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The Independent Investor: Banks Face Tougher Regulations
By Bill Schmick On: 08:46PM / Thursday April 10, 2014
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This week the eighth largest U.S. banks were told they need to increase capital by about $68 billion. In some ways it is too little, too late in the government's efforts to prevent another financial meltdown. Nonetheless, the regulations do provide an increased level of safety for taxpayers.

"Too big to fail" is a term that makes most of us grind our teeth. It was taxpayers, after all, who were required to pay trillions of dollars to rescue our financial sector after the 2008-2009 financial crisis precipitated by our largest banks. Ever since then, regulators have been looking at ways to prevent the same thing happening again.

Now, over five years later and despite massive lobbying efforts by these same banks, this week the Federal Deposit Insurance Corp., the Federal Reserve and the comptroller of the currency approved rules that would raise the ratio of capital required as percentage of total assets to 6 percent at our country's largest banks. That would require the top eight banks to raise an estimated $68 billion in capital by either selling off parts of their businesses or raising equity via the stock market.

The idea behind raising capital levels is simple. The more capital an institution has to put up in order to participate in a risky trade, the less profit they make. In the past, banks could borrow or leverage their existing capital through derivatives or short-term funds called "repos" and buy or sell things like credit default swaps, collateralized mortgage obligations and other exotic, poorly understood financial instruments. With little capital down, the bank's profits were tremendous — until they weren't.  The resulting house of cards they build practically buried us all.

Banks are blasting these new limits. Their spokesmen are arguing that it puts U.S. banks on an uneven playing field with their counterparts in Asia and Europe. These banks, they point out, are governed by the Basil III accord, which also takes into account both a leverage ratio and risk-based capital requirements. That Basil agreement, at 3 percent, they argue, is half the level now required for their American counterparts.

All the usual arguments have been trotted out — loss of competitiveness, less market liquidity, senseless regulations. Over-turning these rules will be the subject of intense lobbying within Washington's corridors of power. Although the lobbying will be fierce, many of these same banks have already taken steps to adjust their capital base higher. In addition, these new regulations, if approved, will only begin to take effect in 2018.

What none of the banks will say is that the old system, where banks themselves set capital levels based on their estimate of the perceived risks of their assets, failed miserably. They have also conveniently forgotten that it was neither European nor Asian banks that triggered the meltdown. It was our largest eight banks that disregarded their own risk assessments in the name of greed.

In many ways, regulating the banks at this late date is similar to closing the barn door after the horse has bolted. Still, the new rules are simple, straightforward and will make it harder for rogue traders and institutions to set off another financial Armageddon. These rules may and do create some unnecessary and nonsensical consequences such as holding large amounts of capital against safer assets like U.S. Treasury bonds. However, unfortunately, our banks have proven that they cannot regulate themselves in these areas. By their own actions, they have invited the devil, in this case, government regulators, to their door.

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: A Crowded Trade
By Bill Schmick On: 04:37AM / Saturday April 05, 2014
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Just about everyone on Wall Street has jumped aboard the bandwagon by now. Sure there are some that still think the market can go higher but the vast majority of investors are now expecting a major pullback. Welcome to what's called a crowded trade.

Pundits are elbowing their way into the limelight on a daily basis sounding warnings of the imminent demise of the stock market. Traders are short and investors are selling as everyone eyes the exits. It appears all we need is someone to shout "fire" for the panic to begin. I wish it were that easy.

It has been over a month since I first warned that this quarter could be problematic for stocks. I was deliberately vague on exactly when this pullback would occur because a "topping out" process takes months to unfold. By the time many equity indexes react and the general public begins to register this process, many individual company stocks could be down 20-30 or even 50 percent.

Over the past few weeks I have brought your attention to several ominous signs that this process is occurring. Usually, small caps decline first and then mid-cap stocks with large cap names the last to feel the brunt. This week I also noticed that the major decline in "momentum" stocks are starting to spread further afield. Some big names in the financial, industrial and healthcare sectors, among others, are getting hit hard.

However, remember that this is a process. All the doom and gloom-sayers of last week, who were convinced that the correction had begun, backpedaled this week. They were flummoxed when the S&P 500 index hit another record high. The NASDAQ turned on a dime and raced higher, while the Dow Jones Industrial Average came within two points of breaking its historic high. No sooner had they wiped the egg from their face when all three averages plummeted again on Friday.

Folks, this is part of the process. It is not popular or pleasant, but it is extremely volatile. As such, I would not be surprised if sometime next week, after a further decline, markets do a one-eighty and reclaim the highs. Clearly, we need this consolidation process. After all, the S&P 500 index is up 179 percent from its 2009 lows. Small cap stocks, as represented by the Russell 2000 equity index, have become more expensive than at any time since 1995.

So let's get down to the nuts and bolts. What should you do? You can sit back, ignore the drama, suffer some paper losses and come out even by sometime in the fourth quarter. Or you can raise some cash by selling some of your most aggressive investments. Wait for a reasonable decline, say 10-15 percent, and re-invest the money. Finally, if you think you are good enough: go to cash and buy back in at the lows. Good luck with that last bit of advice.

Sure, I will endeavor to tell you when that will occur but honestly, how can I accurately pick a bottom when I can't pick a top? No one can and if someone claims they can, well, read their column or invest your money with them.

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: Obamacare Confounds Critics
By Bill Schmick On: 04:15PM / Friday April 04, 2014
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Despite a coordinated and well-financed effort to sabotage and overturn the Affordable Care Act, the open enrollment numbers this week indicate there is a groundswell of support by Americans for a universal and effective health-care coverage.

That may surprise some of you but not this columnist. Back in the day, I lived through the fear and anxiety of having no job or health-care coverage. The nightmare of how to protect my family kept me awake at nights. Fortunately I did land a job, actually a crappy position I took simply because my employer offered health-care coverage.

Right here in my neck of the woods, the North Adams Regional Hospital announced (with three days' notice) it was closing, putting 530 hospital employees (and their families) out of work. A byproduct of this layoff is an abrupt end to their medical insurance. In a different day, these families would have nowhere to turn. Fortunately, thanks to the Massachusetts health-care laws and now the Affordable Care Act (ACA) there is someplace to turn.  

Most readers understand that the legislation that is Obamacare is far from perfect. In my opinion, its passage was simply the beginning brick of a health-care system foundation whose time had come in this, the greatest nation in the world. I expected that there would be wholesale changes to the original legislation as time went by. The resulting vitriolic response to the law consisting of overblown predictions of doom, outright lies and organized sabotage both dismayed and angered me.

Granted, the Obama administration fumbled the ball right out of the gate with their less than auspicious launch of the program's primary website, HealthCare.gov. The Congressional Budget Office, you may recall, had subsequently reduced its estimate of open enrollment by this Monday's deadline to only 6 million due to the botched launch.

Some of the data extrapolations and promises of what the program could and would do for those Americans who were uninsured or underinsured were also overblown. That damaged the credibility of a sincere effort to provide what even many emerging nations offer their citizens. Obamacare was quickly labeled a "train wreck" by the majority of Republicans and was touted as the main issue of the upcoming mid-term elections. Yet, none of those mistakes warranted the effort to overturn the law, let alone shut down the government if its critics didn't get their way.

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.
So it is doubly important to recognize that with all these headwinds, the government's original estimate of 7 million enrollments in individual insurance plans was not only met but exceeded by the March 31 deadline. All those predictions that the ACA would spawn "death panels" (Sarah Palin), massive layoffs (Marco Rubio), skyrocketing health costs (most Republicans) and let's not forget Rush Limbaugh's prediction of "the total collapse of American society," were either outright lies or at best examples of monumental ignorance.

Readers note that this week there has been a deafening silence from the opposition. How very predictable.

Make no mistake; the opposition pulled out all the stops to defeat this effort.  As one small example, the response to my own columns on Obamacare was organized and orchestrated. I still receive daily and weekly comments protesting my position on the need for some kind of universal health care.

I started to dutifully publish these comments but soon realized the emails were so similar and the writing style so clearly from the same hand that it became obvious that I was a victim of a mass anti-Obamacare email campaign.  I can't prove it nor do I need to. I simply delete the innumerable computer-generated emails from "poor widows and orphans wiped out by Obama."

Bottom line, I hope these Obamacare enrollment numbers force a change in the opposition's tactics. Rather than insist on overturning a much-needed health care initiative in this country, wouldn't it be nice if they simply worked to improve it?



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@theMarket: The Faint of Heart
By Bill Schmick On: 03:26PM / Monday March 31, 2014
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It has been at best a bumpy ride for stocks this week. While events in Crimea are partially responsible, there are some underlying factors just below the surface that may have more to do with recent performance than would meet the eye.

Breadth, the number of advancing stocks versus decliners, is one variable that seems to be flashing amber to red. Most market analysts take a faltering breadth ratio as an early warning signal. Then there’s momentum. Momentum is positive when existing trends in the markets continue or accelerate. Recently, that has changed.

Take the biotech sector for example. For most of the year this sector was a darling that at its peak was up over 20 percent. Investors, believing that the area offered enormous growth based on technological innovation, (like stem cells) and new health care initiatives couldn't get enough of these stocks. This week the sector hit a brick wall. Some stocks on Monday and Tuesday were down 10-15 percent with little warnings.

Other high flyers in the technology space were also clobbered. NASDAQ, which outperformed the Dow and the S&P 500 Indexes for most of the year, also experienced a fairly steep down draft. When momentum stocks and sectors begin to falter, I pay attention.

The initial public offering (IPO) market is also an indicator that bears watching. The calendar for new offerings has been red hot. Companies are falling over themselves to go public with 10 new issues this week alone. In the recent past, these IPOs have all opened higher than their initial offering price and then went straight up from there. This week's favorite, a digital entertainment company, was crushed on its first day out of the box; not a good sign.

The phone has been ringing off the hook all week. It appears my last column on the markets triggered some concern. I wrote that the mid-term election cycle could usher in a period of turmoil and possibly a 10 percent or more decline in the stock market. Given my bullish stance on the stock market for well over a year, my forecast upset several readers.

Let me be clear. I am still bullish on the stock market over the intermediate and long-term. I just see some digestion problems between now and the end of the summer. Any paper losses readers may suffer during that time period will be regained by the end of the year. Occasional pullbacks like the one I am expecting is a necessary and expected condition of investing in the stock market. As I have said before, if you can't stomach these occasional declines, you do not belong in the stock market.

The exact timing on when and how long such a possible sell-off would occur is problematic. Some pundits are arguing it has already begun. I doubt it. We will probably rally again up to the recent highs or even beyond before stalling out again. We may well have another month or so before the markets truly roll over so there is plenty of time to adjust your portfolios in the event you want to take some defensive action.

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: Do Women Have a Choice?
By Bill Schmick On: 03:05PM / Friday March 28, 2014
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Income inequality between the sexes in this country has always been a problem and it does not appear to be getting any better. Critics argue that much of the blame lies in the choices many women make in pursuing their education and career goals. I beg to differ.

In my last column on the subject two weeks ago, I observed that the pay differential between men and women had finally caught the attention of national politics. The National Budget Office, for example, pointed out the biggest beneficiary of a minimum-wage increase would be women.  It is true but the real core of this issue lies elsewhere.

As most readers are aware, American society has changed. As a result of the overall income inequality in this country over the last 30-plus years, most couples are required to work full time in order to make ends meet.  Women have also spent decades fighting for that right to work on equal footing with men. Why is it, therefore, that when two people get married, pursue equal professional careers, and decide to raise children, it is the wife who is expected to sacrifice her career, take time away from the workforce and forgo income and advancement?

Who says this is the way it should be?

For me, this is the main obstacle that women face in this country. This expectation that women are required to be the primary caregivers in our society is the root cause of gender income inequality. It is an expectation so prevalent among us that only the strongest of 21st century women even question its fairness.

When a woman is expected to quit her job and raise children, several things occur. Her professional career is interrupted, sometimes for many years. Think of the "Good Wife's" Alicia Florrick, for example. This fictional lawyer dropped out of her legal profession for 13 years to raise children. In the meantime, her philandering husband cheats on her and then goes to prison. In order to support her family, she had to beg and plead simply to be offered a paralegal position at a Chicago law firm.

During those child-raising years, she did not contribute to Social Security a 401(k) plan or IRA, failed to keep up with her competition (mostly male lawyers), and when she did get a job it was at a salary far below what she should have been making if she, instead of her husband, had raised the children. What's more, from her employer's point of view, why pay her more since who's to say she doesn't take another leave of absence if she gets pregnant again?

Unfortunately in America, there is more fact than fiction in this television tale. The divorce rates in the U.S. are 40 percent to 50 percent and guess who ends up with the kids the majority of time? So not only have women given up a career, income and economic advancement, but a vast number of them now are required to support the kids while the ex goes off to prison or to enjoy his professional success with someone younger.

But let's say you are one of the lucky ones with a happy marriage. Whether you like it or not, with the kids grown, you probably still need to go back to work to make ends meet in this economy. But the chances of getting more than the minimum wage job are slim at best. It explains why women represent more than 62 percent of minimum wage workers.

Many of these women are divorced, have children to support or, just as important, they are widowed. You might find it surprising to discover that more than 75 percent of women in this country are widowed at an average age of 56. One in four of these women are broke within two months of being widowed, according to the National Center for Women and Retirement Research. More often than not, their only avenue of support is low-paying jobs with no future.

We haven't even examined the other side of women's role as caregivers to aging parents. It is the woman, once again, who is expected to provide economic and social support for aging parents at the expense of saving for retirement, Social Security benefits and income generation.

So it appears that blaming women for the choices they make as an explanation for gender income inequality would be laughable if the present state of inequity were not so serious. The solution to this injustice goes far beyond raising the minimum wage, but at least it would be a step in the right direction.

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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