This Week in Barrons: Cinco de Mayo, 2019:
“No amount of money ever bought one second of time.” … Howard Stark (Avengers Endgame)
- Electric Cars: Electric cars are gaining traction. If you're thinking of buying an expensive gasoline car – lease it because the value is about to drop. People say that they don't want driverless cars – but they said that about laptops, cellphones, and streaming services as well.
- 5G Smartphones: People will purchase the next round of smartphones when there is 5G service everywhere. The smartphone is like a Swiss Army knife. You create value via software – not by constantly buying more of them.
- Renewable Energy: The U.S. is coming up on a milestone. For the 1sttime, the renewable energy sector (hydro, wind and solar) is generating more electrical power than coal. This is because investments have made renewable energy technologies cheaper, and there's more demand for cleaner energy because of concerns about climate change.
- Presentations 102: New data is telling us that the LESS you say – the more valuable your presentation becomes. The following ‘new’ format forces you to speak more concisely and clearly by allowing just 20 slides and just 20 seconds to present each slide. This technique forces a new way of thinking that eliminates the excess and leads to shorter, more creative and highly polished presentations. The 5 Rules are:
1. 20 slides: For each slide, ask yourself, “What will the audience learn from this slide? What questions might they ask? Is this relevant to my main objective?” If you can’t answer those questions easily & correctly – don’t include it.
2. 20 seconds per slide: You don’t have to speak for all 20 seconds. To cut down the script, try describing your slide in a single sentence – and then in 7 words.
3. Exchange Words for Visual: People’s brains remember a total of: 7 numbers, 12 phrases and 1,200 pictures. Choose words that evoke images. When your audience SEES what you’re saying – you will appear absolutely brilliant.
4. Forget Bullet Points: Limit yourself to 7 words per slide. Give every image or graphic a discernible “holy mackerel”point that’s easy to digest. Use words and visuals that complement (not mirror) each other.
5. Practice, Practice & Practice: Practice getting to your point in 20 seconds. Practice in front of ‘friends and family’ and ask them what they learned.
- “Everyone fails at who they’re supposed to be. The measure of a person is how well they succeed at being who they are.” … Thor (Avengers Endgame)
The Market:
“Some people move on… Not us.” … Captain America (Avengers Endgame)
Last week, even the FED reminded us that they are NOT moving on. They announced no rate cut, no rate hike, but rather lowered the interest rate they pay on reserves. [FYI: The FED pays banks to keep reserves with them. But because banks are keeping many of their reserves with the FED, they're not lending as much as they should. So on Wednesday, the FED lowered the interest rate they are paying on those reserves – in hopes that it will force banks to lend-out more of those reserves at higher rates.] The FED also talked about a dip in inflation that might be “transitory” (temporary) – and then all heck broke loose. Why? The market was looking for the FED to talk about reduced inflation leading to a rate cut. By suggesting that the pause in inflation was temporary, that took a rate cut off the table.
The market is flirting with all-time highs. It's struggling with its own manipulative tactics. If you were going by true fundamentals, GAAP accounting, and the way we used to measure unemployment and inflation – this market would have the DOW at 12,000 not 26,000. So there’s a real war going on, and our banksters need to choose between two alternatives: (1) continue printing and allowing inverted yield curves and lower interest rates, or (2) let things start to normalize and watch the market collapse. For the past ten years, our FED has chosen Door #1. Powell said last week that “some equities” appear to be overvalued. Powell, are you kidding me? Companies have used so much fuzzy math that their balance sheets look like Chia pets. Corporations have gotten quite accustomed to: pro-forma accounting, zero business expansion, and stock buybacks for their execs. If that behavior stops – this market crashes. The FED knows that there is no way out – it’s print or crash.
InfoBits:
- The Unhappy Meal: Burger King finally decided to answer McDonald’s “Happy Meals” with “Unhappy Meals” – because “No one is happy ALL the time.” Yes – this is real, and NO – I’m not kidding. While it is an initiative to promote mental health – they’re also trying to sell more burgers. So companies are now using a generation’s growing depression to sell stuff – and it’s working.
- Berkshire Hathaway – Pt1: “I’ve been an idiot for not buying,”is what Warren Buffet told CNBC in regards to Amazon – when it was revealed that Berkshire Hathaway now has a stake in the internet giant.
- Serial Convertible Bonds: is what Tesla offered this week to investors. PH reminded me that of the following previous serial convertible bond issuers: SunEdison*, Chesapeake Energy, Molycorp*, Lehman Brothers*, iStar Financial*, Calpine*, Fannie & Freddie MAC*, Enron*, Tyco*, Adelphia*, Six Flags*, eToys*, Avaya*, and Worldcom* – ALL of the ones marked with an * went bankrupt.
- Loyalty programs get VIP treatment: Starbucks rose on word that membership in its rewards program topped 17m. Domino’s sales rose 4% as its calorie club surpassed 20m members. And Chipotle boasted that its loyalty program already has 3M burrito faithful.
- Beyond Markets: Beyond Meat (the maker of plant-based meat substitutes) IPOd last week, and had the best-performing IPO in almost 20 years. With Friday’s close of over $70, they’ve almost tripled their IPO price of $25.
- Worst week of the year for the Pig: Last week the Shanghai stock index dropped 6% even though the country's GDP growth beat economists' expectations. One big worry: their economic growth is increasingly driven by government-supported real estate development. That can't go on forever.
- WeWork is going public. The We Company (formerly known as WeWork) has filed for an IPO. They were most recently valued at $47B. They doubled their revenue last year, but also doubled their losses.
- Another EV study: As PKD correctly pointed out, the latest Volkswagen (VW) study compares a diesel-powered Golf TDI with an all-electric e-Golf. They found that the Golf TDI diesel emitted 140g CO2/km over its entire life cycle, while the e-Golf released only 119g CO2/km. VW came up with these results by considering: (a) their e-Golf would use a mixture of power coming from natural resources along with renewable energy sources. And (b) they considered their battery life to not end after 150,000km but rather be available all the way until the end of the battery warranty and then be available for recycling.
- Berkshire Hathaway Pt2: Charlie Munger (vice chairman of Berkshire Hathaway) recently told their 2019 shareholders meeting: “I was recently invited to a happy hour by Bitcoin people. I always wanted to know what they did in their happy hours. I found out that they celebrate the life and work of Judas Iscariot – you know the apostle that betrayed Jesus.” In the past Munger has claimed that Bitcoin and cryptocurrencies are: “anti-social, stupid, and immoral.” And most recently claimed: “Trading Bitcoin is like dementia. It’s like somebody else is trading turds and you decide that you can’t be left out.” Mr. Munger – are you saying that an investment that has gone from $1 to $6,000 in 5 years is a bad investment? If so, has Berkshire produced similar returns? I didn’t think so.
Crypto-Bytes:
- BTC vs Gold: Gold is on the defensive, and down 6% since mid-February. Bitcoin (on the other hand) is on the rise. The 90-day correlation coefficient between Bitcoin and gold is currently at -0.71 – its lowest level since March 20. Of course, correlation is not causation, yet gold’s near-term bearish outlook may be a sign of positive things to come for Bitcoin’s value.
- The Price is Right: Bitcoin has hit fresh almost 6-month highs – currently above $5,700. As a result, a rally to $6,000 could be seen in the next week. Bitcoin will encounter resistance at $5,780 and $5,890 as it heads into that level.
- Squares’ makin’ $’s with Bitcoin: The payments company Square has disclosed $65.5m in bitcoin revenue came in during Q1 of 2019. Bitcoin’s costs are listed at $64.7m – for a bitcoin profit of roughly $832k. Those figures are all-time highs for Square.
- A Central Bank 1st: Those words don’t normally go together. The Central Banks of Canada and Singapore have concluded a trial of cross-border payments using blockchain technology and central bank digital currencies. The Bank of Canada (BoC) and the Monetary Authority of Singapore (MAS) jointly said that the successful trial – the first of its kind between two central banks – showed “great potential to increase efficiencies and reduce risks for cross-border payments.”
- Crypto is ‘Exploding’: The U.S. Commodity Futures Trading Commission (CFTC) expects to see more companies apply to become federally-regulated clearinghouses as a result of growing interest in cryptocurrencies. Chairman J. Christopher Giancarlo, testifying on “the state of the CFTC”before the U.S. House Agriculture Committee on Wednesday, said, “The Commission anticipates new applications for clearinghouse registration resulting from the explosion of interest in cryptocurrencies.”
- Here they come – yeah! U.S. stock broker E*Trade is set to launch Bitcoin and Ether Trading. They will initially add trading support for Bitcoin (BTC) and ether (ETH), with more cryptocurrencies being added in the future. And last week, TD Ameritrade, was testing Bitcoin (BTC) and Litecoin (LTC) trading on its platform.
- 11% of Americans own Bitcoin: Analysts expect the Crypto markets to continue surging despite Bitcoin’s current stability. Bitcoin’s transaction volume is showing real signs of a bull market as the quarterly trend reverses, and more people become comfortable with the digital assets.
Last Week:
“Part of the journey … is the end.” … Tony Stark (Avengers Endgame)
Avengers Endgame was the last in a series of extremely successful Avenger movies. Unfortunately we couldn’t say the same about last week’s market action. I have to continuously remind myself of some basic facts: (a) car sales are at 7 year lows, (b) high-end housing is seeing it's biggest drop in 8 years, and (c) global industrial production is in a synchronized slow down. If I don’t remind myself of those elements – I begin to listen to the ‘white noise’ that’s telling me things like: “Stocks should to be higher because they deserve higher multiples.”
Last Friday (jobs day) was a perfect case in point. The number we were fed was that in April, the U.S. economy created 263,000 jobs, and the unemployment rate had come down to 3.6%. But I still have some basic questions:
- How is that number so high when the services index is at 20 month lows, and services employment is crumbling?
- How is that number even true when: manufacturing is down, average incomes are down, workweek hours are reduced, the household survey employment number (real jobs) is down, full-time jobs are down, and the labor participation rate is down?
- And then there is the Birth/Death model. It’s the beautifully fictitious number that is added to each month’s jobs report to reflect net new business hires. It’s a fake number – with no basis in fact – and in April they said that entrepreneurs created +281,000 jobs. Again, there's no proof that these jobs exist, no tax receipts – simply an equation that suggests that they could be there.
But ah-hah, if we subtract the fictitious jobs (281k) from the total jobs that they said were created (263k) – we get the real answer that the U.S. economy LOST 18,000 jobs in the month of April. Now suddenly all of the other downward facts listed above make sense. Wow, they’re pulling out all the stops to keep this market alive.
Weed:
Warren Buffett loves Coca-Cola to the tune of drinking 5 cans per day. His company (Berkshire Hathaway) is the largest Coke shareholder – owning roughly 10% ($19.5B) worth. So let's just say, when Warren talks – Coca-Cola’s management team listens. Let’s assume when Coke was in talks with Aurora Cannabis to produce CBD-infused beverages – Warren said something similar to his CNBC interview on Friday: “It would be a mistake for Coca-Cola to get into the marijuana – cannabis business. They have a wholesome image and that would be detrimental to it.” Unfortunately, Constellation Brands and Molson Coors have already announced their own investments in the industry. And in the back of every Coca-Cola executive’s mind must be the fact that they’re missing out on a huge opportunity if they heed Buffett's advice. The burgeoning CBD market in the U.S. alone is exploding from $1B in 2019 to $16B by 2025. Given that potential, Coca-Cola may have to ignore Warren Buffett to take advantage of an opportunity the company can't afford to miss.
In 2019 alone, Canopy Growth Corp (CGC) shares have gained 73% - making it the largest cannabis stock by market cap. Their current deal with U.S. based Acreage Holdings could push their stock's value much higher. Right now the deal has no precise date set for the wedding – because only when the U.S. government legalizes marijuana will this marriage actually be consummated. The contingency deal is necessary because under Canadian regulations, companies listed on the Toronto Stock Exchange cannot own assets in locations where marijuana isn't legal. It’s interesting to note that everyone is speaking in terms of ‘WHEN’ rather than ‘IF’ the U.S. government formally recognizes the state-by-state movement toward the legalization of marijuana. Canopy Growth chairman and CEO Bruce Linton said it best: “Our right to acquire Acreage Holdings secures our entrance strategy into the United States as soon as a federally-permissible pathway exists. When the right is exercised, having access to Canopy Growth’s deep resources will enable us to innovate, develop and distribute quality cannabis brands across the U.S. and continue expanding our U.S. footprint.” With the Acreage deal, Canopy will be active in 20 states, in markets valued upwards of $17B.
Canopy Growth’s acquisition of Acreage Holding is not their only connection to the U.S. economy. But among Acreage’s high-profile board of directors is former Canadian prime minister Brian Mulroney. Many have interpreted Mulroney’s position on Acreage's board (which also includes former speaker of the U.S. House of Representatives John Boehner) as a sign that legalization in the U.S. is a bankable event. For those investors keeping count, Canopy has done other deals recently:
- A $4B deal with Constellation Brands (STZ), the U.S. based international beer and wine producer behind brands such as Corona and Robert Mondavi.
- The acquisition of U.S. hemp producer AgriNextUSA – which calls for Canopy to invest between $100m and $150m in AgriNextUSA’s NY hemp operations.
- A multi-year agreement with British Columbia-based HollyWeed – a process used to dry cannabis producing high-quality oil and resin. This will help Canopy better meet the oncoming demand for new CDB-infused edible products.
- And an extension of its partnership with OG DNA Genetics – a globally recognized cannabis brand that brings genetic technologies to Europe.
You can almost smell the excitement in the air – or maybe that’s cannabis?
Next Week:
The good news is – I’m not alone in distrusting our government / FED. The bond market is also not believing any of what they’re selling. The bond market doesn’t believe our FED will raise rates any time soon, and in fact (from the chart above) thinks that there’s zero chance for a rate increase, and a 50/50 chance of a rate ‘decrease’ by the EOY.
This week it was the financials that rocketed higher – allowing the S&Ps to remain level. After all, the energy sector took it on the chin, while the Nasdaq (and specifically the FAANGs) crested into all-time high territory. IPO fever is in play right now, and next week should be Uber’s coming-out party.
This resembles the making of a topping pattern with: bonds being up, gold being up, and energy breaking down. A couple plays to consider going forward:
- Cisco (CSCO) = Buy the June 21st$60 PUT. It’s a bearish position, because Cisco basically sat out last week’s rally in tech. Their earnings are mid-May – so as the stock runs into earnings I would initiate the position.
- Citigroup (C) = I’m looking at the same type of position in Citigroup – purchasing an in-the-money, June 21stPUT option – with the belief that it’s time to take some ‘off the table’ with the financials.
- As the chart below displays – I’m also looking at taking the exact opposite position in New Beverage (NBEV) and Aphria (APHA) – two cannabis stocks right after earnings next week because people will always pay-up for growth.
I'm certainly not the only person that knows this market is rigged, but nobody knows when the wheels will fall off. My guess has been that we exceed the highs, run for another short leg higher, and then we see them pull the rug out from under us. I still like that thinking, but you can sense their desperation. It's getting harder to manufacture happy news when the fundamentals are creaking and groaning. Don’t fight the tape. The ‘powers-that-be’ want this market higher, and thus far they've been successful in making it happen. Until that stops, you have to lean into this.
Tips:
Top Equity Recommendations:
HODL’s:
- Aurora (ACB = $8.90 / in @ $3.07), Earnings on May 7th
- Canntrust Holdings (CTST = $6.05 / in @ $3.12),
- Canopy Growth Corp (CGC = $49.08 / in @ $22.17),
- HEXO (HEXO = $7.73 / in @ $6.37),
- Nova Vax (NVAX = $0.47 / in @ $1.59), Earnings on May 2nd
Crypto:
- Bitcoin (BTC = $5,865)
- Ethereum (ETH = $165)
- Bitcoin Cash (BCH = $292)
Options:
- CGC (49.08): Buy May 17, 47.5 / 50 / 55 Call BFly for $0.03 CR
- SPY (294.03): Buy May 17, (-1) 268 / (+3) 258 / (-1) 256 Put BFly for $0.44 DB
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.
R.F. Culbertson
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