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November 2018 Market Update – Trade War + Bitcoin

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Stay calm.  All is well in the markets.

Remember this time last year Trump unleashed a massive tax cut.

The tax cuts are what sparked the sugar rush of spending to this day.

But things aren’t as powerful anymore on a year-over-year (yr/yr) perspective.

Add in the blowback from tariffs and a whiff of uncertainty enters the picture… and you get the deep, dark red in your portfolio.

As I said last week:

At this point the market will bounce up or down depending on the latest trade war news item.  The market is hostage to the trade war. Trump is playing hard ball. He started the fight and must see it through.

The market clearly wants a deal to get made. News of Trump willing to meet with Chinese President Xi sent stocks up. Then signs of an impasse brought it right back down.

Now the story is fear the Fed will make a policy mistake. One it’s done over and over: raise rates into an economic slowdown.
For example, I was wrong about inflation: CPI was pretty mild.  Although the producer’s inflation rose (PPI).

Nervousness is not something the market handles well. And we’re in the middle of absolute uncertainty today.

I am changing my near-term read of things.

I no longer expect China to blink this month.

I expected some movement post-midterms. I believed China would wait in order to calibrate their response to how Trump emerged.

I rightly predicted that he would emerge unfettered. Nevertheless, China is standing firm.

I can’t tell how much is just playing to the audience and how much is real positioning.

If it’s positioning, then they are making serious policy errors because it means they continue to misread Trump’s willingness to go to the full distance. Which means the trade war gets dragged out into February.
————-

Bitcoin’s fading promise

Cash is not a bad move.  Or gold.  Same thing.

But not Bitcoin (BTC).

BTC fell to a 12 month low – now at just under $4,400. All the other cryptos got crushed too. But what does this all mean?

First, let me repeat my overall take of crypto currency.

I believe that crypto is here to stay for at least 2 reasons.

One is that it enables rapid, low-cost transactions. It is the thing that banks fear the most: a way to bypass them.

But they also recognize a winner when they see one and they are trying to harness the underlying blockchain technology to obsolete their workers.

Second, BTC enables China, Russia, Iran and others to pursue non-dollar transactions.

In fact, the entire starting point for Satoshi’s creation is de-dollarization. Put differently, BTC will always have a home for those who don’t want U.S. dollars.

The real question isn’t Bitcoin – yes-or-no?  The real question has always been – what is Bitcoin really worth?

Last week the market said that BTC was worth 15% less than it was worth the previous week.

Some people will claim that it is tied to a branch in the crypto currency. No. That would not affect all cryptos.

More basically, this has been a trend based selloff.

Bitcoin continued to make new lows since January – when Bitcoin futures became available. And it was able to effectively be “shorted.”

A technical read says that is an indication of further lows ahead. Sure it could bounce back in the near-term. But it looks like the future isn’t as strong as many thought.

And this is BTC specific. The market was relatively unaffected.  Crypto currencies just….collapsed.

It could be connected: maybe a major BTC owner had a margin call somewhere else and decided to close BTC positions to cover.  I leave that to better informed people to figure out.

This leaves two major problems with Bitcoin overall.

BIG PROBLEM #1: Bitcoin has failed it’s first big test. It is clearly not a hedge against market crashes or volatility.  And frankly that is the only reason to own it.

BIG PROBLEM #2: Most owners are underwater. Anyone who bought in the last 15 months and held is now losing money. And over half of buyers bought in the last 12 months.

It’s clearly been a fad over the last 15 or so months (maybe longer?)  Not to everyone. But to many.

It’s evident in the trading volume, which has steadily drooped 50% in just the last 6 months.

Buyer interest is tapped out. As the fad part continues to wane, BTC will be left with more down days ahead.

Avoid Bitcoin for now…

 

Sincerely,

Andrew Zatlin

Editor of Moneyball Economics

P.S. Struggling to make sense of the market? Is the volatility keeping you up at night?

Well, Moneyball Traders have had opportunities to make massive gains... even through the whipsaw of October.

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What’s Next for the Cannabis Economy?

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What’s Next for the Cannabis Economy?

Two more U.S. states voted to legalize recreational marijuana during the primaries: Michigan and North Dakota.

Michigan voted for it. North Dakota against it. That brings the number of states that allow recreational marijuana to 10.

Approximately 1⁄4 of Americans have voted to legalize recreational marijuana.

Almost all states now allow medical marijuana today.

A Gallup poll showed the bulk of Americans now favor legalization. The social stigma that marijuana is harmful continues to fade away to nothing.

Even 64% of Republicans are in favor of legalizing it. Why? Because of the tax revenue.

California generated $75M in tax revenues in the 2nd quarter of 2018. On
track to deliver a cool $300M in extra money in 2018. (And that’s only the beginning: although legal, access is severely restricted.)

Even our law enforcement are disregarding marijuana as an issue..

In Florida, Lee County Sheriff Mike Scott said “Marijuana is probably the least of our problems.” (Even better, law enforcement officials see cannabis tax revenues as a welcome boost to their own budgets. As a telling example, Colorado’s law enforcement officials requested 10% of the State’s gross cannabis tax revenues.)

And it goes without saying that businesses love marijuana too. Retail recreational sales of cannabis are now $6.5 billion (bn) across the 10 states.

So what will happen when marijuana becomes legal across all 50 states? Expect a straight-line up and to the right – to the tune of $30bn in recreational pot. Add another $20bn in marijuana related products and medications.

Federal Government: THE Big Impediment

However, marijuana is a Schedule 1 drug for some reason. That means, per Federal law, it is absolutely illegal and no prescriptions can be written for it. Also included in that list: Heroin, LSD, and quaaludes (among
others). The Alice in Wonderland situation: pot is illegal by Federal mandate and legal in most
States.

The key here is the restriction is mandated by a Federal agency: the DEA (Drug Enforcement
Agency). The DEA decides what drugs are on the restricted list. Removal can be determined by either:
(1) Congressional vote or (2) Executive action.

If States now legally sell marijuana, Why does Federal legalization matter?

One word: banking.

Inter-state commerce is illegal which prevents banks and credit card companies from engaging.

This simple obstacle creates a world of pain for the pot business. Retailers are cash-only, and
become lightning rods for crime. In turn, local legislation mandates costly security. And on and
on and on.

Without Federal legalization, cannabis is radioactive to banks. Legalization leads to big
opportunities. For example, a national market will lead to the rapid emergence of marijuana
futures.

My Prediction: Trump Will Legalize Marijuana

Politics suggest Trump will legalize marijuana.

The process is incredibly easy: the Executive branch can direct the DEA to reschedule it as a less controlled substance. Poof – pot becomes legal.

He won’t see any opposition either. We have a remarkable convergence in favor of legalization coming from social, political, and business interests.

Legalizing marijuana is consistent with various Trump agenda items:

• Trade: Canadian pot is legal and entering the US. Trump would prefer a home-grown source
• Mexican cartels: Pot is a major revenue source for the cartels. And Trump hates the
cartels
• Law Enforcement: A lot of resources get tied up in prosecuting marijuana crimes.

Why legalize now?

With an economy likely to slow in 2019, enabling an offsetting $50bn market is very attractive. Given that it takes time to emerge, better start now and have a win to discuss for the 2020 election.

Politics is really the main reason to move forward now.

First, it undermines the Democrats. Legalization is a progressive move that steals thunder from the Democratic party (the party that tends to be branded as progressive).

The Dems can’t possibly vote against it. Meanwhile, the Republicans will get the credit.

Second, and probably most important, pot legalization would be an incredibly welcome distraction.

Legalization would dominate the airwaves and political environment. And Trump may need that distraction with a Congress bent on attacking him and his agenda.

Take Russia, for example. Which is more likely to generate popular support: a move to legalize pot or a 3rd year of Russia investigations?

It was a fortuitous coincidence that Jeff Sessions was just forced to retire. He was the lone voice
in the Administration against cannabis legalization, and as Attorney General, his voice mattered.

Now he is gone.

How To Invest In The Cannabis Industry

My suggestions is to invest in pot stocks with a very short-term perspective (2~3 quarters).
As background, consider history and the uncanny resemblance to what happened when alcohol was legalized in the U.S. following prohibition.
At the time, alcohol was legal in Canada and illegal in the U.S.  In the run-up to legalization in the U.S., Canadian liquor companies saw their stock prices surge. After all, they had the production facilities and brand names.
But then reality set in. The barriers to entry were actually low: alcohol distillation is a simple industrial process and the U.S. had plenty of raw materials for the process. Prices would drop from competition.
The result: the Canadian companies stock prices collapsed.
Compare that to the cannabis market and you will see an identical set up.
Another problem is choosing the winners.
If you must, avoid names and buy into cannabis with an ETF like MJ.
KEY POINT: Legalization of pot in the US is actually a very bad thing for currently traded pot stocks.”

Sincerely,

Andrew Zatlin

Editor of Moneyball Economics

P.S. Struggling to make sense of the market? Is the volatility keeping you up at night?

Well, Moneyball Traders have had opportunities to make massive gains... even through the whipsaw of October.

The returns speak for themselves. And they’re CRUSHING the market returns. Check it out here.

Quick Market Outlook (November 9, 2018)

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It was a rough October. And although this week saw a massive rally, we ended the week with the S&P falling 0.9% and the Nasdaq 1.65%.

What’s Happening?

There’s a quality-of-earnings problem.
Of the companies that have reported earnings:

  • Revenues above estimates: 59% (a low number)
  • Avg. revenue surprise: 0.8%
  • Q4 Guidance: 63% have guided down

Growth has peaked.

The stock market is concerned.

In one month (October) stock market annual growth has shuddered to a halt: from a 15% rate to 3%.  Not gradual.  Sudden.

Why it’s happening.

It’s risk off for stocks.

Fundamentals and liquidity are combining to push down stock prices.

  • Economic growth is set to slow:  China and Europe were already slowing. But tariffs have added enough uncertainty that trade has slumped harder, and there’s more blowback coming through to the U.S. economy.
  • Higher rates make stocks look pricey.

I still haven’t seen a good explanation this newfound volatility downward. I still am not certain about the catalyst. And that’s a problem for me.

Let’s go with the idea that the market is prescient and is pricing in something close to a recession. That still doesn’t explain the suddenness of the drop.

I’m left with the view that the September Fed hike made investors finally sit up and notice.

The Fed fund rate hit 2.25% and the economy is set to slow to ~2.5% in 2019. The Fed is talking about adding another 100 basis points (bps) – equivalent to a full percentage point – to bring the rate to 3.25%.

That implies negative real growth. This is making money managers nervous. Why raise rates as growth is slowing?

I happen to think the tide shifts again this month. Here’s my prediction:

I think China will blink. The Russian collusion nonsense will finally be closed. And the Fed will start to signal that 2019 rate hikes may be slowed.

This will be good news to the markets.

For this week, expect the market to grope for a catalyst for growth.

Sincerely,

Andrew Zatlin

Editor of Moneyball Economics

P.S. Struggling to make sense of the market? Is the volatility keeping you up at night?

Well, Moneyball Traders have had opportunities to make massive gains... even through the whipsaw of October.

The returns speak for themselves. And they’re CRUSHING the market returns. Check it out here.

Don’t Worry – The Bull Market Is Still On

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No Change to the Bullish Playbook

So far, the economy is moving as we expected:

  • Fed raised rates and remains hawkish (aka more rate hikes coming)
  • Trump’s economic sabre rattling is working. Canada folded this weekend and re-negotiated the NAFTA deal. That makes new trade deals with South Korea, Mexico and Canada. Even China started to show a little flexibility with some tariff reductions. The E.U. & China are playing for time: they want to see what happens after the elections. I don’t think this is the right strategy because the Canada deal provides Trump with all the ammo he needs to keep Congress in line with his trade approach.
  • Manufacturing and other aspects of the economy are very bullish.  We saw the release of some business surveys (PMI, ISM) that underscored ongoing strength.

That’s the background for earnings releases in this upcoming quarter.

However, there are reasons for concern. So let’s review the bricks in the “Wall of Worry” – how the market climbs without getting overly exuberant.

  1. End of tax cut benefits.  The tax cuts drove up EPS and some investors may be looking out to Q1 of 2019 and wondering what comes next.
  2. Rising costs of business: From higher interest rates to costlier steel and oil, margins are getting squeezed.
  3. Peak Housing: A major wealth driver and contributor to the economy is the wealth effect from the housing boom.  There are clear signs that the top is in. Let’s face it: interest rates have risen enough that affordability has dropped.  And with rates likely to rise a further 100bps (or 1% point) in the next year, housing will just continue to slow.
  4. End of the auto boom. Autos have been holding 17 million annualized units and not more for years. This means flat demand for aluminum, steel and other key components.

The key takeaway is the Federal Reserve is removing their punch bowl exactly when housing and autos are weakening – the two key drivers of the U.S. economy.

I would suggest the tariffs will offset a lot of the softness because they are driving on-shoring of manufacturing and related business. That is, the auto sector may not pull the economy forward, but other segments will pick up the baton and run with it.

Sincerely,

Andrew Zatlin

Editor of Moneyball Economics

The Trade War Is About To Heat Up

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Tariffs Will Be A Main Driver Of Volatility

Things are about to get rocky. The market still continues to try and price in tariffs and sanctions.

This is high-stakes poker.

Trump opened with a big raise.

China hesitantly called. They slowed purchases of U.S. goods and agricultural products.

Soy and other farm prices dropped. Trump then raised again. The call was offering farmers billions to offset their losses. His raise was to schedule higher tariffs.

Then came the flop (in poker terms, a round of cards that get dealt prior to more betting).

Bad news for China: African Swine Flu has struck and it is decimating Chinese hogs.

That means demand for U.S. hogs is rising, and undermines China. Pork is the #1 source of protein in China.

U.S. hog prices are down ~10% from last year, but so is the yuan. That’s before the impact of ASF takes hold.  In other words, Chinese consumers are more likely to see food inflation than not.

In the China/US poker game, China did not pull a card it needed.  But the US did.

The next move is Trump’s and he is well-positioned.

Both the selection of goods and the timing work are in his favor.

The first round of tariffs hit products where China is exposed. But the U.S. private sector is not.

Specifically, (1) no U.S. consumer products were targeted and (2) only products where buyers had sufficient alternatives (where Chinese suppliers have less than 20% market share.)

The next round is where consumer pain will be felt.  Smartphones, air conditioners, and so on. Apple will have to decide whether or not to absorb the cost (put differently, Apple needs to decide if they make $50B in profit next year or $48B.)

Here is where timing is Trump’s friend.  The next round of tariffs really won’t affect this holiday season, so smartphones are relatively safe.  And the US consumers won’t notice much of an impact on air conditioners until April or May.

Trump has managed away consumer pressure for now. Corporate pressure is also not a threat for now.

So far, the tariffs have benefited the U.S.  Not everywhere, but overall.  That’s true both anecdotally (steel makers loooooove Trump.) And also economically: GDP is surging and payrolls are strong.

You can also look at this in terms of pure politics.  With manufacturing on-shoring, the Rust Belt is booming: these States voted for Trump.  High-tech hardware companies (Cisco, Apple, HP, etc) are about to get hit but they are based in California, which did not vote for Trump.

Silicon Valley companies tended to lead the anti-Trump charge (yes, Meg Whitman and John Chambers are Republicans and were leaders at HP and Cisco, respectively, but the companies themselves tend to adopt pro-Dem positions.)

To summarize, public opinion is not against the tariff moves and companies that will suffer don’t matter to trump. Even better for Trump, he has them in a lose-lose position.

In fact, when Apple mentions that tariffs will hit their profits, Trump’s response was: then build in the U.S.  And that’s the ultimate goal here: more on-shoring.

My experts say Apple’s $1000 phone’s bill of materials would rise ~$10 per phone if Apple used U.S labor and production.  Sure, that adds up. Apple loses ~$1B in profits and the U.S. gains 10s of thousands of jobs.

This puts Apple in a tough spot.  The public will see Apple forced to make a choice: either support the American worker OR continue to build offshore to earn billions of dollars of profits that they keep offshore and not pay taxes while giving executives billions in payout (Tim Cook just got $120M in compensation).

Apple is screwed one way or the other.  And they have no leverage.

To keep it simple: Trump has time and politics on his side.  And he has crafted his approach to maximize his leverage.

So what is China’s move?  Likely they want to wait until the mid-term elections pass and the political winds are clearer. But I suspect that Trump will be in a good place insofar as domestic politics are concerned as they impact trade.

China could try and weaponize their stock market holdings.

Everyone is afraid China could dump their massive dollar holdings. But that hits all of China. I think a better move would be for China to force their conglomerates to sell U.S. holdings of real estate and stocks. You get the middle class attention when you unleash a bear in the 401ks and property markets. This leaves the most of China unaffected.

This would result in about 8 weeks of turmoil in the stock market as the game continues to unfold.

But underneath it all: a stronger U.S. economy.

Stocks that have international exposure are problematic.  They face a rising dollar and less Chinese consumption.  Avoid these stocks.

 

Sincerely,

Andrew Zatlin

Editor of Moneyball Economics

September 6, 2018: Financial Survival Network – It’s All About Trump