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@theMarket: Has Santa Claus Come & Gone?

By Bill Schmick
iBerkshires Columnist

The rally continued in the stock market as investors abandoned bonds and bought stocks hand over fist. Many think the best is yet to come, since the traditional end-of-year Santa Claus rally is still ahead of us.

However, between now and then, we have the Federal Open Market Committee meeting next Wednesday. The bond market is betting on the following: that the Fed Funds rate is raised by one quarter of one percent, and the FOMC meeting minutes indicate that the Fed may raise rates two more times in 2017. Anything more than that would be hawkish and most likely cause the stock market to correct. That happened last year and cut short the Santa rally.

If the Fed's actions, on the other hand, are in-line with expectations (or even more dovish) the chances are stocks will continue to rally and so will bonds. Although most investors focus almost entirely on the stock market, which has soared since the election, few realize the devastation that is occurring in the bond market.

I have continually warned bond holders that someday they would face Armageddon. It seems to be happening now. During the past three weeks, investors sold over $2.7 trillion worth of bonds. Almost a like amount of money has found its way into the stock market. But I suspect bonds are due for a relief rally fairly soon.

Aside from the upcoming Fed event, one must also look at the nature of the Santa Claus rally. Usually, investors sell stocks during the first two weeks of the month. It's called "tax-loss selling" where investors establish capital losses to offset gains that they may have booked during the year. This usually depresses stock prices across the board. After the selling abates, investors then buy back stocks during the last two weeks and into January of the following year.

This year, however, that has not occurred and with a good reason. Investors expect that under the Trump administration, the capital gains tax will be lowered giving them an incentive to hold on to their stocks until 2017. Given that behavior, stocks might be getting bid up now only to see disappointment in the last two weeks of the year.

The S&P 500 Index has already exceeded my target for the year (2,240). It is now 10 points higher at 2,250, which is a nice round number. There are some traders who believe that we can climb even higher. Some say the Dow could reach 20,000 (another round number) before the end of the year. Certainly, since we are only a few hundred points from that mark, there is nothing stopping investors from chasing stocks higher.

To me that's pure gravy.  I had been expecting a mid-single digit return for the market and year-to-date we have gained a little over 6 percent. Close enough for government work. So what to do between now and the end of the year?

Sit tight and enjoy the fireworks. In the very short term anything can happen.  If we don't have a pullback in December, chances are we will have one in January, but not to worry. I expect that the stocks will continue to have an upward bias at least through the first 100 days of Trump's reign.
 

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 inquiries to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

     

@theMarket: Day Traders Rule the Markets

By Bill Schmick
iBerkshires Columnist

What a week of volatility! The Dow was up or down 100 points or more every day while the other averages were equally as volatile. Brace yourself, because October should be just as crazy.

Pick your poison: the presidential debate, fears of a global banking crisis, a spike in oil — all of them provided a field day for short-term traders. Of course to profit, one must have known who would win the debate, that OPEC would come to a tentative agreement to cut production, and that the largest bank in Germany would experience even more financial difficulties.

I wrote last week that politics would impact the markets this month. The first presidential debate saw the market drop double-digits on Monday, only to recoup its losses on Tuesday, as the market determined that Clinton had won the debate. How they determined that was less important than the money that was made believing it.

OPEC also met this week in Geneva. The betting was that the members would not (or could not) come to an agreement. Traders expected that the oil price would crater once the meeting ended in disappointment — wrong! Oil shot up in price over 5 percent as OPEC members agreed to work out a production cut among its membership before their next meeting in November.

The news caught quite a few day traders and proprietary trading desks of big financial concerns flat-footed. As the smoke cleared, stocks rose even higher following the gains in oil.

Just a few hours later, Bloomberg News reported that several nervous hedge funds were pulling their money out of Deutsche Bank, Europe's largest financial institution. The bank's stock price has been dropping steadily, (down over 50 percent) on concerns that Europe's negative interest rates were decimating the bank's business.

Suddenly, memories of the collapse of Lehman Brothers, which precipitated the 2008 Financial Crisis, roiled the markets. All three U.S. indexes dropped in a panic led by financial stocks.

By Friday, some common sense returned to the markets. The economic and subsequent financial crisis of 2010-2013 shook Europe to its core. In response, the EU and the ECB established a series of safe guards among its banks to prevent a repeat of this kind of crisis.

As a result, even if Germany's largest lender is truly in dire straits, there are certain financial requirements that every European bank must adhere to. In this case, Deutsche bank has about $264 billion in liquidity reserves. The bank also has enough liquid reserves to cover 120 percent of the bank’s obligations for the next 30 days, no matter how severe the stress.

There have also been wild rumors of a bank bailout, plus a half-dozen more stories that cannot be substantiated. They do, however, make for some lucrative trading opportunities by high frequency traders. Don't get sucked into this drama.

My own opinion is that financial stocks around the world were already selling at bargain-basement valuations. This scare makes them even more attractive, if you are willing to hold them long enough. Remember, too, it is also the last week of the month and the last day of the quarter, when a lot of funny business usually occurs (it's called window-dressing).

October is upon us and the next election debate is on Oct. 9, when the vice presidential candidates meet. Batten down the hatches and prepare for the worst. That way, when things go better than expected, you will be pleasantly surprised. As for me, I will be temporarily out of commission for the next few weeks. I am getting a left-knee replacement, but should be back in action before the election. In the meantime, do nothing until you hear from me.

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 inquiries to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

     

@theMarket: The Same Old Song

By Bill Schmick
iBerkshires Columnist

Investors have been waiting all year for that elusive interest rate hike promised by our central bank. September proved to be another false start. Once again, markets rallied on the news, the dollar fell, and investors were happy. So what's new?

As we have written so many times in the past, investors and markets are fixated on a Fed rate hike. Now everyone's attention is on December. Janet Yellen, the Fed chieftain, indicated that she could see at least one rate hike this year — if the data warrants it. The problem is the economic numbers are, at best, inconclusive.

Even the central bank, in this last go-around at the FOMC, lowered its forecast for the future, long-term, growth rate of the U.S. economy. Back in 2011, it forecast a 2.5 percent growth rate. Then lowered it to 2 percent in June and now sees no more than 1.8 percent. That sure doesn't sound like we are going in the right direction.

Furthermore, the Fed's inflation target, which is slightly above 2 percent, has been stuck below that number for years and it does not appear that it will climb anytime soon. You might ask if inflation is contained and economic growth is slowing, why in the world would the Fed raise rates.

The only bright stop seems to be the employment gains we have experienced in the last few years. Even in that area, there has been some dissatisfaction with the quality of jobs the economy has been generating. The number of workers who are either underemployed or have given up looking for a job altogether skew the statistics. The only reason I can see for the Fed to raise rates is to answer Wall Street's demand for a return to "normalization."

That's financial speak for getting the Fed out of the financial markets. Free marketers want the Fed to return to the days when they were not trying to support stocks, bonds, and even commodities as well as overseas markets. I truly doubt the Fed was ever that hands-off when it came to control, but they have been more heavy-handed in their approach to the markets since 2009 and with good cause.

As I have written many times before, the unprecedented lack of any kind of fiscal stimulus out of Washington has resulted in the failure of the U.S. economy to gain any momentum. The Fed knows that and the market knows that. But we all choose to blame the Fed instead.

In the meantime, we are dancing to the same old song. Fed members say "maybe" and the market swoons, followed by no rate cut and the market rallies. Equities remain the only game in town. It's simple: the S&P 500 Index is yielding 3 percent while the ten-year U.S. Treasury note is giving you less than 2 percent. Investors will go where they get the most return.

It also means that volatility will continue. It is why I am advising you to hang in there and ignore the ups and downs. A week ago (before the Fed decision), the markets were prepared for further downside. Today, we are once again approaching the highs of the year — until we hear from the next hawkish Fed member. But remember, a rate hike will be data dependent. It doesn't matter what one or another Fed member might think, so try and ignore the chatter.

Monday night we will also be treated to the first presidential debate. I am sure that will impact the markets, unless the event is a washout for both sides. Since we are approaching the final lap in that race, the polls will be monitored daily. If Clinton's lead over Trump narrows as a result, expect a tantrum from the market. And so it goes.

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: Much Ado About Nothing

By Bill Schmick
iBerkshires Columnist

It has been a volatile week in the markets. The averages have rocketed up and down by a percent or more as traders bet for and against a Fed move on interest rates next week. Does it matter?

If you aren't tired after more than two years of reading what the Fed may or may not do, you have the patience of Job. Whether an interest rate hike happens next week during the FOMC meeting or in December should not mean much to the market. But it does.

When fully 70 percent or more of daily trading activity is now in the hands (or keyboards) of high-frequency traders (HFT), short-term moves are where they make most of their money. During the summer months, they practically starved to death while the markets did little to nothing. Now HFT is making up for lost time.

Granted, in many ways, the stock market is priced for perfection, given that the markets are only 3 percent off historical highs. There are few investments outside of stocks that can give you a decent return nowadays. The fact that interest rates are so low has a lot to do with that. Any change, no matter how small, in interest rates is meaningful at the margin.

Sure, a 25 basis point hike in the Fed Funds rate may not seem like a lot (and it isn't when it comes to the economy). But it does tilt the financial apple cart. And if one apple falls, who's to say that won't cause a chain reaction?  If enough apples are impacted, could the entire apple cart tip over?

Many traders believe that is exactly what happened last December when the Fed initially hiked rates. The stock market had a temper tantrum in January and February that resulted, at its worst, in a 13 percent decline. Of course, the markets have come back since then and gone on to new highs.

If history is any guide, and the Fed does raise rates before the end of the year, we could see the same sort of sell-off. But like the declines in January and February, they would not be a reason to sell. If anything, I would be a buyer of such a move. But I'm getting ahead of myself.

September and October are notoriously volatile months in the stock market. So far that historical trend is solidly intact. Since the Federal Open Market Committee meeting is on the 21st of September, which is next Wednesday, we should see this volatility continue until at least that date. I suspect, however, that regardless of what the Fed decides, the markets will continue to stay volatile.

Whether true or false, investors have it in their head that the Fed will raise rates, if not now, then in December.  And since markets usually discount news six to nine months out, I believe there is more downside ahead as markets adjust to an expected rate hike. Readers may recall that I have been looking for a pull-back in the single digit range and it appears that we are in that process now. Buy that does not necessarily mean a straight down market; we could even see a return to the old highs at some point before falling back.

It might be a drawn-out process that occurs between now and the election with plenty of peaks and valleys. Remember that Wall Street believes Hillary Clinton will win the election. Until recently, the polls gave her a substantial margin, confirming those expectations. As Donald Trump narrows that lead, these same investors will start to get nervous. Nervous leads to caution, caution leads to selling. There is no telling how close the election will become but the closer it is the more potential downside is in the offing.

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 Get Back to Business

By Bill Schmick
iBerkshires Columnist

Since Labor Day marked the end of summer for Wall Street, the big guys came back to work and evidently did not like what they saw. As this week comes to a close, all three indexes suffered losses.

Friday's downturn could be attributed to North Korea, the rogue state that detonated a nuclear device on Thursday night. Those kind of one-off political events often-times unsettle markets. Stocks went down, the dollar spiked as did interest rates and that I found interesting.

Normally, U.S. Treasury bonds are a safe haven so prices go up in times of uncertainty; but not Friday. We have to therefore look under the hood to discern what is really going on with the markets. Aside from the fact that stocks are due for some turbulence, the culprit seems to be additional worries over whether or not the Fed may surprise us by raising rates on September 21.

Then again, traders were somewhat disappointed that Mario Draghi, the chief of the European Central Bank, did not add further stimulus to the already-multi-billions of Euros the ECB is already pumping into their financial markets. Like junkies in search of their next high, traders want central banks to provide more and more easy money in order to justify higher equity prices.

Draghi disappointed them. He appears to have joined his counterparts at the U.S. Federal Reserve in telling the EU membership countries that it is their turn to take up the mantle. He especially singled out Germany in discussing why additional fiscal spending is necessary to accomplish the European bloc's hope for higher economic growth.

Of course European politicians, like those in America, have been sitting back, playing it safe and letting their central bank do all the heavy lifting on the economic front. Naturally, politicians on both sides of the Atlantic like the status quo. You see, doing nothing is not unique to American politicians.

By increasing spending, cutting taxes and/or regulations in order to grow the economy, legislatures are taking a chance. What will their constituents say if the deficit ballooned as a result? T Baggers, here in America, for example, would be out for blood.  I will be curious to see what happens when the Japanese Central Bank meets later this month. Will they send the same message to Japan's parliament?

But in the meantime, our Fed officials are busy sending mixed messages (as usual) over when they plan to raise interest rates in this country. Boston Fed President Eric Rosengren joined the “hawks” on the Fed in warning that rates need to rise soon.  Fed Governor Daniel Tarullo said on morning television, that he would rather wait until there was more proof that inflation was rising before he pulled the trigger.

Nonetheless, their contradictory comments were enough to send the stock market reeling and hike the probability of a September rate hike to 33 percent. In my opinion, I do not believe the Central Bank will hike in September. I do believe, however, that they do not want market participants to become too complacent about when the Fed will raise rates.

The more important question one must ask is what will happen to the stock market if the Fed does raise rates; if this week is any indication, nothing good. As you know, I have been preparing you for a market pull-back. This may be the beginning, and if it is, it won't be something to worry about, but it could be painful while it occurs.

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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