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The Independent Investor: The End of QE II: Wax On, Wax Off
By: Bill Schmick On: 11:59AM / Friday July 01, 2011
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"Wax on, right hand. Wax off, left hand. Wax on, wax off. Breathe in through nose, out the mouth. Wax on, wax off. Don't forget to breathe, very important." — Mr. Miyagi, from "The Karate Kid"

Miles of newsprint and thousands of terabytes of Internet space has been devoted to what happens Friday, the day after the end of the Federal Reserve Bank's quantitative easing experiment. Some say it bodes ill for bond and stock prices. Others argue it will have little or no impact. I say it is simply the end of one program and the beginning of another.

The total cost of the Fed's Treasury bond purchase program amounted to $600 billion. The goal of QE II was to put more money in the hands of consumers and corporations (especially small businesses) in an effort to boost spending and hiring. Unfortunately, it did little to jump start the economy in either area.

In a circular exercise similar to Mr. Miyagi's admonition to "wax on, wax off" the Fed purchased the bonds from the banks, hoping that they would in turn lend that sudden windfall of money to us. But instead, these banks just bought back more treasury bonds. The banks simply refused to lend that money and the Fed has no authority to make them.

QE II did result in lowering interest rates to historical lows, however, which allowed financial speculators to borrow money cheaply and to invest that cash (really short-term speculative trading) into commodities, stocks and all sorts of higher yielding securities. Those of us who have retirement savings also benefited somewhat as the stock market rose and we regained some of the losses incurred in 2008-2009.

All it meant for the average Joe was higher gas and food prices as commodities skyrocketed into the world’s latest financial bubble. That actually slowed spending. As for corporations, the big guys already had more cash on their books than they needed. Their profits were exploding as well and none of them felt the urge to hire more labor since they were doing just fine with what they have now. And why not, since their workers have had no wage increases in years, have had their benefits cut to the bone, and if they complained, well, there are always 13.9 million unemployed American who would be happy to take their job at an even lower pay rate ... As for small business, QE II was a total bust for them.

Doomsayers, such as Bill Gross, the highly respected portfolio manager of the world's largest bond house, Pimco, believe that without the Fed’s support, interest rates in the Treasury market will spike, the economy will fall back into recession, and the stock market will tank in response. A host of knowledgeable players subscribe to that theory and have made their views known to anyone who will listen.

Others believe that there are still plenty of potential investors, especially overseas, who will still want to own U.S. Treasury bonds as a safe haven and as a dependable source of income. Interest rates might rise a little, especially on long term bonds (10-20-30 years) but the rise would depend on the growth rate of the economy and inflation expectations. The stock market would no longer be underpinned by the easy money policy of QEII but that might actually be a good thing since it would reduce the amount of speculation that seems to be a massive part of today’s stock markets.

Of course, the caveat here is that Washington politicians come to their senses and do not allow the country to default by refusing to raise the debt ceiling.

In my opinion, I do not think that the Federal Reserve has taken us this far only to cast us adrift to the whims of fate. The Federal Reserve will continue to keep its role as the largest buyer of Treasuries. A week ago, for example, the Fed stated that it intends to use the proceeds of maturing debt that it already owns to buy more treasury bonds as needed. A total of $112.1 billion will mature within the next 12 months. The Fed also holds $914.4 billion of mortgage-backed debt and $118.4 billion of Fannie Mae and Freddie Mac bonds,  which will also mature. That will mean an additonal$10 billion to $16 billion of cash maturing every month. When you add it all up, the Fed has another $300 billion in cash, more than enough to maintain its support of the bond market.

Remember too that the Fed isn't about to give up on the economy just because QE II didn't quite do the job that they intended. Like Daniel in The Karate Kid, the Fed has learned some valuable lessons from their latest experiment.

I predict that they will try again, as early as next month, to come up with yet another way to stimulate the economy. I’m not sure what they have up their sleeves, but I expect we will start hearing rumors about a new plan very shortly. That will certainly play well in the stock market, don’t you think?

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 e-mail him at wschmick@fairpoint.net. Visit www.afewdollarsmore.com for more of Bill's insights.



Tags: QE II, economy      
@theMarket: Jobs Versus the Market
By: Bill Schmick On: 07:06AM / Saturday June 04, 2011
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The May non-farm payroll jobs report was a disappointment. So much so that investors dumped stocks, convinced that because the country only added 54,000 jobs, the economy is kaput and we all headed for economic Armageddon. Now, doesn't that sound silly?

Let's get real folks. We didn't lose 300,000 jobs last month, which might have justified Friday morning's sell-off. Sure, economists were looking for a job gain of 100,000 plus but why should any one be surprised that unemployment is still above 9 percent given the slow growth rate of our economy?

Since the end of the recession, quarterly GDP has been at best erratic. Beginning with the third quarter of 2009, we have experienced the following string of quarterly numbers: 1.6, 5.0, 3.7, 1.7, 2.6, 3.1, 1.8 percent. All but one of those quarters have trended well below the normal economic recovery rates associated with the end of a recession. Is it any wonder that our unemployment rate bounces around while remaining inordinately high?

The spate of negative economic numbers we have been experiencing of late, in my opinion, has much more to do with the body blow Japan has taken from its earthquake and aftermath. After all, Japan is the second largest economy in the world and the fallout from its present recession impacts everyone.

As for the markets, I believe there are similarities between the April-August period of last year and what is happening today. At that time investors were concerned that we were falling back into a double dip recession. GDP for the second quarter of 2010 had dropped to 1.7 percent from 3.7 percent, while unemployment hovered at 10 percent.

The S&P 500 Index fell by over 16 percent. It was only after the Federal Reserve Bank announced the possibility of QE II that the markets recovered in August. Now the S&P is almost 300 points higher.

Last quarter's GDP growth rate was 1.8 percent down from 3.1 percent the quarter before and unemployment is 9.1 percent, up a smidgeon from last month. Unlike last year, however, we face the "end" of QE II in less than 30 days.

Readers may recall that I discounted a double-dip recession last year. I argued that we were in a slow growth recovery and should expect erratic and conflicting economic data into the foreseeable future. As long as the housing market remains in the doldrums, so will the economy. That argument still holds. At the same time, if the economy slows further, the Fed still has our back no matter how many QEs it takes.

What investors tend to forget is that we narrowly escaped a second worldwide Depression two years ago. While politicians, investors and taxpayers alike speechify about our government's huge deficit and wasteful spending, they should stop and ask why the deficit and spending is where it is today.

As a result of the financial crisis, the deleveraging of debt in the private sector was an absolute necessity. The only way to accomplish that, without driving the world over the brink, was for the government to take on that debt (deliberately leveraging the public sector balance sheet) while, at the same time, spending as much as possible to jump start the economy.

To date, that strategy has worked, although not as perfectly as certain textbook economists might have hoped. We have averted a Depression although this last Great Recession is not like any of the recessions we have experienced since the end of WW II. It is going to take time, effort and patience to unwind the financial tangle that our banks, brokers and insurance companies have created. We are on the right track, even if our path ahead is dimly lit. Expect the track to run through peaks and valleys, make sharp turns, and accelerate at times, while coasting at others. In the meantime, stay the course.

As I write this, the markets are wrestling with 1,300 on the S&P 500 Index, the bottom end of my projected range. Could the markets fall even further? Of course, they can. If we break 1,300, the next stop would be 1,250-1,275, still not the end of the world. From top to bottom that would be an 8 percent correction, after a 300-point rally over 11 months. I'll gladly accept that kind of pullback for a chance to rally up to 1,400 or above.

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 e-mail him at wschmick@fairpoint.net. Visit www.afewdollarsmore.com for more of Bill's insights.



Tags: jobs, unemployment, economy      
@theMarket: Black Friday In More Ways Than One
By: Bill Schmick On: 05:30PM / Friday November 26, 2010
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As 138 million Americans planned their Thanksgiving holiday assault on the nation's willing retail emporiums today, others around the world are working on a more lethal stratagem that has investors more concerned than thankful.

North Koreans greeted our Black Friday with their own version of a 21-gun salute as they bombarded the disputed waters around Yeonpyeong Island even as our U.S. commander in South Korea, Gen. Walter Sharp, was on the island inspecting this week's provocation by the North. The ongoing dispute follows the sinking of a South Korean submarine eight months ago in the same territory of the Yellow Sea. Asian markets sold off as tensions escalated.

There was not much Thanksgiving cheer in Southern Europe either as European debt worries escalated. You would think that now that Ireland has accepted a bail out from the EU, things would calm down. Instead, investors worried about which nation would be next on the list to cry for financial help. Portugal, it seems, is now the center of attention with Spain and Italy still waiting in the wings. Most European markets were trading down as U.S. markets opened on this holiday-shortened Friday.

I wouldn't make too much out of the sell-off. Readers may recall last year's sell-off on the same day as a result of a perceived financial crisis in the Middle East. The following week all the losses suffered that day were quickly regained and then some. As I cautioned readers last week, this pullback may have a bit more to go before the markets are ready to resume their climb.

On the plus side, our own economy appears to be gathering strength with unemployment dropping, consumer spending rising and consumer confidence regaining its footing. As the economic data continues to improve I expect it will provide firm support for further upside in the world’s stock markets. I guess the only possible fly in the ointment I see right now is the failure of congress to act on the looming expiration of the Bush tax cuts. As readers know, I have written about the predicted logjam in Washington that I fear is now upon us.

It is unbelievable to me that politicians will allow these cuts to expire at the end of the year. The Democrats argue that only the middle class should escape the tax increase while the Republicans want everyone including the "rich" (defined by those families who make more than $250,000 a year) to be spared the horrendous increase in taxes. In my opinion, if nothing is done and we all greet the New Year far poorer than we already are, the economy will most definitely suffer.

What rebound we are beginning to experience now will be short-circuited. Consumer confidence will falter and with it the stock market, housing and job growth. The actions of the lame-duck Congress since the elections have not given me a lot of confidence that the two sides will be willing to compromise on anything given the legislative stalemate that has occurred thus far. One can only hope that our elected officials will begin to act and do what is best for the country. As it stands, both sides seem to be preparing for re-election in two years as opposed to governing in the here and now.

At Thanksgiving dinner among friends and family in Pittsfield, both young and old were glum about the prospects for compromise within the government. We all agreed that this country needs term limits and needs them now as a possible start to electing leaders and not career politicians. However, that's not going to get the tax cuts expended by the Christmas holidays. I suggest we all write to Santa this weekend with those extensions at the top of our wish list. In the meantime, I hope you all had a great Thanksgiving.

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 1-888-232-6072 (toll free) or e-mail him at wschmick@fairpoint.net. Visit www.afewdollarsmore.com for more of Bill's insights.



Tags: Congress, overseas, economy      
The Independent Investor: Don't Fight the Fed
By: Bill Schmick On: 10:23AM / Friday November 05, 2010
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Now that QE II is in the bag, expect QE III, QE IV and maybe even a QE V, if that's what it takes to restore economic growth and reduce the unemployment rate to under 7 percent in this country. After the mid-term election results, I believe the Federal Reserve is all that stands between us and a stagnant, deflationary economy. I would not bet against them in this endeavor.

Most of Wall Street is expecting fiscal gridlock in Washington now that the GOP has re-taken the House but is still the minority in the Senate. That will mean little if any new initiatives to either grow the economy or drive down unemployment have much chance of passing. One exception may be a compromise on the Bush tax cuts.

If both sides can muster enough cooperation to cut a deal in extending the tax cuts before the end of the year (when they are set to expire) then we may escape an economic knockout punch of monumental proportions. Outside of that, there is not much that we should expect from the government over the next two years.

That means that only the Federal Reserve Bank, led by Chairman Ben Bernanke and his band of 12 governors, are left to wage the good fight against the forces arrayed against our economy. Their mandate, to promote low, stable inflation and a high level of employment, gives them enough latitude to do just about whatever they feel necessary to jump start the economy. It appears they are doing just that.

QE II not only says the Fed is serious about that mission but signals an intention, in my opinion, that if this one doesn't work, another one will already be in the pipeline, followed by another, and another. That is entirely believable since the Fed can and will continue to print money (U.S. dollars) until the cows come home in an effort to grow the economy, which is the only way they can reduce unemployment.

In an Op-Ed piece in the Washington Post on Thursday, Bernanke defended the Fed's second quantitative easing and stated several things that you should read as Gospel:

"... the heavy costs of unemployment include intense strains on family finances, more foreclosures and loss of job skills."

"... inflation is running somewhat below 2 percent."

"... higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending.”

"... Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion."

Bernanke said next to nothing about the dollar since he did not want to give the impression that the U.S. was deliberately driving the dollar lower (although that is exactly what QE II will do). If you don't believe that just take a peek at the decline in the greenback lately. As I have said in the past, the dollar will continue to weaken as the Fed prints more and more money. A lower dollar will boost commodity prices such as gold, silver, energy, materials and agricultural food items. So ignore the naysayers who say commodity prices have run their course.

As far as the Fed is concerned, pumping more money into the economy is OK, at least for now, since the inflation rate is "a bit lower than the rate most Fed policymakers see as being consistent with healthy economic growth in the long run."

But the most important message investors should take away from his Op-Ed is his extraordinary comment concerning higher stock prices. Evidently the Fed believes higher stock prices should be part and parcel of its attempt to grow the economy. The reasoning makes sense when you consider that consumers are the linchpin of this economy. Given that our two main pillars of wealth, our tax-differed retirement savings and our homes, have taken a huge hit since 2008, any improvement in one or both of these assets should help improve our confidence and therefore our spending. That message is clear in the bullet points above.

The Fed is clearly telegraphing to investors that they want a higher stock market, and like unemployment and the economy, they will do what it takes to accomplish that goal. This message is behind the jump in the stock market this week. My advice to you is don't fight the Fed. Buy stocks.

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 1-888-232-6072 (toll free) or e-mail him at wschmick@fairpoint.net. Visit www.afewdollarsmore.com for more of Bill's insights.



Tags: Federal Reserve, Bernanke, economy, stocks      
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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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