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@theMarket: What Were They Thinking?
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In hindsight, the market's expectations made little sense. Why would European Central Bank (ECB) President Mario Draghi, speaking earlier this week, announce a new stimulus package prior to the outcome of Greek elections on June 17? If the moderates win, and there is a 50-50 chance they will, then there may be no need for any kind of immediate stimulus.
Granted, the declining economic picture in Greece certainly helps the anti-austerity, pro-growth, radical opposition party. Unemployment is now at 21.9 percent. The economy shrank yet again in the first quarter as a result of spending cuts and taxes. GDP is now declining at a 6.5 percent annual rate. But miracles do happen and the moderates could prevail in next Sunday's elections, despite the dreadful state of the country's economy. But the ECB is certainly going to refrain from doing anything that might influence that election — including any stimulus initiatives.
Here in America, the buzz was that Chairman Ben Bernanke was going to announce another stimulus package or extend the Fed's present stimulus "Operation Twist," (which ends at the end of this month). Once again I thought this kind of speculation was coming out of left field. In his testimony on Capitol Hill on Thursday, Bernanke delivered a carefully balanced view of the economy without any new stimulus announcements. Instead, he reiterated (as he has done in every Fed statement) that the central bank stands ready to intervene if necessary.
What both Bernanke and Draghi did say was there is a strong and immediate need for politicians on both continents to step up to the plate and deliver on their policy responsibilities. Reading between the lines, we should understand that central bank intervention (without fiscal action) becomes less and less effective. Bernanke said as much to his audience in the Q&A section of his appearance before the Joint Economic Committee of Congress.
Obviously the markets got it wrong this week, although the hope and a prayer stimulus stories did provide the excuse to push the S&P 500 index up almost 3 percent. To those expecting a snap-back rally, like me, the point is that the markets were oversold and due for a bounce; how we got there is immaterial.
So what happens next? As I said last week, we are getting close to a bottom. A good guess would be a low somewhere around 1,250 on the S&P 500 Index over the next few weeks. I'm sorry I can't be more precise, but it is a tough market and there are a lot of moving parts that aren't easy to decipher.
For example, China cut its key interest rate this week by 0.025 percent. Investors took that as a positive sign, hoping that it signaled a round of further cuts in the months ahead. Since growth in China (or the lack thereof) is vitally important to global growth prospects, investors were bolstered by the development. However, a slew of economic numbers are being released this weekend in China. Some China watchers worry that the data will be much worse than expected. If so, investors won't take kindly to that news on Monday.
Then there is the meeting this weekend between Spanish authorities and finance ministers of the EU. News sources believe that Spain will ask the EU's help in bailing out Spain's troubled banks. Bottom line: it is all noise that will insure that markets will remain volatile over the next week. Strap on your seat belts and welcome to summertime in the stock markets.
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: Fraught With Peril
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Much of Friday's downside action occurred within the first few minutes of the market opening. That is usually the case, leaving most investors no choice but to bear the brunt of the decline. The stock markets in Europe were already falling on their own set of economic woes when the Commerce Department announced that U.S. unemployment rate ticked up from 8.1 percent to 8.2 percent with the economy adding the fewest jobs in over a year.
This was only the latest in a series of disappointing economic numbers that indicate our stop and start economy is slowing once again. Readers may recall that as far back as April, I warned that we could see a slowing in the already moderate growth rate of the economy for a variety of reasons. It was why I advised investors to begin taking profits and getting defensive in the face of the first quarter rally.
As of today, we have basically given back the entire gains of that rally since the beginning of the year. Those who had followed my advice have booked their hefty gains and are sitting on the sidelines. That strategy has paid off.
So here we are at an extremely critical level on the S&P 500 Index. The 200 Day Moving Average has traditionally triggered a change in investment attitudes by many market participants. If the 200 DMA is broken to the downside decisively, it is usually a sell signal. If, on the other hand, the S&P moves above that level and stays there for more than a day or three, it is usually a buy signal. Today that 200 DMA is at 1,284. We are slightly below that level as I write this.
Remember that we are talking art not science, so give that theory a bit of leeway. For example, many times markets reach the 200 DMA, break down through it for a few days and then bounce back above it. So don't go out and sell everything if over the next two weeks we find market averages stay slightly below that magic line in the sand.
Since we won't find out the fate of Greece until after their second round of national elections on June 17, there can be no closure around the immediate concerns of global investors. Will Greece stay in the Euro? If not, what will happen and how will that impact the European Community overall? Yes, "fraught with peril" seems to be an apt description when discussing Europe in June.
So it seems logical that markets will find it difficult to stage any kind of meaningful rally until we know what lies in store for us. Given that markets usually discount the worst in an unknown environment, I suspect that what we are witnessing right now is that discount mechanism at work. In other words, investors are selling the rumors.
That leaves an interesting possibility for what comes after the Greek elections. If traders are selling now, then usually they will buy back on the news, no matter how dreadful it is. I have often stated that markets can deal with the facts, either good or bad. But markets can't cope with the unknown and today there are more unknowns out there than there are leaves on a tree.
We do know that Europe is trouble. We do know that economic data in China, the engine of global growth, continues to weaken and now the U.S. appears to be slowing. We also know that last year's Fed stimulus "Operation Twist" is slated to close at the end of this month.
I find myself looking at columns I wrote a year ago and they are eerily similar to what I am writing today. As such, it would be wise to remember that under these worsening set of circumstances last year, markets and economies declined until central banks both here and abroad announced another set of stimulus measures that sparked huge stock market rallies. It happened last summer as well as the summer before that.
I expect the same will happen again this year, which is why I advised readers to sell in April and reserve the cash. We are not quite ready to invest that money yet but we are getting close. Keep reading and remain patient.
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: Treasury Bonds at Historic Lows
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On Wednesday, interest rates on our government treasury bonds spiraled downward once again as investors, deeply fearful of events in Europe, sought a safe haven for their money. Both the U.S. dollar and Treasury bond prices spiked higher as investors shunned risk.
Fears of a systemic sovereign credit failure in Europe were to blame. This "risk-off" trade pushed the Euro to its lowest levels in two years while yields on sovereign debt in countries like Spain, Portugal and Italy soared. At the same time, Germany, Europe's most stable economy, saw the interest rate on its 10-year government debt fall to all-time lows. In a sense, our Treasuries are simply along for the ride as global investors seek to shed their European investments.
In tumultuous times, individual consumers in the United States can simply put their money in a bank or buy CDs in order to protect it. Large institutions who are seeking safety can't really drive up to their local ATM and dump billions in a checking account, so they use U.S. Treasury bonds instead.
These big players are buying these bonds that are effectively yielding a negative rate of interest after inflation. In other words, these institutions are paying the U.S. government a small amount of interest just to keep their money safe. In times like these it's worth it to them.
Unfortunately, if you are an individual retiree who has their money invested in U.S. Treasury bonds, you also have a problem, especially if you are depending on the income from bond interest to maintain your retirement life-style. It will become extremely difficult to make ends meet since, like those large institutions, you too will be receiving a negative rate of interest on your investments. At the same time, your costs of living continues to go up and up. Gas, food, medical costs, etc. are all climbing higher but your income stream is going down.
But for another class of consumers, those Americans who may be fortunate enough to qualify for a mortgage, the decline in Treasury rates may help them lock in a lower rate for a loan. However, borrowers beware.
Many home buyers erroneously believe that their mortgage rate is tied to the interest rate of U.S. Treasuries. They are not. Mortgage rates are tied to an index of mortgage bonds called mortgage backed securities (MBS). Mortgage lenders watch MBS rates closely. Consumer rates are priced according to what the MBS rates are doing over time.
"Over time" are key words. It means that lenders will only reduce consumer rates if they are convinced that the MBS rates have the staying power to remain at a lower level for a sustained period of time. Lenders will not pass on those lower rates to you, the consumer, until they are convinced that the drop in MBS rates is not simply a short-term spike caused by events in Europe this week (as an example).
So although Treasury rates dropped to historic lows this week, mortgage rates improved only slightly. The conventional 30-year fixed rate didn't move at all. Mortgage borrowers will need U.S. Treasury rates to remain at these levels or go even lower before the MBS market responds in kind. Only then, will consumers see a pass-through in mortgage rates. This could take weeks to accomplish.
So what economic meaning should we read into these "historic lows" in Treasury bond interest rates? Well, I guess that without our much maligned, deficit-ridden country and its Treasury bonds, the world would be a much scarier to place to invest. Take that Darth Vader!
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: When Cash Is King
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Clearly, investors are just as skittish. They were last summer as well, and for the very same reasons. If anything, the stakes are higher today. Last May, there was some concern that Greece might go bankrupt and/or depart the European Community. This year, both Greece and other member states are actively preparing for that outcome.
Last year, there were riots in Athens. Police battled protestors angry over pension and other spending cuts. Damage was minimal and few were really injured, although it made nightly newscasts fairly dramatic. This year it's far more serious. Greek depositors are quietly but steadily pulling their money out of their banks where there are no TV cameras.
Greeks fear that when (not if) they depart the Euro, their currency (the drachma) will be worth next to nothing, wiping out their savings. Depositors in other problem countries such as Spain and Portugal are also doing the same thing, fearing the worst. Unsure of the Euro and its future, these Europeans are putting their money into the greenback. The higher the dollar goes against the Euro, the worse the situation becomes.
Have you also noticed that we are back in the "he said, she said" environment that ruled the market's direction throughout last summer? This week the averages gyrated up and down as one after another European politicians or bureaucrat pontificated over the fate of Greece or Spain. Positive comments, meant to buck up the markets, were quickly followed by retractions or other contradictory statements.
Face it readers, this situation is going to be with us until at least the middle of June, when Greece holds a second election. At that point we may achieve more clarity on the fate of the country and its membership in the Euro-zone with a corresponding move in the markets. Until then expect more of the same volatility.
Last week, I predicted a "snap-back rally." We had it but it wasn't much of one, barely moving the averages up by 2.5 percent or so. The S&P 500 Index now sits at around 1,323. I expect that both the upside and downside will be volatile over the next few weeks, based on the events in Europe.
On the downside, we could test the 200-Day Moving Average around 1,279 on the S&P 500 Index with further risk to 1,250 or so. On the upside, we probably have a celling between 1,340-1,370 on that same index. That would provide a 5-7 percent trading range for the markets. Those who follow the market day-by-day will find that stressful to say the least.
Last week's much heralded IPO, which I likened to the buildup preceding the "John Carter" movie, flopped on an epic scale. That it was a disappointment is obvious, but more importantly, it also drives yet another nail of distrust in the coffin of Wall Street. Retail investors, already wary of anything stock-related, took a flyer only to be burned once again by "da boyz" in the three-piece, pin-striped suits that took their money and left them holding the bag. Soon the only investors left in the markets to be bilked will be themselves.
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 Devil Is In The Details
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Well, it depends on who you ask. Its advocates say it has accomplished its goal, which was to stop the predatory policies against middle/lower class consumers by the nefarious money-center banks and credit card companies.
For the life of me, I really can't see much difference between today and back in the bad old days, can you? Take interest rates, for example, here we are in the lowest interest rate environment in modern history and yet my Visa rate is 15.24 percent for standard purchases. And if, God forbid, I need a cash advance, well then I have the privilege of paying 25.24 percent for that loan plus a fee that could amount to 4-5 percent of the advance.
There is also a clear warning on my bill that states if I fail to pay the minimum balance within the 23 days (my monthly grace period) then my late payment interest rate charge will be 29.99 percent plus a $35 late fee. My second credit card company charges me even more for transgressions. It is true that the fine print on the back of the bill has gotten bigger and so have the explanations for how they calculate the interest rate they charge me. At last count it was a 19-line explanation that never once actually told me the interest rate I'm paying.
And how about those "balance transfer" offers we find in the mail every other day or so. You know the drill:
"Save on Interest. Get a low 0.00% APR on balance transfers until 04/01/13. After that, your variable purchase APR will apply, currently 15.240%"
The ad is accurate enough, but what it fails to make clear is that the offer only applies to balances you transfer. Any new, additional purchases will be charged the 15.24 percent rate. And if the offer also includes the lower rate for new purchases, the time period is very short, no more than 4 or 5 months. Many times there is also a fee for the transfer itself, often amounting to 3-5 percent of the balance.
There can also be another hitch. You need to qualify for the offer. If your credit rating doesn't pass the muster, you might simply be transferring the balances from one high-charging credit card to another. Don't even think about being late on your payments either, because even one mishap will send your rate soaring on your entire balance despite the original offer terms.
To be fair, there are fewer late fees today, especially the kind that compounded a credit cardholder's debt through ballooning charges for over-the-limit purchases and the like. There has also been some roll back in debit card fees, but in exchange consumers are losing things that until recently were free within the banking universe.
The debit card reward program is dead and there are little to no price savings anymore for restaurant or other retail purchases. Retailers are actually boosting prices on many small-ticket items as a result of the Durbin Amendment. The legislation was a last-minute addition to the Dodd-Frank Wall Street Reform and Consumer Protection Act that went into effect on Oct. 1, 2011. The amendment capped the debit interchange or "swipe fees" that franchisees pay to accept Visa and MasterCard debit cards by about 70 percent.The swipe fee cap has had an unintended but disproportionate impact on transactions for small amounts.
A new study by the National Association of Convenience Stores also found that drivers are paying 6 to 10 cents a gallon in hidden bank fees every time they use a credit card to gas up. At the same time, the banks swipe fee goes up with the price of gasoline. Convenience stores paid more than $11 billion in card fees last year, a jump of almost 25 percent. As gas hit $4 gallon in some markets, the bank's average cut of swipe fees alone increased to 7 cents, if you pay with a debit card and 10 cents with a credit card.
The government's legislation still allows credit card issuers to impose plenty of obscure and hard to understand charges such as fees on purchases abroad ( usually about 3 percent) or for having a zero balance (punishment for paying off your debt).
Companies can close accounts and reduce or withdraw lines of credit without notice or reason although they must wait 45 days before applying over-the-limit fees or a penalty rate on a newly lowered credit limit. They can raise your interest rates as high as they want, after giving you 45 days' notice. If you dispute it, the card company will close your account and give you five years to pay off the balance. Finally, you must go through mandatory arbitration to address grievances rather than the courts.
It should come as no surprise that banks have had to look elsewhere once the law made their former abusive and usurious practices illegal. As a result, the credit card issuers are more selective in obtaining new customers and turning down those they don't want. In order to replace lost revenues, the banks have begun to increase charges on checking accounts and minimum balance requirements. So in today’s checking account environment, the typical customer will not only receive zero interest for the funds they deposit in a bank's checking account but also pay increasingly higher costs for the privilege of losing money.
The bottom line: all the credit card legislation has done is switch the chairs around the same old slippery deck, in my opinion. Although credit cards are so prevalent that many of us think a credit card is a necessity (some will go as far as say it is a right), it isn't. You can opt out of the system and pay in cash anytime you want. For some of us it has become a convenience item, which we pay for, in lieu of carrying around bundles of cash. For others it has become much much more and that is dangerous. Credit cards were never intended to become your plastic loan shark or an alternative to a payday loan or check cashing storefront, but for many that is exactly what they have become. If so, it's time to make a change because legislation can do only so much.
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.
