This Week in Barrons: 8.11.2019

This Week in Barrons: 8-11-2019:

   It’s essential that we make new mistakes, and honestly we don’t make nearly enough of them.  Over the past decade there has been a decline in the amount of: original effort, generous intent, and daring in search of something better.  At some point we need to stop making the old ‘stupid’ mistakes.  Einstein defined insanity as the act of doing the same thing and expecting different results. For most of the U.S., it’s more frightening to do something new than it is to retry something that failed.  The ‘fear of making new mistakes’ has plagued most traditional media channels.  They will occasionally test a new medium, but they will rarely leap to it.  For example:

-      Radio shows rarely became TV shows,

-      TV networks never became cable networks,

-      Books continue to ignore technology,

-      In 1994, Bryant Gumbel on network TV was “confused by the Internet”,

-      In 1999, Conde Nast bought ONLY the print half of Wired magazine,

-      In 2000, newspapers were the perfect vehicle for blog networks, but they pressed the ‘snooze’ button.

   It’s not uncommon to have innovation adopted first by amateurs.  In the beginning, there is no mass audience.  As the new idea gains traction, old stalwarts hunker down to protect their existing market share. Encyclopedia Britannica’s leadership was so proud of their content they ignored Wikipedia completely. 

   Businesses that continue to be fearful of ‘making new mistakes’ – must suffer the consequences.  We’re seeing that today in terms of retail.  In the first seven months of the year, U.S.-based companies have announced 42,937 job cuts due to bankruptcy, up 40% over the same period last year.  Bankruptcy filings have not claimed this many jobs since the Great Recession.  Retail is the ‘poster child’ for a sector that keeps making the same mistakes.  How is it a surprise to anyone that more people are shopping on line at Amazon and at eBay.  And, the number of retail store closures in the first 7-months of the year has exceeded the total number last year, and estimates are for 12,000 stores closures this year vs only 5,864 in 2019.

   How is this possible you ask?  Please look no further than the entrepreneurship curriculum being taught on our college campuses.  You’ll only find a few teaching the cryptocurrency model, and less than that embracing the cannabis phenomenon.  This flies directly in the face of Bitcoin being the highest grossing asset in the past DECADE, and the cannabis market growing at 700% year-over-year. I guess as long as the government, IBM and GE control the innovation side of our colleges – we will never have to worry about making a ‘new mistake’ ever again.  And that tells me all I need to know about why the U.S. is no longer one of the top 10 educational countries in the world.

   To paraphrase JB, the only established companies, user bases, and brands that are winning right now – are the ones that are rich in those old fashioned values. The good ones are spending their time transforming themselves into the spitting image of their upstart competition.  Disney wants to look like Netflix, Walmart is trying to retail like Amazon, and McDonalds wants to be as habit-forming and ‘fresh’ as its former protege Chipotle.  They’re reteaching: discipline, patience, dignity, respect, curiosity, wisdom, ethics, honor, empathy, honesty, bravery, awareness and kindness.  These are all skill-sets – soft, learnable and in short supply.  But they’re also decisions and choices we get to make.  What happens to the old farts who aren’t ‘making new mistakes’?  History tells us that their rusty old asse(t)s never matter again.

The Market:   If I had one stock NOT TO BUY – it would be a tie between Uber & Kraft Heinz.

  There are two ways, broadly speaking, that businesses keep their shareholders happy.  First, they make big profits, which can be returned to their pockets.  The second is to grow fast enough that they can at least expect a profit one day in the future.  Uber, the global ride-hailing giant, has sought to put itself very much in Column B.  Uber is one of the greatest loss-making tech companies in history.  The message ahead of its $80B stock market listing earlier this year was that profits might not be here soon, but they will be worth waiting for.  The company’s 2^ndQuarter results confirmedat least one thing: Uber certainly isn’t profitable.  Its $5.2B loss was one of the biggest by any company in the post financial crisis era, even if some of it was due to one-off IPO costs.
   What worries me is their plan toward future riches is based upon dreams.  Uber’s revenue growth is declining (from 20% to 14%) and down to 2% in its core, ride-sharing business.  Itsshare price remains below its IPO price and with lockup periods expiring – things ain’t lookin’ good for it to move higher any time soon.  Uber’s IOU is based upon autonomous driving technology and changing human behavior – so there are no guarantees.  But if growth soon doesn’t accelerate, we may never find out.

   And then there’s Kraft Heinz (KHC) who’s shares have plunged 40% this year - the worst performer in the S&P 500.  The company stunned Wall Street in February when it posted a massive loss because of a $15B write down, slashed its dividend, and disclosed an SEC probe.  Its poor performance is also hurting Warren Buffett (BRKB), who is the company's largest shareholder with a 27% stake.  Private equity firm 3G, which partnered with Berkshire Hathaway to buy Heinz and then merge it with Kraft – is the second-largest shareholder in the company.  Here we have a company that has been so busy cutting costs it has failed to capitalize on its huge asset: the Boca Burger.  Less we forget, Kraft Heinz has owned the veggie burger / plant-based food segment for years.  It now finds itself far behind upstarts: Beyond Meat (BYND) and Impossible Foods. Who would have thought Warren Buffet was too set in his ways to not make ‘new mistakes’?  The man who continues to believe that Bitcoin is ‘just a passing fad.’ The gent who told Coke to stay in its lane and to not partner with a company in the cannabis vertical that’s growing at 700% YoY.  Who knew that making ‘new mistakes’ was so scary?

Info Bits:

-      Scotts Miracle-Gro gains its mojo:  via weed legalization.  Their sales jumped 18% - powered by indoor pot growing.

-      Uber:  ate morethan $5B in losses last quarter, and its stock experienced the exact opposite of surge pricing.

-      Sounding a "Code Blue" for Molson Coors:  The nation's #2 brewer saw sales fall 4.4% as Americans swap light beers for cannabis beverages.  Their new campaign: "Made to Chill" - sounds like it could go either way.

-      Trade War deal close:  remember ALL those fake headlines – everyone does!

-      Walgreens is closing 200 U.S. stores: and an additional 200 in the U.K.

-      A Currency Trade War:  The Chinese yuan slid 1.9% to a record low of 7.1087 to the dollar last week.  The weakening Chinese yuan means that their goods will be cheaper for U.S. buyers, off-setting the tariffs.  How did they get so clever?

-      Zillow wants to SELL Houses:  and that’s not going so well.  It seems that there’s a BIG difference between browsing for your dream house online, and actually buying it.

-      FedEx says “We’re done”:  its ground delivery contract with Amazon will end at the end of the month.  It had already dumped the 'Zon from its air cargo services.

-      Facebook is getting sued again:  The case claims that FB collected and stored facial recognition / biometric data of millions of users without their consent. 

-      “Dude, your credit card’s heavy metal”:  The Apple / Goldman Sachs credit card is the hottest innovation in fintech.  Apple’s fees are non-existent, interest rates are low, and profits are shared with Goldman Sachs.  But if it causes people to use Apple Pay … it’s Priceless.

-      China’s not buying our oil?  Well, they’re not buying our agricultural products either.  China isexpected to dramatically reduce its intake of U.S. crude imports over the coming weeks – more evidence of a global, economic slowdown.

-      60% will ‘Drop where they Shop’:  60% of shoppers will adjust where they shop if the Trump proposed tariffs on Chinese imports go into effect.  44% said they will cut back on shopping, and 25% will switch to Made in America.

-      “Dude, where’s my interest rate?”  5 global Central Banks cut interest rates on the same day.  Coincidence?  Our global economy is slowing quickly.

-      “You’re paying me to take out a mortgage?”  Jyske Bank, Denmark's third-largest bank, announced a 10-year fixed-rate mortgage with a rate of (negative) -0.5%.  They’re effectively paying customers to borrow money.

Factually (per SF):

-       3 of Europe’s biggest economies (Germany, Italy and the U.K.) are probably in recession – and the ECB is out of bullets.

-      Germany, Europe's industrial backbone, is stuttering as the unemployment rate has risen for the second time in three months. 

-       U.K.’s economy contracted at 0.2% for Q2.  The first contraction since 2012.

Crypto-Bytes:  A year from now you’ll wish you had more Bitcoin.

-      New Record Set:  Bitcoin’s hashrate hit a all-time high last week. The world’s most secure computer network just became more secure.

-      Bringin’ out da big guns:  IBM launched a new blockchain project: Trust Your Supplier (TYS) – with Anheuser-Busch InBev, GlaxoSmithKline, Lenovo, Nokia, and Vodafone.  TYS joins other track-and-trace supply chain and logistics launches such as: Food Trust and Trade Lens.

-      Pension Funds  with over $1B in assets have a targeted long-term return of 7.25%. Last year their return was only 6.79%. If those pension funds had just 1% of their assets in Bitcoin – they would have made their target.

-      Bitcoin has no value:  but it is more available, has faster settlement times, and cheaper fees than virtually every other bank wiring system.

-      Bitcoin is:  the 11^thlargest money supply.

-      When Central Banks cut rates and print money:  they’re making the rich – richer by inflating asset prices.

-      An economic recession would expose: who’s been taking too much risk in this traditional financial climate.  The list will open your eyes.

   Global instability is getting worse.  President Trump recently threatened another 10% tariff on over $300B of Chinese goods, which caused the Chinese government to  allow the yuan to weaken in response.  The Chinese currency broke a key resistance of 7 yuan per U.S. dollar late last week (the weakest level since 2008), and the Chinese government asked all state-owned corporations to suspend imports of agricultural products from the U.S.  The failure of the yuan has multiple implications, including the increased likelihood of the Hong Kong dollar’s failure, and a resulting potential for Bitcoin to benefit from significant capital flight.

  As the trade war continues, it wouldn’t be surprising to see capital flight accelerate out of China and Hong Kong.  There are more than $27T in Chinese deposits, and the total crypto market cap barely eclipses $300B.  If 1% of Chinese deposits moved into Bitcoin as a result of capital flight, the crypto market would instantly double.  Bitcoin has previously benefitted from numerous countries where the sovereign currency is devaluing such as: Venezuela, Iran, Argentina, and Zimbabwe.  None of these countries are remotely as developed as China or Hong Kong.  We also saw Bitcoin benefit during recent moments of global instability.  In May of this year, Bitcoin rose 55% while threats of tariffs and trade wars raged on.

   We are watching one of the most interesting experiments in history play out.  Because of low and negative interest rates, individuals are being incentivized to move their wealth into other assets – whether they are real assets or other currencies.  The beauty of Bitcoin is its inability to be manipulated by any one country.  This is causing a larger percentage of the human population to elect to store their wealth in software-based currencies.  They are trusting the governance of an algorithm over that of a human.

   In the crypto arena, the alarms are blaring because economies are speeding towards a global financial crisis with no brake pedal. Don’t believe me?  Lawrence Summers, the former Secretary of the Treasury under President Bill Clinton, put it best when he tweeted: “We may well be at the most dangerous financial moment since the 2009 financial crisis.”  A couple other elements:

-      The U.S. Treasury department decided to officially designate China as a currency manipulator.  A first for a major trade partner since 1994.

-      Factually, China has been manipulating its currency for years. Their recent devaluation was merely the Chinese government stopping the manipulation.

-      China’s depreciation of the yuan has mitigated many of the proposed effects of the tariffs and economic war.  China has not been hurt nearly as much as President Trump and the U.S. had hoped.

   Regardless of the chaos, there is a global hedge available that is becoming more and more obvious – Bitcoin.  I would argue that it is currently irresponsible for an investor to have 0% exposure to the digital currency in their portfolio.  Why?  Bitcoin is a non-correlated, asymmetric return-profile asset.  It has proven to be inversely correlated in times of increased global instability.  Bitcoin remains one of the best performing global assets of the year, tracking along the lines of its 2017 performance.  Historically the 2^ndhalf of the year has been kind to BTC, especially the early autumn months – but history is obviously limited.  Also the correlation between BTC and gold has strengthened considerably the last few months amid plunging debt yields and rising geopolitical tension.  In my opinion, demand for an uncorrelated, non-sovereign asset will likely increase going forward.  We continue to live in exceptionally volatile and unpredictable times.  Institutional investors have sought out non-correlated assets as portfolio diversification tools for decades.  Now that Bitcoin is presenting itself as the perfect global hedge – buy some today.  It will quickly become irresponsible for investors to remain completely on the sidelines.  I call it: “idiot insurance.”

Last Week:

  

  Get ready to strap yourself in.  My guess was that the market was going to head lower after a counter trend bounce.  I think that the big players are going to be freaking out over these bond yields, and someone is going to do something in here to save things.  In other words, we're going to see some wicked volatility coming.  Already I'm hearing people talking about cutting our rates to ZERO right now, to head off problems.  I would (for the time being) recommend keeping your powder dry.

   My big question is: Do you think there's any real reason for this market to go back up, without something solid like another rate cut or some thaw in the China mess?  I can’t find one – other than simple desperation and a little help from the folks behind the curtain.  After all we have: lower corporate earnings, air freight collapsing, large truck sales at 2009 levels, rails falling, the 2-year and 10-year are trying to invert (again), a trade war, a currency war, and 5 central banks cutting rates on the same day.

  China has even warned Hong Kong that they're close to "moving in on them"to stop the protests.  The White house and Congress are making statements that the Chinese shouldn't interfere with Hong Kong politics. Yet in a strange twist, we have photos of a U.S. diplomat talking to the protestors, and supposedly egging them on.  Is Hong Kong going to be the black swan that touches off a true confrontation between the U.S. and China?  It could be.  Right now the protestors in HK have been on a "sit in" at the Airport, and the Mainland has been putting out some pretty nasty media about it. 

  The U.S. and China are NOT any closer to a trade deal. I still think the risk is to the downside, so it's hard to be too eager to buy anything in here.  That said, the gold and silver miners put in a good week, and I’ve outlined a couple individual miners and striking points in the TIPS section.

   Make no mistake, when you see a headline like: “Entire U.S. Curve Inverts As 30Y Yield Drops Below Effective Funds Rate” – you know that things are ugly.  I can’t outguess this.  I can make every reason for this market to go down another 500 points, but the ‘hidden hand’ just erased 300 points from the lows on no news.  Be careful out there, and I think the risk is still to the down side with some massive chop.

Weed:   Cannabis consumption has risen 700% year-over-year.

   Colorado legalized recreational marijuana use in 2014, and a new study shows that the consumer is moving away from ‘smoking pot’ into other forms of consumption. For example, the use of "ingestibles" has risen five-fold over the past 2 years. The only concerning news surrounding this craze is that potency levels need to be tightened-up and less deceiving.  

   Factually:

-      Cronos Groupwill make its first foray into the U.S. market with the acquisition of four subsidiaries of California-based Redwood Holdings for $300m.  FYI – Altria took a $1.8B stake in Cronos late last year.

-      TerrAscendhas acquired Pennsylvania seed-to-sale operator Ilera for a total consideration of around $200m.  TerrAscend is backed by Canopy Growth’s Canopy Rivers venture capital arm.

-      Aphriawas asked about CannTrust in an interview with Bloomberg saying: “I think they have some great medical clients and they have some real interesting assets.  It’s something that absolutely we will be looking at.” 

-      Arizona Beveragereached a manufacturing / licensing deal with Dixie Brands for marijuana-infused products. Arizona Beverage is entering the marijuana-infused beverage and edibles market in the U.S. and Canada in an effort to make up for lost ground in the traditional drinks sector.

   Arizona Iced Teas are a staple at convenience stores and supermarkets around the country, including 7/11s, Walmarts, and Walgreens – which might indicate marijuana products are edging closer to the mainstream.   This is one of the first examples of a major consumer company entering the beverage cannabis market.  Other beverage brands have been dipping their toes into the marijuana space.  In 2017, Corona beer maker Constellation Brands announced a near 10% stake in Canopy Growth Corporation, and increased its investment last year by $4B.  California-based Lagunitas Brewing, owned by Heineken, also launched cannabis-infused sparkling water to be sold in select California locations.  But Arizona is a privately held company – so that gives it ‘Friends with Benefits’ status in terms of transportation and banking relationships.

   Blue Moon is at it again.  Keith Villa is the brew-master and co-founder of Ceria Brewing Company, a company that creates nonalcoholic THC-infused beer.  Ceria's beers are low-dose, containing 2.5, 5 or 10 milligrams of THC – the part of marijuana that creates the sensation of being high.  Since adding marijuana to alcohol is federally illegal under the Alcohol Tax and Trade Bureau, making Ceria nonalcoholic frees them from federal control and allows them to add THC to their products in states where marijuana is legal.  The cannabis beer industry has exploded in recent years with dozens of breweries popping up around the United States – predicted to reach over $1.5B in the next 4 years.  Ceria also works much quicker than edibles, with the THC taking effect in around 15 minutes, similar to the reaction time of alcohol.  However, while the beer is faster-acting, it is not as strong as most edibles.  Ceria is planning to expand from Colorado to California, Nevada, Illinois and Canada in the future.  I’m not embracing the Ceria motto as of yet: 'Cannabis pro Omnibus' (Latin for: 'Cannabis for the People') but I certainly embrace the ground-breaking effort and legitimate first mover advantage that Ceria will possess in various marijuana friendly markets.

Next Week:  

   Volatility reigns with every tweet, currency wobble, and yield tick.  This past week we saw days of 600 point round trips and 700 point plunges.  We saw no less than 5 central banks slash interest rates on the same day.  It's a tough time to be a swing trader because when you go to sleep – you don’t know if you’ll wake up 200 points up or down.  The tensions in Hong Kong are wickedly tense. Gold is soaring and it almost looks like the cabal has lost control of it.  Their last two attempts to beat it down didn't work.  Silver's looking pretty good, as people around the world are really beginning to see that things ain’t so good out there right now.  The "hidden hand"/ Plunge Patrol Team has been hard at work reversing as many plunges as futures will allow.  Their desire is to keep the wheels on this economy, BUT the bond market and the economic releases aren’t buying it.  This is a good time to simply be a spectator.  If you're a swing trader, don't try and catch a falling knife.  Let this shake out a little more before getting involved.  If the agenda is to get the market back to the all-time highs, you will have plenty of time to make your trades.  Be cautious because everything is tense and everyone is nervous.

Tips:

Gold Miners to Consider:  

-      AG over $11, 

-      PAAS over $17.45, 

-      NEM over $40, and 

-      KL over $48.

Top Equity Recommendations:

   HODL’s:

-      Aurora (ACB = $6.54 / in @ $3.07)

-      Canopy Growth Corp (CGC = $32.90 / in @ $22.17),

-      GBTC (GBTC = $14.88 / in @ $10.01)

   Crypto:

-      Bitcoin (BTC = $11,400)

-      Ethereum (ETH = $210)

-      Bitcoin Cash (BCH = $320)

   Options:

-      RIOT ($2.18): 

o  Bot Jan 17, Sold $3 Call / Sold $3 Put / Bot $4 Call for $1.85 CR

o  Bot Jan 17, Sold $2 Call / Sold $2 Put / Bot $3 Call for $1.45 CR

o  (can only lose money if RIOT falls below $0.70).

   Thoughts:

-      John Deere (DE = $154.84)  It’s not just stocks getting pushed around by the tariff scare – grains were also driven lower.  Lower grain prices are putting more pressure on farmers – which in turn puts more pressure on suppliers such as John Deere.  DE has dropped the equivalent of 2.35 standard deviations over the past week.  On the other hand, Washington is working on a farm bailout bill that could give everyone some breathing room, and some extra capital to spend.  DE’s earnings are coming up on Aug 16, which has helped elevate its implied volatility rank to 71%.  A contrarian might see a bullish opportunity in DE, and take advantage of the high volatility rank with a short premium strategy.  If you are bullish on DE, the short Put vertical that’s long the $145 Put and short the $147 Put in the Sept weekly expiration with 36 days until expiration is a bullish strategy that has a 74% 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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