| Home | About | Archives | RSS Feed |
@theMarket: The Italian Massacre
Unlike Greece or Portugal, the Italian bond market is the third largest in the world. So when interest rates on their sovereign debt skyrocket overnight, the world's stock markets pay attention. It was a massacre.Wednesday's decline was breathtaking with all three U.S. indexes declining over 3 percent, giving back in one day what it took a week to gain. World markets followed suit taking a huge bite out of investors' recent stock gains. As I wrote last week, volatility is here to stay and maintaining a defensive investment posture is a good strategy.
Readers should be aware that I am writing this column on Thursday, which is the 236th birthday of the Marine Corps. As a Marine (no ex's allowed) and a Vietnam vet, I will be taking off Veterans Day. Usually, I wouldn't worry about missing one day in the markets, but these are not ordinary times.
The financial contagion that began with Greece almost two years ago has inexorably spread through the PIGS nations to the more dominant economies of the EU. Italy is the current target of investor concern, but I have noticed that even French interest rates have started to climb. Why does that matter to the stock markets?
Let's use Italy as an example. Its debt load at $2.6 trillion is the second highest in Europe (after Germany) and the fourth largest in the world. That is nothing new. The Italians have always lived above their means but have made their debts payments on time each year, thanks to a fairly strong economy. The Italians pay off the annual interest owed by tapping the debt markets for more money. As long as they can continue to borrow at a low rate of interest everything is copacetic.
It would be similar to you paying your minimum monthly credit card payment by borrowing more on the card. Because interest rate charges on credit card balances are north of 20 percent, you would soon find the minimum payment getting larger and larger. At some point, even that minimum payment would overwhelm your ability to pay. What's worse, the credit card company would then refuse to lend you any more money.
Because of the concerns over finances in Europe in general, and high debtor nations in particular, investors are demanding more and more interest to refinance government debt. They are not demanding credit card rates quite yet, but they don't need to.
In Italy this week, interest rates on government debt rose to above 7 percent. Granted it is a long way from our credit card's 20 percent, but it is high enough when you are a couple of trillion dollars in debt. At that 7 percent level, investors believe the Italians might have trouble paying off their minimum payment due. As these worries increase, buyers will demand higher and higher interest to compensate for the perceived risk. It becomes a vicious spiral. If allowed to play out, no one will lend to them, Italy goes bankrupt, which could trigger a domino effect throughout other debtor nations around the globe.
At its center, the problem is not that Italy's economy is in trouble. It is an issue of confidence. Let's face it, Silvio Berlusconi, the nation's recent prime minister, is considered more of an Italian Stallion than a Julius Caesar. But his agreement to resign has left a leadership vacuum at the worst possible time.
At the same time, the EU has still not provided the confidence or the plan necessary to stop these "runs on the bank." In Italy's case, the "too big to fail" slogan aptly applies. Nothing that the EU has proposed so far is large enough to bail out Italy, if push comes to shove.
It appears European leaders are still playing catch up, always one step behind the latest crisis. They are unwilling (or unable) to come up with a truly comprehensive plan to resolve the on-going crisis. I believe that the structure of the European Union is largely to blame for this problem. Unlike our own country, where the Federal Reserve, in combination with our Treasury, can (and did) intervene decisively in the financial markets, Europe has no such mechanism. It may well be that such powers will be developed as the crisis deepens. One thing is for sure, investors worldwide will keep their feet to the fire until a solution is found.
I hope all vets everywhere have a great Veterans Day; as for all you Marines, active or otherwise - Happy Birthday and Semper Fi.
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.
@theMarket: Paid to wait
So here we are again. Another G-20 Summit, Greece on center stage, the Euro trading like a seismograph and you, my dear reader, simply trying to cope.Earlier this week we had the pullback I was expecting with the S&P 500 Index dropping about 5 percent in two days. Then we rallied back into Friday when traders dumped stocks again before the weekend. Along the way, we had the bankruptcy of MF Global, an on-again, off-again Greek Referendum and mixed signals on the viability of the Euro zone bailout plan. Who said it would be easy?
Of course, life can be a bit easier in the stock market if you are willing to ratchet down your expectations and "settle" for a 4-5 percent return. I guess right now, with the S&P 500 Index slightly negative for the year, 4-5 percent would look pretty good. The problem is when markets skyrocket, like they did in October, gaining 18 percent in 18 days, no one wants to settle for a measly 5 percent return. Am I right?
Now don't get down on yourself simply because you are greedy. We all feel this way. When markets drop, fear reigns supreme. We all become conservative. The opposite occurs in up markets. The secret is finding that middle ground where both fear and greed are manageable.
As regular readers know, I have urged investors to stay defensive for the most part even through this rally. That means keeping a large part of your portfolio in dividend and income. Sure, there is always room for a few aggressive investments such as technology, precious metals, etc. but they should not be the majority of your portfolio.
Granted, you won't perform as well as the market on those ripping up days nor will you lose as much on the dips. And if you step away from the daily, weekly and monthly gyrations of the markets and look at the longer term results, you will find that after several months of gut wrenching volatility, we are just about where we were at the beginning of the year.
Consider if your portfolio had been invested defensively since January? Your average return could have been 5-6 percent this year, way ahead of the market right now. This type of strategy really works in volatile times like these.
I am somewhat bullish on equities through the end of the year but I'm not expecting any big upside moves like we had in October (although I'll be happy to take them if they come). I do expect a continuation of the volatility we have been experiencing throughout the year. Therefore you can expect 1-2 percent swings in the markets on a daily basis. By the end of the year, however, I would be surprised if we rallied more than 5 percent from the October highs.
That will be okay with me since I am being paid to wait out the markets' volatility with a portfolio weighted heavily in income and interest. As more and more investors realize the nature of this market, they too will gravitate to this same strategy providing price support for my funds and your stocks. It may not be the most exciting way to play this market. But that's OK; I could do with a little less excitement right now.
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.
@theMarket: She Said, He Said
 |
A week ago, France and Germany announced they had a deal that would be all but completed this weekend and signed, sealed and delivered by Nov. 3, the date of the next G-20 meeting. Markets rallied. Then word came down that this weekend may be too soon for a definitive agreement. Markets fell.
Markets both sold off and then rallied when both French President Nicolas Sarkozy and Prime Minster Angela Merkel indicated that, while no definitive agreement would be completed this weekend, both countries were in agreement on the broad outlines of a deal. The markets here have been up or down 11 days in a row based on this "she said, he said" soap opera.
In a negotiation of this size, with so much at stake, one should expect plenty of starts and stops, contradictory statements and, yes, even some back tracking. It is natural given that this new "comprehensive" program must be sold to 17 nations. A period of consensus building must occur while behind the scenes deals are cut between the players. All this takes time. The fact that the lead players gave themselves such a short deadline in the first place has me scratching my head in puzzlement.
But the real insanity is in the market's reaction. All the historical tools that normally govern the direction of the market have been cast to the winds. The inmates are running the asylum for now and there is little we can do about it.
Granted this crisis has been going on for a long time and has contributed to investors' schizophrenic behavior. The longer things are left to atrophy, the higher the chances of some great meltdown occurring, such as a default by Greece or maybe even one of the larger countries like Italy or Spain. Then, too, the markets have grown increasingly impatient with delay after delay and could force the crisis (and a solution) by selling Europe and global markets en masse. It was exactly what occurred in the U.S. after the first TARP bill failed to pass.
To date, the Europeans are playing a smart game of poker. Every time the markets threaten to swoon in dissatisfaction or frustration, one or more statement is leaked or announced via a newspaper or official, which keeps the markets hoping and investors buying in anticipation of a deal. There are still significant issues to be overcome and the international press has gone over the negatives ad infinitum. By promising a solution in the near future, "next Wednesday" or the "Wednesday after next," they are succeeding in pushing world markets higher, staving off a run on their banks and their markets while giving them more time to negotiate a final solution.
In the meantime, on this side of the Atlantic, quarterly earnings are not as bad as some feared. The macroeconomic data is coming in stronger than expected and there are a proliferating number of stories concerning a plan by the administration and the Federal Reserve to address the housing market. Readers should pay attention to this.I first wrote a column ("What the Markets Missed") explaining that the Fed's latest move in targeting long-term interest rates had much more to do with the mortgage markets, refinancing of troubled homeowners and providing a stimulus to what really is ailing the economy: housing. The troubles in Europe, the "he said, she said" headline grabbers are focusing investor's attention on the forest while a tree may be growing over here in America.
I'm still riding this rally higher but have my finger on the trigger. The game Europe's leaders are playing with the market have a finite lifeline. At some point, they either have to deliver and show their hand or face the consequences.
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.
@theMarket: Bottoming Out
One could tend to dismiss this week's market move as just another short-covering rally triggered by unsubstantiated rumors from Europe. Friday's sell-off in the face of fairly good unemployment data bolsters that premise. So why do I feel we have further to go on the upside?Call it a feeling; call it a hunch, but the market's action over the last week or so makes me think that the rally is not quite over. I noticed that during our recent break of the 1,100 level of the S&P 500 Index (The Low) on Oct. 4, the number of new lows was less than the number of new lows in stock prices registered on Aug. 8. And on that same day, the number of stocks above their 200-day moving average reached a low of 7 percent. On Oct. 4, we registered the same 7 percent low (but no more), putting in a "double bottom." This is a bullish sign.
At the same time, the CBOE Volatility Index (VIX), the investor fear barometer, failed to break out to new highs, despite a lower low in the market. Finally, despite the string of bad news out of Europe, many of the European indexes did not make new lows. Now I know that all this is a bunch of mumbo jumbo to most of my readers. That's OK.
The takeaway is that the internals of this market are starting to show some positive divergences. At the very least, I would not be shorting this market quite yet if I were you. Certain European leaders are making noises that sound like some kind of definitive deal is in the works to resolve the financial crisis among its members.
Stateside, the economic data seems to be turning neutral as opposed to negative. Weekly retail sales were a positive surprise, the economy gained more jobs than expected and there is an outside chance that investors are too negative on the upcoming earnings season.
Now, a little more upside does not mean that the correction is over. We are in a bottoming process. That could take a few more weeks to resolve. I recently wrote a column ("Should you be worried about October?") in which I explained that "September is usually the month where crashes occur and October is the month that ends them."
Our recent low on the S&P 500 was 1,074.77. Could we break that low? Sure we could, but I would be a buyer if we did. Predicting the actual bottom of a correction is more luck than anything else. I would prefer to state a range. Right now let's say we surprise to the upside next week on some news out of Europe. The S&P experiences a sharp reflex rally to 1,225 or more before swooning once again. We fall back to the lows and maybe even break them.
I would be focusing on purchasing industrials, materials, technology, large cap and dividend stocks. I would also look at Germany as well as developed markets outside of North America such as Europe, Australasia and the Far East as represented by the MSCI EAFA Index.
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.
@theMarket: No Where Land
|
"He's a real nowhere man,
Sitting in his Nowhere Land, Making all his nowhere plans for nobody." |
If there was ever an argument for staying on the sidelines, this week's market action should have driven that point home to even the most aggressive investors. We are betwixt and between, groping blindly through a fog of confusion, rumors and false starts. Over the short-term expect more of the same.
Europe continues to be the dog that wags our tail over here in the U.S. A Wall Street Journal headline like "German Vote Bolsters Rescue" sends the markets higher one day only to crash the next when the next headline contradicts yesterday’s news.
"Why can't they make up their mind," grumbles a reader from Great Barrington. "This travesty has been going on for well over a year."
If it were just that simple; unfortunately, the European Union consists of many countries and even more voters who have different ideas about how and what the ultimate solution to Greek or Portugal or even Italy's debt should be. As a result, the process of building a consensus is excruciatingly slow with countless starts and stops.
What the markets need to do is unhook from the day-to-day give and take among the European players. But what we need to do and what we actually do are sadly disconnected, which explains much of the present volatility in the markets. As for me, I am in the camp that Europe will solve their problems, maybe not today or tomorrow, but they will come up with a solution that over time will lead to economic stability.It is clear that Germany has emerged as the strong man of Europe and as such investors should take a close look at the country as a potential area of investment. The country's stocks and exchange traded funds have been sold indiscriminately along with weaker countries such as Ireland, Portugal and Greece providing an opportunity for those who are willing to wait.
As readers may recall, I changed my tune on a possible return to recession after a spate of weak unemployment and GDP data over the last few months. The data has continued to indicate a weakening economy, but up until now, both the government and most economists maintain the U.S. is still growing.
The Economic Cycle Research Institute last week announced that they believe the U.S. economy is indeed tipping into a new recession. Why should you care what one economic forecasting outfit says? Well, their track record has been pretty good, calling the last three recessions accurately without any false alarms in between. According to ECRD, weakness is spreading from one indicator to another and there is not much anyone can do to avoid or turnaround what they believe will become an increasingly vicious cycle.
The oversold market rally I expected last week occurred on schedule. At its height it delivered over a 4 percent gain in just three days before disappearing just as quickly. Since then the daily volatility, if anything, has increased with averages moving up and down a percent or more in mere hours. Trading this market is a recipe for disaster. Even professional traders have backed off after losing substantial sums in intraday trading.
I continue to believe investors should remain in defensive sectors, dividend plays, cash and the bond market.
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.
