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@theMarket: Bulls Batter the Bears
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Despite an increasing number of predictions that the market has run too far, that stocks are heading for a correction, investors still use any minor dip in the markets as an opportunity to get in. On Friday we touched 12-month highs on the S&P 500 Index while the Dow flirted with the 13,000 mark for most of the week.
It seems to me that it is time for a little profit-taking, if you haven't already. My suggestion would be to pare back on your most aggressive equity holdings and keep the proceeds in cash for now. I know that money markets are yielding next to nothing but I don’t expect your cash to sit there for long. Any correction should be short-lived and if it isn't, well, you could always put the money into something higher yielding if necessary.
There are plenty of signs that the averages are "crusin' for a brusin'" from the dissipation of volume, the continued decline in the market's breadth, to the fact that markets usually have trouble when they approach certain technical areas of resistance (like now).
Fundamentally, the rise in oil prices is a real threat to the markets. I outlined the causes for oil's rise in this week's column ("Gas Prices Going Higher"). At $109 a barrel for West Texas Crude and gasoline above $3.60 a gallon nationally, consumers are starting to feel the pressure. The higher energy prices climb, the worse the impact on economic growth. Although investors are aware of this threat, most are assuming that sometime soon (when speculators least expect it), the Commodity Mercantile Exchange (CME) will announce an increase in margin requirements.
The same thing happened last year when oil prices rose above $112 a barrel. Speculators, forced to pay much more for their short-term futures holdings in oil, gasoline and heating oil, dumped their positions, sending energy prices plummeting over night. At some point soon, something must give: either oil prices or the stock markets.
Now that Greece has largely faded from the headlines, Europe faces the aftermath of two years of a festering debt crisis. The European Union overall is now in recession with the Southern European nations suffering the worst. Most nations now face the need to reduce their deficits and are doing so with a combination of reduced government spending and increased taxes.
In Europe, it is much easier to raise taxes than reduce spending thanks to the politically difficult nature of laying off government workers or cutting back on their pensions and benefits. Of course, raising taxes and cutting spending while an economy is in recession is exactly what happened in this country in 1933, and we all know how that ended. Maybe this time will be different, but I'm not counting on that.
As I wrote last fall, the problems in Europe were blinding investors to the positive news coming out of our own economy. By October it had become obvious to me that our stock market did not adequately reflect the stronger growth in the U.S. As predicted, investors have finally realized the truth and prices now reflect the facts, so its time to take some profits.
Bill Schmick is an independent investor with Berkshire Money Management. (See "About" for more information.) None of the information presented in any of these articles 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 (toll free) or email him at wschmick@fairpoint.net. Visit www.afewdollarsmore.com for more of Bill's insights.
The Independent Investor: Gas Prices Going Higher
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Their forecasts are being extrapolated from the present price of gasoline which averages $3.61 per gallon. That is high for this time of year, since February is usually a period of low gasoline demand. You might think that this year is a bit different since the mild winter and absence of snow throughout much of the country might bolster driving. But demand nationwide is down to 15-year lows.
What has propped up oil prices so far this year is continued instability worldwide. The financial crisis and subsequent recession in Europe, which should have reduced energy demand has been counterbalanced by events in the Middle East. The real culprit in the oil patch appears to be Iran.
The world wants Iran to cease and desist developing nuclear weapons or else. In response, Iran has been threatening to close a key oil avenue through the Strait of Hormuz, if the U.S. and the EU deliver on their intent to apply economic sanctions to their country. As a result, the price of oil has been flirting with $100-barrel level over the last few months and is presently trading above $106.73 a barrel for West Texas crude. The threat of higher oil prices if Iran were to embargo Europe or the U.S. is real. Iran boasts the world's fourth-largest proven oil reserves and the world's second largest natural gas reserves.
Middle East tensions are nothing new. The oil market periodically moves up and down with unfolding events in that region. Spikes tend to be short-lived but everyone from the Fed on down pays attention to trends. What makes this situation a little different than usual is that the tensions are occurring just at the moment when the U.S. economy appears to be picking up some speed.
The last thing this country needs right now is for oil/gasoline prices to trend higher. I have written at length on how energy prices are another form of tax on American consumers. Although energy prices account for only 5 percent of our overall spending, it is spending that cannot easily be cut back. If the experts are right and gasoline prices move higher as a result of a stronger demand and the continuation of political tensions, then consumers might be paying a few hundred dollars more this summer for gasoline.
That is a lot of money when multiplied by the number of Americans driving cars, trucks, buses and motorcycles. If past behavior is any guide, consumers will fork over the extra money for gas but at the same time cut spending on other things like restaurants, vacations, and shopping at the mall. Higher energy prices will also take a bite out of profits in Corporate America. It will also mean higher prices from everything from diapers to tires as companies attempt to pass on the higher energy costs to consumers.
Unfortunately, higher energy prices are here to stay as long as this country fails to develop a comprehensive energy plan that will reduce our dependency on oil. Until then, we will remain hostage to every two-bit, oil-rich dictator or wanna-be nation that takes a swipe at us.
Bill Schmick is an independent investor with Berkshire Money Management. (See "About" for more information.) None of the information presented in any of these articles 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 (toll free) or email him at wschmick@fairpoint.net. Visit www.afewdollarsmore.com for more of Bill's insights.
The Independent Investor: Should College be Free, Part II
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My last column ended with two questions:"Does a high school education prepare our youth to enter the work force, escape poverty and become productive citizen of the economy?"
The answer to that question is a resounding no, in my opinion, which creates a problem since the purpose of public education, according to our founding fathers, was the accomplishment of those goals. I believe there is a consensus among Americans that a college education has supplanted high school as a requirement in accomplishing the above goals. In which case, colleges should be tuition-free just like most high schools.
Whether college really does prepare our future generations for "living the dream" is another issue, which leads me to my second question.
"Are we still in the industrial revolution or have we graduated into something more?"
The answer is more important to the future of education and America's place in the world than just about anything you can imagine. Most people would agree that the U.S. has graduated from an industrial revolution to the "information age," yet I believe our educational system, thanks to some historical detours, has failed to adjust to this new reality.
A tuition–free college education is an old concept in this country. Baruch College, now part of the City University of New York system, was founded as a free college back in 1847. In 1862, the Merrill Act established public universities through federal land grant. Most states opted to charge no tuition or a nominal tuition. California’s public university system, for example, which remains the largest in the nation, abolished tuition three months after it was founded in 1868.
When WW II ended in 1945, 16 million Americans (one out of eight) were serving their country in some capacity. With returning vets looking for work, many feared we were heading for massive unemployment and another Depression unless Washington did something about it. In 1944, the GI Bill of Rights was passed. It gave servicemen unemployment checks, low-interest housing, business loans and a free college education.
Nearly 8 million vets took advantage of that benefit and in the process drove the U.S. illiteracy rate to 3 percent, the lowest level in American history. It also transformed our economy, creating a massive Technocracy, while introducing the age of information.
But according to Walt Kelley, one of our readers who sent us his excellent book "Common Sense, A New Conversation about Public Education," it was the launch of the Russian Sputnik in October 1957, and our national response to that event, which set American education on a disastrous detour.
Prior to that period, only 18 percent of Americans went on to college. To meet the perceived Soviet nuclear threat, President Kennedy spearheaded a new educational strategy to answer the Russian menace. In addition to bomb shelters and the like, he argued that higher education would be key to saving our country. Kennedy exhorted an entire generation of high school graduates to go on to college and become professionals. It was, he said, their patriotic duty and would not only save America but the rest of the world as well.
Science and engineering were the main areas of educational pursuit as part of the "space race." Those who may have had the aptitude and interest to attend technical schools thought twice about it. After all, going on to college had become a patriotic duty. The federal government made it even easier to attend by supplying new federal and state loans. The number of colleges and students attending them exploded in the 1960s.
The advent of the unpopular Vietnam War (and the subsequent disillusion among the '60s Generation) brought on a whole new set of variables that once again stood college education on its head. The nucleus of the anti-war movement was centered in colleges, especially those colleges that charged little or no tuition. The ranks of student/teacher protestors swelled since college students were also exempted from the draft as were those graduates who decided to become teachers.
Given the strong anti-war sentiment among educators in general, less qualified high school graduates were admitted to colleges (thus escaping the draft) and many below-average college graduates opted for teaching rather than a stint in the Army. Avoiding war, rather than getting an education, became the driving force for attending college.
Politicians in Washington, miffed by the growing protests and civil disobedience of both students and faculty, realized that funding these institutions of higher education was at cross purposes with their own wartime policies. Ronald Reagan used the University of California's peace activists as a campaign issue in his 1966 election for governor and hiked tuitions shortly after being elected. The same kind of thing was happening in New York and other states.
As funding dwindled, tuition-free universities had no choice but to trim costs and begin to boost tuition. Teachers, feeling the squeeze on both their salaries and benefits, began to organize, forming labor unions to protect their jobs and livelihoods. The end result was an upward spiral of ever-increasing tuition costs that continues today.
A second unanticipated result was the decline in the perceived worth of teachers. Teacher unionization on a national scale led many Americans to unjustly compare teachers to similar blue-collar union members in the auto, teamsters and steel industries. At the same time, the quality of new teachers was thought to have declined as the result of the draft evading tactics of the Vietnam Era. This, combined with the poor results of the American educational system in general, gave teachers a bum rap that has continued to this day.
As the U.S. educational system continues to decline, despite the best efforts of both government and the private sector, I don't believe free college tuition will solve America's educational dilemma although it may help future generations make better career choices. In my next and final column on free colleges, we will address the broader issue of the future of education in this country. Stay tuned.
Bill Schmick is an independent investor with Berkshire Money Management. (See "About" for more information.) None of the information presented in any of these articles 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 (toll free) or email him at wschmick@fairpoint.net. Visit www.afewdollarsmore.com for more of Bill's insights.
@theMarket: Profit Taking
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As a born-again contrarian, I find when most people are leaning one way I tend to start leaning the other. If you have followed my advice and been invested in a dividend and income mostly portfolio, you should be up over 5 percent so far this year, and its only February.
Frankly, I thought the S&P 500 Index would peak out on a short-term basis at around 1,350-1,365 sometime in March of this year. Well folks, as of this week we actually came within 11 points of the top of my range. Is it time for some profit taking?
Markets never go straight up although there have been times when it appears they want to. On occasion over the last few years, stocks have been supported by the policies of central banks around the world. We are in one of those periods right now. In my last column I wrote that the Fed has given stock investors the green light to remain in the market and buy even more equities. Their easy interest rate policies, a tame inflation outlook and increasingly good numbers on the employment and economic front provide support for buying stocks.
That should come as no surprise to you, my readers, which is why you should still be invested in the stock market. All I am saying is that you should be prepared (and willing to sustain losses) during a period of profit taking sometime soon. How much downside this will cause is debatable. We could see as little as a 1 percent pullback to something more like 5-10 percent.
"But 5 percent would just about wipe out my profits for the year," said one reader recently.
No question about that, which is why those who hate to suffer the vagaries of the stock market, might be advised to raise a little cash around now. There is nothing wrong with taking a few profits here and there. It would simply be the smart thing to do, especially if you are heavily invested in aggressive stocks and funds. I still think the year overall will be positive. I just don't expect this straight up kind of market we have enjoyed since Christmas to last much longer.
Stock markets normally discount good news ahead of time. It seems to me that we have already discounted most of the good news out of Europe, the strong numbers out of our own economy, and the decline in the unemployment rate. When markets are priced to perfection (as they are now in the short term) it doesn’t take much to stall their momentum.
Friday, for example, Greece weighed on stocks as investors started to lose patience with the umpteenth round of negotiations between Greece and the EU. I noticed that the stocks that have gone up the most this year experienced the most profit taking. Although the overall averages (Dow, S&P and NASDAQ) have been up marginally throughout the week, certain indexes, like the high flying Russell 2000 small cap index, has seen profit taking. Many times the Russell is a leading indicator of things to come in the overall market.
As such, I am advising readers to add a little caution to the present euphoria by remembering the prudent investor always hedges their bets a bit.
Bill Schmick is an independent investor with Berkshire Money Management. (See "About" for more information.) None of the information presented in any of these articles 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 (toll free) or email him at wschmick@fairpoint.net. Visit www.afewdollarsmore.com for more of Bill's insights.
The Independent Investor: Should College Be Free?
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It is a debate that has occupied this country for years. Should college be free to all Americans or should we continue to pay for it? Those in favor argue it is one of our inalienable rights. Those opposed say college is a privilege to be earned and paid for in order for it to have meaning and merit.I suspect the majority of Americans who are still paying off student loans, or are already paying for a college education (or soon will be) would vote for free tuition. Who can blame them?
My daughter was born in 1980 and graduated college in 2002. During that time period, the cost of a college education increased almost 400 percent. Looking at prices today, I would say I got off fairly cheap. Americans spent almost $100 billion last year to send over 14 million students to public colleges and universities. We all know that tuition and fees continue to skyrocket, climbing 6.6 percent annually. Yet, most of us believe that going to college is essential and the key to an economic future and the American dream.
Costs differ because not all colleges charge the same. Forty-four percent of all full-time college students attending a four-year college are paying less than $9,000 per year for tuition and fees. That’s a lot of money for a family pulling in $50,000 annually. At the other end of the spectrum, roughly 28 percent of full-time students are attending private, non-profit institutions and are paying at least $36,000 annually. Those numbers do not include the cost of living, eating, school supplies and a long list of other school expenses. All but the wealthiest American families are priced out of that market.
To be fair, most students receive some kind of financial aid, usually from the local, state or federal governments. That aid amounted to about $178 billion this year. That means the average student probably received a little over $12,500 in aid and about half of that won’t have to be repaid.
When you account for all student loan programs, grants, tax breaks and such the government is already paying for almost half the tuition, so why not the rest?
Much of the debate comes down to why the government should pay for schooling at all. Critics argue that the public school system is already a disaster. Our students’ learning abilities have already fallen way behind their peers in other countries. Our high schools are becoming a breeding ground for drugs, crime and dropouts. If we allow colleges to become part of this flawed system, critics say, then we may as well call an end to the educational system in America.
It might be helpful, therefore, to explore why a free educational system evolved in America in the first place.
It was Thomas Jefferson who first suggested creating a public school system. He and others like him argued that common education would create good citizens, unite society and prevent crime and poverty. The debate raged for many years. It took until the end of the 19th century before free public education at the primary level was available to all American children.
High school was a different story. Although the first publically supported secondary school, the Boston Latin School, was founded in 1635, it was Benjamin Franklin who first saw the need for something more than a primary education. The demand for skilled workers in the middle of the 18th century led Franklin to establish a new kind of secondary school called the American Academy in Philadelphia in 1751. Once again, public secondary education was no easy sell.
It wasn't until the 20th century that high schools took off. when the majority of states extended compulsory education laws to the age of 16. From 1900 to 1996, when government began paying for secondary education, the percentage of teenagers who graduated from high school increased from 6 percent to 85 percent.
Since then the purpose of a free education has widened from Jefferson's concept of ensuring that citizens could read, write (vote) and remain law-abiding to something more. In order to escape poverty and to provide a skilled labor force for the industrial revolution, Franklin and his peers believed a secondary education was deemed to be in the national interest.
This history lesson has a point. Ask yourself two questions. Are we still in the Industrial Revolution or have we graduated into something more? And two, does a high school education prepare our youth to enter the work force, escape poverty and become a productive citizen of the economy?
For readers who answered no to the above questions, you will want to read part II of this column. Stay tuned.
Bill Schmick is an independent investor with Berkshire Money Management. (See "About" for more information.) None of the information presented in any of these articles 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 (toll free) or email him at wschmick@fairpoint.net. Visit www.afewdollarsmore.com for more of Bill's insights.
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