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@theMarket: Break Out
By: Bill Schmick On: 10:31AM / Saturday December 04, 2010

It would appear that November's pull back in the stock market is over. From top to bottom, the S&P 500 Index lost 4.5 percent and regained 3 percent of that in just the last two days. That feels to me like a break out.

Having gone from oversold to overbought in less than one week, I would suspect that a small dip in the averages is warranted, but that would only be an opportunity to buy in my opinion. Last week, I advised investors not to be too worried about last week's sell-off. I had a hunch that new data would indicate that the economy is improving. That turned out to be the case. I expect a continued stream of better news on the economy over the next few months that will surpass most investor's expectations.

In my last column, I wrote that "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." I implored readers to put their legislators on notice that the tax-cut extensions were their No. 1 priority. Washington must have been reading my columns because on Monday morning both parties met and began working on that extension. With luck, it looks like a compromise could be reached before Christmas.

At the same time, the president's deficit reduction team presented a variety of far-reaching ideas to cut the deficit (see Thursday's column "And Now for That Deficit"). Between those developments stateside, plus the potential bailout of Ireland as well as some strong industrial production numbers from China, set us up for a rally.

Although we have yet to break above April's highs in the S&P 500 Index, over on the NASDAQ we have breached that barrier, as has the Dow. The consumer discretionary, industrial, energy and materials sectors have all broken out to bull market highs as well this week. These sectors all appear to be in a solid uptrend, despite looking a bit extended on a short term basis. Financials continue to move sideways as do some of the more defensive sectors such as utilities, health care, consumer stables and telecom.

Bullish sentiment has also been rising but is still below 50 percent, although next week's figure from the American Association of Individual Investors may show a bigger increase after this recent rally. As a contrarian indicator, bullish sentiment is not yet at worrisome levels.

Remember too that the bulls have the wind at their backs. The economy is growing, (despite the high unemployment rate) as businesses begin to invest in plant and equipment. Although the housing market is bumping along the bottom, it is at least stabilizing, and exports are growing thanks to the weakening dollar. Finally remember that Fed Chairman Ben Bernanke is on record in wanting stock prices higher (see "Don't Fight the Fed" ). All in all, that is a powerful combination that should drive the markets higher. How high?

On the S&P 500 Index 1,300 is a good round number. That's a potential gain that might even entice some of those investors sitting in bonds to come out and play in the equity markets. As for where I see the most potential gains: emerging markets, mines and metals, energy, technology and possibly real estate are my bets.

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: tax cut, deficit, housing      
The Independent Investor: And Now For That Deficit
By: Bill Schmick On: 06:45PM / Thursday December 02, 2010

President Obama speaks with Erskine Bowles, left, and former Sen. Alan Simpson in February before announcing their appointment to the deficit-reduction commission in this White House photo.

The lame-duck Congress is finally getting to work. The president is horse trading with the Republican majority to extend the bush tax cuts before the end of the year. At the same time, the Obama budget deficit commission has released its findings and the full 18-member panel will vote on these proposals on Friday. Be prepared for some fireworks.

When the President Obama first appointed the bipartisan panel led by Erskine Bowles and former Sen. Alan Simpson, to come up with ideas to cut the exploding deficit, I wrote that we would have to wait until after elections before their findings would be revealed. Given some of the radical suggestions these deficit doctors have suggested I can understand why they are only now being revealed.

At long last the "untouchables" are on the table; those sacrosanct programs that no politician has had the guts to address in my lifetime. Taboo subjects such as Medicare, Medicaid, Social Security, farm subsidies, defense spending and mortgage interest rate deductions are on the table. If accepted in its entirety (and it won't be), the plan would reduce the deficit by $3.89 trillion between 2012 and 2020. The current national debt is about $13.9 trillion.

Here are some of the high points. Our complicated tax system and tax brackets would be collapsed into three brackets – 12, 22 and 28 percent. Itemized deductions would be eliminated; capital gains would be taxed as ordinary income. Contributions to tax-deferred accounts would be capped at 20 percent of income or $20,000, whichever is lower.

Although the plan would reduce income tax rates, there would be a price to pay. Your mortgage interest deduction would disappear, gas would be taxed at a higher rate, the retirement age of Social Security would increase and benefits for both Medicare and Medicaid will be cut. Over on the corporate side, taxes would be reduced as well to 28 percent from 35 percent. But employer provided health care exclusions would be capped and phased out altogether by 2038.

Now before you take sides on what you like or dislike about the proposals, understand that just about every interest group, every age group, every demographic profile you can come up with will both gain and lose by these proposals. Lobbyists will trash those proposals that threaten their clients and promote those that don't. On an individual level, I who have just purchased a home (and therefore a mortgage) in Pittsfield while less than five years away from social security and Medicare, will want my representatives to vote against those proposals but vote for a reduction in my income taxes.

You, my dear reader, will have your own agenda and want the deficit reduction to play out in a way that benefits you but takes nothing away from what you already have now.

This would be a mistake.

Our deficit is out of control. Many Boomers, their heads stuck in the sand, believe that if we pretend to ignore it, the deficit will soon become the problem of our future generations. We have gotten into the habit both individually and as a nation of kicking the can down the road. We mouth statements like "I'm glad I'm not growing up in America today" or "kids today will just have to work harder" or "our generation supported them, now it's their turn."

Maybe prior to the financial crisis, that short-sighted attitude would have worked. Now, several trillion dollars in debt later, the hard, sober facts are that if we don't make the sacrifices now to reduce the deficit dramatically, the Boomer generation is going to get clocked at the time when they can least afford it — in retirement. We share a number of economic and social conditions that could quite easily put us in the same position as Ireland, Italy, Spain and Greece. It wouldn't take much for our big lenders, like China and Japan to go on a debt buyer's strike, especially if the deficit continues to grow.

Nations around the world have already warned us of this possibility. Actions to replace the dollar by a basket of currencies are simply another warning shot across our bow. If the deficit continues to rise while America once again backs away from the hard choices we have to make in deficit reduction, then we will all see a spike in interest rates that will make your hair stand on end. Those rates will drive the economy into a depression and the stock market to new lows. Your retirement savings will disintegrate and we baby boomers will be bagging groceries at the supermarket at age 85 — if we are lucky.

So what's it going to be?

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: deficit, taxes, retirement      
The Independent Investor: Sour Grapes
By: Bill Schmick On: 11:38PM / Wednesday November 10, 2010

As the G20 conference gets under way today in Korea, I expect the currency war will escalate now that the U.S. Federal Reserve has launched the second round of quantitative easing. As the dollar continues to decline, our trading partners are getting back a little of their own and they don't like it.

Over the last week or so, the Fed's QE II announcement has been greeted by a chorus of howls from all over the world. Germany's finance minister called U.S. policies "clueless" while Chinese officials quickly added their own criticism.

"As long as the world exercises no restraint in issuing global currencies such as the dollar, then the occurrence of another crisis is inevitable," stated Xia Bin, an adviser to China's central bank.

Brazil's finance minster, Guido Mantega, went further when he said, "Everybody wants the U.S. economy to recover, but it does no good at all to just throw dollars from a helicopter."

Those are just a few choice criticisms but there were many more from nations throughout the world accusing the U.S. of everything from currency manipulation to exporting inflation. They may be right but that doesn't mean we are wrong.

For decades, the U.S. has been running a major trade deficit with our international trading partners. All these countries that are squawking about QE II have been major beneficiaries of a monumental trading imbalance with the U.S. both now and in the past. In Latin America, for example, Brazil, among others, has benefited mightily by keeping its own currency artificially low and exporting huge quantities to the U.S. China is another master of currency manipulation and has followed a weak currency/high export policy for years. Germany is also enjoying booming exports, trade surpluses, low debt and an unemployment is expected to fall to 1990s levels thanks to a weak euro.

So after carrying the weight of the rest of the world's exports for years, the U.S. is fighting back and well it should. It is our nation and not any of the above countries, which is suffering a high unemployment rate, a slow growth recovery, huge trade deficits and a record debt load. We are simply following the same prescription both Japan and Europe followed after WWII, which Latin America followed after their Lost Decade of the 1980s. China's economic miracle is founded and continues to grow along these same economic principles.

Now that America has decided to play the same game, cries of "foul" echo across the world. It is true that America's actions will cause problems for economies around the world. Right now it makes a lot of economic sense for foreigners to borrow in dollars where interest rates are at rock bottom and then invest that money in building plants and equipment back home where interest rates and local currencies are higher. Of course, their governments already hold huge dollar reserves in the form of U.S. Treasury bonds. Foreign central banks fear that all this additional dollar borrowing may cause inflation in their own countries.

You might ask how critics can take the moral high ground and point a finger when for years they have been doing the same thing to us and acting as if America was their own private export market. Nations, however, are not individuals; which brings to mind a quote of Thomas Jefferson, one of our founding fathers:

"Money, not morality, is the principle commerce of civilized nations."

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: currency, trade, deficit, G20      
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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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