This Week in Barrons: 12-15-2019:
Thoughts:
When I was growing up, the gap between good and great was much smaller, there were gatekeepers to make sure nobody ‘became famous’ that couldn’t handle it – either in talent or work ethic. People who created famous people were careful to only bestow it on those that they believed had something to offer. As time moved on, the race for fame grew faster, and many of the gatekeepers and their requirements faded away. This has allowed people to become famous who have very little to offer. This is NOT the case with Paul Graham (co-founder of Y-Combinator) who is both famous and virtually always has something meaningful to offer. He recently wrote: “The most damaging thing you learned in school was learning how to get good grades. It has caused young people to believe that ‘life’ is like taking a series of tests, and that someone can just ‘teach’ you what you need to be successful. Unfortunately, nothing could be further from the truth.” And with most schools giving up on teaching our kids how to learn, we’re stuck with a generation of ‘test takers’. Life is ruthless. It requires everyone to take one test, opportunity, or challenge after another – each one requiring more retained information than the last. Startups are the same way – except that their focus is on a single element – growth. Startups are NOT about raising money and giving investor pitches, but rather about learning what your customers want – doing it – rinse and repeat.
What makes a startup a good investment? “Growth is what makes a startup a good investment. Ideally growth in revenue, but at least in users.” Constantly keep track and brag about how many people are using your product at any given moment of the day.
How do you get a lot of users? “Most rookies think that you need a lot of money to buy your product exposure, and that exposure will (in turn) generate interest and more users. Unfortunately, the way you get a lot of users is to make a product that’s really great.” People naturally use great products, and actively recommend them to their friends. Growth will trickle in at first, and then become exponential. So very simply, the way to get a lot of users – is by making a product that no one can put down.
How do you get a lot of users? “Most rookies think that you need a lot of money to buy your product exposure, and that exposure will (in turn) generate interest and more users. Unfortunately, the way you get a lot of users is to make a product that’s really great.” People naturally use great products, and actively recommend them to their friends. Growth will trickle in at first, and then become exponential. So very simply, the way to get a lot of users – is by making a product that no one can put down.
What’s the best way to make VCs invest in you? “Well, even if you could ‘make’ a VC invest in you – you’d be tricking yourself. After all, you're investing your own time and effort into the same company you're asking them to invest in. If it's not a good investment for you – why are YOU doing it?” VCs invest in growth. People pay a lot of money to find companies / products that are growing – in order to get behind them. If you have growth – brag about it. If you don’t have growth – find it. Show people that you’re growing, and the world will line up behind you.
It seems like such an easy concept – doesn’t it? But instead of building a product, growing a customer base, and allowing your customers to be your mouthpiece – the average entrepreneur seems destined to go down the raising money and deploying capital path. They allow the amount of money they’ve raised to have a louder voice than their customers. Words like: passion, commitment, and making-a-difference have morphed into dollar-denominated phrases with zeros on the end of them.
I guess what really irks me, is that if the current crop of entrepreneurship professors just focus on ‘How to beg for money’, - couldn’t they at least (with the same breath) teach entrepreneurs how to manage their money? After all, over 50% of Americans can’t scrape together $500 for an emergency so: “Houston, we have a problem.”
It strikes me that people as insightful as Paul Graham highlight such important points regarding the difference between learning and test taking, but our educational system actively avoids the most important topic – managing money. Maybe it’s because of Henry Ford who once said, “It’s good that people don’t understand our banking and monetary system, for if they did – there would be a revolution by morning.”
I hate to keep driving the point home on crypto, but at least Bitcoin helps to focus more people toward asking the right questions. It demonstrates a different path. If teaching people about money is dangerous, then showing Bitcoin’s continued price appreciation against the US dollar should incentivize people to become curious enough to understand how fiat money works – and how it doesn’t work.
The Market:
Google is one step closer to making robo-taxis a reality as it launched its Waymo app last week. In the past year, citizens of Phoenix have taken over 100,000 rides in robo-taxis – often with a human ‘safety driver’ behind the wheel. Now in the Phoenix area, you can call a Waymo robo-taxi ride with no ‘safety driver’. Doing some rough math:
- Average Uber ride = $10.
- $7 is the amount the driver gets to keep.
- $2 (of the $7) is the amount the driver needs to cover gas, insurance, and the car payment.
- Therefore, $5 is the cost of the driver, and goes away with robo-taxis.
This means that the cost of the average ride suddenly gets cut in half as the human Uber or Lyft driver is eliminated.
Economically this past week:
- Heavy truck sales are down, and companies are beginning to go belly-up.
- U.S. production fell the most since 2015.
- Diesel demand is down, signaling a manufacturing pull back is still happening.
- U.S. manufacturers are reducing capital spending for the first time in 11 years.
- The average new car loan hit an all-time-high of $31,500.
- Per SF: U.S. business debt exceeded household debt for the first time since 1991. This is a warning sign for the economy as corporate investment softens.
- Per Prof. Jay Ritter: 81% of U.S. companies going public since 2018 did so with negative 12-month trailing earnings – the highest figure since the tech bubble.
- Unless the FED threads a very fine needle, within a couple weeks we could be looking at a squeeze where our FED’s 'non-QE / REPO" program turns into a full frontal assault of true QE. Why? Because our banks don't have the cash to make their reserve margins, and they’re going to have to borrow a lot of money.
I blew it this year on my prediction. After last December’s 20% ‘mini-crash’ and then rebound into February, I thought it was a bounce back from a quick dump and we'd be stair stepping lower in a controlled market meltdown. That never happened. The FED cut rates, printed trillions, had the Swiss National Bank buy billions worth of U.S. stocks, and our own companies bought-back more stock. The FED made it happen.
The question is, can this continue through 2020? We have: election jitters, the national debt, liquidity problems, the impeachment mess, the Barr investigations, civil unrest, the Chinese trade deal, North Korea, etc. They definitely used some voodoo to get past this year. I never saw the non-QE / QE move. The FED’s ability to funnel money through the REPO side of a bank and into the capital markets was ingenious. But maybe they’ve run out of rabbits or hats? I’ll make my predictions next week.
Info Bits: Who’s winning the race over the past 10 years?
- Any press is good press... That’s debatable as Peloton’s new TV Ad is jacked with controversy, sexism and elitism. But it also has everyone chatting Peloton during the at-home fitness company’s most important sales season. Then the ad’s actress owned the drama by jumping into a commercial for Ryan Reynolds' gin – drinking her cycling-induced worries away. Only sales figures will tell.
- Goldman works with WeWork: Goldman Sachs is putting together a $1.75B line of credit for WeWork. This is the first step in carry out Softbank’s plan to get the company back on track.
- The Golden Globe Nominations… were handed out last week with Netflix dominating with 34 nominations. Amazon had 8, with Disney and Apple each grabbing 3. To the victor go the spoils.
- China has ordered U.S. tech off of… all government and public institutional machines within 3 years. This move echoes the efforts of the U.S. to curb the use of Chinese technology.
- Elon Musk… turned heads in Malibu when he showed up at a restaurant in his new Tesla Cybertruck.
- Morgan Stanley is cutting 1,500 jobs as they prepare for an uncertain 2020.
- Southwest Airlines has reached an agreement… with Boeing to be compensated for financial damages due to the 737 Max grounding. Southwest indicated that it would share $125m of the award with its employees.
- Convenience wins: We care more about convenience than just about anything. We’ll gladly trade privacy or our own ethical standards to simply to save a few clicks. So, if we want things to be more fair – make them more convenient.
- As we hit all-time highs on the Nasdaq… only Apple and Google from FAANG have hung with the leaders. Amazon, Facebook and Netflix are lagging.
- Marc Andreesen just dropped… this 44 minute video interview titled ‘Why We Should Be Optimistic About The Future’ = definitely worth a look. https://www.youtube.com/watch?v=UnU5Dikdr2U&feature=youtu.be
- Robinhood introduces factional ownership: Just like in crypto, fractional shares are now coming to Robinhood. Invest in 1000’s of stocks for as little as $1. Choose the amount you want to invest, and Robinhood will slice the shares into pieces – starting with $1. Investing in fractional shares is done in real-time and, commission-free. Yep, this is a big deal.
- Investors pulled $135.5B from… U.S. stock-focused mutual funds and ETFs so far this year. This is the biggest withdrawal on record.
- Where’s my bonus? Deutsche Bank CEO, Christian Sewing, announced that DB is considering cutting bonuses by 20%. Bonuses? DB’s stock is down 60% since the beginning of 2018. Why are there bonuses at all?
- Bah Humbug! November retail sales rose 0.2%, while analysts were expecting a 0.5% increase. Dollar sales in November declined across the board. Is the economy slowing, or are we becoming cheap?
- Morgan Stanley estimates… that Amazon is now delivering half of its own packages.
- WeWork is paying Publicis… $500,000 a month for crisis PR and advertising services – just weeks after almost running out of cash.
- Where’s everybody going – and why? 1,480 CEOs have left their posts in 2019, according to Challenger, Gray & Christmas. 2019 will set this record – eclipsing the previous 2008 high. What do all those CEOs know that we don’t?
Crypto-Bytes:
- Crypto Is KING: Cryptocurrencies have once again outperformed any other major asset classes. Crypto has risen well above the annualized returns for U.S. equities, commodities, and bond markets in 2019. Large-cap cryptocurrencies remain one of the greatest investment success stories of the last decade.
- Halving Boost: Bitcoin's scheduled mining-reward halving in May 2020 could leave prices for the cryptocurrency in a range between $20,000 and $50,000, according to Charles Hwang, managing member Lightning Capital and an adjunct professor at Baruch College.
- If a recession were to occur… we’d see shrinking stock portfolios, growth in other asset classes like crypto, along with new fractional ownership models. Given people are pulling monies from stocks, crypto is growing along with fractional ownership – is a recession right around the corner?
- Record-low bond yields and expensive market valuations… indicate lower future returns and greater risk to the downside for most asset classes. The backdrop remains favorable for bitcoin, especially over longer time horizons. Improved growth prospects tend to hurt non-income producing assets like gold. A potential policy divergence between the FED and other major peers may cause the U.S. dollar to break higher – accelerating economic weakness.
- Banking Assistance: Telegram told investors it was using BNY Mellon and Credit Suisse to move and store fiat currency raised in last year’s $1.7B token sale. The banks declined comment, noting that few financial institutions outside of JPM have been willing to work on crypto projects.
- A decentralized Twitter: Jack Dorsey (Twitter and Square's CEO) will support an independent team of 5 open source architects, engineers and designers to develop an “open and decentralized standard” for social media. The goal is for Twitter to ultimately be a client of this standard.
- Dutch courage: ING (Dutch banking multinational) is developing technology for crypto custody. The move will make ING the first major bank to offer secure, crypto storage
Last Week:
- Monday: If investors are pulling $135.5B from U.S. stock-focused mutual funds and ETFs so far this year, how can stocks continue ever higher? Easy. Our FED is buying them with printed money, and they’re loaning big corporations free money so they can buy-back their own shares. I could still see picking up some Citi (C ) if it gets up and over $76.25
- Tuesday: The futures were red all morning, and then mysteriously jumped green. Why? The WSJ says that the US and China are planning for the December 15th tariff hikes to be delayed. So the algorithms loved that, and we're green across the board. If the financial ETF (XLF) gets over $30.50 – that’s interesting.
- Wednesday: I bought some Citi (C ) at $76.25 yesterday. If they push off the tariff hike, I think it would kick our yearend rally in gear. Speaking of rally, the S&P is less than 1% from its all-time high. The DOW is about 1.5% off that level.
- Thursday: Welcome to the art of negotiation.
The perceived threat of leaving a negotiation, is a powerful tactic. When the other side feels you could bolt at any moment – they act differently. Street vendors know that best because their prospect is standing right in front of them – making the short-term the most important (and only) term to consider.
Commitment has a similar effect. When both parties know that each is committed to a future together, it makes a positive outcome more likely. Monopolies (on the other hand) create unwilling commitment – because the customer is trapped. Nations like the U.S. and China are discovering that shifts in loyalty due to the instantaneous transferability of assets are a real issue going forward. One option is to make leaving more difficult.
On Thursday we saw: (a) U.S. negotiators offer to cut existing tariff rates by up to 50% on $360B of Chinese Imports. (b) U.S. negotiators also offered to cancel the new tariffs set to take effect on Dec. 15. (c) U.S. asked China for firm commitments on increased U.S. product purchases. And (d) the U.S. will reimpose original tariff levels if China fails to carry out pledges. I bought into the chip ETF (SMH) at $138.57.
- Friday: Okay, so yesterday we got a deal. Of course there are no real details. The Chinese haven't said boo about it. I hear that it can't be written - only oral. Here are the particulars: (a) The Chinese have agree to many structural changes / along with purchases of U.S. agricultural products, energy and manufactured goods. (b) 25% tariffs will remain in place, with 7.5% put on much of the remainder. (c) The penalty tariffs of Dec. 15th will NOT be charged.
Weed: The edibles are coming – the edibles are coming… 12/17/2019 in Canada.
- Four federal agencies… issued a joint statement confirming that banks were no longer required to file suspicious activity reports (SAR) for customers solely because they are engaged in the growth or cultivation of hemp.
- Canopy Growth launched… its first hemp-derived CBD drink, marking the company’s first official presence in the U.S. consumer market.
- A flurry of meetings and negotiations… are occurring behind the scenes in Sacramento since California’s cannabis tax increase was announced. Some think the survival of the state’s legal marijuana market is at stake.
- More than 20 congressional lawmakers… sent a bipartisan letter to U.S. Attorney General William Barr requesting that the D.E.A. allow federally licensed researchers to buy products from state-legal dispensaries to study the medical benefits and risks of cannabis.
- Justin Dye of Dye Capital Group… is replacing Andy Williams as CEO of Medicine Man Technologies – a marijuana firm he co-founded in 2014.
- Canopy Growth… announced the appointment of David Klein as CEO. Klein has served as the CFO of Constellation Brands since mid-2015. If there was ever a doubt, Klein’s appointment makes it clear that Constellation intends to exert its influence and steer Canopy toward profitability.
- Massachusetts nears $400m in 1st year Sales: Sales began last November with two stores and, since then, 31 have opened statewide with another 54 awaiting final approval. While Massachusetts’ total sales figure is dwarfed by California’s $2.5B and Colorado’s $1.5B, on a per-store basis Massachusetts dispensaries far outpaced ($12m) the average store in either of those states California ($4m) and Colorado ($3m).
- Cannabis stores post strong sales in Michigan: Michigan’s 5 rec. marijuana stores sold more than $1.6m in the 8 days of legal rec. sales.
- Arkansas posted impressive medical… cannabis sales during the program’s first 6 months of operation – even though only a third of approved dispensaries are open for business.
- Cannabis legalization in Mexico… is expected to take full effect by the end of April 2020. It will be the largest federally regulated market in the world.
- New Jersey residents will vote on MJ legalization… as part of the 2020 national presidential election ballot.
Next Week: What’s left to juice these markets?
- The VIX (volatility index) contracted a bit after the China news, the FED, and Brexit. However, the expected move in the S&Ps (SPX) for next week moved higher from $42 this week – to $46 next week. Markets remain nervous about trade and are anticipating an expansion of volatility. For the past 19 weeks, the SPX has remained inside its expected move. Probabilistically, that’s 5 weeks too long. Given that S&P options (SPX + SPY) control over 25% of the options trading volume – they move the markets and not the other way around.
- BONDS are ready to move. We are due to see more bad economic data this week, and we can no longer blame trade, the FED or Brexit. I expect more capital to flow into bonds, driving rates down and inciting recession fears again. If rates drop below 1.6%, that will invert the yield curve and markets will again talk recession, impeachment and the 2020 election. If/when rates start dropping, look out below for the financials and the homebuilders.
- REPO Market: The FED just committed half a trillion dollars in liquidity to propping them up, and I’m supposed to believe that there’s no problem? I’ve heard that same ‘no problem’ speech from: Greenspan (before 2000), Bernanke (before 2008), and now J. Powell.
- What’s NOT Working: Boeing (BA), Costco (COST), and Lululemon (LULU) are all moving lower.
- Watch For #1: Financials (XLF) to begin moving lower.
- Watch For #2: Tesla (TSLA) to move into all-time high territory.
Tips:
Top Equity Recommendations:
HODL’s:
Aurora (ACB = $2.63 / in @ $3.07)
First Majestic Silver (AG = $11.53 / in @ 10.50)
Canopy Growth Corp (CGC = $20.68 / in @ $22.17),
DRD Gold (DRD = $4.60 / in @ $4.20),
GBTC Bitcoin (GBTC = $8.79 / in @ $10.01),
Microsoft (MSFT = $154.53 / in @ $145),
Pan American Silver (PAAS = $21.53 / in @ 18.00),
Crypto:
Bitcoin (BTC = $7,150)
Ethereum (ETH = $140)
Bitcoin Cash (BCH = $210)
Options:
RIOT ($1.34):
Bot Jan 17, Sold $3 Call / Sold $3 Put / Bot $4 Call for $1.85 CR
Bot Jan 17, Sold $2 Call / Sold $2 Put / Bot $3 Call for $1.45 CR
(can only lose money if RIOT falls below $0.70).
Thoughts:
Twitter (TWTR = $30.39) After dropping the equivalent of 5.8 standard deviations back on October 24 on an earnings miss, TWTR has been trading in a two-point range. But that relative lack of volatility doesn’t seem to match the importance TWTR has in our political and cultural lives. You’d think it would surge with every one of Trump’s tweets during impeachment, or Boris Johnson’s full-steam-ahead news toward Brexit. The upcoming Senate trial along with Brexit news could boost TWTR’s ad revenues and bust it out of its range to the upside. If you’re bullish on it, the long call vertical that’s long the $29 Call and short the $31 Call in the Jan monthly expiration is a bullish strategy that has a 61% probability of making 50% of its max profit before expiring.
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
Until next week – be safe.
R.F. Culbertson
