RF's Financial News

Sunday, August 20, 2017

This Week in Barrons - 8-20-2017

This Week in Barrons – 8-20-2017:

“Toto, I’ve a feeling we’re not in Kansas anymore” … Dorothy – Wizard of Oz.

What if Bitcoin is the next Global Currency?

In the movie The Wizard of Oz, the all-powerful Oz turned out to be just a man behind a curtain, who used smoke and mirrors to accomplish his goals. What if our government is the wizard, and bitcoin is the next global reserve currency? After all, since bitcoin’s inception, the concept of using block-chain technology to digitally track money-flow has exploded. I previously thought a global reset would be accomplished using Special Drawing Rights (SDRs), but what if the SDR is a ‘diversion’ while bitcoin (or any of the over 200 different crypto-currencies) is the real deal. Let me back up.

SDRs were created by the International Monetary Fund (IMF) in 1969 as a supplementary, international bank of reserved assets. Every country participating in the Bretton Woods agreement was required to maintain official reserves of gold and widely accepted assets in order to maintain their own currency exchange rate. But on occasions such as the 2000 Internet bubble and the 2009 financial crisis, SDRs were doled out to provide liquidity and to supplement a member countries' official reserves.

Inside the SDR you have the: U.S. Dollar, British Pound, Japanese Yen, the Euro, and most recently the Chinese Yuan. I originally thought that the U.S. dollar would be replaced as the global reserve currency as part of a ‘global financial reset’ – and the SDR concept would be put in its place. But what if the global financial reset is larger and more complex than originally thought? What if it’s impossible for the IMF to accurately calculate each nation’s net worth? The original concept had task the IMF with calculating the value of a nation by combining their physical assets (lumber, oil, minerals, crops, technology etc.) with their existing worth (citizens and reserves) in order to arrive at a total value for the nation. This ending valuation would then be used to give everyone a percentage of a new global currency. Recently, I've been receiving hints that this valuation can be more accurately arrived at using current crypto-currency & block chain technology. Instead of estimating mineral reserves and guessing at intellectual property (IP) – block chain technology can be used to obtain a more complete digital, map of the money-flow. This could then lead to a more accurate (and dynamic) valuation of a country and its global standing.

A digital project such as this is beginning near Dallas, Texas. A Chinese land developer has purchased 900 acres, and has started to build homes. The digital community has been formed, the $50m ICO (Initial Coin Offering) launched, no U.S. citizens are involved, and all of the residents have agreed to use only the crypto-currency to run their lives. This will allow the community to be valued down to the individual level. The digital tokens have been created – and the process of monitoring transactions, and valuing everyone’s personal property, transactions, and IP has begun. Every transaction will be implemented using the digital currency in order to get a true valuation of each and every individual. If/when they can show meaningful results, then the IMF can come out from behind the curtain and introduce this new digital way of life to the world.

To recap:

- The IMF would like a digital reserve currency that would allow every nation to be dynamically valued.

- At that point, every nation’s value and individual citizen’s worth could be converted into tokens that could be used for trading as well as purchasing goods and services.

Once accomplished, what would be the value of THAT digital currency (call it bitcoin for the time being)? Fundstrat Global Advisors is predicting that a digital currency will hit $6,000/coin by the middle of next year, and $25,000/coin by 2022. They arrived at their valuation using Metcalf’s Law – which values a network according to the square of the number of its users. FundStrat back-tested their model and can accurately explain 94% of bitcoin’s price movement over the past 5 years using this calculation.

Standpoint's Ronnie Moas most recently raised his bitcoin valuation to $7,500/coin by trying not only to account for the number of individuals within a network, but also the extent to which the individuals use the digital currency. His 2027 estimate for bitcoin is $50,000/coin, and says: “You can't look at this as a normal situation. We're in an industry that will grow from $140B to $2T and the individual bitcoin price will move with it. We’re at the same point in the adoption curve as we were in 1995 when we went from 1m to 10m Internet users. The following year the Netscape browser came online, and we went from 10m users to hundreds of millions of users overnight.”

The U.S. Government continues to support the crypto environment by auctioning off hundreds of thousands of bitcoins seized from people breaking the law. The most high-profile example came in October 2013, when the FBI raided the online marketplace Silk Road. Those specific confiscated bitcoins were auctioned off, and some winners of the auctions are:

- Venture Capitalist Tim Draper – who on June 30, 2014 bought 30,000 bitcoins for $647 per coin, and today is looking at a profit of $115m.

- Second Market’s Barry Silbert (who currently runs the Bitcoin Investment Trust) – who on December 9, 2014 purchased 48,000 bitcoins for $378 per coin and today is sitting on a profit of $197m.

The tide is turning toward crypto-currencies and governments could be behind the shift. Japan recently approved bitcoin as a legal payment method. Russia’s largest online retailer (Ulmart) is now accepting bitcoin, even though Russia won’t explore the cryptocurrency until 2018. And in the U.S., there is speculation that the SEC could overturn its rejection of the Winklevoss twins' bitcoin exchange-traded fund.

I realize that I’ve gone on a little long about bitcoin, it’s positioning as a potential SDR, and its continued acceptance. But when comparing it with our manipulated and over-extended stock market – I’d say almost exactly what Dorothy said: “Follow the digital yellow brick road.”

The Markets: Factually this week:- The Russell 2000 Small Cap Index continued its downtrend slide, and for the first time since June 29, 2016 – fell below its 200-day moving average and turned negative for the year.- The relationship between the S&P 500 index (SPX) and Germany’s DAX broke down. Jonathan Krinsky of MKM Partners, points out: “There have only been five other occurrences of this in the last twenty years, and 4 of the 5-preceded medium to large market pullbacks.”- Wall Street’s volatility guide (VIX) moved above its 200-day moving average. This fear indicator is often seen as a measure for near-term market drops.- Gold jumped back above $1,300 per ounce for the first time since the Presidential election. This was influenced by a weaker dollar, diminished expectations for a FED rate hike in 2017, and an indication that investors are hedging their bets against a further slide in equities.- The Dow Jones Transportation average (DJT) continued to trend lower. This is viewed as a sign of overall market weakness because companies that move goods and services should be moving higher along with the broader market. When they don’t, that’s a bearish signal, and one that often previews a broader market fall.- Last week a greater number of stocks hit 52-week lows than 52-week highs – which is something the market hasn’t seen since July 2015. Combine this with down-volume dramatically exceeding up-volume, and it’s a recipe for continued market weakness.- And perhaps the biggest signal that the market may face pressure going forward is the inactivity surrounding the Trump agenda. Not because of the recent rhetoric, but because his infrastructure plan and tax cuts appear to be in jeopardy.

For the S&P index, a combined series of lower highs and lower lows, a break in the downward trend line, and an uptick in volume and breadth – all point to an ominous week ahead of us. This is the first time in a long time (see chart above) that I’ve seen a complete S&P sell-off into the close – with all 100 S&P stocks being down on the day. This is what it looks like when investors want out of their positions – at any cost. The only place to ‘hide’ was in bonds, gold and volatility.

Last week we saw the volatility index (see above) explode above the 110 level once again. Buying volatility (UVXY) is a method of hedging that the pros use, leaving only the retail investor to weather the downward storm.

The financials last week (as characterized by the XLF pictured above) had their most substantial down day in recent memory. Any bounce at this point is going to be sold into. Look for gold to continue its uptrend, the U.S. Dollar to continue moving sideways to down, and U.S. Treasuries to continue climbing higher. Volatility looks to move higher, and off of its abnormally low levels of the spring and early summer. This coming Thursday will be the annual get-together of top central bankers including U.S. Federal Reserve Chair Janet Yellen and European Central Bank Head Mario Draghi in Jackson Hole, Wyoming. Policymakers are expected to deliberate on why the Phillips Curve (the rule that correlates lower unemployment to higher inflation) isn't working as it should.

And finally, buckle up – because the latest rendition of the U.S. Treasury running out of money is about to play out all over again. The curtain goes up on September 29^th, and in the 2017 production – President Trump is playing a lead role with his quote: “The Federal Government needs a good shutdown.” The 2011 production brought down the house – after a nasty showdown led to an unprecedented credit-rating downgrade for U.S. Treasury debt. That curtain-call cost the U.S. taxpayers an extra $1.3B in higher borrowing costs, and coincided with the last 20% stock market correction. With Congress not coming back to work until after Labor Day, that only gives them three weeks to work out a deal and pass a bill. Undoubtedly, Congress and the White House will figure out a way to kick the can further down the road, but the ultimate day of reckoning is fast-approaching.

By the way, in terms of the solar eclipse on the 21^st - please play it safe. If you don't have proper glasses, or at least a #12 welding hood – don’t risk even 30 seconds of looking at the sun. Instead, get a pair of binoculars, and point the big end at the sun, and focus the small ends above a sheet of paper. You'll be able to watch the entire thing on that piece of paper with no ill effects.

Tips:

The DOW put in a high on August 7^th of 22,118, and then fell back about 275 points to 21,843. It then rallied up to 22,024 (a lower high), and fell back to 21,674. If we bounce on Monday and don't make it over 22,024 before falling back again – we would be in a repeating ‘stair step’ lower pattern of lower highs and lower lows. Such a pattern could get us down to 21,500 and potentially 21,200 before finding support on the DOW. I’m looking for a ‘dead cat bounce’ on Monday, and then rolling over and heading lower the remainder of the week.

The financial ETF (XLF) is only up 4.7% year-to-date (YTD), and is losing support by the day. The S&P is still up 7.7%, but is getting its strength from the FAANG stocks that are still up 18% YTD. The Russell Small Cap Index (IWM) is now down 0.4% for the year, and is just shy of entering corrective territory. The retailers (XRT) are in correction mode as they are down 13.79% YTD. The DOW transports (IYT) have come down 8% in the past couple of months and are now flat on the year. If the FAANG stocks begin to drift lower, they could fall quickly and hard – and take the rest of the market with them.

The level on the S&P (SPX) that the bulls need to reclaim is 2,438. If the SPX can’t reclaim 2,438, then we will see 2,411 and 2,400 after that. If we remain between 2,438 and 2,411, the markets will behave themselves. If we go below 2,411, institutions will start to sell hard and fast.

Recommendations:

Bullish Plays:

- Bitcoin Investment Trust (GBTC) – also buy Ethereum & Litecoin

- Paypal (PYPL) – Sell Sept 15^th Put Credit Spread +57.5 / -60

- EOG Resources (EOG) – Sell Aug 25^th Put Credit Spread +80 / -82

- Jr. Miners (JNUG) – Sell Aug 25^th Put Credit Spread +15.5 / -17

- YY Systems (YY) – Sell Aug 25^th Put Credit Spread +69 / -71

- Weibo Corp (WB) – Sell Aug 25^th Put Credit Spread +85 / -87

- Shopify (SHOP) – Sell Aug 25^th Put Credit Spread +90 / -92

Bearish Plays:

- Amazon (AMZN) – Buy Sept 15^th Put B-Fly +940 / -920 / +900

- Netflix (NFLX) – Buy Aug 25^th Put B-Fly +170 / - 165 / +160

- S&P Short Futures (SVXY) – Buying Puts

- Volatility Index (UVXY) – Buying Calls

To 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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Sunday, August 13, 2017

This Week in Barrons - 8-13-2017

This Week in Barrons – 8-13-2017:

“What’s coming is a big, self-driving truck that will run over this economy.” … Antonio Garcia Martinez – former Facebook Exec.

Thoughts:

The key is to embrace the right disruption early – after all, you can’t fight innovation. Sounds easy, but the issue is that disruption shows itself in many forms with many false positives. Just the other day I went for a walk through my local mall. As I walked around Macy’s everywhere I looked there were signs saying: "Everything must go…40 - 60% Off." As I made my way around the 100+ unit mall, I saw: closed stores, discount stores, and no people. Don't get me wrong, this place is not an old, dumpy mall. One store that I walked into had just a few lights on and no air conditioning. The icing on the cake was seeing that a plastic-surgery facility had opened up next to the Food Court. Is this the Amazon effect? I don't think so.

E-commerce accounted for 11.7% of total retail sales in 2016 – up 15.6% over 2015. So, if on-line is just 12% of retail, what happened to the mall? I think people simply have less money to spend – which coincides with credit card debit hitting an all-time high last week. Add to that: car sales puking, 3,300 retail stores being closed, malls looking like downtown Detroit, and a stock market closing near its all-time highs – this simply reinforces the fact that the retail buyer is not out there putting their cash to work in the market. It’s our Central Banks printing money, buying stocks, keeping rates technically negative – that have kept this market elevated.

What bothers me is not that our Central Banksters are doing this, or even the rampant fraud and manipulation, what bothers me is that our current financial media personalities are not calling them out on it. Imagine the talking heads saying: “Today’s market is up despite a bad jobs report that showed us creating 395k part-time while losing 54k full time jobs, or despite corporate earnings – which are actually 5% lower than they were in 2015. It’s up because of our Central Banksters and the Swiss National Bank (SNB) that now owns $84.4B of our stock market. In December, the SNB owned $63B in U.S. stocks. In March, they owned $80.3B, and in June $84.4B. The SNB invested $17B in Q1, but only $4B in Q2 – tapering their buying by 80%. Does this ‘tapering’ mean that they won’t continue jamming this market higher? Imagine if the ECB stopped their 103.4B purchasing of corporate bonds?” A narrative like that from our ‘talking heads’ would be insightful. Unfortunately, what we have is simply reminiscent of financial insight from 1999 - remember:

- David Kathman saying: "Just by looking at the financial numbers, you wouldn't think that GeoCities was worth $5B.” http://news.morningstar.com/articlenet/article.aspx?id=1106

- James Glassman & Kevin Hassett writing in Sept. 1999: "Stock prices could double, triple, or even quadruple tomorrow and still not be too high."

https://www.theatlantic.com/magazine/archive/1999/09/dow-36-000/306249/

- David Kleinbard saying in 2000: “Terra Networks Buys Lycos for $12.5B” http://money.cnn.com/2000/05/16/europe/terra/ AND said again in 2004: “Daum Communications Buys Lycos for Pennies at $95m.”

- And then there were Jim Cramer’s winning picks in Feb. 2000: “You want winners – okay – write ‘em down.” He then proceeded to produce a list completely void of winners – which was tough to do even back then.

o Ariba (ARBA) = now out of business,

o China Herb Group (ISLD) = now out of business,

o Exodus Communications (EXDS) = now out of business,

o 724 Solutions (SVNX) = now out of business,

o Inktomi Corp. (INKT) = now out of business,

o Virtus Investment Partners (VRTS) = now down by 80%,

o Surna (SNRA) = now trading for $0.12,

o Mercury Interactive (MERQ) = now out of business, and

o Inspirit Energy Holdings (INSP) – now trading at $0.16.

As you can see, disruptors are as tough to spot today as they were in 1999. But what’s different this time is that these same experts KNOW what they’re saying is bogus because they’ve seen the movie before. But they just continue to play the same old game. It then becomes our job to (a) recognize disruption (i.e. the Tesla electric / autonomous truck), (b) understand the advantages (less fuel & wages), and (c) figure out the cascading dominos (millions of unemployed drivers & more re-charging stations). You need to take it upon yourself to analyze the situation – because it’s neither their job nor their agenda.

The Market:

Well, the markets couldn’t pull off 10 consecutive ‘UP’ days. They probably came up short due to the escalating tensions between the U.S. and North Korea. Specifically, President Trump’s words saying that N.K. has to stop their threats, or N.K. will see ‘fire and fury’ like never before. That statement moved gold and bitcoin higher, and stocks lower. The discussion going on in the Pentagon right now is: Do we go in with conventional weapons, take out his nuke's, and his government – or do we leave it all alone, and wait until he’s a true threat to LA?

I think China summed it up best when they said: “Don't go in first". That is to say, if N.K. fires on a U.S. installation such as Guam, China won't get involved. But, if we start something militarily, they will be forced to step in and defend N.K. FYI, one element that hasn't gotten much press is that N.K. has told the U.S. that they are willing to talk about putting their nuclear program on hold, if the U.S. and South Korea stop their joint military actions. We have refused to stop.

I have to think that over this weekend calmer heads will prevail and the U.S. and N.K. will continue talking. With that, our market could be in for a sharp rise on Monday. The first job for the markets will be reclaiming the S&P’s 50-day moving average – with decent volume.

Eric Peters of One River Asset Management sees a major shift coming and writes: “All previous periods of extreme asset valuation required investors to imagine a vastly different tomorrow – a wildly optimistic future. But today, they expect the opposite. Due to unfavorable demographics and over-indebtedness, investors expect yields to remain flat forever, interest rates low into perpetuity, and inflation to be non-existent. They are using these low rates to justify extreme valuations across other asset classes – causing a disconnect with the real economy. Basically, they want tomorrow to look EXACTLY like today. Bond yields can’t rise – despite every major central bank looking to hike interest rates and exit QE. They expect governments to tolerate historically high levels of income inequality – despite their citizens voting for the opposite. And they expect rising global debts will somehow be supported by declining global growth.” Eric sees a historic reversal, and is getting long volatility.

One way to take advantage of increasing volatility is to buy the UVXY, and another is to buy bitcoin. Bitcoin and other crypto currencies have had some of their best rallies when viewed as a flight to quality. This weekend bitcoin (BTC) made another record by smashing through the $4,100 level. Crypto has tripled in value – year-over-year. As MCC said: “You don’t buy bitcoin (BTC) to make 20% or 30%, you’re not hoping to see BTC go to $5k or even $10k, you’re waiting for BTC to make it to $100k or $500k – so that the risk matches the reward.” If we see additional market adoption of bitcoin, you will see prices in the $100k to $500k range. I would recommend you visit www.coinbase.com and open a bitcoin account. Use www.gdax.com to manage that account, and watch https://www.youtube.com/watch?v=lcCIjIAqM-4 to eliminate all BTC fees.

Crypto currencies are seeing user growth continue to outpace government regulation. They are seeing technical and toolkit advancement (charting, buying & selling spreads, and options) continue to outpace user growth. And are looking for validation (maybe a Russian volumetric block chain test) before going mainstream.

MCC goes on to explain that the crypto-community is run by nerds – who’s reputations are built on code releases. Everyone knows (for the most part) who is working on what and when it will be released. Www.coinbase.com and www.gemini.com are the two most reputable exchanges because they adhere to governmental regulations, and operate within similar arenas as Fidelity or Vanguard. Currently, crypto-networks will not support 300m people making daily transactions, and that’s where off-chain vs on-chain scalability arguments take shape.

Investing in crypto reminds me of those early ‘Internet’ years, and requires that you pick the right disruptor. There is a clear separation between money being thrown blindly at a crypto-dartboard, and investors armed with understanding and the ability to ‘get-er-done’. Some crypto products that I’ll be discussing over the next several weeks and months will be: distributed exchanges (idex), cryptographically verifiable hedge funds (iconomi), untraceable transactions with 0-knowledge proofs (zcash), micro-transactions for browser-advertising (bat), verifiable fair gambling (funfair), file storage reduction services (storj), and distributed computing (golem) – to name a few.

Tips:

When I look at a chart of Bitcoin and see the damage that was done in the market last week, I can only conclude that the world is bullish on bitcoin. A 77% month-over-month growth rate is nothing to sneeze about. And when I look at what’s in front of our markets – North Korea is not the biggest hurdle this market has to climb. After all:

- August is historically the most volatile month, but Sept. and Oct. aren’t great either.

- Margin debt is at historically high levels. If volatility persists, margin calls will begin and selling will beget more selling.

- Market internals are crumbing, with the number of stocks making new lows dwarfing the number making new highs.

- Over th e past 100 years, a year ending in the number ‘7’ has always had a bad late summer and fall.

- And on August 1^st, the DOW Transports began to flash a ‘red’ sell signal.

Global financials (based upon the following chart) are also in a precarious position. Either European junk bonds need to fetch a higher return (which will be difficult given the current negative interest rate climate in Europe), or U.S. Treasuries need to decline in rates (which will be difficult given our FED’s higher interest rate trajectory).

Heading into August options expiration week, the equity markets are showing signs of tiring, especially the small cap index (IWM). Look for Gold and Bitcoin to continue higher while oil consolidates at resistance. Year-to-date the S&P (SPX) is up 8%, the NASDAQ (QQQ) is up 19%, and the Small Caps (IWM) are up 0.7%. The financial sector (XLF) lost 4% last week – leaving it up only 5% for the year. The financials (XLF) and energy (XLE – down 16% for the year) are taking their toll on the overall S&P performance.

Last week we ‘cracked’ outside the expected move on the S&P (SPX) to the downside. This coming week the levels on the SPX are 2483 on the high side, and 2400 on the low side. Consider 2438 as an inflection point. If we begin to move above that level, we should quickly explode to 2450. However, moving below 2438 would lead us very quickly down to 2411 – and cracking below 2400 would cause things get crazy.

If you’re going to sell volatility this coming week, do it in the VVIX or by buying the UVXY. The VVIX options are into their 87^th percentile – so that is clearly the place to sell volatility premium. Some other reasons to play a bounce next week:

- #1 The Put / Call ratio is extremely elevated

- #2 We have had 2 closes outside the Bollinger Bands, and that tells me we are due to revert back to the mean.

- #3 The Russell has come down into its 200-day Moving Average – which tells me that this ‘flush’ has found support.

- #4 And the Yen – when reviewing time and price, should begin to fall and correspondingly move our markets higher.

Recommendations:

- Apple (AAPL) – Buy the Sept 8^th 160 (+1) / 162.5 (-3) / 165 (+2) unbalanced Butterfly for a Credit of $0.76. This has you risking $174 to make $300 with a 73% probability of winning the trade. AND if Apple completely ‘tanks’ – you get to keep the $76 credit.

- Global Bitcoin Fund (GBTC) – Bullish – buy the shares,

- Alibaba (BABA) – Bullish by selling a Put Credit Spread,

- McDonalds (MCD) – Bullish for a run into $165,

- Nvidia (NVDA) – Bullish and looking for support around $150,

- NetFlix (NFLX) – Looking for a Pin around $175,

- Goldman (GS) – Looking for a Pin around $225,

- Simon Prop Gr (SPG) – Looking for a Pin around $160.