This Week in Barrons: 5-24-2020:
“Sometimes things need to go SPLAT!” … Mike Rowe 2020
Nearly 2/3rds of all U.S. jobs require a college degree, including the majority of the fastest growing professions. Despite having some of the best educational institutions in the world, less than half of our 25-34 year-olds obtain a college degree. This is despite the Federal government’s investment of $120B annually in student loans and grants for the 15m students who attend college each year. In terms of universities, less than half of all 4-year institutions graduate over 70% of their students, and the stats go down from there for ‘for-profit’ and 2-year institutions. Unfortunately, people who wish to achieve a decent lifestyle are stuck paying for a product that doesn’t perform well for a majority of its customers. Weirdly, the price for a college education has grown 8x faster than wages, and requires a massive amount of bankruptcy-proof debt. I believe that COVID-19 has accelerated the timeline surrounding the collapse of the conventional university system. COVID could very well be the triple whammy for colleges.
First, states are spending more on virus protection and getting a lot less from tax receipts – so there will be massive budget gaps. State schools have already started reducing spending per student.
Second, foreign students (who contribute 28% of university revenues by paying full freight) will be less likely to come to U.S. schools this fall. That’s especially true for China, and they make up 1/3rd of the U.S. International student body. The combined shortfalls will cause a 10% drop in revenues for institutions this fall.
Finally, demand for brick-and-mortar higher education is declining. Enrollments were actually dropping prior to the pandemic simply due to affordability, but now universities need to contend with the prospects of social distancing on campus in order to make students feel safe. Without heavily restricting enrollments, I haven’t seen an effective college campus social distancing program. Heck, we can’t even social distance in Whole Foods without dropping foot traffic by more than 50%. Enrollment drops of over 20% will decimate most universities, and those that reopen will likely become hotspots for viral spread.
This combination will push many students to delay fall enrollment, or attend a virtual educational system at 1/10th the cost. With that price differential, schools will need to enroll at least 10x the number of students virtually, in order to supplement an in-person curriculum. It’s not inconceivable that over the next academic year, we see 25% of all public and private universities close their doors.
Finally, demand for brick-and-mortar higher education is declining. Enrollments were actually dropping prior to the pandemic simply due to affordability, but now universities need to contend with the prospects of social distancing on campus in order to make students feel safe. Without heavily restricting enrollments, I haven’t seen an effective college campus social distancing program. Heck, we can’t even social distance in Whole Foods without dropping foot traffic by more than 50%. Enrollment drops of over 20% will decimate most universities, and those that reopen will likely become hotspots for viral spread.
This combination will push many students to delay fall enrollment, or attend a virtual educational system at 1/10th the cost. With that price differential, schools will need to enroll at least 10x the number of students virtually, in order to supplement an in-person curriculum. It’s not inconceivable that over the next academic year, we see 25% of all public and private universities close their doors.
COVID finally broke the seemingly never-ending business model for higher education. An ‘un-named’ provost said it best: “We need to reopen face to face for the money. We can charge our regular rates for face to face, but we can only charge 1/10th of that for virtual learning.” COVID didn’t ruin colleges. Colleges just drank their own Kool-Aid.
To quote Mike Rowe: “When the dust settles, higher education is going to be revealed as the luxury brand that it truly was. YouTube delivers MIT lectures to me for free. They would cost thousands of dollars in person. When you take away everything that has nothing to do with learning or connecting, you are left with a breathtakingly overpriced product.” You can buy a ticket to see the artist in concert for hundreds / thousands of dollars, or you can download their songs on iTunes for $0.99. One experience has a chance of changing your life, the other you’ll be able to replay forever. Education will morph faster than it will bounce back – but we had to transition through ‘going SPLAT’ before we could do either.
The Market… This is ʇuǝƃɹn … no – it’s not urgent.
One issue with manipulated markets is pique blindness. If you see something over and over again, you start to believe it and then ignore it. Marketers are working to pique your interest by making funky adjustments. They’ll change the speed limit to 57, or hang a sign upside down. In one study, a scientist dressed as a panhandler raised more money when he asked for 37 cents rather than a quarter. All of this leads to a condition known as: pique blindness. A culture loaded with so much hustle and noise that only the redonculous headline is noticed. This explains why constantly increasing amounts of quantitative easing and stimulus are required to even get a reaction out of J. Q. Public. The real danger of pique blindness is that we’ll only end up seeing drama, breaking news, and the crisis du jour. The cure = don’t swallow the hook. Turn up your filters and walk away. The other side of pique blindness is the Joni Mitchell line: “You don’t know what you’ve got ‘til it’s gone.” Invest some time and effort each day appreciating the things you treasure. The goal is to constantly be able to see the forest with fresh eyes – not just the fireworks that go on above them.
InfoBits:
- Facebook bought GIPHY for $400m: Facebook and GIPHY are free, but they make money by promoting sponsored content. GIFs will become more prominent in FB, and will expose GIPHY’s brand partners to FB’s 2.5B users.
- Work From Work (WFW) could be a memory… as the likes of Twitter, JPM, and even Morgan Stanley have all said that all employees will NOT return to offices post-COVID.
- How do you turn a 6% business into a 12% business… just eliminate the ‘wait staff and busboys’ and make your restaurant ‘Take-Out Only’.
- Work From Home (WFH)… Commercial real estate giant CBRE’s stock fell 13% this week after Office Depot announced store closings and 13k jobs gone.
- Lulu-Lemonade... despite the lockdown – LuLu’s online sales have tripled and they have invented a new class of clothing: Work-Leisure.
- Uber is closing… more than 36 offices and re-evaluating areas ranging from freight to self-driving tech – after an 80% drop in ride requests last month.
- A South Korean football club is apologizing for filling the fan-less stands with – ‘love dolls’.
- Vaccination rates in children… have fallen below 50% with the lockdown.
- Amazon is talking to J.C. Penney… for either all or parts of the bankrupt department store’s assets. J.C. Penney owns 347 locations and 11 fulfillment centers, distribution facilities, and regional warehouses.
- Pier 1 Imports… sold its last piece of wicker as it’s shutting its doors for good.
- Joe Rogan, comedian and host of one of the most popular podcasts in the world, is taking his show to Spotify in a multiyear, exclusive $100m deal.
- Facebook will limit offices to 25% occupancy, put people on shifts, and require temperature checks and masks when it reopens some workplaces in July.
- Amazon launches its first video game… Crucible & is available free on PC.
- Facebook Shops… is a new e-commerce feature that allows businesses to easily list their products on Facebook and Instagram.
- Victoria's Secret's parent company, L Brands is closing 250 stores.
- Twitter is testing a feature that allows the tweet's author to limit who can reply.
- Shopify will become a digital company: CEO Tobi Lutke said: “We will keep our offices closed until 2021, and then almost everyone will permanently WFH.”
- 2.4m more Americans… filed for 1st-time unemployment benefits last week. Since COVID, 39m have lost their jobs (24% of the workforce).
- $1.3T in U.S. income has been lost… during COVID = $8.9k/ worker.
- In 2020, only 20% of metro and 11% of rural communities… will recover to the pre-COVID employment levels.
- By 2025… half of all smaller communities will still not have recovered to pre-COVID employment levels.
- Hertz Global Holdings… the car-rental company, just filed for bankruptcy. The global economic collapse destroyed demand for short-term auto rentals.
Crypto-Bytes:
- Reddit launched an Ethereum based points system… that allows users to earn ETH rewards for creating and engaging with content on their platform.
- Supercomputers across Europe… have been infected with malware that caused them to inexplicably mine the Monero (XMR) cryptocurrency.
- Amazon, Deloitte and IBM all warned the U.S… that we can’t afford to lose the global military blockchain race to Russia and China. Both are investing heavily in blockchain R&D, and China’s on the “economic warfare” offensive with their digital currency.
- 75 Million Devices: THETA.tv – the blockchain e-sports streaming platform – will soon be available on Samsung's flagship Galaxy S20 smartphones.
- Coinbase… is now a WFH based company. The majority of employees will have the option to work in an office or remotely.
- CashApp (of Square fame)… now allows users to make automatic purchases of Bitcoin. This gives users the ability to gradually gain exposure to BTC without exposing themselves to too much volatility risk.
Last Week:
Monday: The DOW is looking to open higher by almost 300 points. This weekend Powell said that the Fed had more tools, but also said the economy may need all of next year to recover. At 7:45 Moderna (a company doing vaccine trials) came out saying that their Phase 1 study is going well. With this giant gap higher, it's going to be hard to find something that isn't extended. I’m watching: CWH, WPM and AEM in the miner arena. The gold miners are taking a break today, but the silver miners like PAAS and AG are doing well. SIL is the silver miner ETF, and a move over $36.89 will drag me in. Early morning gaps of 700 points cause everything to appear expensive.
Tuesday: The S&P closed right at 2,950 – a resistance level set twice in the last month. If it can't get up and over it, it could be a triple top failure, and down we will go to the low side of the channel. WMT’s earnings crushed the estimates. I expect a volatile day, as the bulls try and push us over that triple top. If we ‘lift off’ from here, I’m watching: KLAC over $175.75, DLTR over $79.95, PYPL over $149.20, and HOLX over $53.50. At 3PM news hit the wires that GDP estimates have just been lowered, and that brought everything down 1% in a blink. Chipotle still closed at an all-time high. Financials and energy were back in the cellar – so all feels right with the world.
Wednesday: CLF is working on a triple top, and if it breaks through that would be nice. OXY gapped down in March, traded sideways, and ‘feels’ like it might want to go.
Thursday: Yesterday our FED felt like buying, and they did. I’m adding AMD to my watch list along with OXY and CLF. I want to see where these three go this morning. I would try OXY over $15.20 and CLF over $4.85. Tech is asleep, pharma a bit red, and all-in-all not much going on before a holiday weekend.
Friday: The S&P 500 closed flat on the day and up 3% for the week. Today marks the highest weekly close since February 23. The CNN Money Fear and Greed Index hit 50 this week for the first time since early March. Funny how people get more bullish as prices rise. Energy and financials were the weakest sectors while Facebook, Lululemon, Nvidia, Shopify, Twilio, and Chipotle closed at fresh all-time highs.
Weed:
- Cannabis banking services… may be included in the next COVID relief package: This would allow similar outcomes to the SAFE Banking Act that has sat in limbo in the Senate Banking Committee for all of 2020.
- Aurora Cannabis announces $40m hemp deal… to purchase U.S. hemp firm Reliva – checking off a long-stated ambition for them to enter the U.S. market.
- Cannabis Cures COVID? Canadian scientists think they found a potential treatment for the coronavirus – marijuana. Marijuana reduces the virus’ entry points by up to 70%. Hey – who knew!
Next Week: In an extraordinarily volatile holding pattern.
- I’m on the edge of normal. I’m seeing a market place that’s in a volatile holding pattern. The SPX was dancing right around 2950 last summer, and here we are again. It remains to be seen how long we use 2950 as resistance, but the longer we’re inside the ‘volatility box’ – the more violent the exit.
- The SPX stayed within the ‘Expected Move’ for the week. Last week we had a $94 expected move that would have allowed us to get to 2,957. On Friday, we closed the week at 2,955 – just $2 away from the expected move. That tells me that hedging activity by the major houses is beginning to drive this marketplace toward normalization.
o But this market is anything but normal. On Thursday night leading into Friday morning, the SPX moved 50 points on pure manipulation by our FED. As long as we continue to get intraday moves of 50 SPX points, volatility is this market’s middle name.
- Volatility Box and Sector Rotations: The longer we’re inside our volatility box – the more violent the exit will be. The amount of open interest that is accumulating is terrifying. The FED is bearish. The jobs numbers are bearish. I guess Main Street hasn’t told Wall Street yet that this economy really sucks.
o The fact that stocks, bonds, gold and the dollar are all constrained is unique. Watch the bonds. They will trigger every other ‘falling domino’.
- Big Tech is just getting stupidly frothy: Remember, the S&P’s can’t go higher without the FINANCIALs. If you’re short the market, and worried about an SPX break-out – then add an inexpensive ‘back-spread’ on the XLF to give yourself some upside protection because the XLF is set to over-react to the upside if the SPX itself breaks-out higher.
o Emerging Markets (EEM) and to a lesser degree energy (XLE) will also move higher on an SPX break-out.
o Facebook’s (FB) volatility skew inverted which tells me that the risk/reward favors FB moving lower in the future. AMZN actually started reversing last week – so I’m leaning toward the SPX being rejected from the 2950 resistance level and moving lower this coming week.
- Bond watch! Big tech can NOT flip over until the BONDS allow them to. Bond volume is steadily increasing, and if the bonds can break-out of their range to the upside, the SPX will move lower with a vengeance. But bonds could break-down as well – so be flexible enough for both violent moves.
- Don’t fall asleep looking at your monitor. This is NOT a quiet market. The volatility of the volatility index (VVIX) has remained over 110 – which is unique for the last 20 years. The professionals are hedging their bets – so things are alive underneath the market’s surface.
Tips:
Country Clubs are seeing a 20% decline in membership. It seems even people that joined golf courses can’t survive 60 days of no income. This economy is a mess. Every company is figuring out how to do more with less, and once they do – those jobs are not coming back. The stock market is not the economy – we’ll see who blinks first.
For this coming week: (a) keep your positions small and define your risk. Do not keep pushing more capital to one direction or another until we break-down or break-out of the volatility box. And (b) I’m flying into quality using precious metals and bitcoin. That’s my simple formula for at least a couple weeks out.
HODL’s:
- First Majestic Silver (AG = $9.38 / in @ 9.15),
- Yamaha Gold (AUY = $5.25 / in @ $4.60),
- Canopy Growth Corp (CGC = $19.42 / in @ $22.17),
- DRD Gold (DRD = $9.27 / in @ $3.82),
- GBTC Bitcoin (GBTC = $10.66 / in @ $9.41),
- GOLD (GOLD = $26.32 / in @ 27.20),
- Hecla Mining (HL = $3.35 / in @ $2.36),
- KL Gold (KL = $38.61 / in @ 26.85),
- New Gold (NGD = $1.2 / in @ $0.82),
- Pan American Silver (PAAS = $27.28 / in @ $13.07),
- SPY = $295.44 in the July 2020 Strangle = $160 Put / $305 Call … closed the Call side – it doubled – left with the PUT side.
Crypto:
- Bitcoin (BTC = $9,200),
- Ethereum (ETH = $205),
- Bitcoin Cash (BCH = $230)
Thoughts:
The Financials (XLF = $21.92) When Fed Chair Powell said: “There’s no limit to what we can do with these lending programs”, the market surged on the idea that an unlimited amount of free money would be chasing a limited supply of stocks. Maybe that’s why Powell said: “You don’t want to bet against America.” Financials typically do better when rates go up. The XLF (the financial ETF) has been trading in a range for the past few weeks. It bounced off the bottom of that range in the past couple of days. The way it digested the latest news, it’s possible that it will stay above its recent lows. The XLF’s implied volatility remains higher than it’s been for most of the previous three years, and is certainly high enough to make short premium strategies attractive. If you think the XLF might rally or at least not drop very much, the short $20 Put in the June monthly expiration is a bullish strategy that has an 85% 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
