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The Independent Investor: Potholes Take Center Stage
By Bill Schmick On: 03:21PM / Friday May 16, 2014
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Can you count the number of potholes you hit or narrowly avoid every day? Do they make your blood boil, teeth clench and trigger a choice euphemism or two during your commute? Unless the Highway Trust Fund (HTF) receives a $302 billion injection of funds this year, it could get a lot worse.

And I'm not just talking about potholes. More than one in nine bridges in this country is structurally deficient. At least 66,405 (11 percent of the total) are in sad shape and these are not out-of-the-way covered bridges that are rarely used. Americans have taken over 260 million trips over these derelict spans. They are simply accidents waiting to happen, like the one last month in Mount Vernon, Wash., or the I-35W collapse in Minneapolis that killed 13 people back in 2007.

President Obama is pleading with Congress to work with him in developing an infrastructure plan that would fund a four-year transportation program. It will not solve our infrastructure problems, but it will help. So far there has been little appetite by legislatures to embrace the concept. If they fail to act, the highway fund will run out of money by August or September.

Historically, the nation's transportation infrastructure has been financed by a gas tax of 18.4 cents established in 1993. In hindsight, that has been woefully deficient in keeping pace with the number of vehicles that use our roads today. The problem is that raising the gas tax or requiring corporations to pay more for infrastructure (an Obama suggestion) will probably not fly in an election year. So, instead, Congress will do what it always does, kick the can down the road by coming up with a stop-gap funding scheme.

If you have ever had the opportunity of driving on the Autobahn, you might ask how the Germans have managed to keep their highways in fabulous condition while keeping maintenance required down to a bare minimum. The answer, my dear reader, lies in the American past.

Back in 1919, a little known War Department publicity stunt organized a 72-vehicle convoy that journeyed across America. It required two months to make the trip. The roads west of the Mississippi were so bad that the convoy averaged a mere 6 mph for the 3,200 mile excursion. Along for the ride, was a young lieutenant colonel named Dwight Eisenhower. It affected him profoundly.

Forty years later, as the 34th president of the U.S., Eisenhower was finally in a position to do something about our road system. Starting in the 1950s, the Interstate Highway System was founded and developed 42,795 miles of roads across the nation. Once again, America showed the world what we could do when we put our mind to it. The goal was to get them down as quickly as possible.

The problem was that these roads were never built to last.

Of course, this sudden network of nationwide roads allowed the American family to enjoy cheap vacations, see the country and make the weekend drive an American pastime. Combined with fuel-efficiency gains, the ownership of cars exploded in this country.

That was bad enough, but what the planners did not count on was the massive shift by American industry from transporting goods via railroad to shipping them via the nation's brand-new highway system. Roads that were of substandard construction (although good enough to withstand the damage of 2,000-pound cars) were suddenly assaulted by convoys of commercial trucks. These rigs, weighing 80,000 pounds or more, do 40 times the damage (the mathematical equivalent) of the lighter weight cars due to a truck's weight distribution.

When roads are not properly sealed, water (ice, snow, etc.) leaks underneath the asphalt and settles in the base of the road, which is mostly compacted dirt here in the U.S. Big trucks constantly drive over these moisture spots driving the water downward causing air pockets that form over time the great American pothole.

The Germans know this, as does every engineer in the world. So some foreign engineers and governments choose instead to build extremely thick roads with solid foundations designed to prevent moisture from penetrating the underside of their structures. So why don't we do this? Because it costs more.

Obviously, in a country that groans and moans over the on-going cost of infrastructure maintenance, building better roads at higher costs is a non-starter. If we ban large trucks from our highway and bridge systems, then our roads would stand up a lot better than they do now.

Good luck trying to implement that change.

Given that corporate America uses our transportation system to help turn a profit, (rather than simply commute to work or see Mom on Mother's Day, as taxpayers do), would it not be reasonable to ask them to foot a larger percentage of the cost of maintenance? Reasonable, but probably political suicide for any elected official. I guess we will just have to settle for potholes.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.



     
The Independent Investor: Inequality in the Housing Market
By Bill Schmick On: 11:09PM / Thursday May 08, 2014
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You, you said that they — What'd you say just a minute ago? They had to wait and save their money before they even thought of a decent home. Wait? Wait for what?! Until their children grow up and leave them? Until they're so old and broken-down that — You know how long it takes a workin' man to save five thousand dollars? Just remember this, Mr. Potter, that this rabble you're talking about, they do most of the working and paying and living and dying in this community. Well, is it too much to have them work and pay and live and die in a couple of decent rooms and a bath?

— George Bailey, "It's a Wonderful Life"

The most expensive home ever sold in America occurred over the weekend in "The Hamptons," Long Island's playground for the one percent. Just a week before that a Greenwich, Conn., estate sold for $120 million. At the same time, the percentage of America's first-time home buyers is at its lowest level since 2008. What does that say about homeownership in the United States?

American income inequality is taking on an even uglier caste as it impacts the real estate market. The recovery in housing over the past two years has been highly unusual. This time around, it has been led largely by institutional investors, hedge funds, private equity firms and wealthy individuals. These astute investors, flush with the cash they had made in the recovery of the financial markets, took advantage of the 35 percent decline in housing prices and the new rental demand of 5 million foreclosed homeowners who were forced to find a new place to live.

These entities spent more than $20 billion to buy up over 200,000 homes which they rented or resold (flipped) as the housing market climbed. All-cash sales have become so prevalent that in the first quarter of 2014 almost 43 percent of all residential property sales were transacted in this way. That's up from 38 percent in the previous quarter.

At this point the big money has been made and the institutions are winding down their purchases. Wealthy individuals, second-home buyers and the occasional owner-occupant buyer, who have the cash, are entering the market. Thanks to the Fed's tapering, mortgage rates have climbed, while stricter credit standards following the crash have shut out the rest of us from any hope of tapping the mortgage market.

As the American middle-class disappears, so too will homeownership at an accelerating pace and what's worse, there is little hope for the future. Consider, for example, those young, first-time homebuyers. Rest assured that "the kids are not OK."

Struggling with high college debt, low-paying jobs (if any) and high monthly rents, the younger generation has little chance of cobbling together the money needed for the 10-20 percent down payment required to purchase a home, even if they could get a bank loan. The reality is that the only borrowers most banks will lend to are those who don't really need to borrow in the first place.

Sure, prices have appreciated and in several locales, mainly along the nation's east and west coasts, sales of $1 million homes have spiked 7.8 percent over the past year. But at the same time, there has been a 7.5 percent drop in overall home buying during that same period.

One wonders who these new, all-cash buyers are going to sell these properties to in the years to come. By definition, there is only one percent of the population that can afford to buy or borrow. How many jumbo loans can banks make before borrowing dries up? Evidently, U.S. lenders are seeing the handwriting on the wall and are cutting jobs in their mortgage lending divisions in advance of further downside.

Clearly, the housing market is stalling and even Janet Yellen, the chairwoman of the Federal Reserve Bank, worries that "the flattening out in housing activity could prove more protracted than currently expected, rather than resuming its earlier pace of recovery."

As my readers know, almost all of the country's income gains from 2009 to 2012 flowed to the top one percent of earners. It is becoming clear that the same thing has happened in the real estate market. That leaves 99 percent of us who will either remain property-less or who will live in our present abode for the foreseeable future. Unfortunately for America, as housing falls prey to the growing trend of income inequality in this country, the future prospects for all of us continue to dim, especially among our young.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.



     
The Independent Investor: When Should You File for Social Security Benefits?
By Bill Schmick On: 02:43PM / Thursday May 01, 2014
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Many of us yearn for the day we can retire and live the good life. However, too many Americans plan to retire at age 62 simply because that is when they become eligible to collect Social Security. That might not be a good idea in the majority of cases.

The Social Security system was intended to be easily accessible, but like so many of our government organizations, it has become a nightmare of complexity. Rather than try and understand the system, many simply retire at 62 and lose out on valuable benefits because they retired too early.

Recently, thanks to the bankruptcy of one regional hospital and another local company's early retirement incentive offers, I have been fielding a lot of questions on the subject.

For most people, it makes more financial sense to wait until you reach full retirement age (FRA) which is 66 (for those who were born between 1943 and 1954). This is especially so in low-interest rate environments like the one we have now. The simple reason is that for every year you delay filing, your monthly benefit will increase between 6 and 8 percent. That is far higher than the present rate of interest, so you are getting paid to wait.

Life is too short to wait, say some, especially if death comes at an early age. You can't predict when you will die, but if you are healthy and longevity is a trait that runs in your family, chances are you will increase your lifetime benefits by waiting. Single women will benefit more than single men simply because women tend to live an average of five years longer than men.

Married couples stand to benefit more than singles by waiting as well. As a 62-year-old spouse, you can choose to either file for Social Security based on your own earnings (if you are working) or on a spousal benefit, based on your spouse's income. However, to receive the spousal benefit your partner must have already retired. The spousal benefit is up to 50 percent of the earner's benefit. If you both wait until FRA or later you will both collect higher benefits.

As a couple, there are all sorts of strategies that could work for you. The lower-earning spouse, for example, could take benefits as early as age 62 while the higher-earning spouse waits until age 70 to file. You will need to crunch the numbers (or have a financial planner do it) to discover what's best for you.

Remember, too, that if you file for Social Security benefits before your FRA and continue to work you need to be aware of how much you earn. If your earnings exceed a certain limit, some of your benefits will be withheld until you reach your FRA. As an example, if you file at age 62, $1 in benefits will be withheld for every $2 you earn above $15,120. If you make more than $40,080, then the government withholds $1 for every $3 you earn above the limit.

If you are a two-earner couple, you have to think about your tax situation. Up to 85 percent of your Social Security income could be taxed if your modified adjusted gross income reaches a certain level. You may be in the unenviable situation where one spouse retires only to see her hard-earned benefits taxed away by the higher income bracket of the spouse.

In certain situations you may have no choice but to file at 62. You may lose your job and you don’t have enough savings to cover the bare necessities, then you may need that Social Security income just to live. For most, early retirement is really just an emotional urge to get out of a bad or boring situation as early as possible. If so, think again. You may have spent the good part of your life at that company and working a few years more won't kill you, but it may make the difference between a great retirement and one that you might regret.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.



     
The Independent Investor: What's up with Big Pharma?
By Bill Schmick On: 07:38PM / Thursday April 24, 2014
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This week several multibillion deals were announced in the pharmaceutical sector. Merger and acquisitions on a global scale appears to be heating up in this sector with over $140 billion in transactions so far this year. What's behind this feeding frenzy?

We all know that the majority of baby boomers are getting older so the demand for health care of all kinds is growing. As a result, the health care sector overall is a great place to invest. While many other industries experienced a devastating drop in profits and revenues over the last five years, the pharmaceutical industry weathered the financial crisis fairly well.

But that's the good news. The bad news is that the cost of bringing a new drug to market has skyrocketed. The development time has lengthened as well while a drug’s patent expiration leaves companies open to low-cost competition. Today it is estimated that the cost of inventing and developing a new drug can be as much as $5 billion. The risk is even greater since 95 percent of the experimental medicines that are studied in human trials fail to be both effective and safe.

When you combine the astronomical costs involved, the lead time and a 5 percent chance of success, it is no wonder that pharmaceutical companies are searching for alternative ways to succeed and thrive in this kind of environment. A merger or acquisition, as opposed to years of in-house research and development, can make more economic sense.

Back in the day, big pharmaceutical companies used M&A activity to diversify. The concept was to be able to offer a lineup of drugs and treatments in various areas of medicine and treatment. That way, if one area did poorly, others would compensate. More categories of treatment, it was thought, would also improve the number of new drugs under development in the pipeline. The problem with that concept was that health care treatment has evolved differently over time. The trend in the industry is toward developing specialty drugs. Drug companies are thinking in terms of disease-related, treatment-specific portfolios and patient groups (such as cancer, diabetes, heart disease, etc.).

As a result, many drug companies have reversed course and are attempting to sell-off what they deem are "noncore assets." Companies are shuffling their portfolios, selling some product groups while acquiring others. These purchases involve smaller companies and subsidiaries of various global companies as the race is on to build franchises in strategic disease areas.

But M&A is not the only road to success. Collaboration and partnerships among global companies is also increasing. While all of these companies have different visions, the dramatic changes they face on all fronts from global government regulation, to Obamacare in this country to the dynamic revolution of the life sciences industry, itself, is altering the way they manage risk and focus their business. Sharing costs and expertise is another new trend in the healthcare arena. As companies understand and become familiar with their partners’ core and noncore assets, deals are a natural outgrowth of this collaboration and being made with increasing regularly.

These agreements take on a new immediacy when the fast-growing emerging markets are taken into account. Regulations are usually less onerous in these developing markets, market share for new drugs is a wide open proposition and an exploding middle-class with purchasing power are an irresistible combination.  Smaller local drug makers in some of these markets, like Latin America and India, have become big enough to catch the eye of U.S. and European behemoths. I expect even more M&A activity there as well.

So the M&A activity that we are seeing is a natural outgrowth of the changes that are occurring in the health care sector worldwide. Those changes are expected to continue and with it so will the pharmaceutical sector.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.



     
The Independent Investor: Good Friday and the Stock Market
By Bill Schmick On: 03:52PM / Thursday April 17, 2014
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This Friday the stock and bond markets will be closed to commemorate the crucifixion of Jesus Christ, or so the theory goes. But that is just one of the many myths involved in this holiday and its origins remain a mystery.

The fact that the New York Stock Exchange (NYSE) has a tradition of closing on Good Friday, one of nine holidays per year, has many traders and investors scratching their heads. After all, it is not a federal holiday and plenty of other businesses are open on that day. What makes Good Friday any more important than say, Columbus Day?

There is a story that during the 1890s there were three years in a row that the market suffered big drops on Good Friday. Superstitious traders took this to be a sign from God that "Thou shalt not trade on Good Friday." There is no evidence that is true. The Exchange was open for trading during Good Friday on three separate years (1898, 1906 and 1907). However, when the exchange did open for business in those years, the market was up two of those three Good Friday dates.

Another fable that many believe was that the market suffered through a Black Friday market crash in 1869. As a result, the Board of Governors of the Exchange swore never to open again on Good Friday. That seems a little hard to believe, since records indicate the exchange was closing on Good Friday as far back as 1864.

Art Cashin, the renowned trader at UBS, says there never was a stock market crash in 1869 but there was a crash in the gold markets back in September of that year. Easter week, however, is in April, not September, so go figure.

Although Good Friday is not a federal holiday, many states do recognize it as a state holiday with local governments, banks and other institutions closed this Friday. As a result, trading volumes are smaller, since fewer potential players are at work.  Businesses that normally stay open on Easter Sunday also tend to close on Good Friday so that their employees get a day off to compensate for working on Sunday.

Some think that the holiday was a nod to Jewish and Christian traders looking for a day off between Passover and Easter. Globally that makes some sense since already anemic trading volumes are even lower because Europe traditionally closes for Easter week. But as the original reason for this NYSE holiday, it does not square. Daily global trading is a relatively recent phenomenon on the stock exchanges.

There is some reason to believe that religion did play a role in the holiday. New York, a century ago, was the home of Irish immigrants. As such there was a preponderance of Irish Catholic officials in just about every walk of life in the city, including the NYSE. It is plausible that those officials could have lobbied for the closing of markets during this important Catholic holiday.  But no one can prove it.

So the origins of this stock exchange holiday remain mired in mystery. It is just one of the many quirky twists that amused and confuse Wall Street on slow holiday weeks. Whatever the reason, Friday is a day off for me, but never fear; I'll still be writing your market column as usual.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.



     
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Bill Schmick is registered as an investment advisor representative and portfolio manager with Berkshire Money Management (BMM), managing over $200 million for investors in the Berkshires. Bill’s forecasts and opinions are purely his own and do not necessarily represent the views of BMM. None of his commentary is or should be considered investment advice. Anyone seeking individualized investment advice should contact a qualified investment adviser. None of the information presented in this article is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com Visit www.afewdollarsmore.com for more of Bill’s insights.

 

 

 



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