This Week in Barrons: 12-16-2018:
Sustainability: (Sus·tain·a·bil·i·ty / noun / the ability to be maintained at a certain level). With the onset of a down market, words like sustainability and profitability are being uttered with greater volume and with more frequency when evaluating investments. After all: (a) non-profits are seeing endowments shrink, (b) governments are looking at reduced tax revenues, and (c) small businesses (including crypto) are being forced to show positive bottom-lines. Organizations are saying words that they haven’t said in a decade like: cutbacks, layoffs, and ‘No’.
Sustainability is hitting school endowments because they are dramatically underperforming the market. It seems our nation's school endowments (since 2009) have earned 5.5% LESS than the normal investment portfolio. If school endowments continue to underperform, the obvious place to make up that lost revenue is via tuition increases. The double whammy with universities is that they’re only graduating 50% of the people that enroll. “It’s a completion crisis not a debt crisis,” said University President Michael Crow. "If you finish in debt, you'll be able to eventually manage your way through it. But if you have debt and don't finish – you have a huge problem.” This sustainability indicator is just another sign that the current higher-ed model is on its way out – one way or another.
Sustainability of our high schools is also in question given the current shift toward Charter Schools. Pick a student niche (special needs, gifted, arts, etc.) and I’ll show you a charter school that is being created for that specific niche that will operate cheaper, faster and better. It reminds me of the way ‘mini-mills’ dismantled the steel industry in our country – one customer niche at a time. Research done by Dr. Jonathan Plucker of Johns Hopkins, shines a light on the ‘excellence gap’ within a lot of these niches – and focuses on an emersion philosophy that is virtually non-existent within the current public high school framework. A typical charter school solution starts with the parents and educators providing opportunities for a child’s talent to surface, and then providing the leadership necessary to move that talent to exceptional levels. As a starting point schools need to: (a) increase the visibility of high-performing students, (2) eliminate the barriers that prevent high-achievers from moving through coursework at a pace that matches their ability, (3) ensure that all high-ability students have access to advanced educational services; and (4) hold local education agencies accountable for the performance of high-ability students from all economic backgrounds.
Sustainabilityhas finally resurfaced as a way of educating and investing in our small business community. When the marketplace was forever rising – elements were ignored because a ‘rising tide lifted all boats’. However, in a declining market environment – financial rigors are being introduced that leave small businesses feeling uncomfortable. For example, a vast majority of the crypto-community has flown under the radar until recently. You can imagine being ConsenSys (ETH) and being forced to watch your currency plummet from $1,500 to $80 over the past 10 months. A day after confirming that 13% of its staff would be cut in a “restructuring of priorities,”– the company agreed to field questions from its 1,200 employees. They came fast and furious: “How long do we have to live? Can I forfeit my job to someone else who was fired? Do our original values mean anything anymore?” CEO Joe Lubin told the audience: “We’re taking a careful look at financial sustainability.” In every new technology, the financial side of the revolution comes sooner and faster than anticipated – and often comes in multiple waves.
Sustainabilityis also touching the investment community – causing them to ask the question: “Who and when will someone buy this thing?” Investors are finally having little patience with: flawed business models, capricious employee compensation structures, and are more openly asking the question: “Are you trying to make money, or just recklessly spending mine?”
Sustainability is front-of-mind on the Gimlet Media podcast titled “The Pitch.” It is the place where “real entrepreneurs pitch to real investors – for real money.” Ms. Jillian Manus (a regular judge on “The Pitch”)approaches the startup capital-raising game from a kinder and more instructional perspective. In the latest episode, Ms. Manus addressed the sustainability issue straight-away by saying, “In any investor meeting, the first question we ask ourselves is: Do we know 1,000 people who would buy this product – or do we know 3 companies where this product would either advance their brand or solve their problem?” As an example of “The Pitch”:
Rezzio’s Jessica Sarkisian described her company as: “Solving a university’s career services issue. Today’s career-service department averages 1 advisor for every 3,000 students. Rezzio’s software is designed to deliver personal, career-ready, skills-development advice along with helping the career-service department manage their work load.” Judge’s Response: “So your sustainabilityis based upon collecting from two parties – both with virtually no money? How will you ever survive?”
Swirl’s Munir Pathak said: “Diverse and inclusive organizations are 2 times as likely to meet their financial targets, 6 times as likely to be innovative and agile, and 8 times as likely to achieve better business outcomes. Swirl builds inclusive cultures by matching, introducing, and coaching employees through a relationship with a new colleague every other week.” Judge’s Response: “With a B2B sale, it will take you years to measure the results. It’s not sustainable. You’ll run out of cash before your 2ndsale.”
Strella Biotech’s Katherine Sizov said: “The average apple in a grocery store can be 8 months to a year old. That’s because they’re stored in packing facilities, with hundreds of storage rooms, and inside each hermitically sealed (no oxygen) storage room are millions of apples. The packer doesn’t know where his ripest produce is – so worst case the fruit inside has spoiled causing $1m worth of losses. Strella makes biosensors that are installed inside storage rooms that monitor fruit as it ripens. We save money for our clients and reduce global food waste.” Judge’s Response: “So you’re a million dollar insurance policy that never expires or goes out of style. Why wouldn’t I buy your product?”
Ms. Manus then offered some sage advice: “Your brand narrative is the most important thing you own. If you can’t talk about your product, you’re not going to be able to sell it. If you can’t SELL IT – then begging will no longer get it done.” Stella won the investment because of their customer knowledge and sustainability. After all, the #1 reason small businesses fail is: “They run out of money.”
The Market: Which Wall Street forecasters should I listen to now?
These well-respected fund managers were given the following grades based upon their advice and corresponding market actions.
Grades = D & F (failed miserably at virtually every turn in the market):
- Ray Dalio (the head of the world’s largest hedge fund) Grade = F He went full bull saying: “Investors are going to feel pretty stupid if they sit around in cash in 2018. We are in this Goldilocks period right now. Inflation isn’t a problem. Growth is good, everything is pretty good with a big jolt of stimulation coming from changes in tax laws.”
- Fundstrat Advisors (Thomas Lee)Grade = F S&P @ 3,025 at EOY.
- Miller Value Partners (Bill Miller) Grade = F “This market lifts higher 30%.”
- UBS (Keith Parker)Grade = F S&P @ 3,150 at EOY.
- B of A / Merrill Lynch (Savita Subramanian) Grade = D- S&P @ 3,000 at EOY.
- CFRA (Sam Stovall) Grade = D- “My price target of 3,000 is looking good.”
- Credit Suisse (Jonathan Golub)Grade = D- S&P @ 3,000 at EOY.
- Deutsche Bank (Blinky Chadha)Grade = D- S&P @ 3,000 at EOY.
- J.P. Morgan Chase (Dubravko Lakos-Bujas) Grade = D- S&P @ 3,000 at EOY.
- Goggenheim (Scott Minerd) Grade = D- In Oct. said: “Stocks can rally 20%.”
Grades = B & C (you win some / you lose some):
- Citigroup (Tobias Levkovich) Grade = B- S&P @ 2,800 at EOY.
- Goldman Sachs (David Kostin) Grade = C S&P @ 2,850 at EOY.
- Wells Fargo (Scott Wren) Grade = C S&P @ 2,850 at EOY
- Morgan Stanley (Mike Wilson) = S&P @ 2,750. Grade = B
- John Hussman said: “The S&P will ultimately fall below 1,000.” Grade = B
- The Slope of Hope (Tim Knight) forecast: “A brutal finish to the year. There might be a severe political crisis or a debt choking crisis – but a vicious selloff will begin that will dwarf what was seen in the autumn.” Grade =B+
Grade = A (were amazing in the foresight and industry):
- LMAX Exchange (Joel Kruger) Grade = A "I’m seeing risk liquidation fears in December. If we take out the yearly low, I would expect an acceleration at which point it could get ugly.”
- Market Anthropology Blog (Erik Swartz) Grade = A “A big unwind in stocks is starting, and it resembles what happened to silver seven years ago. Equities are taking the long goodbye.”
- Ralph Acampora (a well-known market technician)Grade = A “From a technical perspective, the market damage is much worse than people think. The FANG stocks breaking down is the clearest sign that the bull market has turned.”
Info-Bits:
- Yellen warned: of another potential financial crisis: “I think things have improved, but there are gigantic holes in the system – such as the amount of leverage surrounding our loans."
- It tastes like chicken: was all could be said after eating a lab-grownbatch of chicken nuggets. Eating ‘test-tube’ chicken is not a question anymore.
- Willy, is that you? A small town in Germany experienced a technical glitch when it’s streets were suddenly paved with chocolate after a factory mishap.
- Google me: Google CEO Sundar Pichai faced a whole bunch of search queries from Congress last week. Pichai repeatedly denied any political bias and also said the words "follow up"a lot. Darn Google, what happened to turning out results in fractions of a second?
- What’s after a ‘death cross’: a scary ‘head-and-shoulders’ pattern for the S&P – that’s what. It’s signaling a market top that could sell off down into 2,300.
- 6 Digital Privacy Tools you should be using:
1. a VPN:a “Virtual Private Network” routes your internet traffic through a secure server – hides your browsing info. and your location. ExpressVPN and Private Internet Access VPN are two good ones.
2. a Private Web Browser: such as Brave. If you don’t like that one, then at least switch to Apple’s privacy-focused Safari browser.
3. a Secure Messaging App: such as Signal– which is what Edward Snowden uses. At least STOP using Facebook Messenger.
4. a Password Manager: Some of the best password managers are Dashlane,1Password, and the free one included with Apple’s macOS Mojave and iOS 12.
5. an Encrypted Hard Drive: for MACs, simply enable FileVaultprotection, and for Windows download DiskCryptorfor free.
6. a Data Destroyer: to make sure your deleted files are really deleted, MACs use CleanMyMac, and PCs use CCleaner– both are free.
Crypto-Bytes – How do we keep getting the price of Bitcoin soooo wrong?
It really depends a lot more on who you trust – because predicting the future accurately is not a thing. I know that stock market strategists give forecasts of where the market is going in 3, 6, or 12 months – but they’re just guessing. The following are a couple crypto guestimates, but using their guesses as an investment guide is a fool’s game:
- Pantera Capital $20,000 by the end of 2018
- Tom Lee (Fundstrat) $25,000 by the end of 2018
- Anthony Pompliano $50,000 by the end of 2018
- John Pfeffer $75,000 by the end of 2018
- Kay Van-Petersen $100,000 by the end of 2018
- Alistair Milne $35 to $60,000 by the end of 2020
- John McAfee $1,000,000 by the end of 2020
- Tim Draper $250,000 by the end of 2022
- Brian Kelly $250,000 by the end of 2022
Maybe we start with Bitcoin being a ‘store of value’. Over the long haul maybe it provides a return along the lines of other ‘stores of value’ like Gold. Since 1971 (when Pres. Nixon took the U.S. off the gold standard), inflation has averaged 4%. This means that your buying power was reduced by 50% every 17 years, and what cost$1 in 1971 costs $6.51 today. Given that case, the U.S. dollar is a terrible store of value. Gold (on the other hand) has held its relative value since 1971. It took 4 years for gold to settle in as a store of value, but after that time period – the average price increase in gold was less than 1% above the inflation rate during that period. So Bitcoin is still in that early phase of transitioning to be a store of value. Like gold in its early days, Bitcoin has seen a dramatic rise in value (112%) over the past 2 years. And like the stock market, the forecasters who ALL expected the S&P to go up – it also went the other way. I think there are 3 possible outcomes for the price of Bitcoin:
1. Bitcoin fails as a store of value, and in this case Bitcoin is worthless.
2. Bitcoin surpasses gold as a store of value, and in this case would mathematically be worth a little more than $145,000 per coin.
3. Bitcointakes second place (similar to silver) as a store of value. Using the same relationship as silver to gold – Bitcoin would then be worth around $3,346.
One of the most interesting things about Bitcoin is that it can evolve. Even if the likelihood of Bitcoin surpassing gold is small, it still looks very compelling from a risk / reward point-of-view.
Weed & Bio-Tech:
Aurora Cannabis (ACB = $5.91 / -16.75% YTD): Aurora is buying out its distribution partner, Farmacias Magistrales De Mexico. Farmacias Magistrales is Mexico's first and only federally licensed importer of raw materials containing THC (the psychoactive ingredient found in cannabis). Therefore Aurora has just gained: a) exclusive access to a 130m person market, b) 80,000 retail outlets that sell CBD products and c) 500 pharmacies and hospitals that sell THC products.
Lexicon Pharmaceuticals (LXRX = $7.40 / -25.10% YTD): The stock of Lexicon Pharmaceuticals has been down for most of 2018. Its new drug is Sotagliflozin, and is an experimental medicine designed to improve glycemic balance for Type 1 and Type 2 Diabetes. Analysts expect a breakthrough for LXRX in 2019, and are offering 12-month price forecasts of low +35%, median +184%, and high +468% ($42). Lexicon partnered with Sanofi SA on the drug. Lexicon will develop the Type 1 Diabetes market while Sanofi takes the lead for Type 2 Diabetes trials. Once approved, sales of the drug could easily top $1B in 2019.
Supernus Pharmaceuticals (SUPN= $37.20 / -6.65% YTD): Supernus is riding high on two successful epilepsy drugs called Oxtellar XR and Trokendi XR. Their drug pipeline also looks promising with two hopeful treatments for attention deficit hyperactivity disorder called SPN-810 and SPN-812 in late-stage trials. The chances of approval are bright, and the drugs could hit the market within a year or two. Analysts are predicting a gradual rise for SUPN: low = $44 (+18%), median = $59.00 (+58.6%), and high = $80.00 (+115%).
Last Week:
Next Week:
Not even Santa can save this market. Months ago I said that the "top" was set back in January of 2018. Unfortunately, tops are not formed by rushing straight up and then falling straight down. ‘Topping’ is a process, where you first put in a top, and then for months try and retake it. In October, we exceeded the January top by a couple hundred points but couldn't hold it. Since then it's been nothing but a confusing mess of lower highs and slightly lower lows. I also recognize that the ‘powers-that-be’ do not want this market to have topped. A lot of our financial structure is built around a market that continues to go higher. There are credit backed asset prices, derivatives and every other financial arrangement possible – all designed with an upward bias. Think about it – our government changed the GDP and inflation calculations just to keep the market moving higher. All I’m looking for right now is a ‘Hail Mary’ that will take us into January. Will we get it – maybe not? But think about buying some long protection if you need it – especially in the financials (XLF) and the Russell Small Caps (IWM). After all, if our banksters can make it happen, they will. Factually:
- This Wednesday we have an FOMC announcement on interest rates, and a news conference with Chairman Powell following the announcement. There is a 78% chance that the FED will bump rates ¼ point higher this week.
- The ‘Volatility Box’ on the S&Ps runs between 2,600 and 2,800. Right now we are balanced precariously on the lower edge of the box. The financials (XLF) and the Russell Small Caps (IWM) have broken down (outside of their respective boxes) and this puts them in a tough position.
- I’ve seen this movie before. Right when you expect the world to ‘go to heck in a hand basket’ – it moves the other way. Because of the ‘over-sold’ condition, the XLF and IWM could spark a ‘rip your face off’ rally to the upside.
- To that end, here are two extremely inexpensive trades that will act as excellent hedges if this market explodes to the upside – with little downside risk:
1. For 7 CENTS = XLF … Dec 21st= Sell (1) $24.5 Call / Buy (3) $25 Call. This is a Call Ratio Back Spread that delivers very little downside risk, but huge upside potential. Sell the morning of the 20th.
2. For 19 CENTS = IWM … Dec 21st= Sell (1) 140.5 Call / Buy (2) 142.5 Call
- It follows the philosophy – buy protection when you can / not when you have to.
Time is running out. If there is no ‘save’ soon – there won't be one. If the market has priced-in one more FED raise and there’s no trade deal by January – it could get ugly in a hurry. Will the markets go into yearend in a full sell mode? While that’s possible – it’s pretty rare. I will be the first to admit that a Santa Claus rally is looking ever more questionable. If this market does roll over for good, it could fall a long way. After the big wash out we had Friday, we can probably expect some upside trading for a day or two. After that it's anyone's guess. If you’re mostly in LONG positions, please be careful out there.
Tips:
Top Equity Recommendations:
HODL’s:
- Aurora (ACBFF = $5.91 / in @ $3.57),
- Canntrust Holdings (CNTTF = $5.46 / in @ $3.12),
- Canopy Growth Corp (CGC = $30.92 / in @ 22.17),
- Ceco Environmental (CECE = $7.38 / in @ $6.95), and
- NVAX (NVAC = $2.42 / in @ $2.04)
Thoughts:
- AMRN long
Crypto:
- Bitcoin(BTC = $3,250)
Options:
- BIDU (BIDU): Bearish: Dec 28, +172.5 / -175 / +177.5 Put B-Fly
- Canopy (CGC): Bullish: Jan 18, -40 / +35 Put Credit Spread
- FB:Bearish: Dec 21, Buy the +120 / -130 / +135 Put B-Fly
- NVDA:Bearish: Dec 21, Buy the +140 / -147 / +150 Put B-Fly
- XLU: Bullish: Dec 21, Buy the +56 / -57.50 / +58.5 Call B-Fly
- XLF:Bullish: Dec 21, Sell (1) $24.5 Call / Buy (3) $25 Call – for 7 cents. Sell this the morning of the 20th
- IWM:Bullish: Dec 21, Sell (1) $140.5 Call / Buy (2) $142.5 Call for 19 cents. Sell this the morning of the 20th
- MCD: Bearish: Jan 11, Buy $187.50 / Sell $185 Put Debit Spread
- MSFT:Bearish: Jan 11, Buy $112 / Sell $110 Put Debit Spread
Thoughts:
- AAPL: Apple will be building a $1B campus in north Austin over the next 3 years. That gives the BBQ restaurants time to plan for the influx of people. AAPL’s market cap was over $1T back on Nov 1 and has since dropped to just above $800B billion (less than MSFT @ $840B). AAPL’s implied volatility rank is 72%, which means that its option prices are relatively rich. If you think AAPL’s optimism for its expansion might carry over to its stock price and keep it from falling any further or even rally – then the short put vertical that’s long the +162.5 PUT and short the -165 PUT in the Jan weekly expiration with 42 days until expiration is a bullish strategy that collects a credit 1/3 the width of the strikes, has a 77% probability of making 50% of its max profit before expiration.
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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R.F. Culbertson
Until next week – be safe.
R.F. Culbertson
