Don't Think About 'Getting Cute' Today

Don't think about 'getting cute' today... A confession after decades in this business... Not a raging bull, but no longer a bear... 'Did he really say that?'... Sheer, jaw-dropping incredulity from a former banking executive... Ending the week with a chat about gold...

Editor's note: In case you missed our founder Porter Stansberry's critical message on the markets, we've put together a full replay. As Corey McLaughlin explained in yesterday's Digest, we believe any investor will find the talk insightful and well worth the time.

Porter and our Director of Research Austin Root discussed the recent market volatility due to the coronavirus pandemic... detailed what could happen next... and explained how you currently have a once-in-a-generation opportunity to invest in safe stocks for the long term.

So again, if you couldn't watch Porter's urgent broadcast yesterday afternoon, we hope you'll take some time this weekend to watch the FREE replay. You can do that right here.

Now, let's get to today's Digest from Dan Ferris...

I (Dan Ferris) bet a lot of investors lost a bunch of money over the past few weeks...

Stocks descended into bear market territory faster than ever before. But on the flip side... rapid, double-digit rallies included some of the biggest one-day market rises in history.

Fast, significant moves like what we've seen recently entice novice investors to gamble on big, short-term bets... I call this greedy desire to chase quick gains "getting cute."

In general, the shorter your timeframe and the bigger the gains you think are possible, the more you're trying to get cute... and the more risk you're taking of getting wiped out.

If you're a short-term trader with a ton of experience, what I call getting cute is something you likely refer to as "making a living." But most investors are terrible short-term traders...

They go into the stock market with the mentality of a lottery ticket buyer. They figure, "Just one big multibagger trade, then I'm out"... and proceed to lose a lot of money very quickly.

But today, I have a confession to make...

Even after decades of doing this, I just caught myself almost getting cute. Let me explain...

At our annual Stansberry Conference in Las Vegas in September 2017 and again in September 2018, I told our crowds of hundreds of knowledgeable investors that I had figured out how to think about the valuation of the overall stock market.

You see, years ago, I tried to follow the overall valuation of the stock market from month to month. I can't remember why I thought this was a good idea... But eventually I realized it was a stupid, useless exercise.

But with my 2017 presentation in Las Vegas, I finally figured it out...

The valuation of the overall stock market has important investment implications for you as an individual investor on two occasions... when it's at extreme highs, like it was just before the current bear market... and when it reaches extreme lows, like in March 2009.

As I've said before, the price-to-sales (P/S) ratio is the best way to look at the valuation of the overall stock market. And when it comes to the S&P 500 Index, the P/S ratio is highly negatively correlated with the benchmark index's subsequent 10-year performance...

After the P/S ratio reached big peaks over the past several decades, the S&P 500's 10-year returns were poor. And after the ratio hit a big trough, the 10-year returns were great.

But when it's in between those two extremes, it doesn't deserve much thought.

So what levels qualify as extreme highs, extreme lows, and 'in between' those extremes?

It's totally arbitrary.

But we can figure out a range by looking at the P/S ratio for the SPDR S&P 500 ETF Trust (SPY) – an exchange-traded fund ("ETF") that tracks the index. In the following chart, based on data from market-research firm FactSet, you can see the index spent a lot of time around 1.5 times sales before the 2008 financial crisis and has a much steeper trajectory after it...

I don't like to go back too much farther than the dot-com era of the early 2000s. That's because the makeup of the S&P 500 has changed significantly... The index includes many more high-margin, high-return businesses today than just a few decades ago.

During the dot-com bust in 2002, the S&P 500's P/S ratio bottomed at around 1.15 times. It bottomed much lower after the 2008 financial crisis... at roughly 0.65 times sales. And on the flip side, the dot-com and current "everything" bubbles both peaked well above 2 times.

As I've said before... anything over 2 times sales is a notable extreme high. I started getting really bearish in May 2017, four months after the P/S ratio hit 2 for the first time since 2001. I've been consistently bearish on the overall market for nearly three years.

After the recent sell-off, the P/S ratio recently dipped down below 1.6...

This is cheap enough to get excited about... and many stocks have been absolutely clobbered.

My version of getting cute is a little different than the one I identified for most investors... In my version, getting cute would be if I believed that, having been bearish and proven right, I could now proceed to know when we've hit bottom...

In both cases, getting cute means believing you can predict the short-term action in the market. You can't, though. (I certainly didn't... It took me three years to be proven right!)

That's when I caught myself... It would be way too cute for me to try to figure out where the overall market goes from here. Heck, the Dow Jones Industrial Average "officially" entered a new bull market yesterday. It was up 21% in only three trading days.

So instead of getting greedy, I'm taking a step back...

I'm declaring victory after calling for a bear market for three years. And I'm going back to spending all my time finding great businesses trading at reasonable prices – or even dirt-cheap prices these days. That's what my Extreme Value subscribers pay me to do, and this is a great time to do it.

'Are you saying this is the bottom, Dan?'

No. I don't know, nor do I care if this is the bottom.

Neither you... nor I... nor anyone else will know the day the bottom arrives.

(OK, maybe Empire Financial Research founder Whitney Tilson, who has an outstanding track record of calling tops and bottoms. By the way, Whitney just hosted a "crisis summit" earlier this week to give his thoughts and opinions on the coronavirus and the markets. If you missed it, you're in luck... You can still watch a full replay right here.)

It was never about calling tops and bottoms for me anyway... It was about identifying the risk in the biggest bubble in history, and then watching as the market descended into bear market territory faster than ever before.

And let's face it... if you can't find attractive opportunities when the market falls 34% – and some individual stocks fall much more – then maybe investing in stocks isn't your thing.

As of last week, the bear market erased all the gains since November 2016. So I'm at least vindicated in becoming concerned when I did. But now, I need to be a little humble and refrain from believing that I know where the market is headed next. When I look in the mirror now, I think, "Don't get cute, Skeezix. Put your head down and get to work."

If the market makes new lows from here, I'll just find new and better bargains.

I wouldn't call myself bullish on the overall market today, but I'm no longer bearish...

I only become overtly bullish or bearish on the overall market at its extremes.

We're nowhere near a historically significant extreme low in valuation of the overall market. And we're far enough off the extreme high that I can forget about it for a while.

Not a raging bull, but no longer a bear... That's me.

Also, remember that I was almost three years early when I became bearish in the May 2017 issue of Extreme Value. I could be early in starting to buy this time, much like I was on the opposite end... I was ultimately vindicated, but it took years for that to happen.

Value investors tend to buy earlier and sell earlier than most folks...

They buy early because they're just looking for their favorite businesses to get cheap enough to be attractive investments. They're not trying to call market bottoms. They tend to sell early because they feel that holding an overvalued investment is a bad idea, but as we've learned, the market frequently pushes valuations far beyond what's reasonable.

But I'm as happy to be an early buyer as I was to be an early bear... It's better to be three years too early than three weeks too late (as many found out the hard way this month).

As much as I hate to admit it, some amount of my bullishness revolves around the Federal Reserve...

The Fed and the U.S. government are dedicated to whatever amount of stimulus they deem necessary in order to support the financial markets. And they won't go down without a fight.

And when you hear what Fed leaders have been doing and saying, it's enough to make you schedule a hearing test. I've thought, "Did he really say that?" more than once recently.

In a crisis, people show their true colors...

When big, scary events spook them, grown men and women say the darnedest things. And if you want to hear the darnedest things folks are saying these days, the country's 12 Federal Reserve banks are great places to hang out...

As we reported in Wednesday's Digest, Federal Reserve Bank of Minneapolis President Neel Kashkari is saying some pretty weird stuff lately...

On Sunday night in an interview with news program 60 Minutes, Kashkari said without irony, "There is an infinite amount of cash in the Federal Reserve. We will do whatever we need to do to make sure there's enough cash in the banking system."

No wonder it's practically impossible to buy physical gold these days.

I don't know how much cash it would take to cause serious inflation and drive the gold price much higher, but I'm pretty sure it's less than infinity.

The fact that banking is a system overflowing with massive systemic risks – many created and exacerbated by the Fed's own actions – didn't come up in the 60 Minutes interview.

Nor did they talk about how banking wasn't even a system in the U.S. until the early 1900s...

Before the Federal Reserve turned banking into a system, there were merely banks. Before the Fed was created, every now and then, a couple dozen or so banks would fail in events called "bank panics."

Then, Congress created the Federal Reserve in 1913 "to provide the nation with a safer, more flexible, and more stable monetary and financial system." It sought to protect us all from bank panics... And then half of the country's banks failed in the Great Depression.

My point is... if you think the Fed did a great job in the 2008 financial crisis and is doing a great job in the current one, you must also acknowledge that all crises are bigger because of the Fed's very existence. And you should probably own some gold as a means of getting your money outside the traditional financial system. Bitcoin will also do that for you.

Down the road from Kashkari is James Bullard, president of the Federal Reserve Bank of St. Louis...

On Wednesday, Bullard told news service Reuters that the $2 trillion bailout package being debated in Congress is "scaled about right" for the economy.

On March 4, back in the Pleistocene era, Bullard said that the Fed had "the policy rate to the right place," for the coronavirus crisis with its new federal-funds target rate of 0% to 0.25%.

Well clearly, it was just right... Because as soon as they got "to the right place"... the S&P 500 only fell another 28.5% through Monday's bottom. (Yes, that's sarcasm.)

I've said it before, and I will say it again that the Fed's 400 PhD economists think they're economic brain surgeons operating with the finest precision tools. They think they can get the policy "to the right place." They think a $2 trillion stimulus package can be "scaled about right."

The Fed's economists are like a coed wearing beer goggles, trying to hit a dartboard with a banjo. "Whack, whack, whack... did I hit it yet? No? Whack, whack, whack. Oops, sorry, that's gonna leave a mark... Whack, whack, whack... Dude, sorry about your banjo."

Most of us know the Fed believes deeply in its ability to print enough money to fix any problem. So maybe Kashkari's and Bullard's comments didn't surprise you at all... though I bet Kashkari sounds a little crazier than you might have guessed.

But for sheer, jaw-dropping incredulity, you can't beat former Wells Fargo CEO Dick Kovacevich...

You might remember Kovacevich. The 76-year-old presided over Wells Fargo as CEO until 2007, the year the housing bubble started blowing up. And he stayed on as the company's chairman until 2009, after the Great Recession had started.

According to a recent Bloomberg article, Kovacevich expects healthy people age 55 and younger to return to work late next month if the virus outbreak is under control.

That's not such a controversial opinion. I might agree that it's a good idea, too. But I wonder if Kovacevich was sober when he proceeded to tell the Bloomberg reporter...

We'll gradually bring those people back and see what happens. Some of them will get sick, some may even die, I don't know.

See what happens. Some may die. He doesn't know.

I don't know either, Dick. But given your experience helping to run the economy into the ground in 2008, you're no doubt better equipped emotionally to handle the responsibility of putting others' lives at risk... if "responsibility" is the right word.

I bet Kovacevich is a model grandparent. You can easily imagine him saying something like, "Hey kids, why don't you go play in traffic and see what happens? Some of you might die. I don't know."

It doesn't matter if you think the coronavirus is not a problem and we're all overreacting. It only matters that this guy is really cavalier with other people's health and lives.

It's probably pure coincidence that he fostered a culture that perpetrated one of the biggest banking frauds in history, in which Wells Fargo employees set up millions of fake checking and savings accounts. I'm sure his devil-may-care attitude towards employees' lives and health has nothing to do with the way those same employees defrauded their customers.

Bankers say the darnedest things. I won't hold my breath for a world in which they're made to take responsibility for every soul-crushing, wealth-destroying word and deed.

Finally, before we wrap up this week, let's talk about gold...

To put it bluntly, gold has acted really weird since the coronavirus crisis kicked into gear earlier this month... It made a new high of $1,674 per ounce on March 9, according to data compiled by FactSet. From there, gold plunged as low as $1,477 per ounce on March 18.

It's true that in a panic like this, investors tend to liquidate everything they can liquidate. We saw the same thing happen during the 2008 financial crisis...

From the October 2007 stock market top to its March 2009 bottom, gold rose about 23% – but not without a wild rollercoaster ride along the way... Gold fell from roughly $1,000 per ounce in early 2008 to about $700 per ounce in November of that year before turning around and eventually heading to a new all-time high of $1,900 per ounce in 2011.

But demand for physical gold has been relentless in the past few weeks...

Anybody who has tried to buy it knows that's true. As I said in last Friday's Digest, I bought some Canadian Gold Maple Leafs. The dealer took my money, added an extra $95 for each coin, and said to come back around May 21 to pick them up. He had nothing in stock.

Nothing.

Part of the problem is that gold refineries have shut down along with many other businesses due to the coronavirus epidemic. Three of the world's biggest refineries are in Switzerland, near the northern Italian border – one of the world's hardest-hit regions from the virus. And yesterday, Bloomberg reported that shipments of South African gold to London have ceased.

I watched the April gold futures contract fall from a high of $1,704 per ounce to a low of $1,450 per ounce. But then, earlier this week, it shot up $200 per ounce in less than 24 hours. It's untradeable chaos... but at some point, the refiners will reopen for business.

I believe the price of gold is still a no-brainer to move higher over the next several years...

I think it's especially interesting that one- and three-month U.S. Treasury yields recently dipped into negative territory. If negative rates continue to move up into Treasurys of longer maturities, many investors will likely allocate more capital to gold.

If you know you're guaranteed to lose money in a "safe haven" asset like a U.S. Treasury, suddenly paying to store gold makes a lot more sense.

The Fed has already taken no less than 11 separate actions, from lowering interest rates to easing bank regulations to buying corporate bonds and bond ETFs. It has pledged to spend as much capital buying U.S. Treasury bonds and mortgage-backed bonds as is necessary.

In other words, the Fed hopes to solve this problem by sowing the seeds for further and perhaps even larger misallocations of capital, kicking the can down the road once again.

My guess is we're careening down that road faster than many people realize. And as a result, we'll likely face another bigger crisis sooner than anyone would ever guess.

With distressed debt ballooning fourfold recently, perhaps Kashkari, Bullard, and their Fed compadres will choose to size their response "about right" at a higher level than right now.

So if you're looking at your gold and gold stocks and wondering when they'll start behaving better, I don't think you have long to wait. Keep holding... You'll be glad you did.

New 52-week highs (as of 3/26/20): none.

A variety of topics in today's mailbag, including feedback on Porter's "Greatest of All-Time" webinar... Dr. David "Doc" Eifrig's COVID-19 briefing... and a note of general thanks in these crazy times. Do you have a comment or question? As always, send them our way at feedback@stansberryresearch.com.

"Porter, as an Alliance member, I didn't need to watch your presentation, but I did, just because I wanted to hear what you had to say. And I'm so excited about this, I couldn't wait for the presentation to be over to write and tell you that.

"I believe it was two Stansberry Conferences ago when you talked about putting something like this together, and I was able to catch you backstage and tell you how interested I was. At the time I said I was 'only' 68, but I was planning to structure my account into something that I could pass turnkey to my children. I've made some progress with that plan, and I already own some of the stocks that I'm certain will be in this new portfolio. They're ones that didn't hit my recent trailing stops and that I've already held for several years.

"Now, I'm much closer to 70 but still in fairly good health, and one bit of wisdom that comes with the years is that the 'forever' stocks – the 'boring' ones – are the best for a good night's sleep.

"I also have a similar story to your early experience with Coca-Cola (KO). As a young woman I worked for a subsidiary of GTE and was able to take part in the employee stock purchase plan. I enrolled in the dividend reinvestment plan and did extremely well. But eventually I decided to try my hand at trading and sold it, somewhere in the late 70s. If I'd kept it, I'm not sure I even want to know what that would be worth in VZ stock now.

"To close, thank you for putting this together. Stay well." – Stansberry Alliance member Laura O.

"Great session on the Forever Portfolio and looking forward to reading the material which was just emailed to me as a Total Portfolio member. Also wonderful to hear from Porter, who is the very best at what he does – the team at Stansberry is also a dream." – Paid-up subscriber Laura K.

"Great to hear your laugh again Porter!!! It's been sorely missed. You're the man!" – Paid-up subscriber Grant G.

"I enjoyed the presentation today and have descriptor I think Porter should consider... 'Sloth Stocks,' for his batch of stock picks that are his up and coming rising stars. Have a great evening." – Paid-up subscriber Craig H.

"Doc and Matt, excellent [COVID-19 video]. One of the best overviews I read/seen as data was presented clearly about the virus, the economy, and the financial aspects in informative graphs and conversations. Please keep it coming with updates." – Paid-up subscriber Jeanette D.

"Thanks Doc and Matt for the briefing. I appreciate the different perspectives and scenarios... combined with Greg's Ten Stock Trader technical analysis, I feel like I have a better sense of where the markets are heading given all the uncertainty.

"I suggest Doc continue to do these briefings (at least once a week?)... and bring other analysts like Greg. No sales pitch, please!" – Stansberry Alliance member Steve S.

"It is tough to follow all the emails, so I follow a few people and with their BUY recommendations they are always emphasizing the fact that each investor has to honestly assess their risk tolerance...

"My November analysis showed I had risky exposures like too much percent of one holding or high gains in another so I made a SELL or GIVE plan for December and January to spread the capital gains over two years, considering the tax consequences... Again, thanks to tax planning I have learned from Stansberry publications.

"The value of peaceful sleep and not obsessing over the market during these virus weeks is priceless. My thanks and health wishes to the Stansberry family!" – Paid-up subscriber Mike D.

Good investing,

Dan Ferris
At least 6 feet away from everybody in Vancouver, Washington
March 27, 2020