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@theMarket: What Were They Thinking?
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In hindsight, the market's expectations made little sense. Why would European Central Bank (ECB) President Mario Draghi, speaking earlier this week, announce a new stimulus package prior to the outcome of Greek elections on June 17? If the moderates win, and there is a 50-50 chance they will, then there may be no need for any kind of immediate stimulus.
Granted, the declining economic picture in Greece certainly helps the anti-austerity, pro-growth, radical opposition party. Unemployment is now at 21.9 percent. The economy shrank yet again in the first quarter as a result of spending cuts and taxes. GDP is now declining at a 6.5 percent annual rate. But miracles do happen and the moderates could prevail in next Sunday's elections, despite the dreadful state of the country's economy. But the ECB is certainly going to refrain from doing anything that might influence that election — including any stimulus initiatives.
Here in America, the buzz was that Chairman Ben Bernanke was going to announce another stimulus package or extend the Fed's present stimulus "Operation Twist," (which ends at the end of this month). Once again I thought this kind of speculation was coming out of left field. In his testimony on Capitol Hill on Thursday, Bernanke delivered a carefully balanced view of the economy without any new stimulus announcements. Instead, he reiterated (as he has done in every Fed statement) that the central bank stands ready to intervene if necessary.
What both Bernanke and Draghi did say was there is a strong and immediate need for politicians on both continents to step up to the plate and deliver on their policy responsibilities. Reading between the lines, we should understand that central bank intervention (without fiscal action) becomes less and less effective. Bernanke said as much to his audience in the Q&A section of his appearance before the Joint Economic Committee of Congress.
Obviously the markets got it wrong this week, although the hope and a prayer stimulus stories did provide the excuse to push the S&P 500 index up almost 3 percent. To those expecting a snap-back rally, like me, the point is that the markets were oversold and due for a bounce; how we got there is immaterial.
So what happens next? As I said last week, we are getting close to a bottom. A good guess would be a low somewhere around 1,250 on the S&P 500 Index over the next few weeks. I'm sorry I can't be more precise, but it is a tough market and there are a lot of moving parts that aren't easy to decipher.
For example, China cut its key interest rate this week by 0.025 percent. Investors took that as a positive sign, hoping that it signaled a round of further cuts in the months ahead. Since growth in China (or the lack thereof) is vitally important to global growth prospects, investors were bolstered by the development. However, a slew of economic numbers are being released this weekend in China. Some China watchers worry that the data will be much worse than expected. If so, investors won't take kindly to that news on Monday.
Then there is the meeting this weekend between Spanish authorities and finance ministers of the EU. News sources believe that Spain will ask the EU's help in bailing out Spain's troubled banks. Bottom line: it is all noise that will insure that markets will remain volatile over the next week. Strap on your seat belts and welcome to summertime in the stock markets.
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: Fraught With Peril
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Much of Friday's downside action occurred within the first few minutes of the market opening. That is usually the case, leaving most investors no choice but to bear the brunt of the decline. The stock markets in Europe were already falling on their own set of economic woes when the Commerce Department announced that U.S. unemployment rate ticked up from 8.1 percent to 8.2 percent with the economy adding the fewest jobs in over a year.
This was only the latest in a series of disappointing economic numbers that indicate our stop and start economy is slowing once again. Readers may recall that as far back as April, I warned that we could see a slowing in the already moderate growth rate of the economy for a variety of reasons. It was why I advised investors to begin taking profits and getting defensive in the face of the first quarter rally.
As of today, we have basically given back the entire gains of that rally since the beginning of the year. Those who had followed my advice have booked their hefty gains and are sitting on the sidelines. That strategy has paid off.
So here we are at an extremely critical level on the S&P 500 Index. The 200 Day Moving Average has traditionally triggered a change in investment attitudes by many market participants. If the 200 DMA is broken to the downside decisively, it is usually a sell signal. If, on the other hand, the S&P moves above that level and stays there for more than a day or three, it is usually a buy signal. Today that 200 DMA is at 1,284. We are slightly below that level as I write this.
Remember that we are talking art not science, so give that theory a bit of leeway. For example, many times markets reach the 200 DMA, break down through it for a few days and then bounce back above it. So don't go out and sell everything if over the next two weeks we find market averages stay slightly below that magic line in the sand.
Since we won't find out the fate of Greece until after their second round of national elections on June 17, there can be no closure around the immediate concerns of global investors. Will Greece stay in the Euro? If not, what will happen and how will that impact the European Community overall? Yes, "fraught with peril" seems to be an apt description when discussing Europe in June.
So it seems logical that markets will find it difficult to stage any kind of meaningful rally until we know what lies in store for us. Given that markets usually discount the worst in an unknown environment, I suspect that what we are witnessing right now is that discount mechanism at work. In other words, investors are selling the rumors.
That leaves an interesting possibility for what comes after the Greek elections. If traders are selling now, then usually they will buy back on the news, no matter how dreadful it is. I have often stated that markets can deal with the facts, either good or bad. But markets can't cope with the unknown and today there are more unknowns out there than there are leaves on a tree.
We do know that Europe is trouble. We do know that economic data in China, the engine of global growth, continues to weaken and now the U.S. appears to be slowing. We also know that last year's Fed stimulus "Operation Twist" is slated to close at the end of this month.
I find myself looking at columns I wrote a year ago and they are eerily similar to what I am writing today. As such, it would be wise to remember that under these worsening set of circumstances last year, markets and economies declined until central banks both here and abroad announced another set of stimulus measures that sparked huge stock market rallies. It happened last summer as well as the summer before that.
I expect the same will happen again this year, which is why I advised readers to sell in April and reserve the cash. We are not quite ready to invest that money yet but we are getting close. Keep reading and remain patient.
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: When Cash Is King
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Clearly, investors are just as skittish. They were last summer as well, and for the very same reasons. If anything, the stakes are higher today. Last May, there was some concern that Greece might go bankrupt and/or depart the European Community. This year, both Greece and other member states are actively preparing for that outcome.
Last year, there were riots in Athens. Police battled protestors angry over pension and other spending cuts. Damage was minimal and few were really injured, although it made nightly newscasts fairly dramatic. This year it's far more serious. Greek depositors are quietly but steadily pulling their money out of their banks where there are no TV cameras.
Greeks fear that when (not if) they depart the Euro, their currency (the drachma) will be worth next to nothing, wiping out their savings. Depositors in other problem countries such as Spain and Portugal are also doing the same thing, fearing the worst. Unsure of the Euro and its future, these Europeans are putting their money into the greenback. The higher the dollar goes against the Euro, the worse the situation becomes.
Have you also noticed that we are back in the "he said, she said" environment that ruled the market's direction throughout last summer? This week the averages gyrated up and down as one after another European politicians or bureaucrat pontificated over the fate of Greece or Spain. Positive comments, meant to buck up the markets, were quickly followed by retractions or other contradictory statements.
Face it readers, this situation is going to be with us until at least the middle of June, when Greece holds a second election. At that point we may achieve more clarity on the fate of the country and its membership in the Euro-zone with a corresponding move in the markets. Until then expect more of the same volatility.
Last week, I predicted a "snap-back rally." We had it but it wasn't much of one, barely moving the averages up by 2.5 percent or so. The S&P 500 Index now sits at around 1,323. I expect that both the upside and downside will be volatile over the next few weeks, based on the events in Europe.
On the downside, we could test the 200-Day Moving Average around 1,279 on the S&P 500 Index with further risk to 1,250 or so. On the upside, we probably have a celling between 1,340-1,370 on that same index. That would provide a 5-7 percent trading range for the markets. Those who follow the market day-by-day will find that stressful to say the least.
Last week's much heralded IPO, which I likened to the buildup preceding the "John Carter" movie, flopped on an epic scale. That it was a disappointment is obvious, but more importantly, it also drives yet another nail of distrust in the coffin of Wall Street. Retail investors, already wary of anything stock-related, took a flyer only to be burned once again by "da boyz" in the three-piece, pin-striped suits that took their money and left them holding the bag. Soon the only investors left in the markets to be bilked will be themselves.
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: 'Play it again, Sam'
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| "Play it once, Sam, for old times' sake, play 'As Time Goes By.'" — Ilsa Lund (Ingrid Bergman) "You played it for her, you can play it for me ... If she can stand to listen to it, I can. Play it." — Rick Blaine (Humphrey Bogart) "Casablanca"
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Last year, the bull-market rally began to run out of steam on May 2. Over the next two months, the Dow fell 1,000 points to the 11,900 level. There was then a rally that took the averages back up to a little over 6 percent before giving up the ghost once more on July 26. It continued to decline until the beginning of October, falling all together about 20 percent.
It wasn't until the Federal Reserve Bank came to the rescue once again with a new round of monetary easing that the markets finally bottomed and began to rise on Oct. 4, 2011. Over the next six months, the S&P 500 Index rallied 30 percent until its peak this year on April 2. It waited until May 1 before beginning its present pullback.
For Wall Street traders, it was also an exhausting time in the markets during which swings of several percentage points a day became common. Much of the decline was blamed on Europe. The U.S. economic data didn't help either. Week after week, one disappointing data point followed another raising the specter of a double-dip recession. Does any of this sound familiar?
Today the circumstances in both Europe and the U.S. are eerily similar to what happened last spring. So far in May, the stock market is playing the same swan song as last year.
"History doesn't repeat itself, but it sure does rhyme," said Mark Twain well over a century ago. And that saying certainly applies to the stock market. The question is what, if anything, is different about this time around?
The short answer is, not much. Italy and Greece were the focal points of the Euro debt crisis last year. Since then there has been a massive bank bailout and an austerity pact but nothing much has been done to turn the European Unions' struggling economies around. The economic picture has actually deteriorated further, thanks to the nonsensical austerity plan engineered by Angel Merkel of Germany.
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Spain is the main problem right now. As their economy nose dives, their debt explodes, while their banks wobble under mountains of bad real estate loans; the 12th largest economy in the world is fast approaching a life-support situation. Greece, after last week’s election upset, is also revisiting its off-again, on-again membership in the EU.Once again, investors are keying off the Spanish/Greece/Italian sovereign debt yields to decide whether to buy or sell on a daily basis. So far it's been mostly selling. Remember my "She Said, He Said" columns of last summer? Investors were driven crazy by conflicting and often contradictory statements out of Europe's capitals. Today the names have changed — Hollande instead of Sarkozy in France, Draghi instead of Trichet at the ECB, and in Greece, Papandreou for someone yet to be announced — but the conflicting statements remain the same.
Over here, we have the same issues over the economy that we had last year. And in the wings, hovers the Fed. That's right, if our market, Europe's markets, the economy and employment begin to drop dramatically, the Fed will once again come to the rescue. That, my dear reader, is why this year is rhyming with last year and the year before that.
As long as governments continue to tinker with the world's stock markets, as they have done ever since the 2008 financial crisis, we will have these same issues over and over again. I have written about our stop and start economy often. As long as the Fed is the sole locomotive of growth, we can expect the economy and the stock markets to continue to boom and bust.
This has truly become the Great Recession. Readers of this column were advised at the end of March, beginning of April, to take profits and prepare for this sell-off. I am writing off this second quarter. By the end of it, I suspect the averages could be where they were at the beginning of the year, until then, stay defensive and I'll keep you posted.
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: A Sea of Red
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In April, the labor force participation rate, the employment-to-population ratio, and the number of people who said they are employed all fell in the month. The sad fact was that 350,000 people quit looking for jobs altogether. As a result, the labor force technically shrunk, which makes the overall unemployment rate look better than it actually was.
Investors ignored the fact that the number of jobs that were reported by the Bureau of Labor Statistics over the last three months was all revised upward. In total, during the last quarter 53,000 more jobs were gained but went unreported until now. But the market focused solely on this month's data and sold accordingly.
I think that responding to an individual data point is a mistake. Data like unemployment numbers, GDP and the like should be viewed over time. It is the trend that counts, not individual data reports, because government statistics by their nature are highly inaccurate and most of the time undergoes several revisions before a final figure is reported. Yet, the markets insist on trading off today's numbers as if they held the answer to the market's directions for days or weeks into the future.
The big drop in labor participation, however, is not a good sign for the economy or for the administration. In an election year, the GOP frontrunner, Mitt Romney, is asking voters if they are better off today than they were at the beginning of the Obama administration. Clearly those 350,000 workers who have abandoned the work force will answer with a resounding no.
And yet the total number of jobs has grown since President Obama came into office, so both sides will use the unemployment data to suit their own agendas. As the politicians blame each other for the failures and take credit for the successes, no one is really enunciating a clear and precise plan for how to increase the number of jobs in this country. It is simply a game of sound
Overseas, this weekend there are also elections in both France and Greece. It appears from the polls that Nicolai Sarkozy will lose the presidential election and French Socialist candidate Francois Hollande will take over the reins of power. This will present a problem to both Germany and the European Union since Hollande intends to renegotiate the recent austerity pact signed after much deliberation and market turmoil by EU members.
In Greece, parliamentary elections will be held in the midst of a deep recession caused by these same austerity measures. There is enormous unhappiness among Greek voters toward the European Union and its own leaders in both major political parties. Extreme and radical fringe party candidates have been gaining support. There is a chance that voters will not only reject both parties but elect new radical leaders that will want to either renegotiate all their past agreements with the EU or outright reject remaining agreements within the Eurozone altogether.
Given this background, it is not surprising that investors are selling first and waiting for the elections results later. Next week could offer investors a wild ride if things go the wrong way in Europe. Despite the sell-off this week in the markets, we are still a mere 33 points below the level of the S&P 500 Index at the beginning of April. We could easily fall further given the right circumstances. My advice is to stay defensive and remain on the sidelines until the landscape is a bit less muddy.
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.
