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@theMarket: The Market's Line in the Sand

By Bill Schmick
iBerkshires columnist
Over the last two weeks, as Americans returned to work, the stock market climbed rapidly. It has now reached, and breached, an important historical technical indicator. If it can remain above it, investors will begin to believe that the worst is over.   
 
The S&P 500 Index (as opposed to the Dow Jones Industrial Average) is what most professionals consider the benchmark index. This week, buyers pushed that index above the 3,000 level for the first time since the pandemic caused the markets to crash back in March. Why is that important?
 
That is the level that coincides with what is called the Two Hundred Day Moving Average (200 DMA). The 200 DMA is where investors historically draw a line in the sand. It is considered a long-term indicator of the health of the stock market. The indicator appears as a line on a chart of stock prices. It moves higher and lower along with the longer-term price movements of the financial instrument it follows; in this case, the S&P 500.
 
As long as the index is above the 200 DMA, stocks are considered to be in a long-term uptrend. If that sounds a bit like voodoo, so be it, but that little line has proven to provide uncanny support for stocks time and time again. Below the 200 DMA (where we have been for the last few months), technicians and chartists would say that markets are still in a down trend.
 
Now, remember, this is far more of an art than a science. Sure, this week we have closed above the 3,000 level two days in a row. That is a good sign, but I would feel more confident if we remained above that level for a few more days. Friday should give us a good test case of the market's willingness to remain above the line, thanks to President Trump.
 
I gave readers a heads-up last week on the concerns I have over the president's ploy to switch the market's (and the nation's) attention from the pandemic to blaming China for almost everything, including his own failures. In a classic Trump tactic, he is pointing his finger at the Chinese for reneging on the trade deal, for starting the pandemic, for changing the rules of the game in Hong Kong and, if we wait long enough, who knows what he will come up with.
 
That is not to say that the Chinese are blameless, because they are not. My beef is that Trump's timing is off. The problem with China is that its leadership has shown in the past that they neither bluff easy, nor give in to threats, especially where they perceive their national interest is threatened. If Trump wants to go down the road of sanctions, trade duties, etc., so will the Chinese. Ask yourself "do we really need another potential trade embargo, or another disruption in supply chains on top of what our economy and work force are already grappling with?"
 
Up until now, investors have focused almost entirely on the pandemic, the economy, and its aftermath. The consensus seems to be that, barring another resurgence of the virus, the economy and the markets have weathered the worst and things are looking up. Enter Donald Trump, stage left, and his new beef with China. Depending on the outcome, which will hopefully be revealed sometime later today at his press conference, investors will either run for the hills, or stay put. Readers will know the verdict by simply watching the 200 DMA.
 

Bill Schmick is now the 'Retired Investor.' After working in the financial services business for more than 40 years, Bill is paring back and focusing exclusively on writing about the financial markets, the needs of retired investors like himself, and how to make your last 30 years of your life your absolute best. You can reach him at billiams1948@gmail.com or leave a message at 413-347-2401.

 
 
 
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The Independent Investor: The Culling of America

By Bill Schmick
iBerkshires columnist
As the death toll attributed to the coronavirus breached 100,000 in the Unites States this week, among the hardest hit Americans are those in the elderly population. The numbers simply illustrate what we all know. Eighty percent of the known fatalities were at least 65 years old. As such, the virus appears to be very good at selective slaughter.
 
As one of those who are most susceptible to dying from this virus, I have done a lot of soul searching over our future.  Today, I will begin to share some of these thoughts. Aside from the human loss, for example, what potential impact will this pandemic have on health care costs in the future?
 
Today, according to the most recent statistics, firms and individuals spend between 10-15 percent of Gross Domestic Product on health care. While the elderly account for about 16 percent of the population, they represent over 35 percent of total health-care costs. Most of these people are oldsters like me. Statistically, they tend to be older and white, with 40 percent of those expenses accounted for by inpatient stays.
 
Part of the reason for this trend happens to be the large segment of the population that is now represented by Baby Boomers. One can assume that, as they age, their medical costs are going to escalate and grow to an increasing portion of the country's health care costs. That seems to be a no brainer.
 
However, one wonders how the ongoing pandemic will alter that equation. For example, if COVID-19 is here to stay (in one form or another), and continue to prey on the elderly, will the nation's health care costs go up or down? One's first thought would be up, but that may not be true. The coronavirus is an efficient killer. Victims either recover, or die fairly soon. There does not seem to be many cases where the victims linger on.
 
Why is this important?  Because medical spending in the last year of life accounts for 16.8 percent of total costs for those over 65 years old. Just think of it — machines, specialists, MRIs, chemo, radiation, surgeries — the list goes on and on. It is even worse for those that make it over age 70. They can expect to see health care costs double from the ages of 70 to 90. Will death by virus alter that spending outcome? I think so.
 
I realize that's a pretty gruesome argument but one that is nonetheless realistic. I wonder if nature, in the form of this pandemic, is taking a hand in culling our human herd, and, if so, how does one avoid the slaughterhouse?
 
We know that those suffering from low immune systems, diabetes, cancer, and other ailments are highly susceptible to dying from this virus. In fact, the sicker you already are, the higher your risk. The silver lining in this crisis is obvious.
 
If we Baby Boomers ever needed a motivation to change our unhealthy ways, we have it now. How many of us fail even to do the most rudimentary exercises? We eat all the wrong things, and as a result, we number among the highest of all nations in obesity.  In this country, fully 85 percent of us will die from chronic diseases, which could easily be avoided through exercise and diet. We know all of this and yet choose to ignore it.
 
Could this virus trigger a change in our collective psyche in regard to our health? Will exercising at home, wearing masks, eating healthier, and shunning fast food by necessity catch on? If elderly Americans start to perceive a life style change as a result of COVID-19, then just maybe there will be some good outcomes to this pandemic. What do you think?
 

Bill Schmick is now the 'Retired Investor.' After working in the financial services business for more than 40 years, Bill is paring back and focusing exclusively on writing about the financial markets, the needs of retired investors like himself, and how to make your last 30 years of your life your absolute best. You can reach him at billiams1948@gmail.com or leave a message at 413-347-2401.

 

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@theMarket: Memorial Day Markets

By Bill Schmick
iBerkshires columnist
As we begin the Memorial Day weekend that usually launches the nation's summer season, investors are anxious to discover if Americans will ignore CDC warnings, and go back to their old ways of celebrating the holiday. And if they do, will new cases of COVID-19 spike?
 
The re-opening of much of America this week had been met with some celebratory gains in the stock market, but as I predicted, it has been an up and down week, despite the gain. The S&P 500 benchmark Index actually "kissed" 3,000 before falling back the following day. It was a first tentative probe of that level since the March declines.
 
However, if the S&P 500 Index can get through that resistance level over the next few weeks, we have a real chance to re-gain all of the remaining declines in the stock market. That's a big "if" and depends, as we all know, on future medical data. Investors will be watching and their future actions depend on how successful re-opening the country's economy will be.
 
By now, most, if not all, the bad news on the economy, on corporate earnings, and the existing data on the pandemic have been discounted by the markets. Therefore, unless something sudden and terrible should arise on those fronts, I would advise you to ignore those headlines.
 
Instead, readers should pay attention to two developing trends.
 
The first one is the United States re-escalation of trade and political tensions with China. Yesterday's column, "Chinese checkers," outlined my thoughts on this subject. Suffice it to say the Trump administration is doing all they can to shift attention and blame from the COVID-19 issue and their response to it. Focusing on "bad" China is both popular and easy, especially with elections only six months away.
 
In addition, China has managed to throw fuel on that fire by proposing a new national security law in Hong Kong, during the annual meeting of the country's top legislative body, National People's Congress, which begins Friday. If passed, the new law would prohibit secession, subversion of state power, terrorism activities, and foreign interference. Analysts wonder whether the specifics of the law would allow security forces, or even mainland Chinese military forces, to quell demonstrations and the like.
 
Hong Kong, itself, has the power to self-rule. In 1997, Great Britain agreed to return its colony to China under a "one country, two systems" form of government. It is largely a separate legal and economic system separated from China with more freedoms and limited election rights.
 
Under the Sino-British Joint Declaration, China promised to maintain this system until 2047. On Thursday, the U.S. State Department warned that "any effort to impose national security legislation that does not reflect the will of the people of Hong Kong" would be met with international condemnation. The president chimed in, warning China of a strong U.S. response if their government followed through on this new security law.
 
The second trend, also political, concerns the presidential race. As restrictions are lifted nationwide, both political parties are beginning to ramp up their campaigns. Media reports that the Biden campaign has shifted further to the left to include Bernie Sanders' supporters could alarm Wall Street. Sectors such as financials, health care, energy and technology would fare worse under a left-leaning Democratic party, according to prevailing wisdom.
 
Investors also fear that the Trump re-election strategy of further raising tensions with China could also damage what is already a weakened economy, as well as sentiment in the stock market. Given that a Trump re-election bid is no longer a short thing, this combination of concerns could make this campaign season especially volatile for the markets.
 

Bill Schmick is now the 'Retired Investor.' After working in the financial services business for more than 40 years, Bill is paring back and focusing exclusively on writing about the financial markets, the needs of retired investors like himself, and how to make your last 30 years of your life your absolute best. You can reach him at billiams1948@gmail.com or leave a message at 413-347-2401.

 

 

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The Independent Investor: Chinese Checkers

By Bill Schmick
iBerkshires columnist
If you are wondering why China is suddenly back in the news on various political and economic fronts, look no further than the November elections. America needs a scapegoat for all the pain and suffering we have endured during this pandemic. The world's second-largest economy is an easy target.
 
There is no dispute; if we want to cast blame on the country that originated the coronavirus, we know it originated in Wuhan, China. At the time, the World Health Organization, the U.S. Centers for Disease Control (CDC), the federal government, the White House, and the world at large, all applauded China's efforts to contain the virus. Back then (a few short months ago), President Trump actually applauded President Xi's efforts and said so many times publicly.
 
Since then, more than 5 million cases of COVID-19 and 330,000 deaths have been reported worldwide. Untold damage has been done to world economies. The United States, one of the worst-hit nations, has suffered massive unemployment and a big decline in economic growth that has led to our first recession in more than a decade. And all of this has occurred in an election year.
 
Whether warranted or not, President Trump and his administration have taken the lion's share of the blame for America's poor showing in combating the virus. A late and disorganized response, lack of medical equipment, and a continued paucity of testing, are some of the accusations directed at the White House. Donald Trump, however, believes that the best defense is a good offense. Who better to direct our angst and unhappiness at than China?
 
No never mind that Trump announced a "historic" but feeble trade agreement with that nation less than six months ago. Today, with Chinese promised purchases falling short as a result of their own virus-weakened economy, Trump is threatening to break the deal; but there is more.
 
Today, it's about preventing U.S. companies from doing business with Huawei Technologies, a Chinese leader in 5G technology for wireless networks. Last week, a new rule bars the Chinese company and its suppliers from using American technology and software. The escalation will hurt a number of American semiconductor companies that are already reeling from the present recession, but I am sure that somehow, someway, they will be compensated for their losses.
 
This week, the U.S. Senate voted (by unanimous consent) a bill that would expel Chinese companies from all U.S. stock exchanges if they continue to deny inspectors access to their accounting audits. The argument is that China has continued to ignore American demands that if they want to list their companies on an American exchange, they are required to submit to a U.S. audit and the Securities and Exchange Commission (SEC) will have access to those financials.
 
This bill, which will now go to the House, follows on the heels of an order by the president that the federal retirement board, called the Thrift Savings Plan, which invests retirees' stock portfolios, hold off on any new investment plans that might include buying Chinese companies, or any index funds that might include them in their offerings.
 
The estimated $4 billion in potential new investments, while small in comparison to the hundreds of billions in tax-deferred savings managed by the plan, is now off the table. The explanation for the move, provided by the White House, was that the national security and humanitarian risks of those investments were significant and violated U.S. sanctions rules.
 
I believe all of these actions appear to be an effort to refocus America's attention away from blaming those in charge for their COVID-19 response. They are doing so by escalating tensions and continuing the blame game, started three years ago, with what now appears to be America's number-one arch enemy, China. 
 

Bill Schmick is now the 'Retired Investor.' After working in the financial services business for more than 40 years, Bill is paring back and focusing exclusively on writing about the financial markets, the needs of retired investors like himself, and how to make your last 30 years of your life your absolute best. You can reach him at billiams1948@gmail.com or leave a message at 413-347-2401.

 

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@theMarket: Something Off in Bond Versus Stock Market Outlooks

By Bill Schmick
iBerkshires columnist
Given the recent gains in the stock market over the last month or so, it is clear that stock market participants believe that the country will be back on its feet in no time. Over in the fixed income space, it is another story entirely. The question is which market will be right?
 
The betting in the bond market is that U.S. interest rates are not only going to zero, but there is a high probability that America, like Europe and Japan, will soon see negative rates, as early as next year. Six months ago, that was unthinkable.
 
On Wednesday, Fed Chairman Jerome Powell gave a virtual speech at the Peterson Institute of International Economics. He said, "The FOMC committee's view on negative rates really has not changed. That is not something that we're looking at." But he did not rule out that option in the future if the economy worsened. The bond market thinks it will.
 
He also warned that "the recovery may take some time to gather momentum, and the passage of time can turn liquidity problems into solvency problems." That is Fed-speak for don't look for a recovery any time soon, and you may see a lot more bankruptcies. 
 
Negative interest rates are considered a tool that has failed the test of time. Both Europe and Japan have tried them, and while negative interest rates have staved off a severe recession up until now, they are a bad choice. The current opinion is that they should be used "when everything else fails." Unfortunately, that message has not dented the conviction of our real estate speculator-cum-president.
 
 "I disagree with him on one thing now and that's negative interest rates," remarked President Trump after Powell's speech. In Trump's mind, negative rates are a "gift." I understand where the president is coming from.
 
As a real estate magnate, one of the critical variables in any deal is interest rates. How much you can borrow at the lowest rate possible in order to sell sometime in the future at hopefully appreciated prices. While Trump has had a spotty record in doing so, his most successful deals depended on buying at the right price and borrowing at the lowest interest rates.
 
Trump looks at the U.S. economy in the same way, in my opinion. Even the naivest businessman recognizes that the U.S. economy is not a real estate transaction. In an economy, there are always three or four parties to such a transaction — the lender, seller, borrower, and buyer. If rates are too low the lender loses money. If the sale price is too low, the seller gets hurt. The borrower/buyer may make out but maybe not in the long run. Despite efforts from his cabinet, advisors, etc., Trump just doesn't get it and he won't be swayed from his penchant for zero interest rates.
 
In any case, the bond market believes the economy may be moving into dire straits, which is not the message we are receiving from the White House, nor many analysts on Wall Street. Presently, a debate rages on whether the economy will take on a "V"-shaped recovery, like the stock market, or instead, recover in a less rapid "U"-shaped fashion. In either case, the expectations are that it will recover, that COVID-19 is disappearing, and things will be back to normal by this summer, if we open the economy back up now.
 
That's the message from the president, much of the Republican leadership, and their constituency, both on Wall Street, as well as Main Street. Can one blame them? Business owners are terrified with nightmares of imminent bankruptcy. Most will do anything, including risking the health and possible lives of their employees, to open back up.
 
Politically, Trump's standings in the polls are dropping dramatically. Few, if any, presidents have been re-elected when unemployment and the economy are this weak.  Come to think of it, "weak" would be a great leap forward compared to the reality.
 
So, who has it wrong?  The stock jockeys, or the bond vigilantes? Maybe they both do. We could see virus cases drop but continue to linger with flare-ups in the fall. That would stretch out the "U" recovery, but it wouldn't knock us back into another Great Depression. The stock market, on the other hand, could come back down to earth at the same time, reflecting a more reasonable valuation of the economic circumstances.
 
In any case, last week, I warned readers to expect a correction "this week or next." It appears that the stock slide has begun. Throughout the remainder of May and into June, the markets could be unsettled with a bias to the downside. The decline, however, won't be in a straight line. Let's target 2,660 on the S&P 500 Index as a first stop. That would bring us to around a 9.5 percent decline from the recent highs. While that plays out, that should give investors enough time to ascertain whether the economic re-opening exercise that is underway will be a success or failure. Stay tuned.
 
Bill Schmick is registered as an investment adviser representative and portfolio manager with Berkshire Money Management (BMM), managing over $400 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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