This Week in Barrons: 2-17-2019:
“My 3 Favorite thingsare bacon, donuts and you. Ooops – I forgot tacos.” … Happy V-Day
The Manipulated Market:
On December 24th, 2018 – only 1% of all stocks in the S&P 500 closed above their 50-day moving average. It was one of the most extreme oversold levels in history. On February 15th, 2019, following a 18% vertical rally – 92% of all stocks in the S&P 500 are above their 50-day moving average. That’s the highest level since April 2016, and in the 98th percentile of historical readings. Do you think that somehow, on December 27th, millions of investors around the world decided on the exact same day and time to go ‘all in’ for stocks – despite the failing economic reports? OR do you think our friends in the Plunge Patrol Team (PPT), decided that it was time to stop the market from going down, bought a lot of S&P futures, which led to the algorithms buying the indices, and that then led to some fraction of investors getting back into the market?
Also consider this: our FED could be on the verge of an implicit ‘whatever it takes’ moment. On Friday, San Francisco FED President Mary Daly revealed that the FED is considering using quantitative easing (QE) more regularly, and not just as a last resort. Such a move would seem to suggest that our FED isn't about to let a crisis of investor confidence drag the U.S. back into a recession. This kind of talk is reminiscent of ECB President Mario Draghi's ‘whatever it takes’ vow in 2012 to resuscitate the euro. Our FED surely had its reasons for making its thoughts public. Numerous economists and investors have warned that the next recession could be hard to shake-off given that deflation, pensions, deficits, and political populism would all rise to the surface. So for everyone that ‘eye-rolls’ me when I talk about the plunge patrol team – add to that ‘QE Anytime’ and ‘QE Forever’. We now know that:
Also consider this: our FED could be on the verge of an implicit ‘whatever it takes’ moment. On Friday, San Francisco FED President Mary Daly revealed that the FED is considering using quantitative easing (QE) more regularly, and not just as a last resort. Such a move would seem to suggest that our FED isn't about to let a crisis of investor confidence drag the U.S. back into a recession. This kind of talk is reminiscent of ECB President Mario Draghi's ‘whatever it takes’ vow in 2012 to resuscitate the euro. Our FED surely had its reasons for making its thoughts public. Numerous economists and investors have warned that the next recession could be hard to shake-off given that deflation, pensions, deficits, and political populism would all rise to the surface. So for everyone that ‘eye-rolls’ me when I talk about the plunge patrol team – add to that ‘QE Anytime’ and ‘QE Forever’. We now know that:
- Without monetary injections – our markets will go in the tank,
- Europe is in a recession given their 2ndconsecutive negative quarter, and
- Capital markets lead economies – not the other way around.
Last week we found out that December’s retail sales actually FELL 1.2%. In fact, if you remove auto sales – retail sales actually FELL 1.8%. So much for that healthy consumer. That’s the worst retail sales reading in nine years. I find it ironic that Wall Street can say that the markets are a forward looking mechanism and in the same breath rationalize an 18% upward move with retail sales collapsing, applications to buy houses falling like a rock, and major corporations missing revenue and earnings targets.
We are in the ‘irrational’ part of a market cycle. That comes from an old Alan Greenspan quote: “Markets can stay irrational, longer than you can remain solvent.” No fundamentals are driving this market – only China hopium and FED ‘QE forever’. Oh did I fail to mention that the Atlanta FED (last week) cut their GDP estimate from +2.7% growth to a mere +1.5%. That's a huge reduction, and still the market went up. “Can you say manipulation?”
We are in the ‘irrational’ part of a market cycle. That comes from an old Alan Greenspan quote: “Markets can stay irrational, longer than you can remain solvent.” No fundamentals are driving this market – only China hopium and FED ‘QE forever’. Oh did I fail to mention that the Atlanta FED (last week) cut their GDP estimate from +2.7% growth to a mere +1.5%. That's a huge reduction, and still the market went up. “Can you say manipulation?”
But how can anyone manipulate our markets? It starts with the PPT – or more correctly called: the President's Working Group on Financial Markets. They were created by President Reagan in March 1988, when he signed Executive Order 12631. At the time the PPT had 3 jobs: (a) To identify and consider the major issues surrounding the stock market crash of 1987, (b) To consult, as appropriate, with representatives of various exchanges, clearinghouses and other Wall Street bodies, and (c) To keep bad things from happening again. They have unlimited funds, and are extremely adept at covering their tracks.
In December, our markets fell faster and further than any time since the Great Depression. Because of that, Steve Mnuchin (Sec. of Treasury) engaged the PPT to ‘fix’ things, and from that day forward – the markets have gone straight up. So how do they do it? There's a lot of things they can use, but their favorite trick is via the futures market. They use the futures market because of leverage. To purchase futures you only need between 3% and 12% of the actual value – so for one-tenth the cash outlay they can buy an outlandish amount of futures contracts.
After that, we move into the arbitrage arena. When the machine algo-bots notice a large purchase of futures contracts, they naturally get excited about potential good news and immediately follow the futures buy. In anticipation of this good news, they initiate their own index buys – in order to get the spread between the futures and the actual market indices closer. Think of it as: shooting first and asking questions later. When I’m talking about futures, I’m talking about the S&P ‘E-Mini’ contracts (/ES) which will then cause the algos to purchase the S&P basket (SPX). However, not all the algos have the ability to buy the SPX, so some of the buying gets funneled into the SPY. Despite having unlimited resources, the PPT accomplishes their task with the use of futures and a relatively minimal cash outlay. They take advantage of the enormous leverage to buy futures (/ES), the algo-bots see the spread widening and buy the S&P (SPX), and because the S&P ETF (SPY) mimics the S&P – it moves up as well. I hope that helps explain how the PPT can manipulate the markets, and why things no longer fundamentally make sense.
Info-Bits:
The average American aged 25 to 36 is in debt to the tune of about $42,000. Most is from credit cards and not from student loans. Credit card debt is largely psychological, and here are 3 quick fixes:
- Stop buying $4 coffee: Personal investing app ‘Acorns’ found that the average American spends about $1,100 per year on coffee, or about $92 a month. That is more than the amount 50% of Americans invest per month.
- Stop buying shoes: Learn to live with 4 pair of shoes. Shoe retailer DSW found that 75% of women own more than 20 pairs of shoes, with the average man owing 12 pairs. The average person buys 8 pairs / year, and only wears 4.
- Stop buying jeans: Learn to live with 3 pair of jeans. Americans spend $38.5m on denim pants every day – that’s 650,000 pairs of jeans purchased every day. Learn to wear what you already own.
- It’s all over but the cryin’: Amazon announced that they are no longer willing to build a HQ in NY. Imagine being one of the people that bought NY real estate – expecting a boom. Oh-well, bye-bye Bezos – we hardly knew ya.
- But Google’s expanding: The tech giant said it's investing $13B in new offices and data centers around the US. The new digs will come with tens of thousands of jobs. Oh, that includes a $1B campus in NYC. Timing is everything.
- Coke is KO’d: Coca-Cola fell over 7% after a disappointing 2019 outlook. Do you think it’s because they haven't hopped on the cannabis (CBD) train yet?
- Not so Hot Wheels: Mattel fell 20% making it their worst day since 1999. They beat expectations in large part due to Barbie and Hot Wheels, but warned of poor sales for 2019.
- Cruise Control ain’t workin’: XPO Logistics cut guidance for 2019 – plunging 13%. Their biggest client (Amazon) will be using less of their delivery services.
- Amazon – Come on Down: Remember QVC – the station that sells everything from jewelry to skincare to snuggies? Well, Amazon is ready to take ‘em on. Amazon Live will be where hosts discuss and demonstrate Amazon’s products, and allow purchases from a carousel below the content. At least you always know with Amazon: ‘The Price is Right.’
Crypto-Bytes:
- Domino’s Pizzanow accepts Bitcoin.
- Binance (BNB) saw a massive 61% price surge last month.
- Kaspersky Labssays that 13% of the world has used Bitcoin to buy stuff.
- Businesses accepting Bitcoinhave surged by over 700% Y-O-Y.
- Jamie is talkin’ trash again: I’m ready for the CEO of JP Morgan (Jamie Dimon) to insult bitcoin (“It’s a fraud”). It seems out of character than for his bank to prepare for a future where blockchain is a large part of their financial infrastructure including launching their own cryptocurrency – JPM Coin. Unfortunately, when you ‘bad-mouth’ a sector, and then turn around and join that same sector – I begin to look at you like ‘Wells Fargo’. Who can I trust? Jaime, it’s bad enough that:
o You claimed to be the 1st bank to be moving money via cryptocurrency, when Signature Bank has been doing it for years.
o You claimed your technology was built in-house, but it was actually built by mercenaries and licensed from other crypto-firms.
o Mr. Dimon, please learn how to tell the truth. It’s all on the blockchain.
- Con-stan-tin-hopeful: The Ethereum community will shortly try and execute its system-wide upgrade. The hard fork was previously scheduled for mid-January, but was postponed after discovering a security bug.
- Ripple’s hiring incentives: Ripple goes out of its way to say that it did not create a cryptocurrency, but that doesn’t seem to stop them from relying on their token to court, incentivize, and sign new hires. Lately, Ripple’s hiring bonuses range from $1m to $6m in XRP tokens.
- Jack O’Lightning: A bitcoin scaling solution called the Lightning Network may soon come to Square’s cash application for mobile payments. Twitter and Square CEO Jack Dorsey (also an investor in Lightning Labs) announced that there are plans to integrate the scaling technology into Square’s mobile app.
- Cheaper by the Oracle Dozen: According to Oracle, they now have up to dozen enterprise customers – using live applications – running on their cloud-based, blockchain platform. This includes a cargo tracking consortium (Global Shipping Business Network), an educational and professional certification group (China Distance Education Holdings), a conflict minerals company (Circulor), and a solution for dealing with invoices between franchisors (SERES). Another dozen are in the wings.
- The Mitsubishi Payments Platform: Mitsubishi (Japan’s largest financial group and the world’s 5th largest bank) is launching a blockchain-based payments network next year. It will be called the Global Open Network and will be capable of processing over 1m transactions per second.
- The Canadian Mt. Gox: The circumstances surrounding the collapse of the Canadian crypto exchange QuadrigaCX continue to alarm users, and some are beginning to pick fights over who should receive their funds first. However, numerous inconsistencies and other concerns continue to surround the entire QuadrigaCX situation. One theory is that Cotten (the founder) did not actually die, but rather invented this hoax as an exit scam. The company has yet to reveal any addresses associated with its missing cold storage wallets – leading some to believe that the wallets never existed.
- Just my 2 satoshis.
Last Week (we learned):
The Venezuelan Bolivar is now worthless. Their inflation rate is over 1 million percent, and yet they still control the world’s largest oil reserves. If you don’t think this could happen to the U.S. – think again. Your only protection would be physical precious metals or (of course) your crypto-currency holdings.
There are signs that the economy is truly slowing down:
- Retail sales FELL 1.2% in December,
- Home buying is grinding to a hault,
- Major corporations are missing revenue and profit targets,
- The FED is hinting at doing QE forever, and
- The Atlanta FED just lowered their GDP estimates from +2.7% to +1.5%.
This hasn't affected hiring as of yet. In fact, the number of job openings hit their highest level in almost 20 years at the end of 2018.
Last week the markets loved the fact that the China talks are continuing, and that the FED would use QE more often. Talk about throwing in the towel and the kitchen sink. They must be desperate to keep this market up and moving higher. Hinting about using more QE is just NOT normal.
Last week’s predicted move in the S&Ps (by the option pits) was $41, and in reality we moved $71 – almost twice as much as expected. That means that all of the real data that was released meant nothing to investors. The retail sales figures were so bad that people didn’t believe them, and all they heard was that the FED had their backs. But do they really? As silent as the FED has been about raising interest rates is as active as they’ve been at continuing to reduce the balance sheet. It’s getting scary out there.
Weed & BioTech:
These companies could be the next marijuana companies to IPO in 2019:
- Pax Labs: This cannabis-focused vaporizer company (www.paxvapor.com) raised $20m in October and was founded by James Monsees and Adam Bowen – who also launched the nicotine vaporization maker Juul. Juul has separately been valued at roughly $15B by investors, which now includes Altria. Pax produces vaporizers designed to be used with cannabis flour, and a pen and pod system for use with cannabis oil. Because Pax does not produce or touch marijuana, it’s possible it could list on a major exchange like the NYSE.
- KushCo: KushCo (KSHB) produces packaging for various forms of marijuana products. KushCo could be one of the first stocks that will allow institutional investors to feel safe about betting on the cannabis industry.
- Harborside:Doing business as FLRish and as Harborside, the chain of retail pot shops in the San Francisco Bay Area plans to list on the Canadian Exchange in 2019 by doing a reverse takeover of an already existing and listed entity.
3 Biotech stocks with explosive potential:
· Deciphera Pharmaceuticals (DCPH = $27.74 / +32% YTD): Is a clinical-stage biopharmaceutical company enhancing the lives of cancer patients by addressing key mechanisms of drug resistance that limit the rate and durability of response of various cancer therapies. Price Forecast: Median price = $50.00 (+80.1%), and High price = $65.00 (+134.1%).
· Cytokinetics (CYTK = $7.60 / +20% YTD): Is focused on discovering, developing and commercializing first-in-class muscle activators as potential treatments for debilitating diseases. Price Forecast: Median price = $12.50 (+64.7%), and High price = $21.00 (+176.7%).
· Aduro Biotech (ADRO = $3.58 / +36% YTD) Is focused on the discovery, development, and commercialization of therapies for challenging diseases. Price forecast: Media price = $7.00 (+96.0%), and High price = $10.00 (+178.8%).
Next Week:
For the past few weeks it has been easier to play with the ETF's than individual stocks. If the FED wants to push the market, it's the S&P and DOW that are getting the juice; therefore, the SPY and DIA are moving. The market is back to being a game of musical chairs, with each day wondering if the music stops and you’ll have to dive to get a chair. Therefore, your investment strategy and logic are crucial.
- If you wish to be LONG this market I suggest that you:
o Invest with defined risk – using options and not stocks.
o Buy in-the-money, high delta (.85) CALL options.
o Only go 5 to 7 days out, and invest an amount you can afford to lose.
o At the end of that week, if you’re still ‘feeling lucky’ – then roll into the next week.
o Just go week-to-week in order to carefully define your downside risk.
- If you wish to SHORT this market:
o Look at a Risk-Twist-Spread strategy.
o Go out into May, and purchase (3) $261 PUTS, and sell (1) $271 put and sell (1) $259 PUT on the SPY.
o This limits your upside risk, but if/when the market falls – it makes a lot of money very quickly.
For next week, I’m watching the ETF for the financials – the XLF. Right now the XLF is exactly on its inflection point of $26.50. If history is our guide, the market will move in the direction of the XLF next week.
Tips:
Top Equity Recommendations:
HODL’s:
- Aurora (ACB = $7.05 / in @ $3.57) – & covered write,
- Canntrust Holdings (CNTTF = $8.14 / in @ $3.12),
- Canopy Growth Corp (CGC = $47.56 / in @ 22.17),
- HEXO (HEXO = $5.58 / in @ $5.12),
- Nova Vax (NVAX = $2.13 / in @ $2.19) – & $0.65 covered write,
- Zynerba Pharma (ZYNE = $5.22 / in @ $5.22).
Crypto:
- Bitcoin (BTC = $3,616)
- Ethereum (ETH = 123.00)
- Bitcoin Cash (BCH = 122.00)
Options:
- Canopy (CGC = 47.56) Feb 22, Buy +49.5 / -51 / +54, Call B-Fly for $0.01 CR,
- Gold Miners (GDXJ = 32.95) Feb 22, +33 / -33.5 / +34.5, Call B-Fly for $0.01 DB,
- BioTech (IBB = 112.04) Feb 22, +112 / -113 / +115, Call B-Fly for $0.07 DB,
- Utilities (XLU = $55.71) Bull: Feb 22, Buy +56 / -56.5 / +57.5, Call B-Fly $0.06.
Thoughts:
- XRT: The XRT (the retail ETF) made a new high for 2019 on Friday. It is up almost 10% in 2019, but most of that came in the first week of the year and it’s been relatively flat ever since. It’s also been underperforming the broader market. If the market does sell off, the weaker XRT could lead the way down. If you’re bearish on XRT, the long PUT vertical that’s short the $44.5 PUT and long the $46 PUT in the March 29thweekly expiration is a bearish strategy that has a 57% probability of making 50% of its max profit before expiration.
- SPY: The SPY has come back to the level it was before the December rout. The question is, will the SPY keep rallying on all these happy thoughts, or will it deliver a zonk? Well, a game show wouldn’t last long if all the players won jackpots, so the zonks keep the show interesting. And just like selloffs in the market, if you think the SPY might be due for a drop, the long put vertical that’s long the $280 PUT and short the $277 PUT in the March 29thexpiration is a bearish strategy that has a 55% probability of making 50% of its max profit before expiration.
- AMZN: With Amazon’s headquarters news, word that Whole Foods will be increasing prices, and those terrible holiday retail numbers – Amazon has taken it on-the-chin lately. If you believe that AMZN will shrug off all of this news, you might want to consider a bullish strategy that’s long the $1600 CALL and short the $1610 CALL in the March 29thexpiration is a bullish strategy that has a 58% 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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Until next week – be safe.
R.F. Culbertson
