This
Week in Barrons – 10-8-2017:
“Courage is resisting and mastering fear – not the absence of it.” …
Mark Twain
Why is it so hard for us to focus on what
really matters? Why do we allow
distractions to divert our attention – without stopping to ask whether any of
them will make a real difference to our issues at hand? Psychiatrists
tell us that fear and greed are the top 2 motivating factors in our lives. In fact, by controlling fear and greed – we would
not only improve our decision-making, but remove over 80% of our
distractions. Imagine the cross-currents
if you’re a banker discussing bitcoin. I
can almost hear the fear in Jamie
Dimon’s (CEO of JPM), Ray Dalio’s (Bridgewater Associates) and Larry Fink’s
(BlackRock Capital) voices when they talk about bitcoin being a ‘fad’ and in a ‘bubble’
– as they watch their customers walk over to one of the 75+ new crypto-hedge
funds that have been formed this year.
And now that bitcoin is over $100B in market cap, that fear is just getting too big to ignore. I can almost see the greed in the eyes of James
Gorman (CEO Morgan Stanley), Lloyd Blankfein (CEO Goldman) and Mark
Cuban (Shark Tank) as they begin to open their own bitcoin trading businesses,
and remark that bitcoin and blockchain are the ‘wave of the future’.
Banking clients are greedy and are demanding bitcoin exposure in greater numbers;
therefore, banks have little choice but to give-in to their clients’ wishes. However, the road to enter the bitcoin
business is paved in fear. For example, how do banks (that are
required by law to prevent money-laundering) handle a currency that’s not
issued by a government, and that keeps its users anonymous? From the
perspective of the U.S. Treasury, do you classify bitcoin as an asset that has
steadily increased in value and can be taxed, or as a transactional currency? Joshua Satten at Sapient Consulting said: “If
banks are starting to manage and hold bitcoin for their clients, you would immediately
have the OCC and the FDIC looking at how they classify those assets on their
balance sheet and how they potentially re-state those assets within a client’s portfolio.”
This fear
extends across the bank’s customer base because if they don’t offer
bitcoin, then customers will find someone that does. For bank regulators, the fear intensified recently when Switzerland granted a license to Falcon
Bank to transact its bitcoin business on behalf of its wealth-management
clients. More banks endorsing bitcoin will
help cement its reputation as a legitimate asset. It will also bring changes as regulators
demand more transparency. The lack of
transparency and the difficulty enforcing financial laws were both cited by the
SEC as reasons for rejecting two proposed bitcoin ETFs back in March. Assuming U.S. regulators allow banks to deal
in bitcoin, the fundamental question then becomes: Will bankers change bitcoin,
or will bitcoin change the banks?
But fear
and greed go far beyond
banking. In the greed column, we have Tesla that took in billions in significant, pre-production
deposits for their Model 3. Tesla fearfully announced that they are
missing production quotas and are not converting as many deposits to sales as
previously anticipated. But don’t worry Elon,
you still have your scheduled trip to Mars in 7 years. And you may need it, given GM’s most recent
announcement that ‘batteries will be included’ with their 20, new, all-electric
vehicles that they plan on rolling out over the next 6 years.
In the greed
column, we also learned that Google’s self-driving service (Waymo) is
almost ready for prime-time. They used
the word ‘almost’ because Google is fearful
of their own ability to make left-hand turns. It seems that even Google Maps has a fondness
for right-hand turns because programmers thought left-hand turns were dangerous. Well, at least 3 rights make a left – right?
In the greed
column, the EU is beginning to get its ‘tax act’ together. The EU says Apple and Amazon need to start
writing some very large checks – to the tune of $300m for Amazon and almost
$15B for Apple. It’s also taking Ireland
to court for missing the deadline on getting its money back from Apple. For years, there's been a tug of war between
those who say these big tax deals make the EU more competitive, and those who
say they're just big corporate handouts.
Amazon and Apple should be fearful
because it looks like the EU is starting to win.
In the greed
column, Yahoo was sold to Verizon. I’m
fearful that Yahoo just decided to
tell me NOW that their 2013 data breach was actually 3 TIMES as bad as
originally anticipated. The hack
affected ALL 3B accounts and included: names, passwords, phone numbers, and
birth dates.
In the greed
column, Spain really doesn’t want to sing ‘Bye, Bye, Bye’ to Catalonia by
allowing it to declare independence.
Catalonia is the northeastern region of Spain that includes wealthy Barcelona. If Catalonia moves forward, it could force
Spain to take control of the region by force. Spain is fearful
of losing Catalonia, and after declaring the vote to be illegal – dawned riot
gear and sprayed Catalan people with rubber bullets – injuring more than 800. As the Catalan government meets to discuss
next steps toward formal independence, the fear
across the EU is that this could fan the flames of other independence
movements.
Andrew Weil said it best: “Fear and greed are potent motivators. When both of these forces push in the same
direction – virtually no human being can resist.”
The Market:
If you're wondering what last week was all
about – you’re not alone, but need to look no further than the above chart and
data showing maximum greed – minimum fear.
Art Cashin (an NYSE staple) said it best: “I've been doing this for 50 years, and I've never seen anything quite
like it. Small-cap stocks, big
industrials, micro-caps surge to their most overbought levels in 20 years –
while bonds shrug. They are hitting
levels never seen before – based upon what?” Most of history’s bull runs are explained away
by ‘investors going crazy’. It’s different this time because it isn't
millions of individuals – it’s our FED, the Swiss National Bank, Mario Draghi,
the Bank of Japan and the world’s sovereigns all pushing markets for all they
can get. Throughout history, when things have been pushed to excess, they
always have resolved themselves via war. There's a behind the scenes play that we’re
not seeing – yet.
The most confusing time for traders is when
every day is Groundhog Day. Up or down,
any sustained move can be incredibly frustrating because our minds process things
cyclically, and without any accountability for momentum. Any continuous, one-sided tape goes counter to
how our brains work for all other aspects of our life. Remember the saying: “I don’t know what
happened – they always looked so happy together.” The right-hand
always has a left-hand, and without a downside, this market moves from
real-life into ‘Stepford’.
The latest rationale for the market not
going down is the President’s new tax proposal, and the math goes something
like this:
-
The
tax proposal would boost the profits of the S&P 500 companies by about
$17/share.
-
With
the S&P index trading at 19 times 2017 earnings, an extra $17/share implies
a 320-point gain.
-
If
the tax proposal has a 65% chance of passing, that would be worth a 200 S&P
point gain.
One of the smartest things you could have
done with your money at the start of the year was to get it out of the U.S. As the above chart shows, the U.S. market
indices have performed much worse than their overseas counter-parts in 2017. That’s despite the U.S. dollar tumbling sharply
lower against major international currencies.
Yes, the S&P 500 has
risen 13.3% this year, but international markets have risen 17.5% and emerging
markets 27%. Germany is up 22%, France
25%, Brazil 29%, and China is up 45%. That
only looks at the S&P 500, but when you include all of the stocks in the
indices – the median rise is only 9%.
The decline in the dollar has been a blessing
for U.S.-based manufacturers. It makes
imports more expensive, and exports cheaper. Any campaign to restore manufacturing to the
U.S. is going to need to ‘tank the dollar’ – and continued uncertainty, crazy
talk, and political paralysis should do just that. Unfortunately, what is good for the ‘rust
belt’ is not the same as what is good for the markets. A falling dollar will lead to U.S. inflation,
and is likely to lead to even greater gains on financial assets held in other
currencies. Hopefully global diversification
is a watchword in your portfolio, and that is especially true when political
risks and uncertainty are high – like now.
In terms of crypto, Bitcoin (BTC = $4,460) has
risen off of its critical support level of $4,200. If it can break through $4,488, the next
level of resistance before $5,000 is $4,680.
Therefore, it would make sense to hold positions and tighten stops. If however, it turns down and breaks below
$4,100 – the fall could extend to $3,900 and then to $3,730. Ethereum (ETH = $312) has spent the past week consolidating
in a tight range, but this won’t last much longer. Assuming that it breaks to the upside (above
$320), it is likely to start a new uptrend with a target of $355. Therefore, getting long over $320 would be
the strategy. If however, it drops below
$278, it will move to $260 rather quickly.
And finally, Litecoin (LTC = $52.50) is trading in a range between $44 and $58. The best way to trade a
range-bound asset is to buy at support and sell at resistance. If Litecoin can break this range it signals
strength, and I would recommend a long position over $58 with a target of $71. However, a break below $50 will signal a fall
to $44 in short order.
We now must start to include seasonality into our trading. Coming into the final months of 2017, fund
managers that doubted this market are going to face a rude dilemma. If their fund’s performance is lagging, they are
going to want to try and make up for their underperformance by simply diving
into this market ‘head first’. Therefore,
there’s a chance that this bubble rally will simply keep levitating right into
the end of the year. This market
is a QE driven, ponzi scheme market – and should be played as such. I continue to lean long, use smaller-sized positions,
and take profits early. I also sell out-of-the-money
‘put credit spreads’ because with them I win when the market is flat to rising
vs just winning when the market goes up.
I’m long and cautious – because it still works.
Tips:
Recommendations:
Bullish: (Sell PCS = Sell
a Put Credit Spread)
-
Applied Optical
(AAOI = 58.25) – Sell PCS – Oct 13: +52.5 / -53.5, $0.20
-
Activision (ATVI = 63.25) – Sell PCS – Oct 13: +59 / -59.5, $0.10
-
Juniper Net (JNPR = 28.43) – Sell PCS – Oct 13: +25 / -25.5, $0.25
-
Bio-Tech Bull ETF (LABU = 90.43) – Sell PCS – Oct 13: +82 / -83, $0.18
-
Restoration Hdwr (RH = 76.46) – Sell PCS – Oct 13: +70.5 / -71, $0.20
-
Nasdaq ETF (TQQQ = 119.3) – Sell PCS – Oct 13: +111.5 / -112.5, $0.08
-
Western Digital (WDC = 83.85) – Sell PCS – Oct 13: +77 / -78, $0.08
-
YY Inc. (YY = 88.74) – Sell PCS – Oct 13: +84 / -85, $0.38
-
-
Boeing (BA = 258.58) – Sell PCS – Oct 20: +252.5 / -255, $0.60
-
DBV Technologies (DBVT = 43.46) – Sell PCS – Oct 20: +15 / -10,
-
Gilead (GILD = 82.14) – Sell PCS – Oct 20: +78.5 / -80, $0.30
-
Nvidia (NVDA = 181.30) – Sell PCS – Oct 20: +170 / -172.5, $0.41
My Crypto-Currency Holdings
Include:
-
Ethereum (ETH),
Litecoin (LTC), Dash (DASH), Digix (DGD), MaidSafeCoin (MAID), Metal (MTL), OmiseGo
(OMG), PIVX (PIVX), Patientory (PTOY), Steem (STEEM), and NEM (XEM).
To 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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