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The Independent Investor: Can you blame them?

By Bill Schmick
iBerkshires Columnist
From May through September of this year, retail investors yanked over $90 billion from stocks funds. If you include the money investors have taken out of mutual funds since January 2007, the total is almost $250 billion. The question is whether or not the little guy will ever want to come back to the market?

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.


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The Independent Investor: The American Autumn

By Bill Schmick
iBerkshires Columnist
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.


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Independent Investor: Pre-Owned Autos Selling at a Premium

By Bill Schmick
iBerkshires Columnist
If you have been thinking of trading up to a new car, this may be the time to do it. Used auto prices are selling at 16-year highs but your window of opportunity is closing fast.

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.


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The Independent Investor: Should You Be Worried About October?

Bill Schmick
iBerkshires Columnist
A common perception on Wall Street is that October is the worst month of the year for the market. It is true that the month has historically failed to provide stellar returns, but it is actually September that deserves the title of the worst market month of all.

The good news is that September is over. Does that mean we can look forward to better times ahead? Well not quite; we still have to deal with October, which like March, is usually a month that begins like a lion and ends like a lamb as far as selloffs are concerned.

So what makes investors so fearful of October? It might be because October has ushered in some auspicious dates of calamity beginning with a 12.8 percent plunge in the Dow on Oct. 29, 1929. In today's markets, a 12 percent plunge doesn't feel like a big deal but back then it was substantial and it didn't stop there. The market went on to lose 90 percent of its value and usher in the Great Depression.

Then there was the stock market crash of Oct. 19, 1987. That was my first of many encounters with stock market meltdowns throughout the world. Fortunately, it was a short, sharp decline and the U.S. markets recovered quickly.

And how could we forget October 2008? It was the worst month for the S&P 500 Index, NASDAQ and the Dow in 21 years. Global equities lost $9.5 trillion that month and it was the most volatile 30 days in the S&P 500's 80-year history. We registered the most down days in a single month since 1973.

Actually, despite these gruesome statistics, October historically turns out to be the seventh-best month to own stocks, tied with April, putting it in the middle of the pack.

September, on the other hand, is the bad boy of the calendar year. It holds the record for most miserable month as far back as 1929. If we look even further back in history we discover the root cause of September's stock market underperformance.

Back in the day, much of 19th-century American commerce consisted of East Coast purchases of newly harvested crops from the South and Midwest regions for sale to the rest of the country. September was harvest month so bankers and other investors would borrow large sums of money from Wall Street, temporarily pushing up interest rates while redirecting money flows away from stocks and into the bond market. This would also coincidentally push down prices in the stock market that month.


Although money flows have long since been regulated by the Federal Reserve for events like the planting season, the tradition of down Septembers persist. Since 1959, the S&P 500 Index has declined an average of 0.9 percent in September. In the first two years of a presidential term, the performance is a bit worse. Overall, investors have suffered the most double-digit losses in that month as well.

In today's world, other concerns might explain September's continued poor performances. There is the "back to work" phenomenon, which occurs just after the Labor Day holiday. Many investors typically take the summer off and when they come back are disappointed to find that their portfolios gained little during the summer months. They lose patience and sell.

One reason for that disappointment may be that a company's earnings for the year have not met the expectations of the market. The normal end of June, early July, quarterly earnings announcements oftentime disappoint. What may have seemed a reasonable expectation by company management at the end of the prior year may not be a reasonable estimate by mid-year for a variety of reasons. The company's stock price may decline or simply mark time temporarily. Many investors won't want to hang around for yet another earnings disappointment at the end of September, so they sell ahead of earnings season.

This year, September has certainly lived up to its reputation with the averages declining almost 5 percent overall while volatility has skyrocketed. The bottom line is that if September is usually the month when crashes occur, then October is the month that ends them. Since September is over, the good news is that we have weathered the worst and if history is any guide, the future should be a bit 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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@theMarket: Sitting This One Out

Bill Schmick

Trading in the stock market right now is akin to having your pocket picked by a blind man whose pocket you just picked a moment ago. In other words, get to the sidelines if you aren't already there.

Gapping up and then down to the tune of 1 or 2 percent a day is not my idea of an investable market. And just about every day this week we have witnessed this sort of schizophrenic behavior. Those, for example, who may have been feeling pretty good about catching the market just right last week, have watched all their gains disappear.

This week the game was to sell the market down early Sunday night into Monday morning, then buy the lows, rally back up until Fed Chairman Ben Bernanke spoke on the economy on Wednesday, take profits after that, then rally back, in anticipation of President Obama's speech on Thursday night. But since no one really thinks the president will have much of a chance getting another stimulus plan through Congress, traders went short the market before the speech. Friday, of course, was a big down day.

Don't think you can outwit the pros in this game because most of the action is occurring prior to the U.S. market opening. By the time you get to put an order in to buy a stock or ETF, you are already chasing the price. And who do you think is selling this security to you? You guessed it, the prop trading desk that purchased it early in the morning in Europe or Asia. As the markets become even more volatile, traders are increasingly focusing on buying before the U.S. open, selling in the opening hour of U.S. trade, buying back when Europe closes at midday, and selling or buying again around 2:30-3 p.m. 

I've watched in amusement as the talking heads on television change their minds about the market on a daily basis, based on whatever the averages are doing on a given day. First they are bullish, then bearish. They like the financials and then they don't. Wouldn't it be nice if they just back off and admit they haven't a clue about what is going on? At least that would be truthful and honest.

In markets like this, where the fundamentals are practically impossible to discern, most traders rely on technical analysis. Buy at support, sell at resistance — seems easy — but in today's markets that concept has taken on an entirely new meaning. It is possible, thanks to computers, algorithms and software programs to identify technical levels to buy and sell on a daily, hourly or even minute-by-minute basis.

Make no mistake; you can make a lot of money doing that if you are on the right side of the market. The problem is most individual investors are completely outgunned, with none of the technology the big guys have to guide them in this exercise. You can lose a lot of money in a market like this. That is why I have advised all my readers to move to the sidelines and wait this out.

"But how long will this go on?" exclaimed one frustrated client.

The glib answer is as long as it takes. September and October are normally the worst months of the year for stocks, and so far that has turned out to be true. Europe and its problems are still very much in the forefront of investors' attention. Sadly, the news from across the pond continues to be discouraging. There are even public comments from some of the EU countries that Greece should be forced to exit the Euro. That is something that only two months ago no European leader would dare to say.

Over here, things are not much better. If we aren't already in a recession, we are within a hair's breadth of a long-feared double dip. Much will depend on what comes out of Washington and so far the news is not encouraging. Obama's $447 billion stimulus plan announced Thursday night was simply more of the same policies that have already proven to have no lasting impact on economic growth or unemployment.

Whether or not the GOP will go along with part of this plan remains to be seen. But the market has already given its verdict — it's not nearly enough — which leaves the Federal Reserve and its upcoming meeting on Sept. 20 to save the day. I'm stunned at how much weight the market is giving to this meeting.

Are we setting ourselves up for an even bigger fall? Will there be a QE III and if so will it actually do any good? I wish I knew, but at least I'm honest enough to admit that I don't know. And when I don't know I move to the sidelines, comprende?

Who said finance is boring?

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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