When the Wind Blows Hard Enough, Even the Turkeys Fly

Continuing our discussion from last week... Everything is going ballistic these days... Lessons from the dot-com bubble... Stock-trading teenagers, Carole Baskin's tips, and Elon Musk's Twitter misunderstanding... When the wind blows hard enough, even the turkeys fly... Revisiting our three macro trades...

Consider this week's Digest an extension of our discussion from a week ago...

You see, I (Dan Ferris) can't tell investors anything more important right now than more of what I said last Friday. The "time machine" is going to never-before-seen places today...

I've been warning you that stocks were expensive since May 2017. Since then, the market has hit a series of higher highs and lower lows. And with the market's time machine running out of control today, I don't believe it's done hitting higher highs and lower lows yet.

But eventually, it will... At some point, we'll be blasted back into the market's past.

To put it bluntly...

I have never seen a moment this extremely bullish during my 22-year career... in my 59 years of life... or even since Adam and Eve were kicked out of paradise.

Not in 1929. Not in 2000. Not in 2007. Never.

Even though regular Digest readers know that I abhor predictions, I'll go one step closer to making an outright one today... I will be shocked if the benchmark S&P 500 Index doesn't spend at least some time trading 15% to 20% below its all-time high this year.

And one more step closer... I've bet a small amount of real money that it will happen.

Of course, I could be making a mistake by placing such a bet... As I'll show you later in today's Digest (and have shown you in these pages before), it's challenging to try to trade around the top of a major asset bubble. The action tends to be too crazy and choppy.

But whether the top comes today, next month, or next year... it will come soon enough. And I'm urging all of you to at least prepare today for what's ahead. As my colleague Mike Barrett said yesterday, the "pendulum" will swing back to extreme fear at some point...

When that happens, you can't let yourself get caught off guard. You must be ready for a wide range of potential outcomes. In the end, I guarantee you'll be glad that you prepared.

Before we talk about what you might do right now, though...

Let's look at some charts that show the prices of various assets "going vertical" (or nearly vertical) in recent weeks. This is the market in action... And it's a much better way to show you how manic the market is than any sentiment indicators or valuation metrics.

We must start with stocks, of course. The S&P 500, tech-heavy Nasdaq Composite Index, and small-cap Russell 2000 Index are all going ballistic these days, compared with their trajectory over the past decade. Look at the near-vertical moves higher at the end...

It's enough to make you forget that stocks can go down, too. (That steep drop on the chart from last March, at the height of the panic about COVID-19, seems so long ago now.)

In terms of specific stocks, I mentioned bubble poster child Tesla (TSLA) last week...

The electric-car maker's value has gone ballistic, too. It's valued higher in the market today than the next 10 most valuable publicly traded car companies... despite its lack of profitability and the fact that it produces barely half a million vehicles in a year – roughly 1/20th of Toyota Motor's (TM) annual production.

Besides Tesla, the most talked about asset of the moment is bitcoin...

Regular readers know I'm bullish on the cryptocurrency over the long term.

But I've acknowledged many times that it trades like a small mining or biotech stock. And you should expect that type of price action to continue... That includes the price dropping when the big stock indexes sell off, when everybody wants only one asset – cash.

Bitcoin's price chart looks even more ballistic than the stock indexes. Its value went sideways for much of the past two years before it went straight vertical in recent weeks. And despite enduring a swift 25% correction last weekend, its surge remains impressive...

Bitcoin is priced in U.S. dollars (like just about everything else in this world)... so a ballistic price chart implies that inflation might be in the air.

It's the same story with commodities like corn, soybeans, and wheat. They've all started getting more vertical lately, after going sideways for much of the past year...

And the picture is similar with base metals copper and zinc...

Clean-energy exchange-traded funds ("ETFs") have become all the rage lately, too... I should have added these ETFs to my list of election-related macro trades in late October.

Most politicians endorse clean energy now. Political talk about fossil fuels, when it happens at all, is simply about preserving jobs. Politically, it's a foregone conclusion that fossil fuels must be eliminated... The only debate now is about the timetable.

So "clean energy" is the latest buzzword of the day. And I doubt that will change during President-elect Joe Biden's tenure. After all, he built his campaign in part on "getting rid of" the subsidies for fossil fuels.

Look how greedy investors have become for these stocks lately – specifically the ALPS Clean Energy Fund (ACES), the iShares Global Clean Energy Fund (ICLN), and the Invesco WilderHill Clean Energy Fund (PBW). As you can see, they all have gone nearly vertical...

The problem is, most investors don't know how to think about bubbles... let alone how to behave as they inflate and then burst. I want to make sure you're not one of those investors...

That brings us to a former Bernstein Research employee's deep dive into these sorts of things...

Corry Wang, who previously worked at Bernstein and now works for Google Commerce, spent his "winter holiday reading hundreds of pages" of reports about the dot-com bubble. (Happy Holidays, I guess?)

And then, on New Year's Day, Wang posted a series of insightful comments about the era on Twitter. Some of what he shared translates well to the current environment...

For one, he said he learned that nobody noticed when the market peaked and the bubble finally popped. In hindsight, we know the bubble peaked in March 2000... And Bernstein's own strategist – who bet his career on calling the top – didn't notice it was over until July.

It's like musician John Lennon said shortly before his death, in the 1980 song "Beautiful Boy" about his son... "Life is what happens to you while you're busy making other plans."

It makes you wonder what plans folks were busy with as life happened in March 2000...

The bubble peaked on Friday, March 10, 2000.

Most of the New York Times headlines in the days leading up to the market's top were about the presidential primary elections. In those first several issues of March 2000, headlines about stocks or investing didn't appear until I was several pages in (sometimes 40 or 50!).

But on the day the market peaked, right in the middle of the first page and just below the fold, the Times ran a story titled, "Teaching Johnny Values Where Money Is King." The first sentence is...

Every day after school, 13-year-old Jeffrey Mendelman has a peanut butter and jelly sandwich with milk, finishes his homework – and checks his stocks.

I wish I could say there was no hint of the top on the front page of the New York Times the day the Nasdaq peaked in March 2000. But I just can't do that... A 13-year-old boy obsessively checking stock prices is as sure of a sign of the top as you can get.

The January 2021 version of that 'Teaching Johnny' story is, of course, much weirder...

Carole Baskin runs Big Cat Rescue, a tiger sanctuary in Florida. And as many of you probably know, she also stars in the Netflix true crime documentary, Tiger King... It's about her long-running feud with Joe Exotic, who operated a wild animal park in Oklahoma.

As gonzo journalist Hunter S. Thompson said in his 1971 book, Fear and Loathing in Las Vegas, "When the going gets weird, the weird turn pro." So naturally, Baskin recently became a professional stock tout...

It appears Baskin was paid about $300 to make a video mentioning a penny stock called Zomedica (ZOM). Baskin notes that she doesn't hold any of the shares of the pet-medicine maker. But in the video, she said she can feel it in her "cat bones" that it's a good one...

And thanks to her mention, the stock soared more than 230%... Zomedica went from $0.40 per share to $1.35 per share in just three trading sessions through Tuesday of this week.

Another weird celebrity stock promotion implies the bubble is in its death throes...

In a two-word Twitter post around 8 a.m. Eastern time on January 7, Tesla founder Elon Musk simply said, "Use Signal." He was referring to the cross-platform messaging app.

But a bunch of investors didn't care to confirm that detail before hitting the buy button...

Texas-based Signal Advance (SIGL) surged 5,000%-plus in three trading sessions after Musk's message. Unfortunately, that company has nothing to do with the Signal app.

The company has no revenue and hasn't filed a U.S. Securities and Exchange Commission report since 2019. Its stock went up 5,000% solely because it had "Signal" in its name.

During the headiest days of the dot-com era, companies with ".com" in their names soared... despite many having no revenues or viable business models. The same thing has happened during gold manias with companies that have "Gold" or "Gold Mining" in their names... despite many not possessing as much as a single ounce of the precious metal.

When the market's time machine gets to the "We'll buy anything with the latest investor fad in its name" phase of the bubble, surely the end must be near.

In addition, penny stocks like Zomedica are all the rage today...

Bloomberg reported on Tuesday that a handful of penny stocks – including Zomedica – made up almost one-fifth of total U.S. equity trading volume on Monday. And for the first time ever, most share volume is trading "over the counter"... off of the major exchanges.

Any way you look at it, risky speculative businesses are outperforming others... Goldman Sachs' basket of companies with weak balance sheets is up more than 35% since last August, while its basket of companies with strong balance sheets is only up about 26%.

When the wind blows hard enough, even the turkeys fly.

But what do you think will happen to those turkeys when the wind stops?

Like with all equity bubbles, initial public offerings ('IPOs') are scorching hot right now...

In 2020, we experienced the busiest IPO year since the dot-com bubble. More than twice as many companies went public last year than in 2019, according to Barron's.

But this time, the companies are younger (and dumber?)... Companies that went public in 2020 were half as old as their predecessors over the past 12 years.

You have to give those CEOs credit for going public in a mania. There's no better time to take a young company public, if all you want to do is watch the stock price go straight up.

In addition to the ballistic stock index, bitcoin, and commodity charts... the weird stock-promotion angles... the huge penny-stock craze... and the crazy stats on IPOs...

We come to another important lesson from Corry Wang's winter-holiday research...

As he put it, "Fundamentals follow price, not vice versa."

More specifically, as Wang showed in his Twitter thread, the dot-com bubble popped in the first quarter of 2000... but revenue growth didn't fall until the fourth quarter of that year.

It's a classic example of billionaire speculator George Soros' theory of reflexivity...

Most people assume asset prices are responses to fundamental changes in an asset's value. But Soros realized the opposite is often true... Prices can affect fundamentals – which, in turn, affect prices. This situation can create a downward (or upward) spiraling effect.

In 2000, as Wang tells it, falling equity prices led to less capital spending... which led to slower revenue growth... which eventually led to lower equity prices.

I said something similar in my 'Top 10 Potential Surprises for 2021' on the Stansberry Investor Hour podcast...

My surprises aren't predictions... They're just risks or developments that don't appear to be priced into various asset valuations, and for which most investors are unprepared today.

For Surprise No. 3, I explained that investors likely aren't expecting to see a recovering economy this year accompanied by a falling or poorly performing stock market.

Last year, we saw huge economic damage from the COVID-19 lockdowns, yet the market soared to new heights. The opposite can happen, too... The market can fall when the economic fundamentals are good or improving – like it did back in 2000.

I would guess that might surprise most investors as much as last year's combination.

I'm not saying you can't explain what happened with this perceived contradiction in 2020...

I get that big (mostly tech) companies – whose businesses still thrived even in a world full of lockdowns and the majority of folks working from home – led the market higher.

That's not the point. The point is simply whether or not it's a surprise... And a market correction or crash amid favorable or improving fundamental economic and earnings data would likely surprise a lot of investors this year.

Here is perhaps the biggest lesson that investors should take from Wang's big holiday reading project...

Calling a bubble is easy, [but] making money [from going either long or short] is hard.

I've mentioned this idea many times before (and may mention it again, if this bubble doesn't burst soon). I covered it in-depth in the November 2017 issue of my Extreme Value newsletter, when I discussed the price action in Apple's (AAPL) stock from 1998 to 2000.

Apple's stock experienced some big moves around the top of the dot-com bubble, but the extreme volatility made it untradeable – both long and short. As I wrote in that issue...

Look at how Apple's share price behaved as it ran from $1 in June 1998 to $5.15 (split-adjusted) in March 2000 during the dot-com era blow-off top.

The prospect of a five-bagger (a 400%-plus gain) like that in less than two years is enticing to a lot of people. It packs more than a decade of compounding into a matter of months. And in hindsight, it's tempting to say, "Yes! Holding through volatility was worth it for 400% gains!"

But in the reality of the moment, it was very hard to hang on – and very difficult to make anywhere near a 400% profit – due to extreme volatility.

Chances are, you would have gotten in at the highs, fearful you'd miss out on even further gains... and have gotten scared out at the bottoms, fearful you'd lose even more money.

If you zoom in on the charts, you realize that it would've been nearly impossible to do... Apple's stock experienced multiple quick, sharp corrections of 25% to 31% along the way.

You would have needed to see the future to know that you had to get out at $5. The action was just too choppy to trade. The best traders I know tend to hate markets like that.

Don't look now, but with the S&P 500 plunging 34% into late March last year... then up nearly 70% off its bottom through today... we might be in exactly that kind of market.

As we showed above, bitcoin is like that lately, too. And so are several commodity charts.

It's a really bubbly moment... And I wouldn't be surprised one bit if all these assets experienced at least short-term corrections in the coming days and weeks.

So what should you do about all this today?

First, let's revisit the three macro trades I've recommended in the Digest since October...

I suggested buying bitcoin and cannabis stocks on October 23. And then, on November 6, I said to buy the iShares 20+ Year Treasury Bond Fund (TLT) to speculate on a short-term move higher for the U.S. dollar.

Let me start by saying that I'm still a long-term bitcoin bull...

I'm personally still "all in" on bitcoin as a store of value and don't plan on selling any of it for years to come. I would encourage you to do the same if you own any bitcoin today.

But remember, this particular recommendation was an election-related trade... designed to exploit higher inflation expectations. With Biden's inauguration imminent – as well as his recently announced $1.9 trillion stimulus plan – that effect seems to have run its course.

So we'll consider this particular trade over as of today. Bitcoin is currently trading at about $35,500. If you listened to my advice in October, you should be up roughly 170%.

Before the holidays, I said my long TLT trade would be busted if the fund closed at less than $155 per share. That happened on January 6. If you exited this trade the next day, you would've suffered a small loss of about 3%. Not everything can be a slam-dunk winner.

That leaves cannabis stocks as my only active macro Digest trade today...

We're tracking this trade with the AdvisorShares Pure U.S. Cannabis Fund (MSOS). This ETF is up about 70% since October 23. If you're in this trade, I would recommend holding your shares at least until sometime after Inauguration Day – next Wednesday, January 20.

Cannabis stocks soared after Biden's election, just as Cannabis Capitalist editor Thomas Carroll told us they would a few months ago. (Thanks again for the insight, Tom!)

Next, it's critical to remember my mantra – prepare, don't predict...

I still believe "true diversification" – which prepares you for a wide range of long-term outcomes – is the most prudent path right now.

As I've said before, the basic components of a truly diversified portfolio include a foundation of stocks and bonds, plenty of cash, gold, silver, and at least a little bit of bitcoin.

I also recommend that you explore stores of value in which you have a deep personal interest... They can be anything from real estate to gold coins to collectible musical instruments to wine or art. It's basically anything in which you have real knowledge and a personal connection, giving you greater insight into the asset's potential to preserve wealth.

If you're so inclined, you can also make a direct play on a stock market correction...

You could do as I've done and put a very small amount of money into put options on the big equity index ETFs. Stansberry Research's rules – which are designed to protect us from an all-too-intrusive regulatory regime – prevent me from saying more than that.

Greg Diamond, editor of our Ten Stock Trader options-trading service, shares my general bearishness right now... And he has some ideas designed to exploit it. If you're not already a Ten Stock Trader subscriber, I encourage you to learn more about it right here.

Another trader friend said he might buy shares of the ProShares Short S&P 500 Fund (SH)...

The fund is designed to move inversely to the S&P 500. So if a correction happens, you'll make money. Of course, the risk is that you'll lose money if stocks keep ripping higher.

That's why it's not my cup of tea. I'd rather just buy my little put-option position... And if it goes to zero, I'll barely notice. If not, I'll buy myself another guitar or gun... or maybe just add to my cash holdings.

If you're undecided whether to heed my advice to prepare today or not, perhaps this will help...

Earlier this week, Real Vision media group co-founder Grant Williams posted on Twitter about what his friends – including many successful, wealthy investors – are doing today...

A remarkable number of people I admire greatly are talking, very quietly, about how they are taking down risk. No great fuss. No great fanfare. Very matter-of-fact but...

These are the people who generally do this stuff before the crowd.

My old friend Whitney Tilson, the founder of our corporate affiliate Empire Financial Research, made a similar comment in his daily e-mail yesterday...

Three veteran investors – Jeremy Grantham of GMO (who we quoted last week), Tilson's friend Doug Kass of Seabreeze Partners, and David Rocker, formerly of Rocker Partners – "have all argued in recent days that the stock market is in a bubble that will soon burst."

In the post, Whitney included recent excerpts from each investor. He quoted Kass...

For the second time in the last few years, it is my view that, for investors with a less than one- to two-year timeframe, most equities should now be sold.

Kass then shared his many reasons for being bearish... They include a bunch of the same overstretched valuation metrics I've cited several times in recent weeks and months in the Digest, on the Stansberry Investor Hour podcast, and in the pages of Extreme Value.

Whitney also shared Rocker's insights. He notes several market excesses, including some we've documented here in the Digest...

IPOs were 60% higher than they were in the tech bubble of 1999. SPACs (blank check companies) rose 500% last year from 2019's levels. Option trading was up 50% from 2019 and 12 times higher than in the 2020 bubble. Margin debt is up 50% in the last eight months. Stocks are at peak valuations by virtually all traditional measures like price/earnings ratios, price/sales ratios, etc. and in numerous cases are higher than they were in 1929 and 2000.

And then, Rocker concludes, poignantly and almost poetically...

As a bubble inflates, its walls get thinner, more fragile, and more vulnerable to bursting.

At some point, and likely for some currently unforeseen reason, the bubble will burst, suddenly hurting many unsophisticated people and unnecessarily endangering the economic health of the nation.

"Unsophisticated people" like the 2021 version of sandwich-eating, homework-doing, dot-com-era-stock-slinging Jeffrey Mendelman... or any investor who thinks it's wise to follow Carole Baskin's tips... or anyone who can't differentiate Signal Advance from the Signal app.

In the end, Whitney believes his trio of well-connected friends are "right... but just early." Williams, too, pointed out that his friends "generally do this stuff before the crowd."

I've been bearish on the overall market for three and a half years... So I know what it means to be early. But I'm personally betting that I'm less early than any time in that span.

Fasten your seat belts... I believe we're in for a bumpy ride over the next several months. And the stock market's time machine could soon go careening much deeper into its past.

New 52-week highs (as of 1/14/21): ABB (ABB), Analog Devices (ADI), ARK Fintech Innovation Fund (ARKF), Asana (ASAN), Brunswick (BC), Bunge (BG), ProShares Ultra Nasdaq Biotechnology Fund (BIB), Berkshire Hathaway (BRK-B), Columbia Care (CCHWF), Cognex (CGNX), Cresco Labs (CRLBF), Crispr Therapeutics (CRSP), Curaleaf (CURLF), ProShares Ultra MSCI Emerging Markets Fund (EET), Futu Holdings (FUTU), iShares China Large-Cap Fund (FXI), Green Thumb Industries (GTBIF), Harrow Health (HROW), JPMorgan Chase (JPM), Jushi (JUSHF), SPDR S&P Regional Banking Fund (KRE), LCI Industries (LCII), Maxar Technologies (MAXR), ETFMG Alternative Harvest Fund (MJ), MakeMyTrip (MMYT), MasTec (MTZ), Norilsk Nickel (NILSY), Intellia Therapeutics (NTLA), OptimizeRx (OPRX), PowerFleet (PWFL), Qualcomm (QCOM), Sea Limited (SE), TerrAscend (TRSSF), Travelers (TRV), Ulta Beauty (ULTA), ProShares Ultra Semiconductors Fund (USD), and ProShares Ultra FTSE China 50 Fund (XPP).

In today's mailbag, an Alliance member shares his insights on the problems with cybersecurity today, which relates to the topic of Wednesday's Digest. Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"I've been involved with computers and networks since the early 1970s and I can tell you that we are nowhere close to getting 'Real about CyberSecurity,' even with the plans mentioned in your Digest.

"The problem is that the Internet was not initially designed with security in mind. Its purpose was to foster communications and sharing of information. Initially, it mainly connected large mainframe computers owned by Universities to one another. The majority of the people involved were motivated to follow the rules to make the system a success. A manager once told me that the reason they didn't have more security on his system was that the other users knew that if they tried to break into his system, he would then break into theirs, and once this trust was lost, the benefits promised by the Internet would also be lost.

"However, now that the Internet has expanded to all users and it provides not just information but control of systems, infrastructure, and much of our daily lives, we now have many 'bad' players on the Internet who are motivated to hack into it maliciously for financial or other advantages or even just to show they can cause havoc. This problem cannot be solved just by the tools that have been developed or proposed.

"Let me try to explain using an example...

"Imagine you live in a nice neighborhood surrounded by family and friends. You build a house, but since you want everyone to feel free to visit even when you're not there, you put no locks on the doors.

"Eventually, the neighborhood changes and there are now unsavory people lurking about. Your house now gets vandalized regularly. So, now you put locks on the doors. However, you still want your friends and neighbors to get in even when you're not around, so you put the key in the mailbox so that they can get it and still get in...

"Eventually, the bad guys figure out where the key is hidden and they again vandalize your home. So, now you put a combination lock on your mailbox... This works for a while but one day you come home and your mailbox is smashed to pieces and your house has been totally vandalized again.

"So, you decide to give all your family and friends a key to your home and not leave anything unlocked or keys accessible. Then, one day you come home and you see that your side window is smashed and the 'bad guys' have vandalized your house again. And, worse, your mom tells you that she lost your key and that she had it in an envelope with your name on it.

"Do you see the problem? You started out with a premise of open access, and then, as time went by and problems occurred, you tried to build more security onto the house. And every time you fix one means of access, the 'bad guys' figure out another way to get in.

"Now, contrast this with a different scenario...

"For a variety of reasons, you need to build a home in a bad neighborhood. So, from the start, you design it with heavy steel-plate doors. Each door frame is reinforced with each door having multiple locks on it including a key, entering a code, and perhaps even a fingerprint reader...

"Additionally, you only put in windows that have a small enough opening that a person couldn't use them to enter. And for additional safety, you put bars on the windows. And, even with these steps, you still built a house with a good deal of land around it so that you could put a large perimeter fence around the property to keep the bad guys from even getting too near your house.

"The difference is one house was engineered for convenience and the other was engineered for security. The Internet was initially engineered for convenience/ease of sharing and not for security.

"What we're doing now is trying to bolt-on fixes to close the openings that the bad guys have found to get in our Internet house. But as soon as we close one, they find another.

"So, now we're at the point where we're saying to assume that all systems have been hacked and let's try to make it so that we can quicker find and deal with the intrusion. That's like putting a security alarm in your convenience house.

"It's not a bad step to take since the alarm may frighten off some vandals but it still means that the bad guys have gotten inside your house and managed to do damage and steal some valuable possessions and get out before the police arrive.

"Instead of bolting on fixes or trying to make our detection of intruders more sensitive, perhaps the better solution is to keep the intruders out in the first place.

"The difficulty is that making the Internet really secure would require steps that we are not willing to take. You would basically need to redesign every operating system, every application, and every network device from the ground up with rock solid security in mind.

"This could definitely be done. But it would make these new computers and Internet completely incompatible with our existing systems. And we're certainly not in a position to throw-out our billions of dollars of existing hardware and software to start over.

"Consequently, we would need a plan to do the evolution and migration in a way that was not totally disruptive. The best guess estimates are that this evolution would take close to 10 years and it would require the involvement and cooperation of every hardware, network, and software vendor.

"And, unfortunately, selling security is not nearly as sexy as selling features and functionality." – Stansberry Alliance member Walt C.

Good investing,

Dan Ferris
Vancouver, Washington
January 15, 2021

P.S. The markets and Stansberry Research will be closed on Monday, January 18, in observance of Martin Luther King Jr. Day. After this weekend's Masters Series, we'll resume our normal coverage in the Digest on Tuesday, January 19. Enjoy the long holiday weekend.