This Week in Barrons – 8-19-2018:
Thoughts:
Middle-class life is 30% more expensive than it was 20 years ago, and middle class wages have barely moved over that same period of time. This has caused a crisis in: education, healthcare, housing and daycare. In terms of housing, many of the desirable places to settle are no longer looked upon as real estate, but rather as investments. This change has driven up the cost of housing, and has made many cities practically unlivable. The most expensive cities in the U.S. are:
- 5. San Diego, CA – median price single family home = $564,000
- 4. Honolulu, HI - $746,000
- 3. Anaheim, CA - $750,000
- 2. San Francisco, CA - $815,000
- 1. San Jose, CA - $1,070,000.
The 5 least expensive cities in the U.S. are:
- 5. Oklahoma City, OK - median price single family home = $137,500
- 4. Pensacola, FL - $132,500
- 3. Sheboygan, WI - $127,500
- 2. Port Huron, MI - $85,000
- 1. Wilkes-Barre, PA - $51,200.
Some of the collateral damage associated with the high cost of housing has been:
- Over half of the teachers in the top 5 cities, work another job on weekends and evenings in order to make-ends-meet on a teacher’s union salary.
- Only 14% of the total worker population is covered by maternity leave.
- The average college grad is taking 23 years to pay off their student loans.
- The additional debt incurred by 40 or 50-something adults through re-training is on-average over $30,000.
- The overall percentage of unionized workers has fallen below 8%.
The idea of young people being encouraged to ‘do what they love’ should (in many cases) change. Just because someone wants to be a writer doesn’t matter all that much when you realize that over the past 10 years – 50% of all journalism jobs have been eliminated. The gap between the top income earners and the average worker is wider than it’s ever been. A study released last week showed that last year, the top U.S. CEOs made 312 TIMES as much as their average employee. The outgrowth of this wage disparity is a historic lack of mobility by the average worker. It’s not a surprise that for the first time, more young adults (aged 18 thru 34) are living at home (32%) than with partners (31%).
I could go on about the housing crisis, but I would be remiss in not commenting on last week’s passing of the ‘Queen of Soul’.
Ms. Aretha Franklin died on August 16th, 2018. With Aretha, it started with the very first lyric of her first hit song ‘Respect’: "What you want… baby, I got it." She started the feminist revolution. Overnight, "Sock it to me baby" became a part of the conversation. Her lyrics made it onto the TV show "Laugh-In," and even Richard Nixon used them in a speech. Her appearance in "Blues Brothers" stole the movie way from every other musical act. Her final appearance at the Kennedy Center Honors – stole the show. Nobody could follow Aretha. She came out playing the piano, and even made President Obama cry. Aretha (as BL will attest) came from an era when you had to have talent to make it, and when you had to pay endless dues to break through.
Billy Preston (who died in 2006) said it best: "I don’t care what they say about Aretha. She can be hiding out for years in her house in Detroit. She can go decades without taking a plane. She can cancel half her gigs, and infuriate every producer and promoter in the country. She can sing all kinds of jive-ass songs that are beneath her. She can go into her diva act and turn off the world. But on any given night, when that lady sits down at the piano, and gets her body and soul all over some righteous song – she’ll scare the sh*t out of you. And you’ll know – you’ll swear – that she’s still the best f*ckin’ singer this f*cked-up country has ever produced."
R.I.P. the Queen of Soul.
The Markets:
Info-Bits:
- Monsanto: look out below. A jury ordered them to pay $289m to a man who claims their product gave him terminal cancer. The man regularly used Monsanto's weed killer (Round Up) which caused him to contract non-Hodgkin's lymphoma and develop lesions all over his body. Thousands of people have filed similar lawsuits against the company, but this was the first to go to trial.
- Victory Fridges: Bud Light is putting refrigerators full of free beer all around Cleveland. They will only open if the Cleveland Browns win one game this season. Juuuust one. The team lost every game last season. No pressure.
Crypto-Bytes:
- AT&T: better call Saul. The telecom giant was smacked with a $224m lawsuit after allegedly sharing a customer’s phone number with a hacker – who then reportedly stole $24m in crypto.
- South Korea: is putting $4.4B towards a spending plan to accelerate the spread of promising technologies like blockchain. Expect more ideas, more jobs, and more educational programs through 2022 in S. Korea.
The TWEET heard ‘Round the World’. On August 7th, Tesla’s CEO Elon Musk tweeted that he was considering taking the company private with a buyout price of $420 a share (a 23% premium), and that the funding had been secured. On the same day the Financial Times broke the news that Saudi Arabia’s sovereign wealth fund had quietly accumulated a stake of about 5% in Tesla for around $2.5B. In a letter to employees Elon said that as a public company, Tesla is: “subject to wild swings in our stock price that can be a major distraction. The pressure of a quarterly earnings cycle leads Tesla to make decisions that may be right for a given quarter, but not necessarily right for the long-term. Because we are the most shorted stock in the history of the stock market, being public means that there are large numbers of people who have the incentive to attack the company.” This has raised the eyebrows of the SEC overwhether Musk was just being transparent, or whether he was trying to manipulate the stock price. The SEC is now subpoenaing the company, and initiating a formal investigation.
Tesla’s Tweet: Musk has been criticized for his choice of using a ‘tweet’ to announce a major corporate decision. “It would be easy to interpret this as one of those usual, crazy remarks by a founder who’s successful but also erratic in many ways,”said Saikat Chaudhuri. “He is probably a bit frustrated with: investor pressure to replace three board members, production problems, and alleged sabotage by an employee in a factory fire in June.” While the SEC does allow companies to communicate with investors on social media, the key is to communicate full and complete information. It’s doubtful that a ‘tweet’ meets that criteria. There is also frustration surrounding an impending capital raise by Tesla that over the next several quarters will need billions to fund ongoing operations and pay down debt obligations worth over $1.15B.
Tesla’s Profitability: Some took the tweet as a sign of desperation – a distraction due to Tesla’s inability to generate a profit. In the past Elon has been successful in continuously changing the investor narrative, extending the time horizon, and postponing the day of reckoning when investors can look at Tesla as a profit-making entity. Elon has thrown up constant distractions such as a Gigafactory, a new Roadster, and an autonomous truck – hoping that people will ignore his promise: “to mass-produce an affordable electric vehicle that competes with the comparable internal combustion vehicle.” If Musk cannot deliver on that promise, it’s going to be a ‘tough pill’ for Wall Street to swallow.
Tesla’s Day of Reckoning: Tesla’s debt obligations are worrisome. They could lower Tesla’s credit quality and impact its stock price. “The market’s belief in Musk’s ability to raise money has kept its default risk lower than similarly rated junk bonds,”said Reuters. They went on to say: “Tesla is losing money hand over fist. The actual transformation of an industry through the mass production of an affordable electric vehicle for everyone – has not succeeded yet. Henry Ford was a model of the person who actually made money hand over fist by changing the industry. Is Elon Musk the next Henry Ford? We will see.”
Tesla’s Plan B: If Tesla doesn’t succeed as a car company, maybe becoming a battery company is in its future? Tesla’s energy storage and generation business produced revenue of $374m last quarter. They’re presently burning through cash. My only questions are: Will they be able to keep raising money? Will they be able to meet their debt covenants? Because that’s where the death spiral will start.
Last Week:
On Friday, Wall Street witnessed the DOW close at its highest level since February. Optimism returned to the market as the U.S. and China are set to hold talks that could eventually resolve the two countries’ trade standoff. On Thursday the DOW, S&P and Nasdaq all registered their strongest one-day performance since April. For the week, the DOW and S&P rallied +1.4% and +0.6% respectively, with the Nasdaq posting a weekly drop of -0.3%. Tariffs and Turkey’s currency crisis will remain as short-term market drivers. But the message is clear, the U.S. stock market is the star of the show. It seems that Wall Street agrees with President Trump’s “America First’ protectionist campaign. The ‘Stay-at-Home’ portfolio is beating the ‘Go Global’ one hands down. When reviewing some global index returns vs the S&P 500:
- US S&P 500 (SPY) + 6.0%
- India iShares for India - 0.3%
- Japan iShares for Japan - 0.4%
- U.K. iShares for U.K. ETF - 0.6%
- Eurozone Vanguard FTSE - 0.6%
- China iShares China Large-Cap - 0.9%
Undervalued:
Coca-Cola Co. (KO) – BodyArmor vs. Gatorade: The soft drinks war between Coca-Cola and Pepsi (PEP) will soon be an energy drink war. Coke announced on Tuesday that they are becoming the second-largest shareholder in BodyArmor. Currently, Pepsi’s Gatorade controls 75% of the energy market. Coke’s Powerade is unable to make inroads, so BodyArmor is the new kid on the block. Kobe Bryant is BodyArmor's fourth-largest shareholder as his $6m investment in March of 2014 has grown by 30X to $200m today. Analysts are projecting KO to jump 31% to $61 by EOY.
Cigna Corp. (CI) ($188.34 … -7.3% YTD): There are no more roadblocks to the proposed $52B purchase of Express Scripts (ESRX) by Cigna. Activist investor Carl Icahn said on Monday that he will no longer attempt to stop the merger of the health insurer and the pharmacy benefit management company. With everyone in agreement, the buy signals are clearer. Analysts are projecting CI to jump 37% to $258 from Friday’s closing price of $188.
Next Week: U.S. stocks finished higher this week but needed to navigate a bumpy road. With the second quarter earnings season almost over, geopolitical events and policy changes are expected to influence market movements going forward. Next week, existing home sales will be released on Wednesday, new home sales on Thursday, and durable goods orders on Friday.
Tips:
Top Equity Recommendations:
HODL’s:
- Canntrust Holdings (CNTTF), and
- Canopy Growth Corp (CGC),
- Ceco Environmental (CECE),
- Geron Pharma (GERN),
- Kala Pharmaceuticals (KALA), and
- Progenics Pharmaceuticals (PGXY).
- Canopy Growth Corp. (CGC) ($33.75 … +42.7% YTD): Shares of CGC soared +30% on Wednesday after the company expanded its partnership with Constellation Brands. The beverage giant has agreed to acquire an additional 104m shares worth over $3B – leaving Constellation Brands in control of 38% of the cannabis maker. Analysts are looking for an EOY 20% upside to $41.
· Constellation Brands (STZ) ($204 … -10.8% YTD) The maker of Corona Light Beer is gearing up to gain from opportunities in the fast-growing cannabis market. Analysts are showing a 40% upside / $286 price target on STZ by EOY.
Thoughts:
- Kroger(KR = $30.06, +9.5% YTD). With the global battle to dominate online grocery sales heating up, the largest U.S. supermarket operator is venturing outside the U.S. market for the first time. Kroger has partnered with Alibaba (BABA) to sell nuts, supplements, and other products in China. With Kroger building competitive strength by expanding its grocery portfolio and e-commerce presence, analysts see KR popping 20% to $36 in the weeks ahead.
- Alphabet (GOOGL = $1,232.22, +16.98% YTD). Google's parent company announced on Tuesday that it's pumping $375m into insurance start-up Oscar Health. Alphabet will utilize big data to revolutionize the health insurance industry with the insurance start-up’s technology platform that was created to better process insurance claims. Alphabet wants to be part of Oscar Health’s next phase of growth. Analysts are projecting GOOGL to spike 22% to $1,500 with this new development.
Crypto:
- Bitcoin (BTC = $6,350) - $40,000 by end of year
Thoughts:
Options:
- Visa (V) – Aug 24 -141 / +139 Put Credit Spread,
Thoughts:
- Citibank (C): As the situation in Turkey gets worse, the market seems to have decided that big banks will suffer the most if/when Turkey defaults on its debt. JP Morgan, Bank of America and Citibank dropped the equivalent of 1.9, 2.3, and 2.9 standard deviations respectively. Given these banks survived the 2008 financial crisis, they’re likely to survive Turkey. If you think Citibank in particular might rally back, then the long call vertical that’s long the 70 CALL and short the 72 CALL in the Sep 28thweekly expiration with 40 days till expiration is a bullish strategy with a 55% 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!
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R.F. Culbertson
Until next week – be safe.
R.F. Culbertson
