Get ready for a long sideways market... We're living through a massive inflection point... Stocks and bonds aren't safe... A 'manual error' leads to 'disaster' at the New York Stock Exchange... Why this episode is alarming... If we know where to look, we can find opportunities everywhere... A 75% discount for Digest readers...
 The world's top expert on sideways markets is 'very pessimistic' today...
Regular Digest readers know all about author and investor Vitaliy Katsenelson. And Stansberry Investor Hour podcast listeners have heard from him twice (here and here). Vitaliy is a classic value investor. He's incredibly successful, too... In his day job, Vitaliy serves as the CEO of value-investing firm Investment Management Associates. And in his free time, among other things, he writes award-winning books. I (Dan Ferris) have learned more about sideways markets from Vitaliy than from anyone else... I first read about this concept in his 2007 book, Active Value Investing. It's a deep dive for serious, self-guided investors who are trying to pick stocks in what he called "range-bound markets" at the time. In his aptly named 2010 book, The Little Book of Sideways Markets, Vitaliy switched to the now-ubiquitous phrase. And he showed readers how to survive what he called a "cowardly lion" – a market that "displays occasional bursts of bravado but is ultimately overcome by fear." I bet investors who read Vitaliy's books today will be glad they did before long... After all, I believe the next few decades in the financial markets will look a lot different from the recent past. And you had better be ready – or you'll risk losing everything as it unfolds. As it turns out, Vitaliy agrees with me... Just yesterday, he published a new essay on his ContrarianEdge website. It's titled, "Stock Market Roller Coaster: Prepare for a Decade or Two of Disappointing Returns!" In the essay, Vitaliy reiterated something he recently told his money-management clients... I am very pessimistic about the returns from the average U.S. stock over the next decade or two. If you owned index funds over the last decade, you were richly rewarded by the stock market. It is time for the payback. Investors who own index funds have likely strapped themselves into a giant roller coaster which, to this point, has only gone up. Over the next decade or two they will experience an exhilarating ride filled with mini bull and bear markets, but at the end of the journey they will not be far from where they started. Payback is coming, folks. Get ready for an exhilarating ride through a long sideways market. But the thing is... Even if Vitaliy is right that the end of our journey won't be that far from where we start, we can still find ways to profit along the way. The key is figuring out exactly how to do that... Vitaliy and I both believe we're living through a massive inflection point right now... A lengthy period of stellar returns made it relatively easy to get rich in the stock market. Following the 2008 financial crisis, folks could pick almost any stock and watch it go up. But looking forward, we both fear that we're heading into a long period of poorer returns. The markets are at a huge, once-every-few-decades moment. We haven't seen something like what we're living through today since the federal-funds rate peaked at about 20% in 1981. In fact, the current bear market and the likelihood of a brutal, decade-plus sideways market are the main reasons why I recently launched my new monthly service, The Ferris Report... The Ferris Report is designed to help everyday investors exploit the big "top down" changes I expect to happen as the largest mega-bubble in recorded history peaks and begins to deflate. Huge macro trends play key roles in wide swaths of the market and society. And industry-specific micro trends will drive some companies' earnings for many years to come. As I've said before, the coming era (which is already starting) will be the exact opposite of the past few decades in many ways. I've published the following list a few times already... Let's focus on one of the most important changes on my list. It has already occurred. And as you'll see before the end of today's Digest, it's a bigger issue than most folks realize... I'm talking about the shift toward higher interest rates, not lower ones... In a recent issue of The Ferris Report, I said folks could gauge market liquidity by looking at interest-rate movements. Liquidity refers to how easy it is to buy and sell an asset. Our world runs on debt financing... So lower rates mean higher liquidity. It's easier and cheaper to borrow when costs are low. And higher rates mean lower liquidity. It's harder and costlier to borrow when costs rise. By raising rates, the Federal Reserve is essentially reducing liquidity in the stock and bond markets. It's making it harder for investors to easily buy and sell these financial assets. When rates go up, higher interest payments are only the beginning... The value of collateral for financing asset purchases falls because bonds are most of the collateral in the markets. When your collateral falls in value, a broker will ask you to post more collateral to avoid margin calls. And when the markets become volatile in a rising-rate environment, there's a greater likelihood of leveraged portfolios blowing up. That's what happened in the United Kingdom in September... Big pension funds using leveraged bond-buying strategies were hit with margin calls and required to sell their holdings. As a result, British government bonds went into freefall. And the Bank of England had to step in and bail out the pension funds. And as we saw earlier this week, the stock market isn't safe either... Chaos erupted in early trading Tuesday. Financial-services giants Wells Fargo (WFC) and Morgan Stanley (MS) quickly fell 15% and 13%, respectively. And retailer Walmart (WMT) and fast-food titan McDonald's (MCD) each dropped at least 12%. Before long, the New York Stock Exchange ("NYSE") halted these four highly liquid mega-caps and other stocks due to volatile trading. Prices of some of the other stocks plunged as much as 25% before market officials stepped in. But I bet you didn't hear much about this chaos before now. The mainstream media made the whole thing seem mundane. And nobody reported the real reason why this happened... Sudden moves like what happened Tuesday morning are typical when liquidity is drying up. After investigating, the NYSE concluded that a "manual error" in the exchange's "disaster recovery configuration" caused all the chaos to start the day. And market officials said it ultimately happened with as many as 251 ticker symbols. Manual error? It sounds like somebody spilled coffee on a laptop. But hey, we're all human. Whether it was a coffee spill or some other mortal mistake, stuff happens. The troubling part is that somebody can spill coffee, hit the wrong key, or whatever... and instantly reduce an entire exchange's ability to "recover" from what it apparently labels a "disaster." I wonder if this type of disaster would've happened before the Fed started hiking rates. After all, manual errors can happen at any time – not just when liquidity is drying up. We may never know. If the NYSE didn't use the word 'disaster,' I might've shrugged the whole thing off... I certainly wouldn't have called it a disaster. Only a few dozen stocks out of the thousands that trade moved 25% or less very quickly. The whole thing was over in minutes. It seems more like a minor inconvenience to me. But since officials used that word, it got me thinking about real disasters... My mind immediately went to days like "Black Monday" on October 19, 1987, when the Dow Industrial Average plunged 22.6% and the S&P 500 Index fell 20.5% in one day... or any of the other large one-day drawdowns in either index that have occurred in the past century. After Black Monday, the NYSE instituted "circuit breakers"... If the S&P 500 falls 7% in a single session, trading stops for 15 minutes so folks can catch their breath and calm down. If the markets reopen and the S&P 500 drops to a 13% loss for the session, another 15-minute stoppage occurs. And if they reopen again and it falls to a 20% decline for the session, the exchange gets shut down for the day. So theoretically, it's now impossible for the S&P 500 to fall more than 20% in a single day. Regular Digest readers are likely nodding their heads. I've made this spiel in the past. And you'll recall that the COVID-19 panic in March 2020 put the circuit breakers to good use. But all that happened before a manual error screwed up the disaster recovery configuration. When I've previously expressed concerns about the market falling more than 20% in a day, I've made it clear that it was a philosophical argument – not technical or financial. As I've said before, humans in markets are like fish in water... The fish don't control the waves, currents, tides, water temperature, or weather. And as humans, we don't control anything that happens in the markets. We're just riding along. What happened Tuesday with the NYSE is alarming... It gave us a glimpse of how a technical issue could lead to the theoretically impossible result of a greater-than-20% drop in a single day. If a manual error can cause double-digit percentage drops in highly liquid mega-cap stocks... what about an entire index? What happens if the S&P 500 is down 19% one day, hanging dangerously close to shutting down, and somebody with a fat finger leans on the wrong keyboard or spills his Starbucks Frappuccino all over it? Poof! Suddenly, we're down 25% or more! Folks who know a lot more than me about exchanges say that a one-day drop greater than 20% isn't worth discussing. They'll tell you that it simply can't happen in today's world. OK, but what if the market is down 5% one minute and 15% the next? If a manual error happened like that, the market would blow right through the 13% circuit breaker. Don't tell me it can't happen. We don't know that. We just know that it hasn't happened yet. That doesn't mean much in the financial markets, where all kinds of stuff happens that has never happened before. Remember in 2006 when everybody kept saying, "Housing prices have never fallen before," right before they fell for six straight years? Look, I'm not even saying any of this stuff is likely to happen. It's highly unlikely – just like the September rout in U.K. bonds and Tuesday's debacle on the NYSE. If nothing else, these things all prove that the factors we don't control can cause havoc in the markets... And that's the thing about enormous global markets... They're so complex that you simply don't get to see all the interconnections. For example, I have no idea what's going on inside so-called "dark pools" of liquidity created by large financial institutions to trade huge blocks of equities out of public view. Who knows what will happen if those pools suddenly experience a lack of liquidity that nobody expects? Not me. The particulars don't matter. What matters is the interconnectedness of it all – and how that makes every part of the system vulnerable. The more complex and interconnected a system is, the more opportunities for a manual error or small glitch to bring the whole thing down. One day, the British pension funds were pursuing a levered bond-buying strategy. And the next day, they were selling bonds to raise cash to meet margin calls and thanking the financial gods that the Bank of England could bail them out. And with rising rates reducing overall market liquidity, I'm sure something similar will happen again. It's sort of like when your car gets older, and its parts start to wear out... Maybe you don't think about it at first. But eventually, more unexpected problems crop up and you get inconvenienced more often. The reliability you once took for granted is gone. A typical car has thousands of parts. The markets have millions of parts – including all the people, institutions, and computers that everything runs on. No one can possibly predict the next time and place that the interactions of those millions of parts will create a problem. But fortunately, we can start preparing for the inevitable... And if we know where to look, we can find opportunities everywhere... Vitaliy and I agree on at least one of the ways you must prepare for those opportunities. As he wrote on his website this week... Don't be afraid of cash. Secular bull markets taught investors not to hold cash, as the opportunity cost of doing so was very high. The opportunity cost of cash is a lot lower during a sideways market. And staying fully invested will force you to own stocks of marginal quality or ones that don't meet your heightened margin of safety. If Vitaliy and I are both right, my usual advice will be critical... Hold cash. Buy great businesses when they're cheap enough. Hold gold and silver. They're still my core guidelines for portfolio allocation. And I doubt they'll change much until I'm convinced that the sideways market is behind us – which will take a lot of convincing! Following those guidelines will get you through all the unpredictable stuff that happens in the coming years. You'll be ready when complex, interconnected markets throw glitches, "manual errors," bond-market routs, and other unpleasantness at you. And you can do something else... I'm working my way through the list of opposites that I reshared earlier... And in The Ferris Report each month, I'm finding investments to exploit all these trends. So far, I've recommended stocks to profit from the transition from growth to value, the new risk-off mentality, several different stocks in two commodity sectors, stocks with cash-generating real assets, and a way to exploit a secular bull trend in a controversial industry. And just this week, I made a new commodity-related recommendation... On Wednesday, I told The Ferris Report subscribers about three dividend-growth all-stars in an industry I believe will generate superior returns for at least the next four to six years. While many folks are out to demonize this industry, it's critical to our everyday lives. Now, in fairness to my paying subscribers, I can't give away any of the specific stocks that I've recommended in The Ferris Report to you today. But I won't leave you empty-handed... In short, I've arranged a special deal for everyone who reads today's Digest. Right now, you can get a full year of The Ferris Report for 75% off the normal price. Plus, this deal includes instant access to my model portfolio, five research reports, and more. And even better, you can take the next 30 days to decide whether The Ferris Report is right for you. If it's not what you expect, I'll give you a full refund. But I don't think it will come to that... After all, as I've discussed today, stocks could be headed lower and sideways for years – or even decades. You owe it to yourself to prepare immediately. Get all the details right here.
| Recommended Links: |  Dr. Steve Sjuggerud's 2023 'Melt Down' Warning "I've stayed quiet for a while now, but when I saw these numbers, I knew I had to step forward... because the market is about to enter a completely NEW phase." Steve recently ordered our firm to put everything aside and prepare for him to go live with his most important warning since he called the Melt Up back in 2015. Click here for the full details. | |
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New 52-week highs (as of 1/26/23): Aehr Test Systems (AEHR), Arafura Rare Earths (ARAFF), SPDR Bloomberg 1-3 Month T-Bill Fund (BIL), BorgWarner (BWA), iShares MSCI Mexico Fund (EWW), Hologic (HOLX), Revance Therapeutics (RVNC), Starbucks (SBUX), iShares 0-3 Month Treasury Bond Fund (SGOV), and ExxonMobil (XOM). Today's mailbag features feedback on yesterday's Digest, in which we cited data on U.S. gross domestic product ("GDP") and inflation. Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com. "Really? You guys buy this reported GDP increase as a reflection of an improving economy... Surely this is just increased government spending on weapons and free gifts to the Ukrainian government?" – Paid-up subscriber Charles D. "If one looks at the month-over-month inflation rates for the last year, we see that from January through June 2022, inflation was running at more than 10% annually. From July through December, it was running at 1.8% annually, well within the desired range, according to the Fed. "It comes as no surprise then that 'cooler' heads will soon prevail there, unless the inflation rate blows up again. To say that inflation was at 6.5% in December is misleading at best, given the incredibly sharp break starting in July, and continuing to date." – Paid-up subscriber Kelly F. Good investing, Dan Ferris
Eagle Point, Oregon
January 27, 2023
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 | 889.9% | Retirement Millionaire | Doc | ADP
Automatic Data | 10/09/08 | 803.9% | Extreme Value | Ferris | MSFT
Microsoft | 02/10/12 | 764.0% | Stansberry's Investment Advisory | Porter | WRB
W.R. Berkley | 03/16/12 | 633.2% | Stansberry's Investment Advisory | Porter | ETH/USD
Ethereum | 02/21/20 | 567.4% | Stansberry Innovations Report | Wade | HSY
Hershey | 12/07/07 | 526.0% | Stansberry's Investment Advisory | Porter | AFG
American Financial | 10/12/12 | 454.1% | Stansberry's Investment Advisory | Porter | BRK.B
Berkshire Hathaway | 04/01/09 | 451.3% | Retirement Millionaire | Doc | ALS-T
Altius Minerals | 02/16/09 | 320.4% | Extreme Value | Ferris | FSMEX
Fidelity Sel Med | 09/03/08 | 311.3% | Retirement Millionaire | Doc |
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 |
|---|
| 4 | Stansberry's Investment Advisory | Porter | | 3 | Retirement Millionaire | Doc | | 2 | Extreme Value | Ferris | | 1 | Stansberry Innovations Report | Wade |
Top 5 Crypto Capital Open Recommendations Top 5 highest-returning open positions in the Crypto Capital model portfolio | Stock | Buy Date | Return | Publication | Analyst |
|---|
ETH/USD
Ethereum | 12/07/18 | 1,306.3% | Crypto Capital | Wade | ONE-USD
Harmony | 12/16/19 | 1,158.0% | Crypto Capital | Wade | POLY/USD
Polymath | 05/19/20 | 1,058.3% | Crypto Capital | Wade | MATIC/USD
Polygon | 02/25/21 | 926.9% | Crypto Capital | Wade | BTC/USD
Bitcoin | 11/27/18 | 512.8% | 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 | | 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 | | Rite Aid 8.5% bond | 4.97 years | 773% | True Income | Williams |
^ 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%. | 
