RF's Financial News

RF's Financial News

Sunday, December 3, 2017

This Week in Barrons - 12-3-2017

This Week in Barrons – 12-3-2017:




“Education is our only political safety.” … Horace Mann

Thoughts:

Last week:
-       Apple launched an app that will let it study users' heart rates via the Apple Watch.  They are hoping this will help detect irregularities, and let users know if they could be suffering from a heart condition.
-       GM is innovating again, and announced that it plans to roll out a driverless car service – starting in major cities by 2019.
-       The Dallas FED President, Citadel’s Ken Griffin, and the chief economist at the Vanguard Group all came out saying that stocks were overbought.  This late year ‘melt up’ is almost classic in scope, and unique since 1998 -1999 when nothing mattered then either.
-       A lot of fund managers are chasing yearend performance bonuses – which could mean that this year there will be no ‘January effect’?  Often the new year brings in new money, and January turns out to be a very good month.  With an interest rate hike in December and so many fundies trying to look good on paper – the ‘January effect’ could be on hold.

   The market entered ‘melt up’ mode this week, but this time things are much worse.  Back in 1999 it was really only the techs that were in the bubble, and the rest of the market just sort of went along for the ride.  This time around – everything is on fire.  In 1999, everyone knew how it was going to end.  This time around, it's not just fund managers piling into stocks based upon some new-fangled invention – it’s coordinated injections of trillions of dollars by the world’s Central banks.  If the Central banks continue, there's no reason this can't keep going higher for much longer – with the only thing stopping us being inflation.  The current velocity of money is at record lows – meaning that money isn't really changing hands.  But if the velocity increases, then a small amount of inflation could move to hyper-inflation in a hurry.
   Last friday was all about Michael Flynn’s decision to cop a plea, and cooperate with investigators.  The lone charge against him suggests that prosecutor Robert Mueller believes that there could be someone higher in the chain of command about whom Flynn (the former National Security Adviser) can provide critical information.  Flynn was always a member of Trump’s inner circle.  When Trump won, Flynn was given carte blanche in terms of what role he wanted to play in the White House.  That is why his guilty plea is different and more serious than the charges against Trump’s former campaign chairman Paul Manafort.  Flynn sat at the absolute epicenter of Trump’s world, and could have information that goes to the very core of Mueller's investigation into Russia's interference in the 2016 election and any possible collusion between Russia and the Trump campaign.  In short, the knocking that President Trump now hears at the door – is coming from inside his own house.
   The big question is: Who is the real target of Mueller's investigation?  With Flynn’s guilty plea, everyone is now wondering if the Trump presidency is in peril.  Peril does not necessarily mean that Trump is a goner, but it does mean that Mueller's Russia investigation almost certainly will get worse for Trump before it gets better.
   I’ve attempted below to outline how all of this impacted the markets last week.  The bottom chart in the group shows the Russell Small Cap market reaction to Flynn’s guilty plea – announced on Friday when the markets opened.  What the graph shows is panic selling in the small caps that quickly crashed the index down 3 standard deviations.  However, at the same time, the S&P and DOW moved higher by 2 standard deviations – almost as if they were being manipulated.  I have never before seen this type of action.  The markets remain extremely nervous with the upper left graph showing the S&P rising, while the upper right graph shows the NASDAQ falling.  Last week investors rotated out of technology and into energy, financials, and transports – that moved 5, 6, and 7% higher respectively.  The moves higher were all predicated on the passage of a tax reform bill, and on the FED raising interest rates.  Bonds and volatility remain elevated, and let’s not forget that the ‘monsters of tech’ (Facebook, Apple, Microsoft, Google and Amazon) were down 7% on the week.


      


   The way they brought the Russell Small Caps back (see above bottom chart), coupled with the fact that at 2am on Saturday the Senate passed the tax reform bill – should signal yet another upcoming rally higher.  I think Flynn will be a sacrificial lamb with no connection to Trump, and the tax bill passage will get everyone thinking that Main Street USA is going to be healthy again – keeping the ‘melt up’ intact.  I’d be remiss if I didn't mention that markets have a way of setting tops on significant news – remember: "Buy the rumor, Sell the news.”   While I don't think that is what will happen, we have to at least consider the possibility.  All we can do is take what we can get, and hope that we're all smart enough to bail out when the ugliness starts.


The Crypto-Markets:



“In skating over thin ice … our safety is our speed.”  Ralph Waldo Emerson

The problem:
-       Real inflation is running about 9.6%.
-       The average investor makes 5.5% per year.
-       The world is a little bit over $200T in debt.
-       And the 1971 dollar is worth just $0.04 cents today.

  This isn’t a pretty picture – so who can blame someone for being interested in annual gains such as: Bitcoin +1,250%, Ethereum + 2,750%, Litecoin + 1,100%, and Ripple + 5,500%.  Put that together with the CME’s latest announcement that it will begin offering futures products on Bitcoin as soon as December 18th – and you could be witness to a crypto feeding frenzy.  In a separate Friday release, the CBOE said that it has also filed a product certification with the CFTC (Commodity Futures Trading Commission) to offer bitcoin futures trading.  Their launch date "will probably be before the end of the year.  We are operationally ready."  The NASDAQ also announced plans to launch a bitcoin futures service as early as the second quarter of 2018.  It’s becoming clear that the cryptocurrency market is not going away.  In fact, it’s being embraced by some of the biggest tech giants of our time:
-       Bitcoin is a remarkable cryptographic achievement and the ability to create something that’s not duplicable in the digital world has enormous value.” - Eric Schmidt, Former CEO Google.
-       “My view is quite clear. I believe in crypto currencies. I believe they’re going to change the world.”- Richard Brown, Executive Architect of IBM

   In January of 2017, $1,000 was the milestone bitcoin owners were eager to reach.  Bitcoin hit it, and increased over ten-fold to $11,000+.  This year has been filled with good news for digital currencies from another Asian market boom to Bitcoin’s integration with SQUARE, and from the launching of a regulated futures market to growing mainstream adoption.  Hedge funds, pension funds, and family offices have shown extraordinary interest in bitcoin this year.  Simon Yu, CEO of StormX said: “The price of bitcoin is at an all-time high due to institutional money finally starting to flow into the cryptocurrency market.  The general public is starting to realize cryptocurrency is beginning to be adopted by mainstream markets, and will continue an upward trend as they see the potential for more corporate use cases.” 
   Wall Street traders are telling me that the floodgates are about to open, and that a ‘new narrative’ is emerging.  Currently, the main criticism of bitcoin is that it’s too volatile – and low-volatility portfolio models are what drive Wall Street.  Wall Street makes money by holding onto and managing your money as long as possible.  They try to reduce volatility in order to increase client security.  When valuations swing too wildly, clients get scared and start to pull their money out.  With bitcoin being so volatile, it hasn’t fit into the Wall Street mold – until now.  Study after study is coming out showing that bitcoin is a true non-correlated asset.  Which means that bitcoin can be purchased to act as a hedge against other correlated and inversely correlated assets. 
   Why is that important?  One of the elements Wall Street uses to tame volatility is to build portfolios with inverse correlations.  For example, traditionally when stocks go down – bond prices usually go up.  That’s a major reason most money managers have you own both stocks and bonds.  Wall Street is starting to realize that bitcoin is an asset that is uncorrelated to any other.  That means the price of bitcoin is unrelated to the price of gold, stocks, bonds, or commodities.  The Wall Street pitch will be that by adding a 5% allocation of bitcoin and cryptocurrencies to your portfolio, it will actually bring down the volatility of your entire portfolio because bitcoin is unaffected by market crashes, monetary intervention, recessions, or wars.
   Any day now we’re going to see an endowment or pension fund add bitcoin to their portfolio.  They will explain that they’re using bitcoin as a non-correlated hedge to smooth out volatility.  When that happens, Wall Street will grab on to the non-correlated narrative and run with it.  I’ve seen this movie before.  Institutions did it with the “Nifty-Fifty” in the ’70s, and with junk bonds in the ’80s.  They did it with internet stocks in the ’90s, and with credit default swaps in the ’00s.  At first, they’re considered crazy investments.  Then a new narrative takes hold, and they become legitimized when institutions start using them.  Before long, everyone on the Street is using the product.  It will be the same for bitcoin.
   Along with Ethereum (ETH), I have a short list of three cryptocurrencies that I believe will explode higher in the coming months.
   #1 Litecoin:  Litecoin (LTC = $102 – shown in the below – upper left-hand chart) is a peer-to-peer Internet currency that enables instant, near-zero cost payments to anyone in the world.  It’s an open source, global payment network that is fully decentralized.  It is the fifth-largest cryptocurrency by value, and has technical improvements over Bitcoin.  It allows for a greater number of transactions to be processed by the network in a given time, reducing potential bottlenecks.  It plans to produce 84m Litecoins – which is four times as many currency units as Bitcoin.  Their open source feature gives you the power to modify, run, distribute, and copy the core software.
   #2 Zcash:  Zcash (ZEC = $339 – shown in the below – upper right-hand chart) is the result of continuous efforts by developers to create greater levels of privacy.  While the bitcoin blockchain contains records of the participants in every transaction along with the amounts involved - Zcash’s blockchain shows only that a transaction took place, but not who was involved or what the amount was.  The payments are published on a public blockchain, but users are able to use an optional privacy feature to conceal the sender, recipient, and amount being transacted.  Zcash has a fixed total supply of 21m units and is in the top 10 cryptocurrencies by market cap.
   #3 Monero:  Monero (XMR = $203 – shown in the below – bottom chart) is an open-source cryptocurrency created in April 2014 that focuses on privacy, decentralization, and scalability.  Unlike other cryptocurrencies that are derivatives of Bitcoin, Monero is based on the CryptoNote protocol and possesses significant algorithmic differences relating to blockchain obfuscation.  In early 2017, the privacy of Monero transactions was strengthened by the adoption of a superior confidential transactions algorithm.  This technology helped to provide legitimacy for Monero at a time when much of the cryptography used in blockchains was new and had not yet withstood the test of time.  Monero has a circulating supply of 15m units and has gained over 3000% since it began trading.





      Which begs the question: “Can I still get in on the ground floor?”  In 2014, when Bitcoin hit its first real mainstream swing with Coinbase and other exchanges upping their user experience, people started asking: “Is it too late to get into Bitcoin?”  Those questions recur every time Bitcoin’s price rises another $1,000.  However, since only a half-of-a-percent of the global population uses digital currency, there is still plenty of time to be an early adopter.  Jon Chou, CEO of Bee Token says: “People often complain that it's too late to get into Bitcoin.  There are approximately 700,000 Bitcoin addresses, and over 7B people in this world.  It’s important to realize how early we are in the blockchain space.  Bitcoiners from 2010 and earlier are just starting to be vindicated rather than victimized.”  And just last week the WSJ announced that the NASDAQ exchange will begin to offer bitcoin futures as early as June 2018.
   Now for the dose of reality.  There’s a greater-than-80% chance that bitcoin will soon start to move downward into ‘correction terriroty’.  A recent study titled “Bubbles for Fama” was published earlier this year by the National Bureau of Economic Research.  The researchers defined a bubble as any sharp price run-up over a two-year period – followed by at least a 40% drop over the subsequent two years.  When the price run-up is 100% or more, they found the probability of a correction becomes 50%.  When the price run-up is greater than 150%, the probability of a drop becomes 80%.  Bitcoin’s run-up over the past 2 years is over 2,500%.  That’s more than 10 times the threshold the researchers found associated with a ‘near certain’ subsequent correction.  Unfortunately, the researchers were unable to link the probability of a correction to any fundamental factors.
   Whether a fan or a skeptic, it’s clear that the upcoming launch of CME’s bitcoin futures is another step in the direction of cryptocurrency acceptance.


Tips:




   Crypto-Pricing:
   Bitcoin (BTC = $11,639):  On Nov. 29 bitcoin peaked at $11,420.82, creating a zone between $8,750 and $9,100 as formidable support.  If the bears succeed in breaking down that support, the 20-day EMA at $8,530 will act as the next level of support.  On the upside, we just this morning pierced the lifetime high of $11,420.82.  I expect the volatility in bitcoin to subside, but right now the risk to reward ratio in the current environment is not conducive for trading.  Hence, I’m not recommending any trades in BTC today.
   Ethereum (ETH = $476):  If Ethereum remains above the $393 levels, it is likely to rally towards its pattern target of $652.  Below $393, and it’s likely to slide to $350.  I prefer to stay on the sidelines and watch the setup develop over the next two days before initiating any new trades.
   Ripple (XRP = $0.254):  I had anticipated a rally to $0.3 on Ripple; however, it could not cross the $0.28 mark.  From there, it plunged back to the critical support of $0.22.  The $0.22 level held, and the rebound is facing stiff resistance at $0.25 level – which is the 50% Fibonacci retracement of the fall from $0.281 to $0.2195.  Once above this level, a rally to $0.28 and thereafter to $0.3 is likely.  Contrarily, if the $0.22 level breaks down, it can sink Ripple to $0.18 levels.  Aggressive traders can attempt to go long at $0.251 and keep a stop loss of $0.218.
   Litecoin (LTC = $102):  The $93 resistance level was broken like a hot knife through butter.  It will now act as support, and if broken the next support level would be down at $76.  I will wait for the volatility to subside before recommending any new trades.
   Dash (DASH = $789):  I was looking for a price target of $650 for Dash – which was easily surpassed.  Currently, Dash is sitting at the resistance line of the ascending channel, which is likely to be a difficult level of cross.  I expect a couple of days of consolidation before the bulls attempt to resume the uptrend.  The breakout and close above the ascending channel gives it a pattern target of $960.  On the other hand, any correction is likely to find support at the trend line of the ascending channel, around the $680 mark.  Currently, I’m not finding any setups on the charts that offer a good risk to reward trading opportunity.
   Over the next several weeks, I’m looking for moves higher in ZCash (ZEC), Ethereum (ETH), and Monero (XMR).

Equity Recommendations:
Bullish: (Sell PCS = Sell a Put Credit Spread)
-       Abbott Labs – ABT (55.98) – Sell PCS, Dec 8th: -55 / +53, $0.26,
-       Aurora – ACBFF (5.92) – Long Stock from $2 / share,
-       Credit Accept - CACC (304.27) – Sell PCS, Dec 15th: -280 / +270, $2.25,
-       Caterpillar – CAT (141.52) – Sell PCS, Dec 15th: -135 / +132, $0.51,
-       Gastar Exploration – GST (1.04) – Long Stock from $1 / share,
-       Marathon – MPC (62.84) – Sell PCS, Dec 15th: -61.5 / +59.5, $0.35,
-       UnitedHealth – UNH (226.78) – Sell PCS – Dec 8th: -207.5 / +205, $.50,
-       Zebra Tech - ZBRA (110.36) – Sell PCS – Dec 15th: -105 / +100, $0.70,

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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