This Week in Barrons: 6-23-2019:
This time it’s different…
John Templeton always said that the 4 most dangerous words in investing are: “This time it’s different.” Stock market tops and bottoms are what retail investors use to justify their emotional decision-making. Over the next year, investors are likely to repeat these 4 words as they defend higher stock prices. However, they should treat them with the same consideration they give: “The check is in the mail.” Wall Street professionals predict that, before the bull market ends, individual investors (who have mostly stayed on the sidelines) will be swept along in the mania. They will invest in stocks despite the fact that the DOW average has more than tripled in the last five years. They will believe the rationale surrounding why this bull market will not be followed by a 1929-like crash, and why: “This time it’s different.” The 8 reasons that I hear for the difference are:
1. There never has to be a recession again.
2. Quantitative Easing forever – leads to permanent prosperity.
3. Federal deficits can grow by a lot without becoming an issue.
4. Our National debt isn’t worrisome.
5. We can have economic strength without inflation.
6. Interest rates can remain a lot lower for a lot longer.
7. The inverted yield curve does not need to have negative implications.
8. Companies and stocks do NOT need profits to be successful.
The bottom line is that if ANY of the above 8 are true, things really are different this time. Politicians feel that the only way to win elections is to simply ignore deficits. We will soon be reaching a ‘tipping point’ where there is so much debt – people will begin to question any nation’s ability to pay it back. All of the above 8 statements have one thing in common: they’re ridiculously optimistic. Each one hopes for the future, but knows that those very same elements killed them in the past.
I’m reminded of a statement by the premier investor The Great Winfield – who always had trouble making money in market bubbles because his ‘memory’ kept getting in the way. He said: “The best players in this kind of a market have not passed their 29thbirthday. Their strength is that they are too young to remember anything bad, and they are making money so they feel invincible. This is a kids’ market. That is to say: Billy the Kid, Johnny the Kid, and Sheldon the Kid.” Even CNBC’s Jim Cramer realizes that Wall Street has completely disconnected itself from Main Street. Jim Cramer says he expects most companies to post weaker earnings quarter-over-quarter, and goes on to say: “I cannot name one company that is having a better this quarter over last.”
Between gold, crypto, Bitcoin and Facebook’s Libre – maybe it is different this time – in a bad way. To catch you up, Facebook (this week) debuted a digital currency called Libre – and it’s already drawing the ire of lawmakers particularly those in the halls of the U.S. Congress. In addition to calls for hearings into the bigger implications of Libra and its potential risk to the U.S. financial system – Rep. Maxine Waters has called on FB to halt work on the project entirely until further discussions have been had. Facebook responded with: “Our plan is to meet the daily financial needs of billions of people.” To which Rep. Waters said: “We the U.S., cannot let Facebook’s crypto compete with our dollar.” Facebook co-founder Chris Hughes is calling on regulators to stop the Libre – because: “If Libra succeeds, it could give companies economic power over smaller nations. Libra could hand over much of the control of monetary policy from central banks to Facebook.” The G7 is forming a task force to examine the Libra and the U.S. Senate Banking Committee has scheduled a hearing for next month.
Maybe it is different this time, because as SF asks: “Is this not the greatest challenge to our current fiat currency system? I remember when the malls swore that ecommerce would never exceed 10% of retail. Today, malls are struggling to find their reason to exist. If 10% of all retail commerce is conducted via digital currency, how will treasuries make up the shortfall? What adjustments will Central Banks be required to construct?” Heck, I always thought the dollar’s reserve currency status would be challenged by China – not by Libre.
It could be different this time asBitcoin touches $11k, gold is marching higher, and I’m beginning to hear outright ‘fear’ being expressed surrounding the longevity of many sovereign currencies. You can sense the panic in Bruno Le Marie’s voice (French Finance Minister) when he says: “It is out of the question that the Libra will become a sovereign currency. That cannot and it MUST NOT happen.”
Yes Virginia, it may be different this time– but not for any of the 8 reasons above. It will be different when digital currencies begin to displace sovereign ones. If “In God We Trust” is replaced with “Libre Forever” or “Bitcoin For All”– the gigantic house of cards constructed by our global Central Banks will immediately collapse and take nations down with it. Better watch out – it could really be different this time.
The Market:
Libra is the new global pseudo-cryptocurrency by Facebook. Unlike Bitcoin, Libra is a stable-coin backed by real currencies (like the dollar or euro). That means that the value of Libre will not be fluctuating like say – interest in "The Bachelorette." FB’s goal is to create an alternative financial system that goes around Wall Street & traditional banking – and allows anyone to send money as easily as sending a text.
Doesn’t Venmo already do that? Yes and no. Facebook is hoping that the Libre will make ‘banking transactions’ accessible to people who aren't able to get bank accounts. The currency would live in a digital wallet called Calibra (a Facebook subsidiary) that you'd be able to access through Facebook Messenger and WhatsApp.
So Facebook wants to get all up in my business? Yeah – basically, and given their track record (see: privacy scandals, spreading fake news, election interference) people are feeling hesitant to trust FB with their money. Also, financial regulators will be keeping a close eye on whether it could enable money laundering or drug dealing. FB is saying: “We got this.”'
Why would I believe them? FB says that they’re NOT running the show. They’re teaming with 27 partners (including Mastercard, Uber, and eBay) to launch a non-profit in Switzerland called the Libra Association that would oversee all of this. It also promises (wink wink) that Calibra won't use your financial information for targeted ads.
Will this work? FB is hoping that Libra will help the estimated 1.7B adults around the world who don't have access to a bank account – especially in developing countries.
Honestly? Libra is considered one of the biggest attempts by a mainstream company to dip its toe in the cryptocurrency pond. The one big thing FB has going for it – is its 2B+ userbase.
InfoBits:
- 333 slides was how long venture capitalist Mary Meeker's annual "Internet Trends Report"was this year. Internet adoption hit its slowest pace worldwide, but Americans still averaged 6.3 hours/day online. Twitter and Amazon stole more of the online ad market – over Facebook and Google.
- We have a small problem: While blockchain and distributed ledger tech can save billions in transaction fees, there’s one small problem. Turning to blockchain systems means that companies will have to pre-fund all trades before they are executed. “From the standpoint of secure, accessible books and records, distributed ledger tech represents an important step forward. From a funding perspective, it is a gigantic step - NOT forward,” says the report.
- Delivery! Domino’s is testing autonomous delivery vehicles in Houston, Tx.
- Anti-Cloaking – really? It appears that the drone Iran shot down had our latest anti-cloaking technology on and engaged. Iran seemed to pick it off anyway. How is that possible? Guess anti-cloaking means only ‘some people’ can’t see it.
- Riviera Beach, Florida coughed up $600,000 in Bitcoin to a hacker who took over local government computers after an employee clicked on a malicious email. Officials paid 65 Bitcoins to the hacker who’s hack forced the local police and fire departments to write down the hundreds of daily 911 calls on paper.
- Are these the droids you're looking for? People are paying $25,000 for a “droid-building experience” at Star Wars: Galaxy's Edge. I’m not trying to tell you what to do with your money, but really?
- The Game Continues All non-Game-of-Thrones fans were not happy this week when word leaked that work on the prequel series had already started.
- "We're free" Google Calendar crashedlast week and the Internet never felt more ‘free’. But booking a meeting became pure chaos. It seems that we lose Google Calendar for a few hours, and it turns into "Lord of the Flies"out there.
Crypto-Bytes:
- Ripple was trending because they are taking a $50m stake in MoneyGram. The money transfer service will soon be using XRP as part of its daily ops.
- Bigger than the Russian Rubel Bitcoin is now the 8th largest world currency.
- Here we go again – ah-hah Bitcoin (BTC) and Ethereum (ETH) are looking like it’s 2017 all over again. BTC is touching $11k and ETH is over $300.
- Crypto-IPO in the US? Crypto mining giant Bitmain Technologies is said to be relaunching its initial public offering plans, but this time in the U.S. instead of Hong Kong. The firm could file documents with the U.S. SEC in July. Last September, Bitmain’s Hong Kong IPO was hoping to raise $1B, now the target is closer to $400m for the U.S. offering
Last Week:
We opened and simply marched higher, setting a new all-time high on the S&P. So, call me stupid, but when you're 10 years into the expansion, and things suck so badly that our FED is going to cut our insanely low interest rates – how are we at all-time highs? The latest Fed report showed a gain of just 0.3 when a 10 point gain was expected. Call it what you will, markets are up and they're pulling out the stops to do it.
The real deal is quite simple – the global economy is in desperate trouble. I can show you dozens of data points showing: shipping, air freight, regional FED reports, copper, cardboard, and a zillion other things in free fall. Because things stink, the global central banks have decided to go all in. A last ditch effort to do "something" and by something I'm talking negative rates, QE, and money printing on a scale previously never seen.
And because rates are so low and going lower, it forces cash into stocks. Our own Philly Fed report almost went negative – yet we set new HIGHS in the market.
Central Banks of the world have ruined any method of price discovery, and fear and ‘lack of trust issues’ are beginning to creep in – shown by the dramatic rise in gold, the Libre, and Bitcoin. People know that earnings are fantasies made up by accountants using words like “pro-forma” – which loosely translated means: "Any damn number I want to tell you." In June:
The real deal is quite simple – the global economy is in desperate trouble. I can show you dozens of data points showing: shipping, air freight, regional FED reports, copper, cardboard, and a zillion other things in free fall. Because things stink, the global central banks have decided to go all in. A last ditch effort to do "something" and by something I'm talking negative rates, QE, and money printing on a scale previously never seen.
And because rates are so low and going lower, it forces cash into stocks. Our own Philly Fed report almost went negative – yet we set new HIGHS in the market.
Central Banks of the world have ruined any method of price discovery, and fear and ‘lack of trust issues’ are beginning to creep in – shown by the dramatic rise in gold, the Libre, and Bitcoin. People know that earnings are fantasies made up by accountants using words like “pro-forma” – which loosely translated means: "Any damn number I want to tell you." In June:
- The Manufacturing PMI Employment Index fell to 50.2 vs 51.9 in May – the lowest reading since April 2016.
- The Services PMI Business Expectations Index fell to 57.8 – their lowest reading on record.
- And the existing Home Sales fell year-over-year for the 15thmonth – their worst run since the housing crisis.
Now there's a lot I could belly ache about, but I think what requires the most attention is the Iran situation. Don't forget President Trump has a meeting with President XI on June 28. He wants to look strong at that meeting. If he bombs Iran, it will indeed suggest to Xi that he's playing for keeps and isn't afraid to use the military. Iran may just sit back and take it, or they can come out fighting. While they have tremendous missile capability, sheer numbers suggest we'd obliterate them. But will China and Russia remain quiet, or will they step in and essentially create WW3? And then there’s the coordinated central bank game called "Go for Broke"and they're all going to print money, cut rates to negative, and buy stocks. Meanwhile inflation is coming on everything from higher oil to higher food – all while the global economy is falling into the abyss. With all of that – stocks made new all-time highs last week.
Weed:
This week:
- An amendment that would protect all state-legal cannabis programs from interference by the U.S. Justice Department was submitted for the fiscal year 2020 Commerce-Justice Science spending bill.
- U.S. Attorney General William Barr said that he would adopt a hands-off approach toward state-legal cannabis programs.
- New York lawmakers are making a last-ditch bid to legalize adult-use marijuana before the end of June, 2019.
- Molson Coors cannabis joint venture with Hexo will start selling non-alcoholic, cannabis-infused drinks in Canada on December 16. The joint venture will sell everything from cannabis-infused water to a "beer-like product". However, government regulations include the stipulation that alcohol-related terms like "beer" and "wine" can't be used to market them.
- A recent report from Deloitte has predicted the market for next-generation cannabis products, which includes beverages, will be worth $2.7B annually.
The market for cannabidiol (CBD) across the U.S. will reach $16B by 2025 said Cowen vice president Gerald Pascarelli. A Cowen survey found that 7% of U.S. consumers already use CBD as a supplement, which exceeded their expectations and leads them to believe that the total U.S. CBD market will be in the $2B range for 2019. Currently, Cowen estimates that beverages account for around 20% of CBD use in the U.S. Pascarelli said: “Ultimately, we think water will be the main source of market share in the beverage category. If you look at the price per milligram of CBD in beverages, it’s much higher than in areas like capsules and topicals. Super-premium CBD beverages will command over $1 a milligram of CBD. A number of large companies that were previously focused specifically on THC are now also making moves in CBD. Among those is Canopy Growth, which is investing $100-$150m in a hemp extraction operation in NY State. Outside of pure-play CBD companies like Charlotte’s Web and Elixinol, you’ve seen crossover from tobacco in Turning Point Brands, from multi-state THC operators like CuraLeaf and Green Thumb Industries, and from Canadian companies like Tilray and Canopy Growth. CBD products’ high margins are likely to continue drawing new entrants to the category.”
Next Week:
Let’s face it, if Trump and Xi play “Deal, or No Deal” and make a ‘deal’ – markets are going to soar. If there is “No Deal”, the FED will cut rates and we'll also probably soar. As perverted as all this is, the chances are good that we're going higher. This isn’t the easiest call to make especially with the G20 just 9 days from now. There very well could be a deal made between Trump and Xi at the summit. Why? Because China’s getting crushed worse than we are by this tariff mess. Their banking system (already in shambles over so many non-performing loans) had to be bailed out again Monday. They NEED a deal and we WANT a deal. If they come to terms the market is going to explode higher. It might not last long and might even turn out to be a "blow off top". But one thing it would do, is keep the FED on hold again. They wouldn't have to cut rates until September. The latest whispers out of the G20 are that the Chinese are not interested in anything less than total removal of all tariffs. If no deal is reached with President Xi, then it's my guess that our FED will cut rates in July.
There is however a problem with Iran and this ‘war’ thing going around – and quarterly corporate profits. We're about to enter earnings season, and it is NOT going to be pretty. Earnings are going to come out light for hundreds of companies, and weak earnings with an all-time high market – spell danger. But war-time profits are another matter. DuPont’s war time profits normally increase 950%, Bethlehem Steel’s +825%, U.S. Steel’s +220%, Anaconda Steel’s +330%, Utah Copper’s +420%, etc.
I think that this market plays out one of 2 ways: (a) they punch through the old highs, get a ton more volume and just soar higher – leaving everyone behind, OR (b) they bang their head at the highs several times, struggling to get up and over. Right now it looks like the head banging situation could be in play. Sure, maybe Monday we see them push things higher, but Friday brought a pretty broad sell down into the close – giving us some downside work to do before the next attempt at higher.
So the fight is on. In one corner we have the FED willing to cut rates, and jumpstart QE, along with their tag-team partner “stock buybacks”. In the other corner we have the true economic reality of global weakness and insurmountable debt coming home to roost. Who wins? Right now, I think Bitcoin and gold win. They both look really perky. In terms of the equity markets (assuming nothing blows up in Iran), I see a push over 3,000 on the S&Ps and then we begin a long, lengthy, stair-step down. Remain cautious!
Tips:
FAANG stocks are so 2017. Today it is Shopify, Twilio, Zendesk, Paypal, Mongo, Microsoft, Oracle, and Lululemon (the post hoodie uniform of startups). There is a lot that can go wrong, but machines can’t be turned off and software is still going to eat.
Top Equity Recommendations:
HODL’s:
- Aurora (ACB = $7.30 / in @ $3.07),
- Canntrust Holdings (CTST = $5.09 / in @ $3.12),
- Canopy Growth Corp (CGC = $40.16 / in @ $22.17),
- GBTC (GBTC = $13.55 / in @ $10.01),
- Hexo (HEXO = $5.59 / in @ $6.37),
Crypto:
- Bitcoin (BTC = $10,500)
- Ethereum (ETH = $302.00)
- Bitcoin Cash (BCH = $474.00)
Options:
- RIOT ($2.75):
o Buy Jan 17, Sell $3 Call / Sell $3 Put / Buy $4 Call for $1.85 CR
o Buy Jan 17, Sell $2 Call / Sell $2 Put / Buy $3 Call for $1.45 CR
o (can only lose money if RIOT falls below $1).
Thoughts:
- IWM (IWM = 153.95) With the Fed strongly hinting at a future rate cut, it would seem that being able to borrow money at cheap rates is more important than the weakening economic data. IWM (the small-cap index) continues to underperform its bigger cap cousins, SPY and QQQ. Maybe the impact of share buybacks is smaller in IWM’s component stocks, or maybe it’s just not the popular choice for bulls who want to chase a rally. Either way, it’s possible that a phantom rate cut may not be able to keep the market up, and IWM might lead the way down, if it can’t lead the way higher. If you are bearish on IWM, the long Put vertical that’s short the $154 Put and long the $156 Put in the August monthly expiration has a 64% probability of making 50% of its max profit before expiration.
- GOLD(GLD = 131.98) Gold made a 6 year base within a clear and defined longer-term uptrend (2000 to 2010). Since the near-term uptrend began in October 2018, we consolidated those gains sideways before resuming higher. Gold never rolled over as the market rallied 25% in early 2019. The same situation for Gold Miners. Many individual miners have rallied 100% off a 10% move in Gold, and have no desire to give back those gains. I am bullish on gold going forward, and believe that gold (GLD) and the gold miners (GDX, GDXJ) will outperform S&P through 2020 – however, wait for a pullback to buy.
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
