This Week in Barrons – 7-22-2018:
“JBL L 100s – delivering the THUNDER.” … circa 1983
Thoughts:
Remember when the JBL L100 speakers delivered the THUNDER? Oh, ‘thunder’ isn’t something you hear, it’s something you feel. It started before iPhones and selfies, when it was all about them and not you, and when the stars were on stage and you stood in the audience nodding your head because the sound was so loud that you couldn't speak to the person next to you. Thunder blows your hair back. And that’s exactly what the Chinese are doing to their economy in response to Donald Trump’s tariffs. They are quietly bringing the thunder. They’re attacking the Donald with a much bigger weapon than the equity markets – they’re bringing the thunder with the currency markets. They’re devaluing their Yuan.
Over the past 3 months, the U.S. dollar has risen over 7% against the Chinese Yuan – effectively decreasing the price of Chinese goods and increasing the price of U.S. goods and services. I suspect we will see that trend continue in the short-term. Why? Because China is not happy about Donald Trump confronting them with their own unfair trade practices. For the past 30 years they had a pretty cozy set-up, and he's causing them problems. By letting their currency devalue, any tariff effects are easily cancelled out. The tariff is then simply a tax paid to the government used to off-set higher interest charges on their debt.
But there’s more to this than what meets the eye. China (for the last 5 years) has been on a gold buying binge. They have been manipulating the price of gold lower in the overnight markets (using naked paper shorts) – only to be slowly buying the physical metal in the daylight hours. The last gold raid (that drove the price lower) occurred a couple months ago – coincident with the tariffs and Chinese currency devaluation. But if your currency falls 2% in value, doesn’t it cost you more to buy your kilo of gold? It does, unless you manipulate the price of gold lower by 2% - then nothing's changed.
Currently, gold costs about $1,135 / ounce to extract from the ground. Right now gold sells for approximately $1,230 / ounce. When the price of gold drops below the cost of extraction – miners stop mining. So any price manipulation only has about $100 / ounce left in it – which tells me we’re close to the bottom in the precious metal markets.
“We are the world…” circa 1985
I could be nuts, and gold and silver could sink to insanely cheap levels, but if that's the plan – why does JP Morgan own 400m ounces of silver? Why are the Chinese, Russians and Indians buying gold like there’s no tomorrow? SLV (the ETF for silver trading) is in the $14 range – a level not seen since late 2016. Remember, silver was $49 / ounce just 7 years ago. For longer term holds, my money is still on the precious metals, and until I see the sovereigns stop buying them – you have to believe there’s a future in them.
I think that the U.S. dollar continues moving higher – all the while the Chinese Yuan continues its devaluation. The Chinese are much better and smarter manipulators than we are. Their equity markets are down for the year, but not enough to cause them to ‘blink’. A currency devaluation (like ‘thunder’) is something you live through and experience – not something you just talk about. Right now the Chinese are the ones bringing the thunder by playing the currency and precious metals game to perfection. Bring on the popcorn, and prepare to have your hair blown back.
The Market:
“Ouch, that was a little rude for Amazon Prime Day – don’t cha think?”
Info-Bits:
- “Oui are the Champions”: Congrats to France for kicking past Croatia to become World Cup champions for the first time in 20 years.
- “Feelin’ lucky punk?”: Disney is – because Friday, Comcast announced that it was dropping its bid for most of 21st Century Fox. This leaves ‘the Mouse’ as the highest bidder at $71.3B. But Comcast is still in the bidding mood, and is looking to buy Sky - the British broadcaster that Fox has a big stake in. Unfortunately, Disney wants it too – so pass the popcorn.
- No pink slips comin’ from the ‘Zon: Amazon's stock hit an all-time high – making its founder the richest person in the world – worth over $150B. Unfortunately there was some bad news: (a) the ‘Zon's website had a little trouble handling Prime Day (see above), and (b) European workers walked off the job that day to protest low pay and poor working conditions.
- “I’m movin’ out”: The EU and Japan just shook hands on a major trade agreement that creates an open-trade zone between the two countries – waving goodbye to almost all tariffs between them. The agreement was reached a year ago – right after the U.S. pulled out of the Trans-Pacific Partnership. Given Japan and the EU produce 1/3 of the world’s GDP, that makes this the largest bilateral trade deal ever. While Trump is still playing the tariff card with the world, the EU and Japan are saying that they’re: 'movin’ on without you.'
- “I did nothin’ wrong”: The EU hit Google with a record $5B antitrust fine. It seems Google's Android operating system runs on the majority of smartphones around the world. The EU said that Google's been taking advantage of this - by requiring phone makers to pre-install Google apps like Chrome and Maps. Google claims it did nothing wrong – but does acknowledge that this comes on top of another $2.7B antitrust fine that the EU slapped on Google just last year.
- “Consider this your last warnin’”: Friday, the IMF warned that growing trade wars between the U.S. and every other country could cost the global economy $430B – and that the U.S. is "especially vulnerable."
- “Stop your complain-in’”: A recent study shows that heat can make your brain run a little slower. The study focused on college students living in dorms with and without AC. The students who had AC did better on tests than those who didn't. So take a moment this week to thank your office manager for keeping you sharp as a tack.
Crypto-Bytes:
- “It’s wakin’ up – again”: Bitcoin shot out of a cannon last week – ripping through the psychological $7k barrier before leveling off about $7,500.
- “Keepin’ an eye on Civic”: Civic aims to give users control of their data by allowing them to verify what personal info can be seen by others. Their goals are: (a) a decentralized identity ecosystem, (b) an elimination of costs and efficiencies via ID verification, (c) improved user security and privacy, and (d) a user-friendly experience. Here’s to pullin’ it off!
- “Crypto is perkin’ up”: Per KG: “Programmable money has a huge advantage over fiat currency systems when it comes to supply. If asked how many Bitcoins would be in circulation 50 years down the road, I’d have no problem pulling that number. Answering that same question for U.S. dollars is like trying to find Waldo - nobody knows.”
On Monday, Bitcoin (BTC) rose from the $6,300 level to $7,500. Yes, the ‘King of Crypto’ was oversold and due for a bounce, but the catalyst came in the form of a ton of positive news:
- Technically: Bitcoin completed an inverse head and shoulders reversal pattern, and combined with 3X normal volume – it clearly ‘got ‘er done’.
- Bitcoin ETFs: The current sentiment is that the pending filing of Bitcoin ETFs at the SEC by the CBOE will be approved. This means that in August (at the earliest), Bitcoin ETFs will be classified as securities – allowing institutional investors to feel safer about getting into crypto.
- Short Squeeze: The recent move higher came as a result of short sellers scrambling to cover their positions during a price increase.
- Blackrock Investment: The pump can also be attributed to BlackRock Investments (that handles trillions in traditional assets) – coming out and saying that it was exploring blockchain tech and cryptocurrencies. Most took that as a signal that getting into crypto is a foregone conclusion.
- Whale Money: There’s been a steady flow of big money into the crypto market all during this decline. The most recent slab came from Avenue Capital Group’s Marc Lasry, who invested 1% of his net worth ($1.68B) into Bitcoin.
- Steven Cohen: announced his investment in a crypto hedge fund. Mr. Cohen is known as an institutional leader in investing. His admission signals to the ‘big fish’ that that the ‘water is fine – come on in’.
In the equity markets, the week ended a lot like the previous week – apart from trade policy worries, and concerns over monetary policy. Consumer-discretionary and energy sector losses were offset by a rise in staples and financials. For the week, the DOW managed a +0.2% gain while the S&P rose less than 0.1%. The Nasdaq posted a less than -0.1% decline which ended a string of two straight weekly gains. The Donald grabbed the headlines last week:
- Trump’s not thrilled with FED’s rate hikes: President Trump said he wasn’t thrilled by the FED’s rate increases; however, he was “letting them do what they feel is best. A tighter monetary policy only punishes the U.S. by contributing to a stronger dollar.”
- Trump’s going to $500B: President Trump threatened to impose more tariffs on China when he said: “We’re down a tremendous amount on our trade imbalances with China, and I’m ready to go to 500B.”
- Trump’s cracking down on drug prices: Pfizer became the first major pharmaceutical firm to defer any drug price increases. After Pfizer backed off, Merck and Novartis followed suit. Trump is turning up the heat because lowering drug prices was one of his major campaign promises.
Of the 48 S&P 500 members that have reported Q2 results, total earnings are up +23% on +10% higher revenues. As for a sector breakdown:
- Tech sector: Earnings for the sector are +23.5% on +11% higher revenues. This compares to Q1’s +31.1% earnings on +13.1% revenues.
- Financial sector: Total earnings are up +20.9% on +5.8% higher revenues, with 80% beating EPS estimates and 87% beating revenues.
- Transportation sector: The sector is reporting earnings of +22.4% and revenues of +9.5%.
- Other major sectors: The Energy sector is expecting earnings growth of +136.9%, followed by Basic Materials (+52.3%), Industrial Products (+25.3%), and Retail (+18.3%). Autos and conglomerates are the only ones expected to have lower Q2 earnings compared to their 2017 levels. Overall, Q2 earnings are expected to be up +20.4% from the same period last year on +8.3% higher revenues.
I’m kinda’ liking:
- Amazon(AMZN): because it closed at a record high of $1,843.93 on Tuesday, and boasted that its annual Prime Day was the ‘biggest in history’. Amazon is close on the heels of Apple (AAPL) in the race to become the first company to reach $1T in market cap.
- CSX Corp. (CSX) CSX is a momentum stock that posted a fresh all-time high of $69.46 on Friday. The rail-based transportation provider has room to jump by +14% in the weeks ahead given their solid Q2 results.
The earnings season will shift to high gear next week with a heavier influx of companies presenting their second-quarter earnings. Over the past year, corporate earnings have risen more than 20%. In addition, recent economic indicators suggest slightly faster growth ahead with solid job growth and modest wage pressures. The economic reports due over the week ahead are: global manufacturing PMI indicators (Tues.), durable goods orders (Thur.), and 2ndquarter GDP growth (Fri.).
Last week we broke thru that stubborn S&P 2800, and while they haven't piled in like madmen and jammed it higher – they certainly held us above it. Technically, there's NOTHING keeping us from breaking the all-time high level on the S&P at 2875. Will that happen? While it's possible, it's not going to be a cake walk if it does. Why? Because (a) the FED is increasing interest rates, (b) their Quantitative Tightening program moves from removing $15B to $40B this month, and (c) corporate earnings have ‘topped out’ between last quarter and this quarter. So, while there's no better alternative for a lot of investors other than the equity markets, I think we're in the final stages of the run. I know that's strong language, but let’s face facts – bull markets end. This is either the longest or the 2ndlongest bull run in history (depending upon its starting date). And, we can milk this last move higher – for all we can get. But when it fizzles, I think it will be time to institute some longer term short side trades. I didn't put them on last month due to earnings season being right around the corner.
I don't know if we will hit new highs before this market fizzles out, or if we roll over ahead of that milestone – but I have to think that this is it. The FED chairman has done his two day testimony to Congress, and the market didn't mind that. We're knee deep in earnings and for the most part they're doing well. We've broken over 2800 on the S&P – a resistance that has held for months. So in the short term, it looks like we're going higher.
Tips:
Top Equity Recommendations:
Marijuana stocks (HODL):
- Canntrust Holdings (CNTTF), and
- Canopy Growth Corp (CGC)
Crypto (HODL):
- Bitcoin (BTC = $7,500) - $40,000 by end of year,
- LiteCoin (LTC = $83.50) - $300 by end of year, and
- DASH (DASH = $252.33) - $2,500 by end of year.
Options:
- Google (GOOGL) – SOLD Jul 27, -1200 / +1195 Put Credit Spread,
- Lockheed Martin (LMT) – SOLD Jul 27, -320 / +317.5 Put Credit Spread,
- Mastercard (MA) – SOLD Jul 27, -200 / +197.5 Put Credit Spread,
- McDonalds (MCD) – SOLD Jul 27, -160 / +155 Put Credit Spread,
- Spotify (SPOT) – SOLD Jul 27, -177.5 / +175 Put Credit Spread,
- FXI - When you’re President Trump, you can try to fight the FED. But in China (where President Xi heavily influences the People’s Bank of China) the central bank can’t fight the dictator. And when the dictator says ‘devalue’ – you devalue. The falling yuan and stock markets have revealed the dangers in the sky-high leverage of the Chinese economy. 2018’s biggest bankruptcy in China happened Friday (Wintime Energy), but companies are still being encouraged to buy corporate bonds. The question is, how long will this pain last? There’s not much to suggest that the pain will stop anytime soon. That’s why even though FXI is the lowest that it’s been in a year, there could be more room to drop. If you think that FXI might continue to fall, the long PUT vertical that’s short the 40.5 PUT and long the 42 PUT in the Aug weekly with 42 days until expiration is a bearish strategy with a 66% probability of making 50% of its max profit before expiration.
- WMT– Remove your party hats because Prime Day is over. At this point, Amazon pretty much defines online retail. Wal-Mart (whose online retailing business is growing) has had a decent rally over the past couple weeks. Wal-Mart (WMT) is trying to play catch up with Amazon on reports that it’s looking to launch a video streaming service, but unless WMT is willing to write billion dollar checks for content – they may be relegated to second tier status. WMT earnings are coming up on Aug 16, but if you’re bearish on WMT and are willing to take risk through earnings, the long PUT vertical that’s short the 87.5 PUT and long the 89 PUT in the Aug weekly with 43 days until expiration is a bearish strategy with a 65% probability of making 50% of its max profit before expiration.
To 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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