This Week in Barrons: 2-3-2019:
The Upcoming EV Pile-Up on I-70: Industry analysts expect to see nearly a dozen new all-electric vehicles in U.S. showrooms by the end of 2019, with dozens more coming to market in 2020.
- GM: The Chevy Bolt EV was the first to copy Tesla’s range by getting 238 miles per charge. Cadillac will be next to go long-range for 2021 – using a platform that could eventually be used by dozens of other models.
- Nissan: unveiled a 226-mile version of its Leaf at this year’s CES in Las Vegas. Its low price tag could draw buyers away from the Tesla Model 3, and by 2022 Nissan will have over 8 all-electric models – including its high-line Infiniti brand.
- Jaguar: recently launched the I-Pace SUV.
- Audi: will soon follow with the all-electric e-Tron SUV.
- Porsche: will start marketing its Taycan electric sports car later this year.
- BMW: is currently developing range of battery-electric options for every model.
- Mercedes & VW: Benz plans to start marketing long-range EVs in 2019, and both are creating unique electric sub-brands: Mercedes-EQ and Volkswagen I.D.
Losing money: Beyond the cost of parts, by 2023 over $255B will have been spent globally on R&D and cap-x changes required to produce an estimated 207 additional electric vehicle models. Many of them are destined to be unprofitable due to high systems costs, low volumes, and intense competition. Plug-ins and pure electrics currently only account for 4% of the Chinese market and 2% of the American. Only the Tesla Model 3 is currently selling more than 10,000 units a month. EVs are predicted (by some) to only be 20% of total sales by 2030 – and that’s not very much growth. Part of the problem is that charging times are still lengthy. Conventional Level 1 and 2 chargers often require a complete day to charge a Tesla Model S – if the battery was fully drained. Newer Level 3 chargers can produce an 80% refill under an hour. More advanced charging systems are needed, and are beginning to be rolled out by ChargePoint that could deliver up to a 20 mile range per minute of charge – basically emulating what a motorist might expect from a gas pump. ChargePoint expects to add almost 25,000 more charging stations over the next five years, but currently they are few and far between.
Sticker shock: Costis the other obstacle. EVs traditionally cost thousands of dollars more than conventionally powered vehicles. The gap has been shrinking, in part due to competition that has forced manufacturers to subsidize their offerings.
Pretty nutty demand: “Even if there’s a global recession, we’re expecting 2019 deliveries to be 50% higher than last year. To see 50% growth in tough economic times is pretty nutty,”said Elon Musk. Musk said that the real test for Tesla will be 2019. They will have to prove that they can hit their production numbers despite all the competition. Other manufacturers are hoping that the old adage, “a rising tide lifts all boats.” Unfortunately, the second best-selling EV is Toyota’s Prius Prime – and that generated sales of less than 28,000 vehicles last year. In 2018, only six other EVs topped 10,000 units sold. Declining costs, longer range, and increased availability of fast chargers will eventually help to win buyers over to EVs. But, for now, everyone agrees that EVS are a sure-fire recipe for losing money.
The Market:
We’re beginning to see some very interesting parallels between the previous two large market tops (2000 and 2007) and what’s going on today in the market:
- All saw a steep correction off their highs – that broke a multi-year trend line.
- All saw the monthly MACD indicator move lower and a negative histogram.
- All moved from new high to new low on the Bollinger bands before bouncing.
- All bounced right into the 200-day moving average.
- All worked off any oversold conditions.
- All followed a trend of lower unemployment, and the end of a business cycle.
- All coincided with a reversal in yields.
- And all had a FED suddenly halt its rate hike cycle.
I appreciate that between the dovish FED and a potential China deal – markets may just drift higher and any pullbacks could turn into buying opportunities. However, as long as the S&P Index (SPX) remains below its 200-day moving average – there is well-founded risk that this can still turn into a full-fledged bear market. After all, economic growth is slowing, earnings growth is slowing and the last three times the FED halted its rate-hike cycle a recession followed. Right now we have an aggressive bounce that remains below its 200-day moving average. We are no longer in oversold territory. A dovish FED has now been priced in – so that carrot is gone. Both the bull case and the bull-trap scenario remain unconfirmed at this juncture. Nobody (as of yet) is screaming:“The top is in.” Honestly, it’s much easier to see these things in hindsight, and almost impossible to view when you’re living it. Factually:
- Earnings are deteriorating.
- Guidance is lowering.
- The National Association of Business Executives survey is horrible.
- Consumer confidence is sinking.
- This market has all the markings of the Plunge Patrol Team (PPT) making sure it doesn't roll over and puke.
- Even Lockheed Martin lowered their guidance, and with all the military spending - how is that even possible?
Info-Bits:
- How do the Pros Buy Stocks? ThePros don’t just BUY stocks. They buy them at a great price, and then at an even a better price. They first own the stock to capture appreciation and the dividend. Then they sell the covered CALL to lower their breakeven price. And then sell a PUT option below the market which allows them to take in additional premium, along with acquiring more stock if the put strike price gets breached. The above is a demonstration of those 3 steps in XME: (a) Bought 100 shares of XME for $29.50, (b) Sold the $31 CALL for $0.50 in March, and (c) Sold the $28 PUT for $0.60 in March.
- Gold’s a Rallyin’: Gold has been laughed at for years. It's gone nowhere while stocks have easily outperformed it. But if the December sell-off taught us anything, it's that the market can and will surprise you. It’s back!
- Pending home sales dropped in December: Pending sales were down 9.8% YOY in December. This marks 12 straight months of annual declines, and is also the lowest December sales reading since 2013. Many observers thought that sales would get a boost in December from a drop in interest rates.
- The Day After Tomorrow: Last week the temperatures were the coldest in years, thanks to a breakdown in the polar vortex. Chicago set an all-time record low of 27 below zero, and residents reported hearing a series of mysterious booms. Those booms were ‘Frost Quakes’ which happen when underground water freezes and expands, causing the soil and rock to crack. Ouch.
- Is Facebook Back? The social media giant reported revenue and earnings that comfortably beat estimates. They have over $41B in cash. Their employee headcount (35,587) increased 42% YOY. Nicely done Zuck!
- The robots are coming: Travelers flying out of London's Gatwick Airport may soon have a robot parking their car. Do you still have to tip them?
- Goldman, you still got it: Goldman Sachs still has the key to beating the market, but it is only telling its clients. They have created 39 client-facing portfolios. 34 of them are outperforming the market, and 3 have more than doubled the S&P 500’s year-to-date return. Their ‘High Revenue Growth Fund’ likes: Netflix, Align Technology, Amazon and Autodesk. Their ‘High Sharpe Ratio Fund’ likes: PVH, Conagra Brands, and Western Digital.
- $11 Billion: That’s how much the Congressional Budget Office says the economy lost during the partial government shutdown. Almost double what it would have cost to build the wall.
- Just Stop Believing: The world is about to reach a point where: “Seeing is NO LONGER believing”. Advances in artificial intelligence could soon make creating deepflakes (fake audio and video) relatively easy. Videos in which a person appears to say or do something that they didn't actually say or do – will take the war against disinformation to a whole new level.
- Cap-X Growth: Duke University is predicting 1% growth in capital expansion projects over the next year – the second-lowest level since 2009. The data coincides with the National Association of Business Economists, that shows 84% of companies did NOT use their tax law savings to increase their capital spending programs. Deteriorating business sentiment is feeding into weaker capex plans, and this will likely translate into slower economic growth in 2019.
- Is there REALLY wisdom in a crowd? How much should firms trust the wisdom of the crowd? The latest research suggests that instead of going with the most popular answer to a question, companies should choose the answer that is ‘surprisingly popular.’ Surveyors should ask the crowd for not only their own answer, but also for their prediction about what the crowd will answer. That will increase your probability dramatically of being correct.
- Robo Calls: To U.S. phones increased 46% last year. The result? People are not answering their phones because real friends text.
Crypto-Bytes:
- Anybody See My Wallet? Troubled Canadian crypto exchange QuadrigaCX has filed for creditor protection. According to the exchange, they had 115,000 customers and owed them about $190m USD. However, the vast majority of those funds were in crypto – and no one at the exchange can locate or access its cold storage wallet. It seems their founder Gerald Cotton was solely responsible for overseeing its wallet. After he died in December, the company lost access to the wallet. So you’re asking me to believe that there was NO back-up plan?
- About that Bitcoin ETF: The VanEck / SolidX Bitcoin ETF proposal has been resubmitted. That means that there are now 2 Bitcoin ETF proposals sitting before the SEC. Once the proposals are put on the docket, the SEC will have 240 days to decide whether to approve or reject each. Proponents hoping for an approval believe that a Bitcoin ETF will bring in fresh funds, and therefore increase marketplace liquidity.
- Can you say: Orange-Chain? IBM just completed a trial of blockchain technology to track a shipment of mandarin oranges from China to Singapore. The main shipping document (Bill of Lading) was recorded on the blockchain. This document serves as a proof of ownership of goods, as a receipt of goods, and as a contract for the shipment. It is normally mailed to all parties involved in the shipment for signature, and the transaction would normally take 5 to 7 days to complete. This was accomplished in seconds. Along with time savings, the trial also showed that a blockchain-based system can cut storage costs, security expenses, and operating costs used for refrigeration of the cargo container while everyone waits for the documentation. IBM said that it also made for better information handling as it provided a traceable and tamper-proof record storage for the maritime shipment industry – where document fraud accounts for 40% of total fraud!
- Hey Vin, Gone in 900 Seconds: Despite some technical issues, BitTorrent tokens (BTT) sold out within minutes via Binance’s Launchpad platform. According to Tron CEO and founder Justin Sun, the auction ended within 15 minutes – with a total of 59.4B tokens going to 962 participants.
Last Week (we learned): that the FED likes their jobs more than they do the economy. They ‘caved’ to market pressure to keep rates steady. They even suggested that they'd be fine adjusting the speed and duration of running off their balance sheet. While increasing rates does slow things down, it’s the monetary liquidity that has become like heroin to the market. Take away the balance sheet and markets go into withdrawal. Central Banksters can NEVER be seen as being the cause of a meltdown, crash, or slowing economy / recession. They also ‘caved’ to the facts:
- 78m Americans are in the gig economy because full-time jobs don't pay enough.
- In the U.S., 66% of all jobs pay less than $20 / hour.
- More working age Americans do not have jobs – than during the last recession.
- Wages for low-skill workers have remained flat for the last 40 years.
- We have been spending more money than we make for 28 months in a row.
- The average young adult leaving college has negative net worth.
- The average American household is $140,000 in debt.
- Poverty levels in U.S. suburbs have increased 50% percent since 1990.
- 51m U.S. households can't afford rent and food.
- The bottom 40% of all U.S. households bring home just 11.4% of all income.
- 22% of all Americans cannot pay all of their bills in a typical month.
- U.S. households are $13.15T in debt (a new all-time record).
Based upon the above, the FED simply asked itself: “How are we going to be consumers when we've got no money?” So they stopped raising rates. I believe they will stop the balance sheet run-off this year as well. Our FED is absolutely trapped. If they try and normalize rates and work off their balance sheet, they will induce a recession that could quickly spiral out of control. But if they don't, they will blow an even bigger bubble and cause the inevitable hyper-inflation.
Weed:
Last year, almost $14B was spent on cannabis. The Canadian Press voted cannabis the biggest single news story of 2018. Cannabis stocks are on fire … again. Technical stock patterns for marijuana stocks are now flashing BUY signals across the board. To this day, there’s nowhere near enough recreational marijuana to satisfy demand. In fact, Canada’s cannabis shortage is so severe that most stores are closed Monday through Wednesday. And Ontario is limiting its number of retail licenses to just 25 cannabis stores, and won't let them open until April 1st. There just isn't enough weed.
Next Week: If this earnings season has been frustrating for you, I completely understand. It’s because we're not only dealing with earnings, but with our FED and the ongoing trade negotiations. Earnings have been disappointing, and have resulted in the lowest number of earnings ‘beats’ in the past 7 years. Apple set the stage for a messy earnings season when it warned of lower revenue – a couple weeks ago. American Airlines, Macy’s, Kohl’s, Amazon, and Nvidia also plunged when they reported smaller results accompanied by lower guidance. But the market (as a whole) has taken the individual disappointments in stride. The S&P 500 has risen 3% in the last week, and 8% so far this year. The market is still trading 8% below its all-time high last fall, but it has managed to make a sizeable 15% recovery from the depths of last December.
So, if the market is supposed to live and die by earnings, why has the market moved relentlessly higher in the face of dismal earnings? Because “the market moving on earnings” is just some B.S. fed to J.Q. Public. The market moves on liquidity and insanely low interest rates. When FED Chair Powell did his about face, the market rejoiced – knowing that the punch bowl wasn't going away. That's why this market has been able to fluff off Apple and all of the others that have bombed. The renewed hopes of a Chinese trade deal has given Wall Street all the ammo it needs to continue pushing stocks to nosebleed levels. But yes – it’s frustrating. Previously, a revenue miss by Nvidia would have killed the entire NASDAQ. Now, we ignore it and move higher.
The S&P is just 35 points shy of its 200-day moving average – something that the DOW punched through Friday. Will the S&P do likewise? If you're gauging your answer by earnings growth – then the answer is: No. If you add in a dovish Fed and a China deal – then the answer becomes: ‘It could’. We still have another heavy week of earnings coming. If the S&P doesn't get turned away as it nears its 200-day, they could continue to ramp this market higher. Yes it's crazy, but it is what it is. If nothing else, this level should at least give the market some pause – maybe some backing and filling.
Tips:
Top Equity Recommendations:
HODL’s:
- Aurora (ACB = $7.41 / in @ $3.57) – & covered write,
- Canntrust Holdings (CNTTF = $7.48 / in @ $3.12),
- Canopy Growth Corp (CGC = $48.88 / in @ 22.17),
- HEXO (HEXO = $5.65 / in @ $5.12) - & covered write,
- New Age Bev (NBEV = $7.15 / in @ $6.44),
- Nova Vax (NVAX = $2.30 / in @ $2.19) – & covered write,
- Zynerba Pharma (ZYNE = $5.83 / in @ $5.22).
Crypto:
- Bitcoin (BTC = $3,470)
- Ethereum (ETH = 107.00)
- Bitcoin Cash (BCH = 118.00)
Options:
- Canopy (CGC = 48.80) Bull: Feb 8, Buy +53 / -54 / +56, Call B-Fly for $0.07 CR,
- Cronos (CRON = 21.01) Bull: Feb 8, Buy +23 / -24 / +26, Call B-Fly for $0.07CR,
- NBev (NBEV = 7.15) Bull: Feb 8, Buy +7.5 / -8 / +9, Call B-Fly for $0.05 CR,
Feb 15, Buy +7 / -8 / +10, Call B-Fly for $0.05 CR,
- XLU (XLU = $54.53) Bull: Feb 15, Buy +55 / -56, Call Debit Spread, and
- XLY (XLY = 107.19) Neutral: Feb 15, +100 / -102 / -111 / +113, I.C. for $0.56 CR
Thoughts:
- BMY: If you’re looking for stocks with high volatility, look no further than BMY with a 60% IV rank. It’s volatility didn’t drop much after last week’s decent earnings, perhaps due to the uncertainty around its Celgene (CELG) bid. If you think that it’s unwise to bet against Big Pharma and that BMY might rally back from its little sell off, the short PUT vertical that’s long the $46 PUT and short the $47 PUT in the March monthly expiration – is a bullish strategy that collects a credit 1/3 the width of the strikes, and has a 67% probability of making max profit before expiration.
- TLT: How long will this ‘Powell Pump’ last? You may just want to bet against the low-rate mindset and consider an outright bearish position on Treasuries. As far as maturity goes, TLT’s portfolio splits the difference between the 10-year and the 30-year with a maturity of just over 17 years. So, if you’re bearish on TLT, you may consider the long PUT vertical that’s short the $119 PUT and long the $117 PUT in the March monthly expiration – is a bearish strategy that has a 66% probability of making 50% of its max profit before expiration.
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
