RF's Financial News

RF's Financial News

Sunday, June 24, 2018

This Week in Barrons - 6-24-2018

This Week in Barrons – 6-24-2018:

“When did we stop teaching, and start building monuments?” … John Dewey

   Does anyone really believe that a nicer student union will dramatically change the quality of a higher-educational experience?  Every great VC realizes that it’s the ‘jockey’ not the ‘horse’.  Every great musician can play a ‘piano in a bar’ just as well as a ‘Steinway at the Met.’  When did we stop competing on the quality of our teachers, and put the emphasis on our auditoriums and atriums?  Probably around the same time that:
-      State subsidies to big businesses started to increase (tripling since 1990), 
-      Employment in small businesses started to fall (down 1/3 since 1987),
-      And more mergers and acquisitions started to be given the green light.

   The following graphs show that:
-      College entrepreneurship rates have FALLEN by 50% since 1992, 
-      MORE education makes you LESS likely to be an entrepreneur, and
-      Entrepreneurial startup rates are DECLINING across all sectors. 
   So it doesn’t take a genius to realize that all education is doing is: “Following the money.”  If institutions of higher learning prefer monuments over increased teacher salaries – so be it.  If they prefer the short-term view of a new library over longer-term alumni satisfaction – that’s their decision.  But, the following two graphs speak volumes about our entrepreneurial faculty and their results.

“The only thing that interferes with learning – is education.”… Albert Einstein

   In the old days, college students were told to ‘question authority’.  I’m hoping that we’re not too late to get today’s students to distrust their professors – just a little bit.  After all, some ideas are so stupid that only an academic will believe in them.  A little self-education goes a long way.  If you want to know something – Google it.  And if you’re lazy – ask Siri or Alexa.  Heck, a free ‘hot spot’ and a $200 laptop from Walmart will give you the ‘keys to the kingdom’ of knowledge.
   It’s not my intention to get into a discussion surrounding how much longer our colleges are going to be allowed to charge $250,000 for a degree that qualifies someone to serve coffee at Starbucks.  I’d rather discuss the new Brookings Institute Report that highlights the U.S. Startup Slowdown.  It starts with the belief that competition is the basis for a free-market economy because it forces businesses: (a) to innovate, (b) to keep prices low, and (c) to pay sufficient wages to insure employee retention.  Without competition, markets will favor incumbents and will (a) reduce hiring, (b) decrease production, and (c) increase profits.  The report highlights decades of troubling indicators showing the U.S. economy on the decline.  
   The report found that the proportion of U.S. companies less than two years old has declined from 13% in 1985 to 8% in 2014.  Correspondingly from 1998 to 2010, that same share of private sector workers plummeted from more than 9% to less than 5%.  Every industry’s share of new companies fell due to:
-       Rising Market Concentration. Since the 1980s, the share of all sales going to the top firms is increasing – often due to government contracts.
-       Educated Workers are moving AWAY from Entrepreneurship:  In 1992, 4% of all 25 to 54 year old’s with a Master’s Degree or PhD owned a small company with at least 10 employees.  In 2017, that number had dropped to 2.2%.  Big companies figured out that paying high salaries for educated employees kept them away from becoming entrepreneurs. 
   With a decreasing number of startups our economy is less dynamic, but on the bright side – fewer jobs are being lost.  Contrary to popular belief, jobs in the U.S. are more secure than in previous decades.  One way to give startups a boost would be to eliminate the subsidies given to big businesses.  For example, when Amazon gets a tax break for opening a new facility, it makes it even harder for startups to compete.  And those breaks are getting larger, and more frequent.

"People who DO NOT take risks make about 2 big mistakes a year.  People who DO take risks make about 2 big mistakes a year. " – Peter Drucker

  In terms of innovation, what you see above is the new burger-chef at a restaurant in San Francisco.  That chef is a Rube Goldberg-like machine (called Creator) that: slices buns, adds condiments, grills meat, and spits out a fully prepared hamburger – all without any human intervention.  A row of brioche buns moves down a chute, dropping one bun at a time to a tiny saw that slices them in half.  The machine adds a little clarified butter, toasts the bun, and drops it into a box on a conveyor belt, where it squirts a precise amount of each sauce for the order, slices tomatoes and onions in real time, grates cheese, and grinds beef to order before cooking the patty.  In five minutes, your meal emerges – and early reviews are off-the-charts.  Alex Vardakosas (the CEO of Creator) doesn’t “See it as a robot, but rather as the ultimate kitchen instrument that struggled to work with error-prone humans.”   Vardakostas and cofounder Steve Frehn spent the last six years working on the machine, despite being told it wasn’t feasible.  Creator is the first machine to fully transition any segment of food creation and distribution into complete automation.
   I’m waiting to see if Amazon takes advantage of its political and business incentives, to build a subsidized burger joint (monument) right next to the ‘Creator’ – and put them out of business.  Yes, I know: “It’s just business.”  But do our various governments always have to support the ‘big guys’?  Heck, give the startup an even playing field, and more of them just might show-up.

The Market:

"Arguing you don't care about privacy because you have nothing to hide is like arguing you don't care about free speech because you have nothing to say." – Edward Snowden

-      "I will buy a tiger"  A National Basketball Association draftee on what he will do with his draft bonus.  Sounds reasonable.
-      Drop it.Last week General Electric (GE) was dropped out of the DOW. GE has been a part of it for over 100 years, but because it’s struggling – it got the boot.
-      There are now More Guns than Peoplein the US.  In 2017, there were 326m people living in the US – and 393m civilian-owned guns.  This percentage is TWICE as large as the country that’s #2 on the list: Yemen.

-      Waves of Capitalare pouring intothe private crypto market - as ‘seed valuations’ are north of 200M, and some companies are circling back to investors for additional capital once the prior round is complete.  What’s going on?  It’s the valuations at ‘exit’ that matter.  Give it time. Valuations will come in and ‘cram-downs’ will happen.
-      Crypto is hitting the big screenwith an independent film starring: Kurt Russell, Alexis Bledel, and Luke Hemsworth.
   Mary Meeker’s report came out this past week – without a mention of: bitcoin, blockchain, cryptocurrency or ICO.  The highlights were:
-      Smartphone growth flattened despite average unit sales price declines.
-      Internet user growth slowed from 12% to 7%, with current user numbers reaching about 50% of the world’s population.
-      U.S. adult daily online time grew to 6 hrs./day, and 3.3 hrs. are mobile.
-      Online sales grew 16% while physical retail sales continued to decline.
-      Amazon’s dominant share of e-commerce grew to 28% in 2017.
-      29% of the time people are mobile while consuming content.
-      China had over 500m active mobile users in 2017.
-      Facebook owns 3 of the top 5 messaging apps.
-      Mobile video is growing, and Twitch hosts the hottest game: Fortnite.
-      China is home to 9 of the 20 largest Internet companies – and U.S. the other 11.  5 years ago China had 2 and the US had 18.
-      Household debt is at its highest level and rising, while the savings rate is falling (3%).
-      The workplace continues to virtualize with on-demand jobs predominating.

   What was missing from the report was any mention of the growing legions of global ‘block-heads’ working hard to solve crypto/digital problems.  
-      One slide did show Coinbase generating over $1B in sales in 2017, and is scheduled to increase that by 50% this year.  
-      Facebook and Google are caught between using personal data to provide better user experiences and violating consumer privacy.  People are  questioning where the online Goliaths’ stand on:  privacy and security vs freedom of expression vs trust in media and public life.  
-      Since the Ethereum ICO in 2015, we have experienced an unprecedented ‘ICO wave‘, with over $4B raised in 2017, and an incredible $11B raised in the first five months of 2018.

   For the week,the DOW ended lower by -2.0% to mark its largest weekly decline since March 23rd, and its second straight weekly fall.  The S&P 500 lost -0.9% while the NASDAQ booked a weekly drop of -0.3%.  
-      FOX rejected Comcast’s $65B all-cash offer, but struck a new merger agreement with Disney when the deal was sweetened to $71.3B.
-      A stress test revealed that our nation’s largest Wall Street banksare strong enough to continue lending even if the U.S. economy plunges into a severe downturn The results showed that the banks would have more than enough capital to survive the combination of an economic recession, plunging housing prices, and double-digit unemployment. 
-      Canadian Prime Minister Justin Trudeau announced that recreational marijuana will be completely legal in Canada on October 17, 2018.  Once enacted into law, adults in Canada will be legally allowed to: (a) possess and share up to 30 grams of dried legal cannabis or its equivalent in public; (b) cultivate up to four plants at home; and (c) prepare varying types of cannabis products at home for personal use.

   I expect investor anxiety and volatility over a looming global trade war to continue.  However, I doubt that an all-out trade war will actually materialize.  Even if tariffs are announced, the implementation requires a review process that could take months.  Within that period, there is still a negotiating window for our trading partners to prevent disruptions.  Potentially, economic and earnings growth will help to counteract the effects of tariffs.


Top Equity Recommendations:
   7Growth Stocksthat would be insulated from a trade war:
-      Netflix(NFLX +111% YTD) – the video streaming giant is causing media companies to struggle and merge to at least have the strength to compete.
-      Etsy(ETSY +112% YTD), Lululemon(LULU +68% YTD), and Five Below (FIVE +49% YTD) are 3 stocks in the retail sector that are showing remarkable strength.
-      MasterCard(MA +32% YTD), TransUnion(TRU +31% YTD), andVisa(V +19% YTD) are 3 in the financial services sector that showsolid, long-term uptrends.

   3 Biotech Stocksthat are set to rally:
-      Vertex (VRTX) is one of the industry’s top rare-disease drug franchises. They have had a string of positive earnings surprises in the past year, and trials for its regimen for cystic fibrosis patients have gone well. 
-      Alexion(ALXN) is riding a string of execution wins.
-      Gilead(GILD) will benefit from a more stable pricing environment, surrounding its hepatitis C treatments.  Interest is increasing in its nascent immunology and non-alcoholic steatohepatitis franchises.

   Marijuana stocks (HODL):
-      Canntrust Holdings (CNTTF), and 
-      Canopy Growth Corp (CGC)

-      Nvidia (NVDA) – SOLD the June 29: -250 / +245 Put Credit Spread,
-      Chipotle (CMG) – SOLD the July 20: -480 / +482.5 Call Credit Spread, 
   It was only six months ago that CMG was pummeled by reports of food poisoning.  Now, with a new CEO, delivery, and safer food prep - the stock has rallied nearly back to its 2017 highs.  Las week it announced that it was testing new, cheaper menu items like milkshakes, quesadillas and tostadas.  Earnings are coming out on July 26th.  If you think that CMG might not continue to rally and don’t want to risk earnings, the short call vertical that’s short the 480 call and long the 482.5 call in the July weekly expiration with 27 DTE is a bearish strategy that has a 72% probability of making 50% of its max profit before expiration.
-      McDonalds (MCD) – BOT the July 27: +165 / -170 Call Debit Spread,  
   To celebrate the longest day of the year, you may need some coffee.  This past week, Starbucks dropped the equivalent of 6.8 standard deviations.  It had to do with closing stores, lower sales, & higher costs.  McDonalds fell in sympathy.  MCD has earnings coming on July 24.  If you think that MCD has more going for it than Starbucks, the long call vertical that’s long the 165 call and short the 170 call in the July weekly expiration with 34 DTE is a bullish strategy with a 57% probability of making 50% of its max profit before expiration.
-      IBM – SOLD the July 27th: -141 / +139 Put Credit Spread.
   Last week, IBM’s ‘Project Debater’ used machine learning and 300m articles and academic papers to debate a human – and argue for gov’t spending on space exploration and the expanded use of telemedicine.  It won the debate.  That said, IBM is trading near its lows, and has earnings coming up on July 18.  If you think that IBM’s debating success could keep it from dropping further, and are willing to trade through earnings, the short put vertical in the July weekly expiration with 34 DTE that’s long the 139 put and short the 141 put is a bullish strategy with a 79% probability of making 50% of its profit before expiration.

   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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