'Someone Has Snapped on the Light Switch'

Hungry for 'art'... $120,000 for a banana or $52,000 for a computer?... A lesson for investors and an opportunity for entrepreneurs... Why luxury-goods brands can charge more... The most expensive thing in the whole world... Million-dollar dog walkers and office cleaners... 'Someone has snapped on the light switch'...

As we head into the final weeks of a really weird year, I (Dan Ferris) ask you what's worse...

Paying $120,000 for a piece of "art" that's just a banana duct-taped to a wall... or $52,000 for a desktop computer?

The duct-taped banana was on display at the Art Basel art show in Miami earlier this month. It's the work of Italian artist Maurizio Cattelan, who sold three copies during the event.

They come with a certificate of authenticity. It allows the buyers to use their own duct tape and bananas... and tell everyone that it is Cattelan's masterpiece.

The piece was on display on December 7, when performance artist David Datuna walked up to it... ripped it off the wall... said, "Art performance, hungry artist"... and ate the banana.

The work was removed from the exhibit the next day because crowds were creating a safety hazard and making it all but impossible to see the piece.

Can you imagine the news stories had they not removed the banana?

"Two dead, many injured as Miami art lovers stampede toward banana, slip on peel..."

Can you imagine the "Jack and the Magic Beans" moment you'd have coming home to your spouse with a $120,000 certificate saying it's art if you duct tape a banana to your wall?

Never mind all that...

The computer I mentioned is Apple's (AAPL) new Mac Pro desktop, which starts at $5,999... and can cost you more than $52,000 for a top-line model. And that doesn't include the $400 wheels you'll need if you ever want to move it around the office.

The most expensive add-on is the $25,000 it costs to goose the machine's RAM from only 32 gigabytes to 1.5 terabytes.

If you want the luxury of actually seeing what you're doing on your new Mac Pro, you'll also need to pay $4,999 for the new Pro Display XDR monitor, which went on sale last week. And the stand to hold your Pro Display XDR monitor so you can actually use it? That's another $999.

I understand Apple is a hot brand these days. But $400 for wheels? And $999 for a monitor stand?

It's as if luxury carmaker Ferrari (RACE) were selling cars for $200,000 with optional steering wheels that cost another $20,000.

At least you get everything you need for one price when you buy the duct-taped banana.

There's a lesson here for investors and an opportunity for entrepreneurs...

(I'm serious. Stay with me.)

The banana effectively does not exist. When Datuna ate it as a type of performance art, a gallery spokesperson said the work wasn't destroyed because "the banana is the idea." (This is easily the No. 1 quote of this really weird year.)

In this case, the banana is intangible.

Once the artist convinces you that it's art, there's no manufacturing or other expenses. Any time you have a banana and some duct tape, you can make art.

With the computer, you pay for an idea, too... It just so happens that you also get a nice computer you can use. You don't buy an Apple product because you need a computer... After all, a computer that does a lot of the same things can be had for a lot less money.

You buy an Apple product because "Apple is the idea." You buy it for the way it makes you feel.

Once again, it's the intangible that attracts you – and runs the price into stratospheric territory...

Humans place the highest value upon things that don't exist – stuff we make up in our heads.

There is no art in making the banana. The only art is convincing people it's art to the point where they'll pay $120,000 for it.

But there is no actual craftsmanship... as there is with the computer. Likewise, the part of the computer that makes it cost so much isn't anywhere in the manufacturing process.

That's in your head... planted there by Apple's marketing department – and at this point in the company's history, a lot of other folks you know who own Apple products.

As entrepreneur and marketing guru Scott Galloway has said, Apple is really a luxury-goods company. It's selling intangibles like Cattelan and his "idea" of a banana.

Luxury-goods craftsmanship is often nothing special...

Across Asia, you'll find factories that crank out anything you could ever want at any level of quality you might require. And of course, Apple makes a lot of its products in those factories.

If you put the right name on those goods, you can charge, say, $175 for a simple black leather key fob that looks almost identical to the ones that sell for $1.75 in any drugstore... just like they do at Tiffany (TIF), another iconic luxury-goods name.

My wife gets it. (Thank goodness!) The subject of Tiffany came up recently, and she immediately asked, rhetorically, "Why should Tiffany cost more? Does the company use better diamonds?"

Of course not.

But... it's Tiffany. The company can charge a fortune based on the name, a decent level of quality, and that little blue box that everyone recognizes. It all combines to form an idea in the buyer's mind that is vastly more than the sum of its readily available parts.

I bet Tiffany could charge $15,000 for any piece of jewelry that would otherwise go for $5,000 at any other jewelry store in the world. Even if that number is only $10,000 or $7,500, my point remains the same... Tiffany can charge more because of its brand.

Tiffany's name alone adds substantially to the price of its products...

The name – the intangible associated with the company's jewelry and other luxury goods – is where the extra margin comes from. It's nowhere in the manufacturing process.

Luxury-goods makers don't sell products. They sell ideas about what people own when they're rich, cool, hip... or whatever. The intangible is what earns the company thicker margins, nothing else. It's like the banana... But instead of a banana, you also get a watch, necklace, handbag, or automobile.

So why not duct tape a banana to a wall and charge $120,000 for it? Is it much different than what Tiffany and other luxury-goods makers do every day?

The artist attached an intangible to an item that sits in supermarkets all over the country every day. Good for him!

Tiffany does the same with its jewelry, watches, and other goods. You can get a banana anywhere, just like you can get a watch or a bracelet anywhere.

The grocery store we frequent where I live in Washington also has a jewelry store inside. My wife and I could literally pick up a diamond bracelet while we're grabbing a quart of milk and a loaf of bread.

There is nothing remotely close to a shortage of fine jewelry in the world...

It's crazy to think that bananas and duct tape are more scarce than diamond jewelry. But it's true... because you can only get a Maurizio Cattelan piece of art from him. And you can only get Tiffany products from Tiffany, Apple products from Apple, Ferrari cars from Ferrari, etc.

The folks at Tiffany wish they could charge banana-taped-on-the-wall margins...

Maybe after Paris-based mega-luxury house LVMH closes on its acquisition of Tiffany, which is expected to happen in the middle of next year, we'll see a new line of banana products. (If not, maybe I'll have to pitch them.)

I bet you could open an exquisitely decorated boutique that sells nothing but banana-related luxury items. And if you dress the salespeople up in crisp yellow and black uniforms... school them on the proper demeanor... take a few packaging lessons from Apple and Tiffany... and tell a good story about the products... you could clean up.

I bet there's still a huge opportunity to dominate the luxury banana-themed goods market.

I promise you that market is much bigger than you'd ever guess. And I'd bet real money it's underserved a lot sooner than I'd ever bet you could start up a successful competitor to the new Mac Pro.

So much for bananas and computers. It turns out some other bigger stuff is pretty expensive these days, too...

In fact, the most expensive thing in the whole world saw its price rise 10% in a single day last week...

Of course, Saudi Aramco is not a luxury-goods item. It's the gargantuan Saudi Arabian state-owned oil company that began its life as a publicly traded company last Wednesday in Riyadh, the Saudi Arabian capital... at a whopping valuation of $1.7 trillion.

Before the company's initial public offering ("IPO"), the kingdom of Saudi Arabia was the only shareholder.

And as my colleague Kim Iskyan explained in last Friday's Digest, the kingdom raised $25.6 billion in the largest IPO in history. The offering was more than four times oversubscribed, with pre-IPO orders for the shares totaling $119 billion. The underwriting agreement gives the kingdom the right to sell an additional $29.4 billion worth of shares.

The company's valuation briefly reached $2 trillion last week. The price action was no doubt helped by Saudi heir apparent Prince Mohammed bin Salman telling Saudi institutions and wealthy families to buy shares.

Of course, according to the CIA, bin Salman is the same guy who ordered the murder of Washington Post reporter Jamal Khashoggi in 2016. Khashoggi's dismembered body later reportedly turned up buried in the garden at the Saudi general consul's house in Istanbul.

So when bin Salman tells you to buy the shares, maybe there's the slightest chance he means it in a "the beheadings will continue until morale improves" kind of way.

Or not. It's hard to know in these sorts of situations... But either way, Aramco's stock is up out of the gate, and there's probably enough buying power behind it to push it higher in the short term. But it's anybody's guess where the stock goes over the longer term.

Not everything is getting more expensive all the time. Some things are getting less expensive...

For example, Japan-based technology-investment firm SoftBank announced last week that it will sell back its stake in dog-walking start-up Wag Labs. SoftBank paid $300 million for the investment last year.

Wag Labs' CEO quit last month, leaving the company in the hands of its 29-year-old vice president of product and partnerships. A story from news service Bloomberg said Wag was trying to get acquired, possibly at a valuation below the value of SoftBank's 50% stake. Bloomberg said Wag had $100 million left in cash earlier this year.

Meanwhile, SoftBank's most public investment failure, WeWork, is also coughing up assets that it gathered during its frenzied hypergrowth period.

The coworking giant famously failed to go public this year, and saw its private market valuation knocked down from $47 billion in January to just $8 billion recently. In an October presentation, WeWork identified several businesses it acquired as potential divestitures.

Today, it's in talks to sell Managed by Q, an "office management platform company." The company provides cleaning, maintenance, IT support, inventory management, administrative staffing, and security.

Managed by Q was valued at $249 million in January. Reports said WeWork paid $220 million for it in April. Co-founder Dan Teran said he's "actively working to buy back [his] company."

It's a good bet that Managed by Q's valuation now lies well south of $220 million... and that Teran is super excited to bid on it for a lot less than he sold it.

I'm struck by the blandness of Wag Labs and Managed by Q...

One company walks dogs. The other cleans offices.

These sound like jobs you get for your lazy brother-in-law so your wife will stop bugging you about him. They don't sound like jobs that get you into the "Forbes 400" list of the world's richest people.

But in both cases, multiple venture capital firms lined up to throw hundreds of millions in total cash at them... as if they were the next Microsoft (MSFT) – which never needed such help, by the way.

I'm not saying they'll never be good businesses... But it's ridiculous to value Wag Labs and Managed by Q at hundreds of millions of dollars.

I mean, how many dogs can one company walk? How many offices can one company clean?

How does a business gain scale in dog walking? Do the workers run around collecting dogs each morning and dropping them off in a massive treadmill facility in the center of town? If only dog poop made for good fertilizer. Now, that could be a great business.

And what about Managed by Q, the company that cleans and maintains office space?

It sounds like it would take a small army of employees – the kind that'll eventually picket up and down the street for union representation (if it still exists) – and warehouses full of mops, buckets, and caustic cleaning chemicals.

None of it sounds like the sort of thing they'd get excited about in Silicon Valley...

After all, we're in the high-flying days of flashy tech products like Uber Technologies (UBER), Slack Technologies (WORK), and Peloton Interactive (PTON). Unless...

You see, California passed the Adult Use of Marijuana Act in 2016.

I can easily imagine Silicon Valley venture-capital types smoking serious amounts of weed to relieve the stress of toiling night and day, trying to discover the next Google/Alphabet (GOOGL) or Facebook (FB).

So if you want to ask, "What are they smoking as they value a dog-walking company at $600 million?"... the answer is likely just regular weed. But they could be smoking tons of it... because it's legal, so why not?

Shouldn't one of these wealthy stoners be looking to fund a pizza-delivery startup?

Our good friend, investor and author Vitaliy Katsenelson, calls the venture-capital market "dot-com 2.0." The boom appears to be over, with the bust phase in full swing, possibly making it safe for your kid to earn a few bucks walking the neighbor's labradoodle again.

A recent Wall Street Journal article said the venture-capital bubble is roughly $1 trillion... and that venture-capital-backed companies have lost $100 billion in valuation this year.

As venture-capital investor Chris Douvos of investment firm Ahoy Capital told the Journal, "We've been in the middle of a rollicking party that's gone on for five years and [now] someone has snapped on the light switch."

I contend that other, much larger markets are still looking for the light switch today...

It's a tune I've been singing for two and half years now.

The benchmark S&P 500 Index – once again hitting new all-time highs – clearly has not found the light switch yet.

The same can be said about the global bond market... with $12 trillion of negative-yielding debt in the world, 30-year U.S. Treasurys paying about 0.7% more than three-month (yes, month not year) Treasurys, and junk-rated debt at historically low spreads.

I continue to counsel subscribers of my Extreme Value advisory to stock up on financial hangover medicine for whenever the punch bowl empties and the lights come on.

Mainly, that means holding plenty of cash and some precious metals.

In the December issue of Extreme Value, published last Friday, I explained how investors can earn an extremely safe 2% on their cash holdings.

And although the specifics are reserved for my Extreme Value subscribers, my No. 1 recommendation – in more than 20 years at this gig – is essentially a cash-gushing, highly capital-efficient royalty on precious metals that currently pays a 4% dividend yield.

With stocks more expensive than at just about any time in history... U.S. Treasurys paying diddly squat... and developed countries' sovereign debt guaranteed to lose you money if you hold it to maturity... precious metals are more likely to shine than anything else.

And is there any better way to leave a holiday issue of the Digest than in the reassuring embrace of a 4% dividend yield coming straight off a giant pile of precious metals?

I think not.

New 52-week highs (as of 12/13/19): Alibaba (BABA), Becton Dickinson (BDX), SPDR Euro STOXX 50 Fund (FEZ), Fidelity Select Medical Technology and Devices Portfolio (FSMEX), Hannon Armstrong Sustainable Infrastructure Capital (HASI), JD.com (JD), Medtronic (MDT), Microsoft (MSFT), Norilsk Nickel (NILSY), Pan American Silver (PAAS), Invesco S&P 500 BuyWrite Fund (PBP), Flutter Entertainment (PDYPY), Procter & Gamble (PG), ResMed (RMD), ProShares Ultra Technology Fund (ROM), ALPS Medical Breakthroughs Fund (SBIO), ProShares Ultra S&P 500 Fund (SSO), Sysco (SYY), Vanguard FTSE All-World ex-US Fund (VEU), and Vanguard S&P 500 Fund (VOO).

In today's mailbag, a pair of Alliance members share their thoughts on Austin Root's Masters Series essay from Saturday and Doc's lessons about options from last week, respectively. Let us know what's on your mind at feedback@stansberryresearch.com.

Are you interested in learning more about our Alliance membership? It's the perfect time to do so... Porter, Steve, and Doc are holding an Alliance "Open House" event on Wednesday morning, where they'll detail how everything works. Click here for more information.

"Austin, Thanks so much for this newsletter... I am about to make a business deal that is twice as big as I planned. But this made me realize that maybe my original plan was too conservative and the new opportunity is a much better and safer bet." – Stansberry Alliance member Jeff S.

"Doc, as an avid reader of all of your newsletters, I remember listening to a podcast in which you described the options trades, and I initially dismissed that strategy as one that wasn't for me. Having hired and fired multiple money managers, I became an Alliance member and told myself, 'You better figure this out.' Eventually with all the Stansberry tools I am delighted with my investment success.

"Options selling is an important arrow in my investment quiver. As an oral surgeon by trade, I have been able to match and exceed my surgical income with the options premiums alone for years now. Thank you for demonstrating that option selling is an incredibly powerful income strategy over time. And thank you for imparting your readers [with] the confidence to best the money managers I fired. And thank you Porter for providing an Alliance membership whose lifetime fee was a mere fraction of what I paid annually for money management. Gratefully..." – Stansberry Alliance member Bob O.

Happy holidays,

Dan Ferris
Berlin, Maryland
December 16, 2019