Pricing the Long, Wild Path of 2020... and Beyond

A word of thanks... Everything is going up in flames... The crazies target Beethoven... The prominent position of 'street czar'... Finding solace in something familiar... Should investors worry about the election?... Going meshuggeneh for options... Pricing the long, wild path of 2020 – and beyond...

Before we begin this week's Friday Digest, a word of thanks to all of you...

I (Dan Ferris) can't tell you how much it meant to read all of your kind words about my mother's passing. Thanks so much for the many e-mails expressing your condolences.

It's a privilege to write to you each week... and your words touched me deeply.

While nothing that any of you said can bring my mother back, we all know that loss is a part of life. By learning to live better – by emerging "a sadder and a wiser man," as I said last week – we can honor the legacies of our loved ones. And that's what I intend to do.

Now, if only dear old Mom were still alive today to help us survive the rest of 2020...

If she were still here, I could call in a favor... I could ask her about the countless times in her 93 years on Earth when she would say that, if I didn't behave, she'd knock me into the middle of next year.

Because after all we've been through in this crazy year, I'd really like to take her up on that.

Here in the Pacific Northwest, we'd be trapped in the house right now... even without the COVID-19 pandemic forcing millions of Americans to work from home. No matter where you live, you've probably heard by now about the wildfires currently ravaging the West Coast.

We can't turn our HVAC fans off or let our pets outside because the smoke from nearby fires is as thick as London fog. I can't remember the last time we saw the sun... maybe a week ago?

Of course, you'd think we'd be used to the smoke and the fires by now...

After all, almost every night for about the past four months, rioters and arsonists have lit the nearby city of Portland, Oregon, on fire.

They stopped protesting in the name of social injustice or anything that might come close to qualifying as a just cause long ago... Instead, this group of troublemakers is just trying to cause chaos by looting, burning, and vandalizing.

Don't get me wrong... It's not that we're crazy about fire here in the Pacific Northwest. We've simply allowed both our forests and our cities to be badly managed.

With everything going up in flames around me, I went to my Twitter feed to find a little sanity...

That's not as crazy as it sounds.

I follow a small army of finance and economics professionals... many of them brilliant. And I ruthlessly mute or block annoying accounts. So Twitter is usually a pretty civil place for me.

But the crazies filtered through anyway this week...

An article on Vox.com (a leftist, virtue-signaling platform, as far as I can tell) suggested that Beethoven's Fifth Symphony – one of the greatest works of art ever created – was a symbol of the "superiority and importance" of "wealthy white men."

The Vox writers then suggested that the utterly sublime work was "a reminder of classical music's history of exclusion and elitism" for "women, LGBTQ+ people, people of color."

As many longtime Digest readers might know, I majored in music at Towson University... The college is about seven miles north of our company's headquarters in Baltimore.

During my four years at Towson, the Fine Arts building on campus was loaded with every race, creed, and sexual persuasion under the sun. I sang in choirs, played in orchestras, and generally hung out with many folks of different backgrounds nearly every single day.

Nobody cared about any of that nonsense. And I'm hard-pressed to remember anyone pointing their fingers in anger or chucking mindless accusations at Beethoven.

And that was 40 years ago, likely before most Vox.com writers were able to speak, read, or write. (Many still seem challenged in those areas today.)

Look, we all know people are discriminated against in the world. I'm just saying that people of all backgrounds can and do enjoy Beethoven's Fifth Symphony as the masterpiece that it is without wildly proclaiming it as discriminatory.

It's a lot like saying rock 'n' roll is the devil's music. And the fact that the authors are so young (having graduated from Brown University in 2008 and 2009, respectively) adds a layer of irony, with the children wagging their fingers at the grown-ups.

A stupid 'woke' interpretation of Beethoven's Fifth Symphony is truly nuts, but it gets worse...

I also found out this week that the city of Seattle – a few hours up the road from me – signed a one-year deal for $150,000 earlier this summer with a community group called Not This Time.

The group is run by a former pimp named Andre Taylor... His brother, Che Taylor, was shot and killed by Seattle police in 2016.

The city of Seattle has engaged Taylor and his organization to provide "expertise and support services in de-escalation, community engagement, and alternatives to policing."

Taylor's official job title is "Street Czar." You can't make this up... and I had no idea what that meant. But thankfully, Taylor explained it all to local news station KOMO...

A street czar is a person who has a particular genius in a particular area. I know the term "street czar" is quite provocative...

This should be a prominent position because it could help quell some of the incidents that are going on between community and cities.

I took all that to mean Taylor believes only certain geniuses can become street czars. And only these street czars can work in this "prominent position" to increase peace with the police.

So... Beethoven's music is only for "wealthy white men" and we need street czars with a "particular genius" to negotiate with criminals in big cities. Got it. Not crazy at all.

Naturally, after reading that news article, I went to the gun store for the second time this year...

This time, I bought a Smith & Wesson 9mm pistol with a 16-round magazine.

I stood in line for 30 minutes to fill out a pile of paperwork that tells the government I'm not a felon and wasn't dishonorably discharged from the military – both things that you'd think it would already know. And I'll need to go back to the store in a week or so to actually take possession of the goods I already purchased.

While standing in line, I noticed something alarming...

The shelves at the ends of the aisles had been covered with dozens of boxes of ammunition. But now, they were almost bare... except for three lonely boxes of .45 caliber cartridges. There was no 9mm ammo to be found (nor several other calibers, either).

The clerk told me the ammunition comes in weekly... and sells out instantly. Behind the gun counter, there were half as many handgun models hanging on the wall as the last time I visited the store. Some of those displayed are the last of that model in the store's inventory.

Now, you must believe me. I don't want to be that crotchety old guy, but I can't help asking...

What the hell is going on in America today?

From everything on fire... to mindless woke interpretations of majestic art... to using tax money to bribe thugs... to a bona fide guns and ammo-buying mania...

It's getting scary out there. But at least we can find solace in something familiar...

The stock market is once again acting in ways that don't make any sense at all...

Specifically, this time, I'm referring to our old friend Eastman Kodak (KODK).

When we last checked in on Kodak about a month ago, its stock had dropped to less than $9 per share. Its downward trend has continued... falling to as low as $5.53 per share on September 8.

But Kodak received another jolt of life this week...

Its share price nearly doubled on news that a firm hired by its board of directors reported that the company is merely poorly managed... but probably not doing anything illegal.

Don't laugh... This completely asinine "news" was worth an extra $640 million or so of market cap this week.

Remember, the company's share price went bonkers in late July – soaring from less than $3 to as high as $60 in just three trading sessions – on news of a $765 million government loan that the dying camera-film maker will use to enter the pharmaceutical business.

The market action seems to indicate with 100% confidence that Kodak will create a brand-new, sustainably profitable business in an industry it knows nothing about. (I bet the Vox.com writers and Seattle City Council members are buying shares... Just a hunch.)

Last month, I wondered whether Kodak shares would head "back to flatline territory." I still don't think it's a predictable outcome... and this week's surge is just the latest reason why.

Maybe I'm going too far assembling all these little anecdotes – financial and otherwise – and concluding the world has more than a screw loose right now... Maybe I'm more crotchety than I'm willing to admit... And maybe this Digest is just a function of my ongoing grieving process, and I won't even notice this stuff in another month or so.

Whatever the source of my current malaise, let's forge ahead to another topic many folks would really like me to get crazy with them about...

Besides writing to you each Friday, my favorite part of the week involves Stansberry Investor Hour...

I love opening the podcast's mailbag and responding to listeners' questions.

This week, one question stood out for its simplicity and because I'd bet real money that it's a topic on lots of investors' minds. As Investor Hour listener Bill B. wrote in to us...

I am concerned about the upcoming election and the almost guaranteed contesting of the results by perhaps both sides leading to a huge mess going through possibly the end of the year.

I have had some good success with your recommendations over the past 4 months and wanted your opinion regarding perhaps jumping out of the market prior to this mess to let the dust settle and avoid the almost certain volatility that is coming.

I know you believe in owning good value companies and holding for the long term but do you feel it would make sense to avoid this tumultuous time for a few months?

I'll start with my short answer... Selling your entire equity portfolio because of the upcoming election – or any looming event, really – doesn't sound like a good idea to me.

Are elections tradeable events? They certainly can be...

I stayed up to see the 2016 presidential election results on TV, while also watching the futures market on my computer.

The S&P 500 futures fell as much as 5% that night, then recovered – a huge up-and-down move in mere hours. The Mexican peso tanked hard, too... due to President Donald Trump's views about building a wall between the U.S. and Mexico and nixing the North American Free Trade Agreement.

But of course, I'm just talking about one night in those instances... They were short-term events. Should you worry about who gets elected so much that you sell all of your long-term equity holdings and wait until the dust settles?

As someone who once made a similar mistake, I must answer emphatically... No!

Or perhaps I should put it this way... If the winner of the upcoming presidential election matters to long-term equity investors, the system is so broken that you're about to have bigger problems than the value of your equity portfolio – if you don't already.

What's more likely is that the 2020 election will end with this country's 59th peaceful transition of power in 231 years – since George Washington was elected as the first U.S. president in January 1789. That's nothing to sneeze at... It's the longest such record of its kind in human history.

And it's much more important to keep in mind than whether Trump trusts the U.S. Postal Service... or whether the Democrats will hire an army of lawyers to contest a Trump victory.

If Trump wins, will a few malcontents riot and loot? Maybe... But that sort of thing has happened before and will happen again.

It's doubtful the outcome would be any different this time... and that's coming from a crotchety guy who's feeling like the world has lost its mind this year.

Besides the meaninglessness of elections for long-term investors, I must point out something else...

Neither I, podcast listener Bill B., you, nor anyone else can guarantee that the election will be contested by either side... no matter how much noise they're both making about it now.

Politicians are like chimpanzees... They make certain noises and beat on the ground in certain ways to get elected, and they make other noises and beat on the ground in other ways once they're in office. And there is a chasm so big between the two that Elon Musk would need another lifetime to get across (and remember, he builds rockets).

They're all just making noise.

Ignore it.

In fact, maybe you shouldn't even vote... You'll only encourage them and validate their existence. Besides, you must know by now that the skillsets of getting elected and performing well in office are too vastly different to expect them to exist in one person.

That's why I propose that we eliminate the presidency altogether and hire a street czar.

But who am I kidding?

I'm talking as though anybody but Bill B. and maybe a few other worrywarts are interested in selling any financial asset right now. You and I both know that, despite the S&P 500's recent decline of more than 7% from its all-time high on September 2, nobody really wants to sell.

Everybody wants to buy... Buy, buy, buy. Bibbity, bobbity, buy.

Stocks, bonds, exchange-traded funds, S&P 500 futures, special purpose acquisition companies... you name it, people are buying – especially call options. Folks have gone meshuggeneh for call options...

According to our friend and analyst Jason Goepfert, publisher of SentimenTrader.com, options traders are more manic than they've been in 20 years.

In a Twitter post on September 12, Jason said "speculative options activity dropped off" the previous week... but it was "still higher than any other peak in 20 years." Two days later, he posted links to five articles highlighting the options mania.

And then, this past Tuesday, Jason told his SentimenTrader readers that despite a pullback in trading activity, options speculators "are still jaw-droppingly aggressive."

Last week, Barron's quoted Jason about one group of options traders specifically...

These small traders have become the biggest part of the options market. Since mid-July, trades for 10 contracts or fewer have consistently accounted for more than 60% of all opening call purchase premiums, massively dwarfing larger trade sizes.

A Financial Times article quoted derivatives trader Dean Curnutt to the same effect...

The data doesn't have a mark of a whale. It has the mark of lots of little, tiny whales that add up to one big one.

No, these examples don't mean that small options traders have suddenly become sophisticated trading geniuses. That's far from the case... They're just a lot more interested in gambling with options these days.

There again, the fingerprint is not one of a big, sophisticated trader managing a large portfolio... but one of many small gamblers trying to get rich quick. Anthony Denier, CEO of privately held online brokerage firm Webull Financial, told Barron's that small traders weren't "doing it to hedge a position. These are naked, purely speculative plays."

Today, these small options traders are actually pushing stock prices around...

Without getting too far into the weeds, market makers sell call options to traders. The traders are long and the market makers are short.

So the market makers must hedge their short positions by buying equity. The more calls they sell, the more stock they need to buy... which they'll then sell when the call options expire, leading equity prices to fall.

It's a classic case of master trader George Soros' famous "reflexivity" theory... He argues that underlying fundamental data creates certain effects, which go back and influence the underlying fundamental data.

When a really vicious feedback loop gets going, the market can really get wacky. That's what we're seeing happen in the options market today.

We make a lot of options recommendations across various publications at Stansberry Research... But the important thing is, every single one of these recommendations is made with a clear exit strategy already in mind. You would do well to abide such advice...

This is no time to get caught swimming naked if the tide should suddenly retreat in a hurry.

Finally, I'll end this week with a candidate for the best finance quote of 2020...

It comes from a very sophisticated quantitative investor named Wayne Himelsein. (I wrote briefly about Himelsein, the chief investment officer at Logica Capital Advisers, in the August 28 Digest when talking about liquidity.)

Himelsein posted the following message on Twitter yesterday...

An option's premium is priced by the probability that its strike will be profitable at expiration.

But a single probability at one moment in time squeezes a vast opportunity set into a statistical corner.

In reality, each outcome takes a wild path through time.

Price the path.

"Price the path" might prove to be the quote not merely of the year... but also the decade.

Nine months in, the market is higher today than it started out this year (but not nearly as much as it was two weeks ago). And what about the path it took to get there?

Man, what a path it has been so far... And we're still a long way from the end of it. I can promise you that no one in the world priced this path back in February.

Pricing the path acknowledges that owning any asset involves much more than the entry and exit prices. It involves an entire journey in between... sometimes lasting many years.

Pricing that journey – that path – is a big, difficult job.

But as a Stansberry subscriber, you're never pricing the path alone...

Last week, I offered you the best set of foundational principles for investing and life that I know – the three Delphic "entrance maxims" of Know Yourself, Nothing in Excess, and Surety Brings Ruin. And today, I'll leave you with this tidbit of advice...

No matter which publications you subscribe to at Stansberry Research... no matter which editors you follow religiously... remember that we are in the "pricing the path" business around here.

So regardless of where this path takes us in the weeks, months, years, and decades ahead... regardless of whether our music history is erased entirely... regardless of whether street czars save the world or replace U.S. presidents... and regardless of what happens in the stock market...

You're not alone. We will price the path together.

New 52-week highs (as of 9/17/20): Autohome (ATHM), Fortuna Silver Mines (FSM), MAG Silver (MAG), Novo Nordisk (NVO), and Belo Sun Mining (VNNHF).

In today's mailbag, feedback about our thoughts in yesterday's mailbag on our China recommendations. What say you? As always, e-mail us at feedback@stansberryresearch.com.

"So I guess member V.W. doesn't understand the premise of the investment business service that he subscribed to and is looking down a one way street – his? Too bad he can't see that the influence of the bigger picture out there can influence his one way street." – Paid-up subscriber G.Z.

"As you say, the Chinese Communist Party is not stacked with a bunch of sweethearts. Neither is the United States government. A**holes all the way! And we put ours there, didn't we?" – Paid-up subscriber Chuck B.

"Still laughing...

"I won't have anything to do with China when possible. Avoid their products if at all possible and don't want to invest in anything that could benefit the government (sad for the people so there is a downside!). I believe they seek world domination and don't want to help 😉

"But Vince? LOL. Keep up the good work and entertainment." – Paid-up subscriber David C.

"This is not a place to make ideology statements, I myself have strong opinions against policies of my country government (Mexico) and of course of yours. Let's not talk about China or Israel, Brazil, Russia etc., etc.

"But... we are here to take benefits of the companies as they perform in a GLOBAL MARKET! Let's give [a] break to the service this publication give[s] us." – Paid-up subscriber Jose F.

"Dear Stansberry Team of experts, I was raised by a two-war veteran. So, no German or Japanese products allowed in our house. Of course, I am positive he was using their products but not knowingly or possibly [in] mental denial.

"His investments were the same: only USA! He was not a good investor yet he did well in the long term. His basic strategy was to never sell. And mean sell nothing! He kept everything from old paint cans to old worn out vehicles. In the end, he was a multimillionaire. His bad stocks were worth nothing but his good ones were worth millions. I used to tell my friends 'I want to be just as bad of investor as my Dad.'

"Finally, after a bit of maturing and a dose of reality, it would not be prudent to become an uneducated investor or follow my father's strategy. That's when I joined your team of experts. I work for a living but count on the experts for advice on how and when to place my money. What a perfect setup: y'all do the work and I get to choose. What's there to whine about. It's our choice and [we have] plenty of choices. Thanks for giving me and my family a world of opportunities to choose from and hold forever if we feel like it." – Paid-up subscriber E.I.

"Great response!! Stansberry writers had always emphasized that it's the subscribers' decision to invest. Stansberry Research provides the 'ideas/recommendations.' We subscribers make the final decision to invest or not." – Stansberry Alliance member Jim M.

"Several years ago I was informed that my personnel records were part of the Chinese hack of OPM (Office of Personnel Management), including medical records and background checks for security clearances. Having served over 26 years in both civilian and military positions, there was a lot there.

"Guess I wasn't what they were looking for because no one ever showed up with gold bars or cash to turn me. Because of this I was forced to find the good advice from Stansberry in order to prosper.

"I have passed on some of the recommendations because it just didn't seem like something that I could be involved with, but when it comes to making money off the Chinese economy, I'm all in. Just my form of capitalist revenge. Thanks to the team at Stansberry for all the choices." – Stansberry Alliance member Brad F.

Good investing,

Dan Ferris
Holding my breath in Vancouver, Washington
September 18, 2020