This Week in Barrons: 8-18-2019:
Artificial Intelligence, Blockchain, Fintech, and Food and Beverage are the only 4 sectors where funding has continued to grow relentlessly since 2010.
- Artificial Intelligence: is more than a buzzword. AI / Machine Learning is an expanding technology that will benefit nearly every sector. Eight years ago, there were zero seeded AI startups. Now there are over 400, and the chart is the classic S-curve.
- Blockchain: is another exponential curve that shows growth from 0 to over 200 startups in 8 years. Blockchain is the category with the steepest slope. I can’t tell you when the curve will flatten, but given the trajectory – it won’t be soon.
- FinTech: is everything from challenger banks to AI-powered investment advisors. Startups are besieging the incumbents of this regulated world, and starting upon a new leg up in seed capital investing.
- Food and Beverage: is touching the what we eat and farm. From novel protein sources that replace meats to canned beverages that reduce inflammation and stress – consumer preferences are evolving and startups are fueling demand.
In my opinion, the banks have done the worst job of reading these trends. They have continued to mostly ignore blockchain and fintech and their underperforming stocks will continue to suffer. I think Coke, Pepsi, Starbucks, Nestle’s and Procter and Gamble have done a much better job positioning themselves for a future with so many challengers and consumer preference changes. The public markets and the seed markets are very connected and correlated.
The issue (as always) is not the technology or the formula, but creating enough new leaders within these companies. Good leaders create conditions that cause people to choose the naturally correct action(s). Their choices are always voluntary. But they’re allowed to see a vision, an opportunity and an option – in an all but ‘obvious’ light. You can’t make people change, but you can create an environment where they choose to.
The other issue I see is managing corporate growth – which requires an understanding of customer acquisition vs retention economics. Saving a customer is ten times more efficient than finding a new one. If it costs an airline $1,000 of marketing and route development to acquire a first class business traveler, it’s worth at least $10,000 in customer service to keep that same customer. That means that an extra ten minutes on the phone with that customer is a high value proposition. Instead of defining the minimal legal requirement for servicing a customer – outline the maximum possible actions you could have taken. The winner of this race isn’t the organization that does the minimal legal requirement. The winner goes to the company that figures out what is possible for them to do for their customer – and does it.
The Market:
Working as an entrepreneur, the only reliable forward-looking indicator of success has been market timing. Specifically, if your firm is on the cusp of that particular market’s hockey-stick explosion (like CBD, Blockchain & AI), you will have an easier time: finding talent, controlling costs, and getting immediate customer feedback. Then as the market grows (armed with a battle-tested value proposition) – you will get to enjoy the effects of being able to try new things with confidence. However, in frothy markets (like real estate), it's easy to enter into a consensual hallucination that you’re creating value. It’s also easy to wallpaper over the shortcomings of a business with cheap capital. In that regard, WeWork has brought new meaning to the word wallpaper. Their wallpaper will dissipate at the first whiff of a recession, and it will reveal an entire family of rabid raccoons. A shout out to SG for his We-WTF (WeWork)thoughts. We-WTF will IPO in September – and honestly“We- (Does Not)Work”!
1st, their prospectus has a dedication: "We dedicate this to the power of We — greater than any one of us, but inside each of us." I believe that ‘Jim Jones’ had t-shirts with this same message. We's mission is similar: "To elevate the world's consciousness."
2nd, Within the prospectus I found: no magical insight, IP, genius, code-set, skill-set, or even human capital. They realized that SAAS (Software-As-A-Service) firms traded at a multiple of revenue and real estate firms traded at a multiple of earnings. Given We-WTF loses money hand over first, they reshaped their message to emphasize the revenue (SAAS) side of the business. [i.e. We-WTF is NOT a real estate firm renting desks and offices, but rather is a Space as a Service (SAAS) firm.]
3rd, if common metrics for your vertical don’t fit your results – then re-invent the metrics. If Generally Accepted Accounting Principles (GAAP) don’t work for you – just use: “Community-based Profitability Metrics.” Huh? Gross margins are normally a pretty decent proxy for how good or bad a business is – and based upon the chart of We-WTF’s gross margins (below) – this is a really sh**ty business:
4th, there are often various red flags that pop-up surrounding a business. Such as your son or daughter dating ‘the Biebs’ would be a red flag. With We-WTF, the first red flag was when founder Adam Neumann pre-sold $700m worth of his own We-WTF stock. Yes, he’s pre-sold almost ¾ of a billion dollar’s worth of We-WTF stock. This is a $700m red flag shouting out: “Get me the heck out of this stock, but it looks good on YOU though.”
5thand finally, there are ‘mismatched durations’ surrounding the We-WTF business model. Mismatched durationsmeans that the revenue commitments are short-term (customers can stop paying rent tomorrow) and the investing monies are committed for the long term (10 years). That’s exactly opposite what you as a business would like. Therefore, We-WTF is an especially risky business going into a recession, when the ability to reduce your costs (building leases) is limited but your decline in revenue (customers leaving) is unlimited. We-WTF has $47B in long-term building lease obligations and will only do $3B in revenue this year. Heck, what could go wrong?
There are other businesses like this, but they trade at between ½ and 4X revenues. Hertz trades at 2X revenues, Amazon trades at 4X revenues. We-WTF is claiming that it should trade at 26X revenues. Why? There are no scalability effects – as losses have kept pace with revenue growth. There is little pricing power – as they are still a tiny speck on the elephant of commercial real estate. There is no defensible IP, no technology, no regulatory barriers, no network effects, and no ancillary business effects.
Adam realized his calling. He got his $700m out and in his pocket, bank, and mattress. Honestly, you can’t stay in business with net losses of over $900m for every $1.54B you book. As an investor, you can only get out by finding a Fool Greater than you to sell your holdings.
In the remainder of the world, U.S. industrial production unexpectedly fell in July by 2%. The stakes are high are high in this arena because the U.S. manufacturing sector, while employing just 8% of the workforce, accounts for some 11% of total economic output – and has historically been seen as a harbinger of well-paying jobs.
Info Bits:
- Woodstock turns 50 The legendary music festival kicked off a half-century ago Thursday in Bethel, New York – with nearly 400,000 attendees and acts including Jimi Hendrix, the Who and Janis Joplin. But don’t count on reliving the glory as Woodstock 50’s Festival headliners Jay-Z, Miley Cyrus and Halsey canceled.
- Good news for shareholders: is when the CEO of Lyft said that 2019 was a ‘peak loss’ year. Uber investors hope it's true for them too. The revenues vs. costs see-saw could start tipping in the right direction. And guess what? Everybody is raising prices.
- The Salmon Cannon: sucks up fish and shoots them over a dam. Physically it doesn’t hurt them, but mentally those poor fish are finding religion in a hurry.
- What Happens to Local Jobs When State Taxes Go Up? Per MJP, with states competing fiercely for business, even small increases in tax rates will spur firms and people to pull up stakes. A new Stanford study found that both people and businesses will move elsewhere if you raise taxes. No surprise there.
- Brokerage Flipping: E*TRADE is now valued at $10B – down 30% from all-time highs. Robinhood recently raised capital at a valuation just shy of $8B.
- Real average hourly earnings:DECLINED 0.1% month over month in July.
- Inverted. Yield. Curve - Shorter-term bond yields have climbed above longer-term ones, which is known as an inverted yield curve. This is considered an indicator of a possible recession. So what did the markets do as a result? The Dow dropped 800 points.
- Germany's economy contracted by 0.1%: in the second quarter, and industrial output fell by 1.5% in July. If Europe's biggest economy tips into recession, the rest of the eurozone is likely to suffer. The US-China trade war has been a key driver of the decline, as both countries are huge export markets for Germany.
- “A Bigger Fraud Than Enron” Madoff whistleblower Harry Markopolos called $GE “a bigger fraud than Enron.”He released a 170-page report and accused the company of $38B in accounting fraud. Full-disclosure, Markopolos is working with a hedge fund that has shorted GE – and GE was down 13% on the news.
- Retail sales surged in July. Americans boosted spending at stores and especially online last month. Sales rose 0.7% driven by Amazon’s Prime Day.
- UPS has self-driving trucks on the road: UPS announced an investment in trucking startup TuSimple. TuSimple had previously worked with the United States Postal Service to carry mail between distribution centers. UPS, hopes to beef up its own tech offerings, and is also working on a drone delivery service.
- Housing starts dropped 4%to an annual rate of 1.2m units last month, and homebuilding fell for a third straight month in July.
- The U.S. is thinking about selling: 50- and 100-Year Bonds after yields fall.
Crypto-Bytes:
- Goldman Sachs says Buy-Buy-Buy: Bitcoin with a short term target of $13,971. According to the analyst, Bitcoin will rebound from support, leaving room for at least one leg higher toward $13,971.
- New Zealand: willlegalize and tax Bitcoin salaries starting in September.
- Digital Yuan: A Chinese official said they are nearing the launch of their own digital currency.
- 60 Latin American banks: now use Bitcoin for cross-border payments.
- “Are we there yet?”: The SEC has delayed (until Sept. / Oct.) making a decision on three bitcoin exchange-traded fund (ETF) proposals. The ETFs (Bitwise Asset Management, VanEck/SolidX, and Wilshire Phoenix) are all seeking to become the first such investment vehicles based upon bitcoin.
- “It’s about time…”: Samsung has integrated bitcoin (BTC) functionality into its blockchain-enabled smartphones. The move comes 6-months after the flagship Galaxy S10 launched a “Blockchain Keystore.”
- “Don’t you read the memo?”: There is no inverse relationship between Bitcoin (BTC) and the broad US Equities markets. As with any truly non-correlated asset, there are instances where the defined relationships do and don't hold. BTC is not where the big money goes in times of turmoil – like gold, bonds, and other fiat currencies.
With the global economy facing its biggest crisis in 11 years – this could be Bitcoin’s moment to shine. But a rocky road lies ahead – for both bit-coiners and non-coiners. The issue is that the global economic community doesn’t believe that politicians will act rationally. Facts carry less weight in an era when major Western nations are retreating from their viewpoints due to a currency war (for example). A weaker Chinese currency means that all other countries that trade with China are also disadvantaged. So, they will all feel compelled to weaken their currencies, which means that their trading partners will in turn feel pressured to do the same. Already, New Zealand, India and Thailand have announced interest rate cuts in response to China’s decline. Bond markets are expressing their fears through the ‘inverted yield curve’. And UBS is paving new ground by charging large depositors a fee to hold their money. It’s a negative interest rate play that’s angering savers.
The scariest image is one of a currency war where the U.S. is a bully. Bitcoin is an alternative to a currency war, and its digital properties are similar to those of hard currencies like gold: tough to mine, scarce, fungible, and transferable. But it would be foolish to assume that the path for BTC is straight up from here. One major risk to that view surrounds sweeping regulatory backlash. Governments (seeing investment outflows accompanying the financial turmoil) will worry about Bitcoin enabling capital flight and will seek to ban it or at least introduce restrictions on exchanges that make the on- and off-ramps very difficult to use. For now the best prediction is that market volatility will continue and Bitcoin is a legitimate place to put your uninvested capital.
The scariest image is one of a currency war where the U.S. is a bully. Bitcoin is an alternative to a currency war, and its digital properties are similar to those of hard currencies like gold: tough to mine, scarce, fungible, and transferable. But it would be foolish to assume that the path for BTC is straight up from here. One major risk to that view surrounds sweeping regulatory backlash. Governments (seeing investment outflows accompanying the financial turmoil) will worry about Bitcoin enabling capital flight and will seek to ban it or at least introduce restrictions on exchanges that make the on- and off-ramps very difficult to use. For now the best prediction is that market volatility will continue and Bitcoin is a legitimate place to put your uninvested capital.
Last Week:
The entire world has just woken up. People all over the world are trying to stand up for themselves and determine their own Government and future. Combine that with Europe going completely nuts, Denmark issuing negative mortgages, UBS planning on charging their rich clients for holding more than $560,000 in cash – and you’ve got the world going batcrap crazy. Some very bright people have suggested that Hong Kong could be the black swan that ripples across the globe and blows things up. They would be in line behind Germany’s latest Consumer Survey reading of a -13.5 – the lowest since May 2010, and Germany’s Expectations Survey that recorded a -44.1 – the lowest since Dec. 2011, and their 10-year bond yield falling to -0.7%. They could also be behind Japan where their machine tool orders fell over 33% YoY.
Logic would tell you to go short – but QE, Rate cuts, negative rates, buy backs, and Central Banks buying stocks trump logic. Until that nonsense stops, holding a longer term position on the short side is scary. Do I believe the market should be trading multiple thousands of points lower? Yes I do. But the FACT is, with all those issues we're within single-digit percentage points of the all-time-highs.
The big chatter this week was about the 2-year and 10-year inverted yield curve. [The 3-month and 10-year have been inverted for a while now.] What’s truly worrisome, is that as a recession indicator – this is 100% accurate. When a recession comes, it statistically appears within the next 12 to 18 months – which is directly prior to our 2020 election. That explains why the Chinese are negotiating the way that they are. They are just waiting out our recession and a new (potentially more friendly) regime.
Weed: Non-medical cannabis consumption is rising much faster than medical.
Factually:
- 14%of Americans use CBD products.
- The National Credit Union Administration said the agency will not punish credit unions that work with state-compliant cannabis firms.
- Former FDA Commissioner Scott Gottlieb indicated his support for cannabis decriminalization on a federal level.
- Luxembourgwill soon be the 1stEuropean country to legalize adult-use cannabis.
- Mexicowill begin to hold meetings legalizing and regulating cannabis.
- Zimbabwewill soon allow farmers to grow industrial hemp for export.
- Tilray(TLRY) is doing 2 clinical trials with the NYU School of Medicine.
- Green Organic Dutchman Holdings(TGOD) applied to list on the NASDAQ.
- Terradyne (TER) agreed to acquire Ilera, a vertically integrated Pennsylvania cannabis company.
- Juul (JUUL)launched a Bluetooth-connected e-cigarette device that can monitor users' vaping and track their devices.
- The Ohio Attorney Generalhas advised prosecutors to suspend all cannabis prosecution in the state following the legalization of hemp, which prosecutors and law enforcement say effectively legalized cannabis. “This bill legalizes marijuana in Ohio,” Louis Tobin, executive director of the Ohio Prosecuting Attorneys Association, told the news.
- Charlotte’s Webwill more than TRIPLEits footprint with a new 137,000-square foot production growing facility in Louisville, Colorado. The company will build out the facility over the next two years to accommodate rapid production growth that threatens to overwhelm its existing 40,000 sq. ft. of space. That is after harvesting 675,000 pounds of hemp in 2018 – more than 10X their 2017 harvest.
- Cresco Labs has acquired Valley Agriceuticals, one of only 10 vertically integrated cannabis business licenses in New York State, for $32.5m in cash and 13.5m shares. Valley Agriceuticals is licensed for a 75k sq. ft. production facility in Wallkill, New York and 6 eventual retail locations.
- Cannabiniershas launched two new, non-alcoholic, THC-infused beer brands. They also market Brewbudz cannabis coffee.
Next Week:
Investors were caught leaning the wrong way as the July CPI report differed from the PPI report. The July CPI report (that measures inflation at the consumer level) came in ‘hot’ – which puts the Fed in more of a bind. There is still a 100% chance of a rate cut in September, but this makes rate cuts in October and December tougher to do without inflation being under control. The Fed will need to thread the needle by supporting the economy, but not allow inflation to get out of hand. With the July and September rate cuts just starting to impact the economy and comps getting easier, inflation might be stubbornly high in the first half of next year. Combine that the $16T of global negative yielding debt, and “Houston, we could have a problem.” At $16T – it’s 28% of all outstanding debt, and 62% of the entire market cap of the S&P 500. Who buys a negative yielding bond you ask? All I can tell you is traders who feel that they can sell them to a greater fool, and of course Central Bankers who buy anything regardless of price. What happens to the rest of the normal bond investors trying to generate safe returns to meet current and future obligations – they die.
CW reminded me of Charles Darwin, “It is not the most intellectual of the species that survives … but the species that is able to adapt to and to adjust best to the changing environment.” Adapt and adjust best, is what I’m feeling on several fronts. First, Mr. Trump pinned this next election on the stock market. If the market rolls over, or if we are in a recession – he’s not going to be able to pull off a win. So, he's been offering up olive branches to China. He just pushed off hiking extra tariffs until December, and he’s just given Huawei Technologies an additional 90 day grace period. Secondly, while the Chinese will talk an extremely strong game, these trade issues are wreaking havoc over there as well. They just bailed out some of their banks, their manufacturing growth is the slowest in 17 years, and they have the horrors of Hong Kong to deal with. Both sides are trying to save face, while at the same time trying to keep product flowing.
The market put in two bounce days late in the week. It had to, it was oversold. Even the 2/10 yield curve improved a bit, easing some tensions. My bet is that we have some more upside to come. The technicals allow for some more gains to the upside before we run into resistances, so as long as nothing blows up in Hong Kong. Be careful.
Tips:
A couple names that I’m watching are AMT, JPM, WEN, NVDA,CRM,
Top Equity Recommendations:
HODL’s:
- Aurora (ACB = $5.99 / in @ $3.07)
- Canopy Growth Corp (CGC = $28.11 / in @ $22.17),
- DRD Gold (DGD = $4.21 / in @ $4.20),
- GBTC (GBTC = $13.45 / in @ $10.01),
- Overstock (OSTK = $18.11 / in @ $18)
Crypto:
- Bitcoin (BTC = $10,400)
- Ethereum (ETH = $200)
- Bitcoin Cash (BCH = $320)
Options:
- RIOT ($1.85):
o Bot Jan 17, Sold $3 Call / Sold $3 Put / Bot $4 Call for $1.85 CR
o Bot Jan 17, Sold $2 Call / Sold $2 Put / Bot $3 Call for $1.45 CR
o (can only lose money if RIOT falls below $0.70).
Thoughts:
- Real-Estate (IYR = $91.50) With longer-term rates lower, when is real estate going to pick up? Granted, there’s a lag time between the bond market and when people start shopping for mortgages, but you might think that IYR (a real estate ETF) would be forward-looking and rally on the news. Rather, IYR has dropped a bit but is still in the middle of the range it’s had for the past two months. With the broader market weakness not pulling it down, and low rates not pushing it up, you might think that IYR could stay in its range for the next few weeks. As for trading, IYR’s 50% IV rank means short premium strategies could be attractive. If you think that IYR won’t move outside its range anytime soon, you might consider a neutral trade. The short iron condor that’s long the $85 Put, short the $87 Put, short the $94 Call and long the $96 Call in the Sept monthly expiration is a neutral strategy that collects a credit that is 1/3 the width of the strikes, has a 74% probability of making 50% of its max profit before expiring.
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.
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