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The Independent Investor: Emerging Markets Are Still on Hold

Bill Schmick

A few months ago in my market column, I warned investors that emerging markets overall were pulling back and additional downside was probable. Thanks to the problems in the Middle East and elsewhere, that forecast has been fulfilled. Now what?

At the time, I advised that any further downside could prove to be a buying opportunity. The lower the stock markets of places like China, India and Brazil decline, the more tempted I am to begin to nibble at stocks and other securities in these countries.

In the second week of February, investors pulled $5.45 billion from emerging market funds and invested it into developed nations such as the U.S., Europe and Japan. That was the largest inflow of money into those regions in 30 months. Since the beginning of the year, worried investors have withdrawn 20 percent of the $95 billion that was invested in the region in 2010. China alone has lost more than $1 billion of outflows since the beginning of January.

The stock markets of these countries have taken it on the chin this year as a result. Emerging markets have suffered an overall decline of 3.8 percent year-to-date, while stock markets in the U.S., for example, are up close to 6 percent. The one big exception has been Russia, one of the four BRIC countries that also include Brazil, China and India.

Thanks to Russia's vast oil and other natural resources, that country is considered a hedge against future inflation. Investors are also betting that, after years of abusing foreign investors, the Putin-controlled government is getting serious about treating all investors equally. Time will tell if Russia is blowing smoke or truly has turned over a new leaf. In the meantime, however, its equity market has more than kept pace with the U.S., gaining 11.3 percent, while India is down 12.6 percent and Brazil is off 4.4 percent year-to-date.

As readers may recall, the chief reasons for the emerging market sell-off is climbing inflation rates which has been met by tightening monetary policies by central banks in just about all the "hot" countries. Brazil, for example raised rates yet again last night in an effort to slow the economy and reign in inflation. These actions have been the impetus to trigger corrections in all these markets after two very good years for equity investors. Indonesia, for example, was up 46 percent last year so a 5.1 percent pullback so far this year is small potatoes, in my opinion.

The recent upheavals in Egypt, Tunisia and the ongoing strife in Libya have unfortunately lengthened the shadow that has darkened the prospects for emerging markets in 2011. Higher oil prices may also keep a lid on the economic prospects for some countries that have not been blessed with energy reserves.

As a contrarian, I like to buy securities when "the blood is running in the streets" as Baron Rothschild once described this style of investing at the bottom. As of yet, I don't see that bottom. Keep your powder dry for a few more weeks (or maybe months) but keep an eye on these markets. Their long-term economic prospects are extremely attractive. Their present attempts by their governments to reign in inflation just bolsters the investment case for this group of countries whose governments and economies are finally coming of age.

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: The Correction, At Last

Bill Schmick

At long last, we are having a pullback in global financial markets. Most investors would agree that it is long overdue. But now that we are in the midst of it, the bears are out in full force. Ignore them.

"Libya Rebels Tighten Noose" read Friday's headlines in the Wall Street Journal. The national media is devoting huge blocks of time and resources to cover unfolding developments in a country that supplies less than 2 percent of the world's oil. And yet both retail investors and seasoned professionals have been dumping stocks in panic this week. Who says markets are efficient? Honestly, these events may provide the drama and justification for the sell-off, but for me I care only for the outcome.

Yesterday oil hit $103 a barrel. For over a year, my interim price target on oil has been $100 a barrel. I promptly advised readers to take profits (see "Oil hits my price target"). If you missed it, you can read the entire story on my blog at www.afewdollarsmore.com.

The reasoning behind this sale is threefold: 1) contrary to the talking heads on television, I do not believe that these Middle Eastern rebellions will jeopardize global oil supplies and 2) I also expect that Saudi Arabia can and will easily make up any shortfall due to Libya's suspension of oil exports. Right now that shortfall is roughly 700,000 barrels a day.

Finally, U.S. economic growth is moderate at best. On Friday, for example, GDP for the fourth quarter of 2010 was revised down to 2.8 percent following a 2.6 percent rate in last year's third quarter. Those are less than half the growth rate the U.S. normally experiences in prior recoveries. Those numbers do not justify oil prices at existing levels. Today, oil is trading around $97 a barrel. I expect that we will trade in a $5 to $6 a barrel range until there is some resolution in Libya, and then prices should fall back.

Many investors were also surprised at the U.S. dollar's behavior during this latest crisis. The dollar has historically been perceived as a "safe" investment when other securities are not. In the past, its value has risen in uncertain times — but not this time.

Instead, gold and silver spiked higher as investors worldwide preferred precious metals rather than the dollar as a place to hide until this crisis passes. Gold and silver still have room to run and neither has reached my price target.   

Some market analysts argue that because this crisis is about oil, and not financials, the dollar provided little security since higher oil prices would clobber our economy. Economists claim that $100-a-barrel oil will knock a full percentage point off U.S. GDP. They point out that the currencies of Canada, Switzerland and Norway did move higher, however. Two out of these three countries are oil exporters and all are more energy efficient and have higher interest rates than the U.S.

I'm not sure I buy that explanation in its entirety. I have written before that we are in a transition period in which the U.S. dollar is losing its preemptive place among the world's currencies. In my opinion, it may still lay claim to being "first among equals" but over time the dollar will join with a basket of other currencies in providing a new global foreign exchange benchmark. This may simply be another sign that investor's behavior is changing.

As for this pull back, we have already dropped 3 percent or so on the S&P 500 Index. My forecast was for a 3 to 5 percent decline, so maybe we have seen the worst of it, or we might still have a few more days next week before it is over. Either way, buy the 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.

This article was supposed to run Saturday morning but was accidently scheduled for a later posting date. We apologize for any inconvenience.

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The Independent Investor: Oil Hits My Price Target

Bill Schmick

If there is one thing I've learned in forecasting commodity prices, you have to be disciplined. Here in the U.S. our benchmark crude for April delivery hit an overnight high of $103.41 in electronic trading. It's time to sell.

One-hundred-dollar oil has been my target now for well over a year. It is an interim price target because I still believe that over the long term (over the next few years) we will see the price of oil much higher. But for now this rally is on its last legs.

"How can you say that?" demanded one client who just recently jumped on the oil bandwagon. "Don't you read the news? The Middle East is coming apart. The world's oil supplies are in jeopardy."

That is the kind of sentiment that makes me feel even more confident that it is time to take profits. Sure, there are pressing issues over in oil land and I don't deny that there will be additional turmoil before all is said and done. However, I do not believe that the world's oil supply is in jeopardy.

Keep in mind that Libya produces less than 2 percent of the world's oil. Its "King of Kings" (as Moammar Gadhafi likes to be called these days), is in my opinion, a certifiable madman and his ultimate demise would be cause to celebrate. However, that may take some time to engineer and in the meantime oil will most likely stay at these nose-bleed levels. Ultimately, when the crisis has passed, we will once again be back to a global economy that is growing slowly and definitely not at a pace that justifies such high price levels for energy.

This temporary spike in oil is great news for the media. It has spawned an entirely new "what if" series of gloom and doom economic scenarios, which in turn has driven the stock markets down 3 percent.

"Auto sales will be decimated," says one talking head.

"Four-dollar gas is round the corner," predicts a young gas station attendant solemnly.

"The economy will be thrown back into a recession," says an economist, still smarting from his conviction that we would experience a double-dip recession in 2010.

"The consumer will be crushed."

"Restaurants will close."

"It's the end of the world." (My quote).

Those kinds of statements will certainly sell newspapers or keep you tuned into CNBC, but beyond their entertainment value, I see no point in listening to these Doctor Dooms.

Folks, my advice is to keep this present state of affairs in perspective. We were badly in need of a market correction. Now, we have it, thanks to the Middle East.

A month from now when this blows over and the price of oil is considerably lower than today you will be wishing you did two things: 1) took advantage of lower stock prices and 2) sold oil, if you owned it.

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: 707 Days

Bill Schmick

It's official: the S&P 500 Index is now up 100 percent from its low of 666.79 back in March 2009. It was the fastest double in stock prices since 1936. And it is not over.

I have suggested several times in past columns past that a big move in stocks would come when individual investors sold their bond holdings, gathered their courage, and returned to the stock market. That time may be upon us.

Consider that this is the fifth week in a row that inflows into domestic stock funds have increased. A total of $21.3 billion moved into equity mutual funds in January. The first week in February saw an additional $5.85 billion and last week another $9.3 billion flowed into equities.

The money is coming out of bond funds (mainly funds invested in U.S. Treasuries and Munis). As expected, the stock markets' five-month winning streak and low rates of return in the government bond markets and money markets are forcing investors back into equities. This has been my premise for well over a year.

Corporate profits are approaching record levels. The economy is gaining steam, inflation forecasts remain subdued (2-3 percent/year) and interest rates are historically low. That is what I call a "sweet spot" for making money in stocks. But the market's steady rise since the beginning of the year, with little to no corrections, has also confounded veteran market watchers. Some respected technical analysts I know have actually given up trying to predict the timing of a pullback. The truth is that a correction can happen at anytime, but so what. Buy the dip.

Consider that the U.S. market continues to rise in the face of tensions in the Middle East, soaring global commodity prices, declining stock markets in the high growth emerging markets and continued financial concerns in Europe. In the past, any one of the above circumstances has had the power to take our market down 5 percent in a blink of the eye. But thanks to "Bennie and the Fed," investors own a "put" on our market. Back in November in my column "Don't Fight the Fed" had the following explanation for why the market would continue to rise:

"The Fed is clearly telegraphing to investors that they want a higher stock market, and like unemployment and the economy, they will do what it takes to accomplish that goal. This message is behind the jump in the stock market this week. My advice to you is don’t fight the Fed. Buy stocks.”

I stand by that advice.

On another note, have you been watching the price of gold and silver? A few weeks ago I suggested that the price correction in both these precious metals was just about over. Since then both gold and especially silver have roared back to life. Silver is above $32 an ounce. It is getting closer to my target of $36-$37 an ounce, so be ready to take some profits when we reach that price level. Gold has lagged silver so far, but I believe it will ultimately narrow the lead. Nonetheless, both metals performance have been far from shabby.

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: Rebellion in the Mideast — The Internet Strikes Back

Bill Schmick

For my ally is the Force, and a powerful ally it is. Life creates it, makes it grow. Its energy surrounds us and binds us.

— Yoda, "Star Wars: The Empire Strikes Back"

Thousands, if not millions, of demonstrators are protesting their unhappiness from one end of the Middle East to the other. Demonstrators in Iran, Bahrain, Yemen, Iraq, Algeria, even Libya, have followed the leads of Tunisia and Egypt in taking their grievances to the streets. At the center of this revolutionary movement is the Internet.

You may have seen the young marketing manager of Google, the Egyptian Wael Ghonim, on television or the Internet recently. He is credited with starting the Facebook page that helped spark the revolution that ended in the demise of Hosni Mubarak, the autocrat who ruled Egypt with an iron fist for the last 30 years.

"This is the revolution of the youth of the Internet and now the revolution of all Egyptians," this hero of Egypt's revolution said in an interview with the Associated Press.

What struck me most was his sincerity, his matter-of-fact trust in the Internet and its members as opposed to his government. He believes that the Egyptian regime's biggest mistake was cutting off the country's access to the internet. I agree.

By its actions, the Mubarak government acknowledged its greatest fear and confirmed that they no longer had control of the dissemination of information. Middle Eastern regimes (among other repressive societies) have realized full well the value of propaganda and the tight control of communications. Up until the introduction of the Internet, it was a fairly easy job to control the main outlets of communication; namely print, television and radio.

Since these regimes controlled the media, only their special brand of the "facts" were allowed to be disseminated to the populace. The internet changed all that. Those who feel oppressed have access to alternative views of the facts and can decide for themselves whether they are being manipulated and exactly how that manipulation is unfolding. Since information is the foundation of any and all governments, the Internet has made it impossible for oppressive regimes to continue their monopoly on information dissemination.

Internet penetration in the Middle East remains modest at 29.8 percent, according to Internet World Stats, while Asia boasts a 21.5 percent penetration. Africa overall has only a 10.9 percent penetration compared to the U.S. at 77.4 percent. However, as in the rest of the world, penetration is growing by leaps and bounds in the Middle East (over 1,800 percent in the last 10 years). As computers and cell phones proliferate, governmental control of the traditional sources of information becomes much less effective.

Demographics are also aiding and abetting the Internet as a world force for change. In just about every country presently impacted by growing rebellion, the age of the population has been a contributing factor. The region is facing a demographic bulge in age with youth aged 15 to 29 comprising the largest proportion of the population.

At the same time, this segment of the population is bearing the brunt of the region's high jobless rates and skyrocketing costs of food. The traditional and growing disparity between the "haves" and the "have-nots" within their societies has not been lost on these young people who, for the most part, are highly educated. Generally speaking, patience is not a strong point with the youth and, in my opinion, has lost what little patience they had with the political, social, economic and religious oppression of their governments.

Let's face it, most of the Middle East is ruled by religious fanatics, dictators or corrupt kings. None of these regimes are fertile grounds for economic opportunity, the empowerment of women, or equitable access to resources and education. Unfortunately, these are all necessary ingredients if the region's leaders intend to harness the youth, a key human resource, in growing their economies.

What they (and other governments) are only now beginning to realize is that their youth is the Internet generation. It has become a part of their everyday experience, unlike those of us who have not grown up with this phenomenon. As such, the Internet has become the conscience of all societies.

Its adoption has facilitated a meeting ground where the world's angry and disenfranchised youth can band together, gather en masse, if need be, and deliver thousands, if not millions, of protestors into the streets with a simple tweet or the creation of a Facebook page. I expect unrest, rebellion and unfortunately, repression to continue so fasten your seat belts.

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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