This Week in Barrons: 3-24-2019:
Digital Smart Pills: I never in my lifetime thought I’d be swallowing a computer on purpose. In the new Broadway musical "Be More Chill”, the main character is a bullied high school teenager who doesn't fit in with the popular kids. It isn't long before he's introduced to a new drug that's becoming popular among his classmates. The drug contains a computer chip that balances-out all the adolescent voices in his head, and tells him what to do. The chip directs him on how to answer questions, how to be cool, and even how to get a girlfriend.
This is yet another chapter from the: “How Art Imitates Life” handbook. A couple years ago, pharmaceutical companies started releasing digital smart pills containing computer chips. The first digital cancer pill was released in January. It contains an encapsulated chip filled with capecitabine – a cancer chemotherapy drug that patients need to take several times a day. When the chip reaches the stomach, it emits a signal that a skin patch detects. This triggers a message to a computer which allows doctors, patients and families to track medication adherence and bodily information. Smart pills are also beginning to monitor chemical states in the stomach. Proteus, the pharmaceutical company behind the cancer pill, has already incorporated its chip into 40 other kinds of medications. These meds can provide important benefits to the overwhelming number of people who have trouble taking their medications as they are prescribed. Doctors plan for at least an 80% adherence rate to their prescribed medications. Unfortunately, only 50% of the chronic disease meds are taken as directed, and 30% of the patients don’t even fill their prescription. Moreover, following a prescription regimen can be particularly tough for patients who are traveling, on vacation, elderly, or cognitively impaired.
Because this is such a widespread problem, the FDA approved the first digital pill in 2017. It contained aripiprazole and was used to treat schizophrenia and bipolar disorder – which many patients avoid taking because of its unpleasant side effects. DARPA (the U.S. Defense Advanced Research Projects Agency) has also been developing various computer-brain interfaces that have helped patients with strokes and epilepsy by activating or deactivating portions of the brain. By allowing the ‘computer-pill’ to interface with the nervous system, the technology allows veterans and others with amputated limbs to control their prostheses' movements. Researchers initially developed these devices in live animals, and successfully controlled their brains to make them move in certain ways. These robo-animals could be used to detect explosives, or spy on enemies. We’ve even created Franken-sharks, which have electrodes implanted in their brains and can be guided by a remote control. They can be used to spot enemy ship movements. This new technology is not without its dangers. All computers can be hacked or go awry. What if a person was accidentally instructed to walk in front of a car, rather than away from one? What if a Franken-shark suddenly charged at a swimmer?
In the show, the students end up wanting to turn off their computer chips – but doing so proves more costly and difficult. It brings up questions surrounding who controls the devices, and data privacy. After all, I'd certainly welcome a reminder to take my cholesterol medicine, but I’d rather not have my family or others knowing about it. And then there are the ethical issues – just because we ‘can’ doesn’t necessarily mean that we ‘should’. It won't be long before we will have to make up our minds about smart pills. At least the show “Be More Chill” allows us to think about the issues with a smile on our face.
Our Manipulated Market:
Our FED stunned the market last week by announcing NO rate increases in 2019. They cited concerns over the global slowdown, and are specifically targeting China and Europe in that view. They also halted the unwinding of their balance sheet at $4T. To put this reversal in context, it was only 4 months ago that this same FED predicted 3 rates hikes in 2019, and an increase of the balance sheet unwinding to $100B a month. So our FED knows that something unpleasant is coming our way and is:
- Keeping interest rates low for as far as the eye can see,
- Risking the entire financial sector by inverting the yield curve,
- And ok with the S&P and Russell will follow the financials lower.
But what about the upcoming China Trade Deal and Corporate Buybacks? It’s true that we’re still awaiting a trade deal with China and most companies can't announce or do their actual corporate buying until about April 20th. But Friday gave us a 100% recession signal – when we saw the 10-Year and the 3-Year bonds had ‘invert’ their yield curve. In other words, you now make more money investing in a 3-year note than a 10-year note. That means bankers are saying that they can predict what is going to happen in 10 years – better than they can the next 3 years. Wow, that doesn't make a lot of sense. Shouldn't the longer timeframe be riskier and therefore pay you more? Yes, and that’s why an inverted yield curve is so troubling.
Down and down we went. It wasn't just the inverted yield curve, it was horrible economic news out of Europe. It was more bad economic news out of the US. It was a combo platter. But wait a minute. Are you telling me the all knowing and all seeing stock market, didn't know things really do suck out there? Give me a break. None of the bad news that broke on Friday was a secret. Yet we lost 460 DOW points and 54 S&P's. That also came on much higher volume. Actually that's been the pattern for months. Up on lower volume, down on bigger volume. That's simply because the smart money has been selling rallies to the dumb money for months.
How does this impact JOBS? Per SF:
- China’s growth has slowed from 10% to 6.5% due to: tariffs, threats, and the slowing economic cycle.
- FedEx is blaming the global slowdown on exchange rates and trade wars.
- Global job postings are down over 10% year-over-year.
- Technology job postings (including start-ups) are down 51% year-over-year.
How does this impact EDUCATION? Per HL:
1. You need to focus on learning 3 skills: coding, writing, and selling (in that order).
2. Today’s sales = yesterday’s IBM. [Nobody ever got fired for knowing how to sell.]
a. Selling builds your network. Every CEO is reachable via LinkedIn or Instagram.
b. Social Networks are the new banks – with less fees, but just as confusing.
3. Your network is your new way to ‘grade’ your education.
4. Learn how to manage your money – because there is no retirement.
5. Where should you work?
a. Find the companies that are raising series C or D venture rounds – because they have cash, growth, and are willing to train their people.
b. From that list, find the companies whose products are flying off the shelves – and that’s where you need to be.
Info Bits:
- Friday was Red: On Friday everything was lower. The S&P 500 was down by 1.9%, the DOW by 1.8%, and the Nasdaq by 2.5%.
- $1.7 Billion: is how much Google was fined by the EU for unfair practices – on top of the $5.1B it was fined last year.
- ABC = Always Be Closing: Disney closed the deal to acquire 21st Century Fox for $71.3B – but hey, The Simpsons and the X-Men are worth it. And what happens when a media conglomerate buys another media conglomerate – they lay a bunch of people off, and Disney did just that on Friday.
- The Mueller Report: is “a significant wild card that investors should brace for in the near term. Conclusions from the report could initiate impeachment proceedings which would lead to higher market volatility. Look at any gold investment as helping to insure your portfolio against the market reaction,” said John Normand of JPM.
- Lyft is Rising Up: The news is out. Lyft is set to IPO in the next two weeks. They'll be trading as LYFT on the Nasdaq, and the range is currently set between $62 and $68 per share. They're looking to raise up to $2.1B – with an $18.5B valuation. General Motors, Fidelity, and Rakuten all have stakes in LYFT that are estimated to be worth more than $1B.
- Facebook Busted Again? Turns out FB isn't great at keeping people's info private (duh). The latest routine security review found that employees had access to hundreds of millions of users' passwords because they were stored as plain text. FB said that it doesn’t think anyone looked at them – but it raises red flags as to whether FB can be trusted even with things as basic as passwords.
- Myspace – Who? Remember them? The long forgotten social network LOST 12 years’ worth of content – music, photos and video files. It seems a server migration issue deleted all content uploaded between 2003 and 2015 – basically 50m songs by more than 14m artists. Outsiders are viewing this as an act of divine intervention for those who still use Myspace.
- Trump = 1 / Colleges = Nil: The Trump administration wants to put a cap on student loan borrowing in an effort to discourage colleges from driving up the price of a higher education.
- Monsanto – meet Westinghouse: Monsanto, the controversial agricultural biotech giant, was just dealt a fierce blow. A federal jury found that their product RoundUp(the most widely-used chemical weed killer in the world) was a "substantial factor"in causing cancer in a 70-year-old man. There are thousands more cases awaiting trial. Bayer, which bought Monsanto in 2018, is praying that Monsanto will ultimately not be held liable – otherwise…
- Dr. Karen Uhlenbeck: is the first woman to win the Able Prize (a prestigious math award) – proving real heroes solve partial differential equations.
- Glossier: the beauty company that started as a blog – is now worth $1.2B. So you can no longer say that playing with makeup doesn’t get you anywhere.
- The House that Jack Built: Square (the payments startup founded by Twitter creator Jack Dorsey) will hire 3 or 4 new engineers and designers solely dedicated to improving the crypto ecosystem. These new employees will report directly to Dorsey, have the option of being paid in bitcoin, and will be only focused on building what is best for the crypto community.
- Come ‘on Man: Conflict – what conflict? Stewart McKelvey, the law firm that was representing the troubled Canadian crypto exchange QuadrigaCX, recently withdrew due to a "potential" conflict of interest. It seems that they were also representing Ms. Jennifer Robertson – the widow of QuadrigaCX’s late founder Gerald Cotten, and the executor of his estate. Naturally they refused to take back all of their previous erroneously billed hours – but hey.
Crypto Bytes:
- $25m: BlockFi officially launched an interest-bearing crypto deposit account earlier this month and the product is gaining traction. According to CEO and founder Zac Prince, users have already deposited more than $25m since the March 5thlaunch. The product entices investors with returns of up to 6.2%. That rate was recently reduced.
- Crypto-Card: Banking startup 2gether– is soon launching a prepaid Visa debit card that will allow users to spend either: euros, or any of 7 cryptocurrencies across 19 eurozone countries. The card instantly converts the cryptos to fiat currency and charges ZERO FEES for the service.
- Chin-Up: Binance CEO Zhangpeng Zhao sees Bitcoin between: “$4k and $300k – there will be good and bad days ahead.” Also EOS co-founder and BlockOne CEO Brendan Blumer also sees: “Over the next 2 decades, Bitcoin will replace Gold as the leading commodity to store value.”
- Fortune 500 merchant: Avnet (one of the world’s largest distributors of electronic components) is now accepting cryptocurrency payments through a partnership with blockchain payments processor BitPay.
- Bitcoin almost < 50%: Bitcoin (BTC) currently accounts for 50.9% of the total capitalization for the entire cryptocurrency market. If BTC falls below 50%, this would be seen as a sign that the crypto markets are shifting back to a more ‘risk-on’ approach to investing – where investors prefer altcoins over their BTC counterparts.
Last Week:
Game – Set – Match: Woah Daddy. Our FED could not have been more dovish if Pres. Trump was himself the Chairman.
1. When reading the statement, I find zero rate hikes this year. In fact, they suggest that there will only be 1 rate hike for the entire time between now and 2021.
2. They say that growth has slowed again, and that they need to keep the funds rate below neutral right through 2021. (I thought everything was booming and “humming along nicely”?)
3. As far as Quantitative Tightening (reducing the balance sheet) goes, they are going to begin slowing that down in May, and ending it by September.
My feeling was that if we got the market over 2,800, it would challenge 2,815. It did that, and it got through it. Then I was looking for that last ‘rip higher’ with the help of a dovish FED and some sort of China trade deal, because currently, we’re in somewhat of a blackout period for stock buybacks before April 20th. So, either we continue to roll over here in the next few days in something of a buy the rumor - sell the news situation, OR we tread water with the ‘Plunge Patrol Team’ actively participating and propping up the market until April 20th. If we tread water, the financials will be the drag on the market because the yield curve (with short-term rates exceeding long-term rates) really doesn’t allow them to make much money at all. And without the financials participating in any rally – there can be no prolonged rally.
BioTech:
- FibroGen (FGEN = $52.98) is known for creating best-in-class medicines for the treatment of chronic and life-threatening illnesses such as anemia, idiopathic pulmonary fibrosis (IPF) and pancreatic cancer. At present, FibroGen is working vigorously on two products that are in the clinical development stage. Roxadustat treats anemia and has been approved in China already. And Pamrevlumab is a monoclonal antibody that inhibits the connective tissue growth factor in cancer and chronic fibrotic disorders. FGEN is a safe and sound biotech prospect that holds a strong buy with the median price target of: $71.50 (+31%), and a higher target of $85 (+56%).
- Aerie Pharmaceuticals (AERI = $46.82)is ocular-focused and has developed two glaucoma drugs named Rhopressa and Rocklatan. The former was launched in 2018 while the latter is awaiting the FDA’s approval. Once Rocklatan obtains FDA approval, AERI will have a very strong catalyst for its 2019 stock price – because Rocklatan has greater revenue potential as it has the makings of a first-line therapy for patients, and limited competition. Analysts are looking at a median price target of $79.50 (+73.2%) a strong target of $105 (+132%). Another solid choice.
- Akebia Therapeutics (AKBA = $8.39)is focused on treating kidney disease. This biotech has two primary products. Vadadustat is in Phase 3 trials for the treatment of anemia related to chronic kidney disease. Auryxia is an iron deficiency anemia treatment that Akebia inherited from its merger with Keryx Biopharmaceuticals in 2018. Analysts are bullish for Akebia given the multiple catalysts, particularly Auryxia. Analysts see AKBA posting all-time highs in the next 12 months of between $18 (+110%) to $30 (+249%).
Next Week - Did the FED just tell us to Sell?
The FED has disarmed themselves to the point of potentially seeing something so horrific on the horizon (Italy in a recession, Germany in a recession, China slowing down) OR they’re interpreting the data incorrectly. I think it’s the former and they’re realizing that the global economies are tanking. Currently the investing risk vs reward graph is tilted toward the bearish side of things:
- Bonds have rallied thru the roof – and are trading at almost Armageddon levels.
- If we’re going into an ‘earnings recession’, then stock buybacks will slow dramatically.
- The financial market’s ETF (XLF) came into this week – up 13% YTD. The XLF ended the week only being only up 5% YTD – so it lost 8% this week. The financials will cause other sectors to follow their lead.
- The S&Ps are sitting firmly at 2,800 with an expected move of $52 higher or lower for this coming week.
- S&P resistance is at 2,811 and support is down at 2,731; therefore, we either need to rise above 2,811 to breathe a sigh of relief – or we’re going to (at minimum) revisit the 2,731 level quickly.
My big question is: Did we get our last, big push higher on Thursday of last week? It’s possible. The 2800 to 2815 level on the S&Ps is formidable resistance. Four times the market had tried to get ‘up and over’ those levels and was rejected. I thought that if it comfortably exceeded the 2815 level, shorts would have to cover, the market would run higher – before global economic conditions would drag us lower. Back on the 15thwe made it over 2,815 on a closing basis, and last Thursday’s close had us at 2,854. Could the FED’s capitulation event last Wednesday be the final: “Buy the rumor – Sell the news” event? To be honest, I was looking for 2,880 or even 2,900 as the top. The only thing that the bulls have in their favor is that we closed right at the 2,800 level. Now make no mistake, there’s certainly NO FUNDAMENTAL reason for stocks to be moving toward all-time highs. I simply looked at a lame-duck FED rolling over and keeping interest rates low forever – would allow stock buybacks to continue forever. The problem is the earnings recession, and if you as a corporation know that you could buy your stock cheaper a month from now – you’ll wait a month (and then another month) to buy it as part of the corporate buyback program. The good news is that we’ll know soon enough. If 2,800 doesn’t hold this week – while we’re in buyback blackout mode and with no China deal – we could have seen all the ‘up’ we’re going to see. In which case here are some opportunities:
- Utilities ETF (XLU) – it is up 13% YTD and continuing to climb nicely.
- Microsoft (MSFT) – to the downside,
- Intel (INTC) – to the downside,
- Consumer Discretionary ETF (XLY) – to the downside. It is heavily influenced by Amazon (AMZN) that was down 3% on Friday.
- Starbucks (SBUX) – a defensive stock for a bit – then play it to the downside.
You can either play the above to the downside by buying the May in-the-money PUTS (delta 70’s), by buying an April at-the-money Put-Debit spread, or by shorting the stock.
Tips:
Top Equity Recommendations:
HODL’s:
- Aurora (ACB = $9.03 / in @ $3.07),
- Canntrust Holdings (CTST = $9.63 / in @ $3.12),
- Canopy Growth Corp (CGC = $44.38 / in @ 22.17),
- HEXO (HEXO = $5.43 / in @ $6.37),
- Nova Vax (NVAX = $0.54 / in @ $1.59)
Crypto:
- Bitcoin (BTC = $3,995)
- Ethereum (ETH = 137.00)
- Bitcoin Cash (BCH = 164.00)
Options:
- HYG (85.84): Buy Apr 18, +77 Put for $0.03 DB,
- QQQ: (178.35): Buy Mar 29, (1) 183 / (-2) 185 / (1) 187 Call BFly for $0.17 DB
- SPY (279.27): Buy May 17, (-1) 268 / (3) 258 / (-1) 256 Put BFly for $0.44 DB
- SPY (279.27): Buy Mar 29, (1) 286 / (-2) 288 / (1) 290 Call BFly for $0.12 DB
Thoughts:
- RSX: What’s that twinkle in comrade Putin’s eye? Why, it’s palladium, of course. Palladium ( /PA) hit a record high last week, and as Russia is the largest palladium producer – the oligarchs must be grinning widely. The spike in prices was caused by the auto industry’s demand for catalytic converters and news that Russia won’t be shipping out any scrap palladium to the rest of the world. Russia’s ETF (RSX) has followed /PA’s rally, and is now back up to the high prices it made in early Feb. If palladium is all that RSX has, and if you’re a contrarian trader – then a bearish strategy in RSX might be calling out to you. The long PUT vertical that’s short the 20 PUT and long the 21 PUT in the April monthly expiration is a bearish strategy that has a 69% probability of making 50% of its max profit before expiration. Dos Vedanya!
- FXE: Late Thursday afternoon, Britain and the EU agreed to extend the Brexit deadline to May 22, or April 12 – depending upon a vote in Parliament on a Prime Minister May proposal next week. The Brits and EU are starting to sound a little like the FED, whose plans on not raising rates for the foreseeable future pushed the dollar lower and FXE sharply higher. So, while the British pound is mostly on the hook with Brexit – FXE could be weaker if the path forward looks less like a road and more like a tightrope. The long PUT vertical that’s short the 107 put and long the 108.5 put in the May 3rdweekly expiration is a bearish strategy with a 62% 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
