Briton Ryle - Angel Publishing

The China "Problem"

I've railed against China a lot over the last couple of years. That's because I've been around long enough to see many of the scams that Chinese companies have pulled on American investors.

An analyst I used to work with joked all the time about "fake Chinese companies." He traded them, too. Back in 2009 and 2010, they would make fantastic moves higher.

One I remember vividly was a cutting-edge media company. Turns out most of its business was putting billboard signs on Chinese city buses...

Then there was the hog-farming company — biggest in the world or something — that was satisfying the Chinese love of pork. The company was pitched as a great long-term macro play on rising Chinese income levels because people buy more meat as their income allows. Unfortunately, there was a big flood in 2011 (I think it was), and over half the company's hogs either escaped or drowned. The shares collapsed.

I've told you before about Puda Coal, where the CEO stole the company from investors by transferring ownership out of the holding company that was listed on the NYSE and into another holding company he owned. U.S. investors lost everything.

The same thing nearly happened to Yahoo!, when Alibaba founder Jack Ma tried to steal part of that company even though Yahoo! owned ~40%.

And there are scarier stories. I recall a group of accountants being locked in a bank they went to in order to verify a Chinese company's cash deposits. The accountants discovered the company had been lying, but they were threatened that they wouldn't be allowed to leave the bank unless they agreed not to reveal their discovery. The accountants refused but were eventually allowed to leave.

The Wild West

China's financial markets are the Wild West. Sure, you could strike it rich. Or you could get wiped out.

Lately there have been a lot more investors getting wiped out. After an incredible run higher, the Shanghai index has dropped over 30% in a month, wiping out $3.2 trillion in valuation.

As my colleague Geoffrey Pike reported on Friday, China has resorted to some crazy measures to stop the stock market crash. It's now illegal to short stock, for one — hit the "sell to open" button, and you can get arrested. Half of listed companies have halted trading in their stock.

Company insiders and investors who own more than 5% of a company's stock have also been prohibited from selling shares on the secondary market for the next six months.

Geoffrey is 100% right: China is not challenging U.S. economic dominance. And you're not going to see China's yuan supplant the U.S. dollar as the world's reserve currency anytime soon.

Because the Chinese economy is a work in progress. It is a teenager: moody, selfish, and unpredictable.

But like a teenager, we can say it's going through a phase. This too shall pass.

And in fact, we're already seeing some of the big questions from a couple years ago get answered...

Ghost Towns Not So Scary

Just a couple years ago, 60 Minutes ran an exposé that convinced a lot of people that the Chinese economy was a horrible experiment gone awry. Bridges to nowhere, empty highways, and ghost cities — all built just to give people jobs and make use of China's oversupply of steel and concrete.

These photos of empty towers and houses in one district of Zhengzhou convinced many that China was a disaster waiting to happen:

“We found what they call a ghost city,” said Lesley Stahl, 60 Minutes host. “Uninhabited for miles and miles and miles and miles.”

But a funny thing happened on the way to the Chinese economic collapse: That former ghost town is now a fully operational part of Zhengzhou.

Notice the full parking lots, traffic, and boats on the lake. Provincial and city governments relocated their offices here, and a 1,100-bed children's hospital opened last year.

It only took two years for this district to go from ghost town to boom town.

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It contains full details on how things are not looking good for China's economic future.

Here's a quote from economist Stephen Roach to explain:

China is going through unprecedented urbanization. Since 2000, its urban population has increased by approximately 20 million citizens per year. In terms of shelter and its associated infrastructure requirements, China is adding the equivalent of 2½ New York Citys a year. With urbanization likely to continue at this rate through at least 2030, that spells high investment for years to come.

If you don't know Stephen Roach, he was with Morgan Stanley for years, contributing to the firm's phenomenal Global Economic Forum website. He moved to China 10 years ago, and he's been an important voice on the Chinese economy ever since.

And what he's saying is that the vast majority of Chinese investment that's pouring into real estate and infrastructure isn't being wasted. Sure, it may sit idle for a little while — long enough to put pressure on the developer — but the investment will eventually pay off.

This is why China's economy is basically closed: Foreign businesses can't just set up shop, and the yuan doesn't freely trade. There are no free market checks and balances on Chinese debt and investment. So the Chinese government can print money and back all infrastructure investment in a way no other country can.

Roach will also tell you that consumption makes up just 30% of Chinese GDP. That's half of the U.S., and it shows you how far the country has to go.

My Exception

One of the worst mistakes an investor can make is to confuse an economy with a stock market. If you avoided U.S. stocks because of the continually weak economy, well, that was a mistake. Buying Chinese stocks because the economy has a lot of growth ahead is mistake, too.

Of course, I do make an exception (there's always an exception): Chinese solar stocks.

I can't get behind Yingli because it still isn't profitable. But both Canadian Solar (NASDAQ: CSIQ) and Trina Solar (NYSE: TSL) are good choices. Canadian Solar trades with a forward P/E of 10. Trina's even cheaper, with a forward P/E of 8.

Both of these stocks have been knocked down pretty good in the last two weeks as the Chinese market crash hit a crescendo. Now that the Chinese government has stepped in, these two should be good for a nice rally.

I'm a bit partial to Trina because I have it in the Real Income Trader portfolio, where we've taken 27% of our initial investment by selling covered calls on the stock. Still, either one looks like a solid choice.

Until next time,

Briton Ryle

@BritonRyle on Twitter

An 17-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He also contributes a weekly column to the Wealth Daily e-letter. To learn more about Briton, click here.

Global Debt Can't Be Paid

It's not just Greece; the entire world has a debt problem that can never be fixed. The difference is that right now, everyone knows Greece can't pay its loans back.

Greece owes more than $300 billion. Its annual GDP is around $240 billion. And its economy is falling apart...

Greece has been in recession since 2008, and that has shrunk GDP by 25%. The unemployment rate now stands above 27%, and Bloomberg reports that 300,000 small businesses have failed since the financial crisis.

It's a disaster that can only be fixed if Greece defaults on all its loans, leaves the EU, and starts over from scratch.

The IMF said as much in a recent report. Here's the link if you want to read it. I did, but I don't recommend it — it is complete and total B.S. Basically, the IMF says that if Greece can grow its GDP by 3%, it can cut its debt by roughly $190 billion — by 2064.

That's basically a 50-year payment plan. It's ridiculous.

You might wonder why the European Union bailed Greece out in the first place. The answer is that they (meaning France and Germany) did it to save their own banks. When the Greek Debt Crisis: Round 1 hit in 2010, French, Swiss, and German banks held more than half of Greek debt, a total of $150 billion.

Between 2010 and 2012, Greece was bailed out with around 200 billion euros ($220 billion at current rates). More than half of that went right out the door to French, Swiss, and German banks. In other words, the Greek bailouts were really just a backdoor bailout for EU banks.

You may know the name Yanis Varoufakis as the Greek villain/finance minister who just resigned. His was the loudest voice declaring that Greece was getting a bad deal from Europe. He said:

The Greek 'bailouts' were exercises whose purpose was intentionally to transfer private losses onto the shoulders of the weakest Greeks, before being transferred to other European taxpayers.

It's easy to say beggars can't be choosers. It's hard to take seriously Greece's demands that it gets to dictate the terms under which it is lent money that it can't pay back. But on the other hand, Varoufakis is speaking the truth: The Greek people are ultimately paying for the bailout of EU banks.

If you see parallels to how Americans are still suffering as a result of the financial crisis and bailouts while the big banks that started it are all doing pretty darn fine, well, you should.

It's Not Just Greece...

As I said at the open, it's not just Greece. The entire world has a debt problem. There are about six countries in the world that ran a budget surplus in 2014. Most countries have been running deficits since 2007.

Here's a chart from Global Finance (sorry for the length) that shows the dirty truth:

In 2001, Bill Clinton ran a $250 billion budget surplus. That amounted to around 2.5% of GDP. Today, 2.5% of U.S. GDP would be around $350 billion. At that rate, the U.S. could pay off its debt by 2055, 40 years from now.

Hey, at least we're not as bad as Greece!

The idea that global debt will ever get paid off is ludicrous. It just isn't going to happen. So where does that leave us... and the rest of the world?

Well, for one, it means we will see more currency/debt crises in the years to come.

Governments are going to simply keep juggling debt and interest payments, keeping the balls in the air for as long as possible. But of course, there will be times when the balls fall to the ground...

Clearly interest rates will be very important going forward. Payments made at 3% are a lot easier than payments at 5%.

In fact, rising interest rates were a critical factor in the Mexican peso crisis in the 1980s. Paul Volcker's war on inflation pushed rates so high that Mexico was paying 15% of its GDP just to service its debt.

Interest rates also had a hand in the Asian currency crisis in the late 1990s. Alan Greenspan was raising rates, putting a squeeze on countries that had their currencies pegged to the U.S. dollar, like Thailand and Hong Kong.

So watch interest rates. If they rise quickly, you can bet some country will have problems with its debt. (This is one reason the imminent Fed rate hikes are an issue.)

From an investment perspective, you should look to buy those crisis lows — buy when there is blood in the street.

Is Greece there yet? I'm not sure. But I can say that once a country defaults and those loans are off the books, that country's economy will perform pretty well.

And if there's money to be made, investors will get their confidence back pretty quickly...

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Buy Gold and Bitcoin

It's also why you should own an alternative currency like gold or Bitcoin. Gold is the easiest to own, though Bitcoin might be the easiest to use. After all, gold will have to be converted back into currency, while Bitcoin has buying power as it is.

When it comes to gold, I prefer bullion you can physically own. Call me paranoid, but I don't trust premiums on collectibles. Though I suppose if you bought newer minted coins that don't carry much premium, that would be fine.

You may have noticed gold prices have been down the last few days. That's because the U.S. dollar has been rallying. And the current crisis isn't American.

We may be entering a new era where debt crises spring up more often. Be prepared.

Until next time,

Briton Ryle

@BritonRyle on Twitter

$40 Stock Going to $440

In 2006, a small Mexican restaurant chain IPO'd at $45 a share. The stock had been offered at $18, but it launched more than 100% higher on its first day as a public company.

At the time, this chain had 500 stores, and annual revenue had just jumped 32% to around $650 million a year. That's a very strong jump in sales. Investors clearly believed this chain was going to be a winner.

After all, the company had a powerful yet simple formula: serve easily accessible food using quality ingredients at a reasonable price.

Since that 2006 IPO, the company has grown to 1,600 locations. Its sales have jumped from $650 million a year to $4.5 billion. And the stock price launched from $45 to over $650 a share.

You probably know by now that I'm talking about Chipotle Mexican Grill (NYSE: CMG).

Chipotle shares are up 1,371% since that IPO, making it one of the very best investments you could have made over the last decade. It's right up there with Apple and Netflix.

I've found an up-and-coming restaurant chain that is being completely overlooked by investors. One prominent restaurant analyst said this new restaurant is "one of the best-in-history up-and-coming restaurant concepts... [its] early-stage momentum and store-level profitability is even outpacing Chipotle's... early-stage results."

This restaurant is slated to grow by a factor of 15, pushing its stock price 1,100% higher over the next few years. That's why I've started to call it the "Next Chipotle."

The Hunt for the "Next Chipotle"

Restaurants can certainly make great investments. If a restaurant's concept resonates with diners, growth can be explosive.

The best example may be McDonald's (NYSE: MCD). It basically invented fast food at a time when Americans were falling in love with cars and cheeseburgers. Perfect.

It has been one of the great investments over the last 25 years. $100,000 invested in McDonald's in 1990 has turned into over $2.3 million today.

I'm not a fan of McDonald's today — it just doesn't offer enough opportunity for growth. But the example of how much money investors can make in successful restaurants is valid.

Take restaurant stocks like Starbucks (NASDAQ: SBUX) or Panera Bread (NASDAQ: PNRA). Starbucks shares have launched from a split-adjusted $2 a share to $55 since 1998. Panera has done even better, soaring from $5 to $175 in 15 years.

Investors are well aware of the outrageous success they can have with restaurant stocks. Gourmet burger joint Shake Shack's (NYSE: SHAK) shares have been up as much as 229% since its recent IPO.

More recently, chicken wing specialist Wingstop (NASDAQ: WING) jumped from an offer price of $19 to $30... on its very first day of trading.

Of course, not every new restaurant stock is a winner...

How to Pick the Winners

Boston Chicken — now known as Boston Market — ramped nearly 140% on its IPO day in 1993. Investors thought the idea of a restaurant that featured relatively healthy carryout meals for the family was pretty good.

They were wrong. Boston Market expanded too fast and never really caught on with consumers. Just five years after that hugely successful IPO, Boston Market filed for bankruptcy protection.

It was bought out of bankruptcy court protection by McDonald's two years later.

El Pollo Loco (NASDAQ: LOCO) ran from $18.58 to over $40 in its first six days as a public company. But that promising start isn't look so good now — shares have fallen back to around $21 a share.

And even at that price, the forward price-to-earnings ratio is above 25. That's pretty expensive for a company that won't grow earnings more than 15% next year...

Then there was sandwich shop Potbelly (NASDAQ: PBPB). This Chicago-based chain debuted at ~$32 in October of 2013.

Now, I love the Farm House salad from Potbelly. Topped with bacon, chicken, and blue cheese, it's fantastic. But the chain is not doing well. It's barely profitable and is struggling to grow earnings.

The shares have fallen from $32 to under $12. And the stock may fall even further, as the price-to-earnings ratio is still above 40.

Noodles & Company (NASDAQ: NDLS) was another one that was supposed to have a lot of potential. This Colorado-based chain has 410 restaurants and did $385 million in sales over the last year. The stock jumped from $32 to $47 early on, but it, too, is failing to live up to expectations.

Noodles & Company has missed earnings estimates for four quarters in a row. The stock has fallen from $47 to $25. And like Potbelly, its shares look darned expensive, with a price-to-earnings ratio of nearly 70.

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This is the "Next Chipotle"

Now let me fill you on some of the details behind this overlooked, fast-growing company...

The first thing you need to know is how well these restaurants are doing.

Right now, each of this company's 150 locations is averaging $1.5 million in annual sales. That's better than Starbucks, Burger King, and Subway. In fact, at this stage of its growth, Chipotle was doing right around $1.5 million per location, too...

Next up is the expansion plan.

This "Next Chipotle" company plans to have ~1,500 locations open by 2022 — roughly the same number of stores as Chipotle has now.

If it can simply maintain the average of $1.5 million in annual sales per location, that would mean $2.4 billion in annual sales. That's nearly 1,200% revenue growth.

But the simple fact is, this company is growing its revenue at an industry-beating pace. In its last quarterly earnings report, the average revenue at each location grew nearly 8%! For comparison's sake, same-store sales are growing around 2% at Panera and 10% for Chipotle.

Finally, there's the valuation. This "Next Chipotle" company is just turning the corner to profitability. So we have to compare how it is trading in relation to its sales. And at 4 times sales (or revenue), this stock is cheaper than Starbucks, Chipotle, Shake Shack, and Wingstop. It trades with a similar valuation to McDonald's, even though McDonald's sales are falling while this company's sales have 10-fold upside.

Quite frankly, this "Next Chipotle" stock shouldn't be this cheap.

Because if the "Next Chipotle" simply hits its goal of 1,500 restaurants and shows zero same-store sales growth, a P/S ratio of three (below where it is now) would value the company at $6.75 billion — we're talking 1,110% growth for the stock (from $40 to $440) over the next few years!

The "Next Chipotle" has been flying under the radar. But its most recent earnings report, where it reported that fantastic same-store sales growth of nearly 8%, really got some investors' attention. The stock has run from around $32 to $40 over the last few weeks. In other words, the run to $440 a share has begun.

Hands down, this is my favorite investment idea right now. And I've got a great presentation for you that fills in more of the details. You can check it out here.

Until next time,

Briton Ryle

@BritonRyle on Twitter

Why the "Smart" Money is Stupid

U.S. stocks got pounded on Monday as the last hopes for more bailout money for Greece faded. The S&P 500 was down 2.1%, or around 45 points. The Dow was down 350 points.

To put those declines in perspective, Bloomberg tells us the 400 richest people lost $70 billion during Monday's rout. Yeah, boohoo...

I'm not shedding any tears for the billionaires, and I'm sure you aren't either.

But you may be wondering why. Why do asset prices get creamed over the Greek debt situation? What does the price of olive oil have to do with the price of Bakken Shale oil?

After all, Greece's GDP was just $242 billion in 2013. That's about $10 billion less than the GDP of Connecticut. Greece's entire annual output is about that of Chicago's: $563 billion. And Greece doesn't even compare to the GDP of New York City, which is around $1.4 trillion.

Even if Greece went completely out of business and that $242 billion was simply subtracted from the world's total GDP, would we really miss it? With apologies to the Greek people, their $242 billion is a drop in the bucket. Why, then, should the U.S. stock market lose around $1 trillion in value?

The answer: because the so-called "smart money" often does really stupid things.

The Smart Money Ain't Always So Smart

The term "smart money" is supposed to refer to the insiders, hedge fund managers, and institutional traders who have resources that individual investors like you and I don't have. They've got the high-priced research, CEOs and congressman on speed dial, and tens of billions of dollars that they use to push prices in the direction they want.

But all those advantages don't make them smart. Wealthy? Usually. Ambitious? Yes. Greedy? Definitely. But smart? Not necessarily...

The thing is, the smart money believes its press. They hear they are the smart money enough times, and they have the bank account for proof, so they become absolutely convinced that yes, without a doubt, they ARE the smart money.

Problem is, the single-biggest reason people do stupid things is because they are absolutely convinced they are smart enough to pull it off. That's called hubris, and it never ends well.

So when Greek bank stocks get cheap, and when Greek bonds are yielding +20%, these smart-money hedge fund guys start licking their chops. They see the potential to make some quick money once Greece gets its bailout money, and they completely ignore the risks.

You could certainly say this is the effect of the bailout mentality many investors have. If things get really bad for a company or an industry or the economy in general, investors are now very comfortable with the notion that the Fed or the government will bail them out. And so risk isn't really risk at all.

We've seen it with companies like insurance giant AIG (NYSE: AIG). AIG had written a couple hundred billion in insurance policies for mortgage-backed securities in 2005 and 2006 because mortgage default rates had been steady for 50 years.

But when default rates skyrocketed in 2007 and 2008, AIG was suddenly on the hook for a ridiculous amount of money. Of course, that was the "buy" signal, because the Fed and the U.S. government swooped in and bailed out AIG to the tune of some $80 billion.

The smart money made out like bandits that time. But it doesn't always go so well.

Legg Mason's Bill Miller was one of the best-performing mutual fund managers of the 1990s and 2000s. He tried to make the same bailout bet on the government-sponsored entities (GSE) Fannie Mae and Freddie Mac.

I vividly remember when he doubled down on these investments. He was already down something like 70% when he confidently stated he was doubling his investment because the government was going to bail them out and he'd make a ton of money and look like a genius.

Wrong.

The government did eventually bail out Fannie Mae and Freddie Mac, but it was too late for Miller. His $16 billion fund had fallen in value to around $4 billion.

The Bailout Mentality

The smart money tends to think it knows what's going to happen, thinks it can actually see the future, and then bets the farm on it...

We've even seen it with Greece before. Remember Jon Corzine, former CEO of Goldman Sachs to New Jersey governor and back to CEO? As CEO of struggling trading firm MF Global, he though he could cash in big buying the bonds of debt-ridden European countries like Greece and Spain in 2011.

He "invested" $6.3 billion of MF Global's cash on the assumption that the European Union would bail these countries out. Once again, the EU did throw out tens of billions in bailout money, but they took a long time doing it — too long for Corzine and MF Global.

Corzine had leveraged all his bets, and when prices went lower, he had to make margin calls. He used the only cash he had: client funds. Corzine basically stole $1.4 billion in client funds to pay the margin calls, effectively driving MF Global into bankruptcy.

It's scary how much the government and the Fed's financial crisis bailouts have changed the perception of risk in America. The smart money doesn't see risk anymore. They are completely convinced they can buy the riskiest bonds and stocks because there will be a bailout if things get really bad.

But the really tragic part of it is that we — the individual investors — pay the price when the "smart money" inevitably screws up.

The so-called smart money likes to use leverage when they invest. Leverage is like margin — where the investor uses an asset he or she has bought as collateral to borrow more money to invest. It works great when prices are going up. You're making money on money that's not even yours.

The problem starts when prices go down. If the value of an asset you've used as collateral for a loan falls, you have to make up the difference between the new lower value of your collateral and the amount of the loan you received.

And you have to make it up in cash. That almost always means a leveraged investor has to start selling assets. When you start selling, asset prices fall, which means your collateral value falls, which means more selling...

It becomes a very vicious cycle. You could absolutely say the financial crisis was a long series of margin calls fueled by bailout cash from the Fed and the government. And the longer the government and Fed kept paying the margin calls in bailout money, the longer zombie banks and companies could have assets that were doing nothing but falling in value.

The Fed and government made sure no one (except for Lehman Brothers) had to take their medicine, and that's why we are where we are today...

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Today's Margin Calls

So it shouldn't come as a surprise that, once again, the "smart money" loaded up on Greek banks and Greek bonds yielding 20%. That's the bailout game plan.

John Paulson is one big hedge fund name that's bought into Greece. As of the last time he had to report his holdings, he had something like $737 million invested in a couple Greek banks. That stake would be worth around $200 million today.

I don't know to what degree Paulson was leveraged on this "investment." But I wouldn't be at all surprised to learn he had to sell off some assets and meet a $100 million margin call. I also wouldn't be at all surprised to learn that Paulson wasn't the only "smart" investor who made this really stupid investment in a Greek bailout.

Once you get a few "smart" investors being forced to sell a few $100 million in stock, you'll get some pretty big sell-offs like we had on Monday. It happens every time.

Thanks a lot, "smart" money!

Until next time,

Briton Ryle

@BritonRyle on Twitter

The Longest Bull Market

I can't help it. As an investor and newsletter editor, I closely follow what's going on in the economy and the stock market.

It's important to me to have a handle on why stocks are moving, what's driving the economy, where there's risk, and where there's opportunity.

Of course, there's a selfish reason for me: My investments make more money when I stay on top of things. But more than that, people who subscribe to my newsletters want an informed opinion about what's ahead.

I don't kid myself into thinking I am the single source of information for these folks — the one authoritative voice for all things investing. In fact, I hope I'm not. It's always a good idea to get as much input on a topic as you can. Probably half my day is spent reading other people's work, both bearish and bullish.

And besides that, if I fail to present solid analysis and thoughtful conclusions to my paying readers, they quit and move on. The fact that more than 14,000 people currently subscribe to The Wealth Advisory is all the validation I need...

I'm not going to pander to you and just say what I think you want to hear. I know I can get more people to read my writing here in Wealth Daily if I write articles entitled, "Gold is Going to $5,000" or "Stock Market Crash."

If I think there's opportunity in gold (and I do think gold mining stocks should be bought now, as these stocks are incredibly cheap), I'd say so. If I thought the stock market was about to correct/crash, you can bet I'd be telling you to sell some stocks.

So for those that want to hear an unbiased take on what's ahead for the stock market, please read on.

(WARNING: This is bullish analysis. If you want to hear that stocks will crash, look elsewhere.)

3 More Years of Bull?!?

I want to share some analysis from Dr. Ed Yardeni today.

Dr. Ed was the Chief Investment Strategist for Deutsche Bank in the '90s. He was also Chief Economist at Prudential and E.F. Hutton for a time. Today, he runs his own research firm, and if you're interested, he writes a daily blog called Dr. Ed's Blog.

On Monday, his blog post was titled, "The Long Expansion." In it, he suggests this bull market could last until early 2019, or three and a half more years.

I'm not aware of anyone who has suggested the bull market will last that long. So it's worthwhile to know what he's looking at.

It's called the Coincident Economic Indicators (CEI), and it's made up of payroll employment, real personal income less transfer payments, industrial production, and real manufacturing and trade sales. While stocks have been hitting new highs for a couple years now, the CEI (blue line below) entered new high territory about a year ago:

Dr. Ed tells us that after the last five recessions, it took the CEI between 19 and 33 months to make a new high. The average time is 26 months.

This time around, after the financial crisis, it took 68 months for the CEI to make a new high.

Now, the fact that it took so much longer than average for the CEI to get back to previous levels shouldn't be that big of a surprise. The financial crisis was pretty much unprecedented since the Great Depression.

Add in the fact that federal government debt has meant it isn't spending as much as it has in past recoveries, and you have the formula for a long, drawn-out recovery, with GDP growth rates seemingly stuck between 2% and 2.5%.

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Bloomberg illustrates the point with this graphic:

My point is not that the government should be spending more. We're already in a pretty big hole. No, the point, according to Dr. Ed, is how long the CEI trends higher after it has a new high. And he thankfully provided us with another chart to demonstrate...

The interval for the CEI between a new high and a new recession has been between 33 months (1971 to 1973) and 104 months (1992 to 2000). The average length of expansion in the CEI is 48 months.

Add it all up, and you get March 2019 for when the current cycle for the CEI ends. That would make this the longest bull market in history by far.

Damn Statistics

Of course, what Dr. Ed is showing us is a bunch of numbers that don't really have much bearing on where the economy is actually headed. Yes, they do show us what the trends are, but just because a lot of people bought cars last month, for instance, doesn't mean they will buy more cars next month.

That's why the Wall Street saying is, "Trend following works, until it doesn't."

What kills bull markets? Recessions do. And recessions happen when the economy overheats and people and companies have spent too much and are suddenly forced to cut back. Economic activity stalls, and that's when corporate profits decline.

It may seem over-simplistic, but with the U.S. economy growing at 2% to 2.5%, the economy is certainly not overheating. Does that mean four more years of bull market? We'll see...

Until next time,

Briton Ryle

@BritonRyle on Twitter

The Fed's Fun House

Did you hear what Fed Chief Janet Yellen said last week?

Well, if you missed the statement after the latest Fed meeting, I'm here to pass it along... because the Fed's latest explanation of interest rate policy is by far the most important information we've gotten from the Fed in a long time.

You need to know what was said — and more importantly, what it means — because last week's Fed statement is going to dictate the course of stock prices for the rest of this year and probably much of next year, too.

It's too bad the stock market has come to rely so heavily on the Fed. I liked it much better when you could parse the economic data, get a feel for economic and earnings trends, and come away with a pretty good idea of what was ahead for stock prices.

But that all ended in 2009, when interest rates were cut to zero and the Fed guaranteed a couple trillion dollars' worth of debt held by companies teetering on the brink of bankruptcy.

They say you shouldn't jump in the water to save a drowning person because that person will be so desperate that he will grab you in an attempt to save himself, preventing you from helping. Then you both get dragged down.

But that's exactly what the Fed did. It jumped in the water to save the drowning banks and other companies. It lent them money, guaranteed their debt, and cut rates so they could borrow even more money on the cheap. The Fed went "all in." And that meant if these companies went down, the Fed would go down, too.

So the Fed has had to do some pretty radical things to make sure troubled companies stayed afloat. First, it assured us that interest rates would stay low for years. This way, companies could continue to borrow money as cheaply as possible, thereby making their balance sheets as strong as possible.

But that's just one way interest rates help companies and stock prices. The other ways are more insidious...

The Fed's Hall of Mirrors

The Fed's zero interest rate policy has created a hall of mirrors like you'd find at a carnival fun house.

When you see yourself in a fun house mirror, you can still recognize your features. But your reflection will also be distorted to comedic and grotesque extremes. Your head may look tiny while your legs look 10 feet long, or maybe your whole body looks thin as a pencil.

Zero interest rates distort what we see of the economy and the stock market in much the same way.

For starters, low interest rates push people into the stock market. If you're a conservative investor, you may not want to own stock. But when the interest income you are receiving from bond investments isn't even beating inflation, you may have no choice but to accept more risk and go after stocks.

When stocks rally, analysts and economists often presume investors see anecdotal evidence of an improving economy that hasn't really shown up in the data. This is what is meant when you hear that the stock market is the ultimate discounting mechanism. The stock market changes prices based on expectations about the future every day.

So higher stock prices that reflect an improving economy are one thing. But higher stock prices based simply on investors' needs for better yield is quite another. Which fun house mirror are we looking at today?

Low interest rates distort the economic reflection in many other ways. For instance, let's suppose you are a conservative investor that refuses to enter the stock market. You may have to cut your personal spending to make up for the loss in interest income.

Less spending then makes the economy look worse than it is. And as it happens, economists are still wondering why spending hasn't improved...

To further distort the picture, companies are borrowing money at low interest rates and using it to buy back their own shares. As they lower the number of shares outstanding, their quarterly earnings per share automatically rises and price-to-earnings (P/E) ratios fall.

Rising earnings per share makes it look like companies are making more profits than they actually are. And falling P/E ratios make stocks look cheaper than they actually are.

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So What Are We REALLY Looking At?

This is the big problem: Because of zero interest rates, we don't really know what we're looking at. Economic growth and stock valuations are being affected in ways we don't fully understand.

And to make matters worse, investors have started to just assume that low interest rates are a permanent fixture when calculating growth and valuations.

But of course, it's impossible to keep interest rates at zero forever. At some point, all these assumptions about our zero interest rate world have to change. And then what will we be looking at in the fun house mirror?

That's why the Fed's policy statement last week is so important. We've all known interest rates will start rising soon, probably this year. What we haven't known is how high they will go. So last week, Janet Yellen told us the answer...

Interest rates aren't going a lot higher anytime soon. A quarter-point hike or two this year, a few next year... but Janet Yellen came right out and said interest rates would not be above 3% at the end of 2017.

So it looks like we will get to hang out in the fun house for a couple more years. Get ready — stock prices are going higher.

Until next time,

Briton Ryle

@BritonRyle on Twitter

Don't Be Satisfied With the Pros

There's a very good reason most mutual fund managers can't beat the S&P 500. It's the same reason most hedge fund managers can't beat it, either.

Ironically, though, the reason they have such a hard time outperforming the overall stock market is the very reason you can get market-beating returns year in and year out...

This might come as a surprise. After all, the "pros" — the hedge and mutual fund managers that get paid with your money to manage your money — have tremendous resources. They went to elite business schools, they have Bloomberg terminals, and they go to exclusive investment summits with corporate CEOs, central bankers, and political leaders.

The pros can get all the latest and best research. And when they want to invest in a company, they can pick up the phone... and the CEO will answer. If they want to buy into an emerging country's stock market, they'll get a personal tour of that country's primary industries.

You and I just don't have that kind of clout.

But we also don't have the same investment goals as the pros do. And that's actually a very big deal.

There's an old joke that illustrates the difference between us and them...

Two guys are out camping in the wilderness. It's first thing in the morning when they step outside their tent and see a huge bear has wandered into their camp. One guy yells, "Holy $*^#!! There's a bear, RUN!!" The other guy sits down and starts putting on his shoes.

The first guy can't believe it. He stops and stares at his friend. "What are you doing? You can't outrun that bear if he decides to come after us."

As he finishes tying his shoes, the second guy says, "I don't have to outrun the bear. I just have to outrun you."

Professional money managers are the same way. All they care about is their own survival. They don't care how fast they can run. Or how far.

In order to survive, all they have to do is beat the other guy by a percent or two. That's it.

They don't have to make their investors wealthy. They don't even have to beat the market, so long as their peers aren't beating it either.

Why Goals Matter

It's like they are investing scared in a way. They are scared to take too much of a risk — to stray too far away from the herd — to make significantly better investment returns. So they diversify into sectors that are inversely correlated so that losses in one group will hopefully outweigh losses in another group.

They will always keep a certain amount of their available investment capital in Treasury bonds no matter what yields are. They may say they do this for safety or to have cash available to take advantage of unforeseen opportunities. But when you keep 10% to 30% of your capital in bonds that you know will underperform the S&P 500, what you're really doing is undermining your performance.

Or maybe they will use position sizing to try to get a handle on risk. You put more money in stocks that appear safer and less in stocks that appear to have more risk. That way, if the risky stock tanks, it won't tank the overall returns. But if you've done your due diligence and the stock launches, it may not help your overall performance much.

The pros are risk-averse. They don't really want to be ahead of the crowd, to really stand out — they want to be right there in the middle of the pack with all the other professionals and maybe beat them by a percentage point or two. That way, they keep getting their fast bonuses, and the fact that none of them beat the S&P 500 ceases to become an issue.

But the thing is, managing risk is often an illusion. If the stock market tanks, all stocks are going down because in a severe correction, fundamentals don't matter anymore. Avoiding losses and protecting cash becomes paramount, and that's when selling begets more selling and you start to see those nasty 500-point drops on the Dow Industrials.

Any time you buy an asset, you are putting your money at risk because the price could fall, and then you can't sell it for as much as you paid for it. That's the plain truth. To pretend otherwise is just silly.

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The Prevent Defense

In football, they call it the prevent defense. Once a team gets a decent lead, they change their tactics to try and minimize risk. The offense will run the ball more to try to use up the clock so the other team has fewer opportunities to score and also to avoid a costly interception that could lead to points for the other team.

On defense, the team might send more players into deep pass coverage to avoid a big play that might result in points for the other team. They might be happy to let the other team complete as many short five- or eight-yard passes, so long as they don't give up a big 40-yard touchdown.

Every year, I see teams do this when they get a lead. And every year, I hear the announcer say, "Here's the prevent defense, so named because it keeps you from winning."

It doesn't always happen. But enough teams have come back from deficits to beat teams that are using the prevent defense that it doesn't get used as much as it once did. And the reason it doesn't work is because it is a strategic change away from what was creating the success in the first place. All of a sudden, the team stops trying to win and instead tries to not lose.

This may not be a perfect description of how the professional money managers operate, but it's not that far off the mark, either.

Another Way to Manage Risk

Pretty much any time I buy a stock (or recommend one to Wealth Advisory subscribers), I think that stock has a realistic chance to double in price in a year or two. If all I'm looking for is 15% gains, in line with the S&P 500, it's just not worth the risk.

And it's not like you have to buy "risky" stocks to double your money, either. Starbucks (NASDAQ: SBUX) is up 135% for Wealth Advisory subscribers in a little over two years. Boeing (NYSE: BA) is up 140% in about three years.

I don't think any of us would consider these "risky" stocks. But I was absolutely thinking triple digits when I recommended them.

This is a huge advantage that the individual investor (you) has over the pros. You can concentrate your investments in quality stocks with a high probability of doing really well.

Can you imagine the reaction if a professional money manager said, "I put it all in Starbucks"? People would freak out, even though putting it all in Starbucks is really no more risky than buying a little McDonald's, a little Wendy's, and a little Dunkin Donuts...

In other words, nobody wants to lose 20% of their money. But a 20% loss is much easier to take after the stock has rallied 120%.

Until next time,

Briton Ryle

@BritonRyle on Twitter

Reviewing My 2015 Predictions

It usually starts in late November and hits a crescendo during the month of December. And you will see stragglers announcing theirs in January.

No, I'm not talking about holiday plans or New Year's resolutions. I'm talking about predictions and forecasts about the coming year for the economy, stock market, and individual stocks.

In some ways, it's a silly exercise. No one can see the future — though plenty of windbags will tell you they can. I'll tell you right now: Don't trust anyone who says they know exactly what's going to happen in the stock market. The most accurate predictions are usually just extensions of current trends.

In general, humans don't see big changes coming. We tend to see current conditions continuing...

And those who do forecast big "black swan" events are just throwing darts while blindfolded, hoping something hits the mark.

Still, having a plan is helpful. We sure can't invest without having any expectations for the future. And besides that, predictions pieces are fun. Next to the actual profits your investments put up, predictions are a decent scorecard for how in tune you are with the markets.

So at roughly the halfway point of 2015, I thought it would be fun to have a look at my predictions for 2015 and see how they are doing...

I'm going to list them all, unedited from December 1, 2014, and then add a little commentary.

1. We will see three 0.25% interest rate hikes. The Fed has no choice but to hike interest rates. The Fed Funds rate has been too low for too long.

However, the Fed is not likely to go on a prolonged rate hike campaign a la Alan Greenspan in 2003–2004. Ultimately, interest rates may rise to the ~3% range by the end of 2016, but it's going to be a while before we see the Fed Funds rate back above 4% — and we may never see that again.

Banks will be a big beneficiary of rate hikes. You are probably well aware that I am bullish in Bank of America (NYSE: BAC). My Wealth Advisory subscribers are up around 80% on this stock since I recommended it at $9.40. REITs will also remain attractive, but other interest rate-sensitive stocks, like utilities, will underperform.

NOT LOOKING GOOD: While it does look as though we will finally get a rate hike this year, there's probably not enough time for three. As for my sector outlook, utility stocks have underperformed. Banks have done okay. REITs are off around 10%, I maintain they are attractive, but they are likely to take a short-term hit when interest rates rise.

2. Oil prices capped at $85. It is unlikely that global demand for oil will make a big jump higher. And so the only real catalyst for oil prices is production cuts. Because of relatively high debt loads from investment, we do not expect significant production cuts in the U.S.

That leaves OPEC. OPEC is likely to cut production in the first half of 2015, but such action will not push prices back above $100. The share prices of U.S. oil stocks are attractive now.

CORRECT: Oil stock prices bottomed on December 11, 2014, so I say I nailed that. And oil itself has staged a moderate rebound, as U.S. production growth has slowed but not contracted. It seems highly unlikely oil will get to $85 this year, much less beat that mark. OPEC has not cut production as I expected, but still, on balance, I got this one right so far.

3. 2015 U.S. GDP growth will be between 3% and 3.5%. After a strong finish to 2014, growth will stall a bit for 2015. The strong U.S. dollar and weakness in Europe, Russia, and South America, combined with a slowing Chinese economy, will once again keep a lid on growth.

The strong U.S. dollar is going to be a very important story in 2015. Multinational companies will suffer a small decline in earnings due to it, and Caterpillar (NYSE: CAT) in particular could suffer.

MIXED: Yep, the strong U.S. dollar continues to impact profits, so that was dead on. Caterpillar (NYSE: CAT) is down for the year, too. But after that dismal first quarter, it is highly unlikely that 2015 GDP growth will hit 3%.

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4. S&P 500 hits 2,275, but volatility increases. For the last couple of years, the stock market has been a one-way trip higher. That changes in 2015. Stock prices will be much more volatile. It will still be a “buy the dips” market, but the dips will be bigger. Don't be surprised if we see at least two 8%-10% corrections.

Still, on balance, it will be another good year for stocks. The U.S. remains the most attractive market in the world, and the strong U.S. dollar should attract more global investment. My target for the S&P 500 is 2,275 based on S&P 500 earnings of $127 a share.

NOT LOOKING GOOD: S&P 500 to 2,275? Increased volatility? Two corrections? Good Lord, what was I thinking?

Yeah, the general theme of "buy the dips" and "good year for stocks" has been correct so far. But volatility has been completely nonexistent, as the S&P 500 has traded in the tightest range in 20 years. It's reasonable to think volatility may still pick up, and rate hikes could spark a correction. But S&P 500 earnings are not going to hit $127 a share, and so we're not likely to see 2,275 this year...

5. Gold prices stuck between $1,100 and $1,300. Look for a gold rally early in 2015 that sends small gold stocks soaring. Unfortunately, the prospect of higher interest rates and a strong U.S. dollar will keep prices contained.

CORRECT: Gold prices have been stuck as the strong dollar and expected rate hikes keep a lid on inflation. Miners rallied a little to start the year, but I'm willing to ignore the fact that they didn't "soar" if you are...

With rate hikes still on the table, I don't expect much from gold over the next six months.

6. Tech stocks will lead the S&P 500. In 2014, health care and utilities were the strongest sectors in the S&P 500. In 2015, tech will lead, while utilities and consumer discretionary underperform. Given how far energy stocks have fallen, they could be due for a nice bounce once oil prices stabilize, and solar stocks should perform well, too. Financial stocks should also do well as interest rates rise, but I remain bearish on social media stocks.

MIXED: Utilities have indeed stunk this year — it's the worst performing sector of the S&P 500. Energy stocks have indeed rebounded. But health care continues to lead the S&P 500, followed by consumer discretionary. Tech and financials have performed basically in line with the S&P 500.

As for social media stocks, Facebook (NASDAQ: FB) is the only one that has done well. LinkedIn (NYSE: LNKD) and Twitter (NYSE: TWTR) are flat for the year. Yelp (NYSE: YELP) and Groupon (NASDAQ: GRPN) are down.

Keep an eye on Twitter, though. It will be getting a new CEO at some point. Once it figures out how to monetize 300 million active users, the stock will soar. Bet on smart people.

7. The Russian economy collapses. Without a doubt, my forecast of a crisis coming from Russia was my best call for 2014. And it ain't over yet. Vladimir Putin is playing a very dangerous game with Ukraine. Sure, he's extremely popular in Russia, but the Russian economy has only begun to tank.

Will he remain popular when the Russian economy really goes into recession? Will the oligarchs get sick of losing money because of Putin's confrontational stance and take him out mafia-style? I don't have the answer. But oil prices below $80 will crush the Russian economy and make Putin more desperate. This isn't going to end well.

JURY STILL OUT: Yes, Putin's stupid policies have sent Russia into recession... and probably made him a lot richer. But it's not exactly a crisis. To get there, we'd need to see oil back in the $40s or a surge in Russian aggression.

8. No crash for China. For years, stock market prognosticators have predicted a crash for the Chinese economy. I don't think it's going to happen, and that's because it's not a free market.

It seems to me the Chinese Communist Party can keep printing money and covering the economy's problems as long as it wants. You can't buy or sell the yuan on the open market, so there's no real system of checks and balances on China's leaders. You can make money shorting China when the time is right, but don't bet on a collapse.

MIXED: China's economy hasn't crashed. But the fact that I missed the gigantic move for Chinese stocks means I can't take credit for this one. I want to be clear, though: I don't trust Chinese stocks. There's too much fraud for my taste.

Okay, there you have it. Two correct, one wrong, and the rest mixed. That's probably pretty good for predictions...

Until next time,

Briton Ryle

@BritonRyle on Twitter

Where is Americans' Money Going?

2015 was going to be the year the American consumer started spending again. The list of reasons the purse strings were gonna finally fly open was as long as your arm.

Gasoline prices were falling, savings were up, more people were getting jobs, there was a wealth effect from better home values and higher stock prices, and the economy was stabilizing — all these things meant the average American should be in the best financial shape in years.

And what else do you do when you're flush but go out and spend some loot?

Institutional investors plowed money into the S&P 500 Select Consumer Discretionary ETF (NYSE: IXY) during the fourth of quarter of 2014 and again this year, starting in February. Clearly they were betting on better spending numbers.

And that ETF has performed very well. It's up a total of 19% since October 2014 and up 5.5% just this year.

Both gains handily beat the S&P 500's performance over both time frames. You don't have to read between too many lines to come to the conclusion that Americans must be spending more money. Otherwise, why would a consumer discretionary ETF be doing so well?

One strategist guy told Bloomberg, "The American consumer is impossible to push down for a long time, and investors are putting up money now for future returns.''

I'll admit, I too thought spending was going to pick up. It was one of my big themes for 2015. In addition to the conditions listed above, it just felt like we were far enough past the financial crisis that people would relax a little.

Is the Consumer Really Back?

The funny thing is, retail numbers have stunk lately. Christmas shopping wasn't particularly good. First-quarter retail numbers were also nothing to write home about.

And if we look at some specific instances, it's just awful. Teen retailer Abercrombie & Fitch (NYSE: ANF) is just one example. In two years, the stock has fallen from $50 to $22. I can't remember the last time this company had an optimistic earnings report.

Other teen retailers aren't doing well, either. Aeropostale (NYSE: ARO) has dropped from $14 to under $2 in two years. Zumiez (NASDAQ: ZUMZ) has gone from $40 to $23 in six months.

So maybe the millennial crowd doesn't like the traditional retailers. Who can figure out teens and twenty-somethings anyway, right? There are always luxury retailers. People with tons of cash never have any qualms about buying quality goods...

Well, Michael Kors (NYSE: KORS) stock has dropped from $100 to $42 in a year. At Coach (NYSE: COH), it's $60 to $35 in two years.

If you want to, you can certainly make the case that Americans simply aren't spending money. But that's not exactly true.

Big box retailers are doing okay. Both Macy's (NYSE: M) and Target (NYSE: TGT) are up around ~10% year-to-date, and Macy's has only missed earnings estimates in two of the last four quarters...

So let's go back to that Select Retail ETF and once again ask the question: Why has it done so well?

A Retail ETF By Any Other Name...

The individual investor — that's you and me — has to pay attention to the details. Because in today's headline-driven society, if you don't dig a little, you're going to miss something. And if you do dig, if you do the extra work to get to the heart of a matter, you'll be ahead of many other investors.

It would be easy enough to see that the S&P 500 Select Consumer Discretionary ETF has outperformed the S&P 500 by a wide margin and conclude that you should buy Wal-Mart (NYSE: WMT) or Target stock. You'd have done okay — but not because you were mirroring the performance of the S&P 500 Select Consumer Discretionary ETF. That ETF has nothing to do with Target or Wal-Mart...

The top holding of the S&P 500 Select Consumer Discretionary ETF is Disney (NYSE: DIS). The second-biggest holding is Amazon.com (NASDAQ: AMZN), and then it's Comcast (NASDAQ: CMCSA). That's probably not what you'd expect when you see a Consumer Discretionary ETF.

To round out the top 10 holdings, add Home Depot (NYSE: HD), McDonald's (NYSE: MCD), Starbucks (NASDAQ: SBUX), Nike (NYSE: NKE), Time Warner (NYSE: TWX), Lowe's (NYSE: LOW), and Twenty-First Century Fox (NASDAQ: FOX).

That's two cable companies, two media companies, the biggest online retailer that also has a huge website-hosting business, two home improvement stores, and two restaurants. Nike is about the only traditional retailer in the bunch, and even then, that's a stretch.

I'll admit, I was surprised by this fund's holdings because I don't normally think of Disney and Comcast as consumer discretionary stocks. Maybe that's why they added the word "select" to the fund's name...

I'd probably put Comcast and Time Warner in the tech sector. Or even the media sector, but whatever. There's no denying we spend our loot on cable for both TV content and Internet access. And I suppose at the end of the day, you could even call Apple a retailer if you wanted to...

Apple's become the biggest and most profitable company in history by revolutionizing the consumer electronics market (emphasis on consumer).

It might even be frustrating to you to find out a consumer discretionary ETF isn't really about retail. But remember, the whole point of the fund is to perform well. Names be damned, if you can get some quasi-retailers in there and have the fund go up, you do it...

And besides that, we can certainly learn a thing or two about what to do with our money from this ETF...

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What We're Spending On

Yeah, people are spending money — plenty of it. We're buying cell phones, tablets, cars, and going out to eat.

The most recent auto sales numbers were the best in years. And with new electric vehicles and the aluminum-bodied F-150s now hitting the market, there are some truly new automotive products out there that we haven't seen in years.

And Starbucks... well, that's an easy one. Americans are spending more than ever on dining out. The latest statistics show that we are spending as much on going out to dinner as we are on eating in. You know I'm no fan of McDonald's (how that stock remains near a 52-week high when sales are falling is beyond me), but I've had Starbucks in The Wealth Advisory portfolio since $22.85 (split-adjusted), and we've got 120% gains.

Even with restaurants, where we know spending is strong, you have to be discerning. On the good side, names like Chipotle (NYSE: CMG), Buffalo Wild Wings (NASDAQ: BWLD), and Red Robin (NASDAQ: RRGB) have done pretty well, while others like El Polo Loco (NASDAQ: LOCO), Noodles & Co. (NASDAQ: NDLS), and Potbelly (NASDAQ: PBPB) have been disasters.

Of course, you know about Shake Shack (NYSE: SHAK) by now...

There are still a few undiscovered restaurant stocks out there. I've got one in The Wealth Advisory right now that is going to increase the number of locations it currently has by a factor of 10. It is executing well, and it just crushed its most recent quarterly earnings.

I'm more bullish on this stock than any other Wealth Advisory stock, and I'll be sharing more about it with you in the future...

As for "traditional" retail, I think it is what it is. If you're expecting people to run and buy a bunch more clothes, it's not going to happen. I still like the J.C. Penney (NYSE: JCP) trade, but that's a turnaround story. Otherwise, it's probably time to move on from retail.

Until next time,

Briton Ryle

@BritonRyle on Twitter

Oil Bottom Is In

Yep. That's it. Oil prices are done falling.

I'm making the call right here and now that it's time to own oil stocks again for long-term potential, not just short-term trading volatility.

As you should know, I've been leading my Real Income Trader subscribers to 40% trading gains on Bakken oil producer Oasis Petroleum (NYSE: OAS). We've owned the stock since February at $14.35 a share. We've taken $3 a share in cash with a low-risk strategy of selling covered call options against our stock when it rallies. And the shares are up roughly $2 from our $14.35 entry price.

But now and for the foreseeable future, we're going to sit back and let our Oasis shares run.

Oasis was a $55 stock when oil prices were around $100. Today, it is a little below $17. In the next month or two, the price of a barrel of West Texas Intermediate crude is going to run into the $70s, 15% higher than it is right now. And shares of Oasis are about to jump into the $20s.

That's an easy 30% gain, and by the end of the summer, I won't be at all surprised if Oasis is trading near $30. By the end of the year, you could be close to a triple-digit gain on Oasis or any other quality mid-sized oil stock that's been crushed by falling oil prices.

Low Risk is Good

I don't like risk so much these days. But when I was younger, I didn't give it much thought.

In my early 20s, I played in several rock bands, making no money, taking to the road, and rocking out till the wee hours in different cities on the East Coast.

It wasn't a momentous decision to give up on my dreams of being a rock star. I had decided to move out West and go skiing for a couple years. I'd never been to Colorado before, and I got dropped off at the first ski town I came to in the Rockies: Winter Park. Skiing waist-deep powder, rocketing down chutes with a 40% grade, and catching air off 20-foot rocks was all in a day's fun.

After I blew my knee out skiing moguls on a run called Short Haul, I decided maybe it was time to go to college and get a real job. After graduation, in my early 30s, I moved to Baltimore, and with a new marriage and a baby on the way, I took a $10-an-hour internship to see if I could make it in the newsletter biz.

My bio is one risk after another. But these days, with a couple kids looking at college in a few years, I don't take the same cavalier attitude toward risk that was second nature in my youth. That's why I look for the easy profits in the stock market.

And right now, oil is the most obvious upside play I can find. Here's why...

Don't Believe the Hype

On Friday, Saudi Arabia and the rest of the OPEC oil mafia said they were going to keep oil production steady. Oil prices fell on the news, and analysts came out of the woodwork to say that oil prices will likely head lower.

One oil analyst in London told Reuters: "The OPEC decision is bearish for oil... It means we will have an oversupplied market for the rest of the year."

Barclay's said: "This means that global oil stocks, already at record highs, will continue to climb, resulting in further downward pressure on prices..."

And of course, wherever there is misdirection going on, you know Goldman Sachs has to have its say: "We forecast that Saudi and other low-cost producers will continue to increase output..."

Now, here's the thing: U.S. oil inventories have been falling for five weeks. 1.9 million barrels came out of storage last week, 2.8 million barrels the prior week, and 2.7 million barrels the week before that...

And remember, that's oil out of storage and onto the market, in addition to current production that went straight to market.

There are a few reasons U.S. oil inventories falling. Much of it has to do with the fact that there are 60% fewer oil rigs drilling new wells in the U.S. Analysts think U.S. production will be steady — or even fall — in the third quarter.

So the world still has more oil than it can use right now. But the fact that new oil supply will be lower than expected just a month or two ago is good for prices. And I'll tell you right now: Oil prices will launch at the first sign that U.S. production is falling.

The big question is: Why are inventories falling?

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Refiners are COOKING

As you know, the U.S. does not export oil. But we do export refined products like gasoline, diesel fuel, etc. And right now, U.S. oil refiners are processing 16 million barrels a day.

Yeah, that's a huge amount. It's all of U.S. daily production, plus 7 million barrels of imports.

When the price for something is low, it's expected that people will use more. And that's what's happening with gasoline. Inventories of refined oil products (gasoline, diesel, etc.) are barely above their long-term averages, while oil inventory is at 80-year highs. This tells us people around the world are using more gasoline.

Gasoline usage is notoriously slow to be reported. All we have to date are February numbers, and motorists are using 4% more gas. That's a significant number. Globally, demand for fuel is currently running around 1.5 million barrels a day higher than last year. If it continues, that will put a pretty big dent in the oil oversupply.

And there are reasons to think it will continue. Employment growth certainly helps. So does the increased economic activity in Europe. Latin America is even contributing to the increased demand for gasoline.

Manipulation is a Short-Term Strategy

You can only manipulate a market for so long. At some point, market participants will adjust for current price trends and offset the impact of the manipulation. That's what's happening in oil right now.

Saudi Arabia has been manipulating oil prices by oversupplying the market. U.S. oil producers have adjusted by lowering spending and investment in new production. And consumers around the world have adjusted to lower prices by driving more.

That's exactly what's supposed to happen. Saudi Arabia's ability to manipulate oil prices is waning.

And that means U.S. oil stocks are a good low-risk investment right now.

I know the market is screaming, "oil prices will fall" and "it's a bear market for oil." But the simple fact is, the fundamentals are saying something very different.

So buy some oil stocks. Oasis Petroleum is a good one. So is Laredo (NYSE: LPI).

And don't be surprised if you see lower oil prices this week. All that doomsaying can have an effect. Just understand that for the rest of the year, the trend for oil prices is up.

Until next time,

Briton Ryle

@BritonRyle on Twitter

12% Gold Dividend

The best article I read yesterday was this piece on South Carolina senator Lindsey Graham. He said:

What’s wrong with Washington is we talk too much and we don’t drink enough... Ronald Reagan and Tip O’Neill would have a drink every afternoon. They didn’t yell at each other on cable TV. They had a working relationship.

Amen. I've got South Carolina roots. My parents met in high school in Augusta. My grandparents lived out their lives in Columbia. And I have an aunt and uncle and a few cousins in Charleston.

I very much appreciate Senator Graham's desire to get a little Southern hospitality back into politics.

Here are a few other things on my mind:

Gold prices fell below $1,400 an ounce in May of 2013. And they've been between $1,100 and $1,350 ever since. Two years... that's a pretty long time for any asset to consolidate. But gold isn't just any asset. Gold bugs say it's the only reliable currency because its value can't be debased by central bank actions like paper money.

Gold detractors like Warren Buffett say gold has no utility and therefore should be valued in the same way companies are.

Companies can grow by selling more product and can earn more in profit by increasing efficiency. Gold can't do that. Gold is basically dependent on the U.S. dollar for its value.

However, gold mining companies can increase revenue by selling more. And they can earn more profits by increasing efficiency. I can't tell you what gold prices are going to do. But gold stocks look pretty good right now...

Barrick Gold (NYSE: ABX) was a $50 stock in 2011. Today it's around $12. The last time it was below $12 was 1992.

Newmont (NYSE: NEM) broke briefly above $70 back in 2011. It's around $27 now after briefly dropping below $20 last December. You gotta go back to 2000 for the last time that happened.

Seems to me it's a good time to own gold mining stocks. The upside will be explosive when it comes. But instead of buying one particular miner, why not buy them all? With the GAMCO Global Gold, Natural Resources & Income Trust (NYSE: GGN), you can. This closed-end fund run by Mario Gabelli's GAMCO holds all the most important gold miners. It's a little over $7 a share and will pay you nearly 12% a year in monthly dividends. The fees are not too bad either, at 1.25%.

I wrote about Alcoa (NYSE: AA) on Monday. The recent drop below $13 looked like a good opportunity, considering the bullish outlook I have for the company. Right on cue, shares rallied +2% after May auto sales came in very good. Cars these days use a lot of aluminum, but more importantly, the aluminum-bodied Ford F-150 is selling well.

Ford is still ramping up production of these trucks after it re-tooled factories last year. Ford should hit full production levels this summer, and that will be good for Alcoa. Also, Boeing (NYSE: BA) started making the first 737 MAX airplanes this week. The first deliveries of this plane are slated for the third quarter. Boeing has 2,724 orders for the 737 MAX.

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They're calling it "Burger Wars." Americans still lover burgers, just not McDonald's (NYSE: MCD) burgers. Now we want Five Guys, Shake Shack (NYSE: SHAK), Red Robin (NASDAQ: RRGB), and Habit Burger (NASDAQ: HABT).

Shake Shack has all the buzz right now. Its stock has continued to amaze — but not exactly in a good way. It's up huge, but with $126 million in trailing sales, the company has a lot of work to do to justify the $2.8 billion market cap.

Red Robin did $1.2 billion in revenue over the last year. Its market cap is just $11.18 billion. It's clearly a better buy than Shake Shack. The dark horse may be Habit, which did more in sales than Shake Shack over the last year — $191 million vs. $126 million. Yet it's valued at $455 million, a fraction of SHAK's valuation.

Yeah, Shake Shack stores have the cool factor. But the stock price is ridiculous.

Oasis Petroleum (NYSE: OAS) remains my favorite oil stock. My Real Income Trader subscribers have $3 per share (21%) in capital appreciation and another $2.75 a share in cash income from covered call sales. Oil prices have been very steady around $60. I was expecting oil to retest $50 but it has been quite stubborn, and analysts have started to raise their earnings estimates for oil companies.

If you're interested, Laredo Petroleum (NYSE: LPI) looks pretty good, too.

Can we stop talking about stock market bubbles yet? I'm mystified that people like Robert Shiller keep calling stocks a bubble when the trailing P/E is around 18. I have no problem if you think stocks in general are a bit expensive. But that's just not bubble territory. You have to have irrational exuberance to have a bubble. You have to see the "it's different this time" mentality emerge, thinking that things can only get better. Seems to me many investors think things can only get worse...

And besides that, there are cheap stocks out there. Ford's forward P/E is 8, for crying out loud. Bank of America (NYSE: BAC) is 10. Intel (NASDAQ: INTC) has a forward P/E of 14, and for Cisco (NASDAQ: CSCO), it's 13.

Sorry, but these simply aren't bubble valuations.

It's great that no one's freaking out over the possibility of a Greek default. I wish Apple would just get it over with and buy the country.

That's what I've got for you today. Talk to you soon.

Until next time,

Briton Ryle

@BritonRyle on Twitter

3 Stocks for You

We're gonna talk about a couple stocks today.

Yeah, I know, with the stock market near all-time highs and the Fed looking for an opportunity to lay down a couple interest rate hikes, the general consensus is that you should not be buying stocks now. Buy low, sell high, and all that...

I'm sure you know U.S. economic growth was pretty bad in the first quarter. In fact, there wasn't any growth — GDP shrank by 0.07%. It sounds terrible, and it was. Do it again, and we're officially in a recession!

But here's the thing: That was last quarter. GDP is a trailing indicator. It tells you what has happened, not what's going to happen. And stocks are never valued for what they have done, but rather what they could do in the future.

That's why it's always possible to find bargains, to identify stock prices that are mispriced — because people inevitably make mistakes.

It might seem hard to believe that investors are still shell-shocked from the financial crisis. But think about it... Every time we see a big sell-off, doesn't the fear of another giant stock market beat-down lurk in the back of your mind? I know that dark fear rises in my mind every time I see the Dow down 300+ points...

We can chalk some of the first-quarter weakness up to oil prices. Oil companies spent less and laid off workers, and that definitely had an impact on economic activity.

But don't forget that with the exception of March, the U.S. economy continued a string of job gains unmatched since 1990. Manufacturing has picked up, so has the housing market, and even data from Europe has been beating expectations.

However, the best indicator is probably earnings expectations. In the first quarter, earnings estimates were sharply lower — more than 10%. But as we get closer to second-quarter earnings, downward revisions are much lower. Analysts have lowered estimates by 2.1%.

The average downward revision over the last year has been 3.7%. Over the last 10 years, the average downward revision for S&P 500 earnings has been 3.4%.

This is a sign that the economic weakness we've seen is priced in, and companies are more likely to surprise to the upside.

Okay, sorry for the long-winded setup. I just can't offer up stocks for your review without some qualification. The mainstream financial media always paints with broad strokes, and they will tell you the entire market is expensive. That's just lazy. Do some digging, and you can find cheap stocks out there even now...

Cowen Group (NASDAQ: COWN)

Click Chart to Enlarge

Cowen is a small investment bank and brokerage company. Trailing 12-month revenue was $376 million. And it's expected to do ~$394 million for fiscal 2016.

For the last two quarters, it has trounced earnings expectations, reporting $0.16 and $0.20 a share against expectations of $0.11 and $0.14, respectively. Analysts have since pushed estimates higher, but the stock hasn't really moved, as the overall market has been range-bound.

The valuation looks good: trailing P/E is 5, forward P/E is 8.5, and it trades just below book value. Cowen has a net $500 million in cash, and the market cap is $1.3 billion.

Cowen was a $20 stock back in 2007. It's around $6 now, and it's just breaking out to post-financial crisis highs. The stock has rallied ~25% since November 2014.

I wouldn't be shocked to see Cowen shares pull back 10%, and I also wouldn't be surprised to see it run another 60% to $10 over the next six months.

Alcoa (NYSE: AA)

Click Chart to Enlarge

I've been scratching my head a bit on this one. It ran from $8 a share in 2013 to a 2014 high above $17. It has since pulled back to ~$12.50, a 52-week low.

But the thing is, the prospects look great for Alcoa. The company has been transitioning from a bulk aluminum producer to a value-added producer of finished products. A couple key acquisitions in the aerospace sector have made it a major supplier for Boeing. And Boeing is going great guns with its new line of planes.

Alcoa is also a critical supplier for Ford's new aluminum-bodied trucks. All indications are that this truck is being very well received. Other car companies will follow Ford's success, as adding more aluminum lowers overall weight and improves performance and gas mileage.

Alcoa has beaten earnings expectations in each of the last four quarters, yet analysts still will not raise forward estimates. With a forward P/E of 10 and a high probability that it will continue to beat earnings expectations, Alcoa should trade between $18 and $20 by the end of the year.

The Best Free Investment You'll Ever Make

Merrimack Pharmaceuticals (NASDAQ: MACK)

Click Chart to Enlarge

Now, I am not a doctor — the science behind any biotech company is a bit of a mystery to me. And so I have to rely on the market's acceptance of any biotech company for validation. For Merrimack, it looks pretty good.

So far in 2015, the stock has moved from $9 in January to a recent high around $13.60. It has since pulled back to the ~$12 level.

Merrimack is still in the development stage, so it is losing money on R&D. But next year's loss has been cut significantly, which suggests that momentum is building.

Merrimack is valued at $1.3 billion, and it has $103 million in trailing revenues. In fiscal 2016, revenues are expected to jump to $189 million. But the thing is, Merrimack is already positive $20 million for levered cash flow, which accounts for administrative costs and debt payments.

Merrimack is partnered with Baxter and receives milestone payments that are expected to cover operations through 2016, so funding shouldn't be an issue. That's always good for a development-stage company. For investors, the sole focus can be on efficacy of its two main drugs for pancreatic and breast cancer.

Of course, there is always risk with any biotech stock. With Merrimack, the partnership with Baxter is a big plus. The fact that biotechs have been so strong is also a positive.

Big Pharma like Pfizer (NYSE: PFE) and Merck (NYSE: MRK) must make acquisitions to grow pipelines, and that's been a big driver for biotechs. It's not likely to end soon.

Merrimack's chart is a bit indecisive at $11.90 right now. The recent decline from $13 is the result of earnings, not negative results from its drugs. There's support at $11, and that level would make a pretty good entry.

Until next time,

Briton Ryle

@BritonRyle on Twitter

Sell Oil Stocks?

Jim Chanos is a short seller. That is, instead of buying stocks that he thinks will go higher, he sells stock that he thinks will go lower because of inherent fundamental problems.

He made a pretty good call on China three years ago when Chinese stocks were flying high...

At the time, China was putting up double-digit annual growth. Its export economy was booming. So was real estate. Chinese citizens were seeing their standard of living skyrocket, and they were spending.

Chanos called BS. He believed short-term debt was being invested in long-term assets (building factories, condos, etc.) and there would be a problem down the road.

Today, China's debt problems are pretty well known. It's likely there is a real estate bubble. But the Chinese economy hasn't gone into crisis as Chanos once forecast. Still, the China Large-Cap ETF fell more than 30% before the recent rally. Chanos made out pretty well...

But I'm not sure his latest downside bet will pay off so well. Jim Chanos is telling anyone who will listen that he is short Big Oil and U.S. frackers.

Last week, he told "Wall Street Week" viewers that the fundamentals of the oil industry have changed. He said, "These guys like Exxon and Chevron and Royal Dutch Shell are simply replacing $20 [per barrel] oil with $80 oil.”

He's right. Cheap oil that costs $20 a barrel to get out of the ground is gone. Oil from the Canadian oil sands costs at least $60 a barrel to produce. To get at the massive deepwater Brazilian oil fields, you have to get through 6,600 feet of water and another 16,000 feet of salt, sand, and rocks. It's gonna cost a lot more than $20 a barrel to do that...

The most efficient U.S. shale wells can produce oil at around $45 a barrel.

So, yeah, clearly oil companies aren't making as much money with oil prices at ~$60 a barrel as they were when oil was ~$100.

But I'm not sure I want to wager any loot that oil stock prices are going to head lower from here...

Know When to Fold 'Em

The fact is, oil prices cannot stay at $60 forever. It's a simple matter of supply and demand from Economics 101.

If you can't sell something at a price that gives you a profit, then you're not going to produce it. As oil prices squeeze profits, there is less incentive to pump more oil. That's why drilling rig counts in the U.S. have fallen for 24 straight weeks.

Oil companies have decided that preserving cash is more important than producing marginally profitable oil, so fewer new wells are being drilled.

Lower oil production means oil supply will not grow like it has over the last few years, when $100 oil meant big profit margins. But the demand side of the equation — oil use — continues to grow 1% to 2% a year. That's about 1.5 to 2 million barrels a day.

And the fact that the world loses around 5% of oil supply every single year from field depletion means the current oversupply will balance out pretty darn quickly.

How quickly? I don't know. There are a lot of variables that make predicting the exact timing of a turn for oil prices difficult. And really, oil price have already rebounded nearly 40% — from $42 to $60 — because everyone knows the supply and demand situation will change in the future.

It really is just a question of when.

So what do you do? How do you prepare for a rebound in oil prices and oil stock prices when the timing is uncertain?

The Best Free Investment You'll Ever Make

Get Paid to Wait

Of course, you could just buy high-quality oil stocks and wait for the inevitable rebound. That's what many investors are doing right now.

But of course, if oil prices don't recover this summer, or if it takes until next year to get some momentum for oil prices, those oil stocks aren't going to do much. They might even trade lower, as Jim Chanos thinks.

I don't know about you, but I damn sure don't want to buy a stock that has a pretty good chance of trading 20% to 30% lower sometime in the next year. So here's how you can get paid to wait for the real oil stock rebound...

You can buy an oil stock and then sell covered call options on that stock. Let me show you what I mean...

Back in February, I told my Real Income Trader subscribers to buy shares of Oasis Petroleum (NYSE: OAS) around $14 a share. A couple weeks later, we sold a covered call that netted us $1.30 a share.

Now, when you sell a call option, you're entering into a contract to sell a stock at a certain price to the person who bought the call option.

So if you own the stock already, you're simply agreeing to sell that stock. Your contractual obligation to sell the stock is "covered" by the stock you already own.

And that's exactly what we did in Real Income Trader. We bought Oasis at $14, it rallied, and we sold call options that meant we agreed to sell the stock at $17. We were paid $1.30 to sell those shares for a $3-per-share profit.

Sound like a pretty good deal? Yeah, it is. And it gets better...

We didn't end up selling our Oasis shares. But we kept the $1.30 from the call option sale. And when Oasis rallied again, we sold another call option to sell our shares at $18. This time, we were paid $1.05 a share just for agreeing to sell the stock we bought at $14 for $18.

Just two weeks ago, we sold yet another call option on our Oasis shares. This time, we were paid $0.65 a share for agreeing to sell our Oasis stock at $19.

So far, we've been paid $3 a share in cash since February. The stock has run from $14 to $17. Add that $3 of stock price gains to the $3 in cash we've been paid, and we're up $6 on a stock we bought for $14!

That's how you get paid to wait. And frankly, I don't think my Real Income Trader subscribers care if the stock rallies tomorrow or next week — not as long as we're getting paid so well to own it.

Covered calls are a safe and easy way to get paid to own stock. In fact, the strategy is so low-risk that it's approved for IRA retirement accounts.

If you want to learn more about this easy strategy that puts cash payments into your brokerage account, just click here.

Until next time,

Briton Ryle

@BritonRyle on Twitter

China's Great Money Experiment

Friday May 15, 2015.

Remember this date, because it may well mark the beginning of the end for the 30-year Chinese growth cycle.

It's pretty well known that China has created a huge amount of debt as it has gone into hyper-drive developing its manufacturing sector and adding infrastructure to support the urbanization and modernization of its emerging economy.

We've seen the Chinese government pump its economy with the biggest stimulus ever in the wake of the financial crisis. It poured over a trillion dollars into its economy to stave off a slowdown.

We've seen it cut reserve requirements for banks so they will lend more to support the real estate market. And we've seen it raise those requirements when real estate prices start getting out of hand.

All the while, the total amount of debt in China continues to grow. Total bank debt in China has grown from $14 trillion in 2008 to around $30 trillion today. At the same time, China's money supply has doubled. After all, if you're gonna pump out more loans, you have to actually have the money to, um, give to people.

I know this may sound like what's been happening here in the U.S., but there is an importance difference: It's starting to sound like China is actually giving money away...

Last Friday, China's Finance Ministry, banking regulator, and central bank issued a joint directive that banks should keep making loans to local government projects — even if these borrowers are unable to make payments on existing loans.

Yeah, you read that right: China's banks are being "asked" by a communist government to make loans to corrupt local governments when there's a pretty good chance those loans won't be repaid...

These local governments will even be allowed to "restructure" some of their debt by exchanging loans for a type of municipal bond that will have a capped interest rate.

The assumption here should be pretty clear: These bonds are backed by the Chinese government. If the local governments can't pay (likely), the Chinese government will (also likely).

Can This End Well?

It's pretty important to remember that China is a communist country. All politics are local, they say, so the mandates and five-year plans agreed upon by China's communist leaders get put into action by the local governments.

We need more roads, say the communists in Beijing, and local party leaders borrow money, select contractors, skim some cash off the top for themselves, and get the roads built.

No shocker there — local officials are always pretty good at graft, no matter the political system.

But communism is special. And Chinese communism is especially special. Because you've got a few men planning the fate of 1.4 billion people. So they can say, hey, we're gonna need a six-lane highway between these two towns because eventually 600 million farmers are gonna move to these towns and they're going to need to get back and forth.

So the local official goes to the bank, says I need a loan for a six-lane highway, the bank says okay, and they build the highway. Never mind that these 600 million farmers don't want to move, and even if they did, they'd be loading up the ox instead of the Ford that took Jed and his family to Beverly Hills. And so there are miles of barely used highway in China.

Or even better, maybe the Boys from Beijing say oh yeah, we're gonna need big apartment buildings for these 600 million farmers to live in when they move to the big city. Do the math — it looks pretty good. We can build a 20-story building with eight apartments per floor — that's 160 apartments pulling in $800 a month, so we'll be making $128K a month and $1.5 mill a year. We'll get this thing paid off in five years.

Bank says sweet, 8% a year for doing nothing is great. The local official says awesome, I'm gonna skim a cool million off this job. The Boys in Beijing say nice job — the building looks great.

But then not enough people move in. There's not enough cash to pay the loan, the local official can't get new money to build the next building, and the bank is suddenly in violation of reserve requirements. The whole Chinese economy grinds to a halt...

China did something virtually unthinkable

And that's what's been happening. I'm sure you've heard about the ghost towns in China, built in anticipation of residents that have yet to show up. These ghost towns are funded with loans that may never get paid back. And it's a problem because China needs to keep building, spending, and growing.

Is the China Bubble about to Burst?

$3.5 Trillion

It's estimated that local Chinese government debt stands at $3.5 trillion.

To put that in perspective, the bribery/kickback scandal that sent Brazil into political chaos and crushed shares of state-run oil company Petrobras (NYSE: PBR) was less than $4 billion in bribes.

We haven't seen anything like China's loan problem...

And the thing is, because China's economy is basically closed, there are no checks and balances on monetary policy there.

If a U.S. bank lent too much and it looked like it wouldn't get paid back, investors would sell the stock, sell the bonds, pull their money out, and the bank would collapse. But market forces can't be brought to bear on Chinese banks in the same way.

China can keep printing money, keep renegotiating bad loans, and keep lending as long as it wants to. I won't be surprised if China's communist party simply writes off all the bad debt and gives newly printed money to China's banks.

You may think our Fed has gone off the rails, but it's nothing compared to the financial experiment the Chinese are conducting. We all better hope nothing goes wrong...

Until next time,

Briton Ryle

@BritonRyle on Twitter

The Part-Time Problem

Last week, I wrote an article titled, "How the Bull Market Ends."

The gist of the article was that the employment picture in the U.S. is not getting the credit it deserves. In fact, many sources tend to go to extreme lengths to poke holes in the ongoing "economic recovery" story, as this headline (which I included in that article) shows: "In April There Were 26 Waiters And Bartenders For Every Manufacturing Job Added."

Comparing bartender jobs to manufacturing jobs is an unfair comparison. Manufacturing has been in decline for 23 years — until last year. Manufacturing had a net 10,000-job gain for 2014, the first time there's been a net gain since 1990.

But of course, that's not the whole jobs story, as one Wealth Daily reader pointed out.

Briton,

I don't know if you take replies or answer them. I read the article with a degree of skepticism, just as I read the bears gloom and doom. You addressed the employment picture and the types of jobs being produced by this economy. What you didn't address was pay and full or part time work.

If I'm unemployed (Which I am but that's a different story) I'd be happy to have any job. But if I was still at the stage of my life of trying to provide for a family, save for college, all the things we middle class folks do to grind it out, I'd be very concerned about the jobs this economy provides...

I can't speak for every Wealth Daily reader, but I love getting replies from readers. (Normally, I would include your first name and last initial so you could enjoy eternal Internet fame along with my amazingly insightful response.)

Yes, there has been reason to be concerned about the quality of jobs the U.S. economy has been creating. There has been reason to be concerned about workforce participation, too. And while neither of these metrics is back to "normal," they are also better than you might expect.

I've got a series of charts to show you what I mean...

This one is a combo — U.S. unemployment and part-time workers for economic reasons (slow economic growth). Clearly, this total was at ridiculously high levels, a testament to the severity of the financial crisis. It's also improved dramatically.

I know the question is: How much more will it improve? It sure seems like something structural has changed in the U.S. The notion that you can be at the same company out of high school or college for 40 years and have a solid standard of living and retirement seems out the window.

Some of this is because the standard of living in other countries is rising, and some of it is because there's still a lot of slack in the economy. With more people than jobs, the ball is in the company's court. That will change.

And we're seeing that. The number of people who have part-time work due to slack economic conditions is falling...

The number of people who have part-time jobs because that's all they can find is not really falling. This is likely due to structural changes in the economy.

We could look at the housing market and suggest that fewer homes being built means fewer construction jobs. We could look at increased automation in factories from robotics and see fewer opportunities for workers.

Labor markets change — that's not new. Just look at the challenges industrial cities like Pittsburgh and Baltimore have faced and Detroit is now facing.

Reboot Your Retirement Plan

It Was a Doozy

The biggest takeaway from these charts and the employment picture in general is that the financial crisis of 2008-2009 was really, really bad. It's been six years since the S&P 500 bottomed, and the economy still hasn't recovered.

Don't forget it took nearly 15 years for the U.S. economy to recover from the Great Depression.

The U.S. economy lost 10 million jobs during the financial crisis. And it's added nearly 8 million full-time jobs since. Great?

No, it's not great. But it's not terrible, either...

If you want to know why the theme of the "part-time job" recovery persists, I've got one more chart for you...

As you can see, the recovery in full-time employment didn't really get into gear until 2012. We still haven't seen any robust GDP growth, and wages remain stagnant.

I realize all this doesn't help much if you are struggling to find a decent job. But if the job market continues to perform like it has, hopefully your prospects will improve.

Until next time,

Briton Ryle

@BritonRyle on Twitter

What Free Speech Means

I'm pretty sure this article is going to tick some people off. But another fundamental American right is being threatened, and I gotta say this...

If I'm comfortable with my faith or in my beliefs, it shouldn't bother me if you disagree with me or even attack fundamental elements of what I hold dear. You can even call me stupid for what I believe, and while I might then conclude you are a jerk, I cannot (and will not) threaten you or in any way impede your right to say what you want.

That's freedom of speech.

And freedom of speech serves a greater purpose that we may not always recognize: to strengthen our beliefs and our faith.

Because when someone insults or challenges something you believe strongly in, the tendency to get angry about it is also a call to action — to ponder why, exactly, does this bother me so much?

Such self-examination of our beliefs and our faith makes those beliefs stronger, because we then either have to accept the reasons we believe or reject the idea.

I write two articles a week for Wealth Daily. I get plenty of criticism. If I mention the Fed or interest rates, I get called a Keynesian. If I question Fox News, I get called a liberal. I wonder what I'll get called when I criticize a Washington Post article in a minute?

You can say what you want about me; I've got thick skin. And what's more, I'm not afraid to review what I've written to see if there's any merit to the criticism.

So here's a question. I'm sure it's going to be misunderstood and mischaracterized, but I'm going to ask it anyway...

As an American, how do you feel when you see someone burning the American flag? Does it make you question America? Or does it strengthen your sense of what it means to be an American?

If we are honest with ourselves, we understand there are reasons some people are angry at America. Ron Paul will tell you this, too: Drone strikes in other countries that kill civilians without due process, the mistake of invading Iraq, torture — these are all valid reasons for people in other countries to be angry.

There's valid reason for Americans to be angry about things going on here, too...

But when I see a burning American flag, my belief that America is the greatest country on earth — that our freedoms and achievements are second to none, that America offers more opportunity to better oneself than any place on earth — is strengthened.

We Are Charlie

I'm sure you know about the French magazine Charlie Hebdo that was attacked by terrorists for printing images of Muhammad that were deemed offensive. 12 people were killed.

And I'm sure you know about the recent Muhammad cartoon contest in Garland, Texas that was attacked by two men carrying assault rifles.

In both cases, the men who carried out the armed attacks were offended that the image of Muhammad was being made into cartoons. And they had every right to be offended. I'm sure some of us would be offended if it were images of Jesus Christ being made into cartoons.

But that doesn't mean we're going to try to shoot the cartoonists with assault rifles...

If someone says to you, "I will kill you if you say that," they are taking away your right to free speech. And likewise, if you say you'll punch someone if they say something offensive to you, you are taking away that person's right to free speech.

The question of whether it's offensive or not is irrelevant.

The real question is: Are you so uncertain of your faith and beliefs that another person's words can call it into question?

Reboot Your Retirement Plan

What Does Freedom Mean?

So let's say someone threatens you about something you say. Your right to free speech is being taken away.

How do you protect your right to free speech? By continuing to say what you've been threatened about, to continue to speak your mind.

There's a reason you don't see many offensive/grotesque images of Jesus Christ. It's because Christians don't freak out about it. For the most part, Christians understand that their faith is a personal relationship, and that relationship is not changed by what others say.

What's more, Christianity teaches us to turn the other cheek, to have humility and compassion for others.

Because Christians no longer react to offensive imagery involving Christ, they (we) are quite literally "free" from taking offense and free to choose how to worship.

Lately, there's been a debate around whether people should refrain from creating and distributing offensive images of Muhammad out of respect for moderate Muslims — those who are as opposed to radical Islam and its violence and hatred as we are.

And just yesterday, an article by a Washington Post columnist said this:

When Americans engage in high-profile, attention-seeking acts of blasphemy [against Muhammad], they are not joining American military and intelligence forces at the front line; they are complicating and undermining their work.

This columnist is saying the West needs the help of moderate Muslims to fight radical Islam. And while that may be true, he's also saying that we should not create offensive (blasphemous) images of Muhammad so we don't offend potential allies.

In other words, he is advocating abandoning an element of free speech so as not to further offend anyone. Yes, once again, we are being asked to give up a fundamental American right in the interest of national security.

You know what I think? I think we should absolutely defend the right to free speech, no matter what. In fact, I think we are called upon to defend that right when someone says, "Don't say that or else..."

Again, freedom of speech serves a great purpose: It strengthens our beliefs and our faith. And more than that, it should teach us that while sticks and stones (and assault rifles) can hurt us, words never can.

Until next time,

Briton Ryle

@BritonRyle on Twitter

How the Bull Market Ends

I don't mind if someone wants to be bearish. Really. If you wanna jump at everything that goes bump in the stock market or the economy, that's fine by me.

There's just one thing I ask of the sky-is-falling crowd: Get your facts straight.

The U.S. economy is having its best employment growth in decades. As of February, the U.S. economy added 200,000 jobs in 12 consecutive months. That hasn't happened in 30 years. You have to go back to 1985 to find a similar streak.

2014 was a record-setter for jobs. In November 2014, the economy added 423,000 jobs, the most since 2012. Back in 2010, monthly job gains hit above 500,000. But that was followed by four straight quarters of net losses.

For the entire year of 2014, the economy added 2.65 million jobs. That was the best performance since 1999, when we got 3.2 million jobs.

Now, 1999 was very close to the end of that amazing Internet-driven business cycle and a 14-year stock market top. The U.S. economy posted 6.4% GDP growth that year. It was the fourth straight year of +6% growth.

If you were a bear in 1999, you had a compelling argument that GDP growth was overheated and that many new jobs were "bubble" jobs, fueled by ridiculously allocated tech bubble money.

Now, in 2015, we're in the seventh year after the financial crisis. And we've seen two — count 'em: two — years where GDP broke above 4%. We haven't seen even one year of 5% growth, let alone four straight years of growth over 6%.

If you think zero interest rates are a problem, I get it, and you're right. Low interest rates are a problem. And we've already seen one bubble that's directly related to low rates burst in spectacular fashion. That's the shale oil bubble.

There should be no doubt that America's shale boom was driven by low interest rates. Treasuries yield squat, and investors seeking out nice yields gladly poured billions into high-yield oil company bonds. All that cash ($500 billion over the last five years) bought land leases in North Dakota and Texas and rented drilling rigs that pushed U.S. oil production to 20-year highs.

Today, the oil market is oversupplied by at least 1 million barrels a day. And estimates are that 100,000 oil jobs are on the chopping block. Some have already been cut, others are twisting in the wind. I would wager that job cuts are likely to be over 100K by the end of this year. Maybe oil job cuts hit 200,000...

I don't make light of anyone losing their job. I've been fired before, and it's not fun. But at the end of the day, even if the oil patch loses 200K, that's less than the one-month job gains the overall economy has been adding.

If we can see the total implosion of an interest rate-fueled bubble like shale oil and all that happens is we lose a month's worth of job gains, we should probably conclude that the U.S. economy is doing okay.

Barking Up the Wrong Tree

Yeah, the March employment report blew the trend. With just 85,000 jobs created, it stunk. And if that was the bearish indicator — if that was the data you used to conclude the bull market was over — well, I don't know what to tell you.

The bears got a little frisky in March. We saw declines of 77 and 69 points on the S&P 500 that month. The S&P 500 even finished lower for the month of March, a darn rare occurrence.

GDP growth was painful as well — 0.2%. That's darn close to an actual contraction.

But then the April jobs report hit last week. And it was a blowout. 223,000 new jobs were added.

So much for the end of the bull market and economic expansion...

Ah, but those bears are tenacious. They don't give up easy, as headlines like this one show: "In April There Were 26 Waiters And Bartenders For Every Manufacturing Job Added."

"Sure, we're getting jobs, just not very good ones," says the doom-and-gloom crowd. This angle of attack has been pretty popular. After all, if a former manufacturing giant like the U.S. can't put more people to work in factories than bars, clearly something must be terribly wrong.

It sounds good. It's compelling. It's also wrong.

Do you know the last time the U.S. had a net gain for manufacturing jobs? It was 1990 — 35 years ago. Well, except for last year.

The U.S. had a net gain of 10,000 manufacturing jobs in 2014. Again, that was the first net gain since 1990.

Oh, and about the quality of jobs... The breakdown of April jobs gains actually looks pretty good:

Click Chart to Enlarge

You can clearly see that any comparison between manufacturing and bartending jobs is a red herring. The biggest contributors were Professional and Business Services and Education and Health Services. And don't miss the addition of 45,000 construction jobs...

So if you want to build a bearish case for the stock market that's not based on exaggeration and obfuscation, you simply have to look elsewhere. Job growth is a positive story.

Now, I'm not here to tell you everything's great and there's nothing to worry about when it comes to the stock market. If you're invested and you're not worried, that would be a problem. My whole point is that you should be worried about the right things, the things that could actually cause a bear market. There are plenty of them, too — no need to invent them.

Like China.

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China is walking a tightrope trying to raise its standard of living to the point where it can actually support its economy. And it's doing it with what may well be a debt and credit bubble.

The thing is, there's no way to really know because you can't trust the Chinese communist party to tell the truth about what's going on there.

China's currency is not freely traded. It's not an open market, and China doesn't have an open economy. You might think the Fed's money creation is bad, and it is. But China has the potential to be way worse.

What's the money supply growth like there? Why can't the government keep printing yuan to cover bad debt and investment? It's not like they'd tell us...

No, we won't have much indication that China's financial system is going Bear Stearns and Lehman Brothers until it really does blow up. And that would send shockwaves around the world.

Another one that bugs me is interest rates. It's not so much that rates will rise — it's what that means for corporate earnings.

I've written on this before. Corporations have been using cheap money to buy back their stock. And so they are showing earnings growth (~70% of S&P 500 companies beat EPS estimates in Q1) but not revenue growth (only 50% beat revenue estimates).

When rates rise and companies can no longer fund share buybacks, stocks may look more expensive than they already are. Plus, investors will come face to face with lack of growth. And that's never a good thing.

I can't tell you exactly when these things happen, but this is what you should be watching...

Until next time,

Briton Ryle

@BritonRyle on Twitter

You Can't Trust Media

As you know, I live in Baltimore. It's been a challenge to keep the recent protests in perspective. I've seen firsthand how the media blitz has blown things out of proportion.

The worst came on Monday, when Fox News nearly set off another round of mayhem with inaccurate reporting. A reporter — Mike Tobin — said on air he saw a Baltimore police officer shoot a fleeing man in the back.

"Oh no," I thought when I heard that account as it spread across various media channels. "Now the hooligans have the excuse they need to renew their assault on the city."

Only the reporter was wrong. The cops didn't shoot anybody. Yes, an armed man did run from the cops. And his own gun fell and discharged when it hit the ground.

The Baltimore police didn't fire a shot.

In fact, the Baltimore police showed an amazing amount of restraint during the one night of riots we suffered through. Nobody was killed. No video of police beating a teenage rioter emerged that I have seen. I have not found any reports that police shot anyone, though 19 people have been gunshot victims over the last nine days.

The police's restraint was probably the single biggest reason things didn't get worse here in Baltimore.

And one reporter nearly set off the powder keg in his rush to break the story of a police shooting.

What the heck has happened to journalistic standards?

There were plenty of police available — he could've gotten the story confirmed. But he didn't.

Instead, he went live on TV saying this [emphasis mine]:

Well, about 2:45, we saw a guy running from the cops, here right at the intersection of North and Pennsylvania, where the uh, you know, which has been the epicenter of the unrest here. And as he was running away, that officer drew his weapon and fired and struck the individual who was running away. He was a young black male, and what we saw on the sidewalk as the crime scene unfolded there, there was a revolver laying on the ground. It looked like a six-shooter revolver with a long barrel. The individual who was shot — again a young black male — he was alive. They just took him off in the ambulance, but he did not look to be in good shape at all. I can’t really give you an accurate diagnosis and I could not get a look at his wound but he looked to be in bad shape.

The reporter said the officer "drew his weapon and fired."

But again, that's not what happened.

The Baltimore police quickly issued a statement that no police officer fired a shot and, in fact, that no one was shot at all, not even when the suspect's gun went off accidentally.

To Fox News' credit, the story of the shooting was quickly corrected.

Still, that doesn't change the fact that journalistic standards are a joke these days. We've already seen NBC anchor Brian Williams fall from grace for lying about being shot down in Iraq. And Bill O'Reilly has been taken down a peg for exaggerating his involvement in the Falkland Islands.

Shoddy reporting has become an epidemic in America.

I suppose in the Facebook/Twitter era, the news comes so fast there's no time to check the facts. Many "news" sites post articles in the blink of an eye, with sensationalist headlines and very little substance.

Never mind that unsubstantiated reports, like Fox News on the police-shooting-that-wasn't, could have easily reignited the anger and led to more riots. Maybe that time someone would have lost their life.

The Best Free Investment You'll Ever Make

How much is bad reporting costing us?

As an investor, I see bad headlines and news stories every day. How many Americans have been scared to invest in stocks over the last few years because fear-mongers like Peter Schiff, Marc Faber, and Nouriel Roubini relentlessly say a new financial crisis is right around the corner?

Stock prices move up and/or down every day. Sometimes there's a good reason for it, sometimes not so much. But watch CNBC or monitor Yahoo! Finance. They'll roll out the bears when stocks are in the red, and you'll hear nothing but bullish commentary when stocks are rallying.

There's a reason for this. The CNBCs and Yahoo! Finances of the world exist to sell ads and get clicks and make money. Helping you navigate the sometimes-complicated world of finance is a secondary goal at best.

And just like the Fox reporter who chose not to fact-check a potentially dangerous story, the financial media often does the exact same thing, with little concern for the consequences.

Like this headline from yesterday: "Investors flee US stocks at financial-crisis levels"

Holy cow! Really? People selling stocks like they did during the financial crisis conjures up those 500-point waterfall declines that scared the bejeezus out of us all. Surely it's time to sell everything...

Read the article, and you get a different story. U.S. stock mutual funds and ETFs saw $35 billion in net outflows during April. That's the most since October 2008, shortly after Lehman Brothers went bankrupt.

$35 billion sounds like a lot of loot. And it is. But the total value of all listed U.S. stocks is over $20 trillion. Yeah, that's trillion with a "t." $35 billion is literally a drop in the valuation bucket.

Now, I don't want to minimize these numbers. It's never a good sign when you have money coming out of stocks. It's not a harbinger of disaster, either. After a net loss in March, the S&P 500 finished higher in April.

Why did people sell in April? I don't know. Maybe they were raising cash to pay taxes. Maybe some investors needed a down payment for a house. People sell stocks for all kinds of reasons, and it doesn't mean the financial crisis is back.

Now, more than ever, we investors have to be able to think independently about the stock market and our investments. We have to always ask the question: "What does this mean?"

Because the media isn't going to give us any real answers.

Until next time,

Briton Ryle

@BritonRyle on Twitter

How Apple Could Save the Economy

It was a wild weekend here in Baltimore. I actually took my kids out of town to visit the grandparents in Richmond, VA.

Everything seems back to normal after six Baltimore police officers were indicted for a death that was ruled a homicide.

There's a huge number of topics to cover today, so I'm breaking out the "random thoughts" format for you...

Networking giant Cisco Systems (NASDAQ: CSCO) announced it has a new CEO. Chuck Robbins will take over for superstar John Chamber on July 26.

I will miss John Chambers. He was one of the best CEOs out there. He was very candid about how global economic conditions affected Cisco, and because Cisco is heavily dependent on corporate IT spending, his quarterly assessment of corporate spending had ramifications far beyond Cisco's business.

To investors, Chambers was a tech leader and global economic guru. His insight literally moved the market.

That's not to say he didn't make mistakes. His consumer camera division — sort of an early version of the GoPro — was a huge failure and cost the company billions. But if you're not making mistakes, you're not trying.

Cisco started paying a $0.24-a-share annual dividend in 2011. Today, that dividend has grown to $0.84 for a yield of 2.9%. But there's still a lot of upside for that dividend. Cisco generates around $12 billion a year in operating cash flow, and it banks $8 to $9 billion in profit a year — more than double what it pays in dividends. It also has ~$53 billion in cash.

So it's a pretty good bet that Cisco can hike that dividend ~25% a year. And the stock is pretty cheap, with a forward P/E of 13, so it's a good bet to give you 20% annual returns as well. I also won't be surprised if the company is holding back some positive news for the new CEO. If Cisco shares dip on concerns about the end of John Chambers' tenure, or after May 13 earnings, it's a good time to buy.

I've been pretty harsh on McDonald's (NYSE: MCD). But when you miss earnings for six straight quarters, that's what you get. The new CEO announced a turnaround plan this morning, but it seems to focus more on efficiencies within the business than changing the actual product.

I think the product is the problem: McDonald's just doesn't serve a very good burger — not when you compare it to competitors like Five Guys, Shake Shack (NYSE: SHAK), or Habit (NASDAQ: HABT).

As much as I think the business has problems, I am more concerned about the stock price. Six quarters of earnings misses and a 15% decline in earnings last year, and the stock is still just 10% from all-time highs. The forward P/E is 19! More expensive than Cisco, with way more question marks about its future.

McDonald's has basically traded between $90 and $100 for four years. Investors are cutting it way too much slack. I think it heads lower.

I'm also quite bullish on the other burger chains. Shake Shack's expansion plans seem to be going well. Can't buy that stock at current prices though; it's just too expensive, trading at seven times revenue. Habit, on the other hand, is a much better deal, at 2.6 times revenue. Same with Good Times Restaurants (NASDAQ: GTIM), at 2.5 times revenue.

Americans are spending more money than ever on eating out. And I will not be surprised if McDonald's buys out one of these up-and-coming chains to give itself a little boost.

Oil prices are pushing $60. Inventory builds have been less than expected, and drilling rigs continue to be idled. Oil company earnings are right around the corner. My favorite oil trading stock — Oasis Petroleum — reports on Wednesday. I recommended shares to my Real Income Trader subscribers around $14, and we've sold two rounds of covered calls on the stock, totaling $2.35 a share. Our gains right now are $6.35 a share, or around 45%.

I have no idea what Oasis will report for the quarter. Are expectations low enough that oil companies can beat? Or has the recent rally for shares priced in too much hope?

Seems to me oil needs to retest some lows, but I'm not sure I'd put any money on that thought.

Reboot Your Retirement Plan

The headlines are littered with the word "bubble." There's a bubble in stocks and a bubble in bonds. It's true that stocks are entering the "expensive" range, as the P/E for the S&P 500 is above 20. Half of S&P 500 companies missed revenue expectations in the first quarter. That's a bad sign, as growing revenue is kind of helpful for companies that want to grow earnings.

We know earnings per share are being helped by share buybacks. Companies are expected to buy back nearly $1 trillion in stock this year, after $4 trillion buybacks over the last four years.

That's a lot of buying pressure, and it tells us stock prices can continue higher. But at some point (2016?), those buybacks will stop, and the inability to grow revenue will be exposed. This is the biggest threat to stock prices, so keep your eye on it.

Of course, there is an upside story. Like last year, first quarter earnings growth was terrible. That's part of the reason the current P/E is so high. But earnings growth could recover over the rest of the year. Fewer Americans are losing their jobs, and more Americans are getting jobs. And there's even anecdotal evidence that wages are rising.

All that could boost spending, revenue, and earnings. And you know what they say: Never underestimate the American consumer.

U.S. manufacturing added a net 10,000 jobs in 2014. That may not sound like much, but it's the first gain in 20 years. The gain is mainly due to the fact the wages around the world are converging. They are coming down in the U.S. and are rising in other parts of the world. So foreign companies are setting up shop here, and U.S. companies are "re-shoring."

But some companies, like Apple (NASDAQ: AAPL), are doing everything they can to support manufacturing in Asia. Last year, the U.S. "imported" $50 billion in iPhones. This great article shows that essentially all of the economic growth in South Korea and Taiwan is coming from cell phones.

The author also claims that Apple is saving a grand total of $5 per phone by having iPhones made in Asia.

$50 billion in phones may not sound like much for a $14 trillion economy like the U.S. But you could pay 1 million people $50,000 a year with $50 billion...

I wonder if Apple's CEO is mulling how much he could help the U.S. economy?

That's all I got today. I'll talk to you on Wednesday.

Until then,

Briton Ryle

@BritonRyle on Twitter

Rate Hikes Will Expose Problems

Is today the Big One?

With apologies to the late Redd Foxx and his hilarious, "It's the big one, Elizabeth, I'm comin' to see you" routine, the Fed is due to give us a little more clarity on when the first interest rate hike will come.

Yes, it's a big one.

Because the stock market has gotten way too comfortable with zero interest rates... because investors are too comfortable with the notion that U.S. interest rates will never rise... because global economic data is just not very good right now...

Some commentators aren't very worried about rising interest rates. It's the sign of a stronger economy, they say. There's a bubble in Treasury bonds that needs to be tempered, they observe.

If you check the anecdotal data, you'll find that stocks typically do pretty well when interest rates rise.

Sure, the few weeks after the first interest rate hikes usually comes with falling stock prices. But look a few months out, and stocks tend to do pretty well, as this graphic shows:

And the reasons stocks tend to do pretty well when interest rates rise is because the economy really is improving.

From that perspective, maybe we should welcome a hawkish Fed that's ready to charge a bit for lending money...

But I'm not so sure. I think rising interest rates could actually prompt investors to start staggering around, right arm clutched to their heart, left arm waving wildly, declaring, "It's the Big One!"

Here's why...

Addicted to Debt

Interest rates have been at zero since 2009. Six years. That's a ridiculously long time for rates to stay at emergency.

It's not an emergency anymore. Now, low rates are written into people's valuation formulas. Low rates are used as justification of high P/E ratios.

Investors say, "Yes, P/E ratios are high, but you have to look at them in the context of low interest rates."

I'm still not exactly sure what this means. Are investors willing to pay more for stocks that pay dividends because Treasury bond yields are so low? Or is it meant to suggest that companies are earning more because borrowing costs are low?

I suppose you could say it's both — though each excuse has a problem, not the least of which is that the zero interest rate situation is temporary. Bonds won't always yield so little. At some point, yields will rise, and bonds will become competition for dividend stocks.

Borrowing costs will not stay this low, either. They can't. The Fed will hike rates. It's just a question of when...

If you exclude the Internet bubble, the S&P 500 is as expensive as it's been in 40 years. To me, this is a clear sign that zero interest rates are no longer an extenuating circumstance. They are a given, a fundamental data point.

That's not good.

Do You Feel Lucky?

Some people will tell you zero interest rates can stick around because they haven't created any "imbalances" or bubbles at this point.

This is not true. Zero interest rates have created two bubbles that I can see plainly...

The shale oil revolution was built on zero interest rates. Over the last five years, oil companies raised $500 billion because rates have been so low that investors bought up oil bonds without worrying about it.

This money funded a massive drilling expansion that helped push the global oil market into oversupply. Oil prices crashed, and now these oil companies are really struggling. They are taking on even more debt to pay off the debt they already have.

If oil prices don't turn around, many of these companies will go bankrupt. And because they have to keep pumping oil to pay the bills, the oil market may well stay oversupplied for quite a while.

Simplify Options Trading with These Investor Tricks

The other bubble is the company stock buyback bubble. And it is much more subtle.

S&P 500 companies have spent ~$4 trillion on share buybacks in the last few years. And they may buy another ~$900 billion this year. When a company buys back shares, it is lowering the number of shares outstanding. That, in turn, makes earnings per share (EPS) rise because you're dividing the total earnings by a smaller number.

This isn't as powerful as dividend hikes, which return money directly to shareholders. Still, buybacks can make a stock's valuation more attractive in the short term...

The problem right now is that earnings per share (EPS) are showing small improvement. Something like 70% of companies are beating first quarter earnings expectations. But revenue isn't rising. 50% of the S&P 500 is missing revenue expectations.

In other words, much of the earnings growth we are seeing isn't due to an improved economy — it's simply the result of companies having fewer shares outstanding.

The Buyback Bubble

Consider the case of Panera Bread (NASDAQ: PNRA). Panera has bought back 3 million shares since 2012. And earnings per share has risen by one penny.

Panera reported $1.40 in earnings for the second quarter of 2012. It just reported $1.41 for the first quarter of 2015.

It should be clear that if Panera hadn't been buying back stock, its earnings would be around 10% lower than they actually are. And that P/E would be nowhere near the current 27. Investors are pricing stocks for growth when they really aren't growing as fast as it appears.

When interest rates rise, companies will not buy back as many shares because they are using debt to do it. That will shine a spotlight on the lack of revenue growth.

So today's Fed announcement concerning interest rates is a big one...

First quarter GDP came in at an anemic 0.2% gain over last year. And don't forget, last year's first quarter GDP was a decline of 0.1% because of the polar vortex. Growth is simply not good.

Of course, growth could pick up. That's what investors and economists are betting on. And they're betting the Fed won't hike rates with anemic GDP growth.

But the way I see it, we either have a weak economy or higher rates, neither of which is good for stock prices.

So be careful with new stock purchases. Stick to sectors that have growth, like renewables, certain tech stocks, and health care.

You might even get prepared to sell some covered calls against your long-term holdings to raise some cash when the time is right.

You don't want to get caught by surprise when the big one hits.

Until next time,

Briton Ryle

@BritonRyle on Twitter