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The Independent Investor: Five Years After the Crisis
By Bill Schmick On: 12:08AM / Friday September 13, 2013
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The collapse of Lehman Brothers occurred five years ago this week. In hindsight, this investment bank’s disorderly failure proved to be the critical domino that set into motion economic and financial disruptions that are still with us today. What have we learned?

For starters, we've learned that some of our financial institutions have gotten too big to fail, unless we want to endure yet another financial credit crisis. We have also learned that a credit recession, unlike a normal business recession, takes much longer to work its way through the economy. Today few, if any, western economies have regained their stride. GDP growth is still far below the rate necessary to sustain full employment. What growth there is has come with a huge price tag in added debt.

These last five years have also witnessed the transfer of power from the private sector to the public sector in the ability to control and influence markets. Various central banks, wielding policy tools that were never meant to insure that stock markets moved higher or mortgage rates lower, now determine how much you make or lose on your investments on a daily basis.

It is Central bank chairmen like Ben Bernanke, Mario Draghi in the EU, and Japan's Haruhiko Kuroda who move markets today. Even Warren Buffet is small potatoes compared to the pronouncements of our central banks. I'm not criticizing those bankers, far from it, were it not for them the financial world would be in tatters, which leads us to yet another result of the Lehman fiasco.

It is clear to me that our elected officials do not have the will or the ability to deal with this on-going financial crisis. It was, after all, our lawmakers, in league with their Wall Street campaign contributors that precipitated the credit crisis in the first place. The repeal of the Glass-Steagall Act, for example, which allowed banks to re-enter the speculative side of finance, is just one of the many legislative mistakes made in the name of "free markets." Nothing could be further from the truth.

Not one single ranking official of any of the major institutions that precipitated the crisis has ever been indicted, let alone convicted of any wrong doing. The statute of limitations for financial fraud has now run out, guaranteeing that the perpetrators of these crimes of the century will never be brought to justice. How, readers might ask, did this happen?

You see, under our legal system you can't be convicted of a crime unless you can prove intent. The Securities and Exchange Commission (SEC), which was charged with going after the bad guys, had to prove to a jury, beyond a reasonable doubt, that these top guns intended to commit fraud. Evidently, they couldn't or wouldn't.

The majority of the Dodd-Frank financial reforms, adopted with great fanfare over three years ago, have still not been implemented. This "never again" legislation has been effectively hamstrung by politicians on both sides of the aisle. These delays have been aided and abetted by the banking lobby (imagine that). As of September, just 40 percent of the provisions of this law have been finalized and integrated into law. In the meantime, several too-big-to-fail financial institutions have racked up billions in losses by transacting the same type of excessive speculative trades that triggered the subprime crisis.

So what have we learned?

If you lost your job and are unemployed, you've learned how to support a family by working part-time jobs, asking for government help or simply begging. If you kept your job, you've learned not to expect a raise no matter how hard you work, lest you be replaced for less money. Investors learned not to trust anyone on Wall Street, least of all their brokers.

However, if you are one of the bad guys you've learned that crime does pay. If you are an elected politician, you've learned that no matter what you promise, always protect your campaign contributors.

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 Market: Expect Another Volatile Week
By Bill Schmick On: 08:45PM / Friday September 06, 2013
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The stakes are rising. On Friday, Vladimir Putin seemed to suggest that an attack on its ally, Syria, would provoke a response from Russia. President Obama stubbornly maintained that we will still take military action against Syria, who he accuses of breaking international law by gassing innocent people. Historically, financial markets don't take well to the threat of war between super powers.

Some might conclude that Russia is simply calling Obama's bluff by answering one attempt at sabre rattling with another, but investors normally would rather sell first and wait to see if a shooting war develops. In order to navigate the markets these days one needs to be a political analyst, military historian and fortune teller all at the same time.

Well, please come into my parlor, and we will see what my crystal ball says.

On one side, according to the U.S. government, there is some evidence that the Syrian regime did gas its own people. However, the United Nations, Russia, China and the majority of world opinion (including that of our allies) are disputing that and have made it clear that there is no justification for a military response from the U.S.

President Obama, suspecting that a military response might be a hard sell to the American public (less than 30 percent of Americans are in favor of a strike), handed the decision over to Congress last weekend. Both the House and Senate want more details and plan to vote on the issue next week. As a result, I believe that the stock and bond markets, worldwide, will be held hostage to that vote.

You can bet that markets will gyrate up and down based on every comment out of Congress and the White House. Overseas, Russia's Putin, ever the poker player, will be throwing in another chip or two in an effort to increase the stakes of the game. We could see naval or air alerts, even troop movements by Russia in support of its Syrian ally.

In the end, America will have to ask itself if it's worth it. In the face of a United Nations that refuses to uphold the laws it was created to defend, should we? How will a perceived loss of face and resolve impact Iranian or North Korean ambitions? Is gassing 1,000 Syrian civilians equal to gassing millions of Jews in World War II?

I believe that unless the polls change dramatically over the next few days, Americans have already given their answer and the politicians will vote accordingly. I'm guessing that President Obama, although stubborn, is also pragmatic. He will acquiesce to a congress "no go" vote and back down.

In which case, investors will have worried for nothing. At that point, we will be on the eve of the Fed's decision to taper (or not) on Sept. 18. What a wall of worry! Given all of the above, I am impressed by the resiliency of the markets thus far. We are above the S&P 500 Index's 50-day moving average and are less than 3 percent off record highs, despite Syrian worries. I warned readers last week that we are still not out of the woods quite yet. It appears that there are at least two or three good weeks to go before we can see a clearing on the other side. Take heart and stay 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.



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@theMarket: Markets Will Drift Lower
By Bill Schmick On: 03:22PM / Friday August 30, 2013
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August was not a great month for stock markets. September could be equally disappointing. After months of higher highs, a consolidation phase should be expected but it is not the end of the world.

As expected, from the peak, we have pulled back about 4.5 percent in the S&P 500 Index in August. As consolidations go, this one has been exceptionally mild. What makes it so painful is that we have all gotten used to one record high after another. We don't like losing money, even if they are only paper losses. I am putting you on notice that my worst-case scenario would be to expect another 4 to 5 percent of downside from here. Why?

Although I look at a number of indicators, the market's technical indicators across the board have started to deteriorate. So much so that it will make future short-term attempts to re-capture the recent highs problematic. Yet, on the plus side, there are some signs that we could be closer to a bottom than the bears might think.

All month I have been looking for a day in which the number of stocks with down volume on the New York Stock Exchange exceeded those with up volume by more than 90 percent. These 90 Percent Down Days are quite rare. We have only seen five instances of this type of behavior in 2013. In every instance, these readings occurred near the lows (3-5 percent) of their respective pullbacks.

On Tuesday of this week we had a 92 Percent Down Day on the NYSE. However, the event had some shortcomings. Ideally, you want this kind of sell-off (capitulation) to occur after a dramatic decline. Instead, the markets had rallied to new recovery highs prior to Tuesday. It was also a news-induced event, which lessens its significance. The catalyst for the decline was reports that the U.S. and its allies are planning some kind of retaliatory strike against the Syrian regime for its alleged role in gassing its own citizens. So Syria, As a result, any rebound we may get over the next few days should not be believed.

I suspect that at the earliest, we will not be out of the woods until after the Federal Open Market Committee meets again on Sept. 18. In the meantime, the debate over whether the Fed will begin to curtail their stimulus program at that time will occupy the headlines and the market’s attentions. Back in July, I also warned readers that "we are entering that time of year when our dysfunctional political parties may once again roil the markets in an attempt to justify their miserable existence."

Over the next two months, be prepared for the politicians to resurrect all the battles of yesteryear: the debt limits, the deficit, the budget, Obama care, etc. This could be the excuse markets need to spend a month or two more consolidating the gains we have experienced since November of 2012. We could see another 4-5 percent downside in the meantime. That would be my worst case scenario. Overall, that's not much of a decline given the market's recent gains.

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: The Cost of War
By Bill Schmick On: 10:11PM / Thursday August 29, 2013
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Over the last two decades America has participated in three different wars and several military interventions. The economic bill for these actions has been substantial. Today, intervention in Syria is front and center. In this age of supposed frugality, why are Americans still willing to pay for air strikes on Damascus or anywhere else?

One would think that with all the concern over our national debt and deficit that taxpayers would demand an end to these incursions. Yet, Americans are still a soft touch when it comes to protecting those who appear to be victimized whether in Dachau or Damascus. Since 1990 alone, we have stood in the way of bullies in Saudi Arabia, Kuwait, Somali, Haiti, Bosnia, Kosovo, Afghanistan, Iraq and Libya.

But war has a cost and I'm not talking about the human costs. There is no dollar-and-cents price tag I can assign to death and suffering: instead, I want to focus on the economic costs of war. For example, the decadelong conflicts in Afghanistan and Iraq may cost this country as much as $6 trillion, according to a report issued in April by Harvard University's Kennedy School of Government. That would be equivalent to a tax bill of $75,000 for every American household.

That would make Iraq and Afghanistan the most expensive wars in U.S. history. In comparison, World War II cost America $3.6 trillion, which was twice the cost of World War I. Today, Harvard estimates it cost the U.S. $1 million to deploy one American soldier for one year. That is several times the cost of deployment during the height of the Cold War or WW II. Why so much?

Modern-day American warriors fly around in helicopters, cargo aircrafts and gas-guzzling armored vehicles. As a result, it takes 22 gallons of fuel to support one soldier per day in Afghanistan versus just one gallon per day back in WW II — and that conflict was global. Today's soldiers are loaded down with high-tech body armor and weapons and the most advanced electronic equipment money can buy. They have the best medical treatment of any war, anytime in our history. And afterwards, they sit down to steaks and at least three flavors of ice cream at the mess hall.

So why do taxpayers grouse about the bank bail-outs and out-of-control federal spending while condoning trillions of dollars in military spending? One reason is that government spending can be an important source of economic demand during times of low confidence and downturns. As I have written in previous columns, government defense spending can lead to the development of new technologies, generate new industries and create additional sources of demand and jobs.

Depending upon how war is funded, it can also have adverse effects on the economy. America has paid for its wars through debt in the case of WW II, the Cold War, Afghanistan and Iraq. Part of the $6 trillion in cost estimates for Iraq/Afghanistan stems from the massive interest payments we will have to pay on that war debt for years into the future.

In the case of Korea, the war bill was paid for in higher taxes while Vietnam's costs were inflated away during the Carter years. In every case, taxpayers have been burdened and private-sector consumption and investment have been constrained by war spending. Yet, I believe the most telling reason for ignoring this most expensive of pastimes is that while the price of war is rising, it is declining as a percentage of our country's GDP. In my next column I will be addressing that concept further.

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: Japan's new frontier
By Bill Schmick On: 04:36PM / Friday August 23, 2013
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After almost 30 years of stagnation, Japan is seeking to re-gain its competitive edge. Critics argue that this island nation needs to re-invent itself if it ever hopes to find its place amid a multitude of fiercely competitive global players. The question is, how can that be done?

For any other nation, re-inventing one's self might be an impossible task but Japan has a proven track record in doing just that. As far back as the Meiji Restoration in the 19th century, for example, Japan was able to leap- frog into the industrial world by skipping the age of sail altogether. Despite the opposition of powerful industrialized nations, backed up by gunboat diplomacy, the Japanese developed a formidable steam-powered navy that was the marvel of the world.

Against all odds, Japan became a world power by the onset of World War II. After its defeat and dismemberment at the hands of the U.S. and its allies, this pauperized nation rose from the ashes once again during the 1950s. Thirty years later it was the export wonder of the world, benefiting from enormous demand for its state-of-the-art electronics and automobiles.

In my last column I argued that social, economic and geopolitical events have conspired to present Japan with both a challenge and an opportunity today. Japan faces serious regional challenges that will only grow as long as it lacks an advanced deterrence capability. In this day of U.S. budget cuts, it can no longer afford to rely solely on America to be its policeman in Southeast Asia. For Japan, however, a strong defense industry could also evolve into a lucrative export industry.

Japan's aerospace and defense industries (A&D) have made great progress since the days after the Pacific War. Today they build components for most advanced civilian aircraft while co-producing advanced military aircraft such as the F-15s. Thanks to cooperation with the U.S., Japan already has one of the most advanced missile defense systems in the world. As for ship-building, some of the biggest, most sophisticated commercial vessels in the world have been produced there for decades. Manufacturing more aircraft carriers like the recently-launched Izumo would be child's play for the Japanese.

Japan's competitive strengths are in high-technology, high value-added manufacturing and reliability in quality and scheduling. They are also skilled in industrial security and intellectual property. In addition, they excel in long term acquisition and planning, cost containment and highly efficient production capacity. All of the above skills can easily be applied to the defense sector.

By beefing up their own aerospace and defense spending, Japan can reduce military imports and increase exports while strengthening ties with its allies. It can assume the responsibility and obligation to protect its own borders and at the same time present potential enemies with a significant deterrent to further territorial encroachment. For the domestic economy the benefits could be enormous.

Typically, A&D industries hire workers with experience and education, i.e. high-quality employment for Japanese citizens, while reducing unemployment and increasing tax revenues. In addition, investment in defense tends to spur development in other industries. Japan's ability to develop new breakthrough technologies ("leap frogging") in defense can also be applied to the electronics, computing and commercial aerospace industries. In addition, the skills required to develop complex defense systems are easily transferrable to other businesses and commercial industries.

Re-arming may not be the only way, or even the best way, of re-inventing Japan but it is a viable option. Certainly, the United States government, in my opinion, would welcome such a development while other countries, with more to gain by maintaining the status quo, will express their outrage. So what else is new?

Are the majority of Japanese people ready for such a radical new direction today, probably not. But Japan is a nation of consensus and building agreement among its people will take time. In order to accomplish such a momentous and historic step, the present leaders of Japan will have to work slowly and carefully, acquiring public approval at every turn.

So far they appear to be doing just that. The new government, for example, is working on changing its arm export policies as you read this. I believe much of the ground work to move forward has already been laid behind the scenes (as is the custom within Japan). I expect we will hear a great deal more about Japan's defense sector and Article 9 in the months ahead. Stay tuned.

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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