RF's Financial News

RF's Financial News

Sunday, November 5, 2017

This Week in Barrons - 11-5-2017

This Week in Barrons – 11-5-2017:





“Bitcoin will do to banks, what e-mail did to the postal service”… Rick Falkvinge   

   Bitcoin hit $7,500 this week; therefore, I’m going to try and answer many of the digital currency questions that have been asked of me over the past 2 months.  Bitcoin, often called a digital currency, is best viewed as a protocol (a set of code) that delivers data (bitcoins) in defined quantities (blocks) that are stored in a sequence (a blockchain) on a distributed set of global computers.  Think of it as a decentralized, digital, gold-backed currency – without the gold.  But like gold, it’s in limited supply and you need to ‘mine’ it.  Unlike gold you can spend it using a smartphone.
   What is it decentralized?  Today, when you wire money from the U.S. to Hong Kong, you must go through a centralized banking system (called SWIFT), and various foreign exchange services.  This increases time (days) and cost because each node in the transaction is required to uniquely verify and validate the previous information.  In 2008, blockchain technology was created that allowed for instant validation and verification.
   What is Blockchain?  Blockchain is not bitcoin.  Blockchain is a software protocol that uses math and cryptography (encryption) to create a decentralized system.  This decentralized system distributes a digital ledger that is used to record an unalterable transaction record across many computers.  For example, imagine a digital ledger with a computing block attached.  Every time a transaction occurs, a marker of that transaction is attached to the block.  This block is then attached to the chain, so that every other block on the chain can see it.  The block is then managed by the network and not by one centralized system.  This decentralized network does not require a bank or middleman clearinghouse.  Therefore, everyone who owns a bitcoin (effectively) has the entire bitcoin bank and its ledger in their pocket.  Blockchain technology can change everything that requires validation and verification – from stock trading to mortgages to voting.  Here is a link to free online course offered by Princeton University: https://www.coursera.org/learn/cryptocurrency 
   What are the issues?  The more information a block stores, the harder it becomes to scale the system.  When bitcoin was first introduced, it had only 1mb blocks, and would take about 10 minutes to verify the transactions that took place on every block.  Over the past year, the number of transactions occurring in each one of these blocks has grown to the point that 1mb is not enough space to record the many transactions that were taking place.
   What is the upcoming bitcoin change?  The most recent software change (called a ‘hard fork’ = Segwit2x) calls for a specific change to bitcoin's rule set, and invalidates previous rule sets.  This change termed Segwit2x (Segwit = segregated witness, and 2x = double the size of the block) allows for more data to be stored in each block, and also doubles the size of the block from 1mb to 2mb.  This ‘hard fork’ is different than its predecessors (bitcoin cash and bitcoin gold) and offers an outcome that might not be guaranteed.  With bitcoin cash and bitcoin gold, users could have ignored the upgrade and it wouldn't have impacted their transactions at all.  And on certain exchanges, if you held bitcoin you may have received a new cryptocurrency as a bonus.  This same smooth outcome is not guaranteed with Segwit2x.  If ‘most’ of the bitcoin miners upgrade their software, then the bitcoin blockchains will continue to function but feature larger blocks and Segwit2x's rules will become the rules of bitcoin.  If only ‘some’ of the miners upgrade their software, then two blockchains could be created – a ‘legacy’ bitcoin and a Segwit2x bitcoin with different rules and unique cryptocurrencies.  If SegWit2x is successful, investors will have more confidence in bitcoin's ability to be a tool for our global economy going forward.   
   What should I do by November 16th?  A similar scenario happened earlier this year with Ethereum, and resulted in a loss of Ethereum’s core value.  If you own bitcoin, the simplest way to protect against loss is to store your coins off the grid before the fork happens.  Then once the community performs the upgrade, put them back out onto the chain.
   Why is Bitcoin such a big deal?  I'll be honest, when you look at bitcoin from a layman’s perspective, it appears that someone has created something out of thin air.  Yeah, it uses blockchain technology so that it can be tracked, but is it any different than BestBuy Rewards points?  Is it any different than creating a limited supply of baseball cards?  The differences between any fiat currency and bitcoin are: (a) bitcoin is not controlled by governments or banks, (b) it’s decentralized, (c) it’s limited in supply, and (d) offers virtual and immediate validation and verification.  That means that it’s cheaper – better – and faster.
   Can Bitcoin be the new QE?  The effectiveness of central bank QE policies is already being questioned.  How can QE stimulate the global economy without adding more to a country’s already ballooned balance sheet?  Earlier this month the IMF was looking into the idea of turning their Special Drawing Rights (SDR) into some form of blockchain cryptocurrency that would allow one global central bank to infuse the world directly with free money.  If the IMF were empowered to act more like a global central bank, it would reduce the need for countries to hold reserves.  Jose Antonio Ocampo, a Colombian central bank board member said: "Countries would not have to accumulate reserves, which in and of themselves generate a contractionary effect on the country’s economy."
   What about a Russian CryptoRuble?  In June, P.M. Putin met with Vitalik Buterin (the founder of the world's second-largest cryptocurrency) and gave his blessing for Russia to develop a new cryptocurrency – the CryptoRuble.  "I confidently declare that we will run CryptoRuble for one simple reason: if we do not, then after 2 months our neighbors in the EurAsEC [Eurasian Economic Community] will," Nikiforov said.  So, if you think Russia is alone in the national crypto-development arena – think again.
   What about a Chinese Crypto-RMB?  China is testing its own state-run digital currency.  Earlier in June, the central bank finished several digital currency trials involving transactions between it and some of the country's commercial banks.   The development of a digital currency comes at an opportune time for China.  The rapid development of their own electronic payment system and thriving private digital currencies have made it imperative for China's central bank to move quickly in digital finance.  Combine this with China's new oil benchmark to be launched later this year, and this could be the start of a move to a global, cashless society.
   Will Amazon soon accept Bitcoin?  On October 31, Amazon registered three more domains related to cryptocurrency, sparking speculation that Amazon may soon begin accepting cryptocurrency.  The domains are: amazonethereum.com, amazoncryptocurrency.com, and amazoncryptocurrencies.com.  Amazon already owns the amazonbitcoin.com domain name.   This is not the first time a rumor has circulated surrounding Amazon accepting digital currency.  Any move to do so by Amazon (one of the most innovative and influential tech companies in the world) would have enormous positive consequences for the sector.



   After Bitcoin hit $6,000 and stayed above it on Monday, its fan base is looking for it to hit $10,000 quickly, and pundits continued to reiterate the longer-term $100,000 view.  Why?  Because Coinbase is adding 30,000 new bitcoin wallets each day, and CBOE futures and ETFs are coming by the end of 2017.  The feeling on Wall Street is that: “Things are just gettin’ started”.


The Market:
   This week I had the honor of spending time with a dear group of friends that I have accumulated over the past 40+ years.  All the while, the U.S. stock market edged higher for the 8th week in a row.  Some say the gains were because the president introduced a new tax plan, and nominated Jerome Powell to head the Federal Reserve.  Some say they were a result of Broadcom announcing the largest takeover bid for a chipmaker in history – over $100B for Qualcomm Inc.  And some say the gains were a result of Aurora Cannabis (ACBFF) receiving its cultivation license from Health Canada for its second mega-marijuana growing facility.
   In terms of the tax plan, the following chart shows who benefits from the new tax reform proposal – and it’s no surprise that the rich would be the big winners.



   This chart reflects: changes to both the individual and corporate tax rates, the child tax credit, the expanded standard deductions, and the limits to other deductions.  One issue that is not reflected above is the impact of repatriation – which would even magnify the benefits to the wealthy.
   This past week also brought us a new jobs report, and more sector specific employment data.  The following chart compares job growth in the first 10 months of 2017 with the same period in 2016.  Sectors such as professional & business services, education & health care, and hospitality & leisure are still adding tens of thousands of jobs every month.




   3 things that jump out at me are: (a) Retail is collapsing.  So far in 2017, retail jobs have fallen by 6,600 per month, largely due to Amazon and other online retailers.  (b) Manufacturing and mining are coming back.  With stable prices, a weaker dollar and rising global demand – investments in oil drilling and metallic mining are back, and so are the jobs.  (c)  Information is dying.  The Internet and the advancement of computer technologies have devastated employment in traditional publishing, broadcasting, and telecommunications.
   And then there was the latest jobs report itself.  It showed the U.S. adding 261,000 jobs last month, the unemployment rate inching down to 4.1%, and wages growing a paltry 2.4% (even less than September’s number).  One of my friends said it best: “They keep telling us how good things are – yet I’m still paying my kid’s insurance and telephone bills.  It’s the Potemkin Village all over again.  They’re trying to bluff us into believing that everything’s fine.”  [Potemkin Village is a story of how Grigory Potemkin erected phony, portable settlements along the banks of the Dnieper River in Russia – in order to fool Catherine the II.  The structures would be disassembled after she passed, and re-assembled farther down her route to be viewed again as if new.]  My friend was ‘spot-on’.  While the talking heads were crowing about the 261k jobs created – they never mentioned that 83% of them were ‘fake’ – created as a result of the ‘birth/death’ model.  They also failed to mention that the number of individuals NOT in the labor force increased by almost 1m last month.  If everything was so rosy – why are 1m more people leaving the labor force? 
   But the market momentum is in place, they're giddy about stocks, and for now the only direction is up.  20 years ago, the Economist magazine predicted that in 2018 a new global currency would be in place – and that’s not too terribly far away.  In the meantime, (a) make what you can, and (b) don't think for a moment that any of this is normal.  Negative interest rates, the Bank of Japan owning 50% of their own ETF market, or the ECB owning 11% of all European corporate debt – none of that is normal.  I think November will be ‘up’, but I’m not sure about December.  The upcoming rate hike could be the bell that signals a time to ‘take something off the table’.  If 2018 is going to be a tumultuous year, they might want to get out ahead of the noise.  In the meantime, lean long and keep a finger near the sell button.


Tips:



   This past week, Allianz’s chief economic adviser Mohamed El-Erian joined the raft of Bitcoin skeptics that are softening their stance on the cryptocurrency.  Mr. El-Erian, who previously stated: “Bitcoin should be worth 50% of its value”, told CNBC it was “trying to find stability.  It's more of a commodity than it's a currency.”  As Bitcoin reaches new all-time highs of $7,500/coin on news of the CME Group offering bitcoin futures by the end of the year – bubble concerns are beginning to take a back seat.  When El-Erian made his previous comments in September, Bitcoin was trading around $4,000.  With Coinbase adding 100,000 in the first 3+ days of November, he modified his tune to: “My major concern over the long term is making sure pricing maintains a consistent relationship with reality?"   For his part, Jamie Dimon (after his infamous ‘fraud’ accusation) has remained silent on the matter.  While other JPMorgan senior executives have gone on record saying the banking giant is open-minded on the issue of cryptocurrencies in general.

Recommendations:
Bullish: (Sell PCS = Sell a Put Credit Spread):
-       Boeing – BA (261.75) – Sell PCS, Nov 10th: +252.5 / -255, $0.35,
-       Caterpillar - CAT (136.93) – Sell PCS, Nov 10th: +133 / -135, $0.31,
-       Carnival Cruise - CCL (65.43) – Sell PCS, Nov 10th: +62.5 / -64, $0.28,
-       Russell Small Cap - IWM (148.61) – Sell PCS, Nov 10th: +146 / -144.5, $0.15,
-       Micron – MU (43.71) – Sell PCS, Nov 10th: +40 / -41.5, $0.16,
-       Nasdaq - QQQ (153.27) – Sell PCS – Nov 10th: +149 / -151, $0.16,
-       Small Cap Bull - TNA (65.12) – Sell PCS – Nov 10th: +61 / -62.5, $0.21,
-       Wynn – WYNN (150.09) – Sell PCS – Nov 10th: +147 / -148, $0.31,
-       BioTech - XBI (85.6) – PCS – Nov 10th: +80 / 81.5, $0.07

My Crypto-Currency Holdings continue to Include:
-       Bitcoin (BTC), Ethereum (ETH), Litecoin (LTC), Dash (DASH), Digix (DGD), MaidSafeCoin (MAID), Metal (MTL), OmiseGo (OMG), PIVX (PIVX), Patientory (PTOY), Steem (STEEM), and NEM (XEM).

To 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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