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@theMarket: Say It Isn't So
By Bill Schmick On: 04:37PM / Friday June 14, 2013
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So far June is playing out as expected. Stocks are see-sawing in a trading range that is driving day traders crazy. Hopefully, you are not one of them.

This week was almost a carbon copy of last week. For two weeks in a row the averages tested the 1,600 level on the S&P 500 Index and then bounced higher. That was also the level where technicians predicted the market would find support (at what is called the 50-day moving average).

Don't worry; I'm not going to get all technical on you. It is sufficient to note that buyers stepped in at the same level that they did last week. And that is understandable since there really is no reason to go much lower than that. I have been looking for a mild pullback in the 5-7 percent range and that is exactly what we are getting.

If you have been reading my columns, you know that the Fed has provided the excuse the markets needed for this decline. As such, all eyes will be focused this coming week on the central bank's FOMC meeting. Investors are hoping for some clue or hint among the meeting minutes to gauge whether the Fed's intention to taper their stimulus program has firmed or weakened.

Tell me you're not leaving
Say you changed your mind now
That I am only dreaming
That this is not goodbye
This is starting over
If you wanna know
I don't wanna let go
So say it isn't so."

— Gareth Gates


I believe the markets are misinterpreting the Fed's actions. Nonetheless, the fear that the Fed plans to decrease the level of stimulus, if only modestly, is having a damaging effect on interest rates. In addition, investors are now wondering if the Fed's commitment to keep interest rates low, at least until the unemployment rate declines to 6.5 percent, is in jeopardy as well.

All sorts of interest and dividend yielding securities from U.S. Treasury bonds to preferred stocks have seen a downdraft in prices as a result. In the housing market, mortgage refinancing has dried up as 30-year mortgage rates hit 4 percent.

This is not what the Fed expected, in my opinion. They have acknowledged that in the past their on-again, off-again quantitative easing programs caused an uneven recovery in the economy and volatility in the markets. For the Fed, the trick is to wean the markets off central bank stimulus without causing the same results. That is easier said than done.

To be fair, the Fed has already accomplished some truly stupendous results over the last few years. They have kept us out of another Depression and initiated an economic recovery, even if it is slower than we would have liked. Their stimulus efforts in the financial markets have succeeded in recouping all of our stock market losses and then some. The housing market, which triggered the financial crisis, is a much bigger problem. But even there we are seeing a rebound as a result of their efforts

What would help would be stronger economic growth. A few back-to-back quarters of plus 3 percent growth would re-focus investors away from Fed stimulus and back where it belongs on the free market economy. Unfortunately, this grand central bank experiment is like any experiment. There is a lot of guess work involved. If, for example, the Fed were to wait until after one or two strong quarters of growth to taper, there is a risk that inflation could spike. That would force the Fed to ratchet up interest rates and torpedo the economy altogether. If they act now, they risk slower growth or even a recession.

As for financial markets, it is understandable that the Fed wants to inject some uncertainty back into the markets. Uncertainty is a key ingredient in investing. If investors believe the Fed will always have their back in the form of more and more stimulus, then investing becomes a one way street. It can create a bubble in stock prices just as easily as it created a bubble in the housing markets over the last decade.

So as much as we would all like to hear the Fed say it isn't so, we need to be aware that at some point in the future they are going to take away the punch bowl.

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: A Taste of Things to Come
By Bill Schmick On: 04:34PM / Thursday June 13, 2013
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If you are a bond holder, the last few weeks may have come as a shock. Ever since the Fed raised the possibility of tapering their stimulus program, interest rates have spiked higher. For the first time in years, bondholders actually saw bond prices decline. Get used to it.

If you are a baby boomer, the price declines in all things that yield interest or income since May 22 might have you wondering what happened to your "safe" investments. All our professional lives we were told that bonds were "safe" for "conservative" investors, widows and orphans and for those among us that find the stock market too risky.

That was sage advice, if somewhat misleading. For the last 31 years, interest rates have been declining. As a result, bond prices have moved steadily higher. It wasn't that bonds, as an asset class, were without risk. It was simply that bonds were in a classic bull market. From 1982 to 2012, for example, the average annualized return of U.S. intermediate-term bonds have been 8.82 percent. In contrast, the S&P 500 Index had an annualized return of 11.14 percent.

So while we were telling ourselves that we were being conservative, in actuality we were riding a wave of speculation betting that interest rates would decline further and further and forever. Well, reader, the buck has stopped here. Interest rates can't go any lower. Nor is the natural order of things for interest rates to remain at historical lows forever. Something had to change and in this case it is the Fed.

The U.S. 10-year Treasury note is the interest rate most investors rely on as a benchmark. The rate on that security has spiked from 1.67 percent to 2.27 percent in 22 days. Some traders believe it will climb to 2.50 percent before it takes a breather. In the meantime, everything that provides some kind of interest or dividend payment has been clobbered in price. U.S. Treasury bonds, foreign bonds, both sovereign and corporate, U.S. investment grade and high yield bonds, even preferred stocks and other dividend paying equities have experienced a downdraft in price.

As a result, there has been a general outcry of dismay from legions of supposedly "conservative" investors. They are suddenly discovering that their money-making investments of three decades actually carry risk, specifically interest rate risk. As interest rates rise, bond prices decline. However, not all bonds prices decline at the same rate when interest rates rise. But right now, investors are not in the mood to differentiate which bonds (or stocks) they should hold and which they should sell. It is a classic case of throwing the baby out with the bathwater.

In hindsight, dividend and interest bearing securities have been in a bit of a bubble over the last year or two. Last year, for example, preferred stocks outperformed common stocks registering gains of as much as 17 percent. That is way above normal for a conservative investment. Junk bonds have been on a tear as well, gaining more than many common stocks over the last several years. Dividend paying stocks have had similar results.

Common sense would dictate that these defensive investments should not be outperforming their more aggressive brethren. I suspect that the prices of these securities, bid up to unrealistic levels over the last months, are simply coming back to earth.

It is understandable that, after three decades of gains, many bond investors have been lulled into believing that conservative and safe meant that, although the rate of interest they received from their fixed income investments could decline, the prices they paid for these investments would always be immune from any downside. It is true that if you bought that 5, 10, 20 or 30-year bond at the initial offering price you will receive the par value of that bond at the end of its life.

But between now and then, if interest rates continue to rise, get ready for some volatility that could makes the stock market look tame by comparison.

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: Rising Interest Rates Spook Markets
By Bill Schmick On: 03:24AM / Saturday June 01, 2013
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Over the last month, the interest rate on a 10-year, U.S. Treasury note has risen half a point. That may not sound like much in a market that has seen nothing but declines in Treasury yields for years, but investors fear it is simply the start of something big.

By now readers should know that we are in the ninth inning of a thirty year bull market in U.S. Treasury bonds. Everyone (including me) has been warning investors to liquidate their Treasury bond holdings. It is a case of when rates will rise (not if). No one knows exactly when that will happen, but why wait around until they do?

But many bond investors have stubbornly refused to listen. They are driven by fear. They are convinced that stock markets will retest their lows of 2009 on the back of another deep recession or worse. Clearly that has not happened yet (but “yet” for some is still the keyword).

However, as the economy continues to climb, unemployment falls and the Fed stimulates, more and more investors are re-thinking their safe-haven investments. It is the reason gold sold off so dramatically this year and, in my opinion, the same thing is beginning to happen in the Treasury market.

May's spike in interest rates, however, has more to do with misplaced investor concerns that the Fed will begin to taper off its monthly bond purchases as early as June. They fear that with less Fed buying, bond prices will decline and interest rates will rise. This month that has become a self-fulfilling prophecy. I think any talk of tapering off is premature at best and at worse, simply an excuse to take profits in both the stock and bond markets.

I do believe, however, that at some point the Fed will gradually reduce its buy program based on two factors: a stronger economy and a lower unemployment rate. Neither factor is anywhere near a level that would prompt the Fed to withdraw its stimulus even slightly. And when they do, it will be a good thing and no reason at all to sell stocks or even certain kinds of bonds.

Corporate bonds, for example, both investment grade and high yield, do quite well in an atmosphere of rising U.S. Treasury interest rates caused by stronger economic growth.  In that environment, rising rates simply signal a more benign environment for corporations, which have less risk of bankruptcy and are better able to make their debt payments. For corporates, it is virtually the "sweet spot" for investment gains.

Many investors fail to understand that. They have been selling perfectly good, high yielding corporate bonds needlessly. So, by all means, cash in your Treasuries but keep your corporate bond investments. Sure, at some point, when interest rates rise enough, all bonds will be impacted but that time is still a year or two away.

As for the stock markets, this week was uneventful. We are entering the summer period where not much can be expected to happen. It is a period where Wall Street moves to The Hamptons or up North to the Berkshires. Hopefully, the markets will take the summer off as well. We are in need of a pause, one that will ultimately refresh this aging bull.

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: Retirement, Who Can Afford It?
By Bill Schmick On: 03:09PM / Friday May 31, 2013
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Most Americans' retirement savings are under $25,000. That's old news. The new news is that with Social Security in jeopardy, medical costs skyrocketing and the chances of living longer better than ever, how do you expect to retire in the years ahead?

The short answer is most of us won't. But no matter how long you intend to remain on the job, at some point your legs, knees, back or brain will give out, whether you like it or not. For many baby boomers that time is right now, just when the politicians are telling us the country can’t afford to continue funding Social Security and Medicare. It isn't fair but those are the facts.

Honestly, this boomer generation has had its share of "retirement derailers," a word coined by Ameriprise Financial in its survey on the causes behind the retirement crisis in America. Their survey discovered that 90 percent of Americans, ages 50-70 with at least $100,000 of investible assets, have experienced at least one economic or life event that has gutted their retirement savings.

The average person, however, has had four such traumas. Loss of a job, recessions, stock market declines, periods of low interest rates and lifestyle changes such as supporting a grown child or grandchild are some of the derailers that the survey listed. Other causes listed were making bad investments, taking Social Security before retirement age and disappointment over the worth of pension plans.

Remember, too, that the Retirement Derailers Survey polled those with substantial retirement savings compared to the majority of American savers. The Employee Benefit Research Institute found that 57 percent of Americans have less than $25,000 in household savings and investments (excluding their home and pension benefits). Only half of those polled could raise $2,000 in cash if there was an unexpected emergency. Lessons that many older respondents learned such as saving earlier in their lives, acquiring more knowledge about investment and spending less on vacations and extras seem to be falling on deaf ears

Given these well-known facts, one might have expected the rate of the nation's savings would increase but actually the opposite has occurred. The percentage of people reporting that they are saving more for retirement has declined from 75 percent in 2009 to 66 percent today. Have we given up on saving?

That's the conclusion of a recent report by the Deloitte Center for Financial Services. They found that 60 percent of pre-retirees are convinced that future health-care costs will eat up their savings no matter how much they stash away.  In addition, almost 40 percent believe that investment returns will never be high enough to afford even the simplest retirement no matter how much they save.

One wonders if these polls would have a different result if taken in a growing economy with full unemployment and a robust stock market. Although the economy and unemployment leave much to be desired, the stock market is at record highs. The average 401(K) retirement balance for U.S. workers also hit a record high in the first quarter, up 75 percent since March, 2009. Workers, 55 and older, did even better. Those pre-retirees have seen their average balance nearly double to $255,000 from $130,700 back in 2009.

But those are the exception, not the rule; there are millions of Americans who do not even have an IRA, let alone an employee-sponsored savings plan. If the majority of Americans think at all about retirement, they mistakenly assume that Social Security is the retirement plan of the nation. Unfortunately, it is at best a supplemental program to years of private savings of which most of us have none. If ever there was a Black Swan event lurking in the future surely this would be one.

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: What Happens If You Can't Afford Obamacare?
By Bill Schmick On: 05:13PM / Thursday May 23, 2013
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We have all been inundated with the pros and cons of Obamacare. It has become so ubiquitous in our daily lives that most of us have simply tuned it out. We can't afford to do that much longer.

As most readers know, Obamacare, formally named the Patient Protection and Affordable Care Act, will become the law of the land on Jan. 1, 2014. However, as early as October of this year, a new way of buying health insurance will be available to consumers through an online insurance marketplace. So decision time approaches.

But what about all those who have no health care and believe they can't afford to buy it? What do they do? There have been times earlier in my life when I was unemployed. I could barely afford to feed and house myself let alone worry about health insurance. Besides, I was young, healthy and felt I would live forever so what did I need to shell out a couple hundred dollars a month for unnecessary insurance?  Fortunately I had no family at the time. If I had, I would have been in a real bind.

So I can understand how many of us look at this national health care scheme with anger and even fear. After all, the law says that if we don’t join up and obtain healthcare we are going to be fined. What many lower and even middle income families fail to understand is that there is help out there. All we need do is ask.

At last count there are nearly 26 million Americans that could be eligible for a health insurance subsidy, but few know enough about the provisions of the health care act to apply. I'll keep it simple. If you are a member of a working family with annual earnings between $47,100 and $94,200, you will most likely be able to apply for a subsidy. Over a third of those eligible to apply will be between ages 18 and 34 years old. Anyone who is not a member of a government health insurance program (Medicare or Medicaid) and does not have access to an affordable plan at their work place can apply to the government to help pay their premiums. These subsidies will be paid directly to the insurance companies, so there are no out-of-pocket expense requirements.

Starting in October, we will all be able to buy insurance through one of the state-run online health coverage exchanges with health coverage beginning in January. You will be able to choose between four levels of coverage: platinum, gold, silver and bronze. Each of the four plans will offer different premiums and out-of-pocket expense charges.

So let's say you are a family of four earning $94,200 a year and buy a silver premium plan. Preliminary estimates project that such a plan would cost $12,500, but that number could be higher or lower depending upon where you live. The government would pick up $3,550 of that. The exact amount depends on your actual earned income. The idea is to make sure that all individuals pay about the same percentage of their income for health insurance.

For those of us who already have insurance, you will have to decide whether to keep your existing plans or buy insurance on the online exchange. Naturally, you will be able to choose the provider you want based on who offers the most attractive package in terms of affordability and coverage. For all of us, be prepared for mistakes, misunderstandings and some confusion but that is no reason to stick your head in the sand. We are only three months away from making some important decisions so start paying attention.

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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