This Week in Barrons: 7-21-2019:
“Past history is no indication of future performance” … but it is!
Thoughts:
We’ve all seen the above on every investment declaration that we’ve ever signed. The only problem is that both the investment house and the investing public knows that it’s a lie. Successful investment houses duplicate what they’ve done in the past, and that’s why we (the investing public) are signing on with them. This same type of declaration plays out over and over again everywhere you look. In stocks, we all know that Tesla, Netflix, Bitcoin, and Canopy Growth have been volatile stocks in the past – and will continue that going forward. That’s why they coined the term: HODL (Hold On for Dear Life). We have grown to expect that behavior. So much so that when things go differently – it raises a red flag.
For example, on July 31st, in the face of a powerful consumer and a record-breaking stock market, our FED will probably cut interest rates. Chris Rupkey from Union Bank says: “This doesn’t smell right given the strength of the economic data. You really have to ask yourself why they’re going to cut rates.” Despite the data, the FED believes that a risk management interest rate cut is necessary for two reasons: (a) the slowing global economy, and (b) inflation has been below their 2% target for too long. Honestly FED, inflation hasn’t been below 2% in a decade, but we all know why you’re cutting rates – the stock market and the White House are demanding it. The issue is that our historical FED has seldom responded to market or White House pressures – and we’ve grown accustomed to predicting their future behavior based upon their past. This throws a wrench into that pattern.
And there are other areas where ‘past history is not aligned with current performance.’ Just last week Senator Rand Paul voted AGAINST providing proper compensation to 9/11 workers and first responders. His reasoning was that he wanted it spelled out how they were offsetting this particular charge against our national debt. Jon Stewart said it best: “At some point, we have to stand up for the people who have always stood up for us – and at this moment in time maybe cannot stand up for themselves due to their illnesses and their injuries. What Rand Paul did today on the floor of the Senate was outrageous. He is a guy who put us hundreds of billions of dollars in debt. Now, he’s going to tell us that a billion dollars a year over 10 years is just too much for us to handle? You know, there are some things that they have no trouble putting on our credit card, but somehow when it comes to the 9/11 first responder community – the cops, the firefighters, the construction workers, the volunteers, the survivors – all of a sudden we’ve got to go through this. Think of all of the items that he’s voted for in the past – THIS is the one where he would like to see a national debt offset. This is outrageous.” Mr. Paul I ask you: How do you sleep at night voting against comforting and extending the lives of those who risked their own in the 9/11 crisis? We as a country have an over-arching mission statement and humanitarian motives. You know what those first responders and volunteers were trying to do – yes? They were trying to save lives – at the expense of their own. I appreciate the fact that you think we have a short-term, national debt problem. But we as Americans also have a ‘be honest with ourselves’problem. Here’s a simple test I’ve often used in situations such as this. If a private individual stepped forward to fund the entire first responder price tag – would you feel relieved? Or would you feel ashamed that you couldn’t find the money to save the lives of the very people that were saving your life on that day. Mr. Paul, I’m not proud of what you did, and I hope (deep down) you are not either. And if you’re not proud of what you’ve done, perhaps you should do something else?
When I was growing up, my father always called me a ‘Tailgater’ when he caught me doing something that he thought reflected badly on me. Why a ‘Tailgater’? Because:
- Tailgaters don’t go any faster than the car in front of them.
- Tailgaters don’t make the car in front of them go any faster.
- Tailgaters only create frustration, limit choices, and become unsafe.
- If you really want to make a difference, you’re going to have to find your own lane.
Be cautious when past history does NOT line up with future performance - that is more often than not a time to sell, rather than dive in with both feet.
The Market: Why are we at all-time highs? Spoiler alert = War Drums
Is the stock market at all-time highs because:
- Store closings could set a new record and top 12,000 this year? It starts with closing 2,500 Payless stores, 800 Gymboree stores, and 650 Dressbarns – all the way down to 500 Charlotte Russes, 230 Gaps, and 45 Party Cities.
- Online retail sales are up 11.6% year-over-year (YoY). OR because most other retail sales categories are down like: building and garden – down 4.7% YoY, sporting goods – down 5.3% YoY, and electronics and appliances down 5.8% YoY.
- Banks are advertising their high-yield, risk free checking accounts? In a raging bull market like we have witnessed the last 10 years, I would expect to see more aggressive stock market advertisements – not 2% cash accounts.
- The Leading Economic Indicator’s report came in NEGATIVE 0.3% for the first time in years.
- Bitcoin (BTC) is now an “unstoppable force beyond any government’s control”,according to Congressman Patrick McHenry of North Carolina. “We should not attempt to deter this innovation; governments cannot stop it, and those that have tried have already failed,”he continued.
- OR is it due to the Drums of War?
A powerful council in Iran said Saturday that the country's seizure of a British oil tanker in the strategic Strait of Hormuz was in response to Britain's role in impounding an Iranian supertanker two weeks earlier. A spokesman for Iran's Guardian Council was quoted as saying: “The rule of reciprocal action is well-known in international law, and Iran's moves to confront the illegitimate economic war and seizure of oil tankers is an instance of this rule and is based on international rights."
There are rumors that Saudi Arabia and Israel are thinking of partnering in order to ‘take out’ Iran. The problem with attempting to ‘take out’ Iran is that we’re not talking about some back woods nation like Afghanistan. Iran makes uranium. You don't do that if you live in a jungle wearing a loin cloth. Iran has both high intelligence and high technology. In other words, if this escalates into a true shooting war, it could spiral out of control quickly. Iran would unleash all the missiles they possess on U.S. and Israeli posts, and of course the retaliation would be brutal. The ugly part is that the global Central banks need something on which they can blame a global economic meltdown – and ‘WAR’is one of the big elements on their playlist.
Info Bits:
- The mid-engine Corvette: delivers over 495 horsepower, launches from 0 to 60 in 3 seconds, and will start at less than $60k. Yeah baby.
- Tesla turnover – duh: There’s been a bunch of turnover in the Tesla autonomy team, again – and again. This is hard. No-one has autonomous driving working yet, and declaring that you WANT it to work doesn’t mean that your team can MAKE it work.
- There’s no real evidence: that ‘screen time’ is a problem for children.
- 40% of American couples: now meet through online dating apps.
- Housing ain’t doin’ so hot: Housing reports show building permits at a 3-year low.
- Back in the fridge ya go: Budweiser makes 1 of every 4 beers worldwide. It also just canceled the biggest IPO of 2019. The brew-glomerate was planning to spin off its Asia business into a separate publicly traded company. The IPO for Bud Asia was to have raised $10B cash that Bud could have used to pay off some debt. Oh well, stick that can back in ‘da fridge.
- The trade war is taking its toll on China. The country's economic growth slumped to its lowest level in almost 30 years. Things won't get better anytime soon. China's National Bureau of Statistics predicts that their country's economy will continue to face "downward pressure" in the second half of the year.
- What’s the Singularity? The singularity is considered the point at which technological growth goes far beyond what humans can control. Think artificial intelligence becoming smarter than us. Elon Musk seems to be paving the way there with his new company Neuralink. Their first product will be a computer chip implanted into your brain.
- Welcome Back Geoffrey: The giraffe and Toys “R” Us are coming back to the US with two new stores described as “highly engaging retail experience designed for kids.” This is after the chain closed all of their 700 of their original stores.
- Tom Cruise is back in the cockpit: for the new ‘Top Gun’. All the Gen Xers are celebrating like it's 1986 again.
- Boeing is charging-off $5.6B to the global grounding of its 737 MAX: They will likely rack up another $1.7B in MAX production costs due to a factory slowdown. This does not include litigation costs or the $100m the company is donating to those affected by the crashes. The announcement comes just days after airlines extended their grounding of Boeing MAX 737s until early November.
- WeWork co-founder Adam Neumann is a real piece of Work: He raised about $700m for himself over the past few years by selling shares and taking out loans against his stake in the co-working startup. The move is unusual, “given that startup founders typically wait for the IPO to monetize their holdings.” Neumann is WeWork’s largest shareholder, or was – well no one really knows anymore. What a co-worker he must be.
Crypto-Bytes:
- BitMex Tangle in Taipei: Thanks to MCC, if you wish to see BitMex getting their head handed to them in a debate with world class economist Nouriel Roubini – look no further than: https://www.youtube.com/watch?v=qlZukhN_C6c
- Will Bitcoin reduce money laundering? $2T of U.S. dollars were laundered last year – which is more than 650% MORE than the entire crypto market place. I wonder if certain people and organizations are fighting so hard against crypto – because Bitcoin will REDUCE global money laundering. Joe on CNBC’s SquakBox ask Treasury Sec. Steve Mnuchin: “Are you saying cash has never been used for illicit purposes?” Steve answers: “We are just trying to make sure that bitcoin doesn’t become the equivalent of a swiss numbered bank account.” Joe responds: “But how is that even possible – when anyone can buy Bitcoin openly – and it’s completely traceable in terms of where it goes? Won’t Bitcoin reduce money laundering?” Steve answers: … Let’s cut to a commercial break.
- Facebook meet D.C.: Facebook defended its Libra cryptocurrency before Congress last Tuesday and Wednesday, when the Senate Banking Committee and House Financial Services Committee respectively held hearings on the crypto project. David Marcus, who heads up Facebook’s blockchain efforts and leads its Calibra subsidiary, said in pre-written testimony that the company would be taking the time to ensure the cryptocurrency is compliant with applicable anti-money laundering and other related laws. The whole pushback against FB’s Libra is interesting. Either Congress doesn't want the competition to the dollar, OR they're thinking of taking it over to use it themselves. The IMF has hinted that crypto is the avenue they might want to use to help replace the dollar. Obviously with almost 3B users, Libra is a good starting point for a Crypto Central Bank.
- Bitcoin meet Deutsche Bank: Bitcoin (BTC) dropping from $13k to $9.6k could have had as much to do with Deutsche Bank (DB) as anything else. In short order, DB clients withdrew over $1B last week and it’s rumored that the bank had to liquidate their BTC holdings in order to do so.
- Would you like pay delivered in crypto? During the hearing in Washington, D.C., FB’s blockchain lead David Marcus was asked whether he would be willing to accept his salary paid to him in Libra? To which he answered: “Absolutely.”
- Too Big to Facebook? In both testimonies to Congress last week, Facebook's David Marcus stopped short of committing to freezing work on the project. Rep. Brad Sherman (perhaps crypto’s loudest Congressional critic) suggested that Libra was more dangerous to America than 9/11. His colleagues however wondered whether Libra would become “systemically important,”which is Beltway-speak for “Too Big to Fail.”
Last Week: Our rates are going lower, and global Central Banks will be buying more corporate stock – get used to it.
Our FED heads were out in force last week, saying some of the most outrageous things I've ever heard from them such as: “We need to vaccinate the economy against low inflation.” And “We can’t offer specific future timetables on rates because that could influence markets.” Excuse me? Real inflation is currently running in excess of 6%, and you’ve been manipulating markets since the day the FED was created. On CNBC, Blackrock’s CEO Larry Fink said: “The ECB will need to buy stocks for stimulus purposes.” So, along with the Swiss National bank buying stocks, now we’re openly talking about the European Central Bank buying stocks as well. This is madness, but it appears that the plan has Central Banks owning the world – so be it.
Too that end, SB offers 2 cautions:
- We get overly optimistic about design and reliability of any system – and forget what it would be like to live without it. I would put the Internetin that camp.
- We get overly pessimistic about the likelihood and cost of failure – which leads to over-engineering and paying for more redundancy than necessary. I would place putting life jackets on planes in that camp.
Understand that a trend is your friend until it ends. And (FYI) it never tells you when it’s going to end.
Weed: Everything’s back to ‘Comin’ Up Roses’ / flowers. We are in the bottoming process – actively pulling sales from the over $1T alcohol market.
- New CBD investment study: Over 90% of CBD investments are in the FDA’s grey area. Among the over 2,000 investment deals tracked, only 4% of the money is held by companies clearly operating within FDA guidelines, with another 4% being held by companies clearly in violation of FDA guidelines. Therefore, many of current CBD investing strategies are failing to take FDA involvement into account.
- Future sales growth: is only limited by our imaginations. I personally thought that Cowen Group's estimate of $75B in global cannabis sales by 2030 was fairly aggressive, but Stifel analyst Andrew Carter recently called for a $200B estimate on global spend by 2029. Everyone agrees on one element – and that is the U.S. will legalize marijuana at the federal level in the near future. Today, two-thirds of respondents favor legalizing marijuana, with 33 states having approved medical cannabis in some capacity. Of those 33 states, one third (11) also allow recreational consumption. Where will all of these new sales come from? They will be coming from the over $1T alcohol marketplace.
- FDA comes up for air. Amy Abernathy, acting FDA Chief Information Officer, said that the agency is "expediting its work to address the many questions about cannabidiol. This is an important national issue with public health impact, and an important topic for American hemp farmers and many other stakeholders." CBD, a non-psychoactive ingredient in cannabis, is widely held to have wellness properties and to help treat a range of complaints, from pain management to inflammation to anxiety. With many companies anxious to launch products containing CBD, the FDA has come under pressure to devise rules sooner, rather than later. Clinical trials typically take several years to complete. Former FDA Commissioner Scott Gottlieb proposed congressional action to speed things up, based on using tier’d dosages of a substance.
- A bipartisan group in the U.S. Congress: recentlyintroduced a bill to accelerate medical cannabis research. This is a step that will bolster support for federal marijuana reform. "47 states have legalized some form of cannabis, yet the federal government is still getting in the way of further progress on the potential for research,"said Rep. Earl Blumenauer, an Oregon Democrat and co-sponsor of the Medical Marijuana Research Act of 2019.
- FDA says: “It’s a wrap.”: The FDA wrapped up an open call for people to suggest regulations for cannabis extracts. The agency said it will expedite guidance on the topic, a nod to mounting public interest in cannabinoid treatments. The FDA received more than 3,000 responses, ranging from state and local health departments to CBD manufacturers to the American Medical Association. In my view the FDA could issue tier’d dosage guidelines by the end of 2019 and certainly prior to the national election of 2020. Meaning that anything below a certain mg dosage of CBD (500 mg) would be exempt from FDA purview. This would trigger an onslaught of beverages and edibles from ‘the big players’ and would further cripple the alcohol market. But the FDA review is much bigger than CBD. The agency is taking a fresh look at all cannabinoids, whether they come from hemp or marijuana, while also giving the plant a new look now that low-THC varieties of cannabis have been removed from the Controlled Substances Act. Expect increasing recognition from federal health authorities that cannabis has legitimate medical value. It’s ALL GOOD (except if you’re in the alcohol business.)
Next Week: Watch silver this week. It might pull back and if it does – dive into SLV and some specific miners.
Global Central Banks have now gone all in on cutting rates. They will also be doing QE, and actively buying stocks. There's NO way out for the banksters. The only way to keep the economy moving is to keep ‘cutting rates – printing money - feeding the beast.’
The issue is that according to history, when we enter recession – it takes rate cuts of 4 - 4.5% to stop the bleeding and get us moving again. Well, we don't have 4 or 5% to cut – we have less than 2%. So will the U.S. venture into "negative rate-land”? Yes.
But Central Banks know that won't work for long – and that’s where WAR enters the picture. There's nothing Central banks would like better than a war, that would tumble the stock markets of the world, and allow them to wash their hands and point their finger at the war as being the economic culprit. Let's all hope that cooler heads prevail.
In the meantime, they're going to pull out all the stops to keep this market up and the economy creaking along. We are going to get a rate cut at the end of the month – with even more drastic measures on the way. With all the tensions in the world and earnings coming in punk – the market is ripe for a little fading right now. Friday we were up triple digits and yet ended the day red. We could see a bit more red before they jawbone us higher again. Watch gold and silver (especially silver) over the next week as a pullback could be in the offing – and that would be a buying opportunity for the indexes (GLD, SLV and for the mining indexes GDX and GDXJ). Keep your eye on Iran as things are a bit more tense than I’d like, and no one comes out unscathed – if we truly go to war.
Tips:
Top Equity Recommendations:
HODL’s:
- Aurora (ACB = $6.84 / in @ $3.07) – continue to watch ACB – should jump assuming positive earnings in August,
- Canntrust Holdings (CTST = $2.77 / in @ $3.12) – their loss is everyone else’s gain – and in the end – this too shall pass.,
- Canopy Growth Corp (CGC = $35.49 / in @ $22.17),
- GBTC (GBTC = $13.23 / in @ $10.01),
- Hexo (HEXO = $4.91 / in @ $6.37),
Crypto:
- Bitcoin (BTC = $10,600)
- Ethereum (ETH = $225)
- Bitcoin Cash (BCH = $325)
Options:
- RIOT ($1.98):
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 (this trade can only lose money if RIOT falls below $0.80).
Thoughts:
- Gold (GLD = $134.47) Since gapping higher last month back when China, Iran and North Korea provided some global drama, GLD has been trading in a range. What’s the likelihood that it will stay in its range? Good question. But if you think that GLD probably won’t find a reason to break out on the upside or the downside for the next month or so, you might consider a neutral trade. With a 72% IV rank, short premium is the go-to strategy. If you think GLD might stick in a wide range, the short iron condor that’s long the $127 Put, short the $129 Put, short the $138 Call and long $140 Call in the August monthly expiration is a neutral strategy that collects a credit 1/3 the width of the strikes, has a 71% probability of making 50% of its max profit before expiring.
- Volatility VIX = 14.45) Fed Chairperson Powell tried his best last week to keep the market rally going with talk of a rate cut. And he did – sort of. What’s interesting is that the volatility index (VIX) isn’t below 12, like it was last April ’19 and October ’18 when the market was rallying. Even VVIX (the VIX of the VIX), was higher, suggesting tension building in the volatility market. Maybe, just maybe, the VIX could have a sharp move to the upside this summer if something spooks the market. Plus, even though the VIX is a couple points off its recent lows it could be an attractive buy for a contrarian bull. If you are bullish, with the Aug VIX at 14.45, the long Call vertical that’s long the $13.5 Call and short the $16 Call in the Aug expiration is a bullish strategy that has a 54% probability of profit at 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
