RF's Financial News

Sunday, December 11, 2022

This Week in Barrons: Nov. 11th, 2022

You’re living the Innovation Story… and it’s the STORY that everyone will remember. Stories resonate, and hit us in our hearts ‘n souls. Stories feel hard-earned and timeless. Between crypto displacing our financial system, EV’s replacing ICE engines, and AI removing a lot of what’s left … the Innovation Story is telling itself. For those of us old enough to remember the birth of Rock-n-Roll, nothing happens in a straight line. Crypto gave birth to DeFi, blockchain, and an entirely new vision for fin-tech. EV’s paired with inexpensive energy storage have changed millions of people jobs & lives. And, if you haven’t used ChatGPT / OpenAI yet, try it and get used to it.

Innovation changes everything. With ChatGPT, it means that assigning busy-work essays in school or average copywriting at work – are now a complete waste of time. It reminds me that attention-to-detail and time are non-scalable. If you’re work is not any better than what ChatGPT can create in 12 seconds – then don’t bother. Per SG, tech makes old-stuff-easier, but requires new-stuff-to-get-better.

Bill Gates said it best 50 years ago: “Give me a small team, an office above a pizza shop… and we’ll change the world.” And they did. Every time we get too far away from the ‘garage band’ mentality – innovation resets and brings us back. The good thing about open tech – is that no government can stop it. Effected industries will be forced to quickly devour their humble pie, and reinvent themselves. There will always be ‘con-artists’. Just allow good people the transparency, leadership, and financial discipline to win out. Good people never back away from showing their work and verifying their results. A crisis of Innovation does not require a bailout. Did you honestly think that NOTHING would get broken along the way? Innovation is all about making sure a bad story doesn’t get in the way of good facts. Polish and practice your Innovation STORY.

The Market:

It smells like a recession is coming. Are these signs of a healthy economy?

1. Blackstone started limiting withdraws from its Real Estate Fund.

2. FTX’s bankruptcy tops $30B in just direct impact.

3. M&A volumes are down over 35% this year.

4. U.S. manufacturing orders in China are down over 40%.

5. Retailers (TGT & WMT) are reporting HUGE merchandise thefts.

The world is melting down, and our FED is just another puzzle piece. Powell may come out next week, ‘play nice’, and promote a Santa Claus rally, but how long can the masquerade go on? The underpinnings of this economy stink. Recently core Producer Prices increased 0.4% - double the estimate. And while the YoY rise of 6.2% is less than October’s 6.6% reading, inflation remains far too high for anyone’s liking. Heck, vegetables rose 38% YoY – offsetting any decline in energy. China’s prices fell due to lack of demand. And when the world’s second-largest economy shows signs of weak activity and reduced demand – that smells like a global recession to me. I’m just sayin’.

InfoBits:

- Our FED has raised rates at the fastest pace since the early 1980’s.

- For the first time in 20 years… analysts expect a ‘down-year’ for stocks in 2023.

- Car-sharing company Getaround… made its public debut last week via SPAC and promptly lost over 65% of its value. Duh?

- Credit Suisse raised $4.3B to accelerate its turnaround plan… and to help reverse billions in losses. Oh yeah, it will also layoff 9,000 more workers.

- Twitter plans to delete 1.5B accounts… that have been inactive for 15 years. Has Twitter really been around that long? I gotta get out more.

- General Motors battery plant workers voted to unionize.

- Britain warned that their economy will shrink next year… believing that stagflation has arrived, and that the country is in for a ‘lost decade’.

- North Face and Timberland reduced… revenue and earnings expectations due to weaker demand and order cancellations.

- Delta agreed to boost pilot’s pay by 31% over several years… in a $7B+ deal that could end years of contract-negotiation clashes.

- Americans need $1.2m to retire… up 20% (real inflation) from a year ago.

- Metal investors are sounding the lack-of-supply alarm… especially in silver and copper. Analysts expect large deficits to begin soon due to renewable energy and EV demand.

- Morgan Stanley just laid off 1,600… and Plaid about 20% of its workforce.

- Ramesh Balwani (COO of Theranos)… was sentenced to 13 years in prison for fraud. I guess ‘Fake it till you Make it’ didn’t work out this time.

- Uber and self-driving vehicle startup Motional launched… autonomous robotaxi operations in Las Vegas.

- OpenAI’s ChatGPT has people scared: educators are worried that it will destroy homework and take-home assignments. Its art generating cousin (Dall-E) thinks it will begin to eliminate copywriting and design.

- The most searched term on Google this year is… “wordle”

Crypto-Bytes:

- USDC issuer Circle cancelled its plans to go public via SPAC.

- Genesis may owe creditors over $1.8B.

- FTX’s Alameda Research lost over $1B… due to its ‘crack’ OTC trading desk.

- Crypto exchange Bybit will reduce headcount by 30%... again.

- Nexo will soon stop offering its services to U.S. users…. and called the country’s regulatory scheme "an impossible environment.”

- When the going gets tough – big money goes shopping. Goldman Sachs will spend millions investing and buying crypto firms whose valuations have normalized post-FTX implosion.

- Tony Fadell, the creator of the iPod… has designed a new crypto hardware wallet.

- Jim Cramer is urging investors to exit crypto… “It’s never too late to sell.”

- Sber (Russia's largest bank) has announced… that its blockchain network is now compatible with Ethereum's blockchain. The move signals the bank's intention to join the DeFi and Web 3.0 movement.

- Last year, over 60% of US adults were planning on buying crypto… that number is now 8%. FYI: If you’re a believer, now’s the time to buy… not sell.

- Grayscale Bitcoin Trust (GBTC – the world’s largest bitcoin fund)… traded at a record 50% discount to bitcoin – as bankruptcy fears resurfaced.

- Sam ‘Bank-Run’-Fried tweeted that he’ll testify at a Dec. 13 hearing… of the House Financial Services Committee looking into FTX’s implosion. It’s unclear whether he will show-up in person.

- John Ray (FTX’s current CEO) said that… FTX has hired forensic investigators from AlixPartners to trace billions of dollars that have gone missing.

TW3 (That Was - The Week - That Was):

Monday: We’re in full-on grumpy mode today. You can cut the tension with a knife. I remember talking about the quadrillions in derivative debt that's circling the globe. The BIS (Bank for International Settlements) just warned that pension funds and other 'non-bank' financial firms now have more than $80T of hidden, off-balance sheet debt – in the form of FX swaps. Does anyone know the extent of the counterparty risk associated with that debt? Nope – but I bet we will.

Tuesday: This DOW chart looks pretty ugly, and the stochastics appear to be rolling over. The S&P also lost its 200-day moving average yesterday. So, if I were asleep for 20 years and just woke-up, I’d think that we’re in the beginning of a fairly impressive sell off. But, there are silent hands behind these markets, and if they don’t want it to fade – it won’t fade. But what about the fact that analysts expect S&P 500 companies to report a drop of 0.6% in Q4 earnings – after posting a 4.4% rise in Q3? Well, Wall Street wants their end-of-year bonuses – so we definitely have a tug-of-war going on here.

Wednesday: Today we remember Pearl Harbor. The NASDAQ is working on its 8^th out of the past 9 trading days being red. We're overdue for a reversal bounce. I’m liking MMM over $126.80 and LOW over $208.30.

Friday: Okay, today is the Producer Price Index inflation number. Yes, the CPI is the consumer inflation index, but the PPI is also important. Whoa – the Producer Price Index came in hotter than expected. With our FED on tap next week, traders were hoping for a tame PPI (and CPI) so that our FED could put the rate hikes on pause. This did not help things as wholesale prices are up 7.4% YoY. This sets up a pivotal CPI number and FED meeting next week.

AMA (Ask Me Anything…)

Will SBF go to jail? Sam ‘Bank-Run’-Fried’s punishment is no small potatoes. According to U.S. sentencing guidelines, considering the number of victims, size of the FTX fraud, and its close/fraudulent relationship with trading shop Alameda Research – he could go to prison for life. But those sentencing guidelines are often bent to give softer penalties to white-collar criminals. That’s based on the implicit belief that elements like financial fraud and embezzlement are not real crimes. SBF’s youth, combined with his ongoing scheme to paint himself as an incompetent buffoon – could sway the courts to show mercy. It will take real political donations, and sustained public and political pressure to put SBF behind bars. I’d bet that SBF walks – just sayin’.

Next Week: Is Catastrophic Risk Imminent?

- Very seldom do I say… that this week’s price action doesn’t matter one bit in terms of what’s going to happen next week. The S&Ps dropped 60 points in a minute when the PPI came in hot. If the CPI comes in hot and our FED ‘tells it like it is’ concerning inflation, it could be ‘look out below’ for the market – and nobody will care that this week’s action was 2X the expected move lower.

- Oil is screaming that a recession is imminent… even though China is re-opening and letting COVID be damned. Oil’s screaming global slowdown when its price drops over $20/barrel in 2 months. Correspondingly, the energy sector (XLE) has fallen 20% as well.

- Reality sets in with a hot PPI – are you scared? Last week at this time we thought that the S&Ps would move $66 – and we got a $120 move lower. Next week we’re anticipating a $127 move – so put on your ‘big-boy pants’ because the move is binary and big.

- A moment-of-truth will occur next week with the CPI and our FED occurring before COB on Wednesday. The last several CPI prints have come in a little softer than anticipated – and we exploded for +200 S&P points. If this one comes in hot AND our FED speaks its mind – we could go down to 3700 quickly.

- Place your bets – it’s binary… Your goal is to be comfortable with your own risk. If you have directional risk on, make sure you can stomach it if every trade moves against you. The expected move (EM) in the SPYs is $13, but the probability of ‘touching’ is twice that of the EM – so be comfortable with a $26 SPY move either way. If that move scares you, then SELL your positions down to where you can sleep at night, let the move happen, and buy them back when we have calmer seas.

- New Trades:

o BA: The DOW and BA have out-performed the S&Ps for some time, with a recession the DOW will go lower and take BA with it.

§ BOT Jan / +$185 / -$180 PUT Spread

o AAPL: BOT Feb / +$135 / -$125 PUT Spread

- SPX Expected Move (EM):

o Last Week’s $66 EM… and we moved $120 (almost 2X) lower.

o Next Week’s $127 EM… youza. This coming week is going to be binary and big – so make sure you understand your risk.

Tips:

GOLD: Gold is holding support above $1,800/oz. as wholesale inflation pressures rise more than expected. Gold is standing its ground even as inflation and the U.S. dollar push higher. Some analysts believe that although rising inflation pressures could force our FED to maintain its aggressive monetary policy stance, the economy is close to a breaking point. Our FED’s monetary policy could push the U.S. into a recession, and that would be good for gold.

HODL’s: (Hold On for Dear Life)

- PHYSICAL COMMODITIES = Gold @ $1,809 /oz. & Silver @ $23.68 /oz.

- AGG – BOT bonds (AGG = $98.8 / in at $93)

- AAPL (Downside PUTS):

o BOT Feb / +$135 / -$125 PUT Spread

- **Bitcoin (BTC = $17,100 / in at $4,310)

- **Ethereum (ETH = $1,250 / in at $310)

- GME – DRS’d and HODL

- GS (Downside PUTS):

o BOT Jan / +$340 / -$330 PUT Spread

- IBM (Downside PUTS):

o BOT Jan / +$130 / -$120 PUT Spread

- Innerscope (INND = $0.007 / in at $0.0052)

- NFLX (Downside PUTS):

o BOT Jan / +$275 / -$265 PUT Spread

- SBUX (Downside PUTS):

o BOT Jan / +$85 / -$75 PUT Spread

- SPY (Downside PUTS):

o BOT Dec 16 / +$357 / - $347 SPY PUT Spread

o BOT Dec 16 / $285 DIA PUT

- VTV ($142 / in at $143)

- XLP (Downside PUTS):

o BOT Jan / +$77.5 / -$75.5 PUT Spread

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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Sunday, December 4, 2022

This Week in Barrons: December 4th, 2022

In many ways, Softbank, WeWork, FTX, Sam ‘Bank-Run’-Fried, VC’s, SPAC's, and Crypto founders – were all in the right place at the right time. Per HL: “They knew how to work the refs, the clocks, and ‘some fans’ – but now reality has returned.” Our government threw in some performance enhancers such as: 0% interest rates and free money – but those are mostly gone now. In 2022, business and investing are open and more level to everyone. 2022 re-introduced ‘fundamentals’ to your daily routine. The reward for doing your homework is the result itself. You’re Doing what you Love – and Love what you’re Doing. It’s an easy formula. Maybe that’s why so few ever get it right?

The Market:

Learning how VC’s think? I don’t think I ever appreciated how differently VC’s think – until I asked one (+40 years ago) whether they would lease or buy their next car? They turned to me and said: “It really depends upon the interest rate.” Huh? What about the monthly payment, the price, the residual, and my list went on? They turned to me and said (again): “Incorporate all of those elements into the rate, and let me know.” It seems that it’s: “all about ‘dat rate.”

Fast forward and per FW: “VCs still invest via the interest rate method. For example, in real estate you would like to generate an annual yield on your investment (acquisition + construction costs) of between 5% and 10%. In P/E speak – you’re looking at between 10- and 20-times earnings. If you’re investing in young companies, you would require a higher rate of return of about 26% compounded (10x on your money) and in more mature companies about 17.5% (5x return on your money) over ten years.”

How do you decide on whether to invest in Google or a building? Google has a market cap of $1.25T, and is down 30% YTD. It generates $70B of net income/year, and $80B of free-cash-flow. If Google were a building, it would be returning an annual yield of 6.4% ($80B / $1.25T) and a PE of about 18x. [Right in the middle of the 5 to 10% range.] Would I rather own Google at 6.4% or a building in my neighborhood – it’s a tossup right now.

A 6.4% annual return compounded, doubles your money over 10 years, and 3.5x’s your money over 20 years. Many of the top tech companies have lost between 30% to 80% of their value over the past year. Does that mean that they’ve bottomed and are good investments? Maybe. But the question you should be asking is: Which company do I think is going to make me between 5 and 10% on my investment for the next 10 years? Think of everything as a rate of return. If the resulting interest rate falls between 5 and 10% - then invest in it. If the rate is below the threshold – then find someplace else to put your money. So, in terms of lease vs buy? It’s not about the price, the monthly payment, or the residual… “It’s all about ‘dat rate.”

InfoBits:

- Employers plan to boost wages by over 4% next year… but with inflation at 8% - that ‘boost’ may feel more like a dent.

- Embark, a developer of autonomous driving technology for trucks… has gone from $5B to worthless in a year. Not quite FTX – but getting there.

- Apple #1… could see a production shortfall of almost 6m iPhone Pro models due to the unrest in China.

- Apple #2… has “mostly stopped” advertising on Twitter. Apple was Twitter’s #1 advertiser ($48m) in Q1 of this year.

- Apple #3 … Elon Musk claimed that Apple threatened to remove Twitter from the App Store. Elon: whatever happened to ‘The Golden Rule’?

- A 4-day (no-pay-cut) work week is here… in test mode only.

- A record 197m US shoppers… visited stores over the extended holiday weekend, spending an average of $325 each.

- Germany has signed a 15-year deal… with Qatar to receive liquified natural gas (LNG) from Qatar Energy and ConocoPhillips.

- The Purchasing Managers Index (PMI)… showed that U.S. manufacturing contracted in October for the first time since June 2020.

- It’s the H-Hour for EV taxes: The Inflation Reduction Act requires EVs to be mostly US-made to get $7.5k in tax credits. Now, the EU, UK, South Korea, and Japan are all claiming discrimination. Don’t make me laugh.

- Winc, an internet wine subscription company… filed for bankruptcy just over a year after going public. What were they doing as a public company?

- Tesla delivered its first all-electric semitrailer truck to PepsiCo… marking the company’s long-delayed product expansion.

- Have you tried OpenAI’s new ChatGPT yet? Its natural language technology allows users to ask questions, just like a search engine – only it just gives you ONE right answer. Can you say… Google Who?

Crypto-Bytes:

- On the same day BlockFi declared bankruptcy… they also filed suit against Sam ‘Bank-Run’-Fried (SBF) to reclaim stock shares in Robinhood that the FTX founder pledged as a backstop. SBF make it stop.

- Genesis Global Capital, another crypto lender that dealt with FTX… is also at risk of filing for bankruptcy and has halted customer withdrawals

- U.S.-based crypto exchange Kraken… is laying off 1,100 people.

- SBF said that… (a) he regretted stepping down and FTX filing for bankruptcy, (b) he denied implementing a “backdoor” between Alameda and FTX, and (c) he told his former lawyers to “go f**k themselves.”

- Tom Emmer, Co-chair of the Congressional Blockchain Caucus… said: “FTX’s collapse is not a failure of crypto, but a failure of centralized finance and Sam Bank-Run-Fried.”

- SBF said that… (a) he mis-accounted for about $8B of FTX’s funds, (b) he did not knowingly commit any crimes, and (c) he did not knowingly comingle investor funds with his own. He’s using the word ‘knowingly’ too much for my liking!

TW3 (That Was - The Week - That Was):

Wednesday: Jerome Powell is speaking today at 1:30pm. Mortgage apps fell another 0.8%. The German Food CPI jumped 21% YoY in November, and that's the highest reading - EVER. The ADP report is ugly. Manufacturing lost 100k jobs, and it appears like they all became bartenders & servers. GDP was much hotter than anticipated at 2.9%.

Wow, J. Powell is a lot better at this game than his predecessors. He threaded the needle and the more he talked – the more he muddied the waters.

- Our FED will slow the pace of rate hikes in December, but have a “longer way to go” in bringing down inflation.

- The final rate will be “higher than previously projected” and housing services will fall in 2023

So, we’ll see 50bps hikes starting in December. But, he is not going to stop very soon, and if/when he does – he will not be fast to pivot towards cutting. The market loved what he had to say, and I think we have a green light UNTIL Dec. 14 – the next FOMC meeting. By that time, we could have a much hotter CPI (Dec. 13 release) than people expect. At which point, I suspect that the FOMC won’t like the print, will stick to 50bps, but will be much tougher in their words.

Jobs Friday: We were expecting 200K jobs, and got 263K jobs – with October’s data being revised higher. Wages were up 0.6%, and we were expecting 0.3%. A strong labor market means strong wage growth. Strong wage growth means higher services inflation, and higher services inflation means continued upward pressure on the Fed’s preferred inflation metric. It seems as if all of the previous interest rate hikes are not producing the required results. I like the look of IAC. It’s over its 50-day, and if the market stages a comeback, keep an eye on it.

AMA (Ask Me Anything…)

The Jobs Report: According to the official statement, we created 263,000 jobs last month – much higher than the estimates. Inside the report, wages rose 0.6% - much higher than the expected 0.3%. The market tanked on the news - fearing many more FED rate hikes. But WHY did the market rally back on Friday?

Factually: (a) Wages rose 0.6%, (b) the Civilian Labor Force declined = -186,000, (c) the People Leaving the Labor Force increased = +359,000, and (d) our Total Actual Employed decreased = -138,000.

Summary: Once people reviewed the detail, they realized that it didn’t add up to the headline release. That’s why the market rallied back on Friday – Case Closed!

Next Week: Are Markets being Data Manipulated…

A Data-Manipulated Market… produced a few terrifying moments – resulting in an unchanged market. We are channeling within a fairly tight range – all while touting a +20 VIX. With a +20 VIX, we should be rock-n-rolling a lot more than we are – but the DATA is holding us back. Just when we get a little too stretched (one way or another), the data pulls us back into the range. You wonder if the market is being manipulated by the data? For example, on Friday AM’s Jobs Report: we dropped 80 S&P points inside of 1 minute – only to claw our way back throughout the day. This is NOT a good situation for traders.

Costco is a litmus test for Retail… and it isn’t going well. No amount of FED speak could have saved Costco when they presented bad news last week. COST had a huge (+4 standard deviation) move (to the downside) last Thursday due to Costco specific news. It’s difficult picking a directional bias in a data-manipulated market. Heck, Bridgewater Capital just announced that it gave back all of its profits for the year – during these last 2 months of Data Manipulated Markets.

What will we do next week? The next big data point is December 13^th (CPI release), and our FOMC meeting results will be announced on December 14^th.

Sectors: The S&Ps ended the week mildly higher along with Tech (QQQ). However, the Financials (XLF) and Energy (XLE) ended the week mildly lower. Tip #2: Keep an eye on this sector rotation as the Q’s could easily pick up steam into EOY.

Trades:

- Tip #3 = XLP… going lower … Retail’s in trouble. It’s been on the Upper-Edge of its EM for the past 4 weeks, and nothing is that strong in the marketplace.

- Tip #4 = SBUX… going lower … SBUX follows where the XLP leads. Short last week’s 2 std. deviation move. The consumer is in trouble.

- Tip #5 = AGG … going higher … there is no bear market in BONDS !!

SPX Expected Move (EM):

- Last week’s EM = $76… we had Mr. Toad’s Wild Ride last week, but we finished the week $30 higher. We had a 150-point move (from low to high) and only finished mildly unchanged due to Jerome Powell’s speech.

- Next week’s EM = $67… with expectations this small, I would buy short-dated premium at a 14% implied volatility, and finance it by selling longer dated (24%) premium way outside of the expected move. Just sayin’.