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@theMarket: Markets Mark Time
By Bill Schmick On: 12:03PM / Saturday March 24, 2012
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Questions concerning China and its economic future kept the market's exuberance in check this week. Given that China is key to most global growth forecasts, any hint of a slowing of the Chinese economic engine is taken seriously. This week we received a bit of bad news.

Over the last seven years, Chinese government central planners have established a stated economic growth rate for China's economy of 8 percent. This week, Chinese Premier Wen Jiabao set a growth target for his nation's economy at 7.5 percent for 2012, which is half a percent lower than targeted.

At the same time, government forecasters in Australia indicated that iron ore exports may decline by as much as 8.5 percent this year. China was once again the culprit since it is a large consumer of Aussie iron ore. Iron ore is one of the main inputs in the production of steel. Also, Australian BHP Billiton, the world's biggest mining company, predicted that China's steel production is slowing as the country switches its focus from exports and massive building projects to the Chinese consumer and domestic consumption

Shaving one half of one percent off an economic forecast may not seem like a lot, but when the world's stock markets are priced to perfection, any ill wind that may blow quickly accelerates to gale force among market participants. The Chinese stock market nose-dived on the news. That market, which had experienced fabulous gains from 2003 through 2008, has languished and has largely been excluded from the rally in stocks that we have experienced since 2009.

To its credit, the U.S. stock market weathered the news quite well. It simply stalled the equity rally for this week. Although somewhat muted, sentiment is still at or close to highs that have traditionally signaled market corrections. In addition, The Chicago Board of Trade's Market Volatility Index, called the VIX, has hit lows that have not been seen in years. Volatility has been the watch word of the markets over the last two years. The price of the VIX today would indicate that investors are expecting smooth sailing into the future with no clouds upon the horizon.

The S&P 500 and NASDAQ Indexes are having their best quarters since the second and third quarters of 2009. Europe’s problems also appear to be behind us although lingering concerns over the financial shape of Portugal contributed to this week's nervousness. European exchanges had their worst week of the year with a decline of 4 percent overall. We will see if the U.S. market can decouple from the kind of profit-taking that is occurring across the Atlantic.

The recurring theme among everyone I talk to is when a pullback will occur. It was the topic of an entire evening's dinner conversation on a recent trip to Manhattan. Various members of the financial community gave their forecast. None present expected the markets to continue higher. That, my dear reader, is an important contrary indicator. I suspect that there are still a lot of investors, both retail and institutional, who are underinvested in equities and are just looking for a chance to put more money into the market.

Since there will always be those who will jump the gun, any minor decline continues to be met with a wave of buying from those still sitting on the sidelines. I expect that absence any more bad news, the markets will continue to experience shallow pullbacks followed by a slow grind higher. I feel fairly confident that somewhere out there a sell off is coming but exactly when is simply too hard to predict.

Bill Schmick is an independent investor with Berkshire Money Management. (See "About" for more information.) None of the information presented in any of these articles 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 (toll free) or email him at wschmick@fairpoint.net. Visit www.afewdollarsmore.com for more of Bill's insights.




     
@theMarket: Patience Is A Virtue
By Bill Schmick On: 08:10AM / Saturday March 10, 2012
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"So was that the pullback you were looking for?"

"Let's say it was the beginning of one," I answered.

"So how much longer am I supposed to wait? I've got tons of cash and it's not earning me anything."

Sometimes the hardest thing in the world is to do nothing. This appears to be one of those times. Yes, we did pull back over 1 percent earlier in the week in all three averages but the downside was short lived and the markets regained all they had lost by the end of the week. We can thank world governments for that performance.

The EU and its central bank successfully concluded the renegotiation of Greek debt. Just over 80 percent of Greek bond holders "volunteered" to exchange their old bonds for new ones that are worth less than half the value. For all intents and purposes this amounts to a massive bond default by the Greek government, but that's not how it is playing out.

When governments are involved, what normally would have become a default becomes something else. In this case it becomes a "restructuring" and not an embarrassing default. The markets rallied, bidding up European stock markets at the news. They ignored comments from the head of the European Central bank who said that further interest rate cuts and other stimulus measures are at an end. At the same time, the fact that Europe is also entering a recession seemed to be unimportant. 

In the U.S., the Federal Reserve added to the cheer by planting a story in The Wall Street Journal. The gist of the article was that the Fed is considering a new kind of bond purchase that would boost the economy further but would be designed to reduce the inflationary impact of such purchases. The economic term for this is "sterilization" and just the mention of additional easing had investors buying back stocks. As I explained last week, the entire move up in the markets since October has been based on central banks flooding world markets with more and more money. This is like offering investors a huge punchbowl with all you can drink right now. Nothing else matters right now and like those who indulge too often and too much there will be a price to be paid down the road.

As I pointed out to a client this week, the markets did recover on all this good news but are still at about the same level they were when I suggested lightening up on your most aggressive equity holdings. Actually, the Dow Jones Industrial Average was around 13,000 at the time and it is now trading lower than that.

The S&P 500 Index and NASDAQ are where they were on March 1. Gold and silver have been losing trades for the last few weeks as well. But don't get me wrong; I'm not bearish, just cautious in the short term. I expect a choppy market at best and in that kind of environment it pays to wait it out.

Many investors believe the sidelines are an unacceptable position in today's markets. Granted, sitting in cash at money market rates yielding next to nothing is akin to watching grass grow in the middle of winter. The point I would make is that sitting in cash is not about making money. It is about not losing money and that can be a smart move sometimes.

I have no crystal ball that tells me this period of caution will only last a week or two or drag on for a longer period of time. I'm guessing it will be shorter than longer so I'm willing to keep the cash and forego investing it in bonds or something else that provides a greater yield. Part of that decision is based on tax considerations and trading costs. However, those may not be important considerations to you. I can only council patience; the rest is up to you.

Bill Schmick is an independent investor with Berkshire Money Management. (See "About" for more information.) None of the information presented in any of these articles 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 (toll free) or email him at wschmick@fairpoint.net. Visit www.afewdollarsmore.com for more of Bill's insights.




     
@theMarket: Bulls Batter the Bears
By Bill Schmick On: 05:07PM / Friday February 24, 2012
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Day after day, the markets climb higher. Recession in Europe, worries over China's growth, even the skyrocketing price of oil have no power over these markets. The bears are in full retreat and only sunny skies are allowed on Wall Street.

Despite an increasing number of predictions that the market has run too far, that stocks are heading for a correction, investors still use any minor dip in the markets as an opportunity to get in. On Friday we touched 12-month highs on the S&P 500 Index while the Dow flirted with the 13,000 mark for most of the week.

It seems to me that it is time for a little profit-taking, if you haven't already. My suggestion would be to pare back on your most aggressive equity holdings and keep the proceeds in cash for now. I know that money markets are yielding next to nothing but I don’t expect your cash to sit there for long. Any correction should be short-lived and if it isn't, well, you could always put the money into something higher yielding if necessary.

There are plenty of signs that the averages are "crusin' for a brusin'" from the dissipation of volume, the continued decline in the market's breadth, to the fact that markets usually have trouble when they approach certain technical areas of resistance (like now).

Fundamentally, the rise in oil prices is a real threat to the markets. I outlined the causes for oil's rise in this week's column ("Gas Prices Going Higher"). At $109 a barrel for West Texas Crude and gasoline above $3.60 a gallon nationally, consumers are starting to feel the pressure. The higher energy prices climb, the worse the impact on economic growth. Although investors are aware of this threat, most are assuming that sometime soon (when speculators least expect it), the Commodity Mercantile Exchange (CME) will announce an increase in margin requirements.

The same thing happened last year when oil prices rose above $112 a barrel. Speculators, forced to pay much more for their short-term futures holdings in oil, gasoline and heating oil, dumped their positions, sending energy prices plummeting over night. At some point soon, something must give: either oil prices or the stock markets.

Now that Greece has largely faded from the headlines, Europe faces the aftermath of two years of a festering debt crisis. The European Union overall is now in recession with the Southern European nations suffering the worst. Most nations now face the need to reduce their deficits and are doing so with a combination of reduced government spending and increased taxes.

In Europe, it is much easier to raise taxes than reduce spending thanks to the politically difficult nature of laying off government workers or cutting back on their pensions and benefits. Of course, raising taxes and cutting spending while an economy is in recession is exactly what happened in this country in 1933, and we all know how that ended. Maybe this time will be different, but I'm not counting on that.

As I wrote last fall, the problems in Europe were blinding investors to the positive news coming out of our own economy. By October it had become obvious to me that our stock market did not adequately reflect the stronger growth in the U.S. As predicted, investors have finally realized the truth and prices now reflect the facts, so its time to take some profits.

Bill Schmick is an independent investor with Berkshire Money Management. (See "About" for more information.) None of the information presented in any of these articles 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 (toll free) or email him at wschmick@fairpoint.net. Visit www.afewdollarsmore.com for more of Bill's insights.




     
@theMarket: Profit Taking
By Bill Schmick On: 07:53AM / Saturday February 11, 2012
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It has been six weeks (29 consecutive trading days) since we have seen a 1 percent decline in the averages. Given that last year it was practically a daily occurrence, most investors are breathing a sigh of relief. That is starting to worry me.

As a born-again contrarian, I find when most people are leaning one way I tend to start leaning the other. If you have followed my advice and been invested in a dividend and income mostly portfolio, you should be up over 5 percent so far this year, and its only February.

Frankly, I thought the S&P 500 Index would peak out on a short-term basis at around 1,350-1,365 sometime in March of this year. Well folks, as of this week we actually came within 11 points of the top of my range. Is it time for some profit taking?

Markets never go straight up although there have been times when it appears they want to. On occasion over the last few years, stocks have been supported by the policies of central banks around the world. We are in one of those periods right now. In my last column I wrote that the Fed has given stock investors the green light to remain in the market and buy even more equities. Their easy interest rate policies, a tame inflation outlook and increasingly good numbers on the employment and economic front provide support for buying stocks.

That should come as no surprise to you, my readers, which is why you should still be invested in the stock market. All I am saying is that you should be prepared (and willing to sustain losses) during a period of profit taking sometime soon. How much downside this will cause is debatable. We could see as little as a 1 percent pullback to something more like 5-10 percent.

"But 5 percent would just about wipe out my profits for the year," said one reader recently.

No question about that, which is why those who hate to suffer the vagaries of the stock market, might be advised to raise a little cash around now. There is nothing wrong with taking a few profits here and there. It would simply be the smart thing to do, especially if you are heavily invested in aggressive stocks and funds. I still think the year overall will be positive. I just don't expect this straight up kind of market we have enjoyed since Christmas to last much longer.

Stock markets normally discount good news ahead of time. It seems to me that we have already discounted most of the good news out of Europe, the strong numbers out of our own economy, and the decline in the unemployment rate. When markets are priced to perfection (as they are now in the short term) it doesn’t take much to stall their momentum.

Friday, for example, Greece weighed on stocks as investors started to lose patience with the umpteenth round of negotiations between Greece and the EU. I noticed that the stocks that have gone up the most this year experienced the most profit taking. Although the overall averages (Dow, S&P and NASDAQ) have been up marginally throughout the week, certain indexes, like the high flying Russell 2000 small cap index, has seen profit taking. Many times the Russell is a leading indicator of things to come in the overall market.

As such, I am advising readers to add a little caution to the present euphoria by remembering the prudent investor always hedges their bets a bit.

Bill Schmick is an independent investor with Berkshire Money Management. (See "About" for more information.) None of the information presented in any of these articles 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 (toll free) or email him at wschmick@fairpoint.net. Visit www.afewdollarsmore.com for more of Bill's insights.




     
@theMarket: Fed Gives Green Light to Stocks
By Bill Schmick On: 02:37PM / Saturday January 28, 2012
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It wasn't quite a QE III but it came close. This week, the Federal Reserve Bank extended the time period in which they would keep a lid on short-term interest rates to 2014 while at the same time pushing longer-term rates lower. Investors liked that and bought stocks on the news.

The Fed also said it would consider launching a bond-buying program and it wouldn't wait for a recession to do it. Fed Chairman Ben Bernanke hinted he would act if the economy and unemployment simply continues to recover at its present slow pace. At the same time, the Fed dropped its forecast for economic growth this year from a range of 2.5-2.9 percent to 2.2-2.7 percent. He targeted a 2 percent inflation rate for the country but also said he would be willing to see inflation a bit higher if it meant producing more jobs for Americans.

What all of this means for you and I is that the Fed is determined to do all it can to goose the economy, the stock market and the housing markets. In the past, when the Fed conveyed this kind of message to investors, the stock markets climbed higher. I expect the same thing to happen again this time.

It is not yet clear to me how telegraphing their determination to push longer-term rates lower over the next two-plus years is going to help home buyers decide on purchasing, as opposed to renting. If, for example, I was in the market for a fixed rate mortgage and I know rates might trend lower between now and 2014, I would be in no hurry to sign a contract.

The Fed's announcement is also bad news for those retirees who have fled the stock market and have their money invested in "safe" assets such as CDs and U.S. Treasury bonds. They will continue to receive next to nothing for their money while struggling to make ends meet as food, energy, medical services and other necessary living expenses continue to rise.

On the plus side, investors can be pretty sure that the economy won't get any worse and that the stock market is about the only place one can hope to achieve a reasonable rate of return on your investments. Of course, there will be the inevitable piper to pay down the road but central banks around the world have decided to worry about the inflationary consequences of trillions of dollars in stimulus when it happens. Future inflation fears is one reason that commodities led by gold and silver raced higher after the Fed meeting.

So do the Fed's actions change the bottom line of my investment strategy? Not really. I believe defensive areas of the stock markets (those stocks and sectors that pay dividends) will do just fine in this environment. High yield and investment grade bonds will also do quite well. We will still have pullbacks in the market this year and some of them might even be serious. Overall, I believe we are exactly where we should be.

Bill Schmick is an independent investor with Berkshire Money Management. (See "About" for more information.) None of the information presented in any of these articles 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 (toll free) or email him at wschmick@fairpoint.net. Visit www.afewdollarsmore.com for more of Bill's insights.



     
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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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