Time to Sell?

Written By Briton Ryle

Posted October 15, 2014

What am I supposed to be afraid of again?

The Dow has dropped nearly 2,000 points in a month.

Last Thursday and Friday alone, it peeled off 450 points. And Monday, it added another 223 points to the decline.

And that’s just the Dow Industrials. If you look at some other stocks, like small caps or tech stocks, the damage is even more gut wrenching.

Small caps and tech stocks are in bear market territory. So is the Dow, for that matter.

Oil prices are at four-year lows as demand estimates are cut. Copper prices are at five-year lows as China’s economy slows.

What the heck? Is the whole world falling back into recession? Is that why I’m supposed to be selling off all my stocks?

Well, technically Europe is right on the verge of seeing its economy shrink… Yeah, those sanctions against Russia are starting to hurt.

And speaking of Russia, that economy is in collapse mode — and Putin doesn’t seem to care. I wonder how much money his billionaire oligarch buddies have to lose before they take matters into their own hands, mafia-style?

Who knows what’s going on with China’s economy? Growth is slowing to 1990 levels, which is shocking. Some think the Chinese real estate market is about to crash and send shock waves around the world.

The problem for China is that the only way its economy can grow is when they are building stuff — houses, factories, and other types of infrastructure where it takes a long time to get the invested money back.

And aside from the Communist Party government, there’s not enough investment capital to make it work. The thing is, there’s no way to know if a communist government is solvent or not. Seems to me they can keep printing money as long as they want. Who’s gonna know?

The world is under threat of an Ebola epidemic, and the Islamic State is dead set on redrawing the borders in the Middle East.

Yep, it’s an outright disaster across the board. No wonder stocks are crashing…

It’s NOT Different This Time

I guess the media wants me to be terrified about Ebola and global growth and oil prices and Chinese economic collapse and war in the Middle East. I should probably be selling, too.

But for all I can tell, this sharp decline — and all the fearmongering that’s gone along with it — looks like just a run-of-the-mill correction for stock prices.

You’re forgiven if the 2,000-point drop on the Dow is scaring the pants off you. We haven’t seen a correction like this in 686 days. Now please, let’s all put our pants back on take a deep breath…

Growth estimates for the U.S. aren’t going down. In fact, the IMF raised GDP estimates for the U.S. just last week.

Also, U.S. corporations are going to report good third quarter earnings. Sure, analysts have bought into the fear and lowered expectations for the last quarter. But no major companies have come out and said earnings are looking bad.

Well… that’s not entirely true. Ford warned about Europe on September 29. And the stock got creamed for it. But that’s it.

And really, Ford messed up pretty bad on this one. It’s been losing money in Europe ever since the financial crisis. Things were starting to look better, but management got too aggressive and called for a small profit this year.

Now, the company says it will lose $1 billion there…

Any decent management team of a public company has to know you never get too aggressive with your forecasts.

The fact is, the EU only accounts for about 13% of U.S. exports. Even if the EU goes full recession, it’s not going to bring the overall U.S. economy down — not much, anyway. After all, the U.S. is 70% driven by consumer spending.

And there are two trends suggesting Americans will be spending more money, not less.

Well, THIS Might be Different

The employment market is getting a lot better. The unemployment rate continues to drop — now under 6% — and there is anecdotal evidence that wages may be finally starting to move up.

Cheaper gasoline prices are putting more loot in people’s pockets, too. Heck, I paid $3.11 a gallon the other day.

Now, come to think of it, there’s a reason to be afraid: oil prices. Oil price are often used as a proxy for U.S. and global growth: more growth, more driving, and higher prices. So now that oil prices are dropping to multi-year lows, it’s a sure sign that growth is slowing.

Problem is, this time it really might be different for oil prices…

Nobody could have seen the U.S. shale revolution coming. From 3 million barrels a day to 10 million in less than five years? Inconceivable…

But it happened. Now, we’re awash in the stuff. Oil imports have plummeted. Cars get better gas mileage than ever. I’m not surprised U.S. oil prices have fallen to the low $80s…

I guess there’s something to be afraid of if you own oil stocks. West Texas Intermediate crude prices are getting darn close to many oil companies’ production costs. And you can see the effect it’s had on oil stock prices.

Now, normally, when you see oil prices close in on production costs, producers can shut in some wells, curtail supplies, and support prices. I’m not sure U.S. shale producers can do this. They’ve taken on a lot of debt, and they have to keep the cash flowing to service that debt — even if it means sometimes selling at a loss.

This is what happened to natural gas. The need to sell gas to service debt was a big reason the U.S. was so oversupplied. Still is. And natural gas prices haven’t had any upside in years.

Throw in the fact that Saudi Arabia would love to stick it to U.S. shale producers, and we might be looking at an oversupplied oil market for some time.

Good for Retail

I’m pretty bullish on retail stocks right now — especially one $7.50 company I recently recommended to my Real Income Trader subscribers.

I think this holiday shopping season is gonna be a barnburner. And this $7.50 stock could end up well above $10.

I can’t reveal the name because I just recommended it to subscribers, but if you want to learn a bit more about Real Income Traderyou can do so here.

If not, go ahead and look into some retail for a trade ahead of the holidays.

Until next time,

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Briton Ryle

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A 21-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 is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.

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