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@theMarket: A Tale of Two Interest Rates

By Bill SchmickiBerkshires 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.

     

The Independent Investor: The VA — Political Football

By Bill SchmickiBerkshires Columnist

It is an election year and as such veterans are a voting block that neither side can resist. Both candidates are promising to overhaul Veterans Affairs once elected. The questions are whether to hand it over to the private sector or just try and fix the government organization's short-comings.

We all remember the terrible scandal back in 2014 when a whistle-blower revealed shocking inefficiencies, coverups and the deaths of some veterans within the Veterans Affairs. The then Secretary of Veterans Affairs Eric Shinseki, along with a gaggle of bosses in various states, who were caught falsifying waiting time reports for vets, provided the obligatory resignation parade before the nation.

Hearings were called where "outraged" politicians and veterans rights activists all got their share of free media time and in the end the Choice Act was rushed through Congress. This allowed vets to go to private care providers if they were unable to schedule medical appointments within 30 days or travel distances of at least 40 miles to a VA office. This would theoretically insure that no more vets would die while waiting for treatment.

Critics charged that this was simply the first step toward privatization of the veterans' health care system.

A bi-partisan panel, the Commission on Care (COC), comprised of  health care executives and veterans' advocates were charged with looking at the system and coming up with recommendations to "fix" it. Last month that panel issued 18 recommendations that are supposed to "transform this complex system."

If this all sounds like the typical smoke and mirrors remedy to a national problem that we have become accustomed to, then you wouldn't be wrong. First off, the panel recommended an 11-member board of directors that would govern the Veterans Health Administration and report directly to the president. To me that just sounds like adding another layer of bureaucracy on top of an administration chock full of the same.

In addition, a new "community network of care" would allow vets to obtain medical services from both private and federal health-care providers regardless of the distance to or wait times at their nearest VA providers. That would push the system further towards privatization, say its critics. Other suggestions included improving VA leadership, modernizing computer systems, enhancing clinic operations and creating an easy to use VA personnel system.

If all of those suggestions sound well-meaning, but nebulous in the extreme, you are right. If history is any guide, millions (if not billions) will be spent with little visible improvement in veteran's care, accountability will be low to non-existent, and as time passes, the whole effort will dwindle to nothing when the next crisis becomes the nation's priority.

Sorry for my cynicism, and now on to politics.

Few voters realized that the 2014 scandal occurred on Bernie Sanders' watch. He was chairman of the Senate Veterans Affairs Committee and had been so for a year when the scandal erupted. Critics argue that Sanders had been using the veterans' health care system as a model for what a universal health care system in America would look like. Did Sanders' ideological views of how much government could deliver blind him to the VA's obvious (in hindsight) problems and deficiencies?

As politicians will do, Bernie soon turned a losing proposition into a win by taking credit for the Choice Act, even though the legislation opened the door for further privatization of the VA. Not to be outdone, Hillary Clinton, towing the traditional Democrat's party line, wants to build upon the Choice Act and restructure the agency, but falls short of privatizing it.

Republican Donald Trump, as you might expect, jumped into the act. Stating that the Department of Veterans Affairs' health care system is "badly broken," he would move the VA further toward privatization. His campaign spokespeople suggested that it could evolve into more of an insurance provider (like Medicare), than an integrated hospital system as it is now. Other GOP legislatures support at least a partial privatization of vet's affairs.

As a Vietnam vet, there is a lot at stake for me and my fellow veterans. In my next column, I will examine the pros and cons of both positions.

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: The More You Look, The More You Lose

By Bill SchmickiBerkshires Columnist

How many times a day, week, month or year do you check your tax-deferred savings account? Did you know that the more you look, the higher your chances of losing money? For most of us, once a year is more than enough.

There are clients of mine that check their retirement accounts several times a day. To say they are addicted to doing so would not be an understatement. Some of them are retired and have nothing else to do each day but sit in front of the television watching financial channels. They are usually male, have control issues and have substituted watching TV and their investment accounts for their old job.

The sad facts are that the more you look, the higher the probability that you will see losses in your portfolio. That's because the markets do little or nothing the vast majority of time each year. And over time, you can expect the markets to be up or down at least 50 percent of the time. That means that if you check your accounts every single day, you will be disappointed with your returns at least half the time. Do you really want to live like that?

In addition, a loss will always impact you psychologically worse than a gain. For some people, it can ruin their entire day. What's more, those feelings of loss are cumulative. The anxiety builds and builds until you just can't stand another day of losses. So what do you do? Sell, usually at the bottom or close to it.

But it gets worse. You see the largest annual gains in the markets over no more than a couple of days each year.  If you are not invested, you miss it. Then the anxiety really builds, because you don't know when to buy back in. Now you feel like one of those gamblers at a Las Vegas gaming table in the wee hours of the morning, bleary-eyed, hung-over and exhausted but hoping to get back to break-even before they can call it a day.

Various research studies have shown that the more you monitor your portfolio, the riskier you will perceive investing to be. It's even got a name — myopic loss aversion.  It creates an attitude of over-vigilance when viewing short-term losses. And since human behavior is best at avoiding pain in the short run, your natural emotional reaction is to do just that — cut your losses and run.

Behaviorists have studied those who check their portfolio every day versus those who take a peek once a quarter. The daily checker has twice the probability of seeing a moderate loss (2 percent or more) than those who view their account just once every three months. Those who check often are shown to take the least risk in their portfolios and earn the least amount of money.

Frequent monitoring of your investments also causes your stress level to rise. Those who do, experience the stress felt by most Wall Street traders, which is one of the most stressful jobs in the financial sector. And the older you are (listen up, retirees), the more serious will be the consequences to your health.

At any age, stressed-out brains sound an alarm that release potentially harmful hormones such as cortisol and adrenaline (fear and flight). Ideally, the brain turns down these alarms when stress hormones get too high. That doesn't happen when you keep trading (or checking your account). Over time the brain slowly loses its skills at regulating hormone levels. This can cause all kinds of health problems from Alzheimer's to heart attacks and everything in-between.

So how often should you check your accounts? Ideally, no more than once a year and never during down periods, if you want to stay healthy and happy. If you find that a difficult proposition, re-examine your risk tolerance and adjust your portfolio accordingly until you can accomplish that goal.

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: Fedspeak Occupies A Dull Market

By Bill SchmickiBerkshires Columnist

It is late summer and a time when the rumor mills work overtime. Financial news departments, confronted with a paucity of breaking news, are desperate to publish "informed opinions" and comments from any public or private sector big name they can find. This week a squad of Fed officials was happy to accommodate.

Never mind that after a week of speeches on "will they, or won’t they” hike rates in September (or December, or anytime in between), investors are no closer to the truth than they were last week. As long as raising-interest rate decisions continue to be data-dependent, the markets remain in nowhere land.

I am not going to add my two cents to the debate because exactly when the Fed raises rates is immaterial to me. The financial markets may have an initial knee-jerk reaction when they do, but for longer-term investors, I believe that would simply be a buying opportunity. If traders choose to buy or sell stocks based on the conflicting opinions of every Fed official that gives a speech, well, what else can they do on a boring week in late August?

We are less than 1 percent from all-time highs in most of the averages. A week or two of choppy action should be expected. Some traders are concerned that as September approaches, we may see an even deeper pullback. That would not surprise me, but it would also not be a time to panic. 

Let’s say we do have a decline. One that could, from top to bottom, push the averages down by as much as 10 percent. But so what? In my opinion markets would quickly recoup those losses and climb even higher. Do you want to miss that?

Why am I so confident? Well, the way the election is shaping up, the odds overwhelmingly favor Hillary Clinton to win the White House. Wall Street wants and expects that. She represents "business as usual" for the markets with no new policies that will rock the boat. Sorry if you were hoping for change, but Hillary represents a continuation of existing policies with maybe one exception.

Many economists and pundits are now coming around to my view that whoever gets elected will launch a large economic spending program. Infrastructure seems the logical object of this anticipated government largesse. Fiscal spending should propel the economy further and may even restore the U.S. to its historical growth rates for at least a year or two. That would make the stock market roar.

As for the Fed and interest rates, the smart money is betting that if there is an interest rate hike, it won’t come until December at the earliest, and even then it is a big “if.” If history is any guide, the Fed will remain on the sidelines until after the election. In the past, when the central bank did raise rates three months prior to the election, the incumbent party always lost the presidency. I imagine that fact is not lost on a Fed chairwoman who was appointed by a Democrat.

Given that this is the near-term future scenario that the market is discounting, any technical sell-off would be just that. Technical in nature and not something that is out of the ordinary. My advice: Don’t try to time the market. Instead, simply tune out the noise and go to the beach.

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: Health Savings Accounts a Good Idea

By Bill SchmickiBerkshires Columnist

Does your employer offer a health savings plan? Many do, especially if your company's health insurance has a high deductible. If you aren't taking advantage of it, you should and here's why.

Health Savings Accounts (HSA) were created as a way to help control rising health care costs. An HSA is an account, similar to a personal savings account or an IRA that you can open at work or on your own. Employers consider it a supplement to their high deductible employee health insurance plan (HDHP).

How do you know if your health insurance plan qualifies as a high deductible? Usually, HDHPs won't start paying out until after you've spent at least $1,300 (individual) or $2,600 for a family in expenses with your own money.

HSAs are used to pay for things your employer plan doesn't cover. Qualified medical expenses such as co-pays, health plan deductibles and other non-insurance covered medical expenses such as dental and vision expenses. You — not your employer or insurance company — own and control the money in your HSA. The government and the health insurers believe that most people will spend their health care dollars more wisely if they're using their own money.

HSAs function somewhat like a 401(k) or 403(b) plan. You can make contributions from your paycheck on a pre-tax basis. Your employer can also match some percentage of your contributions. No matter how much you make, you can open a HSA plan. Even though you may have already maxed out all of your other available tax-deferred savings plans, you can still open a HSA.

Health Savings Plans offer a triple tax advantage in an age where tax shelters are few and far between. Any contributions to the plan, investment earnings you may make, and money you take out for qualified medical expenses are all exempt from federal taxes.

There are some eligibility rules that do apply before you can qualify. You must be already covered by a HDHP. You can't have other health coverage that is not an HDHP (including Medicare). And you can't claim yourself as a dependent on another person's tax return.

The maximum you can contribute in any single year, as determined by the Internal Revenue Service, is $3,350 or, if you have a family plan, $6,750. These maximum levels are subject to yearly adjustments for inflation. That's also good news given the ever-escalating cost of health care.

So what happens, you might ask, if I contribute the maximum and I don't use it in the first year?

The money simply accumulates in your HSA account, rolling over year after year and hopefully making more and more investment returns. You can invest it in the stock or bond market or just about anything else you want. If you switch jobs, you can roll it over with you.

The only issue is that if you take the money out for anything other than medical expenses, you will pay taxes on it. If you take it out before 65 years of age, you will also pay a steep penalty.

If you are a generally healthy individual and want to save for future health care expenses, this is the way to do it. Or, if you are near retirement, a HSA makes a lot of sense because you know your medical expenses are going to increase in the future.

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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