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The Independent Investor: Should You Be Worried About October? |
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Bill Schmick On: 03:59PM / Thursday September 29, 2011 |
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A common perception on Wall Street is that October is the worst month of the year for the market. It is true that the month has historically failed to provide stellar returns, but it is actually September that deserves the title of the worst market month of all.
The good news is that September is over. Does that mean we can look forward to better times ahead? Well not quite; we still have to deal with October, which like March, is usually a month that begins like a lion and ends like a lamb as far as selloffs are concerned.
 So what makes investors so fearful of October? It might be because October has ushered in some auspicious dates of calamity beginning with a 12.8 percent plunge in the Dow on Oct. 29, 1929. In today's markets, a 12 percent plunge doesn't feel like a big deal but back then it was substantial and it didn't stop there. The market went on to lose 90 percent of its value and usher in the Great Depression.
Then there was the stock market crash of Oct. 19, 1987. That was my first of many encounters with stock market meltdowns throughout the world. Fortunately, it was a short, sharp decline and the U.S. markets recovered quickly.
And how could we forget October 2008? It was the worst month for the S&P 500 Index, NASDAQ and the Dow in 21 years. Global equities lost $9.5 trillion that month and it was the most volatile 30 days in the S&P 500's 80-year history. We registered the most down days in a single month since 1973.
Actually, despite these gruesome statistics, October historically turns out to be the seventh-best month to own stocks, tied with April, putting it in the middle of the pack.
September, on the other hand, is the bad boy of the calendar year. It holds the record for most miserable month as far back as 1929. If we look even further back in history we discover the root cause of September's stock market underperformance.
Back in the day, much of 19th-century American commerce consisted of East Coast purchases of newly harvested crops from the South and Midwest regions for sale to the rest of the country. September was harvest month so bankers and other investors would borrow large sums of money from Wall Street, temporarily pushing up interest rates while redirecting money flows away from stocks and into the bond market. This would also coincidentally push down prices in the stock market that month.
Although money flows have long since been regulated by the Federal Reserve for events like the planting season, the tradition of down Septembers persist. Since 1959, the S&P 500 Index has declined an average of 0.9 percent in September. In the first two years of a presidential term, the performance is a bit worse. Overall, investors have suffered the most double-digit losses in that month as well.
In today's world, other concerns might explain September's continued poor performances. There is the "back to work" phenomenon, which occurs just after the Labor Day holiday. Many investors typically take the summer off and when they come back are disappointed to find that their portfolios gained little during the summer months. They lose patience and sell.
One reason for that disappointment may be that a company's earnings for the year have not met the expectations of the market. The normal end of June, early July, quarterly earnings announcements oftentime disappoint. What may have seemed a reasonable expectation by company management at the end of the prior year may not be a reasonable estimate by mid-year for a variety of reasons. The company's stock price may decline or simply mark time temporarily. Many investors won't want to hang around for yet another earnings disappointment at the end of September, so they sell ahead of earnings season.
This year, September has certainly lived up to its reputation with the averages declining almost 5 percent overall while volatility has skyrocketed. The bottom line is that if September is usually the month when crashes occur, then October is the month that ends them. Since September is over, the good news is that we have weathered the worst and if history is any guide, the future should be a bit better.
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 e-mail him at wschmick@fairpoint.net . Visit www.afewdollarsmore.com for more of Bill's insights.
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@theMarket: Highway to the Danger Zone |
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By: By Bill Schmick On: 08:19PM / Friday September 23, 2011 |
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"Highway to the Danger Zone
I'll take you
Right into the Danger Zone"
— Kenny Loggins from the movie "Top Gun"
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One would think that the world is coming to an end. By Friday morning every headline, every opening sound bite on television and on the radio began with the massive declines experienced by world stock markets this week. Take all this with a grain of salt.
"You never bet on the end of the world," said Art Cashen, the experienced Wall Street veteran and director of floor services for UBS. "That only happens once and the odds of something happening once an eternity are pretty long."
 I respect Art and agree with his prognosis. Readers get a grip. This is a correction, a nasty decline for sure, and will, by the end, take away as much as half of the gains you have made since March, 2009. But remember, even if you are still one of those buy and hold, hold-out investors, you are still up 50 percent from the lows.
"But I'm still underwater from what I had in 2007," laments one reader from Connecticut.
For years I have been imploring readers to find a money manager or broker who does not believe in holding a portfolio through thick and thin. It is a recipe for disaster, in my opinion, that only works during certain specific time periods. The first 20 years of this, the 21st century, is not one of those periods. The problem is that only a small handful of investment advisers (less than 5 percent) within the financial services community actually buy and sell. But since it's your money, I would urge you to do the work and find one.
It may not be the end of the world, but at the same time I am not discounting the risks that face us. We are truly accelerating down the highway into an economic danger zone. The continuing weakness in our own economy, the very real possibility of a European bank failure and Greek default, a hard landing in China, plus another half-dozen potential mind fields does not give one a high degree of comfort. When one acknowledges that we lack the leadership, both here and abroad, to handle this dogfight, even Maverick and Goose might panic.
Instead, it is a time to stay calm and focused. Remember, I was here for you through 2008-2009 and if you followed my advice then you did very well. And I'm here for you now.
No one who reads this column consistently should be surprised with the market's recent declines. In last week's column, John Roque, my friend and one of the best technical analysts on Wall Street, clearly indicated that he thought that a decline to 950 on the S&P 500 Index was a strong possibility. I agree with him wholeheartedly. Yet, even at 950, I don't believe it is the end of the world as we know it.
It also does not mean that stocks must go straight down to that 950 level. I expect there will still be some ferocious rallies to the upside, like we experienced the week before last, where the indexes gained 6-7 percent in three days. I advised investors to sell those rallies. If you haven't already taken my advice and reduced your equity holdings, do so on the next bounce and move into cash or bonds.
Some retired investors need to remain in dividend-paying stocks because they are dependent on the income to make ends meet. If you are in that category, then please consider hedging those holdings with covered put options or inverse exchange traded funds.
On a short-term basis, the markets are oversold. I would not be surprised to see another bounce ahead of us but it does not change the overriding trend, which is down, act accordingly.
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 e-mail him at wschmick@fairpoint.net . Visit www.afewdollarsmore.com for more of Bill's insights.
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The Independent Investor: What the Markets Missed |
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By: Bill Schmick On: 10:49PM / Thursday September 22, 2011 |
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 As disappointed global stock markets plummet in response to the Federal Reserve's latest stimulus initiative, few investors are paying attention to what may be the Fed's real intention behind this new plan: mortgage refinancing.
For the longest time, I have been convinced that the housing market holds the key to economic growth (or lack of it) in the U.S. As such, I have been hoping against hope that one or more of a long line of presidential candidates would actually have the courage and intellect to recognize and address our main problem.
Instead, I hear how "we need to get America back to work" or "we need to roll back all these regulations that are preventing businesses from investing." While all of those jingoistic slogans sound good, none of them address the main issue: how to deal with the trillions of dollars in underwater mortgages and the people who hold them.
The Fed, through QE II, attempted to push interest rates low enough so that borrowers could stave off foreclosure by refinancing their mortgages. The problem is that lenders insist that the market value of homes to be refinanced must be no lower than 25 percent of the mortgage they carry. That's a real "Catch-22" for most borrowers, thanks to the decline in housing values over the last three years.
Their houses are now worth a lot less than that. So mortgageholders are in a bind. They can't sell their property because they won't get back enough to pay off the loan. They can't refinance because the house is worth less than the mortgage and they can't afford the monthly mortgage payments. As the situation drags on, more and more Americans slip into bankruptcy or walk away from their home/mortgage leaving and already weakened financial system to pick up the pieces.
Right now this is just my guess of what the Obama administration may be planning. Over the past week a number of governmental trial balloons have been floated in the media concerning refinancing of up to $1 trillion of mortgage loans on easier terms. It won't be a giveaway, if it occurs, in the sense that to qualify for re-financing, you must be current on your mortgage payments and the loans must have been guaranteed by Fannie Mae, Freddie Mac or the FHA. How would it work?
Homeowners who qualify would get a new 30-year loan at say 4 percent and payoff 100 percent of the old mortgage (presumably carrying a much higher rate of interest). This is called prepaying your loan in the mortgage business. Your bank receives the proceeds and pays off the old loan to Fannie and Freddie. These two government mortgage entities would receive these billions in prepaid mortgages and dispense them to the ultimate mortgage holders in the mortgage-backed securities market.
Now, guess who holds the lion's share of mortgage backed securities in this country? You guessed it, the Fed.
That still leaves Fannie and Freddie with a problem. They need to refinance all these new 30-year, 4 percent mortgages. They are also assuming a lot of risk since lending now, when interest rates are at historical lows, is a dicey business. Who will buy them and how can they protect these new mortgage loans from future losses when interest rates begin to rise? The answer was revealed in Wednesday's Fed announcement.
The Federal Reserve announced that it intends to drive long-term interest rates lower by purchasing long term U.S. Treasury bonds. The Fed said it will also juggle its $2.65 trillion securities holdings by using its enormous cash flow to buy more mortgage debt. In other words, since it will be on the receiving end of all these billions in prepaid mortgage money, it will just turn around and use that cash to buy up billions in these new refinanced mortgages. At the same time, by driving long rates lower through their purchase of long dated Treasury bonds, they effectively remove the risk of rates rising anytime in the near future. The Fed becomes both buyer and seller of this entire refinancing operation.
The beauty of this move, in my opinion, is that the White House will be able to launch a new refinancing program/stimulus plan without going through Congress for approval. Nor will it add to the deficit, since all of these transactions will be run through the Federal Reserve. The Republicans may have gotten wind of this, thus the letter to the Federal Reserve Board just prior to their meeting, warning the Fed members not to do anything further to stimulate the economy.
Well, boys, the Fed just blew you off and you can't do a thing about it.
Is this all a hair-brained scheme of mine born of too much work and too little vacation? Time will tell. But if I'm right, I would expect an announcement fairly soon. I have to hand it to the Obama administration if it is true and they can pull this off. The scope of refinancing they are planning will put $2,000 or more a year into borrower's pockets, which will amount to a huge stimulus program that bypasses Congress and goes straight to the people. I hope I'm right.
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 e-mail him at wschmick@fairpoint.net . Visit www.afewdollarsmore.com for more of Bill's insights.
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@theMarket: Home on the Range |
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By: Bill Schmick On: 10:08AM / Tuesday September 20, 2011 |
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 Over the last few months, the stock market has traded in a range that has confounded both bulls and bears alike. Now, we are fast approaching the top of the range once again. Will the averages disappoint once again or are we on the verge of a break out?
We turned to our old friend John Roque, technical strategist at WJB Capital Group, for some insight. Many readers know John either through these columns or because of his many appearances on CNBC and other media outlets.
"The S&P 500 Index has serious resistance at 1,220-1,227 and then 1,250," he says, "Meanwhile, support levels are 1,150, 1,100 and 1,050. However, 950 is not out of the question."
He points to the Dow Jones Industrial Average's 1965-1982 trading range as a period similar to that of today.
"After a turn down from the top of the range, the Dow would revisit the bottom of the range. The only question is what's the bottom of the range?"
When Roque looks at the technical action of the S&P today, he feels a certain sense of déjà vu. The technical action closely resembles two recent downturns in this decade: the decline that started in 2001 (the Dot-Com boom and bust) and the decline that began in 2008-2009.
"The only thing missing from this setup right now is a turndown in the S&P's 12-month moving average. But I think it will happen because the index's rate of advance has almost stopped."
Underneath this week's advance in the averages, Roque was not impressed with the market's internals. Some of the variables he looks at like the market's breadth (the number of stocks that are advancing in price versus those that are declining) are forming a negative divergence among New York Stock Exchange common stocks. The S&P's 500 stocks are also experiencing weakening breath.
"And when net new highs are also in negative territory, I get cautious. The markets have broken their trend lines and momentum is rolling over, which are two major concerns as well," he explained.
In this kind of environment, stability is in high demand. Two sectors where he sees upward momentum are in consumer stables and utilities. Both groups are outperforming the market but Roque points out that usually happens when markets experience steep declines.
Roque's technical view is a bit sobering, especially in the face of this week's euphoria over the coordinated effort by central banks worldwide to bolster lending to European banks (see my column "Deja Vu"). Remember, too, that investors are expecting some major new initiative to be announced by the Federal Reserve this coming Wednesday. Whether the Fed will meet expectations is anyone's bet, but the fact that traders have bid markets higher in anticipation should come as no surprise.
Traders have used recent events — the debt ceiling, the Fed's Aug. 26 meeting in Jackson Hole, European summits, etc. — to manipulate markets prior to these announcements. So far the evidence has not been encouraging. After each one of these events the markets has traded lower after two or three days.
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 e-mail him at wschmick@fairpoint.net . Visit www.afewdollarsmore.com for more of Bill's insights.
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The Independent Investor: Deja Vu |
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By: Bill Schmick On: 08:20PM / Friday September 16, 2011 |
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"U.S. stocks opened higher Thursday as the Federal Reserve and four of the world's other major central banks agreed to make U.S. dollars more readily available in Europe's struggling financial system."
" ... Early Thursday, investors welcomed the news that the Fed — along with the central banks of England, Switzerland, Japan and the euro zone — is coordinating a program to boost dollar liquidity in the region."
CNNMoney, September 15, 2011, 9:47 a.m.
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The markets are climbing in celebration that the central banks of the world are combining and coordinating their immense financial power to bolster Europe's struggling banks. The message the ECB is trying to telegraph to investors is that Europe is not going to allow a Lehman Brothers-type disaster occur within their community. Why then am I so worried?
After all, over the past week, our markets have soared as European leaders have assured the financial markets that Greece will not default, that the country will not be kicked out of the EU, and that Greece will be able to pay their bills on time. If the chancellor of Germany says its true than it must be so, right? Certainly no one can argue with the market's verdict. Investors scrambled to buy European banks with some French and German banks climbing anywhere from 10 percent to 22 percent within minutes of the news.
 Something about the news, however, doesn't seem quite right to me. How can I square this bailout initiative with comments by France's Finance Minster Francois Baroin who on the same day insisted French banks are solid and do not need to be recapitalized, despite being heavily exposed to Greece's debts. Baroin said on French radio that the banks aren't having difficulties accessing liquidity. Yet, the Wall Street Journal and credit agency Moody’s downgrade of French banks on Wednesday, contradicts these statements.
There was something else about Thursday's ECB statement that struck a disconcerting note within my memory. I went back to the financial crisis of 2008 and found what I was looking for. But before reading further, I ask readers to go back to the top of the page and read the quote from CNNMoney again. Now read the quote below. Notice the dates.
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"The Federal Reserve announced Monday it will offer an unlimited amount of dollars to three other central banks in an unprecedented move to provide liquidity to the global banking system.
" .... After they borrow dollars from the Fed, the Bank of England, the European Central Bank and the Swiss National Bank will provide private financial institutions with one-week, 28-day and 84-day U.S. dollar loans in the latest attempt to unfreeze credit."
CNNMoney, Oct. 13, 2008, 9:09 a.m.
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Sounds quite similar to this week's news, doesn't it? My problem is that while both Europe's leaders and our own U.S. Treasury Secretary Timothy Geithner are telling us "don't worry, be happy" it appears the opposite is occurring behind the scenes. Central banks are tripping over themselves to avoid ... what? I recall in our own country during 2008, the powers to be were saying the same thing about our financial system, just before Bear Sterns, Lehman Brothers and AIG imploded.
So what happened to the stock markets during the October 2008 announcement? The S&P 500 Index climbed from 899 on Oct. 10, 2008, to 1,003 on Monday Oct 13, 2008, an almost 11 percent gain. Two weeks later the index stood at 848 for a 15 percent loss. Now, granted, this is not 2008-2009, although the financial problems within Europe could tip over into a full-blown crisis if allowed to continue.
As for the U.S., 2011 has its own peculiar set of challenges. The economic data continues to weaken and the past data is being steadily revised downward. Employment seems to have skidded to a halt and we may actually begin to see the jobless rate rise in the months ahead. As a result, companies are beginning to guide revenue and earnings expectations lower as well.
Of course the markets are ignoring all that bad news because investors are convinced that the Federal Reserve will announce some fabulous plan to turn all of this around on Aug. 20. But, in the meantime this investor will continue to stay defensive and watch Europe closely.
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 e-mail him at wschmick@fairpoint.net . Visit www.afewdollarsmore.com for more of Bill's insights.
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