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Friday, March 20, 2020

Stansberry: The Beating Will Continue Until Morale Improves


Stansberry Digest
The anatomy of a bear market panic... It really is different this time... We were in the biggest bubble in history... Demand for dollars... Four pieces of advice for investors to follow today... The beatings will continue until morale improves...

I (Dan Ferris) have been bearish for three years...

And even I'm surprised at how bad it's getting.
I knew stocks would fall – and fall a lot – once they finally topped out... But the benchmark S&P 500 Index falling 30% in four weeks?
Even I would have thought that type of drop would take longer.
But bear markets are like that. They surprise everyone with their brutal price action.

The shock and sense of panic in a new bear market fills investors with apocalyptic fears...

The urgency and panic make folks forget that bear markets have happened before and will happen again. They forget that it's normal and natural... We showed the history of U.S. bear and bull markets in Tuesday's Digest.
Investors tend to conclude that a new bear market is not like the others. Because it's happening right now and hurts right now, it tends to feel like it's worse than previous declines...
In e-mails, social media, and in conversations recently, I've heard some version of, "But this is different than all those previous episodes."
This time is different.
That's what people say when markets behave in extreme ways.
They say it at the top of a bull market, meaning... this time, there won't be a crash.
They say it in bear markets, too, meaning... this bear is worse than any before it, so stocks will fall further and it'll last longer... and a recovery is less likely this time.

And the thing is... they're absolutely correct. It really is different each time...

We never had a dot-com boom before the late 1990s and early 2000s. We never had a housing boom like what we experienced from 2002 to 2006. We never had a shale boom before what happened from 2008 to 2014. We never saw $1,900 gold before 2011.
It's the same on the downside, too...
We never had a dot-com bust, a housing bubble bust, a shale bust, or a gold bust (at least not one that started with the precious metal at $1,900 an ounce) before they each happened...
And today, we've never had a passive investing boom before. We've never had negative interest rates. We've never seen a "FAANG" boom before.
We've never had a bubble in absolutely everything – stocks, bonds, real estate, private equity, venture capital... you name it.
The reason people say it's different each time is because it is.

The reason sophisticated people criticize those who say it's different this time is a more subtle matter...

Finance professionals know that investors are least interested in hearing about what could go wrong near market tops. And they're also least interested in hearing about what can go right at market bottoms.
They know the phrase, "It's different this time," means investors have forgotten that markets can go the other way.
It means they believe something that is never true, even if they're technically right that something very different is happening.

Here's the solution to understanding all of this...

The investor's job isn't merely to know what's different at any given moment in the economic cycle. The investor's job is to see what the market is saying about the situation and whether or not it has gone too far.
I've been saying since May 2017 that the stock market has gone too far. I've made similar comments about bonds since my presentation at the 2018 Stansberry Conference in Las Vegas.
The upside turned out to be much greater than I ever thought. But today, self-serving as it may seem, I think there's still more downside risk in the S&P 500...
I don't think it has gone too far yet.

You have to understand, we were in the biggest bubble in history...

I've said a couple times over the past few years that bonds were the biggest bubble in the world.
Technically speaking, they were the biggest component of the biggest bubble in history... with record highs in all kinds of markets – including real estate, private equity, and venture capital.
Stocks were at record-high valuations, higher than the dot-com and 1929 peaks at various moments...
The price-to-sales ("P/S") ratio is a great metric to measure the value of the S&P 500. For the S&P 500 companies, this is the market cap of each divided by revenue for a given year.
P/S ratio has more negatively correlated with subsequent 10-year returns on stocks than all the standard price-to-earnings metrics, according to research by economist and asset manager John Hussman of Hussman Funds. In other words, when the P/S ratio has been very high, roughly 90% of the time over the past century or so, U.S. equity returns were low or even negative for the next 10 years.
The S&P 500's P/S ratio – as shown through the SPDR S&P 500 ETF Trust (SPY) in the following chart – was around 2.28 at the dot-com peak in March 2000, according to data compiled from market-research firm FactSet. It was as high as 2.39 last month. It's around 1.73 today. It doesn't start getting cheap until about 1.5 or 1.6. Take a look...
 
Even though we're pretty close to "cheap" territory now, I believe we'll still see more downside due to the severity of the "everything" bubble... during which excesses built up in every major financial asset (more on that in a minute).
Some finance professionals think the P/S ratio is a bad valuation measure for the overall stock market because there are more thick-margin, high-return businesses in existence, which warrant higher P/S ratios.
I disagree.
The historical record shows that hasn't been true before. Capitalism would have to be broken and competition would have to disappear from commerce before I could ever believe those thick margins will remain thick forever.

I promise you, bad things can and will happen to the 'FAANG' leaders...

I'm talking specifically about four of them – Facebook (FB), Amazon (AMZN), Apple (AAPL), and Google's parent Alphabet (GOOGL).
It's true that they're some of the greatest businesses ever created. But it's also true that they're not as impregnable as everyone believes...
It's just difficult for a human mind to contain such contradictory thoughts as "greatest business ever created" and "not as impregnable as everyone believes."
One of those two thoughts has to give, and it's usually the pessimistic one.
Consequently, folks have been way too optimistic about these stocks. It's similar to the optimism about dot-com darlings Cisco Systems (CSCO), Microsoft (MSFT), and Dell (DELL) in March 2000. (Don't bother writing in to say that the FAANGs weren't as overvalued as the dot-com darlings. I already know it. Doesn't matter.)
But I've said all this before... In fact, I've said just about every bearish thing you could say about U.S. stocks over the past three years.
Unfortunately, it's coming true now.

The question is, 'What happens next?'...

Well, first, the U.S. dollar will keep surging in value against most assets...
I have no crystal ball and don't know the future. But it would make sense that the liquidation phase – meaning, going to cash – that we're in is not over yet.
For instance, we're seeing it in leveraged investment funds that continue to sell through forced liquidations...
Look at the iShares iBoxx Investment Grade Corporate Bond Fund (LQD) as an example...
It's not a leveraged fund, but the type of bonds in this exchange-traded fund ("ETF") are owned by many funds pursuing leveraged strategies. These bonds are issued by some of the highest-quality companies in the world – like Anheuser-Busch InBev (BUD), CVS Health (CVS), AbbVie (ABBV), Goldman Sachs (GS), and Verizon (VZ).
LQD surged to as high as $134 per share on March 6. It's around $108, as I write today. That's a huge move for high-quality corporate debt.
I can't be certain, but I believe that's the result of forced liquidations from various leveraged investment strategies that go by the general name of "risk parity"... They need to balance the volatility of the different assets in the funds. Imagine trying to balance the risk between stocks and bonds by holding more bonds than stocks... and using leverage (borrowed money) to do it.
When a crisis like the one we're in hits, your broker calls you up and says...
"Hey guys, just a heads up, we're forcing you to sell bonds until your leverage is zero.
"And yes, you will get obliterated with losses on this one. Have a great weekend guys!"
Billionaire investor and author Ray Dalio's Bridgewater Associates, the largest hedge fund in the world, has seen its flagship Pure Alpha fund decline by 20% in the crisis. Dalio has frequently discussed the use of risk-parity strategies at Bridgewater.
In other words, even the best of the best are having to liquidate stocks and bonds because their leverage is working against them.
So even bonds that were previously viewed as relatively safe compared with stocks and junk bonds are being sold off. But between Tuesday and Thursday, LQD fell nearly 10% and the SPDR Bloomberg Barclays High Yield Bond Fund (JNK) fell a little more than 6%.
If fundamentals were driving the market, that would not happen.
Those liquidating leveraged strategies and the whole coronavirus episode are teaching us a lesson (if we're smart enough to heed it)...
They're teaching us not to optimize our portfolios and our lives for maximum gain... but instead, for minimum loss.
The drop in LQD could also be due to investors seeing the huge drop in the value of equities. They realize equity serves as a cushion against credit losses... and conclude that as the cushion falls rapidly in value, the credit losses are more likely and probably bigger than previously expected.
It's hard to say for sure, but one thing is definitely true... All the selling of stocks, bonds, and anything that's not nailed down, creates a huge demand for dollars.
It's hard to sell anything in this world without getting paid in dollars.

Eventually, the high demand for U.S. dollars will peak...

Until then, it'll surge as everything else gets cheaper.
A super strong U.S. dollar is matched by an equally steep decline in the value of just about everything traded in dollars.
Just look at the prices of almost any commodity, almost any foreign currency, almost anything priced in dollars right now. They're all down, with few exceptions.
So what should investors do now? I've got a few ideas...
  1. Check out Episode 140 of the Stansberry Investor Hour podcast...
Our interview guest, Raoul Pal, co-founder and CEO of Real Vision and macro-trading guru, provided the playbook for what's going on in the world – and he did it in the first week of February, before it was obvious to everyone...
In the interview, Pal recommended buying bonds, including the iShares 20+ Year Treasury Bond Fund (TLT). We called it the "Trade of the Year" in the Digest on February 25.
Now, that trade is done and he has moved on... But our interview with Pal is still a great education in what's happening in the world right now, as well as its economic and financial implications.
  1. Right now, if you're holding cash, you're in good shape.
Simply holding U.S. dollars will serve the overwhelming majority of investors well today.
Don't try to get cute by shorting foreign currency futures or buying weird currency ETFs. Leave that to the professionals.
  1. Buy gold if you don't already own it, and don't sell your gold if you already do.
I realize it's hard to find physical gold and silver these days. I went to my local dealer to buy either South African Krugerrands or American Eagles yesterday. He said he couldn't help me... and that I could only order Canadian Gold Maple Leafs. So I did. (He also said I wouldn't likely get them until around May 21. Well, better late than never, I guess.)
On the other side of a super-strong U.S. dollar is a super-weak one. The Federal Reserve's desire to feed liquidity to the stock and bond markets will result in the printing of trillions of new U.S. dollars.
When $1 trillion or $2 trillion isn't enough, the Fed will crank up the printing press and flood the market. (Or as former Fed Chairman Ben Bernanke said in a 60 Minutes interview in 2009, they'll "use the computer to mark up the size of the account that they have with the Fed.")
Fed economists are all students of the Great Depression. They all think the Fed didn't print enough money back then. So today, the Fed will print like crazy...
And it will cause precious metals prices to soar. Count on it.
Gold Stock Analyst editor John Doody and Silver Stock Analyst editor Garrett Goggin each told you that this week, too, as we shared in Wednesday's Digest. As Garrett said...
This is what silver and gold investors have been waiting for.
This unprecedented money-printing will push gold to new highs. I suspect gold will trade for $2,500 an ounce in the not-too-distant future.
Between now and then, don't ask me to tell you at what price gold will bottom. I have no idea.
As for the stock market, the smartest thing I've heard recently about when it'll find a bottom came from a guy I unfollowed on Twitter because I didn't want to hear his political views anymore...
But I have to admit, his recent comments about what will stop the bleeding in stocks were spot-on...
"Downtown" Josh Brown, CEO of Ritholtz Wealth Management, said he thinks the market won't bottom until there's a steady flow of good news about the fight against the coronavirus itself.
That sounds right to me... The "second-order" effects of the virus – the financial and economic effects – will be much worse than the virus itself.
Take a look at China... where the virus has largely stopped spreading. But now, we're starting to learn about the hit to the country's economy over the past few months...
The longer it all continues in the U.S., the worse those second-order effects will get.
If we can just make some headway against the spread of the virus, I believe Josh is right... We will start to get back to normal.
There's a lot of news about potentially using a malaria drug called chloroquine to treat the coronavirus. It sounds hopeful, but I'm no doctor. Fingers crossed...
  1. So finally... and this is the hardest thing of all... don't panic out of stocks.
Just stick to your trailing stops. Honor them. If your stop is triggered, sell. If you don't use trailing stops, consider starting now. It's never too late to learn to avoid a catastrophic loss.
Selling stocks when you hit your stops will result in building your cash as the market continues to fall. And it will put you in a very good position when it eventually bottoms.

In short, the beatings will continue until morale improves. Invest accordingly...

Stay safe. Hold dollars. Hold gold. Honor your stops.
And if I turn out to be wrong and the bottom has passed or is much closer at hand than I thought, I'll be very happy to have served you as a contrarian indicator.
For our collective health and wealth, I desperately want that to be true. But don't count on it.

Recommended Links:
Former Wall Street finance attorney explains how to play a panicking stock market... for 100% to 500% potential gains. For the first time ever, he's unveiling his radical trading strategy, and three stocks to apply it on immediately. Watch here now before it goes offline.

Stocks are crashing... And now, a Maryland millionaire is stepping forward to explain how a new moneymaking era is erupting in America, making many rich – while leaving so many behind. Learn more here.

New 52-week highs (as of 3/19/20): short position in Interpublic Group of Companies (IPG).
In today's mailbag, a pair of subscribers thank us for our urgent "Town Hall" event on Monday, while another two subscribers agree that it's hard to find reasonably priced physical gold and silver these days. Do you have a question or comment? As always, shoot us an e-mail at feedback@stansberryresearch.com.
"Austin, I just wanted to reach out and say thanks for the Town Hall! Much appreciated. I liked hearing from all the gang but I found your comments most helpful. I agree with you 100% to be wary of companies requiring a bailout to avoid going bust. I liked your recounting of your investment philosophy: 10 years, 20%, explain to an 11-year-old." – Paid-up subscriber Tim W.
"Fantastic job with all you do. I thought the town hall meeting was outstanding. Having a quick informal, yet focused discussion was very beneficial. I'd like to request those once a quarter moving forward, even without a binary event like the virus.
"Would also request some form of a watch list as an Alliance Member. Of course, I make my own decisions, but it would be very helpful in helping me formulate my plan of attack to put more capital to work, and on which equities, as this thing turns around." – Stansberry Alliance member Steve B.
Corey McLaughlin comment: Thanks, Steve. Stay tuned on your second request. We're looking into doing something like that soon.
"Kind of ironic isn't it... that Porter might have picked the exact year?... Yes, I read and ABSORBED Porter's book a few years ago. Over the years I've been preparing for this crisis.
"OK, so I missed out on huge gains of Netflix and Amazon. But in the meantime I've been making tons of money selling puts, buying dips, selling peaks, building my gold and silver stash and concentrating our stocks against those recommended in his book, namely dividend aristocrats and stocks taken from the 'Magic' and 'Capital Efficient' lists.
"At our ages, (my wife's and mine), we need dividends and interest. I've been taking advantage of the recent panic selloff, building our positions with incredible companies who have long histories of increasing dividend payments. Sure, the market may tank even more but I'm not worried about that.
"My 'Magic' and my '2020' portfolios continue to treat me well and they'll weather this storm too. Luckily I've been paying attention to the advice to load up on gold and silver. Go try to buy some today around the spot prices, good luck there! My favorite places to buy are all sold out and everywhere else is trying to gouge buyers who are stupid enough to pay the premiums.
"Meanwhile, I'm sleeping well. Thanks, Porter!" – Paid-up subscriber Rob W.
"I thought I would mention this since I have not heard any of you talk about it yet. Although the SPOT price of gold and silver has been falling, has anyone tried to actually buy any?
"With silver trading [Thursday] morning at $12.14-per-ounce, one ounce silver rounds are selling for $24.13 with a maximum quantity discount price of a mere $22.13! Almost 100% premium. And even with this huge markup has anyone actually seen a silver round this week? I doubt it.
"Every coin shop in town is empty and the exchanges are all sold out, accepting only pre-orders, which I am a bit uncomfortable about... In times like these I really think twice about giving cash for promises and would prefer to carry my gold or silver home the day I pay for it.
"Thank you Porter and everyone who works so hard in the background for all that you do! Keep up the great work!" – Stansberry Alliance member Jim M.
Good investing,
Dan Ferris
Vancouver, Washington
March 20, 2020

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