This Week in Barrons – 7-15-2018:
WWHD = “What Would Homer Do?”
Before we answer that question, Homer is the kind of guy that:
- Dislikes liberals and social media,
- Enjoys rolling-the-dice,
- Is a patriarch who’s just trying to get by,
- Calls immigrants “some of the truest Americans of all,” but also helps to police Springfield’s borders by building a wall,
- Has done his fair share of ogling, pandering, and discriminating,
- Is easily distracted, and prone to impromptu adventures,
- Has an anti-establishment streak, but is dedicated to providing for his family,
- And is lazy, open to taking bribes, and has flouted the law for personal gain many times.
One entrepreneurial trait that Homer has is that he’s unsafe, and that correlates directly with innovation. In fact, what’s really dangerous these days is safe thinking, because consistently doing what has worked for others is a recipe for failure. The pace of change is accelerating to a point that if your thoughts and behavior are predictable – staying relevant is not in your future. With change, there is a natural tendency to feel a certain amount of anxiety and fear. Innovators are able to reframe that fear and anxiety as fuel for their creativity. They recognize that if an idea didn’t make them nervous, it probably wasn’t all that disruptive. If we’re not making ourselves uncomfortable – then we’re certainly not pushing ourselves to the creative edge. Think about what Homer would do – and do it.
At the individual level, ‘playing-it-safe’ can hurt someone’s climb up the corporate ladder. There is something called a ‘hill-climbing’ syndrome. It teaches you to take the next obvious step toward the top of the mountain, in hopes of eventually getting there. Unfortunately, following that philosophy leads to complete mediocrity and often abandonment. So Homer’s constant distractions and impromptu adventures are a good thing, because it seems we need intelligent risk-taking in order to succeed. We live in a world where (at any given moment) there are a billion people trying to come up with a new idea. And statistically, if you have an idea – there are a thousand other people who also have that very same idea. Therefore, your competitive advantage is NOT the idea, but rather adapting it to your immediate surroundings. The old model was to become an expert at one thing, and ride it as long as you can. Now, there is a growing understanding that ‘siloed expertise’ is a thinking trap.
I don’t look at Homer as the gunslinger type (like we saw in Uber last year), but rather as someone capable of protecting, understanding, and valuing those that are close to him. I see Homer as someone who allows his family to go out and take risks knowing they are not going to have their heads cut off if they fail. I recently listened to an interview with Steve Kerr (the head coach of the Golden State Warriors) as he unmasked the largest fear of an NBA player. It seems the #1 fear of the NBA player is to no longer belong in the NBA due to bigger and stronger competition. Coach Kerr decided the first thing he needed to do was not to ramp up the pressure on this team, but rather make them feel like they were 100% safe and protected so that when they got on the court they could experiment more. Obviously that paid off in multiple championships, but in this case I feel that the coach’s part went underappreciated. He openly took the spotlight off of his star contributors and really made it all about the team. He said: “For now we’re not going to count points, assists, and rebounds – but instead count the number of passes that we had. And until we have enough passes, we’re not going to be successful.” He started measuring new things. You can’t just tell people to celebrate innovation, you have to actually do it. Businesses that are creative, are actually telling the story of their ‘positive deviants’ who are finding workarounds and getting more efficient because they are cheating a little bit. It’s the corporation’s way of incentivizing creative behavior.
Remember when CVS (the drug chain) made the decision to STOP selling tobacco products. Ms. Helena Foulkes thought that there was something hypocritical about delivering healthcare to the community on one hand, and selling them $2B worth of tobacco products on the other. She was a cancer survivor herself, and struggled with how to position CVS to make more money by not selling tobacco. What new partnerships could she make under the new Affordable Care Act? When she was promoted to VP of Retail and told to: ‘put her money where her mouth was’ – she immediately removed that $2B in tobacco sales from her own top line and started helping her team replace it. Within a year she replaced that $2B with a fresh $11B in partnership sales and has never looked back. There was nothing brilliant or amazing about her idea. It was her ability to break with conventional thinking, and begin to think: ‘What would Homer do?’ that helped CVS and the communities they serve.
The irony surrounding innovation is that to create anything of value, you need to work with other people. But often the showing of ideas – ‘group think’ tends to slow down the creative process. It is often a problem for people who consider themselves unsafe thinkers, and are caught in organizations that don’t allow them to be freewheeling and open. There are a lot of ways to persuade a company to be ‘more like Homer’ – start by changing processes and then attitudes.
It’s been 10 years since the start of the Great Recession, and we’re just now gaining back all of the jobs we lost. Unfortunately we still have a historically low rate of labor force participation, a high rate of under-employment, and a missing decade of entrepreneurial businesses. It seems when it comes to job creation, it’s not solely the size of the business but also the age of the business that matters. It seems that thinking like Homer is in trouble. New businesses represent a declining share of the business community, and the gross number of jobs created by new businesses continues to fall. Here are a couple of ideas that Homer had to spur entrepreneurship:
- Because immigrants are twice as likely as native-born Americans to start businesses, Homer wants a special visa for immigrant entrepreneurs that would allow these job creators to start companies.
- Because regulations cost a disproportionate amount to small businesses, Homer wants Congress to implement sunset dates on major regulations.
- Because tax complexity matters more than taxes to entrepreneurs, Homer wants to work on simplifying the tax code even further.
- Homer wants to eliminate all non-compete agreements,
- And Homer would like the government to reduce its support of the student loan program – in order to bring college costs back to reality.
The Market:
Crypto-bytes:
- Over 4,000 ICOs: have managed to raise a combined total of $12B ($3m avg. per project). The good news is that the majority of them fail within 4 months of their token sales. It seems that only 44% of token projects are alive into their fifth month or beyond.
- Token returns: In contrast to IPOs, crypto-tokens continue to generate abnormally positive average returns post ICO. The average ICO generates an average return of 169% when held over the initial 16 days, and 48% over the initial 30 trading day period. It seems that the strongest return is actually in the first month.
Info-Bits:
- Press Undo:The Justice Dept. is appealing the AT&T-Time Warner merger after the two companies already inked the deal. Last month a judge gave the companies its blessing, saying the government didn't prove that the merger would cause anti-trust issues. Now the DOJ is saying ‘not so fast’ and wants a federal appeals court to take a peek.
- A ghost particle:hit sensors in Antarctica, and it’s from a galaxy far, far away (about 4B light years). This is a BF-spatial-deal because it's the first time scientists have been able to track down the origins of this kind of particle. I can hear Bill Nye opening the champagne now.
- You got nothing on me:is what Netflix is saying. For the first time in 17 years, HBO has been dethroned at the Emmys. Netflix is taking the crown as the platform with the most Emmy nominations. I'd like to thank Sandra Oh, and "The Crown”, “Atlanta", "GLOW”, "Stranger Things”,…
- Show me the money: UK regulators slapped Facebook with a fine due to the Cambridge Analytica scandal. This is where a political consulting firm took tens of millions of Facebook users' data without their permission. The Book pretty much knew about it, but didn't do much to stop it. The UK is telling The Book to write them a $664,000 check. The Zuck said no problem – as he daily spends more than that on lunch for FB employees.
An interesting phenomena occurred about a week ago, a gentleman and his camera crew from ‘Campus Reform’ went around asking college students a question. Despite the fact that President Trump had not yet picked a Supreme Court nominee, they went up to random college students and asked the question: "Now that Donald Trump has announced his Supreme Court pick, do you have any issues with his choice?" This was a week BEFORE Trump actually announced his pick. One student after another proclaimed that his pick was “horrible”, "homophobic”, “xenophobic”, “will set the US back decades”, “doesn't understand women's issues”, “was wrong about immigration”, etc. One person went so far as to say they had discussed the pick with their father and they decided this person was terrible.
Last week ended on Friday the 13th and it was as good of a time as any for the stock market to flex its muscles. The DOW (once again) climbed above the 25,000 mark. The S&P 500 finished above the 2,800 level for the first time since February 1. And the NASDAQ managed to end the week at an all-time high. The tech rally overshadowed the continuing uncertainties over trade, and underlined an uptrend driven by signs of economic strength and solid quarterly earnings. For the week, the DOW was up 2.3%, the S&P up 1.5%, and the Nasdaq was 1.8% higher. This is the second straight weekly advance for the three main U.S. benchmarks.
The trade dispute between Washington and Beijing is likely to intensify. Data in June showed that China’s trade surplus with the U.S. swelled to a record as Chinese exporters rushed their shipments before the tariffs took effect.
Stock Picks:
- United Health Group Inc. (UNH): United Health is a member of the DOW. Their stock registered a new high after a recent breakout over the $250 threshold. The health insurer will report its Q2 earnings on Tuesday yet it already finished at an all-time high of $258.70 last Friday. United Health boasts three straight quarters of accelerating revenue growth and two consecutive quarters of double-digit revenue growth. Their Optum health services unit is the growth driver. The unit provides pharmacy benefits management and technology services to health insurers and medical providers.
- Vertex Pharmaceuticals Inc. (VRTX): VRTX ended at $180.50 on Friday – up 3.6% on the week. The biotech tasted its first annual profit in 2016 but since then, growth has been steady. In 2018, annual earnings are projected to soar by 64%. By 2019, annual profit is projected to be rising by 43%. Its portfolio of cystic fibrosis drugs has been fueling the company’s growth. Vertex will report quarterly earnings on July 25.
- Bio Rad Laboratories Inc. (BIO): BIO has again breached the $300 mark. The stock traded at an all-time high of $306.39 at one point on Friday before settling at a fresh record of $303.95. The stock of the maker of automated test systems used for the life science research and clinical diagnostic markets continues to trade tightly near its 10-week moving average. The breakout happened at the $279.69 level. Bio Rad’s sales growth has accelerated for three straight quarters, and analysts are looking for the stock to jump by 15.1% to $350.00 from its current price.
Next Week:
Is this a Trap? You know the history. We hit the highs in January, plunged 10% in February, and spent the last 4.5 months chopping sideways, with a slight bias to the upside. Three times, the 2750 - 2800 level acted as resistance to the upside movement, and the market would retreat from that level, falling 200 S&P points from that level in April, and then 100 points from 2800 in June. On Friday, we put in our first close above 2800 since February, but we only closed at 2801 – so don’t get too excited. The SPY (the trading proxy for the S&P 500) only saw 48m shares traded – which is not breakout volume. Heck, that’s more like the day before a holiday volume.
So here we are, finally above a resistance level that's been in place for ages. Main Street will tell you that the market is going to climb and make new highs, and I guess that's possible. But there are issues with that idea.
- 1st, the FED has quietly been reversing their Quantitative Easing program, and are now doing QT (Quantitative Tightening). Until now, they’ve been reducing the balance sheet by $15B / month, but this month that amount moves up to $40B. If you look at the sell offs over the past 4 months, what you will see that in the first half of the month the S&P rises, and in the second half it falls (see graph above). Is that just some random rhythm, or is that because it's the second half of the month where they're draining off QE money?
- 2nd, the FED is still talking about 2 more rate hikes.
- 3rd, we’ve got the tariff problem, and
- 4th, the Chinese Yuan has been devalued lately – and the last time that happened (2015) the U.S. market took a hit.
I'm thinking that the smart money knows that this isn't the start of a breakout to new highs. If it was, the funds would be piling in and buying the SPY. Are we really going to see a big move higher in the face of the fact that just 4 stocks have accounted for 90% of the S&P's move higher? Sure, it’s possible. But from where I sit (in the cheap seats) my guess is that this attempt at a run higher will fail and roll over by mid-month. Plan accordingly!
Tips:
Top Equity Recommendations:
Marijuana stocks (HODL):
- Canntrust Holdings (CNTTF), and
- Canopy Growth Corp (CGC)
Options:
- 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,
- DIA: You may think Friday the 13th is an unlucky day, but it’s also an excuse to dust off the Harold Melvin & the Blue Notes 1975 hit “Bad Luck”. The 3rdverse clearly states: “Law of average plainly states that chances go around. But if you want to know the truth about it, I’ll tell you what’s pulling you down.” So, in honor of Harold Melvin, one of the founding voices of Soul, maybe the market will drop. And what more suitable product to drop than DIA? If you think that DIA’s little run up won’t last and are bearish on it, the long put vertical that’s short the 249 PUT and long the 251 PUT in the Aug weekly expiration with 42 days till expiration is a bearish strategy with a 69% probability of making 50% of its max profit before expiration.
- LUV: Last week, Southwest Airlines (LUV) announced that it will stop handing out peanuts out of concern for allergies. If it keeps someone from getting sick, I’m all for it. But I’m guessing that the peanut news is a smokescreen to hide lower Q2 load factor metrics. Apparently, LUV added a few more seats than there were flyers. Earnings are on July 26. But if you think LUV might continue to rally or at least not drop and are willing to take risk through earnings, the short 50.5 PUT in the Aug weekly expiration with 44 days till expiration is a bullish strategy with a breakeven point lower than 2018 lows, and an 86% probability of making 50% of its max profit before expiration.
- TGT: Monday, August 16this Amazon Prime Day, and it will be another opportunity for the company to push its Whole Foods (WFM) business with cash credits and discounts at the grocer. Not that we forgot about the merger, but AMZN’s integration of WFM has been a bit slower than Prime members might have expected. When the deal was announced 13 months ago, other grocers like Target (TGT) tanked, but TGT shook off the AMZN scare and has rallied 50% since then – outperforming the broader market and other big retailers like WMT. The question is, can TGT handle another attack by AMZN’s food monster? If you think that TGT might not sustain its rally and drop (either because of AMZN or a sell-off in the market), the long PUT vertical that’s short the 77 put and long the 78.5 PUT in the Aug weekly expiration with 29 days till expiration is a bearish strategy with a 66% probability of making 50% of its max profit before expiration.
To follow me on StockTwits.com to get my daily thoughts and trades – my handle is: taylorpamm.
Please be safe out there!
Disclaimer:
Expressed thoughts proffered within the BARRONS REPORT, a Private and free weekly economic newsletter, are those of noted entrepreneur, professor and author, R.F. Culbertson, contributing sources and those he interviews. You can learn more and get your subscription by visiting:
Please write to Mr. Culbertson at: <rfc@culbertsons.com> to inform him of any reproductions, including when and where copy will be reproduced. You may use in complete form or, if quoting in brief, reference <http://rfcfinancialnews.blogspot.com/>.
If you'd like to view R.F.'s actual stock trades - and see more of his thoughts - please feel free to sign up as a StockTwits follower - "taylorpamm" is the handle.
If you'd like to see R.F. in action - teaching people about investing - please feel free to view the TED talk that he gave on Fearless Investing:
Creativity =https://youtu.be/n2QiPSe_dKk
Investing = https://youtu.be/zIIlk6DlSOM
Marketing = https://youtu.be/p0wWGdOfYXI
Sales = https://youtu.be/blKw0zb6SZk
To unsubscribe please refer to the bottom of the email.
Views expressed are provided for information purposes only and should not be construed in any way as an offer, an endorsement, or inducement to invest and is not in any way a testimony of, or associated with Mr. Culbertson's other firms or associations. Mr. Culbertson and related parties are not registered and licensed brokers. This message may contain information that is confidential or privileged and is intended only for the individual or entity named above and does not constitute an offer for or advice about any alternative investment product. Such advice can only be made when accompanied by a prospectus or similar offering document. Please make sure to review important disclosures at the end of each article.
Note: Joining BARRONS REPORT is not an offering for any investment. It represents only the opinions of RF Culbertson and Associates.
PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING. WHEN CONSIDERING ALTERNATIVE INVESTMENTS (INCLUDING HEDGE FUNDS) AN INVESTOR SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT SOME PRODUCTS AND OTHER SPECULATIVE INVESTMENT PRACTICES MAY INCREASE RISK OF INVESTMENT LOSS; MAY NOT BE SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN MANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN ONLY TO THE INVESTMENT MANAGER.
Alternative investment performance can be volatile. An investor could lose all or a substantial amount of his or her investment. Often, alternative investment fund and account managers have total trading authority over their funds or accounts; the use of a single advisor applying generally similar trading programs could mean lack of diversification and, consequently, higher risk. There is often no secondary market for an investor's interest in alternative investments, and none is expected to develop.
All material presented herein is believed to be reliable but we cannot attest to its accuracy. Opinions expressed in these reports may change without prior notice. Culbertson and/or the staff may or may not have investments in any funds cited above.
Remember the Blog: <http://rfcfinancialnews.blogspot.com/>
Until next week – be safe.
R.F. Culbertson
