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@theMarket: Europe Is a Good Bet

By Bill SchmickiBerkshires Columnist

When the allies invaded the coast of Normandy on June 6, 1944, no one knew how much was at stake. It was a risky move that not only put an end to years of bloodshed within Europe but also ushered in a new world order that continues today. European leaders are hoping that their central bank's actions this week will provide an economic D-Day of their own.

The greatest risk to the economies of Europe is deflation. The European Central Bank (ECB) maintains a 2 percent inflation target for the EU, but the inflation rate as of May was a mere 0.05 percent.  While unemployment remains above 12 percent and economic growth continues at a sub-par rate, the EU could face an era of stagnation similar to that which had plagued Japan for twenty years.

Over the past three years, the ECB has shoveled over one trillion Euros in loans without conditions to the banking sector. Little of that money found its way to the private sector. Instead, the banks simply re-deposited those funds with the ECB and banked the interest or used it to trade for their own account in the stock and bond markets. In the meantime, lending to the private sector keeps shrinking and the economy stalling.

The ECB has now cut a key interest rate to below zero. It essentially means that European banks in a complete reversal will now be paying the ECB to park their funds there. This negative rate of interest in intended to spur financial institutions to begin lending that money to companies and other credit-hungry entities. The ECB also suspended their sterilization operations (taking money out of the market) which should inject a further 165 billion Euros into the mix.

The bank also promised over $500 billion in discounted loans to banks, providing they lend that money to companies and not other financial institutions. I'd give the bank an "A" for effort, but more needs to be done.

Investors were taken by surprise by the boldness of these latest moves. You see, the markets have long been inured to the actions of the ECB as too little, too late. Unlike the U.S., where our Fed answers to no one, the ECB has to juggle the conflicting views of many member nations of the European Union. While the Fed can take decisive and far-reaching steps to jump-start our economy, the ECB needs to build consensus among its members. This takes time.

This week's actions are, in my opinion, only the first of several steps to grow the European economy. A quantitative easing program that emulates the asset purchasing that both the U.S. and Japanese central banks have implemented might be the next step. So far, Germany, with its deep-rooted fear of hyperinflation (pre-WWII) has been against this action.

But Mario Draghi, the bank's president, went on record promising more, if these efforts failed to accomplish his goals. "Are we finished?" he asked. "The answer is no."

I believe him.

So let's bring this down to you and your portfolio. Readers may recall that well over a year ago, I suggested some exposure to Europe either through a mutual or exchange traded fund. That has worked out well since European averages, although still selling at a 15 percent discount to their American counterparts, are all at record highs. I think more exposure to Europe would be a wise move.

Right now, most readers have 25-30 percent in cash based on my advice. Over the next few weeks, I suggest you move some of that cash to Europe. Exactly how you do that is up to you. Take notice, however, that if the ECB's strategy works, one can expect the Euro to weaken against the U.S. dollar while their stock markets rise. It would make sense to look for a fund that combines those two elements. If one decided to simply ignore the currency aspect, remember that Germany is probably the strongest country economically, while Italy offers the most value. Invest according to your own preferences or call or e-mail me for more advice.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. 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 inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

     

@theMarket: Flirting With Record Highs — Again

By Bill SchmickiBerkshires Columnist

You can't keep a good market down, so why is everyone so darn worried about the stock market? Could it be that too much of a good thing may be dangerous to your financial health? If so, someone should tell the bulls.

Truly, no one should be complaining. Here we are at the end of May, normally a month where the markets come under selling pressure, and we are a mere five points away from the S&P 500 Index's all-time high. The contrarian in me says that too many people are waiting for the shoe to drop right now, so it probably won't.

Officially, it is the Memorial Day weekend that kicks off the herd migration from Wall Street's gray canyons and valleys to more amenable vistas. Highly-polished Wing-tips are exchanged for Gucci sandals, as the high and mighty head for the over-crowded beaches and multimillion dollar "cottages" of Long Island and the Hamptons.

Those who remain are the young and ambitious. Without much trading authority, they will have a hard time moving markets. Nonetheless, they will attempt to make a killing for their bosses at the expense of the rest of us. As market volume dries up this summer, it is a toss-up on whether markets become even more volatile or simply wallow in apathy and neglect.

In my career, I have seen both during the summer doldrums. In recent years, the markets have tended to be more volatile with fairly large declines in June and July. In other periods, you could hear a pin drop for weeks at a time on New York trading floors. I'm betting we see more volatility than less.

While the markets continue to grind higher so does the short interest in the stock market.

Short interest is the quantity of stock shares that investors have sold short but not yet covered or closed out. Many strategists use short interest as a market-sentiment indicator, since it indicates how many investors think a stock's price (or market) is likely to fall. Both the short interest aggregate dollar amount of the S&P 500 Index and short interest ratio (days to cover or buy back these shorts) are at levels not seen since mid-2007. We all know how that ended for investors.

The markets continued to make new highs until the end of the year and then subsequently crashed in 2008-2009.

Last week the markets touched my S&P 500 Index target of 1,900 — briefly. It was so quick that I half hoped we would make another stab at that level and possibly break it. It appears we are trying to accomplish that as I write this. Markets are never neat and tidy so if we break this level to the upside, I would expect a bout of short-covering which could propel the markets higher by another 20-40 points quickly. At the same time, I think too many people are bearish for a sell-off right here and now. If we were to see a fast jump higher and a panic stampede into the market at that time we just might be set up for a last hurrah.

Have a happy Memorial Day weekend. But while you are grilling, swimming or just plain having fun, do me a favor. Take a moment to remember our servicemen and women both past and present. I know I will be remembering my buddies in Vietnam that didn't make it. Semper Fi

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. 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 inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

     

@themarket: Don't Buy the Dips

By Bill SchmickiBerkshires Columnist

The S&P 500 Index hit 1,900 this week. The Dow Jones Industrial and Transportation averages also reached new historical highs but the euphoria lasted about a minute and a half.

That's about as long as it took for traders to sell into the move. Not good.

The market gave the bulls all the excuses in the world to man-up and push the markets higher, as they backed and filled for two days, then the bears took over. Thursday was a blood bath and sellers added to the damage again on Friday. Not good.

Last year, if you recall, all I recommended readers to do is "buy the dips" whenever the stock market declined. Obviously, from this headline, I am recommending just the opposite today, especially in the so-called momentum stocks. Momentum, small-cap and mid-cap stocks continue to lead the markets lower. As it should be, since they have led the market up over the first three months of the year. Don't think that they have bottomed. In fact, sell any bounces in these names.

"I can't sell them now, they are down too much," retorted Chris, a friend and client, as we walked our dogs by the lake this morning.

It is an understandable attitude. The hardest thing to do is sell when you are underwater pricewise and down 40-50 percent from the highs. That little devil on your shoulder is whispering that if you just hold on you will recoup all your losses and then some. That may happen but in my experience too often the opposite occurs. Instead, you will end up watching those stocks drop another 30 percent before you finally sell in a fit of emotional disgust.

Another thing to remember is that many of these momentum names that hit astronomical prices had no business reaching that price in the first place. Expecting them to regain their former luster anytime soon is about on par with hitting the lottery next week. To me, it is far better to take losses now, sit on the sidelines in cash and wait until there truly signs of a bottom before buying back in.

If, on the other hand, you managed to avoid getting entangled in these high flyers, sit tight. You have raised the recommended cash. Sure, you will take some paper losses on the rest of your portfolio, but that will be a temporary condition. By the end of the year you should recoup those losses.

It is too hard to tell whether this week was the start of my forecasted 10-15 percent correction.

However, we are entering the third week in May (sell in May and go away) so whatever you do - don't buy the dip. If the markets follow the behaviorial pattern of the last several weeks, expect the market to bounce for a few days next week.

We have now hit my target of 1,900 on the S&P 500 Index. I actually expected a little further upside (20-30 points or so) once we hit that level but I'll settle for what I can get. And who knows, traders might try once again to break that 1,900 ceiling level and propel markets and emotions to higher highs. I don't care.

It feels to me like the markets are rolling over here. If that process has begun, I wish it would be a short, sharp and therefore less painful ordeal than a drawn-out affair that lasts through the summer. However, markets, as I have often said, will do what is most inconvenient for the greatest number of people.

Plan accordingly.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. 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 inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

     

@theMarket: A Shift in Leadership

By Bill SchmickiBerkshires Columnist

Throw out the new, embrace the old, not something you see often on Wall Street. But as technology stocks and other high flyers continue to get trounced, utilities and other oldies but goodies are doing quite well.

When looking at the gyrations of the stock market indexes every day, it appears stocks are simply gaining one day and giving it all back the next. It would be easy to miss the sea change occurring right before our eyes.

Most readers are aware that the biotech sector, along with most new age technology areas, like 3D printing or cloud stocks, has been in the throes of a severe sell-off for over two months. If you review their technical charts, as I have, just about all of them look like death warmed over. Obviously, growth stocks are out and value is in. Those who have bucked that trend and attempted to pick the bottom in these groups have gotten their head handed to them.

However, utility, consumer durable, energy and other old economy sectors have risen as investors took profits in new age equities and invested the proceeds in these "low beta" stocks. Unfortunately for the overall market, that trend is not a good sign. It says that more and more investors are becoming cautious the closer we get to record highs.

One may have noticed, for example, that as the technology-heavy NASDAQ index, along with both the small and mid-cap Russell Indexes, have been declining steadily, the Dow hit record highs last week. The S&P 500 Index has also flirted with record highs and even now, after a so-so week, it is only 30 points from all-time highs.

If you look under the hood, you will find the explanation. Only one security of the top 12 most heavily-weighted stocks (all low-beta, defensive names) in the S&P 500 is exhibiting weakness. Over on the Dow Jones Industrial Average, most stocks that make up that average pay dividends and are also thought to be more defensive than the overall market. In essence, big money investors, especially professional players who have to be invested in equities, are hiding in these defensive areas. They are hoping that if the markets roll over, these stocks will get hurt less than the overall market.

Unfortunately, historical data tells us that even these stocks will ultimately succumb to selling pressure. It just takes a bit longer before the large, big cap value names follow the other indexes lower. The S&P is now in its 10th week of this process, which is the longest it has exhibited this behavior since 1994. The intra-day volatility is also increasing. Consider just one example. On Friday the NASDAQ rallied 0.80 percent in the first half hour of trading and then declined 0.50 percent before 10:45 a.m. The other averages are also experiencing these kinds of wild swings. Not good.

As for quarterly earnings, 736 US companies reported this week, and they have averaged a decline of 2.09 percent on their report days. The average stock that beat EPS estimates has gone up a mere 0.18 percent on its report day. But the average stock that has missed EPS this week has fallen 5.33 percent on its report day. Not good.

Given everything that is occurring in the stock market, I remain cautious and expect further volatility with a higher risk of downside in the weeks ahead.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. 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 inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

     

@theMarket: Headlines Can Be Deceiving

By Bill SchmickiBerkshires Columnist

It was a great April non-farm payrolls labor report. The headlines read that job growth in the Unites States increased at its fastest pace in over two years, while the unemployment rate fell to a five-year low.

Taking a peek beneath the headlines, however, all is not as it seems.

The report indicated that 288,000 jobs were created last month, dropping the jobless rate to 6.3 percent. That was above economists' expectation of a gain of 210,000 jobs. However, the number of workers looking for jobs declined by 806,000. Therefore, they are no longer counted in the employment statistics. Bottom line: a lot of Americans have given up hope in finding a job for good.

A breakdown of jobs was also more than a little disturbing. The most important age groups for jobs in America are those workers aged 25-54. They represent the bulk of our labor force as well as the most productive of all U.S. workers. The total number of their jobs fell from 95.36 million to 95.151 million - a drop of more than 200,000 jobs.

Employment for our younger workers also took a hit. Teenagers (16-19 years old) lost 24,000 jobs while those in the 20-24 age groups lost another 26,000. So who did gain those jobs?

Funny enough, it was workers, aged 55-69, who gained 174,000 jobs. Government was also hiring, and both construction and manufacturing saw employment gains.

Clearly, the economy stalled in the first quarter, as a result of a bad winter and had a deeper impact than first thought on unemployment. We will know exactly how bad when the government releases the next revision of first-quarter GDP growth. The last data point was growth of 0.1 percent. We might actually see negative growth for the quarter when all is said and done. However, I believe that the slowdown is behind us and that future quarters should see accelerating growth.

It is one of the reasons I believe that any pullback in the stock market will be contained over the next few months. The fundamentals of the economy will provide support for this market. Granted, we still need some kind of sell-off in the double-digit category to remove some of the excesses that have crept into overall valuations.

The markets also need time for economic growth to catch-up to market expectations. That process began in the beginning of the year. The sideways chop we have been living with since then is part of that process. A further decline that would last through most of the summer would be ideal. Who knows, maybe this century's madman, Vladimir Putin, may be the catalyst for such a fall.

I know that the majority of professionals are now expecting a sizeable pullback and being in the majority always makes me uncomfortable, but it doesn't make me wrong. I still expect the markets to grind higher, pushing stocks to record highs over the short-term. The Dow made its first record high of the year this week. The S&P 500 Index should breach 1,900 shortly. That's not saying much, since it is less than 20 points away from that level right now.

We could also see a bit of short covering once we make a new high. It could propel the S&P 500 a little further but after that, I am not expecting much. My most bullish case for the markets in the short-term is slightly higher highs with more sideways volatile action as May progresses. I am sure that on-going events in Ukraine will be supplying the volatility while day traders will continue to boost the markets higher until they don't.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. 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 inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

     
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