The pure disdain for proper preparation... Stocks are NOT cheap or attractive in at least 13 ways... The perfect setup to wipe out a bunch of Americans' wealth... The 'wealth effect' in reverse... Learning to think dynamically... 'Be careful out there'... Don't be the patsy at the poker table... If you invest through Bank of America, you might want to look around the table... The megabank published a research note earlier this week about its clients' trading activity. And in short, at least as of last week... Individual investors aren't properly preparing for an economic recession. For the third week in a row, Bank of America's individual-investor clients were net buyers of U.S. stocks. These folks remind me (Dan Ferris) of an old poker adage... If you look around the poker table and don't know who the patsy is, you're the patsy. They're the patsies of the big money, which is selling as these individual investors buy... You see, Bank of America also reported that hedge funds were net sellers for the second consecutive week. And institutional investors were net sellers for the third straight week. The pure disdain for proper preparation from the little guy gets worse... According to Bank of America, individual investors are funding their purchases of cyclical sectors – like tech stocks – by selling some of the best performers over the past two years (industrial and energy stocks). Of course, these sectors are also traditional defensive plays. In other words, these investors aren't behaving like people who fear an imminent recession. They aren't getting defensive and trying to protect themselves. They're still too greedy. Believe it or not, some experts actually view this trend as a good thing... In these experts' minds, the fact that these investors aren't preparing for economic disaster means they still feel safe and secure. But the thing is... I bet the patsy poker player felt safe and secure with his full house until the shark at the other side of the table flipped over his pocket aces for four of a kind. As we've noted before in the Digest, the unsuspecting crowd traditionally pours all of its money in right at the top. And today, this Bank of America report shows us that these folks still don't have a care in the world. They just keep "buying the dip." I admire these individual investors' fortitude. But over the long term, the herd tends to do exactly the wrong thing at exactly the wrong time. And I can't believe this time is any different. Today, these individual investors are acting like stocks are both cheap and attractive. So it doesn't surprise me that... Right now, stocks are NOT cheap or attractive in at least 13 ways... We'll start with the first eight ways. They're metrics tracked by researcher Mark Hulbert. Hulbert gave a rundown on his eight metrics in the Wall Street Journal last week. His most reliable indicator is "average investor equity allocation"... The Federal Reserve publishes this data quarterly. It's simply the percentage of the average investor's financial assets (equities, debt, and cash) that's allocated to stocks. The most recent data point at the end of the first quarter put this percentage at 40.1%... Importantly, Hulbert's article referenced data from the end of 2021 – just days before the S&P 500 Index peaked on January 3, 2022. Of that moment, Hulbert wrote... At the end of last year it was 68% higher than the average of the past 50 years' bear-market bottoms, and at the 99th percentile of the 50-year distribution. The 99th percentile, you say? That seems pretty extreme to me. Hulbert acknowledged that his eight metrics can't predict where stock prices will go in the short term. But over the longer term, he's more willing to suggest the outlook isn't good... Assuming the future is like the past, however, the path of least resistance for the stock market is to decline. Short-term rallies notwithstanding, odds are good that the stock market on balance will produce a below-average return over the next decade. Deutsche Bank publishes similar data on equity allocation. Its number is a little bit lower than the Fed's today (around 33%), after hitting an all-time high above 35% in November. Neither stat is likely perfect. But the fact that they both recently hit all-time highs seems spot on... More of Americans' financial assets are in the stock market than ever before. In other words, Americans are more vulnerable to a stock market correction than ever before... I doubt the past five or six months have changed anything. Bank of America's revelation about individual investors proves the patsies are still out there at the poker table. That brings me to the other five ways that stocks aren't attractive or cheap today. They're tracked by economist and portfolio manager John Hussman... I've discussed Hussman's five revenue- and earnings-based S&P 500 metrics many times in the Digest, in the pages of my Extreme Value newsletter, and on the Stansberry Investor Hour podcast. So at this point, you should be well aware of what to look for. In short, Hussman's metrics are still lingering just below their all-time highs. And his worst-case scenario for the S&P 500 is another 50% to 60% below current levels. Such losses would be devastating. And they would compound on the trillions of dollars that S&P 500 companies have already lost as a group... According to Bloomberg's U.S. Exchange Market Capitalization Index, the total value of U.S. publicly traded companies is down roughly $9.2 trillion from its peak. At about $44.9 trillion today, it's around 18% below its November 2021 all-time high of $54.1 trillion. With stock ownership near all-time highs and individual investors buying into what appears to be a bear market rally as the big money exits... it looks like a perfect setup to wipe a big chunk of wealth off many individuals' and families' balance sheets. The other big source of Americans' wealth is, of course, their homes... Since 1965, between 63% and 69% of American households have owned their homes. Today, it's 65.4%, according to Federal Reserve data. And if you own a house, you probably feel pretty good right now... The S&P CoreLogic Case-Shiller U.S. National Home Price Index shows that home prices are up 34% over the past two years. Take a look... As a result, total home equity has soared to $11 trillion, according to mortgage-lending data and analytics provider Black Knight. That's about $207,000 per mortgage holder. That's the good news. Now, the bad news... If you don't own a home, they're becoming less affordable at an unprecedented pace. Housing affordability declined 29% over the past year, according to the National Association of Realtors ("NAR"). That's the sharpest decline on record. The NAR's affordability index measures whether a typical family makes enough income to qualify for a mortgage loan. Homes are more affordable when prices and mortgage rates are low. And both have soared over the past two years. Bankrate.com's national average mortgage rate was around 3.25% at the start of 2022. Now, it's 5.55%. That's a huge increase in less than six months... For a $400,000 home with a 20% down payment, it would take the monthly payments (before taxes and insurance) from about $1,390 to around $1,825 – an extra $5,200 per year in payments. If you compare that to the median household income of roughly $67,000 (from the 2020 census), you can see how an extra $5,200 per year takes homeownership off the table for many families. The shocking drop in affordability is sending would-be homebuyers into the rental market... And in turn, it's driving up rents to record levels. CNN Business recently reported that the median U.S. monthly rent equaled $1,827 in April. That's up 16.7% over the previous year. And it's yet another new all-time high. If the current trend persists, the median U.S. rent could hit $2,000 per month by August. Some renters have even had to offer more than a landlord's asking price to secure a lease. As Danielle Hale, Realtor.com's chief economist, told CNN Business... Rents are not only maxing out renters' housing budgets, but are the biggest strain on their overall finances, even as inflation drives up expenses across the board. Besides the obvious financial strain for folks just wanting to put a roof over their heads, there's also the vulnerability to the "wealth effect" – which we discussed in the May 27 Digest. The wealth effect is simple... Stocks and homes are American households' primary forms of wealth. When the values of those two assets increase, folks feel wealthier and spend more. The economy booms. But when those assets lose value, people feel poorer and spend less. And in turn, economic activity slows – possibly enough to cause a recession. The wealth effect turns economic cause and effect on its ear... Normally, we assume the stock market reflects the underlying fundamentals of the companies that trade within it. When they're doing well, it means the economy is doing well. The market responds by pushing prices up. The economy (and company performance) is the cause. Higher stock prices are the effect. That's perfectly sensible as far as it goes. But reality is more complicated... The wealth effect turns rising stock prices into the cause. And more spending and economic activity are the resulting effect. Cause and effect swirl around one another in a virtuous upward cycle. The problem is, when the cycle goes too far, it can sputter to a halt – and reverse. A wealth-effect reversal is one of my biggest fears for the next several months... I keep thinking about Malcolm Gladwell's popular 2000 book, The Tipping Point. The tipping point is the moment when an idea or trend starts to spread like wildfire. In the stock market, it happens in both directions. The "meme stocks" hit a tipping point in early 2021 and soared hundreds of percent in days. And on the flip side, the COVID-19 crash of March 2020 took more than $10 trillion off the U.S. stock market in a month. It's not hard to see what might set the wheels of cause and effect in motion... For example, in his Wednesday Digest this week, my colleague Corey McLaughlin highlighted the likelihood of a "parabolic" move in oil prices to as high as $150 per barrel within months. As he wrote... During a conference [Tuesday], Jeremy Weir, the head of the Singapore-based firm Trafigura, talked about how oil prices could surge to new record highs and trigger a slowdown in economic growth... "We have got a critical situation. I really think we have a problem for the next six months... once it gets to these parabolic states, markets can move and they can spike quite a lot." Weir said it was "highly probable" that oil prices could rise to $150 a barrel or higher in the coming months... with supply chains strained as Russia tries to redirect its oil exports away from Europe and the West. The warning is clear as glass and easy to grasp... A parabolic move in oil prices will cause substantial economic pain. That alone could be the tipping point to send the bear market into its next leg down. Perhaps then, investors would finally sell stocks to avoid the effects of that pain on their assets. Plus, as Bank of America said in a separate research note published last Friday... Given 2022's affordability collapse, these [home price appreciation] levels likely are at or near the peaks for this cycle. Key question is how much and how quickly they will decline. What if Bank of America is right and housing prices take a dive? Sure, houses would become more affordable – at least in terms of the tracked data. But what about the real world? If folks are paying $10 or more for a gallon of gasoline and $2,000 or more for rent... will they really be in better shape to buy a house? And what about the effect of higher interest rates? The Fed is determined to raise rates in 50-basis-point increments until it gets inflation under control. And the December federal-funds futures are at 97.22 right now – meaning the market expects the benchmark rate to be around 2.78% by then (expected rate = 100 – price). It's not even above 1% right now. And yet, the knock-on effects in the bond market have pushed mortgage rates way up. That has certainly contributed to the steepest decline in affordability on record. What if that steep decline continues? And what if it takes home prices – and a big chunk of that $11 trillion of tappable home equity – down with it? I realize most people view that mountain of home equity as an asset, but... In markets, you must learn to think dynamically... Don't look at the level of any asset price without also considering the trajectory that got it there. And remember that it feels a lot more like a liability on the way back down. In other words, always think about where prices are in relation to where they've been and where they might go next. The roughly 21% year-over-year increase in the S&P CoreLogic Case-Shiller U.S. National Home Price Index for March was the biggest single leap over a one-year period in the entire series – which goes back to 1987. And as you can see in the following chart, the index is turning "parabolic" today... The housing market looks like a meme stock from this viewpoint. The gains are bigger than ever and the trajectory is more ballistic. I'm no technical analyst, but I've been around long enough to know that ballistic price movements don't tend to top out and go sideways. They tend to top out... and crash back and erase much – if not all – of the initial ballistic move higher. This chart shows a recent run of sharply increasing gains from the previous year. So maybe, before long, it will start showing equally dramatic declines. Just think about that... Imagine that housing gets hit the way stocks have already been hit. And imagine that stocks keep falling. Under that scenario, we would be talking about the loss of trillions of dollars more in stock market value and perhaps another few trillion dollars in home equity. And it could happen in a matter of months. The reflexive effect would bring more selling. Investors would then start selling whatever they can just to eliminate the uncertainty of being in stocks. That's when these folks would finally realize they're the patsy at the poker table. But it would be far too late... The sharks would be long gone with their money. And the individual investors would be broke. Earlier this week, I spoke about the current state of the stock market with my friend Chris Pavese... Our interview will appear in an upcoming episode of the Stansberry Investor Hour podcast. Chris is the president and chief investment officer of Broyhill Asset Management. He's a very thoughtful, thorough, disciplined, bottom-up value investor (as well as a voracious reader and lifelong learner). Typically, Chris doesn't let macro considerations cloud his asset-allocation strategy. But even he couldn't avoid the obvious similarity of the current market environment to the early days of the dot-com bust... All types of garbage stocks have been crushed. They're down 80% or more, in many cases. A lot of the high-flying companies that traded north of 30 times sales now trade at 10 times sales. And even that's still expensive, in Chris's view (and I agree). In the end, related to everything we've discussed today, Chris suggested that we're maybe "one third of the way through this [bear market]." And he advised everyone listening to... 'Be careful out there'... The Bank of America clients I told you about at the start of today's Digest are doing the opposite. They're throwing caution to the wind and buying the dip yet again. The past decade or so in the stock market has conditioned these investors to salivate when stock prices fall. And sadly, they're not doing what prudent investors should do... They're not preparing for a wide range of potential outcomes. And as a result, they'll likely soon learn that it's a death knell for a substantial portion of their net worth. Do yourself a favor this weekend... Look around the poker table. Don't be a patsy. New 52-week highs (as of 6/9/22): None. In today's mailbag, the discussion continues about ways to combat drought in California. Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com. "Please let Brad C. know that it was not me spouting off about California letting water run-off into the ocean instead of capturing it. There are lots of articles, here is one. "Politicians always go for the easy way out... Don't water your grass, don't flush the toilet, instead of addressing the problem at its source and allowing the great technology minds to help with solution ideas like capturing run-off and doing something with it." – Paid-up subscriber Mike K. Good investing, Dan Ferris Eagle Point, Oregon June 10, 2022 Stansberry Research Top 10 Open Recommendations Top 10 highest-returning open positions across all Stansberry Research portfolios Stock | Buy Date | Return | Publication | Analyst |
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MSFT Microsoft | 11/11/10 | 947.4% | Retirement Millionaire | Doc | MSFT Microsoft | 02/10/12 | 814.3% | Stansberry's Investment Advisory | Porter | ADP Automatic Data | 10/09/08 | 764.6% | Extreme Value | Ferris | ETH/USD Ethereum | 02/21/20 | 623.5% | Stansberry Innovations Report | Wade | HSY Hershey | 12/07/07 | 494.8% | Stansberry's Investment Advisory | Porter | AFG American Financial | 10/12/12 | 435.5% | Stansberry's Investment Advisory | Porter | BRK.B Berkshire Hathaway | 04/01/09 | 433.3% | Retirement Millionaire | Doc | FSMEX Fidelity Sel Med | 09/03/08 | 295.8% | Retirement Millionaire | Doc | ALS-T Altius Minerals | 02/16/09 | 269.3% | Extreme Value | Ferris | NTLA Intellia Therapeutics | 12/19/19 | 264.2% | Stansberry Innovations Report | Engel |
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 |
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3 | Retirement Millionaire | Doc | 3 | Stansberry's Investment Advisory | Porter | 2 | Extreme Value | Ferris | 2 | Stansberry Innovations Report | Engel/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 |
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ETH/USD Ethereum | 12/07/18 | 1,409.3% | Crypto Capital | Wade | ONE-USD Harmony | 12/16/19 | 1,390.4% | Crypto Capital | Wade | POLY/USD Polymath | 05/19/20 | 1,087.7% | Crypto Capital | Wade | MATIC/USD Polygon | 02/25/21 | 790.6% | Crypto Capital | Wade | BTC/USD Bitcoin | 11/27/18 | 701.5% | 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 |
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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%. |