This Week in Barrons – 8-26-2018:
”Shark vs man isn’t a fight … it’s a slaughter.” … Jonas Taylor … ‘The Meg’ (2018)
TESLAis no ordinary automaker, and Elon Musk is no ordinary CEO. He makes grand bets and pronouncements, gets cornered by TMZ, and injects himself into spats with other tech luminaries. Now and again, lawyers get involved. In fact, in the past month or so, a lot of lawyers have gotten involved. On August 7, Elon tweeted that he was considering taking his company private, and that he had secured the funding to do so. The end of that sentence may not have been completely true, and that has drawn the attention of shareholders and federal regulators. In the meantime, ex-employees have filed several whistle-blower complaints with the US Securities and Exchange Commission (SEC), alleging retaliation and improperly being fired from the company. And at least 4 Tesla shareholders have accused the company of fraud and market manipulation, and one is asking everyone who purchased Tesla securities after Elon’s tweet to join his case. Meanwhile, the SEC has reportedly opened a probe into Musk’s Twitter activity as the commission served Tesla with subpoenas last week. At this point the lawsuits are just allegations, and tend to come with being CEO of a disruptive company. But they will serve as frustrating hurdles as the company continues to work on ramping up its vehicle production. To examine a few of the law suits:
Martin Tripp (a former Tesla technician)filed a whistle-blower complaint on July 11 with the SEC – alleging that Tesla had lied to investors about production numbers and knowingly used damaged batteries and scrapped parts in its cars. Tesla promptly denied the allegations, and fired Tripp for: leaking information to reporters, stealing trade secrets, and hacking into the company’s computer systems. Last week, Mr. Tripp tweeted out internal photos and emails that he says corroborate his claims. A Tesla spokesperson called the claims false.
Shareholder Lawsuits came directly from Musk announcing on Twitter that he was considering taking Tesla private, and that he had secured the funding to do so. But over the course of the next several days, it became clear that the funding wasn’t secure. So on August 10, a short seller named Kalman Isaacs filed a class-action lawsuit against Musk and Tesla on behalf of everyone who bought Tesla securities after the tweet. Isaacs’ complaint alleges that Musk intentionally lied, knew that the funding wasn’t secured, but hoped to squeeze the short sellers who continue to frustrate him. The lawsuit reads: “As a result of Defendants’ materially false and misleading statements, as well as their market manipulation, Tesla securities purchasers were injured to the tune of hundreds of millions of dollars.” At least 3 other similar lawsuits have been filed – all seeking restitution for funds lost during the August’s market rollercoaster. (Tesla shares climbed 11% following Musk’s announcement but have since fallen after Musk’s glum and emotional interview with .)
The SEC When Elon Musk posted that “funding secured” tweet earlier this month, he not only launched himself into the crosshairs of litigious shareholders, but he also caught the attention of the U.S. SEC. The SEC has issued Tesla subpoenas in reference to: (a) the circumstances surrounding the tweet, and (b) Tesla’s take-private scheme. If the SEC chooses to do so, it could sanction or sue the electric car maker for fraud or even market manipulation.
Carlos Ramirez (a former Tesla director of environmental health, safety and sustainability) hasfiled a lawsuit alleging wrongful termination. According to his suit, Ramirez alleges he uncovered flaws in the company’s incident reporting system at its Fremont, California plant including: “numerous instances of lack of treatment of Tesla employees that suffered workplace injuries, recordkeeping violations, and improper classification of workplace injuries to avoid treating and reporting workplace injuries.” Ramirez’s complaint claims that he alerted Tesla management to these issues, but that the company: (a) ignored them, (b) failed to notify the public or state agencies, and then (c) fired him weeks later. Tesla says Ramirez was not fired for reporting the system flaws, but instead for inappropriate workplace conduct. Representatives for Tesla and Ramirez are set to meet before a judge in late October.
Hyliion, Inc I’ve seen numerous cases of the above behavior, and it often surrounds the venture capital community and their need for greater returns on their investments. The current small business model, in which a small businesses’ initial success is measured by how much money they raise has VC’s: (a) rolling into small businesses, (b) influencing young entrepreneurs, and (c) often driving leadership to the point of irrational behavior. Over the next several weeks / months, I’m going to hi-lite my first hand experiences with many small companies and the impact that VC’s can have on a business: from inappropriate patent filings and sexual harassment claims to investor manipulation, fraud, and more. In one case, after VC funding, 11 of the first 13 initial employees (who were a critical part of securing that funding) were either fired, quit, or resigned as the entire company was uprooted and moved from Pittsburgh, PA. to Austin, TX in one of the craziest experiences that I’ve seen in years. And you wondered why they called them 'sharks’?
- Entrepreneurship’s in the Tank: It seems that traditional economic measures aren’t enough to help communities make decisions that help foster a vibrant entrepreneurial ecosystem. It seems that the latest buzz-words that are being used to measure our grassroots economy are: human connection, social capital, community creativity, and quality of life. According to MJP: “Our policies of the last 50 years have made our inner cities a disaster. So, let’s see if we can measure success differently in order to get more money – because we can’t seem to generate profits or even cash-flow with what we have been given.”
- FED meeting in Jackson Hole: For the first time that I can remember, Mario Draghi from the ECB, and Kuroda from the bank of Japan were NOT in attendance. I’m guessing that it’s their way of protesting tariffs.
- US-China talks End: The two-day meeting of mid-level officials from the U.S. and China ended on Thursday with no major breakthrough. The trade war further escalated with the activation of another round of punitive tariffs on $16B worth of each country’s goods.
- Pepsi really likes SodaStream: I like you. I mean, I really like you. That’s what PepsiCo said to SodaStream last week – along with delivering them a $3.2B check. It seems in the past 5 years seltzer sales have jumped more than 40%, and SodaStream is the lead DIY bubbly water company.
- What the heck is a Bitcoin again? Bitcoin was designed as a purely peer-to-peer version of electronic cash which would allow online payments to be sent directly from one party to another without going through a financial institution. In other words, Bitcoin is designed as a way to make safe and secure payments without banks being involved. For the first time in history, someone without an on-line address or formal identity can sell something securely online, and receive a payment without needing to have an account with a third party. Imagine that.
- Crypto is On-Fire: It seems that crypto startups are ‘burning’ their own coins to boost value. That sounds like good news for investors, except without delivering an actual product – burning coins amounts to little more than market manipulation.
- Crypto-ETF Red Light: The SEC struck down 9 proposed Bitcoin ETFs on Wednesday. But in a shocker of a move, one of them is suspiciously BACK for consideration.
“2.6 million Venezuelan bolivars will buy a single roll of toilet paper.”
Venezuela’s Hyperinflation Reuters reported this week that a single roll of toilet paper cost 2.6m bolivars, and as of Friday: 1 kg of tomatoes cost 5m bolivars, and 1 kg of cheese cost 7.5m bolivars. With prices doubling every several days, Venezuelan citizens are cleaning out convenience stores ASAP to make use of the little purchasing power they still have. How bad is it? The IMF marked Venezuela’s inflation as being: 13,000% in January, 46,305% in June, and 108,596% in August. The real problem here is that emerging market economies are facing an uphill battle trying to repay their USD-denominated loans from 2008 since (a) the 2018 dollar is much stronger, and (b) USD interest rates are moving higher.
Last Week: August 22, 2018, will go down as the day the U.S. stock market registered the longest bull market run in history – which started on March 9, 2009. On Friday, a new record was established with the S&P finishingat an all-time high of 2,874.69. Many market observers say that the market has been holding steady because of a healthy economy and strong corporate earnings.
Bloomin’ Weed: The wait is almost over for investors in the cannabis industry. On October 17, Canada will officially allow licensed dispensaries to sell recreational marijuana to adults. This is the first time an industrialized country will allow the sale of adult-use weed, and only the second overall (behind Uruguay) to permit recreational cannabis. But what is attracting investors to the marijuana space is the forecast of triple-digit sales growth in 2018, 2019, and perhaps even 2020. With the legalization of pot, marijuana stocks like Canopy Growth (CGC), and Aurora Cannabis (ACBFF) are good investment choices that could even be included in an investor’s retirement portfolio.
Next Week: This week’s gains in the U.S. stocks showed that investors remain optimistic despite the rising political uncertainties. The still-solid fundamentals outweighed the headline risks while everyone welcomes the plan of our FED to raise interest rates at a gradual pace. If you talk of mileage, the bull market has yielded a total return of 418% since it started on March 9, 2009. What this means is that the engine remains in good shape – with a healthy economy and rising corporate earnings fueling it. 22% of the gains came from dividends, 21% came from a rising price-to-earnings ratio – with the remaining 57% coming as a result of buy-backs and rising corporate profits. Next week, the revised second-quarter GDP report will be released on Wednesday and the consumer sentiment data is due out on Friday.
But now it’s time for the market to show us what it’s made of. I have been suggesting that there were 3 ways the market could have performed, and 2 of them are still in play.
- 1st, we could have flirted with the all-time highs, never made it, and faded back down. This method is still ‘sort of’ in play. While the S&P did make a new high, it only did it by a point. So, even the smallest gap down on Monday would put us back below the high. It could take 3 or more of those type events to hold up.
- 2nd, the S&P could remain above the high-water mark and start another leg higher. That would push the DOW back up and over its highs, and the whole market would just soar to new heights.
- 3rd, is a scenario where the market surges to new highs, but after a couple days or weeks the ‘rug gets pulled’ out from under it and we start a long, pronounced drop of 20% or more.
I realize that the 3rdoption isn't popular, but consider the journey. We’ve injected TRILLIONS in Central Bank (CB) money to prop up the global economies. We’ve borrowed TRILLIONS to pay for stock buy-backs, and just last week discovered that over 60% of that debt (used to buy-back corporate stocks) is rated as JUNK. How can you have stock indexes making new highs, when 60% of the debt they've issued is junk – meaning at risk of default? So this bull market is based upon: CBs printing money out of thin air and buying equities, and companies issuing JUNK debt to raise money to buy back their own stock. I remember the old saying: “It's different this time". That was the point where everyone would laugh because it was never really different. Well, this time there is no laughing. This time it really IS different because never before have:
- ALL the Central Banks (CBs) worked in tandem to prop up the global economies,
- Interest rates existed below zero,
- CBs bought equities by the billions, and
- Stock buy-backs functioned as a major market driver.
For most of the 20th century, stock buy-backs were deemed illegal because they were thought to be a form of stock market manipulation. Since 1982, when they were essentially legalized by the SEC, stock buy-backs have become perhaps the most popular financial engineering instrument in the C-Suite tool kit. It's obvious why Wall Street loves them: buying back company stock inflates a company's share price and boosts its earnings per share – making the insiders quite happy.
This is why any logically thinking person is struggling with this market. As long as the CBs keep printing and buying equities, and interest rates remain at manipulated low levels so that companies can keep issuing junk debt – then this market can keep going higher. It's worked for the last ten years, why not 10 more? But doesn't history tell us that bubbles pop, and nothing grows to the moon? Indeed. Right now we're staring at 3 doors: (1) Fade out right here, (2) Break out and soar, or (3) Break out for a short period and roll back down. Watch this week’s early action. If we can clearly break out – I’ll be a buyer. But, I won’t let anything go negative on me – aka my finger will be near the ‘sell’ button at all times – because Door #1 and Door #3 could be painful!
Top Equity Recommendations:
- Canntrust Holdings (CNTTF = $6.57 / in @ $3.12), and
- Canopy Growth Corp (CGC = $45.51 / in @ 22.17),
- Ceco Environmental (CECE = $8.53 / in @ $7.55),
- Geron Pharma (GERN = $5.28 / in @ $3.75),
- Kala Pharmaceuticals (KALA = $12.83 / in @ $12.45), and
- Progenics Pharmaceuticals (PGXY = $7.70 / in @ $8.10).
- Abiomed Inc. (ABMD): Although the stock of Advanced Micro Devices recently passed Abiomed for the top spot and best performer in the S&P 500, Abiomed remains a solid investment. ABMD is a value stock and it has always been in the Top 20 S&P stocks since January. ABMD has even outperformed Amazon.
- Bitcoin (BTC = $6,350) - $40,000 by end of year
- Align (ALGN) – Aug 31, +365 / -370 / +375 Call Butterfly,
- Netflix (NFLX) – Aug 31, +365 / -370 Call Debit Spread,
- World Wrestling E (WWE) – Oct 19, +75 / -90 Call Debit Spread.
- TSLA: I didn’t realize that some individuals at UBS physically dismantled one of last year’s Model 3s and found it lacking. If you think that the TSLA bulls and bears will tug in opposite directions enough to keep the stock in a range – then an iron condor that’s long the 270 PUT, short the 280 PUT, short the 370 CALL and long the 375 CALL – in the September quarterly expiration with 37 days until expiration is a neutral strategy that has a 75% probability of making 50% of its max profit before expiration.
- AAPL: The poor Babylonian who invented zero must be rolling in his grave about now. Without zeros there would be no calculus or computers, and Apple wouldn’t be worth a trillion dollars. AAPL hit an all-time high last week, and has arguably been outperforming just about every other symbol on the board. If you think AAPL might lose a few zeros in its value, then the long PUT vertical – short the 212.5 PUT and long the 217.5 PUT in the September quarterly expiration with 37 days until expiration is a bearish strategy that has a 67% probability of making 50% of its max 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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Until next week – be safe.
Until next week – be safe.