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@theMarket: U.S. Jobs Data Sink Markets

By Bill Schmick
iBerkshires Columnist

What's good for Main Street is not necessarily good for Wall Street, at least in the short-term. As traders fret over a new era of rising interest rates, American workers may finally be coming into their own.

The 5.1 percent unemployment rate, coupled with a 0.30 percent increase in wage growth has convinced stock traders that the Fed will raise rates this month. Over the past five years, investing in the financial markets was a one-way street. It didn't matter what the economy did, it was all about lower interest rates. The lower rates fell, the higher the market climbed. As the Fed prepares to reverse course and hike rates, investors are facing a brave new world and are nervous about that.

It will be a world where economics and its inevitable dislocations, will impact market valuations. Inflation will come back, as will wage growth, and productivity will start to matter again. As they have throughout history, interest rates will determine what investors are willing to pay for other financial assets. The end of massive central bank intervention will allow the American markets to function as they have in the past. Are we ready for that?

Yes, you may say, five years is long enough for all this government meddling. Of course, the flip side of that coin is that without the Fed's "put" on the market, we have to assume the risks of the marketplace. For me, personally, I'm fine with that. I cut my teeth in those kinds of markets and grew up in this business using all those historical metrics that have not worked very well since the Fed started intervening in the markets in 2009.

Plenty of people have explained the so-called reasons for the present turbulence in global financial markets. It's China, it's the Fed, or slowing global growth. Declining prices for oil and other commodities also make the list. All of the above may be true, but it strikes me that this is a correction that is looking for a reason. Sometimes there is just no "because ..." and I think this is one of those times.

Over the longer turn, history has taught us that what is good for our economy will also be good for our stock markets. Any discrepancies are usually short-term in nature. This is the crux of the matter. We all know that the typical investor's time horizon has grown shorter and shorter as a result of the internet, the media and our own expectations of what we expect from life. Most of us want it now and we become mightily distressed when that doesn't happen.

Why the lecture? In my opinion, all that is happening in the markets today is a sorting out of the potential risks we face in the near future. Are the markets correctly valued in a rising interest rate environment? How strong will the economy grow and how soon? Will the unemployment rate drop even further, maybe into the 4-plus  percent range. What will that mean? The "what-ifs" are endless, but that's what makes a market.

I suspect it will mean a return to the old ways of doing business. High-frequency trading, computer algorithms and the intensely short–term mentality in the narrow-minded corridors of Wall Street will have to change. As long as the Fed "had our back," traders could take all the risks they wanted. I'm betting that without that safety net, the casinolike element of the stock market will slowly subside. That will be a good thing for you and me.

I wrote last week that readers should expect continued volatility over the next several weeks. I remain convinced that we will re-test last Monday's lows (and possibly even break them). If we did, that would create a last burst of panic and lead to a final washout.

Don't try to trade this correction. Given the 200-point daily swings of the Dow, if the markets don't scare you out, they will wear you out. Instead, start practicing your long-term perspective. Just give the stock market time to digest this transition. Your portfolios are going to come back by the end of the year. Focus on what's really important over this holiday weekend.

The economy is finally picking up speed. Wage gains are accelerating and employment is close to full capacity.

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: Are We There Yet?

By Bill Schmick
iBerkshires Columnist

This week we witnessed the first substantial correction in the stock market of the year. What matters most to investors now is whether we are at the end of the decline or the beginning of something worse.

We've seen the lows, in my opinion, but that doesn't mean we won't retest them. Normally, I would expect to see at least one re-test of the lowest level made by the S&P 500 Index before all is said and done. If so, there could be risk of as much as a 5 percent decline over the very short-term for the markets. That doesn't have to happen, but it may, so I want you to be prepared for the worse.

It was certainly a bad week to be out of the office visiting clients. However, being removed from the fray did give me a different perspective.  What struck me immediately was how panicked investors became at a sell-off that was entirely normal in its depth and duration. At its worst, the S&P 500 was down a little over 12 percent.  The next day it gained back almost 3 percent but that did not seem to matter.

I also noticed that volatility was higher than normal. That could be because many market participants in America and Europe were on vacation. The Dow dropped over 1,100 points on Monday morning before bouncing higher. That really spooked investors. What you may not know is that the Dow Jones Industrial Average has traded over 200 points (up or down) over the last six sessions. That has never happened before in the history of the stock market.

Finally, this correction has punctured several holes in Wall Street's belief that our trading systems are the best in the world and head and shoulders above those of other countries. Not only were there any number of problems in trading both stocks and exchange-traded funds this week, but even the end of day pricing of securities became a problem.

Some of the so-called "circuit breakers" that were originally created to assist the flow of securities trading during times like these actually hindered the flow of trading at times. The lack of bids for securities should also put to bed the myth that high frequency trading somehow improves the depth and breadth of the markets. The opposite occurred this week as computers and the desk jockeys that guide them all fled the market at the same time.

As the smoke begins to clear, what I see is a market that may have more similarities to foreign stock markets (like Shanghai) than we care to admit.  We Americans deride that market where two-thirds of investors are supposedly ignorant retail investors who trade in herds. That's exactly what I witnessed this week in our own markets.

How were the panicky calls to "get me out at any cost" mentality of so many U.S. investors different from those by the Chinese?  At least the Chinese markets appeared able to accommodate trading volumes far better than we could despite handling volumes that dwarf our own. You would think that more experienced, highly sophisticated investor types like us would understand that a 10 percent correction happens at least once a year in the stock market. Yet, I know several seasoned investors and money managers that were selling when they should have been buying.

As for the market, I expect the volatility will continue into September, although not at the rate of this week. You may have a chance to buy lower but that's a short-term call that is simply too difficult to predict. What seems clear to me is that we now stand a good chance of moving higher by the end of the year. I expect the markets to recover all its losses plus another 4-6 percent on top of that. That's not a bad return over the next four months.

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 Are Supposed to Pullback

By Bill Schmick
iBerkshires Columnist

It was a sea of red for stocks this week. Global markets broke a seven-month trading range and the rest is history. Consider this week's decline a positive development. Here's why.

Over the last seven months, the S&P 500 Index has traded in a narrow range between a gain of 3.5 percent and a loss of minus-3.2 percent. That hasn't happened in almost 50 years. As markets go, this was a highly abnormal development. Something had to give and I have been writing for months that at some point we could expect a larger, more "normal" sell-off in the market. Well, now we are returning to normalcy. It isn't pleasant, because losses make us feel worse than gains make us feel good, but it is necessary if we want the market to move higher.

So why, you might ask, if I felt so sure that a decline was in the cards, didn't I recommend that you get out of the market? I might have done so, if I believed that we were facing some calamitous event that would send us down an additional 20 percent or so. I don't see that at all.

Instead, we are facing a long overdue decline that is more psychological than fundamentals. Since traders need an excuse to justify why they sold (when they should have been buying), the media trots out the most popular causes of decline. We have a short list that includes a tiny U.S. interest rate hike (that may or may not happen), falling oil prices (a boon to consumer spending), and a slowing global economy (something that we have known for months).

But before you panic, consider this: year-to-date the Dow is down 4.4 percent. NASDAQ is still up 3 percent and the S&P 500 is off by a paltry 1.13 percent. Readers might recall that there were many days back in 2011-2012 when the averages were off that much in one trading session. So why do you feel so uncomfortable right now?

It could be because the last seven months of watching the market go up and down in such a narrow range has frayed your nerves, like watching a tight-rope act, waiting and holding your breath to see if the acrobat will fall to his death. Yesterday he fell off the tightrope. Your mind may be telling you not to worry, while your emotions are making you feel that this sell-off is the beginning of the end. It is not.

As in past corrections, the markets have dropped swiftly. It is the escalator-up, elevator-down syndrome so prevalent in declining markets. The S&P 500 is presently a bit above the 2,000 level. We have a long, long way to go (1,921) before the decline in the S&P 500 would qualify as a correction. We would have to drop to 1,708 before I would say we were in a bear market.

This weekend, expect the headlines to be even more negative than usual. Ignore it. I'm expecting the S&P index will find support around 1,980, which is less than 30 points lower from here. That could happen as early as mid-week. Do you think you can live with that?

If you have new money to invest in this market, now would be the time to start buying. I know I am. If, on the other hand, you still had money in government bonds, it would be a great opportunity to sell them and move the proceeds into equity. Relax, stay invested and remember that these kind of textbook declines are the cost of doing business in the stock market, nothing more, nothing less.

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: Month-End Musings

By Bill Schmick
iBerkshires Columnist

While the summer months are usually the slowest season on Wall Street, July has proven to be anything but. As we enter the month of August, can we expect the same?

Whether we focus on overseas markets or review our own, it is clear that volatility remained and will remain elevated. Overseas markets in Asia took it on the chin, while the United States was trapped in a trading range that will continue in the month ahead. The good news is that this range appears to have an upward bias, so we can expect some minor new highs as time passes.

For the month, the S&P 500 Index managed to stay above water with a 2.2 percent gain bringing the year's total to an unsatisfying 2.4 percent. Large cap stocks beat small cap stocks, which are down 1.7 percent (but still up 2.2 percent for the year). China, on the other hand, one of my favorite overseas investments, saw its largest monthly loss in six years with the Shanghai market down 14.3 percent. European shares (another recent recommendation) gained 4 percent for the month after plunging earlier as the Greece bailout debacle roiled those markets. The U.S. dollar rose 2 percent but most traders expect the greenback to continue to consolidate in a trading range after experiencing big gains last year.

The commodities markets were where the largest declines occurred in July. Oil dropped 15 percent. Precious metals also declined, led by gold, which was down 7 percent. King copper (off 9 percent) led other base metals and materials lower. The agricultural commodity sector also felt the heat with wheat dropping by 18 percent, corn by 10 percent and soybeans 9 percent.

Investors blame the commodity decline on a perceived slowing of the world's economies led by China. Although the macroeconomic evidence is murky at best, most traders would rather sell first and find out the truth later.

"Is this a buying opportunity," asked one California client recently?

 "Not yet," I answered, and here's why.

While I suspect the commodity space is experiencing the kind of wholesale massacre one looks for when the end of a cycle is in sight that does not mean it is time to buy.

To me, commodities are an asset class that experiences boom and bust periods that sometimes will last for several years or more. The latest boom was a decade long and could now be followed by declines that can last an equal amount of time, depending upon the global economy, the inflation rate and industry specific factors like new and more efficient methods of mining, growing etc. For the most part, commodity prices also tend to under and over shoot their fundamental value and that's what makes investing in them somewhat speculative.

Let's take gold as an example. Gold began its latest run back in 2002. It climbed from $279/ounce to above $1,900/ounce by 2012. That 10-year run has been followed by a decline to its present price of around $1,090 today. I have been looking for a further decline to under $1,000/ounce. Assuming that's the bottom for this precious metal, that does not necessarily mean you should buy gold or any other commodity at that point.

Many commodities will usually take several years after that to "base," once they have made a low. During that further consolidation period, any investments you might make will be dead money. Dead money means your investments go nowhere. In the case of commodities, since none of them pay dividends or interest, the opportunity cost of buying and holding them could be severe. Better to wait until the beginning of the next bull market before committing money to this asset class. That could be another two years from now. I'll let you know.

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: O Ye of Little Faith

By Bill Schmick
iBerkshires Columnist

What a difference two weeks make. Back then, if one took the warnings/advice of the media and much of Wall Street, we were facing financial Armageddon. Today, the markets are flirting with new highs. What lessons can we learn from that?

Number one: the media's first and foremost objective is to sell advertising, if that means scaring its target markets into staying tuned (or reading the next page) then so be it. And I'm not just talking about the fringe elements. Greece, China and Puerto Rico led the list of doomsday stories that littered the headlines of some of the top news organizations both here and abroad.

That's where Wall Street comes in. Reporters need sources and like politicians, many financial soothsayers thrive on publicity. They are more than happy to pontificate on "what ifs," which somehow become facts when translated into news stories.

Despite the fact that Greece represents less than 2 percent of Europe's GDP (Gross Domestic Product), the "Herd" intimated, hinted, or predicted (depending on who you were listening to) that the contagion effect of leaving the Euro would drag us all down into Hades. Greek Prime Minster Alexis Tsipras and his Syriza party was counting on just such a reaction from financial markets when he engineered his "No" referendum two weekends ago.

When the end of the world did not materialize, Greece did an abrupt about face and rushed back to the negotiation table. Since then, Greece has passed an austerity program and is now in the process of receiving much-needed bailout money. Greek banks and financial markets are planning to re-open this coming week.

In my last column, I advised readers that any fallout from the Greek debacle either here or abroad should be viewed as a buying opportunity. It was. World markets experienced a sharp but brief pullback. Since then various European markets have risen almost 10 percent, not counting the currency movements.

On our side of the pond, the financial mishaps in Puerto Rico, a U.S. territory, also spooked investors. Even the doomsayers had a hard time linking events in Greece to what was happening in Puerto Rico, but they tried. Some would have had us believe that what was happening in P.R. "might" happen in other municipalities like Chicago. Since then Puerto Rico has come up with a plan to restructure its debt, but that news never reached page one.

Finally, we have the Chinese stock market. Readers might recall that I was expecting a 20 percent decline or more in that market given its spectacular performance over the last 12 months. That prediction turned out to be more than accurate, since at its low the mainland Chinese markets were down over 30 percent.

Predictions that this market, which is relatively closed to foreign investment, would somehow provide a Black Swan event that would engulf our market and send the world into a financial meltdown was ludicrous. But, in an atmosphere of fear and worry, it was taken at face value by a panicked investing public. That decline was and is also a buying opportunity, although I suspect few have taken advantage of it.

Where does that leave us? The U.S. markets are at, in the case of NASDAQ, or nearing historical highs. So far this quarter's earnings have come in better than expected (surprise, surprise). The Fed is still making noises about hiking interest rates an infinitesimal amount before the end of the year. Greece has averted another calamity but the drama is far from over. I expect more Chinese government support to bolster their stock market.

We can expect 2-3 pullbacks or more in the stock market of between 3-9 percent every year. We just had one. As I have advised readers all year —stay invested and ignore the background noise.

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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