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The Independent Investor: Ready For a 20 Percent Correction?

By Bill Schmick
iBerkshires Columnist

As the stock market makes new highs, investors tend to get greedy. They also begin to believe that what has happened in the recent past will continue to happen in the future. Actually, history shows the exact opposite. It is time to give the potential downside some thought.

Hope burns brightly in the equity markets right now. Many on Wall Street believe that the Republican-dominated Congress, led by Donald Trump, "The working man's president," will usher in a golden era of strong economic growth and robust financial markets. The problem is that politics and investments make for strange bedfellows.

At some point, I expect that the two will part ways and when they do, look out below.

Now, with that in mind, have you given any thought to what you are going to do when the inevitable correction does occur? When your $1 million tax-deferred portfolio loses $120,000 in less than a month, will you panic and sell or will you hang in there or buy more?

This is the time to plan your strategy — not when the markets are down eight days in a row and pundits are predicting the end of the world. Many indicators I watch are predicting that somewhere up ahead, investors should expect a substantial pullback. Stock market volatility, a sure contrary indicator of market strength, has been declining for the past 15 months. The Volatility Index is at historical lows right now.

Then there is the law of physics. What goes up must come down. We are in our eighth year of a bull market. Memories of the 2008-2009 financial crises have faded. It took many investors at least five years after the crash to be willing to dip their toes back in the stock market.

Those who have done so have been rewarded. Now that many of us have our entire foot, leg and neck immersed in equities, it is time to expect some downside ahead.

Before you ask, no, I don't know when it will happen. If I did, I could retire on my tropical island where I would "buy low and sell high." That said, an exit plan, if that is what you want to do, should be percolating in that head of yours.

For most of us, however, any attempt to sell at the top will be met with frustration, lost opportunity, and in many cases, an emotional decision to re-enter the market at even higher prices. The fact is that major declines are part and parcel of investing in the stock market. Most long-term investors who plan to go to cash may succeed, at first, but they almost always fail to re-invest, or if they do, they re-invest too early or too late.

Sure, you will always hear about this guy or that woman who trades the market. The myth is that these "uber kans" almost always sell at the top, (in the nick of time) and buy back at the lows when everyone is running for the exits. Don't believe it. Rest assured that the majority of day traders who are constantly buying and selling lose more money than they make and would have made more money if they had simply stuck with the markets.

That does not mean you have to simply take your lumps, although some lump-taking should be expected and it is painful. One can always dial down your risk, become more conservative, shift your investments into more bonds etc. There are risks in that strategy.

Take the run-up to the presidential elections, as an example. Several of my clients were convinced that a Trump presidency would usher in a financial meltdown, WW III, and all sorts of evil developments. They wanted to sell everything and go to cash.

I resisted, convincing many of them to stay with the markets. Several insisted, however, that they wanted to reduce their risks and become more defensive. I obliged their requests. The results: they made about half of what they could have if they had stayed fully invested, but still made more than if they had simply exited the markets and gone to cash. Each investor must
 decide how much risk they are willing to take and act accordingly.

Before you hit the panic button, however, I see no indications that we will incur anything more than the normal sell-off. Price declines are simply the cost of doing business in the stock market, like paying taxes or insuring your home.

Neither am I predicting a decline is right around the corner. But when it does occur (and it will), be prepared. Understand and plan for it now. If you don't know, give me a call.

Bill Schmick is registered as an investment adviser 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: Health-Care Costs Are Strangling Us

By Bill Schmick
iBerkshires Columnist
Recently, none other than the Sage of Omaha, Warren Buffet, has sounded the alarm on what he sees as the number one threat to American businesses — rising health care costs. His advice is that we better do something and do it quickly.
 
While Congress bickers over how to repeal and replace Obamacare, there is still a large body of American politicians who believe we should simply return to the good old days. While they fiddle with adjusting insurer's premiums, or gutting Medicaid, the entire healthcare system surrounding them continues to burn. While they debate whether you should be responsible for your own medical insurance and how much Medicare should cover, health care costs rise at the rate of hyperinflation.
 
Our legislators and president are strangely silent on what happens to those whose employer does not provide health insurance because they can't afford it; (which is the case for many in small businesses). And by the way, small businesses happen to be the main employer of American labor.
 
They are also silent on what happens to those of us whose Medicare insurance premiums, plus uncovered medical expenses, become higher than their retirement income. Recent estimates put uncovered medical costs at $260,000 for these same retirees. Of course, there is always Medicaid for the impoverished among us. But even that program, if the House has its way, will be reduced by $1 trillion this year.
 
The politicians are focusing on the symptoms and not the cause of our health-care problems.
 
Buffet, a Democrat, in his recent shareholder meeting, took time to address what he called the real problem for American business, and it wasn't taxes. The cost of health care, he maintained now represents about 17 percent of this country's Gross Domestic Product (GDP). That's up from just 5 percent of GDP 50 years ago.
 
In comparison, corporate taxes, the supposed blain of Corporate America represents just 2 percent of GDP and that is down from 4 percent of GDP in 1960. Our country's global competitiveness has fallen, not because of corporate taxes, but because health care costs have diverted business spending from more productive uses like investing in new plant and equipment.
 
Why do Americans still pay far more for medical care than any other Western nation?
 
The U.S. ranks dead last (and has done so for 15 years) in struggling to pay for medical care when compared to other developed countries, according to the Commonwealth Fund. We, or the companies who pay for our insurance, spend roughly $9,523 per person each year on medical expenses. That comes to roughly $3 trillion/year, for a family of four, medical insurance coverage by our employers amounts to $12,591, which is up 54 percent since 2005.
 
But Buffet isn't the only one who is sounding the alarm. Bill Gates, the respected and visionary founder of Microsoft, in a TED Talk presentation last year, also warned of the devastation rising health care costs were having on our economy.
 
Wherever you look, he said, rising healthcare costs are siphoning off money that should be spent on things like education, building bridges, airports and paying down our debt.
 
Governmental and private organizations, combined, are forced instead to divert more and more of their spending to health care costs.
 
Pundits decry America's low rate of savings, but do not take into account how much of that potential savings rate is now being swallowed up by heath care costs. Economists say the typical American consumer is not spending like they used to; how can they when so much of that paycheck is now going to prescriptions, co-pays and deductibles? The truth is that whatever wage raises our workers received over the last few decades have not nearly kept pace with the hyperinflation of our medical costs.
 
I agree with both men. It is time for all of us—corporations, small business, Republicans, Democrats and Independents — to identify the real crisis in this country and do something about it. The health-care sector requires a complete overhaul from top to bottom. Forget this sparring over symptoms and not the cause. If, as a nation, we don't know how to turn the tide, there are plenty of examples among our foreign neighbors. What in God's name are we waiting for?
 
Bill Schmick is registered as an investment adviser 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: Cosmetics Survive, Prosper Despite Competition

By Bill Schmick
iBerkshires Columnist

As the clash between brick-and-mortar retail enterprises and the mighty Amazon escalates, the internet shopping colossus is laying waste to one store or mall after another. One of the few areas that has not only staved off the internet shopping giant, but has actually turned the internet and social media to its advantage, is the cosmetics industry.

There is a combination of fortuitous developments, some peculiar to the makeup industry, and others the result of adept marketing that has allowed the beauty trade to grow unencumbered. Social media, as you might imagine, has played a big part in growing an industry that has revenues of $62 billion and climbing.

For decades, women would pay a visit to their local department store, drugstore, or shopping mall and head for the cosmetics counter. They did so because most women consider makeup a necessity of life. They received a quick lesson in cosmetics application from the clerk or salesperson. At the same time, they could also see and experience these products on their own skin. The only alternative to the beauty shop was to sign up for a cosmetology class, hire a makeup artist or rely on a girlfriend who knew her way around makeup.

Today, social media has become both the new beauty counter as well as a place to show off the results. Just check out the number of YouTube tutorials available on makeup. Now that the industry can post videos on Instagram as well, industry experts can hawk their wares easily and directly, but can also show consumers exactly how a new product is intended to be used as well.

A whole new industry has sprung up around selling cosmetics on social media. There is now what are called "beauty vloggers," enterprising women who are internet businesses in their own right. Some are models or ex-models; others come out of the makeup industry and set up shop as beauty gurus.  They dispense beauty advice as well as tutorials on how to apply specific types and kinds of makeup.

Another new phenomenon is the "haul girls." These are women who take the viewers on an extreme shopping spree and explain on camera what products are "hot," while giving their opinion of the products.  Today, fully 95 percent of consumers looking for beauty products will search out YouTube first. Some of these beauty mavens have millions of subscribers and can make or break a brand. In the beauty business, influencers like these vloggers and haul girls carry a great deal of weight.

And with the popularity of posting photos on Facebook, Twitter and other social media, more and more women don't want to be caught "naked" when it comes to makeup. That simply fuels more and more demand for cosmetic products.

While women use social media today for cosmetic instruction and to learn about the latest products offered, many still need to "test-and-trial" as the industry calls it. Video is fine, but how do you really know what that new blush or nude lipstick is going to look like on you? Buying many cosmetic products online is tricky. The subtlety of shades and colors abound and once it arrives in your mailbox, it is too late.

Unlike clothes or that DVD player, cosmetics, once opened, cannot be returned. This becomes problematic, especially at some of the price points these products command. Sure, some products that a woman will use over and over again can be ordered over the internet, but styles and new developments in cosmetics change rapidly.

That's why testers and samples are a large part of any brick-and-mortar beauty store's inventory. Many, if not all, of the basics undergo a revamp every so many years, so most women will check out the newest offerings on a fairly regular basis. And even your most hard-bitten internet buyer will succumb to buying a new product, especially after using the free consultation or makeup classes offered by these beauty centers. Unlike other industries, the beauty store still manages to deliver an "experience" as well as a place to buy products. Remember too, that there are no seasons in makeup, it has year-round fashion demand.

Discounts are also not high on the list of cosmetic company marketing tactics. Prices remain relatively stable, which is anathema to what usually occurs to a product once incorporated into the Amazon fold. So far, few, if any, of the luxury beauty brands have developed relationships with the internet giant. For now, the beauty business is thriving despite Amazon, and they hope that continues, at least until they can build their own e-commerce presence.

Bill Schmick is registered as an investment adviser 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: Only The Rich Are Saving

By Bill Schmick
iBerkshires Columnist
Last quarter, the  percent age of Americans' personal savings rate stood at 5.9  percent of their disposable income, according to the Bureau of Economic Analysis'. Given that number had fallen to as low as 1.9 percent in 2005, that's a large improvement. But who is saving and who is not is the real question to ask.
 
Our savings rate is clearly higher than it used to be relative to other countries. It is nowhere near the Chinese savings rate of 38 percent of 2014, for example, but it has improved to the point that we are now somewhere in the middle of the pack when looking at the 35 member countries of the Organization for Economic Cooperation and Development.
 
But before we break out the champagne in toasting our newly-thrifty nation, you might want to understand that it is most likely the top 10  percent  of households who are responsible for the lion's share of this improvement. Given that income inequality is at historically high levels in this country (comparable to what they were during the American Revolution), an argument could be made that the "haves" in this country are so rich that they can't spend it all.  And so they increase their savings rate.
 
We do know that as late as 2013, the bottom half of income earners saved little to no money. In 2015, a Pew Charitable Trust study indicated that 41 percent of households had less than $2,000 in savings and 25 percent of us had less than $400 on the side. After the financial crisis, there was some hopeful news for the common man on the credit card front. Debt had fallen every month from 2010 to 2015. However, it appears that is now reversing. At the end of last year, Americans had racked up $1 trillion in credit card debt, an all-time high.
 
The problem in America, according to many behavioral experts, is that we allow our lifestyles to dictate our savings rate, rather than the other way around. "Keeping up with the Joneses" is still alive and well throughout the country, as is the need to acquire the newest, most eye-catching devices or convenience.
 
To many of our citizens, our  country "owes" us a living while we have an inalienable right to spend as much money as it takes to make us happy. Bottom line: 21 percent of working Americans are saving nothing and just 28 percent of us are saving more than 10 percent of our incomes, according to Princeton, Survey Research Associates.
 
In survey after survey, 38 percent of consumers say that the main reason they don't save is because they have too many expenses. To be fair, some of their expenses may no longer be under their control. If you already had a lot of debt, for example, whether it is a home mortgage, college tuition, medical or credit card debt, a certain amount of expenses must be earmarked for these past liabilities. There may not be anything left to save. But it doesn't give us license to keep spending more.
 
Procrastination is the second biggest reason for not saving. Over 16 percent of Americans admit that they simply haven't gotten around to it. And the younger they are, the higher the number of non-savers.  Younger respondents also argue that they don't make enough money to save.
 
The good news may be that the unemployment rate is at record lows and wage growth is improving after years of stagnation. As a result, an outside observer might come to the conclusion that this should allow more people to save more, but this is America. 
 
The question to ask: will Americans save it or spend it? If modern history is any guide, I'm betting on the latter.
 
Bill Schmick is registered as an investment adviser 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: World's Bread Basket No More

By Bill Schmick
iBerkshires Columnist
The recent controversy over dairy trade policies between the Trump administration and Canada is only the tip of the iceberg. While Trump is selectively picking on one particular product, the truth is that the United States is losing its competitive advantage in many areas of agriculture.
 
Government subsidies to the agriculture industry worldwide have always been a thorn in the American side. That's not to say that our farmers have gone without. We, too, subsidize our farmers. Taxpayers are expected to pay at least $87 billion to help farmers over the next dozen years. And for decades, we have been spending billions each year to protect them from lost income and crop failures.
 
The difference between then and now is that, despite other countries' farm subsidies, we were still No. 1 worldwide in a great variety of food stuffs. So we didn't care as much. Today this nation's market share for commodity such as wheat, soy beans and corn are shrinking rapidly. Exports of wheat, for example, have declined by over 50 percent since the 1970s, while countries like Russia have expanded wheat production by over 60 percent in just the last 10 years. As a result, Russia now dominates global wheat production.
 
And Russia is not alone. Countries in South America, specifically Brazil and Argentina, traditional agriculture countries, have also increased production, thanks to investment, technology, year-round growing seasons, and new planting methods. Four years ago, Brazil overtook the U.S in soybean exports (now the world's largest exporter) and will be the second-largest corn exporter after the U.S. this year.
 
How did Brazil accomplish it? Brazil embarked on its agricultural expansion forty years ago. The government enticed farmers to develop vast sweeps of unproductive lands in the north (called the Cerrado) where today over 500 million acres are now growing crops for exports.
 
There are any number of reasons why we are losing market share, but a lot simply has to do with increased worldwide production. For example, if U.S. crop production remains the same, while other countries produce more, then our market share slips. At today's prices for wheat, for example, American farmers are expected to plant 10% fewer acres this winter season because it is less profitable. Other countries will be happy to take up that slack.
 
And then there is the strength of the greenback. The U.S. dollar has been stronger than both the Russian and Brazilian currencies. Since most crops are priced in dollars, it makes our exports more expensive compared to theirs. Lower energy costs has also helped our competitors because it is now much cheaper for an Eastern European exporter like Ukraine to ship wheat between Europe and the Middle East and still make a profit. It is a similar situation wherever you look.
 
And don't think that our foreign competitors are still farming with wooden hoe and bags of apple seeds. State of the art satellite-guided combines, genetically-engineered seeds from the top global producers, and computer programs that can dictate the price of harvested crops months in advance are all tools of the trade now.
 
What could change this balance would be some kind of natural disaster somewhere outside of the U.S. to turn our competitive position around in the short-term. Over the longer term, as costs in competitor countries for labor and land begin to climb, and the worth of the dollar falls back to earth, our comparative advantages should help us regain market share. However, the day when we could call America "the bread basket of the world" appears to be in our rear view mirror.  
 
Bill Schmick is registered as an investment adviser 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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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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