This Week in Barrons: 4-12-2020:
Entrepreneurial Learning:
The other day, my friend was complaining about a lousy class he was taking. I asked him why he was even taking the class, and he continued to tell me about a regimen of ‘clickers’ currently used by teachers to make sure that students actually come to class and don’t fall asleep. It seems that some students would rather spend an entire semester mastering the skill of narrowing the scope of their responsibility, than gaining insight and knowledge. None of this is surprising once you see how we got here.
Labor has forever struggled with management’s desire for them to put in more effort for the same wages. In response, labor pushes to do less work – otherwise management will simply use and discard each laborer at will. Higher education was built on that same model. Professors devote their entire lives working for a certificate that prevents management from tossing them aside. Both of these are in direct contrast with ‘entrepreneurship’ = the joy of creativity. It’s the ability to make something out of nothing – sometimes termed ‘magic’. There’s a certain ‘wow factor’ associated with mixing science and art. And one thing that an artist NEVER says is: “I’d like to do less.” Instead, artists / entrepreneurs wonder how to contribute more – because the very act of creating something is both engaging and invigorating.
After all, within the last generation we’ve succeeded in making virtually any piece of knowledge – one click away. The hard part is no longer having access, but rather finding a cohort and a system that helps you to do it. Learning comes from engagement, commitment, and doing. Learning is a commitment that’s easy to imagine, but in practice a ‘bitch’ to implement. Learning is not expensive. Learning takes effort that is often in short supply when the world is in flux, feelings are uncertain, and we’re constantly being inundated with bad news.
Labor has forever struggled with management’s desire for them to put in more effort for the same wages. In response, labor pushes to do less work – otherwise management will simply use and discard each laborer at will. Higher education was built on that same model. Professors devote their entire lives working for a certificate that prevents management from tossing them aside. Both of these are in direct contrast with ‘entrepreneurship’ = the joy of creativity. It’s the ability to make something out of nothing – sometimes termed ‘magic’. There’s a certain ‘wow factor’ associated with mixing science and art. And one thing that an artist NEVER says is: “I’d like to do less.” Instead, artists / entrepreneurs wonder how to contribute more – because the very act of creating something is both engaging and invigorating.
After all, within the last generation we’ve succeeded in making virtually any piece of knowledge – one click away. The hard part is no longer having access, but rather finding a cohort and a system that helps you to do it. Learning comes from engagement, commitment, and doing. Learning is a commitment that’s easy to imagine, but in practice a ‘bitch’ to implement. Learning is not expensive. Learning takes effort that is often in short supply when the world is in flux, feelings are uncertain, and we’re constantly being inundated with bad news.
- Learning makes us feel incompetent just before it crowns us a master.
- Learning opens our eyes, and changes the way we see, communicate and act.
- “What did you learn today,” is a fine question to ask especially when we have more time available than normal.
- Learning is NOT in as high a demand as we had thought. Enrollments in higher education are down as our culture continues to reward consumption and conformity – but we can change that.
- Doing allows us to become our best selves, and create our own future. We hear what we focus on, and what we hear changes how we experience the world. Megaphones don’t create wisdom – they simply make people louder.
- Doing gives us permission to complain, dream, and to stop acting like ‘teflon’.
- Doing = Entrepreneurship.
The Market:
One thing I’ve learned over the years is that I will never retire. I’m not risk-averse, and I have the wallpaper and tax write-offs to prove it. I’ve learned to make everything interesting and fun. We’re all so careful and insulated that when Batman comes in with his ‘POW’ and ‘WOW’ – we often fail to see him at all. This is one of those rare times that the world stops, and we get a chance to smell those ‘coulda – shoulda – woulda’ roses. The world will eventually change, and when it does – nobody is going to hold back. We all saw the other side and nobody liked it. The true risk-takers, decision-makers, and strategists will not only survive – they will thrive. Become one of them.
InfoBits:
Some Percentages:
- 47% decline… in shopping and entertainment visits.
- 38% decline… in work commutes. Work-from-homes are not possible for many low-paying jobs.
- Booze is up 55%... as we mask our corona-induced worries.
- 66%, 64% and 61% is… the amount Facebook, YouTube and Instagram usage have increased respectively.
- 41% of consumers… expect the economy to rebound within 2 to 3 months.
- 44% of consumers… will further reduce their spending over the next 2 weeks.
- 43% of consumers… will now delay purchases indefinitely.
- Telehealth visits soared 51%... as the virtual healthcare trend accelerates.
Others:
- Luckin Coffee – the "Starbucks of China" announced their 2019 sales numbers were totally made up, a fake – a mere fabric of their imagination.
- WeWork has stopped paying their rent on many locations, even as they continue to charge their tenants.
- Quibi is open for business: The app feels great, but the content – meh.
- Saudi just bought… an 8.2% stake in Carnival Cruise Lines.
- Airbnb raised $1B in debt and equity… as their online rental revenues continue to plummet. It comes at an interest rate of over 10%, and at a valuation haircut of about 50%. Ouch!
- Pennsylvania is trying on-line liquor sales... and about ONE out of every 330 people who tried to access the state’s e-commerce portal got in – the rest are still thirsty. (And you thought filing an unemployment claim was hard.)
- 45 million Americans have student debt… with 70% of our graduates having student loans. Currently 40% of our govt’s balance sheet is student loans.
- Businesses with less than 50 employees… recently shed 90,000 jobs, with 73% of those jobs being lost by businesses with less than 20 employees. 86% of the job losses were in the service sector
- Staples, Subway and Mattress Firm… have stopped paying rent as a way to strong-arm building owners into rent reductions, and lease amendments.
- Waffle House started selling its waffle mix... and it sold out in four hours.
- New Jersey is calling all COBOL programmers… to help rewrite the state’s unemployment software.
- Another 6.6m Americans filed for unemployment last week… bringing the last 3 week’s total to nearly 17m – 11% of the workforce. The actual numbers are higher than that due to those still in the queue and the ineligibles.
- Despite the Fed's carte blanche tactics… economists say the U.S. is already in a recession and will remain that way for the first half of the year.
- Liquid Gold ain’t Gold: Gold is up 13% thus far in 2020. Oil, otherwise referred to as “liquid gold”, is down 62%. Nobody cares about a 10m barrel production cut when demand is so far “in the crapper”.
- There are layoffs, and then there is Instacart… which is encountering unprecedented demand for its grocery delivery services. The company had 1,200 customer care agents on March 1st, and will have 18,000 by May 30th.
Crypto-Bytes:
- Regulatory hurdles: Risk-averse German banks are unwilling to take on crypto firms as clients, despite regulation and guidance from the nation’s Federal Financial Supervisory Authority. “There is no legal reason why banks wouldn’t offer bank accounts but they are hesitant because they don’t understand the business,” said Matthias Winter, partner at Eversheds Sutherland Germany.
Last Week:
Monday: We're up 1,000 points on nothing more than a glimmer of hope that the spread of the virus has slowed. Is this up move going to last more than a day? It could, but I don't think I want to chase it. Gold and silver are up smartly this am. Maybe I nibble on some GLD over 155.45. Other than that, I'm not trusting much. More and more ‘talking heads’ are suggesting the bottom was indeed set, and the coast is clear. Unfortunately, the only way we don't go lower is if the FED continues to buy the market every day. It appears they’re using a ‘black budget’ printing press and buying select ETF's constantly. Maybe that will keep us up. Gold has been rising nicely because of the FED’s printing and the dollar decline.Today the S&P ended up closing higher by 7%, with technology being up by almost 9%. Jamie Dimon (CEO of J.P. Morgan) also leaked a memo that he had written outlining his expectations of a deep recession.
Tuesday: Yesterday they rejoiced that the number of new cases and deaths in N.Y. had slowed. I'm pretty amazed at how the market thinks things will be just rosy in no time. Most (if not all) big name fund managers are still thinking we're going to get a deep recession. So if they're not buying, is the only buyer our FED? If so, maybe the FED should just come out and tell the world: "We're buying $500B in ETF's every day, to prevent a crash that would wipe out millions of pensions." Because day after day we are getting news like: (a) Exxon cuts capital spending by 30%, (b) Boeing shuts down their assembly plant in South Carolina, (c) Small business optimism crashes by the highest percentage ever, and (d) Tyson closes its pork processing plant in eastern Iowa. Without Fed intervention, there's NO way this market can go higher. The economy is frozen, millions unemployed, with millions more in fear – locked inside their homes. With the FED nationalizing everything, is there anything to do? No. The whole darn world is under medical martial law. You can't even go short, because they're rigging this market to not fall. If they weren't rigging this, we'd be at DOW 15K. I’m hearing that 40% of the junior shale operations could go bankrupt soon. I can't even comprehend how much in loan money that translates to, but it's a lot.
Wednesday: Camping World (CWH) is getting some interesting activity. Insiders have been buying large chunks in hope that people might do a lot of RV vacations this summer. Yesterday it hit a high of $6.39. It will be interesting to see if it exceeds that, and I’ll take a nibble on CWH over $6.40. My real question is whether the FED can print enough money and funnel it into enough banks – that those banks can keep this market rising. That $2T they received has proven that for now – they can. How is our economy going to decline by 30%, with the markets going higher?
Thursday: Initial jobless claims are out, and showed another 6.6m people signing up for unemployment. At the same time the FED released another spending program of $2.3%. They will offer up to 4-year loans to businesses of 10K or less employees. They will also lend money to states, municipalities, and a host of other programs. Will it keep the market from puking. It depends on how much of this gets down to the little people that are being crushed. The twist to that $2.3T announcement is that the FED doesn’t owe this money – we (you and I) are on the hook for it. The Treasury is buying all this crap via special purpose vehicles. The FED is simply financing it all by printing the money that the Treasury is using. If the loans go sour, our kids are on the hook. This was the best week in the Dow since oil was discovered in Saudi Arabia in 1938. The Dow traded up 12.67% for the week. Financials were the top-performing sector today rising over 5% - which is what you want to see when money falls from the sky.
Weed:
- Illinois topped $30m in cannabis sales… for the 3rd straight month. Per an executive order, both medical and recreational cannabis will remain open through the current pandemic.
- New York state has passed its annual budget… once again leaving out the cannabis legalization clause that Governor Cuomo had hoped to include.
Next Week: More FED stimulus: How bad are things - really?
1. Welcome to our FED’s world, and we’re just living in it. On Thursday we were greeted with another huge unemployment number – to which our FED countered with an additional $2.3T in stimulus. They are throwing everything they have at this economy to keep it afloat.
a. What’s changed is JOBS, or the lack of them.
b. Our FED has chosen to control the bond market first. They are now down to buying junk bonds (after treasuries and corporates) – which will lead up to our FED directly buying stock EFT’s and big cap stocks directly.
c. By purchasing the HYG (‘junk bonds’), our FED is lowering interest rates on small businesses.
2. Our FED’s new Shock and Awe investment philosophy. “Stun ‘em into submission” is their current thinking. Our Treasury Department and our FED are linked at the hip. Our FED is well on its way to a $10T balance sheet, and in fact our Treasury Department cannot issue debt fast enough for the FED to buy it.
a. If you’re worried about the deficit - don’t be. Being worried about deficits or the fundamentals has not made anyone money in this market.
b. Our FED is currently buying junk bonds (HYG) in order to steady and move the small-cap index (IWM) higher, and it’s working.
c. Our FED is behind the ‘rip-your-face-off’ rally, but honestly – what did you think was going to happen? When you get an over 30% decline in the S&Ps – you will absolutely see a snap-back rally.
3. Unfortunately, our FED can’t fix the underlying structural damage that’s been caused to these markets. The poster child is Boeing. Countries are cancelling orders and because the company can’t do stock buybacks – and doesn’t want to do a bailout because it would give the U.S. government control – they are talking about laying off 10% of their current workforce. Our FED can only fix what’s on the surface. It can do nothing about the leadership, cultural, honesty and integrity issues that now exist within our large cap organizations. Time heals those wounds.
a. You can dream of this being the next bull market, but earnings (or lack of them) start this week.
b. Although a FED capital infusion is nice, we still have 20 to 30% of the workforce without jobs.
c. We lived through the ‘shock’ associated with the +30% market sell-off. We’re experiencing the ‘awe’ of the ‘rip-your-face-off’ rally. And when the markets begin to roll-over, you will see our FED come in again and initiate buying stock ETFs and large cap. Stocks directly. That’s their next move.
4. It’s the identical playbook to Japan. Japan and China have been purchasing stock ETFs and large caps in their respective markets for a long time. So how’s it working out for them?
a. The EWJ (the Japanese ETF) is down 23% since its formation in 1996. On a YTD basis the EWJ sold off to -30% and is now down a negative -16%. Although you may think that when our FED starts buying stock ETFs it will calm market volatility (as it has in the bond market) – history shows that isn’t the case.
b. Again, the FED cannot fix the underlying problem and that is JOBS.
5. My Opinion:
a. What the FED is doing right now (in many cases) they don’t have a whole lot of other choices. Unfortunately throwing money at a marketplace without sufficient leadership and intelligence to drive us back, is like giving Ferrari’s to 7-year olds. We’re just allowing our badly run corporations to die a slower death.
b. The analogy is that our economy has been driven off of a cliff. We can take it to a body shop and it can be made to look all nice-n-shiny again, but there are structural issues (lack of leadership, honesty, integrity, and greed) that all the $2.3T infusions in the world can’t fix.
6. The Indices will begin to Converge:
a. This market place has rallied back quite a bit, and the indices are converging while volatility is expanding to the upside. If history has taught us anything (2007-2008), index products tend to converge during times of high stress. Why? Because their respective correlation coefficients will force the issue.
b. I’m anticipating the QQQ (technology index) to come off ‘hard’, while the IWM (small cap index) continues to rally. You can talk about tech earnings and fundamentals all you want, and I’ll tell you that none of it matters in this current environment. This is volatility, correlation coefficients, and quant-driven trading. No one cares about fundamentals – because fundamentals don’t really matter in a world where the FED buys everything including junk bonds and corporate debt.
7. The SPX Expected Move:
a. Last week the expected move in the SPX (S&P) was $119.77. In actuality, it moved $301.17 – almost a 3 standard deviation move. So that makes 11 out of the last 13 weeks actual market movement has exceeded the expected move. The SPX has done an absolutely hideous job of handicapping risk. To say this a different way, the option markets are not estimating market risk efficiently.
b. Next week’s expected move is $135.20. Last week I said to NOT trust the expected move and do NOT sell option premium, I will ask you to do the same thing this week. I’ve listed a couple of my thoughts under the TIPS section below.
Tips:
Currently, use the rallies to create short opportunities on select stocks:
- New Longs = precious metals, miners, and energy
- New Shorts = CAT, MSFT, INTC, LULU, and XLP as duration short positions.
o Caterpillar: is a June 19th (deep in the money) $150 Put / along with an out of the money Put in the July and August monthlies.
o Microsoft: Currently up 2% YTD and “there goes tech”. I’m watching MSFT for a trigger to become short.
Equity Recommendations:
HODL’s:
- Aurora (ACB = $0.88 / in @ $3.07),
- First Majestic Silver (AG = $7.07 / in @ 9.15),
- Canopy Growth Corp (CGC = $14.57 / in @ $22.17),
- Caterpillar (CAT) – June (ITM) $150 Puts, plus July and August OTM Puts
- DRD Gold (DRD = $7.38 / in @ $3.82),
- GBTC Bitcoin (GBTC = $7.80 / in @ $9.41),
- KL Gold (KL = $35.86 / in @ 26.85),
- NVAX (NVAX = $17.05 / in @ $7.24),
- Pan American Silver (PAAS = $18.19 / in @ $13.07),
- Real Estate ETF (XLRE = $35.53 / in @ $35.08),
- Utility Index (XLU = $60.83 / in @ $61.03)
- SPY = in the July 2020 Strangle = $160 Put / $305 Call
Crypto:
- Bitcoin (BTC = $6,850),
- Ethereum (ETH = $155),
- Bitcoin Cash (BCH = $230)
Thoughts:
Disney: (DIS = $104.50) Disney rallied over 6% last week (the equivalent of 1.6 standard deviations) on news that subscriptions to its Disney+ service are surging. The market seems to be shrugging off the closed DIS theme parks, movies and focusing on digital profits. The question is, will that sentiment follow through to DIS’s competitors, like Comcast (CMCSA)? Universal theme parks are closed, along with their movies. CMCSA doesn’t have the Disney+ line up, but it is the largest internet provider in the U.S. – and the internet is the last thing that home-bound Americans will be wanting to give up. CMCSA’s earnings are coming up on April 30, so that could provide some more price volatility in the stock. And while CMCSA has rallied off its lows, it might follow DIS and at least stay off those lows, if not rally. If you are bullish on CMCSA, the short 32.5 put in the May monthly expiration is a bullish strategy that has an 88% 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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