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@theMarket: Ho, Ho, Ho
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In a recent radio interview, the host complained that the bad news just keeps on coming. If it isn't Europe, it's the embarrassment of our own political leaders in Washington. If that wasn't enough, we have tensions in Iran, North Korea and Syria. Yes, I agreed, all of the above is true and yet the stock markets are essentially unchanged from where they were a year ago.
Reading and listening to the chatter that at this time of year is largely focused on what's next for investors, I find a great deal of confusion. Most strategists are caught up in the continuing gloom and doom pessimism that has pervaded the markets throughout the year. This is despite the fact that the U.S. economy is growing at a rate higher than anyone expected.
No matter where you look — technical charts, momentum, fundamentals — it appears we are heading lower in 2012. Conventional wisdom has it that Europe is heading for a steep recession, China a hard landing and the U.S. by default is dragged down with them. In which case, the stock markets go lower.
After more than a year of faulty starts and disappointments by European leaders, most investors discount any new initiatives coming out of the EU as too little, too late. The joke that we call leadership in Washington is also well known. And that's my issue with the bear case. Everyone knows how bad it is — investors, the Fed, politicians, even Main Street. When a crisis is as well known as this one, it is usually addressed.
In my opinion, it is a mistake to get sucked into this malaise. The Europeans are making progress in solving their financial crisis. Granted, we may not like their half-measures, their delays, their posturing and constant policy reversals but in the end things are getting done.
Bond yields in Spain and Italy are coming down. Banks are no longer in danger of going belly-up. The central banks of the world are on record that they will not let the EU or the Euro fail. Just this week the European Central Bank loaned $640 billion in low-interest rate loans to their banking industry. There will be more of the same in the weeks and months ahead. It may not be enough to save Europe from a recession but it could well limit the severity and subsequent damage to the U.S. and the rest of the world.
Pessimism abounds wherever you look and that, my dear reader, should make you sit up and take notice. It is times like this when we have our best rallies. It is times like this that the smart money stays put and does not give in to the overwhelming gloom that is assaulting us at every turn. As a self-confessed contrarian, I remain somewhat bullish on the markets, if not hysterically so.
My strategy is to watch and wait between now and the end of the first quarter. December and January are normally the strongest months of the year. If the Santa Claus rally fails, followed by a down first quarter of 2012, then I will throw in the towel and get much more defensive. Until then I will give the markets the benefit of the doubt even if I keep my enthusiasm on a short leash.
Merry Christmas to all and to all a good holiday weekend.
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 email him at wschmick@fairpoint.net. Visit www.afewdollarsmore.com for more of Bill's insights.
@theMarket: Is Santa Claus Coming to Town?
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There are many explanations for why markets sometimes move higher between Christmas and the New Year and into January. One reason is the "January Effect." Historically (since 1925) markets have risen in the first month of the year with small caps leading the way. Investors like to get in the market before that move begins, usually during the last week of the year.
Since 1896, the Dow's average monthly return in up years has been roughly 0.5 percent but Decembers have returned 1.4 percent overall. Some believe that tax considerations drive the markets during this time. Investors, for example, who sold losers earlier in the month, now begin to replenish their portfolios with new buys. There is also the fact that many employees receive their year-end bonuses, either in December or January, and invest those proceeds into the markets. I wouldn't discount the psychological impact either. Good feelings, generated by holiday cheer, and the absence of Grinch-like pessimists, who are usually on vacation at that time, spill over into the stock markets..
Yet, not all years have produced Christmas rallies and many Decembers have actually lost money for investors. Given the steady stream of bad news coming out of Europe one would expect that any rally we may have will be somewhat subdued.
For most of this week the markets have tried to rally, largely on good news generated by the U.S. economy. On Wednesday, Thursday and Friday morning's stocks were bid up by one percent or more only to flounder when comments out of Europe cut the gains to just above breakeven. As expected, the sniping began on Monday, almost as soon the EU agreed to expand and police a new fiscal austerity effort among its members. The naysayers were eager to explain why the agreement would be difficult to implement or just plain won't work.
Rumors all week that the credit agencies were preparing to downgrade sovereign French debt to ‘AA’ from "AAA" has also kept a lid on our markets. On Friday, Credit agency Fitch actually downgraded its outlook on France to "negative" but kept their "AAA" rating. It also put Italy, Spain, Ireland, Belgium, Slovenia and Cyprus on negative watch.
Traders have been watching the Euro, selling stocks as the Euro-Zone currency declines and the dollar moves up and then reversing the trade on any strength in the Euro. They argue that the Euro's decline signals worse trouble ahead for the EU and therefore for America and the rest of the world. No one seems to recognize that the Euro's decline actually helps the economies of Europe (making the goods they sell cheaper to overseas buyers), especially in places like Italy and Spain, where exports are a big part of their overall economies.
One wonders when investors are going to decouple from their manic focus on Europe and concentrate instead on the U.S. market where stocks are cheap, unemployment is declining, and the economy growing. It is my hope that it will finally dawn on the markets that there's no place like home, especially for the holidays. In which case, there may be more under the tree than most investors expected.
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 email him at wschmick@fairpoint.net. Visit www.afewdollarsmore.com for more of Bill's insights.
@theMarket: The Case of the Crying Wolf
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Despite these weekly doom and gloom predictions, the markets have weathered the storm. Consider these "end of the world" moments: the U.S. debt ceiling, the budget debate, the lowering of our credit rating; while in Europe there have been dozens of do-or-die deadlines from Greek default to this weeks' EU summit. How long must the wolf cry before we become inured to its call?
The truth is that the media and many of its guests see things in such simplistic terms that either/or is about all they have time for. Real life, as we know, is much more convoluted and complex than that.
Sure, there may come a time when once again (like in 2008-2009), the problems that besiege much of the world's economies will come home to roost. But, if human nature holds true, it won't happen until we least expect it. Since, if we expect something terrible to happen, we will do all we can to avoid or fix it. That process, my dear reader, is what is occurring right now throughout the world.
So if you were thinking that European leaders have finally resolved their financial crisis, think again. Friday's EU agreement moves them another step closer, but we still have a long way to go.
Twenty-six European nations agreed to forge a new treaty in order to establish an even closer fiscal union, one that will force members to get their fiscal house in order or "else." Presumably, "else" would mean that members who fail to toe the line will be booted out of the union. Great Britain, which rejected the Euro in favor of its own currency, the British pound, in the original treaty, was the only member country that refused to join the agreement.
Drafting that agreement, ironing out the fine details, and ultimately passing it should be a guaranteed source of additional volatility as the debate continues. Although the fiscal integrity of several European nations was the source of the financial crisis, this fiscal initiative does little to solve the symptoms of the crisis. Those symptoms - huge debt loads, escalating sovereign interest rates, high unemployment, slowing economies and concern over the Euro — are still of immediate concern.
These worries will be with us for the foreseeable future and, left unaddressed, could sink the markets. But remember, just two weeks ago, several of the world's largest central banks announced their intention to establish a floor under this crisis in the form of massive monetary intervention when necessary.
Over here in America we have our own issues. On the fiscal front, our do-nothing Congress and Senate guarantees there will be no additional economic stimulus unless President Obama can pull something out of his hat that does not need congressional approval. Monetary policy is on hold as the Fed waits for further clues on the economic health of the U.S.
This particular wall of worry is indeed quite formidable. Some investors have decided to just move to the sidelines until this volatile period subsides, and I don't blame them. If concern over your investments is keeping you up at night, you are too aggressively invested, in which case change your allocation.
As I warned in my last column, we saw a lot of volatility in the markets this week. Expect more of the same in the weeks to come. That said, I believe we will move higher between now and the New Year.
Next year, however, may be a different story entirely.
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 email him at wschmick@fairpoint.net. Visit www.afewdollarsmore.com for more of Bill's insights.
@theMarket: Merkel Versus the Markets
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Germany's Chancellor Angela Merkel agrees change is necessary but not the kind the markets want. Her nation insists that good old-fashioned fiscal austerity will solve Europe's problems over time. Investors believe that while that is a laudable goal, it will not do anything to solve the immediate problems of the "too big to fail" nations such as Italy and Spain.
Over the last two weeks the flow of positive comments from European leaders who keep promising a definitive solution has subsided. During that time it has become clear that Germany is unwilling to go along with the majority of EU member nations that want the European Central Bank to act as lender of last resort. As a result, the price of European debt and equities has declined while interest rates have reached untenable levels in Italy and Spain. Even German sovereign debt is not immune. This week's 10-year note auction was woefully undersubscribed with only 65 percent of the issue taken up by investors.
Over the last month I have written that the "she said, he said" strategy of talking the markets up while trying to come up with a solution to the Euro Zone problem would only work for a short time. Without a substantive plan to bail out Italy and Spain, et al, investors would lose patience with Euro Speak. That is now happening and the best that Europe's leaders could come up with is to promise not to criticize each other in public.
The bottom line is that Germany is the largest, wealthiest, most politically stable member of the EU. It owes that success, in part, to the Euro. Its economy has benefited mightily from the currency. Today, without Germany, there would be no European Union and the Germans know it.
As such, the Germans insist that there will be no U.S. Fed–style bailout of European nations with the accompanying risk of hyperinflation. It was never part of their vision. Some believe that they would rather see the EU dissolve first. It appears the markets are intent on forcing Chancellor Merkel into deciding which is most important — Germany's principles or the EU.
In the meantime, the U.S. markets are deeply oversold. So it was no surprise that Friday's holiday-shortened session experienced a bounce in the averages. Investors, after days of Europe mania, focused instead on America and its Black Friday weekend consumer spending spree. The markets are hoping that consumers will forget their woes this weekend and spend, spend, spend.
I do believe there will be a boost to retail spending this year, but after the smoke and hype clears out, the revenue numbers will not be as high as some predict. If spending follows the trend of last year, expect a boost in sales for the holidays now, followed by a decline before picking up again just before Christmas.
I am expecting a nice bounce in the markets into the end of the year. Granted, the averages have gone the other way since last week and have retraced two thirds of October's gains so far this month. Let's hope December lives up to its name as the best month in the year for stocks.
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: ECB Between a Rock and a Hard Place
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Back in the day when the ECB was first established, its member countries insisted that its role would be confined to controlling inflation through monetary policy. Unlike the U.S. Federal Reserve, there was no directive to manage unemployment in their guidelines. This is important because in this country managing unemployment allows our Fed to goose the economy (by printing money) despite the risk of future inflation to reduce the jobless rate.
The Fed's quantitative easing programs was all about buying U.S. Treasury bonds, reducing interest rates and therefore jumpstarting the economy. Some think it was a useless effort while others argue that without it our country would be mired in a multi-year recession with far higher unemployment.
In Europe "too big to fail" is not about the banks as it was in America. It is about a growing list of countries whose government bonds are plummeting in price as their interest rates rise. If allowed to continue, it will pitch many of the southern tier nations into a recession or worse. In some cases, such as Greece, we are talking bankruptcy. Although that would be negative, Europe could survive it. If the same thing happens to Italy or Spain, it would take down the entire European Community and destroy the Euro.
Although the EU has attempted to head off the contagion, they have done too little, too late. The amount of money that would be needed to calm investors' fears of a European meltdown at this point is not available outside of the ECB.
All week, markets have been hoping against hope that the ECB may find a way to save Europe without violating their charter. There is talk that maybe the ECB could lend money to the International Monetary Fund, which in turn could buy Euro debt. Although that would be technically legal, I doubt that Germany would go for it.
Germany is the major stumbling bloc in resolving the ECB's dilemma. It is diametrically opposed to allowing the ECB to bail out Germany's neighbors. After its own hyper-inflation experience during the Weimar Republic, Germans have a horrific aversion to anything that might trigger inflation.
They believe that by bailing out Italy and Spain, or even the PIGS, via an ECB quantitative easing program it would open the door to inflation throughout the EU. Germany also believes that it would nullify any incentive now or in the future for these spend thrift nations to mend their ways.
If nations feel that the ECB will bail them out regardless of their economic policies, argue the Germans, what incentives do they have to change? The Germans fear that the ECB could become a political football with Southern tier nations continuously issuing more and more debt to maintain their lifestyles while the ECB prints money to buy them up.
The Germans have a point. But at the same time, if nothing changes soon, the Euro will be kaput, (something the Germans would hate to see) since their economy has benefited mightily from its inclusion in the EU.
Until there is some clarity on this issue, expect the markets to continue to swoon one week and celebrate the next. We are getting dangerously close to the recent bottom on the S&P 500 trading range, around 1,200. If it breaks there, we could see further declines. I'm betting we hold. There is an increasing stream of good economic data coming out of the U.S. that investors are ignoring. I think that is a mistake.
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.
