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The Independent Investor: Why Baby Boomers Are Grumpy

Bill Schmick

You would think those born between 1946 and 1965 would have a lot to be thankful for. After all, the first wave of those baby boomers is finally eligible to retire in 2011. The recession appears to be over and jobs are beginning to make a comeback, even the stock market is performing well — so what's the problem?

The Pew Research Center's recent survey on baby boomers indicates that fully 80 percent are "dissatisfied with the way things are going in the country today."

Quite a bit of that unhappiness can be traced to personal finances and negative economic views. That makes sense since boomers were hit harder than most segments of the population by the double whammy of declining stock prices and housing prices. For those laid off who are older than 50 years of age, it has been harder to obtain a new job. And even those who are employed argue that real income has stagnated over the last decade. As a result, the majority say their household finances have worsened and a higher portion of boomers than other ages have had to cut spending this year.

The current estimate of baby boomers in America is 79 million, about 26 percent of the total U.S. population. Although they still consider retirement age at 65, the typical boomer believes that old age doesn't begin until age 72, according to the survey.

Times have changed since the boomers came of age in the '60s and '70s. Back then, America was the land of honey and horizons seemed to stretch forever. Now, most boomers point to the huge national debt, the deficit, a lack of political leadership and lament that America is past its prime. They and their country are in decline, or so the story goes.

"My parents worked hard, saved, retired and enjoyed their golden years," said one disgruntled boomer, (who gave me the idea for this column).

"Why can't I do the same?"

Actually, there are a number of reasons why this time around it is different and most of the fault lies with us Boomers. Back in the day, our parents were part of a pension plan that included monthly retirement savings on the company's tab. My Dad was a machinist at SKF (a ball-bearing manufacturer) for 30 years and worked another full-time job at night. The pension contributions increased as his salary rose and as the number of years worked at the company increased. His pension was conservatively managed by trained professionals. It was also fairly easy to calculate the money he would be receiving on the first day of retirement and my parents planned for that.

Their mortgage was fixed and ended right around the time of retirement. Your parents also knew how and what their medical plan would be in retirement as well as Social Security benefits. Most costs were controlled, or at least somewhat contained while families lived frugally and spurned debt. Some did so successfully and enjoyed those golden years, others (like my Dad who died of a massive heart attack a few years after retiring) didn't do so well, but at least the results were fairly predictable.

We baby boomers wanted more.

We did away with pensions and took control of our own retirement in the form of deferred-retirement plans like 401(k)s and IRAs. The problem was that contributing to those plans was voluntary (unlike pension plans). And somehow there was always something more important to spend our money on. Besides it was much more fun to "flip houses and make a killing" than make those monthly contributions toward retirement.

Even those who did save only kinda sorta did it. Self-directed, deferred-retirement plans should have done exceptionally well in the period from 1982 to 2000. It was the greatest bull market in recorded history, but few actually put enough money in these plans to make a difference. By 2001, when some of us actually began saving more, we watched those savings first disappear during the Dot-Com bust and then again more recently in 2008-2009. As a result, retirement plans actually went nowhere in the last decade.

As if that wasn't a low enough blow, those of us who counted on our houses to bail us out — the "I can always sell my house" crowd — witnessed that store of wealth decline 30 percent in the last two years. Houses are not moving, or if they are, sellers are forced to take a cut depending upon the size and location of your home. For someone forced to sell, faced with the prospect of living on social security with insufficient retirement savings, there is definitely something askew with the American Dream. It is no wonder that Boomers are grumbling. Many feel their country’s economic prowess has peaked and the promise of prosperity for all has been broken. Living the dream for many has turned into living a nightmare.

Maybe it was that old long-haired hippie in us that whispered we would live forever so why worry about retirement, or if we really had to, we could get by living in our old VW bus. It is only now that those romanticized notions are disappearing in the face of reality. But it is not too late. Maybe you can't retire at 65 but that may turn out to be a good thing. You can always start saving, and if I am right about the stock market this year, even first-time investors could make a substantial return on their money.

This country still holds promise for those willing to grasp it. No one is ever too old for that.

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 1-888-232-6072 (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: Commodities and Emerging Markets

Bill Schmick

It has been a given that where commodities go, so goes emerging markets, however, that correlation seems to have broken down over the last few months. While commodities, both precious and base, have continued to rise, emerging markets have underperformed since November. What gives?

For several years the basic investment thesis is that emerging markets are economic juggernauts with an insatiable demand for the world's natural resources. Their factories devour every form of commodity and transform them into the world’s textiles, steel, clothes, cars, toys, electronics and scores of other exports.

But sometimes you can come up against too much of a good thing. That is what is happening to several of the larger emerging market countries such as China, Brazil and India. All three countries managed to avoid global recession. While we languished with high unemployment and negative growth, most emerging markets continued to grow and grow and grow. As a result, their domestic economies are beginning to overheat.

As they do, their inflation rates are starting to rise to uncomfortable levels with serious consequences for their economic future. China, for example, grew 9.8 percent in the fourth quarter while registering a 4.6 percent inflation rate. This week Brazil announced that consumer prices in their country rose to nearly 6 percent.

The governments of these countries have responded by raising interest rates and tightening credit conditions. The Brazilian Central Bank hiked interest rates by one half percent to 11.25 percent on Thursday and observers expect another hike very soon.

Local investors, drunk on ever-higher stock prices in 2010, are decidedly miffed that their central banks are taking away the punch bowl this year. China's stock market has declined over 15 percent since November. Brazil and India have also underperformed the U.S. markets as well.

In the meantime, commodity prices have largely ignored this new reality until very recently. Brazil's sudden rate hike, in combination with China's higher reading on domestic inflation this week, have finally shaken some of the euphoria out of the commodity market. We need this pullback (and I hope it continues) in order to square prices with reality in the emerging markets

I believe the declines in emerging stock markets are coming to an end. I would be a buyer of those markets on further pullbacks, because I still believe that regardless of any further short-term actions to slow growth, their economies will still outgrow more developed markets this year, next year, and the years after that. Commodities are also a great place to invest once this pullback is over. I advise that you wait for some price stability before adding to positions.

As for the U.S. stock markets, it appears that just about everyone is now in the "too extended, probable sell-off" camp that we have been waiting for over the last few weeks. The contrarian in me doesn't like to see the consensus come over to my point of view because the stock market often does what is most inconvenient to the greatest number of people.

Nonetheless, I would love to see a 3 to 5 percent correction before the end of the month. It would give me the opportunity to put more money to work. For specific recommendations, call or e-mail me.

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 1-888-232-6072 (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: It's Time to Get Back Into Real Estate

Bill Schmick

Housing has been the bad boy of the financial markets ever since the first subprime mortgage loan went bad back in 2007. So it may come as a surprise to some that I believe that this scorned and much-hated sector of the economy is ripe for a comeback. But don't look for a get-rich-quick kind of reversal.

Recently, the data in the real estate markets has been confusing, even contradictory, which is what one would expect in a bottoming market. For example, the National Association of Realtors said that 2010 was the weakest year for home sales since 1997 and the number of foreclosures in 2011 will continue to weigh on home prices, which are expected to fall even further in the next six months.

Given these somber statistics, why would anyone want to invest in real estate? As a contrarian, I often like to invest in markets that most others shun, especially when I believe the worst is just about over. Over the last few months, certain housing statistics indicate a bottom is forming in this sector, in my opinion.

For example, existing home sales hit their low in July 2010 and have steadily increased each month since then (with the exception of October). For December, sales were up in all parts of the country with the strongest gain coming from the west with a 16.7 percent increase. Sales rose 13 percent in the Northeast, 10.1 percent down South and 11 percent in the Midwest.

Many bearish forecasters, however, point to the rising tide of housing inventory as a reason to stay away from the sector. The more inventory there is to sell, the more prices must go down, and the more time it will take before supply and demand of houses is back in equilibrium. Last month, the inventory of unsold homes stood at an 8.1 month supply, down from 9.5 months in November. The trend looks good but unfortunately it is still far from normal since the historical average of normal inventory is 4.5 months supply.

In September 2010, there were 3,585,000 homes for sale. However, lurking out there are all those houses whose mortgages are in default called "shadow inventory." That represents another 3,776,200 units that could possibly be dumped on the market. If we assume that 50 percent of them will ultimately be added to the national housing inventory, then it could take as much as two years to work off (sell) this entire inventory, assuming that no new inventory came on the market.

New inventory (housing starts) will continue to grow at the same time, but the data indicates housing starts are growing at a declining rate. Since March we've experienced a 20 percent decline in the issuance of building permits. Housing starts dropped an additional 4.3 percent in December. It appears that the big national homebuilders will be cautious for the foreseeable future in building new homes until a recovery begins.

Of course, the real key to the housing market is the growth rate of employment. Without a job, there is little one can buy, regardless of how low housing prices or mortgages rates go. There again the data points to an uptick in employment and the Fed and government are doing everything they can to boost that number.

Most people I talk to have nothing positive to say about the real estate market. Some investors actually hate it, especially if they suffered major losses in REITs or other real-estate related securities. That's the time when many smart people start paying attention. Two men I respect, Warren Buffet and hedge-fund manager John Paulson, are predicting the housing market will bottom this year. I agree.

Remember, too, that in this era, when so many investors are concerned about future inflation, real estate has provided a supurb hedge against inflation along with other commodities. If you are an investor with a short-term horizon (the next 3-6 months), then real estate is not for you, but if you have the patience to invest now and hold for a few years, I believe now is the time to buy. Please call or write for my specific recommendations.

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 1-888-232-6072 (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: This Is the Year for Commodities

Bill Schmick

Last year, precious metals garnered the headlines and the attention of most investors. Gains in gold, silver, palladium and platinum left stocks in the dust. This year may well be the year for base metals, food and energy to outshine precious metals and the stock market overall.

While gold and even silver's rise last year was more about concerns over currencies and inflation, the rise in basic materials is largely a play on the coming global economic recovery. The investment theme is simple: while world economies are beginning to grow, nations and companies rev up production in order to meet demand and therefore the demand for commodities increase proportionately. At the same time, new wealthier, middle-class consumers in developing countries, such as China and India, demand a better diet and now have the money to afford such delicacies as beef, pork, chicken as well as different grains and even bread and pastries.

This scenario is neither new nor original. The prices of aluminum, cooper, steel, lead, zinc and a host of other hard metals as well as wood and paper and other basic materials have been on the rise over the last few years simply because certain developing nations such as China have been demanding more of these commodities to both re-build the infrastructure of their countries and also export to developed nations such as the U.S. and Europe. Now that global economic growth is at hand, demand for these materials will continue to expand, and at an accelerated rate.

Some of these commodities, like rare-earth metals for example, have recently skyrocketed in price causing a mini-bubble in that sector. We can expect more of the same.

Back in September of last year, readers may recall my column "Wheat, Weather and the Grocery Shelves" in which I warned that food prices were heading much higher.

"The real increases in food prices are still waiting in the wings until the world's economies are on firmer footing. Once people can afford to spend again, prices are expected to move up quickly in commodities across the board."

Well, folks, that time has come. Wall Street analysts forecast that food prices could rise anywhere from 2.5 to 4 percent this year versus 1.5 percent in 2010. A variety of factors including weather, population growth, the rise of the emerging market consumer as well as global economic growth have lit a fire under commodities as mundane as sugar, corn and cotton.

Since June, corn prices are up 94 percent, soybeans have gained 51 percent and wheat is up over 80 percent. Just this week, the U.S. Agricultural Department reduced its estimates for global harvests of some important crops, as well as increased their demand forecasts for commodities overall. It seems a safe bet that when looking for new investments this year, commodity-producing companies and countries should be high on your list.

As for the markets overall, all three averages are grinding higher as the second week of January comes to a close. I still expect a pullback of sorts (risk of 3-4 percent) but that would simply be another opportunity to buy stocks, given that I think the stock market will provide rewards of 15-20 percent between now and August. Given that kind of risk/reward scenario, I am a buyer of equities on every dip.

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 1-888-232-6072 (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: The Business of Beauty

Bill Schmick
Don't go trying some new fashion
Don't change the color of your hair ...
I could not love you any better
I love you just the way you are.
— Billy Joel

It is a "recession-proof" business with new openings forecasted to grow by 20 percent between now and 2018. Although these professions require state certification and courses in biology, chemistry, nutrition and herbology, hairdressing, hairstylists and cosmetologists can hardly fill the demand for their services.

The beauty of hair is that it grows; in fact, it is the fastest-growing tissue in the human body. The average human scalp harbors over 100,000 strands, which, if treated kindly, can have a lifespan of five and one half years. And today's female baby boomers are visiting salons at an increasing rate in order to preserve and enhance one of women's most alluring qualities. The nation's hairdressers are working overtime to accommodate these millions of women who keep coming back for a variety of services ranging from washing, shampooing, cutting, coloring and styling their hair.

Women spend well over $50 billion a year at the salon. That's in addition to the billions they are spending on shampoo, conditioners, hairsprays, gels, mousses and hair coloring. And there is evidence that women actually spend more in a recession since it helps make one feel better about themselves in the face of economic uncertainty.

"Even though the economy is not doing so well, my business is just fine," reports Theresa Smith, the owner of Sheffield's Mystique Salon for the last 20 years.

Hairdressing dates back to at least the 1700s when the ladies (and men) of the French Court of Louis XV vied to present the most dramatic appearance possible at balls and other state functions. Powders, pastes, baskets, buns, and even live birds and cascading waterfalls were part of the daily parade of excesses. In this country, hairdressers created the "bob" in the roaring Twenties, the “beehive” during the “Mad Men” years of the 1960s and a long series of television-inspired dos inspired by everyone from Jennifer Aniston to Farrah Fawcett.

"Back in 1983 when I got started," recalls Tracy Wilson, soon to be owner of Indulgence Hair Salon in Pittsfield, "it was all about big hair, big hair spray and scary chemicals. Things have changed, and for the better."

There are a little over 800,000 barbers, cosmetologists and other personal appearance workers in America and about 44 percent of them are self–employed. But cutting, coloring, styling, curling, straightening, giving scalp treatments and massages is hard work. Many in the business, especially those who own their own salon, put in more than a 40-hour week, which can include evenings and weekends. Many hairdressers (29 part time) are part time and many of those work two jobs.

It's a business where the newcomer must pay their dues.

"Here in Massachusetts, the state requires 1,000 hours of practical work in addition to your course studies and once you pass the exam you're licensed as an apprentice," explains Tracy. "Then you are required to work an additional 2,000 hours, roughly two years in a salon before you are a licensed hair stylist."

During that period the fledgling stylist starts at minimum wage plus commissions but will likely only bring in between $18,000 to $20,000 a year.

"I estimate someone who works hard, attracts a returning clientele and continues their education could be making an average of $45,000 a year in this region after five years," says Theresa Smith.

"Education is key," explains Tracy Wilson. "Here at Indulgence we require at least two outside courses and 4 to 6 in-salon courses each year. It is an extremely competitive business and you need to be on the cutting edge of knowledge in a variety of areas."

If the stylist has acquired the confidence, presentation skills and remains serious about her continuing education, the normal progression after five or so years is to open one's own salon.

"We have eight people working here," says Wilson, "and I'm thinking of hiring a massage therapist next year."

Today's female clientele expects more than just a haircut. The entire experience must be of a quality that convinces them to return. The baby boomer generation is the largest segment of women who frequent salons and they are visiting them more often as the Graying of America sets in.

"Boomers are easily 75 to 80 percent of our business and their chief request is hair coloring," says Wilson.

Both women agree that it is a lot of hard work but they both love what they do. I asked Mystique's Theresa Smith if the beauty business might be a viable avenue for the area’s unemployed to either begin or embark on a second career.

"Absolutely!" she said as she greeted yet another loyal customer.

It seems the business of beauty is a positive for those on both sides of the hair dryer.

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 1-888-232-6072 (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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