@theMarket: Ben Does It Again

This week's pivotal event was Fed Chairman Ben Bernanke's first press conference with the media. Judging from the price action in the stock market, Ben passed with flying colors.

The chairman provided a bit of clarity, reassuring the market that in June, when QE II expires, it will be a gradual process of monetary tightening as opposed to a sharp spike in interest rates. Clearly, he gave little comfort to the dollar bulls as the greenback continues its decline (down 8 percent year-to-date) while dashing the hopes of bears in the precious metals markets as gold and silver raced ever higher on a wave of speculative fever and inflation expectations.

Although both Bernanke and U.S. Treasury Secretary Timothy Geithner have expressed their support of a strong dollar policy, neither are doing anything to stem its fall, nor should they, in my opinion. Two years ago I predicted that the U.S. would attempt to export its way out of recession, as would the rest of the world. Judging from the recent spate of quarterly earnings results, U.S. corporations, especially multinations, are making big bucks on the back of the weakening dollar. Profits among corporations are up 26 percent from last year. This will be the seventh quarter in a row where corporations posted double-digit earnings growth.

In Europe, Germany is also benefiting from an upsurge in exports that is helping that country reduce unemployment, propel economic growth and improve corporate profits. At the same time, traditional weak currency, high exporting emerging market countries are feeling the opposite effect as their currencies strengthen, exports slow and imports climb.

Friday's revelation that GDP only grew by 1.8 percent should not have disappointed investors since just about every economist in the nation was predicting as much. Bad weather and the high prices of energy and food were blamed for the less than stellar performance. Most consider it a blip in the forecasts and growth will improve next quarter.

Despite the on-going outrage by commentators (and everyone else who has to eat and drive) about the rising prices of those two commodities, the overall core inflation rate in this country continues to remain below the Fed's targets.

"How can they just ignore gas prices or what I'm paying for meat, milk and even cereal?" demands a client and mother of three, who commutes from South Egremont to Albany every day.

The Fed argues that it cannot control the prices of food and oil, which are set on world markets and represent the totality of demand from around the globe. The central bankers contend that the recent spike in oil, for example, is transitory and will subside over time.

They have a point. Consider food and energy prices in the summer of 2008. They were at record highs only to plummet in the second half of the year. If the Fed had tightened monetary policy (by raising interest rates) in say, June 2008 at the height of the price climb for food and energy, it would have taken six to eight months before those higher rates impacted the economy. By then we were sliding into recession. Tightening would have transformed a serious recession into another Great Depression.

As for the markets, it's steady as she goes, mate, with strong earnings propelling markets closer to my first objective, S&P 500 level of 1,400. I believe we are seeing a little sector rotation going on with consumer discretionary, semiconductors and technology sectors taking a back set this week to industrials, consumer durables and precious metals. Along the way, expect pullbacks but don't be spooked by downdrafts. Take them in stride, stay invested and prosper.

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: Let the Good Times Roll

It appears Monday's low in the stock market averages concluded this last little sell off. The decline occurred, courtesy of Standard and Poor's credit agency. It reduced its outlook for U.S. Treasury bonds from neutral to negative. Since then the markets have climbed back and are now preparing to test the next level of resistance.

We can credit some stellar earnings announcements, especially in the technology sector, for the turnaround in investor sentiment. Most investors were worried that the Japanese earthquake disruptions — especially in semiconductors — would hurt high-tech companies this quarter. But the strength in demand from around the world, especially in the manufacturing sector, has more than made up for any Japanese-generated short falls.

None of this should come as a surprise to readers since I have been expecting (and writing) that global economic growth would gain momentum this year. It is one fundamental reason why I think equity markets will experience upward momentum into the summer.

"But what about the deficit, the declining dollar, inflation, oil prices?" wrote an exasperated reader, who has disagreed with my bullish calls of late.

"How can the market keep going up and up when all these negatives are out there?" he moaned, while still sitting in cash.

All of those concerns are quite real and I am not discounting any of them. See, for example, my recent column "A Shot Across Our Bow" on Standard & Poor's debt warning. It is obvious that the market is choosing to ignore these negatives for now. I'm sure investors will re-visit these worries when the time is right, but remember Maynard Keynes once said that markets can stay irrational about certain things far longer than you or I can stay solvent.

I contend that as long as the Federal Reserve continues to supply cheap money to the markets in the form of its quantitative easing operations, the markets will go up. The historical low short term interest rates that are now a fact of life are forcing more and more investors to take on riskier assets in order to get a decent return for their money.

I'm looking for a quite sizable "melt-up" in global stock markets over the next few weeks or months. I'm also expecting some new moves by China to allow their currency to strengthen in an effort to combat their soaring inflation rate. That would add further impetus to a declining dollar, which would boost our exports and add more growth to the U.S. economy. It might also turn investor's focus back on China, which has lagged world markets for some time. Stay tuned.

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: Stair-Stepping Higher

The best rallies are those that move up, take a breather and then move up again. That way markets do not get extended, the gains are fairly predictable, as are the pullbacks. It appears that is the kind of market we are in at present.

The S&P 500 Index reached a low of 1,249 exactly one month ago. It then soared 7.2 percent to 1,339 in the next 23 days. We began this pullback a week ago and so far have given back less than 2 percent of those gains. I would expect a bit more time and possibly downside before resuming our march toward 1,400 on the S&P.

If you are looking for excuses (as so many of us do) to explain the short-term gyrations in the market there are plenty of culprits. If you are a Republican, it's all about the runaway deficit and the opposition's unwillingness/inability to tackle spending and raise taxes. Democrats will argue it's the fault of the GOP and the tea party that narrowly missed shutting down the government by tacking on superfluous riders to the deal. I expect increased rhetoric and market volatility as the debate on the debt ceiling intensifies, so be prepared.

But all of that is simply headline news. The real questions that are making the rounds of trading floors and hedge fund offices are these: At what point does "non-core" inflation, (energy and food, for example) start to impact corporate profits? Are we already seeing some of that risk this quarter as companies voice their concerns about profit margins in the future?

When will the widening gap between America's haves and have-nots reach a boiling point? Over 70 percent of the population is caught in a terrible climate of stagflation while the top 30 percent get richer and richer. Higher commodity prices will eventually force producers to pass on price increases to consumers. Will these consumers demand higher wages in order to stay afloat? Will corporations respond by raising worker's income or will they hold the line? If they hold the line, will that mean consumer spending retreats and the economy slows? Either way, corporate profits will suffer.

Overseas, Spain's real estate losses are massive and at some point will come to the forefront. How will Europe and the world meet that challenge? Spain, unlike Greece, Portugal and Ireland, is a big economy and problems there would have a severe impact on other economies.

Will China be able to continue its role as the world's economic locomotive? The government is struggling to engineer a "soft landing" as it attempts to control/reduce inflation while maintaining a high growth rate. At best, this is a difficult task and if they over tighten, causing their economy to falter, what will that do to global economic growth?

At the center of this debate is QE 2. There is an extremely high correlation between the rise in commodity prices, the stock market and the Federal Reserve's open market purchases of securities. The ripple effect of QE 2 has spread all over the world and the above questions center on what happens with the end of QE2 in June.

The Fed is flooding the economy with money and that money is sitting in bank vaults and on corporate balance sheets. So there is plenty of money to hire workers and raise wages to pay for those higher prices brought on by sky-rocketing commodity prices. Of course, what I am describing is the beginning of an inflationary cycle that, if left unchecked, could lead to hyper-inflation.

Given that no one knows how this story will turn out, one can forgive the two steps forward, one step back volatility in the markets. Gold and silver continue to rocket higher since all we can be sure of right now is that the Fed will continue to pump money into the economy until June. It is also why I believe the stock market, regardless of these short-term pullbacks, is heading higher for now.

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: Quarter Ends With a Bang

The markets presented plenty of head fakes this quarter. In January, contrary to everyone's expectations, the gains of last year kept right on coming through most of the first quarter, only to hit a brick wall in March thanks to troubles in the Middle East followed by nature's one-two punch to Japan. Despite that, the indexes finished the first quarter with the best gains in over two decades.

The Dow racked up 742 points (6.4 percent), the S&P 500 Index gained 68 points (5.4 percent) while the NASDAQ closed up 128 points for a 4.8 percent gain. If we annualize those gains we could be looking at a 20 percent plus gain for the year, which puts my forecast of a 20-23 percent gain in 2011 right on target.

"It was a choppy quarter though," commented one client on Friday who lives in Dalton.

I agree. Clearly this market is exacting a price (higher stress and wear and tear on the nerves) for the gains we are making. I suspect that additional volatility is waiting for us as we continue to climb a wall of worry throughout this next quarter. Some of the concerns I believe will haunt us through the spring are the price of oil brought on by geopolitical turmoil, continued problems among European financial institutions and, of course, the end of QE II, which occurs in June.

Can the economy continue to grow without the multibillion dollar monetary stimulus that the Fed has been providing for well over a year? The economy appears to be growing and unemployment declining, but is that a function of real demand or simply a response to the Fed's easy money policies? How will the stock and bond markets react to an end to this stimulus?

Smarter people than I are expecting a rapid and disastrous response by the bond markets to the sunset of QE II. They believe that interest rates will immediately spike, disrupting what little lending is already occurring and thereby throwing the economy back into recession. I find that hard to believe.

I'm going to give our central bankers, led by Ben Bernanke, the benefit of the doubt. They read the same papers we do and are well aware of the fears of the markets. Is it really plausible that the Fed will step out of the game and simply watch from the bleachers if the doomsayers are right?

There is simply too much at stake and Ben Bernanke knows it. I believe the process of pulling out of the market will be a managed one. For those who pay attention to "Fed Speak," I maintain that process is already at work. Recently a number of Board Governors who have granted interviews advised the financial community that the Fed will be taking a more neutral policy position in regards to stimulus in the future.

That's not to say there won't be concerns and with them volatility. Skittish investors will always jump the gun, many times before they actually have the facts. In today's markets, trading on rumors is just as viable as trading on the facts. So prepare for some rough sailing; but I get ahead of myself.

As a portfolio manager, it's part of my job to fret and worry about what will be, instead of enjoying what is. And a rising market is what we can expect over the next few months. Sure, we can and will have down days, but I believe they will be short and shallow. Commodity stocks will lead, so make sure you have some exposure to those sectors, and if you haven't yet, get back into the stock market — now.

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: The Coast Is Clear

The stock market continues to be buffeted by bad news. Energy prices are climbing, war rages in Libya, Japan's nuclear crisis continues to radiate and Portugal's government resigned after failing to push through austerity measures intended to avert a financial crisis. The stock market simply shrugs it off and moves higher.

Pay attention readers. When markets continue to absorb negative news, the tea leaves tell me stocks are going higher. Last week, I wondered if the correction was over. The answer is yes. Some arcane variables I follow are flashing green. For example, market breath (the number of advancing stocks versus decliners) has made a sharp reversal over the last 10 days, which is a good sign. In addition, the percentage of stocks that are now above their 50-day moving average stands at 57 percent. If history is any guide that indicates we will enjoy a strong multimonth rally.

"But how can the very same worries that sank the market as recently as a week ago now no longer matter?" protested a snowbird with a summer house in Becket, who was convinced the world was coming to an end just a few days ago.

Markets tend to discount bad news and price in numerous "what if" scenarios over time. The European banking crisis has been with us for well over a year, so Portugal's problems no longer have the power to ratchet up risk on a worldwide basis. It would take serious financial problems in a really large country such as Italy or Spain to roil world markets down the road.

In the Middle East, the protests in Tunisia began in December of last year. Four months later, investors, who initially feared this unrest might spread to Saudi Arabia, now believe that if it were going to happen, it would have done so by now. Sure, oil will still remain at the $100 to $110 a barrel level until hostilities in Libya subside, but the rest of the market is already focusing on other things.

Finally, Japan, the world's most recent crisis, is far from over, but the inflated fears of a nuclear holocaust that drove the markets lower two weeks ago have been punctured leaving a mess (see this week's column "Who Pays for Japan?") but not one that will sink the world's markets. And in the meantime, U.S. GDP was revised upward for the last quarter of 2010 to 3.1 percent. Interest rates remain at historically low levels, and the economy appears to be gaining strength.

What we have had is a good old correction. Now it is over. Valuations are considerably lower (on average 7 percent) which has reduced the premiums in the equity market to a reasonable level. I believe the markets are poised to move substantially higher from here as I have written several times in the past. It appears the same cast of characters — materials, food, technology, industrials and energy — will lead the markets higher. Invest accordingly.

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 1-888-232-6072 (toll free) or e-mail him at wschmick@fairpoint.net. Visit www.afewdollarsmore.com for more of Bill's insights.