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@theMarket: Tea Leaves and Crystal Balls
By Bill Schmick On: 04:27PM / Friday December 27, 2013
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Given that the New Year is just around the corner, brace yourself for a barrage of Wall Street predictions. Investors love to read them, despite the fact that the vast majority of forecasts will be proven wrong. Last year, I was lucky and spot on with my bullish forecast, but 2014 could be different.

 First, the good news, the economy and employment will continue to grow. Despite the naysayers, the quantitative easing by the Federal Reserve Bank over the past several years was, in my opinion, a success. In 2013, we began to see the fruits of their labors. I believe the strength of the stock market this year was fueled by the gathering strength of the economy and not by what the Fed would or would not do.

Unemployment will continue to fall and will drop to below 6.5 percent by the end of 2014. The strength of the economy will mean an increase in hiring by the nation’s businesses and corporations. Wages will begin to climb for workers and profits will expand among employers.

As a result, the stock market will continue to make gains, although not at the pace of 2013. Declines this year were short and shallow. Every time the markets dipped, buyers took that opportunity to add to their holdings. The S&P 500 Index made it through the year without once experiencing a 10 percent decline. The dazzling strength of the stock market disappointed those who were waiting for a serious pullback before entering the market.

It won't happen like that in 2014.

I suspect that somewhere at the end of the first quarter or into the second quarter, we will see a substantial stock market decline of the 15-20 percent variety. Now, folks, this will not be the end of the world nor should you treat it as such. It will simply be a much-needed correction within a bull market.

The second year in an election cycle has always been a bad one for stocks, and there is a lot riding on elections in 2014. At the same time, if markets continue to advance, valuations will become stretched and the chances of a big sell-off will grow higher and higher.

Interest rates will also continue to climb in 2014. This year was the turning point for bond investors. The thirty year bull market in bonds is over and the next several years will see declining values in bond portfolios and higher and higher interest rates. It may well be that as the Fed begins to taper in earnest next year; interest rates could climb high enough to spook the stock market, causing the sharp selloff.

The good news is that I expect all the potential losses that stock investors would incur under my 2014 scenario could well be made up by the end of next year. It may well be that the market's 2014 gains could be around the historical norm, about 7 percent, when all is said and done.  

As most of my readers and clients know, I will not sit idly by in the face of such a selloff, if it should occur. Unlike this year, where my strategy was to buy and hold, next year will require a certain amount of adeptness in first selling and then buying back equities for some of you. For those longer-term players who are willing to do nothing, you can expect, at worst, some paper losses that will be made up by year-end.

Remember too, that we are in a secular bull market. As such, next year's decline, if it occurs, would be merely a speed bump in the grand scheme of things. I fully expect the stock market to continue to make gains beyond 2014, possibly as high as another 60-80 percent. So the best New Year's resolution you could make in 2014 is to stay with stocks for the foreseeable 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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The Independent Investor: Japan Embraces Bushido
By Bill Schmick On: 07:31PM / Thursday December 26, 2013
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It was a word rarely spoken in postwar Japan. Bushido, or the "Way of the Warrior," evoked too many embarrassing and shameful memories culminating in the horror of Hiroshima and Nagasaki. But times have changed.

On Dec. 26, Prime Minister Shinzo Abe did the unthinkable. Defying the Koreas, China and the U.S., he visited the Yasukuni war shrine. It is where the memories of 2.4 million Japanese dead from three wars are remembered. His 30-minute visit sparked outrage from Japan's neighbors who view the shrine as a symbol of Japan's imperial military past.

Last Tuesday, the Japanese government confirmed my thesis presented to readers six months ago. On Tuesday, it announced a significant increase in its defense spending over the next five years amounting to 24.6 trillion yen ($237 billion). That's an increase over the current plan and, in my opinion, the defense budget will be increased again and again as time goes by.

They will use the money to acquire surveillance drones, 28 American F-35A fighter jets, 17 Osprey aircraft, five naval destroyers, six submarines plus amphibious vehicles. That's not all. Japan's existing Self-Defense Forces will be beefed up with a new amphibious unit (similar to the U.S. Marine Corp) whose job would be to re-take islands captured by the enemy.

Abe also announced the establishment of a U.S.-style National Security Council and gained support for changing the country's constitution, specifically Article 9, which prevents Japan from "collective self-defense" (coming to the aid of its allies).

Clearly, Japan is rebuilding its defense capability. This sea change will have long-term repercussions for the Japanese economy and the balance of geopolitical power in Southeast Asia. It also adds to U.S. security while reducing our costs as we begin to share the role of the world's policeman.

In my last column back in August, "Japan's New Frontier," I argued that this island nation was on the eve of re-inventing itself. I predicted that as part of an economic renaissance, Prime Minster Abe and his cabinet was preparing to expand its defense capabilities. Re-armament, in my opinion, would address several issues simultaneously.

An expanding defense industry would provide a large number of highly skilled, highly paid jobs for the country's workforce. It would also be an easy avenue for the government to provide spending and additional stimulus to the economy. It would answer the U.S. government's on-going request that Japan shoulder more responsibility in policing their side of the globe, specifically Southeast Asia. And finally, the return of the samurai in the form of a stronger army, navy and air force would provide a strong detriment against encroachment from China, North Korea and, someday, possibly a more aggressive Russia under Putin.

Recent events have played into the hands of Abe in martialing support in his quest toward bushido. China's arbitrary declaration of an exclusive "air-defense identification zone," covering the disputed Senkaku Islands recently lent credence to Abe's argument that Japan must be willing and able to protect its own territory or else others would take it from them.

This argument reverberates in other parts of Asia. Vietnam and the Philippines have their own disputes with China over territory. It is no accident that Japan, using last month's typhoon damage in the Philippines, dispatched troops, ships and generous amounts of aid while China did next to nothing. It was the largest deployment of Japanese forces since 1945.

Most readers are aware that I have been bullish on Japan, its economy and stock market for the last two years. Everything I see convinces me that my investment stance is correct.

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: Fed Saves the Santa Rally
By Bill Schmick On: 03:55PM / Friday December 20, 2013
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This week the Federal Reserve Bank announced it would begin to taper in January by $10 billion a month.  Most investors expected the markets to drop on the news but the opposite occurred. Why?

One reason is that investors abhor uncertainty. The Fed's announcement this week that they plan in January to reduce their $85 billion a month bond purchases by $10 billion removed a major psychological barrier to the market's advance. Investors now have a game plan on how and when the Fed will reduce their monetary stimulus and can adjust accordingly.

I commend the Fed and outgoing Chairman Ben Bernanke. They handled what could have been a dicey situation adroitly. Bernanke, in his press conference after the FOMC meeting, managed to simultaneously reassure investors that interest rates would remain low, while focusing their attention on the growing strength of the economy. Since then the markets haven't looked back.

So does this week's event change my short-term attitude toward the stock market? I was expecting a decline in the averages. My first stop was the 50-day moving average. We hit that mark and bounced. Many of the indicators I watch are still pointing toward caution but others have turned positive again. I won’t fight the tape and will instead give the market the benefit of the doubt here.

Clearly, the Fed delivered the rally that Santa Claus couldn't. I would expect the market to remain volatile but still maintain its upward trajectory into the New Year and possibly beyond. Given that I had recommended that investors stay long the market, despite any short-term declines, no harm was done. We can all enjoy the next few weeks of upside, but I do apologize for any undue stress I may have caused readers by predicting an imminent decline.

Wall Street winds down beginning next week through the beginning of January. It is a time when low volume allows smaller trades to have a larger impact on prices and we should expect increased volatility.  Maybe we run up, maybe we come down, or maybe we just chop around, but without the big players the market behaves far less predictably. Once again, I advise clients to ignore any short-term moves.

I will mention that we are only weeks away from another stock market phenomenon called the "January effect." At year end (actually starting on the last day of December) through the fifth trading day of January small-cap stocks have tended to rise substantially. The effect is explained by the tendency of investors to first sell these stocks to create tax losses or raise cash for the holidays. This selling drives down prices far below their fundamental worth. Bargain hunters then move in and buy quickly driving up the prices and creating the January effect.

Unless you are an adept trader, I would not recommend you play this game; but for those who may hold some of these small cap stocks, it is good to be aware of these trends.

 It's been a good year for all of us, and well deserved. I want to take this opportunity to thank you for your support and wish all of my readers and clients a very happy holiday season.

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: What the Fed Taper Means For You
By Bill Schmick On: 05:10PM / Thursday December 19, 2013
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This week the Federal Reserve Bank announced the beginning of the end of its years-long support of the financial markets. Granted, $10 billion per month of reduced purchases is a baby first step, but over the next year, the Fed is hoping they can reduce its bond buying altogether.

For the overwhelming majority of Americans, the fact that the central bank has begun to taper its $85 billion a month of bond purchases is good news. It reflects their view (and mine) that both employment and the economy overall are gathering momentum.

In Wednesday's policy statement, the Federal Open Market Committee took great pains to promise that they would keep short-term interest low until after the unemployment rate dropped below 6.5 percent. They said nothing about longer-term interest rates. We can expect to see medium and long-term interest rates (but not short-term) continue to climb for the foreseeable future.

That means that the return you can get in a money market fund or certificates of deposits of one year or less will remain abnormally low.

If you have been vacillating on whether to take out a15 or 30 year mortgage now, or wait for lower rates, don't wait any longer — commit. On the other hand, if you have been hoping against hope that the price of that long-term U.S. Treasury bond or municipal bond you hold is going to regain its former premium price level — forget about it.

You, who remain unemployed and about to give up, don't. Corporations and small businesses will take their cue from the Fed. If the Fed sees growth, and they do, corporations will begin to add to capacity. That means more jobs. As time goes by, those of you who are not satisfied with your job, for whatever the reason, good news is around the corner. More job openings, at better salaries, with more opportunities usually accompany economic growth, so get your resume ready.

Stock market investors also benefit. Market participants can deal with the good and the bad, but uncertainty is a stock market killer. For most of this year, investors have been waiting and worrying about the impact of the Fed's taper. It is true that quantitative easing was an experiment born of necessity. During the financial crisis, the Fed had no choice but to step in to avoid a melt-down of the entire financial system.

The experiment continued as the Fed then tried to use monetary stimulus to grow the economy and stem unemployment. No one knew what would happen or if they would succeed.

Would the end of stimulus trigger a collapse in the financial markets? Would the Fed get it right, tapering at the same rate as the economy grew? Would interest rates spike and stock markets swoon?

These were all legitimate concerns and now we appear to be getting some answers. True, it is still early days and tapering has just begun, but so far so good. It appears that the Fed just might pull off the greatest experiment in modern financial history and benefit us all to boot.

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: Coal in Your Stocking?
By Bill Schmick On: 08:15AM / Saturday December 14, 2013
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The bulls can't muster enough strength to push stocks to new highs. Bears lack the conviction to stage a meaningful decline. It appears we are in a stand-off, but for how long?

This year many of the yearly investments themes of Wall Street failed to bear fruit. The "Sell in May" crowd was mightily disappointed this year. Those who warned that September and then October would be terrible months for the market were also stymied. Today, it's the "Santa Claus" rally crowd. Many investors are geared up to make a stocking full of profits any day now. They may be in for disappointment.

One could argue that we have already had our Santa Claus rally. After all, the S&P 500 Index is up over 25 percent year to date. How much more do you want? I have been warning readers to expect a pullback. Many of the indicators I follow have been flashing amber lights and some have turned red.

Eight of the last 10 and 12 of the last 18 sessions have finished lower. That's called distribution but the losses have been so minor and the euphoria so strong that bulls have largely ignored that fact. Last Friday's jobs report were cause to celebrate. At first the markets did just that, gaining over one percent on the news. But here we are a week later and stocks have given back all of those gains.

Chart of the Day

The politicians in Washington had further good news this week. There won't be another government shutdown in the foreseeable future. Both sides have hammered out a budget deal, which, if passed by the Senate this week, should solve that particular problem at least through 2015.  It removes some of the cliff hanging drama the markets hate so much, but stocks barely moved.

Last week, I advised that if the S&P 500 Index regained 1,800 and remained above it for any period of time, the coast would be clear and this present distribution would have simply been another buy-the-dip opportunity. So far the bulls have not made their case. It is true that the S&P index jumped on the employment news last Friday by over one percent, but quickly broke down. And now it is below that level once again. We are below 1,780, which is another support level. I suspect we decline to 1,760, which is the 50 day moving average. That is my first downside target.

Hopefully, it will bounce from there, but if it doesn't, there is a possibility that we may test the 200 DMA. There have never been two years in a row when the S&P 500 Index did not decline to test the 200 DMA. But I am getting ahead of myself. Let's take it one support level at a time.  

Although all of this cautious advice I am spouting may lead readers to believe I am bearish, when in fact I am extremely bullish over the medium and long-term. It's just that right here, right now, the markets might Grinch us out. But once we go through this little digestion phase, the markets should resume its advance, at least until the end of the first quarter.

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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