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AM Brew, Jun 16th 2022
Yesterday, I got lucky and had a 2% trading profit on the day. Things were not acting well, so I closed out the long equity futures position near the close. Boy was I surprised when I woke up and found that the market had reversed all the Powell gains and is flirting with 3700 in the early pre-market. It now looks like below 3700 is quite likely and people are starting to price in much higher rates and a very weak economy. This scenario is going to produce some extremely good profit opportunities. Investors should stay the course and traders should focus on a few good trades - higher quality entries is preferred to more frequent exposure.
So, I was wrong yesterday - I thought that we would have a nice little bear rally before resuming the malaise - that meant a 2 or 3 day rally of 3% to 4%. Yesterday's choppy response proved me worng, and it reinforces the belief that you really need to be in the best securities: those with good cash flows & balance sheets trading at reasonable valuations. Twenty-five times earnings is so 2021 right now and 15x is more in vogue.
Everyone is bearish on Crypto at the moment; even the crypto die-hards are saying "80% drops are normal". Note that an 80% drop off the $70,000 high puts Bitcoin under $6,000. The best guess is that Crypto is maturing and that means that most of the 200 larger coins will wither away into purgatory ( think of a crypto pink sheet land ). Five or ten large coins will prevail plus any number of well funded stable coins. Its almost certain that the next five years in crypto look like this:
Most coins wither towards death, with the top 10 coins surviving and possibly thriving. Bitcoin & Ether top the list of surviving & possibly thriving coins.
BTC & ETH will do well partially because people will liquidate marginal coins, using the proceeds to buy the leaders.
Excitement about coins will be less in the future, with the majority of players having lost.
The US Government will regulate stable-coins. This means that there is more than a 50% chance that Tether gets exposed for having deficient reserves.
Increased mining costs coupled with a bear-market will reduce mining substantially, starting now. Electricity prices keep rising while coin prices are falling, making mining less attractive. This will be big "news" in three months, but its looking extremely likely that this will happen.
Global taxation of coins will be more sophisticated, making the tax-angle of coins less attractive. Its quite possible that some governments will attempt to tax wallets.
Bitcoin $500k is still a possibility even as the second-tier coins wither away. BTC500k is what happens when central banks print too much.
As expected, the BOE raised British rates 25 bps this morning. The BOE also raised their inflation forecast to 11% - the USA is lucky in comparison. In a market "surprise" the Swiss National Bank raised rates 50 bps to -0.25%. Yes, there are still a few negative rates out there, LOL.
Tesla raised prices across the board and Revlon declared bankruptcy. A quick Bloomberg snapshot of Revlon shows what investors should avoid:
Look at Revlon's 2018 & 2019 figures: Debt > 10X EBITDA, CashFromOperations < 0, Free Cash bleeding. They plugged the gap with more debt in 2019 - why would anyone invest in the equity here ? We write about this because there are plenty of companies that look like this today.
For example, Carvana is a $23 stock, but we can't see why anyone would want the equity after failing to produce free cash flow in the 2021 used-car Nirvana:
CVNA has negative EBITDA LTM, debt is rising fast & looking like its going to approach $10 billion soon, CashFromOps has been consistently negative and Free Cash Flow is of course bleeding. Revlon was just the first shoe to drop. Carvana is next. Investors looking for disruptors missed the fact that Carvana is trying to disrupt a shrewd used-car person who knows the market well - the traditional used car guy has a fixed amount of cars he can buy. As a result, he only buys cars with guaranteed profits. Carvana needs growth, so they have to overpay sometimes to get cars. The traditional used car guy can't grow: he has one lot and that is fixed, so he is very choosy & very shrewd about buying and financing his inventory. Carvana looked interesting in early 2021, as it appeared to be disrupting a conventional industry. Unfortunately, if they couldn't generate free cash in 2021, which was a perfect environment for them, they never will. There are more similarities between Revlon & Carvana, as both managements have a bit of a checkered past. Stay away from stocks like these.
Bloomberg is reporting that European gas futures shot up 24%. I did a double-take reading that. Twenty-four percent? Over what period? It looks like European gas futures are responding to Russian supply decreases combined with the American LNG export facilities fire. Wow, if you think your $5 gas at the pump is bad, imagine living in Germany and potentially faced with a 50% increase in home heating costs, just this week !!
Here at investorcharts, we have this newsletter, which offers a news & fundamentally based look at the major markets. We also publish a technical service. Yesterday, both of our services were quite short-term bullish and quite wrong. Bear markets are difficult. If you are not profitable over the last 3 or 6 months, keep your trading and investing light until your account equity validates your strategy & implementation. If you can steal a stock its good to go big, but for the rest of us mortals, who are simply buying, now is a time for small allocations. Valuations are not at steal levels yet.