This Week in Barrons: 1-26-2020:
Thoughts:
The key to believing – is listening. The only one who has heard everything you’ve said – is you. Jerry Garcia (of The Grateful Dead) performed thousands of times, and he was the only one who heard every note of every performance. The same is true for the work you’ve created, the writing you’ve done, and those voices in your head. You’re the only person who’s heard every one of them. You’re telling others – not because we need to know, but because you need to believe. Constant repetition of what we’re hearing increases the probability of believing it as the truth.
If you want better listening skills, then stop saying these 3 phrases: (1) “Think you’ve got problems?” Nothing says “I matter more than you” like turning someone else’s moment of sharing into a self-centered opportunity to vent. (2) “Don’t worry, you’ll get over it.” Very few phrases are as unemphatic as this one. It’s basically saying: “Please don’t share your feelings with me because I really don’t care.” (3) “Maybe it’s a blessing in disguise…” which is a wonderful rationalization that people use to excuse their involvement in a tough situation.
To find great startups, start by listening to great founders. According to HL, to become a good startup investor, you need to know who’s going to be great before they are – because the market rewards finding ‘diamonds in the rough’. The easiest way to identify future greatness is through in-person meetings. If you meet someone 3 times, and notice improvement each time – “There’s your sign.” The rate of improvement is often more important than their absolute ability. Ask yourself 2 questions: (a) Would you work for that person? and (b) Can you imagine them taking over their industry? Are they:
- Scrappy and formidable at the same time?
- Mission-oriented, obsessed with their company, relentless, and determined?
- Extremely smart, decisive, honest, fast-moving, and willful?
- Courageous, and willing to be misunderstood?
- Strong communicators and infectious evangelists?
- And capable of becoming tough and ambitious?
Some of these characteristics are harder to change than others. For example, people tend to be either slow movers or fast movers and that seems harder to change. Being a fast mover is a big deal. I’ve never heard of anyone investing in founders who do not respond quickly to emails. But in addition to learning how to predict who will become great founders, you will also need to predict what markets will succeed.
Startups can win wherever costs can be low and cycle times can be fast. Startups do particularly well in industries with rapid technological change. That is because their competitive advantages are speed and focus. A higher rate of change gives startups more opportunities to be right, and the larger competitor more opportunities to stumble. Look at market growth rate and the eventual size of the market in say 10 years. The best companies tend to lead the market by a couple of years. They may not have a huge following at first, but the following they have is ridiculously loyal. For example, the iPhone was not a success for its first 2 years, but the people who had iPhones raved about them in ways they never did about previous smartphones.
The best young companies have the following characteristics: compelling founders, a mission that attracts talented people, a product people WANT to tell their friends about (network effect), a rapidly growing market combined with the ability to grow fast, low marginal costs, and a product that is either fundamentally new or 10x better than existing options. Watch out for young companies that could quickly grow to $10B in revenues. That means they must have a fast growing market and some sort of pricing power. Its these types of young companies that end up changing culture – culture changes us – and we end up changing the world around us.
Startups can win wherever costs can be low and cycle times can be fast. Startups do particularly well in industries with rapid technological change. That is because their competitive advantages are speed and focus. A higher rate of change gives startups more opportunities to be right, and the larger competitor more opportunities to stumble. Look at market growth rate and the eventual size of the market in say 10 years. The best companies tend to lead the market by a couple of years. They may not have a huge following at first, but the following they have is ridiculously loyal. For example, the iPhone was not a success for its first 2 years, but the people who had iPhones raved about them in ways they never did about previous smartphones.
The best young companies have the following characteristics: compelling founders, a mission that attracts talented people, a product people WANT to tell their friends about (network effect), a rapidly growing market combined with the ability to grow fast, low marginal costs, and a product that is either fundamentally new or 10x better than existing options. Watch out for young companies that could quickly grow to $10B in revenues. That means they must have a fast growing market and some sort of pricing power. Its these types of young companies that end up changing culture – culture changes us – and we end up changing the world around us.
The Market:
Watch the Bonds. So far this year, treasury yields have defied expectations.
- The 10-year is important because it influences mortgages and other loans. A lower yield reflects worry about the economy and other fears.
- The 10-year yield could continue to move lower due to the easing monetary policies of the FED and other central banks.
- The current yield is 1.68% - down from 1.83% last Friday. That was the largest one week drive (over 8%) since November, 2019.
Info Bits:
- Money grows on bank branches: Last week's big bank earnings validated the economic boom case. J.P. Morgan had the most profitable year ever for any American bank. They earned $36B in profits, and that was 12% YoY growth.
- Delta Airlines updated their resume... telling the world that their greatest strength was not having any Boeing 737 Max planes in their fleet. The Boeing 737 Max will continue to be grounded at least through June.
- “I lost my appetite…” said thousands of Blue Apron customers – after HelloFresh continued to steal market share. HelloFresh has: (a) 1.5m customers to BLUE's 400K, (b) a stock price that’s up 250% vs BLUE’s 96% lower than its IPO, and (c) it’s profitability vs BLUE’s allergies to profits.
- 50% of the luxury skyscraper condos in Manhattan … are still unsold.
- Hands off my hot-wheels: Germany sells more cars to China than to any other country. China wants its own tech giant Huawei to build out Germany's 5G wireless network. U.S. officials suspect Huawei of spying on global communications. Germany's stuck between U.S. pressure and China's threat to drop all Audi and Mercedes purchases.
- Did Saudi Arabia end Bezos’ marriage? Jeff Bezos’ phone was hacked by Saudi Crown Prince Mohammed bin Salman in 2018. Salman sent Bezos a video file which is believed to have compromised the billionaire’s phone when he opened it.
- Tesla joins the 12-figure club: When Tesla’s stock opened above $570 / share – it moved Tesla into $100B country. It seems like the only people going bankrupt at this point are the TSLA bears. Short interest was at its highest level of 43m shares just a few weeks ago. Since then, shorts have covered 17m.
- Netflix received a word of confidence from M. Cuban: this week when he phoned into CNBC to lend his support to fellow NFLX shareholders. Mark said that he is still bullish on the company and has yet to sell any shares. Don’t worry NFLX longs, Mark will call you all personally before he sells. ;)
- WeWork has sold its stake in the women co-working space operator The Wing. WeWork also sold its business management software company Teem.
- Mr. Peanut has died at the age of 104: Please respect his family’s privacy in their time of grief – asks the Planters snack food company.
- Another win for the little guys… as former Wells Fargo executives are getting hit with record fines following the companies illicit sales practices. X-CEO John Stumpf owes $17.5m and is banned from the industry for the rest of his life.
- Facebook is in cahoots with Donald Trump… says George Soros. “I think there is a kind of mutual assistance agreement between Trump and FB. FB will work to re-elect Trump and Trump will work to protect FB."
- $1,000,000,000,000… yep that’s $1T – the amount of U.S. credit card debt.
- Oil is getting burned… as it had its worst week since last May. Oil is down 13% since the Iranian missile strike on January 8th. Levels of support for crude are in the $50 to $54 per barrel range. Those will be in play next week.
- There are over 20 patents issued over Corona-viruses. I’m finding it odd that the virus was developed in our own laboratories and patented. Humm.
Crypto Bytes:
- 5 figures: A widely tracked bitcoin price indicator is about to flash a bullish signal for the first time in 5 months. The MACD (moving average convergence divergence) histogram looks set to cross above zero, raising the case for a rally to $10,000 over the next few weeks.
- Crypto squared: Square won a U.S. patent for a payments platform that enables seamless crypto-to-fiat transactions.
- Campaign integrity: The Online Trust Audit for 2020 Presidential Campaigns, conducted by the Internet Society’s Online Trust Association, examined all the presidential candidates’ campaign websites. The report concluded: “Overall, we found that campaigns have strong website security, reasonable email and domain protections, and poor privacy scores.”
- For sale: Ripple sold $13m worth of XRP in the last quarter of 2019. Ripple CEO Brad Garlinghouse said: “An IPO is a natural evolution for the company.”
- Consensus is building that Cash is Dead: at the World Economic Forum in Switzerland. Executives and politicians around the world have raised digital replacements for cash and coins as a short-term goal.
- Digi-Yen: 70 Japanese lawmakers are proposing a cryptographic yen to counter the approaching launches of Libra and China's digital currency.
Last Week:
- Wednesday: Our FED’s firepower is still in control as they did $90B in overnight Repo's and like magic – we’re UP this morning. INTC has earnings tomorrow and if they do well – then CSCO will move up into their earnings on the 12th. That same thinking goes for Micron (MU). The last hurrah rally is in effect, and it could end tomorrow, or it could go into February. Our FED is NOT slowing down, and they're the deciding factor. Coming into the final hour, it's still up, but only by 27. What caused the selling? The coronavirus that’s spreading like wildfire, is the most blamed culprit.
- Thursday: The ECB kept rates unchanged, and confirms QE will continue at 20B per month. Right at the open the headline hit: Treasury Secretary Steven Mnuchin said the U.S. government cannot sustain federal deficits growing at current levels and will have to slow the rate of spending. He's also talking about the work involved in offering 50 and 100 year bonds to offset the debts. And of course the EU’s Christine Lagarde is out saying: "We will need a highly accommodative stance for a prolonged period of time.” The world is broken. Then we found out that our FED did $44B in overnight Repos and $30B in 14 day Repos. Smile Direct Club (SDC) is the tooth alignment outfit that is now going to sell to dentists and orthodontists. It doesn't have earnings until early February, and it's trying to break out. A move over $14.25 might be worth a shot.
- Friday: The DOW is indicated to open up 96 points at 7:30. Did the virus go away? No, in fact it's spreading rapidly. They now say that 900+ people are infected. In fact, A patient at Hackensack University Medical Center in NJ is being evaluated for possible infection. 40m people in China are on lockdown. McDonald's has shut down its restaurants in five Chinese cities as the virus spreads. As you can imagine the Chinese economy is going to take a hit over this, and their markets are fading. So why are the futures up so nicely? Because in the US, the FED controls everything. INTC beat earnings, and let’s see if CSCO, MU, even TXN might be worth a shot. Quickly, things started moving to the downside. The virus scare could finally be the excuse everyone needed to lighten up and correct. I’m more than willing to exit, and sit on the sidelines.
Weed:
- Of the Europeans NOT consuming CBD… one fifth expect to be consumers within the next 6 months with pain management being their #1 reason.
- Illinois’ retail marijuana revenues are… $20m in less than 2 weeks. To put their rollout in perspective, neighboring Michigan has amassed only half of Illinois’ sales in 3X the time.
- California cannabis brand Nug… is launching a line of live resin vape cartridges. Live resin is a high-end cannabis concentrate made in part by flash-freezing the plant shortly after harvest to separate the THC from accompanying organic compounds.
- Medical cannabis patients in Florida… have purchased over 22,000 pounds of product in under 6 months. That’s 3X Ohio’s 12-month sales.
- Marijuana legalization may hit 40 states: More than 40 U.S. states could allow some form of legal marijuana by the end of 2020. That means virtually every state could have marijuana laws on the books that deviate from federal law. To national brands – that’s a huge regionalization challenge.
- A former head of the DEA… is joining the latest advisory panel tackling CBD regulations. Karen Tandy, who led the DEA from 2003 to 2007 is looking at the CBD industry for the consumer packaged goods companies.
- Thanks to AB for a good summary of the latest cbd efforts. The FDA’s current decision to keep CBD out of food, beverages, and dietary supplements may not be an end-all for the industry. On Jan. 15, a bipartisan group of lawmakers in the House of Representatives introduced H.R. 5587, a bill that would amend the federal Food, Drug, and Cosmetic Act to classify hemp-derived CBD as a dietary supplement. With CBD products being lumped into the same category as vitamins, the FDA would be required to allow them onto store shelves without the testing that’s required of pharmaceutical products – if the bill becomes law. Senate Majority Leader Mitch McConnell (R-Ky.) has blocked cannabis reform legislation from reaching the Senate floor on many occasions but this might be different. Hemp farming is a lucrative industry in Kentucky (McConnell’s home state), and he was a major proponent of the farm bill. Anything that would open the door to higher industrial hemp production has a real shot at making it to the Senate floor. Further fueling momentum is that the FDA approved a CBD-based oral medicine Epidiolex that reduced patient seizures by 40% in two types of childhood-onset epilepsy. The thinking here being that if CBD has already shown to be medicine, perhaps it deserves to be classified as a dietary supplement.
Next Week:
Factually:
- #1. This week the market (SPX) cracked the expected move to the downside. After 23 weeks of market efficiency (working within the expected move), we’ve had 2 consecutive weeks of inefficiency. Last week’s expected move was $30 and we crushed it to the downside. Next week’s expected move has increased to $52 (due to the increased volatility). There are billions of market-dollars out there all designed to make sure we remain within the ‘expected move’. Once we drift outside of those parameters – it becomes ‘Mr. Toad’s Wild Ride’ because a lot of money needs to be deployed quickly in order to avoid absorbing excessive risk. Markets often go through periods of incredible efficiency (like we just did). Normally when those periods come to an end, they do so violently and without warning. If you’re a bullish trader and you are NOT hedged – you’re at the mercy of the market come Monday morning.
- #2. WATCH THE VVIX. Did the market move to the downside because of the coronavirus? No. The virus was just a catalyst within a dangerously overbought marketplace. Markets like that search for catalysts, and we are not ‘home’ yet. Volatility (VIX) made a move higher, but the February (26-day) volatility futures are still below the March (54-day) futures – so everything is normal. But watch the spread. The moment the March contract exceeds the February contract – it changes the nature of how algorithms and firms will trade the S&P futures. If and when the February contract exceeds the March one, algorithms will begin to SELL S&P futures. You can also measure this by the VVIX. If and when it breaks over 100 (currently at 98+), you will know that the professionals are buying downside protection with a vengeance.
- #3 WATCH THE BONDS (/ZB = $160.17). Currently the bonds are moving higher like never before. Traders are looking for safety at all cost. Think of the bonds as a ‘fear gauge’ and once the /ZB crosses over 161 – make sure you have protection such as: gold, silver, and utilities. You can also watch the 10-Year Treasury Bill Index (TNX). As the bonds go higher, the TNX will move lower. Currently the TNX is at $16.81. As the TNX approaches 16.00, markets will begin to fear the yield curve inverting and recession conversations will start again.
- #4 WATCH THE FINANCIALS (XLF). The fnancials (XLF) are DOWN 2.2% on a year-to-date basis. In this market that’s a scary number, but given the bond market rally – it makes sense. As you can see from the above graphs, the minute traders smelled a pull-back they jumped out of junk bonds (HYG) and immediately continued buying the utilities (XLU). The hunt for yield is on. I’m looking for more upside in XLU – fully knowing that it’s an incredibly defensive position against the S&P.
- Monday: if we open higher and see some continued sell-side activity – expect that the selling is real and you should either (a) sell, and/or (b) enhance your defensive positioning.
Tips:
Top Equity Recommendations:
HODL’s:
- Aurora (ACB = $1.99 / in @ $3.07),
- First Majestic Silver (AG = $10.58 / in @ 10.50),
- Canopy Growth Corp (CGC = $22.65 / in @ $22.17),
- DRD Gold (DRD = $6.13 / in @ $4.20),
- GBTC Bitcoin (GBTC = $9.48 / in @ $10.01),
- Microsoft (MSFT = $165.04 / in @ $145),
- Pan American Silver (PAAS = $23.02 / in @ $18.00),
- Utility Index (UTX = $68.36 / in @ $67.10)
Crypto:
- Bitcoin (BTC = $8,600),
- Ethereum (ETH = $170),
- Bitcoin Cash (BCH = $350)
Thoughts:
- Beyond Meat (BYND) = Last week Burger Kings everywhere slashed prices on the Impossible WHOPPER due to lousy sales. This sent BYND lower. Vegetarians don’t eat much fast food anyway, and it seems meat eaters are mighty loyal to cows. That means that BYND’s goals of having fake meat in every bun won’t be happening anytime soon. BYND is still up over 60% for 2020, but a contrarian might be thinking that the rally will run out of steam. BYND’s earnings are coming on Jan 27, which is helping to make its implied volatility even higher, and creating decent credits for short option strategies. If you are bearish on BYND and are willing to take a risk through earnings, the short call vertical that’s short the $130 Call and long the $132 Call in the Feb monthly expiration is a bearish strategy that has a 75% 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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R.F. Culbertson
Until next week – be safe.
R.F. Culbertson
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