This Week in Barrons: 8-2-2020:
BH of the Washington Post wrote a great article on Washington DC’s new crony capitalism – titled ‘The Grifters‘. It seems that on Tuesday afternoon, the White House announced that Kodak (a less than $100m public company that used to make film and cameras) would receive a $765m non-recourse / non-secured loan from the U.S. to create a ‘pharmaceutical start-up’ that over a period of 8 YEARS will start making pharma-supplies. A week ago Kodak was practically bankrupt, and had recently pivoted to be a pension-fund / blockchain company. Our President is loaning Kodak (a company with ZERO experience or expertise in pharmaceutical supply production) around $1B. The money comes from the International Development Finance Corporation (DFC) – a $60B piggy bank established by the Trump administration in 2019 to replace the Overseas Private Investment Corporation (OPIC). Yes, note the references to ‘overseas’ and ‘international’. The DFC is (according to its mission statement) “focused on promoting inclusive economic growth in the world’s least developed countries.” Kodak is located in Rochester, NY. Now, I know things are bad in Rochester – but 3rd World bad? I guess Mr. President: “You don’t even want to try and hide it anymore.” Welcome to Capital Cronyism.
On the corporate side, Kodak’s CEO and Chairman Jim Continenza not only ran Kodak, but was also President of a marketing firm – Vivial. So if anyone thought Jim’s background was in manufacturing and pharma, nope – he’s an ‘Ad guy’. Kodak literally has no one capable of executing on any kind of pharma plan. And it gets better. A couple of months ago, Jim finished purchasing 3m new Kodak shares and options for around $2 / share. On Monday (the day before the FED announcement) Jim picked up an additional 1.5m shares / options. So when Kodak (post-Presidential announcement) went from $2 to $33 / share in a day - Jim made a cool $150m. Mr. President, it stinks that you’re: “Not even trying to hide it anymore.” Isn’t manipulating our markets via the FED’s enough? Next week, maybe you can make Kodak fart Ethereum. THAT would be a Kodak moment for sure.
The Market:
Our economy shrank at a record 32.9% annual pace in the second quarter – the deepest decline in history. Let that sink in a minute. One-third of our economy was just wiped away. If you’re in a crowd of 3 worker-bees, only 2 of you are currently employed. This GDP drop was nearly four times worse than during the peak of the financial crisis, and 3 times worse than the Great Depression. Everybody is blaming it on coronavirus and our lack of leadership (aka our lack of defending ourselves against the virus.) The popular opinion also seems to think that once a vaccine cures the pandemic – things will go back to normal and “let the good times roll.” Markets are attempting to look past the ‘pandemic-blip’ out into Q3 where I’ve heard ridiculously optimistic estimates of GDP increasing by as much as 18%. Which brings to mind Billy Crystal’s mother’s quote from the movie: “When Harry met Sally” after Meg Ryan successfully faked an orgasm in a restaurant / diner == “I’ll have what she’s having.”
Let me put some facts out there on the table:
- Consumer spending (our growth engine) contracted by a record 35%.
- Spending on services nosedived at a 44% rate.
- Household purchases dropped 11%., and sales of clothing and gasoline fell off the table.
- Business investment sank 35%, while spending on equipment shrank by 38%.
- Investment in new housing was down by 39%, but record low mortgage rates have spawned a rash of new home buying.
- Exports dwindled by 64%, topping a 53% drop in imports.
- Inflation ‘fell’ at a 1.9% pace; however, the price of food, insurance and medical are on the rise, and that fall was mainly due to everything being closed.
Our path to recovery depends upon how much ‘free money’ our Congress is willing to give out in terms of relief. The good news is that Americans have dramatically increased their saving and more free money may only cause us to save more – spend less – and deliver another ‘gut punch’ to this economy. Just last week, 1.43m people filed for initial unemployment benefits. These numbers are unprecedented, especially accompanied by a buoyant stock market. Suffice it to say, the chasm between the wealthy and the poor continues to widen. I will go on record as saying the road to recovery will be much harder and longer than people imagine. Given people vote with their wallets – I believe our current leaders will: “Not go quietly into this good night.”
InfoBits:
- 60% of restaurants that shut down during the pandemic… will be closing permanently. That amounts to about 15,770 different establishments - gone.
- 21 retailers have filed for bankruptcy in 2020… which is more than all of 2019. Lucky Brand, Brooks Brothers, Heritage Brands, Ann Taylor, LOFT, Lane Bryant and others – announced their closures in July alone.
- Going the way of Blockbuster... AMC pushed its re-opening back into August because studious are not releasing movies. The longer theaters and studios stay closed – the closer AMC gets to bankruptcy.
- Melania Trump wants to renovate the Rose Garden: I beg your pardon, she’s promising us a new rose garden?
- Google will let employees WFH until at least next summer. Did you hear that, Googlers: Yoga pants forever!
- Un-Happy Meal… McDonald’s sales plunged 23% and profits tanked. Dah-Dat-Dot-Dah-Dahhhh.
- Frappy-Ka-Put-Oh… Starbucks sales fell 40%, but it claims that the worst of the pandemic is behind us. How do they know that?
- Puff – Puff: Marlboro-maker Altria says cigarette smoking is making a comeback because of stimulus checks and despite e-cig restrictions.
- Sherwin-Williams… has seen unprecedented demand for its DIY paint products – as people ‘pimp-out’ their homes.
- Goldman Sachs’ CEO David Solomon, aka DJ D-sol, opened for the Chainsmokers at a Hamptons party (casual). Huge crowds gathered to watch DJ D-sol spin his tracks. It just doesn’t get any better than this.
- The Theatrical Window has shortened from 75 to 17 days… due to the success of Trolls World Tour – a direct to streaming theatrical release. Honestly, it’s becoming a lot better, cheaper, safer and almost faster to see it from home. Ain’t lookin’ good for AMC.
- Per HL: “At this point Fat Nixon has turned his cash cannon into a daily game show – using Kodak as his first target. I can only imagine that next up is a SPAC for ‘Flint Michigan Bottled Water’”.
- Per MJP headline: “Should a journalist remain objective when reporting a story?” The mere fact that anyone should pose this question tells me that journalism (as once intended) is dead (and potentially has been for years).
- Apple announces a 4 to 1 stock split… with trading to begin on a split adjusted basis at the end of August. Lowering the stock price makes the shares more accessible to smaller traders. Just watch: AMZN, GOOGLE, and TSLA will be right behind – as the next leg of price appreciation begins.
- Amazon saw 40% revenue growth YoY… and increased grocery delivery capacity by over 160%. If Amazon’s not careful, they may have to pay taxes pretty soon.
- Facebook beat on the top and bottom lines… despite reporting its slowest revenue growth since its 2012 IPO. FB saw an increase in user engagement. One has to assume that all of those boycotts had ZERO effect in reality.
- If MicroSoft buys TikTok’s U.S. operations… we can only assume that TikTok goes from being a Chinese surveillance tool to being a U.S. surveillance tool. No offense intended and with all due respect Mr. Nadella – wink-wink.
- Exxon Mobil and Chevron reported revenue drops of 47% YoY: First, oil goes negative, and now these companies under deliver on low expectations. What’s one to think?
- Coca-Cola is entering the alcohol biz for the 1st time since 1983: Coke is leveraging its trendy Topo Chico sparkling water brand to launch... hard seltzer. Yeah, that’s just what we need – another hard seltzer.
Crypto-Bytes:
- Crypto’s ripping it again… due to inflation hedging as The US Dollar Index is down 6% over the last 3 months and below this 95 support level that has served as a bottom a few times in the recent past. But honestly – nobody has a freaking clue what is driving the crypto trading sardines.
- ETH is up over 100% YTD… while nobody was looking. Bitcoin is even up 50% YTD. Just when everybody was having fun with stocks like Zoom and Tesla – crypto comes back to life. Maybe they’ll make new highs before year end?
- Twitch likes crypto: Twitch is giving subscribers a 10% discount if they pay in bitcoin, ether, bitcoin cash or Litecoin. The Amazon-owned company, with around 3.8 million broadcasters – first introduced a crypto payment option in 2014. They use the U.S.-based BitPay to process its crypto payments.
- Washington D.C. sez: “Bitcoin is Money”: A federal court on Friday declared Bitcoin a form of ‘money’. Now that’s going to be interesting for sure.
- SPAC’s are everywhere – even in crypto: Newly launched derivatives platform EQUOS.io is set to become the 1st publicly-traded crypto exchange in the U.S. through a SPAC listing on the NASDAQ later this year. EQUOS.io will combine with the Nasdaq-listed 8i – a SPAC operated out of Singapore.
Last Week:
Monday: This week I’m looking for some sideways chop with a chance for a bit of a fade lower. It all depends on the 10 year interest rate and the FED. Last week speaker Pelosi said: "Just so you know, the Republicans are bolstering the stock market. Okay, there's a floor to the stock market. Everybody knows it's not going below a certain place. Okay.” I guess the fix is in. We can fade a bit, but a true roll over seems to be off the table. If gold remains where it's trading this morning, we will have a new all-time high in the shiny metal. The DEM's want $3T and the REP's want $1T. In the meantime, there's been some big gap ups in gold and silver, and of course the miners. With the Dollar sagging – all currency alternatives have moved sharply higher. The question is: Sustainability and is there more to go? I think so. Techs are still leading, but it's narrowed to the most famous names, like usual. I want some more mining stocks at some point, but not with those big gap ups they had.
Tuesday: Usually the first day of a two day Fed meeting is a decent market day, but today isn't shaping up that way so far. Yesterday everyone and his brother was hot and bothered by the move in gold and silver. The SLV was up over 7% on the day, and the gold/silver bugs were besides themselves with joy. Whether they go higher or lower over the next few days, hinges on our FED. If Powell shows the slightest bit of leaning towards slowing QE then the metals will get smacked. But if he stays the course with the pedal to the metal, any fades in the metals should be fairly short lived. Goldman just came out with a statement: "We have real concerns around the longevity of the US dollar as a reserve currency." I’m still struggling to find really good set ups in this market. BBBY is looking really good. It’s over its 200-day by about ten cents, and if it can hold above it today, I might just take that into the close. Gold miner AGI looks like a run if it gets past 11.58 – I’ll take it.
Wednesday: Yesterday the DOW ended the day down more than 200, pulling the other indexes with it. Today, my guess is that Powell will lie as hard as he's ever lied, saying that things are fine and going to be finer, while simultaneously telling us he'll continue to keep the accelerator floored. A look at the DOW chart shows me something interesting. The 50-day and the 200-day moving averages have been moving closer together and now have only a 270 point spread between them. The DOW itself is just 144 points above that 200-day. So it stands to reason that if we get soggy, it will use that 200-day as a support with the 50-day not being that far below it. So, despite the fact that the market should be crashing, it does have some technical reasons to trade sideways and slightly lower. The other element that’s going on are the hearings surrounding Big Tech. Jeff Bezos, Tim Cook, Sundar Pichai, and Mark Zuckerberg will defend their companies before the House Antitrust Subcommittee. Okay, as expected the Fed head Powell has told them all, that he's going to do whatever it takes for as long as it takes. As you can imagine both stocks and the precious metals loved what it heard. There's no question that more fed money is coming, more stimulus, and more QE. The overall course is still higher. Over in the other fantasy land, Congress’s grilling of big tech will not produce a darn thing – really.
Thursday: Overnight, German GDP dropped the most on record. Our first look at U.S. GDP shows that it fell 32.9%. Initial jobless claims grew by 12K to 1.4 million, and the 10-year is down to 0.551%. Organically, the market wants to fade, but the FED stands ready to make sure it doesn't go far. I’m looking for a pink day. The DOW had plunged through its 200-day and bounced off its 50-day to move higher. I'm watching ETSY. They sell things that people make at home. With COVID crushing so many folks, they're turning to EBAT and ETSY to sell their stuff. If ETSY gets over the morning high of 110.84 – I’ll take some. FYI, the big 4 tech players release earnings today after the bell. Facebook, Google, Amazon, and Apple make up 40% of the Nasdaq 100 market cap.
Friday: So last night, big tech blew away the numbers. On top of that AAPL announced a 4 for 1 stock split – something I haven't seen in ages. However despite the incredible numbers, the futures this morning are just ho-hum – which shows you how tired this market really is. I think the thing I find most interesting is that both gold and silver are up this morning. One might have thought that with gold flirting with the highs not seen since 2011, more people would be selling it and moving into the stocks of AAPL, MSFT, AMZN and FB. That tells me that the metals are indeed very strong. Okay, so we've got a classic pop and drop going on here. This market is weak. When the big techs slam earnings and the NASDAQ dips red – you know it's soggy. The market’s freaking out over the 10-year being horribly low, and saying "this economy must be broken." Ya think? KL is now over $53. That's over $20 to the upside, so I think I'm going to take half off the table. Today is turning into a strange one. It appears the PPT group is kicking in right before our eyes – late afternoon. The DOW (that was down 300 points) is now green by 100 – but 23 of the 30 DOW stocks are red. The S&P is green while the advance vs decline index is showing a lot more decliners than advancers. Just the latest rendition of: “Our FED has gone MAD” movie.
Gold – the Anti-Bubble:
The action in the precious metals is off the charts! Gold is making all-time highs like no big deal and Silver is bounding higher by 7.5% plus a session. This along with the crypto rally is enough to make someone think investors are beginning to lose confidence in the US Dollar. Nah, we’re sure it’s nothing.
But to begin with, let’s separate out what is a metal and what is not. In my world, buying shares of the GLD or the SLV is NOT buying metal. You are buying a paper contract with a ton of cross party liabilities / risk. A lot of things have to go right for that piece of paper to survive a true catastrophic situation. I have NO issue with people using the GLD or SLV as a trading vehicle to try and make money on the ups and downs in the swing prices of the metals. Same thing with the miners. Buying metal to me means physical metal. You take it home. It’s yours. There are no counter-parties, leans or futures associated with it. I think of it as insurance first – appreciation second. Insurance against inflation, currency destruction, civil disruptions, etc. And there is plenty of inflation – mostly in food and medical right now. The true hyper-inflation has been kept in check by slowing the velocity of money to a crawl. It’s hard to have soaring inflation, when no one is outside their homes. It’s hard to have inflation when tens of thousands of small businesses are locked down. But with the trillions that our FED has printed, inflation is building up like monsoon rains behind a dam. So the most important part of the metals, is to protect us from the ravages of inflation. My forever example is: in 1915 one ounce of gold could buy you a hand tailored men’s suit. In 2020 one ounce of gold can still buy you a handmade suit despite the value of the U.S. dollar going from ‘one-dollar’ to its present value of about 4 cents.
- Do you want gold, silver or both. Both – for reasons of price disparity. You can’t buy food with gold coins, and you can’t buy transportation with silver.
- How much should you buy? That’s a personal decision. Analysts tell you 10% of your portfolio, and ‘preppers’ say 90% of all you own.
- Where do I store it? Short answer – buy a safe.
Summary:
- Use SLV, GLD, and the mining stocks to make money.
- Take a portion of that money, and buy physical gold and silver.
- Vary the denominations of what you buy.
- Only buy ‘to the sleeping point’ – aka what you don’t have to worry about.
- Store it near you (preferably in a safe) for safe keeping.
Next Week: Market Divergence growing at an Alarming Rate.
S&Ps = BreakOut or BreakDown: Either way – play them with spreads. Currently – the S&Ps are less than ½ a percent from their all-time highs. The Q’s are up 23% YTD – which is incredible given a 33% GDP drop. The small caps (IWM) are down 11% YTD. Although we’ve touched the end of our range on 3 different occasions – we have NOT broken thru the range boundary as of yet. On the S&Ps, we have been oscillating between 3,000 and 3,275 for some time now. I’m inclined to believe that if we do break the outer edge – trading will become wicked. For example using a back-spread configuration: you can purchase 2 August 31 SPY $334 Calls and sell 1 August 31 SPY $327 Call – for a 14 cent credit. If the market explodes – you win, and if the market tanks – you get to keep the credit.
5 Firms control the Fate of the Markets: We’ve had a whole lot of bad news within a market that is being forced higher by the retail trader and our FED.
Divergence grows to alarming levels: Tech earnings have been great – unless of course you’re living in the real (non-tech) world. Risk (when concentrated into 5 stocks) has NEVER been a good thing. If the S&P 500 is concentrated risk, then the NASDAQ is uber-concentrated risk. The 3 worst performing sectors are: energy, financials and utilities. The 3 top performers are: tech, consumer discretionary (basically Amazon), and healthcare. Nobody has ever seen this type of divergence before.
Earnings were great (on Thursday), unless your living in the real world.
Energy = down 41% YTD
Financials = down 23% YTD
RUT = down 11% YTD
Everywhere you look – the ONLY performer is tech.
Gold and Bonds – Is this a rally or defensive posturing? Gold, bonds, and crypto are all rallying and breaking out to the upside. Normally when all of these asset classes rally – we think ‘risk-off’ and ‘defensive’. But lately, the bonds have been ripping higher, without a ‘roll-over’ and on considerably higher volume. Unless something happens that alleviates a ton of fear in a hurry – this rally in gold, crypto and bonds could strike fear in the hearts of every other asset class except – tech. Sooner or later: the real numbers of the economy are going to catch up, because we are in a recession with the retail home-gamer temporarily in control.
Retail opportunities? The XLP (consumer staples) is flat on the year, and I like the risk vs reward on the short side of this trade.
VIX Trades: If you’re looking for a hedge, or if you believe that the market may tank over the next 3 months – you may wish to consider the following trade in the October monthly series:
- Sell the -21 / +18 Put Spread, and
- Buy the +60 / -85 Call Spread for an overall nickel.
If / when the market turns dramatically lower – the VIX will spike higher. This will cause the retail trader to sell (because the retail trader is the first to panic and GTFO). This will drive the market even further lower and the VIX higher. This trade can be done for a 5 cent debit and could net $25. This makes a good hedging trade – if you need one.
SPX Expected Move – 3rd week in a row: This is the 3rd consecutive week that we haven’t touched either the upside or the downside of the expected move. As the market is moving higher, the volatility isn’t really going lower and the expected move is not collapsing. This is surprising to me. I don’t believe that you can time an outlier type move, but I do believe that you should be ready for it. I like putting an outlier trade on to the upside using a back-spread on the SPY, and having a hedge for an outlier move to the downside – the VIX trade annotated above. As this divergence continues to grow, the entire structure of the S&Ps (which feathers into index funds, etc.) – rests in the hands of 5 companies. With the financials being down 23% and energy being down 41% - that leaves Microsoft, Apple, Facebook, Google and Amazon as the only things holding our entire economy together. All you will need is to have ONE of these 5 companies begin to have serious DOJ / Anti-Trust / or other issues – and they will collapse upon each other and then implode upon themselves.
Tips:
This was COMEX’s latest headline: “Gold traders issue largest delivery notice on record.” It appears that no one wants paper money anymore, but everyone wants crypto and/or the physical metals. And, COMEX doesn’t have enough to go around. The metal squeeze will only get worse before it gets better.
Last week we had 2 days in a row where the DOW plunged through its 200-day moving average, only to hit the 50-day and bounce like mad. Someone doesn’t want to see the DOW lose that 50-day. My thinking is that the 50-day moving average only has to move up 147 points to cross over the 200-day. That’s called a golden cross. If this market keeps trading sideways – the 50-day getting over the 200-day will probably cause us to move higher.
HODL’s:
- Yamaha Gold (AUY = $6.51 / in @ $4.60 = up 42%),
- Canopy Growth Corp (CGC = $18.28 / in @ $22.17 = down 18%),
- CTI BioPharma (CTIC = $1.51 / in @ $1 = up 51% ), + Sold AUG $2 Covered Call for $0.35,
- EXK Gold (EXK = $4.32 / in @ $1.53 = up 182%),
- GBTC Bitcoin (GBTC = $12.81 / in @ $9.41 = up 36%),
- Hecla Mining (HL = $5.52 / in @ $2.36 = up 134%),
- KL Gold (KL = $54.60 / in @ 26.85 = up 103%),
- MUX Mining (MUX = $1.38 / in @ $1.14 = up 21%),
- NovaVax (NVAX = $143.10 / in @ $7.24 = up 1,876%),
- New Gold (NGD = $1.65 / in @ $0.82 = up 101%),
- Pan American Silver (PAAS = $37.30 / in @ $13.07 = up 185%),
Crypto:
- Bitcoin (BTC = $11,100),
- Ethereum (ETH = $350),
- Bitcoin Cash (BCH = $275)
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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