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@theMarket: Paid to wait
So here we are again. Another G-20 Summit, Greece on center stage, the Euro trading like a seismograph and you, my dear reader, simply trying to cope.Earlier this week we had the pullback I was expecting with the S&P 500 Index dropping about 5 percent in two days. Then we rallied back into Friday when traders dumped stocks again before the weekend. Along the way, we had the bankruptcy of MF Global, an on-again, off-again Greek Referendum and mixed signals on the viability of the Euro zone bailout plan. Who said it would be easy?
Of course, life can be a bit easier in the stock market if you are willing to ratchet down your expectations and "settle" for a 4-5 percent return. I guess right now, with the S&P 500 Index slightly negative for the year, 4-5 percent would look pretty good. The problem is when markets skyrocket, like they did in October, gaining 18 percent in 18 days, no one wants to settle for a measly 5 percent return. Am I right?
Now don't get down on yourself simply because you are greedy. We all feel this way. When markets drop, fear reigns supreme. We all become conservative. The opposite occurs in up markets. The secret is finding that middle ground where both fear and greed are manageable.
As regular readers know, I have urged investors to stay defensive for the most part even through this rally. That means keeping a large part of your portfolio in dividend and income. Sure, there is always room for a few aggressive investments such as technology, precious metals, etc. but they should not be the majority of your portfolio.
Granted, you won't perform as well as the market on those ripping up days nor will you lose as much on the dips. And if you step away from the daily, weekly and monthly gyrations of the markets and look at the longer term results, you will find that after several months of gut wrenching volatility, we are just about where we were at the beginning of the year.
Consider if your portfolio had been invested defensively since January? Your average return could have been 5-6 percent this year, way ahead of the market right now. This type of strategy really works in volatile times like these.
I am somewhat bullish on equities through the end of the year but I'm not expecting any big upside moves like we had in October (although I'll be happy to take them if they come). I do expect a continuation of the volatility we have been experiencing throughout the year. Therefore you can expect 1-2 percent swings in the markets on a daily basis. By the end of the year, however, I would be surprised if we rallied more than 5 percent from the October highs.
That will be okay with me since I am being paid to wait out the markets' volatility with a portfolio weighted heavily in income and interest. As more and more investors realize the nature of this market, they too will gravitate to this same strategy providing price support for my funds and your stocks. It may not be the most exciting way to play this market. But that's OK; I could do with a little less excitement right 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.
The Independent Investor: Should You Consider Renting What You Can't Sell?
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The first thing to remember is there is no such thing as "can't" when selling your home. It is just what price you are willing to take for it. Some homeowners have no choice. Underwater owners that are running out of money to pay their mortgage must sell or face foreclosure. Their woes have been well documented. But what about those of us who would like to sell, either a primary residence or a second home, but have the money to wait for a bottom in the real estate market?
The rental market is booming across America. More than 3 million Americans have entered the rental market over the last three years and as foreclosures mount, that number will only increase. It appears that demand for rental properties is outpacing supply.
Obviously, renting your home only makes sense if you have another place to live. If you are relocating because of employment, on sabbatical for a year or two, if you have a second home, or will be moving in with someone else (because of a marriage, death of a relative, etc.) then the economics of renting may be appealing.
On the plus side, renting allows the owner to keep the property until prices bottom out and, hopefully, begin to appreciate. In the meantime, rental income can cover mortgages, taxes and insurance payments if the rental price is right. Better yet, certain expenses such as mortgage payments, property taxes, repairs, maintenance, advertising, broker's fees, transportation and insurance can be deducted from rental income.
There's also a phantom tax deduction called depreciation (the wear and tear on your property) that you can deduct each year from your rental income. All you do is divide the fair market of your home (excluding cost of land) by its recovery period, which is 27.5 years for residential property. For example, assume your home is worth $350,000 divided by 27.5 years equals an annual deduction of $12,727.27 from rental income.
But there are some negatives as well. Landlords have plenty of headaches ranging from renters who fail to pay their rent, to vandalism of their properties. Housing maintenance issues don't go away simply because you no longer live in your home. Depending upon its age, everything from leaky faucets, non-flushable toilets to really big emergencies like roof leaks, and lack of electricity and heat must be addressed immediately or you may be hauled into court and sued.
Renters too have rights and in some cases, even obvious reasons for evictions, such as failing to pay the rent, may involve the courts and we all know how lengthy court cases can be.
As it now stands, the U.S. government provides a generous tax break for homeowners who have lived in their house for at least two of the last five years. Married couples who file jointly can keep up to $500,000 in capital gains from the sale of their home, tax-free. Singles can enjoy up to $250,000 in windfall profits. By renting your home that tax break disappears under certain circumstances.
If you are renting for just a year or two, there is no problem. Simply move back within the qualifying time period, sell, and enjoy your gains. However, if you want to rent over the long term (five years or more), you need to understand the tax consequences. Of course, you can always have your cake and eat it too. If you are willing to rent for a period of years, then move back into the house for two years and then sell it, you will qualify for the tax break.
Before you decide, find out your rights as a landlord by consulting with an eviction attorney. You should interview property managers. They will charge a percentage of the rental income for handling all of your landlord duties; but it could be worth it. Finally, create a budget that encompasses all the expenses, taxes and other items you might incur as a landlord.
All of this may take more time and effort then you are prepared for, but let's face it, renting is a business just like any other and requires preparation, planning and work.
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: Europe — A Train on the Right Tracks
It finally looks like the European Union is on the right track. After almost two years of vacillating, finger pointing and empty promises, the outlines of a deal were announced this week in Brussels that could provide a solution to Europe’s debt crisis.The EU gave itself a self-imposed deadline of this Wednesday to come up with at least an outline of a deal. It wasn't easy. There were so many moving parts to include that in the end it took a marathon, ten-hour series of negotiations to get everyone on board.
The respective finance ministers addressed the three areas that most threatened the financial well-being of the Union. Greek debt was the first order of business. Europe's leaders vowed to reduce that nation's debt to 120 percent of GDP versus its present rate of 180 percent. Much of this reduction will be accomplished by asking private creditors (mostly banks) to accept a 50 percent loss on the Greek bonds they hold. It remains to be seen whether these financial institutions will cooperate, but governments have historically managed to get what they have wanted from the private sector (or else).
This 50 percent "haircut" is equal to roughly $139 billion, which will be applied to a second rescue plan for Greece. The Euro leaders promised to guarantee the remaining half of Greece's existing debt and will spend as much as $42 billion to insure against further losses. It will take at least another two or three months to finalize this debt deal.
The next issue, of course, was how to mitigate the big hit Europe's banks are going to take in this haircut. The losses they will incur will drastically lower their reserves and the major concern was how to replenish these reserves quickly. The banks have been directed to go out into the open market and raise as much as $148 billion between now and next June.
Of course, the devil is in the details. There is no guarantee that there will be an appetite for new European debt or equity offerings. Still, depending on the terms, there may be demand from countries such as China, Brazil or in the worst case, European governments themselves that may be buyers of last resort if push comes to shove.
The EU recently agreed to establish a European Financial Stability Facility and fund it with $610 billion. Somewhat akin to the U.S. TARP, the ESFS is a bailout mechanism, only instead of baling out banks, the money was earmarked to save countries like Italy, Portugal and Greece.
The problem was the EFSF is just too small to insure the debt of bigger countries. There was a need to leverage the fund in order to insure at least part of the debt of borderline economies like Italy and Spain. The ministers agreed to allow the ESFS to act as a direct insurer of bond issues, which will bring the total firepower of the fund up to $1.39 trillion. This should make new bond offerings by Italy and Spain more attractive to investors, according to the EU.
There is also an effort to entice big institutional investors from both the private sector as well as government sovereign funds to contribute to a special fund, backed by the EFSF, which could be used to buy government bonds as well as to help in the recapitalization of Europe's banks.
I admit there are still a lot of details to work out but the Europeans should get an "A" for effort in finally addressing the core problems of their financial crisis. I do believe that implementing this program will take time. The process will be less than perfect and that could mean more disappointment ahead, but at least Europe is on the right track at last.
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: She Said, He Said
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A week ago, France and Germany announced they had a deal that would be all but completed this weekend and signed, sealed and delivered by Nov. 3, the date of the next G-20 meeting. Markets rallied. Then word came down that this weekend may be too soon for a definitive agreement. Markets fell.
Markets both sold off and then rallied when both French President Nicolas Sarkozy and Prime Minster Angela Merkel indicated that, while no definitive agreement would be completed this weekend, both countries were in agreement on the broad outlines of a deal. The markets here have been up or down 11 days in a row based on this "she said, he said" soap opera.
In a negotiation of this size, with so much at stake, one should expect plenty of starts and stops, contradictory statements and, yes, even some back tracking. It is natural given that this new "comprehensive" program must be sold to 17 nations. A period of consensus building must occur while behind the scenes deals are cut between the players. All this takes time. The fact that the lead players gave themselves such a short deadline in the first place has me scratching my head in puzzlement.
But the real insanity is in the market's reaction. All the historical tools that normally govern the direction of the market have been cast to the winds. The inmates are running the asylum for now and there is little we can do about it.
Granted this crisis has been going on for a long time and has contributed to investors' schizophrenic behavior. The longer things are left to atrophy, the higher the chances of some great meltdown occurring, such as a default by Greece or maybe even one of the larger countries like Italy or Spain. Then, too, the markets have grown increasingly impatient with delay after delay and could force the crisis (and a solution) by selling Europe and global markets en masse. It was exactly what occurred in the U.S. after the first TARP bill failed to pass.
To date, the Europeans are playing a smart game of poker. Every time the markets threaten to swoon in dissatisfaction or frustration, one or more statement is leaked or announced via a newspaper or official, which keeps the markets hoping and investors buying in anticipation of a deal. There are still significant issues to be overcome and the international press has gone over the negatives ad infinitum. By promising a solution in the near future, "next Wednesday" or the "Wednesday after next," they are succeeding in pushing world markets higher, staving off a run on their banks and their markets while giving them more time to negotiate a final solution.
In the meantime, on this side of the Atlantic, quarterly earnings are not as bad as some feared. The macroeconomic data is coming in stronger than expected and there are a proliferating number of stories concerning a plan by the administration and the Federal Reserve to address the housing market. Readers should pay attention to this.I first wrote a column ("What the Markets Missed") explaining that the Fed's latest move in targeting long-term interest rates had much more to do with the mortgage markets, refinancing of troubled homeowners and providing a stimulus to what really is ailing the economy: housing. The troubles in Europe, the "he said, she said" headline grabbers are focusing investor's attention on the forest while a tree may be growing over here in America.
I'm still riding this rally higher but have my finger on the trigger. The game Europe's leaders are playing with the market have a finite lifeline. At some point, they either have to deliver and show their hand or face the consequences.
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: Can you blame them?
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It is not too difficult to understand why investors have abandoned stocks en masse. The declines and losses most investors experienced in 2008-2009 were traumatic. Many investors never returned to the equity markets, but preferred, instead, to keep their money in bonds or money markets. Those who did participate in the subsequent stock market rally from March, 2009 to the beginning of 2011 made quite a bit of their money back.
This year, however, the individual investor experienced a level of volatility that was beyond comprehension. It didn't matter whether you were invested in stocks, mutual funds or exchange traded funds, or in defensive areas such as dividend stocks or preferred shares. Nothing was immune and the volatility was insane.
Consider the movement in the S&P 500 Index for one 30-day period in September through October of this year: Up 8.31 percent, Down 7.34 percent, Up 5.34 percent, Down 5.68 percent, Up 7.38 percent, Down 8.70 percent, Up 7.34 percent, Down 10.14 percent, Up 6.65 percent.
By the end of the third quarter the Dow, S&P and NASDAQ all lost more than 12 percent, the worst decline since the fourth quarter of 2008. If you were invested in Europe, the results were even worse with Germany, Italy and France all down over 30 percent. Between the volatility and losses, no wonder the few hardy souls who had stuck with the market since 2009 have decided to abandon ship.
Their desertion has drained a great deal of liquidity from the markets over the past few years. Liquidity is a term used to describe the ease in which you can purchase or sell a security without moving the price higher or lower by an appreciable amount. In a recent story in the Wall Street Journal, "Traders Warn of Market Cracks," several Wall Street traders argue that it is increasingly difficult to trade large amounts of stock without moving the market (price level) substantially.
We have all heard of high-frequency trading (HFT) by now. These HFT firms represent about 2 percent of the 20,000 trading firms that operate in the markets today but account for over 73 percent or more of trading volume. Directed by computerized algorithms, hi-speed computers buy and sell in mini-seconds capturing tiny profits (less than one cent per share in many cases) over and over again 24 hours a day around the world.
In calmer market environments, HFT does provide additional liquidity in the markets and actually drives down costs. Where the system breaks down is in volatile markets like we have today. These traders are geared to make small amounts of money on large volumes. When good (or bad) news hits and markets begin react "in size" the HFT firms back away from trading, which instantly causes a 73 percent drop in liquidity at the very time it is needed most. It is what happened during the "Flash Crash" in May of last year.
In addition, some critics are blaming certain leveraged exchange-traded funds for contributing to the volatility in the markets. ETFs have experienced explosive growth in the last five years and now accounts for 40 percent of the daily trading volume. The use of ETFs that provide two and three times the amount of exposure to an underlying index, they say, causes excess buying and selling that would not occur otherwise. ETF defenders argue that leveraged ETFs only account for 4-5 percent of volume and are simply reflecting market sentiment not causing it. A subcommittee of the U.S. Senate has opened hearings on the issue this week.
The bottom line, in my opinion, is that today's stock market environment is no place for the retail investor unless you have help from a professional. Rampant insider information between government and Wall Street, both here and abroad, overnight trading by professionals that effectively prevents the individual investor from participating in the market's big moves, and the above volatility factors make the markets an unfair arena for most of us.
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.
