The Weekend Edition is pulled from the daily Stansberry Digest.
It's Far Too Early to Be Too Bullish By Dan Ferris, editor, Extreme Value
 Sure, it looks like the ultimate contrarian setup right now...
I can't deny that. After all, it's pretty brutal out there... So far this year, we've grinded through the worst first half for stocks since 1970. And according to Deutsche Bank data, in the first half of 2022, we also endured the worst six months for the 10-year U.S. Treasury note since 1788. You didn't think the bad news would just stop coming at the end of June, did you? We've dealt with plenty of other "worst" records since then, of course... For example, on September 13, continued fears about inflation sent the major indexes spiraling to their biggest one-day drop since June 2020. And every stock in the market-cap-weighted Nasdaq 100 Index fell that day for the first time since March 2020. And last week, the parade of pain marched on... On Monday, October 3, mortgage data provider Black Knight's (BKI) Home Price Index showed that median home prices in the U.S. fell 0.98% in August. That followed a 1.05% decline in July. Losses of roughly 1% might not seem like much at first. However, as Black Knight reported, these two drops marked the worst single-month declines since January 2009 – in the depths of the financial crisis. Not only that... they're both among the worst eight drops on record. Surging mortgage rates are driving the home-price declines. According to Bankrate.com data compiled by Bloomberg, the average 30-year fixed-rate mortgage recently hit 7% – its highest level since December 2000. You can't forget that stocks have been taking a beating, too. According to Bloomberg data, roughly $15 trillion in value has been lopped off U.S. stocks since last November. Financial data wizard Charlie Bilello noted on Twitter last week that the typical "60/40" portfolio of stocks and bonds had lost 21% through the end of September. That means this traditional investing strategy is on pace to log its worst performance since 1931 (when it lost 27%). All this bad news in one place surely must mean some type of market bottom is around here somewhere, right? And a ripsnorting rally certainly wouldn't surprise me at any point. That's a typical feature of bear markets, after all. Although a short-term rally could happen, it's still far too early to be too bullish... In the first third or half of a bear market, everybody wants to be a hero. Every market observer wants to be the person who "calls the bottom" and looks like a genius. But just as bull markets don't end until the last bear is gored, bear markets don't end until all the bulls have been ground into burger meat and all the hero wannabes are gone. We're simply not there yet. Many folks have been trying to figure out if and when the Federal Reserve will "pivot" – when it will stop raising interest rates and instead begin cutting them. And the logic goes, the Fed will do that because rising rates have caused too much pain for too many folks. Some people even say the Fed must pivot, as if it has no choice... Don't hold your breath. At a press conference last month, Fed Chair Jerome Powell said that the central bank won't change course on its battle against inflation until its benchmark lending rate is higher than the inflation rate. In other words, until the Fed's federal-funds target range of 3% to 3.25% overtakes the inflation rate – which sits above 8% today – the story won't change. If you think the Fed is going to "save us," you haven't been paying attention. Everybody seems to think the market and the economy are machines that the Fed can tweak as it likes. But you, me, and the Fed are in markets the way fish are in water... The fish don't control the tides, currents, wind, and waves. They're just along for the ride.
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Too many folks don't seem to understand that markets can crash in both directions... Panic-selling is easy to spot, of course. The COVID-19 crash in March 2020 is a great example... In the 10 trading sessions before the market bottomed on March 23, 2020, stocks fell as much as 12% in a single day. But most folks forget that March 2020 had some huge "up" days as well. The S&P 500 Index rose nearly 5% on March 10, more than 9% on March 13, and about 6% on March 17. That type of wild action happened during the Great Depression, too... The Dow Jones Industrial Average fell roughly 13% on October 28, 1929. And the next day, it tumbled nearly 12%. But then, it rose more than 12% on October 30, 1929. All but two of the top 20 one-day percentage gains in the Nasdaq Composite Index occurred on the way down to bear market bottoms. And the two exceptions occurred just days after the bottoms (March 23, 2009 and March 24, 2020). So for all anyone knew at the time, it was still a bear market. In other words... panic-buying is just as common as panic-selling during bear markets. Folks feel the pain of big losses for the first time in years. And they frantically try to win it back when any glimpse of a rally occurs. It never pays to "catch a falling knife" like that. The market never moves in one direction in a straight line – neither up nor down. I still believe we're closer to the beginning of the bear market than the end. And that means it's prudent to remain cautious. After all, we're still in the stage of the cycle when all the highly speculative, boom-and-bust stocks are flaming out, going out of business, or otherwise longing for the good ol' days. The latest example is familiar to longtime Digest readers... I'm talking about exercise-equipment maker Peloton Interactive (PTON)... In the September 3, 2019 Digest, a couple of weeks before Peloton went public, we said... I can't imagine Peloton will exist five years from now. It does nothing that can't be imitated by larger, better-financed competitors. I don't wish the company ill, but I wouldn't touch the stock (on the long side, at least) or buy the product. Peloton went public in late-September 2019 at $29 per share. The stock soared roughly 475% to more than $167 per share in January 2021 as speculators flush with stimulus checks poured money into it. COVID-19 lockdowns boosted Peloton's sales from $915 million in the fiscal year ending in June 2019 to more than $4 billion two years later. At that point, I looked dead wrong. But you can never say never in the markets. Almost a year later, I don't look dead wrong anymore... Peloton's boom ended in early 2021. The bust has been playing out for the past 21 months. The company's sales fell 11% in the fiscal year that ended in June. And its net losses grew 14-fold. The stock trades at $8 per share as of Friday morning. It's down 95% from its January 2021 peak. The endgame is at hand. Recently, Peloton announced its fourth round of layoffs. It's firing 500 employees this time – roughly 12% of its workforce. The Wall Street Journal reported... Chief Executive Barry McCarthy, who took over in February, said he is giving the unprofitable company about another six months to significantly turn itself around and, if that fails, Peloton likely isn't viable as a standalone company. Peloton was always a pure speculation, not a long-term investment... From the beginning, it tried to do what a lot of companies do these days – turn a highly cyclical product into the next iPhone. That didn't happen. And now, the company's survival is at stake. But Peloton isn't the only money loser that has tanked hard... According to data compiled by Bloomberg, stocks in the Nasdaq with negative net income have fallen an average of nearly 49% since the index peaked in November 2021. And those with positive trailing 12-month net income have fallen an average of about 17%. That's nearly three times the loss for unprofitable Nasdaq stocks compared with profitable ones. A 17% loss is painful... But it's more tolerable than your capital getting sliced in half. I know how enticing it is to try to ride the rocket when it seems to go nowhere but up. And criticizing the fundamental outlook of a business as a reason not to own the stock probably still looks stupid to a lot of folks. But I don't know how anybody could fail to see what's happening out there... Folks who bought the worst garbage – much of which traded at exorbitant valuations – have lost much more than investors who stuck with profitable companies. They gambled too much... and got burned. I'm still a card-carrying member of the "Bear Club" today. And I believe this bear market has a long way to go. But I'd be remiss if I didn't help you see the full picture today... One prominent Bear Club member believes it's time to start buying quality growth companies... To be clear, he means the ones that aren't going to flame out like Peloton. As regular Digest readers know, Bear Club member Jeremy Grantham co-founded asset-management firm GMO. And on Tuesday, October 4, his company put out a new report called, "Growth Investing Ain't About The Rates." From the report... Rising rates hurt investors; claims on profits in the future are simply worth less if you discount them at a higher rate. As growth stocks deliver their cash flows deeper in the future, their worth is hit harder than the average stock. But as GMO explained in its note, the effect isn't as strong as most folks think... It's due to the fact that all fast-growing businesses slow down eventually. Growing, high-quality businesses have an advantage over what GMO calls "speculative growth companies." As the report continued... Growing Quality companies... have an extra layer of protection in rising rate environments because they are less reliant on capital markets. Speculative growth companies, on the other hand, tend not to be cash generative and must rely on external funding; therefore, their cost of capital is much more sensitive to rising rates. GMO has been buying high-quality growth companies recently, at prices it says "overplay the role of rates in determining investment results." Given that Grantham is a well-known bear, this could be good news for long-term, fundamentals-driven investment strategies. It's definitely a counterpoint to keep in mind... Even though I believe the bear market is far from over, I also admit that I can't predict when the bottom will occur. The bear market could end soon or go on for two more years. It's impossible to predict. I understand why a wise, old contrarian like Grantham – bearish as he has been – is beginning to buy. As I said at the outset, it sure looks like the ultimate contrarian setup. But I'm just not there yet. And I don't expect to be for at least another year. So for now, let's do what we've learned works best... Continue to prepare for a wide range of potential outcomes. Hold plenty of cash, high-quality stocks, and precious metals. That's the key to our survival in the long term. If this really is the ultimate contrarian setup... we still won't miss the boat. We'll have plenty of time to take advantage of it. But as I've shown you today, a lot of evidence still points to the contrary. So if that's the case, you'll be glad that you're ready when the next "worst" record strikes the markets. Good investing, Dan Ferris
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