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The Independent Investor: When Your Broker Doesn't Want You Anymore

By Bill Schmick
iBerkshires Columnist

Across the nation, various financial institutions, affected by the new "fiduciary" rules issued by the Department of Labor, are making some tough decisions. Don't be surprised if your broker informs you they can no longer manage your company's 401 (k) or other defined contribution plan.

This happened to one of our clients just this week. The couples, both self-employed, had used one of the nation's largest brokers to house and manage their money purchase plans at their companies. A money purchase plan, for those who don't know, is like a pension plan where employees make contributions based on a percentage of annual earnings. This is standard stuff along with profit-sharing plans, 401(k) s and the like. Corporations use these plans as fringe benefits to reward and encourage retirement savings for owners, managers and employees.

All of the above are tax-deferred savings plans and as such fall under the Department of Labor's new rule (starting in April of this year). The rule requires financial professionals who give advice on retirement accounts to act as fiduciaries for their clients. This means they must act in their client's best interests ahead of their own financial gain and that of their company's. They will be required to disclose their compensation and any conflicts of interests as well.

In our case, since we are already fiduciaries, we were able to swiftly transfer both the husband and wife's accounts (worth over $1 million each) to our care and expertise without skipping a beat. We expect that as more brokers and insurance companies come to grips with these new responsibilities toward their client base, we will receive more calls like this.

As you might imagine, most financial services firms are not going to be advertising their decisions to dump you and your corporate accounts. Some, however, are upfront about these changes. For example, State Farm Insurance, which has sold investment products through their 12,000 agents since the early 2000s, will no longer use that model. Instead, they will have a self-directed call center that will make information and other resources available to customers, but they will have to make their own decisions regarding investments.

Mega-broker Edward Jones announced that they will limit access to mutual funds for retirement savers in commission accounts as well as reduce investment minimums to comply with the new rules. I have the feeling that more of these kinds of announcements, as well as letters and phone calls to clients, will happen with increasing frequency as the deadline approaches.

For corporate accounts, this couldn't happen at a better time. More and more disgruntled employees, unhappy with the performance and fees of their company's retirement plan, have pursued litigation to recover what they claim are exorbitant fees and poor performing investments. The DOL fiduciary rule gives the corporate manager or owner the opportunity to transfer their tax-deferred retirement accounts to companies that are already fiduciaries and have thrived under the responsibility of putting their client's interests first. That way, they and their employees can be sure that the investments and fees that are charged are always in their best interests.

Note: Several weeks of Mr. Schmick's columns in January & February disappeared into the ether on their way to iBerkshires. They are being back posted to the dates on which they should have appeared.

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. 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: Markets in Good Shape for Now

By Bill Schmick
iBerkshires Columnist

As the equity markets continue to consolidate around record highs, investors wait for the presidential hand-off on Jan. 20. This could turn out to be the best thing that could happen for the bulls.

Remember readers, there are two kinds of corrections; the kind we have been experiencing for the last three weeks, and the nasty kind that no one really wants to go through. The longer we back and fill, the greater the chances that the next move will be higher.

The caveat, of course, is that investors' expectations will be satisfied, once Donald Trump and Congress get down to work. That could be a big if. So far the only thing the press, the politicians and Donald Trump appear to be engaged in is a discussion on whether or not the Russians tried to hack the DNC and/or RNC. No one has said they got away with it.

Come on people, why are we wasting time on this subject? Ask yourselves how many times the United States government has actively or surreptitiously interfered with another country's election results? My God, American legislatures and presidents have actively condoned all sorts of black ops, bribery and election rigging in other countries for as long as I have been alive. In return, every other country does the same thing with varying success. It is what countries do.

The repeal of Obamacare was the other, more substantial, topic of conversation this week. Note, I use the word conversation, as opposed to any action or concrete proposal, from those who want to trash the Affordable Care Act. As I have written in the past, I expect some of the good parts of that bill to remain in effect. Early indications are that GOP legislators feel the same way.

The initial legislation was never meant to be the end-all or the final version of America's stab at universal health care. The problem was no one in Congress, after the first two years of the Obama reign, was willing to do anything to improve the original legislation. Now, the Republicans are willing to do something. I say it is about time.

Do I really care what name they call it, or if it is done via the public or private sectors?  As long as the GOP makes health insurance more affordable for Americans, I say go for it. Protect our kids and oldsters, while including more and more people into a safety net of health coverage and I'm fine with it. From an investing point of view, the health care sector is one area that I see value right now.

Big Pharma and biotech have been sold off by investors fearing the worst from politicians. Both Clinton and Trump promised to somehow get a handle on drug prices if they were elected. And now, thanks to the attack on Obamacare, the whole health care system could be up for grabs. No wonder investors have shunned those areas. They may be right. But I'm willing to take a chance that, regardless of outcomes, our health care sector will flourish in the future.

This is coming from a 68-year-old investor who has seen the inside of hospitals four times in two years. My knee replacements alone cost upwards of $100,000 and I'm only one patient in a booming business.  Anyone want to bet on how many more times I will be visiting doctors, nurses, or taking prescription meds before I join those ghost riders in the sky? Demographics dictate that more and more Americans will be accessing health care in the years ahead. Bet on it, because the trend is your friend, regardless of whatever tinkering the politicians may do.  

I am starting out this year as a buyer of stocks, especially on dips. It is too early to say whether my bullishness is going to last longer than, say, the first half of the year. There are just too many headwinds--interest rate hikes, stronger dollar, Trump and the Congress--for me to predict anything more than a comic book ending to 2017. All or any of the above could squash the market like a bug, but those issues will take time to work out. In the meantime, there is hope, and an investor base that so far views the cup as half-full. Let's ride that sentiment.

Note: Several weeks of Mr. Schmick's columns in January & February disappeared into the ether on their way to iBerkshires. They are being back posted to the dates on which they should have appeared.

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. 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: Gyms Are Counting on Your New Year's resolution

By Bill Schmick
iBerkshires Columnist

Barbara Schmick tries out her new Peloton machine. While she's likely to keep going, most exercise resolutions fall short.

It's that time of the year again when people like me hate people like you. January is the month when all those good intentions to get healthy and fit translate into a 12 percent bump in health club memberships. If only all those Americans who join gyms this month would stick with it.

Sadly for them (but not for me) all those good intentions dissolve by the end of the first quarter. The health clubs of America get back to normal by March. Actually, 4 percent of new members won't make it past the end of January and 14 percent drop out by the end of February. Well over half of new members will fade by the end of the quarter.

The gym owners have no problem with that. They assume that only 18 percent of new members will hang in there and use the gym regularly. You see, the idea of fitness (as opposed to actually doing it), is extremely popular here in America. We all know that, regardless of our good intentions, the population of unhealthy and overweight Americans grows larger all the time. Over 70 percent of Americans are overweight, according to the latest statistics.

That leaves the fitness industry with a practically inexhaustible pool of potential buyers of their services. Statistics for 2016 indicate that worldwide revenues in the health club industry grew to $81 billion. Over 151 million members visited nearly 187,000 clubs.  As you might expect, the U.S. leads all markets in club count and represents about 55 million memberships. Brazil and Germany are our runner-ups. But health club memberships are also strong in both the Middle East and in the Asia-Pacific region as well.

Some researchers believe that the health & wellness industry will top $1 trillion at some point soon. Of that total, the lion's share of sales will continue to be in the beauty and anti-aging products sales, followed by fitness and exercise and then eating, nutrition and weight-loss sales. Worldwide, the industry is already clocking in at $3.7 trillion and growth is expected to accelerate by 17 percent in the next five years.

But let's get back to trends in fitness. My gym is what you would call a big box facility — lots of equipment for weight training and cardio. It has a couple of personal trainers, locker rooms and showers and that's about it. Membership dues are $10 a month. You can't beat that, especially when you consider I come from Manhattan where yearly memberships can easily cost you $65-$80 a month for comparable amenities.

High-end clubs, like Equinox in New York City, command a multiple of those prices. Unlike my gym, the beautiful people in high-priced facilities lounge around the pool, check their make-up in the club's nutrition center mirror and, on occasion, perspire, but at an acceptable level.

Yet, smaller niche gyms are also gathering a following. These gyms focus on specialty fitness programs that concentrate on a particular style of exercise, piece of equipment (think Pilates), or even a philosophical approach, such as yoga.  

One new twist in this niche market is combining home exercise, while utilizing state-of-the-art internet, and other variables to deliver a customized experience in your living room. This Christmas, as an example, I surprised my wife, who is an avid runner and gym rat, with a subscription plus equipment purchased from a fast-growing, specialty fitness company specializing in spinning.

I reasoned that she needed another cross-sport as an alternative to running. The problem for both of us is that between lifting weights, running, hiking with the dog and other fitness-related activities, we don't have that much spare time available on any given day, thus, a home program that could be done whenever we had the time.

The company, called Peloton, offers an at-home spin class with live instructors accessed via an electronic screen attached to the bike. All classes are recorded in their NYC studio (which Peloton owners call "The Mothership." They also offer an inventory of pre-recorded classes including great simulated bicycle rides through majestic scenery worldwide. Via the internet, the member can socialize with other club members, interact with the trainers, compare notes, and even compete depending upon one's interests.

The membership, spinning bike and accessories were not cheap, but that's what makes me such a great husband. My wife tells me that this company and others like it are growing by leaps and bounds. I don't doubt it.

In any case, even though my gym will be crowded over the next few months, I urge you to join. I am a firm believer in daily exercise and the older you get the more important it becomes. Who knows, maybe we will bump into each other on the elliptical machine and trade stock ideas?

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 inquiries to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

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@theMarket: Stocks Bump & Grind Toward Christmas

By Bill Schmick
iBerkshires Columnist

No surprise that stocks took a break this week. Profit-taking from the election rally has been the main theme over the last few days for investors and could continue through the New Year.

As traders desert their desks for holiday shopping (present company included), volumes have petered out as world markets experience a consolidation. Remember readers that markets can correct in two ways: a sharp sell-off or this kind of sideways movement.

Frankly, give me a good old consolidation anytime. They may be boring, but sharp declines, especially around the holidays, makes for unhappy investors and can ruin the office Christmas party. I am actually relieved that we have had the Santa rally a little earlier this year.

Over the last two weeks I warned investors not to chase the Trump rally. Greed has given way to common sense and another week or two of consolidation might relieve a large part of what I see as "overbought" conditions.

This week, U.S. investors did receive some good news. The economy actually grew by 3.5 percent, which was the fastest rate of growth in over two years. The third-quarter results were fueled by strong consumer spending, higher food exports, and a revival of investment spending.

Of course, the Obama Administration will get no credit for the facts that unemployment is at historical low levels, GDP growth is finally revving up and wage growth is starting to climb.

The new administration will take credit for this revival in investor's minds. The same thing happened in reverse when President Obama took office eight years ago.

George W. Bush left the Democrats with an economy in shambles, a financial crisis that rivaled the crash of 1929, and ultimately an unemployment rate north of 10 percent. Naturally, investors blamed the new guy for the old guy's mistakes. Well, nothing is fair in politics.

The reason I am bringing this up, however, is to ask the question -- how much of the "Trump rally"  should be attributed to the Donald's election and how much is simply a reflection of a turn in the economy that has been going on for the past few months?

Why, you might ask, is this important? Most pundits are crediting last month's market gains to Trump's elections. What if the gains were simply a celebration of a new-found strength in the nation's economy? It would make the levels in the stock market reasonable, especially if investors expect more good news in the future.

Of course, the future is a lot less predictable now than it has been in the past. We still have no idea how many of the president-elect's initiatives are going to bear fruit. In the meantime, the markets are being supported by the existing strength in the economy and a new-found "animal spirit" based on Trump's campaign promises.

But there are a lot of questions in my mind concerning some of those promises. Let's take the tax cuts that just about everyone is convinced are just around the corner. Tax cuts to investors, by definition are positive. But will corporations benefit from a 15 percent tax rate or a 20 percent rate? The difference is substantial, and exactly what will the fine print mean for various sectors?

What sectors will gain the most or will every corporation benefit equally? Will capital gains taxes be cut as well, and if so, by how much? Throw questions about the estate tax, individual income taxes and changes in both corporate and individual tax deductions (like mortgage deductions) into the mix and you may have some unexpected surprises. No one knows.

Then there is all this talk about a huge infrastructure program. Metals and mining stocks as well as cement, copper, steel, and God knows what else have doubled or tripled in the expectation that all these materials companies will benefit from trillions of dollars in government spending. Re-building the nation's highways, hospitals, schools, bridges, airports, electrical grids, etc., were certainly part of Trump's campaign promises, but the timing and method of spending is open to question.

Trump has said in a post-election New York Times interview that infrastructure spending won't be a core part of the first few years of his administration. He also admitted that a New Deal-type program would not sit well with the traditional Republican ethos. That's not to say he won't fulfill his commitment, but it might be so far in the future than the present prices of material stocks justify.

What we do know is that the new president will be unorthodox in his approach to many of the nation's problems. He may very well cut corporate tax rates and at the same time take steps to eliminate corporate cronyism. He may get his infrastructure plan, but convince the private sector to foot the bill, instead of government. He has already showed his penchant for deal making via Twitter.

The point is that the best may lie ahead of us, but attempting to discount the future without the facts is dangerous at best. Fortunately, the growing strength of our economy has less to do with Trump, I believe, and more to do with the policies of the past, especially those of the Federal Reserve Bank. To me, the future looks promising under a new set of Trump initiatives and should be reflected in higher levels in the stock market going forward. I would use any pullbacks in the months ahead as buying opportunities.

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 inquiries to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

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@theMarket: Has Santa Claus Come & Gone?

By Bill Schmick
iBerkshires Columnist

The rally continued in the stock market as investors abandoned bonds and bought stocks hand over fist. Many think the best is yet to come, since the traditional end-of-year Santa Claus rally is still ahead of us.

However, between now and then, we have the Federal Open Market Committee meeting next Wednesday. The bond market is betting on the following: that the Fed Funds rate is raised by one quarter of one percent, and the FOMC meeting minutes indicate that the Fed may raise rates two more times in 2017. Anything more than that would be hawkish and most likely cause the stock market to correct. That happened last year and cut short the Santa rally.

If the Fed's actions, on the other hand, are in-line with expectations (or even more dovish) the chances are stocks will continue to rally and so will bonds. Although most investors focus almost entirely on the stock market, which has soared since the election, few realize the devastation that is occurring in the bond market.

I have continually warned bond holders that someday they would face Armageddon. It seems to be happening now. During the past three weeks, investors sold over $2.7 trillion worth of bonds. Almost a like amount of money has found its way into the stock market. But I suspect bonds are due for a relief rally fairly soon.

Aside from the upcoming Fed event, one must also look at the nature of the Santa Claus rally. Usually, investors sell stocks during the first two weeks of the month. It's called "tax-loss selling" where investors establish capital losses to offset gains that they may have booked during the year. This usually depresses stock prices across the board. After the selling abates, investors then buy back stocks during the last two weeks and into January of the following year.

This year, however, that has not occurred and with a good reason. Investors expect that under the Trump administration, the capital gains tax will be lowered giving them an incentive to hold on to their stocks until 2017. Given that behavior, stocks might be getting bid up now only to see disappointment in the last two weeks of the year.

The S&P 500 Index has already exceeded my target for the year (2,240). It is now 10 points higher at 2,250, which is a nice round number. There are some traders who believe that we can climb even higher. Some say the Dow could reach 20,000 (another round number) before the end of the year. Certainly, since we are only a few hundred points from that mark, there is nothing stopping investors from chasing stocks higher.

To me that's pure gravy.  I had been expecting a mid-single digit return for the market and year-to-date we have gained a little over 6 percent. Close enough for government work. So what to do between now and the end of the year?

Sit tight and enjoy the fireworks. In the very short term anything can happen.  If we don't have a pullback in December, chances are we will have one in January, but not to worry. I expect that the stocks will continue to have an upward bias at least through the first 100 days of Trump's reign.
 

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 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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