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The Independent Investor: Why Is This Recovery Different?
By Bill Schmick On: 03:59PM / Thursday October 09, 2014
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The stock markets are at record highs. Interest rates are at record lows. The unemployment rate is below 6 percent and yet, most Americans are unhappy. They are not feeling the recovery. Why?

The answer to that question is complicated. But let's start with the financial crisis. Like the Crash of 1929, the events of 2008-2009 were also the result of a credit crisis. The country's financial system was on the brink of a meltdown. In the 1930s, a lot of banks went under.  That was averted this time by spending massive amounts of money to shore up our financial institutions. However, the damage was done.

We lost trust. For the first time in three generations, Americans had doubts as to the credit-worthiness of its most venerable institutions. The ensuing recession was unlike any that America has experienced since the Great Depression. When one loses trust, both lender and borrower pull back. It takes a long, long time before that trust is rebuilt.  That process is still ongoing.

Readers may recall that it was only in 1939-1940, a full 10 years after the "Crash," before this country was able to climb out of its longest downturn in memory. Some say that if it had not been for World War II it would have been even longer. I don't believe that it will take us quite that long to return to a normal economy but from a historical perspective, the present state of our economy is understandable.

Back in August, The New York Times crunched some numbers to determine what the economy would look like coming out of a normal recession, compared to what is happening today. They found that five economic sectors out of 11 were lagging badly in this recovery. They were housing, state and local government spending, durable goods consumption, business equipment investment and federal spending. Let's examine how credit impacts these sectors.

Housing is no surprise. After all, it was at the forefront of the subprime loans financial crisis. There is a shortfall of over $239 billion in missing output in this sector. We know the reasons for this shortfall — tighter lending standards and housing prices that are still underwater from their peak. That means less jobs, fewer wage increases, a less mobile workforce since few are willing to sell their homes at a loss to relocate for a job. Bottom line: banks have a trust issue with borrowers; less borrowing, less housing, simple.

Less state and local government spending represents a $180 billion gap versus what they should be spending. The reason for the decline in spending is the absence of tax revenues and burgeoning debt burden most local governments incurred as a result of the recession. States have cut back drastically and for a good reason. They need to borrow just to make ends meet and who will be willing to lend if they are spending like a drunken sailor?  

The $178 billion gap in durable goods consumption is all about big-ticket items, many of which you need to borrow in order to purchase. Things like automobiles, furniture, appliances, etc. If you are already underwater on your house, who can afford to borrow and who will lend to you?

Corporations also have a trust issue. They are spending $120 billion less on plants and equipment than they should be because they lack faith in the future demand for their goods. Most of them can borrow all they want but they don't or if they do it is not for plants and equipment. It is for things they can control like stock buybacks or mergers and acquisitions.

That leaves the Federal government, which is spending $118 billion less than it would in a normal recovery. Because we were forced to spend so much in propping up our financial sectors, the nation's debt skyrocketed to a level that created a crisis of confidence among our politicians. The fear that the nation might not be able to service, let alone pay off these historical high levels of debt resulted in a compromise that in effect reduced spending for the next decade.

To make matters worse, none of the other six sectors that make up the major contributors to gross domestic product have been able to take up the slack. So where does that leave us? When one gets into financial difficulty, it takes a long time to repair a credit rating. It takes years, and that is exactly what has happened between borrowers and lenders over the last five years. There is no way to hurry the process. In the meantime, it is what it is.

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: October Starts Off on High Note
By Bill Schmick On: 06:06PM / Friday October 03, 2014
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Volatility was the buzz word this week in the stock market. The averages moved up and down by a percent or so on a daily basis but ended the week on a high note. Can we expect more of the same?

Traditionally, at least the first two weeks of this month have been volatile, so the good news is that we are half way through that period and so far there has been scant damage to the averages. At one point this week the S&P 500 Index was down about 4 percent from its highs but stocks found support around the 1935 level and bounced from there.

Friday the markets were galvanized by a jobs report that showed 248,000 job gains in the month of September. That drove the unemployment rate down to 5.9 percent, finally dropping below that elusive 6 percent number. In celebration, the markets liked that data point and added another percent or so in performance.

Of course, some worry that if the economy gains further strength too quickly that the Fed may begin to raise interest rates earlier than the expected date of mid-March 2015. So far that is simply supposition. But among Federal Reserve Governors there is growing debate on whether or not to raise rates sooner. Two, and maybe three members (after today's employment number), of the Federal Open Market Committee are petitioning for a faster rate rise. But the buck stops with Federal Reserve Chairwoman Janet Yellen, who has not indicated that an early rate rise is in the cards.

While we here in America are winding down our quantitative easing, over in Europe, Mario Draghi, the head of the European Central Bank, is wrestling with increasing their own QE program. He disappointed investors this week when he failed to announce additional stimulus measures on the heels of stimulus announced just last month. I keep reminding readers that decisions in Europe take much longer than in the U.S. Nonetheless, European markets sold off as a result.

In the meantime, the dollar keeps climbing, gold and silver continues to fall, with at least one analyst at Ned Davis Research predicting that the precious metal could ultimately fall to $650 an ounce.

Over in Asia, Hong Kong protests continue against the Mainland's heavy-handed tactics to reduce the quality of democratic elections on the island. Readers, however, should remember that prior to the peaceful transition of Hong Kong to China; Hong Kong was a colony of Great Britain. As such, its democratic rights were limited during that period as well. That doesn't make it right but it is the facts. Although it makes great headlines and sound bites, I don't believe that these protests will turn into some kind of "Asian Spring" in which the entire region falls into turmoil. Comparing what is happening in Hong Kong to the events in the Middle East is comparing apples to oranges, in my opinion.

As for our markets, I expect to see the rebound continue. In this volatile environment that means that we could reach 1,975 on the S&P 500 and 17,927 on the Dow quite easily. After that, there are two options: first, we drop back and re-test the recent lows between 1,910 and 1,935. There is a lot of technical support at those levels. If we break that, expect to see a long-overdue test of the 200 day moving average come in to play.

Or we could meander around the 1,975 level before trying to take out the historic highs. That is exactly what happened in every market dip so far this year. However, it is absolutely necessary for all the indexes to make new historical highs before the threat of another big dip is removed for the remainder of this year. In either case, I would do nothing but watch.

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: Money & Divorce — What You Should Know
By Bill Schmick On: 06:27PM / Thursday October 02, 2014
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You never paid attention to the family finances. Suddenly, your spouse wants a divorce. Fortunately, it's an amicable separation and you agree to split things up equitably. Where do you begin?

The above scenario is much more common than you think since the odds that your marriage will end in divorce are about even at best. More than 50 percent of first marriages end in divorce and 60 percent of remarriages, so the statistics are weighted against a successful marriage in America. It is extremely important therefore that both spouses understand their current financial situation and what their income needs will be post-divorce.

First, think of what your immediate cash needs will be. If one of you is working and the other is not, then cash flow is going to be highly important to the unemployed spouse. In that case, the cash-strapped party will want to receive assets that one can sell easily, quickly and with the least tax consequences. This would include stocks, mutual funds, exchange-traded funds bonds and possibly Roth IRA assets. For the spouse that is working, a combination of assets makes more sense. Some might not have immediate liquidity such as a home, a limited partnership, retirement plans and certain taxable accounts.

Remember also that you may decide to split up, but that does not mean your debtors will agree to let one or the other off the hook when it comes to your liabilities. Mortgage lenders, credit card companies, the IRS and even your credit report agencies will want to know exactly who and how each party are going to honor their debt obligations. As such, it is important that before you get divorced you agree to either pay off your mutual debt or determine each spouse's responsibility for that debt. It might also be a good idea to request a credit report as well since sometimes there may be some outstanding debt that has slipped through the cracks over the course of a long marriage.

By the way, don't ignore the tax ramifications of splitting up your assets. For example, if the spouse in need of cash flow sells securities there may be taxes to pay at the end of the year. If you are going to agree to sell your home and you think you can sell it for more than the purchase price, you might want to hold off getting a divorce until after the sale. Why?

The first $500,000 in capital gains from the proceeds of a home sale is not taxed as a married couple. However, if you are single the tax exclusion drops in half to $250,000. In addition, you may have also accumulated tax assets, which are tax losses that can be applied against taxable gains over the years. Make sure this issue is examined and those assets divided appropriately.

Next to your home, retirement assets are usually a major part of any couple's net worth.

Employer–sponsored retirement plans, IRAs, even pensions can be divided and transferred on a tax-free basis as long as the rules and regulations are followed. Divison of some of these retirement assets requires both the divorce court and the plan administrator's approval.

Getting a divorce for most of us is a traumatic emotional decision but it also has a major financial impact as well. Separating emotion from the financial decisions is tough enough when the both sides are relatively civil about the decision. It can be almost impossible when the divorce is acrimonious. And I have not even mentioned the subject of children. That is another topic for another time.

In any case it is a good idea to seek out someone who can advise you on these financial matters that has an objective point of view.

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: Wash, Rinse and Repeat
By Bill Schmick On: 08:20AM / Saturday September 27, 2014
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The dollars running, stocks are falling, bond prices are jumping while commodities are tanking. Welcome to another week in the financial markets. Expect more of the same in October.

As September, the worst month of the year for markets, comes to a close (next Tuesday) volatility appears to be rising. Stay strapped down, however, because we are not through the woods quite yet.

Historically, the first two weeks of October can get pretty hairy. Some of us might recall October of 1987 as an example.

So many of us have nudged up our exposure to the equity markets this year in pursuit of more and more gains that any sell-off scares the bejesus out of us. The 1-2 percent pullbacks, like investors experienced on Thursday, is a shock to our system. If you can't stand the heat, get out of the kitchen or so the slogan says.

Does that mean you should raise cash, sell your equity holdings and wait to jump back in after the correction? If you can do that, "you're a better man than I,Gunga Din."

In markets like this "volatility" is another name for stock market declines. Heading into October, therefore, don't be surprised if we have more of this same kind of action in the weeks ahead. The best advice I can give is to hang in there, ignore the paper losses and look ahead toward the end of the year.

I am convinced that whatever losses you may incur will be made up before January.

The U.S. dollar is still climbing after experiencing a decadelong period of underperformance. Usually, a rising dollar and a rising stock market can continue in tandem.

That makes sense because the engine that drives both markets is a growing economy. Like the Fed, I believe that is what is happening in this country.

However, that does not mean that all companies benefit from a strong dollar. Export stocks, many of which you will find among the S&P 500 Index can, and will be hurt by the fact that every gain in the dollar makes the products they sell more expensive to foreign buyers.

Non-U.S. sales account for roughly two thirds of total sales among companies in the S&P and 62 of the largest exporters generate more than 50 percent of their profits from exports. If the dollar continues to strengthen (and most currency analysts think it will) then the impact on the S&P 500 Index could be substantial. Why is that important?

Over the last several years the S&P 500 Index was the best performing equity index in the world. Prior to the financial crisis, other indexes (international, emerging markets, small or mid-caps, etc.) did better.

The S&P 500 Index also happens to be the index most professionals use as a benchmark of comparative performance. As such, it has been hard to beat an index that has performed so well. This could change.

In the future, savvy investors may re-focus their interest on other non-S&P stocks or indexes for better performance if the dollar's strength turns out to be a longer-term trend and I think it will. I suspect that some investors (myself included) are already making the switch.

In any case, chances are high that the market will put us through the wringer (wash, rinse and repeat) in the 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.



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The Independent Investor: Is Wall Street Responsible for Climate Change?
By Bill Schmick On: 10:57PM / Friday September 26, 2014
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Monday's Wall Street sit-in by a few hundred radicals would lead us to believe that Wall Street is responsible for the present changes in the world's climate. Maybe so, but remember this, what Wall Street has done, it can also undo.

Readers know that I am no apologist for big business, the financial community or Wall Street. As for climate change, I am clearly on the side of those 300,000-plus people who participated in the People's Climate March on Sunday. The earth is in jeopardy today thanks to carbon emissions generated by fossil fuels.

The simplistic approach, preferred by this "Flood Wall Street" crowd, condemns Corporate America, Capitalism in general, and oil companies, specifically, for the global dilemma we face. The solution, they offer, is to do away with these entities with the assumption that once that is accomplished, the world shall once again be green and free. If only things were so easy.

Historically, I can understand why they blame all things business. You see, it takes a long time for climate to change, according to the scientific community. As such, we could blame the Robber Barons of the 19th century for today's ills.

After all, without a Rockefeller or Morgan(and Wall Street to fund them), there would be no oil and gas industry, nor railroads to transport these products. Of course, we probably wouldn't have computers or medical technology or a host of other things that makes up today's society either.

We could go back further still in our search for a scapegoat to the Dawn of Industrialization, but then we would have to bring Europe into the equation, specifically Great Britain where it all started. Remember, too, that it was foreign nations, not Wall Street, capitalism or America, that first developed and exploited the globe's natural resources. The world's populations ravaged the earth while mining for coal, tin, gold and dozens of other metals for centuries.

How many forests were cut down worldwide before the New World was even discovered in order to clear the way for population expansion and farming? We wring our hands in anguish today over the downing of trees in the Amazon and other locales but conveniently forget how we have all abused the environment to get us where we are today.

Some say that we need to radically change our priorities. Walk rather than drive, forsake flying and stop mining altogether. Give up fossil fuels even if it would drive the world into a global depression. Radical times, they argue, call for radical solutions.

So who wants to go first, you?

For most of us, those kinds of remedies are beyond the pale, but does that mean that we should simply continue as we are? Of course not, but let's not shoot ourselves in the foot by getting rid of the very engine of change we need to turn around this situation. The forces that got us into this mess are the ones that will get us out of it. Evidence abounds.

It is Wall Street and capitalism that is making it possible for any number of carbon-reducing technologies to flourish. Who funded and is developing the world's first, second and third electric car companies? Where are solar companies getting their backing?

Read my lips: it is private capital that will convert this generation of fossil burning vehicles into one powered by electricity and other clean technologies. Wind farms, rooftop solar panels, organic farming, solar powered utility plants, pollution controls, scrubbers, in fact, just about everything we will need to clean up the environment is either funded by or made by companies that are listed on Wall Street or soon will be.

Yes, world governments have a role in providing the incentives for companies to take a chance on new technologies. But all the governments in the world do not have the money, knowledge or technology to effect climate change. That's the job of the private sector. And as long as there is a profit to be made in cleaning up the environment, Wall Street will be happy to oblige.

So let's use 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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