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@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.
The Independent Investor: Should College Be Free?
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It is a debate that has occupied this country for years. Should college be free to all Americans or should we continue to pay for it? Those in favor argue it is one of our inalienable rights. Those opposed say college is a privilege to be earned and paid for in order for it to have meaning and merit.I suspect the majority of Americans who are still paying off student loans, or are already paying for a college education (or soon will be) would vote for free tuition. Who can blame them?
My daughter was born in 1980 and graduated college in 2002. During that time period, the cost of a college education increased almost 400 percent. Looking at prices today, I would say I got off fairly cheap. Americans spent almost $100 billion last year to send over 14 million students to public colleges and universities. We all know that tuition and fees continue to skyrocket, climbing 6.6 percent annually. Yet, most of us believe that going to college is essential and the key to an economic future and the American dream.
Costs differ because not all colleges charge the same. Forty-four percent of all full-time college students attending a four-year college are paying less than $9,000 per year for tuition and fees. That’s a lot of money for a family pulling in $50,000 annually. At the other end of the spectrum, roughly 28 percent of full-time students are attending private, non-profit institutions and are paying at least $36,000 annually. Those numbers do not include the cost of living, eating, school supplies and a long list of other school expenses. All but the wealthiest American families are priced out of that market.
To be fair, most students receive some kind of financial aid, usually from the local, state or federal governments. That aid amounted to about $178 billion this year. That means the average student probably received a little over $12,500 in aid and about half of that won’t have to be repaid.
When you account for all student loan programs, grants, tax breaks and such the government is already paying for almost half the tuition, so why not the rest?
Much of the debate comes down to why the government should pay for schooling at all. Critics argue that the public school system is already a disaster. Our students’ learning abilities have already fallen way behind their peers in other countries. Our high schools are becoming a breeding ground for drugs, crime and dropouts. If we allow colleges to become part of this flawed system, critics say, then we may as well call an end to the educational system in America.
It might be helpful, therefore, to explore why a free educational system evolved in America in the first place.
It was Thomas Jefferson who first suggested creating a public school system. He and others like him argued that common education would create good citizens, unite society and prevent crime and poverty. The debate raged for many years. It took until the end of the 19th century before free public education at the primary level was available to all American children.
High school was a different story. Although the first publically supported secondary school, the Boston Latin School, was founded in 1635, it was Benjamin Franklin who first saw the need for something more than a primary education. The demand for skilled workers in the middle of the 18th century led Franklin to establish a new kind of secondary school called the American Academy in Philadelphia in 1751. Once again, public secondary education was no easy sell.
It wasn't until the 20th century that high schools took off. when the majority of states extended compulsory education laws to the age of 16. From 1900 to 1996, when government began paying for secondary education, the percentage of teenagers who graduated from high school increased from 6 percent to 85 percent.
Since then the purpose of a free education has widened from Jefferson's concept of ensuring that citizens could read, write (vote) and remain law-abiding to something more. In order to escape poverty and to provide a skilled labor force for the industrial revolution, Franklin and his peers believed a secondary education was deemed to be in the national interest.
This history lesson has a point. Ask yourself two questions. Are we still in the Industrial Revolution or have we graduated into something more? And two, does a high school education prepare our youth to enter the work force, escape poverty and become a productive citizen of the economy?
For readers who answered no to the above questions, you will want to read part II of this column. 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 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.
The Independent Investor: U.S. Energy Production, Going the Right Way
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Over the next decade domestic crude oil production is expected to increase 20 percent or more to levels not seen in the United States since the 1990s, according to the U.S. Energy Information Administration. We were producing 5.5 million barrels per day (bpd) last year compared to 5.1 million bpd in 2007 and production is expected to grow by 550,000 bpd to 6.7 million bpd by 2020. Production is expected to slow after that but still maintain a healthy pace of over 6.1 million bpd through 2035.
U.S. oil production grew faster than in any other country over the last three years. Names from big oil's boom days like the Texas Panhandle, the Oklahoma Border and Granite Wash in states such as Texas, Oklahoma and Kansas have been joined by new wildcat states like the Bakken shale area of North Dakota and even Pennsylvania.
Naturally, since it is an election year, politicians are quick to take credit for oil's resurgence.
"Under my administration, domestic oil and natural gas production is up, while imports of foreign oil are down," said President Obama, which is true but not because of any policies of his administration. Energy exploration and drilling decisions are made many years in advance. Decisions made 4-6 years ago are only now showing up as increased production today.
The real cause and impetus behind this energy rebound is a combination of three factors: the price of oil, an oversupply of U.S. natural gas and new technologies that make drilling and finding new oil cost effective.
Oil is hovering around $100 a barrel and has traded in a rough range of between $85-$110 most of last year. At the same time, natural gas prices are at a 10-year low so it pays for oil and gas exploration drillers to focus on finding more of the higher-priced crude oil component of the energy spectrum.
At the same time, new drilling techniques like horizontal drilling and hydraulic fracturing that contributed to the recent explosion in natural gas production are being applied to traditional oil fields. As a result of the higher prices and cost-effective technology, pools of oil and oil shale that were passed up in the past as too expensive to drill, are now profitable to extract.
All this good news still won't bring this country to its goal of "energy independence" anytime soon. The U.S. is forecasted to consume 19 million bpd of oil by 2020 versus production of only 10.2 million bpd. Of course that forecast can change depending on price, supply, demand and decisions made by both the private and public sector here.
For example, just this week the Obama administration rejected the proposed XL Keystone pipeline from Canada, a $7 billion, 1,700-mile route through the Great Plains of Texas. The decision is not final, but rather a delaying tactic to allow the pipeline's supporters to update their proposal. It is projects like this that can impact the nation's energy production in years to come. Let's hope this country and its leaders can establish a cohesive energy policy soon that will someday make us energy independent.
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.
