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@theMarket: Blood in the Streets
By Bill Schmick On: 06:41AM / Saturday April 26, 2014
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Investors began to focus on events in Ukraine this week as a continuing stalemate between Russia and the West erupted in gunfire. That bloodshed stopped the market dead in its tracks. The question is, for how long?

Up until now, the dispute over Ukrainian territory has been largely a war of words and an excuse to take the occasional profit every now and then. Investors are worried that might change. Here's what we know.

The international agreement forged in Geneva a week ago has broken down with both sides crying foul. We also know that several pro-Russian militants were shot dead at a roadside checkpoint on in an eastern Ukrainian city of Slovyansk on Thursday. It was result of the Kiev government’s military attempt to wrest back control of 10 cities that have been occupied by local insurgents (Russian military?).

Russia's response was to launch new military "exercises" along Ukraine's eastern border. Whether Vladimir Putin is preparing to invade the Ukraine in defense of its ethnic Russian citizenry or is simply bluffing is why the stock markets are on hold. Kiev, fearing an invasion, immediately halted its military offensive.

The fact that the U.S this week has committed hundreds of soldiers to its own military exercises in Eastern Europe simply adds to the tension. It is all well and good to pile on economic sanctions in reprisal for Russia’s new-found adventurism, but if even one of our boys takes a bullet over there, escalation would be immediate and quite dangerous.

Speaking of sanctions, it is obvious that measures levied by the West have not deterred Russia in the least. Granted, it is early days and if new sanctions are invoked, there could be some tough times ahead for the Russian economy. However, the private markets aren’t waiting. They are pummeling Russia’s financial markets in earnest.

The Russian stock market has declined 13.5 percent since the beginning of the year, while its currency, the ruble, has lost 8.8 percent of its value during the same time period. To make matters worse, Russia's economy was already slowing to only 1 percent GDP growth this year, prior to Putin's annexation of Crimea. Russia's central bank has been forced to raise interest rates twice to defend its falling currency and only today hiked them again to 7.5 percent on sovereign debt. That will compound the economy's problems.

At the same time, the debt credit agency Standard and Poor's, cut Russia's sovereign debt rating to its lowest investment grade, BBB-minus, just one step above "junk" status. That is sure to accelerate capital flight which, during the first quarter, topped $70 billion. But is this really a deterrent in the short-term?

Throughout history, the hunger for more political power has always trumped national economic consequences. In fact, the more misery heaped upon the Russian people, the more Vladimir Putin can blame the West. It would be similar to Hitler, who argued that it was Europe and the Jews that were responsible for Germany's post-WWI woes.

Given the reality of blood in the streets of Slovyansk, the stock market's reaction has been remarkably sedate. Many bears are just looking for an excuse to take this market lower. They argue that investors are simply not recognizing the level of risk involved in this confrontation. That may be so.

It is impressive that, instead of crumbling under this geo-political pressure, we find the S&P 500 Index is less than 30 points from its all-time high with the other averages at similar levels.

The bulls point to earnings as a reason to buy. There have been some upside surprises this week in earnings with some big name technology companies releasing surprising numbers. Of course, as is customary in the earnings game, expectations had been driven downward over the course of the last three months by Wall Street analysts, so that even the worst results managed to come in better than expected.

By now, you should be at least 30 percent cash. Clearly, the volatility in the markets is increasing. We are still in a wide trading range.  Russian risk is a concern and could generate more short-term selling. Keep your eye on gold and the yield of the U.S. 10-year Treasury note. If interest rates drop dramatically, while the gold price spikes higher, be prepared for further conflict overseas and a fast drop in the markets.

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's up with Big Pharma?
By Bill Schmick On: 07:38PM / Thursday April 24, 2014
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This week several multibillion deals were announced in the pharmaceutical sector. Merger and acquisitions on a global scale appears to be heating up in this sector with over $140 billion in transactions so far this year. What's behind this feeding frenzy?

We all know that the majority of baby boomers are getting older so the demand for health care of all kinds is growing. As a result, the health care sector overall is a great place to invest. While many other industries experienced a devastating drop in profits and revenues over the last five years, the pharmaceutical industry weathered the financial crisis fairly well.

But that's the good news. The bad news is that the cost of bringing a new drug to market has skyrocketed. The development time has lengthened as well while a drug’s patent expiration leaves companies open to low-cost competition. Today it is estimated that the cost of inventing and developing a new drug can be as much as $5 billion. The risk is even greater since 95 percent of the experimental medicines that are studied in human trials fail to be both effective and safe.

When you combine the astronomical costs involved, the lead time and a 5 percent chance of success, it is no wonder that pharmaceutical companies are searching for alternative ways to succeed and thrive in this kind of environment. A merger or acquisition, as opposed to years of in-house research and development, can make more economic sense.

Back in the day, big pharmaceutical companies used M&A activity to diversify. The concept was to be able to offer a lineup of drugs and treatments in various areas of medicine and treatment. That way, if one area did poorly, others would compensate. More categories of treatment, it was thought, would also improve the number of new drugs under development in the pipeline. The problem with that concept was that health care treatment has evolved differently over time. The trend in the industry is toward developing specialty drugs. Drug companies are thinking in terms of disease-related, treatment-specific portfolios and patient groups (such as cancer, diabetes, heart disease, etc.).

As a result, many drug companies have reversed course and are attempting to sell-off what they deem are "noncore assets." Companies are shuffling their portfolios, selling some product groups while acquiring others. These purchases involve smaller companies and subsidiaries of various global companies as the race is on to build franchises in strategic disease areas.

But M&A is not the only road to success. Collaboration and partnerships among global companies is also increasing. While all of these companies have different visions, the dramatic changes they face on all fronts from global government regulation, to Obamacare in this country to the dynamic revolution of the life sciences industry, itself, is altering the way they manage risk and focus their business. Sharing costs and expertise is another new trend in the healthcare arena. As companies understand and become familiar with their partners’ core and noncore assets, deals are a natural outgrowth of this collaboration and being made with increasing regularly.

These agreements take on a new immediacy when the fast-growing emerging markets are taken into account. Regulations are usually less onerous in these developing markets, market share for new drugs is a wide open proposition and an exploding middle-class with purchasing power are an irresistible combination.  Smaller local drug makers in some of these markets, like Latin America and India, have become big enough to catch the eye of U.S. and European behemoths. I expect even more M&A activity there as well.

So the M&A activity that we are seeing is a natural outgrowth of the changes that are occurring in the health care sector worldwide. Those changes are expected to continue and with it so will the pharmaceutical sector.

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: Easter Bunny Bounce
By Bill Schmick On: 03:55PM / Friday April 18, 2014
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This holiday-shortened week saw a relief rally that began on Monday and carried through until Thursday. The markets still have further to go in the coming week before we once again reach the top of this four month long trading range.

The question that haunts both bulls and bears is when and in what direction will the markets finally break out or break down? As readers are aware, I believe that there is a high probability that stocks will do both in the weeks ahead. We could easily see the S&P 500 Index, for example, reach a new high, possibly 1,900 or beyond.

However, at some point this spring, that index and others will rollover. The resulting decline will be nasty, scary and absolutely meaningless in terms of this 2014's full-year returns. But the trading range will be broken on the downside, as a result. How bad could it get?

Let’s say the S&P 500 Index begins to rollover at 1,900. A 10 percent decline (190 points) would put the average at 1,710. A 15 percent sell-off would equal 1,615. That would simply put us back to the levels we enjoyed in October of last year.

Readers may recall that back then the Fed was still talking about tapering, although it wouldn't be until January that the Fed would begin to cut back on stimulus. Market commentators were warning that the market was overheated and due for a big pullback. Investors earlier that month were concerned that the government would be shut down (it was) and we would default on our debt. Job gains were modest at best and the strength of the economy was a question mark. Pimco's Bill Gross was writing that all risk assets were priced artificially high.

The point of this recent history in hindsight is that dropping 15 percent would only return us to a level where investors thought the markets were too high anyway. Since then, of course, many changes have occurred and all of them positive. Employment and the economy are showing great gains. Corporate earnings have increased. The political stalemate in Washington has at least quieted down. And the Fed has begun to taper but, contrary to popular opinion, interest rates have not sky rocketed.

Times change, however, since then we have risen almost 20 percent in six months. Seasonally we are not in October, but moving instead into spring. That is usually a down period in the markets (sell in May and go away) compounded this year by the mid-term election cycle (also a bad time for markets historically). We have not had a 10 percent correction in over two years — a market anomaly. Bottom line: we are set up for a pullback, but exactly when it occurs is a question no one can answer with any accuracy.

So far, the markets are following my playbook practically page by page. Stocks bounced off their lows on Friday and started this week in rally mood. The technology-heavy NASDAQ led the charge upward with the other averages following. At its low, NASDAQ had dropped almost 10 percent.

The last two weeks of April have been pretty good for the markets historically. All the tax selling is now out of the way and investors are re-establishing positions in various stocks. Chances are that we should re-test the recent highs and do so quickly. Hold on to your hats.

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: Good Friday and the Stock Market
By Bill Schmick On: 03:52PM / Thursday April 17, 2014
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This Friday the stock and bond markets will be closed to commemorate the crucifixion of Jesus Christ, or so the theory goes. But that is just one of the many myths involved in this holiday and its origins remain a mystery.

The fact that the New York Stock Exchange (NYSE) has a tradition of closing on Good Friday, one of nine holidays per year, has many traders and investors scratching their heads. After all, it is not a federal holiday and plenty of other businesses are open on that day. What makes Good Friday any more important than say, Columbus Day?

There is a story that during the 1890s there were three years in a row that the market suffered big drops on Good Friday. Superstitious traders took this to be a sign from God that "Thou shalt not trade on Good Friday." There is no evidence that is true. The Exchange was open for trading during Good Friday on three separate years (1898, 1906 and 1907). However, when the exchange did open for business in those years, the market was up two of those three Good Friday dates.

Another fable that many believe was that the market suffered through a Black Friday market crash in 1869. As a result, the Board of Governors of the Exchange swore never to open again on Good Friday. That seems a little hard to believe, since records indicate the exchange was closing on Good Friday as far back as 1864.

Art Cashin, the renowned trader at UBS, says there never was a stock market crash in 1869 but there was a crash in the gold markets back in September of that year. Easter week, however, is in April, not September, so go figure.

Although Good Friday is not a federal holiday, many states do recognize it as a state holiday with local governments, banks and other institutions closed this Friday. As a result, trading volumes are smaller, since fewer potential players are at work.  Businesses that normally stay open on Easter Sunday also tend to close on Good Friday so that their employees get a day off to compensate for working on Sunday.

Some think that the holiday was a nod to Jewish and Christian traders looking for a day off between Passover and Easter. Globally that makes some sense since already anemic trading volumes are even lower because Europe traditionally closes for Easter week. But as the original reason for this NYSE holiday, it does not square. Daily global trading is a relatively recent phenomenon on the stock exchanges.

There is some reason to believe that religion did play a role in the holiday. New York, a century ago, was the home of Irish immigrants. As such there was a preponderance of Irish Catholic officials in just about every walk of life in the city, including the NYSE. It is plausible that those officials could have lobbied for the closing of markets during this important Catholic holiday.  But no one can prove it.

So the origins of this stock exchange holiday remain mired in mystery. It is just one of the many quirky twists that amused and confuse Wall Street on slow holiday weeks. Whatever the reason, Friday is a day off for me, but never fear; I'll still be writing your market column as usual.

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: No Spring in the Stock Market
By Bill Schmick On: 06:46AM / Saturday April 12, 2014
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As spring finally arrives throughout the country, you would think the stock market would celebrate, but not this year. The indexes were slammed again this week and we can expect more of the same in the months ahead.

By now, if you have been following my advice, you have already raised some cash by selling your most aggressive equity holdings. How much cash you hold is up to you. However, before you sell more, remember, that this sell-off is only a temporary state of affairs. By the fall, you want to be fully invested once again.

In the meantime, don't expect the stock market to simply drop like a stone. What I expect is a series of lower highs and lower lows. That process is beginning to unfold right now. So far this week, we have about a 3 percent decline in the S&P 500 Index. The tech-heavy NASDAQ has had a far greater decline, dropping that much in a day.

Momentum and biotech stocks have been the name of the game since the beginning of the year. While the overall markets simply vacillated up and down over the last three months, those stocks were winners with some names gaining 30-50 percent. Most of those companies are traded on the NASDAQ. Now that the markets are pulling back, it is those same stocks which are leading us lower.

When I first warned investors of a coming sell-off, I mentioned the over-heated initial public offering market (IPO) as one clear early-warning sign that the markets had risk. I noticed that this week, which was billed as the busiest public offering week since 2007, actually flopped.

Only three out of seven new companies actually made it to market, while the others postponed due to market conditions.

By now, most of my readers (and clients) have become accustomed to volatile markets.

Many of you lived through the devastating declines in 2008-2009. We endured together several major declines together since then. We suffered through periods when the markets were going up and down 1 percent or more per day, so what we face this spring and summer should be small potatoes to you.

Those trials and tribulations have seasoned you. As veteran investors, you can live through this decline. You realize that this too shall pass. The key in the months ahead is to maintain your composure, resist making emotional decisions and, if you still have not raised some cash, I want you to do so as the market once again climbs to (and possibly breaks) the old highs.

My suggestions would be to sell small or mid-cap stocks or funds. Large cap growth funds are also a good idea, but resist the urge to just sell everything. Markets can be a quirky lot. The past has taught us that stocks can turn on a dime and if you don’t have skin in the game when they turn, you stand to lose quite a bit.

Sure, I'm looking for a 10-15 percent  decline, but what if stocks reverse and go higher before that? In October  2011, the stock market gained 9 percent in just seven business days. By the time some investors got the courage to get back in the markets had erased almost half their decline.

That's why you play the percentages when investing.

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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