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@theMarket: Regaining the High Ground

By Bill Schmick
iBerkshires Columnist

As of today, the S&P 500 Index is in the plus column for the year. That seemed impossible to most investors just a month ago. And I expect more gains to come over the next two months.

In last week's column, I predicted the worst was over and the price action this week confirms that. This will be the fourth week in a row that U.S. markets have generated positive returns. The engine of growth behind these further gains this week came as no surprise to me.

I have argued repeatedly that the monetary stimulus programs underway by central banks across the globe would keep stock markets climbing. Last week I wrote that "The ECB launched a stimulus program at the beginning of the year. Investors not only expect that to continue, but possibly be increased if economic data warrant it." Evidently, economic data warranted it.

Thursday morning, ECB President Mario Draghi hinted that investors could expect further stimulus in December from the central bank. World markets greeted the news by gaining between 1-3 percent (depending on the country) by the end of the day.

I also mentioned China was another country where "every negative data point will convince investors that the government there will need to stimulate monetary policy further." Their GDP for the year was announced last weekend. It was 6.9 percent, a bit below the government's stated growth target of 7 percent.

Before the U.S. market opened this Friday (and after the close in Asia), China's central bank officials announced another (their sixth) cut in interest rates by one quarter percent. This further fueled gains in both Europe and America. One can only expect that Asian markets will move higher on Sunday night as a result.

In the weeks ahead, I would expect the discussion among Fed Heads to intensify as a result of these new monetary initiatives. Right now, the handicappers are giving a low probability to a rate raise in December.  That could change, if the macro-economic data both here and abroad gather strength. The dollar will also be a renewed topic of concern, since a hike in rates here and a decline in interest rates elsewhere will lead to a stronger dollar.

In the meantime, we still have earnings to worry about. Although the majority of companies have "beat" earnings, revenue and guidance tells a different story. Only 40 percent of companies thus far have raised revenue guidance, blaming the strength in the dollar for these disappointing numbers. Of course, there have been exceptions in the middle of these lackluster results. Some of the biggest names in the technology space have done quite well in both the top line (sales) as well as the bottom line (profits). That has heartened investors somewhat.

As for the markets, we have already topped my short-term targets. My next target on the S&P 500 Index is 2,100. Remember that the year's high is only 34 points above that. By now you should also know that nothing goes straight up, so expect some consolidation. We remain on track to see single digit gains from this index by year's end.

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 Worst Is Over

By Bill Schmick
iBerkshires Columnist

It appears that we have reached our bottom in the stock market. If I'm correct, investors can now look forward to not only recouping any losses incurred over the last three months, but possibly seeing minor gains in their portfolios by year-end. Wouldn't that be nice?

Although I was worried that we might have to re-test the August lows one last time before the middle of October, it does not appear to be the case. Instead, it looks like we are on our way to the old highs. It won't be fast and it won't happen in a straight line. You can expect more pullbacks as we struggle to climb what will be most likely be a wall of worry.

The prospect of slowing global growth, including within the United States, an increasingly uncertain political climate as election rhetoric heats up, the debt ceiling debate, the Fed rate hike risk and continued disappointment in corporate earnings, are just some of the concerns that keep investors up at night. Although I believe these worries are overblown and will prove more of a distraction than a reality, it will keep all of us on our toes.

The most concrete issue between now and the end of the year will be the health of our own economy. Markets have rallied over the past few weeks because a recent string of macroeconomic data points seems to indicate our economy has hit a speed bump. In this case, bad news is good news. As such, the Federal Reserve has postponed a rate hike until the data justifies an increase. That, in turn, was cause for celebration among investors who had feared a rate hike and thus a further slowing of the economy.

As for me, I am sticking to my January forecasts. Monetary stimulus worldwide by the majority of the globe's central bankers will keep stock markets climbing, although as we have seen, not in a straight line; the more stimulus, the more gains. Here at home, I still expect only modest, single digit gains in the S&P 500 Index. This is largely due to our Fed's change in policy from monetary expansion to a more neutral stance on money supply growth. Nonetheless, I still see gains from here.

It was one reason why, although I was expecting this recent sell-off, I made the decision to stay invested. I expected the markets to come back and the timing of getting out and then getting back in was just too uncertain. Consider the last three weeks. Who could have predicted that a weak jobs report two weeks ago would catapult the markets higher by 7 percent - certainly, not me?

China, which I like, is still a topic of concern to investors. This weekend we are expecting a slew of economic data out of that country including a gauge of Gross Domestic Product. Weaker data, however, may not lead to weaker markets, since bad news is good news in that country. Every negative data point will convince investors that the government there will need to stimulate monetary policy further, as it did in this country for several years. The same holds true for Europe. The ECB launched a stimulus program at the beginning of the year. Investors not only expect that to continue, but possibly be increased if economic data warrant it.

Technically, our market appears to be in good shape. We have breached the 2,020 level on the S&P 500 Index. If we can hold on to that level, the next stop should be 2,040-2,050. Earnings have been less than spectacular thus far but, as in every quarter, expectations have been ratcheted down far enough that most companies either are beating or matching earnings estimates. I know I sound like a broken record, but my advice is to stay invested and consider this as a consolidation year.

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: October Should Be the Bottom

By Bill Schmick
iBerkshires Columnist

The third quarter was the worst for stocks in four years. Here we are in October and if history is any guide, investors should expect a bottom in the stock markets over the next three weeks.

That does not necessarily mean that history is a dependable guide. Historical data has proven to be less than helpful over the last few years. That is largely because the central bank's heavy hand in the financial markets since 2008 has skewed the data. Their intervention in both the bond and stock markets has made technical as well as fundamental tools of investing all but meaningless in valuing the markets.

I have been expecting the stock markets to re-test their lows made on Aug. 24, something we have yet to accomplish. Until we do, this correction will continue. Last week, we got close (within 4 points on the S&P 500 Index).  But markets tend to overshoot. It would not surprise me if we actually broke those lows and fell even further. That would create a panic among investors, in my opinion. And panic is what usually signals a bottom.

In addition, October is the perfect month for this to occur. The historical pattern indicates that this month should begin badly for the markets, but reverse course by the end of the month. The only problem with this scenario is that almost everyone is expecting the same thing. As a contrarian that worries me.

Certainly there is little evidence so far of the kind of reversal I am expecting. The news seems to go from bad to worse. Friday's unemployment number was much weaker than economists were expecting and triggered worries that the U.S. economy might be stalling. I don't believe you can base your assumptions on one data point, no matter what it is. The unemployment numbers have been notoriously unreliable when viewed week-to-week or even monthly.

But that didn't stop the algorithmic computers and day traders from hitting the sell button across the board on Friday morning. Investors can expect the wilds swings that we have been experiencing over the last two months to continue a bit longer. I know that most readers are worried. The tendency is to check your portfolios more and more frequently. As the stock market declines, commentators and the media always become more bearish and so will you.

The atmosphere becomes charged with emotion. As more and more pundits turn negative, they try to outdo one another in painting "what if" scenarios. The markets "could" drop much further, they say, without explaining why that would be the case. These are the same jokesters who were screaming "buy, buy, buy" at the top of the market. My advice is to ignore the circus.

Focus on what is important. Yes, your portfolios are lower than at the beginning of the year, but that doesn't mean that by year-end those paper losses won't be paired or completely disappear. I still think we will end the year positive, if only by single digits. That's why I have not changed my forecasts. So far just about everything that has happened has gone according to my playbook. Keep the faith and keep invested.

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: Back to the Future

By Bill Schmick
iBerkshires Columnist

The Federal Reserve Bank postponed hiking interest rates. Global stock markets swooned on what should have been good news. We are back to anticipating what the central bank will do in the future.

Investors are well equipped to handle both positive and negative scenarios, but they can't stand the unknown. And that is exactly what we face for the remainder of the year.

Last week, I predicted the Fed would not raise rates. I argued that based on their achieving only one of their objectives, job growth, the bank would hold off. The rate of inflation, their second objective, has yet to reach their target of 2 percent. There is little evidence that indicates that target rate will be reached any time soon.

Fed Chairwoman Janet Yellen, in her press conference after the FOMC meeting, also indicated that the state of global economies was a concern. Her words echoed the IMF's warnings (also mentioned last week) that now was not the time to raise U.S. interest rates.

In the past, whenever the Fed applied more stimuli to the economy, (or in this case failed to tighten), the markets took it positively. That is understandable given past financial history.

More stimuli equaled lower interest rates, equaled higher stock markets. However, that causal relationship might be wearing thin. Although central bankers have poured over $8 trillion into the global economies over the last few years, economic growth rates have remained stubbornly

The Fed would be the first one to tell you (and has continuously through the years) that monetary policy can only do so much. Without help from the government's fiscal side, (read increased spending) the impact of simply keeping interest rates low is dubious. Over the past seven years in this country, legislatures, led by the Republican Party, have rejected that concept.

Instead, they have done the opposite, with the help of politicians on the other side of the aisle. Even today, the same rhetoric of reduced spending is one of the main planks in every GOP candidate's platform. I vehemently disagree and have advocated the opposite since the onset of the financial crisis. But now is not the time to debate this subject. After all, this is a column about markets.

I maintain that markets will remain volatile for a few more weeks and that a re-test of the August lows is required before this period of correction is over. This past week the majority of traders, expecting that the Fed would not hike rates, bid the markets up to a technical level of resistance, in this case 2,020 on the S&P 500 Index, and then took profits. It was a classic exercise of "sell on the news," which happens quite often in markets like this.

Over the next few weeks, I expect we will fall back to the 1,860 level on the S&P 500 index and maybe a little below that. Selling will be fueled by the same set of circumstances that has bedeviled the markets since the beginning of the correction in August. In summary, we have returned to the pre-Fed meeting guessing game.

What will the Fed do in the future? Are rates off the table for this year? The Fed says no, but states that it is still dependent on the data. It is hard for me to see what is going to increase the rate of inflation to the Fed's target rate this year, ditto to expectations that we will see a lift-off in overseas economies that quickly.

In the meantime, traders are in charge and their time horizon is down to microseconds.

Your only recourse is to ignore the noise, because that is what most of this worry is about, and, look to November and December when the bulls take over again.

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: All or Nothing

By Bill Schmick
iBerkshires Columnist

As traders steel themselves for next week's Federal Open Market Committee meeting, the stock market remains volatile with a bias toward the downside. That should change for better or worse by next Wednesday.

Whether the Fed raises rates or decides to pass for another month or three, I expect traders will use the decision as an excuse to buy or sell the stock market. I normally key off what the bond players think about the Fed's actions and they put the probability of a rate hike at 30 percent.

The odds are low largely because inflation continues to be practically non-existent. The rate of inflation is one of the Fed's twin mandates, the other being employment. Clearly, the jobs picture has been improving all year. So the signals are mixed. Given that the central bank is determined to err on the side of moderation when raising rates, why not wait a little longer before hiking rates?

In addition, although a small rate hike here in the U.S. would have little to no impact on the economy; it does have implications for global currencies, trade and emerging markets. I have referred in the past to the "carry trade." That's an arbitrage investment that many large institutions use on a global basis. They borrow in cheap or declining currencies and invest it in strengthening currencies and bond markets. A rise in rates (even a little one) does and will impact this carry trade. It will also impact exports, imports and, by extension, the economies of various nations.

The International Monetary Fund (IMF) is well aware of this risk. It is the main reason why its Managing Director, Christine LeGarde, has urged our central bank to delay a rate decision until next year. She feels that the global economic conditions are just too fragile at this juncture to sustain a rate rise from the world's largest trading partner. She has a point. Neither the world, nor the Fed, really wants to see the dollar strengthen any further in the short-term. A rise in our rates would do that.

Wall Street would have us believe that the present volatility and uncertainty among stock markets would also be a big deterrent to hiking rates right now. I doubt that. The Fed would not be overly concerned if the U.S. market moved up or down 3-4 percent in the short-term. I'm guessing that you might feel differently about that.

By now, most of us are starting to cope with the newly-found volatility of the markets. For the first seven months of the year, the indexes traded in an extremely tight range. Since then we have been making up for lost time. The CBOE Volatility Index, which measures perceived risk, has jumped 120 percent over the past month.

Consider that over the last 15 trading days alone we have had 11 "all or nothing" days when greater than 80 percent of the stocks in the S&P 500 Index moved in the same direction, higher or lower. That compares to only 13 such days over the first 159 trading days of the year. It indicates that investors are far more concerned about the risk of the overall market than they are about the fortunes of any individual stock. That concern continues today.

It appears to me that the markets will trade aimlessly until the middle of next week. The bears will position themselves around a probable rate cut and a fall in the markets, while the bulls will do the opposite. Whatever happens, the fireworks will be at best a short-term phenomenon. Since no one really knows what decision the Fed will make, the best thing to do is nothing.

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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