This Week in Barrons: 10-13-2019:
Thoughts: … “There’s no bigger thrill than winning a race that you’re not even supposed to be in.” … Kevin Harvick
For ages people have debated which is more important: the idea (because if it’s good enough, who cares who’s leading the charge) or the leadership / team in charge of implementation. What few discuss is the ability of that horse and jockey to work together – as a unit. Neither the horse nor the jockey need to win every interaction. They’re constantly communicating and silently making allowances for each other’s miscues. They realize that understanding promotes engagement, and that allows them to stay in synch. They realize that emphasizing short-term over long-term isn’t a sign of strength, but rather a symptom of immaturity and a recipe for disaster. In any race, the incumbent leader has an unfair advantage because the casual and unsophisticated prospect will always choose them due to ease and safety. So the goal of the horse / jockey combo should NOT be to beat the big fish. The strategy should be to pick a small enough pond and engage a viable enough audience that they gain the reputation and trust required to move on to even bigger audiences.
It’s easier to get me to believe in people than in machines. The most recent example of this was Wednesday’s L.A. Dodges vs Washington Nationals baseball game. Dodgers’ pitcher Rich Hill was in complete control (openin’ a can of whoop-ass) against the Washington Nationals. But big data said that he had to be replaced because he had thrown 117 pitches. Manager Dave Roberts replaced Rich Hill, and the Dodgers went on to lose the game. Now, I’m old enough to remember when Tommy Lasorda did NOT pull Orel Hershiser, and Orel and the Dodgers went on to win the World Series. Today Tommy and Orel are both legends. As an organization you have to decide which game you’re going to play: “Do you believe in your people – or do you play ‘Money Ball’?” We'll never know what would have happened if Rich Hill had stayed in the game. The interesting thing is, Manager Dave Roberts did the exact same thing last year. The Dodgers were winning; big data said to pull the pitcher – he did, and they again lost.
They call it: playing the odds. They were in Hillary's favor, but Trump won anyway. Data is absolutely a part of every ‘above the shoulders’ decision. Unfortunately, entrepreneurship and championships are won ‘below the shoulders’ – with your heart and your gut. Of course Dodger fans dislike Manager Dave Roberts, as he pulled the same stunt two years in a row and blew it both times. I don’t fault him for the decision. I fault him for not being in synch with his pitcher – Rich Hill. Over 90% of the time you can trace winning back to communication. J.Q. Public invests their time, belief, and trust, and expects total communication in return – NOT simply a ‘big data’ decision.
They call it: playing the odds. They were in Hillary's favor, but Trump won anyway. Data is absolutely a part of every ‘above the shoulders’ decision. Unfortunately, entrepreneurship and championships are won ‘below the shoulders’ – with your heart and your gut. Of course Dodger fans dislike Manager Dave Roberts, as he pulled the same stunt two years in a row and blew it both times. I don’t fault him for the decision. I fault him for not being in synch with his pitcher – Rich Hill. Over 90% of the time you can trace winning back to communication. J.Q. Public invests their time, belief, and trust, and expects total communication in return – NOT simply a ‘big data’ decision.
In trading there’s a phrase: “It’s easy to read the left hand side of the chart.” That’s the part that nobody gets paid for. We can guarantee chances, but we can't guarantee outcomes. Forecasting takes initiative, and the only way to get initiative is to take it – because it’s never given. Some people hesitate to take it, because they’re worried that it will run out. From an early age, most of us are taught to avoid taking initiative. Just do your homework. Wait until you’re called on. Become popular. Maybe stand out a little bit. We are taught that failure is far worse than not trying. On behalf of those who seek to serve: go ahead and take some initiative – there’s plenty to go around.
As for me, I’m going to continue betting on the jockey. I’ve always appreciated someone who creates an extraordinary outcome. If they can figure out how to do more with less, and still create a magical outcome – that’s exactly what they should do. The challenge is to engage the prospect / customer in a way that changes their frustration into loyalty. As much as I love betting on outcomes – I love betting on people more.
The Market: Headed for a recession Today = ‘Heck No’ / Tomorrow = ‘Maybe’.
When the economy is expanding, businesses spend more money and companies grow profits more easily. The US economy's been expanding since June 2009 without a recession. A recession is 2 consecutive quarters of economic contraction. After a bunch of data came out last week, our Magic 8 Ball of ‘leading economic indicators’ revealed that our bosses are NOT feeling great about the direction of the U.S. economy.
- Manufacturing: A survey of over 300 manufacturing managers showed the worst sentiment since 2009. For 2 straight months, more factory managers are planning to shrink their businesses than grow them.
- Non-Manufacturing: Also hit its worst point since 2016, but is still growing.
- My Takeaway: If you look at the current economy, things look positive. If you want to celebrate a booming economy and near-record-high market – do it now.
FYI, I was shown a study the other day – depicting what happens within an isolated community when that community is introduced to the Internet. In the beginning, their quality of life improves quickly. Time will be saved, research into proven solutions produces value, and people become connected to a larger population. Those connections lead to even further increases in productivity and learning. And then, the community becomes less happy than their original state-of-mind. Not because they’re worse off, but because the media convinces them that they’re insufficient, inadequate, and/or simply jealous at how green the grass is on the other side of the fence. It seems that our own media narrative defeats our own surroundings every time.
Info Bits:
- The Road is Long: GE is trying to find the road to financial health, so they are freezing 20,000 employee pensions. That should increase productivity!
- Tough day to be at HSBC: as they’re planning to cut 10,000 jobs. THIS is the new CEO’s first action - really?
- Getting your ACT in gear: Students will soon be able to retake specific sections of the college entrance exam (where they had done poorly) – keeping the good scores intact. I can see all kinds of collateral damage coming here.
- “Only you can prevent wildfires”: PG&E, the California utility giant forced into bankruptcy by years of causing devastating wildfires, is cutting power to almost 800,000 customers across Northern California to keep their power lines from sparking more blazes. Literally ‘robbing Peter to pay Paul.’
- Restaurant same-store sales declined 0.4% in Q3: and that is the industry’s first quarterly decline in 2 years.
- “I only need one Johnson in my life, and that’s Dwayne”: After being ordered to pay $572m this past August, Johnson & Johnson is at it again. A 26-year-old Maryland resident that was awarded $680,000 in 2015, was recently awarded another $8B.
- PayPal’s down on Uber: because when reporting results in a couple weeks, PayPal will show a $228m loss driven in large part by a bad bet on Uber just before it went public. Uber's fallen 34% since its IPO.
- 123456: is the most commonly used password in the world – used by 23.2m people. Turns out we're not so different after all. Cue choir singing Kumbaya.
- Denver’s temps dropped 64 degrees in a day: proving once again that in Denver, fall isn’t a season – it’s just a time of day.
- Adam Neumann: WeWork’s cofounder used to be on the Forbes’ list of the world’s richest people – with a net worth of $4.1B. Recently, Forbes announced it was lowering its estimate of his wealth to a measly $600 million-ish.
- WeWork expects to shed one-third of their software engineers, product mgrs., and data scientists. Does anybody still think WeWork is a tech company?
- We(don’t)Work: is locked in negotiations with its largest shareholder, Softbank Group, over a new $1B investment that will enable them to remain solvent while they restructure.
- We(never)Work(ed): If talks with SoftBank are successful, WeWork will seek to negotiate a $3B debt deal with JPMorgan (JPM) because it will quickly need more cash.
Crypto-Bytes:
- “The bells are ringing…” An option premium of 0.0202 Bitcoin (paid via smart contract) is being viewed as a warning sign for Wall Street. The options trade was carried out via blockchain – completely void of all financial intermediaries.
- “Up, up and away…” Bitcoin was up 5% on the week, while ETH was up over 11%. Should we be preparing for the familiar November run-up?
- “Top of the mornin’ to ya:” The Central Bank of Ireland granted Coinbase an e-money license, enabling the company to expand its operations. A CME exec recently noted that almost 50% of crypto trading volumes are coming from Asia and Europe. Imagine that.
- “Bye-bye, so long, farewell…” eBay, Stripe, Mastercard and Visa are all dropping out of the Facebook / Libra project – just one week after PayPal announced its withdrawal. Coincidence – I don’t think so.
Bitcoin continues to be different things to different people.
- In Venezuela, because the country’s national currency hit hyperinflation – Venezuelans sought out Bitcoin as a consistent, available store of value.
- In Hong Kong, protests have been raging for months. ATMs across Hong Kong are either running out of cash or completely non-functional. Over $4B has already been moved from Hong Kong to Singapore. Hong Kong’s interest in Bitcoin is increasing. Asian trading volumes in the past week were more than any other time in Bitcoin’s history. To them, it’s a way to keep their wealth out of Chinese control.
- Citizens of India are experiencing a lack of access to their wealth due to the inept nature of the India’s Central Bank. Their Central Bank has lost the trust of the population which has initiated runs on banks. Small withdrawal limits have been instituted – but not before significant percentages of wealth had been moved into Bitcoin. To Indians, they wish to regain control of their own accumulated wealth.
- The situations in Venezuela, Hong Kong and India are very different, but they all illuminate the importance of Bitcoin on a global scale. The decentralized digital asset provides full control, including lack of seizure or censorship, to any person with an internet connection. Individuals are no longer exposed to the risks of their government, their banking system, their financial system regulators, or any other external force. Bitcoin provides a transparent, disciplined system that continues to store wealth safely. Bitcoin’s properties of 24/7/365 access, non-seizability, and non-censorship become much more important to people in areas where lack of access to your wealth becomes a problem. There are more than one billion people who live collectively in India and Hong Kong. These people are getting a front row seat to some of the challenges in the legacy financial system, which will lead to many of them seeking an alternative solution or hedge.
Last Week: Buy the trade hype – Sell the trade deal.
Some of the canaries are beginning to look like they're gasping for air. The numbers still show growth, but the trends tell a darker story.
- 3M (MMM) has plenty of problems on its plate, but in the ‘short-cycle’ businesses they’re hurting so badly that they cut both costs and guidance.
- Rockwell Automation (ROK) is singing its own short-cycle blues. It's slashing expectations for this year's growth from 4.5% to just 1.5%.
- Eaton (ETN) the power specialist has now cut its outlook twice in 2019 due to slowing sales in construction and trucking – most recently downward by 8%.
On Friday, U.S. and China created yet another ‘Nothingburger’. Everyone kicked the can down the road. If you ever thought the Chinese were going to go along with a full deal – you really missed the plot of the story. China's been screwing us for 40 years, but China’s been making U.S. corporations rich for those same 40 years. So net-net, there was never any pressure to hold China's feet to the fire and address the theft of intellectual property and subsidies. Therefore, the game of cat and mouse continues. The agriculture deal, where China said they would buy $40B worth of AG, is a bit misleading. Right now they buy $10B of our crops. Their pig herds are being decimated by swine flu and they need more pork – so much of this purchase is just replenishment of the animals themselves.
That said, the market could fade early in the week. What the world gets with this deal is an agreement to NOT let things get any worse. We kicked the can down the road without any escalation. What happens now? Earnings happen. That’s another reason why the market could hit an air pocket – because earnings are NOT going to be stellar. They're going to have to make up a lot of excuses. You'll also begin to see another wave of stock buy-backs announced. So my guess is that the market fades this week, and uses the 50-day moving average for support. Is there anything to stop a full blown selloff like we saw last December? No, not really. Earnings will stink, we don't really have a real trade deal, and the political process is kabuki theatre right now. But remember, the market is rigged to hold steady or go higher. So while lower is an option and certainly logical – unless it’s the next act in the play, I wouldn’t bet the farm on it.
Weed: The Legalization Trend is widening and picking up speed.
Factually Cannabis:
- “Freedom oh Freedom…” Ontario is exploring the possibility of letting the ‘free market’ dictate their wholesale cannabis distribution strategy. Mexico introduced a bill that would legalize adult use cannabis through a government-run system. And Pennsylvania introduced a bill to legalize adult use cannabis.
- “It ain’t me…” The Mayo Clinic reported that the respiratory illness from vaping was caused by a mix of "toxic chemical fumes," not oils as previously expected.
- California’s #1: in cannabis tax revenue in the U.S. It took in over $265m for the first 6 months of 2019. That’s up over 88% YoY and still growing.
- CGC has a new Chairman: Canopy Growth (CGC) named David Klein its chairman of the board. Klein was CFO of Constellation Brand (the largest shareholder of CGC) and specializes in corporate strategy, finance and accounting, mergers and acquisitions, technology and investor relations.
- “Breaking up is hard to do…” MedMen and PharmaCann terminated their $682m merger. Along with the release, MedMen got PharmaCann’s Illinois retail outlets, and a new CFO – their 3rd in the past 18 months.
- “You can’t fix stupid”: HEXO Corp said that its previously projected revenues were a bit off – so they cut them by 85%. Yep, they reduced 2020 revenue estimates from $400m to $48m. Proving once again: “You can’t fix stupid.”
- “You can’t fix stupid” (Part 2): The Green Organic Dutchman said that it was considering new financing to complete the construction of two facilities. One small problem, previously they claimed that those projects were fully funded and almost complete. The stock lost 40% of its value in 2 days. Again, “You really can’t fix stupid.”
- “This Buds for you…” A joint venture between Tilray and the world’s largest brewer Anheuser-Busch InBev plans to have a CBD-infused drink on the Canadian market as early as December. THC will take a little more time. In a couple of years we’ll be remembering what it was like to drink alcohol.
California, already the most valuable market in the world, is now also the most lucrative on a tax revenue basis despite numerous municipalities voting to ban cannabis at the retail level. California sales will continue to grow as more shops open and law enforcement shuts down unlicensed dispensaries and other illicit channels, which still account for billions of dollars of cannabis spending.
Dia Simms is entering the cannabis category with a new branding, distribution, and tech firm called BRN Group – HQ’d in Toronto and New York. BRN Group bills itself as a “privately-held, global brand development, management and distribution company that licenses, manages, and distributes superior cannabis brands worldwide.” Southern Glazer’s president Shelly Stein and vice president, new ventures, Kariff Rhooms are among the company’s directors.
Next Week: Pick your poison with Earnings, US-China deal, and/or EU dissention
Pick your poison as to what will create the next bout of volatility. In either case, “Please keep your hands and feet inside your [trading] vehicle at all times.” Because this time, earnings are going to matter – especially top line growth. The media is reporting that we have Phase 1 of a trade deal between the US and China. It will take at least 5 weeks to write it up, so be ready for a short-term ‘sell the news’ event. And finally, there is dissention within the EU Central Bank ranks about additional quantitative easing. Ms. Legarde (who will take over the helm of the ECB this coming week) has said that she wants to go deeper into negative interest rates and additional QE – so expect more fireworks there.
- Trade War – Buy the Hype / Sell the Deal: Last week, after all was said and done – the S&P ended with a small gain.
- Gravity Points: on the SPX are in play when markets are heavily correlated. The SPXgravity points are: 2,983, 2,911, 2,842, and 2,811. In a market place that reeks of chaos, use the gravity points to help mitigate risk – because they will act as support and resistance depending upon the market direction. I do not have a gravity point above 2,983.
- We are still Volatility and Range Bound: Therefore keep your trades small and defined – because sooner or later we will rip the ranges apart. Historical volatility will increase as we begin to break down through the ranges. For example, if the market breaks thru 2,811 to the downside – the S&Ps will fall another 80 points in a heartbeat, and another 50 points after that. Even though there is still a threat to an upside move, bearish positions are becoming extremely inexpensive insurance and I would encourage everyone to have some on – at least as a hedge.
- Earnings are coming: During these last few weeks no one has even noticed individual stocks. But individual numbers are going to matter. Next week we’re going to begin to have answers to questions like: How are the banks performing in a low interest rate environment?
- Expected SPX move: Last week’s expected move in the S&P (SPX) was $53 and next week’s is predicted to be $51. That means volatility is still very much a part of the trading environment.
- A couple BEARISH ideas: (Buy defined risk Put spreads or deep in the money Puts – more than 3 months out – into 2020) on:
o The Home Builders (XHB) – if the economy tanks even a little bit – so will they as they are sitting at all-time highs,
o The Financials (XLF) – especially now that we’re in a low interest rate environment, and
o Consumer Staples (XLP) – with Walmart being up 28% on the year, people will begin to take profits.
Tips:
Top Equity Recommendations:
HODL’s:
- Aurora (ACB = $3.68 / in @ $3.07)
- First Majestic Silver (AG = $9.22 / in @ 10.50)
- Canopy Growth Corp (CGC = $19.43 / in @ $22.17),
- DRD Gold (DGD = $4.74 / in @ $4.20),
- GBTC (GBTC = $9.81 / in @ $10.01),
- Pan American Silver (PAAS = $16.22 / in @ 18.00)
Crypto:
- Bitcoin (BTC = $8,500)
- Ethereum (ETH = $180)
- Bitcoin Cash (BCH = $230)
Options:
- RIOT ($1.80):
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:
- Consumer Discretionary Sector (XLY): Two months ago the XLY (a consumer discretionary ETF that tracks stocks like hotels, restaurants, clothes, food, etc.) started a roller coaster. It dropped 4.5%, rallied 9%, then dropped back 4.5% to land yesterday pretty much where it started. At this point, it doesn’t really matter why XLY heaved around, but rather that its implied volatility is near its highest level for 2019. Now, I’m not going to say that XLY will end up in a month where it is today, or that it won’t swing another 9%. But with a the 61% implied volatility handle, it makes an interesting candidate for short premium strategies and rewards you for taking risk. If you think that XLY might trade in a wide range for the next few weeks, the short iron condor that’s long the $112 Put, short the $114 Put, short the $124 call and long the $126 call in the Nov monthly expiration is a neutral strategy 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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Until next week – be safe.
R.F. Culbertson
Until next week – be safe.
R.F. Culbertson
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