This Week in Barrons: 10-6-2019:
Thoughts: “Unfair. Hah-hah-hah. Really, you think I’m unfair?” … The Joker
I saw some news this morning and immediately thought of it as ‘unfair.’ Then I reminded myself that life is unfair. The game is to be prepared to get the short end of the stick and figure out how to make that into a winning hand. Having said that, a recent stat was presented to me by MJP: "80 percent of CEOs believe that they deliver a superior experience to customers, but only 8 percent of their customers agree." That is a MASSIVE disconnect. I can’t remember the last time perception and reality were that far apart. Honestly, everybody struggles to deliver that 5-star experience – but to think you’re delivering 4 stars and find out that you’re delivering half of a star is embarrassing to say the least. The realities of the business world are beginning to mimic those of higher education.
For example, in higher education you can spend 4 years and $250,000 earning a degree at MIT – or ‘for free’ engage in over 2,000 of MIT’s on-line courses. The choice is yours? Traditional education requires an up-front payment and the student to give-up their freedom of choice. In exchange for compliance, the student is rewarded by test scores and a certificate of completion. The belief in that certificate is extraordinary. Students and families will trade time, focus, geography, and a lifetime in debt to obtain that piece of paper. Learning, on the other hand, has been proven to be mostly self-directed. Learning is not about changing a grade, but rather about changing the way we think and view the world. Learning is voluntary and always available, but unless given as part of a credentialed program – most of us would rather click on another video or swipe left and move on. There is a single exception – the ‘High Performer’. ‘High Performers’ will always choose learning because it is at the heart of what they do. ‘High Performers’ will never ask: “Will this be on the test?” It’s unfair to those paying $250,000 that it’s never been easier to learn. It’s unfair that the certificate has never been worth less, and not nearly as important as we’ve been led to believe.
To fix being unfair, we need to modify perception. The ‘4-star’ CEO needs to stop believing their own press clippings, and the ‘half-star’ customer requires a dose of: ‘There is no free lunch’. The message from the CEO becomes customer dependent. Scientists listen to better science. Bureaucrats respond to more power. Nerds love innovation. Teenagers follow their peers. Believers require authority figures. Bankers will need you to reduce risk. Engineers are convinced by prototypes. Hustlers love the smell of money. Sports fans need you to ‘cover the spread’. It’s unfair that there is no ‘one size fits all’ solution.
To deal with all of those differing messages, find stories and anecdotes that wrap around and support your data. Do NOT find data that supports a particular story because stories, feelings, and outcomes are specific to an occasion. Stats, facts, averages and correlations (on the other hand) are generic, broad and deserve anecdotal support.
Interestingly, much of that Internet storytelling could have changed this past week when a European Court ordered that national judges have the authority to force Facebook to remove material deemed illegal in their home country – but shown around the world. That means a court in Belgium could affect what Brazilians are able to see on Facebook. This allows one country to impose its speech and story-telling laws on another country. It opens ‘Pandora’s Box’ to allow any country to extend their own laws beyond their borders. According to LD, "The ruling is unfair and could fundamentally reshape the way online speech and storytelling are governed. It could drag everyone down to the level of the least liberal country."
The world is increasing becoming more and more unfair. Decisions are more difficult, costly and time consuming – from business and education down to ‘who’ you believe. I was talking with a group of people last night and we all agreed: “Both education and experience allow us to improve our ‘batting average’, but we’re all measured (admittedly unfairly) by how we deal with our mistakes.”
The Market: Wanna buy a used Gulfstream? Trump’s market strategy for re-election.
3 thoughts:
1. You know your company is in trouble when the BOD announces: “We’re selling the Gulfstream.” Nothing’s scarier than having to sell a used Gulfstream ‘at market’. WeWork is the latest casualty of a rogue CEO’s greed and stupidity. Interesting model until (duh) you start to do the math. There’s a lesson here – and it’s not: ‘Only rock bands should own Gulfstreams’ – although that’s not a bad lesson. The lesson is: “You can delay the math, you just can’t ignore it.” In the market, there are a ton of negative elements setting up: (a) a record concentration of wealth & cash, (b) too many passive investors, (c) an inverted yield curve, (d) manufacturing that is in a global recession, (e) a contracting global economy, (f) ridiculous IPO valuations, and (e) an interest rate ‘race to the bottom’ – which eventually will create the same problem we’re trying to solve.
2. Honestly, the reason we pay so much attention the ‘numbers’ and ‘profitability’ at the time a company goes public (IPO), is that very few tech companies go public while profitable. And even those that do, are far away from achieving their long-term EBITDA margins. That means that investors need to understand how an unprofitable, fast growing business eventually generates positive and reliable cash flows. The higher the gross margins the faster it should hit profitability – assuming profits are growing faster than expenses. Having said all of that, focusing on gross margin in a vacuum can be a bit misleading. Plenty of companies exist that generate meaningful EBITDA, and still grow at double digit rates: Apple = 31% EBITDA & 16% growth, Netflix = 11% EBITDA & 35% growth, Amazon = 12% EBITDA & 31% growth, Etsy = 18% EBITDA & 41% growth, Grubhub = 10% EBITDA & 50% growth, Chewy = -5% EBITDA & 69% growth, Canada Goose = 26% EBITDA & 41% growth, and Lululemon = 25% EBITDA & 24% growth.
3. Finally, I wonder how Trump’s incentives may change if he gets cornered with impeachment. According to TL: “Unless Warren seriously fumbles, she will be the Democratic candidate. The markets won’t be comfortable with this, as her policies are decidedly anti-business. She’ll move a bit more centrist in the general election, but investors will still be terrified. If Argentina’s market could drop by half when Macri lost the primary, why can’t ours drop by 30% if Warren is the candidate? Especially, with her leading in most polls against Trump.”
In which case, does a savage market decline favor Trump? Imagine blaming Warren (over Twitter) for the market crashing? Imagine scaring working people that their IRAs will detonate, and retired people that they will lose everything – if Warren is elected? I don’t care what your political leanings are, no one wants to lose a substantial portion of their net worth. Warning voters of an impending 30% loss may be amazingly persuasive in an election – especially after you remind people how successful you were in pushing the market higher as the stock-pumper-in-chief. The market wants to crash because the global economy is rolling over. Trump certainly doesn’t want to take the blame. If the market starts crashing, why wouldn’t he blame Warren and then force it lower so voters feel real pain? That’s how you win elections. So are Trump’s incentives about to change? If so, the market is NOT prepared for such a shift.
Info Bits:
- Forever 21: your favorite retailer from college – filed for bankruptcy and is planning to close 178 stores in the US. Guess those $3 T-shirts weren't gonna last Forever (21).
- We(Don’t)Work: WeWork has pulled its IPO filing. Dreams were crushed. The Gulfstream is being sold.
- “Sit. Fetch. Come”: Tesla launched their new Smart Summon feature, which means your Tesla will come to you when you call it. In other words, you’ll never have to walk to your car again. Will it roll over and play dead too?
- “Let’s go out and buy something…” Oops – where? U.S. retailers have already announced over 8,200 store closings this year, and around 12,000 by year’s end. That would almost double the record of 6,700 closings in 2017.
- Pay to Play: College athletes in California will soon be paid. In 2023, The Fair Pay to Play Act allows athletes to profit from their name, image and likeness.
- “We’re back…” Saudi says oil production is back to preattack levels. The WTO says ‘no rush’ as trade flow growth is the slowest since the financial crisis.
- J.P. Morgan sez: “Developed central banks will see the biggest synchronized easing since 2000.” All the major CBs have flipped from attempting to normalize rates, to slashing and burning / inflating or dying. B. Bernanke once said: “There won’t be a normalization of rates in my lifetime.”
- RECESSION = Manufacturing: U.S. data showed the weakest manufacturing sector in a decade – in recession since Q1 of 2019. September’s Class 8 heavy duty truck orders collapsed 71%.
- Prices plummet for Manhattan Apartments: the most in over 8 years.
- Bad Day for Brokerage Stocks: as Schwab, TD Ameritrade, and E-Trade announced commission-free trading. Layoffs will be coming soon.
- Drone Airline: UPS just won FAA approval for their fleet of delivery drones called: “Drone Airline”. Their first customer is hospitals.
- Uber’s NEW money-maker: is an app that matches temporary workers looking for shift work with opportunities. Why can’t they run a profitable taxi company? Given they’re in business and losing money - who’s subsidizing them?
- Trade War expands: as the US plans to impose tariffs on $7.5B worth of European exports by the middle of October. Europe is expected to retaliate.
- “Houston we have a problem…” Costco missed revenue estimates this week. I thought the consumer was strong?
- Ice, Ice Baby A “melting ice cube” is how people are explaining HP’s printing business. They’ve cut 16% of their workforce – fingers crossed for a turn around.
- Are you seeing this? SNAPs CEO believes that we are 10 years away from smart glasses being widely adopted. I can finally use the word ‘glasshole’ again.
Crypto-Bytes:
- SoFi – the student loan refinancing center: is testing the cryptocurrency waters by offering the ability to invest in 3 digital currencies: Bitcoin, Ethereum and Litecoin. Crypto will complement SoFi's suite of app-based investing options, which include ETFs as well as automated and active stock buying.
- BAYER is on the Blockchain: as it has agreed to work with Ant Financial, the payments affiliate of Alibaba, to develop a blockchain-based system for agricultural product monitoring. They will utilize blockchain tech. to increase efficiency, and ensure the production of high-quality food.
- $24m Slap on the Wrist: Popular blockchain platform EOS, who raised $4.1B in its ICO, will pay $24m in penalties to the SEC for conducting an unregistered token sale. The fine (a ‘slap on the wrist’) is a win for EOS and crypto-at-large, showing that the SEC can be reasonable in their assessments.
- “It’s not you, it’s me.” Just kidding, it’s definitely you. PayPal just pulled out of Facebook’s Libra cryptocurrency project and Visa and Mastercard are second-guessing their own participation. The Journal says few companies want to boost the project publicly, leaving Facebook’s David Marcus to defend Libra by saying: “Our commitment to the mission is more important than anything else.”
Decentralization and transparency are essential to any crypto-currency environment. Transparency will be the hardest idea to sell to any government because true transparency is not selective. True transparency will give insight into what our FED is really doing, who’s paying politicians, and a general flow of funds throughout the market. However, global crypto-adoption will assure no currency competition in the future. With every currency being digitized, the true competition would come at the monetary policy level. People are beginning to opt for currencies that can’t be seized, censored, or debased – as a store of value. Right now, that only option is Bitcoin.
Last Week: Are the wheels coming off – or did we just bend an axle?
Have the wheels come off, or are the axles just bent? Last week we saw PMI’s and ISM’s in manufacturing that were putrid at best, and really poked a stick in the eye of that "everything's great" narrative. The global economy is slowing quickly. On one hand we have: slowing manufacturing (weakest since the crash of 2008), incredibly low velocity of money, no savings, and immense debt levels. On the other hand we have: cloaked QE4 and stock buy backs. Which one wins? In the short term, they can paper over the horrid economic numbers. But in the long run, we get to a point where all new debt simply services old debt – and that’s when the music stops. That situation is close.
Our FED has been doing their Repo operations every night lately because all of the short-term money that is tied up in previous debt. Banks don't want to lend because they're afraid of not getting paid. I’m afraid that the FED game of cutting rates and printing money is going to continue a little while longer. Looking back on the action in August, you’ll see ‘no man's land’ madness. With the China trade mission coming up and the onslaught of earnings – you can potentially expect more chop. In the past, I've used the 200-day moving averages as a bottom of sorts, but play cautiously.
Weed: The Legalization Trend is widening and picking up speed.
- “Do I sell or do I go public?” As the U.S. and Canadian marijuana markets continue to mature, consolidation is inescapable. That, of course, raises the question of how cannabis related businesses can put themselves in the best situation to take advantage of opportunities that will arise from consolidation. According to Scott Greiper, president of New York-based investment group Viridian Capital Advisors, “There are buyers in the hall. But buyers will not be interested in purchasing a cannabis firm unless it’s well run – and in close proximity to profitability.”
- U.S. House Passes SAFE Banking Act: The U.S. House of Representatives passed the SAFE Banking Act last week by a vote of 321-103. It’s the first piece of cannabis legislation to be approved by either chamber of Congress. 91 Republican members of the House voted for the bill, in addition to nearly all the Democrats. The bill would allow cannabis businesses access to traditional banking by removing penalties that banks currently face for working with them. Although cannabis businesses sometimes manage to secure banking services, much of the industry – from growers to retailers – still operate entirely in cash.
- PA Lawmakers pitch adult-use marijuana using state-run stores: Pennsylvania recreational cannabis legalization was proposed last week and it calls for retail stores to be operated by the state Liquor Control Board. The bill has 23 co-sponsors and includes these additional provisions: (a) a 19% retail sales tax, (b) a 10% tax to be paid by cultivators, and (c) a July 1, 2020 deadline for the state Liquor Control Board to establish regulations including cannabis licensing procedures. Remember, Illinois goes live on January 1st, 2020.
- The National Cannabis Industry Association outlined a framework for regulating cannabis using the existing infrastructure of governmental agencies. Tier 1 (the tightest lane) would fall under the jurisdiction of the FDA. The agency would conduct trials, approve and regulate cannabis drugs in much the same way it does existing prescription and OTC medications. Tier 2 covers cannabis products that have higher than 0.3% concentration of THC. This tier would be regulated like alcohol in that it would be regulated by state agencies and the U.S. Alcohol and Tobacco Tax and Trade Bureau would provide federal oversight. Tier 3 would be regulated similar to food and dietary supplements, and would include edible and inhaled cannabis products with a negligible amount of THC. Finally, Tier 4 would include low-THC topical products that would be regulated like cosmetics – focusing primarily on the improperly labeled brands.
- Industry leaders urge Congress to Legalize Cannabis: Nearly 800 cannabis business and policy leaders are calling on Congress to remove marijuana from the federal Controlled Substances Act. They said: “Americans are being hurt because of unregulated, illicit market cannabis vape products. It is yet another reason for real, comprehensive federal cannabis reform that will allow the regulated, tested cannabis industry to displace illicit market actors.” The letter is signed by officials and executives from the Marijuana Policy Project, 4Front Ventures, Berkeley Patients Group, Columbia Care Illinois and hundreds more. It asks for Congress to immediately reschedule cannabis and regulate it like alcohol. Congress currently is in recess and it’s unclear whether lawmakers would take up this kind of reform upon returning.
Next Week: Watch the FED Repos and the Bonds…
Last week we were handed a gift by virtually every brokerage house as they adopted ‘commission-free’ trading. The winners are truly the retail traders. The bid-ask spreads will not change. Brokers will still be selling their order-flow. Last week we also learned that the global economy was a lot worse than anticipated.
If next week plays out the way I suspect, we will start off stronger due to the China trade anticipation, and end by falling back into the outlined ‘Volatility Box’ painted above. It’s the same range-bound trading box that we experienced in August. If that becomes the case, ‘bear spreads’ are priced at about half the rate of ‘call spreads’. If the market is a little bit stronger early in the week – you may wish to buy some put spreads as protection.
We still have our risks:
1. Our FED:
a. Due to the bad ISM data – there is now a 76% probability of a rate cut in October, and a 90% chance of one by December. This is why the markets recovered in the last half of the week – along with the high probability of our FED announcing a new QE policy. Markets initially LOVE lower rates and QE. Unfortunately the real numbers are pointing toward a significant slowdown.
b. The Repo Marketplace continues to seize up on a regular basis – requiring constant FED liquidity injections. This interest in QE is coming right when Japan has announced that it is stopping its QE programs and pronouncing them as ineffective in helping to rebuild their economy.
1. Trade War: tensions will be starting up again this week.
2. Earnings: will start in 2 weeks – with B of A, JPM and Goldman.
3. The Expected Move: of the SPX this week is virtually identical to last week’s SPX expected move. That means risk levels remain high.
4. The XLF touched 26.50: last week. That is my magic line in the sand. Below 26.50 on the XLF, the financials and the general markets lean to the downside. If you’re NOT short the XLF, let it open and short them as they begin to climb and then flatten out on Tuesday / Wednesday.
5. The Bonds (TLT): continue to explode higher – further collapsing interest rates down to 1.515% in the TNX. If the TNX reaches about 1.43%, the equity markets will begin to respond dramatically to the downside.
The other side of next week’s action could be our FED’s secret repo operations. Last week our FED pumped $200B into the economy. Think about that. During 2008 and 2009, our FED was doing QE at the rate of $85B / month, and last week alone they pumped in $200B. Last week they also announced that the NY Fed will conduct various $75B repo operations through October 29th. So, our FED’s balance sheet expanded by $200B in Sept/Oct, and they’re also going to continue the repo’s into November. That is why stocks reversed their horrible slide last week and soared higher. Add to that stock buy backs topping $1T this year, and new highs may no longer be a pipe dream. What about earnings, the slowing economy, and the rise in first time unemployment claims? They will easily spin that into noise and chatter. Watch the levels on the bonds, the XLF and the SPX above. Trade small and take profits quickly.
Tips:
Top Equity Recommendations:
HODL’s:
- Aurora (ACB = $4.40 / in @ $3.07)
- First Majestic Silver (AG = $9.66 / in @ 10.50)
- Canopy Growth Corp (CGC = $22.92 / in @ $22.17),
- DRD Gold (DGD = $4.74 / in @ $4.20),
- GBTC (GBTC = $9.79 / in @ $10.01),
- Pan American Silver (PAAS = $16.26 / in @ 18.00)
Crypto:
- Bitcoin (BTC = $8,100)
- Ethereum (ETH = $175)
- Bitcoin Cash (BCH = $225)
Options:
- RIOT ($1.68):
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:
- Oil (/CL) Years ago there was a theory that oil production would decline to zero – leaving cars, planes and lawnmowers out in the cold. That hasn’t happened, but oil did peak a couple weeks ago as it briefly touched $62. Since then, it’s been slinking back down as the dollar has been stronger and slowing economies demand less oil. It’s been down for the past 8 trading days, and it seems like it might be a bit of an overreaction. With the constant possibility of some political or military disruption to the supply, the risk to oil is always to the upside. That’s why a contrarian trader might consider a bullish strategy on oil. If you are bullish on oil, then short the $48.5 PUT in the November expiration series – because this has 77% probability of expiring worthless.
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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