Note from Ashley Cassell, Managing Editor, TradeSmith Daily: Today we're going to do something different and let you hear directly from the CEO of our parent company MarketWise: Porter Stansberry.
Porter believes we may have already seen a peak in stock prices – and that most investors simply won't realize it until it's too late.
But we at TradeSmith are well prepared for such a scenario. Our battle-tested algorithms help you quickly understand if what we're seeing is a correction or the start of something much worse.
There's one TradeSmith tool in particular that, Porter writes, "I highly recommend... no, I am begging you... to use to measure, monitor, and manage the risks you're taking in stocks."
As you'll see below, Porter has much to say on this, including why stock valuations are at their highest level in over 60 years… so I'll "pass the mic" to him now.
Below, he'll show you why he's issuing his biggest warning in years and what you should do about it.
(The full-length version of this letter originally appeared in Stansberry Digest in July.) |
A Warning From Porter Stansberry By PORTER STANSBERRY, FOUNDER, STANSBERRY RESEARCH ❖ Many of you may not "know" me... But I (Porter Stansberry) founded Stansberry Research, and for 20 years, I wrote to our subscribers each Friday.
I am doing so again now because I believe we are at an important peak in equity prices... that a big decline in stocks is inevitable... and that buying tech stocks here will lead to poor returns for at least a decade.
I hope you will read what I've put together below carefully. I would also urge you to share it with people you care about, your business partners, and your financial planner.
But first, a few disclaimers... ❖ There's no such thing as teaching – there's only learning... Most people can hear all the good advice and important information in the world, and it will have no effect if they aren't ready to hear it with an open mind.
Most people don't read this Stansberry Digest, or anything else, to learn. They read what they like to read, mostly because it reinforces their existing biases. So, I don't expect to be able to change your mind about anything I address below. And as always, if you disagree with my thinking, I hope you'll write in to our mailbag.
But whether you agree with me or not, I hope you'll think deeply about the risks you're taking with your savings. Most people don't think about what they will do if they lose 50% or 75% of their life's savings in only a few days. But that's about to happen... ❖ Second, if you're not familiar with me or my work... Reading what follows will surely leave you thinking that I'm some kind of Chicken Little. I'm not.
The last time I asked to address every subscriber of Stansberry Research directly was in late March 2020 – just as the market was making its COVID-panic bottom. Back then, I organized an "all hands on deck" webinar about the incredible opportunities in the stock market. I pounded the table on buying an incredible portfolio of "forever" stocks – stocks that have durable competitive advantages and that can grow their sales and earnings without having to spend much money on capital investments (companies I call "capital efficient").
We launched the Forever Portfolio service on March 26, 2020, to take advantage of that opportunity. The inaugural portfolio included Alphabet (GOOGL), which is up almost 240% since then... Microsoft (MSFT), up 217%... and American Express (AXP), up 175%. It also included some less well-known but just as exceptional stocks, including uniform provider Cintas (CTAS), up 282%, and weight-loss-drug innovator Novo Nordisk (NVO), up 373%. The Forever Portfolio has achieved a total return of 101% since its inception.
I bring that up because I don't offer these kinds of explicit warnings very often. In fact, I firmly believe that investing in high-quality common stocks is, without question, the very best way to protect your assets in America.
But there are good times to buy stocks... and very bad times to buy them. Ironically, most people get those periods exactly backward.
I hope you won't be one of them. ❖ Let's start here... We are in the midst of the greatest financial bubble of all time... Today's bubble was caused by the same thing that creates every bubble – enormous amounts of newly created credit. This bubble was fueled by the "hidden" bailout of our banking system that began in early 2023 when the Federal Reserve created its "Bank Term Funding Program" to paper over the banks' $500 billion-plus in losses on their government bonds.
Among its actions, the central bank issued more than $164 billion in credit, created out of thin air. Thus, rather than seeing a reduction in credit while interest rates were rising, we've witnessed a gigantic expansion in credit, leading to a financial boom. The mania in tech stocks today far exceeds the 2000 bubble. Going forward, for the next decade or longer, returns on large-cap tech stocks will be well below average. And for investors who pile into tech stocks today, when they are trading at 30 times sales, the results will be catastrophic. This advice is contrary to what virtually everyone else is saying about the stock market right now, so I'll understand if you're deeply skeptical of my views. But I hope you'll pour a glass of your favorite adult beverage and let me explain why your actions over the next three to six months matter so much to your financial well-being. ❖ A little bit of history... In January 2000, at the peak of the Internet mania in the stock market, my longtime business partner and best friend, Steve Sjuggerud, wrote something that virtually assured he would lose his job as the investment director of the well-known (and perennially bullish) Oxford Club.
Steve wrote that we were "at the peak of the greatest financial mania of all time" and that, within a few days or weeks, the bubble would burst, wiping out investors.
But wait, because there's a lot more to the story. A little more than nine years later, on March 20, 2009, Steve wrote exactly the opposite to his True Wealth subscribers. Here's what he said in the issue published that day: In January 2000, I told my 40,000 paid subscribers we were at the peak of the stock market mania. Today, more than nine years later, I believe the exact opposite... I am extremely bullish on stocks, starting now.
I believe the entire stock market could rise by 50% from its lows last week over the next 18 months. And the next seven to 10 years could be phenomenal, as I'll show.
The important thing I want you to understand now is March 2009 is exactly the opposite of January 2000...
Steve became famous for these two legendary market calls. But what most people forget is that Steve didn't merely call the bottom in 2009... He was exactly right about what kind of stocks would lead in this new, decade-long bull market – big-cap tech stocks. In a November 2008 essay in our DailyWealth e-letter, he said... Tech stocks have fallen 50% in the last 12 months and are down 75% from their 2000 highs. Investors are completely ignoring them... Banks, real estate, and commodity stocks get all the headlines. But you want to buy things when nobody's talking about them. And tech stocks are the cheapest they've been since 1995, on a price-to-sales basis.
In the essay, Steve cited the Technology Select Sector SPDR Fund (XLK), the exchange-traded fund of large-cap tech stocks. On March 20, 2009 – the day Steve made his bullish market call – the fund closed at $15.04 a share. Yesterday, it closed at $232 a share. That's a return of about 17 times your money over the past 15 years, if you reinvested your dividends. That's pretty incredible. ❖ He wasn't the only one... Steve wasn't the only analyst who was correctly urging our subscribers to ignore all of the fear that was rampant in the market back in March 2009. Tom Dyson, who has since become a living legend for his incredible stock picking, also made the best market call of his entire life on March 16, 2009. In an essay for our DailyWealth e-letter published that day, Tom wrote... You define your life by a small handful of very important decisions. We're at one of those decision points right now...
Now investors are as pessimistic, uncertain, and afraid as they have been in 120 years of stock market history.
When everyone is bearish like this, it is your imperative as a red-blooded, profit-seeking investor to be bullish...
On Tuesday, the market jumped 6% higher in an explosion of volume. On Wednesday, the market eked out a small gain. Then on Thursday, the market exploded higher again... rising another 4% on big volume...
Right now, we must assume Tuesday was the bottom... That means taking an aggressive long position...
My readers are playing the rally with companies like McDonald's, Exxon, and Johnson & Johnson. These are the strongest companies in the world.
Since then, accounting for reinvested dividends, ExxonMobil (XOM) is up 135%, Johnson & Johnson (JNJ) is up 294%, and McDonald's (MCD) is up a staggering 511%. ❖ As for yours truly... I have always focused more on individual companies than the market as a whole... As an entrepreneur and a business owner, I'm more comfortable making bets on specific businesses that I know well. So, what did I write about in the Stansberry Digest on Friday, March 9, 2009, when the market made its last bottom?
I reminded readers that Warren Buffett was recommending American Express (AXP) and that his own holding company, Berkshire Hathaway (BRK-B), was trading as though it would go bankrupt.
Although that seems impossible to believe today, that's how nutso the market was behaving. After all, Berkshire was AAA rated, it had as much cash on its balance sheet as debt, and it owned a collection of America's absolute best operating and insurance companies. Here's exactly what I wrote: Warren Buffett did a three-hour interview on CNBC this morning. Some of the highlights include Buffett calling American Express (AXP) a "hell of a buy" at $10 a share...
The market is so fearful about Berkshire's derivative exposure that it's pricing a 60% probability Berkshire will default in the next five years. Credit default swaps, bond insurance for Berkshire, are trading at 535 basis points... That's enormous. A Berkshire default is incredibly unlikely... The firm has almost as much cash as it does debt. This is just another example of a panicked market unjustly punishing a stock.
Buffett, of course, was right. Today, American Express is trading for $239 a share – an almost 24x gain in 15 years. And about a year after that interview, in February 2010, Berkshire joined the S&P 500 Index, where it has been a stalwart.
What I hope you'll gather from these stories is that, while stocks do well on average and over time, those averages hide an important reality: There are great times to be a buyer of stocks and there are terrible times to be a buyer of stocks. Right now has all of the hallmarks of a terrible time to be a buyer of most stocks, especially tech stocks. ❖ How do I know?... Stocks as a percentage of household assets are at an all-time high – 35%. Previous peaks include the top of the '68 bull market (29%), the top of the 2000 bull market (30%) and the top in stocks just before the pandemic (34%).
Bear markets bottom when everyone has sold. Bull markets die when everyone has bought. Mid-June saw the largest weekly inflow to tech-centric mutual funds in history.
And who is selling? Insiders at Nvidia (NVDA) have been selling at the fastest pace ever, dumping almost $500 million worth of shares in June. ❖ By every well-proven metric, the S&P 500 is incredibly overvalued... That's mostly because of the largest 10 companies.
Take Buffett's favorite broad measure of the stock market's price level, the total U.S. stock market capitalization measured against U.S. gross domestic product (GDP).
Before 2020, the previous all-time peak was just below 150% in the 2000 bubble. That peak was two standard deviations away from the historical trend line, suggesting an unsustainable extreme.
Today... that measure of the market sits at 200% of GDP... placing it well beyond two standard deviations above the average. 
❖ Nobel laureate James Tobin developed another slightly wonkier measure of the stock market's level. It's called "Tobin's Q"... It's difficult to calculate, and the figures needed to do the calculation are only released by the Federal Reserve each quarter. But it is intellectually sound. The Q ratio is the total price of all the stocks in the market divided by the replacement cost of all of the companies.
The long-term-average Q ratio is 0.83. That means that for most of the past 120 years, the stock market has priced publicly traded companies at a small discount to their replacement cost. However, during several notable periods, investors were willing to pay large premiums.
The first time was during the 1960s, when the Q ratio soared to 1.7. It then fell for 20 years, bottoming at 0.29 in the early 1980s. The second was during the 2000 bubble... when the ratio soared to 1.5, before bottoming in early 2009 at 0.70.
And today? Tobin's Q ratio sits at an all-time high of 1.8. 
Here's a simple prediction for you: Over the next 10 years, stock prices will fall so that this ratio once again is below 1. And when that moment occurs... I strongly suspect that you won't want to buy stocks. Human emotions are what drive stock prices so far above their intrinsic value and what allow them to fall well below their intrinsic value. If you begin to see prices as merely reflections of the crowd's irrational emotions, you'll be much better positioned to profit from these cycles. ❖ Another critical factor makes the current market extremely unstable and subject to a crash... The market today is more concentrated than ever before in history.
The top 10 stocks in the S&P 500 now equal roughly 35% of the entire index's value. The only other time the market was anything like this concentrated was during the Great Depression.
This suggests that the real economy is much weaker than anyone realizes, mostly because investors have pushed valuations of the biggest stocks to incredible extremes. ❖ Finally, the stock market is suffering from a growing lack of "leadership" in the stock market... For example, on June 17, the S&P 500 set a new all-time high, which is a sign of a strong bull market. But on that same day, more stocks were at new 52-week lows than at new 52-week highs.
This is an extremely unusual "divergence." And it's just another example of how a small group of vastly overvalued stocks has pushed an otherwise weak market higher. The reality is, the market has no real foundation. When sentiment changes, there will be a crash.
The last time we saw this kind of divergence in the market was just before it began a 22% decline in January 2022. And there were only two other instances. One was before a sharp 20% decline in late 2018 – the "crypto crash" – and in January 2000 right before the huge 50% decline in stocks when the first tech bubble burst. 
(By the way, hat tip to Hussman Strategic Advisors for this unique piece of market research.) ❖ Does this mean that stocks will collapse next week?... As I sat down on July 11 to write this Stansberry Digest, the market began to experience a historic reversal of trend. Incredibly, as I finished writing the first draft of this Digest, the Russell 2000 Index of small-cap stocks closed 3.6% higher. But the S&P 500 (dominated by the big, overvalued tech stocks) fell 0.88%!
Thus, even though that day saw advancing stocks outnumber declining stocks by 5-to-1 the "stock market," as defined by the S&P 500, declined (by 0.88%). That has never, ever, happened before in the entire history of the stock market. The market is indeed "broken." Driven by the extreme amount of capital that's "indexed" and the enormous size and valuation of the biggest tech names, the stock market isn't functioning normally.
To understand how extreme the risks are in this market today, you have to realize that the other times in market history that the market has behaved similarly in the past were all during the Great Depression, after the enormous crash of '29. On 12/5/29, 8/18/30, 1/11/32, 8/20/34, and 11/8/34, the market's advancing stocks outnumbered the declining stocks by "only" 2-to-1, not by 5-to-1. In other words, the market's dynamics are even more unusual now than they were during the Great Depression.
You already know the big tech names were down big, led by Nvidia, which fell by 5.6%. It's not often that the market confirms a thesis so dramatically literally while you're writing the research, but I believe that's the case here. I think the "top" is in for big-cap tech. I hope you won't try to buy this dip.
Extremely high valuations, like the kind we see today in big-cap tech stocks, are like someone putting dynamite into a hole. The pressure builds and builds and builds. And the more extreme the valuations get, the bigger the inevitable explosion will be.
Right now, the only thing holding up this market is sentiment – the fundamentals are completely broken. When the stocks start to fall, sentiment will disappear. Then there will be a big crash. ❖ And don't look to the government to protect investors... Ironically, efforts to make financial markets safer and more stable – such as central banking – only permit more and more "dynamite" to build up in the system.
A famous economist, Hyman Minsky, first discovered how financial system stability leads to bigger and more violent financial panics – something called a "Minsky Moment." We're on a one-way track toward the biggest Minsky Moment we've ever seen.
The combination of massive (and unsustainable) sovereign debt and unprecedented valuations of U.S. stocks, along with record-high levels of participation in the stock market, is a recipe for some incredible "fireworks." ❖ I'm not trying to be Steve Sjuggerud. And you don't have to call the top to the exact day to be right... And I don't know what "spark" will light the fire. But when stocks are trading at extreme valuations, any bump in the road can lead to immense carnage.
It might be the collapse of a major private-equity firm because of losses in commercial real estate (which is my best guess). Or it could be the invasion of Taiwan (which I think is unlikely). Or it could be the detonation of a nuclear bomb in Ukraine (I sure hope not).
The point is, if you know a great white shark is in the water, do you need to know exactly where he is to know that going swimming at night probably isn't smart?
What should you do? ❖ I've got three sensible solutions... And don't worry... I already know that none of you will actually do these things! There's no such thing as teaching... First, I highly recommend... no, I am begging you... to use TradeSmith's Trade360 software to measure, monitor, and manage the risks you're taking in stocks. This is revolutionary technology for individual investors and includes dynamic trailing stops, portfolio-risk analysis, and, most importantly, risk-based position sizing. I simply cannot recommend this product highly enough. Second, make sure that you haven't inadvertently let stocks grow to be too much of your portfolio. If you're 80 years old and you're 100% in stocks, this would be an important time to rebalance. Please hear me: I am not saying you should sell every stock. Particularly if you own strong, dividend-paying stocks, you may have sound reasons not to sell them even if they decline in price.
Third, look at your portfolio and rebalance toward value. This is an unusually bifurcated market that's eerily similar to 1999/2000 when value stocks became incredibly cheap, while tech stocks became insanely overvalued.
At my new boutique advisory, Porter & Co., we've recently recommended several ultra-high-quality stocks that fit that profile: America's leading natural gas producer EQT (EQT), sportswear giant Nike (NKE), cigarette maker Philip Morris International (PM), cosmetics retailer Ulta Beauty (ULTA), spirits maker Diageo (DEO), and tractor manufacturer Deere & Co. (DE), just to name a few.
While these stocks are all out of favor and trading at near-record-low valuations today, over the next three to five years, we expect all of these businesses to perform well and, sooner or later, to once again be revered by investors.
It was a wonderful privilege to write to all of you again!
Good investing, Porter Stansberry
Stevenson, Maryland |
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