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@theMarket: She Said, He Said
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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.
The Independent Investor: Can you blame them?
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It is not too difficult to understand why investors have abandoned stocks en masse. The declines and losses most investors experienced in 2008-2009 were traumatic. Many investors never returned to the equity markets, but preferred, instead, to keep their money in bonds or money markets. Those who did participate in the subsequent stock market rally from March, 2009 to the beginning of 2011 made quite a bit of their money back.
This year, however, the individual investor experienced a level of volatility that was beyond comprehension. It didn't matter whether you were invested in stocks, mutual funds or exchange traded funds, or in defensive areas such as dividend stocks or preferred shares. Nothing was immune and the volatility was insane.
Consider the movement in the S&P 500 Index for one 30-day period in September through October of this year: Up 8.31 percent, Down 7.34 percent, Up 5.34 percent, Down 5.68 percent, Up 7.38 percent, Down 8.70 percent, Up 7.34 percent, Down 10.14 percent, Up 6.65 percent.
By the end of the third quarter the Dow, S&P and NASDAQ all lost more than 12 percent, the worst decline since the fourth quarter of 2008. If you were invested in Europe, the results were even worse with Germany, Italy and France all down over 30 percent. Between the volatility and losses, no wonder the few hardy souls who had stuck with the market since 2009 have decided to abandon ship.
Their desertion has drained a great deal of liquidity from the markets over the past few years. Liquidity is a term used to describe the ease in which you can purchase or sell a security without moving the price higher or lower by an appreciable amount. In a recent story in the Wall Street Journal, "Traders Warn of Market Cracks," several Wall Street traders argue that it is increasingly difficult to trade large amounts of stock without moving the market (price level) substantially.
We have all heard of high-frequency trading (HFT) by now. These HFT firms represent about 2 percent of the 20,000 trading firms that operate in the markets today but account for over 73 percent or more of trading volume. Directed by computerized algorithms, hi-speed computers buy and sell in mini-seconds capturing tiny profits (less than one cent per share in many cases) over and over again 24 hours a day around the world.
In calmer market environments, HFT does provide additional liquidity in the markets and actually drives down costs. Where the system breaks down is in volatile markets like we have today. These traders are geared to make small amounts of money on large volumes. When good (or bad) news hits and markets begin react "in size" the HFT firms back away from trading, which instantly causes a 73 percent drop in liquidity at the very time it is needed most. It is what happened during the "Flash Crash" in May of last year.
In addition, some critics are blaming certain leveraged exchange-traded funds for contributing to the volatility in the markets. ETFs have experienced explosive growth in the last five years and now accounts for 40 percent of the daily trading volume. The use of ETFs that provide two and three times the amount of exposure to an underlying index, they say, causes excess buying and selling that would not occur otherwise. ETF defenders argue that leveraged ETFs only account for 4-5 percent of volume and are simply reflecting market sentiment not causing it. A subcommittee of the U.S. Senate has opened hearings on the issue this week.
The bottom line, in my opinion, is that today's stock market environment is no place for the retail investor unless you have help from a professional. Rampant insider information between government and Wall Street, both here and abroad, overnight trading by professionals that effectively prevents the individual investor from participating in the market's big moves, and the above volatility factors make the markets an unfair arena for most of 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 e-mail him at wschmick@fairpoint.net . Visit www.afewdollarsmore.com for more of Bill's insights.
The Independent Investor: The American Autumn
Occupy Wall Street, contrary to press reports, did not "come from nowhere." The American grassroots movement that has spread to more than 40 cities is a natural progression of protests that began in the Arab world this spring.But don't try to compare what is happening today on Wall Street or in D.C. to the ongoing struggle for basic human rights in the Middle East, nor to the riots in Greece over their debt crisis, or the seemingly senseless rampage of young people through the neighborhoods of London this summer. The one palpable thread that weaves its way throughout the masses in this global awakening of civil disobedience is that these protestors are convinced that their governments are no longer listening to them.
One recurring complaint that I have heard ever since Occupy Wall Street descended upon Zuccotti Park in lower Manhattan on Sept. 17 is that the protestors cannot articulate exactly what it is they are protesting against. To me, it is as clear as the sky above. It is the same reason our forefathers held the first Tea Party in Boston. Put in historic terms, these modern-day revolutionaries are protesting "taxation without representation." That no matter how bad the situation becomes for the majority of Americans, the status quo will remain the same
They argue that there is now an entrenched and extremely dangerous liason between Corporate America, Wall Street and our political system that threatens our economic and political freedom. If you have been reading my columns over the last few years, you may have picked up the same message.
I have often pointed to the excesses of Wall Street and railed against the practices of the financial sector. Occupy Wall Street and I share the same opinion of government bailouts that have done little but further enrich our nation's bankers and brokers. Instead of lending out the billions of dollars they received in taxpayer money, the banks pocketed that money, speculated with that money and paid their executives huge bonuses with that money. The country narrowly avoided a second depression because of them and yet, how many of these miscreants have paid for their crimes?
This week we were told that two years after the recession, inflation-adjusted median household income fell 6.7 percent to $49,909. During the recession itself, household income fell 3.2 percent and yet American corporations are making record profits with record amounts of cash in their coffers. Yet, they refuse to hire new workers or even raise the salaries of those they employ.
Whether we like it or not, the rich in this country have gotten richer and the rest of us have gotten poorer and it is a trend that appears to be accelerating.
The Occupy Wall Street movement calls us "the 99 percent." They claim that the top one percent of Americans owns 40 percent of the nation's wealth. They also argue that the gap between the 1 percent and the 99 percent is only going to grow wider. They are protesting (revolting may be a better word) in fear that the middle class in this country will be a thing of the past unless something is done.
The greed of Corporate America also figures prominently in their slogans and protest placards. But a corporation cannot feel greed since it is not human. It is an entity that is driven by only one principal–profit. It cannot, nor should it, be worried about things like humanity, kindness, fair play, a livable wage, etc. So, for example, when corporations are making historic record profits by demanding that their existing workers work longer hours for less money, fewer benefits and no raise or bonuses, it is simply following its stated objective, improving profits. Corporate executives will receive large bonuses to keep costs low and they know that with unemployment over 9 percent they can always replace workers who complain or protest.
There was a time in this country where the very same practices occurred. In an effort to protect themselves, workers organized and government regulated the worst of the excesses of corporation's unbridled devotion to profit. That was then but now unions are a shadow of their former selves.
As for government, if the regulator is beholden to these same corporations, then the system no longer works. Although we, the great silent middle class, continue to pay taxes, continue to dutifully vote to "throw the bums out" and replace them with new bums, our views as to what is fair is no longer represented by our leaders.
Our system no longer works when politicians, in order to get elected, finance their campaigns by taking huge sums of money from the corporate sector. How can they do what is fair and equitable for us and at the same time regulate the hand that feeds them?
How different is that from those days when American colonists were taxed but ignored by a monarch who administered to the favored few residing in England?
There is a growing frustration in this country. We work harder than ever, for less and yet we are told that everything that can be done is being done. Most of us are angry; some about the ecosystem, others about the two wars that are a decade old or our inability to get ahead or even find a job. There are plenty of us that are mad about all of the above and then some.
In my opinion, we are seeing the beginning of a revolt by the long suffering, long silent majority. We have a tradition of taking to the streets when our voices are not being heard, beginning with the American Revolution. Veterans of World War I marched for their pensions. The middle class marched during the Great Depression; farmers marched to forestall foreclosure and food prices. Workers marched for the right to unionize, and women to vote. Today brave and motivated Americans are marching again, and I say it's about time. As long as their protests remain peaceful, count me among them.
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.
Independent Investor: Pre-Owned Autos Selling at a Premium
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My wife, Barbara, and I have been shopping for either a used or new car. We own matching 2004 Subarus that we purchased used back in 2005-2006. We would much prefer a vehicle with even better gas mileage, but we live in the Northeast where snow and ice demand a four, or all-wheel, drive vehicle and that limits our choice of fuel-efficient transportation.
The good news for us is that although all used cars are priced higher these days, smaller, fuel-efficient models and hybrids are commanding especially good prices. As a rule of thumb, every $1 increase in the price per gallon of gas, the value of used compact cars rises 8 to 12 percent. So if the trade-in value of your car was worth $10,000 last year, it could bring $11,000 this year.
However, this shortfall in supply won't last long. Dealers estimate by late fall or winter the pipeline will begin to fill once again.
Much of this used-car price windfall is a by-product of the 2008 recession. The consumer was hit by the double blow - less income and, thanks to the financial crisis, increased difficulty in qualifying for either a lease or auto loan. As a result, today, three years later, there are a lot fewer used autos for sale. The average car on the highway today is 10.6 years old, according to Polk, the auto research firm. That's up from 9.8 years in 2007.
Another large source of used cars for dealerships has traditionally been the leased cars market. Companies sell leased cars as used when leases expire. But a lot fewer leases were written during the financial crisis, leaving a large hole in supply at the wholesale level.
"Wholesale prices are quite high," said Mike Coggins, general manager of Haddad Dealerships in Berkshire County. "We haven't passed those prices on to the consumer so our margins are smaller."
Still, Coggins isn't complaining since his used car sales are up 25 percent this year, leading all of his other divisions.
The effect of Japan's earthquake has also contributed to an overall shortage of new autos this year. The disaster in Japan disrupted the world's supply chain of auto parts as well as the export of many Japanese-made vehicles to the United States. This is a far cry from three years ago, when all three U.S. automakers were on the ropes and dealerships around the country were closing every day.
It may actually make more sense for us to look at replacing our autos with a new car this time around. I am going to do my research, something you should do as well, if you are planning to buy a car. Figure out the price differences between a used model and a brand-new vehicle before making a decision. I tend to drive my auto for many years (as opposed to trading it in every three years) so the new-car avenue may make economic sense for me. Find out a ballpark asking price for your vehicles from Kelly Blue Book on the Internet and find out what similar cars are selling for in your area.
I know that we would probably get a higher price for our vehicles by selling them to a private party. Something I suggest you try if you really want to get the best price for your car. We will probably take a 10 percent haircut on the price by trading it in to a dealer.
Yet, neither of us is willing to put the effort into listing it on the Internet and haggling with potential buyers. I would much rather devote that time to writing columns for you, my readers.
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.
