 workers, and have liabilities of over $300m.
- Tim Cook was paid… $125m last year. Tim received: a $3m salary, a $7.7m bonus, $884,466 in perks and other compensation, and had $113.5m worth of Apple stock vest.
- Pier 1 is near bankruptcy: It’s a sad day for wicker and fancy candles.
- Studies say running a marathon… can help you live longer. But first you need to survive the marathon.
- Facebook was responsible for the election… of Donald Trump, but not for the reasons people think. “It wasn’t about Russia or Cambridge Analytica. He simply ran the best digital ad campaign I've ever seen”, said Andrew Bosworth – a top FB executive. “Those algorithms could win him the office again in 2020.”
- Bed Bath and Be Gone… fell 13% after missing earnings. Management is working on a “go-forward strategic plan” – whatever that means.
- Spotify… is developing daily sports podcasts, to further reduce its reliance on music. They’ve already created original shows in true crime and horoscopes.
- Pokémon GO… took the world by storm in 2016, grossing $832m. In 2019 it finished its best year ever by generating an estimated $894m in player spending.
- Yo quiero Taco Bell: Taco Bell is paying $100,000 for store managers. They’re testing the 6-figure salary as a way to lure applicants in this tight labor market.
- China has banned foreign teaching materials… like textbooks and classic novels, in almost all public primary and secondary schools. Instead, the country's schools will feature materials that more reflect Chinese style.
- Madame Tussauds… has removed Harry and Meghan from its Royal family display – too soon?
Crypto Bytes:
- Ziglu: The former head of technology at Barclays, Mark Hipperson, is launching a digital bank called Ziglu that will serve both crypto and fiat accounts. The accounts will be free, able to have multiple currencies, and will be easily exchangeable at interbank rates. Customers will be able to be spend any currency they have using a Mastercard debit card. Pre-launch applications are only being taken from U.K. residents. Other companies are offering similar services; however, Ziglu’s ability to offer multiple fiat currencies, crypto, and a card that allows for spending at any time – could push it into the mainstream.
- Into the mainstream: A powerful presidential advisory committee in South Korea says firms should be allowed to bring crypto-tied financial products such as derivatives to market. The body, formed in 2017, said that it's no longer possible to stop crypto trading, and local firms should meet the demand to avoid becoming dependent on foreign custodians.
- Here we grow again: Bitcoin has risen 10% this week, possibly due to U.S. - Iran tensions. Experts expect bitcoin to continue gaining altitude amid geopolitical tensions. Closing above $7,580 on Friday signaled a short-term bullish breakout.
- Institutional Tie-Up: Crypto banking competitors Prime Trust and Signature Bank have partnered to appeal to institutional clients. Signature announced Monday it would begin offering "real-time"settlements for digital asset trades.
- Ain’t no threat: The chief economist at the IMF said that digital currencies will not challenge the US dollar's role in global trade. Ms. Gopinath thinks crypto lacks the infrastructure and global acceptance needed to displace the dollar.
- Easy does it: Baidu has launched a blockchain-based service allowing developers and SMEs to build decentralized applications and deploy them – all without building their own blockchain platform.
- Sleeping giant: The latest data shows that over 60% of all bitcoin remained dormant in 2019. This is the highest percentage of "HODLERS" since 2017.
- He Shoots and Scores: Brooklyn Nets guard Spencer Dinwiddie will be able to tokenize his contract. Dinwiddie will issue shares tied to his contract beginning Jan. 13. This could be an entirely new way that others can participate in large entertainer and athlete related contracts. I’d like 10 shares of Tom Cruise please … circa 1983 (right before Risky Business.)
Last Week:
KOHL’s (shown above) is even worse than it appears: Kohl’s shares continue to fall on reports of week sales numbers. Why does this surprise anyone? The chart above shows 2020 EPS estimates (red dotted line below) have been trending lower for over a year. Even with lowered expectations, Kohl’s has continued to underperform.
- Monday: Gold is up sharply, and equity futures are down sharply. There’s a sustained nervousness around the Iran situation. I thought that the market was going to levitate for the first two weeks of January. Then on the signing of the trade deal with China, we'd get one last pop higher – and start a fairly significant fade. With Friday’s missile strike, all bets are off. I don't think there's any shame in taking profits in here. Two things happened today: (a) our FED did $79B in Repos, and (b) there's rumors circulating about the FED cutting rates in 2020.
- Tuesday: Tesla is up huge over the launch of their Chinese factory. On the downside, Boeing was hit again as inspectors found some wiring in the tail end of the 737 Max that could short and cause a crash. They should scrap the damn thing and start over. How crazy is it to be looking at long side trades? This is a world where our FED is crazy and willing to inject another $500B going forward. I’m liking ROST over $118, and SPLK over $155.75.
- Wednesday: Even the stock market futures aren't bothered by last night's explosions. I’m guessing that tensions will de-escalate over Iran. They don't want a war they can't win, and we don't need another quagmire. I have RH and SPLK on the radar. I would add TWTR and believe it or not, M to the list. M has a 9% yield, and still has property worth billions. I could see them hitting $20.
- Thursday: Right now there’s NO volume out there. I still like TWTR, SPLK and RH, although none of them are doing much today. My entry levels are: TWTR over $33.55, SPLK over $157.70, and RH over $213.75. I also like MSFT over $162.25. Just watch because we're pretty overbought here. I wouldn't be surprised to see a smidge of selling tomorrow ahead of the weekend.
- Friday: It appears the silver miners are taking it on the chin again. Some sovereign dumped a gazillion naked shorts (which is illegal), drove the silver price lower and the miners went with it. The Boeing saga continues as internal memos have surfaced, with employees mocking the company. Earnings are beginning and the companies that have reported, have NOT done all that well. Buy the rumor, sell the news?
Weed:
- Marijuana businesses are raising cash… by doing sale-leaseback real estate deals because outside financing is scarce.
- Illinois cannabis shops have been open 1 week, have sold $11m, and have had to cut off customers temporarily due to lack of supply.
- The number of cannabis producers… with less than 6 months of cash on hand has increased over the past quarter due to business mis-management.
- Aurora is selling one of its greenhouses… because it has yet to figure out how to make money. They recently reported a 24% decline in net revenue.
- New Mexico is trying to be MJ legal again… The new proposal has the recreational market being handled by the state’s liquor stores. 73% of voters support legalization.
- The Canadian marijuana black market… accounted for 71% of all pot sales in Canada last year, because legal (taxed) pot was TWICE the price of illegal pot.
- A legalize Marijuana bill… made the ballot in Mississippi.
- The Governor of South Dakota… dropped her opposition to hemp.
- Nielsen’s take on CBD in 2020:
o Targeted Education will rise: Expect a rise in manufacturer-driven, educational efforts to hit health care providers. Although 70% of practitioners said they discuss CBD with their patients, only about 33% of practitioners were knowledgeable about the laws surrounding hemp-CBD. The medical community’s influence over the CBD industry will be profound over the next year. Over the next decade, primary care practitioners will do more to drive brand loyalty than traditional branding and marketing efforts. In the coming years, hemp-CBD products positioned as substitutes for over-the-counter solutions targeting arthritis, sleep and general pain will attract the largest percentage of users.
o CBD prices will fall: CBD products frequently range between 4 and 10 TIMES the retail price of CPG products used for comparable needs. Nearly 50% of current hemp cultivators expect to increase the acreage they devote to hemp cultivation. Hemp-derived CBD will become more affordable for producers/manufacturers – causing lower prices at shelf.
o Consumers will grow an appetite for ingestibles: Capsules, gummies and beverages will significantly grow their user bases, pending the FDA’s upcoming ruling. Projections show that with FDA approval, ingestible formats could grow as much as 250% to 375% over the next year. New water-soluble and nano-technologies allow for more efficient absorption. CBD-infused beverages are an especially good fit for this.
o A retail battle will emerge: Traditional brick-and-mortar CPG retail channels – will begin to steal share from online CBD retailers, local specialty CBD and vape shops. New CBD consumers are more than twice as likely to shop for CBD products at a grocery chain or mass merchandiser. And those same consumers are more than 3.5 times more likely to purchase CBD products from a chain drug store.
Next Week:
Growth vs Value: Growth continues to outperform Value. It’s hitting levels not seen in 18 years. Eventually, preferences will shift, but who knows when?
For now, it appears that the idea of going higher for the first couple weeks of January is working. And it seems we're getting a China deal on the 15th – which is already baked into the markets. I’m looking for a blow-off-top starting at the end of this week.
Honestly, the market will go where the FED’s money goes. With trailing P/E’s like: S&P = 25.6, Nasdaq = 28, and Russell = 39 … ‘fuggetaboutit’ - we’re already in the stratosphere. At the end of this week, I’m going to get more defensive. I realize that even suggesting the market may go down is a basis for laughing at me, but even if this market is going to go to 50K – it won’t get there in a straight line.
The FED is doing around $100B a DAY in repo operations. That was not done – even during the 2008 - 09 crash. Combine that with: (a) the Swiss buying $90B in U.S. stocks, (b) $17T in NEGATIVE interest rates, (c) record corporate stock buy-backs, and (d) the highest corporate debt in history – this market scares me. If the FED would stop their Repo activity tomorrow, the entire global financial system would crash. There would be no liquidity at the big institution banks, their cross payments with other nations would grind to a halt, and down everything would go. Now, I don’t expect the FED to do that, but that’s how goofy things have become.
I’m still leaning long, but if I see any more weakness early in the week – I’m taking profits. Strange days – stay safe out there!
Tips:
Saudi Arabia is Hiring: Saudi Arabia is looking for companies to build 4 solar power plants capable of generating a total of 1,200 megawatts. The kingdom aims to build 60,000mw of renewable plants by 2030. Perhaps the Prince saw the Crude vs Solar analysis above – Oil ETF (USO) vs Solar ETF (TAN). They’re similar except USO remains far below its highs and TAN has cleared them and is breaking out. Watch for the decoupling.
AND
I was watching a Chip Wilson (founder of LULU) interview, and he mentioned that he had been selling his 9% position in LULU and buying the Nike of China. I did not know there was a Nike of China . In fact I thought Nike – was the Nike of China. Chip was talking about Anta Sports , founded in 1994. The stock trades on the OTC markets under the ticker ANPDF. I immediately tore off my LULU pants, sold them on eBay, and used the proceeds to buy a few shares of ANPDF.
Top Equity Recommendations:
HODL’s:
- Aurora (ACB = $1.65 / in @ $3.07),
- First Majestic Silver (AG = $11.01 / in @ 10.50),
- Canopy Growth Corp (CGC = $20.54 / in @ $22.17),
- DRD Gold (DRD = $6.06 / in @ $4.20),
- GBTC Bitcoin (GBTC = $9.60 / in @ $10.01),
- Microsoft (MSFT = $161.34 / in @ $145),
- Pan American Silver (PAAS = $22.56 / in @ 18.00),
Crypto:
- Bitcoin (BTC = $8,150),
- Ethereum (ETH = $150),
- Bitcoin Cash (BCH = $270)
Options:
- RIOT ($1.41):
- 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).
Watching:
- EXK over $2.50,
Please be safe out there!
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