This Week in Barrons: 6-9-2019:
Photo courtesy of MJP…
Thoughts:
Why can’t we make them think like us?
That question could not be more fitting – as we celebrate the 75thanniversary of D-Day. Growing up, we’re all taught to think like our customer. What would our customer do? What if, (heaven forbid) we coaxed our customers into thinking like us? Last week, AK’s piece in the WSJ got me thinking: Why do we continue to fight an old war, with old outdated weapons? Isn’t that like showing up to a gunfight with a knife? I get it – we run trade deficits with China. They make everything from shoes to cell phones, lots of apparel and even Hibachi grills. So what? Suddenly nobody likes cheap sneakers? Suddenly we don’t want our intellectual-property stolen, subsidies paid to their state-owned companies, and we really don’t want China to double our spend on innovation.
I hear all the threats and tariffs – and realize that it’s all just a negotiating ploy to stop China’s trade abuses. “The Art of the Trade Deal,” isn’t exactly artistic. I mean, by banning China telecom giant Huawei’s products in the U.S. – we caused disruptions for software companies and chip makers worldwide. By discouraging U.S. companies from hiring Chinese engineers, we caused our soybean exports to be curtailed and critical shipments of rare-earth metals from China to be slowed.
It’s times like these where I often take a step back and say: “What problem are we solving?” Normally it’s one concerning either: budget, decision-maker, or timeframe. And often our solution centers on the ‘stick’ rather than the ‘carrot’. I recently spoke with a Wall Street executive who was tasked years ago with collecting large debts from Chinese state-owned firms. It seems that many People’s Liberation Army generals had commingled their own monies along with state funds to do some fairly complex derivative trading. The good news is that it made everybody equally conflicted and corrupt. My friend (the Wall Street executive) scrambled around Beijing until he finally got a meeting with the vice premier where he diplomatically suggested exposing and suing these firms and generals publicly. The vice premier immediately erupted: “I am not in a position to fix your problem,”and stormed out of the negotiation.
I have no great insight as to what goes on behind-the-scenes in China, but I guarantee that they still have corruption issues. And it’s those corruption issues that could cause China to never agree to our demands. Remember, Japan lost decades because banks could not call in bad loans for Yakuza-connected real-estate projects. So we (indirectly) would be doing China a favor by fixing this problem for them. How do both sides save face, and end this reckless tariff escalation? That’s easy. Simply drop all tariffs and agree to a zero tolerance policy surrounding accountability.
That means that nobody will charge any tariffs, but if you’re caught stealing intellectual property (for example) – you will no longer be allowed to sell into that country. Rather than having this be a political decision – allow this to be a business accountability one. After all, Huawei is a $107B company and has already offered to sign “no-spy agreements”with the U.K. and others. Let’s allow them to sign, and if they are caught spying – no more sales. In order to get back into that country’s good graces and to prove that they have fixed the problem, they will be required to put up a $50B bond to be ‘open for business’ again. You’d be amazed how quickly compliance comes around when revenue is on the line. Do the same for intellectual-property thieves – zero tolerance. You’re cut off from sales until you fix the problem, and then you need to put up hard cash backing your word.
Think decision – accompanied and intertwined with accountability. In this case it’s: zero tariffs accompanied by zero tolerance. Apple (for example) doesn’t violate others’ patents because it knows a judge could shut down its $265B business overnight. As a nation, we used to be pretty good at sales. Let’s return there, and allow China to think the same way we do.
On a different note, I would be remiss in not mentioning and expressing my gratitude to all those that contributed to the largest amphibious invasion in history – D-Day. Sadly, there is no accurate accounting of how many lives were lost that day. American forces landed on two beaches code named Utah and Omaha. The British landed on the Gold and Sword beaches, and Canadian forces on Juno. By midnight, over 132,000 Allied forces had landed in France – with an accompanying enormous loss of life and limb – all due to war. My dad was not involved in D-Day – he arrived later. I can tell you first hand that nobody goes through those horrors without carrying ugly baggage for the rest of their life. I salute and pray: for all those we lost and all that made it, for the untold pain that their families went through, and for the ability to ‘hopefully’ one day live without war.
The Market:
As you review the graph above, you need to seriously ask yourself: Why am I still in this market? Factually: all of the ‘smart money’ has been out of the market for months. David Tepper is getting out. Stanley Druckenmiller is already out. Stanley recently made light of our markets and our leadership when he talked about how Trump and the DOJ are attacking our tech leaders (Facebook, Amazon, and Alphabet) for their bias against Republicans. He went on to say: “But man it’s great that we’re supporting our steel, coal and aluminum industries. Way to think about the future President Trump. Just genius. This is complete nonsense. It’s very simple to me: If you don’t like what Google is doing with privacy, don’t use Google.”
Q: So, when we have rallies like we did last week, what should I be doing?
A: Selling.
Q: Who’s buying?
A: Corporations, and Central Banks (FED).
Why did we rally last week? After all, we still have trade wars, inverted yield curves, and the DOJ investigating the FAANG stocks. Last week showed us more signs of a global slowdown, so our FED started talking about the potential of more QE and the easing of interest rates. As per SF, factory output continued to slid lower for 5 months in a row, and is currently at its lowest point in two years. When the PMI (Purchasing Manager’s Index) drops below 50 – investors should prepare for negative returns. History tells us that some of those declines can be fairly severe – down -37%.
Californians in particular should be worried, because the FAANG investigations threaten the core of Silicon Valley and the solvency of California. Silicon Valley (after all) contributed over $12B in ‘tech related’ capital gains taxes into state coffers. Cali’s income tax collections on these capital gains are the single largest source of revenue for the state. Since 2010, capital gains tax collection in California has skyrocketed from $2B to $16B in 2018. If California were to lose those tech capital gains, it would bring solvency into question.
InfoBits:
- “Don’t you dare look back, Keep your eyes on me…” Google and Amazon are soon going to have to “Shut up and Dance” say the FEDs. They’re both being examined over antitrust issues. I remember when a Microsoft antitrust case kept them occupied while other startups (Google) snuck onto their scene.
- All Aboard … Recession’s a Comin’ US business leaders peg the chances of a major recession popping up by the end of 2020 at 60%. It would be due to tariffs and our current protectionist trade policy.
- Oh we got Trouble… right here in: Boeing as they’re having more 737 issues. The FAA says many of the 737’s have faulty parts on their wings that could crack and fail prematurely.
- All Natural isn’t really ‘All that Natural’: LaCroix sales plummeted by over 9% last quarter because their “All Natural” ingredients aren’t really ‘All that Natural’.
- Go high, Go low, or Go Home: The US economy has experienced income inequality since the '09 recession. High-end retail like LVMH’s mortgageable handbags are still flying off the shelves. Low-end retail like those dollar store chains are enjoying record results. Everyone else is looking forward to 8,000 store closures including: Payless, DressBarn, Gap, and GNC.
- “The ONLY way to win is – NOT to Play”[Joshua] Stanley Druckenmiller liquidated his equity portfolio, and only invests in U.S. treasuries now.
- You Do You: U.S. junk food stocks all made new highs last week.
- Knock-Knock – Who’s there? Prime Air. Amazon customers can expect their first drone delivery within months. The new Amazon Prime Air drones will be fast, safe and fully automated – promising 30 min. delivery if within 15 miles.
- Don’t let the door hit you in the a__: 1,700 IBM’ers were laid off last week. The bond market also gave them a very cool reception when trying to raise $20B to pay for their Red Hat acquisition.
- “To Infinity and Beyond”: Beyond Meat (BYND) was up 40% on Friday after reporting earnings. Their chart might as well just be one straight vertical line up.
- Influencers Unite! Revolve (RVLV) went public Friday and popped over 90%. The online fashion retailer is profitable, making $31m on sales of $499m last year. If you’ve never heard of them, please refer to the Instagram page of any influencer who attended Coachella – and shop their looks.
- Careful what you wish for… A 4-day work week could become a reality in the U.K. Politicians are interested, and (no surprise) so are 3 out of 4 Brits.
- German Industrial Production: Fell more than expected ( -1.9% ) – amid weak manufacturing orders and business sentiment.
- “Must have been the Wrong Time”: Dr. John (6-time Grammy winner and Rock & Roll Hall of Fame member) died of a heart attack this week at the age of 77. His biggest hit was "Right Place – Wrong Time". R.I.P.
- Go ahead – Manipulate the Facts: Per MJP:In an attempt to show ‘upper-class bias’, The Kauffman Foundation reported: “At least 83% of entrepreneurs do not access bank loans or venture capital at the time of startup. 65% rely on personal and family savings for startup capital, and 10% carry balances on their credit cards.” Kauffman was manipulating the facts to show that those draped in poverty do not have a bank account or friends to lean on. But factually: 85% of startups are SINGLE-PERSON startups that can simply use SALES (vs govt. hand-outs) to self-fund as they grow. Source: Bureau of Labor Statistics.
Crypto-Bytes:
- What’s Wrong with this Picture? Justin Sun (founder of Tron and CEO of BitTorrent) revealed in a tweet that he placed a record-breaking bid of $4.57m to have lunch with crypto-skeptic Warren Buffett. This was part of the “Oracle of Omaha’s” annual charity auction for the Glide Foundation. My hope is that Justin’s 7 guests monopolize the conversation with Mr. Buffett.
- Hey FB – Let’s chat: Facebook has started a discussion with the U.S. Commodity and Futures Trading Commission (CFTC) over the social media giant’s ‘GlobalCoin’ (stablecoin) initiative. It seems that Facebook may debut its cryptocurrency as soon as this month – allowing its employees to be paid in GlobalCoin tokens.
- Hey Anti-FB – Let’s chat: While Facebook pursues crypto, crypto is pursuing social media. Block.one (the multibillion-dollar startup that built the EOS platform) announced that it is launching a new social media platform called Voice. Voice will run on the EOS blockchain and will “will NOT let algorithms decide what dominates. Everyone (the user, the platform, the contributor) will play by the same rules.”
- Apple does a 180 on crypto: At their own conference, Apple announced their Cryptokit framework – available in the fall via iOS13. Through this framework, developers can perform common cryptographic operations, such as hashing, key generation, and encryption. Users will now be able to store keys in a presumably secure place on their Apple device. THIS IS HUGE.
Last Week:
Google and Amazon's day of reckoning looks to be drawing closer with their U.S. antitrust investigations. Trump has disliked for a long time how Google and YouTube have shut down the conservative voice. Trump would like them to be regulated, and also believes that this extends to social networking. He’ll move on this, because he's going to need the conservative voice on social media, to help him in the 2020 elections.
I’ve been expecting a snap back rally / meaningful bounce to for a while now. After all, we did have 6 down weeks in a row. I had previously written that I didn’t believe that we’d get anything meaningful until we had either: (a) a breakthrough in the trade situation, or (b) the FED admitting that it was going to cut rates and goose the economy with QE. We received the later this past week.
It was Friday’s Jobs Report that pushed us over the edge. Everyone expected another +200k jobs created report. When the number of a measly 75k jobs created came out – “a hush fell over the crowd.” It cemented the idea that the FED is going to cut rates this year. In fact, odds-makers are saying that the FED will have 3 rate cuts this year and maybe a little QE thrown in for good measure.
It was Friday’s Jobs Report that pushed us over the edge. Everyone expected another +200k jobs created report. When the number of a measly 75k jobs created came out – “a hush fell over the crowd.” It cemented the idea that the FED is going to cut rates this year. In fact, odds-makers are saying that the FED will have 3 rate cuts this year and maybe a little QE thrown in for good measure.
The Bureau of Labor Statistics (BLS) also revealed that part of the 75k jobs created in May … were 204k birth/death-model jobs. In other words, the BLS guessed that 204k entrepreneurial jobs were created. There is no paperwork, no job filing, and no tax information on these jobs – yet they continue to quote the number as gospel. If you take away those phantom jobs, you're left with a NEGATIVE -129k jobs LOST. Yes, we LOST jobs. Not only that, but for the first 5 months of 2019, our economy has LOST a total of 218,000 full-time jobs.
In a world where fundamentals rule, we would be down 1,000 points. But in a fiat world where all that matters is cheap money and QE – this gives the FED more ammo to cut rates. We were up 1,000 points in a week – so some form of dip has to hit soon. It’s scary out there. For the first time in a long time, the crypto environment is making a lot more investing sense to me than the fiat one!
Weed:
Last year, Emily Suzanne Lever tweeted the millennial mind-set: "Everything I want to do is self-care, and everything I don't want to do is emotional labor. Life is hard. We're burning out at such a young age.” Food and beverage brands are embracing this line of thinking. Fast food, alcohol and candy vendors are doing their best lately to convince their customers that it’s okay to eat and drink whatever unhealthy thing they happen to be peddling. The alcohol industry is even trying to brand beer, wine and liquor as "wellness"products. Some companies have advertised their booze as replenishing post-workout fluids, and others have even re-defined the words "low-calorie". Why is the alcohol industry doing this – because it’s currently having a hard time holding onto virtually any customer. Alcohol customers are spending less on alcohol than their previous generation. “Mocktails”are proliferating high-end bars, and Dry January is becoming a thing. There’s an obsession with seltzer that’s overcoming that of craft beer. Also, the spread of legal cannabis and CBD, has made a wider variety of buzz-inducing substances available at the grocery store. Alcohol is no longer the most fun legal drug in town. Even the U.S. House of Representatives last week took another step toward providing mainstream financial services for marijuana companies when it included a provision in a draft spending bill that would bar federal regulators from penalizing banks that work with cannabis / CBD businesses. Honestly, when Ben & Jerrys is actively naming their first CBD ice cream – I think the sector has arrived.
Next Week:
Just understand what this is. This market is NOT a market where earnings, dividends, and corporate management make a stock worth owning. Today stocks go up based on our Fed willing to print trillions of dollars, cutting rates to zero, and creating financial gimmicks to keep the market up. Factually, a couple things happened last week:
1. We started the week expecting the S&P to move $58, and ended with it moving higher by $121. That’s a 2+ standard deviation move to the upside – a huge move by any standard. The SPX finished the week at 2,877 – up 15% YTD. It’s closing in on the 2,911 gravity point – but should see congestion around the 2,883 area next week.
2. VOLATILITYalso increased last week. Normally when markets move higher they force a decline in volatility. In this case, the volatility remained high because investors are worried about the banks.
3. BONDScontinued higher keeping the yield curve inverted with the 3-month yield approaching 2.3% and the 10-year yield down around 2.09%. The wild ride right now is the 2-year note – which is at 1.85%. Either the 2-year note needs to rocket higher or the FED needs to cut rates in within the next 45 days.
4. Next week watch the FINANCIALSas they will be the market’s lynch pin. If the XLF drops below 26.50 – it will get exciting. And honestly, fading a 6% rally with volatility remaining high – is not the dumbest idea I’ve ever heard.
5. In terms of GOLD, I don’t think there’s ever a bad time to buy gold – only ‘better’ times, and now is one of those better times. The next FOMC meeting is on June 18-19, with an OPEC meeting June 25-26, followed by a G-20 meeting June 28-29. There will most likely be a great deal of market action around the headlines that come from these meetings. A monthly/quarterly close above $1362 in gold futures, which is just $20 from Thursday's August Gold close, would technically signal a completion of the 5+ year base in the safe haven metal. Also when a trade deal with China is finally announced, silver's going to really shine. Do not be afraid to buy some of that down here as well.
With the Mexican tariffs being taken off the table, I imagine that the futures Sunday night will be higher – on that news alone. They've taken a market that was down for 6 weeks in a row and looking even lower – and turned it into one that’s just 75 S&P points from its all-time high. Now you see why it's so dangerous to go short. Every braincell says that business fundamentals are deteriorating, and yet with just a tweet and the thought of rate cuts and QE – the market is saved again. We should see some form of fade this week, but all in all (as sad as it sounds) I think they'll push this market even higher. Welcome to market madness.
Tips:
Top Equity Recommendations:
HODL’s:
- Aurora (ACB = $7.64 / in @ $3.07),
- Canntrust Holdings (CTST = $5.25 / in @ $3.12),
- Canopy Growth Corp (CGC = $42.19 / in @ $22.17),
- Hexo (HEXO = $6.43 / in @ $6.37),
Crypto:
- Bitcoin (BTC = $7,800)
- Ethereum (ETH = $244.00)
- Bitcoin Cash (BCH = $390.00)
Options:
- RIOT ($2.70):
o Buy Jan 17, Sell $3 Call / Sell $3 Put / Buy $4 Call for $1.85 CR
o Buy Jan 17, Sell $2 Call / Sell $2 Put / Buy $3 Call for $1.45 CR
o (can only lose money if RIOT falls below $1).
Thoughts:
- Mexico ETF(EWW = $43.57): The last 6 weeks have not been kind to EWW, the Mexico ETF. It’s down over 9% on the weight of trade issues. Despite that, EWW has managed to outperform the big US indices like SPY, QQQ and IWM. Mexico’s economy isn’t that bad, with inflation down and government debt at a modest 46% of GDP. What’s the downside for Mexico? The contrarian bullish strategy in EWW has me believing that it will rally off these lows. If you are bullish, the long call vertical that’s long the $43 Call and short the $45 Call in the July weekly expiration with 40 days until expiration has a 68% probability of making 50% of its max profit.
- Cars.com(CARS = $20.60): When I saw CARS pop up in a list of symbols that have a high implied volatility rank, the old Gary Numan song started playing in my head. It’s either that I’m old, or “Cars”doesn’t have quite the durability of “Shake Your Groove Thing”. CARS (the stock) rallied after its earnings last month, but slinked back down and hit its all-time low on Monday. It was able to recover a bit, though, as the broader market rallied. If you are a contrarian bull and think that CARS will stay off its lows, you might consider a bullish strategy. Sell the short $20 Put and buy the $17.50 Put in the July expiration with 40 days until expiration has an 80% probability of making 50% of its max profit.
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
