This Week in Barrons – 11-26-2017:
“Is this the last Black Friday sale…ever?”
A recent survey by the National Retail
Federation found that 59% of shoppers plan to shop online this year. That would make 2017 the first year that online
shopping was the most popular choice. Robert Schultz (S&P’s chief retail sector
credit analyst) said: "This year the
holiday season is more important than ever for stores like Wal-Mart and Target –
because they are struggling to stay relevant.” A record number of store closures (6,735)
have already been announced this year, and over 620 retail bankruptcies. That's more than triple the tally for 2016. Prominent names such as Toys R Us,
Gymboree, Payless Shoes, and RadioShack have all filed this year,
and Sears (which owns both the iconic Sears and Kmart chains) has said
that there is “substantial doubt” it
can remain in business. Even if all the troubled retail brands make it to
the 2018 holiday season, there's a good chance many of their stores won't. “Store
closings will rise next year to about 9,000 as retailers shift their investment
to online”, says Michael Dart, author of Retail's Seismic Shift. "Even those retailers who have survived
reasonably well are rationing their cost structure and closing stores,"
he said. Factually this retail apocalypse is happening with a strong
economy. If the economy encounters even
a minor bump in the road, things could quickly go from bad to worse for struggling
retailers. Any kind of economic downturn or an uptick in interest rates,
and their debt becomes unsustainable.
So maybe we need to start
analyzing retail stocks thru a prism of cultural change? Amazon is preaching a new
calculus to corporate boardrooms – where profits are ‘so yesterday’. Maybe it’s all about vision and great
storytelling. After all, Amazon (despite
posting just a handful of profitable quarters in its 20-year history) is the
fourth-largest public company in the world.
And now, maybe it’s time for all the others to change their game. NYU business professor Scott Galloway argues
that Jeff Bezos (the founder of Amazon) has created a playing field so tilted
in his company’s favor – others really don’t stand a chance. “Jeff’s ability to paint an extraordinary
vision and register steady progress against that vision is being rewarded with
the cheapest capital in the history of business,” says Galloway. And it’s that steady flow of cheap capital that
has allowed Amazon to do a bunch of extraordinary things that would have doomed
most companies. It allowed it to start: a
cloud-computing business, a movie studio, a consumer electronics business, a shipping
company (road, sea and air), a battery company, and now a clothing company.
Bezos recently told shareholders that the
goal is to “experiment patiently, accept
failures, plant seeds, protect saplings, and double down when you see customer
delight.” It’s clearly working, and other companies (that don’t
compete directly with Amazon) are starting to get the same leeway. Amazon (since its IPO) is up almost
52,000%. $10,000 invested in Amazon when
it IPO’d would be worth $5.2m today. If you’re cut from the fundamental
cloth, then all I can say is that you don’t have to like Amazon’s new rule set for
retail – to buy its stock on $50 to $100 pullbacks.
As well as Amazon plays the game with
‘vision’, Palo Alto Networks (PANW) plays the game with accounting. Last week PANW released earnings to which
Wall Street went nuts – the stock gaining over $10 / share. Yet, if you look at their actual income
statement, you will find creativity at its finest. Using GAAP (Generally Accepted Accounting Principles) – which is the legal way of doing the
books and paying taxes, PANW lost $0.64 / share. But instead, PANW
released a non-GAAP pro-forma earnings statement showing that they ‘magically’ MADE
money at the rate of $0.74 / share. How
long can this chicanery go on? As long as
Wall Street allows it.
Take Tesla – or as
MJP put it: “The world’s largest ‘KickStarter’
campaign.” It’s burning through cash at the rate of
$8,000 a minute / $4B per year as it tries to ramp up Model 3 production. If that spending spree continues, the company
will exhaust its current cash on Monday, Aug. 6, 2018 at 2:17 a.m. Eastern Time. Tesla
is already utilizing more of its revolving credit facilities than ever before. And the bond market is not likely to alleviate
its financial position as investors who bought $1.8B of Tesla bonds 3
months ago remain underwater.
And then there’s Uber. Just imagine the movie about its growth and
demise. If I were Uber’s new CEO, I
would be so jealous of Meg Whitman moving on from running HP. After all, New York's attorney general just
launched another investigation into Uber as it was discovered that 57m Uber
users and drivers had their personal info hacked last year. And to add insult to injury, the company's
employees paid the hackers $100,000 to keep it a secret and delete the
data. Hackers gained access to
usernames, names, driver’s license numbers and mobile phone numbers. The
hack occurred in 2016, and the company has hidden the information from the
public until now. According to Uber: "At the time of the incident,
we took immediate steps to secure the data and shut down further unauthorized
access by the individuals.” But where’s the turnaround at Uber? Last summer, the appointment of a new
CEO was supposed to mark the beginning of a new chapter, but we keep finding
more horror stories at every turn. Combine this with sexual misconduct
and them being stripped of their license to operate in London due to the lack
of corporate responsibility – and I’m beginning to think that Uber ain’t gonna make it.
The early returns for Black Friday weekend are
good, and are expected to exceed those of 2016. According to Customer Growth Partners (a shopper
traffic monitoring group) store crowds in many locations around the country
were reported to be strong. The
economic environment appears to be in solid territory due to a strong labor
market, lower unemployment, high consumer confidence, rising home prices, and a
vibrant stock market. Consumers are also
spending on big-ticket items such as cars, home renovations, and appliances, among other categories. So if this was the Last Black Friday – it should
be one to remember.
The Market:
“GE … we bring good things to light.”
Last week I was looking for a changing of
the guard back to small caps leading the way higher. The indexes started slowly this week, with
the IWM and SPY drifting higher, but the QQQ was lagging. By Tuesday all that changed with 3 moving
higher, and the QQQs taking the lead into the weekend. What does this mean for the coming week? For the S&Ps, all of the moving averages
are stacked and moving higher, the MACD is crossing upward showing a ‘buy’
signal, and even the Bollinger Bands are showing more room to the upside. Elsewhere, gold is consolidating, while crude
oil continues its march higher. The U.S.
dollar is renewing its downtrend trend which is good for the global markets
because for every 1% rise in the U.S. dollar – the world economy suffers a 0.7%
decline in global GDP. Volatility is low – keeping the bias to the
upside for equities. The S&Ps (SPY)
appear to be the strongest, with the NASDAQ (QQQ) at resistance, and the small
caps (IWM) consolidating. SocGen thinks
that: “The S&P has reached our target for the end of this cycle, and is
now entering expensive territory. On all
metrics, U.S. equities are trading at levels only seen during the late-90s
bubble. Since Trump's election, the U.S.
equity market has risen 24%, but only half of this came from earnings growth. According to our calculations, the U.S. equity
market is already pricing in tax reform. The rise in bond yields and FED repricing
should be headwinds against further US equity increases.” I have a
feeling that the closer we get to the mid-December FED rate hike – the more we're
going to see analysts suggesting that our bull market is in need of a
rest.
I put together a preliminary list of my surprise
winners and losers for 2017. The top 3 winners
thus far are:
-
#3 Amazon (AMZN) - First, it reported $43.7B in revenue this
quarter, which is an awe inspiring standalone number. It also showed 34% year-over-year growth
(29% without Whole Foods). AWS (Amazon's
cloud computing service) brought in $1.2B in operating profit, making up for
the $900m loss from Amazon's international segment. As long as AWS keeps
growing at a 40%+ rate, Amazon is good-to-go.
-
#2 Intel (INTC) - A strong quarter from an underpriced company is
always a good recipe for a nice pop in the share price. Notwithstanding the competition, the
semiconductor giant proved its ability to grow despite competitive headwinds from
NVDA and AMD.
-
#1 Wal-Mart (WMT) - Those calling for the demise of brick-and-mortar
retail have wildly underestimated Wal-Mart’s resolve to remain on the map. Comparable sales (the key metric for
companies with physical locations) rose the most in eight years. If that wasn't enough, Walmart reported a 50%
jump in online sales, proving to the world that it can and will adapt to the
new e-paradigm.
The top 3 losers are:
-
#3 Chipotle Mexican Grill (CMG) - Ever since sanitary issues began
plaguing Chipotle in 2015, the Mexican restaurant chain hasn't been the same. The e-coli outbreak (which erupted two years
ago) continues to have an adverse effect on Chipotle's share price, and continues
to prevent it from re-establishing itself as an appealing destination for
consumers.
-
#2 Under Armour (UA) – This exercise apparel and footwear
specialty chain – is in big trouble. Its
largest segment is North America, and unfortunately, the NA sportswear retail
environment has U.S. consumers reining in spending and long-established names
like Nike and Adidas regaining their dominance. It could take a year or more for Under Armour
to regroup.
-
#1 General Electric (GE) - There's no way to soften this – GE is a
chaotic disaster. Key executives (including
the company's chairman) left unexpectedly, earnings disappointed, and their
dividend was cut in half. This
international infrastructure and technology company is going through a
substantial restructuring that will include the divestiture of various
divisions. I’d wait to see what the
final, slimmed-down version of the company actually looks like before even
thinking of investing.
Even though stock markets around the world
are in a bull run, their returns pale in comparison to the
cryptocurrencies. Wealth managers
will soon be forced to invest a portion of their assets in digital
currencies. Here are the top 3 concerns I hear from investors about Bitcoin:
-
#1 Bitcoin is anonymous - False.
Many people believe that Bitcoin's anonymous nature makes it perfect for
money laundering and other illegal activities, when (in reality) there are
other currencies far more anonymous than Bitcoin – including ‘cash’. Bitcoin operates using a technology called
blockchain. Every transaction that takes
place on the Bitcoin network is recorded on the blockchain. If you do a
transaction under a fake name, you may be able to keep your identity secret,
but the minute your identity is revealed – it will be known to the world along
with all your transactions.
-
#2 Bitcoin has no intrinsic value – True and False. It is true that no government entity or banks
‘back-stop’ Bitcoin. But that doesn't
mean it doesn't have value. In fact, the
lack of centralized support actually is one of Bitcoin's intended strengths. When Bitcoin was introduced in 2008, it was
established so that its token would provide a decentralized form of currency
that was NOT connected to any government entity or bank. It’s purely a ‘peer-to-peer’ version of electronic
cash that will allow online payments to be sent directly from one party to
another without going through a financial institution. Today, countries and individuals are actively
using Bitcoin as both a currency and a store of value. As Bitcoin matures, it will become clearer as
to whether the token is actually ‘digital gold’ or a currency – but what really
gives Bitcoin its value is its network.
-
#3 Bitcoin isn’t safe – True and False. It depends upon what you mean by ‘safe’. Over the course of Bitcoin's life, about 25%
of the bitcoins in circulation have been lost or destroyed. This has happened because often people store bitcoins
in hardware wallets or on hard drives that have met unfortunate ends. One
gentleman spent hours rifling through miles of garbage in the hopes of finding
a tossed hard drive that housed over $9m in Bitcoin. Talk about having a bad day. So yes, it’s true that you could accidentally
lose or destroy your bitcoin investment.
There are a lot of resources to help you avoid such a fate. Another safety issue is hacking and digital
security. In 2011, the Mt. Gox breach
saw a thief steal over 850,000 bitcoins. Since then, you can store your
digital currency investments in a wide range of software and hardware wallets –
each equipped with its own security measures.
Coinbase (for example) comes with two-factor authentication. No one can tell you that investing in digital
currency is 100% safe – to do so would be to ignore the tremendous volatility
and the infancy of the space. That said,
with Bitcoin and other digital currencies raking in triple-digit gains in under
11 months of this year – people are willing to take that risk. It's also
worth noting that almost $25B in credit card fraud was reported in 2016, with
46% of all Americans being impacted – so ‘money’ is not any safer.
If you’re looking for a bio-tech company that hasn’t seen a lot of love
in a while – then Curis (CRIS) is for you.
It’s focus is on the development and commercialization of innovative
drug candidates for the treatment of human cancers. CRIS fell below the $1.00 mark on November 14,
and finished at $0.8984 on November 24. The
analysts have an upbeat prognosis, and forecast
the stock price to be in the $3.50 to $7.00 range over the next 12 months. The boost is due to their strong pipeline,
and their plans to conduct research programs both internally and through
strategic collaborations.
And don’t look now but the largest ‘weed’
merger could be on the horizon. Canadian-based medical pot producer Aurora
Cannabis (ACBFF) surprised investors last week with an unsolicited
bid to acquire rival
CanniMed Therapeutics (CMMDF). Aurora
Cannabis is after increased medical marijuana exposure. Apart from chasing the recreational weed
legalization, the company wants to keep pace with industry giant Canopy
Growth (TWMJF). The
completion of Aurora’s Aurora Sky project is expected by mid-2018, and that
would make Aurora the largest and most automated pot growing facility in the
world – capable of producing more than 100,000 kilograms of dried cannabis
annually. Aurora will use this scale to reduce their costs of growing marijuana.
Each year, between Nov. 20th and
December 4th, the market generally moves higher, and thus far this one is
following the same playbook. After
December 4th, however, things get ‘iffy’. That is to say, some years the market
continues higher, and some it begins to roll over. Because there's still so much Central Bank
liquidity in the system, I don't suspect that a ‘roll-over’ is in the cards. But, I also think that once this year draws to
a close, a lot of fund managers are going to be willing to pare down their
exposure, and we could see some rocky times in 2018.
Tips:
Questions from the mail bag:
What do Futures Markets mean for Bitcoin? A bitcoin futures
contract is a forward agreement to purchase or sell a specific amount of
bitcoin, within a specified time frame for a set price. So, if you buy a 30-day bitcoin futures
contract at a set price of $10,000 / BTC – you are agreeing to purchase the
coin at the contracted rate ($10,000) on the agreed upon date. The same goes for selling. Futures markets are the exact opposite of spot
markets. Spot trades occur immediately,
where futures contracts are scheduled in the ‘future’. Factually, there is a lot of money to be made
(and lost) playing the ‘spread’ between the futures price and the spot market price. Future markets will give bitcoin a more mainstream
exposure, and it could help to calm bitcoin’s price volatility. But honestly, bitcoin futures are being
offered in response to customer demand. Bitcoin, like gold, is a
perfect non-correlated asset to be added to an investment portfolio – as a
hedging mechanism. I (for one) am not
surprised that there is such overwhelming demand for bitcoin futures from
traders. Now, every trader is going to
have the option to invest right there on their screen without having to do the work
of buying and securing bitcoin on a separate platform.
In a sign of growing mainstream acceptance,
digital currency exchange Coinbase now boasts more accounts (13m) than
brokerage firm Charles Schwab (10.6m). I’m
sure that the amount of assets controlled by Schwab vastly exceeds that of
Coinbase users; however, the user number does reflect adoption. Regardless of bullish or bearish
expectations, the reality is that Bitcoin is gaining traction amongst members
of the general public. This is further
demonstrated by the offering of futures by the Chicago Mercantile Exchange
(CME) and the CBOE, the proliferation of crypto hedge funds, and the
embrace of Bitcoin in cash-strapped countries.
BTC/USD ($8,980) – Bitcoin has its sights on $9,000 – showing that the momentum is intact and buyers are
willing to step in on every dip. BTC
broke above its ascending channel (see top left chart), and I’m anticipating a
move to $9,969 assuming it remains above $8,600. For fresh trades, the risk to reward ratio is
not favorable as the stop loss is deep – so I’d await a pullback before
committing fresh capital. My bullish view will be invalidated if the digital currency turns down
from the channel resistance line and breaks below $7,400 levels. Until then,
the uptrend in Bitcoin remains intact.
ETH/USD ($475) – For the past 3 days Ethereum has been on fire – breaking out of
its channel (see top right chart) to the upside. Assuming it can hold the breakout, I’m
looking at a rise to the 1.272 extension of $652, and potentially to the 1.618
extension closer to $800. However,
it is unlikely to be a straight shot to these levels. We should see a pullback towards the $420
levels in the next few days, and this would be the buying opportunity.
LTC/USD ($88.79) – Like Ethereum, Litecoin has been steadily rising for the past
several days – and has broken thru its upward channel. It has nicely blown past the selling at the
$72 and $80 levels, and is again shooting for the 1.272 and 1.618 extensions
before consolidating. However, we may see another two to three days of consolidation at the
current levels, as this is the final resistance before the virtual currency can
continue to make new lifetime highs.
DASH/USD
($623) – Dash has found a place in our analysis based on its
stupendous run, which has propelled its market cap. to just under $4.8B –
making it the fifth largest coin by market capitalization. Its immediate target is $650, above which a
move to $729.8 is also possible. As the
risk to reward ratio is not attractive, I don’t recommend a fresh trade at the
current levels at the moment.
Over the
next several weeks, I’m looking for moves higher in ZCash (ZEC) and Lisk
(LSK).
Recommendations:
Bullish: (Sell PCS = Sell a Put Credit Spread)
-
Abbott Labs – ABT (56.13) – Sell PCS, Dec 8th: -55 /
+53, $0.26,
-
Aurora – ACBFF (5.66) – Long Stock from $2 / share,
-
Adobe – ADBE (184.46) – Sell PCS, Dec 1st: -177.5 /
+175, $0.30,
-
App. Materials – AMAT (57.90) – Sell PCS, Dec 1st: -56
/ +54, $0.30,
-
Credit Accept - CACC (288.46) – Sell PCS, Dec 15th: -280
/ +270, $2.25,
-
Caterpillar – CAT (137.39) – Sell PCS, Dec 15th: -135 /
+132, $0.51,
-
First Solar – FSLR (60.83) – Sell PCS, Dec 1st: -59 /
+57, $0.32,
-
Google – GOOGL (1056.52) – Sell PCS, Dec 1st: -1042.5 /
+1042, $0.50,
- Lam Res. – LRCX (216.83) – Sell PCS – Dec 15th:
-210 / +207.5, $0.57,
-
Micron – MU (49.68) – Sell PCS, Dec 1st: -47.5 / +45,
$0.35,
- Netflix – NFLX (195.75) – Sell PCS – Dec 8th:
-190 / +187.5, $0.49,
- UnitedHealth – UNH (212.51) – Sell PCS – Dec 8th:
-207.5 / +205, $.50,
- VM Ware – VMW (124.22) – Sell PCS – Dec 1st:
-118 / +116, $0.36,
- Zebra Tech - ZBRA (109.13) – Sell PCS – Dec 15th:
-105 / +100, $0.70,
My Crypto-Currency holdings include (from largest to
smallest):
-
Ethereum (ETH), Litecoin (LTC), Bitcoin Cash
(BCH), Bitcoin (BTC), ZCash (ZEC), Lisk (LSK), Ripple (XRP), Monero (XMR), and
Dash (DASH).
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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