This Week in Barrons – 7-29-2018:
“It was the greatest corporate loss of value in market history.” … Art Cashin
The odds are stacked against you: 55 to 1.
Ok, I’ll admit it. I don’t have an Instagram or a Snapchat account – and I don’t use Facebook. I don’t have HULU – so I’ve never seen one episode of “The Handmaid’s Tale”. Despite all of those short-comings, I still feel relatively normal and connected.
Two years ago there was a concern that passive ETFs were getting too large. Investors worried that with too much concentrated risk, a sell-off in the ETF markets could potentially be the catalyst for the next market crash. In the past 2 years, ‘FAANG’ stocks (Facebook, Apple, Amazon, Netflix and Google) have risen to a point where their combined market caps are greater than the float of all the ETFs in the U.S. and China. Therefore, risk has shifted to the FANGs, and up until last week no one thought about a FAANG stock collapsing.
Combine this with the latest information out of Trim Tabs showing that the ratio of insider selling to buying is at historic levels. When this ratio is under 12 to 1 – it’s a bullish sign that insiders want to own their own stock. When it exceeds 20 to 1 – it’s a sign that the insiders want out. Right now, the ratio is over 55 to 1 – 55 sellers for every single buyer.
Last week Facebook's stock took a nose dive after the company announced disappointing Q2 earnings. Even though billions of people use the Book and its babies (Instagram and WhatsApp), the Book missed expectations. The Book's been putting fewer brands on your news feed so you could focus on friends and family. Privacy concerns and Europe's new GDPR privacy law have also forced it to make changes that produce less revenue. The Book also asked Wall Street to lower its expectations for the next few quarters, and that’s not what people wanted to hear.
The Book had pretty horrible things to say about their reduced growth going forward and how people are fleeing from their platform. Why is anyone shocked that the Book is losing users? They censor anyone that doesn't follow their own ideology, and then there’s that Cambridge Analytica – selling your personal information – data privacy thing. But the Book is the darling of virtually every mutual fund portfolio – so will funds start to dump it? I'm already seeing analysts come to the Book’s defense and continue to keep ‘buy ratings’ on the stock. They’re saying such gibberish as: “Facebook is actively choosing to make less money, deprioritizing near-term monetization in order to drive engagement to even higher levels with their 2.5B monthly users."
Last week, the Book lost more value ($119B) in a day than any company in stock market history. You could almost hear investors saying: “Run, Forrest – Run,” as they dropped the Book like it was a secret Beyoncé album. Amazon said: 'Sucks to be Zuck' because it had a Prime earnings report that showed over $2B in profits for the first time ever. But Amazon’s facial recognition software did wrongly match 28 members of Congress to criminal mugshots. Maybe Amazon (indirectly) is trying to tell us something?
Between Facebook and Amazon, it’s all about ‘KYC’ = know-your-customer. Both Facebook and Amazon know their customers better than anyone else on the planet. Remember the old phrase: “Put your money where your mouth is”? Facebook and all of its babies capture everything we communicate (‘where your mouth is’). Amazon captures everywhere we’re ‘putting our money’ – with an added sprinkle of data management and video network on the side. Between the two of them, ‘KYC’ has never had a better poster child. I forever preach that it’s the ever-increasing, ever-complex, ever-demanding know-your-customer side of the house that will signal the demise of most companies. Imagine the amount of capital that is wasted on lawyers, licenses, and more lawyers – at the expense of never knowing-your-customer. I can only imagine what a data breach at Amazon and/or Facebook is worth to hackers. At this point, both together are potentially the best massive, semi-privatized, global surveillance system we’ve got.
Google earnings were a yawn. Netflix and Facebook both disappointed. I shudder to think how low this market would have tumbled if Amazon had missed expectations. Insiders aren't selling at a 55 to 1 ratio because they think their corporation’s best days are ahead of them. Sorry. They're selling because they know their own company’s stock is grossly overvalued. There’s a reason why ‘the Zuck’s’ been dumping millions of shares of Facebook. Insiders know the real deal, and at 55 to 1 – they’re "Gettin’ out while the gettin’ is good."
- Who’s ready? I’m not ready nyet. President Trump is delaying his second date with Russian President Vladimir Putin. After their first one-on-one in Helsinki and a whole bunch of backlash, Trump texted Putin: 'Hey, wanna come over?' He penciled in a date for D.C. in the fall, but earlier this week, Putin's people reportedly said: ‘Let’s take this slow.'
- Who’s movin’ higher? Google’s surge in earnings, put it in the running with Amazon and Apple to be the first trillion dollar company. And oh, yeah, Microsoft’s spike is putting it within striking distance, too.
- Who’s cryin’ now? Tesla is burning money so quickly it’s asking suppliers for a refund to help make its cars profitable.
- Who’s a drivin’ me a crazy? Papa John’s founder resigned earlier this month after it came out that he used the n-word in a conference call. Now, the board is trying to prevent him from forcing his way back into a leadership position by buying up more slices of the company pie.
- Who’s movin’ forward? Last year, Nike female employees sent around a survey about unequal pay and workplace misconduct. Now, after complaints to: ‘Just Do Something’– the company's raising salaries for thousands of employees.
- Who’s listening? “Amazon is one of the few companies that actually listen to their shareholders. Mainly through Alexa, but still.” … @jfahmy
- Who’s new @ Goldman? David Solomon – come on down. Last week Solomon said Goldman is looking to add more Bitcoin and cryptocurrency services.
- Who’s tradin’ crypto? According to the most recent Thomson Reuters survey, approximately 1 in 5 financial firms indicate they willbegin trading cryptocurrencies over the course of 2018.
- Who’s doing blockchain? It seems that all of the Big 4 accounting firms: Deloitte, Ernst & Young, KPMG, and Price Waterhouse Coopers have joined a trial to perform blockchain services.
- Who’s accepting Bitcoin? Mastercard announced last week that it COULD allow Bitcoin transactions on credit cards.
- Who’s been smoked’ in Q2? Most crypto sectors were pummeled during Q2. The Top 5 Losers were : Identity Management (-20.7%), Payment Card (-20.4%), Video Games (-15.9%), Advertising (-14.5%), and Smart Contract (-14.3%).
- For the week: the DOW added 1.6% while the S&P rose 0.6% and the Nasdaq fell 1.1%. For the DOW it was their 4thstraight weekly gain – the longest such streak since January. Year-to-date, the DOW up +3% and the S&P is up 5.5%, and the Nasdaq is up 12%.
- Trade tensions are easing between the U.S. and the E.U.
- A $12B farm bailout was announced for U.S. farmers who are hurting from the escalating trade war.
- 4.1% GDP growth (although slightly below consensus) shows a relatively strong economy. However, it was heavy government spending that powered the economy in Q2.
- Facebook & Twitter analysts think that both are buying opportunities. But what did you expect? They’re hoping Facebook reaches $275 (a 57% increase), and Twitter reaches $55 (a 61% increase) after 12 months.
- Takin’ the elevator down is normally what happens to the altcoins when Bitcoin decouples. However, this past week both have seen volume and market cap increases – so keep your head on a swivel.
Looking for a growth - try trucking and biotech. When’s the last time I used those three words (growth, trucking and biotech) in the same sentence? The U.S. trucking industry moves over 70% of the nation’s freight, and over the recent months has shown significant demand increases. The 3 factors working in favor of the trucking industry are: a) a U.S. economy that is on solid footing; b) a capacity crunch and severe driver shortage, and 3) those corporate tax cuts are beginning to take hold. Three stocks in the trucking sector that are reasonably priced and are experiencing strong growth are:
- ArcBest (ARCB = $44.40, +24% YTD) is scheduled to release Q2 results on July 31. Their earnings growth for the current year is 120.3%.
- Old Dominion Freight Line (ODFL = $143.85, +9% YTD) provides long-haul trucking services. They’re most recent earnings were up over 23% YOY. Analysts are looking for a year-end stock price of $175 – up 22%.
- PAM Transportation Services (PTSI = $49.18, +43% YTD) are a transportation holding company that provides truckload and logistics services such as: scheduling, routing, mode selection, and other value-added services.
The Biotech sector has been surprisingly steady as of late with the IBB (the biotech ETF) being up 17% thus far in 2018. Here are 3 stocks that could double by year end.
- Galectin Therapeutics (GALT = $4.99, + 49% YTD) focuses on using its technology to develop drugs specific to the areas of inflammatory, fibrotic, and malignant diseases. Their focus is on cirrhosis of the liver – only for people who drink little alcohol. It’s a $26B market, and analysts look for GALT to be $12 (+140%) by end of year.
- Geron (GERN = $3.34, + 85% YTD)has two drugs in Phase II and III trials being run by J&J. The price of GERN could easily double if the trials yield top-line results, and/or if J&J picks up the drugs for a larger study.
- Progenics Pharmacueticals (PGNX = $7.66, +29% YTD) has a solid pipeline that includes: a) drugs that target cancer, b) an imaging agent for prostate cancer, and c) their own image analysis technology. If the FDA approves one of the cancer drugs – their market cap will double. Analysts project PGNX to hit $16 (+108.6%) in the months ahead.
About half of the S&P has reported and corporate profits are up 25% year-over-year. This will be Wall Street’s 2ndconsecutive earnings growth quarter above 20%. Sales growth is up almost 10%. Along with a GDP reading of 4.1% on Friday, came a consumer spending increase of 4%, and a business investment increase of 9% (more than double the pace of the preceding two quarters). This coming week will give us Caterpillar (CAT) earnings on Monday, Apple (AAPL) earnings on Tuesday, and Tesla (TSLA) earnings on Wednesday.
This is quite an interesting market. Doug Kass is a well-known market guy who often writes for Jim Cramer. Last week he wrote a long article about why he thinks the market topped in January: too much risk, no fundamental support, overvaluation, tariff headwinds, etc. Unfortunately no matter the obstacles – this market continues to move higher. It's had every chance imaginable to fold: from North Korea to Russia, from rising rates to the FED QT program, and from insider selling to just about anything else. But it’s the dark side of this market that is keeping many fund managers negative on the year. Nobody can see what’s going on inside the Swiss National Bank or the Bank of Japan (that currently owns ½ of the entire Japanese market). Dennis Gartman (a good manager) came out early in the month and declared: "The top is in, and we're entering a bear market". Three days later he reversed himself saying: "Well, maybe I got that wrong". What is impacting the market the most are: dark pools, Central Banks, stock buy backs, hidden hands, and the ‘plunge patrol team’. Unfortunately, all of those elements wreak havoc with logic. Logically, if you believe that lower interest rates contributed to a rising market – then it’s natural to think that higher ones will calm it down. Logically, if you think that Quantitative Easing (QE) helped markets rise – then Quantitative Tightening (QT) should have the opposite effect.
Over the last month investors have pulled $9.4B out of emerging market funds and put it into small and mid-cap U.S. growth funds. Stock buybacks are at an all-time-high of $825B – up 42% over 2017. Talk about extremes. Various managers are going short while many stay the course. I continue to think that we are in the last leg-up of a tremendous ‘blow-off-top’ that will then result in a major pullback. But there are so many ‘never-seen-before’ issues out there. The last time China devalued the Yuan (2015) – it shocked our markets considerably. Simultaneously, if the EU drops all trade tariffs with the US – we will see an upside move. Last week, the market yawned at Google’s results, disliked Facebook’s numbers, and slammed Twitter. If large-cap techs can't keep the ball rolling, then what's to keep this market up? Until this market proves to me that it can claw its way back to the old highs, I'm going to be sitting on my hands a lot. I’m looking for a pullback into Tuesday and Wednesday of this week – and then beginning to put on long trades again around the 2802 level in the S&P.
Top Equity Recommendations:
Marijuana stocks (HODL):
- Canntrust Holdings (CNTTF), and
- Canopy Growth Corp (CGC)
- Bitcoin (BTC = $8,200) - $40,000 by end of year,
- NVDA – Aug 10: SELL -250 / +247.50 Put Spread for $1.10 / get in around $252,
- SBUX – Sept 2: SELL -52 / +50 Put Spread for $0.80 / get in around $52,
- XLE – Sept 21: BUY +75 / -80 Call Spread for $2.25 / get in around $76,
- SBUX– Starbucks can’t get any love. It beat revenue and profit estimates, but barely rallied after the number. Compared to my favorite, Dunkin’ Donuts (DNKN), which has been surging – SBUX has been pretty flat after its sell off in June. SBUX is about 12x the size of DNKN, but as far as my favorite coffee shops go – DNKN is the winner. If you think that SBUX’s record Q3 revenue and expectations of bigger stock buybacks in the future could keep it from dropping – selling $52 PUT and buying the $50 PUT in the Sep weekly expiration with 40 days until expiration is a bullish strategy with an 84% probability of profitability.
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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