RF's Financial News

Sunday, December 4, 2022

This Week in Barrons: December 4th, 2022

In many ways, Softbank, WeWork, FTX, Sam ‘Bank-Run’-Fried, VC’s, SPAC's, and Crypto founders – were all in the right place at the right time. Per HL: “They knew how to work the refs, the clocks, and ‘some fans’ – but now reality has returned.” Our government threw in some performance enhancers such as: 0% interest rates and free money – but those are mostly gone now. In 2022, business and investing are open and more level to everyone. 2022 re-introduced ‘fundamentals’ to your daily routine. The reward for doing your homework is the result itself. You’re Doing what you Love – and Love what you’re Doing. It’s an easy formula. Maybe that’s why so few ever get it right?

The Market:

Learning how VC’s think? I don’t think I ever appreciated how differently VC’s think – until I asked one (+40 years ago) whether they would lease or buy their next car? They turned to me and said: “It really depends upon the interest rate.” Huh? What about the monthly payment, the price, the residual, and my list went on? They turned to me and said (again): “Incorporate all of those elements into the rate, and let me know.” It seems that it’s: “all about ‘dat rate.”

Fast forward and per FW: “VCs still invest via the interest rate method. For example, in real estate you would like to generate an annual yield on your investment (acquisition + construction costs) of between 5% and 10%. In P/E speak – you’re looking at between 10- and 20-times earnings. If you’re investing in young companies, you would require a higher rate of return of about 26% compounded (10x on your money) and in more mature companies about 17.5% (5x return on your money) over ten years.”

How do you decide on whether to invest in Google or a building? Google has a market cap of $1.25T, and is down 30% YTD. It generates $70B of net income/year, and $80B of free-cash-flow. If Google were a building, it would be returning an annual yield of 6.4% ($80B / $1.25T) and a PE of about 18x. [Right in the middle of the 5 to 10% range.] Would I rather own Google at 6.4% or a building in my neighborhood – it’s a tossup right now.

A 6.4% annual return compounded, doubles your money over 10 years, and 3.5x’s your money over 20 years. Many of the top tech companies have lost between 30% to 80% of their value over the past year. Does that mean that they’ve bottomed and are good investments? Maybe. But the question you should be asking is: Which company do I think is going to make me between 5 and 10% on my investment for the next 10 years? Think of everything as a rate of return. If the resulting interest rate falls between 5 and 10% - then invest in it. If the rate is below the threshold – then find someplace else to put your money. So, in terms of lease vs buy? It’s not about the price, the monthly payment, or the residual… “It’s all about ‘dat rate.”

InfoBits:

- Employers plan to boost wages by over 4% next year… but with inflation at 8% - that ‘boost’ may feel more like a dent.

- Embark, a developer of autonomous driving technology for trucks… has gone from $5B to worthless in a year. Not quite FTX – but getting there.

- Apple #1… could see a production shortfall of almost 6m iPhone Pro models due to the unrest in China.

- Apple #2… has “mostly stopped” advertising on Twitter. Apple was Twitter’s #1 advertiser ($48m) in Q1 of this year.

- Apple #3 … Elon Musk claimed that Apple threatened to remove Twitter from the App Store. Elon: whatever happened to ‘The Golden Rule’?

- A 4-day (no-pay-cut) work week is here… in test mode only.

- A record 197m US shoppers… visited stores over the extended holiday weekend, spending an average of $325 each.

- Germany has signed a 15-year deal… with Qatar to receive liquified natural gas (LNG) from Qatar Energy and ConocoPhillips.

- The Purchasing Managers Index (PMI)… showed that U.S. manufacturing contracted in October for the first time since June 2020.

- It’s the H-Hour for EV taxes: The Inflation Reduction Act requires EVs to be mostly US-made to get $7.5k in tax credits. Now, the EU, UK, South Korea, and Japan are all claiming discrimination. Don’t make me laugh.

- Winc, an internet wine subscription company… filed for bankruptcy just over a year after going public. What were they doing as a public company?

- Tesla delivered its first all-electric semitrailer truck to PepsiCo… marking the company’s long-delayed product expansion.

- Have you tried OpenAI’s new ChatGPT yet? Its natural language technology allows users to ask questions, just like a search engine – only it just gives you ONE right answer. Can you say… Google Who?

Crypto-Bytes:

- On the same day BlockFi declared bankruptcy… they also filed suit against Sam ‘Bank-Run’-Fried (SBF) to reclaim stock shares in Robinhood that the FTX founder pledged as a backstop. SBF make it stop.

- Genesis Global Capital, another crypto lender that dealt with FTX… is also at risk of filing for bankruptcy and has halted customer withdrawals

- U.S.-based crypto exchange Kraken… is laying off 1,100 people.

- SBF said that… (a) he regretted stepping down and FTX filing for bankruptcy, (b) he denied implementing a “backdoor” between Alameda and FTX, and (c) he told his former lawyers to “go f**k themselves.”

- Tom Emmer, Co-chair of the Congressional Blockchain Caucus… said: “FTX’s collapse is not a failure of crypto, but a failure of centralized finance and Sam Bank-Run-Fried.”

- SBF said that… (a) he mis-accounted for about $8B of FTX’s funds, (b) he did not knowingly commit any crimes, and (c) he did not knowingly comingle investor funds with his own. He’s using the word ‘knowingly’ too much for my liking!

TW3 (That Was - The Week - That Was):

Wednesday: Jerome Powell is speaking today at 1:30pm. Mortgage apps fell another 0.8%. The German Food CPI jumped 21% YoY in November, and that's the highest reading - EVER. The ADP report is ugly. Manufacturing lost 100k jobs, and it appears like they all became bartenders & servers. GDP was much hotter than anticipated at 2.9%.

Wow, J. Powell is a lot better at this game than his predecessors. He threaded the needle and the more he talked – the more he muddied the waters.

- Our FED will slow the pace of rate hikes in December, but have a “longer way to go” in bringing down inflation.

- The final rate will be “higher than previously projected” and housing services will fall in 2023

So, we’ll see 50bps hikes starting in December. But, he is not going to stop very soon, and if/when he does – he will not be fast to pivot towards cutting. The market loved what he had to say, and I think we have a green light UNTIL Dec. 14 – the next FOMC meeting. By that time, we could have a much hotter CPI (Dec. 13 release) than people expect. At which point, I suspect that the FOMC won’t like the print, will stick to 50bps, but will be much tougher in their words.

Jobs Friday: We were expecting 200K jobs, and got 263K jobs – with October’s data being revised higher. Wages were up 0.6%, and we were expecting 0.3%. A strong labor market means strong wage growth. Strong wage growth means higher services inflation, and higher services inflation means continued upward pressure on the Fed’s preferred inflation metric. It seems as if all of the previous interest rate hikes are not producing the required results. I like the look of IAC. It’s over its 50-day, and if the market stages a comeback, keep an eye on it.

AMA (Ask Me Anything…)

The Jobs Report: According to the official statement, we created 263,000 jobs last month – much higher than the estimates. Inside the report, wages rose 0.6% - much higher than the expected 0.3%. The market tanked on the news - fearing many more FED rate hikes. But WHY did the market rally back on Friday?

Factually: (a) Wages rose 0.6%, (b) the Civilian Labor Force declined = -186,000, (c) the People Leaving the Labor Force increased = +359,000, and (d) our Total Actual Employed decreased = -138,000.

Summary: Once people reviewed the detail, they realized that it didn’t add up to the headline release. That’s why the market rallied back on Friday – Case Closed!

Next Week: Are Markets being Data Manipulated…

A Data-Manipulated Market… produced a few terrifying moments – resulting in an unchanged market. We are channeling within a fairly tight range – all while touting a +20 VIX. With a +20 VIX, we should be rock-n-rolling a lot more than we are – but the DATA is holding us back. Just when we get a little too stretched (one way or another), the data pulls us back into the range. You wonder if the market is being manipulated by the data? For example, on Friday AM’s Jobs Report: we dropped 80 S&P points inside of 1 minute – only to claw our way back throughout the day. This is NOT a good situation for traders.

Costco is a litmus test for Retail… and it isn’t going well. No amount of FED speak could have saved Costco when they presented bad news last week. COST had a huge (+4 standard deviation) move (to the downside) last Thursday due to Costco specific news. It’s difficult picking a directional bias in a data-manipulated market. Heck, Bridgewater Capital just announced that it gave back all of its profits for the year – during these last 2 months of Data Manipulated Markets.

What will we do next week? The next big data point is December 13^th (CPI release), and our FOMC meeting results will be announced on December 14^th.

Sectors: The S&Ps ended the week mildly higher along with Tech (QQQ). However, the Financials (XLF) and Energy (XLE) ended the week mildly lower. Tip #2: Keep an eye on this sector rotation as the Q’s could easily pick up steam into EOY.

Trades:

- Tip #3 = XLP… going lower … Retail’s in trouble. It’s been on the Upper-Edge of its EM for the past 4 weeks, and nothing is that strong in the marketplace.

- Tip #4 = SBUX… going lower … SBUX follows where the XLP leads. Short last week’s 2 std. deviation move. The consumer is in trouble.

- Tip #5 = AGG … going higher … there is no bear market in BONDS !!

SPX Expected Move (EM):

- Last week’s EM = $76… we had Mr. Toad’s Wild Ride last week, but we finished the week $30 higher. We had a 150-point move (from low to high) and only finished mildly unchanged due to Jerome Powell’s speech.

- Next week’s EM = $67… with expectations this small, I would buy short-dated premium at a 14% implied volatility, and finance it by selling longer dated (24%) premium way outside of the expected move. Just sayin’.

Tips:

Personally, I’m erring on the side of safety and capital preservation. Bonds (AGG), Gold & Silver (physical), land, Food (KGR), and physically powering via Solar are looking good to me.

HODL’s: (Hold On for Dear Life)

- PHYSICAL COMMODITIES = Gold @ $1,811 /oz. & Silver @ $23.35 /oz.

- AGG – BOT more & more bonds (AGG = $99 / in at $93)

- **Bitcoin (BTC = $17,000 / in at $4,310)

- **Ethereum (ETH = $1,250 / in at $310)

- EGY ($5.39 / in at $5.30)

- GME – DRS’d and HODL

- GS (Downside PUTS):

o BOT Jan / +$340 / -$330 PUT Spread

- IBM (Downside PUTS):

o BOT Jan / +$130 / -$120 PUT Spread

- Innerscope (INND = $0.008 / in at $0.0052)

- NFLX (Downside PUTS):

o BOT Jan / +$275 / -$265 PUT Spread

- RIG ($4.19 / in at $3.47)

- SBUX (Downside PUTS):

o BOT Jan / +$85 / -$75 PUT Spread

- SPY (Downside PUTS):

o BOT Dec 16 / +$357 / - $347 SPY PUT Spread

o BOT Dec 16 / $285 DIA PUT

- VTV ($146 / in at $143)

- XLP (Downside PUTS):

o BOT Jan / +$77.5 / -$75.5 PUT Spread

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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Sunday, November 27, 2022

This Week in Barrons: Nov. 27th, 2022

My business has NO competition… that’s because there’s never any competition for things that don’t matter. Entrepreneurs should be looking for problems that others are paying good money to solve. Therefore, your goal is NOT to find a non-competitive environment, but rather a cheaper-better-faster solution.

Do you grade on a curve? Yes, the Kepner-Tregoe curve. That is where the student puts the percentage odds that they think their test answer is correct – next to each of their answers on an exam. You then multiply the value of the problem by the student’s probability of success and you get the problem’s final worth. So, if you think there is ‘no chance’ your answer is correct – then put down a 0%. Multiply the credit for the test answer by your probability for success (in this case zero) and you receive 0 credit for that answer. And, if you are positive that your answer is correct – then go ‘all-in’ and put down 100%. If you turn out to be wrong, you pay the ultimate price – you fail the exam. It tends to reinforce that life is just a series of probabilities.

Happy Thanksgiving… As parents we need to remember that parenthood is but a short chapter in our child’s story. Therefore, we should stop, look around, and say: ‘Thank You’ – a lot more often.

The Market:

Today’s Twitter… will not be the same in 3 months. That is the amount of time that George Holtz has been given to re-architect, re-shape, and re-write critical parts of the application. Within 30 days, George has already fixed Twitter’s unusable search tool – a task thousands of others took years to not complete. This is the level of developer that Elon attracts, and the level of productivity they achieve. Elon’s style (lead, follow, or get out of the way) is not for the faint of heart, or for those expecting participation trophies. ‘Break-a-Leg’ Elon and George!

InfoBits:

- Bob Iger returns as CEO of Disney… replacing Bob Chapek. Iger was Disney’s CEO from 2005 to 2020, and was brought back in as a fix-it man.

- US existing home sales… fell for the 9^th consecutive month, down 28% YoY while the median price of a home is up over 6%.

- Government owned Amtrak… has not made a profit in 50 years.

- COVID-19 cases in China… are spiraling toward record highs, forcing officials to again lock down large swaths of the country.

- German police have launched an international hunt… for thieves who stole $1.65m worth of ancient gold coins from a museum – within nine minutes and without triggering any alarms.

- Qatar, the 2022 World Cup host… was eliminated from the tournament yesterday and made it the earliest host nation to be knocked out from the World Cup in its 92-year history.

- “Life is like a 10-speed bicycle… most of our gears will never used”… Charles M. Schultz.

Crypto-Bytes:

- Cathie Wood of Ark Investment Management… bought $1.5m of Grayscale’s Bitcoin Trust (GBTC) because it’s trading at a record discount to its underlying net asset value.

- Solana has lost over -93% since January 2022… and over -95% since its all-time high in November 2021.

- Brendan Blumer, the founder and CEO of Block.One… is now the majority owner of crypto bank Silvergate.

- Proof of Reserves - Proof of Liability = Verified Solvency

- The following have completed Proof of Reserves: Kraken, BitMex, Nexo, Gate.io, and HBTC. Where’s Coinbase?

- The following will provide Proof of Reserves in the near future: Binance, Bitfinex, Crypto.com, KuCoin, OKEx, and Huobi. Where’s Coinbase?

- Binance just jumped above Coinbase… as the largest reserve holder of Bitcoin for the first time – ever.

- This is the first time the majority of bitcoin holders… are ‘in-the-red’ since the COVID-crash of 2020.

- Sequoia just made FTX… their biggest single investment write-off in their history.

- Tiger Global Mgmt. marked down their fund by 25%... FTX contributed to their $42B decline.

- Bain Capital/Consulting… was paid +$100m by Tiger Global for their due diligence of FTX. I smell a lawsuit coming.

- Binance has doubled its ‘industry recovery fund’ to $2B… which will be used to buy distressed crypto assets and support the industry.

- Not your keys … Not your coins… Per HL: “I can’t trust the exchanges. God bless the people that use and trust them. I won’t.”

TW3 (That Was - The Week - That Was):

Monday:

- The housing market is falling at its fastest pace since 2008.

- Tech layoffs are above Dot Com (2001) levels.

- Personal credit card debt is near $1T for first time.

- Crypto / FTX losses are over $2T.

- Consumer confidence is at an all-time low.

We're in a recession, and we will be in a bigger one in 2023. The value of Bitcoin is now below its average mining cost. We don’t know just how badly crypto will knock the crap out of our financial system.

Tuesday: Workers at the largest U.S. rail union voted against the latest tentative contract deal. This raises the possibility of a year-end strike that could paralyze vital shipments of food and fuel. Morgan Stanley's Mike Wilson said that inflation has peaked. He also expects the S&Ps to fall to around 3000 in Q1 of 2023.

Wednesday: I believe that energy will become more of a premium product as winter continues. Around Dec. 6^th Europe is scheduled to receive its first blast of arctic air. I'm liking: HES, OXY and SLB in the energy space.

Friday: China cut the amount of cash that banks must hold as reserves for the second time this year – which released $70B to prop up their faltering economy. Production of Apple's iPhones could fall by 30% due to disrupted operations at Foxconn's factory in Zhengzhou. The FTC is likely to block Microsoft’s $69B takeover of Activision Blizzard. One reason for the DOW’s out-performance is: European money. When you're in a war-torn area and you wish to shelter your money, the DOW is known as where the ‘value-based’ American companies reside. It’s easy to buy the DIAs and let-it-ride.

AMA (Ask Me Anything…)

SBF did his best to cripple crypto… by causing hundreds of thousands of people to lose a lot of money. The single biggest loser lost $222m instantly. Forbes just published a list of 134 companies FTX caused to file for bankruptcy protection. James Bromley (FTX’s bankruptcy attorney) and John Ray (FTX’s new CEO) told a U.S. bankruptcy court that Sam Bankman-Fried (SBF) ran FTX as his own personal check book. Sam’s parents and senior executives bought at least 19 properties in the Bahamas, for $121m over the past 2 years. Bromley also said that a substantial amount of FTX’s assets are missing and may have been stolen along with SBF’s leadership abilities. “SBF was supposed to be crypto’s future, and instead he may have robbed the industry of one.”

The future of crypto… is DeFi (decentralized finance), and it will get a lot brighter through: integration, regulation, fungible products, centralized clearing, 3rd party market making, and a trusted ecosystem. DeFi is not an asset or a currency play, but rather a technology play. And throughout history, very few people have succeeded by shorting next generation technology at multi year lows. Backing DeFi is NOT like betting on some overpriced SPAC or a crowded cannabis play. DeFi’s innovative technology is being built on a scale that the world has never seen before. Although the price of digital assets could drop lower in the short-term – fading the space right now offers little reward for a ton of risk.

Next Week: When will REALITY sink in?

Is the Santa Claus rally coming? That answer depends upon the upcoming data. Following the lower CPI print on November 9^th, this market has wandered between 3931 and 4050. Currently, this market is far too data dependent to guess December’s results. In the next couple of weeks, we have: a JOBS number, CPI, GDP, and a FED meeting. And if the layoffs kick in and the JOBS number is lousy – is that good or bad for markets? I am bearish longer term, but fearful of any holiday-related market moves.

Sector update YTD: SPY (-16% YTD), QQQ (-28%), XLF (-9%), XLE (+60%), XRT (-27%), XLP (-1%), and XLU (0%): Due to the market’s data dependency, here are a couple ‘sector specific’ thoughts.

- If the market goes back into a ‘selling mode’, the XLF and XLE are going to take a hit. The financials and energy are both out-performing the S&Ps. So, if I’m going to short something – it’s going to be something that’s out-performing.

- Energy is +60% YTD. When energy starts to break, that means that a global slowdown is in the cards, and that is when REALITY will meet the markets.

- Retail (XRT) is down -27% YTD, but Consumer Staples (XLP) is only off -1% YTD. Shorting XLP gets my attention prior to shorting the XRT.

- Utilities (XLU) is unchanged (0%) on the year and therefore holds additional risk to the downside – especially with its dividend yield being less than the 10-Year.

Currently, markets are too data dependent to take a purely directional position as it relates to the S&Ps. The range is between 4211 and 3931. If you’re bearish on the overall marketplace, go into a better risk-v-reward ratio such as shorting the: XLF, XLE, and/or XLP.

Volatility is changing: It has been moving lower for the past 60 days. However, both the SKEW and the VVIX caught a bid last week. Traders have returned to hedging because they believe there is downside risk. Watch the 9-day VIX this week as to whether it will follow the SKEW and VVIX higher.

TRADES:

- Tip #1 = NFLX… go lower = BOT Jan. PUT Spread = +$275 / -$265 PUT.

- Tip #2 = SPY… go lower = BOT Dec 30 PUT Spread = +$392 / -$382 PUT.

- Tip #3 = SPY… go lower = SOLD Jan 31 CALL Spread = -$440 / +$450 CALL.

SPX Expected Move (EM):

- Last Week’s EM (3.5-day week) was $72, and we hit it almost exactly.

- Next Week’s EM = $76. We moved $72 in 3.5 sleepy days last week. Next week is pricing the same EM, but we have 5 full-days and a JOBS report. I’m expecting us to ‘smash’ through the EM next week.

Tips:

HODL’s: (Hold On for Dear Life)

- PHYSICAL COMMODITIES = Gold @ $1,769 /oz. & Silver @ $21.66 /oz.

- AGG – BOT more bonds (AGG = $98 / in at $93)

- **BitFarm (BITF = $0.61 / in at $4.12)

o Selling CCs for income,

- **Bitcoin (BTC = $16,475 / in at $4,310)

- **Ethereum (ETH = $1,200 / in at $310)

- EGY ($5.24 / in at $5.30)