When the Roof Caves In
Famous folks in finance are sounding the alarm... Bearish before it was cool... Bill Ackman spurs a brief rally... The 'Bond King' shares ticker symbols... Jamie Dimon: 1938 or 1948?... For once, Ray Dalio isn't optimistic... When the roof caves in...
A lot of famous folks in finance are sounding the alarm right now...
They're warning us about a recession, the perils of betting against bonds in the current environment, and central-bank incompetence. And in one case, one of these big-time investors gave us no less than four investment ideas (complete with ticker symbols!).
Now, before I (Dan Ferris) vouchsafe these vaunted voices in today's Digest, I need to get one thing off my chest...
With all the uncertainty today, sounding the alarm is becoming more popular. But regular Digest readers know that I was warning everyone who would listen before it was cool.
Keep that in mind as we dissect what these famous folks are saying and doing today.
Everybody and his brother will say they're bearish and call a recession after the market drops 10%. But only a few select folks (like me) told you to be careful before all the highest-flying garbage stocks got hammered starting in early 2021.
That's typical...
Most investors can't see past their own noses, let alone the corners that I spend my days trying to see around. (No wonder I have so much neck and back pain!)
A lot of folks just go along with whatever is happening in the world. They never question events like...
- The biggest financial mega-bubble in all recorded history
- 0% interest rates for most of the 14 years from 2008 to 2022
- The COVID-19 lockdown-related stimulus that was bound to lead to inflation
Too many investors have totally ignored anything that could upset the 40-year bull market that started in the early 1980s (which is now clearly over).
They're getting blindsided by the biggest bond bear market in decades.
And of course, after every horse has left the barn and disappeared over the horizon, they want help shutting the door. It's maddening.
I've been guiding individual investors like yourself through the twists and turns of the markets since December 1997...
Like clockwork, when the market drops every couple years, somebody asks me for a list of stocks that go up in a crash.
"They don't exist, but I have the ones you should buy when nobody wants to buy anything," I'd often reply as they walked away.
Well... I now have them.
I've pinpointed five stocks that have generated excellent gains since the S&P 500 Index peaked at the end of July. And historically, they've all done well in market downturns.
They're in The Ferris Report, along with all my other recommendations. I just added the latest one to my model portfolio this past Wednesday. This stock soared 37% as the market tanked in 2022. And it's up about 4% since July 31. The S&P 500 is down about 10% in that span.
If you read to the end of today's Digest, I'll mention another way to capitalize on the downturn and set yourself up for big gains over the long term. (Here's a hint... It involves Stansberry Research founder Porter Stansberry, who also just shared an urgent warning.)
OK, I'll stop ranting for now. Instead, I'll follow some good advice I got recently...
Stop looking at yourself and look around you. Really, look around you. What do you see?
When I look around the markets, I see a lot of billionaires now sounding the alarm...
Did a pair of billionaire investors cause a market rally on Monday?
You might know Bill Ackman...
He's the founder of Pershing Square Capital Management. He's also famous for taking a short position against bond insurer MBIA (MBI) before it blew up in the 2008 financial crisis.
Ackman started selling shares short in 2002, when the stock traded between $25 and $60 per share. It peaked at $73 per share in 2006 before bottoming at $2.29 per share in 2009.
The stock has traded for less than $20 per share in the 14 years since then.
In mid-March 2020, with the stock market crashing and the pandemic filling every headline, Ackman went on CNBC for an interview. And he boldly declared, "Hell is coming."
In hindsight, it was a great contrarian buy signal. The S&P 500 bottomed less than a week after Ackman's interview. Then, it surged 114% over the next 22 months.
Now, Ackman is at it again. He posted the following brief message on social media platform X (formerly known as Twitter) at 9:45 a.m. Eastern time on Monday morning...
We covered our bond short.
Ackman was referring to the August bet he made against 30-year U.S. Treasury bonds.
Then, four minutes later, he posted this follow-up message...
There is too much risk in the world to remain short bonds at current long-term rates.
And five minutes after that, he completed his Monday morning trio of X posts...
The economy is slowing faster than recent data suggests.
Keep in mind that Ackman posted these comments shortly after the markets opened.
At the time, the S&P 500 was down about 0.7% in the first 15 minutes of trading. And the yield on the 10-year Treasury was approaching 5% for the first time since 2007.
The following chart tells the story of the rest of the day. I've labeled when Ackman posted his flurry of messages on X. Notice how the market rose for the next three hours...
Now, I can't read minds. So I don't know exactly what millions of investors thought. But it sure looks like Ackman's comment sparked a rally in the world's biggest stock market.
I can't believe anyone would just blindly buy stocks, bonds, coloring books, toilet paper, or anything else just because some hedge-fund manager said he wasn't short bonds anymore.
Now, look at the rest of the chart...
If Ackman did move the market, the good times didn't last long. The S&P 500 started falling again Monday afternoon. And by about noon on Wednesday, the index was trading below its level when Ackman first posted about his bond short. Now, it's at its lowest level since May.
Ackman wasn't the only billionaire moving markets on Monday...
That morning, the 'Bond King' shared a similar take on X...
Regular Digest readers know the Bond King is Bill Gross. We talked about him two Fridays ago in relation to the new investing "epoch." And now, he's sounding the alarm...
Regional bank carnage and recent rise in auto delinquencies to long-term historical highs indicate U.S. economy slowing significantly. Recession in 4th quarter.
Best investments are equity arbs (CPRI and SGEN. VMW a long shot). I'm seriously considering regional banks again...
Maybe next week. Will tweet.
On bonds. Invest in the curve. Various combinations 2/10, 2/5. Should go positive before year end. I'm buying SFR h5 (SOFR futures). "Higher for longer" is yesterday's mantra.
That's what we all want to hear! Ticker symbols!
Anybody can wring his hands. I've done it a zillion times. But hardly anyone ever tells you what to do about it. And even if they do, they don't usually include ticker symbols.
Gross didn't merely predict a recession and make a bunch of noise about the economy. Instead, he packed the weightiest possible punch he could into two social media posts.
He gave us four – count 'em! – investment ideas that he likes right now.
Let me elaborate a little bit on these investment ideas so we're all on the same page...
The first idea is to buy companies that are being acquired – or, as Gross put it, "equity arbs." He mentioned Capri Holdings (CPRI), Seagen (SGEN), and VMware (VMW).
This strategy is also called "merger arbitrage."
The idea is that the stock will trade based mainly on the likelihood that the deal closes – not along with the overall market. On an annualized basis, this strategy can work out very well.
I've done it a few times in my Extreme Value newsletter. And it paid off every time.
I haven't done it much for several years, though. That's because the spreads between the market and deal prices have often been too tiny (except when it seemed likely that the deal would fall through).
The second idea is to consider buying shares of regional banks. Gross has posted about this idea elsewhere – including in follow-up posts on X...
On Wednesday, Gross noted that regional banks were trading at "1/5/10-year lows with price/book ratios at 60% plus or minus and yields at 7% plus or minus." He also implied that he was waiting a few days to start buying them...
Current situation resembles the axiom of "catching a falling knife." It hurts if done too early. I'm waiting a few more days but they are great long term holds.
Gross didn't give us any ticker symbols for this idea. But we can read between the lines.
The third idea from his original collection of posts seems to be a recommendation to trade various bond spreads ("2/10, 2/5"). That sort of thing is only for the smartest of smart bond traders. That's not you or me. If you never hear of it again, you won't be missing anything.
The fourth idea is to buy "SOFR futures." By SOFR, Gross is talking about futures contracts on the Secured Overnight Financing Rate. That's the broad measure of the cost of overnight loans backed by U.S. Treasury securities.
Interest-rate futures are priced as 100 – the interest rate. So if you buy, that means you think rates will fall (meaning the prices of bonds and loans will go up).
Put simply, buying the futures contract is a pure bet on falling rates. Again, if you never think about this or hear about it again, it won't matter and you can still grow your wealth.
In addition to these four ideas, you'll also notice something else about what Gross said...
He's sounding the alarm.
Like Ackman, he's concerned about the economy. He expects a recession by December 31.
But Gross made clearer, bolder calls than Ackman...
Ackman merely exited a bet on higher rates (his bond short). And while doing that, he just said that the economy was slower than data indicates.
On the other hand, Gross is actively betting on falling rates. He gave several investment ideas to anyone who listened. And he predicted an imminent recession, starting this quarter.
Like what Gross wrote about regional banks, the bond call might be an attempt to "catch a falling knife"...
After all, bonds have been in a bear market for more than three and a half years. The yield on the 10-year Treasury bottomed (prices peaked) in March 2020 at less than 0.4%.
If history is any guide, bond bear markets tend to be long affairs that grind on investors' emotions. Rates often ratchet higher every few years for a period of multiple decades.
Maybe you think it's silly to worry about a bond bear market if you plan to buy good bonds and hold them to maturity. That's a logical strategy, but it's harder to do than it sounds...
If you bought a 10-year Treasury in March 2020 and held it until today, you would lose more than 20% of your principal if you sold it at current rates. That doesn't feel good, Skeezix.
JPMorgan Chase (JPM) Chairman and CEO Jamie Dimon also sounded the alarm on the other side of the world this week...
Dimon was attending the Future Investment Initiative in Riyadh, Saudi Arabia.
During the event, he said he wasn't sure if the current moment is more like 1938 or 1948.
I realize that those two years might not stick out to most folks. But let me just say...
Let's hope Dimon is completely off target because neither year was fun for investors.
In 1938, stocks fell 49% from their peak to their bottom. The year began in the middle of a recession, too.
In 1948, stocks didn't plunge like a decade earlier. But they went sideways. Plus, the year started with 10% inflation and ended with a recession that lasted 11 months.
In Saudi Arabia, Dimon also sounded the alarm about record-high government debt around the world and its cause – record-high peacetime government spending.
He also expressed doubts that the world's governments and central banks can "manage all this stuff." And he said simply that he was "cautious."
I took the last part to mean Dimon is highly skeptical of bureaucrats' ability to tweak and manage multitrillion-dollar economies through fiscal policy and rate hikes. In fact, he said...
I don't think it makes a piece of difference whether [interest] rates go up 25 basis points or more, like zero, none, nada.
The banker also criticized central bankers...
I want to point out that 18 months ago, central banks were 100% dead wrong, so maybe there should be some humility about financial forecasting.
I would be quite cautious about what might happen next year.
Billionaire investor and hedge-fund manager Ray Dalio spoke at the conference in Riyadh, too...
Dalio also sounded the alarm about the global economy. His concerns are based mostly on the current state of the world and the effects of monetary policy. As Bloomberg reported...
"If you take the time horizon, the monetary policies that we are going to see will have greater effects on the world, it's difficult to be optimistic about that," Dalio said. The upcoming U.S. elections will be about irreconcilable differences to do with wealth and power, he added.
That sounds a lot like Dimon. And their comments tell us a lot about where we're at today...
These guys have made billions. They've been around for decades. And in the past, Dalio has often expressed confidence in governments' and central banks' ability to manage our lives.
It's also telling because these guys hate being wrong more than anything else...
Dalio's firm, Bridgewater Associates, manages roughly $97 billion of other people's money. It's one of the world's biggest hedge funds.
Importantly, Bridgewater is known for getting the market's big turns right. That's a big reason why it's so successful. So if there was any way to be optimistic, Dalio would find it.
But he isn't saying or doing anything like that right now.
And yes, I realize that you've heard all this before. I'm quoting a bunch of rich and smart folks who are basically saying what I've been telling you in the Digest for two years...
A reckoning is coming – and it won't be pretty.
But as Dimon suggested, perhaps a little "humility" about forecasting is in order...
In the past, another great investor taught us that the stock market is a better forecaster than any individual...
I'm talking about billionaire trader Stanley Druckenmiller.
Druckenmiller famously said that the best economist he knows is "the inside of the stock market." That refers to the way he bases his forecasts on the price action in various industries and market sectors over a given period.
Now, I don't know exactly how Druckenmiller does it. But lately, I've noticed a couple of things along those same lines...
Take the Russell 2000 Index, for example.
This index contains the smallest 2000 stocks of the Russell 3000 Index (which is the largest 3,000 U.S.-traded stocks). Since the Russell 2000 doesn't include the biggest 1,000 stocks, its market cap is only around 7% of the Russell 3000's market cap.
As a result, it doesn't pack a big punch in the overall market. It's also an index filled with a lot of low-quality companies. So it tends to weaken before the rest of the market.
In the current cycle, the Russell 2000 peaked on November 8, 2021.
That was 11 days before the Nasdaq Composite Index peaked. And it was nearly two months before the peaks of the indexes with a lot of higher-quality companies (the S&P 500 and the Dow Jones Industrial Average).
The Russell 2000 is down around 7% this year and 18% since the S&P 500 peaked on July 31. The S&P 500 and Nasdaq are both still showing positive returns for the year.
That's one way for us to measure what's happening inside the stock market. Trashy small-cap stocks are doing lousy. So if a new bull market started a year ago, nobody told them.
Our friends at SentimenTrader.com also look inside the stock market...
And they recently reported an alarming statistic...
In six of the 11 sectors in the S&P 500, more than half of the stocks are in a bear market.
I don't need to ask Druckenmiller what he'd say about that. I don't know if I even care.
But maybe it's the stock market's way of saying that all the stuff these billionaires are sounding the alarm about is real. If that's the case, we should all strap in...
The next several months – or even years, as I've discussed – could be brutal for investors.
You might remember what I said last Friday about folks buying S&P 500 index funds in their 401(k) accounts. They're putting 30% of their money into the top 10 stocks of the index.
Well, look at it another way...
They're putting the other 70% into stocks that are clearly in a bear market (and yet, still "mega-bubble expensive"). That's a troubling statistic. But it gets even worse...
Some of the market's biggest stocks – the so-called 'Magnificent Seven' – have already started faltering...
These seven stocks are Apple (AAPL), Amazon (AMZN), Microsoft (MSFT), Alphabet (GOOGL), Meta Platforms (META), Nvidia (NVDA), and Tesla (TSLA).
They led the market higher for the first seven months of 2023. But that's no longer the case...
Since the S&P 500 peaked on July 31, all seven stocks are down. Apple, Amazon, Nvidia, and Meta Platforms have all fallen at least 10% in that span. And Tesla is down more than 20%.
Suddenly, five of these seven stocks don't look nearly as magnificent.
The other two stocks aren't exactly soaring, either. Alphabet is down about 8% – with much of that drop coming after its earnings report this week. Microsoft was initially up after a good earnings report Tuesday. But through yesterday's close, those gains had evaporated.
Now, I get it...
I'm talking about short-term moves. Even Tesla's drop of more than 20% is typical of its volatile trading patterns.
If I weren't convinced that we're watching the unwinding of the biggest financial mega-bubble in all recorded history, I wouldn't even mention the market's action.
But given that the rest of the market has been getting weaker and weaker, maybe the Magnificent Seven is finally on the decline as well. Maybe this is the beginning of the crash I've expected – but that failed to materialize during the pretty orderly descent last year.
They're like the pillars holding up the roof. When they go, the whole thing caves in.
If the roof is caving in, you better know the five stocks I mentioned at the start of today's Digest...
Again, I've recommended them all in recent months in The Ferris Report.
I can't do what Gross did and share the ticker symbols today. That wouldn't be fair to my paying subscribers.
But I can offer you a great deal to join us. You can find all the details of my strategy in The Ferris Report – as well as a heavily discounted trial-membership offer – right here.
If my suspicions are correct, you'll want to strongly consider joining us. The pain in many folks' 401(k) accounts could soon ratchet up to a new level.
I hope I'm wrong. But hope is not a strategy. And as I always say, "Prepare, don't predict."
Yes, I could be wrong. After all, the Russell 2000 has reached its recent levels twice before – in June and September 2022.
Maybe it will bounce off this low and move higher again. It might even start a new small-cap bull market.
Small-cap stocks tend to thrive at the start of broader bull markets. But again, that hasn't been the case since the S&P 500 bottomed about a year ago.
A lot of folks argue that a new bull market started at that point. But I disagree...
The S&P 500 and the Nasdaq are both still in positive territory since October 2022. But the Russell 2000 is down about 11%. That doesn't sound like a new bull market to me.
I told subscribers to The Ferris Report earlier this year that I expected a market crash soon. I believe we could endure a 20% to 30% drop in the major indexes within a few months.
What if that started on July 31?
If that's the case, we're not even halfway to where I expect we could end up.
When risks pile up with stocks still at mega-bubble valuations, I can't just twiddle my thumbs and hope the market doesn't crash. It's my duty to sound the alarm (again)...
We're living through a massive repricing of risk assets after the biggest mega-bubble ever. And yet, most folks don't even realize it.
Ackman, Gross, and Dalio all finally realize it. Like me, they're sounding the alarm.
Prepare for what comes next before it's too late.
New 52-week highs (as of 10/26/23): CBOE Global Markets (CBOE) and Structure Therapeutics (GPCR).
Our mailbag was full of notes from Digest readers asking how they could watch Porter's latest presentation. If that's you, you'll want to keep reading through the P.S. below. Meanwhile, you can always e-mail your comments to feedback@stansberrryresearch.com.
Good investing,
Dan Ferris
Eagle Point, Oregon
October 27, 2023
P.S. In today's Digest, I hinted at an urgent warning from Porter...
Like me, Porter is no stranger to contrarian predictions. Also like me, he sees a lot of pain ahead for many Americans. That's why he just returned after three years...
Porter is back to deliver an important warning to all Stansberry Research readers about today's market environment. He also discussed what's coming next and a dead-simple solution to protect yourself. For at least today, you can access a full replay right here.