Next 'Sudden' Bankruptcy Is Days Away

The perfect bankruptcy for the Age of Blame... The gamblers who love Yellow's shares... The next 'sudden' bankruptcy is days away... Was losing money the long-term vision?... The sector suffering most from the cheap money pandemic...

Gradually, then suddenly...

That's how Ernest Hemingway famously described the process of going bankrupt. And it's how things ended for Silicon Valley Bank and the two other big U.S. banks that failed in March. That's how it ended in April for retailer Bed Bath & Beyond...

And that's how it ended on Monday for Yellow (YELL), the nearly 100-year-old trucking company we told you about in last week's Digest, when it declared bankruptcy.

Yellow's management issued an embarrassing press release last Sunday, announcing it had filed for Chapter 11 bankruptcy. The subhead to the release read:

International Brotherhood of Teamsters Drives Nearly 100-Year-Old Company Out of Business
30,000 American Jobs Lost

Blaming it on the union is the embarrassing part. Bankruptcy was in Yellow's DNA, as we pointed out last week...

Yellow has struggled for years. It was on the verge of bankruptcy in 2010, 2014, and 2020. In fact, in a twist of fate, Yellow didn't gain national prominence until 1951 – when it declared bankruptcy and was bought by Missouri-based banker George Powell.

So... the company that was born out of bankruptcy and flirted with it three times from 2010 to 2020 wants us to believe that it was otherwise well-managed and that it's all the union's fault that it has finally gone under.

I honestly don't know the particulars and don't care. I know competition from nonunion companies is a real problem for unionized ones. But I don't know... UPS, for example, seems to be handling the Teamsters just fine. The company just reduced its 2023 operating margin expectation from 12.8% to 11.8%, due to having to pay its unionized workforce more, but that's not the end of the world.

Unions aren't perfect. We all know they've been a hotbed of corruption at various times in our nation's history. But they're a fact of life that many companies can handle without going bankrupt.

I can't help thinking Yellow's bankruptcy involved a lot more than "it's the union's fault." But like I've said before, we're living in the "Age of Blame." It's always somebody else's fault. Blaming others is a litmus test. You turn red if you indulge in it... red as in red ink, red flags, and red-faced embarrassment.

Stock markets still under the sway of financial mega-bubbles always find pieces of garbage they like...

And though the market isn't in love with Yellow, somebody clearly still likes it. In last Friday's Digest, we reported how the company shut down operations on July 30... and how the meme-stock gamblers responded by shoving its stock price up more than 400% within a few days.

They were at it again this week, though with a little less verve. The stock is down nearly 50% since last Friday, but it saw two spikes of more than 40% – one on Monday and one on Tuesday. It's still trading about 200% above its July 28 close, the last trading session before it announced it had ceased operations.

The stock should be at $0. With more than $400 million more liabilities than assets, Yellow's equity is worthless. If you bought this stock thinking it would go up just because some people are stupid, then... OK, great... you were right. You better sell while you still can.

Lots of firms were going bankrupt gradually while the biggest financial mega-bubble in all recorded history was still inflating. Now that it has begun deflating, they're hurtling toward the moment when they suddenly cease to exist.

WeWork's 'sudden' bankruptcy is about to arrive...

Office-sharing company WeWork (WE) has been gradually going broke since it was founded in 2010. The "sudden" part – when it finally declares bankruptcy – will probably happen in a matter of weeks.

You'll remember WeWork and its daffy, occasionally inebriated, "visionary" founder Adam Neumann from previous Digests. We documented how insane it was for the venture capital market to value WeWork as high as $47 billion. We covered Neumann's eccentricities and his ability to raise capital even after he was ousted from WeWork due to its failed initial public offering...

We've been following it for at least four years. The first Digest mention of WeWork I can find was in Stansberry Venture Value editor Bryan Beach's April 10, 2019 write-up. I first warned you about WeWork in my September 27, 2019 Digest. We've mentioned the company and its founder in dozens of Digests.

Now the end of the WeWork saga appears imminent. The company filed its second-quarter earnings report and press release on Tuesday. The latter included the following ominous and weirdly detailed warning:

[A]s a result of the Company's losses and projected cash needs, combined with increased member churn and current liquidity levels, substantial doubt exists about the Company's ability to continue as a going concern. The Company's ability to continue as a going concern is contingent upon successful execution of management's plan to improve liquidity and profitability over the next 12 months, which includes, without limitation:

• Reducing rent and tenancy costs via restructuring actions and negotiation of more favorable lease terms;
• Increasing revenue by reducing member churn and increasing new sales;
• Controlling expenses and limiting capital expenditures; and
• Seeking additional capital via issuance of debt or equity securities or asset sales.

It's a little technical, so allow me to translate...

Member churn is industry jargon for "Everybody either works at home or at a real office now, so our business is losing customers." Going concern is accounting jargon for "not screwed." Without limitation means "It's probably even worse than this, but who knows? We sure don't."

Overall, a reasonable translation of the whole statement might be... This was never a real business. It was more like a way to print equity and light investor capital on fire while financial markets were inflating into the biggest mega-bubble in recorded history. That's over now, so we're pretending to make a list of stuff that needs fixing while our lawyers prepare a bankruptcy filing.

Earlier in the same press release, the CEO said:

We are confident in our ability to meet the evolving workplace needs of businesses of all sizes across sectors and geographies, and our long-term company vision remains unchanged.

So... putting this all together, they "have the ability" to "meet the needs" of businesses of all types and sizes all over the place, AND they'll likely cease to exist because they've lost so much money AND the "long-term company vision remains unchanged."

Does that imply that losing money and going bankrupt were part of the long-term vision?

Regardless, the idiots who buy worthless garbage were back at it, pushing up WeWork's stock 140% – AFTER they had fully digested the recent earnings report.

These guys love stocks that are either bankrupt or on the brink of bankruptcy a lot more...

It's WeWork's fault that it has failed. But it didn't create the conditions for its doomed existence...

That came from the world's central banks.

WeWork is (was?) a money-incinerating operation valued solely on the vision of its loony founder and his ability to talk stupider people than himself into giving him billions in new capital. That sort of thing tends to happen a lot when interest rates are kept at zero, like the Federal Reserve did from 2008 to 2015 and again from 2020 to 2022. Extreme interest-rate suppression was the worst economic calamity in all recorded history. Rates were too low for too long. Now we're watching the consequences unfold.

Even hard-earned money can be unwisely spent, but cheap or free money generally burns the biggest holes in folks' pockets. It lies at the heart of the biggest economic and financial disasters.

The one industry that often winds up in the worst shape after overdosing on free or cheap money is banking. Cheap money is like a financial pandemic. Everybody that gets enough exposure to it gets sick. Money is all banks own. It is really the industry's only asset. So the banks all get sick. Some die – as three large U.S. banks did in March.

Now a couple dozen more banks are feeling a little under the weather...

As Corey reported on Tuesday, ratings agency Moody's took various actions on 27 U.S. banks on Monday. It lowered credit ratings on 10 small to mid-sized banks and put six big ones – including U.S. Bancorp, Bank of New York Mellon, and Truist Financial – on review for potential downgrades.

The 11 banks that were neither downgraded nor put on review had their outlooks changed from stable to negative. God Almighty in his infinite wisdom only knows how a bank's outlook can go from stable to negative without a ratings downgrade. But that's the ratings business for you!

The ratings companies are like the banks they rate. They dance as long as the music keeps playing. Then when it stops, they go into sour-grapes mode and say, "We didn't like that song anyway."

If times are good, they don't recognize enormous financial mega-bubbles as a problem – or even that the bubble exists.

You might recall they kept Enron at an investment-grade credit rating until November 28, 2001, just four days before it declared bankruptcy on December 2. Similarly, as the 2008 financial crisis gained momentum, the investment bank Lehman Brothers maintained an investment-grade rating until 15 days before it declared bankruptcy.

The ratings agencies have learned nothing from Enron or Lehman. Signature Bank had investment-grade credit ratings from three different ratings agencies when it failed. They're like bad investors: they're always late to the party, selling good news at the top and bad news at the bottom.

Still... Moody's and its competitors aren't completely useless...

But taking action on 27 banks at least tells us that we were right to be worried about the wider banking sector back in March when we pointed out that:

What happened to Silicon Valley Bank could happen to the most well-capitalized banks in the country...

They're holding the same assets as every other bank – loans, U.S. Treasurys, and [mortgage-backed securities ("MBS")]. It's all the same house of cards. And if enough people blow on it, it will collapse.

If enough people show up and want their deposits back, the bank won't have them. It will fall short of cash, need to raise capital, sell bonds at huge losses... and likely get seized and shut down by regulators – just like Silicon Valley Bank.

The banking business model is not designed for bad times. If it runs into any serious amount of trouble, it goes kablooey. Moody's appears to have finally caught onto that – before the next bank failure or credit problem in the financial markets.

I still believe there's a lot more pain to come than the bland little bear market that started in late 2021/early 2022. From peak to trough, the S&P 500 fell 25% and the Nasdaq fell 36%. That's so benign that plenty of folks think it's over already. But even if the S&P 500 or Nasdaq were to hit new highs soon, I don't think we're out of the woods.

Bear markets after past mega-bubbles suggest we're looking at something like negative 60% or more for the S&P 500 and negative 75% or more for the Nasdaq. We're a long way from either of those.

As I concluded in March:

Cheap money infected everything and everyone. And now, it has become a wrecking ball...

Everybody who bought Treasurys and MBS in 2020 and 2021 is in a similar boat. Do we really believe this problem will only wreck a few tech companies and destroy their banks?

I don't.

Cheap money is a notorious serial killer. And its reign of terror is only just beginning.

We've been living in the Age of Cheap Money and its consequences for 30 years...

The cheapest money in all recorded history led to the most massive financial mega-bubble in all recorded history.

And we're somewhere between the beginning of the end of the mega-bubble and the end of the beginning of the horrendous consequences it'll wreak upon the world.

I figure this message won't land as well as it might have back in October, when the S&P 500 was hitting bottom, or December, when the Nasdaq was scraping its nadir.

But that's why I think it's necessary. I don't want you to be like the investors who buy garbage all the way down. Nor do I want you to be like the ratings agencies who dance while the music is playing and then pretend they're not really that into dancing when it stops.

By all means, feel good about any gains you've made on the long side this year. You've earned them.

Just don't get too complacent about the kind of stuff that blows markets up, like bankruptcies and weakness in the banking sector.

We're looking at more of both in the near future. Heck, if Moody's says so, that means both risks are already playing out as you read these words.

New 52-week highs (as of 8/10/23): CBOE Global Markets (CBOE), Fortive (FTV), ICON (ICLR), Phillips 66 (PSX), Construction Partners (ROAD), and West Pharmaceutical Services (WST).

In today's mailbag, an unprompted note of appreciation for Dr. David "Doc" Eifrig's latest issue of Retirement Millionaire, which subscribers and Stansberry Alliance members can find here... What's on your mind? As always, e-mail your comments and questions to us at feedback@stansberryresearch.com.

"Just wanted to compliment Doc on the latest issue [of Retirement Millionaire]. He always has good advice on every element of living a good life. From investments to bargains to staying healthy enough to enjoy life, he delivers the goods.

"His latest included a breakdown of how to better keep and improve our experiences with every one of the five senses. Talk about complete coverage. You have to give Doc ultimate KUDOS. Thanks again for taking us on this journey." – Stansberry Alliance member Rob W.

Good investing,

Dan Ferris
Eagle Point, OR
August 11, 2023