The Age of Blame

Jim Chanos was right... Skepticism about the triumvirate of investor hope... After six weeks, we're still in the same spot... The crowd turns against a popular 'meme stock'... But these financial vampires are still lurking... Cathie Wood is speaking out (again)... The 'Age of Blame'... Speculation is alive and well in the market...

Jim Chanos tried to warn us all in mid-February...

Back then, the famed short seller took part in an interview with Switzerland-based financial-news website The Market.

Stocks had started 2023 with a significant rally. For example, Chanos noticed that some tech stocks had already doubled since January 1 – 100% or more gains in seven weeks.

But Chanos didn't buy into the hype...

During the interview, he warned that "speculative appetite remains high." Among other things, he cited record options trading – including highly speculative zero-days-to-expiration options – as a reason why he believed folks were still too greedy for their own good.

Chanos also expressed skepticism about the triumvirate of investor hope these days – expectations of double-digit earnings growth for the S&P 500 Index, falling inflation, and lower interest rates. As he told The Market...

I believe there is a chance none of those three things will happen, so you could get disappointment.

Finally, Chanos likened the current environment to the dot-com bubble...

It reminds me of October 2000 when the Nasdaq was on its way to go down 80%. After the first drop, people thought stocks got really cheap as valuations dropped from 10x revenues to 5x revenues. Well, valuation was on its way to 2x revenues. It should never have been at 10x. Judging from past mania peaks can be dangerous because nothing got cheap in 2022.

The last line is the kicker. And remember, Chanos said all that stuff six weeks ago.

Six weeks later, stocks are at roughly the same level again...

The S&P 500 closed at 4,079 on February 17 – the day of Chanos' interview. Today, it closed at 4,109.

The Nasdaq closed at 11,787 on February 17. Today, it's at 12,221.

I guess a modern-day banking crisis isn't that scary to many investors.

The S&P 500 and Nasdaq are still well off their late 2022 bottoms. And they've gone up since mid-February. So whatever wasn't cheap six weeks ago is even more expensive now.

But investors don't seem to care. Like me, Chanos didn't seem convinced that the raging bull market had fully topped out in mid-February. That's how I interpret his comment...

'I'm not sure speculation is gone'...

"Meme stock" retailer Bed Bath & Beyond (BBBY) is a good example.

Yesterday, the company projected that its net sales for the fourth quarter of the current fiscal year will fall to $1.2 billion. That's down from slightly more than $2 billion in the same period last year. And it's lower than Wall Street analysts' estimates for around $1.4 billion.

Bed Bath & Beyond also said it had notified the U.S. Securities and Exchange Commission of a plan to sell $300 million worth of new equity. However, that seems really hard to do when its market cap is roughly a quarter that amount and its business has little chance of surviving – let alone quadrupling in size.

The market hated everything Bed Bath & Beyond announced yesterday. And ultimately, the stock plunged 26% by the end of the day to around $0.60 per share.

Bed Bath & Beyond needs to do something soon to get its share price above $1. Otherwise, it will get delisted from the Nasdaq.

Now, I know what you're probably thinking...

Dan, why do you think Bed Bath & Beyond's poor results, insane equity offering, and sub-$1 stock price are evidence of speculation? It seems like the opposite to me.

Without the meme-stock phenomenon, Bed Bath & Beyond would've gone out of business a long time ago...

Running a failing business in a dying industry is no fun.

But it's not as bad if a horde of know-nothing folks with Robinhood accounts is propping up your stock price because they have no idea that your company is failing. Or maybe they just don't care.

Companies like AMC Entertainment (AMC) and GameStop (GME) also used their way-too-high stock prices to raise more money in the same way. If the fundamentals of their businesses had been the most important factor, they would've never gotten the money they did.

One day, all these meme-stock companies will be toast. And none of them will be able to raise a dime. Then, maybe I'll finally believe speculation is dead (this time around, anyway).

But yes, if you think I'm stretching the truth, I can't deny that the meme-stock buyers have failed in their speculative endeavors. The trade is over. (I still don't think they all know it yet, though.)

Today, Bed Bath & Beyond trades around 99% below its 2021 meme-stock high. AMC Entertainment is about 92% below its 2021 peak. And GameStop's stock is roughly 74% below its early 2021 high.

Neither AMC Entertainment nor GameStop traded anywhere near those levels before they became meme stocks. Everybody knew they were dying – except the meme-stock buyers.

And look at Bed Bath & Beyond's three-year chart. You can see the meme-stock buyers bidding the stock up like a desperate doctor trying to restart a dying patient's heart...

But it's hopeless...

Even if Bed Bath & Beyond does manage to sell some new equity, it won't matter.

As of last November, the company was burning something like $440 million annually. So another $300 million won't even keep the business alive for another year.

It's the same story with the other meme stocks, though they probably have longer to live.

When it comes down to it, the Federal Reserve is the only reason these companies still exist...

The central bank kept interest rates at effectively zero for most of the past 12 years. That led to all manner of nonsense – including the great unwashed hordes injecting these "zombie" companies with new money they couldn't have raised in a slightly less insane world.

Bloomberg columnist Matt Levine – a must-read financial writer – recently pointed out that keeping these companies alive is worse for shareholders than if they had just filed bankruptcy earlier and taken their stocks straight to zero overnight. (Read his take here.)

Instead, the meme-stock phenomenon keeps the poorest and most naive investors' hopes alive as long as possible. It's almost like the company is doing its best to drain them of every last penny.

Meme stocks are less like speculative opportunities and more like financial vampires.

Without the speculative blood still flowing in their veins, investors would've bailed on Bed Bath & Beyond and other meme stocks a long time ago. And their management teams and investment bankers never would've been able to bleed so many more investors dry.

Besides meme stocks, another sign that speculation is alive and well popped up again recently...

I'm talking about "Bull Club" member Cathie Wood. Or more specifically, I'm referring to the continued existence of ARK Investment Management, the company she founded that lights investors' money on fire.

On March 21, a Bloomberg interviewer asked why Wood didn't adjust her exchange-traded funds' ("ETFs") portfolios when the Fed started saying it would aggressively hike rates early last year. That's a polite way of asking why she was still holding cash-burning garbage that only goes up when rates are at or near zero.

Wood's answer was pure gold. She tried to deflect the question and stuck to the buzzwords better than ever before...

The premise of the question is that we're an asset allocator. We are not. We invest exclusively in disruptive innovation, nothing else.

Wood's tone was slightly condescending. She sounded like a little girl who used to get straight A's and refuses to acknowledge that she's now getting F's.

Wood thinks she's telling us that ARK Investment Management's funds don't buy stocks in other sectors, no matter how attractive they might be. And I get that.

But at least to me, it also sounded like she might be saying...

We're not trying to make money for investors. We don't know how to do that. We only make money for ourselves, by telling stories about cash-burning tech stocks.

To be fair, Wood tells a pretty good story...

Apparently, she made the rounds with the mainstream media on March 21. Because on the same day she spoke with Bloomberg, she also conducted an interview with CNBC.

On CNBC's "Squawk on the Street," Wood said that many of the companies in her ETFs raised capital at insanely high valuations in early 2021 – just before they all started tanking.

Wood reasoned that this capital infusion gives the companies in her flagship ARK Innovation Fund (ARKK) a "six-to-seven-year runway." And she claimed that it gives the companies in her ARK Genomic Revolution Fund (ARKG) four years.

If I were doing the interview instead of Wood, I would've said...

These companies raised some cash in early 2021, but few of them are cash-flow positive. So at current burn rates, they'll be out of business in four to seven years – maybe faster if they're as clueless as me and believe all that nonsense about exponential growth.

Perhaps I'm the only fuddy-duddy who heard it that way. I'm sure many faithful investors out there still think Wood's ARK Innovation Fund will soar to the moon one day.

Wood's story kicked into high gear as she expounded on the wonders of cash-burning disruptive innovators. Here's more from her CNBC interview...

This is where the world is going, and it's going to disintermediate and disturb and disrupt the traditional world order. We think our companies and our stocks are on the right side of change. They assume massive multiple compression and we also assume that our companies will enjoy what we're calling exponential and super-exponential growth. Many people don't understand what those concepts are because we have been living in a linear growth world for so long.

And so, if we're right, you look at our electric vehicle forecast, for example. We believe that electric vehicle sales will move from 7.7 million units last year to 60 million in 2027. That's exponential growth. What does linear growth look like? And this is what the consensus is, they say 20 million. If we're right, there's a huge gap there that our stocks are going to enjoy filling.

This story has everything...

• A lot of big, alliterative words like "disintermediate," "disturb," and "disrupt"
• A new "world order" (every good tech story needs one)
• The "right side of change" (former President Barack Obama couldn't have said it better)
• And of course, "super-exponential growth"

For a brief moment as I listened to Wood speak, an image of Mary Poppins flashed in my mind. I could've sworn that I heard her promise that the companies in ARK Investment Management's ETFs would soon deliver supercalifragilisticexpialidocious growth.

The villain in Wood's story is the mean, old Fed...

As she told CNBC...

Interest rates coming down is going to be another booster. Again, it's the valuation hit of the last year that's been so severe to our strategy, [from] February [2021] to today. And that was all related to the Fed jacking up interest rates 19-fold in less than a year. Unprecedented. We think it's like an earthquake.

Twice during the interview, Wood said the Fed's rate hikes had put a dagger in her strategy. She made it seem like Fed Chair Jerome Powell and his buddies stalked and killed all the stocks in her ETFs on purpose by "jacking up interest rates 19-fold in less than a year."

It's almost funny how Wood never credited the Fed for shoving rates down to zero, which caused her portfolios full of money-burning garbage stocks to soar like eagles.

Except that it's not funny. Here's a fair warning that I'm stepping onto my soapbox now...

We're living in the 'Age of Blame'...

It doesn't matter whether it's the mainstream media, politicians, or corporate leaders. They all practice the ironclad discipline of assigning responsibility everywhere but with themselves.

Why is inflation surging? That's easy...

It's because of Russian President Vladimir Putin, greedy grocery stores, greedy oil companies, the COVID-19 pandemic, the other political party, or any number of reasons.

Whatever the reason is, it's clearly not the folks who printed up a few trillion dollars and put a large chunk of it straight into the bank accounts of hundreds of millions of Americans – many of whom were stuck at home, bored, and mostly uneducated about investing.

In this case, Wood's voice is practically lost in the din when she blithely blames the Fed for her losses instead of her highly speculative and risky strategy.

Wood is a thoroughly modern character. She propagandizes to investors about disruptive innovation, touts seven-year runways, and boasts about Mary Poppins-like magic growth trajectories.

And then, she blames her failures on anyone but herself, her company, and its deeply flawed strategy. Meanwhile, her company keeps collecting its clients' fees hand over fist.

At least Wood admits that she isn't a capital allocator.

Without several years of zero interest rates followed by hundreds of billions in pandemic-stimulus checks, her company would be tiny. And her interviews wouldn't be echoing across every major financial-news outlet in the world.

That's how I know Chanos is right. If we had stopped hearing about meme stocks and Wood, it might mean that speculation is dead. But that's not the case at all...

Speculation is alive and well. And it's still propping up our financial markets.

New 52-week highs (as of 3/30/23): Alamos Gold (AGI), Ansys (ANSS), Activision Blizzard (ATVI), Aya Gold & Silver (AYASF), SPDR Bloomberg 1-3 Month T-Bill Fund (BIL), Cintas (CTAS), SPDR Euro STOXX 50 Fund (FEZ), Hershey (HSY), Motorola Solutions (MSI), Novo Nordisk (NVO), Flutter Entertainment (PDYPY), Kering (PPRUY), iShares 0-3 Month Treasury Bond Fund (SGOV), and Unilever (UL).

In today's mailbag, an Alliance member writes in with some kind words for our editor-at-large Daniela Cambone. As a reminder, you can find every episode of Daniela's show on the Stansberry Research YouTube page or in the "Media" section of our website. And as always, you can send your comments and questions to feedback@stansberryresearch.com.

"Stansberry gang, Daniela has been a wonderful addition to Stansberry Research. I realize that this is well after the fact, but what she has brought to the table is something that hasn't been there in the past. By having people from different walks of investments and different areas of what I do has been very valuable.

"Being that I am an Alliance member, I have lots to read. I read lots. I have favorites, but I try to consume as much as I can. Daniela adds another format that is refreshing. It opens up another group of expertise that I wouldn't ordinarily get from other walks of life. Thanks to all of you for providing the very best." – Stansberry Alliance member Jeff S.

Good investing,

Dan Ferris
Eagle Point, Oregon
March 31, 2023