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@theMarket: Markets Climb Higher

By Bill Schmick
iBerkshires Columnist
In the absence of any earth-shaking news, stocks tend to follow the recent trend. That trend, since the election has been up, so ... The question to ask: when we can logically expect that trend to change?
 
As readers may recall, my target for the S&P 500 Index is somewhere between 2,443 and 2,475, which I expect we will hit before the end of the second quarter. This week, we broke 2,400, regaining everything that was lost in last Wednesday's 2 percent downdraft. Now, that 2,400 price level should act as a support for the bulls.
 
"Are you still bullish?" asked one of my clients yesterday.
 
"That depends upon your time frame," I answered.
 
In the short-term I am, if you consider that between now and say, the end of June, the markets could tack on another 2.5 percent or so. That's not a bad return for 30-some days, and it is far better than the yield on the 10-year, U.S. Treasury Note (2. 24 percent).
 
However, I recognize that the odds against further gains in the medium-term (this summer) are climbing. For example, the S&P 500 has not had a 3 percent drop since the August-November, 2016 time period, nor has it had a 5 percent decline since June, 2016. Given that we have had 16 corrections of 5 percent or more since the 2009 bottom, we are overdue for some kind of larger pullback.
 
But in the meantime, the technology sector has been the stand-out winner so far this year. The FANG stocks (Facebook, Apple, Netflix and Google) have clearly been responsible for that leadership, representing about half the gains. Since a fair amount of their goods are bound for overseas markets, a decline in the dollar also helps sales, because it makes their products cheaper for foreign consumers. And the dollar has dropped from a high of around $103, the U.S. dollar index (DXY) is now trading slightly above $97, a substantial decline in currency terms.
 
Why is this important?
 
Well, "leadership" among stocks is a fairly important tool. When there is an expanding group of leaders in the market or a sector, it means that more and more investors are willing to pay up, believing prices are going ever higher. In this case, leadership among the leading sector of the stock market is narrowing. So much so that four stocks represent an outsized percentage of the gains.
 
The dollar's decline is also something that confounds a number of traders. Usually, when interest rates rise, a nation's currency rises with it. The financial markets expect interest rates to rise in the U.S. The Federal Reserve Bank, as we know, is expected to raise rates again in June.
 
They will also be reducing their $4.5 trillion balance sheet, which is stuffed to the gills with Treasury bonds and mortgage-backed securities.
 
"Shrinking the balance sheet" is just financial speak for selling bonds, rather than buying them, which they have been doing since 2008 in an effort to support and grow the economy.
 
When you sell bonds into the market, the tendency is for interest rates to rise. Given this two-prong rate-raising strategy, the dollar should be rising but the reverse is happening. How this will play out is something to watch.
 
These are simply two variables of many I follow and consider in forecasting the direction of the markets. The rise of interest rates, the path of the dollar and leadership within the stock market has me concerned but not overly so, at least not yet. Right now, my tea leaves signal steady as she goes. Of course, on a short-term basis, expect more ups and downs now that President Trump will be returning from his first foreign field trip. And remember, with him comes "The Return of the Tweet."
 
The intensification of the media-led, Russian witch-hunt and the expected battles over health care, the budget, and everything else that the administration has proposed will keep things unsettled and investors on their toes. As the worries mount, markets should climb towards my target range, and when they arrive, we will see what happens next so stay tuned.
 
Bill Schmick is registered as an investment adviser 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. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquiries to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.
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The Independent Investor: Ready For a 20 Percent Correction?

By Bill Schmick
iBerkshires Columnist

As the stock market makes new highs, investors tend to get greedy. They also begin to believe that what has happened in the recent past will continue to happen in the future. Actually, history shows the exact opposite. It is time to give the potential downside some thought.

Hope burns brightly in the equity markets right now. Many on Wall Street believe that the Republican-dominated Congress, led by Donald Trump, "The working man's president," will usher in a golden era of strong economic growth and robust financial markets. The problem is that politics and investments make for strange bedfellows.

At some point, I expect that the two will part ways and when they do, look out below.

Now, with that in mind, have you given any thought to what you are going to do when the inevitable correction does occur? When your $1 million tax-deferred portfolio loses $120,000 in less than a month, will you panic and sell or will you hang in there or buy more?

This is the time to plan your strategy — not when the markets are down eight days in a row and pundits are predicting the end of the world. Many indicators I watch are predicting that somewhere up ahead, investors should expect a substantial pullback. Stock market volatility, a sure contrary indicator of market strength, has been declining for the past 15 months. The Volatility Index is at historical lows right now.

Then there is the law of physics. What goes up must come down. We are in our eighth year of a bull market. Memories of the 2008-2009 financial crises have faded. It took many investors at least five years after the crash to be willing to dip their toes back in the stock market.

Those who have done so have been rewarded. Now that many of us have our entire foot, leg and neck immersed in equities, it is time to expect some downside ahead.

Before you ask, no, I don't know when it will happen. If I did, I could retire on my tropical island where I would "buy low and sell high." That said, an exit plan, if that is what you want to do, should be percolating in that head of yours.

For most of us, however, any attempt to sell at the top will be met with frustration, lost opportunity, and in many cases, an emotional decision to re-enter the market at even higher prices. The fact is that major declines are part and parcel of investing in the stock market. Most long-term investors who plan to go to cash may succeed, at first, but they almost always fail to re-invest, or if they do, they re-invest too early or too late.

Sure, you will always hear about this guy or that woman who trades the market. The myth is that these "uber kans" almost always sell at the top, (in the nick of time) and buy back at the lows when everyone is running for the exits. Don't believe it. Rest assured that the majority of day traders who are constantly buying and selling lose more money than they make and would have made more money if they had simply stuck with the markets.

That does not mean you have to simply take your lumps, although some lump-taking should be expected and it is painful. One can always dial down your risk, become more conservative, shift your investments into more bonds etc. There are risks in that strategy.

Take the run-up to the presidential elections, as an example. Several of my clients were convinced that a Trump presidency would usher in a financial meltdown, WW III, and all sorts of evil developments. They wanted to sell everything and go to cash.

I resisted, convincing many of them to stay with the markets. Several insisted, however, that they wanted to reduce their risks and become more defensive. I obliged their requests. The results: they made about half of what they could have if they had stayed fully invested, but still made more than if they had simply exited the markets and gone to cash. Each investor must
 decide how much risk they are willing to take and act accordingly.

Before you hit the panic button, however, I see no indications that we will incur anything more than the normal sell-off. Price declines are simply the cost of doing business in the stock market, like paying taxes or insuring your home.

Neither am I predicting a decline is right around the corner. But when it does occur (and it will), be prepared. Understand and plan for it now. If you don't know, give me a call.

Bill Schmick is registered as an investment adviser 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. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquiries to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.
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@theMarket: The Trump Dump

By Bill Schmick
iBerkshires Columnist
Investors were shocked this week when the U.S. stock markets fell almost 2 percent in one day. 
 
Wall Street blamed it on the growing scandals engulfing the White House. However, there was little follow through despite predictions that this was the beginning of the long-awaited pullback.
 
To be honest, much of the controversy coming out of Washington — demand for Trump's impeachment, obstruction of justice, witness-tampering, etc. — is simply partisan politics deliberately fueled by a biased media. All of the above, which had been building for days, finally reached the tipping point for investors. As weak-kneed day traders started to sell, the program computers began to join in and the rest was history. Wednesday turned out to be the worst day of the year for stocks.
 
I actually think the carnage was a good thing. It furnished all of us a reminder that markets do go down as well as up. Ever since the November election, stocks have climbed.
 
There has been little in the way of volatility and at most a mild 3 percent pullback in some of the averages over a few weeks. That is not normally how the stock market works.
 
However, we are human and the longer something continues, the more we expect it to continue into the future. When it changes, not only are we surprised but our first reaction is to cut and run. I am sure some of you did just that this week.
 
Over the last two days, stocks have regained about half the losses sustained on Wednesday. From a technical point of view we have at least a 50-50 chance that traders will push the averages back down to the lows that occurred on Wednesday. It's called a retest. If we hold there (around 2,350 on the S&P 500 Index) traders will simply chalk up the event as a warning that somewhere ahead of us looms a larger sell-off.
 
You might ask why the pundits' predictions of a further sell-off didn't come true. The answer lies in how we are all being manipulated by politics and the media. The "experts" told us that all this Russian-inspired controversy, followed by the firing of the FBI director, and the creation of a special jury to investigate wrong-doing within the Trump White House would further delay what the market needs and wants. Tax reform, health care, infrastructure spending and much more would now be pushed back even further and further. It may not even happen at all if Trump were to be impeached.
 
And just as investors began to believe all this tripe, the White House has sent in its forces to reassure investors that all is on track on the economic reform front. Suddenly, the Trump budget will be announced next Wednesday offering all kinds of goodies to investors. At the same time, Steve Mnuchin starts talking about 3 percent GDP growth again. And "The Donald" takes off for a five-nation trip, his first, today, which was sure to distract the media from its Russian witch hunt.
 
The moral of this tale for you and I is to continue to ignore the noise. Think of yourself as a batter who must keep his/her eye on the ball. That ball is the growth rate of the economy, (good), earnings (great), the Fed (moderate). Ignore everything else. Hang in there.
 
Bill Schmick is registered as an investment adviser 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. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquiries to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.
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The Independent Investor: Health-Care Costs Are Strangling Us

By Bill Schmick
iBerkshires Columnist
Recently, none other than the Sage of Omaha, Warren Buffet, has sounded the alarm on what he sees as the number one threat to American businesses — rising health care costs. His advice is that we better do something and do it quickly.
 
While Congress bickers over how to repeal and replace Obamacare, there is still a large body of American politicians who believe we should simply return to the good old days. While they fiddle with adjusting insurer's premiums, or gutting Medicaid, the entire healthcare system surrounding them continues to burn. While they debate whether you should be responsible for your own medical insurance and how much Medicare should cover, health care costs rise at the rate of hyperinflation.
 
Our legislators and president are strangely silent on what happens to those whose employer does not provide health insurance because they can't afford it; (which is the case for many in small businesses). And by the way, small businesses happen to be the main employer of American labor.
 
They are also silent on what happens to those of us whose Medicare insurance premiums, plus uncovered medical expenses, become higher than their retirement income. Recent estimates put uncovered medical costs at $260,000 for these same retirees. Of course, there is always Medicaid for the impoverished among us. But even that program, if the House has its way, will be reduced by $1 trillion this year.
 
The politicians are focusing on the symptoms and not the cause of our health-care problems.
 
Buffet, a Democrat, in his recent shareholder meeting, took time to address what he called the real problem for American business, and it wasn't taxes. The cost of health care, he maintained now represents about 17 percent of this country's Gross Domestic Product (GDP). That's up from just 5 percent of GDP 50 years ago.
 
In comparison, corporate taxes, the supposed blain of Corporate America represents just 2 percent of GDP and that is down from 4 percent of GDP in 1960. Our country's global competitiveness has fallen, not because of corporate taxes, but because health care costs have diverted business spending from more productive uses like investing in new plant and equipment.
 
Why do Americans still pay far more for medical care than any other Western nation?
 
The U.S. ranks dead last (and has done so for 15 years) in struggling to pay for medical care when compared to other developed countries, according to the Commonwealth Fund. We, or the companies who pay for our insurance, spend roughly $9,523 per person each year on medical expenses. That comes to roughly $3 trillion/year, for a family of four, medical insurance coverage by our employers amounts to $12,591, which is up 54 percent since 2005.
 
But Buffet isn't the only one who is sounding the alarm. Bill Gates, the respected and visionary founder of Microsoft, in a TED Talk presentation last year, also warned of the devastation rising health care costs were having on our economy.
 
Wherever you look, he said, rising healthcare costs are siphoning off money that should be spent on things like education, building bridges, airports and paying down our debt.
 
Governmental and private organizations, combined, are forced instead to divert more and more of their spending to health care costs.
 
Pundits decry America's low rate of savings, but do not take into account how much of that potential savings rate is now being swallowed up by heath care costs. Economists say the typical American consumer is not spending like they used to; how can they when so much of that paycheck is now going to prescriptions, co-pays and deductibles? The truth is that whatever wage raises our workers received over the last few decades have not nearly kept pace with the hyperinflation of our medical costs.
 
I agree with both men. It is time for all of us—corporations, small business, Republicans, Democrats and Independents — to identify the real crisis in this country and do something about it. The health-care sector requires a complete overhaul from top to bottom. Forget this sparring over symptoms and not the cause. If, as a nation, we don't know how to turn the tide, there are plenty of examples among our foreign neighbors. What in God's name are we waiting for?
 
Bill Schmick is registered as an investment adviser 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. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquiries to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.
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The Independent Investor: Cosmetics Survive, Prosper Despite Competition

By Bill Schmick
iBerkshires Columnist

As the clash between brick-and-mortar retail enterprises and the mighty Amazon escalates, the internet shopping colossus is laying waste to one store or mall after another. One of the few areas that has not only staved off the internet shopping giant, but has actually turned the internet and social media to its advantage, is the cosmetics industry.

There is a combination of fortuitous developments, some peculiar to the makeup industry, and others the result of adept marketing that has allowed the beauty trade to grow unencumbered. Social media, as you might imagine, has played a big part in growing an industry that has revenues of $62 billion and climbing.

For decades, women would pay a visit to their local department store, drugstore, or shopping mall and head for the cosmetics counter. They did so because most women consider makeup a necessity of life. They received a quick lesson in cosmetics application from the clerk or salesperson. At the same time, they could also see and experience these products on their own skin. The only alternative to the beauty shop was to sign up for a cosmetology class, hire a makeup artist or rely on a girlfriend who knew her way around makeup.

Today, social media has become both the new beauty counter as well as a place to show off the results. Just check out the number of YouTube tutorials available on makeup. Now that the industry can post videos on Instagram as well, industry experts can hawk their wares easily and directly, but can also show consumers exactly how a new product is intended to be used as well.

A whole new industry has sprung up around selling cosmetics on social media. There is now what are called "beauty vloggers," enterprising women who are internet businesses in their own right. Some are models or ex-models; others come out of the makeup industry and set up shop as beauty gurus.  They dispense beauty advice as well as tutorials on how to apply specific types and kinds of makeup.

Another new phenomenon is the "haul girls." These are women who take the viewers on an extreme shopping spree and explain on camera what products are "hot," while giving their opinion of the products.  Today, fully 95 percent of consumers looking for beauty products will search out YouTube first. Some of these beauty mavens have millions of subscribers and can make or break a brand. In the beauty business, influencers like these vloggers and haul girls carry a great deal of weight.

And with the popularity of posting photos on Facebook, Twitter and other social media, more and more women don't want to be caught "naked" when it comes to makeup. That simply fuels more and more demand for cosmetic products.

While women use social media today for cosmetic instruction and to learn about the latest products offered, many still need to "test-and-trial" as the industry calls it. Video is fine, but how do you really know what that new blush or nude lipstick is going to look like on you? Buying many cosmetic products online is tricky. The subtlety of shades and colors abound and once it arrives in your mailbox, it is too late.

Unlike clothes or that DVD player, cosmetics, once opened, cannot be returned. This becomes problematic, especially at some of the price points these products command. Sure, some products that a woman will use over and over again can be ordered over the internet, but styles and new developments in cosmetics change rapidly.

That's why testers and samples are a large part of any brick-and-mortar beauty store's inventory. Many, if not all, of the basics undergo a revamp every so many years, so most women will check out the newest offerings on a fairly regular basis. And even your most hard-bitten internet buyer will succumb to buying a new product, especially after using the free consultation or makeup classes offered by these beauty centers. Unlike other industries, the beauty store still manages to deliver an "experience" as well as a place to buy products. Remember too, that there are no seasons in makeup, it has year-round fashion demand.

Discounts are also not high on the list of cosmetic company marketing tactics. Prices remain relatively stable, which is anathema to what usually occurs to a product once incorporated into the Amazon fold. So far, few, if any, of the luxury beauty brands have developed relationships with the internet giant. For now, the beauty business is thriving despite Amazon, and they hope that continues, at least until they can build their own e-commerce presence.

Bill Schmick is registered as an investment adviser 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. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquiries 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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