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@theMarket: Bulls Batter the Bears
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Despite an increasing number of predictions that the market has run too far, that stocks are heading for a correction, investors still use any minor dip in the markets as an opportunity to get in. On Friday we touched 12-month highs on the S&P 500 Index while the Dow flirted with the 13,000 mark for most of the week.
It seems to me that it is time for a little profit-taking, if you haven't already. My suggestion would be to pare back on your most aggressive equity holdings and keep the proceeds in cash for now. I know that money markets are yielding next to nothing but I don’t expect your cash to sit there for long. Any correction should be short-lived and if it isn't, well, you could always put the money into something higher yielding if necessary.
There are plenty of signs that the averages are "crusin' for a brusin'" from the dissipation of volume, the continued decline in the market's breadth, to the fact that markets usually have trouble when they approach certain technical areas of resistance (like now).
Fundamentally, the rise in oil prices is a real threat to the markets. I outlined the causes for oil's rise in this week's column ("Gas Prices Going Higher"). At $109 a barrel for West Texas Crude and gasoline above $3.60 a gallon nationally, consumers are starting to feel the pressure. The higher energy prices climb, the worse the impact on economic growth. Although investors are aware of this threat, most are assuming that sometime soon (when speculators least expect it), the Commodity Mercantile Exchange (CME) will announce an increase in margin requirements.
The same thing happened last year when oil prices rose above $112 a barrel. Speculators, forced to pay much more for their short-term futures holdings in oil, gasoline and heating oil, dumped their positions, sending energy prices plummeting over night. At some point soon, something must give: either oil prices or the stock markets.
Now that Greece has largely faded from the headlines, Europe faces the aftermath of two years of a festering debt crisis. The European Union overall is now in recession with the Southern European nations suffering the worst. Most nations now face the need to reduce their deficits and are doing so with a combination of reduced government spending and increased taxes.
In Europe, it is much easier to raise taxes than reduce spending thanks to the politically difficult nature of laying off government workers or cutting back on their pensions and benefits. Of course, raising taxes and cutting spending while an economy is in recession is exactly what happened in this country in 1933, and we all know how that ended. Maybe this time will be different, but I'm not counting on that.
As I wrote last fall, the problems in Europe were blinding investors to the positive news coming out of our own economy. By October it had become obvious to me that our stock market did not adequately reflect the stronger growth in the U.S. As predicted, investors have finally realized the truth and prices now reflect the facts, so its time to take some profits.
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 email him at wschmick@fairpoint.net. Visit www.afewdollarsmore.com for more of Bill's insights.
@theMarket: Profit Taking
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As a born-again contrarian, I find when most people are leaning one way I tend to start leaning the other. If you have followed my advice and been invested in a dividend and income mostly portfolio, you should be up over 5 percent so far this year, and its only February.
Frankly, I thought the S&P 500 Index would peak out on a short-term basis at around 1,350-1,365 sometime in March of this year. Well folks, as of this week we actually came within 11 points of the top of my range. Is it time for some profit taking?
Markets never go straight up although there have been times when it appears they want to. On occasion over the last few years, stocks have been supported by the policies of central banks around the world. We are in one of those periods right now. In my last column I wrote that the Fed has given stock investors the green light to remain in the market and buy even more equities. Their easy interest rate policies, a tame inflation outlook and increasingly good numbers on the employment and economic front provide support for buying stocks.
That should come as no surprise to you, my readers, which is why you should still be invested in the stock market. All I am saying is that you should be prepared (and willing to sustain losses) during a period of profit taking sometime soon. How much downside this will cause is debatable. We could see as little as a 1 percent pullback to something more like 5-10 percent.
"But 5 percent would just about wipe out my profits for the year," said one reader recently.
No question about that, which is why those who hate to suffer the vagaries of the stock market, might be advised to raise a little cash around now. There is nothing wrong with taking a few profits here and there. It would simply be the smart thing to do, especially if you are heavily invested in aggressive stocks and funds. I still think the year overall will be positive. I just don't expect this straight up kind of market we have enjoyed since Christmas to last much longer.
Stock markets normally discount good news ahead of time. It seems to me that we have already discounted most of the good news out of Europe, the strong numbers out of our own economy, and the decline in the unemployment rate. When markets are priced to perfection (as they are now in the short term) it doesn’t take much to stall their momentum.
Friday, for example, Greece weighed on stocks as investors started to lose patience with the umpteenth round of negotiations between Greece and the EU. I noticed that the stocks that have gone up the most this year experienced the most profit taking. Although the overall averages (Dow, S&P and NASDAQ) have been up marginally throughout the week, certain indexes, like the high flying Russell 2000 small cap index, has seen profit taking. Many times the Russell is a leading indicator of things to come in the overall market.
As such, I am advising readers to add a little caution to the present euphoria by remembering the prudent investor always hedges their bets a bit.
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 email him at wschmick@fairpoint.net. Visit www.afewdollarsmore.com for more of Bill's insights.
@theMarket: Fed Gives Green Light to Stocks
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The Fed also said it would consider launching a bond-buying program and it wouldn't wait for a recession to do it. Fed Chairman Ben Bernanke hinted he would act if the economy and unemployment simply continues to recover at its present slow pace. At the same time, the Fed dropped its forecast for economic growth this year from a range of 2.5-2.9 percent to 2.2-2.7 percent. He targeted a 2 percent inflation rate for the country but also said he would be willing to see inflation a bit higher if it meant producing more jobs for Americans.
What all of this means for you and I is that the Fed is determined to do all it can to goose the economy, the stock market and the housing markets. In the past, when the Fed conveyed this kind of message to investors, the stock markets climbed higher. I expect the same thing to happen again this time.
It is not yet clear to me how telegraphing their determination to push longer-term rates lower over the next two-plus years is going to help home buyers decide on purchasing, as opposed to renting. If, for example, I was in the market for a fixed rate mortgage and I know rates might trend lower between now and 2014, I would be in no hurry to sign a contract.
The Fed's announcement is also bad news for those retirees who have fled the stock market and have their money invested in "safe" assets such as CDs and U.S. Treasury bonds. They will continue to receive next to nothing for their money while struggling to make ends meet as food, energy, medical services and other necessary living expenses continue to rise.
On the plus side, investors can be pretty sure that the economy won't get any worse and that the stock market is about the only place one can hope to achieve a reasonable rate of return on your investments. Of course, there will be the inevitable piper to pay down the road but central banks around the world have decided to worry about the inflationary consequences of trillions of dollars in stimulus when it happens. Future inflation fears is one reason that commodities led by gold and silver raced higher after the Fed meeting.
So do the Fed's actions change the bottom line of my investment strategy? Not really. I believe defensive areas of the stock markets (those stocks and sectors that pay dividends) will do just fine in this environment. High yield and investment grade bonds will also do quite well. We will still have pullbacks in the market this year and some of them might even be serious. Overall, I believe we are exactly where we should be.
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 email him at wschmick@fairpoint.net. Visit www.afewdollarsmore.com for more of Bill's insights.
@theMarket: Markets Climb a Wall of Worry
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Problems, issues, challenges, call them what you may. Nary a day has gone by when something, somewhere continues to put investors on edge. From the Straits of Hormuz to the infidelities of Republican hopefuls, the world appears to be full of surprises. Yet, the stock markets grind higher.Why now? Haven't these same issues been with us for months? Yet, the same news on Greek debt negotiations that in the past sent stocks into a downward spiral is now simply being ignored. The continued delays in EU progress toward a monetary and fiscal solution to their financial crisis are now greeted calmly rather than with horror.
Some of the market's response can be attributed to a "no news is good news" read on events in Europe. That leaves investors to focus on the positive data coming out of the American economy, something I have been writing about for months. The data continues to improve. We are actually hearing some analysts who now believe the fundamentals of the housing markets are improving.
There is also the recurring story, first identified by me in a September column "What the Market Missed," that the administration is planning a big mortgage refinancing operation with the Fed's assistance. Anywhere from $1-3 trillion worth of U.S. mortgage holders will be able to refinance their high-interest bearing mortgages at lower rates, injecting billions into home owners' pockets.
However, all this good news has been quickly reflected in stock averages. Financials, which have been under constant selling pressure for well over a year, have suddenly rallied big in the last three weeks. Home builders have also jumped by over 10 percent in some cases in the same time period. Technology stocks overall are on a tear, despite some lackluster earnings announcements. The benchmark S&P 500 Index is already up over 5 percent so far this year and we are only now entering the third week in January.
Most indicators are flashing amber or red warning lights indicating the markets are overbought and due for a correction. I agree, although markets can remain overbought for a long time and still plow higher. When I look at the potential downside, I am not too concerned. Sure, we could drop a good 50 points or so in quick order on the S&P but that's about the extent of the downside I see right now.
If I put that in perspective, there were days last year when that kind of decline was almost a weekly occurrence. All week trader talk focused on when the correction would occur and how much the averages would decline. Unfortunately for them, markets will typically do what is most inconvenient to the most number of players.
And that's what happened this week. As traders positioned for a sell off, they were continually disappointed, the pullbacks were shallow and the markets grinded relentlessly higher, despite the worries.
Make no mistake, the good times will end but the trend over the next three months in the markets is up. So enjoy the ride short-term and don't worry too much about the inevitable pullbacks, at least 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 email him at wschmick@fairpoint.net. Visit www.afewdollarsmore.com for more of Bill's insights.
@theMarket: Europe Downgrades Hit Markets
After a week of slowly grinding higher on exceptionally low volume, the markets swooned on Friday. Europe, once again, was responsible.It was almost comical to watch the talking heads this week as they tried to make a case that the U.S. markets were decoupling from the troubles in Europe. They highlighted the increasingly positive economic data, the possibility of quarterly earnings surprises and the hope that the Fed was preparing for another round of quantitative easing.
My take is that Europe has a longer holiday season than we do. Their movers and shakers just got back to work this week. We haven't decoupled. There was simply an absence of market making news until this week.
All of that decoupling talk disappeared on Friday as a rumor surfaced that credit rating agency Standard & Poor's was ready to downgrade a slew of European countries this weekend. At the same time, JPMorgan's revenues disappointed the market in their earnings announcement, sending the entire financial sector into a tailspin. Retail sales for December (as I predicted) also disappointed the markets. The holiday season failed to live up to retailers' expectations triggering fears that future economic growth was in jeopardy.
My advice to readers is to ignore all these one-off events. The simple truth is that we have benefited from A) The Santa Claus Rally and B) the January Effect. In my last few columns, I explained both and predicted the markets would rally as a result. Both A and B came off like clockwork and are now about over, leaving the markets vulnerable to a pullback.
I'm not looking for anything disastrous to develop, outside of a normal two-steps-forward, one-step-back kind of decline. There are too many positive developments for me to become overly bearish.
Both Italy and Spain managed to sell 17 billion worth of sovereign debt ($21.5 billion) this week without too much trouble. That was a vast improvement over last month when few players were willing to even look at buying bonds from these countries. The European Central Bank left rates unchanged, leaving the door open for possible rate cuts in the future. Even Greece, the bad boy of Europe, is stumbling towards a debt deal in their typical on-again, off-again fashion.
There is also a lot of talk about the possibility that the Fed will launch QE 3 sometime in the next few months. This is partially a result of some dovish-sounding speeches from several Fed members lately. I have my doubts. As long as U.S. economic data continues to improve, I don't think the Fed sees the need for additional monetary stimulus right now.
Of course, we are in an election year and sitting presidents in the past have been known to "lean" on the chairman of the Federal Reserve to goose the economy as November approaches. I think it is still too soon for that kind of monetary monkey business before the elections. But it does help buoy the mood of investors so we will put that in the plus column.
In summary, the markets will pull back and then go higher. That will be a trend I expect will continue for the next several months. I'm not looking for big gains, just a general trending higher by the indexes, interrupted by pullbacks on a periodic basis. The upside could lift the S&P 500 Index to the 1,350 level but from here that's no more than a 5 percent gain from here. As such, we will keep one foot in dividend paying stocks and the other in the fixed income market. In other words stay defensive.
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 email him at wschmick@fairpoint.net. Visit www.afewdollarsmore.com for more of Bill's insights.
