The Heartening Upside in the WeWork Debacle

Bison, caribou, and black swans... This whole thing is bigger and meaner than I first thought... History is rhyming again... Bloomberg is drinking the Kool-Aid... The heartening upside in the WeWork debacle... A harbinger, not a one-off mishap... The most disturbing question in the markets today...

'You can't outrun bison'...

That's what 30-year-old Kyler Bourgeous told the Washington Post this week. He should know... A bison attacked Bourgeous at Utah's Antelope Island State Park in early June. He suffered a cracked rib and a collapsed lung.

But after healing, Bourgeous still looked forward to returning to the 42-square-mile park on the Great Salt Lake. He has spent thousands of hours there, visiting regularly since he was young.

Bourgeous went back last Friday night, this time on a date with 22-year-old fellow exercise enthusiast Kayleigh Davis.

Davis was running on a trail, spotted a bison, and moved to avoid it. But as her date said, you can't outrun bison. The animal charged and flipped her 15 feet in the air, puncturing her calf and breaking her ankle.

Bourgeous had told her about his horrific ordeal. So when Davis hit the ground, she stayed still so the beast wouldn't charge at her again... which could have killed her.

Neither Bourgeous nor Davis antagonized the bison. The animals simply charged for no apparent reason.

We addressed big, animal-sized risks a few months ago...

In the July 24 Digest, I (Dan Ferris) described "the caribou factor," a term coined by late Wall Street legend Leon Levy, after caribou migrations delayed the Alaskan pipeline construction in the early 1970s by eight years and caused losses for its bondholders.

Bison are caribou on steroids... Mature caribou bulls average 350 to 400 pounds. Adult bison can weigh more than a ton... And they can reach a top speed of up to 40 miles per hour. It's like getting hit by a car.

They're meaner, too...

Caribou only indirectly disrupted pipeline construction. The delays stemmed from environmentalists who expressed concerns about how the project might alter the animals' migration patterns. Nobody was attacked. Nobody went to the hospital. On the other hand, the bison aggressively pursued the Utah couple.

The caribou is like a 20% correction in the market. The bison can lop 50% off your retirement account and leave you waiting a decade for it to recover.

Maybe you find the discussion about bison unnecessary...

Maybe you think author and trader Nassim Taleb covered it when he coined the term "black swan" for an unpredictable shock to the system or a market crash.

For my taste, that's a little on the genteel side... I'm skinny and weak, but I bet I could win a fistfight with a swan – which is really just a big duck. Nobody fears a duck will gore and trample them to death.

But having an automobile-sized animal with horns run you down on purpose, just because it can? That's a whole different deal...

A run-in with a caribou might leave you looking for new underwear. A run-in with a bison might leave your friends and family hoping your wife serves her famous chicken salad at your wake.

All this talk about bison is my way of saying...

This whole thing is even bigger and meaner than I initially thought... And as I recently pointed out, it has already started.

I'm talking about the big stock market reversal I mentioned in the September 17 Digest.

I showed you how the worst-performing stocks year-to-date ("YTD") drastically outperformed the best YTD performers on September 9... by a greater margin than any single day in 10 years.

I explained how it signaled the start of a new "Golden Age of Value." And I noted that the big reversal was proof that the fast-growing tech darlings that have made investors a fortune over the past decade had finally peaked... as investors poured money into cheaper stocks that have significantly underperformed over that stretch.

It felt like caribou last week. But now, it looks like bison, gleefully trampling everything in their path...

On Tuesday, the folks at The Market Ear – a blog about the markets – published a series of charts labeled "reversal in everything." The feeling of carnage was palpable...

It charted the shift between value stocks and growth stocks. Value stocks – as measured by the Russell 1000 Value Index – gained 3.3% in September. Meanwhile, growth stocks – as measured by the Russell 1000 Growth Index – were essentially flat in that span.

The series also featured the "leaders vs. laggards" reversal from September 9, as well as declines in global defensive stock sectors that have performed well until recently – like software and services... consumer services... food, beverage, and tobacco... household and personal products... and pharmaceuticals. Also charted were declines in recent outperformers like bitcoin, silver, gold, and oil (after the recent attacks in Saudi Arabia).

The jarring price reversal across multiple sectors feels like it rhymes a little too much with recent history for my comfort... As we all learned in 2008, when folks get really spooked, they sell whatever can be sold. (Although with gold, they seem to quickly regret the decision and reverse course... a wise correction.)

I suspect I'm coming off a bit too... paranoid? Downright bearish?

Press reports suggest some folks are in denial about an impending reckoning...

One example popped up in a Bloomberg article on Tuesday. The news service reported that value-investing mogul David Einhorn's Greenlight Capital hedge fund rose 8% in September, "amid the market's temporary shift away from long-favored momentum stocks and toward inexpensive equities."

Hey, Bloomberg... temporary?!

You're either not paying attention to the huge reversals in multiple market sectors and asset classes... or you're way too high on the long-only, buy-the-dip, "FAANG"-flavored Kool-Aid and just don't care anymore.

I don't know how anybody could fail to see what's happening today...

We sit near the top of a record-length bull market that has left the average stock "overvalued somewhere between tremendously and enormously," according to my friend, investor and author Vitaliy Katsenelson.

Economist and asset manager John Hussman chimed in recently on Twitter, pointing out that the most overvalued 10% of stocks in 2000 lost 80% of their value in the bear market that bottomed in the fall of 2002. Hussman added ominously, "Currently, every remaining decile (1/10) of S&P 500 components trades at a richer [price-to-sales ratio] than in 2000."

In other words, 90% of U.S. equities are more expensive right now than they were at the peak of the dot-com bubble. By implication, the inevitable bear market will be a lot more painful than the 2000-2002 rout that took the benchmark S&P 500 Index down 49% and the Nasdaq Composite Index down 78%.

I interviewed investor David Levine for the latest episode of the Stansberry Investor Hour podcast... He said cycles matter, and suggested that a worse outcome for markets than we saw in 2008 is "just math." He finds many investors "strangely delusional" about it.

Need I remind you of famed investor and author Howard Marks' warning that "a lack of imagination" causes many investors to understate and even totally ignore the risk of losing 50% to 80% on the biggest-cap names in the market (which have the biggest influence over the S&P 500's performance)?

I promise you, our two Utah outdoorsy types couldn't imagine a second encounter with a bison, let alone a first. Maybe the first was what happened in 2008... and the second will perhaps be known as the 2018-2020 bear market. Oops, sorry, bison market.

Speaking of massive reversals, WeArePanicking...

Coworking giant WeWork saw the price of its 7.875% May 2025 bond hit new lows this week. It was trading in the mid-$840s today, according to data compiled by Bloomberg. The bond peaked a few cents shy of $1,050 on August 15, one day after the company filed its initial public offering ("IPO") prospectus with the U.S. Securities and Exchange Commission.

It appears that the withdrawal of WeWork's IPO, ouster of loony founder Adam Neumann, and bond-price reversal has a heartening upside (besides the schadenfreude)... Investors can – and do – read IPO prospectuses.

They've demonstrated a reassuringly low tolerance for page after page of "yogababble" – a term coined by entrepreneur and noted WeWork critic Scott Galloway for the company's flowery language, like "our mission is to elevate the world's consciousness." Even better, when investors learn the company is run by a self-dealing egomaniac unchastened by its lame board of directors, they don't seem to want to own the bonds anymore.

(WeWork bondholders are mindful of that Shakespeare quote I shared with you last week... "Sell when you can: you are not for all markets." Imagine trying to sell WeWork bonds when things really go south in the markets... and folks start selling everything they've been in love with for the past 10 years. Bonds can crash, too.)

As you can see in the following chart, the steepest portion of the WeWork bond sell-off – from about $980 to $850 – started on Monday...

Four days earlier, WeNeedCash announced it would sell whatever wasn't nailed down – possibly including some real estate – to try to make bankers, bondholders, and maybe a bunch of investors consider investing in the company.

Besides selling the $60 million Gulfstream G650 jet the board had previously approved buying, WeAreDesperate is also looking to sell three businesses it acquired – event organizer Meetup, office-management firm Managed by Q, and marketing firm Conductor.

The deterioration at WeAreWorseOffThanWeThought is happening fast...

Last week, the Financial Times reported the company would stop signing new building leases. The company promptly denied it the following day. Then, the Wall Street Journal reported two days later that many landlords in New York are unwilling to lease to WeCan'tPayTheRent.

The Journal also reported some landlords are backing out of WeWork deals. That could hit the New York City office market hard, since WeWork is the city's biggest office tenant.

Maybe the bondholders realized all this and came to agree with one landlord, who bluntly told the Journal, "The numbers do not work." That's certainly a candidate for understatement of the year in all of global finance.

I have nothing personal against WeWillNeverSurvive or its crazy founder. But I'm only human, so I feel the guilty pleasure of schadenfreude, like anyone else might.

Still, my primary contention in reiterating the details of the WeWork blow-up is this... You see a lot more of this nonsense near market tops than anywhere else in the cycle.

It's a harbinger, not a one-off mishap.

But perhaps the more disturbing question about WeWork, in particular, and the bond market, in general, is this...

Where has all the 'smart money' gone?

Throughout my adult life, the bond market has often been called the "smart money." It was seen as smart to get in line ahead of equity investors. If something went wrong, the equity might go to zero... but the smart money would still get paid.

It was prudent to eschew "get rich quick" schemes in favor of preserving capital and employing it to earn a steady stream of additional income.

Though the principles remain sound, the actions of real bondholders have me doubting the smart-money moniker for the first time. WeWork is small potatoes... and at least its bondholders are still getting paid a rather stout coupon (7.875%) for the risk they're taking.

But what about the $1 trillion in outstanding corporate debt sporting negative yields?

Never mind the $14 trillion in negative-yielding sovereign debt. That's influenced heavily by central-bank shenanigans and large financial institutions' rules about what they're allowed – and in some cases, required – to own.

No, this time, I'm talking about negative-yields on the debt of individual businesses...

For example, at the end of August, German conglomerate Siemens sold the most negative-yielding corporate bond issue yet. The company issued a total of $3.6 billion in debt. The issue included $1.6 billion of two-year, zero-coupon notes priced to lose bondholders 0.315% per year if held to maturity.

If the smart money hasn't taken stupid pills, then you and I shouldn't waste too much time contemplating what it means when it's smarter to lose a little on a sure-ish thing than to...

What else? Own Uber shares? Own FAANG shares? Own any equities at all?!

Though gold is gyrating right now, it's holding up well overall. And silver is, too. So I think you're OK owning them today. While the rest of the market has weakened, folks like David Einhorn are making money... which helps make my point that there hasn't been a better time to be a value investor, nor a better time to question other equity strategies than today.

Even in an epic bear market, I'm betting that value stocks' superior performance will astound most investors. I plan to be on the winning side of that trade... starting a couple weeks ago.

I'll have a lot more to say about all of this at our annual Stansberry Conference next week...

I'm scheduled to speak on Monday afternoon. I'll be presenting about the new Golden Age of Value and the worse-than-2008 rout I'm expecting.

Unfortunately, the event is all sold out. But the good news is, we've set up a way for everyone to livestream the conference... and even go back and listen to your favorite presentations again for up to 30 days after the event.

Plus, it costs much less than flying to Las Vegas, getting a hotel room, losing money at the blackjack table, eating way too much, and attending the conference. And just for registering for an all-access pass today, you'll get a special gift valued at $399. Click here for details.

New 52-week highs (as of 10/2/19): Flutter Entertainment (PDYPY).

Yesterday's Digest on Uber, Lyft, and the "gig economy" generated a flood of feedback from readers. What do you think? Let us know at feedback@stansberryresearch.com.

"Uber and Lyft are just taxi companies... California's recent actions to properly classify Uber and Lyft drivers as employees demolishes the only important operating distinction between them and Yellow Cab (and all the rest). Once the old line cab companies get their dispatching capabilities into the 21st century (I assume they are all working on it now), there will be no distinction at all. The only remaining political issue will be – can the companies get large cities to restrict competition to protect rates high enough for them to make money, or will they crash and burn through excess capacity?" – Paid-up subscriber Kelly F.

"Don't be so quick to rule out the voters in CA to vote in favor of Uber and Lyft. If they vote against them, they will be voting to pay more for the rides." – Paid-up subscriber Luis A.

"Is it possible that Uber and Lyft will use legal delays not to avoid paying their drivers as employees, but to get to the point where they can use autonomous taxis and don't need drivers? I understood that has always been their stated objective. As usual, a rise in the labor costs leads to a loss of jobs to automation!" – Paid-up subscriber Nick A.

"The discussion around Uber and Lyft not being tech companies seems to be ignoring the push on the autonomous car front. In 10 years, some ride share company will be operating without the hinderance of drivers and thus eliminate the most expensive component of the operation." – Paid-up subscriber Scott S.

"I have worked under both systems. Of course, an employer needs to make a profit on an employee's work. Otherwise, there would be no point in hiring and the profit from workers will vary with the business cycles. But in lieu of higher pay, the worker enjoys benefits and continued employment during recessions. The employer retains skilled workers.

"However, should a worker consistently produce increasing profits and not be rewarded, then he would be better off contracting his services (working for himself). One must know the worth of his services in the marketplace very well and what his employer's total cost for his labor and the profit on his services is. Only then does one know his worth in the market and be able to negotiate a contract that will cover an increased salary, benefits and taxes that goes with being self employed. A successful contractor will price his services above an employee's salary but a little below the full cost of maintaining an employee, thus leaving some profit for the employer. Also having knowledge or skill in such high demand that an employer will contract at a loss. One must save for low work. At least, if one produces more he is rewarded more.

"One could say there is a balance to be maintained which is driven by supply and demand. When there is unbalance, either the employer or employees must adjust or it will be done to them by each other. Alas, each usually wants more than they are worth and thus the antagonistic relationship. It pretty much works until one or both resort to amoral tactics, which seems more the norm today. Just my real world experiences, for what it's worth." – Paid-up subscriber Ernest A.

Good investing,

Dan Ferris
Vancouver, Washington
October 3, 2019