This Week in Barrons: 1-19-2020:
Thoughts:
As SF pointed out, there used to be a debate over whether to call the most recent actions by our FED – ‘QE’. The FED lost that debate, but is guilty of continuing quantitative easing even if they call it by a different name. Honestly, if it looks like a ‘duck’, quacks like a ‘duck’, and swims like a ‘duck’ – it’s a ‘duck’. Investors know that our FED is the main reason why the Dow is up almost 4,000 points since late August. The problem for our leaders is that once everyone knows the secret – does the secret quickly become a lie?
On October 1st, the Fed began buying $60B of T-bills per month as a technical way of controlling interest rates. Since mid-October, the dollar amount of the injections has grown substantially, and the frequency has switched to daily. Unfortunately for Chairperson Powell, even his lieutenants are validating the market’s reaction as one of ‘cause and effect’. I.e. the expansion of our balance sheet is intentionally lifting asset prices. Dallas Fed President Robert Kaplan said: “The FED’s actions are directly contributing to elevated risk-asset valuations.” Deutsche Bank’s chief economist Torsten Slok noted: “For every 1% increase in our FED’s balance sheet – the S&P 500 has gone up by almost an equal 1%.” Data compiled by Bloomberg validates that prior balance-sheet expansions were directly correlated with stock market gains. FYI, the reverse is also true, every time the FED has trimmed its holdings – a major market correction has followed.
How was this allowed to happen? The same way ‘Dolittle’ was allowed to be released. After all it had: (a) one of the more bankable movie stars in the world as its star, (b) a proven story, (c) the best CGI houses in the world doing the effects, and (d) unlimited time and money. My contention is that it’s the lack of constraints that allowed the movie (and a lot of unicorn companies) to become turds. Too many lunch meetings with too many self-important voices around the table. Most of all: no one cared enough to say: “NO”. One simple “NO” would have done it. Just like with our FED and the funding of WeWork, if someone would have cared enough to stop the assembly line until the work was good enough to proceed – everything would have been better. Often the elements we put in place to avoid mediocrity – are the very things that cause it.
Therefore, the winding down of these FED injections is the biggest risk I see facing 2020. “It really doesn’t matter what Chairperson Powell calls it,” said Krishna Memani, former Vice-chair of Investments at Invesco. “The Fed is in a bind and everyone knows it. They must continue to supply ever-increasing amounts of QE to the market – or the market will violently correct.” So the rules are easy, if our FED continues to be ‘all in’ – then buy the SPYs and DIAs. If our FED starts pulling back – so should we.
The Market:
Spoiler alert, just like the unicorns before it: Lyft, Uber, Slack, and Pinterest – Casper (the mattress company) intends to go public without being profitable. Despite its recent $358M in revenues, Casper’s losses jumped to $92M. By the numbers: (a) $423M is how many marketing dollars (since 2016) were spent to stick its dreamy ads across every subway car. (b) $80M (23% of revenues) is the amount it lost on returns, refunds, and discounts in 2019 alone. (c) 16 is the number of new sleep products that it’s working on such as: pills, vitamins, sprays, devices, counseling centers, and meditation. (d) 100% is how much FASTER on-line sales grow in cities where there are NO retail stores. (e) 3 is the number of direct-to-consumer mattress rivals Casper mentiones in its filing, and there are over 200 others that it didn’t mention. And (f) 201, 136, and 9 – which is the number of times Casper mentioned ‘brand’, ‘mattress’ and ‘profitability’ (in that order) in their filing. Bottom line: Casper wants to be the ‘Nike of Sleep’ but is really the ‘Peloton of Slumber.’ Both: (a) are dependent on 1 big, expensive product, (b) promise new things are coming, (c) may never become profitable (and are quite proud of that), (d) rest their future on connecting users via technology, (e) depend upon millennials loving health-n-wellness, and (f) really need the MONEY! NYU Professor Scott Galloway said: “If Casper goes public, the stock will shed 30%+ in the first year.” HL believes if you want to play the ‘sleep space’, play it directly thru Resmed and Inspire Medical – companies that go up every day due to a lack of supply in the pure sleep space.
Short Squeeze Mania: Short squeezes powered by electric vehicles and fake meat are just sooo 2020. Beyond Meat (BYND) is up 52% in the last 5 sessions, and 39% of that float is short. The funny thing is that short interest has actually INCREASED recently suggesting that not only are shorts getting squeezed, new masochists are coming in behind them and betting directly against the rally.
Jimmy Kimmel sez: “One condition for the impeachment trial is that the Senators will have to stand when they cast their vote. This is a big deal because for a lot of these senators, this will be the first time they’ve ever stood for anything”
Info Bits:
- It Musk be Love: Tesla lost almost $1B over the past year while GM and Ford made over $10B. GM and Ford produced 39 TIMES as many cars as Tesla in 2019. Tesla is now more valuable than both GM and Ford combined.
- Quibi… the mobile-only video streamer, launches in April with 175+ shows and movies – and new "turnstile" tech. This is an absurdly big bet.
- Survey Sez… based upon our pocket books – convenience stores WaWa and SHEETZ are America’s new favorite restaurants.
- Gots to make it work bro… said MJP as Impossible Foods pulled the plug on McDonalds this week due to production constraints. That opened the door for rival Beyond Meats to supply the Golden Arches.
- Visa acquires Plaid… for over $5B. Plaid’s API allows others to easily connect to users’ bank accounts. Robinhood, Venmo, PayPal are some of its customers.
- Marijuana is starting to bake… as the marijuana ETF (MJ) jumped higher this week. It’s still down over 50% from its 2018 highs. But if you take a long bong rip – the chart appears to be bottoming.
- UBS believes… that the FED may have to CUT interest rates 3 times this year. That means they see some serious pain for this economy going forward.
- Crypto & Blockchain are back baby: LinkedIn is listing ‘Blockchain Development’ as the number one job skill for 2020. “Blockchain developers were never on the list, and now they’re #1," the firm said.
- I Want My Money Back: For the first time in at least 3 decades, Boeing LOST orders on its commercial planes. They have a 5k plane backlog, so investors aren’t running for the exists just yet – but if it breaks below $320 all bets are off.
- Even Goldman screws the pooch: when they released earnings this morning – missing on profit due to a $1.1B litigation charge. They also liquidated their 10M share position in Uber last year near the bottom. Year-to-date, UBER is up 13% showing that trading is hard, and even the pros get it wrong.
- Eaze may go ‘up in smoke’… because the marijuana delivery giant is almost out of cash. Who's next – DoorDash?
- Rich people… stay healthy a decade longer than poor people.
Crypto Bytes:
- Yes, we have Options: The CME Group opened its highly-anticipated bitcoin options for trading, and the entire sector responded by moving 23% higher YTD.
- Gimme some sugar honey: Bitcoin's 6-month downtrend looks to have ended with last week's double-digit price gain. The breakout opens the doors for a rally above October’s $10k level. A stronger move to levels above the 2019 high of $13,880 cannot be ruled out ahead of May's halving.
- What’s good for crypto, is good for: Heath Tarbert, chairman of the CFTC, believes regulated crypto derivatives will instill market confidence in crypto-currencies. His agency is developing a regulated futures market to assist "price discovery, hedging and risk management" for investors.
- They always come back, don’t they: Former CFTC Chairman J. Christopher Giancarlo, former LabCFTC Dir. Daniel Gorfine, and investor Charles Giancarlo want to take on the dollar digital – and are not waiting for the FED. They are forming the Digital Dollar Foundation, working with Accenture to design and push for a potential U.S. central bank digital currency. Now we’re talkin’.
- Tokenization – welcome to NYC: The new owner of the Chrysler Building is selling a property worth $135m to a blockchain real-estate company, taking 1/5th of the purchase price in Ethereum-based tokenized securities.
- DIY Crypto-Insurance: Gemini, the crypto exchange founded by Cameron and Tyler Winklevoss, has created its own $200m insurance company to protect clients against the potential loss of coins from its offline vaults.
- Even the IRS is on-notice: U.S. lawmakers are pushing to exempt gains from small cryptocurrency transactions (under $200) from being taxed under their new “Virtual Currency Tax Fairness Act of 2020.”
Last Week:
- Monday: Earnings season starts and (as always) the big banks kick things off. Expect their verbiage to be thick. Defense stocks are hitting all-time highs. Technology is doing really well, and has room to run. I think AAPL and MSFT will continue higher. A few interesting charts: PYPL over $115.20, QCOM over $92.75, and CREE over $51.55 all could work for a couple more points.
- Tuesday: Citi and JP Morgan beat their earnings numbers, but Wells Fargo missed. Take a peek at a 6 month chart of Shake Shack (SHAK). It had a huge gap down on Nov 5th, and has been building a base since. It now looks like it might try and break free of that bottoming action and try and fill that gap. If it gets up and over $63.00 and can hold a day – it’s going higher.
- Thursday: Calling a top when the FED is still cranking billions every night sounds like a dumb move to me, but their injections can’t go on forever. We’re in the post China deal move higher phase. Take a look at Tupperware (TUP). It had a huge day yesterday, pushing it over its 50-day moving average by a mile. Watch it for a day before moving in. I talked about MNK trying to break out of a triple top before – but it failed again. Yesterday, it also went bananas – so let’s watch it as well. Whatever last hurrah run the FED wants – I think we're in it.
- Friday: Next week is when the earnings really ramp up. I don’t know how far the FED intends on taking its money printing scheme. I think we continue to move higher next week. Today is a pause day because of the 3-day weekend. In anticipation of an up-week next week – you could buy call options on the SPY or DIA. The XLF over $31.10 also looks attractive and reasonably priced.
Weed:
By the numbers:
- 90% … of the U.S. population would be able to access legal cannabis if all 19 potential markets are added via election or sooner.
- 19, 11, and 8… 19 states are actively debating marijuana reform policies. 11 states with active medical cannabis programs are considering legalizing it for adult use. 8 states may adopt their own medical-use programs. These additional state markets could collectively generate $3.5B in the first full year of sales, growing to a collective $11.5B by their fourth year of operations.
- $41.6B … is the amount of annual sales projected in the legalized cannabis industry by 2025 – if all 19 potential new states were to pass legalization measures and become operational by 2022.
- 223.5m… the number of people currently living in states with access to legal medical or adult-use cannabis (68% of the U.S.). If the 19 additional programs would pass – that percentage would increase to 90% of the U.S. population.
- 28% … of the U.S. population lives in a state with access to legal adult-use cannabis (excluding medical-use). It becomes 54% in 2020 if all 11 potential adult-use states pass their reform legislation.
- Mexico reaffirmed… that cannabis legalization should occur in the coming legislative session.
- Included in adult-use legalization: Vermont, New Jersey, New York, Arizona, Connecticut, New Mexico, South Dakota, Montana, Pennsylvania, and Florida.
- Nationally… a new bill could remove all roadblocks for MJ companies wanting to release a cbd product: https://www.barrons.com/articles/new-bill-cbd-marijuana-stocks-51579104750 . Rep. Peterson (D-MN) introduced a bipartisan bill to include hemp derived CBD as a dietary supplement under the Federal Food Drug & Cosmetic Act.
- In Cali, CBD brands await… Gov. Gavin Newsom signing the new law legalizing all foods, beverages etc. made with hemp-cbd.
- Ontario cannabis stores are selling out of edibles within hours.
- Oye Como Va: 10-time Grammy-winning guitarist and longtime cannabis advocate Carlos Santana announced his partnership with Left Coast Ventures to develop premium cannabis and hemp CBD brands.
A recreational marijuana domino effect is setting up along the East Coast – which could create billions of dollars in business opportunities. Legalization goes from the East Coast to the Southwest (via the Dakotas) and into the deep South. Previously, MJ legalization has primarily occurred through the ballot box. Illinois changed all of that when they approved a $2B adult-use program via the legislature in 2019. Expect that trend to amplify in 2020. “The biggest shift is that legalization is moving toward legislatures,” said Karen O’Keefe, director of state policies for the Marijuana Policy Project. Also the Democratic governors in the Northeast are coordinating adult-use legalization efforts. Being able to use one set of laws and licensing requirements as a template could be a boon to the entire process.
Next Week: Are we in a bubble?
Last week the S&Ps (SPX) cracked thru their expected move ($37) by an additional $30. After 23 consecutive weeks of being an efficient marketplace, we put in a crazy, 2-sigma move higher. There have only been less than 30 down days since October 1st of last year. That’s just not right. Markets are supposed to be inside their expected move 68% of the time – not 23 out of 24 weeks. But (fair warning) when we start cracking into inefficient market territory (going outside the expected move) – it often triggers more inefficient market behavior.
- If you’re bullish right now – you’re scared and looking over your shoulder.
- If you’re bearish right now – you’re taking heat on a daily basis.
- Utilities (XLU) and Junk Debt (HYG) are both exploding higher. It’s almost impossible to have a situation where both of these would win – except one where asset managers are throwing caution to the wind in search of yield. If the marketplace sells off at all, the entire HYG sector (an incredibly illiquid product) will suffer horrifically. The HYG trade only succeeds if interest rates fall by a lot going forward.
- Utilities are up 5% YTD, Housing (XHB) is up 5.5% YTD, and both of these are only slightly less than Apple’s 6.1% YTD. Again, the only scenario where all of these trades work is one where interest rates effectively go to zero.
- Valuations are in ‘ludicrous mode’.
- If you trade options, this is a time to be a premium buyer.
Factually, the most recent 3-month return is 13%. Since 1990, 3-month returns have averaged 2.2% - basically 9.1% per year. In a ‘normal’ year since 1990, returns between -5.1% and 9.5% would be acceptable. We’ve already done 13%. If you look back over the past 15 years, 10% has been a ‘hard cap’ on 3-month returns – either before or after the Financial crisis. The only exception has been when the S&P has pulled back 10% or more and the rally then took us back to even. The only previous market behavior like this one was when we were entering the ‘dot com’ bubble and corporate earnings were through the roof. Watch upcoming earnings and forward guidance. Both will need to be great to keep the S&Ps from reverting to the mean.
Next week:
- Watch the financials as they have been trapped in an incredibly tight range. They will need to accelerate in order to keep this rally going.
- Earnings must knock the cover off the ball and will need to be accompanied by spectacular guidance.
- Davos (the world’s corporate meeting place next week) – will need to have CFOs no longer talking about ‘slower growth’ in 2020 (as they have in the past).
- And the Transports (trucking and shipping companies) are going to have to change their tune. Lately, they are guiding lower and talking of a recession.
Tips:
Top Equity Recommendations:
HODL’s:
- Aurora (ACB = $2.13 / in @ $3.07),
- First Majestic Silver (AG = $10.53 / in @ 10.50),
- Canopy Growth Corp (CGC = $24.89 / in @ $22.17),
- DRD Gold (DRD = $5.93 / in @ $4.20),
- GBTC Bitcoin (GBTC = $10.07 / in @ $10.01),
- Microsoft (MSFT = $167.10 / in @ $145),
- Pan American Silver (PAAS = $21.34 / in @ 18.00),
Crypto:
- Bitcoin (BTC = $8,950),
- Ethereum (ETH = $175),
- Bitcoin Cash (BCH = $350)
Watching:
- Snapchat hit a new 52-week high today. The stock has been strong, up 8.40% YTD. The base forming in Snapchat is reminiscent of Facebook following its IPO. Something to keep an eye on as SNAP is set to report earnings Feb. 4th.
Thoughts: (courtesy of Tasty Trade): Canopy Growth (CGC), the Canadian marijuana company has had a good 2020 rallying 15% thus far. CGC’s earnings are coming up on Feb 13, and that’s pushing up CGC’s implied volatility to 76%. CGC’s price can move a lot, but the high implied volatility means that short option strategies can be rewarded for taking risk. If you think most of the movement might come after earnings, choosing a strategy that expires before, might be a smart choice. If you think that CGC won’t have a huge move before earnings, the short iron condor that’s long the 19.5 put, short the 21.5 put, short the 28 call and long the 30 call in the Feb 7th weekly expiration is a neutral strategy that collects a credit 1/3 the width of the strikes, and has a 70% 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
