This Week in Barrons: 9-1-2019:
Thoughts:
Thanks to AP for reminding me that the Space Race kicked off 64 years ago. The 20-year race for innovation thrilled the world as two superpowers put their resources into an effort that they both considered important. The next decade will bring us a race where countries will allocate billions of dollars in an effort to capture economic, defensive, and societal benefits that come with winning the global reserve currency race. It has been 75 years since this race was first held (Bretton Woods System), and we’re entering the early days of this competition. Whether it’s China, Russia or the U.S. complaining about the U.S. dollar, or Venezuela, North Korea, and Iran becoming angry over sanctions – countries are quickly finding alternatives to a U.S. dollar denominated system. One solution focuses on violence – while the other innovation.
The traditional violent path would see the world’s superpowers engage in combat to establish military superiority as a proxy for global leadership. The winner would have the right to install their national currency as the global reserve. This is the path where other countries are likely to believe they have a low probability of emerging victorious against the U.S. Due to the collateral damage associated with this path, I believe the currency race will be fought along innovation guidelines rather than violent ones. Most countries may not believe they can beat the U.S. military, but I guarantee they ALL believe that they can out innovate the U.S. and its current leadership.
The innovation path leads directly to digital currencies with their: lower costs, greater adoption, increased compliance and security, and a greater ability to collect taxes. There are a few countries that are sprinting out of the gate:
- Venezuela – crippled by economic sanctions, has created the Petro in an attempt to access international financing options. The cryptocurrency was supposed to be backed by the country’s oil and mineral reserves, but has failed miserably, and is not functioning as a currency.
- Switzerland’s – government has requested a report on the pros and cons of a government-backed cryptocurrency. I wouldn’t be surprised if Switzerland adopted an ‘e-franc’ as soon as another nation launches a cryptocurrency.
- China – has been working on a government-issued cryptocurrency that will eventually replace the physical Chinese Yuan. This project is no secret, and runs directly in the face of the U.S. dollar.
- India’s –cryptocurrency panel recommended banning all cryptocurrencies that are not backed by sovereign nations. But also wanted to pursue the creation and launch of their own digital currency that would replace the existing Indian Rupee.
These are just a few examples of how countries are currently assessing the situation. Winning the crown of ‘Global Reserve Currency’is just too large of an incentive for countries to sit on the sidelines. The Great Currency Race has begun, but there is one key difference between this race and the Space Race. The Great Currency Race has a dark horse competitor. A competitor that was built by an anonymous person or group, and already has millions of people using it. A competitor that is more secure than (and not at the mercy of) any other currency system in the world.
The dark horse competitor is Bitcoin. The aspects of the digital currency that make it different (including the decentralized nature and lack of identifiable owners) are exactly the aspects that give it a significant advantage over the other competitors. Just as the Space Race mesmerized millions of people – the Great Currency Race will capture the imagination of hundreds of millions of people. Money is at the core of every society. It is how we transact, and how we measure value. We use it to understand power and the depth of resources. Simply put, money is the most interesting topic in the world, and you’d better believe that interest in the Great Currency Race will dwarf the Space Race.
The Market:
Someone has to win the lottery, and that someone might as well be you – right? The odds are ridiculously against you, but there are plenty of examples of ‘lottery logic’ in our everyday lives. There are TV shows built around someone singing like Taylor Swift, or looking like George Clooney. We regularly watch people trying to raise a $40m seed round, or get picked to be the next big thing. It’s tempting to follow the mass-market stardom path. It’s tempting to believe you have the ‘IT’ factor. But it’s far more productive to focus on stepwise progress for the minimal viable audience. It will NOT make the headlines, but it puts the odds in your favor.
I bring this up because markets are changing quickly and dramatically. We’ve had 10 good years of a bull market, but now the ‘R’ (recession) word is beginning to be heard more often, and not as an ‘IF’ but rather a ‘WHEN’. As budgets collapse, word of mouth and user experiences will take center stage. Online marketing was allowed to exist as a messy mix of direct marketing, influencers, SEO (search engine optimization), tricks-tips-tags and guesswork. It was always a moving target, and mostly focused on tactics NOT strategy – because tactics are easy to measure. Marketing online (on the other hand) is what happens when work to serve an audience arrives in electronic form. Marketing online is simply actual marketing aided by a mouse and keyboard. You need both, but one definitely drives the other.
To demonstrate how quickly our markets are changing, the S&P 500 companies spent 20% LESS on stock buybacks in the 2ndQuarter of 2019 than the 1stQuarter. They spent 13% LESS year-over-year. A drop in buyback spending by tech giants Apple, Oracle and Cisco played a major role. The 3 spent a combined 26% LESS than their previous period. One dot does not make a line, but if this trend continues and corporations start to pay down debt rather than incur more to elevate their stock prices – it will mark a water-shed moment in the equity markets as it is one of the top two forces driving our asset prices higher.
Most people agree that the market volatility we are experiencing will only get worse as we head into the 2020 election. The big difference maker – is the manipulative concept of negative interest rates. Interest rates below zero (where you must ‘pay a bank’ to hold your money) will drive investors out of savings into more risky alternatives. As SF pointed out: “We are back to the same issue we saw 10 years ago – poor returns and flat treasuries. Most pension fund models are built on a basis of 6 to 8% yields. How will funds ever meet their obligations under a ridiculously low interest rate environment? What happens to those California pension funds that are currently underfunded? This is a massive mess that’s only going to get worse as negative rates begin to take hold.” Remember, in a negative interest rate environment – cash is a strategy that keeps you in the game.
Info Bits:
Costco comes to China…
- China got its 1st Costco and people went Berserk: Reports say it was a frenzy as Chinese citizens rushed to the store to buy groceries and goods in bulk. Imagine that, sounds like a typical Saturday at Costco to me.
- Wow – now we’re penalizing kids for being Smart: A panel appointed by Mayor Bill de Blasio has recommended eliminating New York City’s gifted student programsto help desegregate the educational system. Sure – let’s sacrifice the education of our really intelligent / gifted kids for _what again_?
- Former Uber exec charged: Anthony Levandowski, who previously ran Uber’s self-driving car project, was hit with criminal charges for stealing trade secrets from his old employer – Google’s Waymo unit. It was these secrets that helped him form Otto (the autonomous truck company) that he sold to Uber for about $680m. He is alleged to have downloaded more than 14,000 files. “All of us have the right to change jobs,” said U.S. Attorney David Anderson . “None of us have the right to fill our pockets on the way out the door. Theft is not innovation.”
- How about ‘dat iPhone: New iPhone is coming on September 10th. Apple’s stock is up roughly 1,000% since the first iPhone was released in June 2007.
- What’s Social Media: If you’re over 40, social media is Facebook and YouTube. If you’re under 25, it’s Twitter, Snap and Instagram.
- Help Wanted: A sports betting site has a “Help Wanted” sign out asking for an NFL Food Tester. It involves travelling to NFL stadiums on game days and eating all their food. It's like they're living inside my dreams.
- If you’re doubting global easing: The following Central Banks cut their interest rates last month: NewZealand = 50 bps, India = 35 bps, Thailand, Mexico, Peru, Philippines, Paraguay, Hong Kong, Indonesia, Jamaica, and Iceland = 25 bps.
- Risk happens Fast: The Argentinian market was up 45% this year. It is now down -3% on the year. That 48% crash happened in the last 45 days. I know: “That can’t happen here.”
- ULTA was down 30% on Friday: After Friday’s earnings miss, ULTA dropped 30% in a day. Oops, I know: “That can’t happen here. But it just did.”
Crypto-Bytes: Think about Tokenization as a new way to diversify your portfolio.
Tokenization of Art: “Daddy, What’s Money” … by Pascal Boyart
- Tokenization is coming to a neighborhood near you: The above wall mural is a work of art by Pascal Boyart (a French street artist) that just succeeded in selling ½ of the work via tokenization / blockchain. One buyer purchased half of the piece for 25 Ether (ETH), and the 2ndhalf of the mural is still listed as being for sale. The Parisian painter has been experimenting with monetizing his work in different ways outside of the traditional art gallery. His latest path involved fractional / tokenized ownership of his mural “Daddy, What’s Money”, and uses a blockchain to verify the legitimacy of any claims to that ownership. The buyer paid 25 ETH, (about $5k) for half of the piece that depicts a youngster with a look of wonder in their eyes. The tokens represent ownership of the mural, and were created on the Ethereum blockchain – with the sale itself taking place on the digital goods marketplace OpenSea. The acquiring entrepreneur Alistair Milne remarked: "I just bought half of this piece of street art by @pascalboyart as a NFT (non-fungible token). It was the first ever mural to carry a Bitcoin QR code. V. cool new way to collect art (or pieces of art). The other half is still for sale…” https://opensea.io/assets/pascal-boyart-1 … Imagine all of the land, buildings and other assets (or portions of assets) could be invested in via tokenization.
- I like Bitcoin: said the Bank of England’s governor Mark Carney when he suggested a series of digital currencies supported by a network of central banks as a possible replacement to the U.S. dollar as global reserve currency. He (as a former JPMorgan Chase banker) believes that Bitcoin might fit the bill. Richard Galvin, currently the CEO of Digital Asset Management, said: “Bitcoin largely fits the description of what is required. It would also be completely removed from country borders and independent of country-specific interest rate policies.”
- But it keeps dropping: Bitcoin looks to register its third monthly loss of the year with a moderate price drop in August. It’s currently trading at $9.6k, representing a 4.8% drop from August 1st.
Last Week: The data wasn’t good, and the ‘R’ word is being used a lot more often.
- Factually:
o Q2 GDP was revised downward to 2%, and down from 3.1% Q1 growth,
o Pending home sales dropped sharply in July / August,
o Consumer Confidence declined in August,
o Consumer Expectations (based upon consumers’ short-term outlook for income, business and labor markets) declined sharply in August, and
o Household spending was the ONLY element keeping this economy afloat.
- Recession Watch 2019: Gus Faucher, Chief Economist at PNC, expects:
o The trade war to begin to weigh on consumers in the second half of this year as additional tariffs take effect Sept. 1, Oct. 1, and Dec. 15.
o Growth is slowing to a 1.5% annual rate in Q3 2019.
o Growth will dip to a sluggish 1.3% in Q4 2019.
o Higher tariffs will cause consumers to pull back on cars and appliances until at least mid-2020.
o The fate of the global economy is in the hands of the U.S. consumer.
o The latest earnings reports from retailers show that discounters, Dollar Tree, Dollar General, and Five Below are the main ones doing well.
o Business investment spending turned negative in the second quarter – falling at a -0.6% annual rate.
- Mark Zandi, chief economist at Moody’s Analytics,doesn’t see a recession in the next 18 months but said that one can’t be ruled out. "If the President continues to ratchet up the rhetoric and his tariffs on China, it will unnerve business people and substantially increase the risk of going into a recession."
Weed: You can only ignore a market sector that’s up 700% YoY for soooo long.
- With CBD sales increasing 700% YoY: it’s hitting alcoholic consumption hard:
o 51% of young adults are drinking less than a year ago, and
o 37% of millennials are ditching beer because “It makes me fat.”
- California Cha-Ching / Cha-Ching: as its legal cannabis industry paid 19% more in taxes this quarter over last quarter! Charlie Bachtell, CEO of Cresco Labs said: “California is shaping up to be the market we all knew it could be as enforcement measures have started to take a toll on the illegal market. 2020 is going to be a big year for the state, which is already the largest regulated market in the world.”
- Aurora Cannabis: recently completed its acquisition of Hempco Food and Fiber, paying $48m for Hempco’s brands Praise and Planet Hemp as well as its 56,000-square-foot processing facility in Nisku, Alberta.
- Aurora Hemp: also made hemp deals in Europe and South America recently, folding them into its standalone Aurora Hemp division. Aurora’s Cam Battley said: “Hemp will be an enormous global business for us, and we will have an announcement pertaining to our U.S. hemp operations in the near future.”
- Minnesota here we come: Gov. Walz is relying on supporters to continue to push for legalization. He said:“We will have everything ready to go, and will be able to implement it in Minnesota the minute the Legislature moves this along.”
- The National Credit Union Administration: reiterated that credit unions may provide financial services to legally operating hemp businesses.
- The American Bar Association: urged Congress to enact legislation in support of a number of cannabis-related issues.
- Juul: raised an additional $325m in an equity and debt offering.
- Call me “Mr. Recovery”: says Rob Gronkowski (Gronk = x-NFL player) as he promotes CBD products for athletes. That's one way to enjoy retirement.
Next Week: Take advantage of being range bound until the FED meets.
In the words of IY, how many ways can you say chop? It really didn't matter if you were long or short lately – you were going to get burned. The only way to play this mess was to be out by the close, because you never knew what the next day would bring. The week ended with 3 up-days. Most of that was because China extended an olive branch and said that they wanted to hold off on retaliatory tariffs and get onto having meaningful dialog with the US. The algorithms took that as a sign of hope, and up we went. However, Friday the market was considerably higher in the morning than where we closed. After all, who knows what happens over a 3-day weekend?
As you can see by the S&P chart, we're still trapped between the 50 and 200-day moving averages. Until one of those breaks, we can expect more chop. Especially now that it’s September. With September comes another FOMC meeting, and yet another back-n-forth surrounding rate cuts. The market clearly expects a rate cut, even if it's just 25 basis points. If they get a 25 bps cut, they might grumble a bit – but overall the market will hold up. On the other hand, if the FED plays tough and doesn't cut, I suspect we break through the bottom range line in a hurry.
Taken to an extreme, if the FED cuts rates and there is some real news about a trade deal, this market will launch itself into space. Since 1933, any time the S&P has been up 10% between January and August (like it is now), it goes higher 83% of the time. So with history at our backs, adding in a rate cut and a trade deal will give this market wings. But if China continues it’s tough stance, and the FED doesn’t cut rates – we will instantly revisit December's 2350 levels.
I think our next obstacle to moving higher is the 50-day moving average on the S&P. That will serve as resistance, and it's only 20 points away. So I think next week will be spent having the market ‘regroup’ around the 2945 level. Crazy times. Play cautiously, and continue to raise cash.
Tips:
While you never want to overload a sector, I could rattle off a half-dozen metals players that look good: AUY, AEM, FNV,MUX, KL – along with AG, DRD and PAAS.
Top Equity Recommendations:
HODL’s:
- Aurora (ACB = $5.50 / in @ $3.07)
- First Majestic Silver (AG = $10.88 / in @ 10.50)
- Canopy Growth Corp (CGC = $23.58 / in @ $22.17),
- DRD Gold (DGD = $4.32 / in @ $4.20),
- GBTC (GBTC = $11.72 / in @ $10.01),
- GameStop (GME = $3.97 / in @ 4.00),
- Pan American Silver (PAAS = $18.47 / in @ 18.00)
Crypto:
- Bitcoin (BTC = $9,600)
- Ethereum (ETH = $190)
- Bitcoin Cash (BCH = $270)
Options:
- RIOT ($1.84):
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:
- Costco (COST = $294.76) And I thought the checkout lines at my Costco were long. Maybe COST really has deals on stuff that Chinese consumers want and can’t already get, or maybe it’s just the novelty of the store. But something caused a massive traffic jam around the opening of Costco’s first store near Shanghai. That’s presumably the reason COST rose the equivalent of 3 standard deviations last week. That rise, along with earnings coming up on Oct 3, pushed its implied volatility rank up to 52%. Now, I love COST as much as anybody, but I think that contrarianism fits in with the Costco culture. That means, you might consider a bearish strategy that takes advantage of COST’s high IV. If you are bearish on COST and want to avoid carrying a trade through earnings, the short call vertical that’s short the 300 call and long the 302.5 call in the Sept monthly expiration is a bearish strategy that collects a credit 1/3 the width of the strikes, has a 76% 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
