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The Independent Investor: Brokerage Business Not What It Used to Be

By Bill Schmick
iBerkshires columnist
Last week, Charles Schwab, the mega-discount broker, disrupted the brokerage industry yet again by dropping its per-trade commission rates for U.S. and Canadian stocks, exchange traded funds (ETFs), and options for both mobile and internet trades. It was inevitable and simply recognizes what the future holds for that segment of the financial industry.
 
Since Schwab's announcement on October 1, three additional big brokers — TD Ameritrade, E-Trade and Fidelity Investments — have thrown in the towel leaving only Vanguard (among the big houses) left out of the zero-commission trend.
 
The stock market reacted in shock. Traders hit the sell button on their computers sending the brokerage stocks down in double-digit losses. E-Trade, for example, fell 17 percent on the announcement. Many pundits predicted the end of the brokerage business, but those forecasts, in my opinion, were based on an antiquated notion of where the brokerage business is actually heading.
 
The internet and the introduction of smart intelligence has changed financial services forever. Personally, I cannot remember the last time I actually called a broker to place a trade. It is all done through the internet now, so why should I be paying Schwab (or anyone else) $4.95 per trade?
 
I'm not the only one who must have felt this way. The recent success of upstart retail brokerage businesses such as Robinhood, which promises commission-free trading, social media, cryptocurrencies, etc., was not lost on Charles Schwab. Neither were the offers by more serious competitors like Bank of America's Merrill Lynch and JPMorgan Chase that are offering free trading on a limited basis.
 
So how can Schwab, or any of the other discount brokers, make money when they aren't charging commissions? The answer is simple. Commissions mean less and less when it comes to the bottom lines of most brokers. Most of us still have an image of a three-piece business suit, tasseled loafers and cufflinks when the word "broker" is mentioned, and I am sure there may still be some of those dinosaurs left out there in some corner office or another.
 
However, nowadays, it is more likely than not that the markets move too fast to dilly dally on the phone with a broker, or worse still, to waiting on the phone listening to Muzak while the stock skyrockets past you (or is dropping like a rock). Since just about all trading is done electronically, (by people in hoodies and sandals) the costs of executing those trades have dropped too.
 
Sure, cutting most commissions will hurt the bottom line, but not nearly as much as you think. The way brokers make money today, for the most part, is using the cash in your account until you need it. They invest the money in whatever high-yielding instruments they can find for as long as they can. It is called net interest income and last year Charles Schwab, for example, made 2.6 percent on average from doing so. That may not sound like much, but it amounted to $5.8 billion or 57 percent of the company's total revenue. Investment management and administrative fees accounted for only 32 percent of revenues. Commissions, trading and such accounted for the rest. 
 
Throughout the financial services sector, commissions, fees, and other charges are shrinking as more and more retail and institutional clients demand a better deal. As electronics and automation increasingly become the lion's share of the services provided by the financial industry in the future, investors can expect to see this trend continue.
 
Bill Schmick is registered as an investment adviser representative and portfolio manager with Berkshire Money Management (BMM), managing over $400 million for investors in the Berkshires.  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 inquiries to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

 

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@theMarket: An October to Remember

By Bill Schmick
iBerkshires columnist
October is certainly living up to its reputation. This week, we witnessed a more than 1,000-point decline in the Dow Jones Industrial Average before recovering at the end of the week. Behind the volatility: worry over a slowing economy.
 
On Thursday morning (Oct. 3,2019), the Institute for Supply Management (ISM) announced that the non-manufacturing index hit a three-year low. This was on the heels of earlier negative news from the manufacturing sector. The Institute said that sector had experienced its worst contraction since 2009 with the index falling to 47.8 percent from 49.1 percent in September.
 
Economists and traders alike already knew that manufacturing was in a recession as a result of the global slow-down brought on by the U.S. trade war. They were hoping that the weakness in manufacturing would be contained and not spill over into the overall economy. Thursday's data shot a hole into that theory.
 
Consumer spending, as readers are aware, is the end-all, be-all to the U.S. economy. Therefore, any weakness in the economy, investors fear, could translate into job cuts, lower or static wages, and a subsequent drop in consumer spending.   This would deep-six the economy. And the consumer can change sentiment on a dime. If the consumer lacks confidence in the future, an economy can go from moderate growth to near recession in a couple of months.
 
As such, all eyes were on Friday's non-farm payroll report. Economists were expecting job gains of 147,000. Instead, jobs totaled 136,000, while the official unemployment rate (only politicians and the uninformed care about) dropped to 3.5 percent, which was the lowest rate in 50 years.
 
Although the job gains were a somewhat disappointing shortfall in expectations, it was the average hourly earnings that Wall Street focused upon. They came in little changed from last month at 0.4 percent — better than many feared. With a collective sigh of relief, the markets rallied, recouping much of the damage wrought in the beginning of the week.
 
However, all is not as it seems. Much of the job gains were fueled by government jobs and not the private sector. While the strike by GM workers influenced the numbers, it appears that there is less enthusiasm in hiring among U.S. corporations.
 
Clearly, there has been a down-shift in job growth this year but given the string of employment gains that date back to 2011, a fall-off in growth is to be expected. The trick will be to continue to grow the economy enough to fuel continued wage gains (and therefore consumer spending) but not too much, or we could trigger an uptick in inflation.
 
It is why I think the president's demands that the Federal Reserve Bank cut interest rates a full percentage point would be an unmitigated disaster. Far better that he focus on getting a trade deal with China. If that were to happen shortly, a huge weight would fall off the global economy, which would likely fuel growth both here and abroad, and make further interest rate cuts unnecessary.
 
As it stands, the two nations resume high-level trade talks next week in Washington. Two weeks later, the Fed meets again. The recent negative economic data has brought forward the market's hopes and expectations that the Fed may cut interest rates again by 25 basis points at the end of the month (instead of waiting until December).
 
I warned readers that October would be volatile. This first week has been a doozy! I also forecast that we would be trapped in a trading range until an outcome on the trade deal becomes apparent. If Trump continues to stall, or ups the ante on tariffs, or worse, breaks off talks again in another temper tantrum, the outcome would be fairly predictable. It would be an October to remember.
 
If, on the other hand, Trump believes he needs a "win" to counter the slowing economy and the impeachment inquiry, then even a half-hearted deal might be in the cards. In which case, we could see a 10-15 percent move higher in the averages. Don't you just love politics!
 
Bill Schmick is registered as an investment adviser representative and portfolio manager with Berkshire Money Management (BMM), managing over $400 million for investors in the Berkshires.  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 inquiries to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.
 
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The Independent Investor: Markets Bogged Down by Politics

By Bill Schmick
iBerkshires columnist
Recently, financial and economic events have taken a back seat to politics. Whistleblowers, United Nations speeches, White House tweets, and the on-going trade wars seem to be moving markets far more than unemployment or earnings reports. Is this simply a short-term phenomenon, or is something else happening that is becoming a longer-term trend?
 
As readers are aware, over the last three years, financial markets have been increasingly governed by what is happening in Washington. At first, markets keyed off big developments like the tax cuts and what they would or would not accomplish from an economic point of view. From time to time, markets would also focus on the possibility of infrastructure spending, or a new health care plan for the country.
 
However, as the months wore on, more and more of the market's ups and downs were dictated by the trade war, the Russian investigation, and recently, the mid-term elections. The time horizon for investors, given the uncertainties of politics, has become shorter and shorter. That happens to work out well for the high-speed, computer-driven trading platforms of Wall Street. Those "Algos" now represent upwards of 80 percent of all equity trading on any given day.
 
As an example, if you were to track the markets' moves last week, based on political developments, as CNBC and other financial news outlets did, you would see an extremely high correlation between politics and market moves. The president's comments and tweets on Chinas, his speech at the United Nations Assembly, and House Majority leader Nancy Pelosi's news conference on the launch of an impeachment inquiry against President Trump by the Democratic-controlled House, impacted all sorts of financial instruments.
 
Trading in currencies, bonds, stocks, commodities, even commercial credits gained, and lost value based on political events. It is almost as if the tried and true market determinants — the strength of our economy, prospects for inflation, earnings data, and the unemployment rate — are secondary, at best, to the drama in Washington. 
 
Last Friday, the president and his cabinet seriously considered forcing the U.S. financial exchanges to de-list Chinese companies on their stock exchanges. In addition, Trump is considering placing controls on U.S. citizen's ability to invest in Chinese markets. This week, he is slapping tariffs on European goods ranging from single malt scotch to French wine.
 
Is the new normal? Are we entering an era where financial markets are no longer governed by fundamentals, but instead by governments and the whim of politicians?
 
A lot of people would like to blame the present government interference in the economy on Donald Trump, but the transition from free markets to what I believe is a nascent form of corporate socialism predates the Mad King. The truth is that government in this country has taken a larger and larger stake in what we still like to think of as our free market economy. It has been happening for years right under our noses, but we can't see the forest through the trees.
 
The fortunes of the health-care sector, for example, are an area where politics and government are in the front seat, while earnings and growth are almost an afterthought. The banking sector, as a result of the Great Financial Crisis of 2008, is another sector that has felt the heavy hand of government. And then there is the myth of the American farmer and rancher, stalwart symbols of free-markets and capitalism, whose homesteads and businesses have been subsidized by massive government doles for decades.
 
Today, we are focused on the trade war and the severe impact it is beginning to have on global growth worldwide. What we fail to see is that these tariffs are also moving more and more of the country's economic control of the markets and its pricing mechanisms from the private sector to the Federal government.
 
"Big Brother" is now deciding on an almost a daily basis, what products will be exempted from tariff controls, and which will not. How are these decisions being made and by whom? These decisions have an enormous impact on the cost of goods sold and even more on the companies that produce them.
 
This week, we placed tariffs on some European products, such as single malt-scotch whiskey and French wines. Do you really think a Scotch or fine wine drinker will switch to an American whiskey just because of a tariff? And why are Italian wines and olive oil exempt?
 
And like a socialist (or communist for that matter) economy, the government is now dictating which companies will be protected (compensated) because of the impact of tariffs. Why are the nation's farmers, who are largely U.S. mega-cap corporations, given taxpayer money, but the manufacturing sector is not?
 
The manufacturing sector is suffering deeply from the trade war where business has dropped back to a 10-year low. Who is deciding that farmers deserve more help than manufacturers? How is controlling prices, deciding who benefits (and who does not) any different from what a communist or socialist state would do?
 
The point is that while Wall Street rants and raves about an Elizabeth Warren or Bernie Sanders socialist presidency, much of what they fear is already happening right before our eyes. As it is, we have already become a society where nearly every Orwellian prediction in the book "1984" has come to be. We have passively allowed our government to monitor our every movement, conversation, or phone call — all in the name of protecting us from another "9/11." On the economic front, it's the trade war and Trump. When are we all going to wake up?
 
Bill Schmick is registered as an investment adviser representative and portfolio manager with Berkshire Money Management (BMM), managing over $400 million for investors in the Berkshires.  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 inquiries to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

 

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@theMarkets: Markets Muddle Through

By Bill Schmick
iBerkshires columnist
As we close this quarter, investors are having a hard time deciding what the stock market’s next move will be. Since the future appears murky right now, equities are trapped in a tight trading range. Will we break out? And, if so, in which direction?
 
For the bulls, we are tantalizingly close to breaking out to all-time highs, but every time we do, something happens to spoil the parade. The bears, on the other hand, believe the markets are fraught with risk and should be sold. Both sides have a good case, but that decision is going to be made elsewhere, specifically, in Washington, D.C.
 
You would have to be marooned on a desert island not to know the events that have transpired this week in the political arena. From the speeches and meetings early in the week, to the bombshell announcement by the Democrats of a presidential impeachment inquiry, one could accurately describe the week’s events as tumultuous.
 
However, in this debate, I am going to side with the bulls simply because of how well the markets held up under the news. Make no mistake, the threat of impeachment is real and here to stay and, in my opinion, will be with us through the 2020 election. Like the Mueller report, it will take on a life of its own, spreading out and around looking for dirt. And in Washington, it is not difficult to find dirt, especially in a swamp.
 
Look for the controversy to impact the trade talks. Why would the Chinese want to cut a deal with a president under the cloud of an impeachment inquiry? Why not wait and let the Democrats do the work of undermining Trump’s standing and authority? Of course, they could get a deal on their terms, if Trump feels exceptionally vulnerable.
 
Impeachment is yet another blow to expectations that a trade deal will happen anytime soon. As a result, despite economic data to the contrary, the bears will be expecting our economy to falter further. Talk of "Recession 2020" will once again gather momentum. That will lead to rising expectations that the Federal Reserve Bank will need to save our faltering economy and the stock market with more interest rates cuts. You see where this is going?
 
I wonder sometimes, if we couldn’t actually talk ourselves into a recession. It seems that on all fronts, there is indecision. Investors are divided on the prospect of recession, on a trade deal, on whether the Fed will cut rates again in October or maybe December. Is it any wonder that the markets are locked in this trading range with so many unanswered questions?
 
If we now throw in the circus of impeachment, is there any chance that we can carry on and push stocks higher?
 
Well, yes, actually, there is. Have I not just described one humongous “Wall of Worry”? And what happens to stocks in that kind of environment — against all odds, equities usually climb higher. 
 
We could get a trade deal, simply not the deal Trump wants, but one that is good enough for government work. The Fed could back-stop the economy again with one more rate cut, which, in my opinion, would be more than enough to satisfy everyone, at least into next year.
 
As for impeachment, I have enough faith (may be a poor choice of words) that Trump is adept at covering his bupkis in just about any circumstance from paying off prostitutes to obstructing justice. Why should something as nebulous as an impeachment inquiry slow Donny down? 
 
Now that we are heading into October, be prepared for some volatility. It is a notoriously bad month for stocks, although not always. If the markets get tripped up on any of the above concerns, look through them. This too shall pass. Stay positive and stay invested.
 
Bill Schmick is registered as an investment adviser representative and portfolio manager with Berkshire Money Management (BMM), managing over $400 million for investors in the Berkshires.  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 inquiries to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.
 

 

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The Independent Investor: India's Bid for More Trade

By Bill Schmick
iBerkshires columnist
India's Prime Minister Narendra Modi is aggressively pushing for a greater share of global trade now that its neighbor to the north (China) is squabbling with the United States. In doing so, India is hoping to regain some economic momentum, kick-start employment, and reverse its slowing economy.
 
For those readers whose knowledge of India is limited to the next Bollywood musical, India's economy has been in the doldrums. It is still growing at a 5 percent clip, which may sound high to some, but it is at the lowest level in six years. The country's unemployment rate is presently at 8.19 percent, versus 6.27 percent last year.
 
Despite the poor performance of the economy, Modi was re-elected last year with an even larger majority. He is the leader of the largest political party on the planet, the Indian People's Party (BJP), with 180 million members strong.  Modi is considered by most to be a populist and in the same camp as President Trump when it comes to the economy and in his anti-Muslim "Islamophobia." 
 
But India, which was one of the largest and fastest growing economies in the world, has been hit by the global downturn in manufacturing, as well as depressed agriculture and basic materials prices. As a result, consumer spending has slowed, and given the country's population (1.36 billion), that downturn is a big problem. The U.S-China trade war, however, has opened up a new opportunity for India.
 
Vietnam, as my readers are aware, has been the biggest winner so far from the fallout of between the U.S. and China. As international companies abandon China to escape U.S. tariffs threats, they have looked to Vietnam as an alternative center of operations. It is business friendly, offers low tax rates, and has a fairly efficient labor force.
 
This trend has not escaped other countries in the region. Since most observers in Southeast Asia believe that there is no end in sight to the trade wars, several countries are doing what they can to entice some of that business their way. India is one of them.
 
Last week, Prime Minister Modi surprised the financial markets by announcing a $20 billion tax cut for domestic corporate taxes from 30 percent to 22 percent. In one fell swoop, India has gone from having one of the highest business tax rates in Asia to one of the lowest. In addition, he promised that companies formed after Oct. 1, 2019, will only pay a 15 percent corporate tax rate.
 
In addition, most economists in India expect India's central bank to cut interest rates again next month in what appears to be a coordinated fiscal and monetary effort to spur the economy. But Modi is leaving nothing to chance. It is therefore no accident, in my opinion, that he appeared alongside Donald Trump in Houston last Sunday.
 
As 50,000 voters of Indian descent filled a sports stadium, the two leaders heaped praise on one another. For Modi (who also had a private meeting with Trump at the United Nations), he is hoping for help in wooing more American companies to move from China to his country. For Trump, Indian voters in the U.S. are a growing political force. They have historically voted for Democrats, but generally, many Indian voters are business-minded and have  benefited from Trump's business tax cuts, and just might be ripe to switch sides, especially with an endorsement from a popular politician from back home.
 
Indian investors have so far approved of Modi's latest moves, sending their stock markets up almost 7 percent since the tax cut announcements last week. It is too early to say whether Modi's tax cuts will work any better than those of Donald Trump in growing India's economy.  In the case of the U.S., corporations used the tax cuts to buy back stocks, pay extra dividends, and generally enrich those who had investments in the stock market, which went to record highs. If Modi's tax cuts produce the same result, you might want to look at the Indian stock market.
 
Bill Schmick is registered as an investment adviser representative and portfolio manager with Berkshire Money Management (BMM), managing over $400 million for investors in the Berkshires.  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 inquiries 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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