This Week in Barrons: 2-2-2020:
Thoughts:
The World Health Organization has officially declared the Wuhan coronavirus a public health emergency of international concern. It's largely a political move that serves as a signal to governments to take the outbreak seriously. At least 225 people are now dead from the disease, and more than 10k cases are confirmed worldwide. The following is a small checklist put together by some of my medical friends as to their best recommendations for going forward:
- Listen to what’s going on inside your 100 mile radius. When someone is confirmed within that area – you must begin to act defensively.
- Start by avoiding crowds. Go to the 24 hour grocer at night. Drive yourself to work instead of taking mass transit. Avoid dining out.
- Hygiene is second to isolation. Wash your hands every 90 minutes.
- Open doors with a paper towel or your elbow / sleeve.
- Keep a 10% bleach solution in water handy, and use it to spray down hard surfaces. Use bleach based laundry products on contaminated fabrics.
- Remember, a mask is only half the solution. Get some form of safety goggles that fit snugly.
- Stock up on food, water, and medical supplies for 20 days.
- No need to tape doors or windows. Only worry about the 5 to 7 ft. around you.
- Could packages that originated in China harbor the virus? Maybe. Viruses can live for weeks on cool, hard surfaces. It's winter in China, and in the U.S.
- Could your Amazon box from China have the virus in it? Unlikely, but possible.
- If you’re paranoid: (a) Make a 10% bleach solution and set it aside. (b) Put on your safety glasses, N95 particle mask, and nitrile gloves stretched over the cuffs of the isolation gown. (c) Spray the outer container of the package with your 10% bleach solution while it's outside, and allow to sit for a 3-5 minutes. (d) Cut the package open and again, and spray the individual contents with the 10% bleach solution and leave them to sit for 3-5 mins before wiping them down. (e) Now remove your protection in the following order and place in a new plastic, disposable bag: (1) gown, (2) mask, (3) safety glasses, and (4) gloves.
I believe we need to keep an eye on this, but there's no reason for panic. I do however feel the economic fallout is going to be much larger than anticipated – especially for China. When you start containing 100’s of millions of people – that disrupts a lot of supply chains. And trade takes a real hit when nations close borders. [As an aside: it is becoming increasingly validated that the virus was ‘manmade’ and it either escaped or was let loose on purpose. Stay-tuned.]
The Market: …
January 2020 is now behind us, and the major indices closed mixed for the month with the Russell 2000 down over 3%, the Dow down about 1%, the S&P 500 was flat, and the Nasdaq finished up about 2%. Panic is blooming before our eyes, and there are 3 essential ingredients to any good panic:
1. Truth… yes the coronavirus is a real thing and people will die.
2. Media… including social media will take the reality and hyper-dramatize every detail with images and language.
3. Reflexivity… our media has been trained to build a self-sustaining spiral of anxiety that further fuels more hyper-drama.
As evidence of this above, the bonds are rallying like mad with the 10-year treasury yield falling 40 bps to close the month at 1.52%. Amid the virus panic, it seems like nobody is talking about the economic slowdown getting priced into the debt markets. I also don’t think people are taking seriously enough an extended China shutdown and all of the ripples that brings.
Info Bits:
- Nora Ephron once said “Everything is content”: As more people turn their personal lives into social media careers, what happens when their friends don’t want to be part of the oversharing? It’s the big question of the Influencer Era.
- Factually:
o Durable Goods Orders (x-Defense) FELL -2.5% last month.
o New Home Sales FELL -0.4% for the 3rd straight month.
o Pending Home Sales FELL -4.9% MoM for the worst collapse on record
o Chicago PMI FELL 11% down to 42.9 in Jan. (Below 50 = Recession).
o Our FED performed REPOs from $50B to $85B depending upon the day.
o Our FED extended its REPO Operations at least through April.
o State Dept. raised Travel Advisory for China to Level 4 = Do Not Travel.
- The biggest shift to electric vehicles... may not come from consumers but rather companies buying work vehicles. Corporate money for innovation far dwarfs that of consumers.
- Real meat, minus the animal... Memphis Meats just raised $161m to develop cell-based meat. They feed animal cells, and grow the tissue into taco-beef.
- MacKenzie’s gettin’ liquid: MacKenzie Bezos sold $400m worth of Amazon stock. Don’t worry – she still has over $40B left for a rainy day.
- The Guggenheim China Technology Fund… is down 11% in 2 weeks. They’re worried that the bond rally and energy weakness suggest a risk of further economic slowdown.
- Casper’s IPO… is facing uncomfortable questions. Yeah, it’s not profitable, and has NO PLANS to be profitable. NOW – they don’t even make their own mattresses? So they’re a glorified middle-man. Sounds like WeWork to me.
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- Apple and Amazon crushed earnings… and Apple now holds $207B in cash. You could buy the moon AND Lauren Sanchez with that kind of scratch.
- Some popular tourist destinations are banning photography. But if you go on vacation and don't post on Instagram, did you really go on vacation?
- Dropping 4.9% … was how much pending home sales FELL last month. The sound you heard was that of real estate agents crying.
- Beyond Fried Chicken… is what KFC and partner Beyond Meat have developed. From people who tasted it, they said: “It tastes like chicken.”
- #thanksTrump: Americans will pay very little tax on inheriting $764B this year.
- UPS is delivering on the future… by teaming up with Google’s Waymo to buy and outfit thousands of self-driving, electric vans.
- Uber and DoorDash held talks 6 months ago… about a possible merger. SoftBank (their common funder) was hoping the two could collectively stem their losses by teaming up, but DoorDash said no.
- Under new banking regulations… U.S. banks would be able to take larger stakes in venture capital funds. Pass the popcorn. I know how this movie ends.
Crypto Bytes:
- Bitcoin closed out 2019 around $7,200… but has since rallied to $9,400ish. That's a 30% gain for this cryptocurrency and so it looks like a strong first month of 2020. That’s almost as good as Tesla. Heck, maybe it'll go to a gabillion.
- You’ve got it all wrong… A lawsuit accuses Justin Sun, founder of TRON, of harassing and firing two employees as payback for objecting to his management style. Sorry snowflakes, I do hope Justin didn’t hurt your feelings.
- Ribbit, Kleiner Perkins, and Fortress… all have surfaced as investors in Telegram’s token sale as a result of the SEC’s ongoing investigation.
- The World Economic Forum… unveiled an international consortium of banks, governments, and developers focused on designing a framework for a successful cryptocurrency. Someone should tell them, that horse has already left the barn.
- Business is booming: A sign of a slowing U.S. economy is sluggish loan growth for big banks – but not crypto lenders like Genesis. Their loans increased by 21% during Q4.
- ETH hoarders are everywhere: Ethereum miners are HODLING their Ethereum tokens – showing the world their confidence in the project.
- Silvergate Bank could be changin’: Silvergate Bank made its reputation on providing U.S. Dollar banking services for businesses that deal in cryptocurrency. They just applied for a license to provide crypto custody and settlement services.
Last Week:
- Monday: In a disease related downturn, transportation, retail and hospitality all suffer first. People stop going out to eat for fear of catching something, and then restaurant owners don't order any more food from the wholesaler. The wholesaler ‘skips a month’ from the farmer and rancher – and this ripples across all sectors. In China, this ripple will be large and immediate. Will the FED step in and save us? Think about it like this: our FED has been saving the market on every dip, but NOW finally they have an excuse to let the market correct and it NOT be their fault. "Hey, it's the virus, not our economy!" They have their straw-man to blame for a weak market, and not catch heck for it. I use the 50-day moving average as my gauge, and if either index violates that – then I think a short-term trade to the downside would be appropriate. In the meantime, I still like the metals, miners, and the utility index (XLU).
- Tuesday: If you go back a week, the DOW was over 800 points higher. That's a lot of points to fall in a week, so a bounce is perfectly acceptable. We've all been trained (and for good reason) to believe that every dip is buyable because for 10 years, every dip has resulted in a higher market. So, a lot of people out there are counting on this dip being equally buyable. Personally, I’m not terribly anxious to hop in. This bounce could last into tomorrow, but put things into perspective. We’ve clawed back half of yesterday’s drop, but we're still a LONG way from where we were a week ago. We'd need another 61 S&P points to get back to that level, and I don’t see us getting that anytime soon. I think this is a bounce after a big gap down – that comes up short of making it back to where we were.
- Wednesday: So, was Monday's dip a one off, and everything’s fine now? If we put in another huge day, then yeah the momentum chasers are still in charge. But the day ahead of a FED announcement is usually an up day, and the release day is often red. If we go out today just "slightly" green or red, then I'm sticking with the idea that we're heading lower. By 10 am, a lot of the euphoria has faded and the S&P and NASDAQ have gone RED with the DOW up by just 11. Our FED has kept rates unchanged, and said that their policy is perfect for now. I question that, because if everything's in the right place, why do they need to “extend REPO operations at least through April.” Originally the FED’s actions were just to compensate for some tax situations. Then it was extended through January. If everything's so peachy why do they need to push $35B to $80B a DAY into the debt market – until April?
- Thursday: Despite the big red futures, when the market opened, they engaged the MLM (Magic Levitation Machine) and the PPT (Plunge Patrol Team) and came within a hair of getting the DOW green. I believe the market wants lower, and I believe that they’re doing whatever they can to not let that happen. I think that in the short term, we have some more downside. Maybe it's the poor earnings from UPS, and FB, maybe it's the virus, maybe it’s exhaustion, or a combo platter. Honestly, this is a manipulated market that should be sold if there was an ounce of integrity left. I’m not going to front run this market. Some of this weakness is organic, and some is fear / virus based. I think we'll stay soggy through tomorrow, as traders won't want to get too long over the weekend.
- Friday: The reason that this market is holding up so well, is because of past behavior. Everyone and his brother is anxious to BTFD because history shows that this market recovers from anything. And it will continue to do so, until it doesn't. Is this virus the one that does it? I have no clue. The other BIG news today is that BREXIT will finally happen: 3 years and 7 months after the vote to leave the EU. I think that the EU is going to implode. The EU was formed by the elitists as a ‘test tube’ for a one world government. That hasn’t worked out so well – just ask: Italy, France, Portugal, Spain and the U.K. With more nations taking the hint from Trump concerning nationality and not globalism, more EU members will want out. Imagine if the UK does well when it leaves. Assume they get great trade deals and their economy rises. ALL the other nations will want the same and the EU will be nothing but a memory. I'm going to nibble on some more UTX today. If you like to gamble, you may want to consider buying some SPY options on the close – just in case they come in Monday all happy and jam us higher.
Weed:
- Not in the green: Weed delivery leader Eaze is almost out of money. It's laying off employees and not paying its bills. Eaze's struggles are also reflective of the cannabis industry not growing as fast as investors had hoped.
- $1.4B… were the sales of adult-use cannabis in Colorado in 2019. Rec. marijuana sales were up 16% in 2019, marking the first time that sales growth accelerated from year to year in any mature, adult-use cannabis market.
- Huge demand causes Illinois to ration MJ: A few weeks into recreational cannabis sales in Illinois, the supply of flower remains tight – forcing many marijuana retailers to limit the amount sold to any one customer.
- Australia says over-the-counter CBD sales… will be considered in 2020.
- Coke has released a new line of energy drinks… in case regular Coke doesn’t rev you up enough.
- Massachusetts has collected $100m in cannabis tax revenue since launch.
- Oklahoma’s cannabis industry is outpacing all other states… in regard to licenses, growth, etc.
- Rhode Island’s governor… is pitching a recreational marijuana legalization plan centered on state-owned stores operated by private contractors.
- Cannabis executives, professionals and financiers… believe that 2020 will have more of an impact on their business than any year in the past decade.
Next Week:
Derek Jeter (Hall of Fame baseball player) was recently asked: “What did you think about when you made your 3,000th hit?” His response was quick: “You know that my 3,000th hit came with 7,000 outs – yes?” We’re all in the ‘hits’ business, but for the great ones like Derek and Kobe – your reputation comes down to how you manage failure. As an investor the old adage still holds: “You build your track record on the investments that work, and you build your reputation on the ones that don’t.” Listen to Kobe carefully and you’ll hear:
- “If you are going to be a leader, you must hold people accountable – through that moment of being uncomfortable."
- "People think success comes from everybody putting their arms around each other, singing kumbaya, and patting themselves on the back when they mess up. That’s just not reality.”
- “I can’t relate to lazy people. We don’t speak the same language. I don’t want to understand them.”
- “You must put everybody on notice that you’re here, and you are for real. You’re not going away.”
Kobe taught his teammates how to take risks in real-time, and stopped them from yammering on about the ones that got away. Every time we lose a great one like Kobe, I think of Ben Affleck’s line in Armageddon – and apply it to whatever Kobe’s doing now: “Don’t worry – he doesn’t know how to fail.”
Tips: Fear the Bonds…
- The S&P (SPX) Expected Move: The expected move of the SPX was $52.14 last week, and it instead moved over $75. This is the 3rd week in a row that we’ve smashed through the expected move after trading 23 consecutive weeks within those marks. Next week’s expected move is over $81, and this market is quickly becoming ‘Mr. Toad’s Wild Ride’.
- Fear the Bonds: Sell side activity in the bonds started in earnest on Friday. The yield curve is now inverted and the recession indicator is blinking bright red again. That indicator will draw everyone’s attention and traders will begin to exit the party. As a trader, you don’t want to be the first to leave, but you definitely don’t want to be the last one out either. Overall, the selling has been contained with the Q’s having to drop an additional 20 points before there would be any signs of bleeding.
- Big Picture: The selling has been minimal on a percentage basis. The S&Ps are down 1%, and the Q’s are up 1.5% YTD. Currently, there are only a handful of sectors propping this market up and in order they are: Utilities (XLU), Technology (XLK), and Consumer Staples (XLP). The Energy sector (XLE) is the worst performing sector YTD – being down 12% already. Bonds (TLT) are up 6.5% YTD.
- Volatility Futures are Inverted: The market perceives the risk to be higher NOW than 47 days from now. This perception is causing an inverted volatility stance – and often changes the way hedge funds react to various market conditions. It also brings out the yellow caution flag in terms of actively trading this market.
- Will the Selling Persist? Now that we have an inverted yield curve, the reinflation trade is officially over. In the past, when the market's been down big, you'd get some late day levitation. Not on Friday. That suggests to me that the BTFD buyers are still in the closet anticipating more trouble. The only reason there's some doubt is because the S&P reached down to its 50-day and bounced from that level, instead of crushing through it like the DOW did. If the S&P was under its 50-day, I'd be positive we're heading for a true correction.
- What should I buy / sell? Boeing is still holding up – even though it took out a $12B loan so that it could pay its bills. A couple potential short candidates are: Microsoft (MSFT) – which is still up 6% YTD and 63% since the beginning of 2019, Lululemon (LULU) and Netflix (NFLX). Finally the homebuilders (XHB) are already moving lower, but are worth a look.
Top Equity Recommendations:
HODL’s:
- Aurora (ACB = $1.89 / in @ $3.07),
- First Majestic Silver (AG = $10.07 / in @ 10.50),
- Canopy Growth Corp (CGC = $22.55 / in @ $22.17),
- DRD Gold (DRD = $6.36 / in @ $4.20),
- GBTC Bitcoin (GBTC = $10.90 / in @ $10.01),
- Microsoft (MSFT = $170.23 / in @ $145),
- Pan American Silver (PAAS = $22.98 / in @ $18.00),
- Utility Index (UTX = $68.98 / in @ $67.10)
Crypto:
- Bitcoin (BTC = $9,400),
- Ethereum (ETH = $180),
- Bitcoin Cash (BCH = $380)
Thoughts:
- Microsoft (MSFT = $170.23) = This week Amazon joined Apple, Microsoft and Google in the trillion dollar club. While GOOGL seemed to partake in AMZN’s rally after earnings, neither AAPL nor MSFT budged. With that in mind, you may think that some of these big tech stocks (MSFT in particular) might take a breather from any more big moves. MSFT’s implied volatility dropped after earnings, but it’s still a respectable 32%, and premiums for short option strategies remain attractive. If you think MSFT might trade in a range for the next few weeks, the short iron condor that’s long the $160 Put, short the $165 Put, short the $180 Call and long the $185 Call in the March monthly expiration is a neutral strategy that collects a credit over 1/3 the width of its strikes, and has a 70% probability of making 50% of its max profit before expiring.
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
