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@theMarket: Profit-taking: An Opportunity
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Now normally, history doesn't repeat itself but it does rhyme, more often than not. The first Federal Reserve Bank quantitative easing (QE 1) was announced on Nov. 25, 2008, and was formally launched on Dec. 16 of that year. QE II kicked off on Nov. 3, 2010, and QE III was announced last Thursday. After both the QE I and II announcements the markets rallied and then spent several days consolidating those gains. That seems to be the pattern we are experiencing now.
Investors who purchased equities during that consolidation phase were greatly rewarded. The stock market after QE1 gained 29.8 percent during the next 12 months. After QE II, the markets gained another 13.2 percent in just six months. The lion's share of those gains came within the first three months after the announcements. This time around, stocks rallied in anticipation of a third easing so some of those gains could already be in the market.
Nevertheless, a fairly safe prediction would be that over the next 6-8 weeks we should see a substantial rally. That should take us just into the November elections or slightly after. That is where things could get a bit dicey, in my opinion.
The stock market, using the S&P 500 Index as a benchmark, is already up almost 16 percent since I advised readers to get back in the market. If the stock averages were to rally into the November elections, we may be looking at a gain of greater than 20 percent for the year. On Wall Street, there are three kinds of investors: bulls, bears and pigs. I try to avoid "pigging out" when it comes to profits so, by November, it just might be time to cut and run.
In the aftermath of the general elections, there are a multitude of economic issues that the lame-duck Congress will either face or flunk. Chief among them is the often mentioned "Fiscal Cliff." Will the makeup of the House and Senate be such that we can avert across-the-board tax increases and deep spending cuts by Jan. 1, 2013? Will politicians agree to raise the debt ceiling once again? If so, what will that do to the U.S. credit rating?
Those are only some of the gnarly issues Congress and the president–elect will face. Depending on who wins, the first quarter of 2013 might also be a bit stormy. Given that I have no idea of how all of this is going to play out, November might be a great month to take profits this year. There is a risk that things may go absolutely wonderful. Congress and the president could make up. A raft of great legislation could pass before the end of the year and this year's Christmas rally could be stupendous. In which case, I would have left some money on the table by getting out too soon.
So be it. No one ever went broke by taking profits. This year has been a good one so far. Although it is only late September, it is time to begin thinking about an exit strategy. Hang in there for now because I do think there are further gains to be had in the markets. But plan for the future.
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: Game Changer
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This is a game changer, in my opinion, so hold on to your hats because the markets are definitely going higher. The only question is how high?
I won't bore you by regurgitating all the moves the Fed has made, but I will give you the bottom line. Interest rates on the short end will stay low through 2015. The Fed is going to target the mortgage market (read housing sector) by buying up all the mortgage-backed securities they can find. That should both drop lending rates further and also spur the banks to start lending money to Americans who have not been able to obtain mortgages or refinancing.
These latest moves by the Federal Reserve Bank are actions I have been advocating since writing my column "What the Markets Missed" on Sept. 22, 2011. It actually goes further by putting everyone — the markets, the politicians, the corporations and small businesses — on notice. Fed support will be on-going. Why is that important?
Because up until Friday, the Fed's wait-and-see attitude toward additional stimulus created a great deal of uncertainty within the markets and the business world. It also created what I call a "start and stop economy." In such a business climate, both Fortune 500 corporations and small businesses cannot plan, cannot hire, and will not invest.
The Fed is not only removing any uncertainty that this might have been their last QE move, but goes a lot further by putting everyone on notice that they are committed to stimulate for as long as it takes — even after the economy starts to grow again.
Remember readers that no matter how much support the Fed is willing to contribute they can't solve the unemployment problem alone. Once again, Chairman Ben Bernanke reiterated that without fiscal policy, the unemployment situation is not going to improve very much.
So bear with me as I fantasize about the near future. In my opinion, Ben Bernanke just handed the presidency to his boss, Barack Obama. In exchange, so this story goes, the newly re-elected President Obama will forego partisan politics, work with the opposition in both the House and Senate and implement a full employment policy through fiscal stimulus.
But what specific policies are the Republicans and Democrats going to implement in order to reduce unemployment? Both sides keep jawboning about "getting America back to work" but exactly how are they going to accomplish that? How, for example, is cutting spending and raising taxes either directly (taxing the rich) or indirectly (cutting services to the middle class and poor) going to increase job growth? Readers/voters should demand those answers now — before voting for one politician or the other.
But back to the markets, with "risk on" once again, dividend and income funds should take a back seat to more aggressive areas. That doesn't mean dividend stocks won't still go up. They will, but just not as fast. Other more defensive areas such as utilities, consumer and durable goods, healthcare and such will also see less price appreciation than some other sectors. For those who still hold long-dated U.S. Treasury Bonds, get out of them right now. The Fed is no longer supporting that market and as the economy strengthens the prices of these bonds are going to plummet.
Some areas in the stock market that have lagged the overall markets could do quite well between now and November elections. The materials sector seems ripe for a rebound as do the financials and industrial sectors. Emerging markets, which are also top heavy in commodities, could catch up fairly quickly.
I am not sure how high the markets will go before succumbing to a bout of profit taking but, given the background of central bank stimulus, I remain a buyer of pullbacks, which has been my advice since early June. It was a great summer and it could be an even better fall.
Bill Schmick is registered as an investment advisor 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: Are Markets Predicting Obama Winner in November?
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Readers may recall that I have been using the historical performance date of the stock market during election years since 1900 to predict the market's direction in 2012, courtesy of Ned Davis Research. So far, that data had accurately predicted the markets ups and downs all year.
The data shows that the Dow Jones Industrial Average gains an average of 8.6 percent each election year when the incumbent has won. It gains less when the challenger wins. The Dow is up 8.8 percent year-to-date. In only three cases over the past 112 years has the incumbent party candidate gone on to lose after being up that much by the end of August. As such, I would say there is high probability (89.7 percent) that a Democrat will sit in the White House come November.
Of course, you may reject the stock market as an accurate predictor of the future. You may also choose not to base outcomes on probabilities; that is your prerogative. But as a stock market investor you may want to hope that the election-year indicator is correct. Here's why.
In last week's column, I stated that "Traditionally, stock markets are thought to do better under a Republican administration since their policies are normally more pro-business and pro-stock markets," but that kind of thinking flies in the face of reality. Kudos to a reader from Lenox Dale who supplied me with a wealth of statistics which show that stocks have historically fared much, much better under Democratic administrations. The S&P 500 Index has rallied an average 12.1 percent per year since 1901 when Democrats occupy the White House versus just 5.1 percent for the GOP.
The overall economy has done better as well with GDP increasing 4.2 percent annually since 1949 when a Democratic president occupied the Oval Office compared to 2.6 percent under Republicans. Our greatest stock market run occurred under Bill Clinton's watch (1993-2000), followed by the period 1981-1992 under the presidencies of Reagan and Bush.
But enough history, this week we made a little history of our own with all three stock market averages hitting new highs for the year. As expected, European Central Bank President Mario Draghi outlined the latest European rescue plan. The ECB intends to buy member nations' government bonds in exchange for further promises to accept outside oversight of their fiscal policies.
Then, on Friday the unemployment data came in weaker than expected. That immediately had gold flying in anticipation that it is all but certain that the Fed will ease next week at their Sept. 13 FOMC meeting. And my wish came true. I said I would like to see the S&P 500 Index break out of its weeks-long trading range and it did. It appears more upside awaits us.
Bill Schmick is registered as an investment advisor 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: The Fed Keeps Us Guessing
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The stock market, which has been climbing all summer in anticipation of another bout of easing, took the news in stride. The averages gyrated up and down but never really went negative despite what some perceived as disappointment. News out of Europe helped sustain the bulls and the averages. Expectations that the European Central Bank "might" further ease monetary conditions next week kept the markets buoyant. And if not Europe next week, the Fed could always ease at their next meeting in mid-September.
Grasping at straws might be a good way of parsing the rumors that surfaced on Friday that the president of Germany's Bundesbank has threatened to resign. Bulls were guessing that the only reason he would quit is if the European Central Bank was ready to provide more stimulus against the wishes of Germany. It was rather silly that anyone would believe this story, but consider the timing.
The rumor surfaced just hours before the Fed disappointed the markets. It also occurred on one of the slowest trading days of the year when volume was miniscule and participants were leaving early for the three-day Labor Day weekend. It sure smells like an attempt at market manipulation and it worked!
I have to hand it to the central bankers. Both Ben Bernanke and his counterpart in Europe, Mario Draghi, have learned the lingo that keeps the markets high and happy. Words like "fairly soon" or, in Draghi's case, "exceptional measures," when talking about future stimulus has worked like a charm. In these markets where nothing matters but the next fix from the central bankers, government officials are becoming adroit in parceling out just enough hope to keep the stock markets calm and trending upward.
The stock market has also been developing a more positive attitude thanks to the Republican convention this week. The most recent polls show Mitt Romney in a dead heat with Barack Obama. Traditionally, stock markets are thought to do better under a Republican administration since their policies are normally more pro-business and pro-stock markets.
Personally, I would like to see the S&P 500 Index break out of its present range, which has bounced between 1,400 and 1,426 throughout the month of August. It has been encouraging that the bottom level of support has held but so has the resistance at the top. This sideways consolidation is constructive since it has allowed the markets to work off any overbought conditions.
Clearly, no one has made much money in August. We are now entering September, considered the worst trading month of the year in terms of market gains. Some strategists are expecting as much as a 10 percent pullback. As I've written in the past, stocks could easily pull back 3-5 percent at any time, but that's about it. With both the U.S. and Europe's central banks promising to bail out two/thirds of the world's economies, any dip should be contained and simply provide an opportunity to buy equities at cheaper prices.
A note to my readers in the Berkshires:
I have volunteered to teach a course this fall at Berkshire Community College at the Osher Lifelong Learning Institute (OLLI). The classes will be on Mondays from 2:45-4:15 p.m. throughout September and October. The course, "America's Future: Buy, Sell or Hold?" will teach students to think critically about such events as this year's presidential elections, wealth and women, our education system and much more. For more information or to sign up for the course call the OLLI office at 413-236-2190.
Bill Schmick is registered as an investment advisor 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: Watching Thin Paint Dry
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Of course, volume shrinks during the summer months anyway. Wall Street participants take three-day weekends or vacations while finding excuses to be on the golf courses whenever possible. For many, it is a genteel, less hectic time when junior traders man the turrets and talk to their friends via cell phone.
However, Securities Technology, an organization that monitors changes in stock and derivative volume, reports that the daily volume of trading stocks is down 16.9 percent from a year ago. In June alone volume declined 9.9 percent. In Europe it was even worse with a 12.3 percent plunge last month. In addition, trading in derivative markets fell off a cliff, falling 15.8 percent from June to July worldwide. There was also an almost 30 percent drop in exchange-traded funds transactions versus 2011 as well, and this is supposed to be a growth area.
This trend is all the more disturbing since last year's volume declines were just as bad. It appears that investors are abandoning the nation's stock markets wholesale with a growing number of private and even professional investors jumping ship.
Some of the blame can be pinned on the continued presence of high frequency traders who brought us 2010's "flash crash." Last week, one of their fraternity brothers created another mini-crash of over 100 stocks that listed for well over half an hour. They claimed it was a computer glitch that cost that firm over $400 million in losses as well as its independence.
This fiasco follows closely on the heels of the multibillion-dollar derivative loss racked up by one of our nation's "most reputable" banks. It was caught speculating the wrong way in the same markets that brought us the financial crisis. In the eyes of most investors, these incidents simply strengthen the notion that the markets are nothing more than a global casino where the bets are rigged in favor of the dealers and croupiers.
Investors are absolutely correct in my opinion. The game is rigged; the banksters and fat cats get richer while the rest of us get poorer. And if this were not enough, this same one percent of the population is now busily using their ill-gotten gains to buy this year's presidential election. What the diminishing volume shows me is that there is an ongoing "buyer's strike" among investors big and small that will continue until it doesn't.
Is it any wonder that the financial sector continues to lay off thousands and thousands of well-paid Wall Street types? Their business is shrinking away to nothing. Before long all that will be left are the billionaires and their firms. Poetic justice would be a scenario in which they are left trading against each other with the same insider information bought and paid for from the congressmen and senators in their back pockets.
But enough criticism, let's focus instead on buying the dips. There is a dearth of news coming out of Europe and America between now and the end of the month. That gives traders plenty of opportunity to move markets whenever and however they want. For you, that may mean another chance at picking up some equities at cheaper prices, so stay vigilant.
Bill Schmick is registered as an investment advisor 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.
