This Week in Barrons: 12-23-2018:
How LOW can you go?
Last week we tugged on Superman’s cape, and pulled the mask off the old Lone Ranger. We obviously made someone angry, because we experienced the largest weekly market drop in history. If we go down another 200 to 400 S&P points, I think we will begin to experience a complete turnaround in our investing and entrepreneurial thinking. Why – because this is the first time in history when the average American has more invested in stocks than in their house. If we just go a little lower: corporate buybacks will stop, non-profit endowments will pullback, and government tax receipts will shrink – causing layoffs. We will finally start to favor those entrepreneurial, educational, and investible models that show financial sustainability. A recent survey of 12,700 entrepreneurs (over 30 years) found that entrepreneurs START companies rather than JOIN them because: They believe they’re better than their resumes show, and realize they can make more money (and have more fun) by going it alone.
- They choose the path because their resumes and interviews have failed them. They know that a resume and interview do NOT show: resiliency, curiosity, agility, resourcefulness, pattern recognition, tenacity and / or passion.
- On average they scored 12% higher on cognitive ability tests than their educational credentials would have predicted.
- And on average earned 7% more than in a corporate job – due to corporate pay scales being tiered by education and experience.
This explains why immigrants often gravitate toward entrepreneurship, and why family funding is a dominant source of financing. It also explains why entrepreneurs reject standard educational processes – because they doubt that it can increase their productivity cheaper, faster, and better than they can.
The most provocative survey conclusion was that the most talented and productive members of our society are entrepreneurs. This conclusion flies in the face of historical thinking that told us: “Entrepreneurs were those who could not find, could not hold, or could not stand real jobs.” This also tells us that the way we convey our abilities (resume, social listing, and work history) is not only a poor predictor of success – but only serves to reinforce an existing backward facing process. A process that may have worked in the 20thcentury, but the 21stcentury requires individuals that embrace disruption and can think and act differently.
I’m reminded of Ms. Marissa Mayer (who ran Yahoo into the ground) after she ran products at Google. Her hiring process at Google was focused on a candidate’s quantitative analytics. She said: “We only review candidates with the highest grade-point averages and SAT scores – with most graduating from Ivy League schools. One candidate got a ‘C’ in macro-economics, and that bothered me because: Good students are good at all things.” WOW. I guess that explains why the most successful Google products (YouTube, Android, DoubleClick, Keyhold (Google Maps), Waze) were acquisitions and NOT home grown. Obviously Ms. Mayer’s quant jocks didn’t have the ability to get ‘er done entrepreneurially.
The survey went on to talk about the #1 trait of all successful entrepreneurs: STORYTELLING. Presenting and delivering an opportunity to customers and investors is a different kettle of fish, and comes with its own set of challenges. Our brains are hardwired to enjoy and remember stories. An influential story has 3 sections: (a) a setup (that sets the scene), (b) a struggle (that describes the conflict and confrontation), and (c) a solution (that overcomes the struggle). If you race through the setup and struggle to get to the solution – you’re making a mistake. It’s the struggle that really engages the audience – much more than the solution.
Some battle-tested Setuptechniques are:
1. Start with a question that creates a ‘curiosity gap’ and uses the word ‘you’. “Have you ever met…? Do you know much about …? Hands up if you have ever…?”
2. Then place your audience in the scene – because you want them to fire up their imaginations and live it with you. “Imagine yourself as being part of a group of people that …”
3. Now make the characters relatable such as: teammates, customers, even competitors. Compare them to someone that they know – their boss or even a celebrity. “Fred is a bit like Sheldon from ‘Big Bang Theory’…”
The most important part is the Struggle.
4. Begin to relate the problem to something the audience is familiar with. “It’s just like when you would…”
5. Replace every ‘I’ and ‘we’ with ‘you’. “You see this all the time…”
6. Talk in the present tense as this creates a sense of urgency. “It’s like your boss looking you in the eye and saying: Dave, are we keeping you from something?”
7. Use specific details like time, location, and money to bring your story to life. “Cindy’s stop watch showed that the entire exchange took 2 hrs. and 48 min.”
8. Use the ‘pregnant pause’ (a carefully placed moment of silence) to your advantage. “Cherise came to me in tears. [pause] That’s when we knew…”
9. Take the temperature of the audience by asking them to feel. “Imagine what it would feel like to…”
Then there’s the close – theSolution.
10.Introduce the solution as a question. Before telling anyone about the product or service … ask them a ‘What if.’ “What if there was a way to…?”
11.Let someone else be the Hero. Giving credit for the solution to a mentor, a teammate, even a stranger allows you to look humble and relatable to your audience. “It was at that point that the lady in the back row chimed in with…”
12.Use physical gestures, facial expressions, and movement to make your story come alive. “Our client’s productivity went from 60% (hand position 1) to 80% (hand position 2)…”
As evidence that ‘storytelling’ works – currently the world’s highest grossing musical artist is Ed Sheeran. He grossed over $432m this year by just going on stage (often by himself) and just singing ‘n telling his story. In an era set in special effects, it’s amazing that one guy telling his stories through song is captivating audiences worldwide. Ed’s stories are simple, and his songs have melodies that you can sing along to. People like him because they relate to his music – without any frills. He takes an audience on their own particular journey and includes them in his. So just because the limbo bar is moving lower – doesn’t necessarily mean that the cream will stop rising to the top.
The Market:
Last week we heard the Gospel according to David Tepper. It told us: (a) “The FED PUT is dead. (b) Everything is tight right now. Chinese money growth is falling. The ECB is stopping the last of its QE. And our FED is still tightening. (c) The largest net issuance of Treasuries and worldwide fixed income securities is coming early next year. So, something will get crowded very quickly – either stocks, bonds, or both. And (d) there is a trade war going on that is not conducive to confidence, and freezing some worldwide activity. So bottom line: Cash is NOT SO BAD.”
It’s disturbing to me that the average American presently has more money in the stock market than in their home. So just like in 2008 (when our home was our largest asset), our main source of long-term stability is being crushed. Most money managers are advising their clients that:
- The stock market averages at least one 14% drop (from peak to trough) per year.
- Daily dips of 2% (or more) happen at least 5 times per year.
- Every 5 years there is a major panic that leads to a 30% correction.
- In contrast to 2017, this year is a reminder of what can actually happen.
- Cash positions are important because it allows investors to buy dips and act as a "lender of last resort" to those who want to panic sell.
But the facts are, last week’s action is anything BUT normal.
- DoubleLine Capital founder Jeffrey Gundlach thinks that the writing is on the wall for this being the start of a bear market.
- Ryan Detrick of LPL Financial Research says that while this is one of the worst starts to December in the history – he’s holding out hope that we could see a pop before the year’s end.
- Peter Boockvar of Bleakley Advisory Group says there are indications that we may have put in a short-term bottom, but he emphasizes ‘short-term’.
- Tom Lee of Fundstrat thinks that people see the world’s weakness as affecting the U.S. He doesn’t think the bull market is over or even broken.
Even though many stocks are already in bear territory, I think that there's more downside to come - possibly a lot more. There's going to be bounces and chop, but it’s my guess that the overall direction to our markets going forward is going to be sideways and down. This slow movement downward isn't just about the U.S. or U.S. stocks. It affects Europe and the Far East as well. The Sovereigns are going to rethink their bond purchasing, and stock managers around the world will be readjusting their portfolios.
Info-Bits:
- Oil Dropped 8% this week:
1. Recent EIA data revealed that oil production in the U.S. grew even more than previously believed. In fact, recently the U.S. became a net exporter of crude oil and petroleum products.
2. OPEC and Russia had a lackluster production cut (1.2 bpd).
3. Forecasts for 2019 show global demand growth for crude oil slowing.
- Facebook is facing the increased threat of government regulation. Combine that with their network weaknesses, and slowing global growth – and you have 3 main hurdles to any kind of recovery in 2019.
- Gold’s path to $1,300 remains alive. Gold will need the stock market to continue getting battered and the dollar remaining lifeless for it to rise.
- Stocking Stuffers that I’d like are:
1. Companies to stop hiding materially financial information.
2. Politicians to stop front-running defense expenditures.
3. And CEO’s to stop lying about criminal activity inside their firms.
- GlaxoSmithKline is combining its consumer health business with Pfizer to create a medical superpower. They'll become the largest over the counter supplier of medical goodies on earth.
- Tariffs (thanks to MJP):
1. Canada has 10 TIMES the tariffs on the U.S. as the U.S. has on Canada; however trade between the two countries is almost at parity.
2. Japan has 2.5 TIMES the tariffs on the U.S. as the U.S. has on Japan; however imports from Japan are 2 TIMES exports.
3. China has 2 TIMES the tariffs on the U.S. as the U.S. has on China; however imports from China are 4 TIMES exports.
- Stanley Druckenmiller (thanks to JT): “Something is not right about the U.S. economy. Since 2010, corporate non-financial debt has grown 60% from $6T to $9.6T. During that same timeframe, corporate earnings only increased by 27%. So we now have a big debt build-up, and a President who is comfortable doing more deficit based fiscal spending. This puts us in a similar position to where we were in 2007.” https://www.bloomberg.com/news/videos/2018-12-18/druckenmiller-says-something-not-right-about-u-s-economy-video
Crypto-Bytes:
This year has not been great for crypto as: (a) Bitcoin is down more than 80%, Ethereum is down over 90%, and the market overall has shed hundreds of billions of dollars over the past 11 months. And yet, even as startups layoff staffers, reduce funding, or shut down entirely – capital is flowing into the space and firms are moving forward with their projects.
- Binance (the largest crypto exchange) is expanding its venture wing and is launching programs in Berlin, Buenos Aires, Lagos, Singapore and Hong Kong.
- Lolli (a crypto rewards app) is gaining traction, with cosmetics chain Sephora joining its list of retailers. The app allows users to earn bitcoin for shopping at the merchant or other partners like Ulta and Everlane.
- Yoeman’s Capital Growth Fund was just launched by David Johnston and is seeking to raise $200m to support later-stage crypto startups.
- Kraken began gauging interest from investors this week on building a ‘war chest’ to be used for acquisitions.
- Ethereum blockchain development is continuing. Go-ethereum (Geth) just published the latest version of its code, officially locking in the network’s upcoming Constantinople hard fork.
- Facebook has published 5 job openings for blockchain developers and marketers. The new employees will work within the company’s young, Chicago-based blockchain division – developing a new, scalable platform.
- Blockchain Developer is the most in-demand emerging job – according to LinkedIn. The position saw its demand jump 33 TIMES higher than last year.
Weed & Edge Ideas for 2019:
- New Age Beverages (NBEV): What’s great about this beverage company, is potential cannabis legalization. New Age is planning on becoming a global provider of cannabidiol (CBD) infused drinks. Following the legalization of marijuana in Canada and the passing of the Farm Bill (that removed hemp from the Schedule 1 of the Controlled Substances Act in the U.S.), NBEV can start selling products containing CBD. Their stock grew by 183% in 2018.
- NIO (NIO): is often referred to as “The Tesla of China”. It filed for a $1.8B IPO in August 2018. NIO builds autonomous, electric vehicles and is capturing market share at an exponential rate, making it a compelling play in 2019.
- TWILIO (TWLO): If you’ve tried Uber, Lyft, Nordstrom, Lululemon, Airbnb, or a host of others – you’ve encountered Twilio’s communications via text, MMS, voice, and video. Their stock has grown by 270% this year, and is posed to continue its march higher thanks to its impressive earnings growth.
- Etsy (ETSY): Etsy is the online retail platform that allows small entrepreneurs to sell anything from hand-knit scarves and personalized dog collars to jewelry and one-of-a-kind pieces of art directly to consumers. Etsy is up 150% YOY.
- World Wrestling Entertainment (WWE): Yes, this is the company that produces the TV show where grown men step into a ring and pretend to beat each other up. The company signed broadcasting contracts in the U.S. as well as in India – which sparked a 120% rally this year. It’s all about the television rights, and a U.K. deal could be right around the corner.
Last Week:
December’s stock market is on track to deliver the worst performance since The Great Depression! When you stack up the numbers, you can’t deny the historical significance of the carnage that has taken place. Even December being the worst month of the year hasn’t happened since the S&P 500 debuted in 1957. The sentiment is so bad that CNN tracked down former FED Chair Alan Greenspan who said: “It would be very surprising to see the markets stabilize here, and then take off higher. There could be a mini-rally soon, but at the end of that run – I’d run for cover.” Greenspan also warned that rising interest rates could lead to stagflation – characterized by rising inflation, layoffs and high unemployment in a slowly growing economy.
The CEO of Euro Pacific Capital said: “I’m watching the U.S. economy implode. We’re in a lot of trouble. This isn’t a bear market, we’re in a house of cards that the Fed built.” Peter Schiff says that this time the crisis will be worse than in 2008, and that policy makers have set the stage for an economy that is unable to cope with higher interest rates after a decade of easy-money policies. “Markets are starting to crack as this debt is getting more expensive to service. We built this gigantic bubble on this unprecedented amount of cheap money and quantitative easing, and now the hangover will be much worse. I think the FED will ultimately take rates back to zero. They don’t realize how bad the economy is – and don’t remember how bad it was in 2007.”
The only thing that could even spark a rally right now would be some form of a really good deal with China over tariffs. Earnings aren't going to do it. We've been getting lousy reports out of Micron, and if the chip sector isn’t going to do well – then the overall economy is going to falter. If you believe that the market has topped, then it either trades sideways in a giant choppy range, or it continues to fall. I'm hoping more for the fall, because at least you don't have to work very hard to make money.
Next Week:
Factually:
- We’ve seen a flush of almost the exact magnitude across all asset classes. For example: (a) the Russell is down 16%, (b) the S&P is down 13.4%, (c) the Nasdaq is down 14.4%, and (d) oil is even down 15%.
- Going forward the risks are:
1. CREDIT RISK: Junk Bonds (HYG) had their largest outflow ever recorded this past week. This caused rates to spike higher – and pushed financials (XLF) lower by 16% thus far in December.
2. The FED: does NOT have our back. We are still in the midst of the largest stock buyback period in history, but if the downturn continues firms will stop their buybacks in order to conserve cash.
3. VOLATILITY: is still low. Hedge funds are still ‘SELLING’ volatility in this market – looking for a bounce. Until hedgies see the FEAR – this market has further to go to the downside.
4. INEFFICIENCY: Last week we were expecting a 65-point move in the S&Ps, but received a 200-point move (to the downside). That’s a 3 standard deviation move that is virtually unheard of, and certainly a sign of a market that cannot get out of its own way.
- The S&Ps are showing a $92 expected move for Christmas week (3.5 days of trading). If we would move lower (say down to 2,200), that would effectively remove all of the Trump rally from the markets.
o Watch the HYG. A continued move lower will spike yields (closing in on 6%) and further spook the financials.
Tips:
Thoughts:
- If we get a market rally to the upside – short it.
- Stocks like Boeing and Microsoft are ripe for the shorting as they are still somewhat unscathed.
- Another area that has avoided collapse thus far is healthcare (XLV). If the downturn continues, XLV will have to fall with it.
- Markets will be experiencing light volume thru Thursday – so even the slightest movements could have larger-than-life impacts.
- Volatility will continue thru at least March, so selling premium out through that time period is not a bad idea.
Top Equity Recommendations:
HODL’s:
- Aurora (ACB = $4.88 / in @ $3.57),
- Canntrust Holdings (CNTTF = $4.51 / in @ $3.12),
- Canopy Growth Corp (CGC = $26.22 / in @ 22.17),
- Ceco Environmental (CECE = $6.81 / in @ $6.95), and
- NVAX (NVAX = $1.90 / in @ $2.04)
Thoughts:
- Boeing (BA = 304.55) short on rally
- Microsoft (MSFT = 98.23) short on rally
Crypto:
- Bitcoin (BTC = $4,050)
Options: (Looking for a bounce this week or next)
- Canopy (CGC): Bullish: Jan 18, -40 / +35 Put Credit Spread
- XLU: (XLU = 53.81) Bullish: Dec 28, Buy the +55 / -56 / +57 Call B-Fly
- XLF: (XLF = 22.79) Bullish: Dec 28, Sell (1) $23.5 Call / Buy (2) $24 Call – for 9 cents. Sell this the morning of the 27th
- IWM: (IWM = 128.37) Bullish: Dec 28, Sell (1) $132.5 Call / Buy (2) $135 Call for 22 cents. Sell this the morning of the 27th
Thoughts:
- SPY: (SPY = 240.70) Selling Premium:
- SPY Iron Condor: Dec 28 +226 / -231 PUT to -253 / +258 CALL
- SPY Iron Condor: Feb & Mar 15 +200 / -205 PUT to -287 / +292 CALL
- IWM (IWM = 128.37) Selling Premium:
- IWM Iron Condor: Feb & Mar 15 +100 / -105 PUT to -160 / +165 CALL
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
