Betting on Black
Stocks have their best day since 2020... Betting on black... An eye on bonds... The reason for Meta's layoffs... Zuckerberg confesses mistakes... Why it might not get worse... Eric Wade's timely recommendation... Access our conference replay now...
Well, it happened...
This morning, the government published its latest official inflation reading, and it came in significantly better than Wall Street expectations for the first time since this whole inflation nightmare began...
The market's reaction was the equivalent of a bunch of people in a casino throwing down big stacks of chips on a bunch of roulette tables all at the same time...
I (Corey McLaughlin) know roulette is a nearly 50/50 game. But if you're like me and immediately think of red having a negative connotation in the markets, you could say most of today's bets were on black. In other words, it was a bullish day.
On the open, after the October consumer price index ("CPI") data was released pre-market, the major U.S. indexes soared as quick as computers would allow.
By 10 a.m. Eastern, the benchmark S&P 500 Index was up more than 4%... and the Nasdaq was up nearly 6%. They held, then rose into the close to gains of 5% and roughly 7%, respectively.
Real estate and tech stocks led the major S&P 500 sectors, each up roughly 8%.
We haven't seen this kind of one-day rally in stocks in a while...
Today was the best single-day performance for the major U.S. indexes since coming out of the COVID-19 panic bottom in the spring of 2020...
But as I explained yesterday, today's action is the sort of positive reaction we were expecting Wall Street to have for any inflation numbers that looked relatively good, much like during last month's "inflation day."
Let me be clear... This rally and the inflation data don't mean higher-than-usual inflation is a complete thing of the past in the real world – like at the grocery store, gas pump, or for a lot of people's budgets. So long as fiat currency exists, we'll have inflation.
Plus, today's release showed housing and rent prices moved up 0.8% from last month, some food prices increased massively from a year ago – like eggs being up 43% (I hope the chickens are getting royalties) – and energy costs are still rising too...
This also doesn't mean that we won't have a recession next year...
But the October CPI data – which showed headline gains of 7.7% year over year in prices paid by consumers, and a 0.4% gain from September – might indicate that at least a near-term peak in headline inflation is behind the U.S... The markets are looking ahead.
As our Stansberry NewsWire editor C. Scott Garliss showed in a report on the inflation news today, the CPI hit a high of 9.1% in June and was down from 8.2% last month...
As Andrew Hunter, senior U.S. economist at Capital Economics, told CNBC today about October's reading...
[It's] obviously still very high, but at least it's a move in the right direction.
If the direction continues, it would mean the Federal Reserve might not need to be more aggressive in its interest-rate policies. That could make the dollar weaker moving forward... which means all things priced in dollars will get more valuable.
It doesn't mean everything I just described is definitely going to happen, or that something can't happen to change the story. But Wall Street and the market, on balance, appear to be giving this scenario good odds, and they were bullish today.
As our colleague and Ten Stock Trader editor Greg Diamond has been saying, it looks like stocks are pricing in peak inflation.
The bond market may be starting to price in the same thing...
The U.S. 10-year Treasury yield dropped today by more than 6%, or 26 basis points, to around 3.8%, its lowest reading in about a month...
The U.S. 2-year Treasury yield also fell by about 24 basis points, to 4.3%.
Now, you might notice that the 2-year yield is still higher than the 10-year, suggesting expectations for a recession ahead, but perhaps one with lower inflation and interest rates than thought before this morning.
It's also important to note that the 10-year yield is once again lower than the 30-year bond yield (near 4.1%). That means the longer duration part of the yield curve has reverted to normal – because you'd expect to see higher rates with longer-term bonds.
We might be getting the "What the heck is going on with inflation and how high will it go?" part of the macroeconomic narrative out of the way. But the "What comes next?" part is still up in the air, as it always is in some form.
That includes questions around the job market, corporate earnings, and, yes, inflation moving ahead. If the stock and bond markets are pricing in "peak inflation," they're not pricing in low inflation either.
And we don't yet know the effects of the Fed's interest-rate hikes and how much "pain" – to put it in Fed Chair Jerome Powell's parlance – the economy and jobs market will see in the toughest growth environment in about 15 years...
However, we are starting to see more and more news about layoffs...
For one thing, reality is tough at Meta...
Meta Platforms (META), the company formerly known as Facebook, laid off 13% (more than 11,000) of its employees yesterday. Meta CEO Mark Zuckerberg said in a note to employees yesterday, "We need to become more capital efficient."
That phrase – capital efficient – is familiar to longtime subscribers and Alliance members. That's what our team always wants to see in a business when recommending buying shares in any company.
Previously, the company had only "paused" hiring, and Zuckerberg had not-so-gently encouraged people to leave Meta if "you decide that this place isn't for you," as he said on a call with employees in June.
On that call, he also told employees the company was experiencing one of the "worst downturns that we've seen in recent history," and they should prepare to do more work with fewer resources the rest of the year.
Yesterday, Zuckerberg was a bit more sentimental announcing the layoffs, at least publicly. He called them a "last resort," apologized to those impacted, and admitted he was wrong to think that the company's accelerated growth beginning at the start of the pandemic would continue.
"I made the decision to significantly increase our investments," he said. "Unfortunately, this did not play out the way I expected."
In a long note to the company – after explaining that Meta had also scaled back budgets, reduced perks, shrunk its real estate footprint, and that the company needed to do more to "bring our expenses in line with our revenue growth" – Zuckerberg said...
This is a sad moment, and there's no way around that. To those who are leaving, I want to thank you again for everything you've put into this place. We would not be where we are today without your hard work, and I'm grateful for your contributions.
To those who are staying, I know this is a difficult time for you too. Not only are we saying goodbye to people we've worked closely with, but many of you also feel uncertainty about the future. I want you to know that we're making these decisions to make sure our future is strong.
One of the more striking things to me, though, is an apparent contradiction in the details...
Conflicting messages...
It's not too surprising that Meta laid off thousands of workers to reduce expenses. It's more surprising to me that it appeared to lay off key people working on its metaverse dreams, on which Zuckerberg has so adamantly pinned the company's future fortunes...
I don't think anyone knows where Meta is headed at the moment.
All I keep thinking about is that the business is a lot different than when Zuckerberg started Facebook out of his Harvard dorm room 20 years ago. Maybe its time is up... After all, market leaders come and go.
On the other hand, Meta shares are now trading at nine times earnings. So if you're a believer in the company at all, it's not the worst time to buy a few shares. The stock was actually up 6% yesterday, another example of "bad news" perhaps being good for the long term.
Why it might not get any worse...
As Whitney Tilson, founder of our corporate affiliate Empire Financial Research, wrote on Monday (before Meta's layoffs announcement), things might not be able to get much worse for the company...
In short, Meta has been buffeted by no fewer than eight headwinds that, collectively, have severely impacted the company and its stock:
- Apple's (AAPL) privacy measures
- The massive rise of TikTok
- The end of the pandemic
- The strong dollar
- Metaverse spending
- Artificial intelligence ("AI") spending to address challenges from Apple and TikTok
- Reels cannibalizing more profitable segments of Facebook and Instagram
- Weak consumer spending, especially in sectors from which Meta draws advertising
Yet Whitney noted Meta still managed to report a 20% operating margin and $4.4 billion in net income last quarter, and he doesn't think the headwinds are likely to worsen. Some might even turn into tailwinds.
A downsized workforce could lead to better profits, for example. That's what the Zuck hopes, at least. And spending on AI could benefit Meta's advertising business. As Whitney wrote...
With the stock so universally reviled, I think there could be a rapid rush back into it in light of its cheap valuation and the heavy (25th largest) weighting in the S&P 500 Index. I could see it popping 50% on signs of stabilization, doubling on even the slightest hint of improvement in revenue growth, margins, and spending, and tripling if it actually happens.
If you're at all interested in the company, or one in a similar predicament, these sorts of bad-news moments can often turn into great long-term buying opportunities. After today's broad market rally, Meta shares are now up 14% in the past two days.
Finally, a positive spin on the blowup in cryptos...
Yesterday, we shared the nuts and bolts of the ongoing debacle centered on major cryptocurrency exchange FTX and its founder Sam Bankman-Fried. If you missed that, you can get up to speed here...
The prices of the two largest cryptos, bitcoin (BTC) and Ethereum (ETH), were not immune to the fallout from the story, dropping by double digits yesterday. In the past day, bitcoin has risen back up 11%, and Ethereum is up even more, by 18%.
In other words, volatility in cryptos remains high. But as an example of the great work that our Crypto Capital and Crypto Cashflow editor Eric Wade does, here's a positive way to look at the volatility...
A timely recommendation...
Just last month, at our annual Stansberry Conference in Boston, Eric recommended a crypto asset to all attendees – a volatility token. "If you have a high risk tolerance, and if you can behave yourself," with a relatively small position, Eric said this pick could pay off...
Eric shared the step-by-step instructions and where to go buy this token and at what level you should consider buying it, because like other volatility products, simple time decay erodes its value by about 1% or 2% per day.
But if you're looking for something to balance a crypto portfolio and maybe profit from unexpected volatility or black-swan-type events – like FTX's founder going from the cover of Fortune to cautionary tale in a few weeks – Eric told the crowd...
It behaves like a put [option] and it will spike.
And it did indeed spike as fear hit the crypto markets this week. This recommendation rose roughly 90% from Monday night through last night. It has since come down a bit, and the biggest short-term gains are likely behind it, but the token did its job just as recommended. And it could spike again, or stay elevated, if the crypto market sees more volatility.
And that was only one of the recommendations Eric gave to conference attendees... and one of dozens shared by our team of editors, analysts, and special guests last month at our conference in Boston.
Get access to all the recommendations from our conference...
The conference was a huge success, where more than 40 industry experts and in-house analysts and editors spoke about how to navigate this tough market. They shared dozens of recommendations and held small, private breakout sessions with subscribers.
If you missed the big event, fear not... You can still access all the invaluable financial content for a limited time. You'll get to hear from folks like New York University professor Scott Galloway, plus people we mentioned today like Eric, Whitney, Greg, Scott, and many more.
Click here to find out how you can get all the 2022 presentations and breakout session videos, including summaries and transcripts, and receive the tickers of all the recommendations shared.
Why Central Banks Are Hoarding Gold
Central banks around the world are nervous about the U.S. dollars they have in central-bank reserves, says Randy Smallwood, president and CEO of Wheaton Precious Metals. "Gold," he says, "is the constant store of value."
Click here to watch this episode of the Daniela Cambone Show right now. And to catch all of our shows and more videos and podcasts from the Stansberry Research team, be sure to visit our Stansberry Investor platform anytime.
New 52-week highs (as of 11/9/22): Gilead Sciences (GILD).
In today's mailbag, thoughts on the blowup of crypto exchange FTX... yesterday's market action and politics... and an opinion about the real cause of inflation... What's on your mind? As always, send your comments and questions to feedback@stansberryresearch.com.
"SBF [FTX founder Sam Bankman-Fried] insolvency is next level of Celsius [bankruptcy]. How long is this all gonna melt down until the forest is gone?" – Paid-up subscriber Fredrik H.
"Listen to the market talk. DOWN 646.89 points [yesterday]. Like me, it can't believe what the voting public is thinking. Two more years of reckless spending, crazy inflation, rents and housing prices, fuel and food prices out of control. OMG is everyone on meth, heroin, and oxy and pot?
"Joe is following the playbook of Lyndon Johnson. If you want to see how we end up at the end of Biden's wrecking ball, just look back and see how we ended up after Johnson. The events of those days are looking a lot like the events of today. We had war issues, fossil fuel issues, inflation issues, and crazy government spending on social problems. If today's market action is any indication of our economic future, we are in deep do-do." – Paid-up subscriber John M.
"Look at history. Today's stupidity is old news. The U.S. has been printing money since at least the Civil War. Our budget balance has possibly been positive about twice since then. We have had a negative balance of trade since 1960. The $1,000 life insurance policy that my dad bought for me in 1936 would have provided me with a fine funeral if I had died in 1960. Today it won't pay for a decent coffin.
"The $481.56 retirement check that I have received since 1990 has lost more than 50% of its purchasing power. Stop putting all the blame on the current administration. It's the system, not the current administration.
"Inflation has been the norm going back to before the Roman Empire and their coin shaving. Increasing inflation only compounds the rate. It was constrained for a few years because in the late 20th century because the oil producing countries started pricing oil in dollars. Then they bought our debt with their otherwise useless dollars. Then in the early 21st century the Chinese joined them.
"Today's growing inflation is the result of our running out of suckers that are interested in buying our debt, not the current political situation." – Paid-up subscriber John O.
All the best,
Corey McLaughlin Baltimore, Maryland November 10, 2022