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The Independent Investor: 2012 Could Be Another Up & Down Year
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This year a lot can happen. So much depends on forces outside our control that predicting the markets will be up (or down) X percent by year end would be criminal at best. Instead, I would like to broadly outline the possibilities and risks we face in the months ahead and how best to play them.
As I predicted, we are currently in a rally that began before Christmas and should extend for the next few weeks if not months. I don't think we will hit any new highs during this period or if we do it won't be until April. Europe will most likely continue to dominate the news, so we should continue to experience quite a bit of volatility. Be prepared for the 1-3 percent up days followed by the same or more on the down days.
I believe that ultimately Europe will get its house in order but between here and there the markets will be quite choppy. A foot in both the equity and bond markets should play best in that environment. Stick with dividend and large cap stocks and defensive sectors in this period along with corporate and high yield bonds and short-term paper.
Although the U.S. economy continues to improve, it is nothing to write home about. Without additional help from the do-nothings in Washington or an end-run by the president around Congress, unemployment will remain high and growth between 1.5-2.5 percent. That is an optimistic scenario, which assumes that a European recession is inevitable but at the same time contained to their side of the ocean.
If, on the other hand, it appears that Europe's recession is spreading globally then all bets are off. Remember too that stock markets sell first and collect the facts later in this day and age. Just a hint that something like that is in the cards would be enough for a major sell-off in world markets. Therefore it wouldn't surprise me if we have a classic "sell in May (or April) and go away" scenario this year.
Granted that would be a worse-case scenario but one we must all be prepared for. Further hiccups in Europe, fear of renewed recession here at home without further monetary or fiscal stimulus from the Fed or White House could spook sending the S&P 500 Index back towards its 2011 lows at 1,100. Granted, that would be a worse case scenario but one we must all be prepared for. A switch to all bonds would be best in that case.
But remember, we are also in an election year and markets usually begin to anticipate that in the second half of the year. This could give investors an opportunity once again to buy the dip. If history is any guide, the Obama administration will want to do anything and everything they can to boost the economy going into the November election. This year that argument should carry additional weight since both parties are campaigning on the economy and unemployment.
In that case, we could see a major move higher in the averages off the bottom this summer that could move the U.S. market to substantial gains by the end of the year and into 2014. Now, wouldn't that be nice?
If some or most of my forecasts come true for this year, it is quite obvious that a buy and hold strategy will be a recipe for disaster as will all cash, all bonds or all stocks. There will be times during the year investors will want to be both aggressive and defensive and it will be a lot of work, just like last year. There is an old saying that "if you can't stand the heat, get out of the kitchen" or in this case, hire a money manager that can make those decisions for you, but be sure you pick the right one.
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: Robin Hood Would Be Proud
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Some call it the "Robin Hood Tax" (part of HR 3313) because it supposedly taxes the rich and distributes the proceeds to the rest of us peons. It is a bit more complicated than that, but you get the idea. Some say the proposal surfaced as a result of the Occupy Wall Street movement. Others credit the late Noble prize-winning economist James Tobin for the idea. The basic thrust is to impose a financial speculation tax of .03 percent or $3 in taxes for each $10,000 in financial transactions.
Although it doesn't sound like much of a tax, its proponents claim it could generate as much as $48 billion or more per year if all G-20 countries signed on to implement the tax.
In Europe, where every nation is scrambling to raise money, the idea is supported by the European Commission in Brussels that would like to see as much as $10 per $10,000 tax in place throughout Europe by 2014. The Italians, under their new Prime Minister Mario Monti, is planning to impose the tax as part of his country's fiscal reform plan. Both the French and German leaders are on record as backing the idea and even Pope Benedict XVI came out in support of it.
In the United States, the idea has found surprising support among some strange bedfellows. Bill Gates, George Soros, Ralph Nader, Al Gore, the nurses union and the AFL-CIO among others. As such, a bill to impose a tax on certain trading transactions in financial markets (part of H.R. 3313) is working its way through Congress. All the sponsors of the bill are democrats.
Republicans oppose it, which should come as no surprise since the vast majority of Republicans won't even read a proposal to raise taxes of any sort. Surprisingly, the White House and Britain's Prime Minister David Cameron are less than enthusiastic about it. Both feel it might jeopardize their country's leadership positions within financial markets where such a tax may drive traders elsewhere to do their business. The White House also believes it would hurt pension funds and the banks.
In my opinion those are lame arguments and don't square with the facts. For instance, both Hong Kong and Singapore, two fast-growing financial markets, already charge a $20 per $10,000 transaction tax. Great Britain, the leading financial center in Europe, has had a stamp tax in force for 25 years called the Stamp Duty Reserve Tax on most paperless trades of companies located or registered in the UK. It has not impacted the financial status of those markets one whit.
The Securities Industry is against it (surprise, surprise) warning that such a tax would impede efficiency, depth and liquidity in the markets as well as raise costs to issuers, pensions and investors.
What the tax will do, in my opinion, is reduce the speculation in global markets while generating much-needed revenues. Speculation, in the form of High Frequency Trading (HFT) is the bane of our existence. These traders buy and sell blocks of stocks, bonds and exchange traded funds second by second, minute by minute in large volumes throughout the day generating thin but profitable trades that add up. They could care less about a company's earnings or its future prospects. When a stock drops, hundreds, if not thousands, of HFTs and day traders jump on the trade, like vultures over a wounded animal, they drive their victim to its knees before going on to their next prey, all in the name of profit.
A $3, $5 or even $10 tax on these transactions will crater that market and do much to reduce global volatility. Who knows, actual investing may come back into vogue and with it the retail investor. Sure, the tax may hurt the little guy but the individual investor usually doesn't trade 10 or 15 times a day at $10,000 a crack.
Detractors argue that it is not HFT but the circumstances of the market, such as the European crisis, that is responsible for the volatility. I agree that the problems we face worldwide do create volatility and always have, but the markets have never reacted with the level of violent swings and almost daily market volatility that we experience today.
So I say string your bows, Oh, ye Merry Men, let arrows fly and support this transaction tax.
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: Give Local
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American charities took in over $300 billion last year and hope to make this year even better. After all, we Americans are a giving people. Nearly two-thirds of us give something to charity every year with many of those donations occurring between Thanksgiving and New Year's.
Why we give is still somewhat of a mystery. The economy is nothing to write home about, unemployment is high and most of us are pinching pennies. Yet, we somehow find that spare dollar or two to drop into the charitable pot or, in some places, the hands of the homeless.
Experts point to the fundamental social urge to help our fellow human beings. There is also the "feel good" factor, since giving makes us feel better about ourselves. There is also the social pressure to give during company fund drives, or marketing calls for example. Yet, each year we discover that things are not quite as they should be in the nonprofit world. Most readers are aware that many large charitable organizations use professional fund raisers at some point or another for phone solicitations, direct mailing, call centers, etc. These fundraisers charge a fee for their efforts, which can be enormous delivering as little as 46 cents on every dollar donated to the charity.
Recently, the attorney general for New York State released a report that found that, on average, just 37.6 cents of New Yorker donations actually went to the charity of their choice. In some places, such as the Hudson Valley, charities received even less, just 17.4 cents/dollar, which was the lowest percentage in the state. There were actually 61 cases where the charity lost money after paying telemarketers and other fund raisers. New York is no different than Massachusetts, Connecticut, Vermont, New Hampshire or most other states in this regard.
Various organizations have given donors tips on the dos and don'ts of giving. Suggestions such as resisting pressure from telemarketers to give on the spot. Others urge you to do background checks on charities before giving or use charity rating organizations that will do that job for you. Experts say that when giving on-line read the fine print and every watchdog organization advises that we should all educate ourselves about charitable giving. All of the above advice is laudable, but where's the fun in that?
You see, most studies on philanthropy indicate that charitable giving is an impulse thing. That's right, we pass through the supermarket doors and toss our spare change into the bucket without thinking, receiving a heart-felt "Thank you and Merry Christmas" for our efforts. In fact, numerous studies reveal that the more one thinks about things like which charity is the best choice or how this or that charity uses my money, the less generous one tends to be. So how does one give without spoiling the fun?
Give local just like you buy local. Most of us know the needs of our own communities. There are dozens of charities right outside your door that you can give to directly without worrying about fraud or how much of every dollar they will receive. Food banks, animal shelters, human shelters, it's all there and when you give locally there is an added benefit. You improve the quality of life in your neighborhood, which helps everyone.
Take my company, for example. We gave away hundreds of turkeys last year at Thanksgiving. Individually, this holiday season, some of us are sponsoring needy kids with holiday presents as well as donating money to a local animal shelter. Surely there must be a soup kitchen, children's home or something that tugs your heart strings some where close. You don't even need to donate money when you give locally. The donation of your time can be just as valuable. So get out there and give. And God bless us everyone.
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: Why Everyone Should Have a Will
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Looking at him, you might agree. At 25, he is as healthy as the horses he shoes. As a farrier with his own business, he works hard and plays hard. Life is his oyster right now but if he dies, I reminded him, the state gets everything.
"No way," he said, in utter disbelief.
But it is true. As a single man with no relatives and no will, the chances are quite high that the state would take everything. Fortunately, my client found religion and immediately did some estate planning, including creating a will. Unfortunately, most people will find every excuse in the book to avoid creating a will. Many individuals feel uncomfortable with the possibility of their own death or they take the attitude that when you're dead, you're dead, so why worry about it.
You may be surprised to know that most states are prepared for that and have effectively written a will for you. They are called statutes and are used to determine your heirs if you die "intestate" (without a valid will). Each state's statutes are different and can have an enormous impact on your heirs, especially your children.
If you die without a will, for example, and have children under 18, the state will control who will care for them. Sure, siblings or grandparents are usually the go-to choices as guardians, but not always. There are also many instances where a sister or brother may not agree with the court's ruling. In which case, there ensues a long and costly custody battle with most of the emotional hardship borne by your children.
It gets worse. Let's say you have been diligently saving for your kids' college education. Without a will, there is no guarantee that an appointed guardian will honor your wishes. They may simply use the money for your child's support dismissing college as a frivolous expense or a luxury they cannot afford.
Probate is the term used for the long, arduous and expensive state court procedure that administers your estate. An uncle of yours dies in Florida and leaves a condo, but no will. As his nearest kin, you will need to hire a lawyer in state, spend the money, time and effort necessary to have the disposition of the condo adjudicated in the court system and hope that in the end the state rules in your favor.
You go through all those hoops only to find out a distant cousin disputes your right to inherit. At the same time you discover the condo's mortgage is greater than its worth and the condo association doesn't approve the one buyer who might take it off your hands. I think you get the point. Probate is a nightmare.
Many people have confused a revocable living trust with a will. They are two different legal documents, which serve different purposes. In a living trust, you transfer assets into the trust during your lifetime. When you die, those assets go directly to your beneficiaries and do not go through probate. It is a private document and is more difficult to be challenged.
In contrast, a will is a public document. It can be useful in combination with a living trust to ensure that any property that is not already listed in your living trust (such as furniture or antiques, or heirlooms) before death will be transferred to the trust at death. A will can also address the needs of your children by naming a guardian and spelling out the financial provisions for their care and education. A will can also accommodate your wishes and intentions clearly and at greater length than a trust.
Creating a will and/or a living trust is best done through an attorney. It may cost a couple hundred dollars but it is the best way overall to cover yourself and your family in the event of your death. I suggest if you haven't done one yet, it's about time you did.
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: It's Your Move America.
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Back in May of this year, in my column ("Gordon Gekko Should Run for Congress"), I pointed out that our nation's elected officials were not subject to the insider trading law that regulated everyone else. As a result, individual politicians and their cronies have profited substantially year after year from the knowledge they picked up in closed door hearings, subcommittees and the like.
This access to insider information has become even more important over the last few years as more and more market moving events are triggered by governmental actions. Just consider how government pronouncements in the U.S. and Europe over the last six months have caused huge market swings.
Efforts to change this law have been going on for years with scant success. News stories such as The Wall Street Journal articles on the subject last year and last month's "60 Minutes" report on the scandal have increased public awareness. I suspect that if their approval ratings were not so low (congress has a historically low 9 percent approval rating) the politicians would simply ignore the heat, as they have done in the past, and continue to profit at our expense.
A month ago only nine congressmen supported the bill that would require elected officials to report all trades over $1,000 within 90 days. After the "60 Minutes" show, that number increased to 180 and more than 20 senators have since jumped on the band wagon.
Today, a cozy relationship exists between politicians, political intelligence firms and big players on Wall Street. There is nothing illegal in a congressman or senator divulging sensitive information to a political intelligence firm which in turn sells that information to Wall Street. The more market-sensitive information that is passed on through the pipeline, the more a particular politician can demand in future campaign contributions from the beneficiaries of that information.
This bill would make it illegal for individuals and "political intelligence firms" to continue that practice. It would also require firms and individuals involved in "political intelligence" to register just like any other federal lobbyist.
Call me a cynic, but I doubt this bill will pass. Not only are lawmaker's potential for using their office for personal gain at stake, but this bill will also jeopardize the pipeline to campaign funds from those special interests we hear so much about.
In a different world, all my readers and everyone in America who cares (the 99 percent), will call or email their representatives in Washington and demand he or she vote for this bill when it comes up for a vote next week. It is your chance to change a lot of what is wrong with Wall Street right now. It's your move, America.
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.
