This Week in Barrons: 10-21-2018:
Thoughts:
The Dumbing Down of America… Part 1
While Wall Street touts the news of a booming stock market and low unemployment, college students roll their eyes. The improved economy has yet to translate to higher wages for graduates already staring down the barrel of a potential six-digit loan obligation. Federal student loans are the ONLY consumer debt segment with continuous growth since the Great Recession. As the cost of tuition and borrowing continue to rise, the result is a widening default crisis that even FED Chairman Powell labeled as a cause for concern. Student loans ($1.5T) have grown over 150% since 2008. By comparison: auto loans have only grown by 52%, and mortgages and credit card debt have actually fallen by 1%. Increased student loan debt has caused our college students to spend as much time working as studying – as 85% of current students now work paid jobs while enrolled.
Unfortunately, federal student loan debt is showing 1 out of every 10 borrowers as 90+ days delinquent – which is the highest 90+ day delinquency rate of all household debt. And weirdly, those that are at the highest risk of delinquency are those who have incurred the smallest amount of debt. It seems that graduates who leave school with six-figure debt levels – like post-graduates, lawyers, and doctors show the lowest levels of delinquency.
Not only is the cost of higher education rising, but the cost of higher-ed borrowing continues to rise, with student loan interest rates rising to their highest levels since 2009 – 6.6%. Because student loans cannot be eliminated with a bankruptcy filing, FED Chair Powell said: “We stand to see longer-term negative effects on people who can’t pay off their student loans such as reduced: buying, borrowing and credit rating.” Student debt has delayed household formation. In 2017, an all-time-high of 16% of young adults aged 25 to 35 lived with their parents. And over 60% of student loan holders report frequent stress and anxiety over making their payments.
But it gets worse. The lowest number of students in our history are actually ready (curriculum-wise) to attend college. Only 40% of our 2018 high-school grads can do even the simplest of algebra-level math, and this study suggests that we’re not even close:
https://www.wsj.com/articles/act-scores-show-drop-in-college-readiness-especially-in-math-1539768600. The percentage of students meeting college-ready benchmarks has declined for the past 10 years in all subjects tested: English, Math, Reading and Science. ACT CEO Marten Roorda states: “Good math skills are vital to our economy not coming to a slowdown or standstill.”
Before we can discuss how we turn this around, we need to discuss how we got here. Major educators and educational institutions are beginning to come out in support of: “Getting back to basics in education, at the expense of de-emphasizing political correctness.” In one study, a group of ‘left of center’ scholars out of England found that political correctness was wildly unpopular with Americans across virtually every category – especially once you leave an inner-city environment. The data showed an unexpected unity among the vast majority of Americans across race, gender, and income lines in really disliking today's overly politically correct atmosphere. The 10-month study taken between December 2017 and September 2018 included a nationally representative 8,000 Americans, six small focus groups, and 30 one-hour interviews. Researchers identified seven segments of Americans including: a) progressive activists (8%), b) traditional liberals, c) passive liberals, d) the politically disengaged, e) moderates, f) traditional conservatives (18%), and g) devoted conservatives (9%). 65% of Americans are within the mainstream – aka outside the traditional or devoted conservatives, and progressive activist arenas. This 65% was termed the ‘exhausted majority’. According to the report, this large voting block shares: "a sense of fatigue with our polarized national conversation, a willingness to be flexible in their political viewpoints, and a lack of voice in the national conversation." The common thread across the ‘exhausted majority’ is a strong dislike for political correctness. In fact, the following consider the push toward ‘political correctness’ to be a major problem in our country:
- American Indians: 88%,
- Hispanics: 87%,
- Asians: 82%,
- Whites: 79%,
- Blacks: 75%,
- Incomes under $50,000: 83%,
- Incomes over $100,00: 70%,
- Never attended college: 87%,
- Post graduate degrees: 66%,
- Traditional conservatives: 97%,
- Traditional liberals: 61%, and
- Progressive activists: 30%
The takeaway is that other than the tiny percentage of Americans who are progressive activists, there is widespread, cross-category opposition to the sort of political correctness that makes it almost impossible to communicate without fear. And it is the lack of communication and intense segmentation that is holding back our educational system – and turning our teachers into glorified ‘baby-sitters’. An interesting quote from the survey came from an American Indian in Oklahoma who told researchers in a focus group: "It seems like every day you wake up and something has changed. Do you say Jew – or Jewish? Is it a black guy or an African-American? You’re constantly on your toes because you never know what to say. So political correctness in truly scary."
Dr. Yascha Mounk, a governmental lecturer at Harvard University, reviewed the study for The Atlantic magazine and admitted that maybe political correctness has caused elements to go too far. Maybe: Women Entrepreneurs, Minority Entrepreneurs, Tech Entrepreneurs, Biotech Entrepreneurs and even Crypto Entrepreneurs are really just (wait for it) … Entrepreneurs. Maybe: rather than finding and hiring 5 bad entrepreneurship teachers / baby-sitters specific to each ‘politically correct’ sector – we should just lump them all together, hire one great entrepreneurship professor and give the students a memorable experience. Who knew that we were doing it correctly 30 years ago – and all of this ‘political correctness’ has prevented us from moving forward?
Venture Capitalists used to look at a 30% success ratio as being the norm. According to MJP and others, those success parameters have been cut in half over the past 15 years – with government funding (your and my tax dollars) making up the difference. So, with all of our advanced insight and manipulation – we were able to turn a 30% batting average into 15%. That’s hardly cause for celebration. But, it clearly hi-lights the dilution in quality in favor of ‘politically correct’ segmentation. I suspect ‘political correctness’ will go the way of the ‘participation trophy’ – and my only questions are how long will it take to get there and what is the toll on our young people until it’s gone?
In the weeks to come, I’ll discuss what the visionaries are doing in regard to education, where they’re doing it, who’s helping them, and how they’re creating their own business models for funding.
The Market:
Info-Bits:
- Trump to Leslie (60 Minutes) Stahl: "Leslie, I am President, and you are not."
- Housing’s taking it on the chin: Last year a 30-year mortgage was 3.5% - now it’s over 5%. Mortgage applications fell 7% last week, and Refi's are down 35% year-over-year.
- SPY is talkin’ some Volume: On the 2 wicked down days last week, the SPY (S&P Index) traded about 250m shares/day. On the up day, it only traded 94m. Oops – look out below.
- U.S. economy is the World’s most competitive: On Wednesday, the World Economic Forum’s Global Competitiveness Report showed that the U.S. had regained its status as the world’s most competitive economy. The last time America held that distinction was in 2008.
- Ford unveils new SUVs just for China: Ford unveiled a new China sport utility vehicle. The company also plans to release new models that will help boost sales and make a bigger comeback in the world’s biggest auto market (China).
- PayPal springs into action: Analysts believe PayPal will soon be a major moneymaker. PayPal shared positive news about its peer-to-peer app Venmo which previously struggled to contribute to the company’s bottom line. But in the third quarter, its total payment volumes grew by a remarkable 78% to $17B.
- Nokia is ‘turning the beat around’: Expectations are high that Nokia Oyj will make a turnaround and elevate its low earnings bar. Foreign exchange conditions should work in their favor, and the broader market is likely headed for an upswing with the highly anticipated launching of the 5G wireless networks. Analysts are forecasting a 60% upside from $5.62 to $9+.
Crypto-Bytes:
- The Tokens r Coming: Caroline Wozniacki, #2 ranked tennis professional, has entered a partnership with Global Crypto Offering Exchange (GCOX) to found her own cryptocurrency token. Celebrity tokens will give buyers exclusive merchandise and interactions with their favorite celebrities. To purchase celebrity tokens, you must first acquire GCOX’s tokens. GCOX CEO Jeffery Lin is optimistic about potential sales saying:“We’re trying to gather around $450m”.
- Lazarus is back from the dead: The North Korean hacking group (dubbed Lazarus) has been linked to over 14 hacks (>$500m) since January 2017. The cybersecurity report stated that over $880m was stolen from exchanges in 2017 and 2018, and the number of hacks is likely to increase with the entry of traditional financial institutions.
- “Hey, who are the big hitters here?” Fidelity says they are, and the $7.2T asset manager is not easing into the crypto market through a pilot program or consortium membership – they’re jumping right in. Fidelity’s official launch, which is slated for 2019, has the following services queued up: (a) Enterprise-grade custody solutions, (b) A cryptocurrency trade execution platform, and (c) 24/7 institutional advisory services. Tom Jessop will head the initiative and said:“This is a recognition that there is institutional demand for these assets.” Make no mistake, in traditionally low liquidity markets a gorilla such as Fidelity can come in and perform large trades while hedging with OTC (over-the-counter) trades – and leave the retail investor holding the bag. But (make no mistake) this is a huge step forward for the industry. While others are erring on the side of caution – Fidelity is grabbing first mover advantage by the horns.
Last Week:
Wall Street is off to a wobbly fourth quarter start as the October sell-off continues. The DOW and S&P indices are still up +2.93% and +3.52% respectively for the year, with the Nasdaq is doing better with gains of +7.90% YTD. But with third-quarter earnings season underway and mid-term elections forthcoming, solid fundamentals and strong seasonality could take over in time for the Santa Claus rally.
Weed:
Last week recreational weed became legal in Canada. It is the 1stindustrialized country to legalize the green stuff for fun. For the most part, the legal smoking age is 18 – no selling to minors – no driving high – no edibles until next year, but otherwise – party on Garth. The government’s goal is to stop money from going to the black market and to make it harder for minors to get their hands on cannabis. There is a concern that there could be a shortage of legal weed, and we are seeing illegal drug dealers dropping prices to try to keep customers. In the U.S. it’s business as usual. You're good to smoke recreationally in 9 states plus DC (if you're 21 or over). 30 states have given the OK to medical marijuana, but federal law still says that it’s illegal. So, don't try to bring your new Canadian green friend back into the states with you.
Adults in Canada will also be allowed to cultivate up to four plants in their households, and make products such as edibles for personal use. Over the past 12 months cannabis has had a tremendous run, and now the question becomes: “Is there more to come?” It's not an easy question because at its roots – pot is a weed that anyone can grow. All a pot plant wants to do is grow up, and make more little pot plants. By allowing people to grow 4 plants each, it wouldn't take much for the Canadian population to supply themselves. So while initial demand will be off the charts – eventually supply could exceed Canadian demand. In the short term, the good pot stocks should be fine. But longer term, I think there's too much competition and we will see ‘survival of the fittest’. I’m looking for the cannabis stocks to take the: “buy the rumor – sell the news” hit – before buying again.
Next Week:
It’s been 3 consecutive weeks of Wall Street declines. As 3rdQtr. earnings season heats up, the focus will shift back to corporate fundamentals and bottom lines. There are early indications that in the aggregate, sales and earnings growth will remain strong; however, global growth concerns along with worries about rising interest rates are likely to be the main sources of volatility. In the week ahead we will see: Manufacturing PMI Indicators on Wednesday, Durable Goods Orders on Thursday, and Third-Quarter GDP Growth on Friday.
The math should be relatively easy:
- Low rates + $4T in FED QE = equaled an all-time market highs.
- Rising rates + $Bs being removed = equates to a falling market.
From the IMF to the BIS to our own FED – everyone is saying that it’s time to return to normalcy, but if we practice normalcy, we don’t have enough oomph to get back to the all-time highs. My theory for years has been: Debts that cannot be repaid - will not be repaid. It's not just the $21T you hear about that is supposedly our debt – it’s the over $100T when you add back the unfunded liabilities. There are only a few choices that can be made when you're in this deep.
1. Just continue to print, push the market higher – until one day the velocity of money breaks out and we experience hyper-inflation, OR
2. You do a system reset – replacing the current system with a new one.
This isn't something that just popped up in the last year or two. This has been a long, gradual process starting before the meltdown of 2008. So, the reason for this year’s wicked volatility (don't forget January’s flash crash) is that the fundamental underpinnings of the market have been gone for too long. Our growth isn't natural but rather built on the heels of taking on more debt. If we stop taking on debt (and that includes stock buy-backs), we can't grow. The FED has painted themselves into a box. They can’t leave emergency level interest rates in place with a stock market at 26,000 and putting out economic numbers that suggest we're in the best economy ever. They know that hiking rates will indeed nick the economy and the market, but they do not have a choice.
These volatile market swings are indicative of this bull market being near the end of its run. This recent action is a clear message that things are indeed fragile. I think we've seen the highs for the year. If they hike rates in December and this earnings season marks a peak in earnings – what’s left to fuel higher prices? Nothing. I have a feeling that we're going to pop and chop sideways for the next 60 days. So as we see this earnings season evolve, we're probably in for more 300 point market moves. In terms of additional micro-analysis:
1. The SPX (the ETF for the S&P) has a $66 expected move. In a world where $31 expected moves are the norm – a $66 move is way out of bounds.
2. The volatility of the volatility index (VVIX) is at $115 – which means that big funds are buying protection like crazy.
3. The XLF (the ETF for the financials) is sitting at $26.50. If we break below that level, there will a lot more downside. FYI - algos have purchased a lot of PUTs around the $26.50 level.
4. The IWM (the ETF for the Russell Small-Caps) is continuing to be sold. It has fallen 15% over the past month and a half.
5. The XHB (the ETF for the housing market) has been pummeled and is at a point where construction companies are potentially going to begin to lay-off workers.
6. Watch Visa (V) and Mastercard (MA) for prolonged volatility. Both will be bid-up going into their earnings, and then potentially sold.
7. Watch the FEDs balance sheet as it continues to be reduced – taking money out of circulation and slowing down the economy.
Tips:
Top Equity Recommendations:
HODL’s:
- Aurora(ACBFF = $9.97 / in @ $3.57),
- Amarin(AMRN = $19.72 / in @ $2.90),
- Canntrust Holdings(CNTTF = $9.25 / in @ $3.12),
- Canopy Growth Corp(CGC = $46.85 / in @ 22.17),
- Ceco Environmental(CECE = $7.35 / in @ $6.95),
- Correvio Pharma(CORV = $3.28 / in @ $4.79),
- Cytokinetics(CYTK = $7.26 / in @ $7.25),
- Eyepoint Pharma(EYPT = $2.65 / in @ $3.25),
- Geron Pharma(GERN = $1.68 / in @ $3.75),
- Managers Alt Harvest(MJ = $37.45 / in @ $38.02), and
- Protalix BioTheraputics(PLX = $0.54 / in @ $0.75)
Thoughts:
- United Technologies (UTX= $128.68 / +0.87% YTD): With their recent acquisition of Rockwell Collins, UTX has created an opportunity to expand its commercial aircraft design capabilities. UTX boasts a conservative balance sheet and impressive free cash flow which translates into financial flexibility for strategic acquisitions and capital returns going forward. Analysts have a median target of $157.00 (+22.0%) for UTX and a high estimate of $195.00 or a +51.0% upside potential from its current price of $128.68.
- CVS Health (CVS= $74.18 / +2.32% YTD): The U.S. Justice Department has given the green light to CVS to proceed with the Aetna (AET) merger. CVS now has the opportunity to reshape the healthcare industry by creating a “Store of the Future.” The integration of CVS and Aetna data, analytics, and services into CVS stores and morph them into health care service destinations will turn this dream into a reality. Analysts see CVS popping to a high of $106.00 or a +43.2% increase in the months ahead.
Crypto:
- Bitcoin(BTC = $6,600) – “$10,000 by end of year is a no-brainer” M. Novogratz.
Options:
- Canopy Growth(CGC): Bullish: Nov 19, -50 / +47.5 Put Credit Spread,
- Microsoft(MSFT): Bullish: Oct 26, +112 / -115 Call Debit Spread,
- Russell Small(IWM): Bullish: Nov 16, +170 / -175 Call Debit Spread, and
Thoughts:
- Costco (COST): As Sears dies, I’m wondering if Costco will rise even higher. The thought of an 80-foot meat counter near a giant display of batteries along with the $1.50 hot dog is something I can sink my teeth into – and last week’s earnings suggest that I’m not alone. COST rallied after solid numbers in traffic and e-commerce sales. If you think that COST might continue to rally into the holiday season as people buy meat and batteries as stocking stuffers, the long CALL vertical that’s long the $222.50 CALL and short the $227.50 CALL in the November weekly expiration with 45 days to expiration is a bullish strategy with a 64% probability of making it.
- Wynn’s (WYNN): WYNN is the lowest it’s been in about 18 months due to the uncertainty in the Chinese economy and how that will impact Macau. But WYNN is expanding its sports betting business. Earnings are coming up on Oct 25, and have pushed WYNN’s IV rank to 88% - which makes it attractive for short premium strategies. Given WYNN’s underperformance in relation to the rest of the market, if you think WYNN may stay off its bottom and bounce back up – the short PUT vertical that’s long the $108 PUT and short the $110 PUT in the November weekly expiration with 43 days until expiration is a bullish strategy that has a 75% probability of making it.
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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Until next week – be safe.
R.F. Culbertson
