Stansberry Research

Garbage Is Back on the Menu

Dan FerrisStansberry Digest

Garbage is back on the menu... As Bed Bath & Beyond circles the drain, its stock is up 300%... The biggest financial mega-bubble in all recorded history is alive and well... Corporate insiders aren't optimistic... Even the savviest investors can get duped... More destruction is coming... This whole escapade will end one way...


Bed Bath & Beyond (BBBY) could go belly-up any day...

The retail disaster released its third-quarter earnings report Tuesday. It featured...

  • A 33% decline in net sales over the previous year
  • A $100.7 million accounting loss in the quarter
  • Negative operating cash flow of $307.6 million
  • The clear failure of its turnaround plan

These abysmal results practically guarantee that Bed Bath & Beyond will soon go bankrupt. It's incapable of making money. And it's rapidly burning up the little bit of cash it still holds.

In fact, just over a week ago, the company itself admitted it's on borrowed time.

And yet... Bed Bath & Beyond's stock soared as much as 300% this week!

The stock is virtually guaranteed to be worthless once Bed Bath & Beyond goes bankrupt. That detail is obviously lost on the folks who are pushing the share price through the roof.

Meanwhile, Bed Bath & Beyond's three outstanding bonds traded today between $60 and $100 per bond. They're all trading between 90% and 94% below par value of $1,000.

The bond prices tell a more accurate story about the company...

That's because bond investors have a contractual claim on the company's earnings and assets. Meanwhile, in a bankruptcy, stockholders get whatever is left over – if anything is.

In short, bondholders' claims are senior to stockholders' claims. So when the bonds are trading so far below their par value, like right now, the stock is clearly worthless.

With that in mind, the stock's absurd surge this week only means one thing...

The biggest financial mega-bubble in all recorded history is alive and well.

And it isn't just Bed Bath & Beyond...

Other likely bankruptcies soared this week, too...

Money-losing used-car seller Carvana (CVNA) was up about 83% before pulling back today. Its 10 outstanding bonds all trade in the $400 range – more than 50% below par value.

Party-supply retailer Party City (PRTY) was up as much as around 130% this week. And you guessed it... its nine outstanding bonds all trade well below their par value.

And of course, the original "meme stocks" have come along for the ride...

Video-game retailer GameStop (GME) climbed as much as 25% this week. And movie-theater chain AMC Entertainment (AMC) rose roughly 30% through yesterday's close.

So why is all this garbage back on the menu this week?

Honestly, we can never know what these lunatics are thinking. But one thing is clear...

The poor, sad fools who buy meme stocks and bankruptcies apparently aren't broke yet.

We've detailed this story in the Digest before...

These folks congregate on Internet message boards like Reddit. And they're obsessed with the idea that you can buy any piece of garbage and make a lot of money very quickly.

An army of deluded know-nothings still believes it can "stick it to the man" by paying that same man to trade toxic waste that's virtually guaranteed to lose them a ton of money.

The "man" includes hedge fund Citadel and its founder Ken Griffin...

Regular Digest readers will recall that Citadel was shorting the meme stocks when they first became famous. These Redditors' actions led to massive "short squeezes" in early 2021.

But the funny thing is...

Griffin also founded and owns most of a separate business – capital-markets company Citadel Securities.

That's important because Citadel Securities is a huge market maker. It makes a ton of money any time these folks buy or sell their favorite garbage in hopes of causing another short squeeze. And in turn, Griffin rakes in the profits.

It's the ultimate market irony...

The meme-stock loyalists think they're stealing from the rich to give to the poor. But they're really doing the opposite. They're losing what little capital they have left as Citadel Securities and Griffin bank record profits. (Yes, that really just happened.)

The garbage buyers remaining clueless and confident is a pristine example of the "Dunning-Kruger effect." This principle states that the least knowledgeable folks tend to be the most confident... and the most knowledgeable folks tend to be less confident.

The meme-stock buyers' persistence tells us something else important...

No matter what anyone says, investors aren't too bearish yet.

I promise you...

When folks are too bearish, nobody will touch Bed Bath & Beyond, Carvana, Party City, GameStop, or AMC Entertainment with a 39-and-a-half-foot pole. Nobody will talk about those stocks anymore. By then, most of those companies won't even exist anymore.

As I said, it's a good bet that the Bed Bath & Beyond bulls' comeuppance will arrive any day...

Bloomberg reported yesterday that the company was talking to lenders who might finance it during a bankruptcy. These talks included the possibility of a bid for some of the company's assets.

Carvana and Party City probably aren't far behind. In fact, Bloomberg reported earlier this week that Party City is also holding bankruptcy-financing talks.

It sounds like the bankruptcy judges are about to get a whole lot busier.

GameStop and AMC Entertainment will hang on longer than the others because they aren't in quite as awful financial shape. But they're doomed to keep losing money. And one day, they'll likely also be unable to pay back their debts.

In other words... buying the equity of any of these companies is idiotic.

But today, all these Redditors are still insanely bullish on garbage. They don't see the high likelihood of bankruptcy as a reason to sell. Rather, they see it as a reason to own shares.

And they're buying right now, even though equity is always wiped out in bankruptcy.

The stock market is as perversely irrational as ever. It might as well be mid-2021... mid-1999, just before the dot-com peak... or mid-1929, just before the Great Depression.

To be fair, not everybody is still buying like crazy...

Folks who know what goes on inside public companies don't want to buy anything these days...

Corporate insiders bought hand over fist during the COVID-19 downturn in March 2020, according to data from InsiderSentiment.com. Of course, that proved to be a great move for many insiders as the S&P 500 and other indexes soared to new all-time highs.

Then, InsiderSentiment.com's data showed that these insiders sold en masse in November 2021. That was another bit of good timing for a lot of these folks...

Bitcoin, the tech-heavy Nasdaq Composite Index, and the small-cap-focused Russell 2000 Index all peaked that month. And more than a year later, they're all still trending lower.

More recently, insider sentiment has been declining for the past six months.

Said another way...

The great unwashed herd is "buying the dip" with the worst garbage in the market. And at the same time, the most knowledgeable people in corporate America are either selling their own stocks or waiting on the sidelines for whatever god-awful thing they believe is coming.

It's an epic battle between folks who know less than nothing about the companies they're buying and the folks who've spent their careers inside those companies.

I bet I know which group will be vindicated and which one won't!

Now, I don't mean to imply that only foolish individual investors do stupid things...

After all, the list of creditors in the FTX bankruptcy case includes some of the savviest, most successful investors of our time. Court filings released this week revealed investors like...

  • Third Point
  • Thoma Bravo
  • Tiger Global
  • BlackRock
  • Sequoia Capital
  • Paul Tudor Jones

Maybe these folks didn't buy garbage like meme stocks or bankruptcies. But if they can all fall for FTX's loony pitch about all the money they were going to make running a crypto exchange and get defrauded, too... well... you can see that it can happen to anybody.

A mega-bubble permeates every nook and cranny of life.

Everybody gets caught up in it one way or another. You can run, but you can't hide.

Believe it or not, the sophisticated folks at JPMorgan Chase (JPM) can even fall into this trap...

That's right. The too-big-to-fail megabank revealed this week that it got bamboozled by a young entrepreneur touting an allegedly fraudulent enterprise...

In September 2021, JPMorgan paid $175 million for a fintech startup called Frank. The company was created to help smooth out the student-loan process for Americans.

A now-30-year-old entrepreneur named Charlie Javice founded Frank in 2016. And then, just three years later, she was named to Forbes magazine's "30 Under 30" list in finance.

It's clear that Javice is potential "Bull Club" material. She once said she wanted Frank to become the "Amazon for higher education." And she describes herself as "being really unfiltered, having really big opinions, and not being afraid to voice them."

Javice is brimming with self-styled awesomeness. But apparently, honesty isn't her strongest quality...

You see, before the deal, Javice allegedly told JPMorgan that millions of people signed up to use Frank's services. However, a new lawsuit accuses her of creating a list of names, addresses, and birthdates for more than 4.2 million students who didn't actually exist.

Apparently, Frank only had 300,000 users at the time.

JPMorgan claims to have evidence that Javice paid more than $100,000 to at least two different parties to help create the fake list of students. Apparently, the company sent test marketing e-mails to what it believed were 400,000 Frank customers. But only about a quarter of them were deliverable. And only 1% of the delivered e-mails were opened.

JPMorgan fired Frank's chief growth officer in October. And a month later, it did the same to Javice. She has since filed a lawsuit against JPMorgan, alleging that the company reneged on the terms of the agreement under which Frank was acquired.

So I hope you can see what I'm getting at...

It doesn't matter whether it's meme-stock buyers, corporate insiders, the elite of the finance world, or a too-big-to-fail megabank... Everybody is still either buying the dips on garbage, selling their own companies' stocks, or getting eviscerated by the bursting bubble.

Everything has started falling apart, but more destruction is coming...

While investors are caught in various stages of the cycle of foolish mega-bubble speculation, the financial press does what it can to feed them as bullish a narrative as it can muster.

A potential "Fed pivot" remains a favorite topic. On Wednesday, Bloomberg published another example...

This headline is designed to fill readers with hope – or perhaps to exploit the hope that exists among investors. If the market rejects the Fed's "mantra," maybe the central bank will stop raising rates and start cutting them.

That type of move – a Fed pivot – is generally seen as bullish for stocks. But there's a problem...

Previous Fed pivots haven't been bullish for stocks at all. They've actually been bearish... Most bear markets throughout history occurred after Fed pivots.

And of course, a Fed pivot remains unlikely anyway...

Fed Chair Jerome Powell recently reminded us of his mission to inflict pain upon all of us at a forum on central-bank independence in Stockholm. Specifically, he said...

Restoring price stability when inflation is high can require measures that are not popular in the short term as we raise interest rates to slow the economy. The absence of direct political control over our decisions allows us to take these necessary measures without considering short-term political factors.

In other words, "I'm not elected and don't care what's popular with voters... or anybody else. I'm going to keep raising rates until something big breaks. Happy New Year."

Even when Fed members try to be a little upbeat, they can't help themselves...

Philadelphia Fed President Patrick Harker said yesterday...

The days of us raising [rates] 75 basis points at a time are surely past.

That sounds great to a pivot-hungry bull. But he also said...

I expect that we will raise rates a few more times this year.

Well, so much for those Fed-pivot hopes.

The Wall Street Journal put it best yesterday. As it noted, for whatever reason, the market is still filled with folks who are "locked in a game of chicken with the Fed."

It's not hard to figure out how that will work out.

I bet the folks at the Fed have an infinite capacity to endure other people's pain. And I bet the folks buying stocks because they expect a pivot don't have infinite capital or patience.

This whole escapade will end one way...

Investors will panic during a Fed-induced recession later this year. Fearing the worst, they'll sell everything they can. They'll even get rid of the strongest businesses in the markets.

That will set up an incredible buying opportunity for the rest of us. And we'll find remarkable deals everywhere we turn.

I can't wait.

New 52-week highs (as of 1/12/23): Alamos Gold (AGI), CTS (CTS), iShares MSCI Mexico Fund (EWW), inTEST (INTT), MasTec (MTZ), VanEck Oil Services Fund (OIH), RenaissanceRe (RNR), and SLB (SLB).

In today's mailbag, one subscriber writes in about a comment that Digest editor Corey McLaughlin made earlier this week about the Fed... and another one shares his thoughts on yesterday's essay about the chances of a "soft landing." Do you have a comment or question? As always, e-mail us at [email protected].

"'... broadcasting it live so we can hear how smart they are. Too harsh? Or not harsh enough?'

"Not even close to harsh enough, Corey. Here's a bit of my own experience...

"I grew up in a lower middle class home. Nevertheless, through my childhood, I accumulated an Erector Set, Chemistry Set, Microscope, Crystal Radio kit, etc. I read everything I could get my hands on about science. In 1957, for my 12th birthday, I got the now classic book, The Boy Scientist, and absolutely devoured it.

"So naturally, in the early '70s, I obtained a BSEE in Electrical Engineering and a BS in Math. I then worked in a consulting engineering firm for 12 years. Then, in the mid '80s, I obtained a JD Cum Laude, and went into law practice. After five years, I quit law practice and went back to tech.

"Here's the punchline...

"In spite of all my childhood study and my natural bent toward science, I found obtaining the 'bachelor's degrees' in EE and Math significantly more challenging than the 'doctorate' in Law!

"Bottom line: I pay less attention to the people who just talk, than to the people who can do things. (Which includes you Stansberry folks. I notice all of you don't just talk... you all have skin in the game.)" – Paid-up subscriber Edward S.

"Like reading your Digest. It's more of a contrary viewpoint that isn't influenced by the flock. I grew up on a farm some 55 years ago. A flock of sheep always had a leader. Not that the leader knew what's best, but if he took off one direction, all the rest of the sheep followed.

"Which brings me to the likings of the Federal Reserve Bank Presidents...

"Over the last year, they just seem to follow the flock. No independent thinking of what rates should be. The causes of inflation are still there. Inflation at 6.5% is not a good thing. [But] national news thought it was.

"What's next? Can gas go down another $1 per gallon? Can existing housing and rental costs go lower, with the shortage of housing? Are the grocery stores going to lower prices now that they raised them?

"For the average person, things are getting worse. It's not going to be a soft landing." – Paid-up subscriber Norm H.

Good investing,

Dan Ferris
Eagle Point, Oregon
January 13, 2023