This Week in Barrons: 9-15-2019:
Thoughts:
It’s never been our skill set, our knowledge base, or our physical capacity that limits our development. It’s always been our internal narrative, our guts, our willingness to believe, and our ability to care enough to take a chance. You can’t do anything about the limitations of physics, but we can change the limits we place on ourselves. To do that, we need to begin to be slightly more unreasonable. If you want to get ‘unstuck’, if you want to move to higher ground, or if you want to do something more worthwhile – the first question is: “Are you willing to sacrifice and be unreasonable?”
And that is exactly why China will win the trade war with the U.S., and eventually wean itself off its reliance on American technology. “China will never trust the United States again, and it will achieve its technological independence within 7 years,”David Roche, Independent Strategy’s president and global strategist, told CNBC’s Squawk Box. China has traditionally been reliant on U.S. suppliers for key tech components such as chips, software, telecom and jet engines. However, recent developments in the trade war have strained those ties and affected businesses from both sides.
In May, Chinese tech giant Huawei was placed on a U.S. blacklist, restricting the firm from purchasing American-made chips and software unless they got permission to do so. Some American mobile networks use Huawei gear, and others have flat-out declared that their revenue will be affected by the blacklist. Google halted all business activity with Huawei, a move that means future Huawei phones will no longer come installed with Google’s Android operating system.
China is surveying its tech companies to gauge their exposure to American suppliers, and also ramping up development in its own tech industry. For example, it’s developing its own chip industry under the government-led ‘Made in China 2025’ initiative. Currently, only 16% of the semiconductors used in China are produced domestically. Under this initiative, China will produce 40% of its semiconductors by 2020, and 70% by 2025.
Roche predicted that the end of the trade war is not in sight, because the U.S.-China trade war is not about trade. “It’s a conflict between a rising global power and a declining one. It’s about technology. It’s about the free flow of ideas. And it’s rapidly becoming about the free flow of individuals. So it’s a conflict that simply won’t go away.”
And when you ask yourself: “Who is willing to be unreasonable for a longer period of time? Who can ‘sacrifice’ and follow a ‘willingness to believe’ for a decade?” The answer is easy. Heck, our financial institutions hide behind their size to legitimize their value. Our skill sets are weakening, and our willingness to transfer knowledge is nonexistent. This isn’t about watching sports, another episode of ‘The Bachelor’, or believing in aliens. We’re talking about distribution curves, probabilities, and Brownian motion. Unfortunately, my answer as to whether the U.S. is willing to ‘suck-it-up’, and ‘bite-the-bullet’ for a decade is easy. Nope. We only win through sacrifice and being unreasonable.
The Market: Slowdown vs Recession – great question.
Most economists expect growth to weaken, and the jury is out on whether it gets to recessionary levels. The economy expanded by 2.9% in 2018, will slow to 2.3% in 2019, and will only do 1.8% in 2020. Some forecasters expect the economy to contract (turn negative) for one or two quarters in 2020. A recession is often defined as two consecutive quarters of negative output. Honestly, we often only know that we’re in a recession – when we’re beginning to come out of one. It’s doubtful that anyone will have the ability to declare a recession before the 2020 election. Historically, it has taken between 6 and 21 months from the start of a recession until its formal declaration.
Our FED has yet to signal recessionary fears, but the fact that the economy is not in a recession does not mean that a slowdown is not upon us. Historically, economic growth below 1.75% triggers higher unemployment and slower wage growth. And those two together will often times trigger recessions. Recessions are caused by workers losing paychecks – which causes consumers to pull back sharply on their spending.
Slowdowns often come alongside gyrations in financial markets, and that is certainly happening this time around. Volatility feeds downward consumer sentiment. The University of Michigan confidence index showed cracks in August, with one in three consumers mentioning tariffs. Mr. Trump has been insisting that the U.S. economy has great momentum, and that it’s the FED’s reluctance to cut interest rates and the fear-mongering media (not his policies) that are risking a recession.
It’s widely thought that any break below 1.5% on the 10-year Treasury will incite fears of a recessionary ‘tipping point’. We’ve seen elevated recession fears this summer, with the 2-year yield moving above the 10-year – inverting the yield curve. And while the 10-year Treasury note recently survived its third test of 1.5% which is a short-term positive – it sets up a longer-term danger signal. Rate tacticians realize that often 3rdtime bounces set up 4thtime pass throughs. To quote Matthew Graham (COO of Mortgage Daily News): “The big risk here is that the overall rate rally that began in November of 2018 – has run its course.” Our FED lowering rates will have little effect on a consumer that is positioned like a deer in headlights. You can listen to U.S.-China trade rhetoric all you want, but watch the 10-year. If it dips below 1.5%, then ‘all bets are off.’
Info Bits:
- Game of (Deal) Thrones: Over the weekend I learned that America's largest financial firm (JPM) is close to winning the biggest IPO in history: Saudi Arabian oil giant Saudi Aramco.
- Swipe Right - Jealous? Match (who owns Tinder) crumbled as soon as Facebook unveiled Facebook Dating. It’s been known for months that ‘The Zuck’ was getting into the swipe-game. The surprise was how much FB integrated Instagram into playing matchmaker. That cuts straight through Tinder's soul.
- SoftBank (which has invested more than $10B in WeWork) is urging the company to shelve its IPO. SoftBank is worried that they could face challenges raising a 2ndfund if WeWork lists at a steep discount to its last funding round.
- Jack Ma (China’s richest person) has officially stepped down as executive chairman of Alibaba – the nearly half-trillion-dollar online-shopping giant that he co-founded in an apartment two decades ago.
- "Guys get out of the way" Pierce Brosnan wants a woman to play James Bond. He’s really trying to shake’n not stir things up.
- Who can you Anti-trust? Recently, there's been a debate over whether the federal government should regulate big tech. Sen. Warren argues that tech giants like Google, Facebook, and Amazon have become too big and powerful. Others wonder how this regulation would ever be implemented.
- “Yes Siri, I would like fries with that.” McDonalds acquired the AI company Apprente to help make the drive-thru of the future. As long as I can order extra fries without being judged by a minimum-wage human – I’m good.
- It’s a piece of junk: Ford was down last week as Moody’s downgraded their credit to junk. It’s never great when your pieces are being referred to as “junk”.
- “Dude –my camera has a phone”: Okay, Apple is now all about the camera, your health (watch), and services. Apple TV+ is going to cost $4.99/month, making it the cheapest television streaming service on the market. The issue is that their content reflects the price. Their flagship TV show is a post-apocalyptic adventure called See, which looks absurd – and their most prominent game is a remake of Frogger (circa 1981). I don’t get it. Why don’t they just buy Spotify?
- Uber laid off 435 workers: which is most of their global R&D and engineering group. Who’s left to make those autonomous taxis?
- What's stronger than the stock market: Americans’ credit scores. Ranging from 300 to 850, the average FICO score just hit an all-time high of 706.
- Unlimited Groceries: For $98 per year, Walmart is bringing grocery delivery nationwide. It’s a small price to pay to never step into one of their stores again.
Crypto-Bytes:
- Tokenized IPO: Last week we saw the first blockchain-based initial public offering (IPO), with the national stock exchange of the Seychelles selling tokenized shares to investors worldwide. The shares – tokenized on the public Ethereum blockchain – became available Tuesday and immediately valued the company at $25m.
- Priceless Master Stroke: Mastercard is developing a blockchain-powered cross-border payments platform in partnership with R3. It will initially be aimed at connecting faster payments schemes with banks backed by Mastercard’s clearing and settlement network.
- Sacre bleu: France's finance minister said the EU should be worried, and immediately moved to block Facebook’s Libra cryptocurrency because it poses a real threat to the sovereignty of national currencies. Bruno Le Maire said: “I want to be absolutely clear, we cannot authorize the development of Libra on European soil.”
- “How do we stack up?” The U.K. has the most crypto exchanges of any nation worldwide (43). Coming in at 2ndand 3rdplace respectively, are the U.S. (27) and Hong Kong (22).
Last Week: What a difference a week makes…
- Apple showed us that their new watch has an ‘always on’ mode and is able to manage our health. Then they became more like MSFT by launching Apple TV for $4.99/month. Over the past 60 days: (a) Netflix has raised prices and lost subscribers, (b) Disney introduced a streaming service with a boatload of great content for ½ the price of Netflix, and (c) AppleTV came out to a huge user base, with minimal content, but a great family price of $4.99/mo.
- The European CentralBank cut key interest rates, and revived an old QE program. Draghi lowered the deposit rate from -0.4% to -0.5%. He also started buying bonds with a QE program at the pace of 20B Euros/mo. He did not do as much as many people had hoped. The initial response had our futures spiking higher, but settling down substantially by the end of the day. He then said that he’s reaching the limits of its stimulus powers. Awe come on Mr. Draghi, you can always just send people free money can’t cha?
- Our FED keeps jawboning about its 25 basis point cut that is coming. I think they will say "that's it for now" and the market may not like that.
- U.S.-China trade talks could produce an October watered down trade deal. China did say that it was moving to buy U.S. agricultural products after President Trump agreed to delay his next round of tariffs. I think we just keep trending higher. What’s to stop us – earnings? Nah, they're made up anyway.
Weed:
- Growing:
o U.S. farmers have licenses to grow511,442 acres of hemp this year.
o Of those511,422 licensed acres,only 230,000 acres are being planted.
o Of those 230,000 planted acres, only 125,000 acres will be harvested.
o Of those 125,000 harvested acres, no one knows how much CBD extraction will occur, but everyone agrees that ‘branding’ and ‘provenance’ will be the winners going forward as the extract becomes commoditized.
o Conclusion: Less than 18% of the headline licensed fields will be harvested and turned into viable CBD. The big winners continue to be those who know how to grow, care, cultivate and SCALE.
- The FDA is expected to issue a regulatory update on CBD in the coming month. I expect them to take the middle-ground to speed the availability of lawful, hemp-derived CBD in food and dietary supplements as described by former FDA Commissioner Scott Gottlieb in his July 30 op-ed in the Washington Post. Gottlieb's framework would involve a period of enforcement discretions that would immediately allow low-dose CBD in foods/supplements so long as products meet certain conditions (good manufacturing requirements, traceability, safe levels for purity and potency). I believe that such a proposal would be the start of a process that would need to be defined for CBD – and take 6 to 12 months. This stance will keep Pepsi and Coke on the sidelines for developing CBD and other cannabis-based products for the near future.
- Recovery Drinks: Canopy Growthis planning a CBD "recovery drink"down the line, and may start to develop that product in Canada. Recently Aurora (ACB) announced a joint research initiative on hemp-derived CBD with the UFC.
- The CBD customer: As retailers decide whether CBD products are an emerging trend or just hype, new research from Acosta finds that more than a quarter of U.S. consumersare now using them.
o 28% of consumers polled use CBD products on an as-needed (19%) or daily (9%) basis.
o The top uses of CBD products are for joint pain, general wellness, muscle pain, anxiety, and sleep issues.
o 59% of first-time CBD product purchases were planned, compared with 25% being an impulse buy, and 7% doctor-recommended.
o 55% agreed with the statement: "CBD oil is/might be a new miracle treatment", versus 35% being unsure what to think about CBD oil, and 11% deeming the products as "just hype."
o Millennials most often use CBD products to ease anxiety (31%) and for general wellness (30%).
o Gen Xers and Boomers, use the products to alleviate: joint pain (31%), stress (36%), and muscle pain (23%).
o 26% of consumers who have NOT tried CBD think that they are too expensive, 18% said there aren’t enough studies, 14% don’t trust the claims, and 13% think there’s not enough regulation.
o Retailers can entice more consumers to try CBD products by providing samples, entry-level pricing, in-store education (including knowledgeable staff), coupons and discounts, user testimonials, and access to research.
- A Marijuana banking bill appears headed for a U.S. House vote: later this month. This would enable financial institutions to serve the cannabis industry and ancillary companies without fear of federal punishment.
- Aurora plans a ‘significant’ US marijuana entry: saidCEO Terry Booth. Aurora is “laser focused”on exploring opportunities in the U.S. involving CBD derived from hemp.
- Marijuana industry donations: are over $305,000 to U.S. congressional members in the first half of 2019. This exceeds last year’s total by over 20%.
Next Week: Watch the bonds and rates / the TLT and the TNX.
Marko Kolanovic, head quant at J.P. Morgan, says extreme divergences in the market have led to the move in value stocks and that trend should continue. Given the rotation trade, Kolanovic expects more upside potential in small caps, cyclicals, value, and emerging market stocks than in the broad S&P 500. In July, the strategist said the rotation into value stocks was setting up for a ‘once in a decade’ opportunity.
With the first leg being in the books (ECB lowering rates), next up will be our FED next week. Are they going to cut or stand firm? I’m betting that they will cut rates by 25 basis points – but the probability of them doing nothing has risen substantially over the past week. And then come the China talks, and already there are more olive branches being offered up. China may allow companies to resume purchases of U.S. agricultural products. In response, Trump has delayed the imposition of another 250B of tariffs on Chinese goods, from Oct 1 to Oct 15. Remember, lower level talks come in a week and a half, with the big shots coming in to meet with Mnuchin and the boys in October. If we get a deal out of all this, we will have the triple play. But next week – a lot of movement is on the table.
Factually:
- Risk is flying high while we near all-time highs: that just shouldn’t happen. Next week’s expected move in the SPX is $42. For the past 3 weeks, we have exactly hit the expected move to the upside.
- Rut Roh Nasdaq: (see chart below) and notice how quickly the small cap index (IWM / RUT) is catching up to the tech-heavy Nasdaq.
- Gold higher or lower – place your bets: It’s all based upon the bonds and where the market wants to move rates. The best play here is an ‘Infinity Spread’ centered around 100 days out in December, 2019.
- Bonds and Rates: (see combo chart above)
o Bonds had a 4.3 Std. Deviation move last week … mathematically this can’t happen, but it did!
o Volatility of Bonds is higher than SPX (unheard of).
o Snap Back or The Big Collapse Bonds will move one way or the other.
o Rates the probability of the FED NOT moving rates is gaining in popularity. IF that happens, home builders (XHB), utilities (XLU), Home Depot (HD), and XLP will go crazy to the downside. Inexpensive PUT options are out there for the taking.
o Volatility of the Volatility (VVIX) Traders are buying the VVIX as a hedge against a bond collapse. Right now the probability of a rate cut is diminishing and professional traders are worried. What if the market suddenly becomes a ‘rising interest rate’ environment – all by itself?
Please continue to raise cash, trade small, and take profits quickly. Be safe.
Tips:
Top Equity Recommendations:
HODL’s:
- Aurora (ACB = $5.95 / in @ $3.07)
- First Majestic Silver (AG = $9.31 / in @ 10.50)
- Canopy Growth Corp (CGC = $27.46 / in @ $22.17),
- DRD Gold (DGD = $3.79 / in @ $4.20),
- GBTC (GBTC = $12.59 / in @ $10.01),
- GameStop (GME = $4.41 / in @ 4.00),
- Pan American Silver (PAAS = $16.23 / in @ 18.00)
Crypto:
- Bitcoin (BTC = $10,500)
- Ethereum (ETH = $190)
- Bitcoin Cash (BCH = $310)
Options:
- RIOT ($2.12):
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:
- VIX = $13.74 With bonds and gold selling off a bit in the last few days, it seems that what was wrong with the world is now fixed – right? But what if that’s not the case? Maybe it’s the weakness in Europe that’s spurring the ECB to announce new stimulus measures. Or maybe it’s just that we’re headed into autumn when volatility can pick up and send the market to who knows where. Speaking of volatility, the VIX is back down in the 13 handle, indicating relative calm. If you think the VIX might rally over the next month (or at least not fall much more), the long Call vertical that’s long the $14 Call and short the $17 Call in the Oct expiration is a bullish strategy that has a 55% probability of profiting by expiration.
- Google (GOOGL = $1,239) With the Feds and a majority of the U.S. peering into GOOGL at the behest of its competitors in the online ad space, you’d think the stock might drop. Nope. Anti-trust doesn’t scare GOOGL. The market seems to believe that GOOGL will be able to avoid any major restrictions on its business or monetary penalties. After all, when you’re worth over $840B, you can afford good attorneys. But GOOGL is still the fourth largest company, behind MSFT and AAPL, which are over $1T, and AMZN. It’s implied volatility rank stands at 13% - which suggests long debit spreads. If you think GOOGL won’t be fazed by the investigations and will continue to rally, a long, just out of the money Call vertical in the Oct monthly expiration has a 61% 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
Until next week – be safe.
R.F. Culbertson
