When Everyone Knows... Nobody Thinks

What Greg Diamond is watching in the markets right now... Just a little breather or something more sinister?... When 'Everyone Knows' – Nobody Thinks... The latest craziness from GameStop... It's a feeding frenzy out there... One simple step to take right now... Join Greg for his special event next Thursday...

Maybe this is it...

Maybe 2022 will be the year I've been warning you about.

That's what I (Dan Ferris) took away from my recent discussion with Ten Stock Trader editor Greg Diamond... You can listen to our entire conversation on the current episode of the Stansberry Investor Hour podcast.

Regular Digest readers should already know a lot about Greg...

He joined Stansberry Research in 2017. Before that, as a hedge-fund trader, he managed up to $900 million a day for years on Wall Street. He also traded for a $65 billion retirement fund.

Most important, Greg is a brilliant technical analyst... And when he talks, I listen.

On Investor Hour, when I asked Greg for a specific trading idea, he pivoted to something far more important...

He instead shared what he's watching in the stock market right now.

First, Greg said the uptrend in stocks is still intact... And that's driving his current trading decisions in Ten Stock Trader.

That makes sense... With the benchmark S&P 500 Index and the Dow Jones Industrial Average hitting new all-time highs again this week, what other conclusion could he possibly reach?

But then, I pointed out to Greg that the tech-heavy Nasdaq Composite Index and the small-cap-focused Russell 2000 Index haven't made new highs along with the other two indexes...

The Nasdaq's all-time-highest close of 16,057 happened on November 19 – seven weeks ago. And the Russell 2000's all-time high of 2,442 occurred even before that (November 8).

Now, it's true that the Nasdaq and Russell 2000 have outperformed the S&P 500 and Dow Industrials since the bottom of the COVID-19 crash on March 23, 2020...

So maybe the Nasdaq and Russell 2000 are just taking a little breather... Maybe they're allowing the S&P 500 and Dow Jones Industrials to catch up.

Or maybe it's something more sinister... Maybe the Nasdaq and Russell 2000 are telling us that the bubble is done and buying fast-growing companies with questionable business models is no longer a winning strategy. (It never was, of course... But now, maybe the market has decided to finally penalize those folks who don't get that.)

You'll want to pay attention to what Greg said next during our conversation...

He explained that if the Nasdaq and Russell 2000 don't hit new highs soon, it could signal a huge top in the markets.

So even though he expects stocks to move higher in the short term, I know he's concerned.

However it all plays out, it's interesting how the two of us arrived at the same conclusion from completely different directions. Call me guilty of confirmation bias, but I can't help feeling a tiny bit vindicated...

I recommend long-term equity positions based entirely on fundamental analysis... And I don't worry much about timing. Meanwhile, Greg is mostly focused on shorter-term trades based on technical analysis... And timing is a key part of his strategy.

Yet here we are, with our views converging on the potential for increased volatility and a big downturn in equity prices starting this year. Both paths led us to the same conclusion.

It all reminds me of a piece that investor and author Howard Marks once wrote, called 'Everyone Knows'...

Marks published the memo for his Oaktree Capital clients in April 2007.

That was six months before the S&P 500 peaked. The index ultimately fell nearly 60% through March 2009 during one of the worst episodes in U.S. financial and economic history.

As Marks wrote at the time...

What's clear to the broad consensus of investors is almost always wrong.

And he continued...

Take, for example, the investment that "everyone" believes to be a great idea. In my view by definition it simply cannot be so.

If everyone likes it, it's probably because it has been doing well... it's likely the price has risen to reflect a level of adulation from which relatively little further appreciation is likely... [and that] there's significant risk that prices will fall if the crowd changes its collective mind and moves for the exit.

I would add that 'Everyone Knows' is the flip side of 'Nobody Thinks'...

Everyone Knows stocks aren't going anywhere but up... And every little dip is a buying opportunity. Nobody Thinks a major bear market is about to begin.

Everyone Knows the Federal Reserve supports the stock and bond markets and won't let them crash. Nobody Thinks the Fed is playing a dangerous game by doing nothing to disabuse investors of that horribly naïve assumption.

Everyone Knows passive investing flows into index funds and exchange-traded funds are so powerful that the big stock indexes are highly unlikely to fall far without another pandemic or global economic shutdown... And even then, it would be just another short-term dip to buy. Nobody Thinks passive investing flows can move in the opposite direction and that investors can sell without reference to underlying business fundamentals as manically as they bought.

Everyone Knows value investing is dead and buying fast-growing companies is the only way to make money in the stock market. Nobody Thinks the old cycles are still intact and that – just like at the peak of the dot-com boom – great companies' share prices are about to fall 80%, making this a great time to buy cheap value stocks and sell overvalued growth stocks.

Everyone Knows the stock market will never fall more than 20% in a single day as it did in 1987 because they'll shut down the exchange when the S&P 500 is down that much. Nobody Thinks stocks can fall more than 20% in a single day because the market is not a man-made machine but a natural phenomenon... And mankind doesn't control nature.

It's also philosophically true that when Everyone Knows, Nobody Thinks...

In other words, when everyone agrees across a place as vast, deep, and complex as the stock market... nobody is really thinking.

A healthy market features plenty of disagreement... Skeptics keep prices from getting too high by avoiding stocks or betting against them with short positions. Bargain hunters keep prices from getting too low by scooping up cheap stocks.

When Everyone Knows every stock is a buy, dramatically overvalued businesses with no prospects go up 30% instantly just because their management teams use the right buzzwords.

Video-game retailer GameStop (GME) is the latest example of that... The company buys and sells old video games and systems in an age of cheap, abundant, ever-changing, ever-improving computers and software. It's a dying, money-losing business.

And yet, GameStop's share price soared more than 30% after hours yesterday because it announced plans to launch a division that will develop a marketplace for non-fungible tokens (NFTs). The company also said it's entering into partnerships with crypto companies to share technology and co-invest in game-development projects involving NFTs and blockchain technology. GameStop has hired more than 20 people to do all this.

However, to be clear, GameStop isn't doing anything yet... There's no NFT marketplace. There are no new games with NFTs or blockchain.

It's all a bunch of blue sky and hot air, designed to attract more idiots to the company's already insanely overvalued stock. If it were real, GameStop would've issued a real press release to inform investors, instead of leaking a fairy tale about its intentions to the Wall Street Journal.

But of course, Everyone Knows GameStop is going to the moon... and Nobody Thinks it's a zero (except me and a few others).

Remember when a handful of companies inserted the word "blockchain" into their names to make their share prices go up a few years ago... only to see them crash afterward?

This latest initiative from GameStop is just like that... It's not a sign of a healthy market.

Everyone Knows and Nobody Thinks extends outside the stock market, too...

When Everyone Knows every technology is a buy, Nobody Thinks in Silicon Valley that they better take extra care to avoid investing in a fraud.

I'm talking about Theranos, the fraudulent blood-testing company founded by Elizabeth Holmes.

Holmes wore dark turtlenecks like Steve Jobs, the late Apple (AAPL) co-founder... And she spoke about changing the world in an artificially low voice to impress investors and employees. She was briefly worth $4.5 billion when venture capital investors valued her company as high as $9 billion.

It was Holmes' fault that she defrauded investors... But it was those investors' fault that they lost money.

Since then, it has become normal for startup companies to give venture capital investors just days – or even as little as a few hours – to make an investment. If not, the next venture capital firm in line will just bump them out of the deal.

Because Everyone Knows the next Amazon is out there... And Nobody Thinks they'll get defrauded.

When Everyone Knows you can't lose, every acquisition is attractive and capital flows freely... Global mergers and acquisitions (M&A) hit an all-time high of $5.8 trillion last year. That's 64% above 2020, and it's the fastest M&A growth rate since the 1990s.

It's a feeding frenzy out there.

I could go on with Everyone Knows, Nobody Thinks...

But by now, surely you get the picture... The consensus is dangerous.

On the way back down, it will all go in reverse... Capital for M&A will dry up, brilliant entrepreneurs will go begging across Silicon Valley, naïve individual speculators in GameStop will get wiped out, and everyone will start talking about the big indexes making new lows – not new highs.

But right now, Nobody Thinks that can happen.

That will continue until – at the bottom – everyone will know stocks are dead money forever... And nobody will think it's a good idea to invest in decent, profitable businesses with sound prospects. They'll be too afraid of stocks falling more than they already have.

We're a long way from there... But I've pointed more than once recently to the pockets of contrarian opportunity already available – like cannabis and silver-mining stocks. Others will certainly materialize in the weeks and months ahead.

Just give it time... Time is the great healer, the great destroyer, and the only arbiter of truth.

Who knows... given what we noted earlier about the Nasdaq and Russell 2000 failing to make new highs alongside the S&P 500 and Dow Jones Industrials, maybe the greatest opportunity of all will come our way in the next year or two.

We'll see... I don't worry much about timing. And Greg, the guy who does, says it isn't time to short the market yet.

Until that day comes, you better think about raising some cash...

If you want some ideas about how to do that, I'd like to point you in the direction of one of our corporate affiliates. My good friend and Empire Financial Research founder Whitney Tilson wrote about this topic in his daily e-mail on Wednesday morning...

I don't generally set out to raise cash – it's not a top-down decision. Rather, something triggers me to sell something I own – either the stock price rises to the point at which I want to trim or exit (a happy scenario) or something bad happens and I decide that my investment thesis is no longer valid, so I sell (an unhappy scenario).

Also, sometimes my portfolio gets too bloated so I get rid of the smaller, lower-conviction ideas.

I like Whitney's thoughts because it's similar to what I recommend...

Selling out of speculative positions without reallocating the proceeds and trimming stocks that become egregiously overvalued will help you raise cash. Beyond that, if you set aside new income without allocating it, you'll be able to raise plenty of cash in no time.

I just can't help doing this one more time...

Everyone Knows it's wrong to hold a lot of cash. Nobody Thinks of cash as a cheap, permanent call option on future opportunities.

Maybe I have it all wrong... But if you're not asking what Everyone Knows and Nobody Thinks, you're making yourself vulnerable to huge but avoidable losses.

And as I said earlier, I'm not the only one who believes we're in for a rocky year...

You can prepare for a potential crash in 2022 by starting to build your cash hoard. You can also tune in to Greg's special event next Thursday, January 13, at 8 p.m. Eastern time...

Greg will dive deeper into his market outlook for 2022. In short, he believes we'll see the start of a massive crash that could lead to the longest bear market since the 2008 crisis.

Not only that, by using his research methods, he'll name the exact day it could happen.

In preparation for his event, Greg explained...

Mark my words: All those people who think stocks will go up forever... and that the Fed can keep the bull market running indefinitely... you're in for a rude and sudden surprise this year.

I'll say it again... when Greg talks, I listen. I encourage you to do the same. And it won't cost you a penny to do so... We only ask that you save your spot in advance right here.

New 52-week highs (as of 1/6/22): Berkshire Hathaway (BRK-B), Flowers Foods (FLO), SPDR S&P Regional Banking Fund (KRE), McDonald's (MCD), and Viper Energy Partners (VNOM).

In today's mailbag, a question about "betas" stemming from Tuesday's Digest. Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"[Tuesday's] Digest was especially interesting about beta and portfolio sizing, thank you. The Digests are usually too long for me, but I actually read this one all the way through, twice.

"I need a clarification though, being what specific year Beta to use for sizing, 1, 3 or 5 year beta?

"In addition, I can find 1-10 year beta data in Fidelity for ETFs only, no stocks (?), and many ETFs have a 1 year beta from about 0.3 when their 3 and 5 year Beta is much greater than 1.0. Can you explain this? Again, thanks for a great Digest." – Paid-up subscriber T.C.

Corey McLaughlin comment: Thanks for the note, T.C. And we're glad you found the information helpful and easy to read.

The answers here are basically about sample size... A five-year beta measures a much larger amount of data about how a stock behaves relative to the market than a one-year beta. That's why those numbers can be significantly different.

For example, a one-year beta could simply be more reflective of an unusual short-term momentum shift or a one-off event. Meanwhile, a five-year measurement could provide the longer-term view of the stock's relative performance across more diverse market conditions.

On our Stansberry Investor platform, we share the five-year betas for stocks... So if you're having trouble finding them, I suggest you head there.

After you've logged in, you can easily find these metrics – and a bunch of others – if you search for a company by name or ticker on the homepage or under the "Market Analysis" tab. Then, look at the "SnapShot" section for that particular stock.

Good investing,

Dan Ferris
Eagle Point, Oregon
January 7, 2022