RF's Financial News

RF's Financial News

Sunday, January 5, 2020

This Week in Barrons: 1-5-2020

This Week in Barrons: 1-5-2020:                 



Thoughts:

I remember seeing Bill Gates give a keynote speech in the Superdome when he uttered the words: “We tend to overestimate what will happen in 1 year, and underestimate what will happen in 10.  During the upcoming decade I expect that:
1.    The experiment in using capital as a moat…  to build startups into sustainable businesses will be celebrated as a FAILURE.  Uber  popularized the strategy, and has yet to prove it can support itself.  WeWork was a quick learner with this strategy, as it blew up in everyone’s face.  VCs and Universities are failing right and left with the strategy, and I honestly couldn’t be happier.  “Kill the Beast!”

2.    Countries will create and promote digital / crypto…   versions of their fiat currencies.  China will lead the charge, and will gain the most from its ‘first mover advantage’.  Asian crypto exchanges will become the dominant capital market for all types of financial transactions.  The U.S. will be hamstrung by regulators.  

3.    China will become the dominant…   global superpower because of its  technical prowess and ability to adapt.  Conversely the U.S. will become increasingly isolationist.

4.    Climate change…   will cause dramatic changes in real estate values.  Nuclear and solar power will continue their march toward becoming mainstream.

5.    Plant based diets…   will dominate the world, and labs will be the new farms.

6.    Privacy protection…   will finally ‘matter’ and the biggest consumer technology successes of the decade will be in the area of privacy & security.

7.    Genetics will produce massive wins as cancer and other terminal illnesses become better understood and treatable.

The goal is NOT to be right about the above, but to continue thinking about them.


The Market:  





3 WHAT IF’s:
#1       Apple acquires Tesla:  Elon Musk's EV company always sets insane goals, but 2020 looks particularly crazy. They need to:
o   Scale production at the new Shanghai Gigafactory, 
o   Deliver the first Model Y crossover SUVs (on pre-order since March), 
o   Succeed in China despite America's ongoing trade war, and 
o   Build a 4th Gigafactory near Berlin.
Tesla’s stock is at an all-time high thanks to a profitable last quarter and broken widow-gate.  But Tesla is polarizing, and the stock could quickly turn south.  If shares fall 50% (and it's happened before), that's where Apple comes in.
o   Apple has $206B in cash.
o   Creating an iCar has been rumored for decades.
o   With iPhone sales declining, there’s an open ‘parking’ spot on Apple’s product roadmap.  
o   Both company HQ’s are just 9 miles apart.
If Tesla was acquired, Apple's CEO would take the wheel and bring financial stability to Tesla, and bring a dose of reality to Elon's projections.

#2       Chipotle begins to change to a pick-up and delivery restaurant:
Chipotle should become the 1st major US restaurant chain to eliminate tables and make every store offer pre-order pickup and delivery only.  Why – because:
o   Digital saved Chipotle.  Their online sales for pickup and delivery almost doubled last quarter.
o   Space costs money.  Chipotle restaurants are mostly empty during the mornings and between 2 and 5pm when you're not hangry.
o   Their new CEO came from Taco Bell, and I’m betting his ideas only get wilder.
Convenience is winning over retail.  Target’s stock is at record highs thanks to curbside pickup.  Walmart is committed to "delivery unlimited" subscriptions and grocery curbside pickup.
o   Over half of 2020’s restaurant spending is projected to be outside the restaurant.
o   Last year's $10.2B consumer splurge on 3rd party delivery led to ghost kitchens (delivery-only restaurants where customers can't see the place.)
o   Starbucks is testing its first ever pickup-only stores.
Chipotle is facing fresh, fast-casual competition.  McD’s is spending $6B to renovate its stores.  Going table-free isn't just a profit move or a PR stunt, but rather how Chipotle can stand out in a saturated world of quick quality food options.

#3       Amazon starts ‘naked’ shipping (eliminates cardboard waste):
Currently, billions of packages shipped each year means billions of tree-made cardboard boxes.  Amazon launched “The Climate Pledge” to meet the Paris Climate Agreement 10 years early.  They could meet this goal by offering ‘naked’ shipping.  They’ve already ordered 100k electric delivery vans, and are investing $100m in planting trees.  With: ‘Prime Shipping’, ‘2-hour Shipping’, ‘No-rush Shipping’ – ‘Naked Shipping’ is a natural.
o   ‘Naked Shipping’ = No box within a box.  This allows certain packages to be shipped in their native packaging, and just slapping on a label.
o   Give the customer $1 off to ‘Go Naked’ – because it saves Amazon money (the boxes) and helps achieve its Climate Pledge.
Yes, naked isn’t always appropriate.  A Rolex needs the anonymity of a brown box.  But with customers craving "naked-eligible’ $1-off items – producers may make their native packaging more naked-friendly, (like Tide currently).
o   This could negatively affect Amazon’s profits.  Amazon already pays workers to optimize packaging.  Now it will have to pay for the $1 naked incentive, and for an increase in stolen and damaged items.
But Jeff, sustainability commitments can create brand love (Patagonia).  And preventing trees from being turned into boxes will build customer loyalty.


Info Bits:




-       Remember Pixar’s 2008 movie WALL-E?   It is set in the 29th century, where mankind has evolved into boneless blobs that: eat, babble at screens, and lounge in high-speed, floating chairs.  With 40% obesity in the U.S., Segway is debuting a new personal transporter pod at CES in Las Vegas.  It uses Segway's self-balancing technology to propel the user forward on two wheels, while sitting down.  The rider navigates via a knob on a control panel, and can go up to 25 mph.  Yee-Haw!

-       Getting down to business:   Google and Facebook still need to defend themselves against the government’s antitrust claims.  Uber, Lyft, Peloton, Slack, Pinterest, Smile Direct Club… – all need to figure out how stay alive.

-       Let the Streaming Wars begin:   The faceoff is now between Netflix, Hulu, HBO Go, Amazon, Disney+, Apple TV+, and others.  That’s a lot of content in 2020.

-       Gig Economy  Uber and Postmates filed a lawsuit to block the new California law that would require companies to classify these workers as employees rather than independent contractors.  The reclassification would impact the entire ‘gig economy’ – adding further costs to already unprofitable businesses.

-       Apple and Microsoft accounted for 1/3 of the Nasdaq’s great 37.8% year:   If you listen closely – you can hear 1,000 hedge funds shutting down.  No wonder more and more people turn to indexing and simple asset allocation when it comes to investing.  If you can’t beat ’em – join ’em.

-       “War, what is it good for?”   A lot!  Aerospace and defense stocks broke to all-time highs last week.  Everybody knows “dangerous escalation” means profits for: Lockheed Martin (LMT), Northrop Grumman (NOC), Raytheon (RTN) and L3 Harris Technologies (LHX).  The military industrial complex only rolls downhill.

-       The Fog of War:   Sun Tzu once wrote: “All war is based on deception.”   The US and Iran may or may not be heading for war.  But one thing is certain, what we’re all going to be hearing from politicians and the media over the coming days is going to be misdirection.  Remember: everything is questionable.


Crypto Bytes:

-       Bitcoin believers…   expect a 2020 rally as a reward for halving.


Last Week:   



   The good news is that the market is treating the above set of unprofitable companies as it should.  All of the hype placed around ‘eyeballs’ (UBER) and ‘kumbaya’ (WeWork) has gone away and we’ll soon see who can put their ‘big boy pants on’.

-       Last Monday:  The stock market is open all day today and Tuesday.  Volumes stink and ‘weird’ movements are common.  Keep an eye on AMT.  It’s stupidly expensive, but if it clears $230 it has a shot at $240.  PG has technicals that are firming up, and a move over $126.50 could set it free.  BMY is threatening a breakout if it can get over $64.60 A report hit the wires that China is to visit the US next week-ish to sign the trade deal.  Interesting if true!
-       Last Tuesday:   Yesterday there was some tax related selling, as we dropped 183 points. But the banks like MS and C held up remarkably well.  The big question is: Do you hold onto whatever you have and take it into the new year or just sell now?  If you’re a big player and your portfolio is up – you probably want to lock in those profits.  But if you sell today, you will have to pay taxes on those gains in April of 2020.  If you hold out and sell on Thursday, you don't have to pay those taxes until April, 2021.  So, it’s possible we see some selling going into next week.  On the other hand, there's a lot of insurance and pension funds that have to do their new year redistributions the first week of January.  So buying may offset profit-taking.  I thought that we’d rise into the first couple of weeks of January and then see the market begin to stair step lower.
-       Last Thursday:   China did some liquidity injections overnight, and everyone liked that.  Microsoft (MSFT) hit a high of $159.55 this morning, and a move over that would be buyable.  AMD over $47.90 could work but it's awfully extended.  AAPL over $298.45 works, but hold your nose.  Of course the SPY and DIA are buyable over their respective morning highs, but look at the prices.  AMD did go over $47.90 so I snagged some.
-       Last Friday:   Overnight the U.S. targeted the top Iranian commander, killing him and another official in a drone strike.  The initial reaction was that oil jumped, gold jumped, and the futures fell 400 points.  But as the morning evolved the DOW is now only down 240.
   This is a game changer.  The guy they took out is the one that orchestrated the attack on the U.S. embassy.  Bottom line, tensions are very high, and something big could happen.  Just as alarming on the economic side of things - here's the latest round of economic data:

U.S. ISM Manufacturing December: 47.2 (estimate was 49.0)
- New Orders December = 46.8 (previous 47.2) – moving lower.
- Prices Paid December = 51.7 (estimate 47.8) – we have inflation.
- Employment in December = 45.1 (previous 46.6) – moving a lot lower.

  That's the worst manufacturing data in 10 years.  The economy is in serious slowdown mode, and the market is being held up ONLY by the FED and corporate buy backs.

-       Remember the 2010s:  Instagram took off because the ‘boomers’ took over Facebook.  The Chilean miners were rescued.  Obama won a 2nd term.   Same-sex marriage was legalized.  Who knew that Gangnam had style, and Hamilton would take over Broadway.  BP had a deadly oil spill.  Vine walked so TikTok could run.  Dozens occupied Wall Street.  Terror attacks and mass shootings shook the world.  Osama bin Laden was killed.  The US had its 1st female presidential nominee by a major political party.  Donald Trump won the 2016 presidential election, and then got impeached.  Women marched, candidates debated, millions fought for the Iron Throne, and we all tried to Catch ‘em all Things with North Korea got way too tense.  Kaepernick took a knee and started a movement.  People came forward with their #MeToo stories.  There were royal weddings and royal babies.  We flossed, planked, and poured ice over our heads.  Beyoncé sipped Lemonade.  Kanye became a Kardashian.  And we all could have a used a little more CBD.  What a decade.





Weed: 

-       Illinois Adult-Use MJ Launched w/ Heavy Demand:  Thousands of marijuana enthusiasts – including Illinois’ lieutenant governor – turned out on a cold New Year’s Day (2020) to mark the historic start of adult-use cannabis sales in what could become one of the largest U.S. recreational markets in the nation ($2B).  More than 77,000 legal recreational cannabis transactions occurred on Jan. 1 in Illinois, resulting in sales of nearly $3.2m with an average basket size of $135.  

-       New effort to legalize recreational cannabis in Oklahoma:  Supporters of recreational cannabis in Oklahoma refiled a petition to legalize adult-use marijuana in the state.  Michelle Tilley, the executive director of the Oklahoma branch of the American Civil Liberties Union who filed the new paperwork said that the petition was redrafted to make sure there were greater protections for the existing medical marijuana industry and its patients. 


-       Adult-use marijuana delivery firms licensed in Michigan:  Michigan regulators licensed the first three companies approved to deliver recreational cannabis to consumers’ homes.  The Michigan Department of Licensing and Regulatory Affairs approved the delivery businesses, Wood TV reported. Adult-use cannabis sales began in Michigan on Dec. 1.

-       Wholesale cannabis prices are on the rise:   Wholesale cannabis prices are going up in the recreational cannabis markets of: Colorado, Oregon and Washington.  The upward price trend seemed related to stronger demand, growers going out of business, and some farmers pivoting to industrial hemp.

-       Coca-Cola – where there’s smoke … Berkshire Hathaway CEO Warren Buffett and Vice Chair Charlie Munger made it clear that Coca-Cola shouldn’t venture into the marijuana business.  However, rumor has it that In Canada, Coca-Cola is coming out with a new line of Coca-Cola that contains CBD extracts.  Humm?

-       Canopy Growth has launched First & Free   a new line of hemp-derived CBD products, in the U.S.  The First & Free portfolio includes softgels, oil drops, and creams, and will be sold only where legal under state law.  The brand’s softgels retail at $15 a 10-pack of 25-milligram gels on its e-commerce website, while oil drops are at $40 per 30-ml. (25 grams of CBD per ml.), and creams will be released shortly.

-       48% of consumers who inhale cannabis…   self-identify "Having Fun" as a benefit – while only 30% of edibles consumers do.

-       Kansas governor supports legalizing medical marijuana…   and it’s one of the top priorities in 2020 for Kansas Gov. Laura Kelly.  The Republican said that although she is not a proponent of legalizing recreational marijuana, she probably would sign a bill into law if Kansas legislators presented her with one.  Mostly because it is bordered on three of its four sides by states with legal cannabis markets: Colorado, Missouri and Oklahoma.

-       Bermuda releases draft medical cannabis law and rules to ‘spark entrepreneurship’:   Bermuda released the draft legislative blueprint to establish a domestic medical cannabis industry that hopes to attract international investment.  Cannabis could be prescribed only by a medical practitioner and dispensed by a pharmacist.  Bermuda’s draft Medicinal Cannabis Bill, 2019 is available here.

-       The U.S. hemp-based CBD market…   will be north of $2.5B in 2020. 

-       In terms of CBD influence…   nothing is more convincing than a health care practitioners’ guidance.  50% of hemp-CBD interested adults said a health care professional’s guidance would motivate them to use a hemp-CBD product.  CBD products are currently positioned as substitutes for over-the-counter (OTC) solutions targeting arthritis, sleep and general pain.

-       Nielsen projections show that with FDA approval…   ingestible formats could grow their existing user base as much as 250%-375% in a year’s time, as these are the formats that consumers are most familiar with.  We believe that over the next decade, categories that consumers use habitually or as part of their daily routine will contribute significantly to CBD growth and ultimately garner high sales due to replenishment frequency. CBD-infused beverages are especially a good fit for this:  coffee, functional waters, energy drinks, teas and sport drinks. 

-       New CBD consumers…    are more than twice as likely to  shop for products at a grocery chain.  These same consumers are more than 3.5 TIMES more likely to purchase CBD products from a drug store chain.


Next Week:   




In the 2010’s we had:
-       1.  The emergence of the big four web/mobile monopolies; Apple, Google, Amazon, and Facebook.  Today, these four companies own monopolies or duopolies in their core markets and are using the power of those market positions to extend their reach.  What we do about this situation stands as one of the most important issues in tech.

-       2.  Silicon Valley’s position as mecca for tech and startups is finally weakening.  It’s incredibly expensive to live and work in the bay area and the quality of life equation is not moving in the right direction.  The physical infrastructure needs help, BUT that does not mean Silicon Valley is over.  It does mean that other tech sectors will find an easier time recruiting talent to their regions and talent is really the only thing that matters these days.

-       3.  Technology inserted itself right in the middle of society this decade. Our President wakes up and fires off dozens of tweets, possibly while still in bed. We are hostage to our phones and their related services.  There is no putting the genie back in the bottle in this regard, but the fact that the tech sector has such a powerful role means that it will be highly regulated.

   For me, 2019 was downright bizarre.  Everything seemed completely upside down. The stock market came into the year like a bloated pig ripe for slaughter, but the FED had a different idea.  Despite the FACT that the economy had slowed, manufacturing was in a slump, and shipments were down – they manufactured one of the biggest up years in market history.  They accomplished that by slashing interest rates, and pushing trillions into the banks via Repo activity.  The lowered interest rates allowed corps. To borrow billions to continue to buy back their own stock – driving equities higher.  The Repo money that goes to the banks, allows them the leverage to leak that money to institutions and hedge funds.  Not to mention outright Central bank buying of US equities.  The Swiss National bank doesn't even pretend any more. It prints its holdings sheet for all to see.  In their latest 13F filing, the SNB revealed that it held 2,520 US-traded stocks at the end of Q3.  The value of these holdings rose 1.5% to a record of $94.1B.  Its portfolio is loaded with the FANGMAN stocks - Facebook, Amazon, Nvidia, Google, Microsoft, Apple and Netflix - with APPL and MSFT as its largest positions.
   So, instead of the market finally pulling back after 9+ years of simply going higher, the market went insanely higher.  Free money, buy backs, cheap rates, and Central banks buying billions worth of stock worked its miracle.  What happens this year?


Tips:

   Can they keep pushing trillions in "not QE" via the repo markets?  Will corporations continue to buy half a trillion dollars of their own stock back?  Will Central banks continue to buy stocks on the open market?  Trump needs the economy to appear strong and the stock market not to crash.  Well, the economy is NOT strong, and Friday the manufacturing sector posted its worst numbers in 10 years.  Heavy truck sales have fallen the most in 9 years.  The NY December ISM came in at 39.1 versus 50.4 in November.  So the bottom line is this: even If the Feds are on Trump's side, I find it hard to believe they can squeeze 11 more months of upside out of this market.  We're in a bubble of epic proportions right now, and the economy is in contraction.   But I was skeptical last January and look how that turned out.  To do it, they will have to increase the amount of money printed.  Remember, junkies always need more crack just to maintain a high. The market is the same.  Slow the printing and the market will fade.  Which flies in the face of this headline that hit Friday afternoon:  FOMC: EXPECTS TO TRANSITION AWAY FROM ACTIVE REPO OPERATIONS IN MID-JAN.  This market can't go up, and can’t even sustain itself – if they start reducing their Repo activities.  This should get interesting.

Top Equity Recommendations:
   HODL’s:
-       Aurora (ACB = $2.00 / in @ $3.07),
-       First Majestic Silver (AG = $11.97 / in @ 10.50),
-       Canopy Growth Corp (CGC = $19.90 / in @ $22.17),
-       DRD Gold (DRD = $5.49 / in @ $4.20),
-       GBTC Bitcoin (GBTC = $8.59 / in @ $10.01), 
-       Microsoft (MSFT = $158.62 / in @ $145),
-       Pan American Silver (PAAS = $23.48 / in @ 18.00),

   Crypto:
-       Bitcoin (BTC = $7,500),
-       Ethereum (ETH = $140),
-       Bitcoin Cash (BCH = $230)

   Options:
-       RIOT ($1.18): 
-       Bot Jan 17, Sold $3 Call / Sold $3 Put / Bot $4 Call for $1.85 CR,
-       Bot Jan 17, Sold $2 Call / Sold $2 Put / Bot $3 Call for $1.45 CR,
(can only lose money if RIOT falls below $0.70).

   Watching:
-       EXK over $2.50,

   Thoughts:  (courtesy of Tasty Trade):

Back on July 5, 2019, the halfway mark of the year, I used the current prices and vols of five of the most popular indices to create likely ranges for the rest of 2019.  They were:

SPY    68% probability of landing between $272 and $325 // Actual = $321.86
QQQ   68% chance between $170 and $214 // Actual = $212.60
IWM    68% between $139 and $174  // Actual = $165.67
TLT     68% between $124 and $144  //  Actual = $135.48
VIX      68% landing above $11.00 //  Actual = $13.82

So the 3 equity indices landed in the middle of the ranges despite the past six months of rallying.  TLT landed in the middle despite some wild rides in the late summer, and the VIX landed above 11 despite that equity rally that kept it below 20 for most of the year.  This is why probabilities work and not charts, fundamentals or Wall St. analysts.  I’d wait to ‘place your bets’ on the next 6 months until the VIX is higher mid- January – fyi – but here are today’s bets for July 1st:

SPY    68% between $294 and $347
QQQ   68% between $186 and $239
IWM    68% between $147 and $186
TLT     68% between $123 and $147
VIX      68% above $10.75
 
   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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