This Week in Barrons: 6-16-2019:
Thoughts:
The Influencer (Part 1):
Step 1 – Recognize an Influencer: Facebook (the #1 Influencer on the planet) is bringing us Libra – their very own crypto currency. It’s going to be a pretty big deal. Visa, MasterCard, Uber and others have each paid $10m to sign on. Others such as: Stripe, Booking.com and MercadoLibre are also a part of the project. These companies are NOT signing on because Libra is a stablecoin with reduced volatility. They are signing on because Libra is the first native, global, crossover rewards - points - currency system ever invented. For example: say you travel regularly, have accumulated tons of airmiles, and a gazillion hotel points. You always get the upgrades, the room with a view, and never wait in line. Libra takes you to the next level. Now, those same points can buy you a sweater at Nordstrom's, dinner in SoHo, front row tickets at The Garden, and send money to your bestie overseas. But wait: it gets better. You accumulate this currency (in part) – not by slaving over your proverbial ‘day job’ and spending more money – but by sharing your private pics of your kid’s birthday party or liking your college roommate’s Cabo updates. This is a true utility coin. Everyone will want to copy it – few will succeed. Libra has the ability to take crypto mainstream and completely obliterate banking privacy. To quote SJL tongue-n-cheek: “I just can’t wait for a cryptocurrency with the ethics of Uber, the censorship resistance of PayPal, and the centralization of Visa – all tied together under the proven [airtight] privacy network of Facebook.” Whether we like it or not, Facebook (our #1 influencer) has just crossed over into money management. The big losers here are the banks and their fees. The 3 largest banks in 2018 earned: $1.1B in ATM fees, $2.3B in maintenance fees, and $5.4B in overdraft fees. Big tech and crypto are coming for those fees. With this traction, hundreds of millions of people will get a taste of moving money in and out of digital currencies as they pay for goods and services. It’s bullish for Bitcoin, Facebook, Visa, Mastercard and Paypal. Yes Virginia, this is a really big deal.
Step 2 – Acknowledge the Power of an Influencer: If you truly believe that your decisions are independent of everyone else’s – you 1st need a mirror and then you need to meet REVOLVE. Revolve rode the wave of social media and pioneered influencer marketing. Revolve (the fashion company that links buyers with hashtags) IPO’d on Friday and watched their shares immediately double. Revolve knows that we’re no longer watching TV or reading mags – so they meet you on Instagram. Revolve sells clothes under 21 of their own brands and hundreds of others – marketing them through their 3,500 influencers’ social media accounts. They throw 100’s of Coachella-esque (#RevolveAroundTheWorld) trips and excursions annually. It’s not just beautiful people with millions of followers. It tracks fashion styles based upon what's getting clicked, shared, and bought by its 3m+ Insta-followers. Its algorithms detect patterns across data in order to determine what’s in and what’s out. Their goal is: “constant awareness.” Their competitive advantage is: “less inventory risk.” Their result is: “79% of theirclothes were sold at full price last year.”
Step 3 – Be an Influencer: If you’re now thinking that maybe there’s something to this Influencerthing, then MJP has some thoughts for you becoming one:
- Embrace the Strategy: Skate to where the puck is going to be. Flatten the jerk who’s standing there now. Take that puck and bite it in half. Own that puck.
- Understand the Sale: Take no prisoners. “You are in for a battle of wits for which you are totally unprepared"… G. Gordon Liddy. Learn to be efficient. Know when to fire and close.
- Behave like an Influencer: Always behave with respect, grace, honesty, integrity and intensity. “Make your prospect WANT to do business with you."
The Market:
Last week Morgan Stanley’s chief investment officer wrote to his clients:“The economic data continues to deteriorate as we’re seeing: weak durable goods orders, disappointing capital spending, soggy retail earnings, lackluster freight shipments, and a very soft jobs number as evidence of an economy running on fumes. This raises the risk that companies will do whatever it takes to protect margins, and while labor is the last lever they will pull – they will pull it if they need to.”
Nobody on Wall Street is solely blaming U.S. – China trade tensions. Our economy was already slowing pre-China catastrophe. If you’re waiting for lower interest rates to ignite a rally – don’t. Specifically, if you think a 2nd half recovery is right around the corner – I believe that is unlikely to materialize. I like being overweight in some growth areas like cannabis and crypto, and continue to like utilities and consumer staples in this environment. Even the Morgan Stanley Business Conditions Index fell by 32 points in June, to a level of 13 from a level of 45 in May. This is the largest one-month decline on record. “The decline shows a sharp deterioration in sentiment this month that was broad-based across sectors,” said economist Ellen Zentner. The reality is the following are falling: durable goods orders, industrial production, truck orders, air freight orders, PMI, wages, housing, and our job numbers. Our interest rate curves are showing inversions, and China is buying more gold than it has in the past 3 years.
I think you get it. Reality says that this market should be 10K points lower, but the facts are that we’re about to make all-time highs. I’m seeing companies that are rich in old fashioned things (like Walmart, Disney and McDonalds) spend a lot of their time and attention transforming themselves into the spitting image of their upstart competitors. Disney wants to look like Netflix. Walmart wants to retail like Amazon. And McDonalds wants to be as habit-forming and celebrated for its freshness as its former protégé – Chipotle.
In general, I tend to shy away from markets where I see dogs sleeping with cats, and our current situation is no exception.
InfoBits:
- Wedding's off: Fiat Chrysler and Renault planned a $40B summer merger, but their Japanese relatives canceled the nuptials. Renault has a long and incestuous relationship with Japan's Nissan. I guess Nissan felt betrayed that it wasn't asked by Renault for its merger blessing, so Fiat Chrysler pulled out over the family drama.
- You're dead to me, Amazon: That’s what FedEx said when it made the bold move to end its frenemy relationship with the ecommerce beast. Amazon started getting deeper in the shipping game, and lately it opened an air cargo hub in Kentucky. When AMZN produced it's drone delivery teaser – that was the last straw.
- See Data, Engage Customers: Salesforce is acquiring Tableau Software, a data visualization company, for $15.7B in an all-stock deal. "Tableau helps people see and understand data. Salesforce helps people engage and understand customers," said Salesforce CEO Marc Benioff regarding the deal.
- Flying High: United Technologies is merging with Raytheon (RTN), the defense contractor, in an all-stock deal. This will make them the second-largest aerospace and defense company in the world – behind Boeing. The new company will be called Raytheon Technologies Corporation, and will have annual revenue of about $74B. Raytheon makes missile defense systems and cybersecurity products. United Technologies makes jet engines and elevators.
- E3 in a Nutshell: Microsoft and Sony are coming out with game consoles next year. Cyberpunk, Halo Infinite, and the Final Fantasy VII remake will come out next year. Bethesda, Sony, Microsoft, and Google are all coming out with game streaming services this year. There, your’re all caught up.
- No more plastics: Add Canada to the growing number of countries that are banning single-use plastic items by 2021. No more plastic bags, straws, cutlery or stirring sticks. The U.K. is banning such items next year, and the E.U. has passed its own single-use plastics ban.
- 'Merican Oil: The U.S. is producing a record high of 12 million barrels of oil a day. And in 2018, the U.S. had the largest increase in natural gas and oil production in a single year.
- Lessons learned? The Real Real is an online consignment shop for luxury goods. They’re IPOing shortly – trading under the ticker REAL. A fun fact is their CEO Julie Wainwright – is the former CEO of Pets.com. Let’s hoped she’s learned a few things since those days.
Crypto-Bytes:
- AON Insurance: AON is the world’s second-largest insurance broker. They have brought together a panel of insurers to cover digital asset disasters. They will offer insurance on everything from hot and cold wallets to natural disasters to third-party hacks.
- You been Jacked! Crypto-hackers have just unleashed a new malware in Microsoft systems that steals computer resources to mine the privacy coin - Monero (XMR).
- Build-Your-Own: You can now create your own Crypto Fund = https://www.iconomi.com/create-your-own-crypto-fund. Iconomi are good people – give them a try if you have a minute.
- Visa – keeping with their: “Everywhere you want to be”unveiled a Blockchain-based B2B Connection Platform for cross-border corporate payments.
- The Rally’s back on: Crypto-technicals suggest the continuation of a strong growth period in crypto. Bitcoin bulls will be back in the picture once Bitcoin (BTC) rallies above $9,100 (currently at $9,100.)
- Coinbase: Launched its crypto-debit card in 6 more European countries.
- Lunch with Warren Buffett: Tron CEO Justin Sun is moving his $4.6m lunch date with Warren Buffett to “the heartland of tech,”aka Silicon Valley. This is the first time since the annual “power lunch”tradition started in 2000 that the meal will take place in San Francisco. “We want this lunch to be a bridge between the cryptocurrency community and the traditional investor,”Sun said. Buffett told Bloomberg, “I’m delighted with the fact that Justin has won the lunch and am looking forward to meeting him and his friends.”
- John’s Back: None other than John McAfee – the noted cybersecurity expert and eccentric crypto fan has launched a cryptocurrency trading platform. The site claims to let users “trade cryptocurrencies on multiple exchanges within a single dashboard, automatically and manually.” Notably, the exchange appears to be non-custodial, with users’ crypto holdings remaining on eight other exchange platforms. When a trade is executed, funds are transferred from those accounts to complete the transaction. I’m trying to figure out what is unique about this … $0 transfer fees across platforms … NOPE! Still looking…
Last Week:
“Two oil tankers have been damaged in a suspected attack in the waters between the United Arab Emirates and Iran as they were leaving the Persian Gulf. This is the second incident in four weeks, and raises the question of who gains what from them. Fingers will certainly be pointed at Iran as the mastermind behind these events. But the potential benefits to the Persian Gulf nation are outweighed by the risks. And even if Tehran isn't responsible, it could still suffer the consequences.” No one has taken responsibility for this, but the implications are easy to see. Israel wants the U.S. to destroy Iran, and the war hawks are willing to take up that cause. The easy playbook is that Iran gets blamed for all this, despite the fact that they potentially have little to gain by pulling this off.
Because of this and other geo-political news, the market was managed, ever so gently this past week. The goal for the powers-that-be was to keep the market (S&P and DOW) above their respective 50-day moving averages. Giving credit where credit is due – they did a masterful job at that. Each dip down to the moving average (or slightly below) was bought just in-the-nick-of-time to save the day. For 5 days now, we've been crawling ‘magically’ sideways. On Monday we closed with the S&Ps at 2,886, and we closed on Friday (I can’t make this up) with the S&Ps at 2,886. That is not a random walk, or the free market just being free. This is somebody carefully playing ‘Pin the Tail on the Donkey’ without a blindfold. Therefore, the donkey wants to remain in bull mode, above the 50-day moving average. So far they’re managing it very well.
Weed:
As the above chart shows, the density of marijuana stores is slowly surpassing that of Starbucks & McDonald’s in many mature cannabis markets. Recently released facts show that marijuana retailers in Denver, Colorado and Portland, Oregon outnumber Starbucks by close to 2 to 1. McDonald’s, another iconic and recognizable brand, was outpaced in all four markets tested. A lesson that can be taken from the data is that if customers have a less-than-positive experience at any given recreational cannabis store, they likely have dozens of other shops in the same vicinity they can visit. Moving forward, retailers will need to provide consumers a compelling reason to visit and return, such as low prices, exceptional service, quality product selection and/or convenience.
After six months of operation, Massachusetts adult-use marijuana sales continue to rise at an average monthly rate of 21% per month. The average customer spends $44 per visit. Raw flower comprises just under half of all dollar sales, with concentrates, consumables, and topicals accounting for the other half. Estimates for 2019’s recreational sales in Massachusetts will be around $500m, with corresponding taxes approaching $150m.
Weed Deal Watch: Public companies led the charge in acquisitions this past week, targeting private firms for growth in geography and product lines in more than 2/3rds of the deals closed. But as more cannabis companies take to the public markets, the industry may begin to see more public-to-public deals. A couple tidbits from last week are: (a) Cresco Capital Partners closed a $60m raise for its CCP Fund II – which is $10m more than the cannabis fund’s initial target. This fund specifically deploys capital across the marijuana industry, from plant-touching companies to ancillary services. And (b) multistate operator Jushi (which commenced trading on the NEO exchange this week under the ticker symbol JUSH.B) closed a raise of $68.2m.
Next Week:
The whole tariff story is getting old already. Pretty soon someone is going to start a new trade war and nobody will care. No matter the markets immediate reaction, I expect the eventual unwind to be pretty ugly. Staying small is the best investment advice ever. Think back to 2005 - 2007. If you were with me then, you know I was pounding the table that the housing madness would come to a very bad halt, and we were going to see a massive melt down. Well, it happened, but at that point the Central Banks had NOT completely colluded with each other to keep crashes from happening. So, back then it wasn't terribly hard to predict and profit from an enormous crash.
What is “different this time” is: (a) Central Banks (CBs) have embraced the movie ‘Fight Club’ – taken their gloves off, telling the world that anything goes. (b) CBs are now working seamlessly in concert. And (c) CBs in 2007 did not own over $1T worth of stock. Remember what it cost them to buy those stocks? It cost them the electric bill to run the computers which created the digits.
The FED knows that the real economy is floundering. They know the last jobs report stunk, realize we're in a trade war, and understand that Russia and China are trying to deleverage from the dollar. The latest University of Michigan sentiment numbers show us falling over 2% - from a reading of 100 to 97.9. The latest expectations reading fell over 3.5% from 92 to 88.6. So things are not moving in the right direction. Our FED sees credit card debt spiking wildly. People buying things with their debit cards or with cash has been replaced by credit and credit card interest. That’s never a great sign.
The FED knows that the real economy is floundering. They know the last jobs report stunk, realize we're in a trade war, and understand that Russia and China are trying to deleverage from the dollar. The latest University of Michigan sentiment numbers show us falling over 2% - from a reading of 100 to 97.9. The latest expectations reading fell over 3.5% from 92 to 88.6. So things are not moving in the right direction. Our FED sees credit card debt spiking wildly. People buying things with their debit cards or with cash has been replaced by credit and credit card interest. That’s never a great sign.
If this market gets a whiff that our FED is not going to cut rates – they will sell us off. Likewise, if a couple of missiles are fired into Iran's nuclear centrifuge labs – things will become rocky for a while. So it's best to be on your toes in here. At times like these I often remember Joshua’s line from ‘War Games’: “The only way to win – is not to play.”
Tips:
Top Equity Recommendations:
HODL’s:
- Aurora (ACB = $7.56 / in @ $3.07),
- Canntrust Holdings (CTST = $5.00 / in @ $3.12),
- Canopy Growth Corp (CGC = $41.18 / in @ $22.17),
- GBTC (GBTC = $10.80 / in @ $10.01),
- Hexo (HEXO = $5.61 / in @ $6.37),
Crypto:
- Bitcoin (BTC = $9,100)
- Ethereum (ETH = $270.00)
- Bitcoin Cash (BCH = $4300.00)
Options:
- RIOT ($2.73):
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:
- Nasdaq (QQQ): Last Friday, Microsoft’s closing price pushed the company’s market cap over $1T for the first time. MSFT has become a growth story based in part on its next-gen gaming platform given the naughty name: Project Scarlett. There is some market confidence around the easing trade tensions and hopeful about a rate cut. But maybe too confident and hopeful. In fact, a surprise in any of the market’s bullish assumptions could whack the QQQ’s back down. If you are considering a bearish strategy in QQQ, the long put vertical that’s short the $182 Put and long the $184 Put in the July monthly expiration with 33 days until expiration has a 60% probability of making 50% of its max profit before expiring.
- American Express (AXP): Some of the main beneficiaries of the dropping 10-year Treasury yields are consumer finance stocks, and in particular AXP. It has rallied 6 days in a row for the equivalent of 2.3 standard deviations and has reached an all-time high. Warren Buffet’s Berkshire Hathaway is AXP’s largest shareholder (about 20%), and he must be enjoying the ride. Is it wise to fade the Oracle of Omaha? Earnings are coming up on July 17, which could increase the volatility of AXP’s movements. So, if you’re bearish on AXP’s rally and are willing to take a risk through earnings, the long Put vertical that’s short the $122 Put and long the $125 Put in the July weekly expiration with 40 days until expiration is a bearish strategy that has a 63% probability of making 50% of its max profit before expiration.
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Please be safe out there!
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Until next week – be safe.
R.F. Culbertson
