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@theMarket: Markets Tread Water

Bill Schmick

Volume was thin, volatility high, and despite all the excitement over the LinkedIn IPO, the averages finished little changed from the levels of last week. This is a market that requires patience and fortitude.

By now, you probably have had your fill of LinkedIn stories. For those who haven't caught up, all you need to know is that the professional networking company went public on Thursday at $45 a share and proceeded to more than double by the end of the day. It now has a valuation greater than one-third of the companies that make up the S&P 500 Index, making billionaires of its founder and many of its staff.

A few analysts expect LinkedIn's IPO to be just a taste of things to come. The big four in this space - Facebook, Groupon, Twitter and Zynga - haven't set a date for accessing the public markets but are all making noises that suggest future IPOs. Some hope that LinkedIn will revitalize the IPO market, which has been lackluster at best so far this year.

Other analysts fret that the overnight $9 billion market capitalization of LinkedIn is reminiscent of the companies that went public during the Dot-Com boom. And we all know how that turned out. I suspect that, like the stock market in general, the price action of LinkedIn simply reflects the fact that too much money is chasing too few investments led by the "hot money" folks who have abandoned commodities and are looking for the next big play.

At some point, rational behavior will prevail and LinkedIn will trade at a valuation that will better reflect its fundamentals. Until then, I will watch the show from the sidelines.

As for commodities, the prices of silver, gold, grains and base metals are trading like yo-yos in the hands of elephants. In the energy space, oil is fast closing in on $95 a barrel. Don't try to be a hero and trade these price movements. Leave that to the professionals, who, by the way, are losing as much as they're making in these markets. There will come a time when commodities finish falling. Usually, prices will tend to flatten out and volumes dry up at the bottom. That will be the time to look at these investments once again.

In the meantime, the dollar's strength is hurting U.S. stocks as is Euroland's continued difficulties with the PIGS economies. Friday it was the turn of the Greeks, whose sovereign debt rating was reduced further to "B-plus, highly speculative." It appears that default is inevitable for Greece, (something I predicted would happen over a year ago). The trick will be to engineer a default without actually labeling it as such, something bankers and politicians are quite adept at doing after the last few years.

As for the markets, they remain in up trends. The "sell in May and go away" crowd would have you abandon the markets until October. Although the May Play works some of the time, I don't believe this year will be one of them. Stick with the markets and have patience.

Any references to specific securities are for illustrative purposes only and were selected based on a non-performance based criteria. The performance of the securities listed is not discussed and Berkshire maintains a listing of all recommendations for the preceding year and makes it available to the SEC upon request. The securities identified and described do not represent all of the securities purchased, sold, or recommended for client accounts. The reader should not assume that an investment in the securities identified was or will be profitable.

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 (toll free) or e-mail him at wschmick@fairpoint.net. Visit www.afewdollarsmore.com for more of Bill's insights.

 

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The Independent Investor: Ole Man River Bolsters Agriculture Investment Case

Bill Schmick

The flooding of the Mississippi River will be the worst disaster in the Delta farming region's history since1927. Millions of fertile acres in Missouri, Tennessee, Louisiana, Mississippi and Arkansas are under water. Farms along that riverbank could take a $2 billion hit, but to us it simply underscores our argument that agriculture is a long term growth area.

Understand that my heart goes out to those who are suffering from this misfortune. Cotton, wheat, corn, soybeans, rice and even catfish won't be raised or planted this season, forcing many Americans out of work. It also will add even more pressure to sky high agricultural prices. Readers may recall my January column "Stock up now or pay later," where I warned that higher prices for a wide range of soft commodities would be showing up in retail stores and supermarkets just about now. But the flip side of these disasters is they offer a fertile field of investment for those who pay attention.

Horrific weather conditions throughout the world are largely responsible for the present crop shortages. So far this year weather appears once again to have turned a cold shoulder to farmers whether in the Mississippi or the Yangtze River deltas. Even before the flood, the World Agricultural Supply and Demand estimates from the U.S. Department of Agriculture was forecasting large price increases for a variety of grains for the 2011-2012 periods.

The flooding just happened to occur as a free-fall in commodity prices began. Energy, base metals, precious metals and agricultural foodstuffs have all been sold simultaneously. Yet, in the case of agriculture, I believe shortages will continue to persist supporting higher food prices for the foreseeable future. Therein lies our opportunity.

The astute investor understands that these natural disasters offer windfalls for companies that produce much needed tools, equipment and other products that can aid farmers in reviving this devastated acreage. Flooding will normally wash away nutrients and deposit silt or sand as it recedes. Farmers will need equipment to turn that soil, new seed to plant and the fertilizer to make it grow. Although attention is now focused on the Mississippi, don’t forget that other areas of the country are suffering from an abnormally wet spring as well.

In the corn market, for example, U.S. plantings for the first week in May came in at 13 percent, the third lowest pace since 1986 and well below the 10-year average of 43 percent. Ohio, Indiana and Iowa reported plantings of just 1, 2 and 8 percent. The odds that farmers will close the planting gap look slimmer and slimmer since either flooding or severe drought are hitting large areas of the farm belt.

Over in Texas, Oklahoma and the New Mexico range, cattle herds are being pulled off once lush pasture land as either drought or fire has reduced the range to desert. Instead, cattle are dining on feed, already in scarce supply, which will both increase costs and ultimately prices for consumers.

But those are just the short-term considerations. As we look at the long-term supply and demand imbalance, the investment case for food commodities is even stronger. The United Nations Food and Agricultural Organization (FAO) is projecting an increase of 2.3 billion in the world population by 2050 to 9 billion. Developing countries will account for the lion's share of that growth. It will take a 70 percent increase in food production (yearly investment of $209 billion) just to keep pace with that growth rate.

If, at the same time, we want to reduce the future percentage of the world's population that goes hungry, then we need to invest $359 billion a year. Since a growing population that is also hungry is a recipe for violent regime change, politicians worldwide are paying attention.

Unfortunately, there is not enough arable land around the world to expand food production. So, in order to meet future demand, new farming, crop seed and fertilizer technologies will be required. It just so happens that U.S. chemical, fertilizer, equipment and food companies are leaders in forging a path to this brave new world.

Bottom line: for investors, the recent pull back in the commodity space was healthy and long overdue but, in my opinion, does not negate the investment case for agriculture over the long term.

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 (toll free) or e-mail him at wschmick@fairpoint.net. Visit www.afewdollarsmore.com for more of Bill's insights.

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The Independent Investor: A Windfall in Disguise?

Bill Schmick

It started last week with a 25 percent plunge in silver prices. Gold, oil, corn, and coffee followed in sympathy, and by the end of the week it was a full-scale route across the commodity spectrum. These price declines will save corporations and consumers untold trillions of dollars. So why isn't the stock market celebrating?

The power and abruptness of the decline caught the majority of investors unaware. After all, commodity stocks have led the market for well over a year. Stock investors were piggy-backing on what was happening over in the commodity pits. Up until last week, commodity speculators were minting money. They were able to borrow short-term money for practically nothing (courtesy of the Fed's QE 2) and were buying commodities, such as silver and gold, with the proceeds. Over time, as more and more traders jumped on board, commodity prices across the board spiked into the "bubblesphere."

Silver for example, from $36 an ounce to almost $50 an ounce rose in less than two months. At that point the Commodities Mercantile Exchange, decided (or was prodded) that enough was enough. On April 25, they raised the amount of money that investors had to put down as collateral (margin requirements) to guarantee their silver trades. It took five margin hikes in a row (an 87 percent increase in margin requirements) before speculators admitted defeat. And what worked to rein in the price of silver is now being applied to other more important commodities like oil and gas.

The Federal Reserve Bank has been targeting asset classes, such as the stock market, in their effort to spark a long-lasting economic recovery in this country. One fly in the ointment has been the spike in commodity prices, especially oil and food, as speculators borrowed money from the Fed at very low prices and made millions by betting on higher commodity prices.

Oil had reached as high as $112 a barrel and gas prices at the pump were skyrocketing in response. A similar trend was under way in food. The Fed is under increasing pressure and criticism as core inflation remains quite moderate, but consumers and corporations were paying more and more for energy and food (two non-core inflation items). The Fed's Chairman Ben Bernanke has argued that prices for these non-core items are beyond their control. But are they?

Is it beyond reason to speculate that the CME may have received a call from Big Ben over at the Fed? If the Fed can target an upturn in the stock market, how difficult would it be to engineer a deflating of the commodity bubble through the stiffening of margin requirements?

Whether the CME decided on their own or had a little help, the downdraft in commodity prices has removed that problem from the Fed's agenda. It will also produce an immediate and automatic boost to the economy across the board. Gasoline futures are already heading down on the back of a 21 percent margin hike on NYMEX gasoline futures. Corn was limit down (minus-5 percent) on Tuesday as well. Speculators are selling positions in anticipation that margin hikes on other commodities are just around the corner.

Over time, I believe commodity prices will stabilize and even rise, although not at the rate of the past. As the speculative froth comes out of this asset class, the real values will be set by supply and demand and not speculators. Many of these commodities are becoming increasingly scarce, whether in the energy, food or metals space, so the investment case is still viable. In the meantime, as prices come down to earth, I expect investors will begin to realize that this down draft is actually a windfall in disguise.

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 (toll free) or e-mail him at wschmick@fairpoint.net. Visit www.afewdollarsmore.com for more of Bill's insights.

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@theMarket: Let Silver Be A Lesson

Bill Schmick

"You sold silver too soon," grumbled a client. "Look, it's almost $50 an ounce."

That was just one of the conversations I had with disgruntled investors only one week ago. There is no question I felt bad since I had advised readers to sell at least half their silver investments between $36 to $37 an ounce a few weeks ago. Beginning Monday, silver began to drop as the CME hiked margin requirements. By Friday, silver had dropped over 25 percent to as low as $33.05 and ounce.

Parabolic moves such as the kind we have had in silver, and to a lesser extent gold, always revert to the mean. I learned that lesson many times over 30 years of investing in commodities. My strategy is to pick a price level and stick with it, regardless of whether the commodity overshoots my target.

Oil was another commodity where I suggested investors take profits at $100 a barrel. It has subsequently climbed higher, overshooting my target by almost $14 a barrel before it, too, plummeted this week to $99 a barrel. I remain a seller until oil breaks $85 barrel on the downside.

Of course, now that precious metals are in free fall, the knee-jerk reaction from the uninitiated is "at what price do we get back in?"

The easy answer is: whenever investors stop asking that question. When the talking heads and strategists throw in the towel, when precious metals commercials disappear from the airwaves and nobody wants to be bothered with silver, only then will I be willing to reenter the precious metals.

Unfortunately, the sharp correction in silver as well as a bounce in the dollar has impacted the equity markets overall. That is unfortunate and yet for those with steady nerves and grim resolve it is an opportunity.

Most commodities have dropped along with gold and silver. That is understandable given that the majority of traders had purchased commodities on margin (borrowed money). When prices decline substantially (as they have this week) margin calls escalate and notices from lenders flow out through Wall Street like floodwaters through the Mississippi Delta. Margin lenders demand more collateral to maintain their loans to these silver speculators and they want this money immediately.

Speculators, caught with owing huge sums of margin money, did what they always do — sell other investments, usually their winners, to meet the margin call. Oil, gas, base metals, soft commodities — whatever they can sell — which increases the selling pressure on everything and the ripple effect soon reaches high flying stocks and finally equities in general. Welcome to today's markets.

For those of us with cooler heads and steadier nerves, treat this sell off as simply another gift horse in the making. And I'm not about to examine its mouth. I would be buying instead. You see, lower energy as well as other commodity prices are good for the global economy. At some point investors will wake up to that fact. In the meantime, expect more volatility.

"How low can we go?" asked several clients ranging from a doctor in Salisbury, Conn.,  to a retired engineer in Williamstown.

We're almost there, in my opinion. Let's call the low somewhere between 1,305 and 1,325 on the S&P 500 Index (and I may be too negative in my guess). If we dropped as low as 1,300, it would still only be a 5 percent correction from the top. Our last decline was about 7 percent. Since then we have powered as high as 1,370 on the S&P (the intraday high reached on May 2). Remember, you should expect at least three pullbacks a year in the stock market of up to 5 percent. This is simply one of them and the cost of doing business in the stock market.

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 (toll free) or e-mail him at wschmick@fairpoint.net. Visit www.afewdollarsmore.com for more of Bill's insights.

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The Independent Investor: Will Stock Brokers Follow the Ticker Tape?

Bill Schmick

Given that the stock market has almost doubled since its low in March 2009, one would expect that an entirely new crop of youngsters would be clamoring to become the next generation of America's stock brokers. So far the evidence points to the opposite conclusion.

Last month The Wall Street Journal featured an article titled "Dangerous Stockbroker Shortage Threatens America." The gist of the story was that less than 25 percent of all financial advisers are under 40 years of age while 5.6 percent are under 30. The writer quoted research from a Boston-based research firm, Cerullie Associates, that claimed the average age of a financial adviser is just under 49 years old with 14 percent of them over 60.

What I fail to understand is why this supposed shortage is dangerous?

I was a stock broker once upon a time. My clients, however, were not individual investors. My customers were the large institutions with multibillions of dollars that invested worldwide and their famed fund managers who you see quoted on television or in the top-tier investment periodicals. It was a lucrative business.

In exchange for stock ideas and access I provided to company managements, my clients paid handsomely in commission dollars. I often ferried my investors to various countries and regions where I arranged private meetings between them and company officials, finance ministers and even presidents. All-in-all it was a gentleman's business. But things have changed.

Institutions discovered the Internet. Electronic trading evolved and became so cost effective that paying commissions for the services of people like me made no economic sense. Besides, what I could do, so could my clients. A phone call or email from the chief investment officer of a huge U.S. pension fund to company X could accomplish the same objective as in my efforts.

In addition, the commoditization of equities overwhelmed all other methods of investment. The sheer weight of money under institutional management forced large institutions to abandon investing in individual equities. Instead, millions every day are bought and sold in baskets of stocks representing sectors, styles, regional and country indexes. It made stock picking superfluous and brokers like me a dying breed.

The same trend that convinced me to jump ship, abandon the brokerage business and manage money has been steadily chipping away at the retail broker's business over the last decade. The advent of discount brokers, automation, passive investing and instantaneous information via the internet has evened out the playing field for individual investors. Investors are now capable of doing for themselves what brokers have traditionally charged them to do.

Today, you and I receive the same information our brokers do and we get it faster. The popularity of mutual funds and exchange traded funds as preferred investment tools have also impaired the utility of brokers and stock picking.

The big brokers realized this years ago and stopped recruiting and training new brokers. At one time, Merrill Lynch, for example, operated a huge campus in Southern New Jersey for the training of their retail brokers, complete with classrooms, dorms and cafeteria. As commissions declined and profits were squeezed, the brokers cut back on hiring and instead gave more and more accounts to the top producers. These producers are now retiring.

Remember that stock broking is a "people" business. Traditionally, you needed to trust and rely on your broker and if you couldn't, you switched. However, 2008-2009 changed that. During the financial crisis, many brokers, young and old, advised their clients to remain invested only to panic and sell out their clients at the bottom. Lawsuits followed, animosity built and trust declined across the industry. 

As an example, two individual investors were recently awarded $54 million in a securities arbitration case against Smith Barney. The case was over the sale of conservative municipal bond investments that turned out to be less than safe, losing between half and three quarters of their value during the financial crisis.

Given the performance and reputation of brokers and the financial services sector in general over the last few years, is it any wonder that the last thing the new crop of college grads wants to do is become stock brokers?

Even the name "broker" no longer exists. Thanks to millions spent in marketing, the brokerage houses have successfully confused the investing public in exactly who they are dealing with. The broker has gone the way of the ticker tape, the typewriter and the transistor radio. New names such as "wealth manager," "financial consultant" and "financial adviser" have replaced the old title and I for one am not so sure the change is for the better. 

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 (toll free) or e-mail him at wschmick@fairpoint.net. Visit www.afewdollarsmore.com for more of Bill's insights.

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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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