This Week in Barrons: 4-7-2019:
A Slow Grind to All-Time Highs:
I clearly missed the memo. We are beyond the Outer Limits, and must be in some sort of Twilight Zone. I say that because: (a) total equity out-flows have exceeded in-flows for months, (b) we’re in a stock buy-back blackout period, (c) the economic news is wobbly at best, (d) Paychex just recorded their first payrolls decline in a decade – yet markets continue to break-out to the upside. Maybe we don’t question things like this anymore – because we’ve become accustomed to it. Or maybe it’s because much of the manipulation is hidden from public view – such as:
Mark-to-Market: After the melt down of 2008-09, the banks were insolvent. So the FEDs changed the rules surrounding a bank’s asset reporting from ‘Mark to Market’ to ‘Mark to Model’. Previously, banks had to report their assets according to their real time ‘market’ value. Now, they are allowed to report them according to what their financial ‘model’ says they are worth. So if a bank has an asset worth $100k on the open market, they can account for it at $1m – if that is what their economic model says it’s worth.
Birth / Death Model: Each month when they announce the Non-Farm Payrolls (Jobs) Report, a portion of their compilation comes from a computed number called the Birth/Death model. The jobs computed by the Birth/Death model don’t really exist. Yet in three of the past eight months, if not for the injection of those fake jobs into the report – the report would have been negative (showing a net job loss for the month).
Central Banks buying Stocks: On what planet is it not manipulation when a government can print money and use those same funds to buy stocks and bonds in their own markets? How can it not be rigging when the Swiss National Bank is allowed to print $80B, and then use that phony money to buy real stocks? If anyone else did that, it would be called counterfeiting, and they would go to jail.
Japanese Central Bank: In the last 6 years, they have increased their balance sheet to a point where they now control 97% of the entire Japanese stock market. They are still the 3rdor 4thlargest economy on earth, and their own Central Bank has purchased 97% of their own economy. How is that not rigging?
Prices of Silver & Gold: was proven to be rigged by the sovereigns.
Libor Rate: was proven to be rigged by the banks.
VIX is rigged: Just recently a whistler-blower told regulators that the VIX (the volatility index) had been manipulated for a while now. It seems that wealthy individuals have been manipulating the VIX using "sophisticated trading algorithms that post large quotes on S&P options, without ever having to trade or deploy capital to buy those options.” According to the whistle-blower, billions in ill-gotten profits have been scooped up by unethical electronic option makers.
How are we moving higher? We are 2% away from the all-time highs (2,930) on the S&Ps, and by all accounts ready to tackle it next week. How is that possible? After all: (a) we had a 20% selloff in December, (b) global economies are slowing, (c) Brexit is unresolved, (d) the China Trade War is still alive, and (e) corporate earnings are going to stink. The most recent Challenger Layoff Report spiked 35% - making it the worst first quarter for layoffs since 2008. The auto industry alone laid off 8,838 people in March, followed by energy with 8,149 cuts, then financial services with 4,884, and retail with 4,860. There is an increase in the number of companies filing for bankruptcy or closing operations such as: Sears, JC Penny, Payless, Charlotte Rouse, Gymboree – leaving 4,000 vacant stores in last quarter alone. With all of the equities and mutual funds experiencing selling during the first quarter – how can these markets keep moving higher? As per SF: Corporate stock buy-backs have reached epidemic levels – all fueled by last year’s tax windfall. Thus far, companies in the S&P 500 have spent $806B on stock buy-backs, blowing away the previous record of $590B. Technology and financial services firms are the biggest spenders, with Apple leading the pack. 2017's tax overhaul was trumpeted as a way to give companies more cash to invest to grow their businesses. But its timing coincided with signs that the global economy had begun to slow, giving an incentive to companies for giving the cash back to investors instead.
So who’s lying to whom? There seems to be a ton of facts and reasons for this market to tank – and only one that’s driving it higher. Jeez, who are we to believe?
The Market:
Last week investors pulled $7.7B from equity funds as stocks surged higher, and that brings the YTD total for out-flows to $87B. I was always taught that prices go up when demand exceeds supply. So how do prices continue to rise when there are more sellers than buyers? Obviously the buying is being accomplished via dark pools and off-balance-sheet financing – Who’s doing it? Answer: the Presidents Working Group on Financial Markets (the ‘Plunge Patrol Team’) is doing all of the ‘hidden’ buying – but they must. Trillions in loans have been made with equities pledged as collateral. Trillions in derivatives have been ‘swapped’ based upon a market that holds steady or goes higher. Governments need markets to move higher, or the entire house-of-cards will collapse. The question is whether they can keep this going forever, or is there some event on the horizon that makes the markets go down without the money men getting the blame? I'm betting on the event, but for now it seems clear that this market wants to challenge those all-time highs come heck or high-water.
InfoBits:
- Dude, Where’s my Data? Yes it’s Facebook again. Cisco researchers uncovered 74 FB groups devoted to the sale of stolen credit card data, identity info., spam lists, hacking tools, and other cybercrime commodities. The FB groups (with 385,000 total members) sit out there in plain sight with names like: Spam Professionals, Spammers, and Hacker Pros. In fact, they’re even searchable on FB’s site. “They are openly trading criminal information on FB with a user base the size of Tampa, Florida” says Craig Williams, Cisco Talos' Director of Outreach. Cisco’s screenshots show FB users publishing pictures of stolen credit cards and IDs, offering lists of CVVs for $5 each, as well as email collections ripe for spamming and phishing. This is the type of data usually sold on the dark-web. The only thing scarier is that the U.S. Dept. of Cyber-Security invests billions in catching cyber-criminals – and it took a researcher from Cisco to uncover 385,000 of them hiding in plain sight. Come-on Man.
- World's most Profitable Company may not be who you think. Apple is the world's most profitable public company – making $60B last year. Saudi Aramco (the private Saudi oil company) released their financials, and they made $111B.
- LYFT the ride-hailing service had its shares rated a ‘SELL’ in new coverage at Seaport Global Securities, with a price target of $42. The firm called LYFT’s thesis of reduced car ownership a "big leap of faith."
- iHeart IPO: iHeartMedia (the former Clear Channel) is likely going public very soon. Though the company is still the largest radio company in the U.S., they went bankrupt last year. So, does that IPO really sound promising?
- Down 31%: That’s how much Tesla deliveries fell vs estimates in Q1. The week only got tougher for Elon as he was fighting federal contempt charges in NYC.
- How will we divide the pie? Jeff Bezos will still have the largest piece of Amazon because his wife gave him 75% of their Amazon stock. If that doesn't say "amicable divorce"I have absolutely no idea what does.
- The sky is falling: (a) Class 8 heavy truck orders crashed lower by 66% in March. (b) February durable goods orders fell by 1.6% in March. And (c) GM’s 1stQuarter deliveries fell by 7% with sales falling in all 4 brands.
- Arconic: ‘Screw the employees’: As per MJP, Arconic (the Alcoa spinoff) made the decision to reduce the company-provided healthcare benefits provided to retirees. They said:“We did what was best for the company.” It also means that the retirees who gave years of service to Alcoa did so for a lie. The deal was: “You work for us, and when you are done, you will have healthcare.” I have no doubt that the decision is better for the company, but the best long-term benefit for any employer is employees who can bank on the company’s word. Unfortunately, Arconic’s check just bounced.
Crypto-Bytes:
- Market Shift: Bitcoin at $5,150 jumped to a 5 month high this week. The transition from bearish to bullish market was caused by a short squeeze – no surprise there. Continue to watch for more price breaks around futures expiration dates. While this is positive for the bulls, this change will gain more credence when prices break above $5,200.
- PayPal’s First: Online payments giant PayPal has made its first-ever investment in a blockchain technology company – Cambridge Blockchain. They are a startup that helps financial institutions and other companies manage sensitive data using shared ledgers.
- Stealth Launch: Coinbase has quietly launched a fast and free payment service for its users. Coinbase customers will have access to the no-fee service when sending to other users on the exchange. “It’s primarily designed as a resource for customers to learn about the benefits of using crypto for cross-border payments,”a company representative said.
- Crypto Bank: is a new Puerto Rico-based institution catering to traders of cryptocurrency. Licensed last month as an international financial entity, San Juan Mercantile Bank & Trust International will provide custody and settlement services for both fiat and crypto traded on the exchange.
- Bing Ban – Boom: Microsoft’s web search engine Bing blocked more than 5m ads relating to cryptocurrencies last year. But then again – who would advertise on Bing anyway?
- They’re a Bank Beater: Cryptocurrency exchange Coinbase (35) has ranked above investment banking giant J.P. Morgan (44) on LinkedIn’s top 50 U.S. employers list.
- Real QUICK Estate: Barclay’s Royal Bank of Scotland (RBS) and others have completed a blockchain trial that has resulted in faster property transactions. The trial used test data to carry out simulated property transactions over a distributed ledger system. The effort demonstrated that the real estate buying and selling process could be reduced from over 3 months to “less than 3 weeks.”
- Best Crypto-Education: Try Crypto HedgeHog: https://stage.cryptohedgehog.iohttps://stage.cryptohedgehog.io By far the best crypto-education under one roof that money can buy. [Full disclosure: I’m fortunate enough to be related to one of the founders.]
Last Week:
Does it seem odd to anyone else that in last week’s list of top 20 U.S. companies to work for – 6 of them were unicorns with up-coming IPOs (Uber, Airbnb, WeWork, Lyft, Robinhood, and Slack)? You don’t think that becoming instant millionaires while working for one of those unicorns could have influenced anyone’s vote do you? I guess money does by happiness.
Weed & BioTech:
Last week the Cannabis space became more interesting for a couple of reasons:
1. The most recent quarterly earnings reports released from 3 young cannabis companies continued to show how pure numbers fail to tell the entire story. Cannabis is a newly discovered business territory that has endured a far-from-perfect roll-out of a regulatory framework aimed at structuring the legalization of a previously illegal product.
2. Also, cannabis continues to become more than just a recreational-use drug. It is a disruptor that has the potential to change entire sectors including: tobacco, alcoholic beverages, pharmaceuticals, wellness, pet care, and edibles.
Just a couple of the last week’s cannabis high-lights:
- Tilray (TLRY) signed a deal with Sandoz, a division of pharma giant Novartis (NVS) to provide patients increased access to medical cannabis. It also signed an R&D partnership with Anheuser-Busch Inbev (BUD), the world’s largest brewer, to develop non-alcoholic THC and CBD beverages. THC is the element in pot that produces the so-called ‘high,’ while CBD contains medicinal benefits. TLRY also announced a long-term, revenue-sharing alliance with Authentic Brands Group (a NY-based brand development company) to leverage its portfolio to develop, market, and distribute consumer cannabis products globally.
- Cronos (CRON)last quarter received an infusion of cash as U.S. cigarette-maker Altria Group (MO) bought a 45% stake for $1.8B.
- CannTrust (CTST)signed a major partnership with Breakthru Beverage Group (Canada’s largest alcoholic beverage broker) which operates in the beer and wine sector.
The longer the U.S. refrains from legalizing the substance, the more attractive Canadian companies become for major U.S. partners looking to position themselves within the space. As long as the U.S. doesn’t legalize the substance at the federal level, the size and scope of this window of opportunity for Canadian companies is wide open.
On an interesting note, last week the Texas Legislature held hearings on nine pro-cannabis bills. That may not sound like a lot, but considering the political climate in Texas, it’s a sign that cannabis might finally be hitting main street. Maybe that’s why CGC, Canopy Growth, the biggest Canadian cannabis company, has been in a slump for the past two months. After its big run up in January, the stock has been range-bound and drifting a bit lower as if it’s been enjoying some of its own product. But maybe pot’s growing popularity could pull CGC higher, or at least stop it from dropping much more. If you think that CGCmight rally and are bullish on it, the short CGC 40 PUT and buy the CGC 37.5 PUT in the May monthly expiration is a bullish strategy that has an 85% probability of making 50% of its max profit before expiration.
On the Biotech front:
- Assembly Biosciences (ASMB = $19.91) – (fighting the Hepatitis B virus). Assembly Biosciences will be making an important presentation on April 13, 2019, at the annual meeting of the European Association for the Study of the Liver. The clinical-stage biotech is working on finding new ways to combat the Hepatitis B virus. The $508.5m firm is due to present the 6-month data from ongoing phase 2 studies with existing (HBV) patients, plus data from another new trial with chronic HBV patients. The association accepted the presentation for the main event and called it one of the "best in show" submissions. ASMB is up 12% YTD and will gain prominence in the event with a stellar presentation. Analysts see the price popping to their median target of $74.00 (+272%) with a strong possibility to hit an all-time high of $77.00 or +287%.
- Heron Therapeutics (HRTX = $26.22) – (non-addictive pain medication). Heron Therapeutics’ key asset is an anesthetic that can do a better job for patients after getting their hernias repaired and bunions removed. Although the pivotal studies supporting an application are still under review, patients injected with the drug reported significantly less pain intensity than those given the old-fashioned meds. Also patients were less likely to require opioid rescue medication. The FDA granted Heron a priority review, and the approval is expected on or before the end of April. HRTX is up 1% YTD and with the coming FDA approval, analysts have set a median price target of $52.00 (+99%) for HRTX with a high estimate of $75.00 or +186%.
Next Week:
The S&P is just 40 points shy of the all-time highs, and there's a few ways that this can play out:
- We can stall out here.
- We can get to the highs and collapse.
- We can push through the highs – run a bit further and roll over.
- Or we can just keep going higher.
I don't know which it will be, but I'm guessing on the ‘last hurrah’ scenario, where we make a new high just as earnings season hits, and they use poor earnings as the excuse to pull back. I’ve been long the SPY’s and the QQQ's for a couple weeks now, and it has been the right move. We're now in an area where just about anything can happen, so adding to that base becomes increasingly more dangerous. One thing we know is that corporate fundamentals are weakening. So, I think we edge up to 2,930 on the S&Ps, but my finger never strays too far from the sell button.
Tips:
Top Equity Recommendations:
HODL’s:
- Aurora (ACB = $9.17 / in @ $3.07),
- Canntrust Holdings (CTST = $7.62 / in @ $3.12) – missed earnings,
- Canopy Growth Corp (CGC = $43.24 / in @ $22.17),
- HEXO (HEXO = $6.63 / in @ $6.37),
- Nova Vax (NVAX = $0.59 / in @ $1.59)
Crypto:
- Bitcoin (BTC = $5,150)
- Ethereum (ETH = $168.00)
- Bitcoin Cash (BCH = $314.00)
Options:
- CGC (43.24): Buy May 17, 47.5 / 50 / 52 Call BFly for $0.03 CR
- CGC (43.24): Sell May 17, -40 / +37.5 Put Credit Spread for $0.70 CR
- HYG (85.84): Buy Apr 18, +77 Put for $0.03 DB,
- SPY (279.27): Buy May 17, (-1) 268 / (+3) 258 / (-1) 256 Put BFly for $0.44 DB
- XLF (26.60): Buy April 18, 26.5 / 27 / 27.5 Call B-fly for $0.10 DB
Thoughts:
- Amazon (AMZN): I haven’t been to my local Whole Foods in quite a while, but when I heard that Amazon Prime members would be getting significant discounts on stuff like produce, I considered making a trip. Amazon seems to be trying to build in Whole Foods the customer loyalty that Costco and Sam’s Club have. The question is, would I make the trip to Whole Foods and prove Amazon’s marketing team right? Unfortunately, while I still may call an audible this weekend, it’s more likely that I’ll load up on Sam’s Club’s fruits and veggies instead. Despite COST being near its all-time highs, this rally could still have legs. If you are cautiously bullish on COST, the long call butterfly that’s long 1x 240 call, short 2x 250 calls and long 1x 260 call in the May monthly expiration is a bullish to neutral strategy that has a 75% probability of making 50% of its max profit before expiration.
- VIX: The S&Ps have hit a 2019 high. The slowdown in earnings forecasts has been offset by stronger manufacturing data. Unsurprisingly, that rally pushed the VIX lower. That means VIX options are relatively inexpensive, and if you think that the market might drop and push the VIX back up, long debit spreads could be an attractive strategy. Of course, you may want to give a VIX strategy some duration just in case it takes longer than expected for the market to drop. If you are bullish on the VIX, the long call vertical that’s long the 15 CALL and short the 17 CALL in the May monthly expiration has a 61% probability of being profitable at 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
