This Week in Barrons: 2-23-2020:
BTFD: (I sure hope that ‘buying the f-ing dip’ keeps workin’):
Something is drastically going wrong out there. Bond yields are breaking down – as the 30-year closes below 2% and the 10-year is less than 1.5%. Pair this with the ghost town of commerce that is China - auto sales in China were down 92% (per SF). To have China (the most populated nation in the world) just stop buying, and we’re NOT talking about a global recession – is just weird. We’re either all idiots, or maybe we don’t get economics – but something’s happenin’ here. Even Apple warned that because of the coronavirus it won’t meet revenue guidance due to constrained iPhone supply and suppressed Chinese demand. But what I’m hearing on CNBC, is how large the ‘second half bounce’ will be after the virus scare is over.
The past 10 years of irrational exuberance has trained people to only believe that stocks go up, no matter what. It's like everyone knows the asteroid could hit the earth and wipe out 40% of the population, but the only words they know are: "more room for the other 60% of us!" Even Walmart missed their numbers on the top and bottom lines. If you exclude the big 5 (Microsoft, Apple, Google, Amazon and Facebook), U.S. earnings are down 7.5% in the 4th quarter. So tell me again why I should be ‘buying the f-ing dip’?
I was alive during the tech bubble of 1997 to 2000. I saw insanity on a level rarely seen. Many companies were nothing more than a desk, a phone, and a business plan. Many companies had: no profits, no sales, no nothing – but they mentioned ‘Internet’ in their sales pitch and that's all it took. I saw shell companies (with no tangible product or service) gain $20 a day. I saw companies go from $10 to $200 a share without selling a single item or service. It was euphoria of a kind rarely seen – until now.
The current market (in some ways) is worse than those heady tech days. Not only do we have the momentum hunters buying every dip, but now people believe that no matter what happens and how bad it gets – the FED and global Central Banks will have enough liquidity to keep markets moving higher. No wonder no one cares that Apple can’t sell iPhones – it just means that much more demand when people stop dying. No one cares that Land Rover has not sold ONE car in China. It just means they'll sell twice as many when people are allowed out of their homes / cages.
Many of the self-proclaimed experts were not in business when the tech bubble met it's pin. On one day, 180 companies with stocks over $200 per share, went instantly to $0. Hundreds more went from $100 to pennies. Obviously the world can’t keep printing dollars and governments can’t keep buying all of the stocks forever, but when does this current ‘balloon’ pop? I don’t know. But I suspect that when it happens, a lot more people are going to be blindsided than those who lost it all in 2000 to 2001. I personally am NOT ‘buying the f-ing dip’, but that’s just me.
Many of the self-proclaimed experts were not in business when the tech bubble met it's pin. On one day, 180 companies with stocks over $200 per share, went instantly to $0. Hundreds more went from $100 to pennies. Obviously the world can’t keep printing dollars and governments can’t keep buying all of the stocks forever, but when does this current ‘balloon’ pop? I don’t know. But I suspect that when it happens, a lot more people are going to be blindsided than those who lost it all in 2000 to 2001. I personally am NOT ‘buying the f-ing dip’, but that’s just me.
The Market: …
Charlie Munger, vice chairman of Berkshire Hathaway and Warren Buffett’s longtime business partner, issued a dire warning about the market’s future this past week. He said: “I think there are lots of troubles coming. There’s too much wretched excess. Even in China, where they love to gamble on stocks – they’re being really stupid. It’s hard to imagine anything dumber than the way the Chinese build a portfolio.”
In the U.S. alone, investors face risks ranging from the coronavirus’ impact on the economy to political uncertainty stemming from the upcoming presidential election. The Treasury announced on Wednesday that the U.S. budget deficit increased by 25% in the first 4 months of the fiscal 2020 – at the same time the DOW and the S&P hit record highs. You need to look no further than gold hitting 10 years highs to tell you that there’s real fear out there. Rather than selling and going away, investors are selling and buying gold and silver as safety positions.
To make his point about excess, Munger cited the proliferation of EBITDA as a fake profit metric. “I don’t like when investment bankers talk about EBITDA, which I call bullshit earnings. It’s ridiculous,” Munger said, noting EBITDA (which is short for earnings before interest, taxes, depreciation and amortization) does not accurately reflect how much money a company makes – unlike traditional earnings. “Think of the basic intellectual dishonesty that comes when you start talking about adjusted EBITDA. You’re almost announcing you’re a fake.”
Mr. Munger also noted that the innovation boom that he has experienced throughout his life is waning. “I do think that my generation had the best of all this technological change. I don’t think we’re going to get as much improvement in the future because we’ve gotten so much already.”
Investors of all stripes look forward to Munger’s annual address because of the wisdom he shares. Munger is also considered to be one of the best investors and business thinkers ever. So when he says that he’s worried – it matters.
Info Bits:
- Hot Wheels is offering a toy… remote-controlled Tesla Cybertruck with an optional cracked window sticker.
- Jeff Bezos (the world’s wealthiest person)… said that he plans to donate $10B to fighting the climate crisis from his new Bezos Earth Fund.
- Who’s also going out of business? Pier 1 (the home furnishings retailer) announced that it is closing 400 stores and filing for bankruptcy.
- Adam Neuman (x-CEO of WeWork)… put his NYC penthouse on the market for $37.5m. Adam, you should have turned it into a co-working space.
- Canopy Growth surprised everyone… with stronger-than-expected revenues and smaller-than-expected losses. That combo put a soothing CBD balm on the bruised cannabis industry.
- Put a fork in it… Blue Apron (the meal delivery company that went public in 2017) announced that it’s on the verge of closing its doors and selling its assets.
- Baby Gets Paid: Morgan Stanley is buying E-Trade for $13B (a 28% premium) in an all-stock transaction.
- Six Flags (the amusement park operator)… reported a big miss on earnings and revenues. The stock dropped 16%, and is now being called: Five Flags.
- Donald Trump's re-election campaign… has purchased the coveted advertising space atop YouTube (the most-visited video site) for early November.
- Twitter is testing new ways to fight misinformation… including a community-based points system. Sounds like Wikipedia to me … hum.
- McDonalds is making scented candles… that smell like a quarter-pounder with cheese. Hey, nothing says ‘love’ like greasy meat and processed cheese.
- Google’s a changin’: They’re cutting opportunities for employees to grill their bosses, preventing discussions about labor rights, and have fired at least 4 internal activists.
- 54 is the number of toys… that a border collie is able to know by name. Heck, I can't even remember someone's name 3 seconds after meeting them.
Crypto Bytes:
- In another flight to quality… GLD (gold) is breaking above its 2011-2013 levels. Watch for $170 on the upside, and $138 on the downside.
- The crypto-candidate: Presidential candidate Michael Bloomberg announced a financial reform plan that had a provision for "a clear regulatory framework for cryptocurrencies."
- A private / white-label offering: Binance will soon launch a digital asset trading platform that can be rebranded by smaller exchanges for their local markets. Binance Cloud will offer spot market and futures trading, local bank API integrations, and peer-to-peer fiat-to-cryptocurrency exchange services.
- Crypto is #1: Coinbase announced that it is the "first pure-play crypto company" to be approved as a Visa principal member. That will allow them to offer new features for its Coinbase Card and expand to new markets.
- Samsung is raising the flag… on its Galaxy S20 phones which are equipped with a new "secure processor dedicated to protecting your PIN, password, pattern, and Blockchain Private Key."
- Shopify is joining the Libra Association’s… stablecoin project roughly a month after Vodafone pulled out to focus on its own digital payments system.
- The Joint Photographic Experts Group… that created the popular JPEG picture format believes blockchain could be used to verify images, protect copyright as well as flag fakes and image theft. They’d do it by using encryption, hash signatures, and watermarking – all residing within an image's metadata.
Last Week:
- Wednesday: So, why are we green this morning? You could blame it on reports that say the virus and the infection rate have slowed. Or, you can go with the basic rule of stocks in 2020 which says any down day is automatically followed by a green up day. Which one do you believe? This morning I'm still keeping an eye on TTWO. It's got a gap to fill and for several sessions it has been trying to pop free of some congestion. I could still see taking a shot at it over $114.27. Another stock that caught my eye today is BBBY. Yes their earnings stunk, but they announced buy backs and a new plan to turn things around. Given this market rewards everyone, I think a move over $12.50 is buyable.
- Thursday: We saw fear come back into the market. As the above graph shows, the markets showed that they can certainly move when they have to. They moved 50 S&P (SPX) points inside of 15 minutes. That means NOBODY was buying, and given the volume – the world was selling. Moves like that will drive a lot of fear in a hurry. We also learned that the corona virus is NOT slowing down – just being recorded differently within China. Finally we received the Purchasing Manager’s report and it showed the LOWEST reading since 2013. The U.S. Composite Output Index showed a reading of 49.6 – where a reading less than 50 means contraction / recession. That’s a 76 month (6 year) low. Putting all of that together, BONDS exploded to the upside with a final reading of 164.31.
- Friday: The problem with today is that it’s Friday, and everyone (including the Government) is hesitant to buy – fearing bad news over the weekend. I’d argue that nothing’s worse than the coronavirus spreading everywhere and NOT being contained – but hey. There are 100’s of new cases in South Korea, and now new cases in Iran. Russia has closed their borders. This thing is not under control, and supply issues are going to begin to ripple around the globe. Make no mistake, this is a man-made bioweapon that is continually spreading, and how it ends is anyone's guess. I did notice that our military just turned 11 U.S. bases into quarantine centers – so that’s eye opening. I think we put in a long flat-to-red session.
- Friday (EOD): It’s all about the S&Ps expected move (SPX). This week’s expected move in the SPX was $39.32. In reality, the index moved $39.98. Now, the SPX is a $3,300 product – so being able to forecast that move within a half point is amazing – yes? Except when you realize that the average SPX contract is worth 30X the average market contract. There are a lot of forces at work trying to keep the SPX within it’s expected move. Next week’s expected move is about $55. That’s telling me that the options market is expecting extremely risky conditions ahead, and can no longer accurately handicap market expectations. That means we need to be ready for violent moves going forward. The VVIX confirms this as it’s just shy of ‘duck-n-cover’ levels.
Weed:
- As Canadian cultivation license holders retreat… from costly greenhouse expansions, into more lower-cost outdoor cannabis projects.
- Navy Capital… has invested $200m in 40 cannabis companies. Saying they’re bullish on the evolving marijuana industry is an understatement.
- The New Mexico Senate Judiciary Committee… voted to temporarily table a bill that would legalize adult use cannabis.
- Oklahoma regulators… have approved signature gathering to begin for a proposed adult use legalization ballot initiative.
- Altria Group (Marlboro cigarettes)… has invested in Lexaria Nicotine LLC to fund research on regulatory compliant, oral forms of nicotine delivery.
- Curaleaf announced… that its $875m acquisition of Grassroots will proceed following the expiration of the antitrust waiting period.
- Colorado generated almost $2B in cannabis sales in 2019: A great example of a state doing it the right way. Colorado’s recreational and medical cannabis retailers sold a whopping $7.8B since the 2014 launch of adult-use sales.
- Michigan will reach $18m… in sales in just 2 months
- Chicago can only keep enough marijuana product in stock… to open dispensaries for 2 hours a week on a Tuesday.
- Welcome to cannabis slotting fees: The increasingly competitive cannabis market is fostering a pay-to-play mentality among both marijuana retailers and the brands they carry.
Analysts see 4 catalysts to pot stocks going forward:
1. Improving Ontario’s retail operation is first on the list. Ontario is finally beginning to address the supply bottlenecks that have plagued the region since day one of legalization (Oct., 2018). Thus far the system has only allowed 24 dispensaries to open when their population could support about 1,000.
2. A successful rollout of edibles and ingestibles in Canada will play a major role for cannabis stocks moving forward. They boast significantly higher margins than traditional dried cannabis flower.
3. The U.S. elections will act as a launch pad for cannabis stocks. I'm less concerned with who ultimately wins the presidency, and more the political makeup of Congress. If the GOP loses its majority in the Senate, the likelihood of MJ being legalized at the federal level grows significantly.
4. Lastly, one of the biggest catalysts in 2020 just might be the current crop of cannabis stocks themselves. It was no secret prior to the liftoff of MJ stocks in 2017 and 2018 that not all of them would be long-term winners. Aurora Cannabis (for one) since October has been backpedaling at a breakneck pace. Once a presumed industry leader, Aurora will struggle to survive long-term.
Next Week: Fear is coming back into this marketplace.
Bonds are headed skyward as interest rates (see above) tumble to all-time lows. The TNX (10-year Bond) is at 1.47% with the lowest reading being 1.34%. So we are within an eyelash of that all-time low. And as shown above, the TYX (30-year Bond) just hit its lowest reading ever recorded. What’s all that mean? It means that the FED is about to lower rates. It’s now a race to zero, and not a good thing.
This forces the FED to lower interest rates – and remember they don’t have far to go before hitting zero. Right now the 10-year rate is 1.47% and the 3-month rate is 1.56%, so we have an inverted yield curve – a precursor to a recession. In order to bring down the short end of the curve, the FED needs to reduce interest rates by either a quarter or a half point. With an inverted yield curve you get: financials folding, liquidity seizing up, and repo-markets behaving badly.
In Thursday’s dramatic move to the downside, we saw the lack of ANY bids. That is cause for concern surrounding passive investments (ETFs and Index Funds) and stock buybacks. If the market starts to sell off, passive investments will be sold with it and because the ETFs are so pervasive – it will take everything down in its path. It will force stock buybacks to be put on hold – because corporations alone cannot weather the storm of large scale, sell-side activity. Corporations will wait for the selling to end before they start buying again … and that could be a long way down. The problem is that if Thursday’s behavior was any example – there were NO BIDS propping up the market and that’s a dangerous (often panicky) scenario.
But what's the reality? The base line economic news has sucked for a year. Earnings are DOWN year over year. Shipping is down, along with oil and the entire commodities index. How can economies be so booming, and yet no one needs copper? Now toss the virus in the mix and auto plants, airlines, even Apple is down. But let’s not forget, our FED and other Central Banks control every ‘tick’ of the market. Until they stop their insane buying – we can't go down. Do you really think our FED accounts for all of their trillions? They’re buying stocks via the ECB, SNB and/or the BOJ for gosh sake. I think that so much politically is riding on keeping this economic charade alive, that I can't see the market falling more than 5% before the levitation would magically begin.
At one point I thought that the FED and Central Banksters were going to use the virus for the perfect cover to allow a 20% pullback. They could simply say: “Hey, we're powerless, it's the damn virus!" But they haven't. I still think the virus is their ace in the hole in case this whole house of cards implodes. I'm still long a few small positions. I think we could fall some more on poor virus news, so caution is warranted. Just look at gold and the miners like PAAS. They’re roaring, and gold doesn't roar higher unless something's wrong.
Tips: If markets weaken, short unscathed sectors & stocks – buy PMs & Bitcoin.
HINT: If the markets continue to weaken, look to short the unscathed sectors and stocks first. Look to short: LULU (Lululemon), NKE (Nike), WMT (Walmart), CL (Colgate Palmolive), CSX, and even XLU (the utilities ETF) and the XLP (the consumer staples ETF).
Top Equity Recommendations:
HODL’s:
- Aurora (ACB = $1.67 / in @ $3.07),
- First Majestic Silver (AG = $9.96 / in @ 10.50),
- Canopy Growth Corp (CGC = $21.88 / in @ $22.17),
- DRD Gold (DRD = $7.39 / in @ $4.20),
- GBTC Bitcoin (GBTC = $12.54 / in @ $10.01),
- Pan American Silver (PAAS = $25.22 / in @ $18.00),
- Real Estate ETF (XLRE = $41.93 / in @ $39.05),
- Utility Index (XLU = $70.33 / in @ $67.10)
Crypto:
- Bitcoin (BTC = $9,950),
- Ethereum (ETH = $275),
- Bitcoin Cash (BCH = $400)
Thoughts on GOLD: FED chair Powell is saying the economy is steady as she goes. The gold ETF (GLD) has just broken out of a range it was in for the past month. With our FED’s no action and China’s insatiable demand for gold, GLD should remain elevated for the next few weeks. While GLD’s implied volatility rank is only 25%, there’s enough premium in its options to be interesting. If you think GLD will remain elevated then the short put spread that’s long the $146 Put, and short the $148 Put will perform nicely. If you believe that gold has come too far too fast – you may wish to add the Call side on by going short the $157 Call and long the $159 Call in the March monthly expiration. The long side has a 71% 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
