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@theMarket: 707 Days
By: Bill Schmick On: 04:01PM / Saturday February 19, 2011
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It's official: the S&P 500 Index is now up 100 percent from its low of 666.79 back in March 2009. It was the fastest double in stock prices since 1936. And it is not over.

I have suggested several times in past columns past that a big move in stocks would come when individual investors sold their bond holdings, gathered their courage, and returned to the stock market. That time may be upon us.

Consider that this is the fifth week in a row that inflows into domestic stock funds have increased. A total of $21.3 billion moved into equity mutual funds in January. The first week in February saw an additional $5.85 billion and last week another $9.3 billion flowed into equities.

The money is coming out of bond funds (mainly funds invested in U.S. Treasuries and Munis). As expected, the stock markets' five-month winning streak and low rates of return in the government bond markets and money markets are forcing investors back into equities. This has been my premise for well over a year.

Corporate profits are approaching record levels. The economy is gaining steam, inflation forecasts remain subdued (2-3 percent/year) and interest rates are historically low. That is what I call a "sweet spot" for making money in stocks. But the market's steady rise since the beginning of the year, with little to no corrections, has also confounded veteran market watchers. Some respected technical analysts I know have actually given up trying to predict the timing of a pullback. The truth is that a correction can happen at anytime, but so what. Buy the dip.

Consider that the U.S. market continues to rise in the face of tensions in the Middle East, soaring global commodity prices, declining stock markets in the high growth emerging markets and continued financial concerns in Europe. In the past, any one of the above circumstances has had the power to take our market down 5 percent in a blink of the eye. But thanks to "Bennie and the Fed," investors own a "put" on our market. Back in November in my column "Don't Fight the Fed" had the following explanation for why the market would continue to rise:

"The Fed is clearly telegraphing to investors that they want a higher stock market, and like unemployment and the economy, they will do what it takes to accomplish that goal. This message is behind the jump in the stock market this week. My advice to you is don’t fight the Fed. Buy stocks.”

I stand by that advice.

On another note, have you been watching the price of gold and silver? A few weeks ago I suggested that the price correction in both these precious metals was just about over. Since then both gold and especially silver have roared back to life. Silver is above $32 an ounce. It is getting closer to my target of $36-$37 an ounce, so be ready to take some profits when we reach that price level. Gold has lagged silver so far, but I believe it will ultimately narrow the lead. Nonetheless, both metals performance have been far from shabby.

Bill Schmick is an independent investor with Berkshire Money Management. (See "About" for more information.) None of the information presented in any of these articles 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 e-mail him at wschmick@fairpoint.net. Visit www.afewdollarsmore.com for more of Bill's insights.



Tags: metals, growth, stocks, bonds      
The Independent Investor: Will the Municipal Bond Massacre Continue?
By: Bill Schmick On: 02:59PM / Thursday December 30, 2010
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There was a time when municipal bonds were a staid but safe investment. Tax conscious investors, widows and orphans would plow money into these debt issues of towns, cities and state municipalities fully expecting price stability and a predicable stream of interest payments. No more.

What makes municipal bonds appealing to many investors is that interest income received by holders of municipal bonds is often exempt from federal income tax and from the income tax of the state in which they are issued. But ever since the financial crisis and the recession that had accompanied it, state and local governments have had a hard time of it and their bonds have reflected that trading in a wide range similar to stocks and other riskier investments. Vast sums have been made and more recently lost in Muni bonds as investors bet on which states and towns would go bust and which would survive. The betting continues unabated.

Over the last two months, the entire $2.8 trillion market has seen a sizable decline in value. In just one day last month, for example, these bonds were hit by more than $3 billion in redemptions. By the end of that week, bond sales totaled $15.4 billion. The average municipal bond fund suffered a 3.7 percent loss for the month. Losses overall are approaching 6 percent for the year which is a modern-day record.

Underneath those headline figures is a market in which investors are feverishly sorting out those state and local governments with strong fundamentals and even stronger prospects and those that don't.

Forty-six states experienced budget shortfalls this year and 39 of them have projected gaps next year totaling $112 billion to $140 billion. Tax revenues this year dropped 3.1 percent, although that's an improvement over 2009's decline of 8.4 percent. However, most states expect property taxes to begin to decline next year. These taxes tend to lag real estate prices by about three years since assessments trail prices. Towns and municipalities rely on these taxes for at least 25 percent of their revenues and they look to the states for at least another third of their budget in state aid.

States have no money to lend, however, because their own taxes continue to decline due to the large number of unemployed, slow economic growth and the inability to raise taxes while residents are struggling to make ends meet. In 2011, states will also have to begin paying back to the federal government the $40.9 billion they borrowed interest-free through the stimulus plan.

In a similar fashion to the debt problems within some countries in Europe (Greece, Ireland, Portugal, Spain and Italy), here in the United States we too have our weaker states with Illinois and Nevada most often rated the states most likely to experience further economic turbulence. As in Europe, those weak sisters must pay substantially more in interest to attract investors to their bonds while states that have a better financial footing benefit by paying less.

In addition to the shaky finances and unknown risk that confronts this market in 2011 we also face the prospect of interest rate risk — the threat of higher interest rates in the government markets (see my column "Why Are Interest Rates Rising?").

Long-dated municipal bond prices and interest rates track long-term Treasury bond. Unfortunately, U.S. Treasury interest rates on the long end have spiked over the last two months and are predicted to move even higher in the New Year. For investors of both U.S. Treasury and municipal bonds that will mean further losses as bond prices decline.

If you must own municipal bonds, then switching from bond investments in weaker states and localities into bonds issued by stronger municipalities seems to me is common-sense tactic to employ right now. Secondly, stick with revenue bonds as opposed to general obligation bonds.

Revenue bonds repay investors from a specific source such as a highway toll rather than from a tax. General Obligation bonds, on the other hand, are secured by a state or local government's pledge to use whatever resources necessary (such as new taxes) to repay the bonds.

At the end of the day, Muni bond bulls argue correctly that if push came to shove the federal government would bail out any state that was on the verge of bankruptcy. In turn, any state would rush to the aid of a municipality within their domain that was on the verge of failure. I don't dispute that. And if it came to pass that something like that were to happen, it might be a buying opportunity to really aggressive traders but not for widows and orphans. For those who depend on these revenue streams to pay the bills, a far better approach is to simply sell the riskier securities and buy those that offer greater security.

Bill Schmick is an independent investor with Berkshire Money Management. (See "About" for more information.) None of the information presented in any of these articles 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 e-mail him at wschmick@fairpoint.net. Visit www.afewdollarsmore.com for more of Bill's insights.



Tags: Treasuries, bonds      
The Independent Investor: Why Are Interest Rates Rising?
By: Bill Schmick On: 04:56PM / Thursday December 16, 2010
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U.S. Treasury bond interest rates are rising. Since August, the yield on the 30-year bond has risen over one percent, the 10-year is up 118 basis points and the five year is up 102 basis points. For those unfamiliar with the government bond market these are moves akin to the stock market rising 50 percent.

It wasn't supposed to happen this way. The Federal Reserve Bank's second quantitative easing (QEII) was meant to keep interest rates low, provide even more liquidity to the markets and, hopefully, convince banks to lend more to cash-strapped consumers — or so we thought. The opposite appears to be happening.

This is a positive development in my opinion. Here's why:

When an economy moves out of recession and into recovery, one of the first things that happens is interest rates begin to rise. This occurs for a variety of reasons. Investors, for example, are willing to take on more risk. During recessions (including this one) investors normally keep their money in safe investments such as U.S. Treasury bonds. As the data indicates that the economy is beginning to grow again (as it is now), investors sell their bonds and buy stocks as they take on more risk and look for higher rates of return.

Bondholders also worry about the potential for inflation as the economy heats up. There is a lot of historical evidence that inflation begins to rise as the economy grows. Bond prices usually decline and yields rise to compensate for that expected increase in inflation. The point is, that after months of worrying whether the economy will fall back into recession or simply bump along the bottom, this rise in U.S. Treasury bond yields is living proof that the economy is finally growing again and at a rate that convinces investors to sell their bonds and buy stocks.

Now not all bonds should be sold simply because interest rates on Treasury bonds are moving higher. Rising rates are actually a positive for a wide variety of bond investments such as corporate and high yield corporate bonds (called junk bonds). Many of these bonds actually do quite well. That's because with economic-growth investors are more confident that these corporate-bond issuers will be able to service their interest payments and actually pay off their debts. Investors actually see the price of these bond issues move higher.

There is also a supply and demand explanation for rising yields. During the last two years an enormous number of investors have fled to the safety of U.S. Treasuries. Suffering steep losses in the stock market because of the financial crisis, trillions of dollars were invested in Treasuries with no regard to the rate of return on these bonds. Now that the clouds are lifting and the coast is a bit clearer, these same investors are beginning to cash out of bonds. The problem is that everyone is heading for the exit door at the same time.

This year, when the rumors of a possible QE II started to surface, aggressive traders jumped into the Treasury markets with both feet. By the end of August, according to Greenwich & Associates, hedge funds accounted for 20 percent (versus 3 percent in 2009) of the daily trading volume in the $10 trillion U.S. Government Bond market. Following them in were armies of speculators, both here and abroad, all eager to "buy the rumor" of another monetary expansion by the Fed.

Now that QE II has occurred, we are experiencing a classic "sell on the news" exodus from that market at the same time that longer-term bond investors are also selling. This provides a simple explanation for the truly astounding 44.75 percent jump in yields that have occurred in just over two months.

Bill Schmick is an independent investor with Berkshire Money Management. (See "About" for more information.) None of the information presented in any of these articles 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 e-mail him at wschmick@fairpoint.net. Visit www.afewdollarsmore.com for more of Bill's insights.



Tags: Treasuries, bonds      
@theMarket: Marking Time
By: Bill Schmick On: 10:41PM / Friday October 29, 2010
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This coming week will be a humdinger for the markets. The Federal Reserve is expected to begin a second round of quantitative easing and voters will deliver their verdict on the economy in mid-term elections. Both events will have ramifications for investors and stock markets worldwide.

The Fed's decision to further stimulate the economy via a second round of quantitative easing (QE II) has already been priced into the market, in my opinion, but the impact of the mid-term elections has not. If the Republicans gain a majority in the House and additional seats in the Senate, as many political pundits predict, then the markets have reason to rally in the months, if not weeks ahead.

For me, the question is when, not if, the markets will gain more ground. Stocks (and some commodities) are somewhat overbought right now and looking for an excuse to pull back. Maybe the election results will precipitate a "sell-on-the-news" reaction in the very short term. The question I ask is whether the lame-duck Congress will give investors an added excuse to sell?

Most readers are aware that the Bush tax cuts are scheduled to expire in 2010. Will Congress act to extend those cuts before the end of the year? If it does (by extending the tax cuts for many, if not all, Americans), then the markets could see substantial gains. On the other hand, if nothing is done and the tax cuts are allowed to expire than we may be in for a period of uncertainty.

Since I have been attending Charles Schwab's yearly investor conference in Boston this week, it was a good opportunity to take the pulse of the best and brightest on Wall Street as they shared their views of the market and economy. Clearly, just about everyone I talked to is bullish. Not once did I hear the term "double-dip recession," and for the most part, just about everyone was looking for strong markets between now and at least the second quarter of 2011.

In addition, no one likes bonds, especially U.S. Treasury bonds. "Bubble" was the term most often used when describing the $70 trillion investors have stashed away in the bond market. Most argue that the perceived safety that investors see in bonds is an illusion. The investment team from Gameco Investors Inc. headed by famed value investor Mario Gabelli argued that bonds are "in the ninth inning of a 30-year run" providing holders with little yield, no growth prospects and a mountain of interest rate risk. In addition, "Money markets are also not as safe as you think," said Gabelli.

He points out that the $2.8 trillion in money-market funds has a great deal of dollar risk in the form of depreciation, inflation and debasement, besides offering little in the way of yield or growth.

Currency wars was also a leading topic of discussion with most participants believing the battle between nations to keep their currencies weak will continue. The prognosis for the greenback is more weakness ahead as America attempts to export its way to greater growth. As a result, U.S. companies that export are in vogue, especially technology stocks.

Gold, precious metals and commodities in general was an area of heated arguments, with some dismissing the recent run ups as irresponsible speculation while others read the price moves as a rationale answer to declining currencies and the inevitable rise in inflation that lurks just around the corner.

Emerging markets are once again in favor as an area for long-term investment. Bulls point to the increasing percentage of global GDP (49 percent) represented by these fast-growing economies as opposed to what they consider is an underrepresented share of the world's stock market capitalization (only 31 percent).

In the minus column, financial stocks stood out as an area that won't regain its pre-2008 luster anytime soon, neither will consumer discretionary stocks. In both cases, these sectors suffer from the deleveraging that is under way among American consumers. Banks, whose major business is making loans to customers, will experience low growth since Americans are trying to reduce, not increase, their debt as a percentage of their personal income. Consumers are reducing that debt by cutting back on their discretionary spending.

All in all the tone was upbeat at the conference and it felt that business was beginning to get back to normal after several years of strife. Whether that is a good thing when discussing the financial services sector is a matter of opinion.

Bill Schmick is an independent investor with Berkshire Money Management. (See "About" for more information.) None of the information presented in any of these articles 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 e-mail him at wschmick@fairpoint.net. Visit www.afewdollarsmore.com for more of Bill's insights.



Tags: recession, currency, bonds, forecast      
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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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