@theMarket: To Taper or Not to Taper?

Will the Fed taper? If so, when will they taper and by how much? No one knows and because the markets just abhor the unknown, it is why the stock market declined this week. Pay no attention to these histrionics.

The simple fact is that markets need to consolidate, especially in a bull market. Of course, that doesn't sell newspapers or keep you tuned into the television when you should be out enjoying the weather. It is August, people are on vacation, and those who are not are bored to tears. Fretting about will they or won't they passes the time and if you are nimble you might make a little money off the angst in short term trading.

Listen to me: markets discount the news once, not twice, and especially not three times. From May 22 through the end of June, the stock market discounted the Fed's announcement that they planned to taper their stimulus program if and when they felt it was appropriate. It doesn't matter whether they taper in September, by the end of the year or next year. It doesn't matter by how much. All that matters is they will and that the market declined by over 7 percent as a result.

The present pullback in the market is about hitting another record high, (last week the S&P 500 Index breached 1,700) and is now consolidating those gains. End of story. There's nothing more to it than that, so why don’t we all move in and stop rubber-necking.

Instead of fretting over what is happening in the U.S., readers should be paying more attention to Europe. If you haven't read last week's column "Europe is Recovering" access my blog www.Afewdollarsmore.com and have a read. In a nutshell, Europe's recession is coming to an end led by Germany, the powerhouse of the continent. That recovery after the longest recession in years will be similar to the U.S. experience. Unemployment will remain stubbornly high while the economy will grow but at a moderate base.

Values in Europe lag those in the U.S. stock market. In my opinion, those who invest now and are prepared to wait will see some hefty returns over the next few years. There are many who still doubt that an anemic recovery in Europe won't help stocks much, but they said the same thing about the U.S. market back in 2010 and look what happened here.

Over in Asia, Japan (another long-term favorite investment of mine) has been going through a period of consolidation that I expect should continue into the fall. Both the Nikkei Index as well as the Japanese currency have experienced huge moves since last November. A period of consolidation is almost a text book requirement before further advances (in the case of stocks) and declines (the yen) can be expected.

August is traditionally a disappointing month for U.S. investors. Stocks usually trade aimlessly in a listless fashion. My advice is to simply ignore the headlines and gyrations in the stock market this month. September will be time enough to take the measure of the markets for this coming fall.

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: What's Not to Like?

This has to be the most-hated stock market rally in history. No one trusts Wall Street or the stock market and just about everyone is looking for an excuse to sell. There isn't a day that goes by without some lionized Wall Street sage predicting the top of the market. That's why it will continue to go up.

An informal survey of recent communications from clients and readers reflects that nervous attitude. Here is just one such missive.

"Dear Bill," began this client email I received on Monday, "interesting article in Barrons, predicting a bear market being imminent. I see this guy has a good track record. Thoughts?"

Over the last six months I have received dozens of similar queries. I won't start to worry until everyone throws in the towel and becomes bullish. In the meantime, enjoy the ride.

This week the Fed said all the right things. They reiterated their position that until the economy begins to grow at a satisfactory rate they will keep the money flowing and remain committed to their stimulus policies. The latest data shows an economy that is still growing at a sub-par rate while employment is improving modestly. Friday's employment number was a bit of a disappointment, gaining just 162,000 jobs, well below that magic 200,000 jobs a month number that we need to make a substantial dent in the nation's unemployment number.

This is absolutely the best news for our Goldilocks' market (if not for the economy and employment). As long as the porridge called data is neither too hot nor too cold, stocks will continue to climb on back of the Fed's easing policies.    

Technically, many indexes are reaching new, all-time highs. The S&P 500 Index cracked 1,700 for the first time in history this week with many technicians pointing to 1,750 as the next stop. Small cap indexes have been leading the markets higher and are now in uncharted territory. The transportation index, which many Dow theorists believe is critical to confirming new highs in the Dow, is on a tear and is itself at a new all-time high. What's not to love in these numbers?

Many investors tend to be a bit myopic in looking at the prospects of the U.S. market. Given that it is the largest stock market and economy in the world it is an understandable mistake. I urge readers, however, to pay attention to what is also happening in economies overseas. In recent columns, I have called your attention to the growth story now unfolding in Japan, but don't ignore the prospects for a European turnaround.

The world's central bank's stimulus policies are finally starting to boost the growth prospects of many nations. This will have a larger and larger impact on the global marketplace where one nation's growing economic health will bootstrap growth in other nations. The last time this happened in the 2003-2007 period, Chinese growth acted as a locomotive for the rest of the world.

We may be entering another such period, only a new engine could be based on the expanding economy of Japan, the European Union as well as the United States. In that kind of future economic environment investors want to take a longer term approach to the stock market. What’s not to like about that?

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: Political Posturing Ahead

The markets have spent most of this year focusing on concrete things like the economy, jobs, the Fed's stimulus program and corporate earnings. However, we are entering that time of year when our dysfunctional political parties may once again roil the markets in an attempt to justify their miserable existence.

It is no accident that President Barack Obama took to the road this week with proposals for additional federal spending to boost the economy. After heaping all the blame on the Republican House for blocking his middle-class economic agenda, he introduced what appears to be a re-hash of old proposals that have been shot down repeatedly by the Republicans. What's the point?

The Democrats are hoping that playing the blame game, just prior to the legislative summer recess, will hurt Republicans returning to their districts, who (they hope) will be greeted by an outcry of anger and disgust by voters. I believe they are misreading the situation.

While it is true almost everyone is down on politicians, what most observers fail to realize is that both conservatives and liberals won't allow their representatives to compromise in order to advance a new economic or social agenda for the nation. "Moderate" has become a dirty word among this increasingly polarized society. Positions have hardened, rather than softened, and legislators who appear to have "caved-in" risk a short shelf life in Washington.

This year's budget battle has begun. Both Houses have approved their own version of a budget based on party lines that is $91 billion apart in terms of spending. If we don't have a budget by the end of September, the politicians will most likely do what they have done every year since Obama was elected, pass a temporary measure (or not) before the government shuts down on Oct. 1. Does any of this sound familiar?

Then there is the debt ceiling, where once again the U.S. Treasury will run out of funding between October and mid-November. The Obama administration says there will be no deals cut in order to get Congress' approval to raise the ceiling. On the other hand, thanks to the sequester, spending cuts that will automatically take effect again next year, the Republican-controlled Congress will be looking for even further cuts in entitlements programs such as Social Security and Medicare.

About the most anyone can hope for is that the markets have become so inured to this useless posturing, that they tune it out entirely. There is an old saying in the stock market that an event can only be discounted once. Anything more becomes a buying opportunity. In the past five years, the "Double Ds" of deficit and debt have been discounted several times and all of those sell-offs have turned out to be a wonderful buying opportunity. I suspect it may happen again.

In the meantime, the markets are performing handsomely. Each spurt higher has been followed by a healthy consolidation, which is exactly what you want in a bull market. Ignore the noise. Minor pull-backs should be expected. Investors are still way too cautious to spell an end to the upside.

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: Say It Isn't So

So far June is playing out as expected. Stocks are see-sawing in a trading range that is driving day traders crazy. Hopefully, you are not one of them.

This week was almost a carbon copy of last week. For two weeks in a row the averages tested the 1,600 level on the S&P 500 Index and then bounced higher. That was also the level where technicians predicted the market would find support (at what is called the 50-day moving average).

Don't worry; I'm not going to get all technical on you. It is sufficient to note that buyers stepped in at the same level that they did last week. And that is understandable since there really is no reason to go much lower than that. I have been looking for a mild pullback in the 5-7 percent range and that is exactly what we are getting.

If you have been reading my columns, you know that the Fed has provided the excuse the markets needed for this decline. As such, all eyes will be focused this coming week on the central bank's FOMC meeting. Investors are hoping for some clue or hint among the meeting minutes to gauge whether the Fed's intention to taper their stimulus program has firmed or weakened.

Tell me you're not leaving Say you changed your mind now That I am only dreaming That this is not goodbye This is starting over If you wanna know I don't wanna let go So say it isn't so." — Gareth Gates

I believe the markets are misinterpreting the Fed's actions. Nonetheless, the fear that the Fed plans to decrease the level of stimulus, if only modestly, is having a damaging effect on interest rates. In addition, investors are now wondering if the Fed's commitment to keep interest rates low, at least until the unemployment rate declines to 6.5 percent, is in jeopardy as well.

All sorts of interest and dividend yielding securities from U.S. Treasury bonds to preferred stocks have seen a downdraft in prices as a result. In the housing market, mortgage refinancing has dried up as 30-year mortgage rates hit 4 percent.

This is not what the Fed expected, in my opinion. They have acknowledged that in the past their on-again, off-again quantitative easing programs caused an uneven recovery in the economy and volatility in the markets. For the Fed, the trick is to wean the markets off central bank stimulus without causing the same results. That is easier said than done.

To be fair, the Fed has already accomplished some truly stupendous results over the last few years. They have kept us out of another Depression and initiated an economic recovery, even if it is slower than we would have liked. Their stimulus efforts in the financial markets have succeeded in recouping all of our stock market losses and then some. The housing market, which triggered the financial crisis, is a much bigger problem. But even there we are seeing a rebound as a result of their efforts

What would help would be stronger economic growth. A few back-to-back quarters of plus 3 percent growth would re-focus investors away from Fed stimulus and back where it belongs on the free market economy. Unfortunately, this grand central bank experiment is like any experiment. There is a lot of guess work involved. If, for example, the Fed were to wait until after one or two strong quarters of growth to taper, there is a risk that inflation could spike. That would force the Fed to ratchet up interest rates and torpedo the economy altogether. If they act now, they risk slower growth or even a recession.

As for financial markets, it is understandable that the Fed wants to inject some uncertainty back into the markets. Uncertainty is a key ingredient in investing. If investors believe the Fed will always have their back in the form of more and more stimulus, then investing becomes a one way street. It can create a bubble in stock prices just as easily as it created a bubble in the housing markets over the last decade.

So as much as we would all like to hear the Fed say it isn't so, we need to be aware that at some point in the future they are going to take away the punch bowl.

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: Rising Interest Rates Spook Markets

Over the last month, the interest rate on a 10-year, U.S. Treasury note has risen half a point. That may not sound like much in a market that has seen nothing but declines in Treasury yields for years, but investors fear it is simply the start of something big.

By now readers should know that we are in the ninth inning of a thirty year bull market in U.S. Treasury bonds. Everyone (including me) has been warning investors to liquidate their Treasury bond holdings. It is a case of when rates will rise (not if). No one knows exactly when that will happen, but why wait around until they do?

But many bond investors have stubbornly refused to listen. They are driven by fear. They are convinced that stock markets will retest their lows of 2009 on the back of another deep recession or worse. Clearly that has not happened yet (but “yet” for some is still the keyword).

However, as the economy continues to climb, unemployment falls and the Fed stimulates, more and more investors are re-thinking their safe-haven investments. It is the reason gold sold off so dramatically this year and, in my opinion, the same thing is beginning to happen in the Treasury market.

May's spike in interest rates, however, has more to do with misplaced investor concerns that the Fed will begin to taper off its monthly bond purchases as early as June. They fear that with less Fed buying, bond prices will decline and interest rates will rise. This month that has become a self-fulfilling prophecy. I think any talk of tapering off is premature at best and at worse, simply an excuse to take profits in both the stock and bond markets.

I do believe, however, that at some point the Fed will gradually reduce its buy program based on two factors: a stronger economy and a lower unemployment rate. Neither factor is anywhere near a level that would prompt the Fed to withdraw its stimulus even slightly. And when they do, it will be a good thing and no reason at all to sell stocks or even certain kinds of bonds.

Corporate bonds, for example, both investment grade and high yield, do quite well in an atmosphere of rising U.S. Treasury interest rates caused by stronger economic growth.  In that environment, rising rates simply signal a more benign environment for corporations, which have less risk of bankruptcy and are better able to make their debt payments. For corporates, it is virtually the "sweet spot" for investment gains.

Many investors fail to understand that. They have been selling perfectly good, high yielding corporate bonds needlessly. So, by all means, cash in your Treasuries but keep your corporate bond investments. Sure, at some point, when interest rates rise enough, all bonds will be impacted but that time is still a year or two away.

As for the stock markets, this week was uneventful. We are entering the summer period where not much can be expected to happen. It is a period where Wall Street moves to The Hamptons or up North to the Berkshires. Hopefully, the markets will take the summer off as well. We are in need of a pause, one that will ultimately refresh this aging bull.

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.