This Week in Barrons: 7-12-2020:
Winners Win because: They Know How!
Someone asked me this week: “How can Harvard University charge $50,000 for a glorified YouTube channel?” Answer: “Because people will pay them $50,000 for it.” You see, Harvard knows its customer better than any other university. Do you think that their services will be any less valuable in the Spring of 2021?
- Mike Trout (the greatest baseball player in the game right now) is sitting out the 2020 season. Do you think he will be any less valuable next year?
- Elon Musk is showing the world how well Tesla knows its customer by becoming the most valuable car company in the world.
- Kanye West is showing the world he’s a winner by signing a $100m dollar deal with GAP and declaring: "I’m running for president of the United States.”
- Lululemon is showing people they’re winners by buying ‘Mirror’ (the ‘most narcissistic exercise equipment company ever conceived’) for a mere $500M.
- The top 3 stocks on the Nasdaq demonstrated that they knew how to win by hitting triple digit YTD returns – mid-way through the year.
- And then there’s Netflix (NFLX). Netflix is up 69% YTD, and is benefiting from 3 trends. First, it’s a classic COVID stock and beneficiary of the quarantine. It’s simple: people ‘nest’ and watch Netflix. Second, it runs on a subscription model. Subscriptions are having a ‘moment’ as everyone from Amazon Prime to Zoom will demonstrate. Third, they got their ‘mojo’ workin’. It’s a real thing, and 2020 has been a classic momentum environment with a narrowing number of strong stocks getting more attention, more capital, and more gains. Finally, Netflix is executing – growing it’s library and customer base. I remember when CEO Reed Hastings told the world that Netflix would no longer send out DVD’s, but rather switch over to being a 100% streaming service. The world crucified him by his toenails. Reed WON – because he knew how!
Continue to back your winners – because they know their customer and they understand what it takes to win!
The Market: What’s a SPAC anyway?
What’s a SPAC? SPACs are hot right now. SPAC stands for “Special Purpose Acquisition Company”, and is a shell company that IPOs to raise capital – then buys another private company with real operations. Examples are: DraftKings, Nikola Trucks, and now Spartan Energy Acquisition Corp (SPAQ) – that went from $10 to $16.70 this week on news that it was the leading bidder for electric car company Fisker (slated to begin actually delivering vehicles in 2022).
SPACs are shell companies with no operations that allow retail investors to invest in a private equity type transaction. SPAC offerings are normally sold in $10 units which consist of one common share along with an out-of-the-money warrant. The common share price must be added to the trading price of the warrant to get an accurate picture of the SPAC's performance. Between 85% to 100% of the proceeds raised in the IPO for the SPAC are held in trust to be used at a later date for the merger or acquisition. A SPAC's trust account can only be accessed in order to fund a shareholder-approved business combination, or to return capital to the shareholders at a charter extension or business combination approval meeting. Each SPAC has its own liquidation window within which it must complete a merger or an acquisition – otherwise it will be forced to dissolve and return the assets to the public stockholders.
The SPAC is usually led by an experienced management team composed of three or more members with prior private equity, merger and acquisition and/or operating experience. The management team of the SPAC typically receives 20% of the equity in the underlying vehicle at the time of offering, exclusive of the value of the warrants. Look for more SPACs to rear their heads in the coming months and years as the laws and regulations surrounding (for example) ‘marijuana companies’ continue to change.
InfoBits:
- The top stocks in the Russell 2000 are going crazy: It’s one of those ‘hidden from view’ trends. Continue to watch: NVAX, WTRH, OSTK, INO, and LVGO.
- Fracking pioneer Chesapeake Energy just filed for bankruptcy: Shell & BP both wrote down the value of their oil assets – not because they think the economy won't bounce back, but because they think oil won't.
- Tesla, under the “I can’t make this up” category: JP Morgan analyst, Ryan Brinkman raised his price target on Tesla from $275 from $295. Tesla is roughly $1,550/share. Ryan might be worse than a BAD weatherman.
- Facebook is only a stone’s throw away from its all-time-high: Remember the advertising boycott?
- Uber agreed to buy Postmates… a food delivery startup, for $2.65B – right after laying off 14% of its workforce in May and taking a Q1 $2.9B loss.
- The EU cuts its economic forecast… and is now projecting an -8.3% contraction in 2020.
- Deutsche Bank fined $150m … for their dealings with accused child sex trafficker Jeffrey Epstein. How is this bank still in business?
- Palantir files for IPO … the data and analytics unicorn known for its hefty valuation and secretive ways, has filed confidentially for an IPO.
- Levi’s sales fall 62%... and will cut 15% its of corporate workforce.
- A meeting between civil rights leaders and Facebook… did little to quash tensions between groups continuing the widespread FB advertiser boycott.
- Walmart+ (its subscription service)… will offer same-day grocery delivery and other neat stuff. They need to ‘stick the landing’ and solve the ripe tomato problem in order to legitimately compete.
- Shake Shack reported a 49% drop in same-shack (store) sales… and store traffic was down 60%.
- Because of COVID:
o 10m U.S. adults have moved either temporarily or permanently.
o 200,000 Americans will die by Nov. – unless face masks are mandated.
o President Trump and the Gov. of FLA have ordered schools to reopen.
o Dr. Fauci continues to be the voice of reason without a microphone.
- Twitter is looking to build out a content subscription service. If Twitter can get people to pay for specific real-time streams while delaying free streams – then they’ve got a new revenue stream that expands with scale.
- Nvidia (NVDA) is worth more than… Intel. Who woulda thought?
- Brooks Brothers declared bankruptcy: You know – where your grandfather shopped.
- 70,000 tech startup employees have been unemployed since March… and 25,000 of them are in the Bay Area.
- Art investments have outperformed the S&P by over 180% since 2000. The art market went bizonkers last week, setting 17 new world records in the first ever Zoom auction.
- Over 10,000 apartments are available to rent in Manhattan… an increase of 85% over last year. Landlords are dropping prices and offering larger incentives.
- President Trump refused to release his financial records… under the guise of Presidential immunity. The Supremes disagreed: “No citizen (not even the President) is above a criminal investigation.” Release the Kracken / records!
- Americans are rapidly shrinking their credit card debt … because we can't be social. And it seems not being social saves money – who knew?
- LinkedIn (owned by Microsoft)… programmed its iPhone and iPad versions to divert sensitive information without users’ knowledge. Shame on you Microsoft!
- Bed Bath & Beyond sales fell 50%… and will close 200 stores.
- 1/3 of U.S. households have NOT PAID… their most recent housing payment.
Crypto-Bytes:
- Coinbase is preparing to list on the U.S. stock exchange… sometime in early 2021. Rather than an IPO, the firm would prefer to go the direct listing route. The company was last valued at $8B in 2018.
- Crypto Loans: More than 75 companies in the blockchain and cryptocurrency industry collected at least $30m from the U.S. based Paycheck Protection Program.
- Binance gives back… by donating over 27,000 KN95 masks to the U.K. National Health Service’s Pru Trust.
- Cardano’s ADA has recorded a 170% return… propelling the crypto to its highest price level since June 2019.
- Trading volumes fell on top spot exchanges… by 36% in June.
- Dogecoin = winner / winner… TikTok videos and a fomenting sense of FOMO have driven trading volumes of Dogecoin up nearly 2,000%. It’s meme-inspired price also climbed 35%.
- Digital Yuan & ANT Financial: Didi, the Chinese equivalent of Uber, is forming a task force to design and implement a trial of China’s digital currency on its 500m Didi user transportation platform.
- Libra still plans to issue its multi-asset backed stablecoin… according to Libra’s Director speaking at the Global Digital Finance virtual summit
Last Week:
Monday: If this big, green open holds, then the DOW will once again be over its 200-day moving average. If it can hold that, then the next target would be exceeding its June 8 high of 27,580. Now, if we come up shy of that number and start to fade lower, it could be a series of lower highs – leading to a longer term fade. But today, they just need to keep the DOW over that 200-day. It really isn’t wise to buy things when the market is indicated to open +440. So, we sit on our hands. There’s no reason for the rally other than all of the FED money that’s sloshing around in the world. OSTK is really lit – trading up over $10 a share above our buy in. I like: AMAT over $63.25, MMM over $158.90, PAAS over $30.56, and ROKU over $135.95.
Tuesday: Novavax (NVAX) is soaring after the U.S. government awarded them $1.6B for COVID vaccine development. That’s a substantial grant, and it’s lighting up the bio-tech arena. The DOW is implied to open down by about 210, but they can certainly buy that dip higher. The NASDAQ didn’t even play the game, it simply went green by 10 am. Gold got itself to $1,808 this morning, and is looking great. Speaking of looking great, OSTK is now up $13 over our buy-in, and our precious metal miners are having a field day. Can we get any more extended? You bet, but we could also see a multi-day pulldown. On that note, I took off the OSTK @ $45.70. I won't know until tomorrow if this is the start of a slide lower, or just a one day pause in the ever reaching market. I'm not buying into this market right now, although I suspect they're going to try and firm us up heading into the close.
Wednesday: Yesterday, they allowed a bit of fade. The DOW simply could not power over its 200-day moving average and ended the day down about 400 points. This morning the futures are slightly red. Are we really going to see a multi-day fade? It's possible – even the most corrupt markets take a breather once in a while. We are overdue for a period of lower highs. Gold is up again, and I may need to find something else in miner land. This market is tired and wants lower, but our FED isn’t willing to let it fade. I would buy WPM over $47.12, PAAS over $32.61, and MUX over $1.14.
Thursday: In the final hours of yesterday’s session we saw them light the afterburners and up we went. Today we have initial jobless claims, and it appears that 1.3m people filed for new unemployment claims last week. The continuing claims came in at a whopping 18m. Yesterday, I bought more PAAS when it crossed 32.61. Whoa, what just happened? The DOW went from mild green, to down 345 points. It seems that the Supremes just decided that the NY DA can indeed demand Trump’s financials. Wall Street isn't stupid. They know that this could be the straw that breaks Donald’s back – so they’re a bit rattled. I've been waiting all week for some sideways fade, and maybe this news is just the excuse they need. The DOW has not been able to get up and over its 200-day for weeks, and maybe things need a pullback. I don't think it's time to get brave in here.
Friday: We’re having a few stumbles out of the gate this morning. MTSI over $37.35 looks interesting to me. The DOW is trying to get some points back, but the S&P is trying to take a break. Over the past few days it was the DOW in the pits and the NASDAQ soaring. Today, it’s the DOW picking up 300 points, while the NASDAQ struggles to stay green. The market is stronger than I expected today, but it sure is a strange session.
Gold:
Gold is traditionally thought of as a safe-haven asset, but that hasn’t stopped it from rising to a near nine-year high – and within striking distance of its record. The interesting part to me is that it flies in the face of other assets traditionally viewed as risky remaining buoyant and rebounding from their pandemic-inspired selloff. I chalk it up to:
- (1st) Efforts by global central banks to push down interest rates, which have fallen into negative territory in inflation-adjusted terms. Investors who hold gold are not missing out on the yield they would earn from holding bonds. Jeff deGraaf, chairman of Renaissance Macro Research, said: “The continued low interest rate environment provides a constant tailwind for gold.” In another note from Georgette Boele, precious-metal strategist at ABN Amro: “Central bank policy is a strong driver behind higher gold prices. Not only are official rates close to zero, they are not likely to go higher in our forecast horizon.”
- (2nd) Most central banks have announced: “To Infinity and Beyond with QE (Quantitative Easing).” Ms. Boele concludes that: “This QE forever is music to the ears of gold bugs. Gold flourishes whenever currencies race to the bottom”.
June was the 7th consecutive month where global, gold-backed ETFs recorded positive cash inflows. Last week the World Gold Council reported that gold-backed ETFs added an additional 104 metric tons / $5.6B / 2.7% of assets under management. And, for the first half of the year, global net inflows reached $39.5B – surpassing the previous annual inflow record from 2016.
Next Week: Exuberance, Divergence and Volatility…
The Tesla graph above is the basic definition of exuberance. The Nasdaq’s performance is eerily reminiscent of the dot com era. It’s getting downright sketchy – because it’s pulling away from the other averages at a record pace. Most people have been lulled to sleep, but the VIX remains around 30 (almost 3 times higher than last summer). If you combine exuberance, with wild divergence, and add in a pinch of volatility – you have a recipe for everything you would want inside of a trading market.
The NASDAQ is even scaring me. The magnitude of the moves that we’re seeing inside of the NASDAQ is extraordinary. And the way that it continues to pull away from the other index products reminds me only of the ‘dot com’ era. The reason I say that is NOT because of the Q’s upward trajectory, but rather because of their ‘bid-less’ moments where they will fall 100 points in a matter of minutes. This behavior repeats itself virtually every trading day right after the open. Interestingly, the ‘Monsters-of-Tech’ diverged lower than the S&Ps on Friday. For the last 2 consecutive weeks, the Nasdaq has massively exceeded it’s expected move. Consider buying an August monthly / OTM (out-of-the-money) Put spread. You’re looking for a quick flash to the downside. Not a crash – just a strong rip to the downside that would bring that Put spread into profitability.
Exuberance is the name of the game. If you want irrational, Tesla will demonstrate that. On Friday TSLA finished up 11% and currently is worth ($286B). That is more than Goldman Sachs, Caterpillar, and Costco combined. There are no fundamental arguments for a Tesla valuation that is that high. What you have are algorithms with extremely deep pockets (not people) that are chasing an asset. You’re seeing this same behavior in several other tech-stars: Apple ($1.66T), Netflix, Google, Facebook. The only issue is that we’ve seen this movie before, and it always ends horribly.
Earnings Season is here again. There is an overwhelming marketplace feeling that the financials will end up holding the bulk of the COVID risk. We know that a ton of people are out of work. There’s at least 18m worth of continuing unemployment jobless claims. Because of that, I’m anticipating all kinds of mortgage fallout. Every financial institution is going to intentionally take larger than normal loan-loss reserves – which will intentionally lower earnings. Now, the Street may very well interpret that as a positive and applaud them for doing so. I have a July 31st back-ratio spread on the XLF looking for an explosion of the financials to the upside. The financials (XLF) are still down 24% YTD; therefore, it won’t take much good news at all to get them to climb a couple points. What I don’t know is if we’ll hear much of any forward guidance this earnings season. The markets continue to interpret overall economic data rather than that of the individual companies and their earnings. That’s why I continue to like crypto and precious metals.
A trade idea: Who says you cannot BUY an iron condor? Yes, normally you sell an iron condor in order to make money by a stock remaining within a range. However, if you believe that something CAN move outside it’s normal barriers – then buying an iron condor is the way to go. And especially think of buying them on elements such as Gold (GLD) and Bonds (TLT). Buying iron condors on these two elements work, because their implied volatility is incredibly low in a marketplace that’s running on a 30 VIX; therefore, their option premium prices are reduced – lowering your downside risk. All you really need is one significant daily move to make 30% on the trade.
SPX Expected Move: During the last 6 weeks, we cracked through the expected move 50% of the time. Last week we remained inside the $81 expected move. For next week, the SPX is projected to have a $76 or lower expected move. That means if you bought an August monthly iron condor, in a low volatility asset – all you need is one week where it breeches its expected move to make the trade ridiculously profitable. Everything continues to point toward an ‘inefficient’ market. A market where we crack through the expected move as often as we remain within it. The expected move is designed to remain valid - 68% of the time. When it’s not – it’s up to everyone to use that to their best competitive advantage. I’m buying: iron condors, ratio back-spreads, precious metals, and crypto.
Tips:
One thing that hasn’t changed is that the DOW cannot seem to get up and over its 200-day moving average. That causes me to review some sector performance numbers: Industrial conglomerates = down -23%, Autos = down -31%, Advertising = down -34%, Consumer Finance = down -37%, Regional Banks = down -37%, Energy = down -36%, Casinos/Gaming = down -43%, Hotels = down -52%, and Airlines = down -55%. That is what our bull markets are made-up of in 2020.
As long as our FED continues to keep the accelerator pressed to the floor, this market is destined for higher prices. Let me rephrase that, the ‘Monsters-of-Tech’ and Tesla are destined for higher prices, and that drags the indexes with them. One risky money maker right now is buying out-of-the-money (OTM) Call options on TSLA. Buy them on a down day and wait for the huge pop where the cheap OTM options become expensive in-the-money options and sell.
It’s truly odd that the stock market is rallying in the summertime. This year we have already had a he crash and a huge rally. The odds of either of those events happening again is equivalent to being struck by lightning twice = one in nine million. With the market’s current implied volatility at 2 and 3 times historical levels, we should expect some decent sized moves with scary downside velocity.
HODL’s:
- Yamaha Gold (AUY = $5.51 / in @ $4.60 = up 20%),
- Canopy Growth Corp (CGC = $17.42 / in @ $22.17 = down 21%),
- DRD Gold (DRD = $16.29 / in @ $3.82 = up 326%),
- EXK Gold (EXK = $2.61 / in @ $1.53 = up 71%),
- GBTC Bitcoin (GBTC = $9.75 / in @ $9.41 = up 3.6%),
- Hecla Mining (HL = $4.04 / in @ $2.36 = up 71%),
- KL Gold (KL = $45.81 / in @ 26.85 = up 71%),
- MUX Mining (MUX = $1.09 / in @ $1.14 = down 4%),
- NovaVax (NVAX = $94.36 / in @ $7.24 = up 1,203%),
- New Gold (NGD = $1.36 / in @ $0.82 = up 66%),
- Pan American Silver (PAAS = $32.42 / in @ $13.07 = up 148%),
- SPY = $312.23 = in the July 2020 Strangle = $164 Put – sold the Call side.
- XLF = $22.97 = July 31st = SELL -1 $23 call, and BUY +2 $24.5 Calls for $0.14 credit == You win if it explodes higher and you don’t lose if it doesn’t.
Crypto:
- Bitcoin (BTC = $9,250),
- Ethereum (ETH = $240),
- Bitcoin Cash (BCH = $240)
Thoughts: As the QQQ is propelled to another all-time high, there are a few of its larger components that are outperforming it. Amazon (AMZN) for one, and Netflix (NFLX) is another. Both stocks have surged higher in the past few days as the market figures companies like them will benefit from a new coronavirus quarantine. AMZN has rallied much more that NFLX, rising the equivalent of 2.8 standard deviations since the end of June. That’s 2x the 1.4 standard deviations that NFLX has risen during that same time. Maybe NFLX has some catching up to do? NFLX’s earnings are coming up on July 16, and that could cause some larger price swings. If you think NFLX will continue to rally over the next few weeks, or at least not drop too much through earnings – the short put vertical that’s long the $465 Put and short the $470 Put in the Aug monthly expiration is a bullish strategy that collects a credit 1/3 the width of the strikes, and has a 76% probability of making 50% of its max 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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