Markets forever climb a Wall of Worry. Unfortunately, we’re not very good at predicting the future, but we are good at knowing when we’re in an emergency situation. I always caution people before they act to ask: “What happens then?” – 6 times. Force yourself to think 6 steps ahead. If any of those steps involve, “and then we’ll need a miracle,” or “we’ll deal with that when the time comes” – it’s probably worth reconsidering your first step.
That was dumb luck! If you play 100 games that involve rolling the dice, the better player will win – because dice luck will even out over time, leaving skill the dominant factor. Generally, people who are prepared and persistent do okay. Organizations often have the opportunity to take early profits and invest them to areas where upsides are further down-the-road. Truly successful VCs leave with their winnings – before the party is over. During the upcoming recession, learn to separate luck from skill – and construct ‘back-up plans’ in order to increase your chances of an on-time arrival.
Entrepreneurs, valuation compression dead ahead! Remember when it was all about customer acquisition & retention / free-cash-flow / and profitability – and NOT about how much money you raised or your latest valuation. We are headed ‘Back to the Future’ – faster than you think and will outstrip most young projects of whatever cash they have left. Per HL: “I’m bullish on tech, but bearish on how tech companies are managed and governed.” Tech companies have been allowed to self-inflate (bodies & payroll) – without customer growth. As the money trees vanish and valuations compress, it is important that founders and investors embrace lower valuations so that there is more optionality as the company evolves. It means that companies will not ‘sell-out’ immediately, will attack smaller markets, and use valuation compression to learn how to manage customer and investor expectations - if they choose to take on investment at all.
The Market:
Cooking is an Art and a Science. Per SG: It’s all about ‘pattern matching, process and timing’. One type of cook is very skilled at following the recipe – leading to quality control, consistency and diligence. Another understands how the recipe works – noticing the patterns, nuances and opportunities. The solution always involves modifying the timing of the recipe to fit a problem’s particular solution. It’s always about the blend of: Pattern Matching + Process + Timing = Solution Implementation.
We are unique… The only other time in the past 25 years that both stocks and bonds were down in back-to-back quarters was in 2008 - the financial crisis.
- For the Month: The S&P fell -8.4%, the Dow -6.7% and the Nasdaq -8.7%.
- For the Qtr.: The S&P fell -16.4%, the Dow -11.2% and the Nasdaq -22.4%.
- For the 1st Half: The S&P fell -20.6%, the Dow -15.3% and the Nasdaq -29.5%.
The S&P recorded its steepest first-half drop since 1970. YTD, Energy was the only sector above water: +29%, utilities -4%, consumer staples -6%, healthcare -8%, technology -24%, communication services -27%, and consumer discretionary -28%.
Inflation is a stubborn beast… as headline inflation shot up by 0.6% for the month, and 6.3% YoY – levels not seen since the early 80’s. The U.S. Q1 GDP print was finalized down -1.6%, and the Atlanta FED is projecting Q2 GDP to be down -2.1% = 2 red quarters in a row == Recession. Larry Summers (former Sec. of Treasury) believes that it will take 5 years to get inflation under control – which makes sense given it took us over a decade to get into this predicament.
InfoBits:
- Recession-omics… remember that high rates: (a) discourage borrowing & spending, and encourage saving, (b) reduce corporate growth = less hiring, and (c) cool consumer demand & cause layoffs.
- A tale of two labor markets…
o Hospitality and travel couldn’t hire fast enough - while pandemic thrivers slowed hiring and cut positions.
o Unemployment is at a record low and wage growth has doubled from 2019.
o The tech industry made 8X more job cuts last month than it did during the first four months of the year … combined.
o Remote hires now represent 62% of all new hires this year.
- The housing cooldown… as the days of Zillow-scrolling and cheap mortgages are over. Home-buying is cooling as mortgage rates spike to their highest levels since ’09. Redfin and Compass had mass layoffs, and the average mortgage payment is now 31% higher than the average rent.
- Retail’s inventory glut… After years of struggling to get products on shelves, big retailers now have too much stuff.
- Russia’ knock-off economy… is thriving as the Russian ruble is the strongest it’s been in 7 years and shelves are stocked due to more domestic production. “What sanctions?” … say Russians.
- Economists worry that Roe v. Wade will… hurt wages, jobs, and growth.
- Corporations can be the 4th branch of Government... as they exert their financial influence – from where they open offices, to where they put their $’s.
- Goldman Sachs and Morgan Stanley suspect… that a wave of Wall Street layoffs is likely as the bear market darkens forecasts.
- U.S. Consumer Confidence dropped to 16-month lows… and even vacation intentions fell on higher gas and airfare prices.
- New car quality declined sharply this year… with Polestar (the Volvo EV spinoff) ranked last with 328 problems per every 100 vehicles sold / leased.
- Bed Bath & Beyond is feeling the heat… and so are its shoppers – as some stores are turning off the A/C to save $$ as sales plummet.
- YTD cannabis funding and exit numbers are a buzzkill… as more people are enjoying cannabis products, but are less enthusiastic about investing in them. We could see the lowest total funding in the sector since 2017.
- By 2030, half of the cars sold in the US will be EVs… and half of those will be via a direct-2-consumer channel. Ford and GM will need to play: “Let’s Make a Deal” with mega-dealerships such as AutoNation and Penske to keep the peace.
- Top Gun Maverick… is the 1st Tom Cruise movie to hit $1B at the box-office.
- In San Fran, a driverless robotaxi fleet was paralyzed for hours… Were those Ai cars unionizing?
- Apple’s former Securities Lawyer pled guilty to insider trading. Ugh. Come-on-Man, you literally had ONE job.
Crypto-Bytes:
- Prominent crypto hedge fund Three Arrows Capital (3AC)… has defaulted on a $670m loan, and over 50% was due to Voyager Digital. This caused Voyager to (in turn) restrict withdrawals and other currency movements.
- Goldman Sachs is looking to raise $2B from investors… to buy distressed crypto assets at a steep discount if Celsius goes bankrupt. Akin Gump and Citigroup have recommended Celsius file for bankruptcy.
- MicroStrategy, one of the biggest BTC holders… has purchased another $10m in BTC at an average price of $20,817 per coin.
- Three Arrows Capital (3AC) was ordered to be liquidated… by a British Virgin Islands court. They were running a Madoff-style Ponzi scheme: borrowing $18B from institutional lenders in order to pay off fund redemptions.
- Grayscale Investments sued the U.S. SEC… less than an hour after the SEC rejected their application to convert from a futures to a spot ETF.
- FTX is trying to buy crypto lender BlockFi for $25m… which is a 98% reduction from their last $4.8B valuation.
- Facebook is testing NFTs with select US-based creators.
- Binance is betting big on influencers… partnering with TikTok superstar Khaby Lame just a week after signing soccer star Cristiano Ronaldo.
- Buying the dip… as El Salvador purchased 80 more bitcoin at an average price of $19k. They are down 55% on their bitcoin bet, but say that losses pose “an extremely minimal” risk to the country’s fiscal future.
- EU policymakers have struck a deal on crypto legislation… aiming to protect investors and set up strict standards for stablecoin issuers. They also finalized rules on surveilling “un-hosted wallets” - aka private blockchain addresses.
- Crypto lending platform Celsius is exploring options… to preserve and protect assets. It seems that the crypto lender failed to disclosed that it had made huge bets with client’s funds… imagine that!
- June was Bitcoin’s worst month in 11 years… but the light at the end of the tunnel could come as soon as the end of this week in crypto-land.
TW3 (That Was - The Week - That Was):
Monday: Watch CHPT because Biden is still planning on putting up thousands of EV charging stations.
Tuesday: Financials and banks are looking higher after several of them announced buybacks and dividend increases following their passing of our FED’s annual stress test. CHPT didn’t make the buy in yesterday, but I’ll be watching it again today. BTU is trying to make a move. The DOW was up 440, and now it’s down over 400 while the S&P and NASDAQ are also red. They're blaming it on the worst consumer confidence numbers in a long time, along with our FED reaffirming their stance on rate hikes.
Wednesday: Yesterday’s sell-off on weaker consumer confidence data dampened investor optimism and fueled worries that our FED’s battle against inflation will tip the economy into recession. The benchmark S&P will hit its biggest first-half percentage drop since 1970, and all three indexes are on course to notch 2-straight quarterly declines for the first time since 2015. Tomorrow afternoon Micron (MU) reports earnings. The whole chip sector / NASDAQ could move based upon what they report.
Thursday: A warning last night from Restoration Hardware (RH) said it all: “The deteriorating macro-economic environment has resulted in lower-than-expected demand. For the second half of the year...our expectation is that demand will continue to slow." That statement encapsulates what markets are going through right now and why sentiment about the U.S. economy is so somber. Powell had a great quote today: “We now better understand how LITTLE we understood about inflation.” This market is looking ugly, and even energy is soggy. I suspect that the PPT will pull us out of this pit, so maybe buying some DIA and SPY calls works thru the weekend – but as far as individual stocks: I’m out of ideas.
Friday: MU’s earnings stunk out loud and they guided lower for the next quarter. The Zuck told us that they’re cutting Meta engineering hiring by 30%. This market is broken. We were at 3.4% on the 10-Year a week ago, and now we’re under 2.9%. That’s NOT normal. The Eurozone reported 8.6% YoY inflation. As a result, most Central Banks are taking aggressive measures to combat inflation. Meanwhile, record-high prices and rising interest rates are causing consumer and business sentiment to push to record lows – and cause a softening in manufacturing. So, could we be ‘manufacturing’ our own way into a recession?
AMA (Ask Me Anything…)
Lessons from this Bitcoin Cycle: (per AP and BD)
- Bitcoin is a good hedge against loose monetary & fiscal policy.
- Pivot quickly – don’t wait for inflation to rise, because by the time it hits = you’re doomed. Tip #1: The NEXT TIME our FED turns dovish = BUY BITCOIN.
- If you want to hedge inflation, buy commodities and short bonds.
- Remember, bitcoin is younger than either of my two sons. This is the first cycle that features institutional adoption, and we should not be 100% sure that the next cycle will look the same.
- The next time someone says that bitcoin isn’t an inflation hedge, simply reply: I use commodities and short bonds to hedge inflation. I go long bitcoin as a hedge against insane monetary and fiscal policies. SELL quickly when policies reverse.
Here’s how the Experts are Ranking the Causes of Inflation:
1. Covid-19,
2. Congress being irrational,
3. President Biden CARES Act 3,
4. President Trump CARES Acts 1+2,
5. Consumers spending more than they made,
6. Consumers (shifting to Goods over Services),
7. Russian Invasion of Ukraine,
8. Supply Chain shortages due to ‘Just in Time’ Delivery,
9. FED Monetary Policy,
10. Wages & Unemployment Insurance,
11. Housing Shortages,
12. Semi-conductor shortages in Autos,
13. Corporate Profit Greed,
14. Tax Cuts (2017) and Infrastructure Spending (2022), and
15. Crypto
Next Week: Is there even MORE to come?
- The SPUz are holding on by a thread. This past week, we came within $25 dollars of breaking outside of the SPX expected move. That would have made our market inefficient – 5 of the past 6 weeks. We are hanging on by a thread.
- The super-strong dollar is keeping the metals down, but more than that – it’s becoming a large ‘flight-to-quality’ instrument that is experiencing strong volatility. The U.S. Dollar (DXY) is up 10% YTD – which is a phenomenal move. The Euro is close to parity with the Dollar – and that hasn’t happened in +20 years. But the real move lower is in the Japanese Yen (/6J), and could result in entire countries (such as Japan) having to declare their currency (/6J) almost worthless. Companies like Apple have already increased prices (in Japan) by 20% overnight - due to currency devaluation.
- Bonds Rallied = Rates Collapsed == What Happened?
o #1. The 20 and 30-year Bonds (/ZB) are rising and their corresponding rates are falling. All the while, short term rates are rising. Therefore, an inverted yield curve is right around the corner. That is both deflationary, and a sign of an upcoming recession. Tip #2: It also means our economy will collapse long before our FED reaches their intended 5 or 6% FED Funds Interest Rate goal.
o #2. Traders are using Bonds as hedges.
o #3. I’m concerned because Bonds are starting to rally and long-term rates declining. That will cause an inverted yield-curve (recession) as our FED raises short-term rates and the market brings long-term rates lower.
- Volatility is still an issue:
o Low VVIX, SKEW, and /VX – but not in backwardation … yet. The VVIX (the Volatility of the Volatility Index) is at one of its lowest points – saying that very few people are buying out-of-the-money PUTS as hedges. The SKEW is also at one of its lowest points of the year – saying that nobody is buying out-of-the-money CALLS as hedges … either. Tip #3: There is a lot of CASH out there in currency / U.S. Dollars. Beware of low volume trading conditions that will amplify any large directional moves.
- Lowering Earnings Guidance or Warning:
o GM -50% YTD, MU -48%, RH -60%, META, NFLX, and COIN. Earnings warnings are coming and this next week we should hear more of them. Nobody pushes out their bad news prior to the June 30th, but the world is slowing and MSFT, CAT and everyone in-between is part of it.
- For the 2nd half – what’s changed?
o There are still significant headwinds, without any resolution in sight.
o I believe we will see higher volatility going forward, along with more bankruptcies and sector capitulation.
- SPX Expected Move (EM):
o Last Week = $112 for 5 trading days
o Next Week = $94 for 4 trading days … keep your hands and feet inside of the vehicle. Tip #4: As a trader you need to forget about your directional bias, and continue to sell back-month premium so that you can let TIME work for you. Historical volatility is at 30, while the VIX is at 26. That means if you’re selling short-term volatility – you’re taking your life into your own hands.
Tips:
HODL’s: (Hold On for Dear Life)
- CASH == Nexo = COIN = Commercial Banks @ 8% yield on USDC
- PHYSICAL COMMODITIES == Gold @ $1,812 / oz. & Silver @ $19.85 / oz.
- **BitFarm (BITF = $1.11 / in at $4.12)
o Selling more CCs for income,
- **Bitcoin (BTC = $19,050 / in at $4,310)
- CDEV (CDEV = $5.98 / in at $7.83)
o Selling more CCs for income,
- CostCo (COST = $485)
o Bot July, +$465 / -$460 PUT Spread
- CPG (CPG = $7.26 / in at $6.44)
o Sold Jul $7.50 CCs for income,
- Emerging Markets (EEM = $39.85 / in at $39.71)
o Bot Jul +$40 / -$42 Back Ratio CALL Spread
- Energy Fuels (UUUU = $5.13 / in at $11.29),
o Sold Jul $8 CCs for income
- **Ethereum (ETH = $1,050 / in at $310)
- China Large Cap (FXI = $33.98 / in at $40.81)
o Bot 29 Jul +35 / -33 Put Spread
- GME – Holding
- **Grayscale Ethereum (ETHE = $7.22 / in @ $13.44)
- **Grayscale Bitcoin Trust (GBTC = $12.25 / in @ $9.41)
- Hudbay Minerals (HBM = $4.15 / in @ $5.04)
o Bot October 22, $7.50 CALLs,
- Silver (SLV = $18.31)
o Bot Jul +$19.50 / -$21.50 CALL Spread
- Uranium Royalty (UROY = $2.37 / in at $4.41)
o Selling more CCs for income,
** Denotes a crypto-relationship
Trade of the Week:
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Please be safe out there!
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