'Favorably Disconnected' From Reality... For Now

A mega-bubble warning that's flashing red... Stocks don't know they can sink... A recipe for chaos and catastrophe... The market will show its uglier side... Be careful out there... [Stansberry Research Logo] Delivering World-Class Financial Research Since 1999 [Stansberry Digest] A mega-bubble warning that's flashing red... Stocks don't know they can sink... A recipe for chaos and catastrophe... The market will show its uglier side... Be careful out there... --------------------------------------------------------------- Chauncey Gardiner walked on water... Perhaps you recognize that reference from the 1979 film Being There (based on the 1971 Jerzy Kosinski book of the same name). In the film, Peter Sellers plays a pleasant, extremely dimwitted middle-aged man named Chance. Chance lived his entire life in the home of a rich man, serving as the man's gardener and having virtually no contact with the outside world. He has never been to school, the doctor, or the dentist. He has never been ill. He knows only two things: gardening and what he sees on TV. After the man's death, Chance wanders off the property for the first time in his life. A young man pulls a knife on him, and Chance tries to click it away with his TV remote control. Having been disconnected from reality his whole life, he literally doesn't know how it works. With his only reference points to reality being gardening and television, Chance responds to everything everyone says to him with a pleasant comment from one of those two sources. Chance meets powerful, wealthy people, including the president of the United States, whom he recognizes from TV. They all think he is speaking metaphorically and looking deep into the world and into their souls (and they mistake "Chance the gardener" for the name "Chauncey Gardiner"). But he's really just a friendly simpleton who only knows gardening and TV watching. At the film's end, Chance wanders outside and walks across a lake without falling in. Curious, he stops and pokes his umbrella down into the water, then continues walking. He didn't know he was supposed to sink, so he didn't. Chance's pleasant personality and total cluelessness remind me of a June 2023 report by market-research firm Leuthold Group, which noted: Years preceding presidential elections are more likely than others to feature stock-price action that is favorably disconnected from the fundamentals. Today's disconnect is certainly favorable to those making money on it... I'm talking about the market's mega-bubble valuations and the extreme outperformance of the largest, most popular stocks. I've noted the market's extreme valuation many times before. A recent Wall Street Journal article did it using five simple metrics for the S&P 500 Index: - Price to earnings above its 10-year average - Price to book value above its 10-year average - Premium over 10-year Treasurys near its most expensive point in two decades - Price to earnings growth below its 10-year average and above its 20-year average - Cyclically adjusted price/earnings ("CAPE") ratio higher today than 96% of the time since 1881, below only its 1990s and 2021 peaks I don't know how important all these statistics really are, but I've frequently cited CAPE as a good way to spot mega bubbles. It's flashing red right now at 33.8. Bottom line: the S&P 500 is expensive any way you look at it (except maybe by the 10-year price-to-earnings-growth ratio). That's a high-level picture of the market. The fact that stocks are expensive doesn't necessarily scream "disconnected from reality." But if you drill deeper... You can see the disconnect in other ways... For example, analyst Tavi Costa recently reported on X (formerly known as Twitter) that Microsoft's (MSFT) market cap is double that of the entire S&P 500 energy sector... yet it generates just half the annual free cash flow of all the energy stocks. I get how Microsoft is a highly capital-efficient business compared with oil and gas production. And I get how that makes it trade at a rich valuation. But consider what happens if either Microsoft or the oil companies suddenly disappear. I don't get how being inconvenienced by having to change software is worse than having your standard of living reverted to 1858 (the year before oil was first discovered in America). I realize the S&P 500 energy sector isn't the entire U.S. energy sector... but the U.S. is the largest oil producer. Microsoft isn't the entire global software industry, either. And yes, branded software is not a fungible commodity like oil and gas... And Microsoft's cash flows are less cyclical than the energy sector's. I understand the objections to this comparison, but they don't change a basic truth: The real wealth created by oil and gas companies ought to be at least as valuable as software. You can choose your own flavor of market disconnect. But whichever example you consider, it means the same thing... The stock market doesn't seem to know it can't walk on water... It is utterly clueless and has no reason to believe that anything is wrong, because everything always seems to work out OK. But that's not how it works. A rising market is endlessly pleasant and OK until the risks build up and transform it into an impending disaster. For example, there's the simple fact that, as asset manager GMO put it in their latest quarterly letter: The largest stocks generally become the largest by way of becoming expensive. Returns depend on how much you pay for stocks, so it naturally follows that becoming one of the biggest stocks in the world – again, by getting expensive – might be bad for subsequent returns. Sure enough, using data going back to 1957, GMO found that on average, nine of the 10 largest-cap stocks have underperformed the S&P 500 in the year after achieving top 10 status. GMO further concluded that: Since 1957, the 10 largest stocks in the S&P 500 have underperformed an equal-weighted index of the remaining 490 stocks by 2.4% per year. But the last decade has been a very notable departure from that trend, with the largest 10 outperforming by a massive 4.9% per year on average. Also consider what tends to eventually befall mega-cap companies like Nvidia (NVDA), which now trades at 30 times sales and 96 times earnings. As GMO puts it... Good returns in the face of high valuations, moreover, require exceptional earnings growth. When a company already has a substantial market and profit share of the industries in which it operates, unusual growth tends to be significantly harder than normal. In other words, a stock becomes a mega cap by a combination of growing the business and becoming expensive... but nothing grows to the sky. Sooner or later, growth stalls and the market loses its tolerance for exorbitant valuations. The whole letter is worth reading, and [you can find it here](. But I'll give you one final quote to tie it all together... Ten years ago, the index was more than twice as diversified. We have never seen – over any 10-year period – a decline (or increase) in diversification of the magnitude we have just witnessed. The last few times the stock market rapidly became concentrated were 2000, 2007, and 2011... and it has never been as highly concentrated as it is today. Investors should be troubled by concentrating their assets into a small group of expensive stocks. But only a few professionals seem worried about it. For example... Hedge-fund manager David Einhorn says the disconnect has 'fundamentally broken' the market... Appearing recently on Bloomberg's Masters in Business podcast, Einhorn blamed passive and quantitative investors. As he put it... Passive investors have no opinion about value. They assume everybody else has done the work. We'll leave quants (who rely on computer analysis to help them buy and sell stocks) for another day. Passive is likely the bigger problem... Passive investing means buying stocks without any reference to their underlying fundamentals, which most people do in their 401(k) accounts. They buy stocks automatically every time they get paid, having done no research, with no knowledge of the underlying fundamentals of the businesses they're buying. They buy whether stocks are up or down... dirt-cheap or trading at mega-bubble valuations. In other words, passive investing starts by disconnecting one's investments from fundamentals. That's the strategy: "Forget about the fundamentals. Just keep buying." Einhorn sees so many people buying stocks passively – completely disconnected from their fundamentals – that he even had to change the way he invests. As he explained on the podcast, he used to analyze which companies deserve a higher valuation, expecting the market to deliver it. Now, he buys companies that he believes are deeply undervalued and can reward investors through share repurchases and dividends – even if their valuations never increase. A recipe for chaos and catastrophe... Passive investing as we know it today started in 1976 when fund giant Vanguard created the first index fund. Back then, hardly anybody knew the term passive investing. But eventually even Vanguard's famous founder, John Bogle, understood that passive investing could wreck the market... as Einhorn says it already has. At the Berkshire Hathaway shareholder meeting in 2018, Bogle told the audience... If everybody indexed, the only word you could use is chaos, catastrophe. The markets would fail. We're probably getting very near the point where Bogle, who died in 2019, might use words like chaos and catastrophe... if we're not there already. According to data compiled by Bloomberg, passive exchange-traded funds ("ETFs") and mutual funds make up 58% of all equity funds. And many more assets around the world are surely benchmarked to indexes like the S&P 500 and the Nasdaq Composite Index. So the market is concentrated in one strategy of buying one asset in a way that further concentrates investors into a tiny handful of the few thousand stocks available on U.S. exchanges. Right now, if you put money into an S&P 500 fund, you're putting more than 30% of your investment into the 10 largest stocks. In other words... you're putting the biggest chunk of your investment into the stocks GMO showed have historically underperformed the market over the following year, the following 10 years, and, on average, for the whole period from 1957 to the present. I wonder how many people would even raise an eyebrow if I told them that's what they're doing with their 401(k) every two weeks – without a care in the world – and that it might be riskier than they've been led to believe. That's the trouble with being favorably disconnected from reality. The utter pleasantness of it all provides a negative incentive to want to reestablish one's connection with the facts and fundamentals of investing in stocks for the long term. It makes you wonder how much longer it'll take for our broken, chaotic markets to reveal their uglier side... Most folks like it when their S&P 500 index funds make new all-time highs. It doesn't look or feel anything like a problem. It feels like they're crushing it. I seem crazy for complaining about it. Oh well... Anybody who reads my Digests and The Ferris Report knows I'm doing what I can to prepare investors for the day when reality reasserts itself. Until then, I'll wear the crazy hat with pride. And of course, right when markets are most expensive, highly concentrated, and frankly dangerous, you can count on academia – arguably as broken as the stock market! – to come through with lots of technical gobbledygook to show you that everything is just fine. That's what I took away from a November 2023 paper called "Beyond the Status Quo: A Critical Assessment of Life Cycle Investment Advice," written by three finance professors from three American universities. Their conclusion is that you should be 100% invested in equities from the day you start investing until the day you die. No bonds. No precious metals. Just stocks. Never mind how they came to this conclusion (though it's fun to read analyst [Cliff Asness' refutation of it](. My beef with the paper is that investing is never about owning a single asset class... and it's so typical of academics to invest time and energy promoting an asset class when it's at mega-bubble valuations in the most concentrated market in history. It's too perfect. These finance professors are like the shoeshine boys of 1929... a bunch of overconfident know-nothings giving stock tips right before the big crash. They exhibit no depth of insight, no understanding of the cycles that move markets over long periods of time. Investing goes beyond any single asset class. It's about understanding risk and reward and asset values. It's about choosing a strategy that aligns with your goals and your personality. Static, academic opinions like "you should be 100% in equities at all times" are meaningless and detached from the reality that you work, save, invest, and live in each day of your life. Be careful out there for the rest of the year... Lastly, remember that Leuthold Group's "favorably disconnected" piece was from last year. It said returns were highest the year before an election, not the year of one. Right now feels like a dangerous moment to me. I almost feel the way I did in my [November 19, 2021 Digest]( when I said I was more bearish than in September 2018 and recommended shorting stocks to those who were comfortable with it. The best short sellers I know wait for stocks to start falling before they start shorting. It wouldn't surprise me at all if stocks start falling soon and for those brave enough to take the short side make some money in the next several months. But you don't need to do that. All you need to do is what I've been recommending for a few years now. You need to prepare for a wide variety of outcomes... which means having great stocks bought at reasonable prices, plenty of cash, safe bonds paying handsome yields, and precious metals. That's a great core portfolio. It'll likely take good care of you in a wide variety of market environments. Holding that kind of asset mix is a frank admission that you don't know what's coming next, but that you intend to make money and preserve your wealth no matter what it is. --------------------------------------------------------------- Recommended Links: [Beware of the 'Wall of Debt' (See These Charts)]( Despite the market highs, forensic accountant Joel Litman sees trouble ahead. His data reveals a crisis could send some stocks soaring while others crash in the coming weeks. In a brand-new interview, Joel names 18 widely owned stocks you should sell immediately and the ONE group of stocks you should own with 500% upside for free. [Take a look at the evidence here](. --------------------------------------------------------------- [Until MIDNIGHT: This Simple Currency Move Could Make You 400% Gains]( Today, 14-year Stansberry Research veteran Brett Eversole is stepping forward with an urgent new currency update. He says there's ONE move today that could set you up for a 48% dividend payout... on top of a potential 400% capital gain. You have until midnight to get the full details – [click here while there's still time](. --------------------------------------------------------------- New 52-week highs (as of 2/15/24): ABB (ABBNY), AbbVie (ABBV), Applied Materials (AMAT), American Express (AXP), Berkshire Hathaway (BRK-B), Brown & Brown (BRO), CBRE Group (CBRE), Canadian National Railway (CNI), Costco Wholesale (COST), Crispr Therapeutics (CRSP), Disney (DIS), Electronic Arts (EA), iShares MSCI Emerging Markets ex China Fund (EMXC), Diamondback Energy (FANG), Comfort Systems USA (FIX), Franklin FTSE Japan Fund (FLJP), Fidelity National Financial (FNF), Fortive (FTV), Intercontinental Exchange (ICE), JPMorgan Chase (JPM), Linde (LIN), Eli Lilly (LLY), VanEck Morningstar Wide Moat Fund (MOAT), Sprouts Farmers Market (SFM), Sprott (SII), Spotify Technology (SPOT), SPDR Portfolio S&P 500 Value Fund (SPYV), ProShares Ultra S&P 500 (SSO), Stellantis (STLA), Cambria Shareholder Yield Fund (SYLD), TFI International (TFII), Travelers (TRV), ProShares Ultra Financials (UYG), Visa (V), Veralto (VLTO), Viper Energy (VNOM), Vanguard S&P 500 Fund (VOO), Advanced Drainage Systems (WMS), and Health Care Select Sector SPDR Fund (XLV). A quick housekeeping note before we get to the mailbag: The U.S. markets and our offices are closed on Monday for Presidents Day. Following this weekend's Masters Series, we'll pick up with our regular fare here on Tuesday. In today's mailbag, feedback from a happy yet concerned subscriber... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com. "Greetings, I'm pro America and stocks. I'm a subscriber with multiple Stansberry services. Among the analysts, I'm leaning towards Greg [Diamond] and Dan's analysis regarding the markets being overvalued. "I'm sharing an observation on Berkshire Hathaway still sitting on a record amount of cash. The last big investment move they made after buying Occidental and Dominion was at the beginning of the Japan bull market rally which some are reporting is reaching a peak. I don't believe that Berkshire is sitting on this much cash simply because of Mr. Buffett's age. "I'm of the shared opinion that U.S. equities in general are overvalued, inflation risks are not fully appreciated, and that higher rates for longer are highly probable, which is contrary to the mainstream media and the herd who are so hopeful for rate cuts. At this time rate cuts would likely come because the economy is getting worse which at some point will begin to be reflected in equity prices. "That's why I appreciate the way that Stansberry helps readers find cheap, hated, great value opportunities and provides valuable macro insights especially on bottoms and tops..." – Subscriber Rodger G. Good investing, Dan Ferris Eagle Point, Oregon February 16, 2024 --------------------------------------------------------------- Stansberry Research Top 10 Open Recommendations Top 10 highest-returning open positions across all Stansberry Research portfolios Stock Buy Date Return Publication Analyst MSFT Microsoft 11/11/10 1,346.3% Retirement Millionaire Doc MSFT Microsoft 02/10/12 1,290.8% Stansberry's Investment Advisory Porter wstETH Wrapped Staked Ethereum 02/21/20 1,011.3% Stansberry Innovations Report Wade ADP Automatic Data Processing 10/09/08 908.0% Extreme Value Ferris WRB W.R. Berkley 03/16/12 749.8% Stansberry's Investment Advisory Porter BRK.B Berkshire Hathaway 04/01/09 615.3% Retirement Millionaire Doc HSY Hershey 12/07/07 469.3% Stansberry's Investment Advisory Porter BTC/USD Bitcoin 01/16/20 458.2% Stansberry Innovations Report Wade FLUT Flutter Entertainment 08/01/19 437.8% Stansberry's Investment Advisory Gula AFG American Financial 10/12/12 433.7% Stansberry's Investment Advisory Porter Please note: Securities appearing in the Top 10 are not necessarily recommended buys at current prices. The list reflects the best-performing positions currently in the model portfolio of any Stansberry Research publication. The buy date reflects when the editor recommended the investment in the listed publication, and the return shows its performance since that date. To learn if a security is still a recommended buy today, you must be a subscriber to that publication and refer to the most recent portfolio. --------------------------------------------------------------- Top 10 Totals 5 Stansberry's Investment Advisory Porter/Gula 2 Retirement Millionaire Doc 2 Stansberry Innovations Report Wade 1 Extreme Value Ferris --------------------------------------------------------------- Top 5 Crypto Capital Open Recommendations Top 5 highest-returning open positions in the Crypto Capital model portfolio Stock Buy Date Return Publication Analyst wstETH Wrapped Staked Ethereum 12/07/18 2,053.7% Crypto Capital Wade BTC/USD Bitcoin 11/27/18 1,276.1% Crypto Capital Wade ONE/USD Harmony 12/16/19 1,129.8% Crypto Capital Wade POLYX/USD Polymesh 05/19/20 1,048.2% Crypto Capital Wade MATIC/USD Polygon 02/25/21 858.8% Crypto Capital Wade Please note: Securities appearing in the Top 5 are not necessarily recommended buys at current prices. The list reflects the best-performing positions currently in the Crypto Capital model portfolio. The buy date reflects when the recommendation was made, and the return shows its performance since that date. To learn if it's still a recommended buy today, you must be a subscriber and refer to the most recent portfolio. --------------------------------------------------------------- Stansberry Research Hall of Fame Top 10 all-time, highest-returning closed positions across all Stansberry portfolios Investment Symbol Duration Gain Publication Analyst Nvidia^* NVDA 5.96 years 1,466% Venture Tech. Lashmet Microsoft^ MSFT 12.74 years 1,185% Retirement Millionaire Doc Band Protocol crypto 0.32 years 1,169% Crypto Capital Wade Terra crypto 0.41 years 1,164% Crypto Capital Wade Inovio Pharma.^ INO 1.01 years 1,139% Venture Tech. Lashmet Seabridge Gold^ SA 4.20 years 995% Sjug Conf. Sjuggerud Frontier crypto 0.08 years 978% Crypto Capital Wade Binance Coin crypto 1.78 years 963% Crypto Capital Wade Nvidia^* NVDA 4.12 years 777% Venture Tech. Lashmet Intellia Therapeutics NTLA 1.95 years 775% Amer. Moonshots Root ^ These gains occurred with a partial position in the respective stocks. * The two partial positions in Nvidia were part of a single recommendation. Editor Dave Lashmet closed the first leg of the position in November 2016 for a gain of about 108%. Then, he closed the second leg in July 2020 for a 777% return. And finally, in May 2022, he booked a 1,466% return on the final leg. Subscribers who followed his advice on Nvidia could've recorded a total weighted average gain of more than 600%. You have received this e-mail as part of your subscription to Stansberry Digest. If you no longer want to receive e-mails from Stansberry Digest [click here](. Published by Stansberry Research. You’re receiving this e-mail at {EMAIL}. 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