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@theMarket: Labor on Their Mind
By Bill Schmick On: 07:55AM / Saturday August 23, 2014
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It is that time of the year again when the world's central bankers gather together in Wyoming to sort out the economic conditions of the global economy. This year most bankers will be looking at labor growth, or lack thereof, and what to do about it.

In this country we have seen some surprising gains in the employment picture this year despite a less than stellar economic growth rate. Unemployment has dropped from above 7 percent to 6.2 percent in less than a year. Fed officials are somewhat pleasantly puzzled by that performance. FOMC members are watching things like how many part-time jobs are being filled versus full-time positions. They are also looking for hints of wage growth and under what circumstances it is rising. Some members have their fingers on the interest rate trigger advocating a raise sooner than later, while others urge a wait-and-see attitude.

Janet Yellen, our Federal Reserve chairwoman, kicked off the Jackson Hole, Wyo., event, with an address to the central bankers and the press. She urged a pragmatic approach to policy when dealing with the labor markets. Using the unemployment rate alone to guide monetary policy is too simplistic, she argued. Although the jobless rate has declined, there are still millions of Americans who can't find jobs or have only been able to land part-time work with no benefits. Even more have given up looking for work, discouraged after years of trying to find a job.    

Then there is the trend toward retirement by this nation's Baby Boomers. Two hundred and twenty-five thousand Americans turn 65 every month. In 2010, for example, only 10 percent of that demographic age group was retired. Today, that number has reached 17 percent and is climbing. Nearly 25 percent of all Americans born between 1946-1964 are planning on retiring in the years ahead. How does that impact our idea of full employment when calculating what are structural unemployment (essentially permanent) issues versus cyclical issues?

Yellen presents a good argument. It is a fact that the unemployment rate does not account for part-time workers, discouraged workers, retiring workers and shifts in the nature of the economy. If we have jobs that are going unfilled because the nation lacks workers with sufficient skills and education to do the job, then that is a structural issue. The same is true when dealing with the growing number of Baby Boomer retirees.

No amount of interest rate declines and stimulus money is going to dent a structural issue. In which case, it would be time to raise interest rates early and sooner than the markets expect. Anything the Fed says that implies that we are approaching an unemployment rate that is bumping up against "structural" problems then (as far as the markets are concerned), look out below.

On the other hand, if keeping rates lower for longer would generate more economic growth and therefore more jobs (cyclical employment) then investors would like that. It would mean the markets still have a green light to make new highs and continue the rally based on a zero interest rate policy. Therefore investors were content to hear that the Fed will be taking a "pragmatic" approach to the labor markets.

As long as easy money is on the table, the markets will continue to go up. It also means that the cottage industry of Fed watchers that have sprung up over the past five years will continue to try and out guess what the Fed will do next. Of course the Fed has no idea what they will do next (the pragmatic approach) but we will continue to read and listen to the pundits anyway.

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: Financing ISIS
By Bill Schmick On: 05:26PM / Thursday August 21, 2014
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Outgunned, outmanned and outfinanced, terrorists should be logically on the losing end of any combat engagement. And yet,   they exist and sometimes flourish despite the odds. Much of their success can be attributed to cash, the life blood of any army, and their increasingly sophisticated method of raising it.

Terrorists today would like you to think that they thrive because their cause is just. It plays well with the foreign media but the truth is that they have developed a sophisticated global fund-raising system that utilizes everything from Internet appeals to directly tapping into some country's defense budgets.

The Islamic State of Iraq and Syria (ISIS) is a great example of how modern terrorism finances revolution. Take their recent rape of Syrian resources. ISIS targeted and captured Eastern Syria because that's where the nation's oilfields are located. In the name of revolution, the conquerors were soon exporting oil to the world and spending the proceeds on munitions.

Like locusts, ISIS minions then spread out throughout Syria gathering up and smuggling out of the country antiquities and other treasures for even more money. In just one Syrian region alone, they netted $36 million by selling a boatload of 8,000-year-old relics. But it was in Iraq where they really hit the jackpot.

As town after Iraqi town was annexed in their drive toward, Baghdad, the capital, ISIS rolled up an increasing cache of money, supplies and American-made equipment including arms, ammunition and assorted vehicles. In invading Mosul, Iraq's second-largest city, their operatives pulled off the largest bank heist in modern history, netting the group over $400 million. Most experts believe ISIS has amassed roughly $2 billion in their war chest while continuing to write a new page in terrorist fund raising.

ISIS has also expanded the use of the Internet. They have learned the value of social media from groups such as al Qaeda. They are now using various internet sites to raise awareness and contact individual donors. Those who contribute are kept informed of their donations at work via progress reports on special operations, body counts and new advances by revolutionary fighters.

Funny enough, ISIS owes its existence to America's allies in the Middle East. Specifically, Saudi Arabia, Qatar and Kuwait have been funneling donations to the group in their bid to blunt the resurgence of Sunni-led forces in the region. They have argued that the U.S. failure to oust Assad, Syrian's strongman, left them no choice but to support those forces in Syria that could oppose the regime.

The Sunni-Shiite sectarian war has forced almost all the countries in that region into feuding religious camps. The U.S. objective of promoting peace and stability in the region is definitely on the back burner among these nations. The terrorists have tapped those sentiments and developed a financial pipeline through Turkey or Jordan into Syria that is worth hundreds of millions in donations, especially from Kuwait.

Kuwait, where this kind of activity is still legal, acts as an assembly point for money throughout the Gulf States from charities, religious groups, fund raisers and even raffles. The effort is so widespread that U.S. officials have charged that their country's minister for justice and Islamic affairs is a major terrorist financier. It appears to make little difference to that government or its people.

So in a roundabout way, our energy dependence on that region has spawned much more than higher prices at the gas pump. It has and still is oil money that supports terrorists, whether we are fighting ISIS, al Qaeda or a hundred other militant groups. The longer we wait to gain energy independence, the longer the problems of terrorism will continue to plague us.

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: Geopolitical Risk Trumps Economic Growth
By Bill Schmick On: 04:04PM / Friday August 08, 2014
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The front page of most newspapers on Friday featured at least three hot spots around the world that has investors worried. None of them may be anything to worry about over the long-term, but over the next few weeks they have the potential to drive the stock market lower.

You may ask, why now? After all, the situation in Ukraine has been going on all year. Turmoil in the Gaza Strip has been a reason for concern for far longer. The Iraqi Shiite/Sunni fighting has plagued us for months. About the only new threat that has arisen over the past two weeks has been the occurrence of a number of cases of Ebola Virus. So why have investors suddenly decided to embrace these concerns as a reason to sell stocks?

Investors need a reason to sell and so does the media. Simply selling because the market's price levels have gone too far or because we haven’t had a sell-off in a while are simply insufficient reason for most of us, we need an excuse to sell and now we have them.

Don't get me wrong; the world is a mess right now. As I wrote yesterday in my column "Beware the Russian Bear," the situation in the Ukraine is fraught with danger. The escalating embargos that are flying around between the EU, the U.S. and Russia certainly have the potential to hurt global growth. President Obama's decision to authorize air strikes in Iraq is clearly a new development, while financial problems among the Portuguese banks have soured investors on

While geopolitical risks move to the front burner, the economy, unemployment, wage growth and what the Fed is going to do about it have receded to the back burner. Interest rates continue to drop, despite the end to quantitative easing in October. The employment gains are accelerating, forecasts are now around a 3 percent growth rate for U.S. GDP in the third quarter while corporate earnings, for the most part, appear to be growing even faster than expected.

But, remember, the stock market and the economy are not the same thing and therein lies an advantage to profit. Right now (and possibly over the next month or two), the stock market will remain volatile with a downside bias. I would expect the S&P 500 Index to re-test its 200

day moving average (DMA) which is at 1,861 or so. That’s another 2 percent-plus down move from where we are now. It may take several days or even weeks to get there.

Usually, the market will bounce at that point. Nothing says that bounce will be sustainable and in most cases will result in disappointment and another re-test of the 200 DMA.

What happens next will depend on how investors handle the decline. Usually, declines end in a bout of panic selling; something we have not seen yet. We could easily go lower than the 200.

Some perma-bears are calling for a 20% correction depending on who you read. Right now, I would say those forecasts are a bit extreme. Maybe half that amount is where I stand.

But remember folks, we are talking about paper losses. The growing economy will provide a cushion of support for stocks. This could actually turn out to be a great buying opportunity for investors in the weeks ahead. At the beginning of the year, I forecasted a 5-6 percent gain in the S&P 500 Index for the year. I don't see any reason to change it. I believe next year will offer much better gains, so keep your powder dry and wait for lower prices. You won't be disappointed.

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: Beware the Russian Bear
By Bill Schmick On: 05:05PM / Thursday August 07, 2014
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Twenty-thousand Russian troops are massing along the Ukraine border. Wednesday, in retaliation for another round of Western sanctions, Vladimir Putin imposed sanctions on certain U.S. and EU imports. And yet the markets barely registered the event. Are investors a bit too complacent?

Price action in the stock market would indicate that global investors believe both sides are bluffing. Putin is simply playing a game of chicken, pundits contend, betting Europe and the U.S. will blink first. They seem unperturbed that the hardware being deployed by the Russians on the Ukrainian front could roll back all the hard-won gains of the Ukrainian government over the past few weeks in a matter of hours.

As for Putin's economic trump card — an embargo of energy exports to Europe this winter — no one believes it will happen. And here's where financial people, especially free market types like those who reside on Wall Street, sometimes get it wrong. They believe that no one would shoot themselves in the economic foot simply for political gain.

Russia makes $1 billion a day from its natural gas and oil exports to the EU. The Russian economy is on the brink of recession after 15 years of strong growth driven by higher commodity prices. GDP is slowing from 0.9 percent in the first quarter to a forecasted 0.5 percent in the second. Inflation is rising, now 7 percent, and so is unemployment. Given the economy's weakened state, the sanctions imposed by the West are having a negative effect.

Its common knowledge that Europe depends upon Russia for a full third of its energy needs. It is also true that Russia's economic growth depends upon its energy exports, which accounts for over 50 percent of all exports. An embargo would hurt Russia far more than it would hurt Europe.

So, from a financial perspective, it would make no sense at all for Russia to shut off Europe's supply of energy this winter. The problem with that logic is that Putin, backed by a cadre of hardliners, does not necessarily believe that economic concerns should be their number one priority. Recent history proves this fact.

Back in the winter of 2006, during Russia's ongoing energy squabble with the Kiev government, they shut off gas supplies. Putin ordered another Ukrainian energy embargo in January, 2009. That one severely curtailed energy supplies throughout eighteen European countries. Some nations reported major drops or a complete cutoff of energy supplies at the time. The EUs distress was simply collateral damage from the Russian's point of view in its dispute with the Ukraine.

As for the argument that Putin would not dare to push too hard, give the state of his economy, investors have an extremely short memory. In the summer of 2008, the Russian economy was weakening as well, but it didn't stop Russian troops and tanks from over-running Georgia. Putin simply blamed the resulting economic weakness on the American financial crisis.

Today, things are different. The majority of Russians approve Putin's actions. During this crisis, unlike the 2009 gas embargo, the EU is not only supporting Ukraine, but also levying sanctions on Russia as well. Annexing the rest of the Ukraine, after getting away with swallowing up the Crimea, would be a logical next step from Putin's perspective.

Given all of the above, I am far less confident than the majority of investors that this conflict will go the way we expect.

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: Why Some Corporations Are Leaving America
By Bill Schmick On: 10:01PM / Friday August 01, 2014
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In recent weeks, politicians and concerned citizens alike have decried the growing number of corporations that have opted to renounce their citizenship and move off-shore. Rather than simply playing the blame game, a better approach might be to examine the underlying cause for this growing exodus. 

Taxes, as you might imagine, are the crux of the matter. It is true that U.S. corporations pay the highest tax rate in the world at 35 percent. It is an often-quoted statistic but not entirely accurate. The effective tax rate is more like 25 percent when all the deductions and allowances are accounted for. Nevertheless, that number is still high and many corporations fear it is going to grow larger in the years ahead.
 
The United States also insists that companies pay that same rate on income that was made overseas by its subsidiaries and repatriated home. In comparison, many countries tax only domestic profits, (those that are made in-country) while ignoring profits made overseas in countries like Ireland where tax rates are much lower.
 
As a result, some companies have resorted to a legal maneuver in which they merge with a foreign company or declare that its U.S. operations are now owned by its existing foreign subsidiary. By taking advantage of this tax loophole, a company can then shift reported foreign profits outside of American tax jurisdiction. As a result, they are only paying taxes on profits that are made in the United States. The rest of their worldwide income is repatriated to their new legal address in their new foreign domicile with little or no tax burden.
 
This is an especially appealing option to many technology and drug companies because much of their profits are derived from intellectual propriety like patents. If they transfer those patents overseas (and they do) a major portion of their profits becomes tax free. 
 
To be clear, these companies are still paying taxes here. They are not moving jobs or production overseas. They are free to keep their top executives in the United States and most do! Bottom line these so-called “inversions” are nothing more than a change of address, a new mailbox that now resides in a foreign country. 
 
Despite the furor these inversions have caused, we are not talking about many companies. Only 41 U.S. corporations have reincorporated in lower-tax countries since 1982, including 12 since 2012. Eight more are planning to do so this year. The U.S. Treasury estimates a decline in tax revenues of some $17 billion over a decade. That’s not much. What worries the politicians is that the pace may be quickening despite the Internal Revenue Service’s attempts to discourage the trend.
 
Senator Dick Durbin is working on a measure called the “No Federal Contracts for Corporate Deserters Act,” which will prevent inversion companies from benefiting from federal contracts. Others have resorted to name calling and deriding these companies as unpatriotic.
 
There is an argument that what made these corporations great was their ability to benefit from the things our government has provided - patent protection, our legal system, education, training, infrastructure, research and our ability to defend their interests from others in time of strife.  And now they are turning their back on us in the name of higher profits?
 
There was a time when we could have explained away this attitude by reminding Americans that corporations are nothing more than economic animals driven solely by the profit motive. However, the Supreme Court changed all that when they declared corporations “individuals” with the same rights and responsibilities as humans. Should we therefore expect a new level of loyalty and good citizenship from these newly-minted citizens?
 
Clearly, our tax code is a mess. In order to remain competitive in this global marketplace, this country needs to adjust corporate and individual taxes at some point. However, we all know a tax overhaul is impossible given the present state of congress. As such, we should expect more of these inversions in the future as companies fend for themselves in the absence of action by our government.
 
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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