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@theMarket: October Should Be the Bottom

By Bill Schmick
iBerkshires Columnist

The third quarter was the worst for stocks in four years. Here we are in October and if history is any guide, investors should expect a bottom in the stock markets over the next three weeks.

That does not necessarily mean that history is a dependable guide. Historical data has proven to be less than helpful over the last few years. That is largely because the central bank's heavy hand in the financial markets since 2008 has skewed the data. Their intervention in both the bond and stock markets has made technical as well as fundamental tools of investing all but meaningless in valuing the markets.

I have been expecting the stock markets to re-test their lows made on Aug. 24, something we have yet to accomplish. Until we do, this correction will continue. Last week, we got close (within 4 points on the S&P 500 Index).  But markets tend to overshoot. It would not surprise me if we actually broke those lows and fell even further. That would create a panic among investors, in my opinion. And panic is what usually signals a bottom.

In addition, October is the perfect month for this to occur. The historical pattern indicates that this month should begin badly for the markets, but reverse course by the end of the month. The only problem with this scenario is that almost everyone is expecting the same thing. As a contrarian that worries me.

Certainly there is little evidence so far of the kind of reversal I am expecting. The news seems to go from bad to worse. Friday's unemployment number was much weaker than economists were expecting and triggered worries that the U.S. economy might be stalling. I don't believe you can base your assumptions on one data point, no matter what it is. The unemployment numbers have been notoriously unreliable when viewed week-to-week or even monthly.

But that didn't stop the algorithmic computers and day traders from hitting the sell button across the board on Friday morning. Investors can expect the wilds swings that we have been experiencing over the last two months to continue a bit longer. I know that most readers are worried. The tendency is to check your portfolios more and more frequently. As the stock market declines, commentators and the media always become more bearish and so will you.

The atmosphere becomes charged with emotion. As more and more pundits turn negative, they try to outdo one another in painting "what if" scenarios. The markets "could" drop much further, they say, without explaining why that would be the case. These are the same jokesters who were screaming "buy, buy, buy" at the top of the market. My advice is to ignore the circus.

Focus on what is important. Yes, your portfolios are lower than at the beginning of the year, but that doesn't mean that by year-end those paper losses won't be paired or completely disappear. I still think we will end the year positive, if only by single digits. That's why I have not changed my forecasts. So far just about everything that has happened has gone according to my playbook. Keep the faith and keep invested.

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.


@theMarket: Back to the Future

By Bill Schmick
iBerkshires Columnist

The Federal Reserve Bank postponed hiking interest rates. Global stock markets swooned on what should have been good news. We are back to anticipating what the central bank will do in the future.

Investors are well equipped to handle both positive and negative scenarios, but they can't stand the unknown. And that is exactly what we face for the remainder of the year.

Last week, I predicted the Fed would not raise rates. I argued that based on their achieving only one of their objectives, job growth, the bank would hold off. The rate of inflation, their second objective, has yet to reach their target of 2 percent. There is little evidence that indicates that target rate will be reached any time soon.

Fed Chairwoman Janet Yellen, in her press conference after the FOMC meeting, also indicated that the state of global economies was a concern. Her words echoed the IMF's warnings (also mentioned last week) that now was not the time to raise U.S. interest rates.

In the past, whenever the Fed applied more stimuli to the economy, (or in this case failed to tighten), the markets took it positively. That is understandable given past financial history.

More stimuli equaled lower interest rates, equaled higher stock markets. However, that causal relationship might be wearing thin. Although central bankers have poured over $8 trillion into the global economies over the last few years, economic growth rates have remained stubbornly

The Fed would be the first one to tell you (and has continuously through the years) that monetary policy can only do so much. Without help from the government's fiscal side, (read increased spending) the impact of simply keeping interest rates low is dubious. Over the past seven years in this country, legislatures, led by the Republican Party, have rejected that concept.

Instead, they have done the opposite, with the help of politicians on the other side of the aisle. Even today, the same rhetoric of reduced spending is one of the main planks in every GOP candidate's platform. I vehemently disagree and have advocated the opposite since the onset of the financial crisis. But now is not the time to debate this subject. After all, this is a column about markets.

I maintain that markets will remain volatile for a few more weeks and that a re-test of the August lows is required before this period of correction is over. This past week the majority of traders, expecting that the Fed would not hike rates, bid the markets up to a technical level of resistance, in this case 2,020 on the S&P 500 Index, and then took profits. It was a classic exercise of "sell on the news," which happens quite often in markets like this.

Over the next few weeks, I expect we will fall back to the 1,860 level on the S&P 500 index and maybe a little below that. Selling will be fueled by the same set of circumstances that has bedeviled the markets since the beginning of the correction in August. In summary, we have returned to the pre-Fed meeting guessing game.

What will the Fed do in the future? Are rates off the table for this year? The Fed says no, but states that it is still dependent on the data. It is hard for me to see what is going to increase the rate of inflation to the Fed's target rate this year, ditto to expectations that we will see a lift-off in overseas economies that quickly.

In the meantime, traders are in charge and their time horizon is down to microseconds.

Your only recourse is to ignore the noise, because that is what most of this worry is about, and, look to November and December when the bulls take over again.

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.


@theMarket: All or Nothing

By Bill Schmick
iBerkshires Columnist

As traders steel themselves for next week's Federal Open Market Committee meeting, the stock market remains volatile with a bias toward the downside. That should change for better or worse by next Wednesday.

Whether the Fed raises rates or decides to pass for another month or three, I expect traders will use the decision as an excuse to buy or sell the stock market. I normally key off what the bond players think about the Fed's actions and they put the probability of a rate hike at 30 percent.

The odds are low largely because inflation continues to be practically non-existent. The rate of inflation is one of the Fed's twin mandates, the other being employment. Clearly, the jobs picture has been improving all year. So the signals are mixed. Given that the central bank is determined to err on the side of moderation when raising rates, why not wait a little longer before hiking rates?

In addition, although a small rate hike here in the U.S. would have little to no impact on the economy; it does have implications for global currencies, trade and emerging markets. I have referred in the past to the "carry trade." That's an arbitrage investment that many large institutions use on a global basis. They borrow in cheap or declining currencies and invest it in strengthening currencies and bond markets. A rise in rates (even a little one) does and will impact this carry trade. It will also impact exports, imports and, by extension, the economies of various nations.

The International Monetary Fund (IMF) is well aware of this risk. It is the main reason why its Managing Director, Christine LeGarde, has urged our central bank to delay a rate decision until next year. She feels that the global economic conditions are just too fragile at this juncture to sustain a rate rise from the world's largest trading partner. She has a point. Neither the world, nor the Fed, really wants to see the dollar strengthen any further in the short-term. A rise in our rates would do that.

Wall Street would have us believe that the present volatility and uncertainty among stock markets would also be a big deterrent to hiking rates right now. I doubt that. The Fed would not be overly concerned if the U.S. market moved up or down 3-4 percent in the short-term. I'm guessing that you might feel differently about that.

By now, most of us are starting to cope with the newly-found volatility of the markets. For the first seven months of the year, the indexes traded in an extremely tight range. Since then we have been making up for lost time. The CBOE Volatility Index, which measures perceived risk, has jumped 120 percent over the past month.

Consider that over the last 15 trading days alone we have had 11 "all or nothing" days when greater than 80 percent of the stocks in the S&P 500 Index moved in the same direction, higher or lower. That compares to only 13 such days over the first 159 trading days of the year. It indicates that investors are far more concerned about the risk of the overall market than they are about the fortunes of any individual stock. That concern continues today.

It appears to me that the markets will trade aimlessly until the middle of next week. The bears will position themselves around a probable rate cut and a fall in the markets, while the bulls will do the opposite. Whatever happens, the fireworks will be at best a short-term phenomenon. Since no one really knows what decision the Fed will make, the best thing to do is nothing.

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.


@theMarket: U.S. Jobs Data Sink Markets

By Bill Schmick
iBerkshires Columnist

What's good for Main Street is not necessarily good for Wall Street, at least in the short-term. As traders fret over a new era of rising interest rates, American workers may finally be coming into their own.

The 5.1 percent unemployment rate, coupled with a 0.30 percent increase in wage growth has convinced stock traders that the Fed will raise rates this month. Over the past five years, investing in the financial markets was a one-way street. It didn't matter what the economy did, it was all about lower interest rates. The lower rates fell, the higher the market climbed. As the Fed prepares to reverse course and hike rates, investors are facing a brave new world and are nervous about that.

It will be a world where economics and its inevitable dislocations, will impact market valuations. Inflation will come back, as will wage growth, and productivity will start to matter again. As they have throughout history, interest rates will determine what investors are willing to pay for other financial assets. The end of massive central bank intervention will allow the American markets to function as they have in the past. Are we ready for that?

Yes, you may say, five years is long enough for all this government meddling. Of course, the flip side of that coin is that without the Fed's "put" on the market, we have to assume the risks of the marketplace. For me, personally, I'm fine with that. I cut my teeth in those kinds of markets and grew up in this business using all those historical metrics that have not worked very well since the Fed started intervening in the markets in 2009.

Plenty of people have explained the so-called reasons for the present turbulence in global financial markets. It's China, it's the Fed, or slowing global growth. Declining prices for oil and other commodities also make the list. All of the above may be true, but it strikes me that this is a correction that is looking for a reason. Sometimes there is just no "because ..." and I think this is one of those times.

Over the longer turn, history has taught us that what is good for our economy will also be good for our stock markets. Any discrepancies are usually short-term in nature. This is the crux of the matter. We all know that the typical investor's time horizon has grown shorter and shorter as a result of the internet, the media and our own expectations of what we expect from life. Most of us want it now and we become mightily distressed when that doesn't happen.

Why the lecture? In my opinion, all that is happening in the markets today is a sorting out of the potential risks we face in the near future. Are the markets correctly valued in a rising interest rate environment? How strong will the economy grow and how soon? Will the unemployment rate drop even further, maybe into the 4-plus  percent range. What will that mean? The "what-ifs" are endless, but that's what makes a market.

I suspect it will mean a return to the old ways of doing business. High-frequency trading, computer algorithms and the intensely short–term mentality in the narrow-minded corridors of Wall Street will have to change. As long as the Fed "had our back," traders could take all the risks they wanted. I'm betting that without that safety net, the casinolike element of the stock market will slowly subside. That will be a good thing for you and me.

I wrote last week that readers should expect continued volatility over the next several weeks. I remain convinced that we will re-test last Monday's lows (and possibly even break them). If we did, that would create a last burst of panic and lead to a final washout.

Don't try to trade this correction. Given the 200-point daily swings of the Dow, if the markets don't scare you out, they will wear you out. Instead, start practicing your long-term perspective. Just give the stock market time to digest this transition. Your portfolios are going to come back by the end of the year. Focus on what's really important over this holiday weekend.

The economy is finally picking up speed. Wage gains are accelerating and employment is close to full capacity.

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.


@theMarket: Are We There Yet?

By Bill Schmick
iBerkshires Columnist

This week we witnessed the first substantial correction in the stock market of the year. What matters most to investors now is whether we are at the end of the decline or the beginning of something worse.

We've seen the lows, in my opinion, but that doesn't mean we won't retest them. Normally, I would expect to see at least one re-test of the lowest level made by the S&P 500 Index before all is said and done. If so, there could be risk of as much as a 5 percent decline over the very short-term for the markets. That doesn't have to happen, but it may, so I want you to be prepared for the worse.

It was certainly a bad week to be out of the office visiting clients. However, being removed from the fray did give me a different perspective.  What struck me immediately was how panicked investors became at a sell-off that was entirely normal in its depth and duration. At its worst, the S&P 500 was down a little over 12 percent.  The next day it gained back almost 3 percent but that did not seem to matter.

I also noticed that volatility was higher than normal. That could be because many market participants in America and Europe were on vacation. The Dow dropped over 1,100 points on Monday morning before bouncing higher. That really spooked investors. What you may not know is that the Dow Jones Industrial Average has traded over 200 points (up or down) over the last six sessions. That has never happened before in the history of the stock market.

Finally, this correction has punctured several holes in Wall Street's belief that our trading systems are the best in the world and head and shoulders above those of other countries. Not only were there any number of problems in trading both stocks and exchange-traded funds this week, but even the end of day pricing of securities became a problem.

Some of the so-called "circuit breakers" that were originally created to assist the flow of securities trading during times like these actually hindered the flow of trading at times. The lack of bids for securities should also put to bed the myth that high frequency trading somehow improves the depth and breadth of the markets. The opposite occurred this week as computers and the desk jockeys that guide them all fled the market at the same time.

As the smoke begins to clear, what I see is a market that may have more similarities to foreign stock markets (like Shanghai) than we care to admit.  We Americans deride that market where two-thirds of investors are supposedly ignorant retail investors who trade in herds. That's exactly what I witnessed this week in our own markets.

How were the panicky calls to "get me out at any cost" mentality of so many U.S. investors different from those by the Chinese?  At least the Chinese markets appeared able to accommodate trading volumes far better than we could despite handling volumes that dwarf our own. You would think that more experienced, highly sophisticated investor types like us would understand that a 10 percent correction happens at least once a year in the stock market. Yet, I know several seasoned investors and money managers that were selling when they should have been buying.

As for the market, I expect the volatility will continue into September, although not at the rate of this week. You may have a chance to buy lower but that's a short-term call that is simply too difficult to predict. What seems clear to me is that we now stand a good chance of moving higher by the end of the year. I expect the markets to recover all its losses plus another 4-6 percent on top of that. That's not a bad return over the next four months.

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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