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The Independent Investor: 'Sell in May and Go Away?'

By Bill SchmickiBerkshires Columnist
If I hear one more person spout that line, I think I'll go nuts. Suddenly, because this cliche has worked for the past two years, it has become gospel to believe it will happen again this year. Investors should be wary.

Back in July 2008, I wrote in "Myths of the Market":

"Sell in May and Go Away," is one often quoted saying that implies that stock market returns are higher in the November-April period than in the May-October months. After 27 years experience in global markets, I tend to agree. My belief is backed up by multiple studies that indicate that in 36 out of 37 developed and emerging markets this indicator works the majority of the time. Although no one can provide one single cause for this, I believe it has something to do with summer vacations, especially in Europe, where the effect has been noticeable since 1694."
 
As a contrarian, when everyone is expecting the same thing, (in this case, a sell-off in the markets lasting into the fall), I tend to lean the other way. There certainly are plenty of good reasons to be concerned that this third year will be the charm. Questions over QE3, the ongoing Euro crisis, a slowdown in China, an incredible first quarter rally in stocks—all of these would indicate we need a correction or at least a healthy pull back.

The most convenient thing for all of us would be to cash in our chips, get to the sidelines and enjoy our summer. If you had done so in 2010, you would have missed a meager 1 percent gain in the markets between April 30 and Oct. 31. In 2011, you would have dodged a 6.7 percent slump in the averages. But markets usually do what is most inconvenient for the greatest number of investors.

A recent report from Ned Davis Research pointed out that the Selling May strategy doesn't work nearly as well when it occurs in a presidential election year. They looked at every presidential election since 1900. Investors on average would have missed a hefty 4.4 percent gain as measured by the Dow Jones Industrial Average in those years by selling in May. If an incumbent wins, the gains are even higher (7.6 percent).

Now, before you reverse course and buy everything in sight, a word of caution is appropriate. The same study did show that, on average, a correction did occur during the second quarter of presidential election years. The duration of the pullback is what differs.

Usually, a summer rally occurs after the second quarter sell-off in an election year. When the incumbent party has lost the election, the summer rally fizzled out and the Dow made a new low in late October, followed by a weak year-end rally. When the incumbent won, the summer rally was stronger and the pullack in the fall was mild, followed by a strong gain into the end of the year.

The explanation for the differences in these presidential election-year markets comes down to uncertainty. That uncertainty is compounded when the economy has been weak, as it is now. Leadership in times like these is extremely important to market investors. Some would argue that the incumbent (the devil you know) is preferable to one you don't know, who may or may not, usher in successful policy changes. The presidential candidate's party affiliation did not appear to have any bearing on the results.

So the moral of this tale is that there may still be a sell-off between now and the end of June, but politics will have an inordinate influence on what happens this summer and fall.

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.

     

The Independent Investor: Not In My Back Yard

By Bill SchmickiBerkshires Columnist
Part II in a look at the boom in natural gas; Part I can be found here.

The oil and gas boom in this country has had some serious side effects. Everything from earthquakes to polluted water has been blamed on the industry. Residents near the areas of hydraulic drilling and exploration are fighting back using the Environmental Protection Agency, lawsuits, lobbying and the media. The challenge is separating fact from fiction in this on-going fight.

There is no question that there has been a remarkable increase in the number of earthquakes in the middle of the country, for example, or that an entire neighborhood of homes in Dimock, Pa., claimed it was threatened with explosive levels of methane gas. Twenty water wells in the same area, the site of natural gas drilling in the Marcellus Shale, showed the presence of sodium, methane, chromium or bacteria.

A recent documentary, "Gasland," on HBO featured another Pennsylvania village caught in the controversy over America's oil and natural gas boom. The movie allegedly uncovered the "secrets, lies and contamination" of natural gas drilling. As a result of the growing controversy three states — New Jersey, New York and Pennsylvania — have called a moratorium on any further drilling or hydraulic fracturing for the time being. That is a big deal because the Marcellus Shale sits below those states and has enough natural gas to fuel this country for the next 20 years.

Environmentalists and people living near drilling sites are saying not in my back yard. They believe that attitude is justified since the risks are great and who can blame them? I'm sure I would feel the same way if someone proposed to drill a well in the parking lot of my condo. The moratorium is needed, so its advocates argue, simply to study the impact of this drilling before people get hurt or sick. Naturally, the energy industry is arguing that the risks are small and that thousands upon thousands of wells have been drilled with no negative impact whatsoever. They have a point.

Take the earthquake issue, where a study by the U.S. Geological Survey identified a sixfold increase in manmade quakes in an area including Arkansas, Colorado, Oklahoma, New Mexico and Texas. All the headlines pointed to natural gas drilling as the culprit. The gas guys were found guilty, strung up and buried before the survey team could come to a conclusion. Only then did the scientists admit that the quakes were not directly caused by hydraulic fracturing with one exception, one lone well in Arkansas.

The 20 "contaminated" wells in Pennsylvania I mentioned were later found by the EPA to present no threat to human health and the environment. As for the earth beneath the affected homes in Dimock, it did contain methane among other elements, but the EPA could not prove a connection between the contaminants and the oil and gas developments. In fact, they concluded that the presence of these elements could just as easily have been caused by naturally-occurring background levels or other unrelated activities.

I have learned that most studies tend to reflect the bias of those conducting them. In other words, you can make a study say anything you want given enough samples. This battle, in my opinion, has already been won by the weight of public opinion. A cessation of exploration will have a negative impact on the economies of all three states. At the same time, the declining price of gas will not justify continued drilling in a land of litigation.

Free market capitalists might moan and argue that a person has the right to do whatever he wants with his property including fracking. On the other side, advocates will contend (rightfully so) that there is no such thing as zero-impact drilling. One's decision to allow fracking in your backyard can and does directly impact my property next door.

The industry heightens the paranoia surrounding it by refusing  to disclose what potentially toxic chemicals (if any) are used in the drilling process. The regulations do not require disclosure so they won't provide it. They are also exempt from EPA regulation thanks to the Bush Administration's 2005 loophole legislation dubbed the "Halliburton Loophole" by opponents.

As a result, all sorts of fears can be invoked (real or imagined) by any blogger or tree-hugging anarchist that wants to invent their own bizarre plot against humanity. Is the nation's watershed in jeopardy of contamination? Many environmentalists claim it could be impacting millions of unsuspecting Americans. Without the data, we don't know. Others worry that in the vacuum caused by the absence of federal regulation, undermanned and revenue starved state regulators are turning a blind eye to industry regulation.

Back in the day, when the United States was still a powerhouse of industry, a growing and vocal group of concerned citizens began uncovering the seamier side of this formidable industrial base. We discovered that the byproducts of these industries were causing enormous amounts of air and groundwater pollution. At the same time, workers were coming down with all sorts of ailments from asbestos poisoning to cancer. Instead of helping the industrial sector transform itself into something more acceptable, we drove it away.

Politicians swooped in to pass bill after bill creating new safety standards, stricter codes and of course higher taxes on these bad boy industries. Industrial companies found themselves spending more time and money defending their practices from lawsuits, sit-ins and protests. In the end it wasn't worth it. They started looking for less hostile manufacturing locations abroad and found them.

Americans today lament the loss of that U.S. industrial base. We conveniently forget that part of the reason for that exodus was caused by a sea change in how we viewed those industries. Although the present challenges facing further gas drilling in our country should be taken seriously, let's try not to apply the same "not in my back yard" attitude toward gas drilling that sent our industrial base packing in the past.

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.




     

The Independent Investor: The Gas Rush

By Bill SchmickiBerkshires Columnist
There is talk that this country could be the Saudi Arabia of natural gas. It's clean burning, domestically produced, abundant and offers a concrete exit plan away from this nation's foreign energy dependence. Yet, from Texas to New York, Americans appear to be willing to take up arms against any additional gas drilling.

As recently as five years ago in the U.S., natural gas was in short supply using traditional exploration and drilling methods. Then, engineers had a breakthrough. Two key technologies were discovered — horizontal drilling and hydraulic fracturing (fracking) — were discovered. Horizontal drilling allows gas developers to drill vertical wells that turn and snake more than a mile sideways under the ground. Fracking, which was actually invented more than 60 years ago, involves pumping millions of gallons of chemically-treated water into deep shale formations at enormous pressure. The fluid cracks or widens existing cracks in the shale freeing hydrocarbons to flow toward the well.

As a result of these technologies, vast caches of natural gas trapped in deeply buried rock have been made accessible leading to an eightfold increase in shale gas production. One of these deposits, the Marcellus Shale sprawls beneath West Virginia, Pennsylvania and New York. This deposit alone could produce enough energy to fuel every natural gas fueled device in the nation for the next 20 years.

Natural gas prices have plummeted as a result of all this new supply and are now trading at 10-year lows ($1.94 per 1,000 cubic feet). The prognosis by experts is that prices aren't going to rise anytime soon since there is so much gas still in the ground that the energy industry, policy makers, economists and natural gas customers can't figure out what to do with it.

It has already been a great boom to both residential and commercial users of the fuel. The typical consumers spent $868 on average this winter, a 17 percent decline from last year. Utilities that generate electric power consume 34 percent of the nation's natural gas output. Decline in gas prices are being passed through to customers, who are beginning to see their utility bills decline throughout the Northeast.

Another 30 percent of natural gas is consumed by industries to heat boilers or make chemicals, fertilizers and plastics. Prices have come down and supplies have reached a level that major corporations are announcing large-scale expansion projects close to the sources of these new natural gas discoveries.

Dow Chemical has announced plans to build a multibillion-dollar plant to convert natural gas into the building blocks of plastic in Freeport, Texas. Royal Dutch Shell is building a similar $2 billion chemicals plant near Pittsburg, Pa., close to the output from the Marcellus Shale. These are but two of 30 chemical plant projects that are ear-marked for the U.S. over the next five years.

Steel and iron producers are also excited at the prospect of saving over $11 billion annually through 2025. Steel maker Nucor is switching from coking coal to natural gas production of their iron products in a new $750 million plant in Louisiana. The trucking industry that now consumes just 0.1 percent of natural gas production is looking at a crash program to build natural gas refueling stations along America's Interstate Highway System to refuel new long-haul trucks that will burn natural gas.

All of this expansion means jobs. Economists predict as many as 500,000 new jobs by 2025. At the same time, if we can build the infrastructure to transport and convert our nation's existing oil-based economy to consuming natural gas over the long run, we no longer need fear turmoil in the Middle East. The whims of OPEC will be a thing of the past. At the very least, America could join the league of energy producers/exporters and begin to export our surplus gas to foreign buyers. Europe, for example, pays 75 percent more for their natural gas than we do.

All of this sounds wonderful, yet there is a darker side to this "Gas Rush." Homeowners across the nation in those regions where natural gas is being exploited have witnessed their once-pristine communities become industrial sites. In place of their willow trees or pastures, sprawling plants lit by huge flares late into the night blotting out the moon and stars.

Trucks rumble through neighborhoods spewing noxious fumes that mingle with other possibly toxic substances.  Neighbors keep children and pets behind fences away from containment ponds filled with unknown chemicals. They worry about the drinking water and hold their breath as earthquakes make the windows and china tremble where no such quakes had occurred before.

In our next column, we will examine the darker lining within this pink cloud of natural gas abundance. Opponents of fracking argue that the risks outweigh the rewards in any further development of natural gas. Here we are on the verge of a possible renaissance in American manufacturing and yet New York, New Jersey and an increasing number of municipalities and local governments are ordering a halt to further development.

Is that wise or is America once again shooting itself in the foot? What do you say?

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.



     

The Independent Investor: A Stop & Start Economy

By Bill SchmickiBerkshires Columnist
Recently, worries have surfaced over the sustainability of economic growth in this country. Over the last several months, the data has been pretty good. Now the numbers indicate the economy is faltering — again.

I say again because the same thing happened last year at around the same time. Economists call that a stop and start economy, something we haven't seen since 1967. The mild winter and warmer early spring in two-thirds of the country this year has also added some confusion to the economic picture. Confusion in terms of how much of the strength in America's fourth quarter of 2011 and into the first quarter of 2012 was because of the abnormally mild weather?

On the surface, everything was looking just ducky at the start of this year. The manufacturing cycle seemed to be catching fire. There appeared to be pent-up demand, coupled with massive liquidity injections by our Federal Reserve (QE 2.5) and the European Central Bank's money giveaway as part of their bail out of Europe's financial system. As a result, economic activity exploded at the end of last year (as did the stock market).
And then came the Ides of March.

Most of the manufacturing data for March indicates a less-sanguine portrait of America's economic health.  Industrial reports ranging from the Chicago Fed's national activity index, the ISM Composite Index, and the Richmond, Dallas and Kansas Manufacturing indexes released monthly by the Federal Reserve all say the same thing. 

The economy is slowing for the second time in 12 months.

Just recently the Economic Output Composite Index marked its first decline in March since August 2011 and this week's National Federation of Independent Business (NFIB) Index confirmed that March was a real stinker.

The NFIB Index is important because it gives us a better view of what is going among small businesses, which are the backbone of our country. Over the last 6 months, the NFIB Index has grown steadily, like the rest of the economic data. But In March, nine of the NFIB's 10 index components hit the wall, declining markedly with the largest drops in hiring plans and expected real sales growth.

The gloomy prognosis for sales and hiring is especially important because small businesses hire the majority of workers in America. They are also completely dependent upon the consumer. Between fuel savings from the mild winter and lower gas prices at the pump last summer, those windfall savings generated $30 billion for American consumers. That was money they could and obviously did spend on other things. Now that the weather cycle has returned to more normal temperatures the impact of those economic "tax credits" have dissipated.

The stop-and-start performance of the economy should come as no surprise to readers. After all, it is something we have been living with since the end of the recession back in 2009. Back then, in order to "jump start" the economy, the federal government, along with our Federal Reserve, has thrown money at the problem again and again. The resultant record deficits we now endure have put an end to the government's giveaway programs but not those of our central bank.

We have printed and then poured trillions upon trillions of dollars into the economy. After each spending splurge, we have seen a rise in economic activity but as the next round of quantitative easing ran its course, that activity began to sputter once again. This bout of stimulus is scheduled to end in June. Last year we witnessed a similar phenomenon at the end of QE II.

The government and the Fed have hoped that at some point once enough money is in the system that "organic" (real) economic activity will pick up where their stimulus left off. So far that has not been the case. Given that it an election year, I doubt that the Fed or the government will allow the unemployment rate to rise or the economy to slow once again. If the numbers continue to decline we can expect yet another round of stimulus, regardless of its impact.

Bottom line: What do you call someone who does the same thing over and over again and still expects a different outcome?

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.


     

The Independent Investor: Retailers' Easter Baskets Full

By Bill SchmickiBerkshires Columnist
"... He's got jellybeans for Tommy,
        Colored eggs for sister Sue,
There's an orchid for your Mommy
And an Easter bonnet, too."


"Peter Cottontail" by Steve Nelson & Jack Rollins

 This year's early spring could mean a little extra cash in retailers' Easter baskets. Despite gasoline prices approaching $4 a gallon, consumers are shopping for everything from hams to hydrangeas.

Overall revenues are expecting to increase by 11-14 percent. That would make three years in a row in which retail revenues have risen in the March/April period. The unseasonably warm weather we have been enjoying has helped chain store sales post their best weekly gains in more than 11 years. Easter also happens to have arrived 16 days early this year. The combination of the two developments could mean as much as $16.9 billion more this year, according to the National Retail Federation.

Easter is the 4th largest spending holiday in America after Christmas, back-to-school, and only slightly smaller than Valentine's Day. The average consumer is expected to spend $145.28 (up 10.9 percent from 2011) and 25 percent higher than the dark days of 2009. The average male shopper will outspend women, with shoppers in the 25-44 years age category spending the most.

Almost 19 percent of Americans will shop online this year while as many as 46 percent of shoppers will at least use their mobile devices to comparison shop and/or research product and retailer information. Yet, Americans are still looking for a deal. Over 63 percent of spenders are heading to discount stores as their first stop for Easter purchases, followed by department stores (42 percent) and specialty stores (25.4 percent)

My first stop will be at the supermarket, where I will pick up a free turkey or ham as a result of accumulating $300 in shopping points over the last two months. It is no surprise to me that food is the top category of spending for Easter and Passover with 87.7 percent of shoppers buying $5.11 billion in ham, lamb, turkey, and fish with all the trimmings. Ham prices have been higher than usual over the last two years, thanks to high feed costs. A typical ham is selling wholesale for 75 to 80 cents per pound this spring, well above the 55 cents per pound it has averaged for the previous five years.

Candy is also a big item. Easter comes in second after Halloween as the top candy selling event of the year, according to the National Confection Association. We will spend $2.346 billion to fill our children's Easter baskets this year, spending an average of $20.35 each for sweets. Flowers and greeting cards on the other hand, while experiencing healthy sales, are not as important during this holiday. Still, Hallmark Cards reports Americans will send $57 million greeting cards this season, which makes Easter the fifth highest holiday sales period for them.

More than 7,500 warm temperature records were set last month. The warmest March on record was set for Chicago, Oklahoma City, Milwaukee, Detroit, Kansas City, Nashville, Indianapolis and Tampa, while it was the second warmest month in the history of New York City and Philadelphia. The warm, dry weather in two-thirds of the country spurred additional sales in a host of product lines. Spending for lawn and garden supplies was up 39 percent in March over last year. My wife, Barbara, had a hard time buying a rake at our local Tractor Supply store because the sales clerk said they had been sold out weeks before.

Spring clothing sales are also benefiting from the demand for new Easter outfits, while young and old alike are shedding overcoats and scarves to hunt for that perfect pair of shorts or tank top.

All in all, Easter this year should be gangbusters. What retailers worry about now is whether the strong sales now are only pulling demand forward. Will the heavier spending carry over into the summer or will shoppers, having depleted their spending limit, simply put their hands back in their pockets until the fall? I suspect additional consumer spending will depend upon how strong the economy will be and how fast unemployment will fall during the next several months. In the meantime, I wish you my readers a Happy Easter and Passover.

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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