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@theMarket: Historical Low-Interest Rates Prop Up Equities

By Bill Schmick
iBerkshires Columnist

There was a time when soaring bond prices and correspondingly lower interest rates were a bad sign for the stock market and the economy. Thanks to worldwide central banks, that correlation no longer exists, or does it?

Current wisdom on Wall Street will tell you that interest rates are at historical lows because investors are hunting for yield. And it just so happens that the U.S. bond market still offers the highest return on your money. That's not hard to understand if you realize that most developed nations' treasury bonds are yielding far less than ours thanks to central bank manipulation.

Gold, on the other hand, continues to rise, racking up a 30 percent gain so far this year. Buyers of gold are usually worried that one of two things will occur — runaway inflation or fear of economic collapse. Wall Street will tell you that none of those historical reasons matter. Instead, this time around, the pundits say it is all about the declining value of global currencies.

As foreign countries' interest rates continue to decline, so do their currencies. Foreign and domestic investors, according to the headlines, are buying gold and our Treasury bonds because "there is nowhere else to go."

You can throw into that explanation the reason why so many investors are buying anything with a yield. One conservative client of mine called today wanting to know if she should buy more of two Vanguard dividend funds (both of which were trading at record highs). I suggested she wait a bit, but like so many retirees, she wanted and needed her money to be earning something, anything, even if it was less than a dollar a month. I remember the same kind of conversations in 2008.

Remember last month's non-farm payroll employment number? No? Well, let me remind you. Job growth came in at just 38,000 job gains. The market swooned. Today the job gains totaled 278,000 jobs. The market roared. The moral of this tale is individual data points mean absolutely nothing. All they do is give high-frequency traders the chance to buy your stocks cheap or sell them to you at the highs.

For those of you who follow my columns, you know that I am a bit of a contrarian. Here is my take on the markets, gold and interest rates. Something is wrong. The bond market is full of very smart people, who don't normally get swayed by emotions or short-term events. The fact that rates are this low says there is something out there lurking in the woods that should (but isn't) telling us to be careful.

Maybe we are underestimating Brexit. The markets are convinced that whatever happens, the central banks will bail us out. I hope so. But then there is the gold price. Even on days when gold should logically fall back (like today), it doesn't. Normally, when the dollar gains, gold declines. It isn't happening.

I write this because we should all be wary of what is happening right now in the markets.

That does not mean that markets won't reach and even surpass the historical highs. There is a good chance that the S&P 500 Index will climb to 2,160-2,170 in the short term. That's not much but the direction is still up. However, when it does, I may turn a bit more cautious going into the doldrums of summer. Stand by.

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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@theMarket: Fourth of July Started Early for Markets

By Bill Schmick
iBerkshires Columnist

It wasn't supposed to happen. After the British surprise vote to exit the European Union caught global investors leaning the wrong way last week, most traders expected a blood bath.

Instead, after a two-day 5 percent sell-off, markets have regained almost 90 percent of that loss in the last few days. So how could the "smart money" get it so wrong twice in one week?

Readers may recall that traders had at first bid the stock market higher in anticipation that the UK would remain in the EU. When that didn't happen, traders flipped the other way by selling and shorting. Most of the world markets were down by 5 percent or more between last Friday and Tuesday.

And then a funny thing happened. Markets worldwide started to rebound despite dire predictions that fallout from the Brexit vote would crater the economies of Europe, impact the U.S. economy, and generally create worldwide havoc. You can credit the central banks of the world for the turnaround in the markets, not that they did anything special. They simply stated that they stood ready to defend world markets, if necessary, from anything that might appear to be unorderly. That’s all that was required.

Traders took that reassurance to mean (like it has in the past) that even more money would be poured into financial assets in the near future. Global bonds rallied as interest rates plummeted. Commodities soared and so did stocks. Over the last three days there was a worldwide dash to buy back financial assets of all kinds. Thursday night, as expected, the Governor of the Bank of England Mark Carney said British investors could see further stimulus this summer.

That sent the UK stock market (the FTSE 100) to a 10-month high leaving British stocks up 2.8 percent since Brexit. The British pound, on the other hand, has plummeted 8.5 percent during that same time period, which will be good for UK exports in the months ahead.

As the fireworks subside and the smoke clears, we find ourselves just about where we were before the whole Brexit thing started. The S&P 500 Index and the Dow are up 3 percent for the year, NASDAQ, the weak sister, is making up its losses and the world looks wonderful as we head into a three-day weekend.

Of course, you may wonder why gold, a traditional safe-haven commodity, is climbing, even though Brexit fears appear to be a thing of the past. So too are U.S. Treasury bond prices, also a safe-haven in times of uncertainty. Does this mean, as many think, that the world is in a mess and investors are simply whistling past the graveyard?

Well, yes and no. Gold and other commodities are running because more and more investors are convinced that this entire central bank stimulus is making the world’s currencies less and less viable. There will come a day, so the bears say, when we will all pay a high price either in inflation or another financial crisis for all this central bank largesse.

Then, too, as more and more global bonds pay negative interest rates, thanks to these same central banks, investors are chasing the highest rates of returns they can find. U.S. Treasury bonds, after inflation, are returning you nothing in interest payments, but foreign investors are buying them hand over fist because they still offer more than their own bond markets do.

As rates fall, dividend yielding stocks, such as utility and telecom companies, which pay large dividends, are making new highs, despite the fact that these stocks are becoming more and more expensive.  What used to be safe and defensive has now become aggressive and risky.

As central banks continue to experiment with our financial futures in this brave new world, the stock market continues to climb until it doesn't. Where it all ends, no one knows. Have a happy Fourth of July.
 

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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The Independent Investor: Clicks vs Bricks — Who Will Win the Retail War?

By Bill Schmick
iBerkshires Columnist

Have you noticed that you are buying more products via the internet? Do you find yourself showroom shopping when you do make the trip to that department store or mall? It is happening to all of us and as it does, the traditional brick-and-mortar retailers are feeling the loss.

That doesn’t mean the demise of malls or department stores altogether, but over the next decade there will be fewer of them, especially in depressed areas of the country. The main culprit in this story is e-commerce or internet shopping. In the first quarter of this year, e-commerce accounted for $74.9 billion. That might sound like a lot of money but it still only accounts for 7 percent of overall consumer spending in this country.

Still, online shopping has taken market share every year since it began and is growing at roughly 8 percent per year. Its main attractions are convenience, lower prices and increasingly, free shipping. Clearly, without the overhead costs of physical storefronts, e-commerce companies such as Amazon can undercut traditional retailers at every turn. As more and more internet retailers develop huge logistics networks around the country, it will become both easier and cheaper to ship to their customers.

Wall Street analysts are quick to predict the demise of malls, shopping centers and department stores. They estimate that the brick-and-mortar crowd will need to close as many as 20 percent of their stores nationwide in the future. Weaker retailers (like Sears and J.C. Penny) will bear the brunt of shuttered shops.

Although traditional retailers are fighting back with their own e-commerce efforts, they find that when they close a storefront, what e-commerce traffic they had before the closing also declines. That generates a double whammy to their bottom lines. Despite that fact, most brick-and-mortar retailers are forging ahead in establishing their own e-commerce businesses.

In addition, they are establishing "loyalty programs," which reward the shopper by discounting merchandise. They are also issuing their own credit cards with various bonus schemes attached to how much you purchase on those cards. You may have also noticed that in certain stores there are more and more interactive or digital displays for comparison shopping on the spot. Other stores have developed entertainment for the kids while the parents shop as well as eateries and other efforts to enhance the experience of your shopping trip.

So don't play taps for traditional retailers just yet. There are also some things an online website just can't replicate. You can't, for example, touch and feel a product before buying it on the internet. That doesn’t stop someone like me from checking out the product and price in the store and then buying it on the internet anyway. That's called the "showroom effect." In my own case, however, if the store has a knowledgeable and professional staff, depending on the product, chances are that I will buy it in the store anyway.

Higher-end retail stores and malls will continue to thrive, in my opinion, as they meet the challenge of the internet. Just check out your neighborhood Apple emporium to get a taste of what the future brick-and-mortar stores will look and feel like. The experience will be worth the trip for many. And let’s not forget the social aspects of shopping, at least for those of the Baby Boomer generation. One elderly client I recently talked with admitted that he loves shopping and enjoys wandering the aisles checking out new and varied products.

I imagine that there are people of all ages that still "hang out at the mall" or just visit the brick-and-mortar storefronts for a day of shopping; but the younger you are, the less likely that you will want to spend time doing that.

In summary, there is still going to be room for both clicks and bricks kind of shopping in the future. At least until the likes of Amazon can somehow bring virtual reality shopping into our living rooms. Don't laugh; I wouldn't put it past them to be working on something like that right now.
 

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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@theMarket: Who Is Next?

By Bill Schmick
iBerkshires Columnist

 

The vote is in and all you have to do is look at world markets to discover the verdict. The citizens of the United Kingdom voted to exit the European Union. Chaos reigned for today but tomorrow may be a different story, at least for U.S. investors.

Do not panic. Most of my readers are heavily invested in the U.S. equity and bond markets. As such, the fallout from Brexit will be short-lived here at home as investors come to the realization that, for now, the United States is the only game in town. As I look at Friday morning's damage to our markets, I am impressed at how well we are doing compared to Europe. Essentially, all we have done is give back a week's speculative gains on the back of Wall Street's totally incorrect view that Britain would remain in the EU.

Europe, however, is, and will be another story. As I mentioned before, the UK was the European Union's second largest economy (although it never agreed to use the Euro as its currency). Think about it. Your second most valuable player leaves the team. What are the odds your team continues to have a winning season? Clearly, the European economy is going to take a hit from this event. To make matters worse, it is just coming out of recession as we write this.

Then too, what will the exit of one of your MVPs mean to the rest of the team? In this case, nearly every member state of the EU has a political party or organization that is lobbying for a referendum to leave the EU. Here are some of the countries at risk with the percentage of voters wanting a chance to vote for their own exit: Italy (58 percent), France (55 percent), Sweden (43 percent), Belgium (42 percent), Poland (41 percent), Spain (40 percent) and even 40 percent of Germans, the EU's largest and most stable partner, want a chance to vote and possibly bolt the union.

But not all will come up roses for some U.S. companies. There will be repercussions that could hurt our largest multinational corporations as a result of Brexit. Many U.S. companies have invested in the UK partially because of their free-trade access to the rest of Europe. It would be like a Japanese company building an auto plant in Mexico in order to take advantage of our NAFTA agreements with Mexico. We might find that these companies will face a large decline in profitability on their UK assets. The US financial sector may also go through some rough times for the same reasons.

There is no question that this breakup will cause disruptions throughout Europe and reduce mutual trade and financial flows. Remember that an exit will take at least two years to implement. I have long said that markets can deal with the good and bad, but can't handle uncertainty. Imagine this upcoming period of extended uncertainty. It will most assuredly reduce corporate and investor confidence abroad.

Trade agreements will need to be renegotiated among the EU and with the rest of the world. In the case of Great Britain, where trade accounts for over 50 percent of this island nation's GDP, everything will have to be renegotiated. That will take time and a lot of it.

Optimists point out that there are countries in Europe that have done well without inclusion in the EU. Switzerland is always most pundits' prime example. The problem here is that the Swiss economy is only a fraction of the size of Great Britain, so it is like comparing apples to oranges.

Currencies will also be a problem. Volatility will reign supreme in currency markets as traders and corporations try to hedge this new element of risk in the world. The U.S. dollar may strengthen. It certainly has today, and, if so, that too may cause problems for our export-oriented companies. One thing is sure; volatility is here to stay for the foreseeable future.

Hopefully, you took my advice over the last few weeks and reviewed your own risk tolerance because the heat is certainly rising in the kitchen. The U.S. is the best game in town and as such you are in the right place at the right time.

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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The Independent Investor: Pet Insurance & Why You Should Have It

By Bill Schmick
iBerkshires Columnist
Titus and his ball.

Whether you are adopting a pet or buying that pure blood breed, the first thing you should consider is pet insurance. Skipping this step could cost you several times the purchase price of your new pet each year. Better be safe than sorry.

Pet insurance is like any other insurance, human or otherwise. The cost of coverage is based on your pet's age, health profile, breed and however much insurance you want to purchase.

You will pay a yearly premium, have a deductible, co-pays and a maximum cap on how much your insurance covers per year.

The best time to take out insurance is before your pet develops health problems. Learn from my mistakes. In my case, Titus our seven-year-old, chocolate Lab, developed arthritis in his right shoulder two years ago. It is a common and chronic health problem among Labs (as is arthritis of the hips), and has cost us several times his purchase price over the years. Even though I could still buy insurance for him, it would make little difference since the policy would not cover pre-existing conditions such as his arthritis.

If you plan to adopt an animal, my advice is to get a clean bill of health from the shelter, adoption agency or veterinarian prior to bringing it home. Otherwise, you may be stuck with an existing condition that will drain your bank account for as long as you own the pet. A common mistake would-be pet owners like myself make is ignoring the emotional attachment that develops between man and beast.

I am a dollars and cents kind of guy and convinced myself that once Titus' health bills passed a certain plateau, it would be time to put him down from an economic point of view. That plateau has come and gone many, many times and Titus is still very much part of the "family."

He will be with us no matter the cost until he dies. So much for my cold calculated strategy, I just wish I was smart enough to buy insurance seven years ago when it made sense. Learn from my mistakes.

You need to decide how much insurance is right for you. Skin problems are the largest source of health claims for dogs with minor issues averaging $210 a visit while benign skin masses were higher at $347 per visit, according to a 2015 analysis of pet insurance claims.

Diabetes ($862/visit) and urinary tract infections ($441/visit) led the list for health claims for cat owners.

Like every insurance policy, there is a ton of fine print that you must wade through. Your job is to identify and understand what is excluded from coverage. Be sure you identify any waiting periods before the particular insurance policy kicks in. For example, some dogs develop ligament injuries quickly, but you may find that those kinds of injuries have much longer waiting

periods than other health issues.

Every policy has "extras" and most of them concern wellness issues — annual checkups, vaccinations, even teeth brushing. Carefully compare what those services would cost on their own outside of insurance before buying them.

Finally, make sure you comparison shop before settling on one plan. Every insurance company charges different rates for coverage. Some offer discounts if you cover more than one pet, for example. Deductibles may be lower on one plan, but check what kind of reimbursements you will be receiving. Some companies reimburse a certain percentage of what your vet charges you, but others only give you back what they deem to be "usual and customary" for the cost of a particular treatment.

Bottom line: pet insurance can save you a lot of money, if it is purchased properly and at the right time. It should be your number one agenda right out of the gate after acquiring your pet.

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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