This Week in Barrons – 5-20-2018:
“Entrepreneurial engineers make collaboration the cornerstone of corporate innovation.” Amer Sheikh…CEO of Startup Labs
The first time I read the above quote, I just shook my head and said: “What a pile of horse-manure.” Here, I thought entrepreneurship was all about disruption, marching to a different drummer, coloring outside the lines, and often wearing your passion on your sleeve. In fact, according to MJP: entrepreneurs are known for their creativity and risk tolerance; where engineers, mathematicians, and health care workers typically are not. Consider, for example, the ideal attributes of a civil engineer building an interstate bridge near your home. Do you picture a risk-taking engineer who is cutting corners and highly comfortable with uncertainty, or someone who tends to prefer to follow the rulebook and stay within the lines? I think it’s the latter. Unfortunately, entrepreneurial creativity and risk-taking are becoming core components of solid organizations, and it’s these pieces where the engineer is often ill-prepared.
A new Blended Entrepreneurship Program (BEP) attempts to answer this need by merging entrepreneurial education with the more discipline-focused STEAM (science, technology, engineering, art, and math) fields. The results of this merger have (at best) been underwhelming. After all, STEAM students naturally gravitate toward certainty, have a low tolerance for risk, and have little interest in pursuing anything entrepreneurial. Some recently enrolled pharmacy students (for example) said that while the entrepreneurial program sounded great – their final decision came down to more practical matters such as financial aid, and the traditional program’s strong job placement record.
That’s not to say there aren’t opportunities for innovating and creating new products in highly specialized fields such as: applied mathematics, healthcare, bioinformatics, and technology. The question becomes, how to teach entrepreneurship to people who are inherently risk adverse.
Entrepreneurship education has morphed into developing business plans and investor pitches – with less emphasis on the entrepreneurial mindset. But it’s the entrepreneur’s thinking and drive that correlate directly with their passion for innovation and their founding of new ventures. Traditional planning and pitching have done little to impact an entrepreneur’s passion, but HAVE contributed to small business formation reaching its lowest levels in over 50 years.
So not only are we compensating our entrepreneurial educators incorrectly (by number of students vs results), but we’re also teaching and rewarding our students on elements that have little to do with entrepreneurship. It’s no wonder that our graduates take the traditional / more risk-adverse approach to life. Instead of rewarding students for ‘pushing the envelope’, we’re awarding them with a participation trophy for putting a square peg into a square hole. The #1 fear in entrepreneurship is: ‘Fear of Failure’. Entrepreneurs need to develop the ‘ability to recognize an opportunity’, and that only comes from failure. Young entrepreneurs need to make more mistakes, take more steps backward (without rewards), find alternative solutions – and then take deeper dives toward the solution. The winners are those who hold their breath the longest during a dive – not those who continue to swim on the surface and cover more area.
This explains why I’m seeing a niche for the ‘older worker’ in the young, entrepreneurial company. Entrepreneurial companies are normally interested in hiring younger people. The median age at a hot tech company is: 29. At IBM the median age is 38, and the median age of the average American corporation is over 42. It’s not a surprise that tech companies have so many younger workers. Younger people are often more in touch with the latest skill sets in programming and software. Youth is also more able to put in the crazy hours behind many startups. None of that favors the older worker.
However, the ‘Fear of Failure’ goes away as we get over 55 years old. The confusion and embarrassment over making a mistake lessens as well. The populations of the U.S. and many other developed nations are aging, and the big surprise has been that older people want to work MORE than in previous generations. Against all expectations, the labor-force-participation rate of older Americans started rising in the 1980s and 1990s. For example, the labor-force-participation rate for men aged 65 to 69 was 25% in 1985, and 37% in 2016. By 2020, over one-quarter of the workforce will be over 55.
Might I suggest that the ability to spot, mobilize, and deploy older workers could be the next biggest source of competitive advantage in the U.S. Many companies need to retool their methods to fit better with the experience, calculated risk-taking, and sound judgment so often found in older workers. As SF writes: “The choice to hire an older worker may not be an IF, but a WHEN.” It seems that the U.S. birth rate has slipped to a 30-year low – even further below the replacement level. The real issue that this will create is the replenishment of our Social Security fund. But if ‘70 is the new 30’, then I see a new place for the older worker – and that is directly inside the young, entrepreneurial corporation.
The Market:
“Wide diversification is only required when investors do not understand what they are doing.” … Warren Buffet
The knock on spreading your money across a variety of assets has traditionally been that it saps a portfolio’s power. It presumably limits the upside, while also limiting risk. But according to Mark Rzepczynski of AMPHI Research, if properly constructed, there is actually more upside to a globally diverse, multi-strategy, multi-asset class portfolio. He developed the chart above and calls it: “The single most important chart for any portfolio manager or investor. The phrase: ‘diversification is the only free lunch in finance’ may not truly resonate as well as the picture, and the picture says it all.” Mark believes that “The power of diversification is explosive when correlations are low.” And the crypto-currency arena currently has the lowest correlation to every other asset class.
Crypto-Bytes:
HSBC & ING Bank went Crypto: Multinational banks HSBC and INC have announced their first trading transaction using blockchain technology.
Canaan:The world’s 2ndlargest producer of bitcoin mining hardwareapplied to IPO (Initial Public Offering) on the Hong Kong stock exchange. Major financial institutions like CMB, Credit Suisse, Deutsche Bank, and Morgan Stanley will participate in the syndication of the offering. This would make the Chinese rig maker the first cryptocurrency company to hit the public markets in Hong Kong. Bloomberg sees the IPO yielding about $1B.
Consensus 2018 in NYC came to an end: But not before a series of bold predictions. Venture capitalist Fred Wilson predicted that the next Nasdaq would be built on top of a cryptocurrency, and Square CEO Jack Dorsey expressed his vision that bitcoin would become the internet’s “native currency.”
Info-Bits:
What do you say when you're really strapped for cash: You're not alone. A new study showed that almost 50% of all U.S. families cannot afford food and rent. The unemployment rate is at a 17-year low, and people are still struggling. Women are using birth control in higher numbers, and only women in their 40s saw an uptick in birth rates last year.
What to say when you take the remote: I’m running things now. Last week Catalonia (the semi-autonomous part of Spain that includes Barcelona) swore in its new president. Last year, the region voted to break up with Spain. Spain responded by firing the regional government, and then Catalonia's president fled the country. The new president of Catalonia is all for their independence, and has described anyone who's not pro-Catalan culture as "Beasts in human form." Spain's not thrilled, and is considering charging him with hate speech.
"In the future, there will be no female leaders – just leaders.”… Sheryl Sandberg (COO of Facebook). New York Congresswoman Carolyn Maloney rallied the crowd on May 13 at the "Women on the Block" event in Brooklyn, where more than 300 people came together to talk about cryptocurrency and blockchain technology. The event saw Ms. Elizabeth Stark (CEO of Lightning Labs) urge interviewers to stop asking her the question: “What’s it like to be a woman in crypto?”
Last week investors pumped $9B in fresh funds into U.S. equities. Even with fresh money, the DOW and S&P both posted 0.5% weekly losses. The tech heavy NASDAQ registered its own 0.7% loss, but the Russell Small-Cap index rose by 0.2%.
Amazon is playing its disruptive role again by igniting yet another price war. On Wednesday, Whole Foods unveiled its loyalty program that offers special discounts to Amazon Prime members. Many feared that the Amazon – Whole Foods deal would mess up the $800B U.S. grocery industry, and let’s be careful what we wish for. Costco, Kroger, and Walmart have all told Amazon to: “Bring it on.” However, Laura Kennedy (V.P. of Retail Insights at Kantar Consulting) said: “The e-commerce business of Walmart is only 4% of its total U.S. sales. The real issue is that most of what they sell is food, and people don't buy food online. So Whole Foods could hurt them."
The negative trend of biotech stocks during the first half of 2018 drove its performance ranking down to #27 out of 197 industry groups. It dropped 22 places in the past 13 weeks. The ranking of pharmaceutical companies also dropped from #51 to #78. Analysts think that the trend is likely to reverse because Abbvie, Celgene, and Regeneron could spike in the second half of 2018 due to their accelerating number of drug approvals and launches.
Abbvie is launching Upadacitinib – a drug that treats arthritis. The FDA will also decide upon Elagolix – a drug that treats a condition of the female reproductive system, and Venclexta – a treatment for leukemia. Regeneron is set to soon receive a decision on Sanofi’s drug for treating asthma. The two companies are also collaborating on a drug to treat skin cancer. Celgene investors are anticipating a major turnaround when it unveils data from a late-stage cancer drug called Revlimid. And shortly, Celgene is due to say more about its acquisition of Juno Therapeutics.
For the first time since mid-April, the price of Bitcoin sank below $8,000. The drop erased the previous monthly gains, but is hovering around $8,300 as of this writing. Analysts believe the gains will be short-lived as the odds are stacked against the cryptocurrency. Fundstrat’s Thomas Lee expressed disappointment at the lack of a crypto-rally – citing the lack of regulatory clarity as the main issue. He added that the support of major institutions is needed in order for the crypto space to grow.
Canopy Growth (TWMJF) is the largest marijuana company in Canada, and has filed its intention to list on the New York Stock Exchange. Their stock price has more than tripled in the past 12 months. Once the NYSE approves the application, Canopy Growth will be the first pot producer to list on the both the Toronto and New York exchanges and become the second Canadian marijuana company (after Cronos Group (CRON)) to list outside the country’s border. By listing on the NYSE, Canopy Growth would attract more U.S. institutional investors. The shares of Canopy Growth will likely start trading under the ticker CGC before the end of May.
This is at a time when the North American legal weed market grew 33% in 2017. Tenyears from now, projected annual N.A. sales could reach $47B. In the report published by Marijuana Business Daily, Canadian cannabis oil exports grew by over 400% in 2017. Few industries can match the potential astronomical growth of legal marijuana. Currently, only Canada and the Netherlands are actively exporting any cannabis products. All eyes are focused on Canada which is expected to become the first developed country in the world to legalize recreational marijuana on June 7th.
U.S. stocks appeared tentative last week even though the leading economic index that measures 10 key economic trends such as: unemployment claims, new manufacturing orders, and stock prices – rose for the 7thstraight month. But last week was all about the bonds – which had the 10-Year hitting 3.1%. Yes, this will cause credit card debt will increase, but that’s not my worry. Everything surrounding interest rates has to do with the ‘cost of carry’, and how (on the institutional arbitrage side) the cost of carry is increasing. Many of the high-frequency trading firms have trading strategies that only work between certain ‘cost of carry’ interest rates. And if ‘the juice is not worth the squeeze’,you will begin to see liquidity contract – and that’s what we saw last week. As liquidity contracts – volatility will increase, and volatility will bring traders back into the market. The real loser here is the retail trader – who is unable to move as fast or as accurately. Currently the financials are showing more volatility than the NASDAQ. My advice is to use this time to re-think your risk exposure, and to re-load your hedges. Watch the 2,731 level inside the S&Ps. If we get above 2,731 – we could run up to 2,848, but if not – we are still in a rising interest rate environment.
In many ways, I’m expecting this coming week to mirror last week. The financials are on the forefront of this volatility, and this is reflected in the uncertainty surrounding interest rates. For the last 6 trading days, the financials have come down – while interest rates have gone up. It seems that higher interest rates are only good for the financials when they rise under control. Be careful here, because the financials could be in a lose-lose situation. If rates continue to move to the upside at their current rate – the financials will be sold. However, if interest rates turn around and go lower – the financials will probably be sold as well. And often: “So go the financials so go the markets.”
Top Equity Recommendations:
Volatility will continue higher, because divergence is everywhere. I recently received a warning from MG (extremely knowledgeable analyst in the marijuana space) about ACBFF and CBWTF. It seems that Aurora is in danger of not having enough of its own product to meet obligations. Aurora Sky was built on the site of a former airplane hanger, and the soil is contaminated by old airplane fuel. The location remains next to an active airport; therefore, the planes are consistently dumping more fuel – increasing the difficult for growing weed. The reason Aurora started their Sun project was because they were concerned that Sky wouldn’t be viable. CBWTF has a joint venture issue. It seems that the joint venture they have with FV Pharma is to retrofit a massive Kraft facility into a production one. These types of facilities make great R&D arenas, but not good growing ones. With this lack of production staring them in the face, they could have trouble raising capital for future projects. MG sees Canntrust (CNTTF) as one of his favorite names in the space, along with OGI and WMD.
Marijuana stocks (HODL):
- Canntrust Holdings (CNTTF)
Options (Metals & the Miners):
- XRT (Retail ETF): Buy June PUTS (looking for retailers to move lower)
- EEM (Emerging Markets ETF): Buy June PUTS if this breaks below 46 and especially if it breaks below 45 – due to the higher U.S. dollar.
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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