This Week in Barrons: 2-9-2020:
E-Mail Bag:
Are Entrepreneurs born, or are they made? You’re born with freckles, blue eyes, blonde hair, and among other things – talent. You learn a skill. I don’t think there are many places where talent is the key driver for success. Assuming we all (at least once) did the hard work required to learn something important – then we all have what it takes to develop additional skill sets. So, just do it. Entrepreneurs are made. The 2 main skills that entrepreneurs possess are generosity and passion. Their third skill is the ability to deliver on a promise.
Is Entrepreneurship different now? Well, buy low – sell high still works. But the lesson of the last decade, seems to be that none of the other old norms will be counted against you. The last decade proved that the biggest risk was NOT taking a big enough risk, and ending up like a shopping mall. I don’t remember who told me this rule, but it stuck with me: “Don’t ask for permission, beg for forgiveness”. However, in this NEW era we seem to have morphed into: ‘Don’t ask for permission or forgiveness‘. I’m not sure I like the new rule so much.
Should I buy a Tesla: I could not have answered this better – per MJP: “I reviewed the MPG calculations as experts try to compare ‘gallons of gasoline used’ based upon BTUs in the burned gasoline – to how many BTUs of electrically generated power are needed. The more practical comparison is: How much does it cost to drive 315 miles? According to AAA, gasoline prices range from $2.02 to $3.51 / gallon, and the cost of 110v consumer electricity ranges from 9.37 to 22.5 cents / kW-hr. So go ahead – try nailing that Jell-O to a wall, or just pick the right costs for your desired answer. Hint: If you wish to justify a Tesla – pick Oregon’s prices. P.S. To avoid needless argument, I assumed all vehicles cost the same, and ‘forgotabout-dat’ 30 minute charging time for EVs when on the road.” After all, our time is free – right?
Should I worry about the Coronavirus: Last week the UK Telegraph said: “China's coronavirus is not remotely under control and the world economy is in mounting peril because 66% of the Chinese economy is closed. Over 80% of the manufacturing is shut down. The Chinese economy is 17% of the world economy, so you can’t shut it down for long without shutting down the world.” China is the world's biggest importer of oil. OPEC is worried that China's demand for oil will fall, which would lead to a sharp decline in prices. I'm under the impression that this coronavirus is much worse than we're being told. Notice how quickly main stream media has turned it into a nothing burger? They say it's contained and no worse than the flu. This is a 100% reversal from what they normally do. Anthony Fauci (head of the U.S. National Institute of Infectious Disease) said: “It’s very, very transmissible, and is almost certainly going to be a pandemic.” Something stinks out there. I'm not spreading fear porn, I'm simply saying that things are not adding up. I think we're being set up.
The Market: …
Thanks to HL. Last November buyers took control of Tesla’s stock. That’s when all the fundamental research became just a blinder to the price action. A lot of smart people have been destroyed by this move higher, and a lot of young investors have hit their first homerun. Tesla’s stock finished January at $650.57, up 55.5% from its December close of $418.33 – up 26.8% from November. On Monday, the stock ripped up 19.9% to close at $780. On Tuesday, it got as high as $969 before falling to Friday’s close of $748.07.
If you bought Tesla stock at any point from its founding up until a week ago – congratulations for your foresight. On the other hand, if you bought during this past week you saw Tesla’s entire ‘free float’ turn over in 3 days. Most of that volume was back and forth trading between a relatively small number of holders, but the possibility exists that the majority of people now holding Tesla stock could be losing money on it. What happened? Did the FED accidentally buy Tesla instead of Treasuries?
One obvious place to look are the short sellers. Tesla is a very heavily shorted stock and Musk loves to fight with short sellers. It would be satisfying to Elon if short sellers capitulated, and were forced to buy in their shorts – driving the price higher. Unfortunately, short interest hasn’t changed all that much in recent weeks, nor does the short interest explain the magnitude of the move. The best explanation I’ve heard is:
- Some short sellers have been capitulating, and buying as the stock goes up,
- Convertible arbitrage agents have been selling short as it goes up and buying as it goes down, and
- Tesla’s investment banks have been selling as it goes up (and buying as it goes down).
The overall result of the above limits the downside, but results in far less volatility than what the stock has been experiencing.
Another place to look is the options market. $1,000 call options that cost 2 cents were worth $1.98 on Wednesday – a surge of 9,800%. The fortunes minted via Tesla options have corresponded with its surge in popularity. The 10-day average call option volume more than doubled since early December. On Monday, almost twice as many Tesla calls traded as S&P calls. That’s the largest gap ever recorded, and this activity could have contributed to the rally in the shares. When an institutional trader buys a call, the dealer who sells it typically buys a certain amount of stock in the underlying to offset their exposure. If the shares continue to rise, the selling dealer will dynamically manage that hedge by buying more shares. If most of the action in Tesla calls involved retail buyers and hedged sellers (dealers & market makers), then the call options would have a volatility-increasing effect due to the market makers. Also call options are a leveraged way to buy stock. On Friday, you could have spent $266 to buy the $800-strike call options and get exposure to $65,000 worth of stock.
Now, let’s couple the option market’s leverage with the excitement. There was a huge rush of new investors buying at over $700 a share from Robinhood in particular. On Monday, 12,000 Robinhood accounts bought Tesla for the first time. It’s a one-stock mania. Electronic trading systems love to interact with this retail flow. Dollar trading volume in “TSLA” on Monday was a record for an individual stock. Volume was triple what Apple traded, and Tesla is one-tenth the size. In a sign of just how the Tesla mania was spreading FOMO across the globe, typing the phrase “Should I” into a Google search – returned: “Should I buy Tesla stock?” as the very first autocomplete prediction.
Of course if everyone is going around thinking about Tesla, that will make the stock go up. But if everyone who bought the stock did so on their phones, after casually asking Google, they might not be the most committed long-term investors. “Wait I thought Google told me to buy this stock and now it’s going down? I’m outta here.” So the combo platter of: (a) short sellers capitulating, (b) traders buying large volumes of out-of-the-money call options, and (c) retail traders experiencing FOMO just piling on all contributed to the runup. The big difference between Tesla and Bitcoin – the vast majority of people who HODL Bitcoin now – held it 4 years ago as well. (HODL = hold on for dear life).
Info Bits:
- Energy’s dead-cat bounce: The XLE was up 3.76%, bouncing off support. This is the 4th time since Dec. 2018 it has rebounded from these levels. Every retest has been followed by a lower high – could this time be different?
- Google broke out numbers for YouTube… YouTube ads generated $15B in revenue in 2019 – 36% growth over 2018. Google’s cloud business generated $9B in revenue in fiscal 2019 – 51% growth over 2018.
- Macy's will close over 100 stores… over the next 3 years and to lay off 2,000 employees as digital shopping continues to hammer its bottom line.
- Snap still isn’t profitable… nearly 2 years after its IPO. Shares dropped 10% after its most recent earnings announcement.
- Intercontinental Exchange made a takeover offer for eBay… valuing the company at over $30B. It was rejected.
- Instagram generates over 25% of Facebook’s sales… It also generated more in revenue last year ($20B) than Google's YouTube ($15B).
- Disney+ netted nearly 30 million subscribers… smashing expectations. Guess they underestimated how many people wish life was uncomplicated again.
- Bernie Madoff, who architected of one of the biggest financial frauds in U.S. history, has asked for early prison release saying he has just 18 months to live.
- Casper Sleep, the mattress seller, priced its IPO at the lower end of its slashed range, says the "path to public ownership is scary for unprofitable startups."
- Peloton plummeted as much as 12%... after the fitness company’s earnings report showed mounting losses and slowing revenue growth.
- Pinterest's shares climbed 17%... after Q4 results beat expectations on both the top and bottom lines. Just imagine if they actually made money.
- Uber shares rose as much as 10%... after the company announced their Q4 loss was narrower than expected. Just imagine if they too actually made money.
- XLF – the financial ETF… broke out of a 2-year channel and is now bumping up against all-time highs. A weekly close above 31.25 would be a bullish signal.
- Uber and Postmates… heard from the judge that she’s inclined to approve Cali Bill 5, which aims to convert gig-economy workers into employees with benefits.
Crypto Bytes:
- Bitcoin futures broke $10k… rising to multi-month highs early Friday. CME’s February contract printed a high of $10,030 – a level last seen on Oct. 26.
- Although Bitcoin adoption may move at a glacial pace… merchants are seeing sustained traction. According to BitPay, the payment processor facilitated $1B in crypto transactions in 2019, while Coinbase said its commerce arm processed $135m worth – a 600% increase since 2018.
- The Winklevoss brothers, founders of the Gemini exchange… won a flurry of U.S. patents related to their own Gemini dollar (GUSD) stablecoin.
- Ripple's technology will form the basis… of a new XRP-based remittance service for cross-border payments between the U.S. and Mexico.
- SEC Comm. Hester Peirce is proposing a safe harbor… for token projects, potentially giving startups a way to raise money without running afoul of U.S. securities laws. Under Pierce's proposal, crypto startups would have a 3-year grace period from their first token sale to achieve a level of decentralization sufficient to pass through the agency’s securities evaluations.
Last Week: “The only winning move is – not to play”… Joshua – War Games.
Tuesday: Last evening China unleased the hounds of hell, and (a) injected over a trillion Yuan into their system, (b) banned short selling, (c) banned the bulk sale of stock, and (d) forced state governed companies to buy their own stock. That boosted the Chinese market in a big way, after falling over 10% because of the virus. The algorithms pushed the futures up huge this am. Since then we've had Ron Baron on CNBC telling us why Tesla is going to be a trillion dollar company. Apple says that they are going to resume production of the iPhone despite the virus, and oil is up because OPEC wants to cut production.
So can all this money overcome the damage that's ravaging China? After all, there are at least 4 different viruses running around that country. Everyone’s focused on the corona virus, but don't forget the African swine flu which wiped out 50% of their hogs is still viable. They've had to cull 20K chickens because the bird flu is running around, and the H1N1 swine flu is beginning to pop up again. Tack on Hong Kong, and the slowing global economy, and yeah – China’s got troubles.
Here in the States, the market's going to open insanely higher. The question is, what happens next? China has shown the world that like the U.S. the markets are not free. In due conscience, I can’t buy anything up here – especially not Tesla.
So can all this money overcome the damage that's ravaging China? After all, there are at least 4 different viruses running around that country. Everyone’s focused on the corona virus, but don't forget the African swine flu which wiped out 50% of their hogs is still viable. They've had to cull 20K chickens because the bird flu is running around, and the H1N1 swine flu is beginning to pop up again. Tack on Hong Kong, and the slowing global economy, and yeah – China’s got troubles.
Here in the States, the market's going to open insanely higher. The question is, what happens next? China has shown the world that like the U.S. the markets are not free. In due conscience, I can’t buy anything up here – especially not Tesla.
Wednesday: The coronavirus is creating severe demand shocks that could further depress oil prices. Word out of one of many Wuhan crematoriums is that employees are all working 24/7 and are in need of at least 100 body bags per crematorium. Ecuador just proclaimed their first case of the coronavirus. A cruise ship off Yokohama found multiple people stricken with the virus and sent 10 to the hospital. Wuhan is building 8 more temporary hospitals. But back in the U.S. the algorithms have the futures up 260 on this so called "cure" for the virus. Yet as you can see by the reality of things, there’s real damage being done by the virus. Instead of a fade off from yesterday, we're going to be witness to another monster gap up. Everything has become so insane.
Friday: For the bad news, China has locked down another province and now has over 400m people in quarantine in their homes. Am I supposed to believe that this is all because 600 people have died? Really? Also, insider sales are roaring – hitting 5 sales to every 1 buy. That's the worst level since January of 2017. It would appear that insiders know their company's situation best, and are taking advantage of this mind bending run up and cashing out. Hey, I can't blame them. They probably have a feeling that their stocks are higher than they should be, and they're taking advantage of that.
Weed:
- Wholesale flower prices are improving… according to Oregon marijuana growers. This is welcome news for recreational cannabis cultivators in one of the country’s previously most oversupplied MJ markets.
- MedMen co-founder and CEO has resigned: Adam Bierman’s resignation comes amid a prolonged downturn for the company. MedMen operates in Arizona, California, Florida, Illinois, Nevada, and New York.
- Wana Brands is partnering with Curio Wellness… to expand distribution of its line of infused cannabis products to Maryland’s medical marijuana market.
- CBD retailer 7th Sense is partnering with Sports Illustrated … to launch a line of CBD products – starting with a limited edition recovery cream. Authentic Brands Group owns 7th Sense and operates in shopping malls around the U.S.
Next Week:
The Feds have finally figured out that their incessant repo operations are inducing "elevated asset prices". We are also really starting to hear about supply chain problems, as manufacturers and even retailers are beginning to run dry on parts and merchandise. Neil Ferguson, the Vice Dean of Medicine from the Imperial college in London, believes there are 50K new cases of Corona Virus every day. We are seeing a Herculean tug of war. An overblown market about to see the realities of a global economic slowdown, vs the Central Banks going “all in" to keep their plates in the air.
The market is ripe for a fade, but China came in with historic levels of stimulus and reversed any thoughts of a lower market. Can they pull that act again? I actually don’t think so. Let’s go thru the process:
- SPX Expected Move: Last week’s expected move in the S&P was $81.42, but we actually moved $102. That is the 4th week in a row that we’ve moved outside the expected move (signaling an inefficient market) – following 23 weeks of efficiency. That’s saying that BILLIONS of dollars were on the WRONG sides of various trades. That alone is telling me to expect more chaos next week. Next week’s expected move in the SPX is $50.41.
- Volatility: Volatility is remaining high, and everything next week is a catalyst for a marketplace that can’t settle down. It’s indeed rare when we have a market at all-time highs accompanied by elevated volatility. The 30 and 60-day volatility futures are in line, but are within 40 cents of being inverted. When volatility futures become inverted, the market place is saying that uncertainty is the norm. Therefore, just by looking at expected move and volatility – we can confirm that markets are in a very precarious point.
- China… has moved into full-tilt liquidity mode. They have injected over $300B into their economy last week alone. To put that in perspective, that’s 20% of the entire Canadian economy injected to save China’s economy in a week. Estimates are that the coronavirus will be with us for at least the next 90 days. The question now becomes, will China (and the U.S.) be able to sustain without Chinese goods and services. OR will a market place begin to turn on itself – and the FED have very few tools with which to defend it.
- Tesla’s actions… over the past several weeks are ones from a panic’d marketplace. Last week’s move (alone) in Tesla was a 5-standard deviation move. Something that large is virtually impossible to achieve – but they did it. Without fundamentals to rely on, this simply becomes: ‘Mr. Toad’s Wild Ride.’
- 225,000 new jobs were created last month. But the market sold off on the news anyway. With a good jobs number, you would think that signaled a better economy. And with a better economy, nobody would need the FED to cut rates. However, the BONDS rallied, which effectively reduced interest rates and told the world to beware of a false positive reading of our economy.
Be very careful out there. If this market was to start a 10% correction, it could come quickly, and remember: 10% of this market is 3,000 DOW points and 300+ S&P's.
Tips:
1. Bond yields recovered mildly: Which means capital is flowing into the bonds as a safe haven.
2. BULLISH: The defensive sectors (including Bonds) are not backing off: XLU (utilities), XLP (consumer staples), TLT (bonds), and XLRE (real estate) – ALL continue to move higher.
3. TRADES: Bounce and Fade trades are fun if you’re a trader. (a) Avoid parabolic tech such as: Microsoft, Google, Apple, etc. (b) Have fun with: XLE (energy sector), UNG (natural gas), XLF (financials), JPM (JP Morgan), FXI (China), EEM (emerging markets), SBUX (Starbucks), CAT (Caterpillar), XHB (homebuilders), and BABA (Alibaba – after earnings)
Top Equity Recommendations:
HODL’s:
- Aurora (ACB = $1.70 / in @ $3.07),
- First Majestic Silver (AG = $9.57 / in @ 10.50),
- Canopy Growth Corp (CGC = $19.63 / in @ $22.17),
- DRD Gold (DRD = $6.03 / in @ $4.20),
- GBTC Bitcoin (GBTC = $11.79 / in @ $10.01),
- Microsoft (MSFT = $183.89 / in @ $145),
- Pan American Silver (PAAS = $22.29 / in @ $18.00),
- Utility Index (XLU = $68.59 / in @ $67.10)
Crypto:
- Bitcoin (BTC = $10,100),
- Ethereum (ETH = $230),
- Bitcoin Cash (BCH = $450)
Thoughts: With reports of China rounding up whole cities of people infected with coronavirus and cruise ships being quarantined at sea, our stock indices continue to hit record highs despite a contagion that could spread further and last longer than expected. Why? Likely because short term rates continue to be low and money keeps getting shoveled into big cap stocks because it has nowhere else to go. But on the long end, both /ZN and /ZB have fallen sharply in the past couple of days as the bond market no longer sees a big risk. Maybe TLT, the ETF that tracks 20-year Treasuries, will try to sort itself out for the next few weeks and trade in a range, without making a big move either higher or lower. TLT’s 35% implied volatility rank isn’t very high, but TLT’s options are still rich enough to create some interesting opportunities. If you are neutral on TLT, the short iron condor that’s long the 137 Put, short the 139 put, short the 146.5 Call and long the 148.5 Call in the March monthly expiration is a neutral strategy that collects a credit 1/3 the width of its strikes, and has a 72% probability of making 50% of its profit before expiring.
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
Until next week – be safe.
R.F. Culbertson
