The No. 1 Question Most Investors Forget to Ask

 
When my friend Seth asked me to invest in his new wine store, the decision was easy…
 
He'd already answered the most important question you must ask before making an investment.
 
Most investors forget to ask this question. But as I'll explain today, if you know how to answer it, you'll set yourself apart from the crowd…
 
I got to know Seth while I was in medical school at the University of North Carolina at Chapel Hill and he was the wine buyer for a local grocery store… He was educated as a chef and was working on his Master Sommelier badge. (A "sommelier" or "wine steward" is the wine expert at high-end restaurants. You must pass an exam to throw around the snooty French title, and "master" is the highest level of certification.)
 
Seth always gave great suggestions for meal and wine pairings and would remember them months later… As a customer, I could tell he cared about me, listened, and gave great advice (a spectacular combination). So when he approached me about backing his shop… I knew he understood wine and had a passion for it.
 
But what really sold me was the due diligence he had performed on the wine market in the Raleigh-Durham-Chapel Hill area. (The "Triangle," as we Tar Heels call it.)
 
He talked to local restaurants. He visited other wine shops. He took notes. He even studied traffic patterns on the streets near where his shop would be. His business plan was detailed, thoughtful, and laid out different scenarios. He thought about the marketing and the customer experience in great detail…
 
And it was clear from the dividend he could pay me – along with the discount on wine I'd receive as a part owner – that I would easily get my capital back out of the shop in a short amount of time.
 
That's the core question you must ask any time you think about investing your money.
 
Whether you're loaning money to friends or family, acquiring land, purchasing gold coins, or buying a stock… You have to go in knowing how you will get your money back and how likely you are to recover it.
 
Backing Seth was an easy decision… Eight years later, the dividends I'm getting from a simple wine shop in North Carolina are providing me with a nearly 15% annual return (and lots of great wine at wholesale prices). By year 10, I can imagine doubling my initial stake every year.
 
The two-part question I've described is what's known in financial circles as an "exit strategy." This probably isn't how most folks think about an exit strategy… I'm not talking about protecting yourself from the worst-case scenario.
 
When I talk about exit strategy, I mean knowing how… and how likely… I am to get my money back.
 
Most people never consider how they'll get their money back. People speculating on the next hot stock tip, gamblers in Vegas, and even a lot of options buyers are usually hoping and praying to get a large chunk of money back at the end. But they can't really say how that will happen… And they certainly have no grasp of how likely (or unlikely) that is. But it makes a big difference in the success of your investments.
 
When you invest your money, you can get it back in one of two ways…
 
1.  
You either get it back in a stream of income – as interest or dividend payments.
 
2.   Or you get it back when your principal is returned to you – like when a bond matures, or when you sell your asset (whether it's stocks, gold coins, or a beachfront condo). If you sell it for more than you paid, you've got a "capital gain."
When I recommend ideas in my monthly Retirement Millionaire newsletter, I focus on both pieces of the puzzle… income and capital gains. Most of the time, I want to ensure stable income that will return capital while we wait for the potential growth that will result in capital gains.
 
So before you make any investment, know your exit strategy. Know exactly how you will get your money back.
 
Here's to our health, wealth, and a great retirement,
 
Dr. David Eifrig
 
Editor's note: Dave uses this strategy in his Retirement Millionaire newsletter to help his subscribers stop gambling – and start investing. His portfolio is filled with investments designed to return a steady stream of income, while building capital gains over time. It's a great way to sleep well at night. To learn more about a risk-free trial, click here.

Source: DailyWealth

Massive Buy Signal: Goldman Bails on Commodities

 
Goldman Sachs wants out of the commodities business.
 
Who cares, right? Who trades commodities like corn anymore?
 
You might not think this is a big deal… But it is…
 
You'd be shocked at how often Wall Street firms get OUT of a sector – at EXACTLY the wrong time.
 
Goldman's likely exit from commodities might just end up signaling the bottom in commodities prices. Let me explain why…
 
Goldman Sachs is the leading commodities firm among Wall Street banks. It generated $3.4 billion in revenues from commodities in just one year (2009). But after years of falling commodity prices, Goldman's revenues in commodities have plummeted. Last year, the company's commodity revenues were just $1.1 billion.
 
Any executive "suit" or "bean counter" at Goldman would look at the falling revenues and say it's time to cut out that division. And how could you argue? Revenues are down by two-thirds since 2009.
 
Commodities prices have performed terribly in recent years. Take a look…
 
Year
Return
2011
-13.3%
2012
-1.1%
2013
-9.5%
2014
-17.0%
2015
-24.7%
2016
11.8%
And the pain doesn't end there… Commodities prices are down 5% this year so far. That means they've fallen in six of the past seven years.
 
Goldman is not the first to think about bailing on commodities… According to Bloomberg, a slew of financial-services firms – Morgan Stanley, JPMorgan Chase, Barclays, and Deutsche Bank – have all either cut back or exited commodities trading in recent years.
 
So why is this good news for commodity prices? Why would Goldman's exit be a potentially massive buy signal?
 
It's because of a principle that I learned firsthand nearly 20 years ago… and have applied successfully since…
 
One of my investing heroes is a guy named Jim Rogers. Jim delivered a 4,200% return over 10 years as co-manager of the Quantum Fund in the 1970s.
 
My business partner Porter Stansberry and I have gotten to know Jim over the years. He made a huge impact on us when we hung out with him in New Orleans in the late '90s.
 
In 1998 – when everyone was thinking about stocks – Jim told us he was out of the stock market. Instead, he was downright giddy about the upside potential in commodities.
 
He told us that when he heard Merrill Lynch was getting out of the commodities business that year, he "couldn't stop smiling."
 
You could hardly blame the suits and bean counters at Merrill Lynch's corporate offices for getting out of commodities back then. Commodities were the worst-performing asset class out of all asset classes for two consecutive years (1997 and 1998).
 
Jim absolutely nailed the opportunity… Commodities went up more than 20% a year – in five of the next seven years!
 
Merrill Lynch's suits gave up on commodities at exactly the wrong time.
 
I took note of what Jim had done. I knew I would use the same principle at some point.
 
My opportunity came in late 2002…
 
That year, Merrill Lynch let go of Martin Fridson. Known as "the dean of the high-yield bond market," Fridson is the smartest guy in the room when it comes to high-yield debt. It was one of many signs that Wall Street was giving up on high-yield bonds.
 
High-yield bonds had been the worst-performing sector of bonds in three of the five previous years (1998, 2000, and 2002). So the suits at Merrill Lynch decided it was time to cut back on the company's high-yield-bonds department.
 
You can guess what happened next…
 
High-yield bonds were the best-performing bonds the next year – delivering a near-30% gain in 2003.
 
Not only that, but high-yield bonds were the best-performing bonds in three of the next four years… again, after Merrill Lynch let Fridson go. The company's exit from the high-yield bond market was a sign of the bottom.
 
So, let me remind you of where we stand today:
 
•   Commodities prices have fallen in six of the last seven years, and
•   A slew of major Wall Street firms are throwing in the towel on commodities.
Based on history, we're seeing the classic signs. It might just be anecdotal evidence… But it looks like a major buying opportunity in commodities is imminent. When the uptrend returns, we will get back in.
 
Good investing,
 
Steve
 

Source: DailyWealth

These Three Industries Will Explode as the Chinese Middle Class Grows

 
In 1950, the United States started a boom that ultimately produced the largest middle class in history. It also kicked off a surge in the economy that would make the U.S. one of the richest countries ever.
 
China is on the verge of something similar today.
 
In 2000, just 4% of China's urban population was considered middle class. By 2022, that figure will be an incredible 76%. That's more than 550 million middle-class people in China… nearly two times the entire population of the U.S.
 
A growing middle class means Chinese consumer spending will surge, too. And just like the consumers in the U.S. did during its boom, China's middle class is set to spend its money on three specific industries…
 
We expect to see these three things happen with the rise of the Chinese middle class…
 
1.  A massive shift in Chinese health care
Right now, the Chinese government provides some form of health insurance to almost all its 1.4 billion citizens.
 
But public health care is a mess. There are simply too many patients for the poorly paid public doctors to care for. Lines are long, and standards of care are poor for most Chinese citizens.
 
So with more money, the middle class is demanding better health care.
 
Management-consulting firm McKinsey & Company estimates that the middle class will grow private health care spending in China to $1 trillion by 2020, up from a little more than $350 billion in 2011.
 
It's already starting. The Chinese government, keenly aware of the frustrations of its citizens, took the first steps to allowing private ownership of hospitals in 2011. As a result, 2015 marked the first time that private hospitals accounted for more than half of the market.
 
Still, these small, private providers only accounted for 15% of the total services provided to Chinese families that year. So the private health care industry still has plenty of room for growth.
 
2.  Big upside potential from the "Golden Age" of Chinese education
China's growing middle class is also rapidly spending more money on education and tutoring.
 
Parents are worried their children will have to compete even more fiercely for good jobs than older generations. And the Chinese economy is shifting from manufacturing toward services. That means the definition of a high-paying job is rapidly changing.
 
So parents are enrolling their children in the best preschools, middle schools, high schools, and universities they can afford. They're also paying for extra tutoring.
 
According to professional-services firm Deloitte, Chinese education will expand at a 12.7% compound annual growth rate ("CAGR") over the next three years, generating revenue of nearly $440 billion in 2020. In fact, Deloitte calls this the "Golden Age" in Chinese education.
 
3.  Ongoing growth in China's restaurant industry
Fast food is quick and convenient, and it's cheaper than eating at full-scale restaurants. That's why the Chinese middle class – increasingly urbanized and pressed for time – is spending its new money on fast food.
 
According to research firm IBISWorld, the Chinese fast-food industry's revenue grew at an annualized rate of 10% from 2011 through 2016. And that number is expected to grow with the middle class.
 
As a result, many Chinese fast-food restaurants are about to see their profits soar… along with their share prices.
 
To sum up, these three sectors are creating massive opportunities for investors…
 
Remember, the Chinese middle-class boom is similar to the one that started in the U.S. in 1950. Investing during that boom made investors a lot of money.
 
We believe similar gains are possible in each of these sectors in China. So if you're looking to profit from the Chinese consumer boom, start with health care, education, and fast food.
 
Regards,
 
Kim Iskyan
 
Editor's note: Stansberry Churchouse Research has uncovered three companies in each of these industries that are set to soar from the Chinese middle class. Each of these stocks could double over the next year. And it couldn't be simpler to invest in these stocks. They all trade on major exchanges. That means you'll likely be able to buy them from the brokerage account you already have. Learn more about this opportunity right here.

Source: DailyWealth

Would You Lend $1 Trillion to a Bunch of 18-Year-Olds?

Steve's note: Regular readers know we're in the late innings of a truly astounding bull market. But today, we're sharing an essay from my friend and colleague Porter Stansberry about what comes next… the "Melt Down" after the "Melt Up."
 
In this essay, he explains the forces gathering to upend the stock market, and why you should start preparing now. You'll see exactly why it's so important to take advantage of this bull market now… We may never get another one like it…
 
On a final note, the markets are closed tomorrow for Independence Day. We'll get back to our usual publishing schedule on Wednesday. Enjoy the holiday.
 
I (Porter) know a headline like that will leave me with only about five people still reading. So let me try again…
 
The next 18 months will likely see: a terrible bear market… a substantial economic recession… and a great opportunity for you to buy high-quality businesses at reasonable prices – but only if you raise cash now.
 
Don't believe me? Let me explain…
 
Seriously… I think we're approaching another critical nexus…
 
One of two things is about to happen. Either a significant restructuring of our tax code frees up billions and billions of capital currently stranded overseas and provides big incentives for U.S. corporations to invest heavily in America… or the credit cycle I've been reporting on since late 2015 is going to continue to roll over into a default cycle. That would cause a serious bear market late this year or at some point in 2018.
 
I realize that saying either of these events could happen doesn't help you much right now. But that's why I think prudent investors should begin to hedge at least some of their portfolios to account for the possibility of either outcome.
 
Today, however, I simply want to show you the most important facts behind this forecast.
 
Two powerful economic forces are about to collide…
 
The first is reversion to the mean.
 
Right now, large-cap U.S. stocks (represented by the benchmark S&P 500 Index) are trading at higher levels than at any other time in history, except for during the huge tech bubble of 2000.
 
The chart below shows you the ratio between the market value of these companies and their annual sales. This "price-to-sales" ratio is one of the best ways to measure the real value (or lack of value) in the stock market because there are ways to inflate other measures, like book-value ratios and earnings…
 
One vital point to remember, however: Just because stocks are extremely expensive compared with history doesn't mean they can't become more expensive. I don't advocate shorting individual stocks just because they're expensive in terms of their ratios. Nor do I advocate shorting markets merely because they're expensive relative to history. Valuation doesn't equal timing.
 
On the other hand, reversion to the mean is inevitable. Every bubble will eventually find a pin.
 
The second economic force I want to talk about today is likely to be the pin that bursts this big stock-market bubble…
 
I'm talking about debt.
 
Everyone loves to borrow money. Few people enjoy paying it back. Many won't.
 
This bull market has been powered by four important credit drivers: record levels of auto loans… record levels of student loans… record levels of corporate-bond issuance (much of it "junk")… and an unprecedented monetization of the Federal Reserve's balance sheet.
 
As I'm sure you'll agree, these four big drivers of credit growth have now stalled. And as the credit spigot turns off and borrowers are unable to borrow more, defaults will skyrocket.
 
Let's start with autos…
 
The average new car price (about $35,000) is the highest price ever. Compared with average wages (about $50,000), cars are vastly more expensive than ever before. So how have Americans been driving record numbers of new cars? Two ways: leases and very easy credit policies.
 
Since 2014, we've been warning that auto-lending standards were far too loose and that sooner or later, rising defaults would greatly reduce demand for new vehicles (and wreck the balance sheets of auto lenders). Were we right?
 
The value of auto loans that are at least 30 days in default currently totals $23 billion – up 14% in just the last year. And since 2014, the leading independent auto lender, Santander Consumer USA (SC), has seen its stock fall in half. I believe it will soon fall in half again.
 
The automakers themselves have been leasing a record percentage of their new-car sales (30%). That seems great until all those cars come back to the dealers. Off-lease used-car supply has doubled since 2012 and will continue to increase by another 25% over the next two years. Banking giant Morgan Stanley believes this will cause a 50% drop in used-car prices.
 
Remember what happened when housing prices fell?
 
Lots of folks who borrowed way too much money to buy their houses decided there was no point in paying the mortgage because they were "underwater" on the loan. They mailed the bank their keys and bought a cheaper house down the street.
 
Just remember that record percentages of new-car buyers over the last five years were subprime borrowers. Given the small down payments and the extended loan terms (up to seven years!), these buyers have never had any equity in their cars. Their cars have never been worth the loan. What do you think they'll do with those cars? They will mail back the keys and buy a cheaper used car.
 
An incredible 32% of all outstanding auto asset-backed securities (ABSs) issued in 2016 were "deep subprime" – up from just 5% in 2010. I guarantee we'll see the first-ever auto ABS default. These debt instruments are currently rated "AAA" – just like the subprime mortgage bonds were. And that's why bad car loans will shake up the whole banking system.
 
What have the automakers said about these problems so far? Ford Motor (F) was the first to even mention the problems, saying its earnings would fall 50% this year. What did its stock do? Not much… but it will…
 
I'm not going to waste your time with the details behind the student-loan debacle…
 
Just ask yourself: Would you lend $1 trillion to a bunch of 18-year-olds?
 
The U.S. Department of Education makes it next to impossible to calculate an accurate default rate, but Bloomberg has sifted through the data to get a reliable picture – and it's horrifying…
 
Some 41.5 million Americans collectively owe nearly $1.3 trillion on their federal student loans… About one in every four borrowers is either delinquent or in default. Total indebtedness has doubled since 2009.
 
Navient (NAVI) handles most of the loan servicing on behalf of the Department of Education. It has also invested several hundred million dollars in packages of student loans. And it's currently being sued by the government for trying to collect on student loans. Go figure.
 
Its stock is down by roughly half since its peak in 2015. Think it can fall in half again? Or do you think it's more likely that college students suddenly become financially responsible?
 
In regards to corporate lending, we've seen banks begin to reduce outstanding corporate lending for the first time since 2008…
 
We also track corporate-default rates and corporate-debt downgrades in our trading service, Stansberry's Big Trade.
 
So far this year, Standard & Poor's has downgraded 465 U.S. companies. We're on pace to see around 900 downgrades this year. That would fall short of last year's total, but it would be more than each of the years from 2010 to 2015.
 
The high-yield "junk" bond default rate reached 5% in 2016. It now stands at 4.5%. But the credit cycle has certainly rolled over. Defaults and downgrades are continuing to rise.
 
Finally, and perhaps most important…
 
The Federal Reserve says it will now begin to "unwind" the $4 trillion credit stimulus it has been providing the market. That's like taking 25% of GDP out of the credit market. I'm fairly confident that won't be good for interest rates, default rates, or the stock market.
 
The "Trump Trade" – the big rally we've seen since the presidential election – has investors feeling confident, even euphoric. I'd certainly admit that if Trump can push through significant tax reform, it's possible this default cycle could be cut short.
 
Especially important are Trump's efforts to flatten the progressive nature of the tax code through a border adjustment tax (which would allow for the top marginal rate on income taxes to fall to around 30% and would allow for taxes on capital gains and dividends to fall to around 20%).
 
Trump's effort to change the rules on corporate taxation and depreciation schedules is also crucial. Allowing companies to expense all capital investments in full would create a significant boom in corporate spending.
 
But – barring some significant restructuring of the U.S. economy – you should be looking to hedge your portfolio going into the second half of 2017.
 
The credit problems aren't going away. They're going to get worse. It's only a matter of time before they upend the stock market.
 
Regards,
 
Porter Stansberry
 
Editor's note: When this bull market is finally over, the "Melt Down" will be just as powerful as the "Melt Up." But you can protect your investments from the inevitable crash. Porter recently joined Steve to discuss his contrarian strategy to help you make money on the way up – and profit even more on the way down. But you need to act soon. Click here to learn more.

Source: DailyWealth

The Battle to Be the Fed's Greatest Fool

The Weekend Edition is pulled from the daily Stansberry Digest. The Digest comes free with a subscription to any of our premium products.
 
 "Big Three" U.S. automaker General Motors (GM) is finally admitting the obvious…
 
The boom in auto sales is peaking. As news service Reuters reported following the company's conference call on Monday…
 
"The market is definitely slowing… it's something we are going to monitor month to month," [GM] Chief Financial Officer Chuck Stevens told analysts… "Pricing is more challenging."
 
U.S. new vehicle sales hit a record of 17.55 million units in 2016 after a boom that began in 2010. A glut of nearly new used vehicles is expected to undermine sales this year. Major automakers have reported sales declines for the past three months.

Unfortunately, while the company admits that sales are slowing, its outlook remains relatively rosy. More from the report…
 
General Motors now expects U.S. new vehicle sales in 2017 will be in the "low-17 million" unit range, reflecting a widespread expectation that the industry is headed for a moderate downturn…
 
GM had previously announced it expected 2017 new vehicle sales in the "mid-17 million" unit range. Stevens told analysts that sales could fall by 200,000 to 300,000 units this year but that the automaker had "somewhat insulated" itself from a downturn by reducing fleet sales, which lower vehicles' residual values.
 
"We are going to remain disciplined from a go-to market perspective," Stevens said.

In other words, GM believes this "moderate downturn" will cause prices to plummet to levels not seen since… 2015, when new-vehicle sales totaled a little more than 17 million.
 
 We believe GM is far too optimistic…
 
During the last big downturn, sales peaked near 17 million in 2005… and ultimately plunged to just 10 million by 2009. Given the size of the recent boom, we wouldn't be surprised to see sales fall to less than 10 million this time around.
 
GM apparently also has a different definition of "disciplined" than we do…
 
According to Stevens himself, the company has an incredible 110 days of supply sitting on dealer lots today. This compares with an average of just 65 days of supply among major U.S. automakers since 1960, according to data from WardsAuto. Stevens did say the company hopes to bring this figure down to 70 days of supply by the end of the year.
 
We're skeptical of this claim as well… Automakers have been using huge discounts and incentives to entice new buyers. But this trend is unsustainable. And we're seeing signs that it's peaking, too. As the Wall Street Journal noted this week…
 
Incentives have moderated recently, a sign that carmakers aren't willing to cut into profitability to maintain market share as demand cools…
 
Industry sales in each month so far this year have fallen from a year earlier. In a note to investors Monday, Barclays analyst Brian Johnson said he expects the seasonally adjusted sales rate to ease to 16.5 million in June. That would mark the fourth straight month that the pace of sales fell below 17 million, the slowest stretch since mid-2014.
 
But Mr. Johnson agrees that automakers "may be drawing the line" on big discounts that have helped fuel sales over much of the past year. He said incentives in June were at the lowest levels in about a year.

 Meanwhile, the "legacy" of former Federal Reserve Chairman Ben Bernanke appears to be in trouble…
 
Today, Bernanke is probably best known as the man who "saved" the U.S. economy from the 2008 financial crisis.
 
Of course, we believe Bernanke's bailouts and easy-money policies merely delayed the inevitable… and ensured the next crisis will be far bigger. In the end, we suspect history may remember Bernanke as the greatest fool to ever run the Fed.
 
For example, in 2005, near the top of the biggest housing bubble the world had ever seen, it was Bernanke who said…
 
We've never had a decline in house prices on a nationwide basis. So, what I think what is more likely is that house prices will slow, maybe stabilize, might slow consumption spending a bit…
 
House prices have risen by nearly 25% over the past two years. Although speculative activity has increased in some areas, at a national level these price increases largely reflect strong economic fundamentals.

In 2007, after the housing market had clearly rolled over, it was Bernanke who assured the public time and again that the problems in subprime mortgages were "contained"…
 
Despite the ongoing adjustments in the housing sector, overall economic prospects for households remain good. Household finances appear generally solid, and delinquency rates on most types of consumer loans and residential mortgages remain low…
 
The effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system.

And in mid-2008, just days before subprime "contagion" caused the collapse of mortgage giants Fannie Mae (FNMA) and Freddie Mac (FMCC), you-know-who swore the following before Congress…
 
[Fannie and Freddie] are adequately capitalized. They are in no danger of failing.
We could go on, but you get the point…
 
 But Bernanke could now have some competition for this "title"…
 
His successor – current Fed Chair Janet Yellen – is suddenly in the running, too…
 
During a question-and-answer event on Tuesday, Yellen was asked about the likelihood of another financial crisis. And you may not believe her response. As financial-news network CNBC reported (emphasis added)…
 
Speaking during an exchange in London with British Academy President Lord Nicholas Stern, the central bank chief said the Fed has learned lessons from the financial crisis and has brought stability to the banking system…
 
She also made a bold prediction: that another financial crisis the likes of the one that exploded in 2008 was not likely "in our lifetime." The crisis, which erupted in September 2008 with the implosion of Lehman Brothers but had been stewing for years, would have been "worse than the Great Depression" without the Fed's intervention, Yellen said.
 
Yellen added that the Fed learned lessons from the financial crisis and is being more vigilant to find risks to the system. "I think the system is much safer and much sounder," she said.

We suspect she'll regret those words…
 
Central banks have created the largest speculative boom in history.
 
Unlike the last, this bubble isn't concentrated in a single area like U.S. housing. It has spread to nearly every corner of the developed world. Consumers… corporations… and even governments have loaded up on record amounts of debt.
 
Another crisis is inevitable.
 
 In the meantime, our colleague Steve Sjuggerud believes stocks can still go much higher before it arrives…
 
As regular readers know, Steve has long predicted that a "Melt Up" will push stocks to explosive new highs before the bull market finally ends.
 
But Steve says it's no longer a "what if" scenario. He believes the Melt Up has already started… And on Thursday, he hosted a free event with Stansberry Research founder Porter Stansberry to share an important update on this situation…
 
In short, Steve said we're closer to the end of this bull market than he initially believed. He and Porter now agree it could be just a matter of months before it peaks… and the way you position your money in the days and weeks ahead could dramatically change your financial future. Steve even shared the name and ticker symbol of his favorite way to profit as the Melt Up continues.
 
If you couldn't make it to this week's event, you're in luck. You can still access a full replay and hear Steve's urgent update for yourself. Click here to see it now.
 
Regards,
 
Justin Brill
 
Editor's note: Steve's latest recommendations are the absolute best ways to take advantage of the final innings of this historic bull market. And right now, he's making an incredible offer to DailyWealth readers. You can gain access to our best Melt Up research at a 78% discount to the normal subscription cost. But don't delay… This offer expires soon. Learn more here.

Source: DailyWealth