This Week in Barrons: 9-22-2019:
Thoughts: We may have seen the last of the Unicorns.
“Unicorn” is a term that was coined six years ago to refer to a start-up valued at more than $1B. Unicorns are very real, and have been breeding almost uncontrollably – from 33 start-ups being awarded that distinction in 2013 to hundreds today. While differing in vertical markets and business models, they all share at least one of the following traits:
- They are fast-growing,
- Create heavily financed losses,
- Have corporate structures that give their founder(s) total control, and
- Are often unceremoniously backed by Softbank’s Vision Fund.
Most unicorns tick at least one of these boxes, but WeWork ticks them all. The office space company may or may not be a tech company, but it certainly burns through cash by the billions to finance heavy losses. It’s led by an opinionated founder, and heavily backed by SoftBank. WeWork has the ability to bring down the entire unicorn mentality. Until now, the likes of: Uber, Lyft, Snap and Spotify have been able to raise huge sums of money from Wall Street without a hint of profitability. But this week, the ‘cult of WeWork’ was forced to delay its own IPO amid big questions over its governance, financial losses, and basic business model. History has shown that all artistic phenomena peak dramatically before a crash, and this investor-based infatuation with loss-making unicorns could very well follow the same pattern. To quote Harry de Quetteville: “A bet on WeWork is essentially going to be worth trillions or nothing.” But that’s no different than any other unicorn. Unicorns often:
- Don’t give audiences what they want, but rather give ‘em what they need,
- Lead audiences rather than respond to them,
- Act on inspiration and not desperation,
- Refuse to look back, unless they must,
- Need help to make it, but will fight ‘tooth-n-nail’ against that help,
- Are always doing something for the first time, and
- Have trouble: ‘Staying in their lane’.
It’s tempting to be an artist. The freedom of working your own hours, and making what you want – whenever you want. Except it comes with a hook – responsibility. Artists are responsible for owning what they make. Per HL: “the value of WeWork’s artistry sank the most on concerns that the cash-burning company will miss out not only on the $3B it planned to raise in the IPO, but also the $6B loan that is tied directly to a successful IPO. WeWork must carry out the offering by Dec. 31 to get the loan. WeWork could easily go from a planned $47B IPO in September to a debt / bankruptcy reorganization in November. This could change the private markets.”
In my world, a large part of this happened because it was all about the artistry – until it wasn’t. Artists inherently downplay ‘the Finishing Move.’ Artists often downplay the sales process, and that’s where ALL of the value and profit are created. If you ever purchased a product online, you have experienced ‘the Amazon effect.’ Amazon doesn’t make the products, but it controls the customer relationship. 90% of the profit in a transaction goes to the company making that final sale – not the manufacturer. Big bucks are paid to the people doing the ‘hard work’. Hard work (in this case) is: earning the attention, garnering the trust, and helping someone make the choice to buy your stuff. Don’t confuse ‘hard work’ with ‘important work’. The factory is important because without it there’s nothing to sell. But in an increasingly commoditized world – it’s not the hard part. The Broadway producer makes the money – while the artistic chorus member barely ekes out a living. Either you’re doing the hard work, or you’re left out of the transaction. It’s not enough any more to say: “We’ll make it up on volume.” Not when every aspect of your business is operating at a loss: Uber, Lyft, and now WeWork.
WeWork (like Enron) has all the makings of a wakeup call to the markets. It succeeded in blurring the lines between vision, bulls**t, and fraud. A couple of ‘tells’:
- The board (after 7 days) reduced their IPO offering price by 25%. This either reeks of desperation or a lack of fiduciary responsibility.
- Adam Neumann’s veneer is cracking mercilessly with no end in sight. Adam is the young, charismatic, visionary CEO of WeWork – with an oversized ego.
- The ‘rats’ are leaving the ship in droves as Softbank and others (Saudi Arabia and Abu Dhabi) are re-thinking their various investment options.
- Adam Neumann has suddenly become ‘tight lipped’ as if he’s now being advised by lawyers to ‘stick to your talking points, and don’t take any questions.’
- Adam’s idea of a community-based earnings model (a crowd sourced EBITDA) is no longer valid and now ‘down right’ scary.
I’m actually hoping that this ‘dose of reality’ spills over into the public markets fairly quickly. Per MJP: there’s a saying that describes the prosperity cycle: “Hard times create strong men. Strong men create good times. Good times create weak men. And, weak men create hard times.” Thank you WeWork for completing the cycle.
The Market:
Here’s a list of 10 names that every 5th grader knows, but I don’t recognize a single one: Eleven, Forky, Pennywise, JoJo Siwa, Sabrina, Robin, Ashley, Kylo Ren, Brite Bomber, and Tormund. I really felt clueless and disrupted when I learned that these were the top 10 kid’s Halloween costumes for 2019. The idea here is that every market will at some point morph and become disrupted. I believe the future of investing will not be about buying ETFs, mutual funds, and annuities, but rather focused on self-directed and active strategies. The new investor is indifferent to product, welcomes heightened volatility, and understands delta neutrality.
This disruptive behavior will even extend into the VC (Venture Capital) world. Currently, 1 or 2 companies will determine the fate of any given VC fund. In the last 15 years, VC returns have stabilized in the high teens / low 20’s – which is enough to sustain the sector. The only thing that would return us to higher multiples would be a massive reduction in the amount of capital coming into the VC environment – and I’m not seeing that happen any time soon. With 1 or 2 big winners determining your fate, then any VC’s success rests on the shoulders of the manager who can pick the winners.
Info Bits:
- Purdue Pharma – you’re toast! The maker of the painkiller OxyContin, filed for Chapter 11 bankruptcy in New York. It's all part of the agreement it made to pay billions of dollars to multiple states and governments to settle lawsuits. Purdue will provide over $10B in funding to address the opioid crisis, including settle with 24 state attorneys general.
- UAW turned up the heat on GM: The union's 46,000 hourly workers walked out at 31 GM factories and 21 other facilities across nine states. It's the first work stoppage in the U.S. auto industry in 12 years. The union said GM was putting profits ahead of the employees who helped save the company after it went through bankruptcy and a federal bailout over a decade ago.
- Orange is the new black for Felicity Huffman: who was sentenced to 14 days in prison for her role in the college admissions scandal.
- Mom jeans are ‘Hot’: J. Crew just filed the paperwork to spin-off Madewell into a separate company with its own IPO. While J.Crew's sales have slipped, Madewell now makes up the majority of the company's profits.
- More ‘Hot’ Mom jeans: Not to be outdone, Old Navy is being spun-out of GAP – and just announced that 800 new Old Navy stores are coming.
- Smile Direct ‘burns’ it up: Smile Direct Club (SDC) dropped 28% on its 1st day of trading – becoming the worst IPO of 2019. The ortho-disruptor prescribes clear braces without an in person meeting – keeping prices low and length of stay short. But losses are doubling – reminding me of WeWork, Uber & Lyft.
- Tinderella: Tinder is making a series about the worst dating experiences of all time. Are we sure that’s a story that needs to be retold?
- The Justice Department ‘burns’ Edward Snowden: Snowden is arguably the world's most famous whistleblower, whose leak spotlighted the U.S.'s blurred line between privacy and security. With this lawsuit, it appears that the discussion won’t be going away any time soon.
- TV’s are ‘hot’ again: ROKU was down last week due to Facebook’s new spyware (sorry Portal TV) which will not only put a camera and mic in your home (cool Zuck – you finally heard my prayers), but it will also let you stream content from various services like Netflix and Amazon.
- FedEx didn’t Deliver: and had its biggest drop since 2008, after reporting earnings last week. There’s concern about global trade and their lack of deliverability.
- Netflix is ‘burnin’ pay stubs: And in their place they’re paying filmmakers, actors and producers MORE if their films are successful. They’re doing this to try to prevent projects from going to other studios. Duh. Sure, we all love Stranger Things, but who is watching The Ranch?
- We Wonder Why: India banned the production, import and sale of e-cigarettes. Strange, it’s almost like they’re bad for you or something?
- A dozen ‘hot’ wings to go: Wing (a subsidiary of Google) is partnering with FedEx and Walgreens to conduct the first drone delivery trials.
- R.I.P. Cokie Roberts. This past week the legendary journalist and political commentator died at age 75. Over the span of her career, Ms. Roberts worked at CBS, NPR, and ABC News – earning 3 Emmys for her work. In 2008, she was named a "Living Legend" by the Library of Congress. ABC News's President James Goldston said, "Cokie's kindness, generosity, sharp intellect and thoughtful take on the big issues of the day made ABC a better place and all of us better journalists. She was a true pioneer for women in journalism.
Crypto-Bytes:
So when it comes to digital currencies, there are a few things that I anticipate will happen: (a) Governments will continue to pressure any corporation that launches a digital currency with the ambition of gaining global adoption. (b) Governments will create, launch, and scale their own digital currencies. Some countries, like China, are already working on this, while others will make the decision in the near future. And (c) Bitcoin will be the last survivor. The decentralized digital currency is a living example of the proverb: “What doesn’t kill you makes you stronger.” As governments continue to outlaw or regulate other digital currencies, the largest market cap asset will gain more adoption, benefit from the computing network becoming more resilient, and ultimately be the only digital currency with the potential to gain global adoption.
On the slight chance that I’m correct in my analysis, we are looking at one of the largest paradigm shifts in human history. Many people are getting behind a movement to separate money and government. As we push forward into the digital, hyper-connected world, the ideas that can leverage technology, coordinate global resources, and maintain leadership – stand to gain the most. For the small number of groups that can leverage the model, we are likely to see them change the world.
Factually:
- JPM Coin: JPMorgan’s blockchain-based payments initiative has added Deutsche Bank as its latest member. The addition brings the total number of banks signed up to the Interbank Information Network (IIN) to 320.
- ETHER Payments: BitPay will soon support Ethereum on its crypto payments platform. With BitPay, subscribing merchants will be able to accept payments in bitcoin, bitcoin cash and ether – along with a handful of stablecoins.
- EOS in Trouble: The world’s 7th largest blockchain, EOS has been a project long plagued by fears that its structure was too centralized. Now that the lion’s share of its entities that govern the chain are in China – fears are being voiced concerning state intervention.
- I got Options: Chicago-based derivatives marketplace the CME Group has announced that it will offer options on its bitcoin futures contracts starting in Q1 2020. This will give clients additional tools for precision hedging and trading.
- I dumped my OVERSTOCK: Said Patrick Byrne, the former CEO of Overstock who resigned abruptly in August. He has sold all of his 13% stake in Overstock (the company he founded 20 years ago), and has reinvested all of the proceeds into “investments that are counter-cyclical to the economy – gold, silver and two flavors of crypto. By this move I also move outside acts of retaliation from the Deep State.”
Last Week: The REPO Market FROZE last week – of course QE is coming back!
The “Repo Market” is a short-term funding market that is used mostly by banks and institutional borrowers. That market ‘seized / froze’ last week – prior to the FOMC meeting. That means that more organizations showed up to borrow money than there were funds available to borrow. Yes (I’ll say that again), our short-term, global lending market ran out of cash right before the FED meeting – and the FED was required to inject liquidity in order to keep it alive. Whether you call this ‘injecting liquidity’ or ‘a small amount of QE’ – we now know the future. We are going to have continual problems with the Repo Market because corporations / banks / organizations are going to need more and more short term financing. Is another round of QE in our future? Absolutely. Last week should have changed virtually every investor’s view on this market.
Also last week, we saw a bid come back under the bonds. What does that mean? That means we saw the rest of the world continue to purchase our bonds and treasury notes. After all, why wouldn’t they? The rest of the world has negative rates, and currently our 10-Year Treasury note is sitting around 1.75%. Because of this negative condition, we should see continued bond buying. Unfortunately, as more money comes into our bonds – the lower our interest rates will be driven. Financials have an inherently tough time in low interest rate environments. And if financials are having a tough time – you can assume that the markets in general are going to have a tough time getting any traction to the upside. I would also expect to see our FED suspend its forward guidance program because right now it’s “every man for himself” out there.
Weed:
Aurora (ACB) delivered earnings results which featured record adult use sales for the industry, with revenues up 52% sequentially. These strong results were overshadowed by a wider than expected loss – in a quarter where the company had promised profitability. The company is talking up their new line of vapes and edibles (mints, chocolates and gummies). My price target for ACB is $10 - $12 over the upcoming year.
Factually:
- Trends according to Ben Kovler of Green Thumb Industries:
o There is a massive decline in interest for cannabis combustibles.
o Consumer preference is: easy-to-use & health and wellness oriented.
o CBD is allowing people to get a better night’s sleep, and reduce their inflammation & pain.
o The highest growth will come from consumables
o The location for the highest growth is the East Coast.
o The debate between Beverages vs Chocolate Bars depends upon efficacy and distribution. It’s difficult to determine if the efficacy of a cannabis beverage is the same as that of an edible. And then there are the beverage distribution and supply chain issues. Comparing a beverage to a chocolate bar, each beverage has between 10 and 20 mgs, but a bar is typically 100 milligrams – with each ‘break-off’ square containing 5 or 10 mgs. So one chocolate bar is equivalent to a 5 to 10 beverages. People can buy 10 chocolate bars, but nobody walks out with 100 cans of anything. The alcohol and non-alcoholic distribution systems are beginning to adapt to cannabis. Nonetheless, the beverage segment is where ‘the action is.’
o Marketing strategy = educate, be honest, and deliver a consistent experience. Educate the staff, budtenders, POS personnel – anyone who is out there talking about the product with consumers every day.
- Budtender comments: In his new book: Cannabis Cocktails, Mocktails and Tonics author Warren Bobrow re-issues the old remark: “Most cannabis drinks taste like bong water.” According to Bobrow, the problem with many cannabis and cbd based drinks comes down to quality and quantity. “On the one hand, mixologists try to cover up the cannabis flavor with too much sugar. It’s tough to make sugary hemp oil taste good. The result is often a one-dimensional drink. If it’s going to be sweet – try using high-quality sugars like Turbinado, raw honey and agave. Work with mixologists from the liquor industry. There both artists and scientists work together to create the next generation of beverages.”
- CannTrust lost its license: Health Canada suspended it citing noncompliance with Canada’s federal cannabis laws and regulations.
- Maryland’s market is hot: The state is on pace to double sales YoY.
- Bruce is back: Ousted Canopy Growth co-CEO Bruce Linton is getting back into the marijuana business by joining Gage Cannabis as executive chairman. Meanwhile, Slang Worldwide, a manufacturer of cannabis packaged goods, announced Bruce Linton as an investor. And a Better Choice Company announced that Linton would become an adviser.
- Maine is bagging and tagging: The Maine Office of Marijuana Policy conducted a demonstration of a cloud-based software product provided by Florida-based BioTrackTHC that will use barcode-based tags and labels to track the growth and distribution of marijuana products. Individual tags and labels will cost 25 cents. BioTrackTHC did receive a contract from Maine to provide the track-and-trace system required in the state’s marijuana legalization act.
- CBD is booming: despite any legal ambiguity. A recent report from IRI says CBD products are exploding, and are expected to generate up to $2B in sales in 2019 – with the U.S. cannabis industry reaching $45BB by 2024.
- Hooyah for Sen. Mitch McConnell: Senate majority leader Mitch McConnell submitted a provision this week that would give the FDA 90 days to submit an outline of its plans, and 120 days for its formal policy. McConnell, a longtime hemp supporter along and member of the U.S. Hemp Roundtable, is pushing the FDA. Jonathan Miller, general counsel for U.S. Hemp Roundtable said: “The lack of FDA guidance is putting a cloud on CBD sales. Despite a lack of guidance, CBD continues to emerge in food and drink, and garner major support from major brands. But our biggest enemies are bad companies that have high levels of toxins or make false claims. We want to weed out the bad players.”
- USDA: Hemp Cultivation Draft Submitted: The U.S. Department of Agriculture (USDA) submitted its draft regulation to the White House on the growing and selling of hemp. They’re hoping to include: the availability of crop insurance and banking services, interstate hemp transportation, importing hemp seeds from overseas, and pesticide use in farming.
- U.S. House to vote on cannabis banking bill next week: that would create a federal safe harbor for financial institutions to serve state-lawful cannabis businesses.
- Wisconsin wants to legalize medical marijuana: and 3 legislators introduced a bipartisan bill that would create a licensing system for growers, processors and sellers.
- New Hampshire lawmakers overrode Governor’s medical cannabis veto!
Next Week: Watch out for negative rates and QE – they’re coming…
If you wish any proof as to what negative interest rates do to financials, the upper left-hand chart of DB should be proof enough. European Banks are in a negative interest rate environment, and are sitting at 20-year lows. This tends to support the theory of shorting the financial ETF – the XLF. Also think of shorting JPMorgan. It’s sitting at all-time-highs – which makes an ideal place to short.
The headlines at the end of last week had the Chinese cancelling their trip to view Montana’s farms and return to China sooner than expected. The market took that as bad news and immediately:
- Amazon (AMZN) became shortable. Already trading in an incredibly tight range – any bid higher should bring out the shorts.
- Roku (ROKU) and Netflix (NFLX) fell and should be avoided until the dust settles.
- Microsoft (MSFT) also became shortable under heavy volume.
- Costco (COST) and Caterpillar (CAT) – that have carried this market higher are beginning to show the strain and are giving some back.
- Intel (INTC) is also giving some back as it passes through its expected move to the downside.
- Even Apple (AAPL) declined – despite their new iPhone going on sale.
Also next week, watch the risk markers:
- The VVIX is still over 100 with the S&Ps sitting near all-time-highs. That tells me that the professionals are worried about what’s right around the corner.
- Gold is continuing to move higher (see lower right-hand chart) – from a low of $1,300 / ounce in June to over $1,500 / ounce.
- This coming week’s expected move for the S&P has widened – even though there is no FOMC or market-moving reports due. That’s signals fear.
Please continue to raise cash, trade small, and take profits quickly.
Tips:
Top Equity Recommendations:
HODL’s:
- Aurora (ACB = $5.02 / in @ $3.07)
- First Majestic Silver (AG = $10.09 / in @ 10.50)
- Canopy Growth Corp (CGC = $25.56 / in @ $22.17),
- DRD Gold (DGD = $4.43 / in @ $4.20),
- GBTC (GBTC = $12.80 / in @ $10.01),
- GameStop (GME = $4.7 / in @ 4.00),
- Pan American Silver (PAAS = $16.80 / in @ 18.00)
Crypto:
- Bitcoin (BTC = $10,100)
- Ethereum (ETH = $220)
- Bitcoin Cash (BCH = $315)
Options:
- RIOT ($2.06):
o Bot Jan 17, Sold $3 Call / Sold $3 Put / Bot $4 Call for $1.85 CR
o Bot Jan 17, Sold $2 Call / Sold $2 Put / Bot $3 Call for $1.45 CR
o (can only lose money if RIOT falls below $0.70).
Thoughts:
- Gold (GLD = $142.95) has taken a nice two-week vacation from its massive summer rally. Not even the excitement of a spike in oil could push GLD higher, and yesterday’s widely expected rate cut by the Fed couldn’t either. The rate cuts here and in Europe had a “risk-on” effect of sorts, as money moved back into stocks and out of the safety of gold. But GLD could still have some supporters betting on the bullish side, while bears could keep pressure on GLD that’s still trading near 5-year highs. The result is that GLD might not go anywhere for a while. The market still sees some potential excitement, though, giving GLD a 59% IV rank. That makes it a short premium candidate. If you do think GLD might trade in a wide range for the next month or so, the short iron condor that’s long the $134 PUT, short the $136 PUT, short the $145 CALL and long the $147CALL in the Nov expiration is a neutral strategy that collects a credit 1/3 the width of the strikes, has a 72% probability of making 50% of its max profit before expiring.
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Please be safe out there!
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Until next week – be safe.
R.F. Culbertson
