Porter Stansberry has a new pitch for his firm’s flagship newsletter, Stansberry’s Investment Advisory, and it’s all about the decline of the dollar and the importance of owning businesses instead of holding cash — his basic stance is that “America’s New Money” is equity in valuable assets, not constantly depreciating US dollars.

And he pulls in Whitney Tilson, who now runs that newsletter (Porter did come back to MarketWise (MKTW) last year as CEO, after it collapsed in value following its soap opera of a SPAC deal… but his own writing is still mostly for the Porter & Co. newsletter he wrote while he was “exiled” from the company). Tilson teases some ways to follow through on this general investment idea… so that’s what we’re going to look at today.

The intro is over-the-top, as usual:

“How I Cut My Salary to $1, Then Pocketed a Million Dollars in One Day With America’s New Money”

“A new form of money (not gold or cryptos) is making some Americans wildly rich. Everyone’s legally entitled to this secret currency, but few know the first thing about it….

“Most people simply don’t realize there’s an enormous change underway in America. Most have no idea what’s going on, or what it means.

“In short: Our government (the Federal Reserve, the U.S. Department of the Treasury, and the executive branch) have destroyed the value of our traditional money, the U.S. dollar.

“The collapse of the dollar accelerated recently because of the trillions in free money handed out during COVID. That’s when the collapse in the dollar (mislabeled “inflation” by the government) accelerated so much that many Americans finally took notice.

“But what most people don’t fully understand is that it wasn’t only COVID that caused this collapse of our currency…

“The constant devaluation of our money is the stated purpose of the Federal Reserve!”

It’s hard to argue with the long-term rationale, of course — over the past 50 years or so, executive compensation has blown away worker compensation, leading most of the benefits of increased productivity to go to the owners, not the workers. Those who have participated in equity markets, either buy buying stock or by earning stock from their companies, as part of their retirement plans, have done much better than folks who just collected a paycheck and saved in a bank account. Inflation is a painfully regressive tax even when it’s pretty mild, and when it gets extreme it can lead to social unrest and, in Porter’s estimation, ruptures in the “social contract.”

So… what is it that Porter and Whitney think we should do in this situation? That’s where we catch up with the ad again, when Whitney starts hinting at his recommendations…

“How to Make 10 Times More Than the Stock Market

“One thing most people don’t realize is that there’s a small group of companies that control the majority of the world’s equity exchanges.

“You’ve certainly heard of the New York Stock Exchange (“NYSE”) for example.

“But you might not know that instead of buying stocks ON the NYSE… you can actually buy the NYSE equity exchange itself – it went public in 2005.

“Since then, it has returned 2,600%… that’s 10 times more than the NYSE Composite Index, which is made up of stocks that trade on the exchange.

“In other words: You’re much better off owning the actual exchange, rather than the stocks that trade on the exchange!

“This is a huge secret of the financial world that my team and I discovered.”

OK… so “own the exchanges” is the secret. In Tilson’s words…

“Today I want to show you the two best investments in this space, which could be set to soar hundreds of percent over the long term, as equity continues its transition to becoming our new currency.

“These are phenomenal businesses, which could expand to all kinds of other assets over time.”

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But which ones?

“….the best equity exchanges are near-monopolies that benefit from significant barriers to entry. And the truly amazing thing is, it doesn’t matter if the markets are going up or down – these exchanges get paid no matter what… in fact, they make even more money in volatile markets because there’s more trading.

For example… you probably remember when Silicon Valley Bank collapsed last March. Well get this: One of the exchanges our team recommends you buy had its highest volume ever that month.”

OK, so there’s one clue… anything else?

“One of the ‘Magnificent Seven’ stocks that have driven U.S. markets higher just made a $1 billion investment in one of the exchanges we recommend you buy today – they’ve structured a 10-year partnership. The point is: This is where you want your money right now.

“We conservatively estimate hundreds of percent returns in the coming years for the two exchanges we recommend you buy right away.”

That’s almost certainly what used to be called the Chicago Mercantile Exchange, now publicly traded as the CME Group (CME). They did indeed sign a ten-year deal with Google, to use Google Cloud… and in a separate deal that was presumably a sweetener for the Google Cloud contract, Alphabet invested $1 billion in some convertible preferred shares of CME Group (this was 2-1/2 years ago, in November of 2021, and at the time Alphabet was trying hard to get its Cloud offering up to scale — signing a big deal like that with a major exchange was be a big coup, showing that Google Cloud was as viable an option as Amazon Web Services).

CME Group is the primarily exchange for futures trading, after CME merged with the Chicago Board of Trade and then with NYMEX many years ago… and it also has a deal with Dow Jones Indices (including part ownership) that gives them a monopoly on S&P futures trading. It’s also one of the more reasonably valued exchanges among the publicly traded options, probably in part because it’s not necessarily growing all that fast. CME is decently profitable, it has a 10% return on equity (ROE) these days, and it has benefitted from economies of scale as trading volumes have generally increased — they have grown earnings by about 9% per year, and revenue by about 5% per year… and they also pay a substantial dividend, currently about 4.1%, and trades at a forward PE of about 21. The stock got pretty overvalued during the go-go trading times in 2020 and 2021, but it seems to me that it’s back to being pretty reasonable again.

The business is more complex and diversified than it was when it went public, almost 20 years ago, so they now do a lot more than just equity futures and commodity futures trading, there’s a lot of bond and cash trading on their platforms as well… but this is essentially the same kind of business as any exchange: They are primarily a fee-based business that lives off of volume, so if there’s a lot of trading, they’ll make more money… if trading collapses, they’ll make less money. There’s a more stable core of earnings, in the form of market data revenue, but fee-based revenue is most of it — in the first quarter this year, they had about $1.2 billion in fee revenue, and $175 million in data revenue (that’s selling live market data to traders and institutional research platforms, etc.). They’re also very efficient and should continue to see small economies of scale as the market grows over time, since most things are computerized and they don’t need to add more people just because trading volume goes up — but that’s true of pretty much any “exchange” type business — their pre-tax profit margin is usually in the 70-80% range.

Whitney doesn’t drop any other hints about the specific exchange he likes, other than that “highest trading volume” clue from March of 2023… but there are not all that many large publicly traded ones — these are pretty much your options:

• Chicago Board Options Exchange, now called CBOE Global Markets (CBOE), which is the fastest-growing and most profitable exchange, but also probably the most volatile, since it generally is driven by trading in stock options. Has grown earnings at 14%/year over the past five years, probably driven in large part by the enthusiasm for options trading that came after the pandemic shutdowns, so it has a higher ROE than CME, and trades at about the same forward valuation (21X earnings), with a smaller dividend. CBOE is the baby in this group, with a market cap of $20 billion.
• Intercontinental Exchange (ICE), which owns the New York Stock Exchange but has also been the upstart over the past couple decades, taking some market share in derivatives and futures trading. ICE rivals CME in size, both are around $75 billion, and it has built some other businesses over the years, including a mortgage technology business, but like CBOE and CME they mostly make money from trading fees and selling trading data. Earnings growth has lagged for NYSE, but should pick up, and they too trade at about the same forward PE, with a small dividend yield. They are the most diversified player.
• Nasdaq (NDAQ) has probably done the best job in this bunch of selling data and licensing their indices, they rely less on the fees from running the NASDAQ market and more on those higher-margin licensing and data deals (like royalties for the QQQ ETF, for example), as well as offering investor-relations products and services to publicly traded companies, so they are somewhat more profitable but are valued similarly to ICE, CBOE and CME… though the stock and the earnings can also be a bit more volatile.
• MarketAxess Holdings (MKTX) is the company that has been trying for years to bring open exchange trading in bonds to the market — with some success. A lot of bond trading is still done desk-to-desk, sometimes even over the phone, but they built an electronic fixed-income trading platform about 20 years ago and it has slowly been taking share of that market, making it easier to trade and find real pricing for debt securities (bonds, loans, etc.). They are more profitable than the other exchanges, but also trade at a higher multiple, and have also seen their shares collapse in value because of the end of the 40-year bond bull market in 2021, as interest rates started to rise.

So… which ones might Whitney Tilson like the most? We can’t say for sure, of course, given the lack of other clues for any specific exchange other than CME Group, but my guess would be that the Stansberry’s Investment Advisory portfolio probably includes CME, Intercontinental Exchange (ICE) as the broadest play on exchanges, and MarketAxess (MKTX) as the one that’s most unique and could perhaps lead in helping to lead fixed-income trading out of the stone age. Pretty much every exchange reported some days of record trading volume in March of 2023, though both the CBOE and MKTX reported record trading volumes for that full month, so that would lend a little weight to those two as possible matches.

There are also a handful of other meaningful publicly-traded exchanges in other markets, including Euronext (ENX in Paris, EUXTF or ENRXY OTC in the US), which is probably the cheapest of the large stock exchanges, if only because Europe is relatively inexpensive these days… or the former leader of Europe, the London Stock Exchange (LSEG in London, LNSTY or LDNXF in the US)… as well as lots of smaller ones that remain independent, including the Warsaw Exchange (WSX in France or Germany), Tel Aviv Exchange (TASE.TA, TVAVF), the ASX in Australia (ASX.AX, ASXFY, ASXFF), the São Paulo Stock Exchange, often abbreviated BOVESPA (B3SA3.SA in Brazil, BOLSY OTC in the US), the Bolsa Mexicana (BOLSAA.MX, BOMXF), to name a few. They mostly tend to trade at pretty similar earnings multiples, though those that are country-specific are also, in some ways, plays on those currencies, so most have not looked so great in US$ of late.

And there’s also the OTC Markets Group (OTCM), whose stock has been somewhat of a small-cap darling at times, they operate what used to be called the pink sheets, for over the counter trading, but have also spruced up some of that with their OTCQX and OTCQB markets, and providing investor relations-type services for companies that aren’t listed on larger exchanges (either because they’re listed overseas, or because they’re tiny or can’t meet the quality criteria of the exchanges). OTCM is more profitable and cheaper than the “real” exchanges, but is also very, very small and probably, like most of the stocks listed on the OTCQX, risker than its larger near peers.

Whitney also hints at some other recommendations that are in his “Special Reports” at Stansberry’s Investment Advisory… including a “free equity” one…

“The 400% ‘Free Equity’ Secret

“Years ago, I discovered another one of the biggest secrets in the financial world.

“It’s a business that has found a way to essentially get free ownership in many of the world’s best stocks.

“How does it work?

“Well, think about it this way…

“Just about every financial service business – including banks, brokers, hedge fund managers, venture capitalists, etc. – has to pay for the capital they use right?

“Banks borrow from depositors and investors… brokers and hedge funds have investors, all of whom must be repaid.

“But what if there was a way for a business to get access to seemingly unlimited capital for free… and you could use that money to buy shares in America’s best companies?

“… it’s probably the biggest investment loophole in the financial world… it’s all 100% legal and licensed by state governments.

“Most importantly, the returns have been astounding.

“We wrote about this secret back in 2012, for example, and the three recommendations our team made have returned as much as 419%, 253%, and 473% to date.”

So what’s that? Given the terminology, I’d say it’s very likely that Tilson is doubling down on the pitch Stansberry made, including a big push in 2012, for buying the best property & casualty insurance companies… who do indeed get “seemingly unlimited capital for free” if they’re consistently profitable underwriters (since they get to use the insurance float, with no cost, to invest — and don’t have to share those investment proceeds with their policyholders).

The Stansberry folks have their own insurance stock data system that they use to pick their favorite stocks, which have been sometimes teased by Porter Stansberry as “God’s Investment” or “The World’s Best Business.” The general spiel has often been that they like consistently profitable underwriting companies who trade at a big discount to their “book value plus float”, and there’s some art to interpreting the float and the underwriting profitability at some companies… but the names that most consistently crop up as longtime Stansberry recommendations or favored stocks in this sector include W.R. Berkley (WRB), Chubb (CB), Travelers (TRV), American Financial Group (AFG), RLI (RLI) and Arch Capital (ACGL), and I guessed a couple months ago that they had finally recommended Markel (MKL), too, after that company’s bad fourth quarter. And, of course, the king of “float” is Warren Buffett, and Whitney Tilson is a big fan of Berkshire Hathaway (BRK-B) — that’s a much more diversified conglomerate, but I’m sure Buffett would tell you that insurance remains their single most important business, including GEICO as well as their various reinsurance and insurance underwriting companies under Ajit Jain.

Most of these stocks have had exceptional returns over the past year, as rising interest rates have boosted their portfolio income (they often juice their returns with stocks or alternative investments, but have to keep a ton of their “float” in safe bonds, and those bonds now provide real returns for the first time in more than a decade), so they’re trading at above-average valuations, and often pretty large premiums to book value relative to their historical ranges. I don’t know which ones might be “buyable” in Stansberry’s system at the moment — and the only one we’ve identified as a recent pick of theirs is Markel, which has recovered a bit after their most recent earnings report (last week) so is now probably 10% above the price they liked. I also find the sector very attractive and own many of the stocks, including Chubb, W.R. Berkley, Markel, American Financial and Berkshire Hathaway.

And yes, the stocks that Stansberry has focused on most in this sector over the past 10-15 years, including W.R. Berkley and Arch Capital, have had those roughly 400% returns since 2012, beating the S&P 500 by at least a little bit… and some have done quite a bit better than that. There’s also an ETF for the property & casualty insurance stocks, ticker KBWP, if you’d like to dabble but don’t want to pick stocks — that particular ETF, which includes most of the names I mentioned above, has roughly kept pace with the S&P 500 since inception, and there’s a decent chance that it might hold up better than the broad market if there’s a technology stock-driven meltdown at some point (it did during the 2022 bear market, at least, and also held up well during the weak markets of 2015-2016).

Have a favorite among those insurance players? Think things are going to get ugly for underwriters after a very strong year? Let us know with a comment below.

And, of course, we’d be delighted to hear what you think of Whitney Tilson at the helm of Stansberry’s Investment Advisory, or their favored “exchange” stocks, or, really, whatever else… our friendly little comment box awaits your wisdom below. Thanks for reading!

Disclosure: Of the companies mentioned above, I own shares of Alphabet, Berkshire Hathaway, Markel, Amazon, W.R. Berkley, American Financial Group, and Chubb. I will not trade in any covered stock for at least three days after publication, per Stock Gumshoe’s trading rules.