Dan Ferris' Controversial Thought of the Day (Prepare Yourself)
The latest 'What's Wrong, Warren?' moment... Portnoy vs. Buffett... These investors love the stocks of bankrupt companies… Signs of a top: 20-somethings trading $1 stocks… In praise of gray beards… Dan's controversial thought of the day (Prepare yourself)…
'What's Wrong, Warren?'...
That's the question the Wall Street Journal ("WSJ") published on December 27, 1999... three months before the biggest equity bubble in history peaked.
"After more than 30 years of unrivaled investment success," the article began, "Warren Buffett may be losing his touch."
A-shares of the legendary value investor's holding company Berkshire Hathaway (BRK) were trading for around $54,000 back then. The stock had lost 23% of its value in that year. The S&P 500 Index was up 18% (including dividends) over that same period. And the tech-heavy Nasdaq exchange had soared 83%.
Of course, we now know nothing was "wrong" with Warren Buffett...
The dot-com bubble peaked in March 2000. And by the time it bottomed out in October 2002, the S&P 500 had lost 48% of its value, and the Nasdaq had plunged 77%.
During the same time frame, Berkshire Hathaway rose 77%.
History is rhyming again...
The question this time comes not from the WSJ, but from Twitter. (Naturally... it's 2020, not 1999.)
Sports website entrepreneur Dave Portnoy has found himself stuck at home. With sporting events canceled under the COVID-19 shutdown, he has taken up a hobby – day trading.
Portnoy tweets over-the-top videos suggesting he thinks it's easy to make money in stocks. He supplied us with the "What's Wrong, Warren?" moment of 2020 on Tuesday, when he tweeted: "I'm sure Warren Buffett is a great guy but when it comes to stocks he's washed up. I'm the captain now."
During the accompanying video clip, Portnoy said, "There's nobody that's gonna argue that Warren Buffett's better at the stock market than I am right now. I'm better than he is. It's a fact."
The only problem with Portnoy's tweets is Poe's law. The adage about Internet culture states that it's impossible to create a parody of an extreme viewpoint so exaggerated that it won't be mistaken as sincere.
Of course, that same day, Federal Reserve Chairman Jerome Powell said, "We're not thinking about raising rates. We're not even thinking about thinking about raising rates." All 17 Fed officials who participate in rate-setting meetings expected rates to remain at zero through next year, with 15 expecting them to stay there through 2022.
Portnoy posted his tweets early Tuesday morning, after the market rose on Monday and before Powell spoke.
The stock market went haywire around 2 p.m. Eastern time on Tuesday as Powell spoke – first rising quickly, then falling. It went on to fall three days in a row.
Did Portnoy call the top by dissing Buffett, as the WSJ did in 1999?
Maybe I'm all wet with this Buffett thing... We're only talking about four days here, after all. But it seems everything happens faster these days. We had a one month, 34% bear market earlier this year. And now, we're in the middle of a massive rally off its bottom. Still...
Other anecdotal signs stink much worse than Portnoy's anti-Buffett moment...
For example, look at the huge jumps made by the stocks of some bankrupt or near-bankrupt companies...
Hertz Global (HTZ) filed bankruptcy on Friday, May 22. The stock closed at $2.84 a share that day and sank as low as $0.40 the following Tuesday. (Markets were closed Monday for Memorial Day.)
Since then, the stock has been as high as $6.25 a share, nearly doubling on Monday, June 8.
Who's buying, you ask?
"Who else?" I reply...
There are "hundreds of thousands of tiny buyers" who use the Robinhood investing app, according to Bloomberg. Robinhood is popular with the smallest investors because they can start accounts with just $500 and buy fractional shares. Bloomberg reported that 96,000 Robinhood users bought Hertz shares last week.
The WSJ reported that the number of Robinhood accounts holding Hertz shares "tripled in the three-trading-day period that ended on Monday – a more rapid gain than any other stock."
In a note that same day, Barclays auto analyst Brian Johnson offered a "gentle reminder to new investors" that Hertz has filed for bankruptcy.
In the overwhelming majority of cases, the equity of bankrupt companies becomes worthless. Getting the equity holders out of the way so bond investors can be paid is the primary reason for most bankruptcies. Bondholders often use their influence to push companies into bankruptcy.
Similar soaring price action occurred in other bankrupt or near-bankrupt companies, like Whiting Petroleum (WLL) and Chesapeake Energy (CHK). Whiting rose 400% and Chesapeake rose 500% between June 4 and June 8.
Having not participated in the bull market since 2009, lots of small investors got the day-trading bug while cooped up at home for the last few months. It's not just Robinhood, either. Traditional online brokerage firms Charles Schwab (SCHW), TD Ameritrade (AMTD), and E-Trade (ETFC) saw a total of nearly 1.6 million new accounts opened in the first quarter.
But buying bankrupt companies is only insane about 99% of the time. Every now and then, a bankrupt company's equity survives, and the stock soars. But it's still super rare.
What's crazier than that is the action in China-based real estate firm Fangdd Network Group...
The company's shares opened at $10 on Monday and closed at $47 – a gain of 395% – soaring as high as $129 during the day.
No news and no developments in Chinese real estate explain the move.
The near-fivefold increase is best explained by the company's name: Fangdd... which looks a lot like FAANG... the common acronym for Facebook (FB), Amazon (AMZN), Apple (AAPL), Netflix (NFLX), and Google (GOOG).
Did Robinhood traders think they'd found a FAANG exchange-traded fund?
Given the insane times and the total lack of news, that looks like the most likely explanation to me.
As of yesterday's close, Hertz, Chesapeake, Whiting, and Fangdd were all trading at least 50% below their Monday highs.
The stock market is not a game for the inexperienced...
The average age of a Robinhood account holder is 31.
When a bunch of 20- and 30-somethings start flooding into the stock market, pushing stock prices rapidly higher – look out. Stansberry and the whole wider world of investing is positively brimming with bright young people. I am never the smartest person in the room at Stansberry.
But I have something no young person has – gray hair.
I interviewed a fellow gray beard, investor Jesse Felder, on the Stansberry Investor Hour podcast recently. Jesse is worth following on Twitter (@jessefelder). On Tuesday, Jesse tweeted:
My 20 [year-old] son, stationed on an airbase in Turkey, just called to tell me about all the guys on the base going around bragging about how much money they've made buying "one-dollar stocks" on Robinhood.
So let's add it up: Portnoy's bragging... The flood of new, tiny investors... the bankrupt equities soaring... the ridiculous Fangdd action... 20-year-old soldiers buying $1 stocks on trading apps. Anybody with gray hair will tell you...
These things happen at or near tops, not bottoms...
It all reminds me of the old story about famous banker J.P. Morgan pulling his money out of the stock market because his shoeshine boy had expressed bullishness. I don't know if it's true or not, but it should be.
Nobody can predict exact tops and bottoms. Maybe the recent drop in the stock market is just a tiny breather before the recovery bull resumes... But this certainly feels like a shoeshiner moment.
And it's not like the stock market isn't crazy expensive...
As we pointed out last week, the S&P 500 is trading around 2.3 times sales lately, just shy of its all-time most expensive moment in history of 2.4 times sales – hit in February, right before the coronavirus-induced 34% rout.
To top it all off this week, I received a bunch of crazy, nasty e-mails from Stansberry Investor Hour podcast listeners.
After commenting on the riots and looting across the nation, I was flabbergasted to get this note from listener David G:
There are not "riots in the streets"!... so disingenuous, it turns my stomach. Each additional attempt to assuage your inner guilt of supporting the Great Leader diminishes you more and more. If you no longer support the ideals of equality in the Declaration and more importantly the Constitution, just say so.
There absolutely have been riots in the streets across the U.S. and in other countries around the world, too. It would take quite an effort to avoid knowledge of them.
You'd think after saying something that dumb, he wouldn't be able to top it... But he did! If by "supporting the Great Leader" he means Trump, I've said numerous times on the podcast that anybody who believes Trump is any different (better or worse) than Obama, or Obama than Bush, Bush than Clinton, Bush I, Reagan, Carter, Ford, Nixon... and all the rest of them, is not the quickest of cats at the best of times.
Then, listener Charlie wrote in to tell me, "Looting is the fault of all Americans," a rather typical modern, totally bankrupt, non-starter of a viewpoint.
I apparently touched a nerve by commenting on the violence in American streets. My controversial viewpoint? Here it is... (Prepare yourself): There is no excuse for the initiation of force against others' person and property. I don't care if it's started by a jackbooted cop in riot gear... or some masked anarchist flinging bricks at a 7-Eleven. There's no such thing as justified vandalism, arson, burglary, assault, battery, and murder.
That's a controversial viewpoint today.
Have a swell weekend.
New 52-week highs (as of 6/11/20): DocuSign (DOCU).
In today's mailbag, feedback on yesterday's Digest about the Federal Reserve and COVID-19... Do you have a comment or question? Send it to us at feedback@stansberryresearch.com.
"Shouldn't we be happy that we have more cases along with fewer deaths? Sound science would say that is the natural way to build our overall herd immunity. Yes?
"All the scare tactics of more cases does not paint the 'real' picture. Why is this not being portrayed in its entirety?
"Also, if death toll stands around 100,000 or so (mostly older and/or sicker people) and 100,000 small and medium-size businesses are permanently 'gone,' was that a trade-off worth making for all the 'living' formerly healthy people who were feeding families, paying employees and adding to the good of the community?" – Paid-up subscriber S.A.
"Zero rates on 'riskless' investments will force savers to riskier investments. Banks will be able to charge huge fees to originate toxic loans to desperate borrowers which the banks then get packaged and sold to desperate savers, yes a repeat of yore." – Paid-up subscriber Kendrick M.
Good investing,
Dan Ferris
Vancouver, Washington
June 12, 2020