RF's Financial News

Sunday, January 14, 2018

This Week in Barrons - 1-14-2018

This Week in Barrons – 1-14-2018:

“Do what you have to do, until you can do what you want to do...” Oprah Winfrey

Last Week we said:

- “WOW” when Oprah showed up at the Golden Globe Awards to accept the Cecil B DeMille (lifetime achievement) Award. Her speech had me wondering if I was watching a preview of candidate Oprah 2020. As the first black woman to take home the award, she honored the past, and gave me hope for the future.

- “Really?” when President Trump declared himself a “stable genius”.

- “I knew it” when JPMorgan Chase CEO Jamie Dimon declared: “I regret calling Bitcoin a fraud, and believe in the technology behind it.”

- “Really?” when Warren Buffet admitted his ignorance surrounding cryptocurrencies but said: “I can say with almost certainty that they will come to a bad ending.” It’s uncharacteristic of Mr. Buffet to have such a negative opinion on something that he admittedly knows very little about.

- “We’re in trouble now” because November consumer debt rose by $28B to over $3.8T – the biggest increase in over 15 years. But hey, J.Q. Public is just following the lead of our corporate bosses and borrowing money to buy stuff. Except our corporate bosses are buying their own stock back, at a lot cheaper interest rate than J.Q. Public is paying.

- “Really?” When the Chairman of the Federal Bank in Chicago answered a question on Bitcoin: "It's hard to imagine a world where the main currency is based on an extremely complex code, understood by only a few, controlled by even fewer, without accountability, arbitration or recourse." Uh, didn’t you just describe the Federal Reserve banking system?

- “Car guys know how to sell.” This week KBB reported that the average price of a new car rose almost 2% to a record high of $36,133.

- “Really – yeah baby” Bonus season will soon be upon us, and Wall Street banksters will soon be flush with an extra $138k per head in cash. We all know that traders will be running directly to play the crypto-markets with ‘big bucks – no whammies’.

- “Numbers don’t lie” As of last week, there were 3,745 Bitcoin meetups organized around the globe. The total signups are just south of 1m, with the 3 largest Bitcoin groups being: the Mountain View Hackers and Founders (15,050), Bitcoin of NYC (7,440), and the Toronto Starts (6,887).

The crypto market moves in cycles, and understanding these cycles is key to profiting, managing risk and keeping sane. Howard Marks describes two ways to profit from markets: (1) hold more of the things that rise and less of the things that fall, and (2) cycle adjustment, or trying to have more risk exposure when markets rise and less when they fall. The key to cycle adjustment is to understand where you are in a cycle and calibrate the risks and rewards accordingly. Over the last few months, the market has been driven by new capital entering the space and a psychological acceptance of bitcoin. The original crypto-capital entered via Bitcoin (BTC), and has performed well. From July through December, Bitcoin dominance increased from 41% to 66%, and BTC’s price increased from $2,492 to almost $20,000 – driven strictly by capital inflows.

In December, the market became more retail-dominated and less crypto-educated with Coinbase becoming the proxy for this phenomenon. Coinbase signups tripled from November through the end of the year. At that point, larger investors started to take profits, bitcoin began to falter, and it became time to find the next shiny object. In the first three weeks of December, Litecoin (LTC) increased from $100 to $371. LTC also fell from grace as restless investors moved on with more ‘house money’ to play with. Their attention spans moved from Coinbase to other exchanges such as: Bittrex, Poloniex and Binance. At that point, the cheaper the asset – the greater the chance of a return. And when I say cheap, I'm not referring to market capitalization, but rather its pure, actual price.

The average crypto-investor tends to think of them self as analytical, disciplined and contrarian, but the fact of the matter is that most tend to magnify cyclical moves. The key is that when investor euphoria is widespread, you should lighten up on those assets which are expensive and be more aggressive with those that are cheap. The time to be overweight alt coins is at the beginning and middle of the altcoin cycle – not towards the end. Currently, we're on the precipice of a major entrance of institutional capital to the crypto-space, and the one place it is going is BTC. The market in altcoin terms is getting expensive and in BTC terms it's getting cheaper.

Every crypto-rally has had a common thread: it was partially driven by new capital, and it becomes enamored by an alternative asset or market narrative. The cycle is often triggered by a legitimate change in fundamentals. And then, subsequently, is taken to the extreme by investor behavior. Earlier in 2017, it was smart contract functionality and ICOs. Now, as BTC fees creep up and Ethereum is facing scaling issues, most of the coins that have increased in price are aiming to be cheaper, faster, and more scalable. What we're actually seeing is a mini-hype cycle play out around a new market narrative.

New technology captures investor attention. Emotional influences cause investors to follow the herd and fear of missing out predominates. The cycle gets taken to its extreme until it can go no further. For example: you will know that it’s getting interesting when you stop by your neighborhood breakfast spot, and three kids are in line in front of you buying pastries. To pay their bill the oldest swipes her phone and leans over to her younger siblings and says: “This cost us half of our winnings. Next week we need to buy more Litecoin.” When I was their age, I was drinking water from a backyard hose and trading baseball cards. So, my question is: In 5 years which will be worth more, one Litecoin or my Barry Bonds rookie card?

The Markets:

“The true soldier fights not because he hates what is in front of him, but because he loves what is behind him.” ― G.K. Chesterton

This week we are seeing a transition in the markets.

- 1. The SKEW on the S&P is collapsing. That means that the premium is coming out of the ‘out-of-the-money’ puts versus the calls. Which means that if you think this market will continue higher in the short-term (through the end of January), but in February will take a pause – then it is advantageous to buy the short-term weekly calls, along with a couple February monthly puts – because the puts are ‘on sale’.

- 2. The VIX (a measure of market volatility) is increasing as the market is exploding higher. This is rare, and often says that the market is transitioning from a premium buying opportunity, into a premium ‘selling’ one.

- 3. And lastly, options volume has exploded higher in the first couple weeks of January. In 2017 the average options volume was 17m contracts per day, but on Friday the markets did 27m options contracts – an increase of almost 60%.

Investors are working themselves into a ‘fever pitch’ kind of stage – hence the increase in options volume. There is no fear to the downside – hence the SKEW collapsing. And therefore, the strategy for this type of market is to buy short-term (weekly) in-the-money calls on the S&Ps, and couple that with buying 1 or 2 month out S&P puts. Because the only way out of these types of rallies is via: ‘shock-n-awe’ to the downside.

Last week we learned that the Swiss National Bank made over $55B in profits in 2017 by printing money, and using it to buy stocks. They have accumulated about $800B worth of our stocks and because the markets have been roaring higher – they made more money than Apple, J.P. Morgan Chase, and Berkshire Hathaway – COMBINED.

So, why wouldn’t they print and buy another $900B, $1T, or $2T? Why would they even think about stopping when they're raking in those kinds of profits? And what about the world’s $233T worth of debt – not counting the Quadrillions in derivatives and counter party swaps? And what happens to the world if our Central Banksters (including our FED) slow down their printing and buying? Unfortunately, it’s the junkie scenario. A junkie cannot maintain, but rather needs more. The moment money is injected into the global monetary system, banks will leverage it: 10, 20, 50, or 200 times. That gives a boost to the underlying economies, but then its effect starts to fade – just like with the junkie. Central Banks have moved from being lenders of last resort, to buyers of first resort. We're mired in a global debt and derivative bomb that is mathematically impossible to diffuse. Therefore, the introduction of a multi-national currency (crypto-currency) is potentially the ‘only solution’ to this monetary dilemma.

In terms of last week, all 3 benchmarks finished at all-time highs. The beginning of 2018 has been the best equity trading start to a year since 2003. The DOW gained 4.4%, the S&P 500 gained 4.2%, and the Nasdaq witnessed a rise of 5.2%. We found out that the American consumer literally ‘shopped until they dropped’ as the Commerce Department reported that retail sales rose 0.4% last month – after a 0.9% surge in November. Japanese automakers Toyota and Mazda announced plans to set up a $1.6B assembly plant in Huntsville, Alabama. Fiat Chrysler announced that it will shift production of its heavy-duty pickup trucks from Mexico to Michigan in 2020. Both moves are intended to lower the risk to the automaker’s profitability should President Donald Trump pull the United States out of the North American Free Trade Agreement (NAFTA). The week also signaled the start of the fourth quarter's earnings season.

As PM suggested to me, there is a substantial argument to be made that stocks like Facebook and Google are still inexpensive because their fundamentals and consumer demographics are still growing. Stocks like Facebook, Apple, Google, and Microsoft could be the consumer staples of the 21st century that even a recession won't sidetrack. After all, do you spend more timing washing your clothes and dishes or using your iPhone to check Facebook or email? And would you rather own Facebook's expected revenue and earnings growth rate of 25%, or Clorox’s of 3.1%? Couple this with Facebook trading at 23 times one-year forward earnings, while Clorox is trading at 24 times – and when adjusting for growth, you can easily see how much more expensive Clorox is over Facebook.

Obviously high-growth companies like the FANGs carry a higher level of risk, but they also offer the most significant upside potential when things are moving in the right direction. Currently, the U.S. economy appears to be strong. I don’t know what consumers will value more in a mid-21st-century recession: bleach or news feeds, but at least with a news feed – you’ll be able to share your feedback. After all, what satisfaction do you get from a bottle of bleach?

But mark my words, this market is not normal. Both the market and crypto-currencies remind me of late 1999 and early 2000. In early 2000, the market topped and immediately took 70% off the NASDAQ. This time it is different, because it’s not only the retail folks and the fund managers but also the Central Banksters doing the manipulation. Technically they could just keep printing new money and injecting it into stocks forever or until hyper-inflation takes over. In any event, I've been through bubbles before, and I'll play with this one too. As we enter earnings season, you may want to consider buying ETFs instead of stocks, or consider using options as well.

Tips:

Top 5 Equity Recommendations:

- Marijuana stocks (pick 3):

o Aurora (ACBFF),

o Cannimed Therapeutics (CMMDF),

o Canntrust Holdings (CNTTF), and

o GW Pharmaceuticals (GWPH),

- Energy Exploration stocks:

o GAStar Exploration (GST), and

- A crypto play, Overstock.com (OSTK)

Top 5 Crypto Recommendations: I’m looking for the ‘Alt Coin’ market to calm down for the next week or so:

- Ethereum (ETH) – Green bars & Propulsion higher,

- Zcash (ZEC) – Green bars & Propulsion higher,

- SaiCoin (SC) – Green bars & Propulsion higher,

- NEO (NEO) – Green bars & Propulsion higher,

- Bitcoin Cash (BCH) - Blue Bars & Lost Propulsion, and

- RaiBlock (XRB)

In terms of some crypto-levels:

BTC ($13,544): Aggressive traders can buy on a breakout above $14,500 and keep a stop loss of $12,500 – with a target objective of $16,500. Risk-averse traders should wait for a reliable setup to form as there is no clear trend. It’s better to wait for a breakout or breakdown before initiating any positions.

ETH ($1,319): Ethereum has been strong during the South Korean episode. Buyers jumped in at the 38.2% Fibonacci retracement level, of the latest rally from $640.43 to $1,382. If the price can break out of the overhead resistance zone of $1,382 to $1,434, it will signal the start of the next leg of the up move – which could carry ETH towards $1,814.67. BCH ($2,557): Bitcoin Cash broke out of its range on Jan. 10; however, it could not rally into $3,249. It faced strong resistance at $2,950 and turned down from there. On the upside, $2,950 is the critical resistance and on the downside, $2,291 continues to be a strong support. Traders should wait for a breakout above $2950 to initiate long positions. A breakdown below $2,072 could result in a decline to $1,733. XRP ($1.84): For the past three days, Ripple has been attempting to hold the uptrend line, and is currently correcting inside a descending channel. Strong support exists between $1.77 and $1.40, which are 50% and 61.8% Fibonacci retracement levels of the recent rally to $3.317. I am not recommending any trade in XRP right now. LTC ($239): On Jan.11, the bears failed to break Litecoin out of its range. The bulls will now try to push prices towards the resistance line at $280. This move will gain momentum above $254. Support is all the way down at $215.

XEM ($1.36): NEM is currently in a pullback mentality. Traders bought the dip last week, and XEM could rally toward $1.57 and $1.69 – which are the 50% and 61.8% Fibonacci retracement levels of the recent fall from $2.06. Aggressive traders can buy here (at the $1.38 level) and set a stop loss at $1.06. Though the initial risk to reward thinking is not attractive, buying near the strong support of a trend line is a good strategy.

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, January 7, 2018

This Week in Barrons - 1-7-2018

This Week in Barrons – 1-7-2018:

“Fire and Fury” … by Michael Wolff

The hardcover book is sold out, and I’m old enough to remember when ‘Sold Out’ meant something. People who have read the book tell me that: “It’s riveting” and “You can’t put it down.” One take-away from the book is that everybody expects things to happen overnight. But more often than not, additional weight just keeps being put onto the camel's back – until it collapses. Another take-away is to measure everything by the numbers – with the issue being timeframe. After all, academia still refuses to measure actual numeric results. To quote MJP: “Academia is all about feeling good. Real numbers are a stark reality that just get in the way. With real numbers come winners and losers – and academia can’t have that.” And if you wonder how it got that way, you need to look no further than Walter Williams: “Factually, with few exceptions, schools that turn out ‘teachers’ are the academic slums of our colleges. They tend to be the home of students who have the lowest academic test scores when they enter college, and have the lowest scores when they graduate and choose to take postgraduate admissions tests. And finally, the professors tend to have the lowest level of academic respectability."

- Last week the University of Central Florida ignored all of the numbers and shouted: “We’re going to Disney World to celebrate being college football’s national champions.” Even though they didn’t even make it to the ‘real’ college football playoffs.

- Intel still refuses to publish the numbers associated with its latest massive security flaw. It seems that every Intel chip since the mid-90’s has allowed hackers access to everything stored within your device's memory: passwords, credit card details, emails, photos, etc. Intel has known about the flaw for months, and was hoping to come up with a fix before it was made public. Oh well, chalk up one for the leakers – and about a billion for the hackers.

- Bitcoin’s numbers (to quote Helen Reddy) are becoming “too big to ignore.” If it wasn’t BTC’s 1,800% year-over-year increase that got you, just last week it was released that crypto exchanges handled more trading volume (on a dollar basis) than the New York Stock Exchange. Guess that explains why Godman Sachs executive Michael Bucella is joining Blocktower Capital (a crypto-hedge fund). And on Capitol Hill why there’s a new regulation that would require U.S. Congress members to make their Bitcoin holdings more transparent. I’m guessing that’ll never see the light of day.

- Last week we learned that in the last 6 months, 2.5m users have joined the Binance exchange – making it the largest digital currency exchange in the world. But under the ‘You can’t please everyone’ category – it recently announced that it has closed its doors to new user registrations.

- The most recent crypto-survey shows that 41% of millennials want to buy bitcoin over the next 5 years, but only 2% of them currently own it. So, it’s no wonder that Spencer Bogart thinks: “Bitcoin will reach $50,000 this year because the drawbridges for institutional pools of capital have just been lowered.”

If we file the previous facts under ‘fire’, then my ‘fury’ comes from our nation’s continued stance on entrepreneurial education. The American Dream is on hold. Why?

- Because small business creation is at a 30-year low, while corporate consolidation and income inequality is at an all-time high.

- 85% of registered small businesses employ ONE person.

- 30 years ago, 16 out of 100 companies grew to hire 50 employees or more. Today that number is down over 30%.

Bitcoin and blockchain could be the new building blocks. Thanks to SF for: “I believe that block chain technology and crypto currency are going to become the new world currency; decentralizing the central banks and making it possible for small businesses and developing nations to trade and exist in the global economy. While I don't know exactly how this will shake out, I do know that crypto currency is here to stay and is gaining wider and wider acceptance within companies like Microsoft, Amazon and even the NYSE. This is the largest transfer of wealth the written history of the world has ever seen. It is creating a new barter system right before our very eyes. I don’t know how it will impact the ability of central banks to continue to operate within a debt driven society, but that bar has been set pretty low.”

What will 2018 hold for the entrepreneurs, startups, incubators, accelerators, incinerators and respirators? I dunno, but I can assure you that a record amount of taxpayer money will be spent doing the ‘same-old’ stuff and creating the ‘same-old’ non-results.

The Market:

From watching New Year’s Day commercials, I learned that: (a) If I trade with Fidelity for $4.95 a trade I would have a ‘clear advantage’, (b) I can invest with confidence at T. Rowe Price because ‘they get it’, and (c) Apple’s animojis are a true game changer. Given I can’t seem to get my arms around any of those 3 rules, I’ve instead chosen to embrace what Calvin once explained to Hobbes, “Happiness isn’t good enough for me! I demand euphoria!”

Well, it appears that the stock market is feeling that same Calvin ‘euphoria’. In the first trading week of the year, all three major U.S. market indexes achieved record highs. Job gains in December (148,000) were below expectations, but their three-month average exceeded 200,000, and the unemployment rate maintained its 17-year low of 4.1%. Also, this bull market could see 2 consecutive quarters of GDP growth above 3%. Even UBS released its new 2018 target for the S&P 500, and it’s 17.8% higher to 3,150. FYI – historically markets return 12.4% the year after a 20%+ higher market.

However, the proverbial ‘canary in the coalmine’ could be the demise of ‘normal retail sales’. During 2017 Cushman & Wakefield reported that retailers closed an estimated 9,000 store locations, and 2018 could see an additional 12,000 location closures. They estimate 25 major retailers could declare bankruptcy such as: Gap, Gymboree, Rue21, Sears, Bebe, Bon-Ton, Stein Mart, and Walgreens. Last year retail bankruptcies reached a six-year high matching the highest total since the end of the Great Recession.

On the other side of the spectrum, marijuana associated firms added about $1.7B in value on Tuesday, bringing their total value to over $19B. Effective January 1, 2018, selling pot for recreational purposes is now legal in California. While many states, including California, have decriminalized or legalized marijuana use, the drug is still illegal under federal law. That creates a conflict between federal and state law. And on Thursday, U.S. Attorney General Jeff Sessions quashed the trio of memos from the previous administration that adopted a policy of non-interference with marijuana-friendly state laws. With the Attorney General’s action, federal prosecutors can now have a hand in how possession and distribution is regulated in states where marijuana is legal. The news sent the weed stocks lower and investors wondering what might happen to an industry that took in $8B in sales last year, and is expected to grow to $23B and create 280,000 more jobs by 2020.

Mr. Sessions called the shift a "return to the rule of law", but stopped short of explicitly directing more prosecutions, resources or other efforts to take down the weed industry as a whole. "In deciding which marijuana activities to prosecute under these laws with the department's finite resources, prosecutors should follow the well-established principles that govern all federal prosecutions," Sessions said in a memo to all federal prosecutors. Chris Walsh, vice president and analyst for Marijuana Business Daily criticized Sessions’ action, comparing the move to a "stink bomb." "We'll just see what the fallout is, but I don't think it's going to be a significant impact beyond a chilling effect," said Walsh. "You're not going to dismantle this industry. It's too late for that. You're not going to put that genie back in the bottle."

To put the California marijuana legalization effort in perspective: California’s recreational pot market would DOUBLE the size of the legal marijuana market in the U.S. That’s because California has the sixth largest economy in the world – larger than: France, India, Italy and Brazil. And California’s population is bigger than 7 other states that sell recreational pot – combined. But let us not forget Canada’s impact on the marijuana market where (a) the age limit is 18 instead of 21, (b) purchases can be made online, with credit cards, and delivered to your home, and (c) where you can also purchase pot in stores other than dispensaries.

If you wonder why I’m putting so much emphasis on marijuana companies, I (just for grins) decided to examine various company’s revenue growth versus their stock price for the 5-year period between 2012 and 2017. I found:

- Pfizer = revenues down 14% - stock price up 55%,

- Merck = revenues down 19% - stock price up 53%,

- Yum Brands = revenues down 54% - stock price up 58%,

- Phillips = revenues down 52% - stock price up175%,

- McDonalds = revenues down 11% - stock price up 73%, and

- Ebay = revenues down 31% - stock pricing up 117%.

In each case it showed reduced sales growth along with a soaring stock price. Historically low interest rates, have allowed companies to borrow for almost nothing, and use that borrowed money to buy back their own stock. That’s what sent stock prices higher. Add to that the Central Banks of the world buying millions of shares of stock – and you have a roaring stock market. But if things are so good, then why are more people ‘sharing’ houses than at any time in history? It seems that our Central Banks have painted themselves into a corner. Remove the ‘juice’ and these markets will fall like rocks. Keep the ‘juice’ flowing and we create bubbles, froth, inflation and the ugliness of a crash. At some point, I think they will try and introduce a controlled demolition. That is where they slowly remove their accommodative stance and pray not to upset the apple cart. But for now, the question of the day is: Are we going to see the market continue higher again in 2018? The first 6 weeks of the year should be the tell. If we don't run out of gas before mid-February, then the plan will be for a higher 2018. Of course, if we run into something like a nuclear exchange with N.K. or Iran – then all bets are off.