This Week in Barrons: 1-6-2019:
Manage What is in Front of You (with Accountability):
Gamblers have a saying: “Play the hand you’re dealt”,and “Only bet what you can afford to lose.” But before they play, every professional gambler will tell you that they spend the 10,000 hours necessary to LEARN how to compete. Lately, I smile whenever I hear people talk about shortcutting the learning curve by increasing diversity, inclusion, and equity. Honestly, if it were that easy – don’t you think everybody would do it? After all, many thought Steve Jobs was a bully and had no time for manners. Most think that Elon Musk doesn’t care about rules. And I personally saw Bill Gates fire 6 people while giving a talk, on stage at the Superdome. Honestly, no amount of diversity, inclusion, or equity was going to impact the speed at which those 3 individuals ‘got s__t done’. Why – because they ‘owned’ the learning curve in their respective disciplines. The big guys were waiting and praying for them to fail. Meanwhile, the accountability was squarely on their shoulders, and they reminded everyone of that fact regularly.
People will re-learn how to manage with accountability – when the money dries up. That is when foundations have down years (like in 2018)and when VCs pull-back in order to support their existing investments (like in 2019). Then we will all stop promoting diversity, inclusion, and equity as cures – and start focusing on speed, results, and sustainability. Case in point: look what happened to Apple this past week. They made a managerial error – suddenly phone pricing and upgrade cycles mattered. Losing as much as Apple did in one day (10%) – has a way of making the way forward very clear. And to put that in perspective, Apple lost the equivalent of buying: (a) Nvidia (the company), (b) Tesla (and having money left over), or (c) buying 3+ Twitters.
Downturns shine a bright light on mis-management, and often mis-management is accompanied by little or no accountability. For example: Pittsburgh has a local professional football team that odds makers had going to the Super Bowl. Unfortunately due to mis-management – the team failed to even make the playoffs. In the last week of the season, we had a wide receiver go so far as to refuse to practice with the team before the big game. What did management do? They paid the wide receiver NOT to play. Do they know what kind of message that sends to the rest of the team? Where’s the accountability? What do you think the wide receiver will do the next time he doesn’t feel like practicing with the team?
There are many examples of corporate myopia being traced back to mis-management accompanied by a lack of accountability. Sony (under Mr. Morita) OWNED the television and musical device (Walkman) world – until J.Q. Public switched to flat screens and mp3 players. Apple (under Steve Jobs) owned the iPod and iPhone product categories – until J.Q. Public decided there was no reason to pay $1,000+ for a new phone every other year when the Huawei phone was 1/3rdthe price with 90%+ of the functionality. Both pivoted to become ‘services’ companies, but (in Apple’s case) without any major services to promote (WeChat and WhatsApp have already been acquired by somebody else) – a services based revenue stream is going to be a long time in coming.
In 2019, the really bad news for J.Q. Public (JQ) is that he’s going to have to learn how to manage his #1 asset – his stock & bond portfolio. For the last 9 years he’s been allowed to: (a) NOT manage his own assets because the experts ‘had his back’, and (b) just believe what he was told (rather than doing his own homework). This will make 2019 a challenging year for JQ, because he’s been fed a laundry list of distractions, and has missed:
- Machines driving our stock market,
- The U.S. adjusting its GDP and unemployment calcs to make them look better,
- The U.S. being over $100T in debt – with no ability to repay,
- The U.S. having a 105% Debt to GDP ratio – when over 100% is = ‘3rdWorld’,
- Repossession rates soaring while credit markets are seizing-up,
- China and Russia building their own financial clearing system – paving the way for the U.S. Dollar no longer being the world’s reserve currency, and
- The U.S. being in worse financial shape than in 2007 - 2008.
JQ has witnessed firsthand the public mis-management of our educational system. This has caused teachers and public education staff (including college faculty, school psychologists, and employees) to quit their jobs in record numbers. Teachers cite no pay raises, budget cuts, teaching vs baby-sitting, and improving prospects elsewhere as the key reasons for their departure. I remember when stability and longevity were the number one perks to being a teacher.
Politically, JQ is seeing our President having a difficult time pushing his own mis-management down to specific government employees. And as MJP was quick to point out, when is the last time an incoming congress-person ever referred to the incumbent President as a “MotherF__ker”?
What’s the FED’s accountability for the upcoming mis-management of our financial soft landing? Who’s owning the stock market dropping 30% from here – as it will bring commerce to a standstill? Who’s accountable for the various pension funds that have over $200T in unfunded pension liabilities?
I’ve said it before – J.Q. Public is not going to know what hit him. All of the dominoes are in place, and all it's going to take is for the first one to fall. I don’t want to be the doom and gloom guy. I'm just pointing out the fact that due to our past 10 years of ‘not managing what’s in front of us – with accountability’ – we are in deep doo-doo. This year J.Q. Public is going to find out just how much mis-management and a lack of accountability is going to cost him.
The Market:
In 2018:
- 2018 was the worst year for the DOW since 2008, and the first decline for the benchmark index since 2015. The DOWs top and bottom 3 were: Merck (+36%), Pfizer (+21%), Microsoft (+19%), - Dow Dupont (-25%), IBM (-26%), and Goldman Sachs (-34%).
- 66% of the S&Pwere down for 2018, and the top and bottom 3 were: AMD (+80%), Abiomed (+73%), Fortinet (+61%) – L-Brands (-57%), Mohawk (-58%), and Coty (-67%)
- The Nasdaqwas down 4% for the year, and the top and bottom 3 were: AMD (+80%), Workday (+57%), and Lululemon (+55%) – Kraft Heinz (-45%), JD.com (-50%), and Western Digital (-54%).
For 2019, I blended my thoughts with some of JR’s:
1. Apple does NOT recover. Fundamentally: Apple has slumped about 40% from its highs and many value investors are urging you to buy and be patient for a rebound. Goldman has compared Apple’s struggles to those of Nokia. I’m not going that far, but with iPhone revenues flat-lining, and a trade war far from over – I’m not seeing a catalyst for a move higher. MATH: tells me that Apple will close 2019 – 15% lower than today.
2. Tesla is stuck in neutral. Fundamentally: Even though this could be the year Tesla outsells Audi, BMW and Benz combined – I still expect competition in the EV space, cheap gas, and generally weak auto sales to keep Tesla’s stock price in line. MATH: tells me that Tesla will close 2019 – 10% lower than today.
3. Netflix is at a nosebleed valuation. Fundamentally: from privacy concerns to a general decline in tech worship, and from vague growth narratives to investor goodwill propositions – I’m seeing a tech decline in 2019. MATH: tells me that Netflix will close 2019 – 9% lower than today.
4. Facebook will continue to fall. If 2018 was defined by Facebookcoming back to earth, 2019 will deliver its continued demise along with the unwind of many of its trends due to privacy concerns. MATH: is telling me Facebook closes 7% lower than today.
5. 10-Year Treasury notes will remain below 3%. Fundamentally: Yields have fallen since November, thanks to more dovish comments from the FED and real demand from investors looking for safe havens. Those same trends will keep yields subdued during 2019. MATH: tells me bonds will close 2019 – 15% lower than today.
6. OIL prices remain low. Fundamentally: between U.S. production increases, slowing global demand, and the other oil producing nations being ineffective at cutting production – the over-supply will keep prices depressed. MATH: is showing that oil will close 2019 – 8% below today’s price.
7. S&Ps are likely to be 4% lower at the end of 2019 than today.
8. GOLD is back. Gold, silver and their respective miners will be the best performing asset class in 2019. Gold will finally breakout above its 5-year base of $1,400 and trend higher. Silver will move above $14, and will display a ‘buy signal’ there before it moves higher. MATH: Gold is likely to be 2% higher at the close of 2019 than today – and silver will outperform gold.
9. ICE (Internal Combustion Engine): Dan Neil wrote a piece in last week’s WSJ saying: “If you purchase an internal combustion engine automobile now, be prepared for it to be worth NOTHING in 5 years.” You can argue with me all you want, but Dan is ‘the man’ and a well-respected automotive guru.
10.Pay-To-Play: If companies won’t pay for talent, talent will go where the money flows. 2019 will be the year where we see the really talented people change allegiance at the drop of a hat. (Downturns in markets bring out those reactions.) In 2019, if you're not inventing – you’re losing. It’s a business – not a museum. Good management (with accountability), traction, feedback and momentum are the important requirements for innovation in 2019.
Info-Bits:
2019 could see:
- Uber change how we get from one place to another.
- Option Trading go mainstream. It grew 22% last year – exceeding all other financial products.
- The Boomer Crisis: Due to retirement issues, we’re going to see renewed pressure on growth stocks over dividend stocks. Diversification will include: growth, dividends, bonds, and crypto. This will lower bond yields and help to drive a crypto bull market as retirement money seeks yield.
- The Rise of Nintendo: Nintendo released a smash hit with the Switch Console – two years ago. We’re in the beginning of the device cycle, and their 2019 gaming pipeline looks strong. Additionally Nintendo is releasing an iOS focused Mario Kart game – shortly.
- Bank Stocks: With most financials generally trading rangebound to down, 2019 should see favorites and I’m liking: J.P. Morgan, Citibank, and PNC.
Crypto-Bytes:
Bitcoin made it to 2019 without:
- a Bitcoin ETF,
- dates for the Bakkt launch,
- any clear crypto regulations, or
- any trusted custodian.
Bitcoin did gain another believer in Tony Robbins and his 3m followers. One element that has not changed is the differing opinions on crypto. Many developers still believe that it’s a garbage network, others that it will revolutionize governance, and still others believe it will replace gold as a store of value. We have seen Bitcoin ‘almost’ die over 90 times in 2018, and there are ‘almost’ 1,000 dead Altcoins out there.
- In 2018, 2,284 initial coin offerings reached their conclusion as investors poured in $11.4B – an average of $5m per offering. During 2017, the corresponding values were showed 966 ICOs taking in $10B for a $10m per project average.
- Ethereum achieved its historical high on Jan. 13, 2018 ($1,352), while the lowest level of the year was touched on December 15 ($84 – losing 94%).
- The top 5 countries for completed ICOs are: USA (645), Singapore (437), U.K. (364), Russia (295), and Switzerland (207).
- The performance of token sales in 2018 that passed the first step was better than 2017, with 19% of the 2018 projects achieving their soft cap — as compared to 10% a year ago.
2019 brings us more critics blaming the reliability of ICOs on their promotional antics and starting to focus on security token offerings (STOs) or other possible traditional investment vehicles. And even after a dramatic downsizing, the crypto market is still larger than at the beginning of 2017 – anda concentration in industries serviced could finally signal a wider understanding and adoption.
Weed & BioTech:
GW Pharmaceuticals (GWPH = $108 / +4.72% YTD): GW Pharma is becoming a solid investment option in 2019. J.P. Morgan raised $345m for GWPH in an October 2017 stock offering. Their Epidiolex drug (the world’s first marijuana drug to treat severe forms of epilepsy) could surpass $1B in annual sales by 2023. The U.S. FDAhas approved the plant-derived oral solution of cannabidiol and beginning in 2019, doctors can start prescribing Epidiolex. Price Forecast: Median target is $181.00 (+79.5%) with a high estimate of $221.00 or a +119.2% climb.
Vanda Pharmaceuticals (VNDA = $27.75 /+5.41% YTD): Vanda Pharmaceuticals will be banking on sales of their two FDA-approved therapies: Hetlioz – a drug for the treatment of non-24-hour sleep disorder, and Fanapt – a drug treating schizophrenia. The FDA is set to decide on August 16, 2019 whether Hetlioz is able to expand its patient pool. Since it’s a high-margin specialty drug, an approval could double the share price of Vanda. Price Forecast: Median target is $43.50 (+61.1%) with a high estimate of $52.00 or a +92.5% jump from its latest price of $27.02.
Last Week:
Last week was an ugly week, and it goes much deeper than just Apple. Apple's CEO Tim Cook told us that for the first time in decades, that Apple’s (AAPL) revenue numbers were going to miss their estimates. Considering so many people thought Apple was completely immune to global economics, it was quite a shock. But it wasn't just AAPL that was getting rocked last week – it was everything connected to AAPL including: chip makers, screen makers, and even case makers. Finally, we are seeing the proof that things aren't nearly as rosy as everyone thinks they are. Now granted, Apple is used to their users throwing away perfectly good phones so they can rush out and buy the newer more expensive model. I can’t fault them for assuming that behavior would go on forever. But sentiment changes instantly in a downturn, and causes people not to cough up that extra $1,100 for a phone. It’s natural to blame China and the tariffs, but it’s almost impossible to return to the way things were.
Last week also gave us an ISM (Institute for Supply Management) report. The ‘New Orders’ portion of the report showed the 3rdlargest DROP ever recorded. That means that businesses are not buying. Yet another data point telling us that our economy is not as strong as what we might think.
Factually, last week’s expected move for the S&P (SPX) was predicted to be $84. For the week we moved upward $46 – so we stayed within the expected move. However over the last 5 days, the historical volatility in the S&Ps is averaging above 30% - which is a lot. And the corresponding historical volatility in the Nasdaq is averaging over 40%. Those kinds of Nasdaq numbers are reminiscent of the 2008 financial crisis with one major difference – nobody is panicking out there right now. FYI, I took Friday’s wild move to the upside as indicative of a long term, hostile market place.
Next Week:
The December jobs report was a blow-out number. Instead of creating the +179k jobs that everyone expected – we got a whopping +312K. Now granted, a lot of that was holiday hiring, but it does create an interesting issue for the FEDs. While economic numbers such as the latest ISM report, car sales, and housing sales are showing a severe slow-down (giving the FED a reason NOT to hike) – the big jobs report and rising wages gives them the ‘green light’ to move things higher. It's an interesting dance, and should put a lid on all those people screaming that the FED is hiking into a coming recession. How do you have a recession when we've seen the fastest pace of hiring in 4 years? Now, the last couple times we had a blow-out December, the following few months were in fact, dismal (as those holiday people got their pink slips).
I’ve been looking for this type of rally for the past 2 months, but only if we received: (a) a signal that the FED rate hikes were ending, and/or (b) a deal with China. Well, on Friday the FED told us that the hikes are on hold for now. Is this the start of something big? I think it could be. Granted it’s nuts gaining almost 800 points in one day, but that's the beast we're in now. Thursday we were down 660, and Friday we were up 800. What does Monday bring? I think that we're going higher next week, as they try and claw back some of the big plunge.
I’ve been looking for this type of rally for the past 2 months, but only if we received: (a) a signal that the FED rate hikes were ending, and/or (b) a deal with China. Well, on Friday the FED told us that the hikes are on hold for now. Is this the start of something big? I think it could be. Granted it’s nuts gaining almost 800 points in one day, but that's the beast we're in now. Thursday we were down 660, and Friday we were up 800. What does Monday bring? I think that we're going higher next week, as they try and claw back some of the big plunge.
I still believe that 2019 will show us a lower market, but from where will the drop start? I'm watching 2400 on the S&P as a potential battle line. If we lose that, we're going to slide a lot further – and I will institute shorts under that scenario. Another scenario that is going on right now is the push up into 2575, 2626 or even 2655 on the S&Ps. There's a lot of upside resistance out there now, but if we use the 50-day at 2655 as our end point - I think that would be a logical place to scale into some shorts. So, we've got a box. The December lows at 2400 and the 50-day at 2655 – with a couple points in between such as 2575 and 2626 that could also prove as barriers. Into next week, I’m looking long for the first half of the week – then looking for short plays.
Tips:
Top Equity Recommendations:
HODL’s:
- Aurora(ACB = $5.22 / in @ $3.57),
- Canntrust Holdings(CNTTF = $5.36 / in @ $3.12),
- Canopy Growth Corp(CGC = $28.25 / in @ 22.17),
- Ceco Environmental(CECE = $6.89 / in @ $6.95), and
- NVAX (NVAX = $2.15 / in @ $2.04)
Crypto:
- Bitcoin(BTC = $3,850)
- Ethereum(ETH = 154.00)
- Bitcoin Cash (BCH = 160.00)
Options:
- Canopy (CGC): Bullish: Feb 15, -35 / +30 Put Credit Spread,
- QQQ: (QQQ = 156.23) Bearish: Feb 15, Sold the -165 / +170 Call Credit Spread,
- VIX:(VIX = 21.38) Bearish: Jan 19, Buy the 25 PUT,
- XLF:(XLF = 24.27) Neutral: Jan 11, Sold the -23.5 / +24.5 Call Credit Spread,
- XLU: (XLU = 52.63) Neutral: Jan 18, Buy the +53 / -54 Call Debit Spread
Thoughts:
I know it’s hard to take your eyes off of the Apple smack down, but you may want to turn your attention to volatility for a minute. If you think that the bad news about AAPL might trickle through the rest of the market and take the Nasdaq Index (QQQ) lower, and want to take advantage of QQQ’s 84% IV rank, the short call vertical that’s short the 165 call and long the 170 call in the Feb expiration with 40 days until expiration is a bearish strategy that has a 78% probability of being profitable.
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
