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@theMarket: Markets Need to Digest Recent Gains

By Bill Schmick
iBerkshires Columnist

Greed and fear make the world go round. While Donald Trump attempted to tap into the latter emotion in his acceptance speech this week, investors were mesmerized by the opposite emotion, at least where the stock market is concerned.

It is true that the markets, like the humans that trade them, tend to vacillate between these emotions when gains and losses begin to nudge the extremes. Of course, we would all like the markets to just continue to climb, but a line I read recently sums it up well.

"Keep in mind that betting on never-ending capital gains is the very definition of a Ponzi scheme."

The best thing that could happen to the stock market in the short-term would be to pull back. A nice orderly advance, which is not something we have experienced since the beginning of the month, is the ideal scenario for making money in the financial markets.

Too far, too soon, invites downside swoons of selling that force weak holders to panic (fear). When the market turns, and it inevitably does, it forces those same sellers to chase prices upward (greed). Just recognize that pullbacks are the cost of doing business in the equity markets. You can't avoid them and to try is a fool's game.

There is no question that the market is "overbought." By whatever metric you may use — the Vix, investor confidence, sentiment or momentum indicators — we need to pull back and we need to do it soon. It was encouraging that during the last two days of the week some selling appeared. That's a good thing.

Now these kinds of pull-backs do not need to be deep. A week or two of up and down days called a "consolidation through time" can relieve an overbought condition just as effectively as a 3-5 percent sell-off. Given that we are in earnings season, I'm hoping that a series of mixed results from some market "darlings" could deliver just that sort of period.

So far, second quarter earnings results have been better than expected. About 66 percent of those companies who have reported thus far have come in with earnings beats. That should come as no surprise. Every quarter, this game of revising down company estimates low enough to produce a beat fools fewer and fewer investors.

Normally, these companies announce before or after the close and only professional traders really benefit from any price movements. Rarely does the euphoria over an earnings beat last for more than a day or two and then the company's stock price tends to return to its pre-announcement levels. Very few professionals are willing to take a position in a stock prior to earnings. That, they say, is akin to putting all your money on black or red at the gaming tables.

Now that we are half-way through this month's convention season, the extreme volatility that so many of us had feared never surfaced. Despite some marching and protests, the GOP convention went off with barely a blip. Markets took the bombastic speeches and self-adoration that is so typical of the American political party system in stride. This coming week we will see the Democrats try to best the Republicans in their appeals to the voters. Hopefully, we will then be back to regularly scheduled programmed channels.

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: Markets Make Hay

By Bill Schmick
iBerkshires Columnist

A series of new historical highs rewarded investors who remained patient this year and remained invested. Unless something changes in the world of central banking, there is a good chance that further gains are in store for the stock market.

There will be pullbacks from time to time as the markets digest their gains. We have enjoyed several back-to-back gains in the stock market. The S&P 500 Index, for example, has climbed over 100 points without one down day. That is not something that can continue unabated.

The key to all this upside momentum is, of course, the worldwide largesse of governments and central banks. Take, for example, the events in England this week. Although economists and traders were expecting the UK's central bank to cut interest rates by half a percent; they didn't. But, they also said that investors should expect a rate cut in a few weeks, once they have a chance to examine the most recent economic data from the Brexit fall out.

Then there is Japan. Prime Minister Shinzo Abe's ruling coalition won the majority of seats in Japan's upper house elections last Sunday. Investors interpreted that win as a win for "Abenomics." Readers should recall that Abe and Japan's central bank has poured mountains of money into the Japanese economy. Despite that effort, Japan's economy remains in limbo.

Abe and his government plan to spend even more in the months to come. Given that we are talking about the world's third largest economy, more stimuli will wash around the world holding interest rates down and financial markets up.

Of course, our own central bank's efforts to hike interest rates is now "on hold" for the foreseeable future. That is thanks to potential worries about the impact on Europe and the UK from the Brexit vote. Once again, global markets are in a familiar environment of slow economic growth, declining interest rates (and currencies) with nowhere to go but the stock markets.

Speaking of which, we are in the first week of second quarter earnings season. As the game begins, analysts' forecasts for this quarter have been ratcheted down to 4-5 percent declines in company earnings overall. That is the sixth quarter in a row where corporate earnings have experienced a negative growth rate. The Street has been hoping (and betting) that company managements will be giving us better guidance on their future business this time around.

So far that has been the case. The big banks have been able to "beat" estimates this week.

The financial sector overall has lagged the market all year. It is difficult for banks to do well when interest rates are this low. Hopefully, these earnings results will put a fire under the sector.

Retail is another group where disappointments have weighed heavily on the sector. Although, these companies won't report for several weeks, traders are also counting on good news out of at least some companies.

You may be wondering how long all of this central bank stimulus, quarterly earnings games and other financial machinations will support the markets. It has done so for at least the last five years. Even the bankers tell us that without additional government spending, their spending efforts can do no more than maintain the present environment. The bears are right: we are in an environment of smoke and mirrors. Yet, we can worry all we want about that while the markets climb higher. The "don't fight the Fed"  mentality is still the flavor of the month until it isn't, so enjoy 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.

     

@theMarket: Historical Low-Interest Rates Prop Up Equities

By Bill Schmick
iBerkshires Columnist

There was a time when soaring bond prices and correspondingly lower interest rates were a bad sign for the stock market and the economy. Thanks to worldwide central banks, that correlation no longer exists, or does it?

Current wisdom on Wall Street will tell you that interest rates are at historical lows because investors are hunting for yield. And it just so happens that the U.S. bond market still offers the highest return on your money. That's not hard to understand if you realize that most developed nations' treasury bonds are yielding far less than ours thanks to central bank manipulation.

Gold, on the other hand, continues to rise, racking up a 30 percent gain so far this year. Buyers of gold are usually worried that one of two things will occur — runaway inflation or fear of economic collapse. Wall Street will tell you that none of those historical reasons matter. Instead, this time around, the pundits say it is all about the declining value of global currencies.

As foreign countries' interest rates continue to decline, so do their currencies. Foreign and domestic investors, according to the headlines, are buying gold and our Treasury bonds because "there is nowhere else to go."

You can throw into that explanation the reason why so many investors are buying anything with a yield. One conservative client of mine called today wanting to know if she should buy more of two Vanguard dividend funds (both of which were trading at record highs). I suggested she wait a bit, but like so many retirees, she wanted and needed her money to be earning something, anything, even if it was less than a dollar a month. I remember the same kind of conversations in 2008.

Remember last month's non-farm payroll employment number? No? Well, let me remind you. Job growth came in at just 38,000 job gains. The market swooned. Today the job gains totaled 278,000 jobs. The market roared. The moral of this tale is individual data points mean absolutely nothing. All they do is give high-frequency traders the chance to buy your stocks cheap or sell them to you at the highs.

For those of you who follow my columns, you know that I am a bit of a contrarian. Here is my take on the markets, gold and interest rates. Something is wrong. The bond market is full of very smart people, who don't normally get swayed by emotions or short-term events. The fact that rates are this low says there is something out there lurking in the woods that should (but isn't) telling us to be careful.

Maybe we are underestimating Brexit. The markets are convinced that whatever happens, the central banks will bail us out. I hope so. But then there is the gold price. Even on days when gold should logically fall back (like today), it doesn't. Normally, when the dollar gains, gold declines. It isn't happening.

I write this because we should all be wary of what is happening right now in the markets.

That does not mean that markets won't reach and even surpass the historical highs. There is a good chance that the S&P 500 Index will climb to 2,160-2,170 in the short term. That's not much but the direction is still up. However, when it does, I may turn a bit more cautious going into the doldrums of summer. Stand by.

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: Fourth of July Started Early for Markets

By Bill Schmick
iBerkshires Columnist

It wasn't supposed to happen. After the British surprise vote to exit the European Union caught global investors leaning the wrong way last week, most traders expected a blood bath.

Instead, after a two-day 5 percent sell-off, markets have regained almost 90 percent of that loss in the last few days. So how could the "smart money" get it so wrong twice in one week?

Readers may recall that traders had at first bid the stock market higher in anticipation that the UK would remain in the EU. When that didn't happen, traders flipped the other way by selling and shorting. Most of the world markets were down by 5 percent or more between last Friday and Tuesday.

And then a funny thing happened. Markets worldwide started to rebound despite dire predictions that fallout from the Brexit vote would crater the economies of Europe, impact the U.S. economy, and generally create worldwide havoc. You can credit the central banks of the world for the turnaround in the markets, not that they did anything special. They simply stated that they stood ready to defend world markets, if necessary, from anything that might appear to be unorderly. That’s all that was required.

Traders took that reassurance to mean (like it has in the past) that even more money would be poured into financial assets in the near future. Global bonds rallied as interest rates plummeted. Commodities soared and so did stocks. Over the last three days there was a worldwide dash to buy back financial assets of all kinds. Thursday night, as expected, the Governor of the Bank of England Mark Carney said British investors could see further stimulus this summer.

That sent the UK stock market (the FTSE 100) to a 10-month high leaving British stocks up 2.8 percent since Brexit. The British pound, on the other hand, has plummeted 8.5 percent during that same time period, which will be good for UK exports in the months ahead.

As the fireworks subside and the smoke clears, we find ourselves just about where we were before the whole Brexit thing started. The S&P 500 Index and the Dow are up 3 percent for the year, NASDAQ, the weak sister, is making up its losses and the world looks wonderful as we head into a three-day weekend.

Of course, you may wonder why gold, a traditional safe-haven commodity, is climbing, even though Brexit fears appear to be a thing of the past. So too are U.S. Treasury bond prices, also a safe-haven in times of uncertainty. Does this mean, as many think, that the world is in a mess and investors are simply whistling past the graveyard?

Well, yes and no. Gold and other commodities are running because more and more investors are convinced that this entire central bank stimulus is making the world’s currencies less and less viable. There will come a day, so the bears say, when we will all pay a high price either in inflation or another financial crisis for all this central bank largesse.

Then, too, as more and more global bonds pay negative interest rates, thanks to these same central banks, investors are chasing the highest rates of returns they can find. U.S. Treasury bonds, after inflation, are returning you nothing in interest payments, but foreign investors are buying them hand over fist because they still offer more than their own bond markets do.

As rates fall, dividend yielding stocks, such as utility and telecom companies, which pay large dividends, are making new highs, despite the fact that these stocks are becoming more and more expensive.  What used to be safe and defensive has now become aggressive and risky.

As central banks continue to experiment with our financial futures in this brave new world, the stock market continues to climb until it doesn't. Where it all ends, no one knows. Have a happy Fourth of July.
 

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: It's Still a Coin Toss

By Bill Schmick
iBerkshires Columnist

Despite all the algorithmic programs, high-powered computers, enormous capital and worldwide connections, what happens in the investment world sometimes comes down to a coin toss. The British vote next Thursday to stay or exit the European Community is shaping up to be one of those binary events.

Have you noticed that there are more and more of these kinds of events in the world?

Remember the U.S. government shutdown, the Greek Referendum, the TARP vote, the German bailout votes for Greece, the vote on Spanish austerity? These are just some of the either/or occasions that sent global markets up or down in double-digit moves.

If you listen to some of the big brokers, they are predicting as much as a 15 percent decline for the U.K. stock market (the FTSE 100) if a Brexit occurs. But if they stay, you could see as much as a 14 percent rise in the same index and an even larger rebound in the European markets. On the bright side of this contest, look at it this way: for once you have the same chance to be right (or wrong) on the outcome as the big guys.

By the way, remember my prediction that volatility was going to rise this summer? In less than two weeks the VIX, which is an index that measures volatility in the markets, has risen by 40 percent! Hang on to your seats, readers, because we still have until next Thursday before this soap opera plays out. However, while the world ignores everything else but the Brexit outcome,

I'm on to other things.

This week's FOMC meeting and Chairwoman Janet Yellen's press conference afterward really surprised me. Although the Fed always couches their words in financial speak, technical jargon and just plain poor English, in essence, the message I received was that further interest rate hikes are off the table at least for the foreseeable future.

Two weeks ago I predicted a June rate hike was a non-starter, but I still expected a hike sometime later, maybe July or September. While mumbling about global risks (Brexit) as a reason to delay any action, Yellen admitted that some of the economic forces that are holding back the economy and a rise in interest rates "may be long-lasting and secular."

Slower productivity growth, as well as the retiring Baby Boomers in this country and in other aging societies, who will spend less, and save more will drag down growth. Yellen said that these are "factors that are not going to be rapidly disappearing but will be part of the new normal."

These are arguments that former Treasury Secretary Larry Summers, who was in the running for Janet Yellen's job, have been arguing for some time. He believes industrial nations are caught in a swamp of secular stagnation where economic growth will be at best moderate.

If Summers, and now Yellen, are right in their assumptions (and both are a lot smarter than I), this change in outlook should have some predictable outcomes. For example, the U.S. dollar should trade in a range, or even fall at least until that time when a rise in U.S. interest rates is a real possibility. St. Louis Fed President Jim Bullard, a leading "hawk" on the Fed's board, said in a white paper today that low GDP growth (2 percent) and an even lower Fed funds rate will likely remain in place at least until to 2018.

It would seem to me, given past investor behavior, that this kind of environment will force more and more retiring Baby Boomers into the stock market in search of better yields and price appreciation. It augurs well for higher stock markets worldwide, since they will be the investment of last resort in an environment of secular stagnation.

However, the downside is that investors will need to temper their expectations of what they can expect from stocks. Single-digit returns will be the best we can get unless one wants to wander further afield to regions, countries and asset classes that may offer higher returns as well as risk. More on that later, but for now, if the UK does exit the EU, investors can expect a continuing high degree of turbulence within 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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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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