RF's Financial News: May 2022

Sunday, May 29, 2022

This Week in Barrons: May 29th, 2022

Imperfect and proud of it… was the inscription on a tag that appeared on an article of clothing that I purchased last week. To me, as soon as I recognize that things are mechanized, measured, and perfected – they become less interesting to me. It seems according to SG: implicit in the desire to have something handmade, is that it might be better (or worse) than what you’re used to. As we get better at making everything look the same, the variability and surprise of imperfection becomes even more intriguing to me. Look around for the tag: Imperfect and proud of it.

The Market:

- VCs need to stop writing advice threads to startups… and start writing explanations to their investors as to why they deployed soooo much capital at indefensible valuations. Per PS: “Who knows how long it takes to work all of the excess capital / valuations through the system. It will be messy and not covered by a financial media focused on politics, inflation, rising rates, and the stock market. How investors and VCs behave – will have a lot to do with how bad it gets in the private markets.”

- Prolonged downtrends can often become self-fulfilling prophecies: Companies without positive cash flow will have to raise more money to survive – which means diluting current shareholders. Tech companies will be forced to give their employees more stock options in order to keep them from leaving – which means diluting the current shareholders even further. Per HL: downward pressure on valuations brings in more dilution / stock availability from both the company side and from the shareholders who want out. This is why most rips (higher) don’t last long during downtrends. Market bottoms are formed in 3 stages:

o Stage 1: you’ll notice the main indexes making new 52-week lows while many stocks and ETFs won’t follow suite. This is NOT a reason to buy, but just a sign that the selling may be getting weaker.

o Stage 2: you’ll notice some wide-spread buying with the majority of stocks and main indexes going up 5 to10% on 3 to 5X their avg. daily volume.

o Stage 3: finally, you’ll notice long setups starting to show up and some will even follow through. If this does NOT happen, then Stage 2 is most likely a bear market bounce and new lows are right around the corner.

InfoBits:

- The Congressional Budget Office… estimates that our GDP will grow by 3.1% in 2022 and that inflation has topped. Unfortunately:

o The U.S. GDP Growth Rate suggests a 1.5% contraction in Q1 and a continuation in Q2.

o Over 50% of Wall Street’s pros and 80% of all small business owners believe our FED’s fight against inflation will lead to a recession.

- Netflix bets the house on Stranger Things… by spending $30m on each of the 9 episodes. FYI: All of Squid Game (Netflix’s most-watched show) cost less than 8% of one episode of “Stranger Things.”

- SpaceX is looking to raise new funding at a $127B valuation… which is a 25% increase in valuation and twice Boeing’s market cap.

- The median price for a previously owned home increased… 15% YoY to $391k and30-year mortgage rates jumped from 3.7% to 5.5%.

- The number of new homes purchased fell 29% YoY… and were the weakest since April, 2020. There’s a 9-month inventory of new properties, and cancellations are increasing.

- European Central Bank Pres. Christine Lagarde… outlined her ‘Trust Me’ plan to start interest rate hikes and QT… “All in due time”. Why am I worried?

- At the World Economic Forum… Citi CEO Jane Fraser is now convinced Europe will fall into a recession.

- Broadcom acquired VMware… giving them access to data centers for cloud users.

- Starbucks is exiting Russia after 15 years.

- The BNPL (Buy Now, Pay Later) space starts to sour… Klarna lays off 10%.

- Amazon adjusts its warehouse strategy… as it looks to sublet more than 10m sq. ft. of space.

- Last Friday, 3,700 articles were published on our BEAR-market… it was the 2^ndhighest amount… EVER.

- Bill Ackman says… “There is no prospect for controlling inflation unless the FED aggressively raises rates, or the stock market collapses. If the FED doesn’t do its job, the market will do the FED’s job, and that’s what’s happening now.”

- Retailers have gone from having too little inventory to too much… which is bad for profits but great for consumers.

- Lyft and Uber plan… to halt hiring and cut budgets to prop up prices.

- Pepsi will stop sponsoring the Super Bowl’s halftime show… and plans to shift its focus to digital ads – reaching more soda-sippers.

- Justin Timberlake sold his music catalog for $100m… to a Blackstone-backed management firm.

Crypto-Bytes:

- Change happens SLOWLY… then ALL at once!

- Can’t Stop, Won’t Stop, GameStop… as they launched their beta version of their non-custodial crypto wallet (able for download) – directly ahead of its NFT marketplace.

- MicroStrategy currently owns over 129,000 BTC… and their CEO said they will buy more if the price drops below $21k.

- Our FED is saying… over 12% of all adults held crypto in 2021.

- Bitcoin delivered its 8th straight week of losses… for the first time in its history amid weak macroeconomic sentiment, inflation concerns and systemic risk from within the crypto industry.

- FTX founder Sam Bankman-Fried says that he will spend… “from $100m to $1B” on Democrats running in the 2024 election. The size of this “hard money” donation would be record-breaking and put Sam in the mega-donor category.

- Andreessen Horowitz has closed on its latest $4.5B crypto fund: One third of the capital is being earmarked for seed deals.

- Luna 2.0 is launching… just weeks after their first project met a Terra-ble fate. The old chain, which has lost almost all of its value, will be renamed Tera Classic (LUNC).

- Portugal's Congress rejected 2 bills… that sought to tax crypto. The country has a 0% crypto capital gains rate – making it popular for crypto tax avoidance.

- Federal Reserve Vice Chair Lael Brainard said… a well-designed central bank digital currency (CBDC) could complement stablecoins and cash.

TW3 (That Was - The Week - That Was):

Monday: This morning the futures are bright green across the board. Traders believe that Friday was a short-term bottom, and we should be able to finally put in a multi-day rally. Unfortunately, every good opportunity for the last 3 weeks ended up being a two-day wonder and then back down we went. If this one catches on, watch: CHPT > 10.97, SLB > 41.81, DBA > 22.97, OSTK > 28.48, and OXY > 63.31.

Tuesday: Of the 98 trading days this year, yesterday was just the 13th time that the S&P 500 traded in positive territory for the entire session. This morning things are red across the board due to SNAP, FB and GOOGL. If we give back less than half of yesterday’s gains – then there’s still hope for more upside. More than half and we'll roll over pretty hard. Right now, I’m going to sit tight and try to gauge the money flow.

Wednesday: I have my eye on a possible reversal stock – Bed Bath and Beyond = BBBY. It was $30 in March, and is $8 now. It could be ready to move up.

Thursday: The DOW futures are up over 200 points, and that’s on top of yesterday's 200-point gain. Could we finally be seeing a decent bear market bounce? Remember: gasoline is still over $4.50/gal. Companies are raising prices because shipping costs are soaring. The war in Ukraine has no end in sight, and food production is crippled. I could see moving into some BBBY if it can clear $8.65. I like LAC over $26 and CDEV over $7.45. This is a classic, short-covering, low volume monster day – that could run for a few more.

Friday: The market thinks that it sees signs that the FED has done enough. It thinks that because housing is cooling – our FED can stop hiking and maybe not even start quantitative tightening. I don’t think so. I have no desire to buy anything up here. I’ll wait for Tuesday and see what happens over the weekend.

AMA (Ask Me Anything…)

What’s the big deal about ETH2? Ethereum’s smart-contract compatible blockchain powers everything from DeFi to the Bored Ape Yacht Club. Unfortunately, the tsunami of resulting traffic has bogged the network down, caused fees to soar, and has inspired a host of new competitors. That is why ETH2 is one of the most anticipated technological events in the history of crypto. Ethereum’s developers are gearing up for a series of changes not limited to vastly increased transaction speeds and much lower incremental ‘gas’ fees.

Why did BTC and ETH lose their support levels last week? The entire crypto market lost over $520m last week. ETH futures lost over $236m – nearly double the amount of BTC futures = $125m. A fundamental reason for the drop could be a lack of demand for Ethereum’s network fees.

Next Week: A Perfect Bear Market Rally.

Markets == Conflict and Chaos: Above 4211 = Bullish / Below 3931 = Bearish

- Short covering and the reading of the FED minutes – sparked a rally. This rally showed retail traders how the pros put their own spin on how many interest rate hikes our FED will give us – in order to get out of their own positions.

- Did the markets get their groove back? Not yet, but above 4211 could give us another answer. Let’s not get too carried away about a short-covering rally heading into an end-of-week / holiday weekend. FYI, on Friday we traded 5X the normal amount of S&P option contracts.

- Last week the SPX moved TWICE its Expected Move: We started the week around 3900 on the SPX, and ended it 260 points higher. The expected move was $126. During the entire 7-week slide, markets were extremely efficient, but were equally as inefficient last week to the upside.

- The LEVELS on the /ES are 3,931 and 4,211: Above the 4211 level in the SPX, we could easily trade into 4500. We are an event-driven marketplace. Tip #1: If you wish to be bullish, buy out-of-the-money call spreads. DO NOT buy long stock positions until the SPX 4211 level has been resolved.

- NVDA and COST were down after their earnings announcements, but ended up leading the market higher on Friday due to order flow. Watch them on Tuesday for further forward-looking direction.

Where is the Hedging?

- The SKEW is low, and the VIX is 26. The VVIX is 93, and that is the lowest volatility reading since the onset of COVID. Hedging activity is missing.

Positioning:

- Energy is up 55% YTD. Oil is $115/barrel while our GDP is showing continued contraction. Why isn’t the slowdown being felt in the energy sector? Tip #2: SHORT the XLE by buying In/Out July PUT Spreads.

- Trade the yield curve: Tip #3: Watch the 2-Year Note move higher than the 10-Year over the next 3-month period – as the yield curve inverts…again.

- Fade the rally using the XLF: Tip #4: SHORT the XLF by buying In/Out July PUT Spreads … AFTER the SPX resolves it’s move to 4211.

SPX Expected Move (EM):

- Last Week’s EM was $126 and we moved $260.

- Next Week’s EM = $100 over just 4 trading sessions. The S&Ps moved over $100 on Friday alone. Be careful, 4211 will act like a magnet this week, and I’m not sure it’s justified given the real economic climate out there.

Tips:

HODL’s: (Hold On for Dear Life)

- CASH == Nexo & Celsius == @ 8 to 12% yield on USDC

- PHYSICAL COMMODITIES == Gold @ $1,857 / oz. & Silver @ $22.14 / oz.

- **BitFarm (BITF = $1.84 / in at $4.12)

o Sold Dec ‘22: $5 CCs for income,

- **Bitcoin (BTC = $29,100 / in at $4,310)

- CPG (CPG = $8.82 / in at $6.44)

o Sold Jul $7.50 CCs for income,

- Energy Fuels (UUUU = $6.64 / in at $11.29),

o Sold June $8 CCs for income,

- **Ethereum (ETH = $1,790 / in at $310)

- GME – Holding

- **Grayscale Ethereum (ETHE = $11.94 / in @ $13.44)

- **Grayscale Bitcoin Trust (GBTC = $18.96 / in @ $9.41)

- Hudbay Minerals (HBM = $5.81 / in @ $5.04)

o +Bought the October 22, $7.50 CALLs,

- Uranium Royalty (UROY = $3.00 / in at $4.41)

o Sold July $5 CCs for income

** Denotes a crypto-relationship

Trade of the Week:

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Please be safe out there!

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Sunday, May 22, 2022

This Week in Barrons: May 22nd, 2022

“Stock prices could fall another 50%...” per TT:

- In 2017, the most expensive stock traded at 11.7x forward revenues. Today, that number is 22.2x.

- In 2017, the average company traded at 5.4x, compared to 7.9x today.

- So, we can easily go down another 50% and stay within precedent.

“A recession is likely, because it’s very hard to stop inflation without one,” says Larry Harris … former Chief Economist of the SEC.

“Businesses solve problems. Capitalism works, but you must Build baby Build…” per HL. There’s no other option. This time our government isn’t coming to save you, or solve your problems. We need every entrepreneur to go to work right now – solving problems and building solutions. If we don’t get that scenario, we are going to be in big trouble. Jeff Bezos, Elon Musk and Marc Andreessen all say: “It is time to build!” They couldn’t have been more right. Hopefully entrepreneurs will take the call to arms seriously. I can’t wait to see what happens when we unleash the builders on a down market.

The Market:

Per TS: “The problems with crypto are mainly regulatory, and fixed via regulatory clarity. Regulators botched the meme stock blowup by displaying real-time incompetence, internal arrogance, and the complete inability to make-a-decision. Hey crypto – sound familiar? Even decentralization in its purest form needs some sort of industry validation and transaction integrity – in order to operate with trust. I can’t open an option, futures, stock, or even gambling exchange without regulatory approval. But I can launch a crypto exchange tomorrow.” I believe that the lack of liquidity in both markets is about to catch up with us. The FED PUT that provided a safety net and allowed, rewarded and increased the velocity of money – is no longer available. I believe that stock and crypto prices are headed lower – maybe a lot lower. But that’s not a sell signal as much a challenge and trading philosophy that people need to understand and actively practice. However, I will be pissed if Matt Damon and Tom Brady make more from shilling crypto on TV than I make from my passive buy-n-hold positions. Please = trade small and learn how to sell.

InfoBits:

- Goldman Sachs cut its EOY S&P target… to 4,300, and down to 3,600 if/when there is a recession.

- FED Head Loretta Mester warned… of negative growth for the next several quarters (defined as a Recession), but was careful not to use the ‘R-word’.

- In 67% of developed countries, college costs less than $2k/yr.: US private colleges cost $38k/yr. (avg.). In the past 2 years, US college enrollment has dipped 7% as more students choose to “earn over learn.”

- McDonald’s is pulling out of Russia: They will sell all 850 restaurants to a local buyer, who will no longer use the McDonald’s name, logo, or branding.

- JetBlue will now attempt… a hostile takeover of Spirit Airways.

- May’s Empire State Mfr. Survey… showed a contraction in business activity.

- Former FED chair Bernanke is concerned about stagflation in the U.S. That’s where the economy stalls, unemployment rises, and inflation stays high.

- If you control eyeballs, you have ad-tention: Whether it’s Kroger / Walgreens replacing your fridge doors with digital screens, or Marriott selling you rental cars in your hotel room. There’s a $500B ad market out there that is ripe for a change.

- Last quarter was Berkshire’s largest stock buy ($42B) since 2008: They bought: Apple, Citigroup, HP, Paramount, Activision Blizzard, and Ally Bank.

- Walmart and Target both missed earnings and guided lower… I’m beginning to doubt the health of our consumer.

- Mortgage Applications were down -11%... purchases off -11.9%, and Refis fell -9.5%. Another housing bubble is starting to burst.

- The summer of Americans hitting the travel road… will need to overcome the highest gasoline prices…EVER:

- INTC’s shareholders voted down CEO Gelsinger’s $178m pay package… I’m guessing slowing growth and lower share prices aren’t big winners. The same can be said for JPM shareholders voting down J. Dimon’s $50m bonus.

- Y Combinator has advised its founders to "plan for the economic worst."

- Klarna, a buy-now-pay-later company… is looking to raise new funds that could value the fintech giant at over 30% LESS than their previous valuation. Public shares of their competitor Affirm are down 75% YTD.

- Amazon proclaimed that it will be… more focused on technologies that affect the real world, rather than on the metaverse going forward.

- Delinquencies on subprime car loans / leases… hit a record in February.

- Melvin Capital, the hedge fund at the center of the GameStop saga… is closing its doors. They were down 39% in 2021, and down another 23% YTD.

Crypto-Bytes:

- The number of Bitcoin wallets in the red… and the number of Bitcoin longs – both just hit all-time highs.

- India’s top central bank officials… feel that cryptocurrencies have the potential to become a replacement for the rupee in financial transactions. This could undermine their ability to regulate the flow of money.

- Nigeria’s new securities rule book… is looking to give clarity on crypto’s role in their economy.

- Boost Mobile’s new cellphone plan… will let you play games and earn blockchain-based "BoostCoins" to pay down your bill.

- Despite a nationwide crackdown… Chinese miners contributed about 21% of all crypto’s total hash power… second only to the US’s 37%.

- SEC Chairman Gay Gensler begged for a higher budget to take on crypto… using the UST token collapse as his ammunition.

- Galaxy Digital CEO Mike Novogratz confirmed… that his famous LUNA tattoo, “will be a constant reminder that venture investing requires humility.”

- Chainalysis is launching ‘Storyline’… an on-chain visualization tool that aims to help investigators “follow the money” in crypto crimes.

- Crypto exchange FTX is diversifying… it will let customers trade stocks and ETFs on its popular trading app alongside bitcoin and other crypto.

- Coinbase is pausing new business projects… freezing hiring, and slashing its cloud spending on Amazon Web Services.

- Shopify (SHOP) is expanding its crypto payment options… by adding Crypto.com to its list of tech providers.

- The U.S. Dept. of Commerce is requesting public comments… on how to best ensure our country’s competitiveness in digital assets. It’s a complicated task for governments due to the technology’s ability to challenge their authority.

TW3 (That Was - The Week - That Was):

Monday: We have fallen a long way in a short period of time, so some claw back higher makes sense. Just don't buy into the hype that ‘the bottom’ is in. I believe ‘A bottom’ may be in, but not ‘THE bottom’.

Tuesday: What’s up with today's big futures? Home Depot hit a home run on earnings and even guided higher. However, Walmart missed earnings and lowered guidance. The other story is that China appears close to opening up some more of their locked down regions, and may even be "unlocking" some internet sites. The bottom line however is that we've been looking for a bear market bounce since last Monday, and maybe it is finally here. In MRO and DBA (‘agriculture’ ETF), breakouts are forming so we’ll need to watch those. Now, DBA is not a fast mover, but it is moving in the right direction. After being up almost 300, the DOW faded off and is now only +148. You can see people ‘selling the rally’. I’ll take MRO over $28.65 and DBA over $22.50 if either make it to their buy-ins. Usually bear market bounces are real screamers. This one is more like a whimper.

Wednesday: This morning is a pretty good show of why you don’t get too excited about one or two ‘up’ days. Even yesterday, the volume across the entire stock market was down 9% from the norm. So, not everyone was on board with the bounce. I like the chart of CHPT if things warm up, but right now we’ve given back all of yesterday. This particular bear market is mean. The DOW was off 1077 the last I looked. In times past, our FED would be out in force talking about how they won't be as aggressive as people fear, and basically saving the market. Not this time. Powell has stated that he's gunning for lowering inflation. He can't do a darned thing about supply issues, but he can target demand. He knows that if/when this market puts in a really meaningful drop – inflation will fall. People spend much less when their 401K's get creamed and their individual portfolio's get slaughtered. I'm not surprised that our FED isn’t rushing to the rescue. I am surprised that this market can't even mount a decent counter trend bounce. It looks like they're willing to test the May 12th low, and I’m not up for trying to catch a falling knife.

Thursday: They're trying like mad to make a stand here today, but I do NOT think the selling is over. I’m still in the hunt for my bear market rally. The DOW was down over 300 for most of the day, and is now off just 100. The NASDAQ is up 62, and the S&P is fighting for green. Watch OSTK over $28.50 and CHPT over $11.

Friday: The futures this morning are bright green across the board. Is it possible that this is the bear market bounce I've been looking for? Nope – oh well. I put on a couple PUT spreads on the SPY and FXI – so we’ll see how those work out.

AMA (Ask Me Anything…)

Q: Will entrepreneurs have to change the way they think?

A: YES. The entire ‘Get Big Fast’ / ‘Build Back Better’ thought process will need a reboot closer to the days of earnings and fundamentals. I’ve heard of more term sheets being pulled in the last month – than I have in the last decade. To me that says: (a) there was too much money sloshing around in the hands of newbie investors, and (b) thousands of companies were funded that will need to work off their rich, over-valuations. RR said it best: “In almost no scenario will the inflated private valuations hold. Those gigantic valuations were modeled on the assumptions of strong growth and zero rates – and both of those ideas are dead in the water.” Honestly, there’s always money available for good, sound investments. BUT, if a startup needs to raise without a strong free-cash-flow / profitability matrix behind it – the road will be longer and a lot more painful.

Q: What should I buy in a bear market?

A: Cash (by far) is ‘personally’ my largest position. I’m only buying the indexes and defensive commodities such as: gold, silver and copper. One of the characteristics of a bear market is a very high correlation between stocks – regardless of their current or expected fundamentals. When you are below the 200-day moving average (as we are), I trust the indices over individual stocks. Whenever we rejoin the days of growth stocks breaking higher, that is when I will return to stock picking. In the meantime, I’m focused on using the indexes for market exposure and for liquidity.

Next Week: On the Verge of a Crisis

Market Overview:

- Oversold has become a cliché: The S&Ps have gone straight down for 50 days, and on Friday ended exactly on the lower edge of their expected move. Every short-covering rally is being met with money managers and institutions selling into that rally. We are missing people putting new money to work. Money managers are fighting for their jobs – because when their quarterly reports come out (July) – clients will realize that they don’t have to pay someone to lose their own money. Self-preservation is finally at stake here.

- YTD recap of major sectors: SPY = -18.6%, QQQ = -28.5%, XLF (financials) = -17%, vs XLE (energy) = +42% - which is holding the entire S&P 500 up. Even Apple (AAPL) is down -24.4% YTD, and (along with the rest of mega-tech) could get substantially weaker.

“Give me liquidity, or give me death…”

- Liquidity is non-existent in many products: The bids / asks associated with the S&P futures have been incredibly thin. Nobody wants to make a tight market out of an incredibly volatile one.

- Indices are seeing a concentration of liquidity: Liquidity is concentrated into the major indices rather than individual stocks. Tip #1 = If you’re going to trade – trade small and trade the major indexes. The volume we’re seeing is in response to directional risk being taken in a particular major index product.

“Bonds are being: Bid, Back Better…”

- Bonds and the Dollar are both catching a Bid… and are being used as a hedge. The major players are concentrating their liquidity into the major index products, Bonds and the Dollar.

“We don’t need no stinkin’ BOTTOM…”

- Volatility is just wrong: On Friday the S&Ps broke down to 3807, and the volatility index (VIX) barely responded. We should be seeing a VIX of 45, but we’re barely scratching 30 (29.6). Traders are still taking inordinate amounts of risk.

“ABC’s = Always Be Closing = Sell…Sell…Sell”

- Forget about a BOTTOM: Tip #2 = SELL PREMIUM to survive, or buy inexpensive PUTS in elevated sectors as a hedge.

SPX Expected Move (EM):

- Last Week’s EM = $133… we touched it – to the penny.

- Next Week’s EM = $126… tells me we are not close to a bottom as this market is becoming incredibly efficient to the downside. Markets are on the verge of a much larger crisis that starts with a lack of liquidity and ends with a lack of clarity. Tip #3 = The only way to stay alive is to hedge your positions.

Tips:

If this bear market resembles those in the past, we should see one to two-month long rallies that dissolve into lower market moves. We’re not seeing that…yet. This is a different bear market. Per FW: “I suspect we are either in a recession right now or headed toward one - brought on by tightening our money supply and increasing rates to control inflation. This recession could easily last until the end of 2023. Recessions end when economies and inflation slow down – and when stocks ‘hang-out’ at a bottom for extended periods of time. None of this happens quickly.”

HODL’s: (Hold On for Dear Life)

- CASH == Nexo & Celsius == @ 8 to 12% yield

- PHYSICAL COMMODITIES == Gold @ $1,845 / oz. & Silver @ $21.76 / oz.

- **BitFarm (BITF = $1.82 / in at $4.12)

o Sold Dec ‘22: $5 CCs for income,

- **Bitcoin (BTC = $30,500 / in at $4,310)

- CPG (CPG = $7.58 / in at $6.44)

o Sold Jul $7.50 CCs for income,

- Energy Fuels (UUUU = $6.06 / in at $11.29),

o Sold June $8 CCs for income,

- **Ethereum (ETH = $2,050 / in at $310)

- Chinese LG-CAP ETF (FXI = $30.42 / in @ $30.35)

o Bought the June 17, $29 PUTs,