This Week in Barrons: 11-11-2018:
Thoughts:
I read an article this week explaining that by Amazon NOT choosing your home town for its HQ2 – it will further validate your home town as being the “Valley of Death” for entrepreneurship. It went on to clarify by saying that the greatest uphill battle for entrepreneurs is that there’s simply not enough ‘free money’ floating around for startups. It seems startups have a difficult time raising capital to keep their lights on after they burn through their first $1m in seed funding. And those larger amounts of money are often only found in areas such as: Silicon Valley, Austin, Boston, NYC and D.C. What I’m trying to figure out is two-fold: a) When did the concept of ‘begging for dollars’ replace ‘selling customers for revenue’? And b) I thought the successful entrepreneur relied on KYC (know your customer) more than KYF (know your funder)?
Sure, we can blame the cities for our startup entrepreneurs not knowing how to sell. But honestly, until now every major university (except Stanford and now Harvard) has refused to teach SALES as part of their business curriculum. Therefore, I guess it’s by university design that startup entrepreneurs are forced to beg – because they’ve never been taught how to sell. How crazy was Harvard when it recently announced a partnership with the Sandler Sales Training Institute – for them to be included as part of their core business curriculum? [ https://www.prnewswire.com/news-releases/the-world-leader-in-sales-and-sales-leadership-unites-with-the-world-leader-in-higher-education-300714482.html.]
Or even crazier, instead of blaming our cities for not attracting the ‘big bucks’, why don’t we find better leaders that know how to generate revenue for their respective start-ups? As I review a couple of Pittsburgh’s most recent ‘big money’ raises:
- Plextronics had no trouble raising $41+m – before they declared Chapter 11 bankruptcy in January, 2014 – due to lack of sales.
- 4Moms had no problem raising $84+m – before they ‘restructured’ and laid off most of the employees in June of 2016.
- Aquion raised $180+m before they declared Chapter 11 in March, 2017 – due to lack of sales.
Obviously all of our cities, accelerators, and universities (other than the 5 previously mentioned) seem to WANT their ‘darling start-ups’ to manage themselves right into bankruptcy. Why is that?
- Plextronics and Aquion were allowed to raise hundreds of millions of dollars without showing a product that could be sold competitively on the open market.
- And the 4Moms Board of Directors was obviously convinced that the American consumer would pay $1,000 for a child’s car seat. Really?
Here are a set of indicators that I use to help notify me that an entrepreneurial situation is about to take a wrong turn:
- Expansion without Representation: The start-up is out looking for more ‘space’ IN ADVANCE of gaining the appropriate customer base to support it. It’s always more prudent to play: ‘Follow the Leader’ than ‘Build It and They Will Come.’
- Telling is NOT Selling: A start-up’s leadership is out ‘telling’ the world why they are great, and NOT out ‘selling’ customers.
- Honesty seems to be the hardest word: It scares me when honesty and transparency turn from being second-nature to the most difficult choice for the entrepreneur.
Unfortunately, all of the above are only cured with: mentorship, leadership and experience. MJP had a great line during the Internet boom: “There is 1,000 TIMES more investment money out there. It’s a shame that there are not 1,000 TIMES more smart people to manage it.” So let’s be honest, it’s not our cities that have a problem attracting follow-on investment – it’s the previously funded entrepreneur that scares the investor due to their past spending history and lack of: awareness, guidance, vision, and operational ability.
The Market:
Where have all the ICOs (Initial Coin Offerings) gone?
The fear of legal prosecution is only one factor behind the decrease in ICOs. A more important factor is that the market has turned due to many ICOs being underwater. This has upset investors (the majority of which were retail individuals) and has led to class actions and the involvement of regulatory agencies. It has also cast a spotlight on some dubious practices including the lack of contractual recourse. After all, why wouldn’t the entrepreneur forget about the project and just keep the money – when the going gets tough. This is where ‘tokenized securities’, otherwise known as STOs come into play. What if the industry could collectively re-work how ICOs are structured and make them compliant with securities laws? This would attract large and more stable institutional investors, and bring liquidity to many illiquid assets. Acouple interesting ideas are:
First, Compliance Protocol Companies and STO Exchangescould expand their focus to ensure that companies fully understand the consequences of going public. Whenever there is a security listed on a proper and legitimate US or EU exchange, the company has to report its accounts under IFRS or U.S. GAAP and comply with mandatory disclosures and regulatory filings.
Second, Trustees & Custodians. The lack of trustees (who usually carry a fiduciary duty to investors) is the single biggest structural weakness in the ICO / STO space. A ‘Digital Trustee’ could face: investors, companies and issuers. Think Bank of New York or State Street Bank – not Goldman Sachs. A Digital Trustee could contractually enforce an actual contract – as it has no conflict of interest. Currently in the normal ICO there is nothing enforceable. Digital Trustees would provide an enormous degree of investor protection, and would cause the STO to sell faster and at a premium.
Third, Regionalization. Forget about companies trying to be everything to everybody. Regionally focused entities will have a more sustainable business model. For example, take an office building in Dubai. The owner would like to obtain some liquidity against his building – and the local banks won’t give him attractive sale / lease-back terms. A real estate backed STO would be 99% distributed to regional Middle East investors familiar with the property and/or the management company. It would be listed on a regional exchange. Its officers would only be required to understand the rules and regulations in the region, and its issuers would only need to understand regional reporting and filing requirements. Cheaper-Better-Faster.
Finally, force the industry and major regulators to agree on minimum disclosures and behavioral criteria for promoters, exchanges and compliance protocols. Let’s all agree to some common sense rules surrounding: fair market practices, restrictions on employees and principals, disclosures of conflict of interests, market manipulation policy, disclosure of historical outages, insurance, custody and cybersecurity policy.
Bringing these 4 elements into reality should bring both sense and sensibility back into the ICO / STO arena.
Info-Bits:
- PPI came in ‘hot’: The Producer Price Index (released on Friday morning) showed prices up 0.6% in October (annualized > 7%). That is 3 times the norm, and makes a December FED rate hike a 100% event.
- Justice Ruth Bader Ginsburg: Someone started a GoFundMe campaign to send her to Wakanda to heal, and to manufacture her ribs out of vibranium.
- Guess who’s NOT coming to brunch: Facebook’s CEO Mark Zuckerberg said ‘Thanks but no thanks’ to meeting with officials from the UK and Canada to answer questions about fake news and data privacy. He said no, and now Argentina, Australia, and Ireland are saying: 'C'mon man.'
- Pittsburgh Steelers – We’re Hiring: Mike Tomlin said the following regarding his missing all-pro running back: “We’re interested in having volunteers – not hostages. We want people that want to be here. We don’t care about the situation – if you WANT to be here, we will find a way to make it work.”
Crypto-Bytes:
As we transition to digital currencies and blockchain applications we will all need to ‘grow a pair’. We will need to learn how to care for our own assets. Currently, banks take care of our money, trusts take care of our properties, and stock brokers take care of our investments. If we have an issue with any of these areas, there is a backup system in place. These external organizations are responsible for backing up our information because essentially we do not own our own data – they do. And that’s the problem. We’re free from worrying about it – because we no longer own it. With blockchain, all of that will change. The safety of our assets and our sensitive information will become our individual responsibility. Currently we tend to think of digital assets as ‘copies’ of something that exists in the somewhere else. With decentralized blockchains, the original (and only) copy of the data exists with you. Maybe just on your phone. So like cash, if you lose it – it’s lost forever. This will be a difficult transition for some. If you’re prone to misplacing your keys every other week or losing your eyeglasses when they are sitting on top of your head – this will be difficult. We will need to learn NOT to forget our passwords, leave our phone at a friend’s house, or leave our personal laptop computer at work. For example, since your password doesn’t exist in some central database – if you lose it – there is no way to recover it. All of your Bitcoin (for example) could then be sitting on the blockchain with no way to access it. [ FYI: As of July 2018, a total of $44B worth of Bitcoin is inaccessible and permanently lost on the Bitcoin blockchain. ] Andreas Antonopoulos, one of the foremost Bitcoin experts, prints out his passwords and key phrases and puts the paper copies in bank safety deposit boxes.
We will need to learn to stop trusting organizations, and to start trusting the blockchain protocol. The trust resides within the technology. In the nine years that Bitcoin has been around, there has not been a successful theft from the protocol. The reason hackers are unsuccessful is because of the decentralized nature of the protocol. To successfully compromise the system, a hacker would need to gain consensus from the community to implement their changes. Thus far, hackers have not been able to gain that consensus. Regulations and laws do not prevent hackers from hacking into Bitcoin, the decentralized community does. For proof of the safety of decentralized frameworks, all you have to do is look at the evidence:
- Amount of Bitcoin stolen from centralized exchanges = $15B,
- Amount of Bitcoin stolen from the decentralized Bitcoin protocol = $0.
When there is a shift in trust from centralized organizations to decentralized blockchains – we will all take on a new responsibility for the safety of our assets. That’s when we will collectively grow from blockchain infants to blockchain adolescents and put on our big boy / girl pants.
Last Week:
Honestly, I couldn't have gotten this week any more wrong. I was convinced that ahead of the mid-terms, the market would be flat, and instead it rose Monday and Tuesday. Then I was convinced that if Congress got split, the market might pull in a bit. Well, Congress did get split, and instead of rolling over, we put in a 500 point rally, and finally pulled in on Friday.
- Aren’t we staring at another rate hike next month? Yep.
- Didn't some major multinational companies miss their earnings estimates? Yep.
- Didn’t we get to DOW 26k because the Republicans held both houses? Yep.
I could go on but we all know that this market is running on buybacks, and currently even the FED is taking away the punchbowl. Factually:
- We now have 45% of the S&P in bear-market territory. Nobody is talking about it because the mega-market caps (other than Facebook) are not there – yet.
- The ‘wealth effect’ stocks such as: Wynn, Las Vegas Sands, Marriott, Hilton, GM, Ford, Ferrari and Tiffany are being hit hard on their bottom lines. This is a sign of a turning economy – especially with all of them projecting dramatic slowdowns.
- Quantitative Funds are beginning to invest in ‘duck-n-cover’ stocks such as: Verizon, Walmart, and McDonalds.
- Remember that the ‘gravity pivot points’ on the S&P (areas of risk and heavy volume) are: 2845, 2811, 2731, 2682, 2626, and 2575. We are currently between the 2811 and the 2731 levels.
Weed:
Repeat after me:“Buy the rumor, Sell the news.” That means that according to the above chart, you were safe buying the pot stocks all the way up to October 16th– and the day that their Canadian legality was granted (Oct. 17th) – the pros sold them. That is the preferred execution of these types of trades. Next week, Aurora Cannabis, Cronos, and Canopy Growth will all report their Q3 results. This will be the biggest financial test for the companies since Canada legalized adult recreational use of marijuana on Oct. 17. Even though legalization (basically) occurred after the quarter ended, pot producers were frantically trying to produce enough marijuana to satisfy demand – so costs may have shot higher and hurt the bottom line. We will find out what real hurdles these companies are experiencing getting product to market. After all, as legalization began many large buyers have received only 40% of their order.
Aurora Cannabis: Even though Aurora reported earnings just a few weeks ago, the company will display their Q3 results on Monday before the markets open. Expect another update about the Aurora Sky facility in Alberta that is costing $150m for an 800k sq-ft facility due to produce 8k kilograms of weed a month beginning in 2019. Beyond its construction activities, watch Aurora’s investments. Last quarter, the company’s stake in The Green Organic Dutchman Holdings (TGODF) brought in more profit on paper than its cannabis operations. Aurora has since sold a portion of its shares but has made other investments, such as buying a $20m stake in Choom Holdings (CHOOF), a Canada-based pot retailer, with an option of acquiring 40% of the company at a later date.
Cronos Group: Cronos currently has two brands for recreational consumption called Spinach and Clove. As of the end of Q3, the company’s dried flower products were sold out in Ontario, but available in British Columbia. In their Tuesday earnings report, watch updates on their Building 4 – a 280k sq-ft facility in Ontario. It has received licensing but may not begin harvesting until November. It has also inked a partnership in September with a U.S.-based Ginkgo Bioworks, that furthers the company’s goal to advance its knowledge of cannabinoids.
Canopy Growth: Canopy is one of the few large weed companies with a retail footprint, operating in several provinces under the Tweed brand, so executives may have greater insight into how recreational pot is faring so far. As Canopy’s weed production is among the highest of its peers and it has signed supply agreements with every province – watch its commentary and guidance for the December and March quarters. Canopy’s trucks are each hauling about $3m of product, so it’s no wonder they announced a deal with Brinks Corp. (BCO) to provide security for the company’s domestic and international operations. Canopy Growth is the cannabis industry’s $4B gorilla, and is expected to release earnings Wednesday before the market opens.
Next Week:
The problem now is: since I didn't see this 3 day monster rally coming, what good is my opinion? Maybe not much. But my feeling was that we would get one last gigantic yearend rally, if we kept the house under Republican control and got some form of agreement on Chinese tariffs. (Don't forget, in January the tariff rates go from 10% to 25%. If something doesn't stop that from happening, am I to think this market continues higher?) Well, nobody seems to care about a Congress divided, so it's very possible that we're going to see a sustained run up into yearend – with or without Congress or China. All that being said, if we do run out the year and hit new highs, I have to think it's a blow off top, that will be shortable for months. Just sayin’.
- The expected move for the S&P this coming week is only $50. That seems low to me, and not condusive to selling short duration premium.
- Wealth effect stocks such as Marriott and Hilton (down 11% YTD) are saying that bookings and average ticket sizes are declining.
- Wynn (down 40% YTD) is talking about the decline in Macau gaming – which is a further barometer on the Chinese wealth effect.
- Verizon, Walmart and McDonalds are being use as risk-mitigation (duck-n-cover) stocks that fund managers are buying rather moving into bonds.
- A downward moving marketplace is going to be brutal on the retail client. Why – because the retail investor has been trained over the past 9 years to ‘buy the dip’. When their stocks move lower – they will jump in with both feet and ‘buy them on sale’. Unfortunately, what we’re seeing is the makings of a slow, sustained downturn – where algorithms systematically dismantle all the sectors individually until all are in bear territory.
The psychology of algorithms and fund managers tells me that they will begin to stop beating down the home builders (XHB) and other ‘ugly’ sectors, and will turn their eyes toward the currently less effected companies in order to ‘sell’ and show profits to their members / investors. Look at buying the January $125 PUTS on Microsoft (MSFT – up 27% YTD). Boeing (BA) is another candidate for a 3 to 6 month decline.
Tips:
Top Equity Recommendations:
HODL’s:
- Aurora(ACBFF = $7.18 / in @ $3.57),
- Amarin(AMRN = $22.40 / in @ $2.90),
- Canntrust Holdings(CNTTF = $6.62 / in @ $3.12),
- Canopy Growth Corp(CGC = $39.06 / in @ 22.17),
- Ceco Environmental(CECE = $7.82 / in @ $6.95),
- Correvio Pharma(CORV = $3.15 / in @ $4.79),
- Cytokinetics(CYTK = $7.12 / in @ $7.25),
- Eyepoint Pharma(EYPT = $2.30 / in @ $3.25), and
- Geron Pharma(GERN = $1.66 / in @ $3.75),
Crypto:
- Bitcoin(BTC = $6,450) – Mike Novogratz believes that Bitcoin taking out $10k will lead to new highs. He also believes that Bitcoin’s downtrend woes are near an end, and that a revisit to Bitcoin’s all-time high is in the cards during 2019 due to increased interest from institutional investors. “There’s going to be a case of institutional FOMO [fear of missing out], just like there was in retail,” Novogratz reports. “Before that happens, Bitcoin needs to take out a couple key overhead price resistance points at $6,800, and after that we could end the year at $8,800-9,000,”he clarified. Mike also believes that: “By the end of the first quarter we will take out $10,000 and after that we will go back to new highs — to $20,000 or more.” In recent weeks, a number of traditional banking firms have shown increased interest in crypto, such as Fidelity and their Fidelity Digital Asset Services. Now that the first stone has been thrown, a domino-effect is expected where many of Fidelity’s closest competitors join what is turning into an arms race. Next month, the parent company of the NYSE (Intercontinental Exchange) will be launching their Bakkt trading platform, which offers physically-settled Bitcoin Futures contracts. Many believe this could help cause Bitcoin’s price to increase by eating into the cryptocurrency’s limited supply.
Options:
- Canopy Growth(CGC): Bullish: Dec 18, -40 / +35 Put Credit Spread
Thoughts:
- Tesla (TSLA): TSLA’s government subsidies might start to get more negative attention in D.C. TSLA’s surprise profit last week was comprised in part of subsidies and credits, and pushed the stock up the equivalent of 1.6 standard deviations. If you’re a contrarian bear, it might be time to get short. The long put vertical that’s short the $335 PUT and long the $345 PUT in the December expiration with 43 days until expiration – is a bearish strategy with a 62% probability of making 50% of its max profit before expiring.
- SPY (SPY): With the midterm elections over, the SPY rallied the equivalent of 1.73 standard deviations. The idea that the government can do much to benefit business in the short-term is questionable, especially with a split Congress. It takes months for any legislation to get passed in the easiest circumstances, and changes in regulation can take an equally long time as lobbyists wrangle with staffers. If you’re bearish on the SPY, the long PUT vertical that’s short the $280 PUT and long the $282 PUT in the Dec expiration with 43 days until expiration is a bearish strategy with a 62% probability of making 50% of its max profit before expiring.
- For Downside Volatility:
o QQQ –Buy the $171 PUT and Sell the $168 PUT for December 7th, and
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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Until next week – be safe.
R.F. Culbertson
