Mr. James Thaddeus Toad. Many remember the famous Fantasyland ride at The Magic Kingdom in Walt Disney World. Fewer remember the Kenneth Graham novel (1908) "The Wind in the Willows". I thought the ride was fun, though I have not been on it since my children were small. I thought of Mr. Toad and his "wild ride" more than once this weekend. Yes, I still watched my badly short-handed New York (Syracuse) Mets take on Major League Teams. I watched the Yanks storm toward the top of their division. Kept up with the Brooklyn Nets, New York Knicks, and New York Islanders, and their collective playoff adventures. Something big appears to have happened in golf too, though I must admit, that game has never caught my fancy.
What has also caught my attention, if not my fancy, is the world of digital, or cryptocurrencies that trade 24/7. Bitcoin, the "crypto" that clearly gathers the most attention, pretty much cracked, yes last week, we all know that... only to recover somewhat by Friday, but also on Sunday afternoon. I saw prices just above $31K per U.S. dollar. Yet, again, Bitcoin seems to have found support in the same ballpark area where support showed last Wednesday (May 19th). Guess we know where at least some of the big money is. As I write this morning's Market Recon, I see Bitcoin trading with a 36 handle pushing toward 37.
Of course, by the time this article hits publication, Bitcoin could be trading anywhere from $25K to $45K, and that would shock not one of us. There is no fundamental way to analyze digital assets that do nothing productive, can not serve as a medium of exchange, obviously can not serve as a reliable store of value, and to be honest do not even exist if the lights go out. Yet some feel, and they do hold great enough potential to offer enough hope to enough people to create significant demand.
I often point to gold (and other "precious" metals) as the old man's (my) alternative to Bitcoin and Bitcoin competitors. I am often correctly told that gold is not productive, and does not currently serve as a medium of exchange. That much is true. Gold has admittedly lost much of a generation of potential investors to the likes of Bitcoin. It appears to me to be not a law of science, but clearly a generational divide, as both older and younger investors seek a store of value that lies outside of standard national or regional fiat money supplies.
Plus/Minus
What advantages do cryptocurrencies hold over precious metals? For one, unknown potential. Bitcoin is the leader, Ethereum is number two, but my crypto-screen tracks more than 37 of these "cryptos." Clearly the overwhelming majority of these will end up worthless. One key advantage is the convenience of ease in the transfer of value anonymously, or semi-anonymously. While this allows for those trying to move wealth out of nations with weak economies, or troubled currencies, it also tends to attract interest from criminals such as drug dealers, ransomware hackers, and terrorists. One might ask for Bitcoin in exchange for releasing an organization's data taken hostage. They are not going to ask for a couple of buckets of gold bars, and probably could not carry them if they did.
What advantages does gold or precious metals have over "cryptos''? Besides more stability, even if less recent success as a store of value? Gold, and silver both have a 5,000 year history as a medium of exchange. The lights go out, if held in smaller divisible units such as coins, these metals would be useful. Gold bars held in a vault in Miami or Toronto might as well be cryptos for just how useful they would be in an apocalyptic type crisis. They will, however... also rise in value versus a weakening fiat currency as will certain cryptos. Precious metals are also subject to far less "headline risk" than are cryptos. We all see celebrities with a vested interest either "spooking" or touting the value of various "tokens" on social media. At least if I speak or write about a stock I own, viewers and readers know where I stand. Gold is just gold and interest seems to be increasing as perhaps some Bitcoin investors might (my conjecture) be looking to diversify their alternative investment portfolios in the face of this extreme volatility. Gold has been volatile over the past seven days or so as well. By volatile, I mean that gold has traded as high as $1890 per ounce and as low as $1850 over one week's time. That's gold's idea of crazy.
Questions
I have several questions, given that these wild fluctuations in digital asset pricing do appear to be impacting other financial markets. We know that more Bitcoin is mined in China than anywhere else. We know that this mining is incredibly harmful to the environment. China is cracking down on the use of cryptocurrencies in order to reduce the power of these assets versus the home currency (digital or not) while also reducing criminal activity. We see signs that the U.S. and Europe may not be too far behind China in cracking down on such activity as well. How much would a crackdown on illegal activity reduce demand for these assets? I don't know.
There are questions that pop in my head, at least on the corporate side as well. One, how do CEOs of corporations that hold Bitcoin or other cryptos on the balance sheet explain to shareholders the extreme volatility in the value of the asset side of the ledger, and what if a significant portion of that value winds up being lost? Another question for CEOs of corporations that have chosen to either hold cryptos on their balance sheets, or even facilitate the trading of transfer of these tokens is how do they balance, in a very "ESG" conscious investment environment, such activity with the activist investor community? These activities rely so heavily not just on the burning of fossil fuels, but increasing reliance upon the dirtiest fossil fuel of them all, coal. Clearly, if all are true to stated intention, then investment in these companies would have to come from an ever dwindling number of investors who do not prioritize green investment, or are willing to exhibit hypocritical intent when it suits them.
I read over the weekend at Bloomberg's website (the piece by Vildana Hajrix and Calire Ballentine) that a recent report from blockchain analysis firm Chainalysis showed that more than half of the $410 billion spent on "current" Bitcoin holdings occurred within the past year. The analysis shows that approximately $110 billion of this investment runs with an average net basis of less than $36K. That means, if my math is correct, that about $300 billion of the buy and hold investment made in the past 12 months are under water when Bitcoin trades at $36K, as it seems to be this morning (for now).
These folks have either dug deep on the two serious attempts made to crack Bitcoin to the downside at just above $30K. What happens upon a third attempt? Sometimes doors open when knocked upon for a third time. These markets may or may not be liquid enough to provide an orderly exit if enough of these folks head for that door at the same time. We have already seen outages at well known exchanges. I have my doubts.
Be Cognizant
Those so invested, or at least interested need to know that the four day Coinbase (COIN) Consensus Conference kicks off today (Monday), May 24th and runs through Thursday, May 27th. Key topics will be the evolution of cryptocurrency and blockchain technology. Key speakers include Federal Reserve Governor Lael Brainard, Cathie Wood of Ark Invest (ARKK) , Ray Dalio of Bridgewater, and former Secretary of the Treasury Larry Summers. Headline risk in both directions? Almost definitely.
Equity Markets
Equity index futures appear to be holding up well early on Monday morning, even as the already mentioned cryptocurrency markets trade wildly, even as China warns futures traders on commodity market violations. This has pressured markets for certain nonferrous metals.
As for last week, the general trend seemed to be lower, but significantly so for most large-cap indexes. The S&P 500 gave up less than one tenth of one percent on Friday, and less than half of one percent for the week, while the Nasdaq Composite surrendered just less than one half of one percent on Friday, but managed a gain for the week of 0.31%. Smaller caps were hit harder than those two headline indices, but the Dow Transports truly were slapped around, taking a 2.8% hit over the five day period. Across the transports, Delivery Services, the Airlines, Truckers, the Rails, and Maritime Transport all stumbled.
This weakness was perhaps merely reflective of a rotation out of value, or even cyclical stocks and back into "growth" to some degree, but more so into a defensive type posture which if not at least a sign of caution, is at a minimum interesting. The sector performance tables for the week (using SPDR ETFs) were led by the REITs (XLRE) , Health Care (XLV) , Utilities (XLU) and Consumer Staples (XLP) . The five cyclical sectors took the bottom five (of 11) slots. Trading volume has remained stubbornly thin, suggesting a persistent lack of conviction across professional trading desks as the S&P 500 has traded sideways for six weeks, and the Nasdaq Composite is actually still trading well below the highs of April and February.
While the Nasdaq Composite has remained range bound for four months now, traders will note that the index had taken both the 21 day EMA and 50 day SMA on Friday only to give both up by day's end. Equity index futures suggest that another attempt will be made on these levels on Monday morning with the support of the stronger long end of the U.S. Treasury yield curve. I see the U.S. Ten year Note currently paying just 1.616%, which would be the lowest yield for that particular product that we have seen in two weeks. Lower nominal rates at the long end of the curve will force some more capital out of cyclicals and into tech or growthy type stocks.
Trading Note
For those wondering, the spectacular early success of Ford Motor's (F) has caused a rally, but not yet a breakout. The name has been in a consolidating base pattern since peaking February into March. Last week's rally left the shares at the doorstep of the pivot at $13.60, not to mention Relative Strength just shy of being technically overbought. My price target, based upon that pivot, stands at $17. I am long these shares much lower. My panic point will be the lower bound of the already mentioned base at about $11.25.
For Sports Fans Only
I ran a poll over the weekend on my Twitter (TWTR) page. I asked the question... "Major League Baseball should... (144 of you voted, here are the results)
1) Adopt a universal DH Rule..... 44.4%
2) Drop the DH Rule................. 27.1%
3) Leave it the way it is............. 20.1%
4) DH only for the starter........... 8.3%
I did not vote. While as an old-time baseball purist, who really enjoys the more strategic National League game, I was disappointed that the universal DH won by plurality. I, however, found it somewhat heartening that a majority of respondents preferred to limit the DH Rule in some way. Hopefully the powers that be will listen to their fans, who happen to be the customer here. That said, we do know better. The players' union has more power than the owners and the owners more power than the fans. We come last. That said, we are aging, and baseball better pay attention. The kids don't love this game the way we did. They have other interests.
Economics (All Times Eastern)
No significant domestic macroeconomic events are scheduled.
The Fed (All Times Eastern)
09:00 - Speaker: Reserve Board Gov. Lael Brainard.
11:00 - Speaker: Cleveland Fed Pres. Loretta Mester.
12:00 - Speaker: Atlanta Fed Pres. Raphael Bostic.
17:30 - Speaker: Kansas City Fed Pres. Esther George.
Today's Earnings Highlights (Consensus EPS Expectations)
After the Close: (RIDE) (-0.29), (NDSN) (1.64)
(Ford is a holding in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells F? Learn more now.)
