This Week in Barrons: 10-11-2020:
Only ONE bird gets the worm…
Entrepreneurs aren’t waiting for the economy to come back to start their businesses. And these builders of post-COVID businesses won’t be dependent upon real estate. Instead, they are building around a tech-stack that is devoid of a storefront. For example, if you’re launching a restaurant in 2020 you’re going to need a mobile ordering, pickup and delivery system from Slice, Toast, or DoorDash yes? If you’re launching a clothing store you’re going to need a presence on BigCommerce, Shopify, Etsy and/or Poshmark? If you’re opening a rental business you’ll need a point-of-sale system from Square and a website from Wix? And finally you will need operational help (most likely) from either Brightwheel and/or ServiceTitan. Every single new corporate formation has replaced the ‘Where are you located’ question with: “What technology stack are you using to help you grow?” This trend will accelerate over the next 12 mos.
These days (per FW) the big VC ‘wins’ are coming from being (a) ‘early’ to the party, and/or (b) being the ‘most committed’ institutional investor. VCs are looking back over their ‘wins’ and are finding that their home runs came when NO other firms validated their investment decision. It’s being called: negative social proof. A typical scenario that’s circulating about is the first time Brian Armstrong (founder of Coinbase) came to a Y-Combinator event involving 15 other presenting companies, Coinbase, and a slew of VCs. After 4 hours, only 1 VC wanted to invest in Coinbase, and the dialogue between the evening’s moderator and the potential investing VC went something like this:
- Moderator: “So which companies did you like best?”
- VC #20: “I like Coinbase. I think Brian Armstrong is on to something big.”
- Moderator: “You are the first and only VC to say that.”
- VC #20: “I think that it’s going to be huge. Please make sure we get the call when Coinbase wants to raise.”
VCs win and win big when there’s negative social proof – aka when NOBODY else likes the idea but them. In their words: “In a COVID world, you bet big or go home. Only ONE bird gets the worm, and NOBODY gets a participation trophy.”
The Market: State of the Recovery…
The U.S. may have to retake the Recovery 101 course, because we only added 661k jobs in September. This was a lot lower than expected. Do you remember when the unemployment rate was:
- 3.5% - back in February, 2020?
- 14.7% - back in April – after the COVID lockdowns, and we lost 22m jobs?
- 11.1% - back in June – as businesses reopened, and we added 7.3m jobs?
- 8.4% - back in August – as we added 3.2m new jobs. But many people gave up looking for work and became part of the long-term unemployed in the U.S.
Those 661k new jobs in Sept. mean that our recovery is slowing down. Factually: (a) the unemployment rate fell to 7.9% due to 1.1m people leaving the work force, (b) 865k of those 1.1m were women, (c) we’re still 12.6m jobs DOWN from our peak, and (d) bottom line, even with a vaccine – additional economic medicine will be necessary. The $2.2T stimulus in March was largely responsible for driving the recovery, but those benefits have expired. With 9 companies in the final phase of testing, the race for a COVID-19 vaccine is hot, but the CDC says vaccines won't be widely available until the summer of 2021. With the pace of recovery slowing, and no stimulus bill in sight – we could be headed for an extremely rocky next 90 days.
InfoBits:
- Bristol Myers Squibb is buying MyoKardia… for about $13B to bolster its heart disease portfolio.
- Ialy’s Nexi will acquire fintech rival SIA… for about $5.4B – creating a European giant in the payments sector.
- Crowdcube and Seedrs (crowd-equity fundraising platforms)… have agreed on a merger – creating one of the largest private equity marketplaces.
- Apple has stopped selling… Bose, Logitech, and Sonos audio products – in order to boost its own.
- Coke discontinued its Zico coconut water brand… as it has 275+ other under-performing "Zombie brands" over the years.
- Faraday Future… is planning to go public through a SPAC deal.
- $67B is the size of our trade deficit… the highest in 14 years – ballooning from $37B in February.
- Boeing slashes its 10-year forecast for new aircraft demand… by 11%.
- McDonald's brings back baked goods… so it’s a donut-shaped recovery.
- Wells Fargo cut 700 jobs in commercial banking… and plans to reduce its workforce by tens of thousands in the near future.
- Levi's saves itself with ecommerce… and now wants your old jeans for "Re-commerce." It wants to continue selling your old pair of hip-huggers.
- Eli Lilly asked the FDA for emergency use approval… of its COVID-19 antibody treatment, saying it could supply 1M doses this year.
- DoorDash is making your food delivery as important as the food… by creating free meal credits across 4,000 different restaurants and grocery.
- This year’s World Peace Prize goes to… the World Food Program for acting as a driving force in efforts to prevent the use of hunger as a weapon.
- IBM is doing more financial engineering… as it announced that it will make its Managed Infrastructure Services unit – a separate public company.
- Advanced Micro Devices is maybe buying Xilinx… for $30B.
- GoPuff, a convenience food delivery service… has raised $380m in new funding with a post-money valuation of $3.9B.
- Forest Road Acquisition Corp is a new SPAC… comprised of 3 former Walt Disney Co. execs, Shaquille O’Neal, and one of Martin Luther King Jr.’s sons. They will raise $250m to take video streaming platforms public.
- Morgan Stanley is buying Eaton Vance for $7B… days after completing its takeover of E*Trade Financial.
- The number of Manhattan apartments available for rent has tripled. The average rent fell by 11% to $3,036.
- The majority of Americans believe… the worst of COVID has yet to come.
- 'The West Wing' is reuniting: This headline is very confusing if you didn’t know that “The West Wing’ was a TV show.
- First Mark Capital… became the 1st VC to raise a SPAC.
- Jeffrey Katzenberg is looking for a buyer for Quibi: So far, WarnerMedia, Facebook, and Apple have all said: ‘Nope, No Dice, and Quibi Who?’
Crypto-Bytes:
- The Ethereum 2.0 experience… is the first time the cryptocurrency industry will see a blockchain of its size and value – attempt to transition all users and assets to an entirely new decentralized network while keeping all operations on the old network active and running.
- Ripple’s Chairman Chris Larsen will remove Ripple from the U.S…. if our country’s hostile stance toward cryptocurrency companies doesn’t soon change.
- To get the best education on blockchain… you need to attend: MIT, Cornell, University of California – Berkeley, Stanford, or Harvard.
- Square purchased 4,709 Bitcoin… a $50m investment representing 1% of the firm’s total assets.
- Bitcoin options go crazy … as $48m worth of options were bought – the highest daily volume since July 28th.
Last Week:
Monday: The futures are up sharply and I assume it is because Trump is not dying. That’s one uncertainty the market can put behind it. But we are moving right into earnings season along with the most contested election in U.S. history. I believe that the dips will be bought with FED money, and we’ll try and stay above the 50-day moving averages – trending sideways and up. Oil's up 6%, and the dollar’s down = good for stocks this week. I’m liking the movement in the chip sector this week – right off the bat.
Tuesday: Today’s all about COVID news flow and who else is infected. We are green and Powell is speaking, so maybe he'll energize them with words of more free money and we'll see the market run. Volatility is the name of this game and we've got it in spades. Boom! In just moments we went from being up 100 to down 300. Word hit that Trump has instructed the Republicans not to negotiate the stimulus package until after the election. Is this a way to put pressure on the two sides to get something done? It could be, but the drop was dramatic and fast. Now we just sit and see if this is the end of the rally, or a one day knee jerk.
Wednesday: The futures rebounded on Trump suggesting that Congress should send $1,200 per person, and help the airlines. We're in a period of great uncertainty and wicked volatility. We’ve regained all we lost yesterday, but I’m not going to buy anything today. We're up huge, and too many things have moved too far. With a full boatload of Fed heads out today, and Powell saying they are "committed" to using their full range of tools to keep the economy going – the market is having a prime day. Interestingly, the FAANMG stocks are up, but not as much as they should be.
Thursday: Across the wire comes: “Trump says that it looks like there’s a really good chance to reach a deal on COVID aid – talks have re-opened.” But Trump wants a healthy market heading into the election and every good news item will be rewarded like this. Today we should see a lot of up and down action. The chip sector has come alive. Coca-Cola (KO) is making a nice chart set-up, and with earnings on the 22nd – it has a chance to run higher. I'd take KO > 50.40. Another chart that has my eye is COP, and I’d nibble > 35.20.
Marijuana… The beverages are coming … the beverages are coming:
- Cannabis advocates say that the cannabis industry will support 300,000 workers by the end of 2020 even as some businesses are forced to shut down.
- Recreational marijuana legalization is once again on the ballot in Arizona. Sales and production numbers show an elevated level of demand with increasing medical marijuana patient counts in AZ in July and August.
- Beverages are the legal cannabis industry’s fastest-growing segment. It’s split down the middle whether consumers prefer THC or alcohol.
- Ontario-based Canopy Growth is set to introduce cannabis-infused drinks in California and Illinois, and expand into other states in the following months. The companies will focus on session ability – emphasizing THC dosages: “That will more closely liken itself to current beverage alcohol serving sizes. Canopy Growth owns a 74% market share in Canada, and sees THC-infused beverages as a game-changer in U.S. cannabis. We believe that beverages and other Rec 2.0 products will attract new consumers to the market and further drive conversion from the illicit market.”
- A democratic sweep in November will bring with it the passage of the STATES Act in the first year of the new administration. This would force the legislature to address: capital markets access, section 280E's removal, and social equity. New adult sales from NM and VT in January will boost the marijuana rec. legal market. I expect marijuana legalization to pass in AZ and NJ in November, with NY, PA, CT and RI to follow closely suit.
- The STATES Act is the simplest and least contentious way for Congress to legalize cannabis. It is mirrored after the 10th Amendment to the U.S. Constitution which defers to the states all powers not given to the federal government. Ultimately, cannabis would remain illegal unless a state took action to legalize, and states would be free to legalize for medical use, recreational use or both. Given states would regulate cannabis sales with no federal government involvement, there would be no interstate commerce for cannabis (unless states were to enter compacts with each other to permit cannabis to move between them). Because of its broader political appeal, the STATES Act is a more likely path for legislation than the MORE Act that would remove cannabis from the list of controlled substances entirely.
Next Week: Be on your game – because Volatility is alive ‘n well…
Markets - What Me Worry? The S&P continues to grind to the upside, but the ranges on a day-to-day basis are phenomenally large. Part of that is because everybody’s talking about a stimulus deal. My advice in that regard is: (a) to buy the stimulus rumor, and (b) to sell the stimulus deal. The market is big, bad and binary. It’s overbought, setting itself up for perfection, and can move at least one standard deviation higher or lower on a single tweet.
These large, daily ranges have NOT abated. In July and August we had a large ‘gamma squeeze’ driven largely by the retail trader and Softbank. During that time, the daily ranges were tight, small, and manageable. Once we crossed over into September, the game completely changed. Lately, the most recent volatility to the upside, is almost as great as it was earlier to the downside. That is not a healthy trading environment, and in fact this week we broke-through the expected move (in the S&P) to the upside. Be aware of this market inefficiency, and continue to remain focused on managing your risk – assuming that at any time this bounce could fade.
It’s a Shell Game as to who’s leading versus following. When examining the IWM (small caps), in 5 of the last 6 weeks the IWM has breached its expected move. That signals a small cap marketplace in chaos. I question whether it’s tremendous upside move – can proliferate outward to the rest of the markets? This is currently a COVID news-driven environment. Manage your own risk appropriately.
- [ASIDE: A couple of us have been having some fun buying CTIC (a $3 stock) and wrapping it in either a $1, $2 or $3 weekly covered call. This is netting us between 5 and 8% / week = rinse ‘n repeat. It’s a safer way to live ‘n fight another day.]
“Fish where the fish are biting.” Lately, the small caps (IWM) have been outperforming the other indices by a wide margin. Even though the NASDAQ (QQQ) brought us to this dance, the small caps have (at least temporarily) stolen the show. FYI, energy continues to lag this market, without any hope of reversing that trend.
The Bonds were sold hard this week. This is bullish for the financials = XLF. Right now the bonds (/ZB) are around $174. If the bonds get down to the $170 level, this marketplace will feel very differently about the bonds and the corresponding rise in interest rates that it will bring.
The Dollar was also sold hard this past week. I think the Dollar is being used as a flight to quality, so if the S&Ps selloff – we could see the Dollar rip higher. The Dollar could rip higher because there’s nowhere else to go? The Euro and the ECB are doing the same type of stimulus as we are. Right now the Dollar ($DXY) is at $93. A move down to $90 is completely fine, and would only be interesting if it crossed below $88.
The Metals (gold and silver) move inversely to the Dollar. If you’re short the dollar, you’re often long gold and silver, and to that end – last week was good to you.
A VIX volatility spread trade: The floor lately for the VIX has been around $26, and we closed at $25 on Friday. It’s becoming advantageous to sell a downside put spread in order to finance an upside call spread. For example: in the December monthlies, you can buy the $45 / $65 call spread for $1.10, and sell the corresponding $22 / $17 put spread for $1.35 to finance the trade.
The SPX Expected Move: Last week we broke through the $90 expected move on the SPX to the upside by over $30. This coming week the experts are predicting that the SPX will move less = $72. We had 3 days this past week where we moved over $70 in a day. I’m scratching my head over this one, but it tells me NOT to sell options premium in the market. This is a market that not even the experts are ‘handi-capping’ well. This market is: big, bad and binary.
Tips:
Despite COVID, the election tensions, despite the riots and the marches – we put in a big week. Our President would love nothing more than market all-time highs. Powell appears to be fine with the idea of printing forever, and Mnuchin’s obviously on board – so ‘up’ is the word right now. But we are entering earnings season, and the word is that because of COVID closing so many businesses in Q2, this quarter should look great. And yeah – most earnings estimates have been cut to the bone, so it should be fairly easy for most companies to beat their estimates – there is that. One company that I’ll be watching and doesn’t release earnings for a couple weeks is ETSY. If the market remains positive, it looks like ETSY has more room to run.
HODL’s: (Hold On for Dear Life) / (All %’s = YTD)
- Yamaha Gold (AUY = $6.17 / in @ $4.60 = up 34%),
- Canopy Growth Corp (CGC = $18.07 / in @ $22.17 = down 19%),
- CTI BioPharma (CTIC = $3.19 / in @ $1),
o Selling more Oct. $3 covered calls for 20 cents
- EXK Gold (EXK = $3.62 / in @ $1.53 = up 137%),
o Looking into selling Oct. $4 covered calls
- GBTC Bitcoin (GBTC = $11.77 / in @ $9.41 = up 25%),
- Hecla Mining (HL = $5.53 / in @ $2.36 = up 134%),
- KL Gold (KL = $51.17 / in @ 26.85 = up 90%),
- MUX Mining (MUX = $1.17 / in @ $1.14 = up 3%),
- New Gold (NGD = $2.09 / in @ $0.82 = up 155%),
o Looking into selling Oct. $2 covered calls
- Pan American Silver (PAAS = $34.18 / in @ $13.07 = up 162%),
o Looking into selling Oct. covered calls
- Hyliion (HYLN = $29.73 / in @ $0.32 = 9,191%).
Crypto:
- Bitcoin (BTC = $11,350),
- Ethereum (ETH = $375),
- Bitcoin Cash (BCH = $240)
Thoughts:
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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