RF's Financial News

RF's Financial News

Sunday, June 30, 2019

This Week in Barrons: 6.30.2019

This Week in Barrons: 6-30-2019:




Mailbag:

   Will we ever see another recession?   Remember the Jeff Goldblum quote from Jurassic Park: “Our scientists were so preoccupied with whether they could – they didn’t ask whether they should.”  This past week many readers wrote in asking whether we will ever see a recession again.  Coincidentally, CW wrote a piece about our need for a recession – because yes, it seems our central bankers were so preoccupied with saving us from a recession, that they never stopped to ask if they should.  Nobody likes recessions and rising unemployment, but in a capitalistic society they serve a purpose.  Recessions are nature’s way of rewarding the strong.  Of course politicians hate recessions because someone has to lose, and in a world of participation trophies – losing is paramount to committing political suicide.
   The idea of a zombie parallel is not lost on me. Zombie companies are those that don’t earn enough money to cover the interest payments on their borrowed debt.  They stay alive only by repeatedly refinancing their loans – presumably at lower and lower interest rates.  Zombie firms now account for 16% of all the companies listed on U.S. stock exchanges. This is up from only 2% in the 1980’s. Some of those zombies walking amongst us are: Hertz, JC Penney, Mattel, Revlon, Rite Aid, and Tesla. 
  Zombie companies suck the life out of healthy companies by competing with them for customers, capital, materials and labor.  By continuously lowering our interest rates in order to satisfy zombie companies (including the U.S. Government), we’re actually promoting LESS competition not more.  We are generating start-ups at the slowest pace since the 1970’s.  Even the IPO market is looking eerily like the late 1990’s – namely no earnings. 
   Another unintended consequence of low interest rates is that people are actually saving more due to the low rates.  And low rates are impacting politicians – and their  embrace of the notion of ‘free money’, ‘free education’, and ‘free healthcare’ for all. Globally, the amount of negative-yielding debt crossed a record $13T last week, and that represents 26% of global sovereign debt.  Please don’t follow the herd.  To quote CW: “Save more.  Spend less.  Be a survivor.”

   The other question I get fairly regularly is:Why do I write this column every week? Great question, and maybe (many years ago) I should have become a full stack developer and called it a day.  But after putting in the hard work to become an engineer, entrepreneur, mathematician, and computer geek – I did find a different calling.  I learned a lot from my oldest son who taught me:
-      If you’re an actor, being able to write means that you can cast yourself.
-      If you’re a marketer, being able to write means that you can tell your own story.
-      If you’re unemployed, being able to write puts you in a special minority.
   I think of writing as a way to help me organize my thoughts.  When I put things down on paper – I use that effort to further refine my viewpoint.  Now, there is a certain finality about putting something into a form that you really can’t take back.  The good news is, that you don’t need any special permits or equipment to write things down.  You don’t need an insider’s edge or money to express your opinion.  Writing may be the skill with the highest return on investment because it is simply a by-product of your own thinking.  I write because it helps me think – but the benefits go far beyond that:
1.   It allows me to meet people that I otherwise would never have known.  
2.   It allows me to give – without ever needing anything in return.
3.   And in a world of influencers, I’ve learned to savor words and language.  To quote Robin Williams: “No matter what anyone tells you – words and ideas can change the world.”


The Market:




   What does Libra mean to Bitcoin and crypto?  I believe Libra’s success will be a positive for Bitcoin.  Currently, the one value proposition that holds well for bitcoin is that increased liquidity will allow it to be superior to gold as a risk-hedging vehicle.  That would cause even more people to switch to bitcoin as a store of value in times of political and institutional turmoil. That argument will only be enhanced if Libra succeeds in converting billions of people to digital payment wallets, because it will more broadly establish the power of blockchain-based digital money as the way of the future.  However, the currency-basket-backed Libra token is a real competitor to other reserve-backed crypto-tokens, such as USDC.  Whatever happens, the daily currency float is mind-blowingly huge.  There are $6T a day out there in foreign exchange transactions.  That allows plenty of room for different models, different tastes, and different trust systems for coordinating digital value exchanges.  But again, Libra’s success does not come at the expense of bitcoin – but rather in conjunction with it.

   What do I really think of Facebook?  A gent who I admire – Mr. Roger McNamee – offers a dissection of Facebook that is much better than anything I could write.  He parallels his FB journey to that of Jimmy Stewart in the movie Rear Window.  Roger goes back to the days when he was a FB cheerleader, but then something looked wrong and out of place.  Roger describes it as pulling on a single thread of a sweater and watching everything begin to unravel right before your very eyes.  According to Roger, there are 4 classes of problems that scare the heck out of him with Facebook.
1.   The first relates to public health.  FB intentionally manipulates our attention.  In little kids, the consequences are horrible.  In teenagers, it results in bullying on Instagram. Adults come into FB with filter bubbles – that allows them to strongly reinforce things they already like. These filter bubbles amplify conflict to a point where the left and right hands can no longer co-exist.  FB amplifies and exploits that characteristic.
2.   Secondly, FB approaches democracy as it does advertising.  FB gives the politician the ability to look completely different to a variety of people. FB’s advertising engine allows politicians to become single-issue candidates in the eyes of voting blocks. FB can actually prevent someone from seeing the entire candidate – in favor of just that trait that will cause that specific voter to vote a particular way at that point in time.
3.   The third issue is privacy.  To privacy, everybody says the same thing: “Hey, my data’s already out there.  I’ve got nothing to hide.”  And yes, most of those elements are demonstrably true, but they miss the point. The problem is the way FB is using your data to affect OTHER people.  That is the big problem.
4.   Lastly, FB is behaving like the monopoly it is.  FB is the defacto consumer mindset and they’re acting like it.  They long ago switched from CARING how we think – to just TELLING US how we think.  The only potential governor of their actions now is our own government, and to quote Zig Ziegler: “Everything can be bought by the highest bidder.”  So I’m not expecting our government to save us any time soon.


InfoBits:

-      Durable Goods orders  were down 1.3% last month.

-       Yo quiero Taco Bell:  Not so fast.  If you’re thinking about staying in the first Taco Bell Hotel – you can’t.  Rooms were sold out in the first 2 minutes.

-      Skies are gonna clear up:  put on a happy face because San Fran just banned the sale of e-cigarettes below the age of 21.  Altria – who bought a 35% stake in Juul for $12.8B is having nicotine withdrawal about now.

-      How hot is it?  It’s sooo hot that in Spain manure on fields ignited and sparked a 10,000-acre wildfire.

-      PMI is in Contraction: A measure of business conditions fell in June into contraction territory for the first time since January 2017.  The survey found that 80% of the firms said trade tariffs had negatively impacted their businesses, with price increases leading to a pullback in orders. "With customers rethinking their purchases, demand tumbled, and consequently firms pulled back production, weakening overall sentiment,"said Shaily Mittal, senior economist at MNI.

-      Jony Ive is leaving Apple:  as their Head of Design after nearly 30 years. Apple’s iPhone sales are down 30% (YOY) – as people choose to refresh their smartphones less often.  Ive is leaving Apple at a time when we recognize that the iPhone is actually like a drug that has made us more informed, but less happy. 





Crypto-Bytes:

-      BTC is having a record quarter: Bitcoin's bull market looks entrenched with 165% gains so far this quarter.  But signs of temporary bull exhaustion have emerged.  We could see a minor pullback toward $10,000 in the short term.  The outlook will remain bullish as long as the price is trading above $9,097.

-      Where is Libra smokin’?  The ideal market for Facebook’s new Libra may be Indonesia.  Residents there have the world’s highest rate of Facebook post engagement; nearly 10% of residents already own some crypto; and the country has the world’s 4thhighest number of FB users.  

-      Beyond Money:  Buried in the FB libra white paper is a sentence hinting that the social media giant’s ambitions go beyond money and extend into the concept of decentralized identity.  The paper states, “We believe that decentralized and portable identity is a prerequisite to financial inclusion and competition.”  This indicates that FB might be taking on the issue of proving online identity.

-      Direct Deposit:  Square is letting users deposit bitcoin directly to their Cash App accounts.  The move is only the latest for Square, which brought in $65.5m in revenue from bitcoin during the first quarter of 2019.

-      The Twins are alive in Chi-town:  Gemini is growing its team and expanding to Chicago as part of a push to upgrade and modify its technology.  The exchange announced that it had brought on 5 x-Coinbase engineers, with experience in working on matching engines and other marketing tools.  While the new team will focus on supporting Gemini’s core products, part of their mandate will be to work on institutionally focused tools and technology.

-      Henry Kravis, Alan Howard, Louis Bacon & Peter Thiel:  are the latest titans of finance to take a shot at cryptocurrencies.  The co-founder of KKR & Co. (Henry Kravis) has invested in the flagship fund of ParaFi Capital of San Francisco, according to Ben Forman, a former employee who started his firm last year to focus on digital assets.  Kravis joins a handful of bold-faced names who have defied mainstream skepticism to channel some of their wealth into virtual currencies and/or the underlying blockchain technology.

-      Erik Voorhees says: “Shapeshift will support Libra.”

-      Will you be a Libra node?  Sure, why not,”says Binance.

-      The 3 faces of Libra:  “Libra is several different things at once. It’s Facebook creating a cryptocurrency.  It’s potentially a new decentralized global payments platform.  And it’s potentially the thing that will bring cryptocurrency truly into the mainstream,” says Kevin Werbach.


Last Week:




   This has been the best, first 6 months of any year since 1997.  The S&P 500 is up 17.4%.  But let’s not get ahead of ourselves, that basically gets the market back to where it was in October, 2018.  Last week, most of the markets were slightly lower – except for the Russell (small-cap index) which gained substantially on Thursday and Friday with the release of the bank stress test results.  The Russell is filled with regional banks, and bank regulators came out and opened the flood gates to bank stock buybacks. That caused the financials to take off to the upside, even though they’re running directly into a lower interest rate environment.  Go figure.  
   The trade truce happened between U.S. and China on Saturday. But if you look at the last 12 minutes of the trading session on Friday, the SPX (the indicator for the S&Ps) went for a 20 point romp higher prior into the close.  It seems that somebody leaked the news to the markets – prior to it actually happening for the rest of us.  
   Now that the first half of the year is ‘in the can’, HL had some interesting predictions for the 2ndhalf of 2019 – and they are as follows:
-      Xi does NOT give an inch with Trump and trade.  I don’t know what that does to the markets.  UBS and most economists think we are guaranteed a recession if tariffs don’t relent.  I think tariffs continue to melt up, but I have trouble seeing a full-fledge recession in 2019.
-      I think growth stocks in general – in specific: small caps, emerging markets, cannabis, crypto and biotech (genetic stocks) will outperform if the markets continue to hold or march higher.
-      The ladies – Kamala, Warren, and/or Michelle Obama will pull away from the pack of Democrats.


Weed:

-      CGC falls 8% after earnings:  Canopy Growth (the biggest cannabis company) fell 8% after earnings because (spoiler alert) investors are impatient.  Revenue for its high-end dried weed jars, prescription-looking softgel canisters, and yoga-friendly vapes only rose 13% from last quarter to $94M.  Hype for Canopy after weed-legalization last October pushed their market value to $13B.  Now it needs to convince cannabis buyers to switch from ‘black market’ to ‘legit market’.  It also has to deal with regulation, taxes, and advertising rules that limit it to medical-style marketing.  Bottom line, Canopy is in global prep mode – in part due to the $4B investment it got from Corona-owner Constellation Brands.  Canopy has acquired production facilities, device companies, and retail stores.  Now, it’s awkwardly waiting for growth catalysts – like edibles being legalized in Canada this fall.

-       You gotta believe in Trulieve: amarket leader in dispensary operations in Florida, closed a $70m debt capital raise.   

-      MediPharm Labs a Canadian infused product manufacturer, raised $56m in an equity offering.  

-      MJ Freeway and MTech  completed their merger to form Akerna, a cannabis compliance technology company.  Akerna is now trading on the Nasdaq under the ticker symbol KERN.

-      Surterra Wellness a player in Florida’s medical marijuana dispensary world, completed its acquisition of NETA Wellness of Massachusetts.

-      CBD could reduce alcoholism:  While the study was small and preliminary, the findings were presented at the annual scientific meeting of the Research Society on Alcoholism in Minneapolis.  The researchers found that cannabis consumption, whatever the composition of THC and CBD, lead to a decrease in drinking across several control groups.  Participants in the CBD-dominant group reduced their drinking by an average of 50%.  Participants who consumed the cannabis with above-average THC also reduced their drinking significantly by about a third.  Ms. Karoly said: “The results are another tantalizing piece of evidence that suggests CBD might be an effective therapy for alcohol abuse.”  
Whether you lift a glass or skip that second cocktail, there's good reason to cheer these new findings.


Next Week:



   Markets are trading on the idea that the FED is going to save the economy. There’s no other explanation for it.  The global economy is slowing.  Trade wars are everywhere.  Geopolitical risk is prevalent.  The only thing left is to get that 25 basis point rate cut before summer’s end, and we should be ‘home free’ (said sarcastically).  It’s a Fed-fueled-fantasy.  I think we pop on Monday – and die out as the week goes on.  The charts are expecting a $53 expected move in the S&P across 3 trading sessions – so markets are expecting great things higher or lower.
   In terms of trades, be careful these next couple of weeks before earnings season starts.  It’s not about whether you think XYZ stock is going to go higher or lower, but rather viewing your trades through a market maker’s lens.  Do this by examining the IV (implied volatility) of what you’re buying and comparing it against the IV of what you’re selling.  I don’t care if you’re bullish or bearish – whether you like Caterpillar or Boeing.  Make sure that the directional option trade that you’re putting on (assuming it’s a spread) has a higher IV rank on the sell side portion than it does on the buy side portion.  That will tell you that the ‘house / market’ is positioned alongside you – and in your favor.
   For example, look at the emerging markets (EEM).  They have rallied as of late, and if you think they’re ripe for a fade – then look at buying the August 2nd$43.5 Put and selling the $41.5 Put as a bearish, directional, in-out put spread. That’s buying an 18.4% volatility item, and selling a 22.8% volatility contract.  You have a $2 spread that you’re paying $0.67 for, and the market views your actions as going in the correct direction.   How do you know that?  Because the implied volatility on the sell side is higher than on the buy side of this transaction.


Tips:

Top Equity Recommendations:
   HODL’s:
-      Aurora (ACB = $7.82 / in @ $3.07), 
-      Canntrust Holdings (CTST = $5.02 / in @ $3.12),
-      Canopy Growth Corp (CGC = $40.31 / in @ $22.17),
-      GBTC (GBTC = $15.13 / in @ $10.01),
-      Hexo (HEXO = $5.32 / in @ $6.37),


   Crypto:
-      Bitcoin (BTC = $11,500)
-      Ethereum (ETH = $306.00)
-      Bitcoin Cash (BCH = $430.00)


   Options:
-      RIOT ($3.14): 
o  Buy Jan 17, Sell $3 Call / Sell $3 Put / Buy $4 Call for $1.85 CR
o  Buy Jan 17, Sell $2 Call / Sell $2 Put / Buy $3 Call for $1.45 CR
o  (can only lose money if RIOT falls below $1).


   Thoughts:

-       Oracle (ORCL = $56.97)  Last week, ORCL jumped the equivalent of over 4 standard deviations after the market smiled upon its earnings and sent it to a record high.  It’s settled back since then, but it’s still up 24% on the year.  China is cutting back on U.S. database and enterprise software – and instead using home-brewed tech.  That could hit ORCL, which has a significant presence in China.  Regardless of whether there’s a trade war, China may realize its own stuff could work just as well as ORCL’s, and save some money not paying ORCL’s license fees.  If you think ORCL might drop back to earth and are bearish on it, the long put vertical that’s short the 55 put and long the 57.5 put in the Aug expiration with 47 days until expiration that has a 65% probability of making 50% of its max profit before expiration.

-      J.P. Morgan (JPM = $111.80)  With all the political talk about free college, JPM’s CEO Jamie Dimon weighed in on the $1.6T outstanding student debt, stating “What we’ve done is a disgrace”.  I personally wonder what those students would do if they had invested their average $40K in debt rather than spending it on college?  JPM exited the student loan business years ago.  JPM had to pare back its “shareholder distributions” a bit to meet the Fed’s minimum capital ratios, but it’s still increasing its dividend by $0.10 and raising its share buyback to $29.4B.  JPM’s been knocked down by falling rates, but if you think Dimon and JPM will find a way to make money regardless of rates and think that the dividend and buyback could boost its price, you might consider a bullish strategy.  The long Call vertical that’s long the 105 Call and short the 110 Call in the Aug expiration with 47 days till expiration that has a 74% probability of making 50% of its max profit before expiration. 

   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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