This Week in Barrons: 10-25-2020:
“You gotta pay your dues … before you play the blues.” Joni Mitchell (early in her career) recorded a song: “Cross the Bridge and Join the Dragons.” It wasn’t a hit, nor is it something you’d want to listen to over and over again. But shortly after releasing that song, Joni Mitchell became a household name. Most people agree – she had finished paying her dues. ‘Paying your dues’ requires: practice, analysis (figuring out what is and isn’t working), and incredible skill. The common misconception is that you’re born with ‘genius’ in your blood or you’re not. And although there is a kernel of truth there – genius is truly a DEVELOPED trait. Genius is part of a skillset, and there’s a ton of work associated with ‘remaining a genius’ – but it all starts with ‘paying your dues.’
The power of the microphone … “I hate this restaurant.” Pre-COVID, I took someone to an authentic Italian restaurant. They looked over the menu, and proceeded to order a hamburger and french fries. Somehow, the talented, Italian kitchen staff figured out how to produce the non-menu items – narrowly avoiding a tantrum. In my friend’s mind, restaurant meant: “A place to order a hamburger and french fries.” If you look at many 1 star reviews, that’s the exact behavior we’re seeing. A mismatch that is completely blamed on the person who created the work – and NOT on the critic.
It doesn’t matter that the item was: (a) clearly marked, (b) extraordinarily well-produced, and (c) that everyone else’s experience was delightful. Because of some spoiled, under-informed and impatient patron – it failed. Failure comes 1st from our inability to find the time to read and comprehend the offering. 2nd, we are becoming increasingly afraid of change. Most of us would rather be entertained instead of transformed – lectured instead of engaged. 3rd, the other side of giving everyone a microphone means that we’ve amplified the voices of dissent to an unbearable volume.
This has produced a fork in the road. You can either turn your business into something that panders to the middle, sells the regular stuff, and challenges no expectations. Or, you can do the incredibly hard work of ‘jumping the shark’, challenging expectations, and finding those early adopters that wish to experience something that matters – instead of something that’s safe. Very few successful entrepreneurs have chosen the first alternative – just sayin’.
The Market: “Show me the Monet”…
If you’re at all associated with the consumer products (CPG) category, you’ve been asking someone to: “Show you the money” for a while now. Currently, it seems that CPG revolves around: (a) a newfound focus on distribution, (b) a profound shift in consumer behavior, and (c) a certain repentance about relying on Amazon.
(a) It seems that getting ‘distribution’ is no longer the biggest challenge. A study by Sheena Lyengar of Columbia University, has shown that consumers will buy up to 30% more when presented with fewer choices. While distribution is a big challenge, it seems that competition and recognition is an even bigger one. Smaller brands are using ‘boots-on-the-ground’ to visit stores and ensure the best possible store conditions. It’s back to having an ‘in-person’ solution where sales velocity leads distribution.
(b) COVID has produced dramatic changes in consumer behavior. The online consumer wants all the information to be a click away. Their attention span is limited and their purchasing journey is usually bombarded by multiple deals – making brand-loyalty almost a memory. There is presently a battle going on between ‘comfort buying’ and ‘out-of-stock’ conditions. It will be interesting to see if the lack of availability will change brand preferences. On average, only 8% of customers are willing to switch brands. However, with significant life changing events (such as global pandemics), 21% of customers switch brands and that number increases as buyers grow impatient with ‘stock-outs’. Stanford economist, Paul Romer, once said, "A crisis is a terrible thing to waste. It’s not an option for brands to use the crisis as a catalyst to push their customers toward digital – it’s a necessity.”
And what discussion that includes a global pandemic, changes in human behavior, and digital marketing would be complete without mentioning (c) Amazon. Amazon regularly delists brands due to inventory and quality concerns, but brands continue to line up due to the million-person audience. Amazon is more like a bargain bin than a department store. Brands are unorganized, listed in mismatched categories, sold from disparate vendors, and sometimes counterfeited – with the main focus being PRICE. It’s not uncommon to have brands experience increases in Amazon sales – only to cannibalize their own existing sales channels. Honestly, you must ‘fish where the fish are biting’ and these days they’re in the Amazon pool.
These 3 themes overlap. COVID accelerated the adoption of online shopping. In turn, this pushed more customers toward Amazon – who recently reported that 40% of all online sales are coming through their platform. #1 in every entrepreneur’s book right now should be to make online sales and marketing a priority, and get on Amazon.
InfoBits:
- The CDC states… the average U.S. male is 5ft. 9 inches tall, and weighs 197 pounds. The average female is 5 ft. 3 inches tall, and weighs 170 pounds.
- $99 rents you a private AMC theater.
- Section 230… is the Congressional legislation that protects social media companies from being liable for what users post. Social media can’t be sued for posts, and can’t be punished for “reasonable moderation.” The issue is: if social networks act like editors, then they should be accountable for all content on their platforms. Losing Section 230 immunity would be world-shattering for them. Imagine if Facebook was sued every time someone posted something false or offensive.
- Mortgage rates in Denmark have gone negative.
- Intel is selling its flash-memory manufacturing business to South Korea’s SK Hynix for about $9B.
- SoftBank Group shares climbed to a new 20-year high as investors rallie behind founder Masayoshi Son’s more cautious strategy of selling assets, paring debt and buying back shares.
- American consumer confidence… is higher in October by 2 points MoM.
- Retail sales in September… rose 1.3% from August said the Nat’l Retail Fed.
o Clothing = + 11% MoM,
o Sporting Goods = +5.7% MoM,
o Health and personal care = +1.7% MoM,
o Building materials = +0.6% MoM,
o Online = +0.5% MoM,
o Furniture = +0.5% MoM,
o Grocery = flat MoM,
o Electronics = -6.1%.
- S&P estimates… that there’s a 33% chance that we fall back into a recession.
- Apple’s first-day preorders for iPhone 12… surpassed the iPhone 11.
- The US vs Google lawsuit is the biggest in decades…. 11 states filed claims accusing the tech giant of an “illegal monopoly” in search and advertising. Google’s pre-loaded, long-term device agreements will also be prosecuted.
- An Asian Goldman Sachs subsidiary will plead guilty… to foreign corruption and bribery charges and pay $2B to the US Justice Department.
- GMC unveiled its electric Hummer… and it will have 1,000 hp and 11,500 lb-ft of torque. The truck will also have an infinity roof, 18-camera views, and Crabwalk (GM’s diagonal driving capability for tough off-roading). It will cost a cool $112,595, and reservations are == “Sold Out”.
- Ammo Inc has millions of backorders: They’re a company that specializes in making ammunition for: Sportsman’s Warehouse, Bass Pro Shops, Dick’s Sporting Goods, Rural King, and Camping World. They announced that they have 100m in backorders. Why are people buying so much ammo?
- Quibi is kaput… six months after launching. Quibi is the mobile video streaming service that Jeffrey Katzenberg and Meg Whitman launched earlier this year and died despite (or because of) raising $2B in funding beforehand.
- The labor market isn’t recovering as strongly… even though the Sept. unemployment rate declined in 30 states. The labor force shrunk in more than half of those states – suggesting people have given-up looking for work.
- $2B is how much GM is pouring into factories to build its Cadillac EV: It plans to launch 22 new electrified vehicles by 2023.
- A California appeals court ruled unanimously against… Uber and Lyft – saying that they must reclassify their drivers as employees.
- Guinness is making a non-alcoholic version of its iconic stout… for when you want a full-bodied beer without the ‘full-body’.
Crypto-Bytes:
- PayPal will now offer crypto transactions & trading: Bitcoin, bitcoin cash, ether, and Litecoin will be offered to its 346m customers and 26m merchants via a partnership with Paxos Trust Company.
- In Bitcoin We Trust… said the Central Bank of the Bahamas as it launched its national digital currency = The Sand Dollar.
- Central Banks are being forced into the innovator’s dilemma. They can’t replace their existing fiat currency system, but will ride it as long as possible – eventually replacing it with a superior, digital / Bitcoin system.
- With China’s 2 to 3 year head start on the Digital Dollar… it’s possible that the US dollar’s reserve status comes under immense pressure as the digital / fiat renminbi gain adoption. This is the Chinese government’s dream scenario and the U.S. is playing right into it.
- Binance recorded an all-time high… spot trading volume in Q3.
- Deposit growth: Deposits at crypto-friendly Signature Bank grew by 8% in Q3.
- PayPal and Bitcoin popped… when PYPL announced that they will allow crypto transactions. Bitcoin ticked its highest price since July 2019.
- HODL is calling itself “the first true bitcoin DeFi” product. Users will be able to borrow USDT, USDC, PAX or DAI stablecoins in a peer-to-peer fashion - without going through KYC procedures and/or leaving their bitcoin as collateral.
- PayPal is exploring purchasing bitcoin custodian BitGo.
Last Week:
Monday: This week 80 S&P companies will be reporting earnings. Here's a headline that I've been talking about for years: POWELL: FED EVALUATING BENEFITS OF A DIGITAL CURRENCY. POWELL: FED HAS NOT MADE A DECISION TO ISSUE A DIGITAL CURRENCY AS OF YET. Don’t worry USA – crypto is coming. I'm beginning to watch: ZM, CWH and OSTK. I think GOGO is desperately trying to break out, and a move over $11.25 would work for me.
Tuesday: There's a lot of pushing and pulling going on out there concerning the stimulus. So, I'm primarily looking at chart set ups like HAL: for 9 sessions it's been banging around between $12 and $13. A recent high was $13.08 and if it gets over that, I'd take a shot. Other than that, there’s just too much chop.
Wednesday: Autonation beat the estimates in a big way, proving that people don't want to use Uber, Lyft or mass transit – and are buying cars, RV's and boats. Goldman just came out saying "probably not" to a stimulus deal before the election. The charts that I’m finding are in the metal and mining space. DRD is wedged up tight against its 50-day moving average at $12.95. If it gets over it and holds the day – I’d be a buyer. If the miners are moving, the ones I’m watching are: NGD, CDE, GFI, and HMY.
Thursday: Initial jobless claims came in a bit below estimates, but the number is huge at almost 760K. TSLA is up and they’re reminding me a lot of AMZN – where for 20 years they didn't make any money but kept going higher. Then they made a ton of money. Currently, TSLA makes money selling carbon credits. Maybe one day they will explode like AMZN when they make money selling cars? All of those miners that were looking good yesterday – petered out into the close. It's all about the stimulus. Pelosi's starting to get pushback from her own party about not agreeing to a deal. The only safe plays right now are the ETF's.
Friday: With all of the uncertainty in the air, I wouldn't be against a small position in the Q's at some point today. If we don't get a stimulus deal, we drift sideways and down. If we get one, we get a couple hundred points. I'm trying the QQQ if it gets over $284.90.
Marijuana…
- Medmen plots Massachusetts entry & Florida expansion: Medmen opened its 4thFlorida location and says it will double its number of stores in the Sunshine State by the end of next year. In Massachusetts, Medmen has received a provisional license for an outlet in Boston, as well as a second one in Newton.
- Illinois collected more than $100m… in tax revenue connected to adult-use cannabis sales from January through August.
- Missouri launched its medical market on Saturday… with the opening of 2 N’Bliss Cannabis locations in St. Louis.
Next Week: “Mitigate risk when you CAN … not when you HAVE TO.”
Lately I’ve been hearing a lot about traders having over-sized hedges on – coming into this election. In the professional world, if everyone is hedged - then where’s the risk? After all, over the past 2 weeks we have largely been unchanged on the SPX, slightly lower on the Nasdaq, and slightly higher on the Russell. And the markets do not seem to be paying attention to any of the economic data.
What are the Bonds and the Dollar saying? The 10-year interest rate shot up substantially last week – while the dollar moved dramatically lower. Part of me thinks that ‘all’s right with the world’ when the dollar starts selling off – because the U.S. dollar is basically a ‘flight to quality’ vehicle. However, the falling bonds are worrisome because they cracked below their expected move this week – on what was otherwise a fairly calm week. Keep an eye on TLT this coming week, along with the ‘Monsters of Tech’ as they will be coming out with earnings.
Decision time – do we hedge, hold or fold? The S&Ps are just a ‘hop-skip-and-a-jump’from their all-time high. The implied volatility surrounding the SPX peaks around the 2ndweek of January – so are we expecting the election to not be resolved until 2021? In which case, any hedges should potentially go into 2021. But what’s the best hedging indicator?
-- Is it the VVIX? The VVIX is the volatility of the volatility index. A lot of top professionals use VIX options in order to mitigate risk, but only the sharpest traders are using that as an indicator. Most traders use the SKEW and the SPX Open Interest.
-- The SKEW? The SKEW is the difference between the out-of-the-money Put implied volatility premium – compared to the equi-distance out-of-the-money Call implied volatility premium. When the SKEW is high, it means that there is a huge demand for Puts – which is often indicative of large hedging activity. Right now, the SKEW is somewhat in the middle = no-mans-land.
-- The SPX Open Interest? The SPX open interest is not showing any out of the ordinary activity. The open interest on the Call side is balanced (roughly) by the open interest on the Put side.
Conclusion:
- I’m not seeing any wild outside bets on the PUT or CALL side of things.
- I think significant hedging activity could lie in front of us – to be initiated during this coming week.
- I think that we will breach the expected move in this market place fairly actively during the months of November and December.
- Play it Safe: Mitigate your risk when you CAN – NOT when you HAVE TO.
Tips:
With the election 9 days away, there’s no great reason for this market to move much, as they take a wait and see attitude. Yes, the announcement of a stimulus bill would pop us potentially for just a day, then they would go back to sitting on their hands.
HODL’s: (Hold On for Dear Life) / (All %’s = YTD)
- Yamaha Gold (AUY = $5.80 / in @ $4.60 = up 26%),
- Canopy Growth Corp (CGC = $19.73 / in @ $22.17 = down 11%),
- CTI BioPharma (CTIC = $3.50 / in @ $3),
o Constantly selling Nov. $3 or $4 covered calls…
- EXK Gold (EXK = $3.54 / in @ $1.53 = up 131%),
o Looking into selling Nov. $4 covered calls
- GBTC Bitcoin (GBTC = $14.38 / in @ $9.41 = up 52%),
- Hecla Mining (HL = $5.15 / in @ $2.36 = up 118%),
- KL Gold (KL = $46.66 / in @ 26.85 = up 74%),
- MUX Mining (MUX = $1.08 / in @ $1.14 = down 4%),
- New Gold (NGD = $2.20 / in @ $0.82 = up 168%),
o Looking into selling Nov. $2 covered calls
- Pan American Silver (PAAS = $33.25 / in @ $13.07 = up 154%),
o Looking into selling Nov. $40 covered calls
- Hyliion (HYLN = $22.11 / in @ $0.32 = 6,809%).
Crypto:
- Bitcoin (BTC = $13,000),
- Ethereum (ETH = $410),
- Bitcoin Cash (BCH = $270)
Thoughts: AMZN has been underperforming, like some of its big cap cousins. But a contrarian trader might see that as an opportunity to get long a stock that can take advantage of the holiday spending. AMZN’s earnings are coming up on Oct 29. That’s pushing its implied volatility rank to 69%, making its options interesting short premium trade candidates. If you think AMZN will rally, or at least not fall very much, over the next few weeks as the holiday season kicks in, you might consider a bullish strategy to take advantage of the elevated volatility. The short Put vertical that’s long the $2,840 Put and short the $2,850 Put in the December expiration is a bullish strategy that collects a credit 1/3 the width of its strikes, has a 79% probability of making 50% of its max potential 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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