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The Independent Investor: Secular vs. Cyclical The Big Picture
By Bill Schmick On: 10:51PM / Friday November 29, 2013
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Over the last four years, the stock market has gained over 100 percent. Some think we've hit the top, while others believe we are just getting warmed up. The difference of opinion centers on whether you think we are in a cyclical or secular bull market.

What's the difference? When you hear "cyclical," whether bull or bear, you should think short-term; a couple years at best, secular, on the other hand, can last from 5 to 20 years.

In secular bull markets, stocks rise more than they fall with any declines made up by subsequent increases in stock prices. In secular bear markets, the overall trend is down. It is a period of wealth destruction in which stocks decline more than they advance over a long period of time.

Within these long-term secular markets, stocks can perform counter to the trend for several years. These are called cyclical bear and bull markets. The period 1982 through 2000 was considered the greatest economic expansion in global history and a textbook example of a secular bull market. Yet, there were short recessions and several times when the markets declined during that period. As an example, the Crash of 1987 occurred during that secular bull market.

A secular bear market began in 2000. Yet, 2003-2007 were bullish up years followed by a devastating decline into 2009 (brought on by the financial crisis). Today's disagreement centers on whether the end of this secular bear market occurred with the lows seen in 2009.

Those who think that is the case date the new secular bull market as beginning as 2009. Although the gains have been steep, they believe the markets still have over a decade of growth ahead of us.

Others disagree. They argue that the last four years was simply a case of another cyclical bull market rally within a secular bear, like 2003-2007. Most believe that will end this year. They argue that this bear market won't be over until at least 2018.

Most of their argument rests on the passage of time. Statistically speaking, if you took all the bull and bear markets periods over the last 132 years and measured their average duration you would arrive at an average of 17.4 years. But statistics have a way of turning fact to fiction.

As another example, there has also been more secular bull years (80) than bear years (52) with the average gain of all secular bull market rallies equaling 415 percent, while the average losses of secular bear markets has been minus-65 percent.

All of these statistics are neat and clean but entirely unrealistic as an investment tool.

Consider: there were only three periods since 1877 when the duration of secular markets were even close to a 17.4-year time span and all of them have been since 1968. It is true that secular bulls provided far more gains than the bears caused losses, but the gains at times were only half the historical average.

Some of the smartest people I know on Wall Street are convinced that we have entered a new secular bull market. They are definitely a minority, but I happen to be in their camp.

After several years of worldwide governmental stimulus, both fiscal and monetary, the global economies are beginning to grow. I believe that global growth will accelerate in the years ahead.

The markets, in my opinion, are looking backward, focusing on the Fed's stimulus program.

They fail to realize that the Fed's quantitative easing has already accomplished its objective. All that's left is to let the markets begin to work on their own. That will happen early next year.

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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@theMarket: Stocks Need a Break
By Bill Schmick On: 08:06AM / Saturday November 23, 2013
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This week the S&P 500 Index touched 1,800 before pulling back a bit. Hitting round numbers in the averages usually creates some profit taking among investors. A number of indicators are also hinting that a minor correction could happen at any time.

A stock market decline in the magnitude of 5-6 percent is overdue. I'm not sure if it will happen this week or next, but I am pretty sure it is just around the corner. I could be wrong on my timing although the evidence is building. Some of the variables I watch are flashing red lights, others are simply amber and a few remain green.

One indicator I watch is small cap speculation. Frothy markets are wonderful for penny stocks. Speculators day trade these puppies and can make as much as 8-10 percent in a short time period if they bet on the right horse. In the last few days those stocks are not working as well as they have over the past month. They are usually a leading indicator for market turns.

Then there are the momentum stocks. In bull markets there are always stocks that seem to go up and up almost every day until they don't. Take the current mania for solar stocks and companies that produce 3D printers. In the last few weeks some 3D stocks have actually doubled. But this week, these same stocks have been down as much as 20-30 percent. When momentum stalls, the overall market is usually not far behind.

As a contrarian, I also pay attention to investor sentiment. The more bullish investors become, the more worried I get. Proprietary crowd sentiment numbers indicate we are at a level where the market has pulled back several times since 2011.

Readers may ask how this cautionary column squares with my belief that we have entered a secular bull market that could last for years. A secular bull market does not mean that the markets go up and up without experiencing declines. They do, and some of them can be severe.

It is what keeps the bull going. Periodic sell offs that allow the markets to consolidate its gains and give new buyers a chance to get in is the historical formula for a long-lasting uptrend.

What I am hoping to see is a short-term decline in which the S&P 500 Index falls to its 100-day moving average. That is around 100 points lower from here. In the grand scheme of things, it's no big deal. It would allow the markets to then stage a traditional Christmas rally sometime in late December continuing through the New Year.

I'm sure you are asking what this means for your portfolio. The short answer is a paper loss in your portfolio. Some investors may be tempted to sell now and jump back in after the correction. Good luck to you if that's your plan. There is no guarantee that the markets will cooperate. What if the decline is only 2 percent? What if I'm wrong and the markets continue to grind higher without a pullback? Are you willing to be glued to the computer screen eight hours a day watching the markets for a turn that may not come?

If you can't take a short-term loss 5-6 percent paper loss in your portfolio, you are invested far too aggressively. These kinds of minor declines are the cost of doing business in the equity markets. They happen all too frequently. Get used to it, or reduce the risk in your portfolio permanently.

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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The Independent Investor: Averting a Future Food Crisis
By Bill Schmick On: 12:03PM / Thursday November 21, 2013
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More and more scientists, sociologists and economists are predicting a world food crisis in this century. Meeting that challenge will require another Green Revolution, but how we accomplish that is the subject of a great deal of controversy.

Between the 1940s and 1970s the world enjoyed its first "Green Revolution." It was an age of technological advances in food production. This golden age of agriculture introduced new chemical fertilizers and pesticides, better irrigation and planting methods, improved and different varieties of seeds and a new understanding of farm technology. This renaissance in farming resulted in huge gains in the amount of food farmers were able to produce globally. That revolution not only improved the diets of millions, but also saved millions more from starvation.

Of course, there was a downside to this new age of agriculture. The chemical fertilizers were found to deplete the soil of nutrients. They were also are a major contributor to water pollution. We have found out that water is also becoming a scarce commodity. New products such as Bt corn, which produces its own insecticide, and Roundup Ready crops (genetically altered food substances), were hailed as saviors of the world.

However, questions concerning the safety of these new bumper crops were raised by environmental organizations, such as Greenpeace and other consumer organizations. These groups argue that no one knows or understands the long-term effects of these genetically-altered products on humans. Demands to discontinue the use of these products ultimately resulted in a European ban of these bio crops.

As a result, many argue that pursuing further scientific and technological advances in farming is not worth the risk, given its potential impact on the environment and humanity.

Instead, they would rely on augmenting tried and true government policies, re-regulation of existing laws, more food aid and increased coordination among countries. All of the above actions are commendable, but I question whether more of the same policies can really meet the future challenges we face. So far they haven't.

Clearly, there are some obvious ways of beefing up crop production. For example, we could get rid of the biofuels boondoggle legislated by the U.S. It is a multibillion dollar misguided effort to convert corn into ethanol as a way to use less oil and gas. The process requires enormous amounts of energy, and diverts almost two-thirds of American corn production away from where it's needed — in the food chain.

"Smallholder farmers" is also an idea that has come of age. Over two billion people work on small farms in developing countries. The problem is that these potential food producers lack investment, infrastructure and technological expertise to even feed their own families, let alone their local villages.

Adding insult to injury, for decades, the U.S. and Europe lectured poor countries not to subsidize their own farmers while bestowing billions on their own farming sectors. Only recently have those misguided policies begun to change.

But for my money, my hopes lie with the private sector and profit-driven entrepreneurs. That is where the breakthroughs are occurring in clean energy and fuel-efficient cars. If there is going to be another Green Revolution, science and technology will lead it. It already is.

Researchers in the Philippines and Mexico are breeding new seeds that will produce more stable crops. Crops that will be more pest and weed resistant while yielding higher nutrients. Golden Rice, for example, is a new rice seed that is high in beta-carotene, a source of Vitamin A. It was supposed to be targeted to subsistence farmers in vitamin A-deficient areas. Unfortunately, critics of genetically-engineered crops squashed the idea.

There are organizations working to modify African sorghum into a more digestible food crop. Others are producing animal-free meat as well as dozens of other food stuffs that could make a huge dent in world hunger. But those efforts are still entangled in controversy.

I believe that as worldwide hunger and famine becomes more acute, environmentalists, consumer advocates and scientists will be motivated to sit down and work together. Faced with few workable alternatives, they will succeed in developing and testing safe, highly nutritious and higher-yielding crops and other food stuffs.

Today's technology is also playing a part in this budding revolution. The FOODsniffer, for example, is a smart phone app that detects infections, toxins and genetic mutations in plant and animal samples. The VitaHerd employs a sensor that captures and analyzes the vital signs of dairy and beef cows to improve health, prevent disease and improve productivity. Another company uses computer vision to identify and eliminate weeds, which could someday replace the entire $25 billion herbicide market. Robots are now being employed to pick, prune and even plant certain specialty crops. Drones are being used to overfly crop land monitoring and identifying potential problems before they become acute.

The point is that another Green Revolution has already begun. It is simply a question of how fast it will be allowed to grow, given the obstacles. Hopefully, its opponents will soon realize that more than hunger and starvation are at stake. Many of the hungriest parts of the world tend to be the most war-torn. As the food crisis grows, so too does the threat of war. No one wants that.

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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@theMarket: Market Gains Are Just Beginning
By Bill Schmick On: 03:59PM / Friday November 15, 2013
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For those who have yet to commit to equity, it is time to reassess. We have entered a new phase in stock markets worldwide. It is called a secular bull market and could last for many years.  Don't let this opportunity slip by.

Talking to prospective clients and investors over the last few years, I have heard a litany of reasons why stocks are not a good investment. The following are just a few of the more popular excuses: a second financial meltdown is just around the corner. The Fed's quantitative easing will spark hyperinflation. U.S. debt and deficits will sink the markets. Washington's politics will drive the country into a depression.

Then there are those trapped in self-fulfilling prophecies. I call them the "I missed it" crowd. These are the investors that continuously argued that the markets are too high year after year.  Now, four years later and over 100 percent higher, they are still sticking to the same mantra.  A subgroup of those dissenters, who are still holding U.S. Treasury bonds or CDs, would like to take the plunge, but they too are afraid that the stock markets gains are over.

My position is that the above investors are looking backward. Future gains will be equal to or better than those of the last few years driven by gathering strength in world economies and low interest rates.

So let's put this "markets are too expensive" argument to bed once and for all. The stock market, as represented by the benchmark S&P 500 Index, on March 24, 2000, was trading at 1,527. Today, Nov. 15, 2013, that level is 1,792. That is a gain of only 17.3 percent over 13 years (1.3 percent gain annually). That is much less than the inflation rate during the same time period and far below the market's historical average of 7 percent per year over the last 100 or so years.

Ask yourself if those kind of gains accurately reflect the advances we have witnessed over the last 13 years in education, energy, technology, science, medicine, food production industrial manufacturing and a host of other areas.  By any stretch of the imagination, does a 1.3 percent gain in stock prices each year reflect those advances?  
Of course not; but let's look at another metric, the trailing price/earnings ratio (P/E) of the market, a tool that attempts to value stocks by dividing the price of a stock by its past earnings. Back in March of 2000, the P/E ratio stood at 28.3 times earnings. Today, that ratio is only 17.4 times earnings. So why is the market cheaper now than it was 13 years ago?

The simple answer is that the stock market had been in a secular bear market for most of that time. During secular bear markets, which can last from five to 15 years, gains are hard to come by. During secular bull markets, which I believe we have now entered, the opposite occurs. There is a catch-up period where markets begin to make up for all those years of low growth. We are in that phase right now. In the years ahead, the gains will begin to slow down but should be above the historical average. We may even have a few years where we experience losses (because of a recession, for example) before growth resumes.  

So for discussion's sake, let's guess that this particular secular bull market will last a decade. If the S&P 500 Index simply returns to its historical norm, that would mean 7 percent growth/year times 10 years or a total of 70 percent. Of course, if you compounded those gains the returns would be much higher.

The moral of this tale is that anyone with a long-term view could enter the market today, despite its historical highs, and expect to prosper for years to come. Sure, there would be pullbacks, as there are in every market environment, but the trend would be your friend. How simple is that?

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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The Independent Investor: Food, the Next Scarce Commodity
By Bill Schmick On: 04:15PM / Thursday November 14, 2013
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Recently, a leaked report from a United Nations scientific panel had some bad news for the world and consumers in particular. The scientists are predicting that climate change, coupled with an increase in demand, have set food prices on an upward trajectory for decades to come.

Readers of this column should not be surprised. Over the last several years, I have written extensively on the subject of weather, climate change and the demographic shift to higher consumption of food within the emerging markets. We have all felt the impact in our pocketbooks every week at the supermarket. What is recent and most alarming in the panel's preliminary findings is the extent by which food production will shrink and demand rise.

Through this century, the United Nations Intergovernmental Panel on Climate Change, the world's foremost authority on the subject (and winner of the 2007 Nobel Peace Prize), expects food production will decline by 2 percent per decade. They blame climate change for the decline.

They forecast that higher temperatures because of greenhouse gases will reduce crop production in tropical climates while increasing production in cooler zones. Back in 2007, when the panel's last report was released, scientists believed that any reduction in production in the southern hemisphere would be nullified by increased production in the northern parts of the globe. That is no longer the case.

At the same time, consumption demand for food is predicted to rise by as much as 14 percent each decade. This increase in demand has two parts. The world population is expected to grow from 7.2 billion today to 9.6 billion souls by 2050. At the same time, the on-going change in the economic fortunes of those living in the lesser developed parts of the world will increase demand for the quantity and quality of all sorts of food.

Places like China, India and other emerging markets, where much of the world's population lives, have seen a drastic and welcome increase in living standards, wages and consumption habits. For the first time ever, peasants-turned-factory workers and shopkeepers can afford to enrich their diets with pork, beef, chicken and various dairy products.  As salaries increase further, so will the demand for food.

Over the last few years, I have pointed out the impact of weather (drought, floods, hurricanes, etc.) in our own country on the prices of various food staples such as corn, wheat, sugar, beef and other commodities. Worldwide, we have witnessed huge spikes in all sorts of crop prices from coffee to cocoa. And don't forget that crop shortages and rising prices have already had an immediate and negative impact on the populations and politics of various countries.

Food riots in Haiti, Bangladesh and Egypt and in various countries in Southeast Asia have occurred with depressing frequency. Recently the scarcity of food has had regional implications, most notably in the Middle East. Discontent was as much about food as it was about autocratic rulers during the Arab Spring. In 2010, droughts in Russia, Ukraine, China and Argentina and torrential storms in Canada, Australia and Brazil — all major wheat and grain producers — considerably diminished global crops, driving commodity prices up. The Middle East was already dealing with internal social, economic and climatic tensions, and the 2010 global food crisis helped drive it over the edge.

The most obvious answer to combating this coming food scarcity is to bring more land into agricultural production. In my next column, we will take a look at what is happening in the United States in response to this challenge and what players will stand to benefit the most by this trend.

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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