This Week in Barrons: 4-26-2020:
“Oil is a 4-letter Word… DEBT” … CNBC
First things first, on Monday the price of WTI (West Texas Intermediate) crude oil settled at a minus -$37 per contract. This was the May contract, and what that negative number said was that nobody wanted to buy oil because they had no place to store it. It seems that the global slowdown is so enormous, that they literally couldn’t give it away. That has never happened before. At one point, our global culture was built around oil and even traded in petrodollars. Seeing such ‘in your face’ destruction means that there’s pain in the oil community, but more pain for the banks that have loaned them the money for drilling and exploration.
This is a one-of-a-kind event – yes? I call it: asymmetrical experience – the ability to handle unique ‘one-off’ situations. Such as: (a) getting your tonsils out, (b) picking a caterer for your wedding, (c) raising money from a venture capitalist, and (d) applying to college. In these situations, the professionals that you’re dealing with have a significant advantage. They’ve done this before, and you’ll be gone after the deed is done. In such an asymmetrical situation, it’s unlikely that you’re going to outsmart or outlast the experienced pro. Therefore, make it your mission to hire the best local guide you can find. Find someone who knows more than the other person – only they work for you.
This week’s asymmetrical situation was that on Monday it cost you more to sell oil than to buy it. That empty oil storage unit was suddenly worth more than the one that was full of oil. This is next-level crazy even for 2020. Mutual and hedge funds will blow up because of this. Books will be written about it. I have no idea where the next implosion is coming, but there’s more where that came from. Our FED’s money printing machine is in full turbo, and the side effects are impossible to predict.
The Market: “Betting against the guys printing the money makes no sense”… GE
Factually:
- Industries showing max. layoff fears are: travel (69%), advertising (59%), and food service (57%). While those with no layoff fear are: the military (6%), government admin (18%), and warehouse workers (19%).
- 53% of currently employed consumers will spend LESS this year than last.
- They will save on: social activities (48%), apparel (42%), and travel (39%).
I agree with Rob (Koyfin CEO), that the overwhelming majority of evidence suggests that the current market rally may persist. Our FED’s aggressive stimulus measures are having the desired effect of reducing risk and reflating asset prices. However, the most difficult part of being bullish is that the economic and fundamental data is so darn bad. Jobless claims have spiked to record levels, and earnings are declining significantly in Q2. However, negative data is the reality around market bottoms. If this rally is to continue, the data needs to become ‘less bad’ over the next 3 months. For example in 2009, the market started rallying in March, and the non-farm payrolls report didn’t turn positive until November.
If the Fed is successful in reinflating the economy, the bond market will need to confirm this trend. Bond yields are currently trading near historic lows, with the 10-year around 0.64%. In a reinflationary environment, the yield on long term bonds like the 10-year and 30-year – needs to increase.
The biggest risks to this rally are that our FED stops its QE program, the government fails to pass further stimulus measures, and/or the market decides to ignore the FED like it did in Japan. The argument surrounding this being a bear market rally is solidly backed by negative news every day. The forced shutdowns are unprecedented, and the resulting economic damage is significant. On the flip side, the current stimulus from the FED, BOE, ECB and BOJ dwarfs anything in history. In the following table, notice the most recent momentum sectors when put alongside their corresponding YTD performance. To me, gold and healthcare stand out as winners.
Sector 20-day 100-day
Energy (XLE) +37% -44%
Healthcare (XLV) +30% -3%
Real Estate (XLRE) +28% -14%
Utilities (XLU) +28% -9%
Discretionary (XLY) +24% -12%
Materials (XLB) +24% -21%
Industrials (XLI) +23% -26%
Financials (XLF) +21% -30%
Tech (XLK) +19% -5%
Staples (XLP) +19% -7%
Communications (XLC) +15% -11%
InfoBits:
- 60 million Europeans… will suffer layoffs or wage cuts due to the pandemic.
- Declining freight volumes, utilization, and rates… will lead to the worst trucking conditions on record.
- "It kind of sucks" … said a man (awaiting his stimulus check) as he found $8.2m deposited in his account. It was an ATM error – actual balance = $13.69.
- With 27M Americans unemployed… Banks are preparing to NOT receive repayment on many loans, and are setting aside record amounts for loan losses.
- Casper the mattress company… still hasn’t figured out how to make money so it’s laying off 21% of its workforce.
- Netflix added… an astonishing 15.8 new paid subscribers last quarter, and SNAP reported user growth rising 20% during Q1.
- Google is slashing… its marketing budgets by 50%, and has broken off talks to buy or lease more than 2m sq. ft. of office space in the Bay Area.
- Bloomberg puts chances for a Recession in 2020… at 100%.
- Sycamore Partners… is scrapping its plans to buy Victoria’s Secret.
- Billionaire Richard Branson… is trying to save his travel empire by putting his private Caribbean Island up as collateral for a $500m Virgin Atlantic loan.
- ZOOM fatigue… is the latest thing employed workers are complaining about.
- McDonald's new ‘Thank You’ meals… are being given to healthcare workers and first responders. Now that’s a Happy Meal to smile about.
- DraftKings went public this week… allowing you to bet on a company that bets on things for a living.
- Zoom achieved 300m users… faster than Instagram or FortNite. This would be mind-boggling – if the whole world hadn’t already become mind-boggling.
- Facebook announced Messenger Rooms… that look a lot like Zoom’s video-conferencing service. Does FB only copy products of successful companies?
- Peloton grabs the yellow jersey… by smashing the record for the largest live workout audience = over 23,000 viewers.
Crypto-Bytes:
- dForce is insolvent… following a late-night hacking escapade. While the perpetrator is unknown, they allegedly returned $24m of the $25m in crypto back to Lendf.Me with a note saying, "Better luck next time."
- ConsenSys (the Ethereum incubator)… laid off 14% its workforce.
- Those $1,200 stimulus checks… are finding their way into Crypto exchanges Coinbase and Binance as a spike of exactly $1,200 deposits are being recorded. “In Crypto We Trust.”
- Binance created the Venmo of Africa… termed Bundle. It allows the African user to transfer cash, buy, sell and store cryptocurrencies all from their phone.
- China's crypto pilot thickens… as Starbucks and McDonald's are among 19 restaurants and retail shops that will be involved in testing China’s new digital currency. So where is the U.S. in this innovative climate – oh yeah, It’s Not.
Last Week:
Monday: Monday greeted us with deep red futures. Why – because oil has crashed. Why is cheap oil a negative for the market? For the consumer, cheap oil is great. For the oil producer, cheap oil is bad because at these prices you simply can't make a profit. And when you can’t make a profit – you can’t pay back your bank who loaned you the money for the exploration, land, and drilling activity. That will trigger a financial crisis where hundreds of regional banks will go insolvent, and the ripple effects fan out from there. Wow, the May contract for WTI just went negative – closing below a negative $37 a barrel. We are living in some damned interesting times.
Tuesday: The NASDAQ, which had been the strongest index, is down over 300 points. What can we do here? If you go short, you’ll need to take it home, and hope that there’s no 600 point gap-up in the morning. Likewise, buying the dip can walk you into another plunge like today. Honestly, I find day-trading the safest place to be. The PM miners are higher today because one of their biggest costs is oil. When oil is free, it helps all of their bottom lines. I’m liking: NEM over 60.25, PAAS over 20.10, AUY over 4.50, GOLD over 25.15, and NGD over $0.80. If we really go out red, that would be two ugly closes in a row, and I may buy some SPY and DIA to play the morning gap-up.
Wednesday: Earnings are coming out, and nobody’s taking a stab at guidance. Tomorrow is a new release of initial jobless claims. Will another 5+ million people have signed up? In an interesting twist, Bank of America has called gold the "true money", and ultimate store of value – with a price target of $3,000 / ounce. That's pretty wild, because bankers generally hate gold because it’s in opposition to their fractional banking philosophy. Things behind the oil curtain are still wobbly. With trillions of dollars of derivatives having been collateralized by oil reserves, those contracts are in danger of default due to the price of oil. Everywhere you look there's turmoil over this global oil mess. Someone asked me: “If the market goes lower, won't the miners go lower too?” Maybe, but with BofA saying that gold should double, and the miners having declining expenses – they should hold up fairly well. I’m looking at buying more: NEM over 61.55, PAAS over 20.95, AUY over 4.65, GOLD over 26.18, and NGD over $0.80. Right now it’s the regional banks that are in trouble in my book.
Thursday: Because initial jobless claims came in at +4.4m instead of the 5m the market was expecting – the algorithms are on a buying spree. I always wondered whether our FED could support the entire market – evidently it can. Unfortunately, it's not really a market anymore because there’s no price discovery. I’m liking: CSCO over $43, AMD over $57.75, and SWKS over $94.50. Wait a minute, things are starting to crack. It seems that GILD's Remdesivir drug trial, failed to do anything positive. They said that 17 people had to drop out due to "significant side effects." The whole world was counting on this drug being the silver bullet. GILD then came out and said that there are other trials going on around the world, and to wait on the larger trial results before casting judgment. Honestly, I have my PM miners and I’m stickin’ with them.
Friday: The S&P is struggling to get over its 50-day moving average. It tried but failed on April 17th and again on April 20th. My hunch is that we rise up and over the 50-day today, and it holds into the close. Since this market has absolutely no connection to the underlying economy, all we can do is keep an eye on the charts. One that popped into view for me was UBER. UBER has been trying to break out of congestion for weeks. UBER over $29 would put it over its 50-day, and worth trying. NXPI over $91.20 just looks interesting.
Weed:
- Canopy Growth (CGC) is continuing its cost-cutting efforts by exiting its deals in Africa, Canada, Colombia, and the U.S.
- Rebel Coast is launching a number of new cannabis drinks. Expanding from its original offerings of Sauvignon Blanc and Rose in 750-ml. bottles, the new lineup is now available in 12 ounce, 10mg THC, sparkling black cherry, lemon lime, and mixed berry seltzers at $8 per can.
- Wana Brands has partnered with I Heart Jane to facilitate online ordering. The partnership will allow the edibles powerhouse to showcase partner retailers directly on its website. This expedites the sales process and allows customers to order through Wana’s website and pick up their purchase at their local retailer. I Heart Jane’s retail platform powers more than 1,300 dispensaries in 29 states.
- CBD brand Beam has added pro golfer Billy Horschel and race car driver Danica Patrick to its investors. Beam’s products range from CBD oil “The One” ($60-$120), a CBD salve called “The Fixer” ($60), a nano-CBD hydrogel called “Boost” ($70), and nano-CBD daily capsules called “Revive” ($70).
Next Week: Are markets close to breaking?
The economic blows keep coming: Earnings are almost non-existent, and nobody’s talking about their forward vision. With another 4.4m jobless claims, that puts unemployment around 20% - which hasn’t happened since the Great Depression. 6.4% of all mortgages are in forbearance with $764B in unpaid principal. This is FAR BEYOND the 2009 financial crisis. Durable goods purchases contracted at a 14.4% rate. Google slashed its marketing budget by 50% and froze all hiring. Our markets are in denial right now, because the Nasdaq is only down -1% YTD.
Last week, inside the S&P… we are flat to higher on less and less volume. Our implied volatility (VIX) is still in the mid to high 30’s, but our historical volatility has dropped considerably. So this marketplace is wound up like a top, and is absorbing a ton of risk. Watch the SPY this week around 290 or around 270. If we are going to break-up or break-down it will be from those levels. There is a FED meeting this week and their words could be enough to move markets. I’m bearish in some situations: MSFT, INTC, CAT and AAPL, but I’m bullish on the SPY. I also built a couple of back ratio positions inside of the IWM as a hedge against my bearish positions.
You can’t fight the FED meeting on Wednesday… and I expect that they will lean toward their next bout of stimulus. I also expect that Jerome Powell will be asked whether they are investing directly into ETFs, and he will dodge that question. My bearish thinking comes from the fact that I believe the markets will eventually turn on the FED. In the end, it’s about services and economic output. Eventually, giving people money won’t work because it doesn’t improve economic output. In every case, when the FED has used the blunt end of a stick to stimulate the market – the market has eventually reacted negatively. Therefore, it would not be out of character for the market to reject the FED – eventually.
How do you put capital to work? Do you buy now? There’s a FOMO feeling out there that you have to get back in before the market jumps to new highs. The VIX is still at 36 (high). You can’t read the BONDS – because nobody (other than our FED) wants to trade them. Correlations are extraordinarily high – so when the market moves, everything will be moving in the same direction. Private equity (PE) is throwing capital at distressed firms. A few weeks ago I made a joke about PE bailing out the Cheesecake Factory who can’t even pay their rent on their buildings. I bring that up because I never assume that PE is doing the right thing, and in this case believe that they’re very early to this party. Everybody (but me) believes that our FED will backstop a downward slide in the markets. I wouldn’t be surprised if we saw an initial surge higher in the markets this week, and then we begin a prolonged ‘fade-to-black’. Volatility is still high, and we’re operating in a very tight channel under low volume conditions. Anybody can control the first move, but I’m not sure our FED can control what happens after that.
SPX Expected Move: Last week our expected move was $111, and the actual move turned out to be $37.82 to the downside. That means our market – for 11 out of the last 15 weeks – was inefficient at assessing risk. Next week’s expected move is $95.88. This week, I’m looking for a move ‘outside’ that expected move.
Tips:
I think we're heading a bit higher, but there's still a big contingent out there predicting a head-fake higher and a larger move lower, before pushing higher again. Let's see if the S&P can hold above its 50-day, before we get too terribly excited. But the fact that it got up and over it for a market close, is indeed a good indicator that it wants to move higher to begin with. I think the key will be that close at 2874 on April 17. If we can't punch up and over that, I could then see a significant drop.
HODL’s:
- First Majestic Silver (AG = $7.70 / in @ 9.15),
- Yamaha Gold (AUY = $4.76 / in @ $4.60),
- Canopy Growth Corp (CGC = $15.65 / in @ $22.17),
- Camping World (CWH = $7.83 / in @ $6.55),
- DRD Gold (DRD = $9.54 / in @ $3.82),
- GBTC Bitcoin (GBTC = $8.55 / in @ $9.41),
- GOLD (GOLD = $27.60 / in @ 27.20),
- Hecla Mining (HL = $2.50 / in @ $2.36),
- KL Gold (KL = $42.91 / in @ 26.85),
- New Gold (NGD = $0.86 / in @ $0.82),
- NVAX (NVAX = $19.80 / in @ $7.24),
- Pan American Silver (PAAS = $21.69 / in @ $13.07),
- Utility Index (XLU = $58.32 / in @ $61.03)
- SPY = in the July 2020 Strangle = $160 Put / $305 Call … close to selling the Call side – it’s doubled!
Crypto:
- Bitcoin (BTC = $7,600),
- Ethereum (ETH = $195),
- Bitcoin Cash (BCH = $245)
Thoughts:
Home Builders Index (XHB = $31.83) Mortgage buyers are taking away the source of liquidity, and in response mortgage lenders are making it tougher for people to borrow money. Once there’s no one interested in taking the risk of a mortgage because of lost or uncertain wages due to COVID-19, banks slow down writing them. That isn’t good for housing. That’s why XHB, the homebuilder ETF, has been relatively flat for the past couple of weeks and has underperformed the broader market. Even if people start heading back to work, there will be continued hesitance to making big purchases. The expectation of that should keep a lid on XHB’s price. That’s why you might consider a bearish trade on XHB. The short call vertical that’s short the $34 Call and long the $36 Call in the June monthly expiration is a bearish strategy that collects a credit 1/3 the width of its strikes, has an 80% probability of making 50% of its profit before expiring.
Follow me on StockTwits.com to get my daily thoughts and trades – my handle is: taylorpamm.
Please be safe out there!
Disclaimer:
Expressed thoughts proffered within the BARRONS REPORT, a Private and free weekly economic newsletter, are those of noted entrepreneur, professor and author, R.F. Culbertson, contributing sources and those he interviews. You can learn more and get your subscription by visiting: <http://rfcfinancialnews.blogspot.com/>.
Please write to Mr. Culbertson at: <rfc@culbertsons.com> to inform him of any reproductions, including when and where copy will be reproduced. You may use in complete form or, if quoting in brief, reference <http://rfcfinancialnews.blogspot.com/>.
If you'd like to view R.F.'s actual stock trades - and see more of his thoughts - please feel free to sign up as a StockTwits follower - "taylorpamm" is the handle.
If you'd like to see R.F. in action - teaching people about investing - please feel free to view the TED talk that he gave on Fearless Investing:
Creativity = https://youtu.be/n2QiPSe_dKk
Investing = https://youtu.be/zIIlk6DlSOM
Marketing = https://youtu.be/p0wWGdOfYXI
Sales = https://youtu.be/blKw0zb6SZk
Startup Incinerator = https://youtu.be/ieR6vzCFldI
To unsubscribe please refer to the bottom of the email.
Views expressed are provided for information purposes only and should not be construed in any way as an offer, an endorsement, or inducement to invest and is not in any way a testimony of, or associated with Mr. Culbertson's other firms or associations. Mr. Culbertson and related parties are not registered and licensed brokers. This message may contain information that is confidential or privileged and is intended only for the individual or entity named above and does not constitute an offer for or advice about any alternative investment product. Such advice can only be made when accompanied by a prospectus or similar offering document. Please make sure to review important disclosures at the end of each article.
Note: Joining BARRONS REPORT is not an offering for any investment. It represents only the opinions of RF Culbertson and Associates.
PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING. WHEN CONSIDERING ALTERNATIVE INVESTMENTS (INCLUDING HEDGE FUNDS) AN INVESTOR SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT SOME PRODUCTS AND OTHER SPECULATIVE INVESTMENT PRACTICES MAY INCREASE RISK OF INVESTMENT LOSS; MAY NOT BE SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN MANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN ONLY TO THE INVESTMENT MANAGER.
Alternative investment performance can be volatile. An investor could lose all or a substantial amount of his or her investment. Often, alternative investment fund and account managers have total trading authority over their funds or accounts; the use of a single advisor applying generally similar trading programs could mean lack of diversification and, consequently, higher risk. There is often no secondary market for an investor's interest in alternative investments, and none is expected to develop.
All material presented herein is believed to be reliable but we cannot attest to its accuracy. Opinions expressed in these reports may change without prior notice. Culbertson and/or the staff may or may not have investments in any funds cited above.
Remember the Blog: <http://rfcfinancialnews.blogspot.com/>
Until next week – be safe.
R.F. Culbertson
Until next week – be safe.
R.F. Culbertson
