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The Independent Investor: Japan — The Sun Is Beginning to Rise

Bill Schmick

Readers should know by now that I'm a contrarian. The worse things seem to get, the more interested I become. Take Japan for example.

This island nation has suffered one economic bad spell after another for over 20 years. Japan is a depressing tale of economic and political mismanagement that has resulted in years of negative interest rates, a huge budget deficit, a stagnant economy, moribund stock market and a disillusioned and aging population. The massive earthquake and tsunami that triggered a nuclear disaster at a nuclear power plant in the eastern part of the country was seemingly the last straw that broke this country's back.

Japan is now officially in recession, which started in the last quarter of 2010, and has both widened and deepened thanks to these calamities of nature. Faced with enormous rebuilding costs, any effort to rein in the government's huge deficit looks hopeless. As a result, last week Moody's Investors Services placed Japan's government debt on review for a possible downgrade after changing its view in February from "stable" to "negative."

So why am I interested in investing in a country faced with this unending list of woes?

After two decades of lackluster efforts to revive the domestic economy, a new approach has been forced on the nation's leaders, thanks to the earthquake and tsunami. An enormous re-building of parts of the economy has to be undertaken, similar to the kind of reconstruction Japan undertook after World War II. Experts estimate it will cost $200 billion to $300 billion.

Japanese corporations need to increase their capital expenditures in order to regain lost capacity as well as to invest in improving their supply chain operations against a repeat of this kind of disaster. In addition, they will spend more money on earthquake proofing existing factories and office buildings and acquiring alternate power sources. This could add another $150 billion to $200 billion to national spending.

Aside from all the spending that is beginning in the near future, the government will maintain its extremely loose monetary policy. Interest rates will remain at 0 percent for the foreseeable future. At the same time, the yen is expected to decline as investors shy away from bonds that are rated "negative" by Moody's and an economy that is in recession.

To my way of thinking, here is an economy that is on the eve of a massive stimulus program, a declining currency (good for increasing exports), a corporate sector hell-bent on increasing capacity and re-gaining global market share (think autos) and a population that is willing to finance the effort regardless of Moody's outlook on their bonds. In the eastern region, new housing (unlike the U.S.) is in great demand. And unlike our own financial institutions that refuse to lend despite low interest rates, Japan's banks will lend and lend to corporations and individuals in order to help the recovery effort.

What this indicates to me is that a V-shaped economic recovery in Japan is a strong possibility. If I'm right, the stock market is a screaming buy.

Over the longer term this particular set of economic variables may actually pull the country out of its decadeslong deflationary quagmire. Japan as a nation needs to spend again, build again and buy again. Up until now, there hasn't been the will or a really compelling reason to do so. Now, whether you call it divine intervention or simply the flip side of a bad set of circumstances, Japan has its mojo back. It may take a few years before all of the above unfolds, but I think we are on the cusp of dramatic change within this country. Remember, you heard it here first, folks.

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.

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The Independent Investor: Gordon Gekko Should Run for Congress

Bill Schmick

Did you know that congressmen and senators consistently outperform the stock market year after year? On average, the lower house members beat the market by about 6 percent a year while those of the higher chamber wrack up a 10 percent level of outperformance annually. Now, if you believe that's purely coincidental, well, I have a bridge I can sell you cheap.

Don't take my word for it. Four university researchers from four different schools poured over 16,000 stock buys and sells of 300 congressmen over a 16-year period and found "significant positive abnormal returns." Five years ago, the same team uncovered even better results when investigating the personal stock transactions of Senators.

As a full-time portfolio manager myself, I know managing money is a 24/7 job that requires an enormous amount of research, experience and time. How can our politicians manage to pull out these startling returns year after year, while serving in Washington, running election campaigns and travelling back home to their constituents?

The university report speculates (without forming a conclusion) that the out performance may have something to do with the ability of members of both houses to trade on non-public information or worse, vote their own pocketbooks.

But wait, how can that be? Isn't trading on insider information illegal?

Well, it turns out that our lawmakers are excluded from the same insider trading rules that have nailed so many Wall Street traders, most recently in The Galleon Insider Trading Case.

Just think how much potential for abnormal profits resides in knowing what bills and appropriations will pass and those that won't. If, for example, a huge contract is awarded to one of our defense companies in a non-public appropriations bill, a member of either house could legally buy the stock ahead of time and even tip off friends, family and possibly their largest campaign contributors.

It may also explain how certain big financial institutions, over the last few years, seem to know exactly how bad or good the country's economic data will be prior to public release. That data has been capable of moving markets substantially either up or down over short periods of time.

Given the U.S. government’s massive intervention in the financial system since 2008, the ability to make piles of money from government actions is immense. Is it any wonder that politicians have adroitly avoided changing the rules that govern their own actions, until now?

A bill introduced by Reps. Louise Slaughter, D-N.Y., and Tim Walz, D-Minn., called the STOCK (Stop Trading on Congressional Knowledge) act was reintroduced in March of this year. It was first introduced in 2006 and predictably went nowhere. The act would "prohibit Members of Congress and federal employees from profiting from nonpublic information they obtain via their official positions, and require greater oversight of the growing 'political intelligence' industry."

"As it stands today, neither members of Congress nor their staff can be held legally accountable for making personal investment decisions based on non-public information," explains Congresswomen Slaughter, "Even more troubling is that unregistered firms might be using Congressional non-public information to make financial transactions at the expense of the average investor. The bill places those individuals under insider trading rules and enhanced disclosure rules."

The act would prevent government employees from disclosing non-public information to anyone if they believe it will be used to buy or sell stocks, bonds or commodities futures. It would also require members of Congress and employees to report the purchase, sale or exchange of securities in excess of $1,000 within 30 days.

"This is a matter of equality under the law," said Congressman Walz, "The same standards we have established for Wall Street should apply to Congress. The potential for abuse is obvious and troubling and there is simply no good reason Congress should get to play by a separate set of rules in the stock market."

Readers may agree that there is something hypocritical about politicians and regulators probing hedge funds for suspicious trading while the very same government officials are able to trade on nonpublic information on current and upcoming congressional activity and give it to their friends as well as hedge funds if they choose.

While I applaud the efforts of Walz and Slaughter, I suspect the chances of STOCK's passage is about as remote as my growing hair again.

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.

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The Independent Investor: Ole Man River Bolsters Agriculture Investment Case

Bill Schmick

The flooding of the Mississippi River will be the worst disaster in the Delta farming region's history since1927. Millions of fertile acres in Missouri, Tennessee, Louisiana, Mississippi and Arkansas are under water. Farms along that riverbank could take a $2 billion hit, but to us it simply underscores our argument that agriculture is a long term growth area.

Understand that my heart goes out to those who are suffering from this misfortune. Cotton, wheat, corn, soybeans, rice and even catfish won't be raised or planted this season, forcing many Americans out of work. It also will add even more pressure to sky high agricultural prices. Readers may recall my January column "Stock up now or pay later," where I warned that higher prices for a wide range of soft commodities would be showing up in retail stores and supermarkets just about now. But the flip side of these disasters is they offer a fertile field of investment for those who pay attention.

Horrific weather conditions throughout the world are largely responsible for the present crop shortages. So far this year weather appears once again to have turned a cold shoulder to farmers whether in the Mississippi or the Yangtze River deltas. Even before the flood, the World Agricultural Supply and Demand estimates from the U.S. Department of Agriculture was forecasting large price increases for a variety of grains for the 2011-2012 periods.

The flooding just happened to occur as a free-fall in commodity prices began. Energy, base metals, precious metals and agricultural foodstuffs have all been sold simultaneously. Yet, in the case of agriculture, I believe shortages will continue to persist supporting higher food prices for the foreseeable future. Therein lies our opportunity.

The astute investor understands that these natural disasters offer windfalls for companies that produce much needed tools, equipment and other products that can aid farmers in reviving this devastated acreage. Flooding will normally wash away nutrients and deposit silt or sand as it recedes. Farmers will need equipment to turn that soil, new seed to plant and the fertilizer to make it grow. Although attention is now focused on the Mississippi, don’t forget that other areas of the country are suffering from an abnormally wet spring as well.

In the corn market, for example, U.S. plantings for the first week in May came in at 13 percent, the third lowest pace since 1986 and well below the 10-year average of 43 percent. Ohio, Indiana and Iowa reported plantings of just 1, 2 and 8 percent. The odds that farmers will close the planting gap look slimmer and slimmer since either flooding or severe drought are hitting large areas of the farm belt.

Over in Texas, Oklahoma and the New Mexico range, cattle herds are being pulled off once lush pasture land as either drought or fire has reduced the range to desert. Instead, cattle are dining on feed, already in scarce supply, which will both increase costs and ultimately prices for consumers.

But those are just the short-term considerations. As we look at the long-term supply and demand imbalance, the investment case for food commodities is even stronger. The United Nations Food and Agricultural Organization (FAO) is projecting an increase of 2.3 billion in the world population by 2050 to 9 billion. Developing countries will account for the lion's share of that growth. It will take a 70 percent increase in food production (yearly investment of $209 billion) just to keep pace with that growth rate.

If, at the same time, we want to reduce the future percentage of the world's population that goes hungry, then we need to invest $359 billion a year. Since a growing population that is also hungry is a recipe for violent regime change, politicians worldwide are paying attention.

Unfortunately, there is not enough arable land around the world to expand food production. So, in order to meet future demand, new farming, crop seed and fertilizer technologies will be required. It just so happens that U.S. chemical, fertilizer, equipment and food companies are leaders in forging a path to this brave new world.

Bottom line: for investors, the recent pull back in the commodity space was healthy and long overdue but, in my opinion, does not negate the investment case for agriculture over the long term.

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.

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The Independent Investor: A Windfall in Disguise?

Bill Schmick

It started last week with a 25 percent plunge in silver prices. Gold, oil, corn, and coffee followed in sympathy, and by the end of the week it was a full-scale route across the commodity spectrum. These price declines will save corporations and consumers untold trillions of dollars. So why isn't the stock market celebrating?

The power and abruptness of the decline caught the majority of investors unaware. After all, commodity stocks have led the market for well over a year. Stock investors were piggy-backing on what was happening over in the commodity pits. Up until last week, commodity speculators were minting money. They were able to borrow short-term money for practically nothing (courtesy of the Fed's QE 2) and were buying commodities, such as silver and gold, with the proceeds. Over time, as more and more traders jumped on board, commodity prices across the board spiked into the "bubblesphere."

Silver for example, from $36 an ounce to almost $50 an ounce rose in less than two months. At that point the Commodities Mercantile Exchange, decided (or was prodded) that enough was enough. On April 25, they raised the amount of money that investors had to put down as collateral (margin requirements) to guarantee their silver trades. It took five margin hikes in a row (an 87 percent increase in margin requirements) before speculators admitted defeat. And what worked to rein in the price of silver is now being applied to other more important commodities like oil and gas.

The Federal Reserve Bank has been targeting asset classes, such as the stock market, in their effort to spark a long-lasting economic recovery in this country. One fly in the ointment has been the spike in commodity prices, especially oil and food, as speculators borrowed money from the Fed at very low prices and made millions by betting on higher commodity prices.

Oil had reached as high as $112 a barrel and gas prices at the pump were skyrocketing in response. A similar trend was under way in food. The Fed is under increasing pressure and criticism as core inflation remains quite moderate, but consumers and corporations were paying more and more for energy and food (two non-core inflation items). The Fed's Chairman Ben Bernanke has argued that prices for these non-core items are beyond their control. But are they?

Is it beyond reason to speculate that the CME may have received a call from Big Ben over at the Fed? If the Fed can target an upturn in the stock market, how difficult would it be to engineer a deflating of the commodity bubble through the stiffening of margin requirements?

Whether the CME decided on their own or had a little help, the downdraft in commodity prices has removed that problem from the Fed's agenda. It will also produce an immediate and automatic boost to the economy across the board. Gasoline futures are already heading down on the back of a 21 percent margin hike on NYMEX gasoline futures. Corn was limit down (minus-5 percent) on Tuesday as well. Speculators are selling positions in anticipation that margin hikes on other commodities are just around the corner.

Over time, I believe commodity prices will stabilize and even rise, although not at the rate of the past. As the speculative froth comes out of this asset class, the real values will be set by supply and demand and not speculators. Many of these commodities are becoming increasingly scarce, whether in the energy, food or metals space, so the investment case is still viable. In the meantime, as prices come down to earth, I expect investors will begin to realize that this down draft is actually a windfall in disguise.

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.

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The Independent Investor: Will Stock Brokers Follow the Ticker Tape?

Bill Schmick

Given that the stock market has almost doubled since its low in March 2009, one would expect that an entirely new crop of youngsters would be clamoring to become the next generation of America's stock brokers. So far the evidence points to the opposite conclusion.

Last month The Wall Street Journal featured an article titled "Dangerous Stockbroker Shortage Threatens America." The gist of the story was that less than 25 percent of all financial advisers are under 40 years of age while 5.6 percent are under 30. The writer quoted research from a Boston-based research firm, Cerullie Associates, that claimed the average age of a financial adviser is just under 49 years old with 14 percent of them over 60.

What I fail to understand is why this supposed shortage is dangerous?

I was a stock broker once upon a time. My clients, however, were not individual investors. My customers were the large institutions with multibillions of dollars that invested worldwide and their famed fund managers who you see quoted on television or in the top-tier investment periodicals. It was a lucrative business.

In exchange for stock ideas and access I provided to company managements, my clients paid handsomely in commission dollars. I often ferried my investors to various countries and regions where I arranged private meetings between them and company officials, finance ministers and even presidents. All-in-all it was a gentleman's business. But things have changed.

Institutions discovered the Internet. Electronic trading evolved and became so cost effective that paying commissions for the services of people like me made no economic sense. Besides, what I could do, so could my clients. A phone call or email from the chief investment officer of a huge U.S. pension fund to company X could accomplish the same objective as in my efforts.

In addition, the commoditization of equities overwhelmed all other methods of investment. The sheer weight of money under institutional management forced large institutions to abandon investing in individual equities. Instead, millions every day are bought and sold in baskets of stocks representing sectors, styles, regional and country indexes. It made stock picking superfluous and brokers like me a dying breed.

The same trend that convinced me to jump ship, abandon the brokerage business and manage money has been steadily chipping away at the retail broker's business over the last decade. The advent of discount brokers, automation, passive investing and instantaneous information via the internet has evened out the playing field for individual investors. Investors are now capable of doing for themselves what brokers have traditionally charged them to do.

Today, you and I receive the same information our brokers do and we get it faster. The popularity of mutual funds and exchange traded funds as preferred investment tools have also impaired the utility of brokers and stock picking.

The big brokers realized this years ago and stopped recruiting and training new brokers. At one time, Merrill Lynch, for example, operated a huge campus in Southern New Jersey for the training of their retail brokers, complete with classrooms, dorms and cafeteria. As commissions declined and profits were squeezed, the brokers cut back on hiring and instead gave more and more accounts to the top producers. These producers are now retiring.

Remember that stock broking is a "people" business. Traditionally, you needed to trust and rely on your broker and if you couldn't, you switched. However, 2008-2009 changed that. During the financial crisis, many brokers, young and old, advised their clients to remain invested only to panic and sell out their clients at the bottom. Lawsuits followed, animosity built and trust declined across the industry. 

As an example, two individual investors were recently awarded $54 million in a securities arbitration case against Smith Barney. The case was over the sale of conservative municipal bond investments that turned out to be less than safe, losing between half and three quarters of their value during the financial crisis.

Given the performance and reputation of brokers and the financial services sector in general over the last few years, is it any wonder that the last thing the new crop of college grads wants to do is become stock brokers?

Even the name "broker" no longer exists. Thanks to millions spent in marketing, the brokerage houses have successfully confused the investing public in exactly who they are dealing with. The broker has gone the way of the ticker tape, the typewriter and the transistor radio. New names such as "wealth manager," "financial consultant" and "financial adviser" have replaced the old title and I for one am not so sure the change is for the better. 

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.

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Bill Schmick is registered as an investment advisor representative and portfolio manager with Berkshire Money Management (BMM), managing over $200 million for investors in the Berkshires. Bill’s forecasts and opinions are purely his own and do not necessarily represent the views of BMM. None of his commentary is or should be considered investment advice. Anyone seeking individualized investment advice should contact a qualified investment adviser. None of the information presented in this article 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 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com Visit www.afewdollarsmore.com for more of Bill’s insights.

 

 

 



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