Stop Quacking Like a Duck

This can't be normal behavior... But then again, maybe normal is a bad benchmark today... 'Stop quacking like a duck'... Maybe $12 billion isn't all it's cracked up to be... Why today's corporate insiders remind me of Shakespeare... Let the good times roll!...

The stock market is loony...

On Tuesday, House Speaker Nancy Pelosi announced that Democrats would proceed with an impeachment inquiry into President Donald Trump. She accused him of violating the U.S. Constitution by urging Ukrainian President Volodymyr Zelensky to investigate Joe Biden, the former vice president and current Democratic presidential candidate.

The stock market immediately started falling after Pelosi's announcement... The benchmark S&P 500 Index finished the day down about 0.8%, closing at 2,966.60.

Then, on Wednesday, Trump released a partial transcript of his conversation with the Ukrainian president... and the market went up. The S&P 500 gained about 0.6% on the day, closing at 2,984.87 – just slightly below where it was before the whole mess began.

Do you realize what this means?!

It means real people with real money are sitting around, waiting to buy and sell stocks based on watching TV and reading news headlines.

Maybe a neurologist among our readers can tell me what causes someone to sell an interest in a business based on a five-second-old news headline that has nothing to do with anything the business will do today... tomorrow... and certainly not next year. And then, less than 24 hours later, reverse course and buy that interest back.

It can't be normal behavior.

Now, I'm sure all the Extreme Value subscribers reading this Digest will ask if it's normal to hold a stock for a decade while it goes sideways... just because the management team is the best in the business and has multiplied the revenue more than 20-fold, making it one of the most profitable, cash-gushing, dirt-cheap businesses on the planet right now.

I'll tell you that isn't normal, either... But it's the right thing to do.

Maybe normal is a bad benchmark for judging stock market events...

Loony WeWork co-founder Adam Neumann stepped down as the company's CEO this week under pressure from everyone who has uttered or written his name in the past month.

It turns out self-dealing, "lite" corporate governance, and weird, flowery language in an initial public offering ("IPO") prospectus aren't all they once were.

The 40-year-old Neumann is now the company's non-executive chairman – a role normally taken by 70-year-olds who've done such a great job for decades that you can't imagine not having them around. In other words, the exact opposite reason why Neumann now bears the title.

Neumann also gave up voting control of the company. WeWork's chief financial officer and vice chairman replaced him as co-CEOs.

In the September 17 Digest, I wondered whether JPMorgan Chase Chairman and CEO Jamie Dimon was a mafia Don. Now, I have to wonder if JPMorgan's deep involvement in WeWork will tarnish Dimon's sterling, "endorsed by Warren Buffett" reputation...

JPMorgan is the lead underwriter on WeWork's IPO... And the investment bank is also among those who lent $500 million to Neumann against his WeWork shares. Dimon met with Neumann on Sunday to hash out WeWork's increasingly unlikely bid to go public.

That meeting came just days after it was announced that Dimon received a call from SmileDirectClub (SDC) CEO David Katzman, wondering what went wrong with the mail-order orthodontics company's own IPO... which kind of bombed. The stock currently trades at about $13 per share – more than 40% lower than its IPO price of $23 per share.

Maybe the Godfather is just getting old. Maybe he needs to get out of the business of making offers people can't refuse if they want to earn a decent bonus this year. Maybe Dimon needs his heir to step up so he can retire and drink more wine and hang out in the garden with his grandchildren – like Don Corleone.

Whether he stays or goes, I doubt folks will let Dimon forget about WeWork for a while...

On Tuesday, Ritholtz Wealth Management CEO and CNBC regular Josh Brown posted a video about Neumann's ouster and the failure of WeWork's IPO on Twitter. He also wrote...

Wall Street was THISCLOSE to selling you #WeWork at $50 billion. Stop quacking like a duck and they'll stop throwing breadcrumbs at you.

Investors will never stop quacking like ducks and Wall Street will never stop trying to make money by shoving toxic breadcrumbs down their throats... though maybe they're more like geese, with Wall Street forcibly fattening them up to make foie gras.

Whichever waterfowl you like, Brown nailed his point...

It seems like everywhere you look on Wall Street, some rich dude is taking investors for a ride. And they're quacking like crazy, practically begging him to do it.

Take billionaire hedge-fund mogul Ken Griffin, for example...

Griffin started trading stocks from his Harvard dorm room at age 19. He's worth roughly $12 billion today, according to Forbes.

More than once in the past couple of years, Griffin's hedge fund, Citadel, has sold investment-grade bonds to pay a dividend to him and other owners. The company sold $500 million worth in 2017... And it just did the same thing again earlier this month.

Now, Citadel's bondholders won't likely wind up in the same sorry state as WeWork's shareholders and lenders. But the guy is already worth $12 billion. I'll go out on a limb and assume his partners are super-rich, too. Why do they need another $500 million right this minute? Why does Griffin need another dime?

Maybe he'll buy another Manhattan apartment for $238 million (the most expensive home in America) or another house near Buckingham Palace for $122 million. He bought both of those places earlier this year. And according to the Wall Street Journal, Griffin has spent more than a half-billion dollars on real estate since 2012.

I don't care that Griffin is rich... or that he got rich from hedge-fund fees. I just find it weird that he's using his company's credit rating to fund his art and real estate fetishes... when he is – or at least, should be – loaded to the gills with cash.

Then again, what do I know? Maybe having $12 billion isn't all it's cracked up to be. I'm sure billionaires have problems I can't begin to fathom...

What if Griffin needs another couple of paintings to hang in one of his new homes – and has to spend another $500 million on them, like he did in 2016? What if he's just a little short on his "walking around money" to do that? What then?

I can't imagine the horror of owning all that real estate... the taxes... the furniture... the paint... and worst of all, having other rich people walk through your latest mega purchase, saying things like, "Bless your heart, what a cute little place," or "That rug was an interesting choice."

Maybe the likes of Neumann, Dimon, and Griffin really do have a good reason to need all this money...

Maybe they just need a ton of money to buy the influence they'll need to get their kids into a fancy college. Apparently, you don't need good grades to go to Harvard. You just need to be good at sports or know somebody.

That's the message of economist Tyler Cowen's recent Bloomberg Opinion article...

Apparently, significant numbers of Harvard admissions are recruited athletes, legacy admissions, "Dean's Interest List," and children of Harvard faculty and staff. One source whom Cowen cited said 43% of white students admitted during a particular period were these so-called "ALDC" students... and 75% didn't meet the requirements to go to school there.

I'm not sure if I really care who gets into Harvard or not. Because let's face it, Ivy Leaguers or not, our best and brightest – the people who really did the work and received good grades – routinely turn in brilliant academic careers, then head straight for Washington, D.C., or Wall Street... and proceed to break everything they touch.

In both places, some of the smartest, most capable people seem to rely almost exclusively on a single go-to move to get ahead – larceny. We're told every day in 100 different ways that if the smartest people could only steal enough from the rest of us, they could fix every problem in the world. At least that's what the Washington geniuses do. The Wall Street geniuses just say, "Past performance practically guarantees you'll lose a ton, but I'll still get a bonus."

Don't bother writing in to tell me I'm too cynical. I'm still optimistic about the future. Besides, the situation in financial markets today is merely hopeless... not serious.

Wall Street banks and brokerages aren't the only ones selling to buyers who know less than they should...

Corporate insiders are selling, too. So maybe you should exercise caution about taking the other side of the trade.

The Financial Times reported on Monday that insiders – including chief executives and board members – are selling shares of their own companies "at the fastest pace in two decades."

U.K.-based data-analysis firm Smart Insider tracks insider buying and selling. And it says insiders are on track to sell $26 billion worth of stock this year – the highest total since they sold $37 billion in 2000. The firm also noted big insider shareholders at Walmart (WMT), Estee Lauder (EL), and Lululemon Athletica (LULU) have been particularly aggressive sellers lately.

Insiders know more about their businesses than you do. More than I do. More than Warren Buffett does (most of the time). A piddling few will be honest enough to say, "I'm heading for the exits, so I'll have something left if I get fired before the market bottoms." They'll mostly say things like, "No matter how bad it looks, we're fine. Buy the stock. I'm just selling a few shares as part of a long-term plan."

They don't actually say that, but that's what I hear when they talk. Maybe I'm the one with the neurological disorder. We still need that brain doctor to write in...

Today's corporate insiders remind me of Rosalind and Phebe in Shakespeare's romantic comedy, As You Like It. The masterpiece deals with several cases of love at first sight and its consequences. As Rosalind tells Phebe in Act III, Scene V...

For I must tell you friendly in your ear
Sell when you can: you are not for all markets:
Cry the man mercy, love him; take his offer:
Foul is most foul, being foul to be a scoffer.

That's a poetic way of saying, "You better marry this guy, because you're too unattractive and spiteful to expect many more offers, so sell when you can and marry him already."

It's similar to what desperate, beleaguered outsider shareholders hear in their mind's ears at market bottoms. And it's the same thing insiders seem to be hearing today... near a market top.

Corporate insiders don't need someone like Rosalind whispering in their ears...

They won't wait until times get bad to sell.

According to the Financial Times, insider selling this year is on track to eclipse the amount sold in 2007 (the year the S&P 500 peaked before the financial crisis) and again in 2017 (the year I told Extreme Value subscribers we were finally in a bona fide market mania and to sell when you can).

Yes, a lot of folks will sell you financial products you shouldn't buy.

Every now and then, somebody tries to stick Stansberry Research in that category...

I believe they do it mostly because we sell our products enthusiastically.

When they do that in my presence, I stay calm and harken back to the early days of my involvement in the newsletter world... in the years leading up to the founding of Stansberry Research 20 years ago.

The industry was in a dreadful state back then... And Porter saw incredible potential to serve investors with great research. He seized it, and I believe the world is better for it.

I've been at Stansberry Research longer than anyone but Porter...

I was employee No. 5 or No. 6. The folks hired before me were all administrative folks who have since moved on. It has been quite a ride over these past 20 years (22 total in the newsletter business for me).

If you told me 25 years ago that I would be hosting a weekly podcast with thousands of loyal listeners and writing a newsletter that has been around since 2002, I might not have believed you. I doubt it would have happened to me anywhere else.

Wall Street, Ken Griffin, and corporate insiders might be richer than we are at Stansberry Research. But they're selling stuff you shouldn't buy... I'm proud to say Stansberry Research is selling products that I truly believe no investor can afford to do without.

Just my two cents. I'll end today's Digest with two more...

Since May 2017, I've been saying that the stock market is in a mania...

But I've still managed to find some good deals since then. I've told people to hold plenty of cash, buy gold, and buy value when and where they can find it.

I've also been saying that expensive, fast-growing (mostly technology-related) companies would soon stop providing investors with amazing returns... And when that happens, you better learn to be a value investor. I said a new "Golden Age of Value" would arrive... eventually.

With all the loony selling I've detailed today – and as we've explained in recent Digests here and here – the market has finally shifted... The Golden Age of Value has arrived.

Growth is done. Value has taken command... and I'm betting it will stay in charge for some years to come. (I recently put my entire 401(k) into a value fund.)

So if you're looking for those 50% to 100% pops over the next six to 12 months (give or take), you won't find them in fast-growing tech stocks and hot IPOs anymore. From here on out, you'll need to learn to look for cheap, beat-up businesses with more than a little hair on them.

I've been searching for those stocks for the past 17 years as the editor of Extreme Value. My chief research officer Mike Barrett and I are finding a bunch of stocks that have basically been left for dead for the last several years while everyone was buying the so-called "FAANG" stocks.

We're looking forward to sharing all of our best ideas with our Extreme Value subscribers in the coming weeks and months – and I hope to pass along some of those insights in the Digest, too.

It's the end of the road for growth-obsessed investors and a brand-new day for us value guys! As they say in Cajun Country, "Laissez les bon temps rouler!" (Let the good times roll!)

New 52-week highs (as of 9/26/19): Axis Capital (AXS), New Oriental Education & Technology (EDU), Equity Commonwealth (EQC), Hannon Armstrong Sustainable Infrastructure Capital (HASI), iShares U.S. Home Construction Fund (ITB), New Pacific Metals (NUPMF), Procter & Gamble (PG), ProShares Ultra Utilities Fund (UPW), and U.S. Concrete (USCR).

In today's mailbag, several subscribers share their thoughts on yesterday's Digest about what the "super-rich" are doing and Democratic presidential candidate Bernie Sanders' plan for "billionaires" in America. As always, you can share what's on your mind by e-mailing us at feedback@stansberryresearch.com.

"Thank you for providing this information [about the world of family offices]! Outstanding read. I have wondered what the big money people are doing. This is a very well timed article. Keep up the good work!" – Paid-up subscriber Bernadette G.

"I am just a regular guy with a profitable business that wants the employees to stay and also prosper. Nope, not a billionaire. Millionaire? I don't feel like one. I am 65 and run an urgent care center. Yes, I am a physician. Over the last 15 years, I have seen reimbursements stagnant or actually decrease. I have seen taxes increase. Property taxes have gone up. Franchise taxes have been added. Employee wages have increased (but not as much as I would have preferred). Medical practices are somewhat unique but still are representative of the problem. I think the minimal wage should go up. The problem is I can't increase prices because I am subject to the prices offered by most insurers. I am in a conundrum. I want my employees to earn more. I have little if any control over the prices paid for the services provided while 'governments' continue to construct taxes that take from me and give to them. It is a no win for me and will eventually force me to sell my practice. How does that help any of my employees? It does not. We need less government, not more. Just my two cents." – Paid-up subscriber Mitchell F.

"Bernie began life as a Communist in his Brooklyn family and he matriculated to a socialist today and a full Marxist as soon as possible. Bernie and wife ripped off students in her college strangling them with student debt and worthless Diversity/genderism degrees. Bernie is a millionaire with three homes and flies everywhere despite his Climate change green mouthings." – Paid-up subscriber James P.

"Bernie is delirious with socialism... as long as it does not affect his lifestyle of living off the government." – Paid-up subscriber Garry V.

"I am a psychiatrist who is still working though I just turned 80 in June. Bernie never did answer questions about Venezuela under Maduro. Too bad he didn't read Ayn Rand's Capitalism: The Unknown Ideal not to mention Rand's Atlas Shrugged or For The New Intellectual. If he had read Rand's The Objectivist Newsletter 1962-1965 he would have encountered a book review of Ludwig von Mises' Planning For Freedom and Planned Chaos.

"I subscribed to Rand's newsletter in 1968 and have read many of the works of Mises, Hayek, Murray Rothbard, Bastiat, Carl Menger, Hazlitt, Nozick, Epstein, as well as every issue of Reason, The Freeman, Future of Freedom Foundation, Freedom Daily and publications of the Foundation for Economic Education, CATO, The Independent Institute, you get the idea.

"I was at the first meeting in Denver of the National Libertarian Party and founded the LP of Pennsylvania.

"Did you know that Ron Paul was an Obstetrician who delivered 4,000 babies before he ran for Congress in the 1970s? When he was elected and took the oath of office he did what most never think to do, he wondered just what he needed to do in order to keep the oath he had just taken!

"Ron Paul read the history and came to realize that the Founders, in their attempt to assure that their children would never live under a tyrant like King George the Third, only granted certain powers to the Congress which they listed in the Constitution in Article 1 Section 8.

"He realized that he had to identify the power being sought in a new bill in the Congress and see if that was among the granted powers. If it wasn't he voted NO. In his first 11 terms he voted as the sole NO vote over 300 times!

"When Ron Paul ran for the presidency in 2008 two young college students were impressed with his principled record and each started an organization in their college. Ten years later Students For Liberty and Young Americans For Liberty are active on around 2,000 college campuses and they have grown into the hundreds of thousands of student activists who recruit classmates and spread to other campuses, besides reading and learning about the Austrian school of economics and benefitting from affiliating with many other organizations within the libertarian/Objectivist movement.

"So as we sleep the numbers of bright young college boys and girls are encountering SFL or YAL colleagues and join the movement and when they graduate continue to support the movement as their numbers grow into the millions affected and enlightened by that experience. No doubt they will number in the tens of millions, the movement is growing exponentially, and will be able to offer the electorate a more enlightened alternative to the likes of those politicians who have not learned, think they know it all without reading, and have no appreciation what this country is really all about, its principles of individual freedom and limited government with sound money. Pleasant dreams." – Paid-up subscriber William C.

Good investing,

Dan Ferris
Vancouver, Washington
September 27, 2019