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@theMarket: Markets Get Back to Business

By Bill Schmick
iBerkshires Columnist

Since Labor Day marked the end of summer for Wall Street, the big guys came back to work and evidently did not like what they saw. As this week comes to a close, all three indexes suffered losses.

Friday's downturn could be attributed to North Korea, the rogue state that detonated a nuclear device on Thursday night. Those kind of one-off political events often-times unsettle markets. Stocks went down, the dollar spiked as did interest rates and that I found interesting.

Normally, U.S. Treasury bonds are a safe haven so prices go up in times of uncertainty; but not Friday. We have to therefore look under the hood to discern what is really going on with the markets. Aside from the fact that stocks are due for some turbulence, the culprit seems to be additional worries over whether or not the Fed may surprise us by raising rates on September 21.

Then again, traders were somewhat disappointed that Mario Draghi, the chief of the European Central Bank, did not add further stimulus to the already-multi-billions of Euros the ECB is already pumping into their financial markets. Like junkies in search of their next high, traders want central banks to provide more and more easy money in order to justify higher equity prices.

Draghi disappointed them. He appears to have joined his counterparts at the U.S. Federal Reserve in telling the EU membership countries that it is their turn to take up the mantle. He especially singled out Germany in discussing why additional fiscal spending is necessary to accomplish the European bloc's hope for higher economic growth.

Of course European politicians, like those in America, have been sitting back, playing it safe and letting their central bank do all the heavy lifting on the economic front. Naturally, politicians on both sides of the Atlantic like the status quo. You see, doing nothing is not unique to American politicians.

By increasing spending, cutting taxes and/or regulations in order to grow the economy, legislatures are taking a chance. What will their constituents say if the deficit ballooned as a result? T Baggers, here in America, for example, would be out for blood.  I will be curious to see what happens when the Japanese Central Bank meets later this month. Will they send the same message to Japan's parliament?

But in the meantime, our Fed officials are busy sending mixed messages (as usual) over when they plan to raise interest rates in this country. Boston Fed President Eric Rosengren joined the “hawks” on the Fed in warning that rates need to rise soon.  Fed Governor Daniel Tarullo said on morning television, that he would rather wait until there was more proof that inflation was rising before he pulled the trigger.

Nonetheless, their contradictory comments were enough to send the stock market reeling and hike the probability of a September rate hike to 33 percent. In my opinion, I do not believe the Central Bank will hike in September. I do believe, however, that they do not want market participants to become too complacent about when the Fed will raise rates.

The more important question one must ask is what will happen to the stock market if the Fed does raise rates; if this week is any indication, nothing good. As you know, I have been preparing you for a market pull-back. This may be the beginning, and if it is, it won't be something to worry about, but it could be painful while it occurs.

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: A Tale of Two Interest Rates

By Bill Schmick
iBerkshires Staff

Ahead of the Labor Day weekend, investors had little to do but bet on how strong or weak the unemployment number would be. It turned out to be weaker than expected and the markets rallied.

Yes, we are once again in a "bad news is good news environment." Weaker economic data means the chances of the Federal Reserve Bank raising interest rates at the September meeting is diminished. That means lower rates for longer, which equals higher prices for stocks, bonds, and commodities. None of the above disappointed on Friday.

Investors should take the action in the markets (both up and down) with a grain of salt. The real market moves normally begin after the unofficial end of summer, Labor Day. We will have to wait until then before identifying real trends in the markets.

It has been almost 40 days since the stock indexes have experienced a one percent move. That hasn't happened since 2007.  The pros are expecting a big move one way or another. The markets are coiled but the problem is which way will they move? But don't look at stocks for the key. It is in the bond market where we may find clues to the next move.

What is the bond market saying about the chances of a rate hike in September? Traders are giving a hike less than 50 percent. So unless that changes, it remains a plus for a stock market advance. But is a rate hike really what is driving the bond market?

Sure, the central bank can raise the level of interest rates on short-term bonds, but they have little control over what really matters to the economy and that is long-term interest rates.

Ten- and 30-year U.S. Treasury interest rates are controlled by the market, not the Fed. If long rates stay down, it is good for the economy and good for the stock market. If they rise, then the reverse is true. And it is here that the plot thickens.

The fate and direction of our long-term bonds are highly dependent on what happens in the global fixed income markets. All investors seek higher yield (along with safety). The country that provides the best deal gets the lion-share of demand for fixed income investments. Because our two main competitors in that market (Japan and the European Union) are offering negative rates of interest, demand for U. S. bonds have been highly popular among global investors.

What's not to like. You get to own the safest bonds in the world and get 2.9 percent (in the case of 30-year treasuries) while other countries are giving you zippo for their bonds. How long can that continue? Until the European Central Bank and the Bank of Japan decide to change their monetary policies.

The European Central Bank will meet on Sept. 8 and the Bank of Japan on Sept. 21. All indications are that neither central bank has any plans on changing their stimulus policies any time soon. In the case of Japan, they may actually increase their stimulus. If that is the case, we can look to the U.S. markets as a place you want to be invested between now and at least the end of the year.

Now that does not mean that we are immune to market declines. In fact, we are overdue for one, but it will be a passing event and nothing to get worried about if and when it comes. Have a great Labor Day!

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: Three in One

By Bill Schmick
iBerkshires Columnist

On Thursday, all three U.S. benchmark averages — the S&P 500, NASDAQ and the Dow Jones Industrial Average—registered historical new highs on the same day. You don't want to know what happened the last time this happened.

That was in 1999. The year after ushered in the Dotcom boom and bust where some averages lost 20-30 percent and sent the markets on a roller coaster that did not end until 2003. Am I saying that will happen again? No, but I am expecting a pull-back soon in all three averages.

It is not something that most investors need to worry about. As I mentioned in my last few columns, stocks are overbought and valuations are being stretched higher and higher. That is a typical occurrence in financial markets. Rarely do markets trade on par with what we call a "fair valuation." Securities, for the most part, trade above or below their fair value all the time.

It is what causes rallies and followed by sell-offs, which is the very nature of the market.

So far this year, we have had two sharp declines: in January and then again in February, followed by a rally that has now taken us up to new highs (without a significant decline). OK, you might argue and say that the two-day, panic sell-off after Brexit qualified as a third. I won't quibble with that, but it does not negate another decline sometime this month or possibly in September.

The point is that when it occurs (notice I did not say if), I would simply ride it out. We are in an election year and if history is any guide, no matter how sharp or severe the decline, chances are that by the end of the year the markets will still be positive. Remember, too, that my own expectations were for a mid-single digit return from stocks in 2016. As of today, we have already reached my target.

There is nothing to say that the markets won't go higher from here, because just about everyone is looking for a correction in August. That is understandable, given what happened on Aug. 19 of last year. Remember the Dow down 1,000 points before the opening that day last summer? How soon we forget.

But a sell-off now would be too easy. Markets usually do what is most inconvenient for the most number of investors. A more likely scenario is that we continue to grind higher. The S&P 500 Index breaks 2,200 on the upside. Stock chasers rush in to buy and push the averages up by another 20-30 points and then wham!

Could it happen that way? Possibly, but how it happens and when should matter little to you. Whatever downside we have will simply be a passing storm. The clouds will lift as the election approaches. If Clinton continues to maintain her lead in the polls, or widen it, then Wall Street will take heart and continue to support stocks. On the other hand, if Trump should regain momentum or even move back to even with Clinton, then we can expect more volatility all the way up to Election Day.

So those who want Trump in the White House could pay for that support via damage to their investment portfolios. Nonetheless, I expect that whoever wins what damage may occur to our investments will be short-lived. Americans are forever optimistic and within weeks, if not days after the election, we will see the markets rally on renewed hope of better days ahead.

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: Markets Need to Digest Recent Gains

By Bill Schmick
iBerkshires Columnist

Greed and fear make the world go round. While Donald Trump attempted to tap into the latter emotion in his acceptance speech this week, investors were mesmerized by the opposite emotion, at least where the stock market is concerned.

It is true that the markets, like the humans that trade them, tend to vacillate between these emotions when gains and losses begin to nudge the extremes. Of course, we would all like the markets to just continue to climb, but a line I read recently sums it up well.

"Keep in mind that betting on never-ending capital gains is the very definition of a Ponzi scheme."

The best thing that could happen to the stock market in the short-term would be to pull back. A nice orderly advance, which is not something we have experienced since the beginning of the month, is the ideal scenario for making money in the financial markets.

Too far, too soon, invites downside swoons of selling that force weak holders to panic (fear). When the market turns, and it inevitably does, it forces those same sellers to chase prices upward (greed). Just recognize that pullbacks are the cost of doing business in the equity markets. You can't avoid them and to try is a fool's game.

There is no question that the market is "overbought." By whatever metric you may use — the Vix, investor confidence, sentiment or momentum indicators — we need to pull back and we need to do it soon. It was encouraging that during the last two days of the week some selling appeared. That's a good thing.

Now these kinds of pull-backs do not need to be deep. A week or two of up and down days called a "consolidation through time" can relieve an overbought condition just as effectively as a 3-5 percent sell-off. Given that we are in earnings season, I'm hoping that a series of mixed results from some market "darlings" could deliver just that sort of period.

So far, second quarter earnings results have been better than expected. About 66 percent of those companies who have reported thus far have come in with earnings beats. That should come as no surprise. Every quarter, this game of revising down company estimates low enough to produce a beat fools fewer and fewer investors.

Normally, these companies announce before or after the close and only professional traders really benefit from any price movements. Rarely does the euphoria over an earnings beat last for more than a day or two and then the company's stock price tends to return to its pre-announcement levels. Very few professionals are willing to take a position in a stock prior to earnings. That, they say, is akin to putting all your money on black or red at the gaming tables.

Now that we are half-way through this month's convention season, the extreme volatility that so many of us had feared never surfaced. Despite some marching and protests, the GOP convention went off with barely a blip. Markets took the bombastic speeches and self-adoration that is so typical of the American political party system in stride. This coming week we will see the Democrats try to best the Republicans in their appeals to the voters. Hopefully, we will then be back to regularly scheduled programmed channels.

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: Markets Make Hay

By Bill Schmick
iBerkshires Columnist

A series of new historical highs rewarded investors who remained patient this year and remained invested. Unless something changes in the world of central banking, there is a good chance that further gains are in store for the stock market.

There will be pullbacks from time to time as the markets digest their gains. We have enjoyed several back-to-back gains in the stock market. The S&P 500 Index, for example, has climbed over 100 points without one down day. That is not something that can continue unabated.

The key to all this upside momentum is, of course, the worldwide largesse of governments and central banks. Take, for example, the events in England this week. Although economists and traders were expecting the UK's central bank to cut interest rates by half a percent; they didn't. But, they also said that investors should expect a rate cut in a few weeks, once they have a chance to examine the most recent economic data from the Brexit fall out.

Then there is Japan. Prime Minister Shinzo Abe's ruling coalition won the majority of seats in Japan's upper house elections last Sunday. Investors interpreted that win as a win for "Abenomics." Readers should recall that Abe and Japan's central bank has poured mountains of money into the Japanese economy. Despite that effort, Japan's economy remains in limbo.

Abe and his government plan to spend even more in the months to come. Given that we are talking about the world's third largest economy, more stimuli will wash around the world holding interest rates down and financial markets up.

Of course, our own central bank's efforts to hike interest rates is now "on hold" for the foreseeable future. That is thanks to potential worries about the impact on Europe and the UK from the Brexit vote. Once again, global markets are in a familiar environment of slow economic growth, declining interest rates (and currencies) with nowhere to go but the stock markets.

Speaking of which, we are in the first week of second quarter earnings season. As the game begins, analysts' forecasts for this quarter have been ratcheted down to 4-5 percent declines in company earnings overall. That is the sixth quarter in a row where corporate earnings have experienced a negative growth rate. The Street has been hoping (and betting) that company managements will be giving us better guidance on their future business this time around.

So far that has been the case. The big banks have been able to "beat" estimates this week.

The financial sector overall has lagged the market all year. It is difficult for banks to do well when interest rates are this low. Hopefully, these earnings results will put a fire under the sector.

Retail is another group where disappointments have weighed heavily on the sector. Although, these companies won't report for several weeks, traders are also counting on good news out of at least some companies.

You may be wondering how long all of this central bank stimulus, quarterly earnings games and other financial machinations will support the markets. It has done so for at least the last five years. Even the bankers tell us that without additional government spending, their spending efforts can do no more than maintain the present environment. The bears are right: we are in an environment of smoke and mirrors. Yet, we can worry all we want about that while the markets climb higher. The "don't fight the Fed"  mentality is still the flavor of the month until it isn't, so enjoy it.

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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