RF's Financial News

RF's Financial News

Sunday, August 5, 2018

This Week in Barrons - 8-5-2018

This Week in Barrons – 8-5-2018:



“A $1T valuation is not the most important measure of our success.” … Tim Cook (CEO of Apple) as Apple topped the $1 trillion milestone.

Apple – “It’s not WHAT you do – it’s WHY you do it”:
   The first time I heard this phrase was over 10 years ago when I listened to Simon Sinek: https://www.youtube.com/watch?v=u4ZoJKF_VuA.  He went thru a natural progression on how everyone on the planet knows WHAT they’re doing, some know HOW they’re doing it, but only an elite few know WHY.  These same individuals understand: their purpose, their cause, and their belief.  They also understand ‘why’ anyone else should care.  
   The average person communicates by first talking about ‘what’ they do.  And if someone is still interested they continue talking about ‘how’ they’re different or better.    And after those two points, they often expect some sort of reward: a purchase, a vote, or something.  It’s called the ‘outside-in’ approach to communication, and if Apple were an average company their pitch would be:
-      We make great computers.
-      They’re beautifully designed, simple to use, and user friendly.
-      Would you like to buy one?

   But in May of 2001, Apple turned things upside-down and started communicating from the inside-out.  Their pitch went something like this:
-      We here at Apple believe in challenging the status quo, and thinking differently.
-      We do this by beautifully designing our products to be simple to use and user friendly.
-      We just happen to make great computers. Would you like to buy one?

   You see, May of 2001 was when the 1stApple store opened at Tysons Corner Center Mall in Tysons, Virginia (near Washington, D.C.).  It was Apple’s signal to the world that the way Apple products and services will be sold (from this day forward) will be from the inside-out. They started selling by first explaining the ‘why’, then the ‘how’ and the finally the ‘what’.  Their mantra became: “People don’t buy ‘what’ you do, they buy ‘why’ you do it.”    And that explains why the Apple eco-system continues to grow.  Once I know ‘why’ I’m doing something – then I can repeat that behavior across different categories such as iPhones, iPads, Beats, etc.  
   At its root, Apple is just a computer company – no different (structurally) from any of their competitors.  Their competition is equally qualified to make every product Apple makes.  In fact many have tried – remember the Microsoft phone and the Zoon.  Microsoft failed because they couldn’t answer the question: “Why would you buy a phone from a computer company?”  The Apple buyer has answered that question right up front, and is now asking the question: “What else can I buy from you?”
   Communicating from the outside-in allows someone to understand vast amounts of complicated information (features, benefits, cost savings) quickly.  It just doesn’t drive behavior.  When Apple communicates from the inside-out, they’re talking directly with the part of the brain that controls behavior, and then people rationalize their behavior with the facts and figures across a spectrum of products.  Apple found that by giving people all of the facts and figures up-front – often resulted in the buyer saying: “This just doesn’t feel right.”  


 
   Apple’s latest milestone (the $1T market cap.) was achieved after the company reported better-than-expected quarterly results.  The company also delivered an upbeat forecast for its September quarter, when it typically releases new iPhone models.



   On the other side, we have what is being called the: “Facebook sh*t show”.  When Bill Gates and Microsoft made the bold and sudden pivot to the Internet in 1995, I argued that only a company founder would have had the ‘cojones’ to make that call.  The pivot saved Microsoft a lot of pain, misfortune, and (most importantly) kept them relevant.  The point here is that the Zuck is in the exact same spot.  Without a bold move, Facebook could end up in the trash bin of technology companies that missed the next wave of innovation such as: Compaq, Palm, Blackberry, Blockbuster, and Kodak.  If Steve Jobs hadn’t returned to Apple in 1997, turned his NeXT operating system into OSX, and rolled out the iPod in 2001 – Apple would have most certainly turned to dust.
   But social networking is not only dying – it is increasingly mistrusted.  Both Facebook and Twitter’s earnings reports showed slowing revenue and user growth, along with dramatically increased costs associated with security and ‘fake news’.  Facebook’s former president Sean Parker said it best: “Facebook’s business objective was always to consume as much user time and attention as possible.  This allowed them to make billions trading customer online behavior like a commodity. However, the path to keeping those ad exchanges well fed and the money rolling in is very dark.  Both Facebook and Twitter have become modern day drug dealers – who’s members require constant hits of dopamine called ‘alerts’. In the early days, an ‘alert’ meant that something meaningful was happening, but now it’s all about groups that users never wanted to join, events that they would never attend, and others begging for a ‘like’.”  
   The issues are stacking up:
-      Privacy concerns are causing user disconnects.
-      European GDPR laws are curtailing revenues.
-      Market saturation – now that Facebook has 65% of the addressable market (2.25B users / 3.5B people on the Internet).  The ‘Law of Diminishing Returns’, will make it more costly to add the next 100m users.
-      Facebook is not good for productivity or for a healthy lifestyle.
-      And there is a shift occurring in Facebook’s appeal to the younger generation.  They are now associating Facebook with their parents.  The younger generation has turned to WeChat – a combination of WhatsApp and Instagram – focused around a smaller community.  
   I’m not even going to go into Facebook’s need for technical decentralization – because what’s already on the table is going to take Bill Gates’ and Steve Jobs’ sized ‘cojones’ to pull off.  I fondly remember the Tysons Corner Center Mall and that day in May – when Apple told the world: “We’re on a mission”.  It started with them adopting an ‘inside-out’ philosophy, and later becoming the world’s first $1T corporation.  CONGRATS to Apple for a job well done!


The Market:




   “She came out of nowhere” is what was being said this week when ICE (the Intercontinental Exchange that owns the New York Stock Exchange) announced its plans to launch a digital assets platform that would include a secure Bitcoin futures product.  Called Bakkt, the platform will offer a one-day ‘physical’ Bitcoin futures contract – meaning that Bitcoin will actually be delivered on a specified date.  (This is unlike the Chicago exchanges’ Bitcoin-linked contracts, which are cash settled.)  The product is expected to launch in November – pending U.S. Commodity Futures Trading Commission (CFTC) approval.
   “The grass is NOT always greener” is what Forrester said this week when it predicted that 90% of all blockchain projects would never become operational – which (fyi) coincides almost perfectly with a 90% failure rate for all startups.  Sure, the numbers could be a coincidence, but in many ways startups and blockchain projects are similar.  They both have: (a) Team Risk – a shortage of developers and leaders, (b) Market Risk – the market may not want what they’re selling, and (c) Tech Risk – it just doesn’t work.  The following issues are somewhat unique to blockchain projects:
-       Half-baked proposals that are allowed to be ‘over-funded’,
-       Minimal executive experience, 
-       There is no agreement on what blockchain to use,
-       The blockchain team is extremely fearful of failure, and 
-       The time estimates are completely un-realistic. 
   Too many companies were attracted to the blockchain hype cycle with the classical expectation that the technology would revolutionize their business overnight.  Firms are discovering that the shoes they’re using for their particular race are (a) encased in cement and (b) their race is actually a marathon.  The bottom line is that we should expect to see a lot of these blockchain projects extended.

Crypto-bytes:
-      The U.S. dollar:  is the dominant currency being traded for Bitcoin – over the Japanese yen.  The U.S. dollar makes up 68% of total trading of fiat for Bitcoin.
-      Total ICO funding:  reached the $19B level, with the average ICO being $39m.
-      Bitcoin – long or short:
o  CFTC data shows large institutions are betting on Bitcoin falling.
o  The same data shows smaller traders betting on Bitcoin to the upside.
o  Nobody knows because even the combined volumes of the CBOE and CME dwarf the offshore derivative markets – which recently processed over $8B of trades within a 24 hour period.
-      Personnel Moves: 
o  Andrew Peel (V.P. at Credit Suisse) left for Morgan Stanley to serve as the head of digital assets.
o  Kevin Jenkins (former Visa MD) joined the blockchain payment and I.D. platform company Nuggets as a non-Executive Director.
o  Tomer Federman left Facebook to launch an investment firm specializing in blockchain and crypto assets.

Info-bits:
-      MacCoin:  McDonald’s introduced a limited edition currency for its 50th anniversary of the Big Mac.  Yes – it’s an actual coin,  Yes – no one needs it.
-      Jobs Report:  The jobs number this week came in at 157k – below the 200k estimate. Unfortunately 146k of those 157k were fictitious – birth/death model jobs.  The unemployment rate fell to 3.9%, and now the arguments are starting, concerning whether this report was an outlier or the start of something.
-       Higher Ed is heading in the wrong direction?  Thanks to JR for showing me that 61% of Americans believethat the U.S. higher education system is going in the wrong direction.  Republicans feel colder toward college professors than Democrats, and Republicans have grown increasingly negative about theimpact of higher education on our country’s direction.  They think:
o   Tuition costs are too high (84%),
o   Students are not being taught workplace related skill sets (65%), and 
o   Higher Ed is protecting students too much from offensive views (51%).

Last Week:
-      The DOW climbed +0.54%, while the S&P gained +0.46%.  The Nasdaq ended the week 1% higher and recovered after two straight weeks of losses.
-       President Trumpdirected Robert Lighthizer to increase the proposed 10% duty on $200B worth of Chinese imports to 25%.  Trump wants Beijing to make fundamental changes to its policies on intellectual property protection, technology transfers, and subsidies for high-tech industries.
-      The FEDconcluded its two-day meeting on Wednesday, and voted unanimously to keep the target range for its benchmark rate at 1.75% to 2.0%.  However, two more rate increases are imminent this year which could happen in September and December. The Feds upgraded their assessment of the U.S. economy citing rising economic activity and a strengthening labor market.
-      The Financial Timesreported that Japan has unseated China as the world’s second-largest stock market. The drop followed the news surrounding raising the proposed tariff on $200B in Chinese goods to 25%.
-      Teslareported a record $717.5m loss for the second quarter of 2018, but the electric carmaker registered $4B in revenue and forecast additional increases to its production capacity and profitability in the second half of 2018.
-      Huawei Technologiesovertook Apple to become the world's second largest smartphone seller.  The Chinese smartphone maker beat Apple in smartphone sales for the first time.

Undervalued Biotech:
-      Amarin Corporation(AMRN = $2.67 / -33.42% YTD):  In about 60 days, Amarin will be unveiling the results for the cardiovascular outcomes study known as Reduce-It.  Analysts are already forecasting a 280.2% increase in the stock price to $10.00.  The objective of this five-year clinical trial is to evaluate the ability of its highly refined fish oil pill Vascepa to lower the rates of serious cardiovascular events, like a heart attack or stroke, when used in conjunction with statins.  If that happens, Amarin would instantly have an addressable market of about 75m people in the U.S. alone.
-      Kala Pharmaceuticals (KALA = $12.62 / -31.75% YTD):  KALA has a potential upside of 272.7% to $47.00.  There is good news surrounding the company’s Phase 3 Trial of STRIDE-3 for the treatment of dry eye disease (DED).  But the real catalyst for KALA is INVELTYS, a drug designed to treat patients with post-surgical ocular inflammation and pain.  INVELTYS has an approval date set for August 24, and analysts see an 85% chance that the treatment will get secure approval.  If approved, INVELTYS would be the first FDA-approved corticosteroid eye drop with a twice-daily dosing regimen.
·       Durect Corp. (DRRX = $1.41 / +52.96% YTD): Durect Corp. has been having a good year, and analysts are forecasting another +69.5% increase up to $2.50.  One catalyst for Durect is that its partner Indivior received FDA approval for PERSERIS – making it the first once-monthly injectable for the treatment of schizophrenia in adults.

Cannabis:
-      Molson Coors announced that the company entered into an agreement with Hydropothecary Corporation to form a joint-venture that would pursue opportunities to develop non-alcoholic, cannabis-infused beverages for the Canadian market.  The Canadian market will see more cannabis-infused beverages when the government legalizes pot drinks in 2019.

Nest Week:
   The acceleration of earnings growth in the second quarter improved investor sentiment.  80% of the companies reporting have exceeded expectations.  Corporate profits are up 24% over 2017 and are on track for a second consecutive quarter above 20%. Earnings season will be winding down next week and Friday’s inflation report is the only economic data on tap.  
   We're only 8 points away from the intra-day S&P high set back in July at 2848.  Getting past that would give us the go-ahead and challenge the all-time high set at about 2,875.  The reasons for the market to actually achieve that are few, and the reasons why it shouldn't are building daily.  But the fact is that the market can always remain irrational longer than anyone can remain solvent.
   Recently I've been moaning about lumber prices crashing, copper sagging, and home sales slowing.  Add to that the jobs report that wasn't really that good.  It showed that more people are now holding ‘multiple’ jobs than at any time in history – excluding the melt down of 2008 - 2009.  Add to that our FED raising rates, and the possibility that we've seen the best earnings we're going to see – it paints a fairly grim picture.
   But on the other side of the coin we have record stock buy backs, and an enormous amount of cash being printed by the various global central banks.  Add to that, emerging markets continue to flounder – which causes money to come out of them and flow back into U.S. equities.  Last week I saw a survey of money managers that showed them either extremely bullish or bearish – nothing in the middle.
   When I’m looking to go long in a stock, I have a couple basic rules that I like to follow that normally put the odds in my favor. They are:
-      The overall market is flat to rising.
-      The stock’s chart looks like it's going to challenge and punch through resistance.
-      And I’d like the stock to have some fundamental reason to move higher.
   For next week, watch the 2850 level in the S&P.  If we can push through that level – it’s time to add, if we can’t – then it’s time to take profits and regroup.


Tips:



Top Equity Recommendations:
   Marijuana Stocks (HODL):
-      Canntrust Holdings (CNTTF), and 
-      Canopy Growth Corp (CGC)

   Biotech Stocks (HODL):
-      Correvio Pharma (CORV), 
-      Geron Corp (GERN), and
-      Progenics Pharma (PGNX)

   Crypto (HODL):
-      Bitcoin (BTC = $8,200) - $40,000 by end of year, 

   Options:
-      DE – Aug 17 Earnings Call BFly: +145 / -150 / +155 for $0.70 
-      HD –  Aug 17 Earnings Call BFly: +195 / -200 / +205 for $0.95
-      LOW – Aug 24 Earnings Call BFly: +100 / -105 / +110 for $1.00
-      IWM:  Even though AAPL is a big chunk of both the SPY and QQQ, it is not in the Russell Small Cap index (the IWM) at all.  If you’re bearish on the market, and nervous about AAPL, then you might consider a bearish strategy on IWM.  The long PUT vertical that’s short the 165 PUT and long the 167 PUT in the September expiration with 47 days until expiration ($0.75) is a bearish strategy with a 64% probability of making 50% of its profits before expiration. 
-      GM:  When I heard that Ford was bringing back its Bullitt Mustang (again), it took me back to my dad’s ’68 Buick Electra 225.  I learned to drive on that car, and two tons of steel and a V8 made sure I didn’t die learning to merge into traffic.  So, as Ford is trying to muster another rally for nostalgia, GM might rally in sympathy.  If you’re bullish on GM and think it might stay off its recent lows, the short 37.5 PUT and long 35 PUT in the September weekly expiration with 33 days until expiration ($0.76) is a bullish strategy that has a 79% probability of expiring worthless.

   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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