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@theMarket: Stocks Need a Break

By Bill Schmick
iBerkshires Columnist

This week the S&P 500 Index touched 1,800 before pulling back a bit. Hitting round numbers in the averages usually creates some profit taking among investors. A number of indicators are also hinting that a minor correction could happen at any time.

A stock market decline in the magnitude of 5-6 percent is overdue. I'm not sure if it will happen this week or next, but I am pretty sure it is just around the corner. I could be wrong on my timing although the evidence is building. Some of the variables I watch are flashing red lights, others are simply amber and a few remain green.

One indicator I watch is small cap speculation. Frothy markets are wonderful for penny stocks. Speculators day trade these puppies and can make as much as 8-10 percent in a short time period if they bet on the right horse. In the last few days those stocks are not working as well as they have over the past month. They are usually a leading indicator for market turns.

Then there are the momentum stocks. In bull markets there are always stocks that seem to go up and up almost every day until they don't. Take the current mania for solar stocks and companies that produce 3D printers. In the last few weeks some 3D stocks have actually doubled. But this week, these same stocks have been down as much as 20-30 percent. When momentum stalls, the overall market is usually not far behind.

As a contrarian, I also pay attention to investor sentiment. The more bullish investors become, the more worried I get. Proprietary crowd sentiment numbers indicate we are at a level where the market has pulled back several times since 2011.

Readers may ask how this cautionary column squares with my belief that we have entered a secular bull market that could last for years. A secular bull market does not mean that the markets go up and up without experiencing declines. They do, and some of them can be severe.

It is what keeps the bull going. Periodic sell offs that allow the markets to consolidate its gains and give new buyers a chance to get in is the historical formula for a long-lasting uptrend.

What I am hoping to see is a short-term decline in which the S&P 500 Index falls to its 100-day moving average. That is around 100 points lower from here. In the grand scheme of things, it's no big deal. It would allow the markets to then stage a traditional Christmas rally sometime in late December continuing through the New Year.

I'm sure you are asking what this means for your portfolio. The short answer is a paper loss in your portfolio. Some investors may be tempted to sell now and jump back in after the correction. Good luck to you if that's your plan. There is no guarantee that the markets will cooperate. What if the decline is only 2 percent? What if I'm wrong and the markets continue to grind higher without a pullback? Are you willing to be glued to the computer screen eight hours a day watching the markets for a turn that may not come?

If you can't take a short-term loss 5-6 percent paper loss in your portfolio, you are invested far too aggressively. These kinds of minor declines are the cost of doing business in the equity markets. They happen all too frequently. Get used to it, or reduce the risk in your portfolio permanently.

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: Market Gains Are Just Beginning

By Bill Schmick
iBerkshires Columnist

For those who have yet to commit to equity, it is time to reassess. We have entered a new phase in stock markets worldwide. It is called a secular bull market and could last for many years.  Don't let this opportunity slip by.

Talking to prospective clients and investors over the last few years, I have heard a litany of reasons why stocks are not a good investment. The following are just a few of the more popular excuses: a second financial meltdown is just around the corner. The Fed's quantitative easing will spark hyperinflation. U.S. debt and deficits will sink the markets. Washington's politics will drive the country into a depression.

Then there are those trapped in self-fulfilling prophecies. I call them the "I missed it" crowd. These are the investors that continuously argued that the markets are too high year after year.  Now, four years later and over 100 percent higher, they are still sticking to the same mantra.  A subgroup of those dissenters, who are still holding U.S. Treasury bonds or CDs, would like to take the plunge, but they too are afraid that the stock markets gains are over.

My position is that the above investors are looking backward. Future gains will be equal to or better than those of the last few years driven by gathering strength in world economies and low interest rates.

So let's put this "markets are too expensive" argument to bed once and for all. The stock market, as represented by the benchmark S&P 500 Index, on March 24, 2000, was trading at 1,527. Today, Nov. 15, 2013, that level is 1,792. That is a gain of only 17.3 percent over 13 years (1.3 percent gain annually). That is much less than the inflation rate during the same time period and far below the market's historical average of 7 percent per year over the last 100 or so years.

Ask yourself if those kind of gains accurately reflect the advances we have witnessed over the last 13 years in education, energy, technology, science, medicine, food production industrial manufacturing and a host of other areas.  By any stretch of the imagination, does a 1.3 percent gain in stock prices each year reflect those advances?  
Of course not; but let's look at another metric, the trailing price/earnings ratio (P/E) of the market, a tool that attempts to value stocks by dividing the price of a stock by its past earnings. Back in March of 2000, the P/E ratio stood at 28.3 times earnings. Today, that ratio is only 17.4 times earnings. So why is the market cheaper now than it was 13 years ago?

The simple answer is that the stock market had been in a secular bear market for most of that time. During secular bear markets, which can last from five to 15 years, gains are hard to come by. During secular bull markets, which I believe we have now entered, the opposite occurs. There is a catch-up period where markets begin to make up for all those years of low growth. We are in that phase right now. In the years ahead, the gains will begin to slow down but should be above the historical average. We may even have a few years where we experience losses (because of a recession, for example) before growth resumes.  

So for discussion's sake, let's guess that this particular secular bull market will last a decade. If the S&P 500 Index simply returns to its historical norm, that would mean 7 percent growth/year times 10 years or a total of 70 percent. Of course, if you compounded those gains the returns would be much higher.

The moral of this tale is that anyone with a long-term view could enter the market today, despite its historical highs, and expect to prosper for years to come. Sure, there would be pullbacks, as there are in every market environment, but the trend would be your friend. How simple is that?

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: Market's New Highs Are No Surprise

By Bill Schmick
iBerkshires Columnist

Here we are just days after the latest attempt by our government to scuttle the financial markets and the averages are making new historical highs. Investors should expect more of the same as long as the Federal Reserve keeps pumping money into the financial system.

While the politicians, aided by the media machine, continue to construct one wall of worry after another, you my dear reader must stay above this daily to and fro. You must keep your eye on the ball. The ball in this case is the $85 billion per month that the Fed continues to push into the financial system.

"Taper," a word that saw the stock markets swoon and interest rates soar is no longer on the front burner; at least not this year, thanks to the latest deficit/debt debacle out of Washington. Back in September, at the Fed's FOMC meeting, Chairman Ben Bernanke had said that tapering was off the table for now due to a slowing economy (thanks to the Sequester) and possible fallout from the upcoming deficit/debt talks. The latest economic data indicates that this little charade out of D.C. will cost $25 billion and shave almost 0.08 percent off fourth-quarter GDP growth. Once again the Fed got it right.

Many on Wall Street tend to want to outguess the Fed. That is a mistake. They are the most wired-in group of financiers in the world. When they talk, it is better to just listen because they are right more often than not. Therefore, when Ben tells me no taper, I have to stay bullish on the markets. This is not rocket science, folks.

You see, the Fed controls the stock and bond markets. It has been so ever since the financial crisis. Many investors continue to make the mistake of thinking the stock market and the economy are one and the same. In times past (pre-financial crisis) that may have been so. Since then however, the Fed has followed an unrelenting monetary policy of stimulus. Although it has been only marginally effective in growing the economy and employment, it has done wonders for the stock market.

It wasn't supposed to work that way. It was supposed to be a team effort. The Fed has been hoping against hope that the U.S. government would follow their lead and use all the fiscal stimulus at their disposal to get the economy growing again. Instead, our politicians have done just the opposite. Since 2010, the government has done everything in their power to sabotage the economy. Today, with our political system in complete disarray, the Fed is the only game in town.

We now have over five years of historical experience of what happens to the stock markets when the Fed stimulates. Ask yourself, has anything changed? There is no need for second guessing here. When I told you that we would not get into a shooting war with Syria, did you listen? Over the past few weeks, when I advised you to ignore the Washington circus because it would end in an 11th hour deal, did you take heart?

Oh ye of little faith, stop focusing on these mundane issues that have little or nothing to do with the performance of your portfolio. We are going to new highs in the markets; enough said.

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: The Same Old Song

By Bill Schmick
iBerkshires Columnist

The stock market has been down all week. Investors have been so busy biting their nails over the debt ceiling and the budget debates that they have had no time to buy this dip. The question is should they?

The S&P 500 has fallen about 33 points since last week, or roughly 1.8 percent. I blame our elected clowns. As the clock runs out and a Tuesday shutdown of the government grows ever closer, weak-kneed investors are bailing. Yet a government shutdown is small potatoes compared to the risk of not raising the debt ceiling.

In yesterday's column "Play It Again (Uncle) Sam," I explained that government shutdowns have occurred 17 times since the seventies. The longest was a three-week stretch during the Clinton years and none of them had done any lasting harm to the economy, the government or to the stock market. The debt ceiling debate may be a horse of a different color.

There could be some real harm done to all of the above if Congress were to allow the debt ceiling to expire in the middle of October. Although the U.S. Treasury might be able to still pay its bills for another week or so, default would certainly be a direct result of this congressional insanity.

It is ludicrous to believe that this tea party-inspired game of chicken has actually gotten this far. A default would cost this country at least as much as the entire 2013 federal deficit in higher interest rates and lost economic activity. How, therefore, does the Republican Party achieve its goal of reducing our debt and balancing our nation's budget by doubling the size of both overnight?

It is informative to look back just two years ago to the summer of 2011 to see how the GOP's first stab at blackmail proved out. At that time the debt ceiling debacle was narrowly averted by both parties agreeing to the Budget Control Act. But a few days later the Standard and Poor's Credit Rating Agency downgraded our national debt because of our dysfunctional political process and its legislators. The Dow dropped 635 points in one day (5.6 percent) while during the summer fiasco, the S&P 500 Index lost 16.5 percent.

The Budget Control Act ushered in the sequestration mechanism of automatic spending cuts when neither party could agree on tax and spending measures to reduce the deficit. Those spending cuts were enacted at the beginning of this year. As a result, employment gains have slowed and the growth rate of the economy reduced in 2013. Go Republicans!

However, notice something interesting about the market's reaction today to these same set of circumstances. The stock market has declined less than 2 percent versus the 16.5 percent sell–off in 2011. Interest rates, rather than spiking on the threat of a default, have actually declined from close to 3 percent on the 10-year Treasury note to 2.61 percent today.

The message here is to focus on price, not hyperbole. The media would have you believe that the world is coming to an end once again. The tea party, desperately trying to gain support before their primary elections, are playing us all. Investors aren't buying it. Too often in the past, we have sold out in fear of what these politicians would do only to discover that they are all paper tigers. Don't fall for it this time. Buy the dip.

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: From Russia with Love

By Bill Schmick
iBerkshires Columnist

Stocks rallied this week as news that the world may have found a way to resolve the looming confrontation between the U.S. and Syria. If so, investors can thank Russia for the solution and a much-needed deal that might actually extend into a brokered peace.

Last week, I suggested that readers should not worry too much. I had my doubts over whether we would see any 'rocket's red glare' over Damascus. Given the overwhelming lack of support by the American public and adverse world opinion for a pre-emptive Syrian strike, I was sure that neither Congress nor the president would pull the trigger.

Now that Russia has offered to broker a deal involving the destruction of the Syrian regime's 1,000-ton stockpile of poison gas, the world gets to have its cake and eat it, too. What's not to love about that? Although the media is arguing that President Obama has handled this international incident poorly, I'm not so sure. If Obama can pull off ridding the world of yet another potential danger without firing a shot, I say kudos to him.

However, I am not pleased with reports coming out of Japan's Nikkei Shin Bun last night that President Obama is leaning toward making Larry Summers our next Federal Reserve Chairman over Janet Yellen, the vice chairwoman of the Board of Governors of the Federal Reserve Bank. Summers, in my opinion, is just another of a long line of politicians that have moved between the private and public sectors peddling their influence in exchange for money and position..

The head of our central bank needs to look beyond his or her next meal ticket and focus instead on doing the best possible job for all of the country, not simply Wall Street. I believe Janet Yellen would be such a person. The White House has denied that a decision has been made, but that doesn't mean it won't be Summers. Obama, as a lame-duck president, can do what he wants. I'm hoping he makes the right choice, rather than the political one.

Next week, the Fed meets and most economists and investors believe that the much-mentioned taper will begin at that time. Depending on whatever announcement is made, the stock and bond markets could see quite a bit of short-term volatility. Pay no attention to it.

All you need to know is if the economy gains pace and unemployment does not, then the Fed is going to taper and, at some point, end its efforts at quantitative easing altogether. That will be good for the stock market and bad for the bond market. If, on the other hand, the Fed does not taper it means the economy is rolling over and unemployment will remain the same. That will not be good for the stock market longer-term.

My best guess is that the Fed will announce some minor pull-back in monetary stimulus. For example, they could decrease their $85 billion in monthly purchases of U.S. Treasury bonds and mortgage-backed securities by $10-15 billion or so. Since this year's deficit is not nearly as high as expected, the need by the U.S. Treasury to issue bonds has been reduced. The Fed could simply pull back their Treasury bond purchases while leaving the mortgage-backed security purchase plan the same. That would not be the end of the world no matter what the pundits may say.

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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