The Last Bear Is Gored

One of the last bears standing in the dot-com era... The 'scapegoat' was right in the end... 'The last bear is gored'... This old Wall Street adage is about timing... Risk is everywhere in today's market... I would say this even if it got me fired... The most important thing an investor does... 'Something to do' right now...

Shortly before the top, Gail Dudack became the 'scapegoat' she feared...

Dudack worked as the chief investment strategist for Warburg Dillon Read, a division of global finance giant UBS (UBS), in the late 1990s. That, of course, was one of the best times ever for stocks...

The benchmark S&P 500 Index soared more than 230% from the start of 1995 into March 2000. That's remarkable for an entire index. And with the dot-com boom in full swing, the tech-heavy Nasdaq Composite Index did even better... It surged 570% in a similar span.

Those massive returns were phenomenal for most folks. They made many Wall Street analysts look very smart... And they made a lot of everyday investors incredibly wealthy.

But they posed a big problem for Dudack... She was one of the last bears standing.

In today's Digest, I (Dan Ferris) want to explain why Dudack is a classic example of an old Wall Street adage... I'll also cover a current example and tell you something that most folks don't want to hear... And finally, I'll detail "something to do" right now to get ready for what's coming.

With that in mind, let's learn the rest of Dudack's story...

Dudack started getting bearish in October 1997, long before almost anyone else feared an imminent bust...

That month, she sent her Warburg clients a review of the classic history of financial speculation – Manias, Panics, and Crashes by Charles Kindleberger... It's not a tome that will get you excited about putting money to work in the markets, if you know what I mean.

Still, being bearish like Dudack might not sound like a big deal. But in a huge bull market, it could be very hazardous for the health and safety of a Wall Street analyst...

For example, as author Maggie Mahar reported in her must-read book, Bull! A History of the Boom, 1982-1999, Prudential analyst Ralph Acampora predicted in the summer of 1998 that the Dow Jones Industrial Average would soon crash... And Acampora's employer became so worried that angry investors would harm him that it hired a bodyguard as protection.

Around that time, according to Mahar, Dudack told her husband...

I don't want that to happen to me... I keep thinking about John Kenneth Galbraith's description of what happens to a bear during an investment mania. You'll be scorned, you'll be terrorized, and when the bubble begins to collapse, the public will be very angry. It will need a scapegoat.

The "scapegoat" is why Mahar devoted an entire chapter to Dudack in Bull!... In fact, she titled Chapter 18 "The Last Bear Is Gored" in reference to an oft-recited Wall Street adage.

The phrase refers to a well-known investor or analyst being vocal in his or her bearishness about the overall stock market – and perhaps actively betting against it. The investor is then "gored" when he or she becomes tired of taking losses and throws in the towel on all bearish positions or meets some other fate due to his or her opposition of the bull market.

In effect, the sharp horns of the raging bull gored them.

The phrase implies that few, if any, bears are left – and in turn, that a top may be imminent. It's when the relentless ascent of the market into the valuation troposphere has wiped out all those folks who've bet against it. At that point, only the bulls remain.

Dudack also reported her bearish views during weekly TV appearances...

At the time, she was one of the so-called "elves"... The elves were a group of 10 analysts who appeared on the weekly TV show Wall Street Week With Louis Rukeyser.

The show and its host were known as "perma-bulls"... Their primary job was to keep telling the "little guy" watching at home that he could make a fortune in stocks by sticking with it for the long term. Any bearishness, as correct as it might turn out to be, just didn't fit in.

Given the show's very bullish bent, it's a miracle that Dudack lasted as long as she did... She expressed her bearishness on Wall Street Week for 156 straight weeks. (Three years!)

And Dudack's bearishness ultimately outlasted her job...

On Saturday morning, November 6, 1999, Dudack's neighbor called to ask why Rukeyser had fired her on the previous evening's program. It was the first Dudack had heard of it.

Dudack was fired for being bearish. And it proved to be a telling indicator...

The last bear had been gored. The stock market peaked four months later. And it wouldn't bottom until late 2002 – another two and a half years after the dot-com peak.

Though the dot-com bust thoroughly vindicated Dudack for her streak of bearishness on Wall Street Week, she didn't benefit from being right... Warburg fired her in the fall of 2000.

As author Michael Lewis wrote in a 2003 Bloomberg column, which Mahar quoted in Bull!...

Just as we grossly exaggerate the importance of people who argue that the market is going up, even when those people are dimwits, we grossly diminish the importance of those who say the stock market is going down – even when those people are first-rate thinkers.

To the uninitiated, the removal of one of the last well-known bearish investors from their bets against the market might sound like an "all clear" signal to buy stocks with abandon... With no one except bulls left, surely stocks would do nothing but keep rising indefinitely.

But goring the last bear is not an all-clear signal. Instead, it's the opposite – a warning of great danger...

You see, the market is efficient and rational most of the time... In normal times, it's hard to consistently find opportunities to buy stocks for less than their intrinsic values.

In other words, it's hard for investors to earn higher-than-normal returns with less risk.

Market prices are established through a balance of buyers and sellers. If the sellers offer more stock when the price goes up, it generally tends to trend back down – and vice versa.

But every now and then, roughly every decade or so, investors start behaving as if stocks will never fall. They believe the last bear has been gored, leading to indefinite good times...

Investors come to believe the riskiest speculations are "no brainer" opportunities. The market becomes less of a valuation mechanism – and more of a measure of risk appetite.

Nowadays, for example, retail investors have a record appetite for buying call options in search of large short-term gains...

That's a very risky thing to do.

And the way retail investors are doing it implies they believe that it's easy to predict the stock market's direction over any given week – and they always predict it will go up.

Of course, the potential for loss is highest when you don't acknowledge its existence... That's where we are in the markets today.

But in reality, risk rises with valuation... The more expensive a stock is compared to the earnings power of the underlying business, the riskier it is.

And yet, when one of the last famous and vocal bears is gored, it means there's a lot of demand for stocks... no matter the price, which also means... no matter how high the risk.

That's a recipe for poor – or even potentially disastrous – returns.

When the last bear is gored, it's as if there's no downward pressure on stocks anymore... It's a clear-cut sign that too many investors have become blind to the risks they're taking.

That leads me to the last gored bear in the current, seemingly never-ending bull market...

His name is Michael Burry.

A medical doctor by training, Burry was one of the first investors to become bearish as the housing bubble continued to inflate before subprime mortgage companies started falling apart in 2007. And of course, that eventually led to the Great Financial Crisis in 2008.

Burry shorted subprime mortgages by purchasing credit-default swaps from big banks like Goldman Sachs (GS). Investors in his hedge fund worried that Burry was wrong and the bet would go against them, creating massive losses. But Burry was right...

His hedge fund made investors 489% from its November 2000 inception through the end of June 2008. He made $100 million in profits for himself and $725 million for his investors.

Burry made plenty of successful long bets in his career – including buying GameStop (GME) before it soared out of sight as a "meme stock" this year. But overall, he'll probably always be known for his successful subprime short, which was the subject of the 2010 book and 2015 movie The Big Short. (In the movie, actor Christian Bale plays the role of Burry.)

So it should be no surprise that a bet against electric-car maker Tesla (TSLA) was Burry's largest position in the first quarter of this year... At the time, Burry was short more than 800,000 Tesla shares – worth more than $500 million – via put options.

Then, three months later, in his second-quarter filing with the U.S. Securities and Exchange Commission ("SEC"), Burry reported a big put position against the ARK Innovation Fund (ARKK). Regular readers know I've expressed bearish views on this fund more than once in the Digest. Burry also had a large short position against the iShares 20+ Year Treasury Bond Fund (TLT).

Well, today... all of Burry's bearish positions are gone.

The headline "Michael Burry Nukes His Portfolio, Exits All Bearish Positions" has been published and republished around the Internet since Tuesday. According to his latest SEC filings, he left all bearish positions – which reportedly generated a net loss for his portfolio.

In other words, Burry is tired of losing money by being bearish in a decade-plus bull market. He has finally thrown in the towel. The raging bull has gored Burry into submission.

By now, you might be questioning the significance of a single investor losing money on a few large bearish positions...

After all, Burry is not literally the last bearish investor in the market today.

Chicago-based hedge fund Livermore Partners is still short Tesla and the ARK Innovation Fund, as well as Facebook – excuse me, Meta Platforms (FB). Yesterday, Livermore Chief Investment Officer David Neuhauser told CNBC's Squawk Box Europe...

Historically, when you look at bubbles and speculation, there always seems to be a sector or a class that tends to be sort of the poster child, and it seems like [electric vehicles] to me is one of them.

So with that in mind... who really cares about Burry exiting his short bets?

It's a decent question, so let me remind you of what I'm trying to do in the Digest...

I'm trying to show you what the topping process of a massive bull market looks and feels like as it goes by. Remember, a top doesn't happen overnight... It's a long, drawn-out process that punishes folks. One common sight at such times is the goring of the last bear.

In the end, 'the last bear gored' is about timing...

Burry, a famously successful short-seller, has apparently exited all of his short positions during the most frenzied part of the bull market... We're at a time when the S&P 500 continues to trade near recent all-time-high valuations and investors' appetite for the most speculative plays – like short-term call options – seems to know no limit.

The S&P 500 has made 65 new highs this year... And Burry can't take it anymore. He's out.

It's times like this when it just looks plain stupid to be bearish.

It's like standing on the tracks with a speeding train bearing down on you at 125 mph... It's moving too quickly for you to get out of its way. You're just signing up to get run over.

But of course, folks said the same thing about Gail Dudack in the late 1990s. She was "wrong" for three years and became a scapegoat... until she wasn't wrong anymore.

And as I've pointed out in the Digest, cracks are starting to show in the great bull's façade...

At various points throughout this year, I've shown you how bubbles in clean energy, cannabis stocks, special purpose acquisition companies (SPACs), meme stocks, and ARK Investment's ETFs have already weakened or outright collapsed.

Now, I must admit that Stansberry Research is much more tolerant of my bearish views than Warburg was of Gail Dudack's in the late 1990s. But even if this would get me fired, I'd still say it...

I've been around the block too many times to worry what anyone thinks about what I have to say. And my sense of resolution about the unattractiveness of most stocks today is stronger and clearer than ever...

I'm more bearish about stocks today, November 19, 2021, than I've ever been in my life about anything.

You could say that my bearishness just hit a new all-time high...

I'm even more bearish today than I was in April 2008. Back then, I warned subscribers of my Extreme Value newsletter...

1) The financial crisis isn't half over yet, and you need to know just how big it really is.

2) Housing prices have a long way to fall.

3) Stay away from leveraged companies, banks, homebuilders, and the like.

4) When you buy stocks, pick only the best names with the best managements and the least leverage. And only buy at a substantial discount to a value about which you're highly certain.

Armed with hindsight, we now know that was the right call...

Home prices fell another 20% and didn't bottom until 2012. You can see what I mean with the following chart of the S&P CoreLogic Case-Shiller U.S. National Home Price Index...

I'm also more bearish than I was at the Stansberry Conference in Las Vegas in September 2018... At the event, I recommended buying put options for the first time in my career. The S&P 500 fell almost 20% from its high on September 20 to its Christmas Eve low that year.

It might seem crazy to be super bearish in a year when the S&P 500 has made 65 all-time highs...

At least there's no doubt that it's a contrarian viewpoint.

But as the experience of Gail Dudack and the wisdom of John Kenneth Galbraith have suggested... being a bear among bulls is an invitation for a serious goring.

I don't care about any of that, though. To me, it's all worth it if I can help you see...

The most important thing an investor does is assess risk.

Great investors are like insurance underwriters... They're always looking at what can go wrong and deciding how much they need to get paid to take on the risk.

Well, today, with securities prices at all-time-high valuations, too few stocks are paying me enough to take on the risks of owning them. But notice an important distinction...

I didn't say, "no stocks." I said, "too few."

As the late value-investing legend Peter Cundill said, "There's always something to do." The trick is to find that "something"... And that trick is much harder to pull off in times like this.

So what's the trick right now? What's the 'something to do' today?

My friend and longtime investor Rick Rule actually shared my favorite long idea right now on this week's episode of the Stansberry Investor Hour podcast. I'll let you listen and decide if you like it. (Full disclosure: I have a version of Rick's recommendation in my own portfolio.)

And of course, my Extreme Value subscribers know I haven't thrown in the towel on stocks yet... I've identified 12 undervalued opportunities this year. And eight of them still trade below my maximum recommended buy prices, which means they're still good values.

Otherwise, my favorite overall idea at the moment is straightforward... It seems like a great time to look for attractive short-sale opportunities.

But let me stress that this strategy isn't for everyone reading this essay... Short-selling is so hard that it's not worth doing for most folks. The risk-return proposition is dicey at best...

Losses from short positions are theoretically unlimited since a stock can soar hundreds of percent higher. As that happens, the short sale – the bet against the stock – will keep losing money. Meanwhile, short-sale profits are limited since a stock can't fall more than 100%.

And in addition to picking the right stock... you also must get the timing right. Otherwise, you'll wind up needing to exit too early – before your short thesis proves to be correct.

Still... given the many deflating mini-bubbles I've mentioned in recent months... the all-time-high valuations in many stocks and other asset classes... and the unsustainable frenzy of speculative buying today... it's time to add short sales if you're comfortable doing so.

A wise, old short-seller once told me that he doesn't go short until after his target's share price has started its decline... For example, I would take a look at a stock like Peloton Interactive (PTON).

The exercise-equipment maker is already down 70% from its January high. That makes it more attractive to me as a potential short target than any high-flying tech stock that's still in spitting distance from its all-time highs.

And all those deflating mini-bubbles mean you'll likely be able to find a bunch of stocks well off their highs just like Peloton. You just need to roll up your sleeves and get to work.

But if you decide that shorting isn't for you, that's OK...

That's definitely a smart decision to make if you're not an experienced investor.

Just make sure you have plenty of cash, which you should be doing anyway. Like short positions, cash will rise in value relative to falling asset prices in a bear market.

If a bear market takes hold and investors begin to panic, cash will become like oxygen...

Nobody will think about it until they're running out of it. Then, it's all they think about... And they will sell absolutely anything they can get rid of to get it – including shares of excellent, cash-gushing companies at rock-bottom prices.

During those times, an enterprising, long-term, value-focused investor in great businesses should be happy to provide the liquidity that these desperate investors seek... With plenty of cash saved up, you'll be able to scoop up incredible bargains hand over fist.

You'll never hear me say that I believe the top of the market is imminent or that it's behind us. As I've pointed out before (and as I said again above)... market tops are processes, not one-day events. You often can't tell you're at the top until it's far in the rearview mirror.

But I will say that I believe risk in stocks – like valuations – is at an all-time high today. And I'll keep warning you about the inevitable bust even if it means becoming a scapegoat or the last bear gored like Gail Dudack or Michael Burry.

My advice right now is simple...

Invest accordingly. Reduce your speculative bets. Make sure you have plenty of cash ready to go when the bust happens. And consider shorting vulnerable stocks if you're comfortable.

This is a dangerous time for investors. Be careful. And don't say I didn't warn you.

New 52-week highs (as of 11/18/21): Apple (AAPL), Analog Devices (ADI), Automatic Data Processing (ADP), Applied Materials (AMAT), Atkore (ATKR), Bath & Body Works (BBWI), Richemont (CFRUY), Costco Wholesale (COST), Comfort Systems USA (FIX), Formula One Group (FWONA), Alphabet (GOOGL), Home Depot (HD), Ingersoll Rand (IR), iShares U.S. Home Construction Fund (ITB), Knowles (KN), Lennar (LEN), Lynas Rare Earths (LYSDY), Microsoft (MSFT), Motorola Solutions (MSI), Cloudflare (NET), ProShares Ultra QQQ Fund (QLD), ProShares Ultra Technology Fund (ROM), ProShares Ultra S&P 500 Fund (SSO), ProShares Ultra Semiconductors Fund (USD), Vanguard S&P 500 Fund (VOO), and Verisk Analytics (VRSK).

Today, a subscriber writes in with his thoughts on the energy sector. He's referring to reports that President Joe Biden recently asked some of the world's largest oil-consuming nations – like Japan, China, and South Korea – to consider releasing some of their crude-oil reserves in an effort to lower prices. As always, you can tell us what's on your mind when it comes to the markets at feedback@stansberryresearch.com.

"Isn't it so hypocritical of our government to ask other countries to draw down their crude reserves so as to increase oil supply and reduce prices. This is the same government that stifles domestic production and throws one roadblock after another in the path of those who would make us energy independent." – Paid-up subscriber Paul H.

Good investing,

Dan Ferris
Eagle Point, Oregon
November 19, 2021