This Week in Barrons – 7-8-2018:
On Friday, the trade war between the U.S. and China officially began. The Trump administration hit China with $34B in tariffs due to its unfair trading practices - especially when it comes to intellectual property. China disagreed and sent a belated 'Happy Birthday’ to America by assessing its own $34B in tariffs. The U.S. and China are playing poker with the world's two biggest economies, and both are expected to be hit hard – including the U.S. auto and agriculture industries. But for now, no one looks ready to fold.
As if to add insult to injury, yesterday Trump said that he's still not happy with where things stand on NAFTA (the free-trade deal between Canada, Mexico, and the U.S.). He said that he won't sign it until after the mid-term elections. This came as Canada hit back at U.S. steel and aluminum tariffs with $12.6B of their own on things like pizza, ketchup, yogurt, and chocolate. No one's living happily ever NAFTA just yet.
When you see things go this far, you can either point to it and laugh, or examine it because it’s probably there for a reason and a purpose. I believe our trade wars were started for a reason. And I believe that it’s NOT a coincidence that President Trump is attacking immigration at the same time as he’s attacking global trade. It’s also rumored that he plans on ‘fixing’ our ridiculously elevated prices on higher education before mid-term elections as well.
In general, the purpose of a trade war is to make ‘free trade’ more about ‘fair trade’. That part can be accomplished (at least with Germany, Japan, Mexico, Germany, and the EU) fairly straight-forwardly with tariff adjustments. However, there is a problem with China. Not only is China’s trade imbalance equal to those 4 other countries combined – but begs the question: ‘What value do we put on our stolen intellectual property?’ One long-term solution to the theft of our intellectual property is to remove any non-US-citizen’s access to our higher education. Currently, when I think of our universities, I see a service that:
- Doesn’t give refunds,
- Doesn’t guarantee results,
- Increases in price and decreases in value – while you’re using it,
- Encourages you to take on massive debt even though you can’t afford it,
- Guarantees that this debt is legally inescapable.
- BUT – remains the top, higher-educational system in the world.
I’ve heard rumors that President Trump could be planning on limiting the number of non-US, student visas. That would cause our colleges to admit only 40% of the non-US (full-paying) students that they accept now. For example: if a school currently admits 5,000 under-grad and post-grad students per year – 50% of those students pay an average of $35k per year, while the remaining (mostly non-US) pay the full sticker-price of $70k. This produces a total student tuition-based revenue of $262.5m per year. By reducing the amount of educational visas by 60% and filling those positions with U.S. students – the school’s revenues will be reduced by over 20%. This $50m+ reduction is significant when you’re running a university – with limited or no profit margins.
So going forward, don’t be surprised if universities with existing foreign facilities pick up the lost revenue by expanding over-seas. Also, domestically this could be the university ‘fiscal reset’ we’ve all been waiting for. It would give the universities a common enemy on which to blame their financial ills other than their own gross financial mismanagement. But more importantly, it allows President Trump to be in a position of strength – negotiating on multiple fronts: (a) trade and tariffs, (b) immigration, and (c) high-priced education.
The Market:
“A man will be deemed clever by his answers, but wise by his questions."… Naguib Mahfouz
Info Bits:
Say ‘bye-bye’ to Scott Pruitt: Last week the EPA head resigned after facing multiple government investigations for allegedly dropping millions of tax dollars on personal security, and asking an aide get him a used mattress from a Trump hotel. The EPA is planning to 'keep calm and carry on,' as the guy stepping in to replace Pruitt is expected to keep hitting ‘undo’ on environmental regulations.
ETF performance: 1sthalf results of 2018 // 2ndhalf estimates for 2018:
- S&P 500: SPY ($275) +1.51% YTD// EOY between $240 / $301,
- Nasdaq: QQQ ($176) +9.63% YTD // EOY between $145 / $198,
- Small Caps: IWM ($168) +8.20% YTD // EOY between $145 / $186,
- Bonds: TLT ($123) -3.83% YTD // EOY between $113 / $130, and
- Volatility: VIX ($13) +46.20% YTD // EOY above $6.
Jump in the VIX:That’s an impressive jump in the volatility index (VIX) given the small rally in the SPY. Could that rally be signaling more pain for equities? Or is the VIX just going to revert back to the low double digits? It’s anyone’s guess, but let’s check back at the end of the year.
Trade deficit sinks: by 6.6% in May – hitting a 19-month low directly in front ofdisputes and tariffs erupting over unfair trade practices.
Facebook’s Zuckerberg is the 3rdrichest person: according to the billionaires index. Mark Zuckerberg has unseated investing guru Warren Buffett as the world’s 3rdrichest person. This only confirms that technology is the most robust creator of wealth on the planet. Amazon’s founder Jeff Bezos holds the loftiest position followed by Microsoft’s co-founder Bill Gates. All 3 players made their fortunes from technology.
Jobs Report Friday: produced headline numbers saying: 213k jobs were created, the unemployment rate climbed to 4%, wages grew at 0.2%, and the U6 unemployment number rose to 7.8%. Unfortunately, the BLS’s birth/death model was responsible for adding 104,000 of those 213k jobs. Even worse is that part-time jobs increased by 145K while full-time jobs actually FELL by 89k. We're running into earnings season, and the ‘powers that be’ desperately need to see this market move higher.
Crypto Bytes:
WINNER – WINNER: of a trade war could be the crypto-currency market.
LeBron is a Laker: and with that comes the 3rdwave of a blockchain boom called security tokens and STOs (Security Token Offerings). Smaller companies can’t afford to front the bills for an IPO (> $1m cash), but with STOs they can gain access to capital, institutional and retail investors, fractionalized ownership, instantaneous investment, and a 24/7 globally accessible market.
“I’m BULLISH on: Ethereum over a 10-year time horizon” according to MultiCoin Capital’s partner Kyle Samani. He also remains uncertain about any other securities that haven’t been given the go-ahead by the SEC. Tokens that are deemed a security will have their ‘rugs’ yanked from under them as exchanges pull their support. That will ‘dry up’ the buy side of the equation, and leave holders scrambling for the door. That’s why XRP ($17.8B in valuation) could make some noise (in a bad way) if it’s labeled a security. Quoting Samani: “If that happens, liquidity is going to dry up on XRP and the price will plummet. In other words, take the elevator down.”
Hundreds will follow: Coinopsy suggests that there are roughly 1,000 projects with no pipeline activity. That smells like a bait-and-switch tactic – where ‘dumb’ projects can no longer rely upon speculative fervor to turn half-baked ideas into pastries. Tokens trading on exchanges without SEC approval will get the boot.
Where’s the safe house? Until a trading platform receives SEC approval, there is NO safe haven. Institutions are rushing to be the first accredited platform because to quote Ricky Bobby: “If you’re not first, you’re last.”
Where’s the safe house? Until a trading platform receives SEC approval, there is NO safe haven. Institutions are rushing to be the first accredited platform because to quote Ricky Bobby: “If you’re not first, you’re last.”
Last week, all 11 primary sectors in the S&P 500 finished the week higher. The health-care sector was the biggest gainer (+1.5%) with Biogen enjoying its best day in 14 years. The tech sector followed suit with an increase of 1.2%. For the week, the DOW rose 0.8%, the S&P gained 1.5%, and the Nasdaq was up 2.4%.
In the first half of 2018, the U.S. stock market logged a total return of 2.7% - including dividends. Since 1950, when the S&P was positive at the halfway mark – the market ended the year higher 94% of the time.
This year, tech stocks are still the bright spot in a volatile market. Netflix has more than doubled, Amazon has surged 46%, Apple is up 11%, and Google has gained 9%. Analysts still project a potential upside of 35% for Facebook from its closing price on Friday. And Microsoft is silently waging a battle against its rival Apple. Microsoft is reaping huge successes with its shift in emphasis to the enterprise – and CEO Satya Nadella isn't conceding the consumer services space to Apple just yet. Given the company’s valuation, stock characteristics, and steady business outside of the cloud – Microsoft’s downside risk is low and therefore a good buy going forward.
The week ended well for biotech stocks as Biogen (BIIB) released positive results from a Phase 2 study of its Ban2401 therapy. The drug seeks to cure age related cognitive decline and Alzheimer’s disease. As a result, the entire biotech sector rallied in sympathy. Atlantic Equities analyst Steve Chesney said, “This is all about believing in innovation. When a company like Biogen reports positive clinical results for a disease like Alzheimer's, the implied success for the rest of the industry's pipeline moves a little bit higher.”
On Friday, the DOW ended the day above its 200-day moving average, and the S&P put a lot of distance above its 50-day moving average. All in all, this feels like the start of a run that can finally last a few days. I see S&P 2,800 as formidable resistance, but I can at least see the market getting there. What I’m not sure about is whether we will challenge the all-time highs.
The problem is the ‘fake news’. A jobs report that has a headline number of +213k jobs, that upon examination turns into +145k part-time jobs and -89k full-time jobs – is not a good sign. Soon, we will be entering earnings season. We're going to hear a lot of non-GAAP earnings numbers combined with stock buy-backs that will be financed with low-interest debt. After the S&P falling almost 1,000 points, I can make sense of the market bouncing a bit higher. But a break to new highs on a bogus jobs report and fake-earnings could be a tough pill for even this market to swallow. Enjoy the bounce and grab a few trades, but hold onto a heavy dose of ‘caution’ – at least for now.
Tips:
As we emerge from July 4th, I’m reminded of a quote from the late President Theodore Roosevelt (circa 1910): “It’s not the critic who counts; nor the man who points out how the strong man stumbles. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, who comes short again and again, because there is no effort without error and shortcoming; but who does actually strive to do the deeds; who knows great enthusiasms, the great devotions; who spends himself in a worthy cause; who at the best knows in the end the triumph of high achievement, and who at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who neither know victory nor defeat."
In Bitcoin (BTC) this past week, there was a downside correction below the $6,700 support in bitcoin, but the $6,400-6,450 support zone held and prevented any further declines. A base was formed and the price jumped above the $6,600 resistance level, and opened the doors for more gains when it briefly pierced above $6,800. There is a high probability that price of BTC may accelerate above the $6,800 level in the near term – with the next resistance being $6,875, and $7,000 above that. In the short term, there is a major ascending channel in place with support at $6,600 on the 4-hour chart. Technically: (a) the MACD is gaining momentum in the bullish zone, (b) the RSI is now placed well above the 60 level, (c) major support is at $6,600, and (d) major resistance is at $7,000.
Top Equity Recommendations:
Marijuana stocks (HODL):
- Canntrust Holdings (CNTTF), and
- Canopy Growth Corp (CGC)
Options:
- Activision (ATVI) – BOT Jul 20, +78 Call for $1.00,
o (ATVI) – SOLD Jul 20, -77.5 / +75 Put Spread for $1.10,
- Mastercard (MA) – SOLD Jul 27, -200 / +197.5 Put Spread for $1.25,
- McDonalds (MCD) – SOLD Jul 20, -160 / +157.5 Put Spread for $1.50,
- Ubiquiti Net (UBNT) – BOT Jul 20, +90 Call for $1.10,
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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