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This Week in Barrons: 11-18-2018:
“Have your car talk to my car and we’ll set something up for lunch?”
Thoughts:
When having a discussion on autonomous vehicles, there is no one better to speak on the topic than Lawrence Burns – former VP of R&D and Planning for GM.
- What are the roots of the autonomous driving industry?
Burns: After 9/11, DARPA was very interested in developing a vehicle that the military could use to keep soldiers out of Harm’s Way. In 2007, they created a competition called: the DARPA Urban Challenge. 85 teams entered that race for a $2m first prize. GM put its money on Carnegie Mellon University while Volkswagen worked with Stanford. GM (and CMU) won – but the real winner was the proof-of-concept technology that showed cars could really drive themselves.
- How close are we?
Burns: Very close. As an advisor to Waymo (the Google self-driving spinoff), I’ve seen first-hand their self-driving vehicle fleet on the road near Phoenix, AZ. Which means there are also 100’s of early-adopters who are experiencing these vehicles on a day-to-day basis. But Americans drive 3T miles a year – so we need to be 99.99% close.
- Will autonomous vehicles save us money?
Burns: Autonomous vehicles can save us money in different ways. 1.3m people die on our roadways every year. We’re over 90% dependent on oil. We have climate change issues, and there are a lot of hassles to owning and operating a vehicle. By allowing cars and trucks without drivers, you’re going to impact the movement of goods as well as personal mobility. You’re going to allow younger, older, handicapped, and people who couldn’t afford to own a car – to move around more freely. You will spend less time traveling, and be able to get out of a car feeling better than when you got into it.
- How will it change the trucking industry?
Burns: Think about the parts of a truck that are there just because of the driver: doors, windshield, seats, steering, controls, dashboard, etc. The parts you will remove from the driverless truck, are going to save you more than the parts you’re going to add to make it autonomous. You will also save the wages and benefits paid to the truck driver – averaging $0.64 / mile. The impacts will be felt in both productivity and safety.
- What kinds of partnerships are necessary?
Burns: After the DARPA Challenge the auto industry went into denial until about 2014 when companies like GM and Ford really got their act together. Traditionally the auto industry has ‘sold a product’, and now there is a huge opportunity for them to ‘sell a service’ called transportation. Waymo has logged over 9m public road miles, and has accumulated partnerships with everyone from charging stations to insurance carriers.
- What are the environmental benefits?
Burns: The path to electric vehicles runs directly through autonomous driving. Once you have an autonomous vehicle, you can reposition vehicles when they’re empty so that you can be a transportation service provider focused on reducing cost per mile. Electricity costs 10% less than an internal combustion engine. 80% of the trips Americans make are with 1 or 2 passengers – so we don’t need 4,000-pound vehicles to do that. With autonomous vehicles we can reduce our dependence on oil for transportation by 80% - which is one of the keys to climate change.
- What are the job implications?
Burns: The job implications are significant and a hurdle. There are 4m people in the U.S. who make their living as drivers, and millions more in tangential industries such as oil and gas. In fact, the two states whose GDP has grown the most since the recession are North Dakota and Texas – oil states. The transition is inevitable, and will happen sooner than most people anticipate. There will be huge productivity gains when current drivers become working passengers because over 90 minutes per day will be given BACK to over 200m drivers. A dramatic change is coming, and just because we won’t plan for it will not slow it down.
The Market:
“I’m losing money for the first time in 9 years. Am I still having fun?”
A whole lot of things happened last week from the New York Times publishing a scathing report on Facebook to Amazon choosing a second home.
- What was in that NYT / Facebook report?
Last week the New York Times published a blockbuster report with 5 bylines, 50 sources, and 5,000 words – on the failures of Facebook’s management team (specifically Ms. Sheryl Sandberg) during the past 3 years. The story is not a flattering one ( https://www.nytimes.com/2018/11/14/technology/facebook-data-russia-election-racism.html), but attempts to shed a light on the following issues:
- What is Ms. Sandberg’s future at Facebook?
- Why did FB intentionally smear Apple using the group: Definers?
- How far will FB bend over in favor of the Democrats in the coming years?
- Why is FB engaging in hateful, anti-Semitic behavior?
- Why did FB allow the Russians to hack the U.S. 2016 election?
- And has FB fundamentally changed over the past two years?
Even though Mark Zuckerberg (the company’s CEO) has been on a seemingly endless apology tour – the real question remains as to whether any of their fixes are enough to solve their serious issues. And given Facebook continues to roll out technical and staffing changes, the Times report shows that its ruthless efforts to protect the company's reputation at all cost remain its #1 goal.
- Amazon announced a tie for HQ2:
Tuesday, Amazon announced that the 14-month public bidding war for its HQ2 had come to an end. After reviewing 238 proposals from cities across North America, the company says it will build two large regional offices in Queens, New York and Arlington, Virginia – along with a smaller campus in Nashville, Tennessee. But Amazon’s Hunger Games-style civic competition has shined a spotlight on how Amazon (and companies like it) have benefitted enormously from taxpayer funds. Each year, local politicians spend $90B to lure corporations like Amazon into their states. This is more than the federal government spends on housing, education, or infrastructure. In the end, Amazon says it will collectively receive $2.2B from the three cities where it plans to open offices. It’s tough to swallow why the richest man in the world just got $2B in taxpayer subsidies.
- Paul Tudor Jones says: “We’re probably in a global debt bubble.”
Billionaire investor Paul Tudor Jones thinks that the world has accumulated too much debt. Jones said: “Global debt to GDP is at an all-time high. This is going to make it very challenging for policymakers to move forward.” Mr. Jones believes that it is in the corporate bond market where the first signs of trouble will emerge. Recently, U.S. corporate debt hit an all-time high. “We need to pay attention” he said “Because in the past few days we've had liquidity absolutely dry up in many debt markets. There probably will be some really scary moments right around the corner with corporate credit." Mr. Jones also said that the Trump administration's corporate tax cut will hurt investors by causing the economy to overheat and the FED to keep raising rates.
- Ken Moelis is worried about interest rates suppressing growth.
Ken Moelis, founder and CEO of the boutique investment bank Moelis & Co. is also worried about those corporations that have loaded up on cheap debt during the era of low interest rates. “It won’t take too much of a move in interest rates to stop corporate growth due to increased interest payments” said Moelis. Because of higher rates, he is expecting a wave of indebted companies to face critical restructuring issues before the current economic cycle resets.
Info-Bits:
- Natural gas prices spiked 18%: last week. That is the single largest one day move in natural gas in 14 years, and the highest level traded in 9 years. The spike is attributed to a nationwide forecast calling for exceptionally cold winter temperatures over the next couple weeks.
- Entrepreneurship = Diversity + Inclusion + Ecosystem: According to MJP, the new world order of entrepreneurship focuses NOT on profitability and jobs, but rather: Diversity, Inclusion and Ecosystems. The rate of business creation is at an all-time low. They’ve failed at profitability and jobs. So, they’re re-defining their elements for success. It’s only ironic that the acronym spells: D.I.E.
- ‘Massive’ capital infusion beats ‘Lean’ any day: As JT reported, Steve Blank (author of The Lean Startup) wrote: “With capital chasing the best deals, and hundreds of millions of dollars pouring into some startups, most funds have replaced the idea of ‘lean’ with the idea that massive capital infusion owns the entire market.” That leaves ‘The Lean Startup’ a mere footnote for a bygone era. It’s like the old baseball saying: “Home runs put butts in seats, but singles and doubles win pennants.” Small businesses will have to decide whether they want to be rich (putting butts in seats), or right (winning pennants).
- Recent wildfires in California: caused the U.S. Interior Secretary to say: “Every year we watch our forests burn, and every year there is a call for action. Yet, when action comes, and we try to thin forests of dead and dying timber, or we try to sustainably harvest timber from dense and fire-prone areas, we are attacked with frivolous litigation from radical environmentalists who would rather see forests and communities burn than see a logger in the woods.”
- Lack of sunspots to bring record cold: Sunspots have been absent for most of 2018 and the Earth's upper atmosphere is responding. Data from NASA's TIMED satellite show that the thermosphere (the uppermost layer of air around our planet) is cooling and shrinking. "If the current trends continue, it could soon set a Space Age record for cold,"says Mr. Mlynczak of spaceage.com. "We're not there quite yet, but it could happen in a matter of months."
- “Houston has more brothels than coffee shops: and it has a lot of coffee shops,”said Texas Governor Greg Abbott. But what Houston is currently adding to its repertoire is a robot brothel: Kinky S. Dolls. It’s a brothel that rents realistic-looking, life-size dolls with basic artificial intelligence functions built-in. Yep – they’ve taken Ai to a ‘whole n-other level’.
Crypto-Bytes:
The last 72 hours in crypto-land have left many traders speechless. It was due to Bitcoin (BTC) falling from $6,500 to a new low of $5,544 in a matter of minutes. The total crypto market lost over $29B within the same period of time. If you ever wondered why institutional investment in the crypto market is still a ways down the road – it’s because of antics like what happened this past week.
In a nutshell, the past week has been spent comparing man-parts associated with two very large players in the crypto-world. To set the scene: Bitcoin Cash (BCH) was preparing for a hard-fork when suddenly both sides of the battle (Bitcoin Cash ABC and Bitcoin Cash SV) vowed to take down the other side using any means possible. The ABC version was supported by Jihan Wu (CEO of Bitmain) and Roger Ver. The SV version was backed by Craig Wright (claiming to be the real Satoshi Nakamoto). While their behavior may seem childish and reminiscent of 5thgraders – it’s a reminder of why this market is still considered to be immature and manipulated.
Jihan Wuwas reported to have mobilized his 90,000 Bitcoin mining machines to gain an upper hand in the ABC hard-fork. He was quoted as saying: “I have no intention of starting a hash war with Craig Wright, because if I do (by refocusing hash power from Bitcoin (BTC) mining to Bitcoin Cash (BCH) mining), Bitcoin will dump below its yearly support, and may even breech $5,000. But since Craig Wright is relentless, I am all in to fight till the death!” Roger Ver also joined in by announcing that his mining pool of Bitcoin.com could also be redirected from Bitcoin to Bitcoin Cash ABC.
Craig Wright responded on Twitter explaining that for a winner to emerge, there has to be continuous mining of Bitcoin Cash ABC – because one day will not win the war. He went on to state that the fall of Bitcoin does not phase him, and warned Bitcoin miners NOT to switch over to mining Bitcoin Cash ABC. He said: “To all BTC miners, if you switch to mine BCH, we may need to fund this with BTC. If we do, we will sell a lot of BTC for USD and will tank the BTC market! Consider that, and have a nice day (BTC to $1,000 does not phase me).”
There was a massive sell-off in BTC – as both sides sold to finance their war efforts. I wouldn’t be surprised if most crypto traders fled to stable coins until the dust clears and adults re-enter and gain stability in the crypto market place.
Last Week:
Has the bear market finally come a knocking? Because the last few weeks have been so dramatic, it is easy to start suggesting that the end is here. This year has been a sideways, sloppy mess. If you look back at the start of the year, we came roaring out of the gate, pouring on almost 2,000 DOW points in a month. We were putting in all-time highs almost every day. But February hit and the markets puked all that back up and then some. From that February low through July we did nothing but chop up and down in a big channel. In August we finally pierced that upper boundary of the channel and ultimately ran-up to make a new high for the year on October 3. Since that time, another massive fall has taken place wiping out the entire year’s gains. At the end of October, the selling stopped and a wicked bounce ensued – but that bounce did NOT take us to new highs. It didn't even get us back to the January high. Since November 8, we have fallen over 1,342 DOW points in 5 sessions. So, the only constant this year, has been wicked up and down chop. Market ‘old-timers’ will tell you that when a market is getting ready to change direction – it starts to become choppy, volatile, indecisive and wicked. We've had over 70 sessions with 300+ point round trips, and dozens with over 500+ point round trips. I think we are ‘topping’, but it’s a process – not an event. The bulls push for more, while the bears take their shots.
Specifically we saw 3 elements last week:
1. Distinct capital rotation out of over-performing sectors and into underperforming ones. For example: traders sold tech and bought emerging markets. I’m seeing a constant game of ‘musical chairs’ that I think gets uglier before moving higher.
2. The ‘Life Raft Stocks’ are rising at alarming rates. Stocks like Verizon (up 13% YTD), Merck (up 35% YTD), and Aetna (up 15% YTD) are flying off the charts, and are potential ‘shorts’ once they calm down.
3. Nvidia and Applied Materials are telling us that tech is quickly slowing down. Think about shorting Microsoft – a stock that’s up 26% YTD and has been virtually untouched by the downturn thus far.
Remember the ‘gravity pivot points’ on the S&P (areas of risk and heavy volume): 2911, 2842, 2811, 2731, 2682, 2626, and 2575. We are currently at 2742 – between the 2811 and the 2731 levels.
Next Week:
That said, I still think there can be one last blow off top – aka a big strong run that possibly takes us to a new high. Why do I think that? History. While nothing ever happens ‘every time’, I've seen a lot of times where after the Thanksgiving holiday, the market moves higher by putting on its ‘Santa Claus Rally’ hat, and runs into the new year on the ‘January Effect’. I think that mentality can still be in play. But, if we get a ‘Santa Rally’ and a ‘January Effect’ – I believe that's the ‘blow-off top’ that proceeds a long, protracted bear market. I still think they have enough desire to pull it off because there have been numerous down days where the market COULD have fallen another 400+ points – but instead stopped on a dime and reversed. Between now and the end of the month, I can see us down even more – potentially a real washout. But, I’m still leaning toward the idea that they will use that ‘flush’ to pile into a year-end rally.
As for next week, each time I review the DOW’s last 4 sessions – whenever we set an intra-day high we simply drifted back lower. It’s pretty evident that 25,511 is a line of resistance that is difficult to cross. If we can get through that congestion, the DOW could easily pick up 300 points and challenge its 50-day moving average. But if we don't, I think we’re still putting in some lower sessions before ‘Santa Claus Comes to Town’. It think we see a move higher during this Holiday shortened week, and then a pullback the week after. Then in December, I think they work up a year-end run. But first, they have to get the DOW over 25,511, and the S&P over 2750. If we see that, we should see a nice upside burst. But if those levels hold, or they aren't even challenged – then we've got some more work to do on the downside before any year-end rally hits.
All in all, I think we're in for some very interesting times. Word is that the Mueller investigation is getting ready to offer up indictments, and there are some interesting developments on who’s actually NOT on the list. One thing to remember in this whole mess is that a big Government shake up will dent this market.
For this coming week:
- We are looking at a $47 expected move (higher or lower) in the S&Ps.
- Watch the financials. If the XLF (the financial ETF) remains above $26.50 – the S&Ps can rally, but below $26.50 and the S&Ps will have trouble getting out of their own way.
- Watch the retailers for the holidays – especially in a rising interest rate environment. Think about shorting Macy’s (M) if it bounces higher, and look into a longer term short of Lululemon (LULU) such as buying a February PUT.
Tips:
Top Equity Recommendations:
HODL’s:
- Aurora(ACBFF = $6.40 / in @ $3.57),
- American Express (AXP = $109.46 / in @ $108.31),
- Canntrust Holdings(CNTTF = $6.32 / in @ $3.12),
- Canopy Growth Corp(CGC = $35.21 / in @ 22.17), and
- Ceco Environmental(CECE = $8.35 / in @ $6.95)
Crypto:
- Bitcoin(BTC = $5,650)
Options:
- Canopy Growth(CGC): Bullish: Dec 18, -40 / +35 Put Credit Spread
Thoughts:
- 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
