Orange Swans Aplenty

Lava-like goo... Cleaning a steam engine... Nobody cares (or knows) what they buy... The Will Rogers market... The Internet's valuation boost... Orange swans aplenty... Don't sit out this crazy market...

Ever wonder what actually melts in a nuclear meltdown...?

Nuclear reactors are built with elaborate cooling systems. When they fail, uranium fuel pellets get too hot and turn into a lava-like goo. This melts the zirconium rods they're encased in, then the surrounding concrete and steel.

The whole mess can get so hot it burns through the reactor's containment structure and leaks into the environment.

A nuclear meltdown is a catastrophic, extremely dangerous event that can get people killed.

When the stock market melts down – like it did in March 2020 – it hits millions of people with steep losses. Some of them sell out, making the loss permanent.

It's not hard to understand why anybody might refer to any steep bear market as a meltdown.

I (Dan Ferris) have a harder time with the opposite term – Melt Up.

In the physical world, when something melts, gravity dictates that it flows downward. So there's no equivalent to a Melt Up in a nuclear reactor. This is strictly a financial term. My colleague Steve Sjuggerud coined the now-popular phrase to describe a rapidly rising, frenzied run, often occurring at or near the end of a longer bull market.

I'm not saying I don't get it. I do. The etymology is clearly intended as an opposite of meltdown and doesn't go any deeper than that.

But unlike the economic optimism of a regular bull market, there's a negative connotation to a Melt Up. It's a purely speculative affair, totally divorced from the underlying fundamentals of the asset whose price is "melting" higher.

What's really melting (down, as gravity dictates) is the asset's attractiveness as an asset. The higher its prices go, the worse it becomes as an investment.

A Melt Up usually culminates in a 'blow off'...

That's another core part of Steve's longtime Melt Up thesis. On Tuesday, Digest editor Corey McLaughlin quoted billionaire trader Paul Tudor Jones using that phrase in a recent CNBC interview:

My guess is that I think all the ingredients are in place for some kind of a blow-off... History rhymes a lot, so I would think some version of it is going to happen again. If anything, now is so much more potentially explosive than 1999.

Like meltdown, blow-off is borrowed from the physical world. A steam-powered locomotive needs to blow off steam at various times to avoid damage from water accumulating in the cylinders and to get ash and other debris out of the firebox and boiler.

Capitalism does that, too. It has built-in mechanisms for clearing out debris, like bankruptcies and bear markets. It's healthiest for the economy to let those events run their course, no matter how painful they might be. They clear the way for the capital to be reallocated elsewhere. Such episodes are nearly always preceded by financial market blow-offs.

Right now, investors are buying stocks without any reference to business fundamentals. It's perhaps the quintessential sign that we're in this final surge.

But there's a problem with that idea – a big one...

Investors nowadays never care about the fundamentals of the underlying businesses they're buying.

That's true no matter what sort of market we're in – bull, bear, Melt Up, blow-off, meltdown... it doesn't matter. They just keep buying.

As Apollo Global Management economist Torsten Slok recently observed in his firm's Daily Spark e-letter:

US workers contribute on average around $8,500 to their 401(k) accounts every year, and with 71% of 401(k) assets allocated to equities – and the Magnificent Seven having a weight of almost 40% in the S&P 500 – the bottom line is that each worker in the US puts an estimated $2,300 into the Magnificent Seven stocks every year...

This is passive money going into the Magnificent Seven regardless of whether their outlook is good or bad.

Today, the seven largest stocks by market cap are Nvidia, Microsoft, Apple, Alphabet, Amazon, Meta Platforms, and Broadcom. (Tesla was formerly the seventh.)

These are mostly phenomenal, cash-gushing businesses with great competitive advantages. They mostly have great balance sheets, too, with the caveat I pointed out in my September 5 Digest: that the four data-center hyperscalers (Microsoft, Alphabet, Amazon, and Meta), as a group, now have more debt than cash on their balance sheets.

Historically speaking, though, America's list of the 10 most valuable companies tends to turn over every 10 years or so. Their businesses turn out to be not as great as previously thought... or other companies just overtake them in size.

But none of that means anything to passive investors, who tend to have zero idea of what they're buying. As my colleague Bryan Beach has pointed out more than once, many of them probably don't know they're invested in the stock market at all.

So... if investors never care about the fundamentals no matter what the market is doing...

Then how can we really define a blow-off as a period in which investors don't care about fundamentals?

Maybe the trick is to focus on the worst cases... when investors particularly love cash-burning businesses.

Eventually, a cash-burner runs out of cash to burn. It either turns itself around, gets acquired, or goes out of business.

The small-cap Russell 2000 Index – a notorious repository of low-quality businesses – recently eclipsed its November 2021 all-time high. And most of the index's best performers this year have been money-losing businesses.

As of yesterday, 118 Russell 2000 stocks have doubled or more this year, and 82 of those (69%) have reported negative net income over the past 12 months.

Folks today are like early-20th-century comedian Will Rogers, who said:

Don't gamble. If [a stock] don't go up, don't buy it.

A stock's business results pale in comparison to its recent share price performance. World's worst businesses? Nobody cares. A rising share price is the only consideration. That alone makes stocks attractive or unattractive to many investors today.

Speculating on a bunch of money-losing companies is absolutely doomed to destroy much of the capital applied to it. This fact seems to be lost on the participants (if it has even crossed their minds).

We can also look at the market's appetite for new speculative products...

That's what we did in last Friday's Digest...

ETF Database lists more than 260 single stock exchange-traded funds ("ETFs"), most of them leveraged. ETF issuer Direxion alone offers 118 leveraged and inverse ETFs, many on single stocks. Forty of those funds apply three times leverage. There are even a few 4X ETFs for the most swashbuckling riverboat gamblers in the market.

Bloomberg recently reported that there are currently more than 4,300 ETFs, eclipsing the number of listed U.S. companies at roughly 4,200. ETF issuers have launched 640 new funds so far this year. There are about 16,000 ETFs, closed-end funds, and mutual funds in existence today.

It's less of a stock market than a "let's figure out new ways to speculate on stocks" market.

It makes you wonder what else has changed about the structure of the stock market itself...

Not all the changes are indicative of greater risk in stocks. For example, I've cited the S&P 500 Index's cyclically adjusted price-to-earnings ("CAPE") ratio numerous times to demonstrate how expensive the current market is relative to history.

But it's easy to see how the overall level of valuations has risen over the long term...

The chart shows three big bottoms in valuation (1920, 1982, and 2009) and three big tops (1902, 1929, and 1999). As you can see, each top and each bottom is higher than the last. The overall valuation has moved higher over time. (Remember these are valuations, not prices. They occur near but not necessarily exactly when the big tops in the markets happen.)

Using a 10-year rolling average CAPE ratio starting in 1890, even the lowest values after about 1990 are higher than pre-1990 highs. In the terms of a technical analyst, the resistance of the period up to 1990 becomes support after it.

The bottom line is that we're clearly in a higher-valuation regime. And there's no telling how much higher it can go from here. Maybe the market won't hit a significant top until the CAPE ratio is 60 or more... There's no predicting it.

My regular readers are used to me treating elevated CAPE ratios as a warning sign. But let me acknowledge one reason that justifies higher valuations starting in the 1990s...

In 1990, Tim Berners-Lee released the first web browser...

This innovation kicked off the Internet age and revolutionized how we do everything. From then on, the Internet led to the creation of vast new wealth, both from new businesses and by making many existing businesses more efficient and profitable to operate.

The dot-com boom saw it coming and pushed the stock market to a valuation so high it still stands as the most expensive moment in U.S. history.

Many of the new businesses that have been created use little capital compared with the highly cyclical, highly capital-intensive commodity-oriented businesses like railroads, manufacturers, oil and gas producers, chemical companies, and miners that dominated the 19th and 20th centuries.

Less capital-intensive businesses tend to be less sensitive to economic cycles. That reduces risks and earns a higher valuation in the market.

Many new Internet-age businesses also have thicker margins and large, consistent cash flows. That also makes them worth a lot more than the stalwarts of the old economy.

Companies like Microsoft, Amazon, or Alphabet might lose money some years, due to the normal cycles of the economy. But unlike their old-economy predecessors, they suffer little if at all when the economy slows, keeping their fat cash profits rolling in. Investors should and historically have been willing to pay a premium for those attributes.

I'm not saying bear markets are a thing of the past...

I still think history will rhyme and we'll see another bear market someday.

I don't invest based on predictions like this... But if you want a wild guess with a few data points attached, maybe 2029 will rhyme with 1929, 1989 (in Japanese stocks, which later crashed), and 1999... They were all big market tops, followed by big bear markets and decade-plus sideways markets.

But I am saying the superior economics of doing business in the Internet age explains the trend toward higher valuations since 1990.

Looking ahead... given the massive wealth creation the world expects from AI, it should surprise no one if the CAPE ratio soars well past its last all-time high of 44.2, achieved in December 1999 near the peak of the dot-com bubble.

And while we're looking for reasons to expect the party to continue, I can't help mentioning a brand-new force in the market that's levitating some share prices lately...

This blow-off has a brand-new speculative ingredient...

You've heard of black swans – rare, unpredictable, and catastrophic market events that seem inevitable in hindsight. Trader/author Nassim Taleb wrote a great book about them called The Black Swan: The Impact of the Highly Improbable.

Today, we have a twist on that... the orange swan.

An orange swan is a rare, unpredictable market event caused by the Trump administration.

Orange swans can be positive or negative (same as black ones). The "tariff tantrum" that tanked markets earlier this year was a negative one. We got a small taste of that again today... as the S&P 500 slumped nearly 3% on the president's latest Chinese tariff threat.

But more notably, four positive orange swans have lifted individual stocks in recent months...

On July 10, rare earths miner and magnet maker MP Materials (MP) announced a multibillion-dollar partnership with the Department of Defense (now the Department of War). The partnership will build a facility to make magnets out of rare earths, deemed essential for national security. The stock is up about 70% since.

On August 22, the Trump administration announced it would take a 10% stake in Intel (INTC). The chipmaker said this federal cash would help "advance U.S. technology and manufacturing leadership." The stock is up 50% since.

Lithium miner Lithium Americas (LAC) is up about 15% since October 1, when the Department of Energy announced a restructuring of a previous deal, which now includes a 5% equity stake and a separate 5% stake in its joint venture with General Motors (GM).

The craziest and most recent orange swan is Trilogy Metals (TMQ). On Monday, Trilogy announced the Department of War would take a 10% stake in the Canadian copper and cobalt miner to facilitate its projects in northwestern Alaska.

The stock immediately tripled in after-hours trading and is up about 213% as of yesterday's close.

Setting all politics aside, the stock market has largely concluded (for now, at least): "Orange man good!"

Folks love it when the president tells them what to buy. And so far, buying those stocks hasn't been a terrible idea at all.

I doubt Trump's crew is done yet, though there's just no way to predict which industry or company he'll shine his light upon next. Still, I expect he'll provide us with more orange swans – "for the good of the country," of course.

The market may be crazy, but don't sit it out...

Today's market is a mix of stocks you should flat-out avoid and richly valued companies that will profit from a revolutionary new technology's global economic transformation.

It's fine if you just want to keep contributing to your 401(k) and let AI come to you. That's probably what most folks reading this should do with the vast bulk of their retirement savings.

But I doubt you'd be reading this if you didn't actively manage some portion of your capital. And it's not a horrible idea to allocate some portion of that to intelligent speculations.

I'm not saying to buy leveraged single-stock ETFs or meme stocks. And I recommend you establish and follow an exit strategy to protect your gains once the market is done blowing off steam.

But real companies that make money could still surge for years. I've said all along that you need to stay invested in stocks, high valuations or not. Now, I see value in taking on a little more risk, too.

As long as the party keeps going, this is definitely the type of market that will reward you for it.

New 52-week highs (as of 10/9/25): Arista Networks (ANET), Constellation Energy (CEG), Ciena (CIEN), Cencora (COR), iShares Biotechnology Fund (IBB), Lynas Rare Earths (LYSDY), Monster Beverage (MNST), Intellia Therapeutics (NTLA), Invesco WilderHill Clean Energy Fund (PBW), Roche (RHHBY), iShares Silver Trust (SLV), Global X Uranium Fund (URA), and ProShares Ultra Semiconductors (USD).

In today's mailbag, feedback on yesterday's edition, which pointed out one of the White House's ideas for what to do with tariff revenue... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"I'm saddened to see Corey fall into the logical fallacy of continuing discussion of what to do with the tariff revenue without obvious critical analysis. He quotes Barrons' report about the President's idea of giving some of it to farmers rather than using it to pay down the 'national debt and fiscal deficit.'" – Subscriber Kelly F.

Corey McLaughlin comment: Important disclaimer: Not all quotes are endorsements. In fact, many times when I quote things from outside sources, it's to concisely share new information... or, in some cases, point out an absurdity... and get to more of the discussion.

Good investing,

Dan Ferris
Medford, Oregon
October 10, 2025