I am betting that most of you have seen the stories running this week at various websites regarding the hopeful rebirth of such extinct mammals as the Woolly Mammoth, and the Cave Lion. (What could possibly go wrong?). Some say that the Siberian wilderness is good for nothing. Well, one thing that we know for certain is that other than hiding nuclear launch sites, the Siberian wilderness was good at preserving the soft tissue of animals that died over 40,000 years ago.
Now, scientists from several countries are using modern technologies to see if cloning these animals is even possible, and how it might be done. Think something along the lines of the movie "Jurassic Park." Some scientists say that this is inevitable after the advances that have been made, and could happen for real within ten years.
Back From The Dead
You may have noticed that another extinct breed of cat rose from the dead this week. The bank stock. No cloning necessary. Just the rebirth of what is known as net interest margin. As I bang out this missive, the U.S. 10 year is still giving up 3.07% in overnight trading, while the two year continues to pay less than 2.8%. Know what that means, sport? That means that the fabled 2s/10s spread has expanded to more than 27 basis points. Let's take a look.
This is a year-to-date chart of this spread. You can see that 27 basis points -- which is representative of other spreads and determines honestly just how profitable the business of traditional banking practices has the potential to be. That spread now has poked it's ugly little head above the 50-day Simple Moving Average for the first time since May, and spans the most turf than at any point in nearly four weeks.
Now, take a look at the Financial Sector SPDR ETF (XLF) over the same timeframe. A golden cross last week. Huzzah. A 1.7% run just yesterday. Why? Plain and simple. As simple as it gets. Interest rates are on the move. Economic growth is strong. The Atlanta Fed is currently at 4.4% annualized for the third quarter.
Trade conflict is there, but so many economists disagree on just how damaging it may be, or how long in duration the condition will last. What they all seem to agree on is that 10% is much better than what was expected, and China's response has also been less severe than what was expected.
Inflation expectations? The CPI has started to roll over. Global PPIs may or may not be peaking, but we all know that global PPIs are supported by demand for raw materials, and there may be reduced demand for commodities coming forth from not only emerging markets that suddenly struggle with U.S.-denominated debt and negative current accounts, but from larger economies as well. The Chinese growth engine looks to have a twig stuck in the gears.
- Trump Should Pay Attention to LNG -- and His 'Energy' Donors
- Tilray and Other Cannabis Firms Have Even More Catalysts on the Horizon
The whole sector was hot, from large multinational banks to regional banks to Capital Markets to Consumer Finance. The Financial sector in aggregate is trading at roughly 12.4x next year's earnings, slightly below the group's five-year norm. Keep in mind that the last 10 years have been anything but normal for the banks, and that the S&P 500 trades at a much better valuation of 16.8x (give or take) in the same context.
For me, my picks remain the same. The space is competitive. Lending seems to be offered to the consumer now from every corner. My thought is that this hurts the regional banks more than it does the larger-caps. I will stick to best in class. For me that still means JP Morgan (JPM) , Citigroup (C) and a name that I came so close to giving up on... Goldman Sachs (GS) . Perhaps with new leadership in the offing, might come a new aggression. These guys were, as much as the rest of us hated them, truly elite traders. Then again, once upon a time, so was Salomon Brothers. Oh, by the way, these rising yields are having the very opposite and very negative impact on sectors thought of as bond proxies, or dividend payers. That would be the Utilities, the Telecom names, and the REITs.
Mr. Toad Is Certainly Jealous
Mr. Toad may have had a wild ride. I bet even Mr. Toad has never seen anything like this. Tilray (TLRY) , the Canadian cannabis producer that every one of you has now looked at with awe, debuted on the Nasdaq stock market in July in an IPO priced at $17. Seems reasonable.
Yesterday, the shares closed for the day at $214.06, up 38% for the regular session, after being halted five times. In between 14:30 ET and the closing bell at 16:00 ET, these shares traded as high as $300.00, and as low as $151.40. My guess is that in the days of an open-outcry, two-sided, ongoing-auction market at a centralized point of sale, this name would probably have traded in a significantly smaller range on the day... but who am I to judge?
I truly feel for the short sellers. I really do not know what I would have done if I were short this name. Was this a tempting short over the preceding few days? I would say yes, it was. Fortunately, I never short equity. (That's a lie, I have shorted Tesla (TSLA) several times).
If I feel negatively on an issue, I will generally purchase puts with strike prices and expiration dates that I find acceptable. This will allow for upside (for your P/L) on downside (for the stock in question) at an already defined level of risk. Too easy, it would seem.
Short sellers, though, are a confident breed. They have to be, and they do not want to see the time premium of a purchased option play erode like it does... so they open themselves up to both sizable gains and sizable losses. What you saw yesterday in TLRY was almost certainly a short squeeze of epic proportions.
Trying To Trade this Space
The most recent catalyst for the Canadian cannabis industry was Tuesday's news that Tilray had received approval to import a medical cannabis-based product into the U.S. for clinical testing. The targeted condition is a neurological disorder known as "Essential Tremor" that largely impacts folks older than 65 years of age, and is most evident in the involuntary shaking of one's hands.
The hope here is that if there is evidence of an improved condition for those afflicted, perhaps cannabis-based products might be useful in combating an entire host of neurological ailments. On top of that, recreational use of cannabis goes legal across Canada at the federal level on October 17.
Do I think the space worthy of investment? Yes, I do. TheStreet's Stocks Under $10 portfolio, which I run along with Chris Versace, holds long positions in this space. That said, no, I do not believe in investment at any valuation -- and one thing is obvious, the mechanism for rational price discovery, at least in Tilray appears to be irrational at the moment.
Other well-known plays in this space would be Canopy Growth (CGC) , the benefactor of that large investment made by Constellation Brands (STZ) in August. That is partially what kicked off this round of the marijuana investment mania, as potential investors such as Diageo (DEO) , Phillip Morris (MO) , Molson Coors (TAP) and Coca Cola (KO) have all been mentioned in print somewhere as at least showing interest in one Canadian cannabis producer or another.
Other names in the space drawing interest would be Cronos Group (CRON) and Aurora Cannabis (ACBFF) . Be cognizant of the fact that every one of these companies is currently running with negative cash flows. If you get long, you are buying growth potential, not value and not performance.
Aurora happens to be my favorite, as it has the least downside due to its low market price, But be aware there, that the float is large -- at more than 900 million shares, where at least until the lock-up expires the float for TLRY is a mere 17.8 million shares. This means that 177% of TLRY's entire float traded yesterday. Let that sink in. My imperfect math has the lock-up date sometime in February for those interested.
Trade Idea: Tilray
For those flat TLRY, there is no way I see that a trader might intelligently initiate on either side today. For the investor who might be long at least 100 shares, December $290 calls went out priced at $50 last night. Earnings are due November 27. Reducing your net basis by 50 clams while creating no increase to principal risk? That does not sound too bad to me.
I would not write naked calls nor naked puts against this name. Too volatile. The retail investor, I think, needs to look at the cheaper names that have not yet signed a production deal with an American large-cap. That investor might also want to wait for a dip, because one would think that this trader will get a turn at bat.
Economics (All Times Eastern)
08:30 - Initial Jobless Claims (Weekly): Expecting 210K, Last 204K.
08:30 - Philadelphia Fed Manufacturing Index (Sept): Expecting 17.3, Last 11.9.
10:00 - Existing Home Sales (August): Expecting 5.37M, Last 5.34M SAAR.
10:00 - Leading Indicators (August): Expecting 0.5% m/m, Last 0.6% m/m.
10:30 - Natural Gas Inventories (Weekly): Last +69B cf.
Today's Earnings Highlights (Consensus EPS Expectations)
After the Close: (MU) (3.32)