@theMarket: What's Up With Bonds?

At the beginning of the year, Wall Street was certain that interest rates were on their way up. Investors dumped all kinds of bonds anticipating that prices would plummet. Bond prices did the upset. Go figure.

The reversal caught just about everyone by surprise (including me). The thinking behind the bond call was straightforward. The Fed announced it was winding down its stimulus program. It also planned to begin raising interest rates sometime in 2015. Bond players, as they usually do, were expected to anticipate that move and begin to sell U.S. Treasury bonds this year. It all made total sense from an investment perspective. It was the end of a 30-year bull market in bonds so investors were advised to sell.

What few had foreseen in the first half was a slide in the European economy and a rise in geopolitical risk. Those conditions have effectively trumped any move by the Fed. Here's why.

Consider that America and its sovereign debt have long been considered a safe haven in time of global risk like today. So as ISIS makes inroads in the Middle East and Putin thumps his chest in Europe, it stands to reason that global investors would buy U.S. bonds but there is more at work here than that.

Bond investors do not operate in a vacuum, especially when it comes to sovereign debt. They compare (price shop) the perceived safety of one country and what its debt is yielding against other countries and buy the best deal. This week, Euro zone yields on sovereign debt have fallen out of bed due to slowing economic conditions. The bet is that things are getting so bad that their central bank will have to take further easing actions in the weeks ahead.

So let's say I'm a global bond investor. The 30-year U.S. Treasury bond is yielding a shade above 3 percent while the German 30-year is yielding 1.7 percent and the Japanese 40-year bond is offered at 1.8 percent. Why would I buy the German or Japanese paper when I could get more return in the U.S., which, by the way, is also a safer investment in a faster growing economy? Even at the present low rate of interest, American sovereign debt is a much better deal than offshore sovereigns.

It also explains why we are seeing both the U.S. stock and bond markets moving in the same direction. As interest rates drop and yields get lower and lower, the return from the stock market looks better and better versus what one can get in the bond market. Clearly, lower interest rates are bad for savers but great for stocks and equity investors.  I know that I wouldn't be willing to settle for a 3 percent return over 30 years in a bond when I can get twice that in stocks, but some risk-adverse investors certainly would.

In this kind of environment, fears of what our own Fed may or may not do a year from now is definitely on the back burner. As we close out the last days of summer this Labor Day weekend, the stock markets are once again hitting new highs. Fewer and fewer strategists are looking for pull-backs of any magnitude. All seems right with our markets while the rest of the globe seems to be falling apart. Too much complacency, probably, but it is what it is.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

@theMarket: Labor on Their Mind

It is that time of the year again when the world's central bankers gather together in Wyoming to sort out the economic conditions of the global economy. This year most bankers will be looking at labor growth, or lack thereof, and what to do about it.

In this country we have seen some surprising gains in the employment picture this year despite a less than stellar economic growth rate. Unemployment has dropped from above 7 percent to 6.2 percent in less than a year. Fed officials are somewhat pleasantly puzzled by that performance. FOMC members are watching things like how many part-time jobs are being filled versus full-time positions. They are also looking for hints of wage growth and under what circumstances it is rising. Some members have their fingers on the interest rate trigger advocating a raise sooner than later, while others urge a wait-and-see attitude.

Janet Yellen, our Federal Reserve chairwoman, kicked off the Jackson Hole, Wyo., event, with an address to the central bankers and the press. She urged a pragmatic approach to policy when dealing with the labor markets. Using the unemployment rate alone to guide monetary policy is too simplistic, she argued. Although the jobless rate has declined, there are still millions of Americans who can't find jobs or have only been able to land part-time work with no benefits. Even more have given up looking for work, discouraged after years of trying to find a job.    

Then there is the trend toward retirement by this nation's Baby Boomers. Two hundred and twenty-five thousand Americans turn 65 every month. In 2010, for example, only 10 percent of that demographic age group was retired. Today, that number has reached 17 percent and is climbing. Nearly 25 percent of all Americans born between 1946-1964 are planning on retiring in the years ahead. How does that impact our idea of full employment when calculating what are structural unemployment (essentially permanent) issues versus cyclical issues?

Yellen presents a good argument. It is a fact that the unemployment rate does not account for part-time workers, discouraged workers, retiring workers and shifts in the nature of the economy. If we have jobs that are going unfilled because the nation lacks workers with sufficient skills and education to do the job, then that is a structural issue. The same is true when dealing with the growing number of Baby Boomer retirees.

No amount of interest rate declines and stimulus money is going to dent a structural issue. In which case, it would be time to raise interest rates early and sooner than the markets expect. Anything the Fed says that implies that we are approaching an unemployment rate that is bumping up against "structural" problems then (as far as the markets are concerned), look out below.

On the other hand, if keeping rates lower for longer would generate more economic growth and therefore more jobs (cyclical employment) then investors would like that. It would mean the markets still have a green light to make new highs and continue the rally based on a zero interest rate policy. Therefore investors were content to hear that the Fed will be taking a "pragmatic" approach to the labor markets.

As long as easy money is on the table, the markets will continue to go up. It also means that the cottage industry of Fed watchers that have sprung up over the past five years will continue to try and out guess what the Fed will do next. Of course the Fed has no idea what they will do next (the pragmatic approach) but we will continue to read and listen to the pundits anyway.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

@theMarket: Geopolitical Risk Trumps Economic Growth

The front page of most newspapers on Friday featured at least three hot spots around the world that has investors worried. None of them may be anything to worry about over the long-term, but over the next few weeks they have the potential to drive the stock market lower.

You may ask, why now? After all, the situation in Ukraine has been going on all year. Turmoil in the Gaza Strip has been a reason for concern for far longer. The Iraqi Shiite/Sunni fighting has plagued us for months. About the only new threat that has arisen over the past two weeks has been the occurrence of a number of cases of Ebola Virus. So why have investors suddenly decided to embrace these concerns as a reason to sell stocks?

Investors need a reason to sell and so does the media. Simply selling because the market's price levels have gone too far or because we haven’t had a sell-off in a while are simply insufficient reason for most of us, we need an excuse to sell and now we have them.

Don't get me wrong; the world is a mess right now. As I wrote yesterday in my column "Beware the Russian Bear," the situation in the Ukraine is fraught with danger. The escalating embargos that are flying around between the EU, the U.S. and Russia certainly have the potential to hurt global growth. President Obama's decision to authorize air strikes in Iraq is clearly a new development, while financial problems among the Portuguese banks have soured investors on

While geopolitical risks move to the front burner, the economy, unemployment, wage growth and what the Fed is going to do about it have receded to the back burner. Interest rates continue to drop, despite the end to quantitative easing in October. The employment gains are accelerating, forecasts are now around a 3 percent growth rate for U.S. GDP in the third quarter while corporate earnings, for the most part, appear to be growing even faster than expected.

But, remember, the stock market and the economy are not the same thing and therein lies an advantage to profit. Right now (and possibly over the next month or two), the stock market will remain volatile with a downside bias. I would expect the S&P 500 Index to re-test its 200

day moving average (DMA) which is at 1,861 or so. That’s another 2 percent-plus down move from where we are now. It may take several days or even weeks to get there.

Usually, the market will bounce at that point. Nothing says that bounce will be sustainable and in most cases will result in disappointment and another re-test of the 200 DMA.

What happens next will depend on how investors handle the decline. Usually, declines end in a bout of panic selling; something we have not seen yet. We could easily go lower than the 200.

Some perma-bears are calling for a 20% correction depending on who you read. Right now, I would say those forecasts are a bit extreme. Maybe half that amount is where I stand.

But remember folks, we are talking about paper losses. The growing economy will provide a cushion of support for stocks. This could actually turn out to be a great buying opportunity for investors in the weeks ahead. At the beginning of the year, I forecasted a 5-6 percent gain in the S&P 500 Index for the year. I don't see any reason to change it. I believe next year will offer much better gains, so keep your powder dry and wait for lower prices. You won't be disappointed.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

@theMarket: June Swoon

This week the stock market was actually down three days in a row. It caught many investors off guard, but by the end of the week, traders were expecting the dip buyers to arrive. They did not disappoint.

As we approach the first days of summer, the stock market appears to be becoming more, rather than less, volatile.  The VIX, the volatility index, actually jumped a bit from its record lows as turmoil in Iraq and a subsequent spike in oil prices spooked the markets.

Earlier in the week, the World Bank also cut their economic forecast for 2014 global growth from 3.2% to 2.8%. And here in America, the election defeat of Eric Cantor in the Virginia Republican Primaries provided additional uncertainty for investors. Given the news, who could blame traders for taking a little off the table, especially at these record-high index levels?

So can we expect the markets to regain the losses suffered this week? It looks like we could see the S&P 500 Index hit the 1,950 level before all is said and done. Some think that could be the top but calling an end to this bull market has been a fool’s game. I would suggest there are better things to do.

On the economic front, there is plenty to be happy about. The deficit is improving dramatically, bank lending among the smaller, regional banks is surging and we are even seeing some improved lending from the larger banks as well.  

On the negative side, the rate of national debt is still growing, although at a reduced rate. So far, thanks to the extremely low interest on that debt, the servicing costs remain low but that will change as interest rates rise. It is a problem and one that needs to be addressed fairly soon.

Corporations are still hoarding cash. The money they do spend is being used to pay dividends or buy back their stock or someone else’s. As a result, merger and acquisition activity is at record highs. As this rate, it will soon become cheaper to build rather than buy additional capacity. And that will be a good thing for the nation’s health. Our stock of nonresidential equipment in this country is getting older and there is a widening gap between that stock and its rate of replacement.

When and if corporations decide that the future economic picture looks strong enough to risk building new plant and equipment, employment will rise and so will wages. That day is coming. We have recently witnessed the rise of a number of activist’s hedge fund managers who are urging corporate managements to either increase their capital expenditures or sell out to someone that will.  

So overall, the picture is brightening. If I look out over the longer term, I see more positives than negatives for the economy. All we need do is get through the next few months of uncertainty and stock market volatility. This month may be the beginning of that pullback I’ve been looking for. If it occurs, it shouldn’t last more than a month or two. All it requires is a little patience.

That’s not so bad, is it?

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

@theMarket: Europe Is a Good Bet

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

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

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

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

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

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

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

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

I believe him.

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

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

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.